In June, we told you about recent Internal Revenue Service (IRS) enforcement action related to its 2017 Notice designating types of transactions that the IRS has identified as tax avoidance schemes. (Participating in a “listed transaction” requires taxpayers to make additional disclosures on their returns and may subject them to enhanced penalties.)
Congress is now weighing in on the subject. Back in June, a bipartisan group of lawmakers in both houses introduced the Charitable Conservation Easement Program Integrity Act. That bill has been almost entirely incorporated into the House Ways and Means Committee markup of the $3.5 trillion budget reconciliation bill currently being negotiated among moderate and progressive Democrats in the House and Senate.
Unlike many of the other so-called “payfor” provisions, this one doesn’t seem to be getting much attention in the popular press. Behind the scenes, however, much discussion is ongoing – not so much about the details but, rather, the effective date.
Easements to protect land predate the Internal Revenue Code. In a 1964 Revenue Ruling, the IRS first agreed that an easement donor was entitled to take a charitable contribution for the fair market value of the restrictive easement. The 1976 Tax Reform Act added the donation of an easement exclusively for conservation purposes to the Internal Revenue Code, but it didn’t become permanently part of the Code until 1980.
As sometimes happens, well-intended public policy becomes the next great tax shelter. Promoters began organizing partnerships that would buy otherwise unusable property at low cost, selling membership interests to high-bracket taxpayers. The land would then be valued, for donation purposes, at five to ten times its cost or more, leading to significant tax write-offs and tax savings.
Needless to say, the IRS has challenged the valuations and other terms of the easements. More often than not, these challenges have survived judicial scrutiny. That hasn’t stopped the ongoing promotion of these transactions.
The deduction for qualified conservation contributions made by a pass-through entity would be limited to 2.5 times the partner’s basis in their partnership interest allocable to the contributed property. Certain family partnerships would be excluded from these rules, ostensibly to protect family farms. The disallowance also wouldn’t apply to property held for three years or longer. The penalty for disallowance would be doubled from 20% to 40% of the tax underpayment.
But here’s the kicker – these new rules would apply to contributions made after December 23, 2016, the date of the IRS Notice. There is intense lobbying on both sides of the question but, so far, it seems as if supporters of the provision have the upper hand and the better argument. As they put it, investors have had five years notice that the IRS considers these shelters to be abusive. Whether this provision makes it into the law and, if so, if it is retroactively effective or not remains to be seen. We will be following this and other developments closely and will keep you updated as the situation evolves.
In the meantime, feel free to reach out to your Friedman LLP advisor with any questions.