SYNDICATED CONSERVATION EASEMENTS
What are Conservation Easements?
Holders of historically and environmentally significant property often wish to maintain such property in its present state. However, undeveloped or historically preserved use is rarely the most profitable land use, particularly where such land lies in a major urban area or contains valuable mining rights. Landowners with a genuine will to preserve their land may lack the means to maintain valuable land at less than optimal use. Due to these concerns, Congress enacted Internal Revenue Code (“I.R.C.”) § 170(h)(2)(C) to provide tax deductions for taxpayers who donate an easement that is considered a “qualified conservation contribution.”
The enactment of a federal income tax deduction for the donation of an easement considered to be a “qualified conservation contribution” was essentially a Congressional subsidy to preserve historically and environmentally unique land in its current state, rather than developing the land to a more profitable use. Although the term “qualified conservation contribution” also encompasses the donation of a donor’s entire interest and a donor’s remainder interest, our focus is limited to the donation of a conservation easement (“CE”) interest.
To be considered a “qualified conservation contribution,” the donation of an easement restricting use must be: of a perpetual term; made with charitable intent; to a qualified organization; exclusively for conservation purposes; and properly substantiated through appropriate appraisals and forms. The amount of a “qualified conservation contribution” is generally valued as the difference between the fair market value of the donor’s property pre- and post- donation, reduced by the amount of any short-term built-in capital gain existing in the contributed property at the time of donation. The amount of a “qualified conservation contribution” is tax-deductible to the donor; however, the donor’s ability to currently deduct a charitable contribution in any given tax year, is generally limited to the applicable rate of the donor’s contribution base for that year subject to deduction carry-forwards. “Qualified conservation contributions” enjoy an across-the-board preferential applicable rate of fifty percent (50%) and fifteen year carry-forwards.
Conservation Easement Syndication Programs
There is a difference between a straight forward donation of a conservation easement over the donor’s own property held for more than one year, and the CE syndication programs that have proliferated nationwide. The latter is a method for promoters to sell membership interests in an LLC to investors who then get a pro rata charitable tax deduction from the CE donation commensurate with their contribution to the limited liability company (“LLC”) making the donation.
A typical syndication structure generally involves the following: (1) a “land-rich, cash-poor” contributing partner who holds greatly appreciated property that is historically or environmentally significant and wishes to monetize their property interest in a conservationist manner (for example, if the property has sentimental value to the contributing partner or if the contributing partner believes, contrary to market expectations, that contiguous property rights will drastically increase in value over time if the integrity of the overall tract is preserved); (2) an investment fund partner that is an investment entity with high-income investing partners of its own; and (3) a managing partner who is often the promoter of the CE syndication.
The syndication steps are generally as follows: (1) the contributing partner contributes significantly appreciated real property to a newly-created LLC in exchange for a 99% ownership interest in the LLC; (2) the managing partner contributes a nominal amount in exchange for a 1% ownership interest in the LLC and also manages the LLC; (3) the contributing partner sells the majority of its interest in the LLC to the investment fund partner (retaining only a nominal interest); (4) the investment fund partner compels the LLC (i.e. the managing partner) to grant a CE over the property to a charitable land trust (or other tax-exempt entity) that meets the tax-deductible requirements of a qualified conservation contribution; and (5) the CE deductions are allocated to the partners of the investment fund partner according to the relative partnership agreements (as well as to the managing partner on a pro-rata basis according to the managing partner’s nominal share).
The IRS recently designated these CE syndication programs as “listed transactions”, which is a rarely used disclosure and penalty regime that is reserved for the worst and most widespread tax shelters that the IRS encounters. The IRS has also raised several issues in litigation with taxpayers over CE syndication programs, including improper valuation by appraisers; improper structuring of the CE such that it does not meet the definition; poor documentation; and several other compliance issues.
Required Disclosures and Audit Risks
As with all listed transactions (a designation for transactions that IRS believes to be illegal and abusive tax shelters), the IRS will eventually require all promoters of syndicated conservation easements companies to file a list with the IRS identifying all taxpayers who engaged in their syndicated conservation easement deals. In addition, as in all prior tax shelter transactions, the IRS has required each taxpayer who invested in a syndicated conservation easements deal to file a Form 8886 Disclosure, which identifies the taxpayer’s participation in the transaction to the IRS.
Ultimately, this will likely lead to numerous IRS audits. And if the past is any indication of the future, taxpayers who participated in a syndicated conservation easement transaction will suffer substantial damages. Either way, the IRS knows the identity of taxpayers that have participated in what the IRS believes to be an illegal and abusive tax shelter that will be disallowed, and if you are such a participant, you are likely to suffer substantial damages as a result.
If you have participated in a syndicated conservation easement transaction, time is of the essence in making the decision as to whether to hire a firm to pursue your claims for damages against the promoters and other professional advisors as the statute of limitations may have already begun running or will soon begin to run.
We have substantial experience, expertise, and success, as well as a sterling reputation, in representing taxpayers who have participated in illegal and abusive tax shelters in litigation against the largest accounting firms, law firms, and investment firms. We are very interested in talking with you about your case, your options, and our team representing you.
The Firm’s tax shelter practice is led by David R. Deary, W. Ralph Canada, Jr. and Jim Flegle. We have significantly fortified our team, however, through a co-counsel arrangement with both Beckett Cantley and Ed Rappaport.
Beckett G. Cantley is a well-known tax lawyer and law professor with special expertise in the areas of captive insurance and syndicated conservation easements. His body of work includes some of the most cited law review articles, mainstream media publications, and speeches throughout the country and particularly in association with the ABA Committee on Captive Insurance (where he served as Chairman of the Subcommittee on Taxation of the main ABA Committee on Captive Insurance). Mr. Cantley is known as one of the foremost experts on abusive captive insurance transactions, and has a similar reputation with respect to syndicated conservation easements.
Ed Rappaport is a tax lawyer who has significant experience in representing clients in tax controversy matters and representing victims of fraudulent tax shelters. He also has significant experience in both syndicated conservation easements and captive insurance transactions.
Our team is built to be not only a highly successful trial team but also highly qualified in the areas of the applicable tax laws that determine if a syndicated conservation easement or captive insurance transaction is an abusive and illegal tax shelter, enabling us to develop and implement the best strategy to recover damages.
If you would like to speak with David R. Deary, please call 214-572-1700 and ask for Janet Bailey, his assistant, and she will schedule a time to talk with Mr. Deary and the team.