IRS looking to crack down on land donation abuse

IRS looking to crack down on land donation abuse

Conservation land easements may be the target of IRS reform before year’s end, according to a member of the agency’s chief counsel.

The main problem: Tax advisers who help landowners sell the tax deductions they get for land donations to other taxpayers. Such moves, called syndications, are typically done because a landowner doesn't have enough income to make full use of a sizable tax deduction.

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Tax deductions cannot be legally sold to other taxpayers, so a structure such as a limited liability company is created, the land becomes an asset of that company, and shares are sold to others. When land is donated, each shareholder can apply any tax deductions to their personal taxes.

While the moves may be technically legal, the Internal Revenue Service can reject such deals if they appear to be motivated only for the purpose of avoiding a larger tax bill. The tough part for the agency is identifying such deals. 

“Here’s some good news, we’ve been very busy and we intend to issue something about abusive syndications soon,” said Karin Gross, supervising attorney in the IRS office of chief counsel. “We’re not going to be lagging in this respect.” 

The news comes to the relief of organizations like the Land Trust Alliance, which promotes land conservation while advocating for tax incentives to encourage people to donate land. 

“We're encouraged to see the IRS will soon take steps to address these types of syndications,” said Andrew Bowman, the alliance’s president, in a statement. “The bottom line is that tax-deductible donations of conservation easements are charitable and serve the public good. Abusive transactions can undermine public confidence in very important conservation work.”

Experts say conservation land easement abuse has been an area of concern, but being able to successfully enforce rules governing land donations would be a challenge for an understaffed IRS.

Tax avoidance schemes. 

Conservation easements restrict the use of land, typically limiting or barring the land from being developed. Land conservation groups promote easements as a way to preserve land. Donors usually receive a series of tax benefits for their land, and the benefits are determined by the appraised value of the land.

Steve Small wrote regulations on conservation land easements for the IRS when he served in the office of the agency’s chief counsel. He said the process for claiming conservation land easements had been straightforward for decades.

“Beginning...maybe a decade or so ago...we started to see these transactions where they’re tax shelters,” Small told The Hill Extra. “The pace of these syndications seemed to pick up enormously,” within the last few years, he added.

Small said conservation land easement abuse has been a “back-burner issue” at the IRS, but, even if it was at the top of their minds, it would be incredibly difficult to act upon because it would require significant auditing.

“Even if they did audit one of these transactions,” Small said, “it could take 10 or 12 years, so that doesn’t do anything for the transactions that occur in the meantime.”

He explained that it would be more efficient for the IRS to require people to list these transactions on their tax returns because it would discourage below-board investments.

“I think that by itself will prevent a lot of the folks from investing in these in the first place,” he stated.

Phony appraisals.  

Small explained that inflated appraisals also wind up fooling people because of the sophistication of syndication packages offered to potential donors.

“Some of these syndication packages look fantastic. They’re professionally done, they’re backed up with all kinds of good reports,” he explained. “If you want to know how appraisers fool people, the stuff looks very convincing.”

While Small is hopeful that listed transaction rules will cut down on the number of bad syndications, he said it’s only a matter of time before someone tries to work around the system.

“This is America. There are promoters and syndicators and advisors and others who are making significant fees putting these transactions together,” he said. “No matter what the rules are in any area, people are going to break ‘em. It’s not just conservation easements. Those are a tiny blip on the screen of abusive tax transactions.”

A pleasant surprise. 

For Russ Shay, the policy director at the Land Alliance Trust, the announcement from the IRS was welcome news. He said the trust began noticing reports about these kinds of transactions showing up in law journals, but that the trust couldn’t get a straight answer from the agency.

“We went to the IRS and said, ‘can you really do this?’ and we couldn’t get them to answer that question. Then we began asking more of them,” Shay said regarding the legality of the transactions. “I’ll be frank, we were quite surprised to hear this announcement.”

Shay explained that the effort to curb these abusive transactions has been a long time coming.

“We’ve discussed with some members of Congress legislation that would potentially make them illegal,” he told The Hill Extra. “We’ve discussed other options to increase the IRS’s ability to enforce in this area, and we’ve been at this with the IRS.”

While the agency’s announcement is a step in the right direction, it’s not a guarantee that these kinds of abusive transactions will stop all together, given that the IRS hasn’t successfully proven these transactions are illegal in court, according to Shay.

“We still don’t know to the extent the IRS can curtail these kinds of transactions,” he explained. “Most reputable securities dealers and CPAs and accountants, financial advisors would steer their clients away from doing this. Could it still be done? Yes.”

Repercussions for charities. 

Shay admitted that it’s hard to track people pushing these faulty transactions, but it’s crucial to protect charitable land donations.

“We hear rumors, we see documents, but we don’t see anyone’s tax returns,” he said. “We’re dealing with donors who are making donations as sort of an act of faith, and we want to make sure that there’s not a barrier to people who are trying to make a charitable donation.”

Small predicted that there will be some resistance to the potential action taken by the IRS.

“There will be people who will fight this. There’s no question,” Small said, while adding this is ultimately in the best interest for land conservation. “It’s charitable giving. There is a tax incentive, but it’s charitable giving, and you don’t want charitable giving to get a bad name.”

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