Wyden, Grassley Seek Info on Conservation Easement Abuse

Grassley, Wyden Launch Probe of Conservation Tax Benefit Abuse

Wednesday, March 27, 2019

WASHINGTON — Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) today launched an investigation into the potential abuse of syndicated conservation easement transactions, which may have allowed some taxpayers to profit from gaming the tax code and deprived the federal government of billions of dollars in revenue. For several years now, the IRS has been investigating these transactions. They appear to involve promoters selling interests in tracts of land to taxpayers looking for large tax deductions. In such an arrangement, the taxpayers then get inflated appraisals of those tracts of land and grant conservation easements on that land. The resulting inflated charitable deductions are then split among the taxpayers.

“There are very legitimate purposes for the conservation easement provisions of the tax code. But when a handful of individuals cook up a scheme to cash in at the expense of federal revenue and in violation of Congress's intent, something needs to change. There's no reason that the rest of the taxpaying American public should be left with such a raw deal,” Grassley said. “This is just our first step in getting to the bottom of how these tax provisions are being abused, and it will inform what else ought to be done to fix the problem.”

“Our first concern is preserving the integrity of the conservation easement program, which has helped protect critical habitat across the country. The goal of our bipartisan investigation is to ensure a few bad actors don't threaten the program by selling off deductions based on exorbitant appraisals. The program must not be abused and used as a lucrative tax shelter for the wealthy,” Wyden said.

Groups of taxpayers appear to have used and continue to use syndicated conservation easements to reap tax benefits greater than their initial investments. These groups of investors will pool resources to buy land and grant conservation easements on it to prevent development. With very little oversight, many of these groups receive extravagantly high appraisals for that land, boosting their tax benefits.

The Brookings Institution found that this practice cost the federal government more than $3 billion dollars in 2014 alone, and estimated that it has cost even more in the years since.

In 14 separate letters, Grassley and Wyden sought documents and information from individuals who appear to be associated with these investor groups that might have unfairly profited from conservation easements. The senators are seeking information about the organization, tax code compliance and promotion of the groups from these individuals.

Each of the fourteen letters can be found at the following links:

Mr. John Steven Bush
Mr. Matthew Campbell
Mr. Andrew Kyle Carney
Mr. Thomas Jason Free
Mr. James Freeman
Mr. Christopher T. Graham
Mr. Bryan Kelley
Mr. Aaron J. Kowan
Mr. Robert McCullough
Mr. Matt Ornstein
Mr. Eugene “Chip” Pearson, Jr.
Mr. Mark A. Pickett
Mr. Ricky B. Novak
Mr. Frank Schuler

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John Steven Bush

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March 27, 2019

Dear Mr. Bush:

We are writing to you as the Chairman and Ranking Member of the Committee on Finance of the United States Senate. The Committee has exclusive jurisdiction within the Senate over matters of federal taxation, and we are conducting a bipartisan inquiry into syndicated conservation easement transactions that are identified in IRS Notice 2017-10, which was released on December 23, 2016, and amended by IRS Notice 2017-29, which was released on April 27, 2017. By the initial notice, designated transactions having certain characteristics became "listed transactions," meaning their participants must disclose to the IRS on their tax returns their participation in the transaction, and each transaction's material advisors have certain disclosure and list-maintenance obligations as well. For you convenience, copies of IRS Notices 2017-10 and 2017-29 are attached.

The Committee seeks information regarding the prevalence and nature of these transactions as well as the Notices' effect on compliance with our tax laws. Accordingly, please respond to the following questions by April 30, 2019 and please provide all documents electronically:

All questions and document requests listed above should be read as including requests for draft materials, materials that were intended for an audience of one individual, and materials intended for an audience of more than one individual. These document requests should also be read as requesting materials maintained in hard-copy form, and such materials with hand-written notes on them should be considered separate from their original-source materials and separately responsive to this request for documents, as are the original-source materials. All uses of "and" and "or" should be read as "and/or," and singular forms should be read as including the plural forms, and plural forms should be read as including the singular forms. The word/root word "partner" should be read to also mean "member" or similar such individual where entity terminologies so require it in order for any given question or request to make sense given the specific applicable pass-through form at issue.

