Patriotic Scoundrels and Conservation Easements
The Tory abolitionist Samuel Johnson, long before it was cool to be woke, once yelled that slavery was an “immoral state.” He loathed slavery and even proposed a toast in the halls of Oxford to the “next insurrection of Negroes in the West Indies.” Instead of “patriotism” in his most famous quote, he might have said “administrative due process is the last refuge of scoundrels.” The syndicated conservation easement promoters know they are running a scam, but they insist that proper procedures be employed to shut them down. Johnson wielded satire like a sword and, about those promoters might have said, “they yelp the loudest for freedom, while being the drivers of tax abuse.” Promoters never, or hardly ever, defend their tax schemes on the merits, preferring instead to insist on rights to administrative due process.
Johnson was particularly unpopular in the new world, by the way, because he defended the Crown’s right to impose taxes on colonialists in Taxation No Tyranny.
“Of this kind is the position, that “the supreme power of every community has the right of requiring, from all its subjects, such contributions as are necessary to the publick safety or publick prosperity,” which was considered, by all mankind, as comprising the primary and essential condition of all political society, till it became disputed by those zealots of anarchy, who have denied, to the parliament of Britain the right of taxing the American colonies.” In favour of this exemption of the Americans from the authority of their lawful sovereign, and the dominion of their mother-country, very loud clamours have been raised, and many wild assertions advanced, which, by such as borrow their opinions from the reigning fashion, have been admitted as arguments; and, what is strange, though their tendency is to lessen English honour and English power, have been heard by Englishmen, with a wish to find them true. Passion has, in its first violence, controlled interest, as the eddy for awhile runs against the stream.
Johnson was right about the nature of sovereignty, just wrong about the proper sovereign. Conservation easement promoters don’t occupy the same moral high ground as colonialists. There is no natural law they can cite. They can only seek refuge in process.
We’ve followed conservation easements forever, it seems like. Last week, merely three days after our last post on the topic, 80 Alabama LLCs filed the latest challenge to the Service’s efforts to curb the abusive use of conservation easements. To briefly recap, Notice 2017-10 designates syndicated conversation easements as listed transactions, requiring participants to comply with certain disclosure and list maintenance requirements. It describes syndicated conservation easements thusly:
SECTION 2. FACTS A transaction described in this section is a listed transaction. An investor receives promotional materials that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment. The promotional materials may be oral or written. For purposes of this notice, promotional materials include, but are not limited to, documents described in § 301.6112-1(b)(3)(iii)(B) of the Regulations. The investor purchases an interest, directly or indirectly (through one or more tiers of pass-through entities), in the pass-through entity that holds real property. The pass-through entity that holds the real property contributes a conservation easement encumbering the property to a tax-exempt entity and allocates, directly or through one or more tiers of pass-through entities, a charitable contribution deduction to the investor. Following that contribution, the investor reports on his or her federal income tax return a charitable contribution deduction with respect to the conservation easement.
Here are some of the allegations from the complaint:
D. Events Leading Up to the Issuance of Notice 2017-10 112.
112. For at least several months before the issuance of Notice 2017-10, the IRS considered whether to treat as listed transactions certain donations of conservation easements.
113. At no point did the IRS or Treasury follow the notice-and-comment procedures set forth in section 553 of the APA with respect to the decision that was ultimately reflected in Notice 2017-10.
114. Instead, on October 30, 2016, an IRS attorney stated at a meeting of the Land Trust Alliance that the IRS was considering making syndicated conservation easement donations a listed transaction. See Fred Stokeld, Controversial Easement Transaction Might Get Listed, 153 Tax Notes Fed. (TA) 773, 773 (Nov. 7, 2016) (attached as Exhibit 4).
115. In the following months, rather than publishing the action that it was considering in the Federal Register and thereby making it generally available to the public, IRS employees spoke with and corresponded with select members of the public about the decision whether to issue a listing notice.
116. One private attorney who supported the proposed IRS action stated that the action would “put investors on notice about what’s going on.” See Fred Stokeld, Controversial Easement Transaction Might Get Listed, 153 Tax Notes Fed. (TA) 773, 773 (Nov. 7, 2016) (Exhibit 4).
117. On December 23, 2016, Treasury and the IRS publicly released an advance copy of Notice 2017-10. 118. Notice 2017-10 was published in the Internal Revenue Bulletin on January 23, 2017.
darryll jones