IRS Confirms Classification of Syndicated Conservation Easements as Abusive Tax Transactions
The Internal Revenue Service (IRS) confirmed this month that it will be classifying syndicated conservation easements as abusive tax transactions going forward. While syndicated conservation easements have long been a red flag for the IRS, this new development increases the risks for taxpayers who rely on syndicated conservation easements to reduce their federal tax liability. Learn more from Texas IRS dispute lawyer Lawrence Brown.
New Federal Regulations Classify Most Syndicated Conservation Easements as “Listed Transactions”
As the IRS explains in an October 7, 2024, News Release, the U.S. Department of the Treasury has “issued final regulations identifying certain syndicated conservation easement transactions as ‘listed transactions’ – abusive tax transactions that must be reported to the IRS.” This has significant implications for taxpayers who use syndicated conservation easements for tax planning purposes.
The Treasury’s new regulations took effect on October 8, which means that effective immediately, taxpayers must report qualifying syndicated conservation easements to the federal government. Since these are now classified as “listed transactions,” failing to report a qualifying transaction to the IRS can itself have adverse consequences—even if the syndication in question does not violate the Internal Revenue Code.
This raises another key point: The Treasury’s recent regulatory action does not prohibit the use of syndicated conservation easements for tax planning purposes. There is nothing inherently unlawful about these transactions. Rather, as the IRS has explained previously:
“In recognition of our need to preserve our heritage, Congress allowed an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations.
“[But, t]he IRS has seen abuses of this tax provision that compromise the policy Congress intended to promote. We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements. In some cases, taxpayers claim deductions when they are not entitled to any deduction at all (for example, when taxpayers fail to comply with the law and regulations governing deductions for contributions of conservation easements). . . .”
It is also worth noting that not all syndicated conservation easements will necessarily qualify as “listed transactions” under the Treasury’s new regulation. Although, due to the breadth of the regulatory language and the Treasury’s specific goal of targeting abusive syndication strategies, most syndicated conservation easements will likely need to be reported. This makes it critical for high-income and high-net-worth taxpayers who use syndicated conservation easements to make informed decisions with the help of an experienced Texas IRS dispute lawyer going forward. This applies not only to determining whether a syndicated conservation easement qualifies as a “listed transaction” under the new regulations, but also to whether a syndicated conservation easement runs afoul of the Internal Revenue Code.
What it Means for Syndicated Conservation Easements to Be Deemed “Listed Transactions”
What does it mean for a syndicated conservation easement to be deemed a “listed transaction” under the Treasury’s new regulations? As the IRS explains, a listed transaction is “[any] transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction.” Again, while these transactions are not necessarily unlawful, they are subject to reporting requirements, and they are highly likely to trigger scrutiny from the IRS.
With this in mind, high-income and high-net-worth taxpayers who rely on syndicated conservation easements to mitigate their federal income tax liability should take some proactive steps to ensure that they will be prepared to withstand the IRS’s scrutiny if necessary. Some examples of these steps include:
1. Reassessing Internal Revenue Code (IRC) Compliance
For high-income and high-net-worth taxpayers who use syndicated conservation easements, now is the time to ensure that their tax mitigation strategies fully comply with the Internal Revenue Code (IRC). This is true not only for the current tax year, but for previous tax years as well. When conducting tax audits, the IRS often examines several years’ worth of returns, and past violations can expose targets to substantial liability for back taxes, interest and penalties.
2. Determining Whether the Treasury’s New Syndicated Conservation Easement Regulations Apply
Taxpayers should also determine whether the Treasury’s new syndicated conservation easement regulations apply to their specific transactions. As noted above, while the regulations are likely to cover most syndicated conservation easements, there will be exceptions.
3. Reporting Any Syndicated Conservation Easements that Qualify as “Listed Transactions”
To comply with the Treasury’s new regulations, taxpayers must timely report any syndicated conservation easements that qualify as “listed transactions.” Failure to report listed transactions can itself lead to penalties.
4. Generating and Maintaining Documentation of IRC Compliance
To ensure that they are prepared to withstand IRS scrutiny if necessary, taxpayers who use syndicated conservation easements should also ensure that they have adequate documentation on hand. Being able to affirmatively demonstrate compliance with the IRC can be critical for avoiding unnecessary costs and consequences during an audit or investigation.
5. Addressing Any Concerns Raised By Previous Federal Returns
Since the IRS can audit several years’ worth of returns, taxpayers who have concerns about their syndicated conservation easement claims in prior years should address these concerns before they lead to scrutiny. This will be the most cost-effective approach in virtually all cases.
Again, these are just examples. With the IRS focusing on syndicated conservation easements heading into 2025, high-income and high-net-worth taxpayers need to ensure that they are not exposing themselves unnecessarily. If you have used a syndicated conservation easement as a tax mitigation tool in the past, or if you have questions about using syndicated conservation easements going forward, we strongly recommend seeking legal advice that is custom-tailored to your individual circumstances.
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