Tax Incentives for Conservation Easements in Headlines Lately
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hy have conservation easements been in the headlines so much lately? What property rights do they create, and what tax benefits can be obtained? Creating a conservation easement is one of the strategies available under the Internal Revenue Code (Code) for estate and income tax planning purposes. Conservation easements are a niche tool not widely used by general estate planning practices. This article sheds light on the conservation easement mechanism for an estate planner and the issues related to conservation easements addressed in recent years by the courts, the legislature, and the Internal Revenue Service (IRS).
Tax Notes (Apr. 10, 2023). Some experts have been advocating for the IRS to address this backlog in a settlement program; a limited one had been rolled out by the IRS Office of Chief Counsel in 2020 with little success (IR-2020-130, CC-2021-001). The largest offenders pursued by the IRS have been syndicated conservation easement promoters facilitating large fund partnerships to buy land and donate rights to develop it to generate substantial tax deductions. In 2017, the IRS issued Notice 2017-10 (later modified by Notice 2017-29), designating a syndicated conservation easement deal as a listed reportable transaction subject to penalties under Code § 6662A. In 2022, however, the Sixth Circuit (Mann Construction Inc. v. U.S., 27 F. 4th 1138 (6th Cir. 2022)) and the Tax Court (Green Valley Investors LLC et al. v. Comm’r, 159 T.C. No. 5 (2022)) held that the IRS lacks authority to identify listed transactions by way of a notice for failure to comply with the notice and comment requirements of the Administrative Procedure (APA). This led to the issuance on December 6, 2022, of proposed regulations (REG106134-22) requiring disclosure of syndicated conservation easement deals as potential listed transactions under threat of perjury. In March 2023, a settlement was reached in the amount of $6 million between the IRS and EcoVest Capital Inc. in a conservation easement promoter injunction and disgorgement lawsuit. See Kristen A. Parillo, EcoVest Paid $6 Million to Settle DOJ Easement Promoter Suit, Tax Notes (Apr. 10, 2023). The real estate company promoted conservation easement transactions
Summary of Recent Developments Conservation easements have been, for some time, an audit target for the IRS. Besides challenging the valuation of the conservation easement deduction, more recently the IRS has been disallowing the deduction based on the failure to meet the requirement that the easement exist in perpetuity (as illustrated by several recent court decisions discussed below). There is an estimated backlog of over 750 docketed conservation easement cases in the Tax Court. See Armando Gomez and Roland Barral, “It’s High Time to Clear Out the Tax Court’s Easement Backlog,” Juliya L. Ismailov is an associate at Sullivan & Worcester LLP in New York, New York. She is a member of the ABA RPTE’s Business Planning and Litigation, Ethics & Malpractice Groups.
Published in Probate & Property, Volume 37, No 5 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 58
September/OctOber 2023
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By Juliya L. Ismailov
