Senate Finance Committee launches investigation, while anti-syndication bill is introduced in the House and Senate

Abusive syndicated easements are bad news, as described in more detail in my December 2017 article here. The Land Trust Alliance and the IRS have been fighting to shut down this tax shelter for years, and now Congress is jumping into the fray. On March 27, 2019, the Senate Finance Committee announced the beginning of an investigation into abusive syndicated conservation easement transactions. The Committee kicked off its investigation with fourteen individual letters to parties associated with investors known to have engaged in this type of syndicated easement.


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New California Law Tracks Federal Financing Restrictions on Transfer Fees

Last session, California passed California Civil Code Section 1098.6 prohibiting the creation of new transfer fees effective as of January 1, 2019, unless the fee provides a “direct benefit” to the property, as defined under federal regulations.

A “transfer fee” means any fee requirement imposed by a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of real property (or an interest in real property), that requires a fee to be paid as a result of a transfer of the property.  Traditionally, a transfer fee would be instituted by a master community developer to underwrite the community homeowners association’s ongoing costs to manage the community. Unfortunately, some developers started treating transfer fees as a permanent source of income and began implementing them even where they would not be used to manage the community. This abuse gave rise to Civil Code Section 1098.6 last year and, earlier, certain federal regulations limiting federal financing of property encumbered by transfer fees that do not benefit the property.


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When the Tax Court issued its opinion in Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (December 27, 2018), the conservation community gave a collective sigh of relief because the court dismissed the IRS’s arguments challenging amendment clauses in conservation easements. But alas, the Tax Court giveth and the Tax Court taketh away. That sigh of relief came with some bitter medicine regarding floating homesites. More below.
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Service Focuses on Conservation Purpose Test and Division of Proceeds Clause in PBBM-Rose Hill, Belair Woods, and Champions Retreat Golf Founders

The IRS has been busy this year challenging conservation easement deductions, particularly conservation easements protecting golf courses and conservation easements providing overinflated syndicated tax deductions.
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Governor Brown signed S.B. 901 into law on September 7. The controversial and lengthy bill is simply entitled “Wildfires,” but has garnered a lot of media attention for what many are calling a utility bailout for the Northern California fires. What hasn’t received much attention is a small paragraph slipped into the bill to amend California’s conservation easement enabling statute, California Civil Code Sections 815–816.
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Earlier this month, the U.S. Tax Court handed down an oddly reasoned memo opinion rejecting a North Carolina developer’s conservation easement deduction in Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45 (April 4, 2018).

Practitioners in this field know that the deductions claimed for conservation easements can be hotly contested by the IRS, whose litigation strategy relies on the kitchen sink method—a method that is frequently successful due to the complexity of the regulations and the difficulty donors have complying with them. Here, however, it seems as though the kitchen sink method could have been avoided because the easement in question clearly appears to have been either purchased for its full value or granted in exchange for development rights. But, instead of going the easy route, the Tax Court opinion focuses on whether the donor’s remaining property was enhanced by the easement, finding that it was—contrary to the opinions of two appraisers hired by the donor and one appraiser hired by the IRS.


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Green v. U.S., No. 16-6371 (10th Cir., Jan. 12, 2018)

Practitioners and donors often forget a pesky donation limitation that applies only to irrevocable trusts: the deduction for a real property donation is limited to the trust’s adjusted basis in the real property and is only permitted if the real property was acquired using the trust’s gross income. Internal Revenue Code section 642(c)(1) permits an irrevocable trust to claim a charitable deduction for “any amount of the gross income” of the trust which is donated to a qualified donee. Traditionally, most conservative tax practitioners have interpreted Section 642(c)(1) to mean that an irrevocable trust may donate an interest in real property, so long as (1) the interest was acquired with gross income and (2) the trust’s claimed deduction excludes unrealized appreciation. Unlike Internal Revenue Code section 170, which applies to individuals and corporations and clearly permits claiming unrealized appreciation as part of a charitable deduction, trusts and estates must rely on section 642 to claim charitable deductions and that section does not contain a similar provision.


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