Conservation Easement

Syndicated Conservation Easement Transactions - This notice describes certain transactions in which some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. The promoters identify a pass-through entity that owns real property, or form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the pass-through entity or tiered entities that owns the real property, suggesting to prospective investors that they may be entitled to a share of a charitable contribution deduction that equals or exceeds two and one-half times the amount of the investor’s investment. The promoters obtain an inflated appraisal of the conservation easement based on unreasonable conclusions about the development potential of the real property. The entity then donates a conservation easement encumbering the property to a tax-exempt entity. Investors then claim a charitable contribution relying upon the pass-through entity’s holding period.

Captive and Conservation

If a taxpayer participated in a reportable transaction and filed an incomplete disclosure statement, or didn’t file a disclosure statement with its return, and/or didn’t file a complete disclosure statement with OTSA (if required), the IRS may assess a penalty under Internal Revenue Code (IRC) § 6707A. Where the taxpayer participated in a listed transaction, the period of assessment with respect to that transaction will remain open until the taxpayer or a material advisor properly discloses the participation in that transaction. See IRC § 6501(c)(10) for more information. In addition, where a reportable transaction is not properly disclosed, any IRC 6662A reportable transaction understatement penalty will apply at the 30% rate rather than the 20% rate for reportable transactions that are properly disclosed.

Captive

A lawsuit arguing that taxpayers are permitted to challenge a Treasury Department reporting requirement without first violating it defies a measure Congress took to protect tax collection, the U.S. Solicitor General’s Office told the U.S. Supreme Court. The office made that argument in a Wednesday court filing urging the justices against taking up a case testing the reach of the Anti-Injunction Act. The act blocks lawsuits aimed at restraining officials from assessing or collecting taxes, which some interpret as shielding the department from early legal challenges to regulatory actions. In the new filing, the government insisted that the reporting requirement is directly tied to tax collection. “Requiring taxpayers and tax professionals to report information (and tax professionals to keep records) about such transactions enables the IRS to ensure that taxes applicable to them are not evaded but are properly assessed and collected,” the Solicitor General’s Office said. CIC Services LLC, a Tennessee-based company, has argued that the law doesn’t block its challenge to a reporting requirement backed by a penalty in IRS Notice 2016-66 because it’s challenging the burdens of reporting rather than the penalty itself and, in any event, the penalty isn’t a tax. The case strongly divided judges at the U.S. Court of Appeals for the Sixth Circuit, with a three-judge panel ruling 2-1 in favor of the government and multiple judges weighing in separately when the full circuit declined to rehear that decision. The IRS notice required CIC Services to report the micro-captive transactions it advised on, which involve small insurance companies that are allowed to pay tax on just their investment income if their premium income doesn’t surpass $2.3 million. The IRS has argued that the arrangements may be tax-avoidance vehicles rather than genuine insurance. CIC Services has said the notice containing the reporting requirement isn’t legally valid because the IRS didn’t notify the public of its plans for the requirement and respond to comments in advance, which the company says was required by the Administrative Procedure Act. An attorney for CIC Services LLC didn’t immediately return a request for comment. The case is CIC Services, LLC v. Internal Revenue Service, U.S., No. 19-930, response brief filed 3/25/20.

Restricted Property Trust

Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits - 2007-45 I.R.B. 1 (transactions in which certain trust arrangements claiming to be welfare benefit funds and involving cash value life insurance policies that are being promoted to and used by taxpayers to improperly claim federal income and employment tax benefits (identified as “listed transactions” on October 17, 2007)).