Syndicated Partnerships

What Are Syndicated Partnerships?

Syndicated partnerships are an unfortunate tax-sheltering scheme that has arisen over the last several years. In a syndicated partnership, a promoter operating on behalf of the tax shelter seeks funding from investors to be able to purchase real estate and then donate a conservation easement on the real estate. The investors then apply the resulting tax deductions against their own taxes. These tax shelters typically use two methods to maximize their investors’ returns: (1) obtaining grossly inflated appraisals and (2) reallocating profits and losses out of proportion to the ownership interests in the tax shelter. As the IRS explains in detail in Notice 2017-10:

The Treasury Department and the IRS have become aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to claim charitable contribution deductions in amounts that significantly exceed the amount invested. In such a syndicated conservation easement transaction, a promoter offers prospective investors in a partnership or other pass-through entity (“pass-through entity”) the possibility of a charitable contribution deduction for donation of a conservation easement.

The promoters (i) identify a pass-through entity that owns real property, or (ii) form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the pass-through entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment. The promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. After an investor invests in the pass-through entity, either directly or through one or more tiers of pass-through entities, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under § 170(e) (1). The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity.

For a more in-depth look at the characteristics of these syndicated partnerships, I recommend Stephen J. Small’s article, “Note #6: ‘Syndications’ of Conservation Easement Deductions – Or, There’s Trouble in River City.”

Special IRS Reporting Requirements

As with any tax shelter, syndicated partnerships are being closely watched and audited by the IRS. As the IRS straightforwardly states in Notice 2017-10:

The IRS intends to challenge the purported tax benefits from this transaction based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.

The IRS notice then goes on to declare that donations of conservation easements by syndicated partnerships are “listed transactions.” This is a special designation used by the IRS to combat tax shelters. Basically, it means that the taxpayers who engage in these types of transactions and their advisors are required to provide certain disclosures to the IRS. For a more detailed explanation of these new disclosure rules, I recommend Ed Zollars’s article, “Certain Syndicated Conservation Easement Transactions Identified as Listed Transactions.” For an explanation of the practical effects of a tax shelter being classified as a “listed transaction,” see Jay Adkisson’s article, “The IRS Leaves A Lump Of Coal For Syndicated Conservation Easements In Notice 2017-10.”

The Land Trust Alliance has also issued an advisory detailing best practices for land trusts to follow when they suspect that they have been asked to accept a conservation easement from a syndicated partnership.

For more information on syndicated partnerships, read the posts that follow.