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What Could Be Next for Syndicated Conservation Easements?

Dec. 5, 2022, 9:45 AM

For several decades, the IRS has been concerned about unqualified appraisers, overvalued properties, sales of deductions, and more. To combat these concerns, the IRS issued Notice 2017-10, in which it designated syndicated conservation easement as listed transactions when promoters are involved in the syndication, meaning taxpayers must disclose them as a potential tax avoidance transaction.

Additionally, the IRS began including syndicated conservation easements on its annual “dirty dozen” list in 2019. A news release that same year announced that the agency would “significantly increase ... enforcement actions” with regards to such easements.

A November 9, 2022, Tax Court ruling held that Notice 2017-10 was a rule and not a legislative interpretation, and thus violated the Administrative Procedures Act. Combined with pending legislation that would limit the charitable deduction for conservation easements in certain cases, this has left many wondering what’s next.

Conservation Easements Explained

A conservation easement deduction is allowed when someone donates real property to a qualified charity. Section 170 of the tax code allows for a higher-than-normal charitable deduction for this kind of donated land to encourage the donations. While a donation by an individual normally would be limited to 30% of their adjusted gross income under Section 170(b)(C) as capital gain property, qualified conservation property is capped at 50% of AGI under §170(b)(E).

To be considered qualified conservation property for the charitable deduction, the property and easement must meet certain requirements. Under Section 170(h)(1), the contribution must be a real property interest, donated to a qualified organization, and donated exclusively for conservation purposes. To be qualified, the interest must include perpetual restriction on the use of the property. Put simply, the owner must put an irrevocable restriction on the land that it will not be developed.

Syndicated Conservation Easements

Syndicated easements involve several investors forming a partnership or company to purchase or invest in land, then donating the property for a charitable deduction. While there is no legal limitation against a company donating land for a conservation easement, there are concerns that syndicated easements often follow the letter of the law but not the spirit.

A simple example would be several individuals forming a partnership and contributing amounts of money, which then becomes their basis in the partnership. The company will then purchase a piece of land, such as an abandoned building or a golf course that has fallen into disrepair.

The property is then appraised at its best use value, which may be significantly higher than the amount paid for the property. The charitable deduction is equal to the difference between the property at the best use value and the value with the easement, which then flows through to the partners. The deduction can be significantly higher than the partner’s basis in the partnership—as much as 10 to 11 times in some cases.

Things get murkier when the transaction becomes more complicated. For instance, an individual who already owns land may form a limited liability company or partnership and transfer the property to the entity. Usually, this would be someone who may not be able to take full advantage of a large charitable deduction. That individual will then sell membership interests to other parties, with an operating agreement that allocates all deductions to those new membership interests. The original property owner then donates the property, with all charitable deductions going to the purchasing members. Depending on the operating agreement, the original owner may have an option to purchase the membership interests back from the other parties after an agreed-on length of time, usually at a significant discount.

The EARN Act and Conservation Easements

After a months-long wait, the legislative text for Senate Bill 4808, Enhancing American Retirement Now Act, was formally introduced by Sens. Ron Wyden (D-Ore.) and Rob Portman (R-Ohio) in September. The EARN Act is the companion bill to the Securing a Strong Retirement Act of 2021, which passed the House of Representatives in March with overwhelming bipartisan support. It is expected to be included in the omnibus bill during the current lame-duck session.

While the EARN Act is the Senate’s version of the Securing a Strong Retirement Act, there are some key differences. One change is Section 1104, which contains the bill text from the Charitable Conservation Easement Program Integrity Act of 2021, which targets certain conservation easement arrangements.

Effects of the Bill

The bill adds a new numbered section to Section 170(h) that would limit contributions by partnerships if the amount or value of the contribution “exceeds 2.5 times the sum of each partner’s relevant basis in such partnership.” The bill states that the contribution would not be considered a qualified conservation contribution. This seems to mean that the entire contribution would be held to the 30% AGI limitation, as opposed to the amount of the contribution over the partner’s basis. Although new section 170(h)(7)(A) reads as being specific to partnerships, new section 170(h)(7)(E) clarifies that it would be applied to other pass-through entities, such as S corporations.

To combat the issues the IRS sees with overvaluation of property, the bill would alter Section 6662(b) to add accuracy-related penalties for gross valuation misstatements. If a taxpayer is found to have claimed a deduction using an overvalued property appraisal, they will be subject to an additional 20% penalty under 6662(b)(2). The bill also removes the ability to use any reasonable cause exceptions for penalties under Section 6664(c)(2), making it a strict liability penalty for the taxpayer. The changes would be effective retroactively for contributions made after Dec. 23, 2016—the original issue date of Notice 2017-10.

As is expected in all things tax related, there are exceptions. The limitation on the deduction doesn’t apply if the property that is being contributed has been held by the partnership or pass-through entity for at least three years after the latest of three actions:

  • The date on which the entity acquired any portion of the property that is being contributed;
  • The date on which any partner or member of the partnership or entity acquire any interest in the entity; and
  • For tiered entities, the latest date on which any entity acquired any interest in another entity and/or the latest date on which any member or partner in any entity acquired an interest in the entity.


It remains to be seen if the EARN Act will become law. These conservation easement provisions included in the EARN Act were added as revenue offsets for some popular provisions, and with the death of Notice 2017-10, there will likely be pressure from the IRS for this legislative fix for the perceived syndicated easements issue.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sarah Adkisson works as the technical lead for federal tax planning and research at Corvee, a software and solutions company serving tax professionals and firms. She is an attorney in Maryland and Washington, D.C., with over six years of experience in tax and estates and trusts.

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