Syndicated Conservation Easements: 2.5x Rule and Listed Status

The pitch, and why the IRS wrote a rule around it

The deal usually arrives as a land partnership: you put in a sum, the partnership owns acreage, and a few months later it donates a conservation easement to a land trust. A qualified appraisal values the easement far above what the land cost, and the deduction flows to you on a Schedule K-1 (see our K-1 guide). Notice 2017-10 described the same pattern in 2017 and said promoters obtain an appraisal “that purports to be a qualified appraisal” but that greatly inflates the value of the conservation easement “based on unreasonable conclusions about the development potential of the real property.” It listed the transaction effective December 23, 2016, reaching transactions entered into on or after January 1, 2010.

The notice did not survive in court. IRS Action on Decision 2024-01 records that the Tax Court, the Sixth Circuit and the Eleventh Circuit held that post-2004 listing notices must go through notice-and-comment rulemaking, and that “the Service will follow” them “in all circuits.” The decisions it names are Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022), Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) and Green Rock LLC v. Internal Revenue Serv., 104 F.4th 220 (11th Cir. 2024). Treasury had already proposed regulations on December 8, 2022 (REG-106134-22), and finalized them as T.D. 10007. That is the document this page reads. We did not read the court opinions themselves; we cite the IRS’s own description of them in the Action on Decision, which states it is “not to be relied upon or otherwise cited as precedent by taxpayers.”

The four steps in 26 CFR 1.6011-9(b)

The regulation says the steps occur “regardless of the order in which they occur.” A deal is a syndicated conservation easement transaction only if all four are present.

Source: Treasury Decision 10007, Internal Revenue Bulletin 2024-43, section 1.6011-9(b) and (c).

Three additions matter to an investor. A gift of a fee simple interest, or of a remainder or whole interest described in section 170(h)(2)(A) or (B), is “substantially similar” (paragraph (c)(7)). The class of participants is wide: an owner of the pass-through entity, the entity, and “any other taxpayer whose Federal income tax return reflects tax consequences or a tax strategy arising from” the transaction (paragraph (e)(2)). And the land trust that receives the easement is not a participant (paragraph (e)(3)) and, per the preamble, is not a material advisor when it acts “solely in its capacity as a qualified organization.”

The 2.5 times rule: where the line sits and how your “investment” is measured

Paragraph (d) is the part of the regulation most summaries skip. It does four things.

• Bright line (d)(1). Where the materials offer less than 2.5 times the investment and the deduction actually allocated is also below 2.5 times, the transaction is “generally not” substantially similar to the listed one. A principal purpose of avoiding the line, for example by a series of gifts, lets the IRS disregard the series.
• Highest number wins (d)(2). If materials suggest a range, or one document (an appraisal or an oral statement) says more than the others, the highest amount decides.
• Three-year presumption (d)(3). The 2.5 times rule is deemed met if the entity donates within three years of your investment and both the allocated and the claimed deduction are at least 2.5 times the investment. You can rebut it only by showing to the Commissioner’s satisfaction that none of the promotional materials suggested or implied a deduction of that size.
• What counts as investment (d)(4). Only the anti-stuffing method, or for contributions made after December 29, 2022 the relevant basis method. Under anti-stuffing, only the portion of your price attributable to the land on which the easement is placed counts. Money the entity holds in cash or securities, or retains for future upkeep, is out.

The regulation’s own two examples show the effect.

Source: Treasury Decision 10007, paragraphs (d)(5)(i) and (d)(5)(ii). The multiples in the sixth row are our arithmetic; the regulation states the investment and the expected deduction.

A worked case at the size of a typical pitch (our arithmetic)

An investor puts in $100,000 and the fund’s only assets are land and an equal amount of cash. The brochure says the deduction could be $240,000. Measured against the $100,000 price, that is 2.4 times, under the line. But under the anti-stuffing method half of the price is attributable to cash, so the investment is $50,000 and the same $240,000 is 4.8 times, above it. The reverse also holds: the same brochure on an all-land fund stays at 2.4 times and is outside the bright line, although the preamble warns that a deduction below 2.5 times may still be overvalued and “remains subject to review by the IRS for accuracy.”

Section 605 of SECURE 2.0: a second, separate trap

Section 605(a) of the SECURE 2.0 Act, enacted December 29, 2022, added section 170(h)(7). It is a deduction rule, not a reporting rule, and its 2.5 times is a different ratio from the listed-transaction test. Section 170(h)(7)(A) says a partnership’s contribution “shall not be treated as a qualified conservation contribution” if its amount “exceeds 2.5 times the sum of each partner’s relevant basis in such partnership.” Relevant basis is the part of each partner’s modified basis allocable to the land donated, measured before the gift and without regard to section 752 liabilities.

Source: 26 U.S.C. 170(h)(7); Treasury Decision 10007, preamble parts III.A and III.B and section 1.6011-9. Table wording is our summary.

The preamble explains why an exception to the deduction rule is not an exception to the listing: transactions that satisfy one of the three exceptions and contain all four steps “continue to be transactions that the Treasury Department and the IRS view as likely to be abusive.” A deal can therefore keep its deduction under section 170(h)(7) and still be a listed transaction, and a deal that clears the partnership-level test because the gift is under 2.5 times total relevant basis is still listed for any partner who was shown a deduction of 2.5 times that partner’s own investment.

Section 170(f)(19) adds a reporting condition for a historic-building gift by a partnership above the same ratio: no deduction unless the entity states the contribution on its return.

A worked case for the statute (our arithmetic)

A partnership’s partners have relevant basis of $4,000,000 in total. The cap is 2.5 times that, $10,000,000. A gift appraised at $16,000,000 exceeds the cap, so under section 170(h)(7)(A) it is not a qualified conservation contribution unless one of the three exceptions applies. A gift appraised at $9,000,000 does not trip the statute, although it can still be a listed transaction for an investor whose own offered deduction was 2.5 times or more of that investor’s investment.

What you owe if you took part, and what a promoter owes

A participant discloses on Form 8886, attached to each return and each amended return that reflects participation (26 CFR 1.6011-4(d) and (e)). If the transaction became listed after you filed, you must file with the Office of Tax Shelter Analysis within 90 calendar days of the date it became listed, for open years. Section 1.6011-9(g) treats a disclosure made under Notice 2017-10 before October 8, 2024 as the disclosure required now, for the years that disclosure covers.

Source: 26 U.S.C. 6707A, 6707, 6662, 6664, 6662A and 6501. Section 6707A(f) states the section 6707A penalty “shall be in addition to any other penalty imposed by this title.”

For a material advisor, a listed transaction lowers the gross-income threshold that makes a person a material advisor from $50,000 to $10,000 where substantially all the tax benefit goes to natural persons, and from $250,000 to $25,000 for other transactions (26 CFR 301.6111-3(b)(3)(i)(B)). Under T.D. 10007 a material advisor must disclose only if it made a tax statement on or after October 8, 2018 (paragraph (h)(2)). These are the advisor-side rules; the section 6707A figures above are the investor’s.

Penalty arithmetic on a $100,000 underpayment (our arithmetic)

Suppose a disallowed deduction produces a $100,000 underpayment. At the 20 percent rate in section 6662(a) the penalty would be $20,000; at the 40 percent rate in section 6662(h) it would be $40,000. For a separate failure to file Form 8886 where the disclosed tax decrease was $100,000, 75 percent is $75,000, which falls between the $5,000 minimum and $100,000 maximum for a natural person. Whether more than one penalty applies to one underpayment depends on the coordination rules in sections 6662 and 6662A, which we did not work through.

Who actually disclosed under Notice 2017-10

Treasury’s Regulatory Flexibility Act certification includes the only count in the document: the gross receipts of respondents to Notice 2017-10 that file Form 1065 or Form 1120-S, for filings 2017 to 2021.

Source: Treasury Decision 10007, Regulatory Flexibility Act section, chart of respondents to Notice 2017-10. The document does not give counts, only shares.

The document also estimates the paperwork for Form 8886 at 10 hours 16 minutes of recordkeeping, 4 hours 50 minutes of learning and 6 hours 25 minutes of preparing and sending, at $102.08 an hour, or “approximately $2,127.00 per filing.” Commenters said the figure was too low, and the document says so too.

What a reader can do with this

• Find every promotional document before you read the tax return. The regulation treats appraisals, private placement memoranda, websites and oral statements as promotional materials, and the highest number in any of them counts. Our guide to reading a private placement memorandum covers where tax statements hide.
• Compute two ratios, not one. Your offered deduction against your investment as defined in (d)(4), and the partnership’s gift against the sum of relevant basis for section 170(h)(7). Ask the sponsor for the partners’ relevant basis; the entity has to compute it.
• If you already hold a K-1 with a conservation deduction, check whether Form 8886 was filed for each year, and whether your earlier disclosure under Notice 2017-10 covers the year.
• Do not treat a deduction below 2.5 times as safe. The regulation says that below the line the deal is generally not listed; it does not say the valuation is right.
• Compare with an ordinary gift. An easement given on land you own is not this transaction; our guide to donating real estate to charity covers Form 8283 and the appraisal rules.
• If you are being offered one now, the investor sees only the sponsor’s side of the paperwork. A tax professional who has read the offering and your return, and who is not paid by the sponsor, is the person who can answer the questions above. Deals sold as private placements are described in our 506(b) and 506(c) census.

FAQ

Sources, read and saved on October 31, 2026: Treasury Decision 10007 and the Internal Revenue Bulletin 2024-43 issue containing it (89 FR 81341); IRS Notice 2017-10 (2017-4 I.R.B. 544); IRS Action on Decision 2024-01 (Internal Revenue Bulletin 2024-52); 26 U.S.C. 170, 6501, 6662, 6662A, 6664, 6676, 6707 and 6707A; 26 CFR 1.6011-4 and 301.6111-3 (Cornell Legal Information Institute). The worked cases and ratios marked as ours are our arithmetic and use invented figures to show the mechanics. We did not read the court opinions, Treasury Regulation 1.170A-14(k), or the IRS forms and instructions. This is analysis of public documents, not investment, legal or tax advice.