The Internal Revenue Service has issued a notice alerting taxpayers and practitioners that it considers certain syndicated conservation easement transactions to be tax avoidance transactions.

In Notice 2017-10, the IRS said it is identifying the transactions, and substantially similar transactions, as “listed transactions,” meaning they could be considered abusive. The notice also alerts people involved with the transactions that “certain responsibilities” may arise from their involvement with them.

Bloomberg News

Section 170(e)(1) of the Tax Code allows a deduction for a qualified conservation contribution, which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. The contribution should include a restriction, granted in perpetuity on the use that can be made of the real property.

The issue of conservation easements came up during the presidential campaign this year when reports emerged that Donald Trump was likely claiming tax deductions for property on some of his golf courses and estates, including his Mar-a-Lago complex in Palm Beach, Florida. The Wall Street Journal speculated the conservation easements could be one reason for the continuing IRS audits that Trump claimed prevented him from releasing his tax returns to the public.

The transactions described in the IRS notice, however, appear to be a different matter and are described in terms of an investment scheme. The IRS and the Treasury Department have become aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. In those transactions, a promoter offers prospective investors in a partnership or other pass-through entity the possibility of a charitable contribution deduction for donation of a conservation easement.

The promoters first identify a pass-through entity that owns real property, or they form a pass-through entity to acquire real property. Additional tiers of pass-through entities may then be created. The promoters then syndicate ownership interests in the pass-through entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that they could receive a share of a charitable contribution deduction equaling or exceeding an amount two and a half times the amount of the investment. The promoters also receive what purports to be a qualified appraisal, greatly inflating the value of the conservation easement, based on unreasonable conclusions about the development potential of the property.

After an investor puts money in the pass-through entity—either directly or through one or more tiers of pass-through entities—the entity then donates a conservation easement encumbering the property to a tax-exempt entity. According to the Tax Code, investors who have held direct or indirect interests in the pass-through entity for a year or less may rely on the entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property. Meanwhile, the promoter receives a fee or other consideration for the transaction, which may be in the form of an interest in the pass-through entity.

The IRS said it intends to challenge the purported tax benefits from such transactions based on the overvaluation of the conservation easement. The IRS said it may also challenge the purported tax benefits from the transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.

Michael Cohn

Michael Cohn, editor-in-chief of, has been covering business and technology for a variety of publications since 1985.