Notice 2017-23: Disclosure and Filing Requirements
Gain clarity on the reporting duties created by IRS Notice 2017-23 for those involved in certain conservation-focused tax arrangements.
The Internal Revenue Service (IRS) has identified certain arrangements involving syndicated conservation easements as “listed transactions,” a designation for arrangements believed to have a potential for tax avoidance. A listed transaction is a reportable transaction that the IRS has determined to be a tax avoidance scheme, which triggers disclosure requirements for those involved. Final regulations issued in October 2024 now govern the reporting of these transactions, upholding their classification as listed transactions.
The Transaction Identified in the Guidance
The transaction begins with a promoter, or a group of promoters, forming a pass-through entity such as a partnership. This entity then acquires a parcel of land, or in some cases, acquires an entity that already owns the land.
Following the acquisition, the promoter markets and sells interests in the pass-through entity to investors. Promotional materials suggest that investors could receive a charitable contribution deduction worth at least two and a half times their investment. For instance, an investor might contribute $50,000 with the expectation of receiving a $125,000 tax deduction. The Internal Revenue Code, however, limits the charitable contribution deduction for such transactions to 2.5 times the partner’s basis in the partnership.
After securing investor funds, the pass-through entity donates a conservation easement on the property to a qualified tax-exempt organization. A conservation easement is a legal agreement that permanently limits uses of the land to protect its conservation values. The entity then obtains an appraisal that values the donated easement at a significantly inflated price, far exceeding the partnership’s original cost, which is the mechanism used to generate the large tax deduction.
The charitable contribution deduction, based on the inflated appraisal, is allocated among the investors or partners. These investors then claim their portion of the deduction on their personal income tax returns. The IRS has stated its intent to challenge these deductions based on overvaluation and other legal doctrines.
Identifying Participants and Their Roles
A “participant” with a disclosure obligation includes several parties. The primary participants are the investors who acquire an interest in the pass-through entity and are allocated a portion of the charitable contribution deduction. These individuals or entities claim the deduction on their income tax returns.
Another category of participants includes promoters who organize or establish the pass-through entity. This group is responsible for structuring the deal, acquiring the land, and marketing the investment to potential participants.
The definition of a participant also extends to “material advisors,” which can include professionals like accountants, attorneys, and appraisers who provide advice related to the transaction. Anyone who makes a tax statement regarding the potential tax benefits of the donation and receives a minimum fee for their services can be classified as a material advisor. Material advisors are required to file Form 8918, Material Advisor Disclosure Statement.
Disclosure Requirements and Required Forms
All identified participants are required to file Form 8886, Reportable Transaction Disclosure Statement. This form is the primary tool the IRS uses to gather information about listed transactions and the parties involved. Failure to file this form can lead to significant penalties.
When completing Form 8886, participants must identify the transaction as the “Syndicated Conservation Easement” listed transaction. The form requires the name and tax ID number of the pass-through entity that donated the easement and information identifying the promoter.
Participants must also report the amount of the charitable contribution deduction they claimed on their tax return. The form also requires a description of the transaction’s features and the expected tax benefits. Gathering documents from the promoter and the pass-through entity’s tax filings is a necessary step before completing the form.
Filing Procedures and Deadlines
A completed Form 8886 must be sent directly to the IRS Office of Tax Shelter Analysis (OTSA). The form can be sent by mail or fax; the address and fax number are in the official instructions for Form 8886.
In addition to the submission to OTSA, a duplicate copy of Form 8886 must be attached to the participant’s federal income tax return for each year of participation. For example, if an investor claimed deductions from the easement in multiple years, a Form 8886 must be attached to the tax return for each of those years.
The penalty for failing to disclose a listed transaction is 75% of the decrease in tax shown on the return as a result of the transaction. This penalty has a minimum of $5,000 for individuals and $10,000 for other entities, and it is capped at a maximum of $100,000 for an individual and $200,000 for other entities. While initial deadlines for past transactions have passed, they remain relevant for taxpayers addressing non-compliance or filing amended returns.