IRS Notice 2017-37: Listed Transaction Disclosure Rules

The Internal Revenue Service (IRS) identified certain syndicated conservation easement arrangements as “listed transactions” in Notice 2017-37, viewing them as having the potential for tax avoidance. After the notice was successfully challenged in court for procedural reasons, the Treasury and IRS issued final regulations in late 2024. These regulations properly designate these specific arrangements as listed transactions, ensuring the disclosure rules are legally enforceable. The reporting obligations for those involved in these transactions remain in effect under the new regulations.

The Transaction Identified in Notice 2017-37

The IRS defines the targeted transaction to include specific elements. An element is the involvement of promoters who organize and syndicate ownership interests in a pass-through entity, such as a partnership or an S corporation. The entity’s primary asset is a piece of real property, and interests are sold to various investors.

A characteristic of these transactions is the promotional material provided to potential investors. These materials suggest that an investor is likely to receive a charitable contribution deduction that is disproportionately large compared to their initial investment. The IRS targets transactions where the promised deduction equals or exceeds two and a half times the investment amount, known as the “2.5 times rule.”

The last step involves the pass-through entity donating a conservation easement on its property to a qualified organization. A conservation easement is a legal agreement that permanently limits uses of the land to protect its conservation values. Following the donation, the entity allocates the large charitable contribution deduction among its investors, who then claim it on their personal tax returns.

Disclosure Requirements for Participants

Individuals or entities who invest in a syndicated conservation easement transaction are considered participants and have specific disclosure duties. The primary tool for this is Form 8886, the Reportable Transaction Disclosure Statement, which is available on the IRS website.

On Form 8886, participants must provide a description of the arrangement, the name of the pass-through entity, and the date of their investment. They are also required to disclose the amount of the charitable contribution deduction claimed on their tax return and information about the material advisors and promoters who organized the transaction.

This disclosure is not a one-time event. A participant must file a separate Form 8886 for each taxable year in which they participated in the transaction and claimed a tax benefit from it.

Disclosure Requirements for Material Advisors

The IRS also imposes reporting obligations on “material advisors.” A person or entity qualifies as a material advisor if they provide material aid, assistance, or advice regarding the transaction and derive a minimum level of gross income from these services. This can include promoters, appraisers, accountants, and attorneys who facilitate the arrangement.

Material advisors are required to file Form 8918, the Material Advisor Disclosure Statement. This form requires a detailed description of the transaction’s structure and the tax benefits it purports to offer.

In addition to filing Form 8918, material advisors have a record-keeping duty. They must prepare and maintain a list of all investors or participants to whom they provided assistance. This list must be maintained for a specific period, be furnished to the IRS upon request, and contain each investor’s name, address, and taxpayer identification number.

Filing Procedures and Deadlines

Disclosure forms are sent to a dedicated IRS unit. Both Form 8886 and Form 8918 are mailed to the IRS Office of Tax Shelter Analysis at: Internal Revenue Service, OTSA Mail Stop 4915, 1973 Rulon White Blvd., Ogden, Utah 84201. This centralized submission point ensures that all disclosures are processed by a specialized team.

The deadlines for filing are specific. For ongoing participation, Form 8886 must be attached to the participant’s income tax return for each year of participation, and a separate copy must be sent to the OTSA at the same time. For material advisors, Form 8918 must be filed with the OTSA by the last day of the month that follows the end of the calendar quarter in which the person became a material advisor.

Penalties for Non-Compliance

Failure to comply with the disclosure requirements carries financial penalties for both participants and material advisors. Penalties for non-compliance are fully enforceable under the new regulations.

Participants who fail to file a required Form 8886 for a listed transaction are subject to a penalty equal to 75% of the decrease in tax shown on the return as a result of the transaction. The penalty has a maximum of $100,000 for individuals and $200,000 for entities.

Material advisors face a different set of penalties. For failure to file Form 8918, the penalty is the greater of $200,000 or 50% of the gross income the advisor derived from the activity. This amount increases to 75% of gross income if the failure was intentional. A material advisor who fails to furnish the required investor list to the IRS upon request is subject to a penalty of $10,000 for each day of the failure after a 20-day grace period.