Accounting
Tax Strategy: A syndicated conservation easement update
The long efforts to put in place the enforcement mechanisms to attack syndicated conservation easements appear to at last be finalized. In October 2024, the Internal Revenue Service issued final regulations targeting syndicated conservation easements. The agency first started identifying claims for substantial conservation easement deductions by investors in syndicated partnerships back in 2016, and issued Notice 2017-10 identifying syndicated conservation easements as abusive and requiring reporting by participants. It also sought help from Congress to specifically disallow the abusive aspects of the transactions.
The syndicated conservation easement industry fought back. The industry won a court case on the basis that the notice issued by the IRS failed to meet Administrative Procedure Act requirements for notice and opportunity for comments. Lobbying efforts stymied the progress of congressional action and included efforts to strip the IRS of enforcement funds. Initial efforts to get taxpayers to accept settlement offers were frustrated by funds available for the defense of the transactions built into the deal structures.
The IRS has challenged $21 billion in deductions claimed by 28,000 syndicated conservation easement investors. Even the Land Trust Alliance, which administers traditional conservation easements, became concerned that the syndicated conservation easement activity would result in the complete loss of the conservation easement deduction. The IRS estimated that the number of syndicated conservation easement deductions grew from 249 deals in 2016, generating $6 billion in charitable deductions, to 296 deals in 2018 producing $9.2 billion in deductions. Traditional conservation easement deductions have resulted in around $1 billion in annual deductions.
Statutory action
After several years of frustration in getting Congress to address syndicated conservation easements, success was achieved with the enactment of Code Sec. 170(h)(7) in 2022. Code Sec 170(h)(7) provides that a contribution by a partnership is not treated as a qualified conservation contribution if the amount of such contribution exceeds 2.5 times the sum of each partner’s interest in the partnership. Exceptions are provided for three-year holding periods, contributions made by family pass-through entities, and contributions made to preserve a certified historic building. Reporting requirements apply to partnerships, S corporations, and other pass-through entities. The statute does not apply retroactively, but only to contributions made after Dec. 29, 2022.
Final regulations
In order to overcome the APA challenges to the syndicated conservation easement notice, the IRS began a process of issuing proposed regulations to meet APA requirements. In November 2022 the IRS issued proposed regulations that disallowed deduction for syndicated conservation easement transactions made by a partnership or an S corporation after Dec. 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner’s or S corporation shareholder’s relevant basis. The regulations also imposed new reporting requirements for the members of the entity who are seeking a deduction based on the transaction — IRS Form 8886, “Reportable Transaction Disclosure Statement.”
The final regulations were issued on Oct. 7, 2024, and are effective Oct. 8, 2024. They address three specified classes of abusive syndicated conservation easement transactions and substantially similar transactions:
1. Transactions involving contributions occurring before Dec. 30, 2022;
2. Transactions for which a charitable contribution deduction is not automatically disallowed by Code Sec. 170(h)(7); and,
3. Transactions that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.
The final regulations generally adopt the 2022 proposed regulations with clarifications of the meanings of the terms “substantially similar transactions,” the 2.5 times rule, “conservation easement,” and “participant.” The final regulations also clarify that participants and material advisors must report syndicated conservation easement transactions to the IRS that were completed in tax years that are still open. It is possible that taxpayers could be subject to both the requirements of Code Sec. 170(h)(7) and the final regulations.
Lam Yik/Bloomberg
Settlement offers
The IRS initiated its third settlement offer to try to dispose of many of the audits before it in June 2024. The earlier settlement offers had only limited success. However, the final regulations and growing success in the courts may push more syndicated deals into settlement. Only taxpayers who receive a settlement offer letter from the IRS are eligible for the settlement offer. The settlement offers have typically involved agreeing that the deduction for the contribution be disallowed in full; all partners must agree to settle; the partnership must pay the full amount of tax penalties and interest before settlement; partners can deduct the cost of acquiring partnership interests; and penalties can range from 10% to 20% for investor partners and up to 40% for partners active in the transaction. The settlement offers require the cooperation of partners during the resolution of the issue.
It may be difficult for some partnerships to get the consent of all partners in a deal to participate in the settlement and to be willing to cooperate in the resolution.
Criminal and civil enforcement
With Code Sec. 170(h)(7) in place, as well as now the final regulations, the Tax Court has set aside APA concerns and started to deny overvaluation of conservation easements. For example, in Mill Road 36 Henry LLC v. Commissioner, U.S.T.C. Oct. 26, 2023, the court limited the LLC’s deduction to its tax basis and added an accuracy-related penalty. A circuit court case has also rejected the claimed deductions.
Some of the key promoters of syndicated conservation easements, as well as one of the appraisers utilized by the promoters, have been convicted of fraud and falsification of documents and some have already received substantial prison sentences.
Summary
The tools now seem to be in place to curtail the syndicated conservation easement industry. There remains a lot of work for the IRS to resolve all of the transactions still under audit. It remains to be seen how helpful settlement offers will be in disposing of some of these audits.
Small business jobs growth remained steady in November, while workers’ wages grew only slightly, payroll provider Paychex reported Tuesday.
The
“The states that were impacted by the hurricanes took a pretty big dip right after that happened,” said Frank Fiorille, vice president of risk, compliance and data analytics at Paychex. “But that’s usually the case that we’ve seen for many of these sorts of events that it bounces right back quickly.”
Texas gained 1.22 percentage points as its jobs index climbed to 101.60, which led states for job growth in November. Dallas (101.07) and Houston (100.94) ranked first and second, respectively, among top U.S. metros for job growth in November.