Furthermore, if you withhold any documents on account of any privilege, please provide a privilege log describing each such document, its date, its author(s), its recipient(s) or intended recipient(s), and the nature of the privilege(s) claimed.

Should you have any questions, please contact John Schoenecker of the Chairman's staff and Chris Arneson of the Ranking Member's staff at 202-224-4515. Thank you for your attention to this important matter.

Sincerely,

Charles E. Grassley
Chairman
Senate Committee on Finance

Ron Wyden
Ranking Member
Senate Committee on Finance

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Listing Notice — Syndicated Conservation Easement Transactions

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are aware that 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. This notice alerts taxpayers and their representatives that the transaction described in section 2 of this notice is a tax avoidance transaction and identifies this transaction, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations (Regulations) and §§ 6111 and 6112 of the Internal Revenue Code (Code). This notice also alerts persons involved with these transactions that certain responsibilities may arise from their involvement.

SECTION 1. BACKGROUND

Section 170(f)(3)(B)(iii) of the Code allows a deduction for a qualified conservation contribution. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. Section 170(h)(1) through (5); § 1.170A-14. A qualified real property interest includes a restriction, granted in perpetuity, on the use that may be made of real property. Section 170(h)(2)(C). For purposes of this notice, a qualified real property interest is referred to as a conservation easement.

The Treasury Department and the IRS have become aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to claim charitable contribution deductions in amounts that significantly exceed the amount invested. In such a syndicated conservation easement transaction, a promoter offers prospective investors in a partnership or other pass-through entity (“pass-through entity”) the possibility of a charitable contribution deduction for donation of a conservation easement.

The promoters (i) identify a pass-through entity that owns real property, or (ii) 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 that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor's investment. The promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. After an investor invests in the pass-through entity, either directly or through one or more tiers of pass-through entities, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity's holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under § 170(e)(1). The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity. The IRS intends to challenge the purported tax benefits from this transaction based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.

SECTION 2. FACTS

A transaction described in this section is a listed transaction. An investor receives promotional materials that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor's investment. The promotional materials may be oral or written. For purposes of this notice, promotional materials include, but are not limited to, documents described in § 301.6112-1(b)(3)(iii)(B) of the Regulations. The investor purchases an interest, directly or indirectly (through one or more tiers of pass-through entities), in the pass-through entity that holds real property. The pass-through entity that holds the real property contributes a conservation easement encumbering the property to a tax-exempt entity and allocates, directly or through one or more tiers of pass-through entities, a charitable contribution deduction to the investor. Following that contribution, the investor reports on his or her federal income tax return a charitable contribution deduction with respect to the conservation easement.

SECTION 3. LISTED TRANSACTIONS

Transactions entered into on or after January 1, 2010, that are the same as, or substantially similar to, the transaction described in section 2 of this notice are identified as “listed transactions” for purposes of § 1.6011-4(b)(2) and §§ 6111 and 6112 effective December 23, 2016. Persons entering into these transactions on or after January 1, 2010, must disclose the transactions as described in § 1.6011-4 for each taxable year in which the taxpayer participated in the transactions, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016. Material advisors, including appraisers, who make a tax statement on or after January 1, 2010, with respect to transactions entered into on or after January 1, 2010, have disclosure and list maintenance obligations under §§ 6111 and 6112. See §§ 301.6111-3, 301.6112-1.

