In the Summer 2015 issue of Saving Land, Tim Lindstrom addressed the use of partnerships, LLC’s and syndications in connection with easement donations. We agree with much of what Tim said, but we have a concern that his comments may be construed in an overbroad manner and perceived as an attack on all transactions that involve partnerships and syndications. As lawyers who have defended a large number of easement deductions administratively and in court, we plead: don’t throw out the baby with the bath water!
As Tim says, all syndications are not shams. Donations of conservation easements by partnerships and LLC’s generally are legitimate and yield appropriate charitable deductions for the entity’s members. This includes many donations that are made following a syndication or other diversification [fractionalization] of ownership of the entity. Selling interests in property prior to a donation is not “selling a deduction.”
We agree that special allocation of deductions among members may be problematic, raising questions of substantial economic effect. Disguised sales, which can be facilitated by a partnership vehicle, are just that – disguised sales, leading to holding period and other issues. Diversifying the membership of an entity (syndication) may be associated with these issues, but special allocations and disguised sales can be readily identified and resolved as issues in the audit process when they are inappropriate. Most entities making easement donations do not have these issues. In fact, most entity-level donations we have seen, including syndicated partnerships, involve no special allocations; donation deductions are distributed in proportion to ownership interests.
At the heart of concern over “syndications” is the fundamental question of the value of the easement. Valuation is not an issue unique to syndicated partnerships, nor is value analyzed differently for donations by entities. Yet, some have tried to stigmatize syndicated partnerships, lumping them into a class, and treating them as uniquely undeserving of easement donation deductions. This effort reflects laziness (auditing is “too hard”), misdirection (limit deductions by any means possible), or more fundamentally hypocrisy (limit deductions to donations made “our way”).
We recently tried a Tax Court case in which a substantial easement donation was contemplated to be made after a syndication of memberships in a partnership owning 6200 acres of developable property. The new members became entitled to the benefit of 50% of the property at a cost to them of $45 Million. Shortly thereafter, easements were placed on 1200 of 6200 acres. Partners shared in the deductions in proportion to ownership. IRS conceded the 1200 acres had substantial conservation values, but challenged the value of the easements. The case proceeded on the entirely appropriate issue of value. The existing laws and procedures are well suited for resolution of value disputes. Traditionally, these disputes are resolved by agreement between IRS and the taxpayer. Unfortunately, IRS has often been unwilling to analyze easement values objectively and the result has been unnecessary litigation.
In that case, 1200 acres of quality habitat (including mountain ridges and slopes) were conserved. The partnership retained 5000 acres of prime developable land. No one looking at the facts of the case has suggested anything amiss about the easement donations made after diversification of ownership in the partnership.
Another case we tried, Kiva Dunes Conservation LLC, T.C. Memo. 2009-149, involved a sale of partnership interests prior to the eventual donation of an easement. The Court’s findings of fact describe the transaction. Again, no one has suggested anything inappropriate relating to the syndication. The easement value claimed by the taxpayer was $30.6 Million; IRS said $2.6 Million. The Court determined the value as $28.7 Million, and neither the IRS nor the Tax Court expressed concern about the structure of the transaction or that the case involved a sale of partnership interests prior to the donation of the easement.
We have some thoughts about Tim’s discussion of a land trust’s role in the valuation of an easement and execution of the Form 8283, but we’ll address those in a separate response.