IRS, Lawmakers Continue to Scrutinize Tax-Advantaged Land Deals

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By Kaustuv Basu

The IRS will give the Senate Finance Committee more details soon about transactions that the agency says exploit a tax deduction for land preservation that has cost the Treasury billions of dollars since 2010.

More information on the scope of these deals, called syndicated conservation easements, is expected in June when committee staff members are briefed. That’s when top lawmakers on the committee will decide how to curb these transactions, sources told Bloomberg Tax.

Finance Committee ranking member Ron Wyden (D-Ore.) has called the transactions a sham, where a “critical tool for land preservation has been systematically exploited by bad actors peddling tax shelters to the highest bidder.”

A group of bipartisan lawmakers, including committee Chairman Orrin G. Hatch (R-Utah), is pressing for more scrutiny.

A conservation easement is a legal agreement that gives a tax deduction to the owner of a property in exchange for donating a piece of land to a nonprofit trust or public agency. The donation ensures that the land isn’t developed in the future. The Land Trust Alliance, which represents more than 1,000 land trusts, found in its 2015 census that about 56 million acres of land had been conserved by national, state, and local land trusts as of the end of 2015. This was an increase of 9 million acres from 2010.

In recent years, the Internal Revenue Service has tried to flag deals that it considers to be tax-avoidance strategies. The agency said in December 2016 ( Notice 2017-10) that it intended to add syndicated conservation easements to its catalog of tax-avoidance, or “listed,” transactions.

Not all syndicated deals are structured the same way, but there are some similarities. In an example, the “promoters,” usually working as pass-through businesses, sell part ownership in land or similar property with the help of promotional materials to investors. The investors are told that they might be able to get a charitable deduction for the property that is equal to, or more than, two and a half times their initial investment. This is often done by greatly inflating the value of the easement based “on unreasonable conclusions about the development potential of the real property,” the IRS said.

The IRS notice requires those who have taken part in syndicated deals from 2010 onward to disclose the details to the IRS, or face a penalty.

More Enforcement?

The agency could start aggressive enforcement against syndicated deals that look sketchy, a source familiar with the inquiry said.

The IRS could scrutinize those behind the inflated appraisals, audit some of the promoters of these deals, and use information from whistleblowers, said Dean Zerbe, a former top counsel to the Finance Committee.

“I know for a fact that they are getting very good information from the whistleblower community,” said Zerbe, an attorney who represents tax whistleblowers at Zerbe, Miller, Fingeret, Frank and Jadav, PC.

Adam Looney, a senior fellow at the Brookings Institution who has studied syndicated deals, said the IRS notice didn’t seem to change the behavior of the major players involved. “To be clear, the IRS notice doesn’t change the law. And the IRS notice just says you have to report the transactions,” he told Bloomberg Tax.

Looney suggested better standards for appraisals as one way of dealing with the issue. “Stronger rules for appraisals and greater scrutiny of transactions using, for instance, a panel to appraise high-value transactions (as is used for donations of high-value art) could help,” Looney wrote in a December article for Brookings.

Legislative Efforts

A total of 552 entities and 15,238 individuals have taken part in syndicated deals since 2010, the IRS told the Finance Committee in mid-March, according to documents obtained by Bloomberg Tax.

The agency said at the time that the aggregate deductions could total as much as $230 billion. But it has revised the initial number to about $20 billion since then, according to sources familiar with the discussions.

Bipartisan bills—introduced in November 2017 by Reps. Mike Kelly (R-Pa.) and Mike Thompson (D-Calif.) ( H.R. 4459); and in February 2018 by Sens. Steve Daines (R-Mont.) and Debbie Stabenow (D-Mich.) ( S. 2436)—would prevent partnerships from profiting from the donation of a conservation easement where the charitable deduction claimed is more than two and half times the original amount invested.

A behind-the-scenes effort to attach the bill to a broader measure to retool the IRS that could move through Congress this year hasn’t been successful so far.

Kelly wrote to Treasury Secretary Steven Mnuchin in March, reminding him that the House Appropriations Committee included language in the omnibus spending bill to bar the IRS from enforcing its December 2016 notice. That language was dropped from the final bill that became law in March after some in the Finance Committee objected, according to a source familiar with discussions.

Rep. Tom Graves (R-Ga.), chairman of the House Appropriations Financial Services and General Government Subcommittee, told Bloomberg Tax that the language was added because the IRS notice was issued abruptly and without public input. “It’s about slowing down the rules and regulations process and allowing more public input,” Graves said before the omnibus spending bill passed. “I support the provision that was in our House bill.”

A spokesman for Graves declined to comment when asked if the congressman would support similar language in future legislation to prevent the IRS from examining syndicated conservation easement deals. House Ways and Means Committee Chairman Kevin Brady’s (R-Texas) office didn’t respond to questions about his opinion on syndicated transactions.

The Supporters

Partnership for Conservation, a group that has backed syndicated deals, said many of its members supported efforts to prevent the IRS from enforcing the notice “since it was fundamentally unfair that the notice was issued without the opportunity for stakeholder input and was retroactively applied.”

The group said in an email that it would support legislation that raised standards for appraisals of conservation easements.

But the Kelly bill wasn’t an effective response to concerns about overvaluation, the group said.

Congress intended to provide a financial incentive through tax savings to conserve land, the group said in the email. Providing this incentive is vital to more land being saved, it said.

Bad Actors?

The Land Trust Alliance supports the Kelly-Thompson bill. “The ongoing exploitation of the conservation easement incentive by a few bad actors is giving a black eye to the entire program,” the organization said in a December letter supporting the legislation.

Lori Faeth, government relations director for the Washington-based organization, said the bill was narrowly tailored to impact those who are making a profit from conservation easements and would halt these transactions. Faeth told Bloomberg Tax that the group is pushing for the bill to be added to a broader bill to make changes to the IRS.

With assistance from Colleen Murphy.

To contact the reporter on this story: Kaustuv Basu in Washington at kbasu@bloombergtax.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bloombergtax.com

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