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IRS Issues Proposed Regulation on Conservation Easements as Listed Transactions, but that Doesn’t Mean It Is Acquiescing to Court Decisions by ROBERT S. HORWITZ

In Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (Nov. 9, 2022), the Tax Court invalidated Notice 2017-10, which designated syndicated conservation easements as listed transactions, because it was a legislative rule that was issued without complying with the notice and comment provisions of the Administrative Procedures Act (“APA”).  We recently blogged on the Tax Court’s decision.  See, https://www.taxlitigator.com/wp-content/uploads/2022/11/Blog-The-Tax-Court-Gives-a-Primer.pdf.   

Less than a month after the Tax Court published its opinion, the IRS issued a Notice of Proposed Rulemaking and Notice of Public Hearing on a proposed regulation on “Syndicated Conservation Easement Transactions as Listed Transactions” as Treas. Reg. §1.6011-9.  87 Fed. Reg. 7185 (Dec. 9, 2022).  While this may appear to be a concession of error by the IRS in issuing a listed transaction notice without following notice and comment rule making procedures, Part 7 of the Preamble to the Notice of Proposed Rulemaking states that Treasury and the IRS disagree with Green Valley Investors , but:

… to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation, the Treasury Department and the IRS are issuing these proposed regulations to identify certain syndicated conservation easement transactions as listed transactions for purposes of all relevant provisions of the Code and Treasury Regulations.

These proposed regulations inform taxpayers that participate in syndicated conservation easement transactions, and substantially similar transactions, and persons who act as material advisors with respect to these transactions, and substantially similar transactions, that, once these proposed regulations are published in final form, those taxpayers and material advisors must disclose the transactions in accordance with the final regulations and the regulations issued under section 6011 and 6111. Material advisors must also maintain lists as required by section 6112. Prior to the date these regulations are published as final regulations, it is the position of the Treasury Department and the IRS that disclosure and list maintenance requirements for syndicated conservation easement transactions identified as listed transactions in Notice 2017-10 continue to be in effect, other than in the Sixth Circuit. In addition, taxpayers, including taxpayers in the Sixth Circuit, who have filed a tax return reflecting their participation in a syndicated conservation easement transaction before the final regulations are published and who have not disclosed the transaction pursuant to Notice 2017-10 will be required to file a disclosure statement within 90 calendar days after the date on which the final regulations are published if the period of limitations for the transaction remains open. Material advisors also have disclosure and list maintenance obligations with respect to such transactions.

      In other words, we can expect that the IRS will continue to advocate, outside of the Sixth Circuit, that Notice 2017-10 is valid and will continue to assert penalties against taxpayers and material advisors who fail to file disclosure statements and material advisors who fail to maintain lists. 

The Preamble to the proposed regulations discusses:

  • The reportable transaction “regime;”
  • The duty of participants to disclose reportable transactions and the penalties for failing to disclose;
  • The duty of material advisors to disclose reportable transactions and maintain lists and the penalties for failing to disclose and maintain lists;
  • Tax-exempt entities as parties to prohibited tax shelter transactions;
  • Provisions of IRC §170 relating to conservation easements;
  • Notice 2007-10;
  • The purpose of the proposed regulations; and
  • An explanation of the rules.

             Other than Part 7, discussed above, the part of the preamble that I found of interest was Part 4, concerning tax-exempt entities involvement in prohibited tax shelters.  IRC §4965 was enacted to deter tax-exempt entities from facilitating prohibited tax-shelter transactions, including listed transactions.  A tax-exempt entity which facilitates a prohibited tax shelter transaction by reason of its tax-exempt, tax-indifferent, or tax-favored status, and its managers are subject to an excise tax and the entity is subject to certain reporting and disclosure obligations.  Part 4 contains a detailed discussion of the taxes under §4965 to which a tax-exempt entity and its managers could be subjected and the disclosure and reporting requirements imposed on tax-exempt entities that are parties to tax shelters.

Note: the essence of syndicated conservation easement transactions is the donation of an easement to a tax-exempt entity.  This would seem to make those entities subject to the §4965 excise tax.  The proposed regulation does not list tax-exempt entities to whom conservation easements are donated as participants in the transaction and expressly excludes them from such treatment.  Thus, a tax-exempt entity will not be subjected to the §4965 excise tax for its role as the donee of an easement. 

