Only months after the U.S. Tax Court and the 6^th Circuit Court of Appeals ruled that the IRS failed to adhere to the Administrative Procedures Act when it promulgated Notice 2017-10 and designated most Syndicated Conservation Easements (“SCEs”) as listed transactions, President Biden signed a $1.7 trillion government funding bill, which among other things, aimed at ending SCEs. The Internal Revenue Service and the Department of Justice have been targeting SCEs for years and now Congress has stepped in.

Included within the legislation is a bipartisan set of rules that essentially closes the door for pass-through entities (“PTEs”) that exploit the charitable tax deduction that was initially approved by Congress to promote protection and preservation of environmentally and historically important land. With regard to conservation easements, the legislation specifically provides that in order to now qualify as a qualified conservation easement, to enable a charitable tax deduction, the value of a conservation easement contribution allocated to an owner of a PTE cannot exceed 2.5 times that owners adjusted tax basis (which is generally the amount contributed by the owner to the PTE as adjusted by certain other tax items). If the value does exceed this basis limitation, the IRS is given statutory authority to disallow the deduction in its entirety and assess significant civil penalties.

Although the new legislation does not ban all conservation easements, at the current top tax rates it makes nearly all contributions of conservation easements at best tax neutral – taking away all the motivation to put together and market SCEs. Additionally, PTEs who make any otherwise qualified conservation easement contribution (including any SCEs) will be required to make significant disclosures regarding the details of the transaction to the IRS, which will put those transactions at risk of being scrutinized by the IRS.

There are some limited exceptions built into the new law.  First, if the PTE has held the property that is contributed more than three years and each owner has also held their interest in the PTE for that length of time, the basis limitation does not apply. Additionally, there are some limited exceptions that apply to family owned PTEs and contributions involving historic structures.

The legislation is a clear and strong response to the perceived abuse of the system that was in place to promote conservation efforts of open land – the overvaluation of conservation easement contributions. While this legislation will likely halt the motivation of promotors and investors to create any new SCEs, there is no indication that the IRS and DOJ are relenting in their pursuit of previous SCE deals. The IRS has not altered its enforcement position or provided any better terms in its settlement offers to taxpayers and grand juries are still collecting evidence in ongoing investigations. The IRS and DOJ continue to have broad bipartisan support for aggressively pursuing conservation easements that allegedly use inflated appraisals. 

Now more than ever, individuals, partnerships and corporations who are interested in conservation easements should contact legal counsel prior to entering into the transaction. Anyone who personally invested or has clients who invested should contact legal counsel if they receive a civil subpoena, grand jury subpoena, notice of an audit, or want to assess their liability.