The House Appropriations Committee has approved legislation that bans the IRS from enforcing rules to curb conservation easement syndications. Currently, the ban only applies to past transactions, those easements entered into before January 23, 2017, the date the IRS released a Notice subjecting easement syndications to onerous tax shelter rules. The IRS is still free to impose its rules on taxpayers involved in future conservation easement syndications.
The prohibition is contained in the 253-page, fiscal year 2018 Financial Services and General Government Appropriations bill, cleared by the Appropriations Committee in mid-July. The bill would cut funding for the IRS by $149 million from the fiscal year 2017 level. The conservation easement provision is one of several policy provisions aimed at “reducing regulatory red tape…” according to a Committee release. The bill is not law yet. It still has to wind its way through the budget process, but it is likely to be approved with this provision intact. Congress has long shown its support for conservation easements, with some members even writing IRS Commissioner Koskinen directly, urging that IRS take a less aggressive stance on enforcement.
Not All Easements Affected by Tax Shelter Rules
The IRS rules in the funding bill are included in IRS Notice 2017-10, issued in January 2017. This Notice put conservation easement partnerships and LLCs on its list of tax shelters if they promise investors charitable contribution deductions equal to or exceeding two and one-half times the amount invested. For example, if a taxpayer is offered a $125,000 tax deduction for a $50,000 investment in a syndicate, the conservation easements underlying the investment would be “listed transactions.”
The effect of this IRS designation is troublesome. It forces syndication promoters to disclose detailed information on the transactions, including the names of investors, and also requires taxpayers to disclose their participation in a syndicate on their tax returns. Failure to file these disclosures can result in stiff penalties for both investors and promoters. The new rules were supposed to be retroactive, requiring reporting on transactions as far back as 2010, but the Appropriations bill bars any retroactive enforcement.
Georgia Leads in Easements
Georgia taxpayers are disproportionately affected by conservation easement restrictions. Between 2010 and 2012, about 36 percent of all deductions nationwide for donations of conservation easements were taken by taxpayers in Georgia, according to Adam Looney of the Brookings Institution. Looney’s May 2017 report, Charitable Contributions of Conservation Easements, also notes that Georgia has 1.5 percent of conserved land.
How Syndications Work
In the typical easement transaction, a taxpayer enters into an agreement with a charitable organization to permanently give up development rights to his or her property for purposes of preserving natural areas. In return, the landowner gets certain federal and state tax benefits, including a federal charitable contribution deduction. The deduction is limited to 50% of a taxpayer’s adjusted gross income (AGI) or 100% of AGI for farmers and ranchers.
What Happens Next
The Appropriations bill was approved by the Committee on a vote of 31-21 in July. This legislation is just one of several bills making appropriations for the U.S. government for fiscal year 2018, which begins in October 2017. The new Administration’s budget proposals were released late, which has caused some uncertainty surrounding the usual budget timetable. Still, Congress has shown its support for conservations easements in the past, and the ban on enforcement of the IRS rules is likely to be embraced by both the Senate and the Trump Administration as the legislation moves toward enactment. Congress may not stop with a ban only on retroactive action. As the bill advances, we may see an extended ban on IRS conservation easement restrictions going forward.