Introduction to Syndicated Conservation Easements

In general, the conservation-easement tax incentive established under Internal Revenue Code section 170(h) has enjoyed much support from taxpayers and from Congress. However, over the last decade, the syndication of conservation-easement transactions among unrelated participants, or “investors,” has developed a controversial reputation within the tax community. Some argue such syndicated conservation-easement transactions are an effective method for conserving land, while others argue they are simply abusive tax shelters.¹

As a result of all the controversy surrounding Syndicated Conservation Easements, in December 2016, the Department of the Treasury and the IRS issued IRS Notice 2017-10.² This notice designated syndicated conservation-easement transactions as “listed transactions,” meaning the promoters and participants had to tell the IRS they were involved in such transactions.

Thereafter, in September 2018, the IRS announced that Syndicated Conservation Easement Transactions were one of its compliance campaigns.³ Then, in March 2019, the IRS announced that syndicated deals were on their annual “Dirty Dozen” list of Tax Scams to avoid.⁴

So, what is a syndicated conservation easement transaction? In simplest of terms, a syndicated conservation easement transaction allows a pool of investors to form a venture (oftentimes a partnership of S Corporation) to acquire land from a promoter that is then donated to a qualified charitable organization, usually legitimate land trusts, for the purpose of conserving the property for certain enumerated altruistic and charitable purposes, such as for outdoor recreational use by the general public, or protecting wildlife or preserving historic structures. Although the various offerings differ in their specifics, as a general rule the outcome is nearly always the same: for every dollar a taxpayer pays to a promoter to invest in such a venture, he or she is effectively buying tax deductions which help reduce their overall tax liabilities.⁵

As a general rule, tax law grants to taxpayers the ability to claim a charitable contribution deduction for property contributed to a qualified recipient organization.⁶ However, no charitable contribution deduction is allowed for any transfer or contribution of less than the taxpayer’s entire interest in the property, such as a grant of only certain rights to a piece of land. This is known as the “partial interest rule”.⁷

Fortunately, the Internal Revenue Code (“Code”) provides an exception to this partial interest rule, for “qualified conservation contributions.”⁸ A qualified conservation contribution is a contribution of a qualified real-property interest to a qualified organization exclusively for conservation purposes.⁹

As one can see, there are five elements that need to be met for this exception to be met.

First, there must be a “contribution” of some sort. This means that there must be some sort of transfer of money or property made with charitable intent and without receiving any adequate consideration.¹⁰ In other words, a voluntary “gift” must be made.

Second, the gifted item must be that of a “qualified real property interest.” As relevant here, a qualified real-property interest includes a restriction granted in perpetuity on the use which may be made of the real property (i.e., an easement).¹¹

Third, the real property must be gifted to a “qualified organization.”¹² Qualified organizations include certain governmental units, public charities that meet certain public support tests, and certain supporting organizations.

Fourth, the easement granted must be made “exclusively” for one or more “conservation purposes.” The term exclusively, as used here, means that the conservation purpose covered by the easement must be “protected in perpetuity.^”14

In order to satisfy the “protected in perpetuity” requirement, the Internal Revenue Code (“Code”) and regulations require that all the following requirements be met:

• The no-surface-mining requirement.¹⁵
• The eligible donee requirement.¹⁶
• The restriction on transfer requirement.¹⁷
• The no inconsistent use requirement.¹⁸
• The general enforceable in perpetuity requirement.¹⁹
• The mortgage subordination requirement.²⁰
• The future defeating events requirements. ²¹
• The mineral extraction restrictions requirement.²²
• The baseline documentation, documentation.²³
• The donee notice, donee access, and donee enforcement requirements.²⁴
• The judicial extinguishment requirements.²⁵
• The proceeds requirements.²⁶ Reg. section 1.170A-14(g)(6)(ii).

Each must be satisfied at the time of an easement’s donation, and compliance is indirectly policed by the IRS and the courts.²⁷ “The key,” said the Tax Court, “is for a donor to meet [these] unusually complicated rules.”²⁸

Finally, the Code articulates four types of “conservation purposes” that will qualify for the deduction:

• the preservation of land areas for outdoor recreation by, or for the education of, the general public;
• the protection of a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem;
• the preservation of open space (including farmland and forest land) where such preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and
• the preservation of an historically important land area or a certified historic structure.²⁹

Distilled down to its bare essence, essentially a conservation easement is a legal agreement in which a landowner voluntarily gives a qualified organization the right to prevent the landowner (and any future landowners) from developing the land, subject to the terms of the easement. The landowner (“donor”) is said to “grant” a conservation easement to the qualified organization, which is the “holder” of the conservation easement.

Under the Code, when a landowner grants a conservation easement to a qualified organization, the landowner is able to claim a charitable deduction equal to the fair market value of the donated easement as determined at the time the grant is made with such value being determined in a qualified appraisal prepared and signed by a qualified appraiser which must be attached to the return filed by the donor.