Land Trusts Should Be Aware of Proposed Easements Regulations

Organizations that accept conservation easements would do well to recognize the new requirements and obligations that a proposed tax regulation could have on their communities.

The proposal, issued in December, identifies syndicated conservation easements as listed transactions under Section 6011. This move came in response to a series of court cases—Mann Construction, Inc. v. U.S.; GBX Associates, LLC v. U.S.; and Green Valley Investors, LLC, et al. v. Commissioner.—invalidating prior attempts by Treasury and IRS to designate such easements as listed transactions in Notice 2017-10.

The notice of proposed rulemaking confirms that Treasury and the IRS will continue defending the notice but states that the proposal’s purpose is “to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation.” It largely tracks Notice 2017-10 as modified by Notice 2017-29 in identifying syndicated conservation easements as listed transactions and describing the general transaction structure.

Treasury and the IRS are considering removing the provision stating that a donee organization is not treated as a material advisor under Section 6111 and eliminating or limiting the carveout for Section 4965.

While being treated as a material advisor will create additional disclosure and list maintenance obligations, the failure of which may result in penalties, the change to Section 4965 has even greater consequences for the donee organizations. Section 4965, enacted in 2006, imposes an excise tax on certain tax-exempt entities entering into prohibited tax shelter transactions. The excise tax applies when the tax-exempt entity is a party to a prohibited tax shelter transaction, including any listed transaction.

In Notice 2017-10, Treasury exercised its authority under Treas. Reg. 53.4965-4(a) to identify (in published guidance) that donee organizations accepting syndicated conservation easements wouldn’t be treated as a party to the transaction or a participant under Treas. Reg. 1.6011-4. While it’s still unclear what the final regulation will say, the mere mention of this potential change may have far-reaching effects on the conservation easement community.

If the carveout is eliminated or limited, donee organizations accepting conservation easements must analyze the applicability of Section 4965 and its consequences on these transactions. This may be enough to deter some organizations from accepting conservation easement donations altogether. But for those who want to continue to encourage land conservation, they need to be aware of the new obligations imposed on them by virtue of Section 4965. These include a separate and independent disclosure obligation than that imposed by Sections 6111 and 6112.

Under Treas. Reg. 1.6033-5, a tax-exempt entity that is a party to a prohibited tax shelter transaction must file a disclosure statement for each prohibited transaction. Form 8886-T is a one-page fillable form that essentially requires the entity to identify the type of entity it is, the type of prohibited tax shelter transaction it participated in, and the identity of the other parties to the transaction.

Although the form itself doesn’t appear overly burdensome to complete, and the cost to complete these disclosure obligations may be manageable, the more important issue for donee organizations will be determining whether a disclosure is required in the first place. The disclosures are only required for a prohibited tax shelter transaction, but not all conservation easements are syndicated conservation easements as defined by proposed regulation Treas. Reg. 1.6011-9.

This forces the donee organization to determine whether the easement is syndicated. The analysis, which may be difficult for the donee organization to complete, is crucial because failing to make the required disclosures can create significant penalties to the donee organization.

Section 6652(c)(3)(A) provides a penalty for each day the entity fails to file the required disclosure. The penalty is adjusted for inflation and is currently set at $105 per day, not exceeding $54,000 per disclosure. Given that each transaction requires a separate disclosure, an entity that accepts numerous conservation easements per year could face significant penalties for not complying.

The IRS also can make a written demand for the entity to file a disclosure by a specified date under Section 6652(c)(3)(B). If the entity fails to file that disclosure by the specified date, it will be subject to a separate penalty of $105 per day, not to exceed $10,500 per disclosure.

While the donee organization could avoid penalties if it had reasonable cause for failing to comply with the disclosure requirement under Section 6652(c)(5), a reasonable cause analysis typically focuses on all relevant facts and circumstances.

One option is for the donee organization to rely on other parties to the transaction (typically the taxable parties) to notify it, under Treas. Reg. 301.6011(g)-1, if the conservation easement is syndicated and thus a prohibited tax shelter transaction. But that may not be enough to prove reasonable cause and avoid penalties for failing to disclose the transaction.

Donee organizations need to be aware of the potential ramifications that eliminating or limiting the Section 4965 carveout will have. There’s a potential liability for excise taxes, increased costs associated with additional reporting and disclosure obligations, and potential penalties for failing to make the required disclosures.

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

Erin R. Hines is a member of Chamberlain Hrdlicka’s tax controversy and litigation group and has extensive experience in all facets of federal tax controversy, including IRS examinations, appeals and litigation.

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