Good news! Congress has finally passed the Charitable Conservation Easement Integrity Act after years of advocacy by Land Trust Alliance to rein in the tax shelter strategy known as the abusive syndicated conservation easement.
The Act disallows a charitable contribution for certain donations by partnerships where the partners acquired the Property less than three years prior to the easement donation, the partnership is not a family partnership, and the deduction claimed is more than 2.5 times the partners’ basis in the partnership. Here is the language of the Act in full, for reference.
Aside from the relief of having something from Congress on the books to battle the abusive syndicated CE juggernaut, most of us in the (non-shelter) conservation easement community are excited about something else the Act does:
The Act instructs the Secretary of the Treasury to publish safe harbor language for extinguishment clauses and boundary line adjustments.
(Something this blog advocated for way back in 2020—Thank you, Congress and LTA!)
Land trusts and easement donors should keep an eye out for that safe harbor language, and, in the meantime, consider whether they should be prepared to amend their older easements when the safe harbor is issued.
Safe Harbor Timing
The Act gives the IRS 120 days to issue the safe harbor and then donors have 90 days to amend their easements to comply with the safe harbor.
The IRS’s deadline is looming on April 28.
It is unclear whether the IRS will provide the safe harbor via regulation, which requires public notice and comment, or whether the IRS will provide the safe harbor by issuing a memorandum or notice. Given ongoing litigation around whether substantive notices comply with the Administrative Procedure Act, the IRS could choose to be more conservative and go the regulation route, which could take some time to complete after the initial proposed regulation is issued. On the other hand, a simple memorandum or notice will start the 90-day clock for CE amendments immediately upon issuance. You should be prepared to move quickly as soon as the safe harbor is issued.
Should You Amend?
Easement donors who have claimed a charitable deduction for a conservation easement within the past 3 to 6 years and/or plan to continue claiming a deduction for carryforward years, should review their easements and consider whether they will amend to comply with the safe harbor language.
Barring fraud or substantial omission of gross income, the audit period for a charitable deduction is typically three years following the tax filing for the deduction—this includes years in which any carryforward deductions were claimed, which could extend up to 15 years beyond the original easement recording date. So, if an easement was donated in 2015 and the deduction was fully claimed in 2016, that easement does not necessarily need to be amended, without further review of the deduction’s impact on the donor’s reported income for that year. But, if the donor has continued to claim carryforward deductions up to and including for the donor’s tax filing in 2020, the easement should be reviewed to determine whether it complies with the IRS’s current positions on extinguishment and boundary lines and, if not, it should be amended when the safe harbor is issued. Otherwise, the charitable deduction for that easement could be denied by the IRS.
Ninety days is a fairly short time to negotiate, finalize, execute, and record an amendment, so early preparation and discussion between the easement parties is key.
Background About the Safe Harbor’s Content
As I and others have written about ad nauseum, syndications have been the scourge of our work for the past decade. Once the IRS became aware of the billions being bilked from the Treasury by shelter promoters, the agency adopted a take-no-prisoners approach to denying deductions for all conservation easements, not just tax shelter easements. As part of this warfare, the IRS is looking everywhere and anywhere in the Tax Code and the Treasury Regulations for ammunition to find foot-faults in easement language. The IRS found good traction at the Tax Court with a few technical errors in particular: (1) the extinguishment proceeds clause and (2) boundary line adjustments (otherwise known as “floating easements” and “floating building envelopes”).
Extinguishment Proceeds Clause: This blog previously highlighted a few cases in which this clause takes center stage—Coal Property Holdings, PBBM-Rose Hill, and Carroll—Please take a look there see the IRS’s argument in all its gory detail. The IRS started attacking these clauses in 2016, with the Tax Court’s support, and most land trusts and easement donors were caught flatfooted because the clauses being attacked had been used in the community for decades (and even approved by the IRS in previous private letter rulings). At this point, it is unclear what language should be used in the conservation easement. It may come as a surprise, but regulatory language is not necessarily drafted the way contract and deed language is drafted and does not typically contain any nuance. For now, many practitioners have just been parroting the regulation language, but this leaves much to be desired as to how an extinguishment will actually work on the ground.
Boundary Line Adjustments: Similarly, in the mid-teens, the IRS started scrutinizing easements to determine whether they contained any clauses that permitted either the exterior boundary of the easement or any reserved homesites to be relocated. We walked through these arguments in detail in a prior post about the Tax Court’s opinion in Pine Mountain (overturned by the Eleventh Circuit Court, but still applicable in the other circuits).
In sum, mark your calendars and consult with qualified legal counsel to figure out whether you’ll be doing any easement amending in the next few months.
(Note: This article was updated April 25, 2023, to account for the extended audit period of six years for substantial omission of gross income.)