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    IRS requirement update for land trusts working with donors that are pass-through entities

    Posted October 8, 2024 Updated December 11, 2024
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    Land Trust Alliance
    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.

    The Alliance has been urging the IRS since 2011 to address abusive transactions in a way that does not impair well-intentioned legitimate reasonably valued conservation easement federal tax deductions. The Alliance has commented on IRS guidance, actions and regulations for more than twelve years including these new listed transactions regulations. The Alliance strenuously urged the IRS to include the same exceptions in the listing regulations that are in the Integrity Act but the IRS declined. The Alliance continues to press the IRS to adjust its practices regarding legitimate transactions, including in a letter sent to IRS commissioner Werfel.

    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.”

    As our understanding of the Regulations increases and we receive new information, we will update this resource. Please check back regularly if you engage in transactions with pass-through entities.

    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:

    1. 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 potential tax shelter transaction.

    2. They apply to donations of conservation easements or donations of land by pass-through entities (all types). They do not apply to individuals or to entities that do not qualify as a pass-through entity.

    3. 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.

    4. These regulations are effective starting Oct. 8, 2024. 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.

      But there is also a lookback period. Land trusts categorized as material advisors for donations determined to be listed transactions which occurred during the lookback period (Oct. 8, 2018-Oct. 8, 2024) must file Form 8918 by Jan. 30, 2025. For the same transactions, donors (categorized as participants) have until Jan.6, 2025 to report. 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.

    5. 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.

    6. 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.

    7. These are fact sensitive analyses requiring legal interpretation, so land trusts should consult legal counsel.

    8. Due to these recent changes in federal law, going forward Practice 10C4 is suspended until the next formal revision process for Land Trust Standards and Practices.

    Decision tree

    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.

    As our understanding of the Regulations increases and we receive new information, we will update this resource. Please check back regularly if you engage in transactions with pass-through entities.

    Decision tree

    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. View the recording of the Alliance’s webinar on the new law, new regulations and steps that land trusts need to take.

    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, tax, 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.