FEE SIMPLE CHARITABLE DONATIONS INSTEAD OF CONSERVATION EASEMENTS HALE E. SHEPPARD Introduction extreme positions, many of which ultimately cannot The IRS has been attacking for several years what it be supported before the Tax Court. This article examines a relatively obscure has labeled syndicated conservation easement trans - Tax Court case actions (“SCETs”). Among the many weapons em - whose importance ployed by the IRS are identifying SCETs as “listed Common challenges by the IRS likely will increase as transactions” in Notice 2017-10, 2017-4 IRB 544, The IRS has been advancing a series of arguments tax disputes launching a “compliance campaign” consisting of to challenge charitable donations by partnerships, involving syndicated conservation dozens of specialized Revenue Agents, featuring and the list continues to expand. easement SCETs on the IRS’s “dirty dozen” list, and engaging transactions and in a widespread practice of claiming that tax deduc - Description of SCETs. In December 2016, the IRS fee-simple property tions related to SCETs should be $0 and imposing announced in Notice 2017-10 that it intended to donations increase. severe penalties. challenge SCETs on grounds that they supposedly Assaults on SCETs are now common knowledge, constitute “tax-avoidance transactions” that in - but what many fail to realize is that the IRS does volve overvaluations of donations. 2 The effect of not limit itself. Indeed, the IRS has also been chal - Notice 2017-10 was that SCETs became what are lenging fee-simple donations of property to charities known as “listed transactions.” 3 Accordingly, for years, applying many of the same techniques participants, material advisors, and others involved used more recently against SCETs. This article ex - with SCETs that occurred during or after 2010 amines a relatively obscure case from yesteryear, are subject to additional reporting, due diligence, Terrene Investments , whose importance likely and record-keeping requirements. For instance, will increase as tax disputes involving SCETs and participants in SCETs must file Forms 8886 (Re - fee-simple property donations increase. 1 This case portable Transaction Disclosure Statement) with demonstrates that the IRS has a history of taking the IRS each year, while material advisors are ob - ligated to file Forms 8918 (Material Advisor Dis - closure Statement). HALE E. SHEPPARD (B.S., M.A., J.D., LL.M., LL.M.T.) is a Share - holder in the Tax Controversy Section of Chamberlain Hrdlicka, Notice 2017-10 broadly defines an SCET as fol - and Chair of the International Tax Section. He specializes in tax lows: audits, tax appeals, and Tax Court litigation. Hale can be reached by phone at (404) 658-5441 or by e-mail at hale.sheppard@cham - • An investor receives promotional materials berlainlaw.com. [oral or written] that offer prospective investors NOVEMBER/DECEMBER 2019 TAXATION OF EXEMPTS 11 in a pass-through entity [such as a partnership] • e donation of the easement lacked charitable the possibility of a charitable contribution de - intent, because there was some form of quid duction; 4 pro quo between the donor and the easement- • Such deduction equals or exceeds an amount recipient; that is two and one-half times the amount of • e donation of the easement was conditional the investor’s investment; upon receipt by the donor of the full tax deduc - • e investor purchases an interest, directly or tion claimed on its Form 1065 (U.S. Return of indirectly (through one or more tiers of pass- Partnership Income); through entities), in the pass-through entity • e easement-recipient failed to give a proper that holds real property; “contemporaneous written acknowledgement” • e pass-through entity that holds the real prop - letter; erty contributes a conservation easement en - • e appraisal was not attached to the partner - ship’s Form 1065; The IRS announced in Notice 2017-10 that • e appraisal was not prepared in accordance it intended to challenge syndicated with the Uniform Standards of Professional Ap - conservation easement transactions (SCETs) praisal Practice (“USPAP”); on grounds that they supposedly constitute • e appraisal fee was based on a percentage of “tax-avoidance transactions” that involve the easement value; overvaluations of donations. • e appraisal was not timely, in that it was not sufficiently proximate to the making of the do - nation or the filing of the Form 1065; cumbering the property to a tax-exempt entity; • e appraisal was not a “qualified appraisal;” and • e appraiser was not a “qualified appraiser;” • en allocates, directly or through one or more • e Form 8283 (Noncash Charitable Contri - tiers of pass-through entities, a charitable con - butions) was missing, incomplete, or inaccurate; tribution deduction to the investor. • e donor’s cost or adjusted basis in the donated • Following that contribution, the investor reports property, as listed on Form 8283, was improperly on his or her federal income tax return a char - calculated; itable contribution deduction with respect to • Not all appraisers who participated in the analysis the conservation easement. 