Menu
Tax Notes logo

JCT Says Conservation Easement Bill Would Raise $6.6 Billion

JUL. 9, 2019

JCT Says Conservation Easement Bill Would Raise $6.6 Billion

DATED JUL. 9, 2019
DOCUMENT ATTRIBUTES

July 09 2019

Honorable Steve Daines
United States Senate
SH-320
Washington, D.C. 20510

Honorable Debbie Stabenow
United States Senate
SH-731
Washington, D.C. 20510

Dear Senator Daines and Senator Stabenow:

This letter is in response to your request for a revenue estimate of S. 170 (116th Cong., 1st Sess.), the “Charitable Conservation Easement Program Integrity Act of 2019.” S. 170 limits the charitable deduction allowable to taxpayers in connection with certain “syndicated” conservation easement transactions, as described below.

A deduction is permitted for charitable contributions, subject to certain limitations that depend on the type of taxpayer, the property contributed, and the donee organization. The amount of deduction generally equals the fair market value of the contributed property on the date of the contribution, except as specified in the Internal Revenue Code (the “Code”).

As a general matter, a taxpayer may not claim a charitable deduction for a contribution of a partial interest in property, such as a remainder interest or a grant of only certain rights with respect to a parcel of land. The Code provides an exception to the partial interest rule, however, for “qualified conservation contributions.”1 A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire interest of the donor other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction (granted in perpetuity) on the use that may be made of the real property (i.e., an easement). Qualified organizations include certain governmental units, public charities that meet certain public support tests, and certain supporting organizations. Conservation purposes include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem; (3) the preservation of open space (including farmland and forest land) where such preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and (4) the preservation of an historically important land area or a certified historic structure.

On December 23, 2016, the IRS issued Notice 2017-10,2 which designates certain conservation easement transactions as listed transactions.3 According to the Notice, “[t]he Department of the Treasury . . . and the Internal Revenue Service . . . 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.” In such a syndicated conservation easement transaction, which is a listed transaction under the Notice, 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 investor purchases an interest in the pass-through entity that holds real property. The entity then contributes a conservation easement encumbering the property to a tax-exempt organization and allocates a charitable contribution deduction to the investor based on an inflated appraisal amount. Following the contribution, the investor reports on his or her Federal income tax return a charitable contribution deduction with respect to the conservation easement.4

S. 170 would disallow certain charitable deductions allocated to an investor in a syndicated conservation easement transaction. Specifically, no amount of a deduction for a qualified conservation contribution of a partnership is allowed to an investor as a distributive share of the contribution if the aggregate amount taken into account by the investor for the taxable year exceeds two and one-half times the investor's adjusted basis in the partnership (determined at the close of the taxable year and without regard to the contribution) (the “disallowance rule”). This disallowance rule applies only with respect to the first three taxable years of the investor that end after the date on which the investor first became a partner in the partnership (the “holding period”). The bill also includes an exception to the disallowance rule for certain family partnerships. S. 170 is effective for contributions made in taxable years ending after December 23, 2016.

Participants in syndicated conservation easement transactions are likely to engage in tax planning using the holding period to avoid the disallowance rule. As noted above, an investor is subject to the disallowance rule only for the first three taxable years ending after the date on which the investor first becomes a partner in the partnership. Thus, for example, a calendar year investor who becomes a partner on December 30, 2019, would satisfy the holding period on December 31, 2021, two years and one day after becoming a partner in the partnership. Once the holding period ends, the disallowance rule no longer applies, and the investor may claim a charitable deduction in excess of two and one-half times his or her basis in the partnership.

For taxpayers unable to delay the realization of income, participation in a syndicated conservation easement transaction becomes a relatively less attractive tax-avoidance mechanism because of the new holding period requirement. However, for taxpayers able to delay income realization for the duration of the holding period, syndicated conservation easement transactions remain an attractive tax-avoidance mechanism under your proposal. By establishing a partner-partnership relationship shortly after the date of enactment of the proposal and then delaying the syndicated conservation easement transaction until after the end of the holding period,5 an investor may still ultimately claim a deduction in excess of two and one-half times his or her adjusted basis in the partnership.

Furthermore, promoters of syndicated conservation easement transactions might establish tiered-entity structures that would allow future investors to avoid the disallowance rule of the proposal immediately upon making an investment, effectively circumventing the holding period. For example, a top-tier partnership that holds land and contributes an easement to a tax-exempt organization might have as its investors only S corporations. Once those S corporation investors have met the holding period requirement, new investors in the S corporations may benefit indirectly from charitable deductions allocated by the partnership to the S corporations without having to satisfy the holding period under the bill since the holding period will have been met by the S corporations (i.e., the partners).

While your proposal is expected to reduce the number of syndicated conservation easement transactions and the amount of associated deductions relative to our baseline projections in the near term as taxpayers must wait to satisfy the new holding period requirement, this reduction is expected to be temporary. Upon satisfaction of an initial holding period following the date of enactment, we expect there to be an increase in syndicated conservation easement transactions relative to our baseline projections, as taxpayers who delayed income realization during this interim period execute transactions and claim charitable deductions in excess of two and one-half times their adjusted basis in partnerships. After that time, we believe taxpayers largely will be able to avoid the disallowance rule for the reasons set forth in the preceding paragraphs.

Because S. 170 is effective for contributions made in taxable years ending after December 23, 2016, the disallowance rule would apply to the entire 2016 tax year and all subsequent years for a calendar year taxpayer. Taxpayers who participated in syndicated conservation easement transactions from January 2016 through the date of enactment generally would not be able to satisfy the holding period requirement of the bill to avoid the disallowance rule. As a result, your proposal will require partners who claimed charitable deductions associated with syndicated conservation easement transactions in excess of two and one-half times their adjusted basis in partnerships to amend their returns for tax years 2016-2018 to reflect the disallowance.

We assume an enactment date of July 31, 2019. We estimate that your proposal will have the effects on Federal fiscal year budget receipts shown in the table below. Because of the uncertainty and resulting variability in some key parameters, additional data from the IRS and other sources will be critical to improved estimation in this area. As a result, these estimates are subject to updates as crucial data becomes available over time.

Fiscal Years [Billions of Dollars]

I hope this information is helpful to you. If we can be of further assistance in this matter, please let me know.

Sincerely,

Thomas A. Barthold

FOOTNOTES

1Secs. 170(f)(3)(B)(iii) and 170(h).

22017-4 I.R.B. 544.

3A listed transaction generally is a transaction that is the same as or similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other published guidance as a listed transaction. Enhanced disclosure requirements and reporting penalties apply in the case of a listed transaction. See, e.g., secs. 6662A and 6707A; Treas. Reg. Sec. 1.6011-4.

4In December 2018, the Department of Justice initiated litigation against several alleged participants in syndicated conservation easement transactions. See https://www.justice.gov/opa/pr/justice-department-sues-shut-down-promoters-conservation-easement-tax-scheme-operating-out. No decision has been issued in that case, and the litigation is proceeding.

5We have assumed a date of enactment of July 31, 2019. A calendar year taxpayer who becomes a partner in a partnership on or shortly after that date would satisfy the holding period of the proposal on December 31, 2021, approximately two years and five months later.

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID