The Internal Revenue Service is cracking down on the use of pre-packaged conservation easements to lower the tax bills of wealthy investors, Forbes reports.

Conservation easements, as attorney Jay Adkisson explains on the Forbes site, "are meant to further the public good by encouraging folks with certain types of property to donate property rights (usually easements promising not to change the character of the property) to charitable organizations so that the property stays...in its current form." The potential for abuse is created when a tax shelter promoter identifies a piece of land that is a candidate for a conservation easement, forms an LLC or limited partnership, rounds up investors to purchase the property, and then has the property appraised by a "friendly" appraiser on the basis of a hypothetical development plan. According to the IRS, "[t]he promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property." With the inflated appraisal in hand, the property is then donated to a nonprofit organization, thus "conserving" it while generating a sizable deduction (often in excess of the original investment) for the investors.

Those days could be over. Earlier this month, Adkisson writes, the IRS issued a notice that in effect flags such deals as "listed transactions." As such, any investor entering into such a deal on or after January 1, 2010, has to file what amounts to the tax shelter disclosure statement as found in Form 8886 by the participant(s) and Form 8918 by the promoter. Failure to file carries severe penalties. The goal is to help the agency determine whether the deal has been arranged by promoters who do this kind of transaction over and over. "If you have a one-off real estate deal that ends in a conservation easement donation, that is one thing," writes Adkission, "but if you have the same promoter where pretty much every deal ends in a conservation easement where the tax benefits greatly exceed the original investment, well, then good luck defending that."

"Conservation easements have provided, and will continue to provide, a valuable incentive to permanently protect certain property," he adds. "But when folks start selling them primarily for the tax benefit, then the slaughterhouse opens."