Following the recent sentencing of real estate developer, Jack Fisher, for his role in the alleged fraudulent sale of $1.4 billion in charitable tax deductions, increased attention has been brought to potential abuses of conservation easements. Conservation easements – agreements that offer tax breaks in exchange for the protection of natural land resources – are now under heightened scrutiny from the IRS.
While Fisher’s 25-year prison sentence sends a clear warning regarding tax fraud, concerns have been raised about the impact on legitimate conservation efforts and necessary takeaways for future transactions. Thus, proactive steps are required from companies and investors applying for green tax breaks, in order to comply with the evolving landscape of conservation easements.
Among the important considerations are limitations on deductions made by pass-through entities. Expert tax advisors and legal counsel specializing in conservation easements can assist in navigating these complexities, ensuring compliance with Section 170(h) of the tax code among other regulations, and mitigating tax risks.
The SECURE 2.0 Act of 2022 added Section 170(h)(7) that enforces a limit on deductions for qualified conservation easement contributions made by pass-through entities. It inserts a restriction on deductions where the sum total of a contribution surpasses 2.5 times the sum of each partner’s relevant basis in the partnership unless a specific exception applies. These exceptions extend to contributions made beyond a three-year holding period, contributions made by certain familial partnerships, and contributions aimed at the preservation of certain certified historic structures.
Moreover, it is essential to avoid conflicts of interest and to obtain independent appraisals. Opt for appraisers who are honest, reputable, and adhere to uniform standards of professional appraisal practice. Be cautious not to succumb to pressure to accept unrealistic or inflated valuations.
Thorough due diligence is compulsory. In addition to investigating qualified and independent appraisers, examine the easement organization meticulously. Look for proven historical success in conservation projects and a strong commitment to transparency.
Maintain meticulous records and avoid any manipulation of documents related to the transaction. Make sure that all appraisals are conducted and valuations finalized within the appropriate time frame.
The recent US v. Lewis case underlines the significance of understanding potential risks and enacting suitable compliance strategies to protect legitimate conservation easements. While presenting challenges, it also offers valuable lessons for the future of conservation easements.