The Midwest (100.62) remained the top region for small business employment growth for the sixth consecutive month.
Hourly earnings growth in Tennessee (3.98%) ranked first among states in November, marking the first time Tennessee has ranked first since reporting began more than 10 years ago.
Probably due to workforce composition changes due to recent hurricanes, Tampa (4.84%) jumped to No. 1 among the top U.S. metropolitan areas for hourly earnings growth in November.
“If you look at the sectors, the leisure and hospitality sector is the softest,” said Fiorille. “The construction and professional business discipline was up the most this past month. Wages are still under that 3% number. We haven’t seen much of a jump on that.”
Paychex has also been tracking numbers for workers who switched jobs or stayed at their jobs. It saw a large jump in pay for those who switched jobs early in the pandemic, but the differences in pay compared to those who remained at their jobs have narrowed in recent years.
“Especially during COVID, when the labor market was really tight, it was a pretty big gap,” said Fiorille. “People who switched jobs were seeing a pretty big increase in wages. We’re seeing that really compressed to where now there’s almost not much of a gap at all, which validates that the labor market, while still being strong, has definitely cooled a little bit from the last few years.”
He thinks accountants should keep their small business clients informed about the possible tax changes that may occur next year when the Trump administration takes office in Washington. Other important topics include artificial intelligence, privacy and beneficial ownership information reporting.
Small businesses should also be aware that the Biden administration’s expanded overtime rule was
Under the
The Department of Labor is
“It does really impact a lot of businesses,” said Fiorille. “We’ll see what happens.”
The Public Company Accounting Oversight Board today announced it settled a disciplinary order sanctioning Weinstein International CPA and its sole partner, Idan Weinstein, for audit and quality control failures.
The PCAOB found that during three different audits, the firm and Weinstein committed multiple violations, including failing to obtain sufficient audit evidence, exercise due professional care and professional skepticism, and resolve inconsistencies with respect to related party transactions, intangible assets and cash balances.
“To protect investors, the PCAOB will not hesitate to take enforcement action against auditors who fail to perform audits in accordance with PCAOB rules and standards,” PCAOB chair Erica Williams said in a statement.
The firm also failed to establish, implement and monitor adequate quality control policies and procedures to ensure firm personnel would comply with professional standards. Weinstein, as the firm’s owner, directly and substantially contributed to the violations.
“This case highlights the PCAOB’s continued commitment to hold auditors accountable for failures to approach their audits with due professional care and professional skepticism, particularly when the failures involve multiple audits and inconsistent audit evidence,” Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations, said in a statement.
The sanction is the latest in a long line of increased enforcement efforts by the PCAOB, including
Without admitting or denying the findings, the firm and Weinstein consented to the disciplinary order, which:
- Censures them;
- Bars Weinstein from being an associated person of a registered public accounting firm, with a right to petition to re-associate after three years;
- Revokes the firm’s registration, with a right to apply to re-register after three years; and,
- Requires the firm to review and certify its quality control policies prior to submitting any future registration application.
The PCAOB would have imposed a joint and civil money penalty of $75,000 but did not do so after considering the firm and Weinstein’s financial resources.
Both firms are based in Delaware County, Pennsylvania. The combined firm will include three partners and 70 staff members (58 from BGA&F and 12 from Howe). Financial terms were not disclosed, but after the combination, BGA&F expects to earn over $12 million annually. The deal was arranged by Ira Rosenbloom, chief operating executive of Optimum Strategies.
William E. Howe & Co. has been in business for over 100 years, offering accounting, audit, tax planning and compliance, and advisory services. BGA&F specializes in clients from the real estate industry, medical and dental practices, hospitality and manufacturing businesses. BGA&F dates back to 2017 when Pennsylvania accounting firms
“We’re excited to welcome William E. Howe & Co. into the BGA&F family,” said BGA&F ., managing partner William B. Gowie Jr., in a statement. “The merger is a strategic step that enhances our ability to provide comprehensive accounting and advisory services to a broader client base. Together, we are well-positioned to deliver innovative solutions while maintaining the integrity and client-focused approach that have defined both firms.”
The Media office of William E. Howe & Co. will become a BGA&F location, operating under the Barsz Gowie Amon & Fultz name until the lease expires in September 2025. At that time, the office will consolidate with BGA&F’s offices. In addition to Media, BGA&F also has offices in Chadds Ford, Pennsylvania.
“We are proud of the legacy we’ve built at William E. Howe & Co.,” said Herbert I. Berkowitz, CPA, managing partner of William E. Howe & Co., in a statement Tuesday. “This merger allows us to continue that tradition while offering our clients expanded capabilities and resources. We’re confident that our combined expertise and shared commitment to quality will drive even greater success for our clients.”
CRM, OKTA, BOX and more
Small businesses saw modest growth in jobs and pay in November
PCAOB sanctions Weinstein International CPA for audit, quality control violations
Are American progressives making themselves sad?
U.S. Beneficial Ownership Information Registry Now Accepting Reports
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
-
Economics1 week agoDemocratic states are preparing for Donald Trump’s return
-
Economics1 week agoMarkets cheer Bessent’s credentials to lead Trump’s Treasury department
-
Economics1 week agoTrump’s proposed tariff increases would boost inflation by nearly 1%, Goldman Sachs estimates
-
Economics1 week agoAs Jack Smith exits, Donald Trump’s allies hint at retribution
-
Economics7 days agoPCE inflation October 2024:
-
Finance7 days agoJWN, DELL, SEDG and more
-
Economics7 days agoDoes Donald Trump have unlimited authority to impose tariffs?
-
Economics5 days agoEuro zone inflation, November 2024