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Treasury Blacklists Certain Conservation Easements (Listed Transactions)


12/29/2016
 
Synopsis
 
Emboldened by the Clower decision, decided December 22, 2016 in the 11th Circuit Court of Appeals (permitting IRS to investigate appraiser’s valuation of conservation easement), on December 23, 2016, the Department of the Treasury and Internal Revenue Service identified certain conservation easement contributions as “listed transactions” (i.e., a situation being taken advantage of for unacceptable tax avoidance). Taxpayers who have already involved themselves in these situations at any time in the last 7 years since January of 2010, may have a reporting responsibility (for open tax years), to avoid significant penalties. The report, Form 8886, must be filed by June 20, 2017 (May 1 for current-year situations). Their advisors may also have a similar reporting responsibility, Form 8918, by May 1, 2017, to avoid significant penalties.  
 
Issue
 
Notice 2017-10 (the “Notice”) blacklists “syndicated conservation easement transactions.” These are defined as situations where, typically, a taxpayer is approached by a promoter who has the taxpayer invest in an entity or tiered structure holding real property, which is at some point encumbered with a conservation easement that is then contributed to a tax-exempt donee. Situations like this resulting in a charitable deduction to the taxpayer-investor of at least 2.5 times the taxpayer-investor’s investment are the ones that Treasury has outlawed, retroactive to January 1, 2010. (The inflated deduction arises from anomalies in the valuations of the easements). If a taxpayer has taken such a deduction since 2010 and the tax year is open, the taxpayer is subject to this reporting requirement.
 
Penalties
 
Taxpayers that do not comply with the reporting requirements of the Notice are subject to penalties under I.R.C. §6707A, the penalty for failure to comply with disclosure requirements. The penalty would be, per arrangement, a minimum of $10,000 ($5,000 for a natural person) but if higher, equal to 75% of any decrease in tax shown on the return as a result of involvement in the arrangement (but capped at $200,000 ($100,000 for a natural person)). The IRS has indicated that independent of the reporting penalty, other penalties may apply, such as substantial understatement penalties (especially where a taxpayer gets involved in these subsequent to December 22, 2016).  
 
Material advisors face penalties of $200,000 per arrangement not reported.
 
What Does CohnReznick Think?
 
Taxpayers involved in the past have the reporting obligations described in the Synopsis, which affords a little more time. The statute will remain open in terms of the required disclosures for one year until after these disclosures are made, since this is a listed transaction situation.  
 
If taxpayers or syndicators believe they may have been involved in these transactions, please contact us.
 
Contact
 
For more information, please contact Dan Wise at Dan.Wise@CohnReznick.com or 973-403-7964.
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 
 
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