IRS is ramping up enforcement efforts again for donations of conservation easements and taxpayers are continuing to litigate cases involving donations of conservation easements. In one week, we have an IRS Notice and two Tax Court decisions impacting donations of conservations easements. Here is what you need to know:
- The IRS has issued Notice 2017-10 listing Syndicated Conservation Easements as listed transactions. Syndicated Conservations Easements are described as those for which the charitable contribution deduction is greater than 2.5 times the investment made. Any syndicated conservation easement or any similar transaction entered into on or after January 1, 2010 must be reported to the IRS in accordance with Sections 6011, 6111 and 6112 and the Notice.
- Observation: The IRS has employed the listed transaction rules on a limited basis for the past 10 years, but seems to be reversing that trend by identifying a transaction of interest and a new listed transaction in the last quarter of 2016.
- In 15 West 17th Street LLC, v. Comm’r, 147 T.C. No. 19, the Tax Court ruled that the exception provided in Section 170(f)(8)(D) to the contemporaneous written acknowledgement requirements set forth in Section 170(f)(8)(A) is not operative because regulations have not been issued. Therefore, when a charity does not issue or does not properly issue a contemporaneous written acknowledgement to a donor, there is no recourse for the donor and the deduction can be denied in full. This is a harsh result for well-intentioned donors.
- Observation: This ruling has broad applicability to charitable donations and impacts any large donation and particularly non-cash donations, such as art.
- Finally, some good news. In McGrady v. Comm’r, T.C. Memo 2016-233, the Tax Court agreed that taxpayers in Bucks County Pennsylvania had donative intent and did not receive more than incidental benefit when they transferred land to a charitable organization and to the city as part of a complicated conservation and development plan, and also purchased a small parcel subject to a conservation easement. The Tax Court did adjust the value of the taxpayer’s donations from $4.7 million to $3.7 million, rejecting the IRS position that the donation value was actually $1.3 million or less. The Court also rejected the IRS position that penalties applied.