On October 8, 2024, the Internal Revenue Service (IRS) issued new regulations via TD10007, now promulgated at 26 CFR § 1.6011-9, which designate certain conservation easement and land donations as “listed transactions.” This means the IRS is requiring certain taxpayers and their material advisors, including accountants, attorneys, and possibly land trusts, to file additional forms or face severe financial penalties. The taxpayer’s filing must be made on Form 8886 no later than January 6, 2025. The material advisors’ filing must be made on Form 8918 no later than January 30, 2025.

Who is affected by TD10007?

The purpose of the listing is so that the IRS may gather additional information about abusive tax shelters known as “easement syndications.” Unfortunately, in its zeal, the IRS drafted the regulations with such a broad brush that they will affect many legitimate donors.

If your conservation easement or land was donated by a pass-through entity and the donation claimed was more than 2.5 times the basis of the entity or its members in the underlying property, then this regulation may apply to your donation.

A pass-through entity is defined to include partnerships, limited liability companies, non-grantor trusts, and S-corporations. The calculation of the applicable basis can be quite complex and should be undertaken in consultation with the taxpayer’s tax advisers.

Taxpayer Filing

If the listing applies to your donation, the time periods for filing are different for the taxpayer versus the material advisors to the taxpayer.

The taxpayer’s filing is only required if the audit period for the donation is still open. Barring fraud or substantial omission of income, the audit period for a charitable deduction is typically three years following the tax filing for the deduction (six years may be likelier if the deduction was large)—this includes years in which any carryforward deductions were claimed, which could extend up to 15 years beyond the original easement recording date or five years beyond the deed recording date for fee title donations.

For example, if an easement or parcel of land was donated in 2016 and the deduction was fully claimed in 2017, the taxpayer may not need to file Form 8886, without further review of the deduction value relative to basis. But, if the taxpayer has continued to claim carryforward deductions up to and including for the taxpayer’s tax filing in 2020, you should determine with your advisers whether the amount of the deduction meets the applicable 2.5x basis threshold. Otherwise, the charitable deduction for that easement could be denied by the IRS and the IRS could assess substantial financial penalties (up to $200,000).

Material Advisors’ Filing

The taxpayer’s material advisors are required to file Form 8918 if the material advisor provided certain types of advice on or after October 8, 2018. Although the regulation provides that a taxpayer need not file if the audit period has closed, no such exemption is provided to material advisors.

The definition of “material advisor” is complex, but it includes anyone who has provided the taxpayer with a “tax statement” on or after 10/8/2018 and has received any consideration exceeding $10,000.

In its preamble comments to the regulation, the IRS says that “tax statement” does not include the land trust’s signing of the Form 8283, the contemporaneous written acknowledgment, or the conservation easement or deed. However, there is the risk that preparation of the baseline report or other supporting documents could be deemed to be a “tax statement.”

The $10,000 consideration threshold does not include stewardship endowments but, again, as indicated in the IRS’s preamble comments, transaction fees or other payments that are not used primarily for monitoring and enforcing the easement can count as consideration that gives rise to material advisor status.

The Land Trust Alliance has made resources available to member land trusts here to assist with making this determination of whether the land trust is a material advisor if it is the recipient of a gift that is subject to the listing.

Penalties for Failing to File

If a taxpayer fails to file in accordance with the regulation, the IRS may assess a penalty in the amount of 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if the transaction were respected for federal tax purposes), subject to a cap of $100,000 for natural persons and $200,000 for other entities. In addition, a 20% penalty applies to understatements resulting from listed transactions. That penalty increases to 30% if the taxpayer does not disclose the transaction.

If a material advisor fails to file in accordance with the regulation, the IRS may assess the material advisor a penalty of up to $200,000 for failing to file Form 8918, plus $10,000 per day for failing to provide the additional required information on Form 13976 after the IRS affirmatively requests it from the advisor.

If you believe this listing affects your donation, please consult with your legal or tax advisers as soon as possible. Note that this listing will affect future donations as well, at least while the regulation is in place.

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