Attorneys
Philadelphia-based Shareholder Kevin Sweeney and Associate Katherine Wheeler Published in The Legal Intelligencer
On Oct. 7, the IRS finalized regulations identifying certain syndicated conservation easement (SCE) transactions as listed transactions, a type of transaction with additional reporting requirements. In these transactions, investors typically acquire an interest in a partnership that owns land and then claim a portion of charitable contribution deductions for the appraised values of easements conveyed by the partnership to preserve the land's conservation attributes.
The IRS has sought to restrict taxpayers' use of SCE transactions and has included such transactions in its annual list of "Dirty Dozen" tax schemes in recent years. Previously, the IRS issued Notice 2017-10 identifying certain SCE transactions as listed transactions, but this notice was later struck down by the courts for its failure to follow the Administrative Procedure Act's notice and comment procedures.
The new IRS regulations require taxpayers who participated or materially advised others in SCE transactions to satisfy additional reporting requirements. The regulations define participating taxpayers as pass-through entity owners, pass-through entities and "any other taxpayer whose federal income tax return reflects tax consequences or a tax strategy arising from" an SCE transaction.
Taxpayers who are subject to these additional reporting requirements will need to report participation in these transactions using Forms 8886,Reportable Transaction Disclosure Statement, and 8918, Material Advisor Disclosure Statement. In addition to future transactions, the regulations require participants to retroactively report participation in SCE transactions for prior years that are still open for statute of limitations purposes.
Initially created by Congress for the purpose of promoting conservation, there is nothing inherently wrong with SCE transactions. That said, taxpayers who have participated or will participate in these transactions must be aware of these regulations and the newly enacted complex set of reporting rules. The filing of Form 8886 triggers an automatic review of the transaction by the IRS Office of Tax Shelter Analysis and the possibility for additional disclosure obligations. For taxpayers who fail to timely report their involvement with an SCE transaction, the IRS has the authority to impose significant penalties.
Taxpayers involved with SCE transactions that are still in taxable years open for tax assessment should consider proactively seeking legal advice about these new reporting requirements to ensure they remain incompliance with all IRS filing obligations. Taxpayers who are unsure whether they qualify as a material advisor or participant under the new regulations or those who previously reported their involvement with SCE transactions under Notice 2017-10 should also consider seeking legal advice to ensure they remain compliant with all IRS reporting requirements.
Any taxpayers who do report as required and who subsequently come under IRS examination for involvement in an SCE transaction should immediately seek out tax controversy attorneys with an understanding of this complex issue. Given the IRS's aggressive investigation and enforcement of potentially abusive SCE transactions, any failure to comply with these new regulations could prove to be very costly.
Kevin Sweeney, a shareholder in Chamberlain, Hrdlicka, White, Williams& Aughtry's Philadelphia office, is an experienced tax attorney and former federal prosecutor who defends clients in civil and criminal tax controversy and litigation matters. He can be reached at ksweeney@chamberlainlaw.com.
Katherine Wheeler is an associate in the firm's Philadelphia office who practices in its tax controversy and litigation group. She can be reached at katherine.wheeler@chamberlainlaw.com.
Reprinted with permission from the October 22, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.