            The regulation defines as syndicated conservation easement transaction as one in which:

  • A taxpayer receives promotional material (which can be written or oral) offering investors in pass-through entities the possibility of a charitable contribution deduction that is equal to or greater than 2.5 times the investment in the pass-through;
  • The taxpayer acquires, directly or indirectly through one or more tiers of pass-through entities an interest in a pass-through entity that owns real property;
  • The pass-through entity that owns the real property contributes an easement on such property, which it treats as a conservation easement, to a qualified organization and allocates, directly or through a pass-through, a charitable contribution deduction to the taxpayer; and
  • The taxpayer claims a charitable contribution deduction with respect to the conservation easement on a federal income tax return.

The regulation also defines (a) a charitable contribution deduction relating to a conservation easement; (b) promotional materials; (c) qualified organizations (which includes governmental entities other than the United States) and (d) real property.

Under the 2.5 times investment rule, if the promotional material suggests a range of possible charitable contributions, the highest amount will determine if the 2.5 times requirement is met.  There is a rebuttable presumption that the 2.5 times rule is met if, within 3 years of the taxpayer’s investment, the pass-through entity that owns the real property allocates a charitable contribution deduction to the taxpayer that is equal to or exceeds 2.5 times the taxpayer’s investment.  The proposed regulation also has an “anti-stuffing rule” under which, if the investment in the pass-through is allocable in part to property on which a conservation easement is placed and in part to other property, whether the 2.5 times rule is met will be based solely on the part of the investment allocable to the property on which the conservation easement is placed.

The proposed regulation lists the parties who will be considered participants in a syndicated conservation easement transaction: (1) the owner of a pass-through entity; (2) a pass-through entity; and (3) any other taxpayer whose federal income tax return reflects the tax consequences of or a tax strategy arising from the syndicated conservation easement transaction.

Comments on the proposed regulation must be received by the IRS by February 6, 2023; requests to attend the public must be received by 5 p.m. ET on February 27, 2023; and the public hearing will be held by teleconference on 10:00 a.m. ET on March 1, 2023.   According to the Regulations.gov website, one comment on the proposed regulation has already been submitted.

It is also of interest that in the Preamble to the above proposed regulation, the IRS also makes clear that, while not involving Syndicated Conservation Easement Transaction, it also doesn’t agree with the adverse ruling issued in Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (holding that Notice 2007-83, designating as a listed transaction certain trust arrangements using cash value life insurance, was invalid for failing to follow APA’s notice and comment rulemaking procedure).  So why hasn’t the IRS issued proposed regulations designating as a listed transaction the transaction described in Notice 2007-83?  Two possible reasons: first, the notice was issued 15 years ago and the trust transactions involved are not prevalent any longer; second, the Tax Court is a court of national jurisdiction and is the court which is handling the syndicated conservation easement cases while the Mann Construction decision is only binding in the Sixth Circuit.  Note that since the enactment of the Tax Cut and Jobs Act in 2004, the IRS has issued only six listed transaction notices, four of which were issued more than a dozen years ago.  The number of cases involving listed transactions other than syndicated conservation easements may be few and far between.

Again, it should be expected that the IRS will continue to argue in cases outside the Sixth Circuit that Notice 2017-10 (and other listed transaction notices including 2007-83) is exempt from the APA’s notice and comment rulemaking provisions, possibly in the hope that there will be a conflict in the circuits and the Supreme Court will ultimately resolve whether listed notice transactions are subject to the APA’s notice and comment rulemaking procedures.  It would save time and money if in the future the IRS follows the APA in issuing listed transactions notices.  The APA has several exceptions to the notice and comment rulemaking procedures, including good cause exception where following the procedure would be “impracticable, unnecessary, or contrary to the public interest.”  The Tax Court in Green Valley Investors noted that the IRS expressly waived reliance on this exception.  

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Executive Committee of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions. In 2022 the Tax Section of the California Lawyers Association awarded him the Joanne M. Garvey Award for lifetime achievement in and contributions to the field of tax law.

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