Notice 2017-10: Syndicated Conservation Easement Rules

The Internal Revenue Service (IRS) has identified certain syndicated conservation easement transactions as “listed transactions,” which are considered to have a high potential for tax avoidance. This designation imposes disclosure and reporting duties on those involved. The IRS and the Treasury Department took this step after observing promoters syndicating these deals to offer investors charitable contribution deductions that were significantly larger than the amount they invested.

While initial guidance was issued in Notice 2017-10, it has since been superseded by final regulations for transactions occurring after October 8, 2024. These regulations were established after the original notice faced successful legal challenges.

The Transaction of Interest

A conservation easement is a legal agreement where a property owner voluntarily restricts the future development and use of their land to achieve specific conservation purposes. These restrictions are granted in perpetuity to a qualified organization, such as a land trust or government agency. The owner who donates this easement may be eligible for a charitable contribution deduction, an incentive designed to encourage the preservation of natural habitats and open spaces.

The transaction becomes “syndicated” and draws IRS scrutiny when a promoter organizes a group of investors, often through a partnership or S corporation, to acquire property and donate a conservation easement. These arrangements often use promotional materials suggesting investors can expect a charitable contribution deduction that is at least two and a half times their investment.

The structure involves the pass-through entity purchasing land and holding it for a short period. An appraisal is then obtained that values the property’s “highest and best use” at an amount greater than the purchase price. This valuation is used to calculate the value of the donated conservation easement.

In response to these transactions, Congress passed the SECURE 2.0 Act of 2022. This law disallows a charitable deduction for a conservation contribution by a partnership or S corporation if the deduction is more than 2.5 times the sum of each partner’s or shareholder’s basis in the entity. This rule applies to contributions made after December 29, 2022.

Identifying Participants and Material Advisors

Participants

A “participant” in a syndicated conservation easement transaction is an individual or entity that invests in the arrangement and claims the resulting tax benefit. This means the investor contributes capital to a pass-through entity, such as a partnership or S corporation, that is involved in the easement donation. The defining action of a participant is reporting the charitable contribution deduction, which was allocated from the pass-through entity, on their federal income tax return. If an investor’s tax return reflects a charitable contribution from a transaction that meets the criteria of a listed transaction, they are considered a participant.

Material Advisors

A “material advisor” is an individual or firm that provides assistance or advice related to the syndicated conservation easement transaction. This includes promoters, appraisers, accountants, and legal professionals who are compensated for their services. To be classified as a material advisor, the person must make a tax statement regarding the transaction and receive a minimum level of compensation.

A person is a material advisor if they receive gross income in excess of $10,000 for providing advice to a natural person, or $25,000 for providing advice in all other cases. This compensation can be for services like tax advice or appraisals that support the transaction’s tax consequences.

Required Information for Disclosure

To comply with reporting requirements, participants and material advisors must use IRS Form 8886, “Reportable Transaction Disclosure Statement.” This form is the vehicle for informing the IRS about involvement in a listed transaction.

Completing Form 8886 requires detailed information about the transaction. The filer must identify the transaction by its official name, “Syndicated Conservation Easement,” and reference the applicable IRS guidance. The form requires a factual description of the transaction, including all the steps from the investment in the pass-through entity to the donation of the easement.

The filer must also quantify the tax benefits they expected to derive from the transaction. This includes the amount of the charitable contribution deduction claimed and any other associated tax advantages. The form asks for the identification of other parties involved, such as the name of the pass-through entity that made the donation and any material advisors who provided guidance.

The Disclosure and Filing Process

The filing process involves a dual-submission requirement. The first step is to attach a completed copy of Form 8886 to the relevant federal income tax return for each year of participation in the transaction. For an individual investor, this means including it with their Form 1040 for the tax year in which the deduction was claimed.

The second step is a separate mailing. A copy of the same completed Form 8886 must be sent to the IRS Office of Tax Shelter Analysis (OTSA). This mailing must be done concurrently with the filing of the tax return. Both actions must be completed for each applicable tax year to fulfill the disclosure rules.

Penalties for Non-Compliance

Failure to comply with disclosure requirements for listed transactions carries financial consequences. A participant who does not properly disclose their involvement on Form 8886 can face a penalty equal to 75% of the decrease in tax shown on the return as a result of the transaction. This penalty has a minimum amount of $5,000 for a natural person and $10,000 in any other case, with a maximum of $100,000 for a natural person and $200,000 for other entities.

Material advisors who fail to file the required disclosure statement are subject to a penalty that is generally $50,000.

Following court decisions that invalidated the original notice on procedural grounds, the IRS will abate penalties that were assessed based solely on the authority of that notice. However, new regulations provide a firm basis for enforcing these penalties going forward.

Beyond penalties for non-disclosure, individuals may also face an accuracy-related penalty if the tax deduction from the easement is disallowed. For underpayments resulting from these transactions, a 40% penalty can apply, in addition to paying the back taxes and interest owed.