5 signed Form 8283; Notice 2017-10 also identifies “tacking” of the • e Baseline Report was insufficient in describing holding period of the relevant property as one of the condition of the property; the hallmarks of an SCET. It describes this concept • e conservation easement was not protected in the following manner: “Investors who hold their in perpetuity; direct or indirect interests in the pass-through • Any mortgages or other encumbrances on the entity for one year or less may rely on the pass- property were not satisfied or subordinated to through entity’s holding period in the underlying the easement before the donation; real property to treat the donated conservation • e Deed of Conservation Easement contains easement as long-term capital gain property under an improper clause regarding how the proceeds [Section] 170(e)(1).” 6 from sale of the property upon extinguishment Finally, Notice 2017-10 indicates that the inflated of the easement would be allocated among the values of the easement donation are attributable donor and easement-recipient; to “unreasonable conclusions about the development • e Deed of Conservation Easement contains potential of the real property.” 7 an amendment clause, which, in theory, might allow the parties to modify the donation, aer Technical arguments raised by the IRS. The IRS has taking the tax deduction, in such a way to un - published an audit technique guide (“ATG”) con - dermine the conservation purposes; cerning conservation easement donations, which • e Deed of Conservation Easement contains Revenue Agents and other IRS personnel often follow a merger clause, as a result of which the fee when conducting examinations. 8 The ATG contains simple title and the easement might end up in a “Conservation Easement Issue Identification Work - the hands of the same party, thereby undermin - sheet.” It identifies a large number of technical chal - ing the ability to protect the property forever; lenges ( i.e. , those not related to valuation) that the • e Deed of Conservation Easement was not IRS might raise as a reason for completely disallowing timely filed with the proper court or other lo - an easement-related tax deduction: cation; 12 TAXATION OF EXEMPTS NOVEMBER/DECEMBER 2019 FEE SIMPLE CHARITABLE DONATIONS • e easement-recipient was not a “qualified or - This sounds good, at least in theory. However, ganization;” the reality is that many parties fully disclose fee • e easement-recipient was not an “eligible simple charitable donations to the IRS anyway donee;” and for several reasons. First, the standards in Notice • e property lacks acceptable “conservation 2017-10, as well as the duties to file Forms 8886 purposes” for any number of reasons, including and Forms 8918, apply not only to SCETs, but the habitat is not protected in a relatively natural also to all transactions that are “substantially state, there are insufficient threatened or en - similar” to SCETs. This term broadly encom - dangered species on the property, the habitats passes any transaction that is expected to obtain or ecosystems to be protected are not “signifi - the same or similar types of tax consequences cant,” the public lacks physical or visual access and that is either factually similar or based on to the property, the conservation will not yield a significant public benefit, the property lacks historical significance, the conservation purpose The IRS has published an audit technique does not comport with a clearly-delineated gov - guide concerning conservation easement ernment policy, the easement allows uses that donations, which Revenue Agents and are inconsistent with the conservation purposes, other IRS personnel often follow when the donor has certain “reserved rights” that in - conducting examinations. terfere with or destroy the conservation pur - poses, etc. 9 a similar tax strategy. 10 The regulations under - As if this were not enough, the “Conservation score the following about the concept: (1) The Easement Issue Identification Worksheet” in the term “substantially similar” must be broadly ATG expressly indicates that these are not all the construed in favor of making disclosures to the possibilities. Indeed, it states that “[t]his worksheet IRS; (2) Receipt of a tax/legal opinion regarding is not an all-inclusive list of potential issues for do - the tax consequences of a transaction is not rel - nations of conservation easements [and] users