The IRS issued Notice 2017-10 on December 23, 2016, designating certain donations of conservation easements by partnerships as a “listed transaction.”
While this guidance does not invalidate any compliant conservation easement donation, it does unfairly designate already highly disclosed charitable contributions as “tax avoidance transactions.”
Most conservation easement stakeholders acknowledge that since the incentive’s passage in 1980, there have been limited abuses with conservation easements. There are sensible solutions to curb such problems, but Notice 2017-10 does not solve the primary source of abuse: inaccurate and/or poorly substantiated appraisals, or appraisals that often lead to over-valuation of the development rights being protected within the deed of conservation easement.
1) The Form 8886 does not provide the IRS with any additional substantive information that is not already disclosed on the Form 8283.
Prior to Notice 2017-10, taxpayers were already required to raise their hands when claiming a deduction for a conservation easement donation by including IRS Form 8283, Noncash Charitable Contributions, with their tax return for any deduction claimed for the donation of a conservation easement. Additionally, taxpayers claiming a deduction greater than $500,000 must have a qualified appraisal attached to their tax return. Failure to submit or complete the information required by the Form 8283 (which must also be signed by both the appraiser and the donee) can result in the entire conservation easement deduction being automatically disallowed. Additionally, prior to the Notice, taxpayers were already at risk for penalties if the IRS disagreed with value reported by the taxpayer. Such valuation penalties include a 20% increase of the additional tax owed if the IRS determines the donation’s correct value is between 50% and 66.6% of the taxpayer reported value, and 40% if the IRS determines the value is less than 50% of the taxpayer reported value.
As a result of Notice 2017-10, taxpayers must also fill out Forms 8886, Reportable Transaction Disclosure Statement, which takes, by the IRS’s own estimates, approximately 20 hours to complete. The penalty for a taxpayer who fails to adequately complete and file the Form 8886 can be as high as $100,000. The Form 8886 does not provide the IRS with any additional substantive information that is not already disclosed on the Form 8283 or other information sources or places that are included with the taxpayer’s return.
SOLUTION: If the IRS needs additional information from taxpayers, it would be more effective and far less burdensome for the IRS to ask for the additional information in a revised Form 8283. Consolidated disclosure would ensure compliance through tacking on to the existing disclosure Form 8283.
2) The Notice does not provide for disclosure of information by which decision makers can evaluate the quality or the quantity of the conservation achieved through the conservation easement donation.
SOLUTION: To evaluate whether achieve the congressional intent is being met, the IRS could seek the disclosure of the location, acreage and conservation purposes achieved by the conservation easement donation. This in conjunction with a review of the associated property appraisals would help decision makers ensure that the cost of conservation is balanced with the conservation achieved.
3) The Notice, while discussing the problem of overvalued conservation easement donations, does not actually make an overvalued conservation easement part of the defined listed transaction.
SOLUTION: The IRS should work with stakeholders to develop procedures that will help the IRS better and more efficiently identify problematic appraisals during review.
The ratio contained in the Notice which triggers its application, namely that the charitable contribution deduction could equal or exceed an amount that is two and one-half times the amount of the investor’s investment, is not indicative of whether the donation is overvalued or that is it not supported by an accurate and well-substantiated qualified appraisal. According to Section 170(h), the donor of a conservation easement must hire an independent, qualified appraiser to produce a qualified appraisal that accurately substantiates and describes the fair market valuation of the “highest and best use” of the donated property rights/ property. It is the appraised value that determines the amount a landowner may receive in charitable deductions, in return for permanent conservation.
In addition to these solutions, P4C has a developed a complete listing of Best Practices and continues to develop solutions that can be achieved through legislation. Those Best Practices can be found here.