Deadline Looming to Amend Conservation Easements
In December 2022, Congress passed a new law commonly referred to as SECURE Act 2.0. This new law gave conservation easement donors a safe harbor to amend provisions relating to extinguishment and boundary line adjustments found in existing conservation easements that are inconsistent with the requirements of the Internal Revenue Code (IRC). Historically, these clauses have been included in syndicated easements that have been used as fraudulent tax shelters. Syndicated easements often involve several investors forming a partnership or company to purchase or invest in land, then donating the property for a charitable deduction. In recent years, the Internal Revenue Service (IRS) has targeted these donors whose conservation easements they view as fraudulent tax shelters.
SECURE Act 2.0 required the IRS to provide guidance relating to the amendment of conservation easements with questionable extinguishment and boundary line adjustment provisions. In April the IRS issued Notice 2023-30 which provides donors a brief opportunity to remedy extinguishment and boundary line adjustment provisions that are not compliant with the existing requirements identified in Notice 2023-30. This is done by recording an amendment including the safe harbor language before July 24, 2023. This is obviously a very short window of time, Once recorded, the IRS will treat the amended conservation easement as being effective as of the date the original conservation easement was recorded.
The safe harbor only applies to conservation easement donors with extinguishment and/or boundary line adjustment clauses that do not comport with the requirements of Notice 2023-30. The amendment is optional; therefore, donors are not required to amend problematic extinguishment and boundary land adjustment provisions. However, failure to do so could subject you to audit.
The safe-harbor deed language for extinguishment clauses is:
Pursuant to Notice 2023-30, Donor and Donee agree that, if a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation of the perpetual conservation restriction renders impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if (1) the restrictions are extinguished by judicial proceeding and (2) all of Donee's portion of the proceeds (as determined below) from a subsequent sale or exchange of the property are used by the Donee in a manner consistent with the conservation purposes of the original contribution.
Determination of Proceeds. Donor and Donee agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in Donee, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction, at the time of the gift, bears to the fair market value of the property as a whole at that time. The proportionate value of Donee's property rights remains constant such that if a subsequent sale, exchange, or involuntary conversion of the subject property occurs, Donee is entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.
The safe-harbor boundary line adjustment clause is:
Pursuant to Notice 2023-30, Donor and Donee agree that boundary line adjustments to the real property subject to the restrictions may be made only pursuant to a judicial proceeding to resolve a bona fide dispute regarding a boundary line's location.
To benefit from the safe harbor language, donors must have:
A conservation easement that contains problematic language in the extinguishment and/or boundary line adjustment provisions; and
Have submitted the conservation easement for federal tax deductions under Section 170 of the IRC.
Donors whose conservation easements do not contain problematic language or who did not claim deductions for the contribution of their conservation easements will receive no benefit from filing the amendment. Additionally, it is unlikely that donors whose conservation easement donations are outside the window for IRS audit will receive any benefit from amending their conservation easements with the safe harbor language.
If a deduction was taken, barring fraud or substantial omission of gross income, the audit period for a charitable deduction is typically three years following the tax filing for the deduction—this includes years in which any carryforward deductions were claimed, which could extend up to 15 years beyond the original easement recording date. Investors in certain syndicated conservation easements must file Form 8886 with the Office of Tax Shelter Analysis. For taxpayers who fail to file Form 8886 in the timeframe and manner prescribed by the IRC, in addition to any penalties, the period in which the IRS can assess for that tax year remains open until the later of the normal three-year period or one-year after a complete Form 8886 is filed.
If you haven’t had your conservation easement reviewed, time is running out as the deadline is July 24 to record the amendment. Utah residents should remember that July 24 is a state holiday and the Recorder’s office will be closed. Therefore, to be safe, recording should occur on July 21, the business day prior.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.