The top 10 percent of syndicated transactions that the IRS says exploit a tax deduction for land preservation got a charitable tax deduction of $8,230 for every $1,000 they invested, according to an IRS letter obtained by Bloomberg Tax.
The Internal Revenue Service previously flagged such transactions for close scrutiny. The issue has also attracted the attention of the top tax writers in the Senate, including Senate Finance Committee Chairman Orrin G. Hatch (R-Utah).
“Our latest analysis shows that the average return ratio for the top 10 percent of syndicated transactions was 8.23 with total deductions of $7,526,512,804 and investment of $ 914,714,364,” said the letter from acting IRS Commissioner David Kautter to Hatch. Kautter said he was sending a similar letter to Finance ranking member Ron Wyden (D-Ore.)
IRS briefed top Finance Committee staff July 13 on their findings on syndicated conservation easements. Sources familiar with the conversation said the committee plans to work with the IRS to end the abusive transactions while making sure legitimate conservation efforts aren’t affected. Legislative proposals to stop the suspect transactions are being evaluated, they said.
Bipartisan bills—introduced in November 2017 by Reps. Mike Kelly (R-Pa.) and Mike Thompson (D-Calif.) (H.R. 4459); and in February 2018 by Sens. Steve Daines (R-Mont.) and Debbie Stabenow (D-Mich.) (S. 2436)—would prevent partnerships from profiting from the donation of a conservation easement where the charitable deduction claimed is more than two-and-a-half times the original amount invested. But the prospects for these bills remain uncertain in an election year when policy can take a backseat to politics.
A conservation easement is a voluntary legal agreement that permanently restricts development on a property. Individual owners or partners can receive a tax deduction if they donate property for this purpose under Section 170(h). The syndicated easements usually involve multiple individuals claiming a tax deduction, often through a partnership structure.
In December 2016, the IRS flagged (Notice 2017-10) syndicated easements as tax-avoidance strategies, saying value of the land can be inflated to claim a larger deduction.
According to the letter, 248 entities claimed deductions worth $6 billion for tax year 2016. The total value of deductions for all years is about $20 billion. “As of the date of this letter, the IRS has begun enforcement activity with respect to more than 40 of these entities,” the letter said.
The IRS scrutinized 22,638 disclosures and found that the return ratio, which is the total contribution deductions divided by total investment, was 4.74 percent.
For and Against
Wendy Jackson, executive vice president of the Land Trust Alliance, a group that has spoken out against syndicated transactions, said “bad actors” were using conservation easement tax shelters to make a profit at the expense of honest taxpayers.
“The deeper the IRS digs on the issue, the more wrongdoing they find. Deals are not being disclosed despite a clear mandate to do so. Tax shelters are still being created despite the IRS flagging them as abusive tax shelter transactions,” Jackson said in an email. “And the hundreds of people facilitating this business are flouting the rules despite a bipartisan congressional investigation.” Jackson said the IRS “enforcement activity” mentioned in the letter was encouraging but she called on Congress to pass legislation to stop the “profiteering.”
Partnership for Conservation, a group that backs syndicated deals, said the agency is arbitrarily labeling certain conservation easements as a tax avoidance strategy, and threatening an important conservation tool.
“The regulatory burden created by the IRS in issuance of Notice 2017-10 is misguided tax policy that threatens an important and cost-effective conservation tool and doesn’t address the root cause of the limited instances of overvaluation,” said Randy Bampfield of the group’s legal committee and former senior counsel for the Office of Chief Counsel at the IRS.
“The Partnership for Conservation supports commonsense legislative reforms that will produce more accurate and well-sustained valuations,” he said in an emailed statement.
Bampfield said the IRS letter follows a pattern of misguided assumptions and incomplete data “without explaining the methodology behind their findings or considering the quality and the quantity of the land conserved.”
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