On January 17, 2017, the IRS issued a Guidance Notice classifying syndicated conservation easement transactions as “Listed Transactions,” or presumed tax shelters.

A conservation easement is an agreement between a landowner or investor, and a land trust or government agency that permanently limits development of the land with the aim of conservation. The restrictions are perpetual and thus reduce the resale value of the property.

In recent years, promoters have marketed conservation easements as investment vehicles providing tax benefits well in excess of the amount invested. This is referred to as the syndication of conservation easements. With syndicated conservation easements, a promoter forms a pass-through entity like an LLC or limited partnership, and markets the concept to other investors who become members. The investors put money into the pass-through entity, and the promoter uses those funds to purchase the land. The promoter coordinates the creation of a conservation easement. Then, that conservation easement is donated to a qualified land protection organization, like a land trust. The investors become eligible for a federal income tax deduction equal to the “value of their donation,” and also become eligible for federal estate tax relief. Most states also provide some form of tax incentive for conservation easements.

The “value of the donation,” as determined by a qualified appraiser, equals the difference between the fair market value of the property before and after the easement takes effect. To make this calculation, the promoter typically retains a design firm to prepare a plan to develop the property into something substantially more valuable than the land in its unimproved state: for example, like a golf course, housing development, or retail complex. The qualified appraiser then utilizes the development plan to calculate a “before” value based on the highest and best use of the property. The appraiser calculates an “after” value based upon comparable undeveloped properties.

Appraisers and other professionals providing services in connection with syndicated conservation easements should take heed of the IRS Guidance Notice. The professionals should consider taking steps to minimize exposure to investors who are audited and penalized by the IRS, including, without limitation, ensuring their engagement contracts contain adequate legal disclaimers, limited and damage-limiting clauses, and hold harmless provisions. The professionals also should consider limiting such work to cases in which a legal opinion regarding the viability of the tax credit is obtained prior to effectuation of the easement.