IRS requirement update for land trusts working with donors that are pass-through entities
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About This Document
During the last two years, the tax landscape for land trusts and landowners donating land or a conservation easement has changed dramatically. In 2022, Congress passed the Charitable Conservation Easement Program Integrity Act, which disallows deductions for certain syndicated conservation easement transactions. On Oct. 8, 2024, the IRS released new regulations requiring a land trust to report a different category of transactions if the land trust meets the criteria of being a “material advisor.” These new regulations have important implications for land trusts working on easement or land donations from pass-through entities, such as a partnership or limited liability company.
It is important to remember that the regulations only apply to federal tax deduction donations made by pass-through entities that meet the elements of a “listed transaction.”
New requirements to report and disclose information to the IRS
The regulations for reporting and disclosing information to the IRS to help them identify tax avoidance transactions have changed. On Oct. 8, the U.S. Treasury published final regulations that have important implications for land trusts working on easement or land donations from pass-through entities, such as a partnership or limited liability company.
A few immediate takeaways:
The regulations only apply to federal tax deduction donations made by pass-through entities, most commonly limited liability companies, that meet the elements of a tax shelter transaction.
They apply to donations of conservation easements or donations of land by pass-through entities (all types). The do not apply to individuals or to entities that do not qualify as a pass-through entity.
Land trusts need to comply with both the Charitable Conservation Easement Program Integrity Act and its regulations AND these listed transactions regulations, which are instituted by the IRS to identify potential tax shelter transactions. The elements differ for each set of regulations — please see the Alliance’s decision tree for the Integrity Act and the decision tree for the listed transactions regulations to understand the differing requirements.
These regulations are effective immediately.
These regulations require material advisors of tax shelter transactions to report their involvement to the IRS on Form 8918, and if they do not, then severe penalties ($200,000) can be imposed. Land trusts in certain situations may be considered material advisors and may need to report if participating in such a transaction meets the criteria of a material advisor.
These regulations list the steps to determine if the donation could be considered a tax shelter transaction and needs to be reported by the landowner. (The land trust may also need to report depending on whether it can be considered a “material advisor.” All steps must be present under the new regulation to require disclosure to the IRS:
a. A taxpayer receives promotional materials that offer prospective investors in a pass-through entity the possibility of being allocated a charitable contribution deduction, the amount of which equals or exceeds 2.5 times the amount of the taxpayer’s investment.
b. The taxpayer becomes an investor in the pass-through entity that owns or acquires real property, and the pass-through entity contributes a conservation easement on or makes a land donation of the property to a qualified organization. The pass-through entity then allocates a charitable contribution deduction to the taxpayer proportional to the taxpayer’s investment in the pass-through entity.
c. The taxpayer claims a federal charitable contribution deduction with respect to the contribution of the real property interest.
If your land trust is involved in a potential donation by a pass-through entity (including certain family partnerships) then pay close attention to the possibility of being categorized as a material advisor by the IRS and the related reporting requirements. Signing the Form 8283, providing a contemporaneous written acknowledgement and accepting a stewardship contribution do not alone categorize the land trust as a material advisor. Other acts, such as baseline and easement preparation, are less defined.
These are fact sensitive analyses requiring legal interpretation, so land trusts should consult legal counsel.
Is your land trust a material advisor to a listed transaction?
This decision tree can assist a land trust in determining if it meets the definition of a material advisor in a listed transaction, thus requiring the land trust to report the transaction to the IRS or face penalties.
Is this easement deduction disallowed pursuant to the Charitable Conservation Easement Program Integrity Act?
The following decision tree can assist your land trust in determining if the transaction meets the Integrity Act disallowance rule or its exceptions.
The Alliance is working diligently to provide more information to guide land trusts through these determinations and through this new regulatory regime. Join the Alliance’s Conservation Defense Network and Tax Manager, Diana Norris, for a webinar on Nov. 21 that will explore the new regulations and their impacts on land trusts.
Disclaimer
The Land Trust Alliance designed this material to provide accurate, authoritative information about the subject matter covered with the understanding that the Land Trust Alliance is not engaged in rendering legal, accounting or other professional counsel. If a land trust or individual requires legal advice or other expert assistance, they should seek the services of competent professionals. The Land Trust Alliance is solely responsible for the content of this series.
