The Land Trust Alliance has heard serious concerns from land trusts about tax shelters using conservation for potentially abusive federal income tax deductions. The U.S. Department of the Treasury has also informed the Alliance that it has observed extreme overvaluation of some conservation easement transactions and even some land gifts. While there appear to be few of these transactions, the overvaluation is very large.
Highest ethical principles
The Alliance and its members are committed to operating with the highest ethical principles, and the vast majority of conservation donations are made by generous landowners with true philanthropic intent.
Land trusts are not required to accept any donation where the land trust feels uncomfortable with the valuation or any other aspect of the transaction. The Alliance believes that land trusts must decline to participate in tax shelter transactions even when the donation would lead to extraordinary conservation. Remember that it is illegal to sell federal income tax deductions.
The Alliance believes that these transactions are limited to a small number of promoters but still could damage the reputation and public support of land conservation and land trusts due to the hundreds of millions of dollars in deductions taken. The Alliance is confident that land trusts intend to do the right thing, but a few may have unwittingly participated in these tax shelter transactions.
Tax shelters are not charity
In these transactions, unrelated investors fund land acquisition through various pass-through entities, such as partnerships or limited liability companies. After a short holding period, usually fewer than three years, the entities donate conservation easements (or land) to land trusts and claim deductions based on appraised values that are significantly in excess (often by three to 10 times) of the original acquisition price.
As a result, investors receive exaggerated tax benefits that are worth significantly more than the investors’ initial investment. Typically, promoters organize these transactions in return for high fees. Sometimes promoters offer extraordinary stewardship donations to the participating land trusts.
Partnership tax is an extraordinarily complicated area of law, and the ultimate determination of any transaction’s legality rests solely with the IRS based on facts known only to the taxpayer and his or her advisers. The Alliance has repeatedly and aggressively pursued the IRS to issue detailed guidance addressing these tax shelters. Investors profiting from what is supposed to be a charitable gift does not represent the spirit of charity, nor does it reflect Congress’ intent.
Recommendations to maintain public confidence
Because of the likely potential harm to the land trust community, the Alliance recommends that member land trusts evaluate their existing land and easement acquisition policies and procedures and incorporate the following cautionary measures to ensure that they do not facilitate or participate in tax shelter transactions. Because of the importance of this matter, we urge each land trust to share this advisory with its board members, attorneys and appraisers.
Land Trust Standards and Practices prohibit a land trust from knowingly participating in potentially fraudulent or possibly abusive transactions (Practices 1D, 10B and 10D). Practice 8K requires land trusts to examine projects for potential credibility issues. Practice 9A requires that a land trust obtain a legal review by an attorney of every transaction appropriate to its complexity.
Tax abuse and tax fraud are illegal, and even the most significant conservation benefit does not justify participation in a tax shelter transaction. Exercise full caution in transactions with any indicators of concern (see below) and consult with your professional advisers before accepting the land or conservation easement.
A written policy will help guide land trusts in avoiding tax shelters, in decisions and actions on signing Form 8283 and in communicating with donors. The Tax Code defines substantial overvaluation as 150 percent of actual value and gross overvaluation as 200 percent of actual value (see Code sections 6662(e) and (h)). The integrity of land conservation and continued public support depend upon your careful work and due diligence.
Cautionary measures for avoidance of tax shelter transactions
Seek the advice of the land trust’s external legal and tax advisers (not a board member or staff) and any qualified in-house legal and tax counsel to evaluate your existing acquisition policies and procedures and consider adding the following cautionary measures to ensure that your land trust does not unwittingly facilitate or participate in abusive tax shelters with a pass-through entity (S corporation, general partnership, limited partnership or limited liability company — “donor entity” for purposes of this advisory).
At the outset of any transaction, ask the donor entity if it is a partnership or other pass-through entity involving unrelated partners. If yes, then and only then conduct further diligence. This includes asking the donor entity the following questions, having the land trust attorney perform reasonable due diligence of public records and having experienced land trust personnel independently check relevant information (for example, a title review and any documents filed with the secretary of state):
- Are there multiple unrelated people who are members of the donor entity that owns the property to be conserved?
- How long have the donor entity and the people who hold partnership or membership interests in the entity held the property, and what are their respective ownership interests?
- What was the original purchase price or basis of the property to be conserved?
- Does the donor entity intend to claim a federal tax deduction in connection with the transaction? How will that be apportioned?
- What are the donor entity’s expectations for value of the land or easement donation?
- Will the donor entity make the appraisal available to the land trust prior to closing?
A donor entity is not obligated to answer any of these questions; however, land trusts are not obligated to accept contributions about which they have unresolved questions.
