Roots of the 250% Nonprofit Tax Abuse Resolution

Close-up of the maintenance department with pen


The Integrity Act of the Charitable Conservation Easement Program is back. We find out from a press release by the Senate Finance Committee. Senator Grassley speaks pretty strong language.

The nature conservation program is an important instrument for protecting and preserving our environment. But bad faith fraudsters have exploited the program through abusive actions at the expense of the American taxpayer.

Senator Wyden also uses strong language and is likely to make too much promises about the bill’s impact as well.

The abuse of syndicated conservation measures by some bad actors is one of the most egregious tax havens out there. Our bill would ensure that the IRS has the tools to stop these transactions.

It is hard to imagine that a transaction would fall under this law that is not yet abusive under applicable law. The “tools” the IRS needs to stop these transactions are more agents and lawyers.

A particularly egregious abuse

The invoice is targeted to a transaction that the IRS identified as a listed transaction in Notice 2017-10. The penalties for not posing as a publicly traded transaction are so severe that I have made publicly traded transactions the subject of one of my tax planning laws. -Reilly’s Fourteenth Law of Tax Planning – If something is a listed transaction, just don’t do it. – The summary of the main provisions of the draft law in the press release reads:

The Integrity Act of the Charitable Conservation Easement Program, which tracks an IRS Listing Notice posted in December 2016, would generally not allow a charitable deduction if it exceeded 2.5 times (250 percent) a partner’s original investment.

Here is the actual language that will be added to the code:

In the case of a qualified maintenance grant from a partnership (whether direct or as a distributive portion of such a contribution from another partnership), a partner of that partnership may not consider any amount of this contribution in this section as a distribution portion of such a contribution if that of that partner for the tax year so total amount considered (but for this paragraph) exceeds 2.5 times the portion of the adjusted base of that partner’s interest in such partnership (immediately prior to this post and without taking into account) pursuant to Section 752) that (according to rules governing the rules of Section 755 are similar) is attributable to the qualified property interest for which such a contribution is made

This is followed by a language that limits this restriction to a three-year window and makes it retroactive to 2016. There are also different rules for historical business and an exception for family partnerships.

I gave you the actual language because it illustrates Reilly’s Third Law of Tax Planning – Any clever idea that comes to mind has (or will) likely have a corresponding rule that will cause it to not work. My immediate thought as I read the executive summary was that it would be easy to beat if you just used leverage. That “regardless of section 752” kills that.

Why 250%?

Maybe you can deduce the reason for the multiple of 2.5. In very broad terms, if you got an interest in property for $ 100,000 and then can get a $ 250,000 deduction for waiving a conservation measure, you essentially got the property encumbered as free. That’s why I think 2.5 is way too high.

I spoke to Steve Small, who figured out 2.5x in an article on tax returns – correct and inappropriate deductions for conservation-easy donations, including developer donations. Mr. Small was on the first floor of Section 170 (h) as described in the article:

Section 170 (h) became law in 1980, and as a lawyer advisor in what was then the Chief Counsel’s office, I participated in drafting the statute and then drafting Section 170 (h) income tax regulations. In 1985, three years after leaving the IRS, I wrote the Federal Tax Law of Conservation Easements, an annotated commentary on the law and regulations.

Mr. Small left the IRS in 1982 and started working as a tax attorney for a company. There were few protective measures, but as the area developed his book became more important. From 1988 he was able to concentrate on “private land protection”. Over time, deals he deemed abusive came through his desk. He wrote the Tax Notes article in 2004.

The article comes with a list of eleven questions that should warn you that business is sketchy. Here are the first three:

1. Has the taxpayer owned the property for less than 24 months?

2. If the answer to Question 1 is yes, is the deduction claimed greater than two and a half times the cost base?

3. Is the taxpayer a limited liability company or a partnership?

Apart from the fact that it is three years instead of two, that is really the essence of the current legislation. Given Mr. Small’s role in the original legislation and the regulations that followed, there is something about that.

Is 250% Too Much?

The 2.5 limit turns out the most egregious abuse, but it still seems too generous to me. If I were to set a limit, it would probably be 90% with a three year holding period and it would increase gradually. Remember that the deduction is on the property for a relief. And unless you drink the Kool-Aid blended by Partnership For Conservation (P4C), a relief can’t be worth more than the property itself.

When I asked Mr. Small if 2.5 was too generous, he stated it was possible, but offered a perspective from his time with the IRS.

Like a colleague in the Treasury said when I was on the chief counsel and we were trying to fill in all sorts of loopholes and I said what if someone just cheated? He said that’s what we have tax fraud laws for. On the perks of the comment – I’d guess 95 +% of people who join syndications want a deduction right away. So if someone wants to cheat, the chances of stopping them are slim.

Another perspective

I reached out to P4C and received the following comment from President and Chairman Robert Ramsay:

It is regrettable that the intransigence of certain stakeholders, up to this point, has prevented constructive solutions for nearly two entire congresses from advancing, thousands of well-intentioned and law-abiding taxpayers into a state of grave burden, and general conservation frightening efforts.

If these stakeholders are willing to engage in meaningful and collaborative dialogue to compromise and pursue reasonable solutions to protect and maintain the integrity of all protective measures, Partnership for Conservation is ready to participate. Until that point, continued insistence on the same misguided proposals for a class of landowners, including retrospective tax increases, will only help delay progress further

To gain recognition for them, the P4C-advocated model, where a conservation measure is worth more than the current undeveloped land market can support, is the only way to help the high-income, low-wealth people who do not yet own land , can benefit from the deduction.

There used to be legitimate tax havens for high income people and not much else. Not so much these days. On the other hand, the marginal rates are much lower.

Land Trust Alliance

The Land Trust Alliance is likely one of the “adamant stakeholders” that Mr. Ramsay was referring to. Your view of the act is quite positive as you can see from this statement.

The stars are now focused on getting that bill passed this year and stopping the abuse once and for all. We have bicameral, bipartisan legislation that will end the abuse. And Congress now has a chance to address the problem, preventing the additional billions of dollars from mistakenly coming out the door of the US Treasury Department. I look forward to thanking Congress for passing these laws.

It’s actually quite unusual for an advocacy group to ask about the tax code to cap their most valued deduction.

Other coverage

I’ve been dealing with this topic for over a decade. Here is a summary of my coverage.

The American Society of Appraisers got something from the Senate’s introduction of the bill in September.

To address the potential exploits, S.4751 has made several improvements over the former. Many of the distinctions are two and a half times that. In particular, the bill targets an exploit where taxpayers could try to meet the ratio by inflating the external base through debt or by contributing unrelated assets to the partnership. If there are pass-through entities, the bill is aimed at those who use the complex structure to bypass the two and a half times ratio enforcement. Other changes include new limits to prevent potential exploitation of the holding period and clarification of when the rule that denies a deduction due to the transfer of companies in the partnership will take effect.

Richard Tucker of the Jefferson Land Trust urges The Leader for support.

In the US, some bad actors have used the incentive to make big profits at the taxpayers’ expense. These transactions are abusive tax havens and must not be continued. For this reason, I and other conservation officials across the country are calling on Congress to pass the Charitable Conservation Easement Program Integrity Act.