The legitimate provision
A landowner may grant a permanent restriction on the use of their land to a qualified organization for conservation purposes, and claim a charitable deduction for the value given up. The value is the difference between what the land was worth unrestricted and what it is worth subject to the restriction.
This is a deliberate and well-established policy. Land is conserved, the owner is compensated through the tax system, and no public money changes hands. Properly done, it is unobjectionable.
What syndication changed
The syndicated version inverts the transaction. A promoter acquires land through a partnership and sells interests to investors, marketing the deal on the deduction rather than the land. An appraisal supports a value for the forgone development potential far above what the partnership paid for the property, and the deduction flows through to the investors.
Marketed in terms of a multiple of capital contributed, this is not a conservation decision with a tax consequence. It is a purchase of a deduction, and the land is the mechanism.
The regulatory sequence
The response developed over several years and each step increased the exposure of participants rather than only promoters.
- 01The transactions were identified as listed transactions, triggering disclosure obligations for participants, advisers and material advisers, with substantial penalties for non-disclosure that apply independently of whether the deduction is ultimately allowed.
- 02Sustained litigation followed, in which the Service prevailed in a large majority of cases, often on valuation and sometimes on technical defects in the deed such as the treatment of proceeds on a judicial extinguishment.
- 03Settlement initiatives were offered on terms that required concession of most of the deduction and payment of penalties.
- 04Legislation was enacted disallowing deductions where a partnership's contribution exceeds a specified multiple of the partners' basis, with exceptions for family partnerships and longer-held property.
- 05Criminal prosecutions followed against promoters and appraisers, with convictions obtained.
What a participant is actually exposed to
| Exposure | Detail |
|---|---|
| Disallowance | The deduction is denied, in most litigated cases in full rather than reduced to a defensible figure |
| Accuracy penalties | Substantial valuation misstatement penalties escalate with the degree of overstatement and are additional to the tax and interest |
| Disclosure penalties | Separate and severe, imposed for failure to disclose a listed transaction regardless of the merits |
| Interest | Running from the original due date, which on a matter resolved years later is itself a large number |
| Extended examination | A listed transaction on a return draws attention to the rest of the return, and to other years |
| The promoter's indemnity | Frequently worth less than assumed. Entities dissolve, and an opinion letter obtained by the promoter is not the participant's defense |
The test this suggests for anything else
We include this in the archive because the pattern generalises, and because every client at this level is shown something structurally similar eventually.
- If the proposition is quoted as a ratio of deduction to dollars invested, the deduction is the product and the asset is the wrapper.
- If the economics only work because of the tax treatment, there is no business purpose to fall back on when the treatment is challenged.
- If the opinion letter arrived with the subscription documents, it is the promoter's opinion and not advice to you.
- If your own adviser is being kept at arm's length, or told the analysis is proprietary, that is the answer.
- If a disclosure obligation attaches, the transaction has already been identified as a category the Service intends to examine.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.