Offshore Syndicated Conservation Easement Transactions
Offshore Syndicated Conservation Easement Transactions: In recent years, the Internal Revenue Service has significantly increased the enforcement of offshore compliance. While it is very common for taxpayers to be aware that they may have a FATCA (Foreign Account Tax Compliance Act) or FBAR (Foreign Bank and Financial Account/FinCEN 114) reporting requirement for their overseas accounts, assets and investments — there has been a recent uptick on US Taxpayers getting sold on suspect overseas syndicate conservation easement transactions. Oftentimes a promoter approaches the US Taxpayer or a representative and promotes an investment in a rural farm or other land charitable contribution opportunity that guarantees the taxpayer an incredible deduction on their tax return — too good to be true, and it usually is. When Taxpayers search for alternative investments, it is important to be aware of whether or not the specific investment is a listed or otherwise reportable transaction. if so, then additional reporting is required, usually on form 8886.
Let’s take a look at the syndicated conservation easement transaction:
Syndicated Conservation Easement Transactions
Here’s how the IRS summarizes the syndicated conservation easement transaction in reference to Notice 2017-10:
This notice describes certain transactions in which some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested.
The promoters identify a pass-through entity that owns real property, or form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the pass-through entity or tiered entities that owns the real property, suggesting to prospective investors that they may be entitled to a share of a charitable contribution deduction that equals or exceeds two and one-half times the amount of the investor’s investment.
The promoters obtain an inflated appraisal of the conservation easement based on unreasonable conclusions about the development potential of the real property.
The entity then donates a conservation easement encumbering the property to a tax-exempt entity.
Investors then claim a charitable contribution relying upon the pass-through entity’s holding period.
What does this Mean?
Since this is a pretty dense topic, let’s break it down piece by piece:
What are Promoters?
Promoters are the individuals who go out and try to solicit investments. Oftentimes, a Taxpayer will receive the information about the investment from their own representative — who may have been contacted by the promoter.
One key point about the syndicate is that it is owned through a pass through(s) — which means that the income and deductions will pass through directly to the investors, instead of getting entangledf at the corporate level.
Excess Charitable Deduction & High Appraisal
The Taxpayers are then able to deduct an extremely large charitable contribution for contributing the easement. The reason the value of the contribution deduction is so high, is because the Promoter secures an extremely generous value of the appraisal –will may far exceed the total value of the donations made. The deduction then “passess through” to the investots — who each get a very large piece of the deduction for their own individual tax return.
Is it Illegal?
While it may not be per se illegal (yet), Courts have been coming down hard against these tax schemes and so the IRS is giving individuals a way out by way of the settlement program .
Want to Undo a Listed Transaction?
If you are not already under audit and/or have not been penalized — you may consider corrective action in order to resolve the issue. This may mean removing the benefit from your tax return and filing amended returns. If you already in tax litigation you may consider entering the settlement program — if you qualify.
IRS Syndicated Conservation Easement Settlement Program if Already in Court
In October of 2020, the IRS provided a settlement opportunity for certain syndicated conservation easements that are currently docketed in U.S. tax court:
IR-2020-228, October 1, 2020
WASHINGTON — As the Internal Revenue Service continues combatting abusive syndicated conservation easements, the agency today released additional information to help address questions related to the ongoing settlement initiative.
Today the Internal Revenue Service Chief Counsel released Chief Counsel Notice 2021-001 PDF (“CC Notice”), which contains information regarding Chief Counsel’s settlement initiative for certain pending Tax Court cases involving abusive syndicated conservation easement transactions described in IRS Notice 2017-10 PDF (“SCE transactions”). Prior coverage of the settlement initiative can be found in IRS news release IR-2020-196.
The IRS encourages investors to seek independent professional assistance with understanding the settlement terms and CC Notice, and to help them assess their hazards of litigation. Investors would be well advised to obtain counsel from competent, independent advisers not related to or recommended by the SCE transaction promoter.
As previously noted in IR-2020-196 the IRS has been very successful in litigating SCE transactions. While some promoters have attempted to distinguish the decided cases, claiming that their transactions are “different” and do not suffer the same flaws, the IRS has many grounds for disallowing the tax benefits claimed from these abusive transactions. The IRS will soon publish updates to the Conservation Easement Audit Technique Guide, which will set out new arguments that taxpayers can expect the IRS to make in cases involving SCE transactions.
The CC Notice reflects the IRS’s continuing efforts to combat abusive SCE transactions. Notably, the newly established Office of Fraud Enforcement and the National Fraud Counsel are coordinating with examining agents and Chief Counsel attorneys to canvas cases for additional fraud considerations, which might include assertion of the 75% civil fraud penalty, or where applicable, referrals to Criminal Investigation.
The CC Notice also responds to a recurring question raised by several groups of partners that have approached IRS Chief Counsel seeking to resolve their cases. The Chief Counsel settlement initiative requires that the partnership that engaged in the SCE transaction and all its partners agree to settle on the offered terms. Those terms include a complete disallowance of the claimed charitable contribution deductions and penalties, although some partners may deduct their cost of investing in the partnership. The CC Notice explains that, in rare cases, Chief Counsel may permit less than all the partners to settle on these terms.
In most cases, however, the IRS will require settling groups of less than all partners to pay an additional 5% penalty, reflecting the lost efficiencies of the IRS having to proceed with the partnership case. The IRS and Chief Counsel encourage partners who want to settle to work with the other partners to reach a full resolution of the case. The CC Notice also indicates that the IRS will settle with individual partners (or groups of individual partners) only when they own a significant percentage of the partnership and they cooperate with Chief Counsel, which may include providing evidence that Chief Counsel might use to support its contentions in the litigation. The CC Notice provides that partners or groups of partners interested in resolving their cases on these terms have 30 days from the date of this Notice to elect to settle.
The CC Notice also explains that Chief Counsel may consider making the same offer to newly filed cases in Tax Court. Chief Counsel will consider a variety of factors in deciding whether to extend the offer, including whether the partnership fully cooperated with the IRS during the audit.
Finally, the CC Notice answers numerous procedural questions related to the settlement terms.
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