For rules regarding the time for providing disclosure of a transaction described in this notice, see §§ 1.6011-4(e) and 301.6111-3(e). However, if, under § 1.6011-4(e)(1), a taxpayer is required to file a disclosure statement with respect to a transaction described in this notice after December 23, 2016, and prior to May 1, 2017, that disclosure statement will be considered to be timely filed if the taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by May 1 (because April 30 is a Sunday). In addition, for purposes of disclosure of transactions described in this notice, the 90-day period provided in § 1.6011-4(e)(2)(i) is extended to 180 days. Further, if under § 301.6111-3(e), a material advisor is required to file a disclosure statement with respect to the listed transaction described in this notice by January 31, 2017, that disclosure statement will be considered to be timely filed if the taxpayer files the disclosure with the Office of Tax Shelter Analysis by May 1, 2017 (because April 30 is a Sunday).

Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the syndicated conservation easement transaction described in section 2 may already be subject to the requirements of §§ 6011, 6111, 6112, or the regulations thereunder. The transaction described in section 2 is identified as a listed transaction regardless of whether the transaction has the characteristics described in section 1 of this notice.

Whether a taxpayer has participated in the listed transaction described in section 2 of this notice will be determined under § 1.6011-4(c)(3)(i)(A). Participants include, but are not limited to, investors, the pass-through entity (any tier, if multiple tiers are involved in the transaction), or any other person whose tax return reflects tax consequences or a tax strategy described in section 2.

For purposes of this notice, a donee described in § 170(c) shall not be treated as a party to the transaction under § 4965 or a participant under § 1.6011-4.

Participants required to disclose these transactions under § 1.6011-4 who fail to do so will be subject to penalties under § 6707A. Participants required to disclose these transactions under § 1.6011-4 who fail to do so may also be subject to an extended period of limitations under § 6501(c)(10). Material advisors required to disclose these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707. Material advisors required to maintain lists of investors under § 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) may be subject to the penalty under § 6708(a). In addition, the IRS may impose other penalties on persons involved in these transactions or substantially similar transactions, including the accuracy-related penalty under § 6662 or § 6662A, the § 6694 penalty for understatements of a taxpayer's liability by a tax return preparer, and the § 6695A penalty for certain valuation misstatements attributable to incorrect appraisals.

The Treasury Department and the IRS recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transaction described in this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly.

DRAFTING INFORMATION

The principal authors of this notice are Angella L. Warren and Maxine M. Woo-Garcia of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact Ms. Warren at (202) 317-7003 (not a toll-free call) or Ms. Woo-Garcia at (202) 317-7011 (not a toll-free call).

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Syndicated Conservation Easement Transactions Identified in Notice 2017-10

On December 23, 2016, the IRS released Notice 2017-10, 2017-4 IRB 544, identifying syndicated conservation easement transactions described in section 2 of that notice and substantially similar transactions as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 6111 and 6112 of the Internal Revenue Code. Section 3 of Notice 2017-10 provides that in the case of a participant with a disclosure obligation with respect to these transactions under § 1.6011-4(e)(2)(i) (regarding subsequently listed transactions), the disclosure is due to the IRS Office of Tax Shelter Analysis on June 21, 2017. In response to requests for additional time for participants to meet the disclosure obligation with respect to these transactions under §1.6011-4(e)(2)(i), this notice extends the due date for participants filing disclosures under § 1.6011-4(e)(2)(i) from June 21, 2017, until October 2, 2017.

The due date for disclosure by material advisors under § 301.6111-3(e) and participants who have disclosure obligations under § 1.6011-4(e)(1) (regarding returns filed after December 23, 2016) with respect to the transaction described in section 2 of Notice 2017-10 is unchanged by this notice and remains May 1, 2017.

This notice also provides that for purposes of Notice 2017-10, a donee described in § 170(c) is not treated as a material advisor under § 6111.

EFFECT ON OTHER DOCUMENTS

Notice 2017-10 is modified.

DRAFTING INFORMATION

The principal author of this notice is Maxine Woo-Garcia of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this notice contact Ms. Woo-Garcia at (202) 317-7011 (not a toll-free call).