Listing Notice Overview
A year ago, the IRS published Listing Notice 2017-10, which notified taxpayers that they will be treated as having participated in a listed transaction under Section under Section 6111 and 6112 of the Internal Revenue Code and Section 1.6011-4(b)(2) of the Treasury Regulations if they invest in a syndicated conservation easement transaction where the charitable contribution deduction amount significantly exceeds the amount invested. In other words, the IRS identified syndicated conservation easement transactions as reportable tax avoidance transaction, and failure to report such transactions can have serious tax consequences. The listing notice also specified certain disclosure requirements for taxpayers and material advisors who are involved in such listed transactions.
Taxpayer Disclosure Requirements
Section 1.6011-4(d) of the Treasury Regulations requires taxpayers who have entered into syndicated conservation easement transactions to disclose such transactions. Specifically, taxpayers are now required to file a “Reportable Transaction Disclosure Statement,” IRS Form 8886, (i) with their tax return and (ii) with the Office of Tax Shelter Analysis (OTSA).
Taxpayers who fail to disclose their listed transactions will be subject to penalties under section 6707 of the Internal Revenue Code. Section 6707 provides for a penalty equal to 75% of the decrease in tax shown on a taxpayer’s return related to the listed transaction, up to $200,000 (or $100,000 for natural persons). Additionally, taxpayers may be subject to an extended statute of limitations if they fail to disclose listed transactions.
Material Advisor Disclosure Requirements
The listing notice states that “material advisors” who make a tax statement with respect to syndicated conservation easement transactions, have disclosure and list maintenance obligations under Sections 6111 and 6112 of the Internal Revenue Code.
But who is considered a material advisor?
- Are broker dealers material advisors?
- Are registered investment advisors material advisors?
- Excuse me for a second as I engage in some self-reflection—is FactRight a material advisor for programs that it reviews for BD and RIA clients?
Sections 6111(b) and 301.6111-3 define a “material advisor” for listed transactions as any person who provides material assistance in organizing, managing, promoting, selling, or carrying out a listed transaction, and who receives at least $10,000 in gross income for providing such assistance.
As such, the IRS may deem broker dealers and registered investment advisors who sell investments in syndicated conservation easement transactions to be “material advisors”. Heck, the IRS even considers FactRight a “material advisor” for providing due diligence services on such programs. As “material advisors,” broker dealers, registered investment advisors, FactRight, and other parties that have opined on such transactions, are all subjected to disclosure and maintenance obligations, described below.
Section 301.6111-3(d) of the Treasury Regulations requires that material advisors file a “Material Advisor Disclosure Statement,” Form 8918, which requires the following:
- Information identifying and describing the listed transaction
- Information describing any potential tax benefits expected to result from the transaction
- Other information requested by the IRS
Additionally, Section 6112 of the Internal Revenue Code generally requires that material advisors maintain a list identifying each person whom the advisor advised with respect to the listed transaction. Material advisors are required to make that list available for inspection upon written request by the IRS.
FactRight suggests that firms examine their errors and omissions insurance policy to determine whether it addresses activity in which the firm is considered a material advisor.
The IRS has a history of auditing and litigating tax deductions for conservation easement donations and specifically challenging the values determined by qualified appraisals. A successful challenge by the IRS could result in disallowance of a portion (or even all) of the deduction. In such a case, taxpayers could owe additional tax and interest and may incur valuation misstatement penalties.
While the listing notice does not invalidate syndicated conservation easement transactions or prohibit investors from participating, it expressly stated the IRS’s intention to challenge tax benefits based on the valuation of an easement. Additionally, it stated the IRS may also challenge the tax benefits based on partnership anti-abuse, economic substance, and other rules. It is uncertain whether the IRS will allocate additional resources to auditing syndicated conservation easement programs or the investors who participate in those programs in the future. However, it appears the IRS stated its intention to apply a broader and increased level of scrutiny to such transactions. Due diligence on investment programs with conservation easement strategies is particularly important because of the IRS’s track record of challenging easement values and the potential for increased scrutiny following this listing notice.