Tax Deductions from Land Donations Under Scrutiny

The IRS announced that they will be keeping a watchful eye on certain land donation deals that receive significant tax deductions. This pronouncement was disclosed in IRS Notice 2017-10 and later modified by IRS Notices 2017-29 and 2017-58.

Taxpayers who are involved with land donation deals known as syndicated conservation easements will be under a microscope in the coming days, as the IRS noted this a “priority compliance area for the agency.” The IRS will be challenging these types of transactions under the anti-abuse rules, economic substance methodology, and other rules/doctrines prescribed by the Secretary.

Syndicated conservation easements allow multiple people to claim tax deductions for donations of land that is protected from future development. The landowner does not give up ownership, control, or enjoyment of the land. The easement only restricts what can be done on or to the land. In the typical case, a perpetual conservation easement is given to a qualified conservation organization as described in Treas. Reg. 1.170A-14(c)(1). IRC Section 170(h)(4)(A) identifies the following four types of donations as qualifying conservation easement contributions:

• Preservation of land areas for outdoor recreation by, or the education of, the general public.
• Protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.
• Preservation of open space (including farmland and forest land).
• Preservation of a historically important land area or a certified historic structure.

However, the IRS investigation surfaces from cases where taxpayers are claiming substantial tax breaks far exceeding the value of the initial contribution amount. For example, the IRS noted that some investors in pass-through entities have received promotional material that offers a charitable contribution deduction worth over 250 percent of the investment!

In addition to the overstated deduction amounts for the alleged charitable donation, the IRS is also seeing that these transactions do not meet the basic requirements for claiming a charitable deduction for a donated easement in areas regarding rules that govern qualifying and credible appraisals of the donated property, substantiation and other sorts of compliance. These are red flag warning signs for the IRS and warrant increased examination and possible penalties.

According to the IRS, they are currently looking into 80 cases on the docket in Tax Court and plan to further investigate the inflated deductions and the potentially thousands of investors involved in these transactions.

The IRS has included syndicated conservation easements in the 2019 “Dirty Dozen” tax scams to stay away from. In addition, conservation easement entities purporting to provide the investor a 2.5X or greater charitable donation return on an initial investment in the pass-through is considered a listed transaction under IRC Section 6011. These types of transactions require additional reporting and are regarding in some circumstances as tax avoidance schemes by the IRS.

Here is a list of common tax scams that taxpayers may encounter published by the IRS.

If taxpayers amend their returns by removing the deduction, they may be able to avoid penalties, an audit or prosecution, the agency said. Please contact a BPW advisor at (805) 963-7811 if you have any questions regarding the content of this article.