Indicators of concern
The land trust should have serious concerns about a transaction with a potential donor entity of unrelated individuals if the information that the land trust obtains reveals any one or more of the following indicators of concern:
- The donor entity is being advised or managed by a promoter (a person or entity that is being paid to help facilitate the proposed contribution and/or is being paid to otherwise promote, organize or secure the transaction [other than the entity’s formal legal counsel]), and unrelated investors in the donor entity have been solicited to purchase an investment with claims of significant tax benefits.
- The donor entity is organized so that the people involved participate in the pass-through of tax deductions disproportionate to their respective ownership interests in the donor entity.
- The donor entity recently acquired the land from unrelated persons within the 36 months prior to the initiation of either the appraisal or conversations with the land trust, whichever is earlier.
- The donor entity anticipates a total aggregate deduction in excess of 2.5 times the entity’s acquisition cost for the property within 36 months of acquisition.
- If the land trust discovers any of the above indicators of concern, it should immediately seek expert legal and tax counsel and, relying on such counsel’s advice, take the following steps:
- Ensure continued involvement of the land trust’s external legal and tax advisers in the transaction.
- Inform the donor entity in writing of its requirements for accepting a donation of land or conservation easement.
- Ask the donor entity to certify in writing:
- The identity of all persons with a direct or beneficial interest in the donor entity who will share in any related tax deduction.
- That the shares of the tax deduction resulting from the proposed land or easement contribution will be allocated proportionally to any individual’s interest in the donor entity.
- The date on which and price at which the donor entity acquired the property.
- The identity of any promoter who played a role in facilitating the proposed contribution or otherwise promoting, organizing or securing the transaction and, if so, his or her relationship to the donor entity.
- The identity of the donor entity’s legal and tax advisers regarding federal gift substantiation requirements associated with the land or conservation easement donation.
- That the donor entity and each of its partners or members have been informed and understand that the land trust will only close on the transaction and subsequently sign a Form 8283 if the fully completed form is presented to the land trust with the full appraisal sufficiently prior to the closing to enable the land trust to read and understand the full completed Form 8283 with all attachments.
- Remember to request that the land trust be named as an intended recipient of any appraisal, if that will be necessary to obtain the appraisal.
- That the donor entity and each of its partners or members have been informed by the land trust in writing and understand that the land trust reserves the right not to accept the land or conservation easement and withdraw from the transaction at any point and also to refuse to sign Form 8283 if it believes the appraisal indicates an increase in value of 2.5 times the basis in the property within 36 months and the value of the donation is $1 million or greater.
- That the donor entity and each of its partners or members have been informed and understand that the donor entity and each of its partners or members are solely responsible for relying on their own judgment and/or professional advice furnished by the appraiser and all legal, financial and accounting professionals engaged by the donor entity and its partners or members in connection with the conservation donation.
- That the land trust is providing no representation with respect to the availability, amount or effect of any deduction, credit or other benefit to the donor entity, its partners or members under the Internal Revenue Code, the Treasury regulations or other applicable law or to the value of the conservation easement or the underlying land.
- That the donor understands the IRS rules and the penalties associated with overvaluation and has been fully and competently advised by the donor’s tax adviser as to all the tax rules associated with a qualified contribution of a conservation easement or land.
Action steps on identification of concerns
The land trust should withdraw from the transaction prior to accepting the proposed conservation easement or land gift, after consulting with outside expert legal and tax counsel:
- If information gained during the “cautionary measures” phase indicates the appraisal shows or will show an increase in value of more than 2.5 times the basis in the property within 36 months and the value of the donation is $1 million or greater.
- If the land trust has significant concerns about the allocation of the anticipated deduction within the donor entity or the commitment of its partners or members to conservation of the property and adherence to the conservation easement restrictions.
If there is no apparent overvaluation of the donation, but the land trust has significant concerns on transaction structure or stewardship, then it expresses its serious concerns to the donor in writing, obtains the certification described above from the donor entity before closing and keeps a copy of the documents in its file.
The land trust should refuse to sign Form 8283, after consultation with outside counsel, if it has already accepted a gift of a conservation easement or land and is subsequently presented with a Form 8283 or an appraisal or both showing an increase in value of more than 2.5 times the basis in the property within 36 months and the value of the donation is $1 million or greater. If the land trust has other reservations about the transaction after closing and before signing Form 8283, it should express its concerns to the landowner in writing and keep a copy of the document in its file.
Remember that this is an iterative and additive assessment not a mechanical or narrow checklist. Start this process in the earliest conversations in order to identify and decline to participate in all tax shelter transactions before the transaction is concluded. If you become aware of a tax shelter transaction or have questions or concerns, call or write to Russ Shay at 202-800-2230 or Leslie Ratley-Beach at 802-262-6051.
Last revised August 8, 2016