IRS Offering Potential Settlement for Syndicated Conservation Easements

June 29, 2020 | Article

By Ben Peeler and Elyse Katz

The IRS recently announced a limited-time settlement offer to certain taxpayers with pending docketed Tax Court Cases. Specifically, this relates to those cases involving syndicated conservation easement transactions. Taxpayers who are eligible will be notified by letter with applicable terms.

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The Impact of a Syndicated Conservation Easement and the IRS’ Stance
A syndicated conservation easement is defined by the IRS as a conservation easement obtained through a subscription or investment partnership where the investor receives a charitable contribution deduction equal to 2.5 times (or greater) the amount of their initial investment. These investments have been listed transactions for several years and require filing notice with the IRS on Form 8886.

In the IRS’ latest news release dated June 25, 2020, they announced a limited-time settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions. Those taxpayers that are eligible will be notified by letter with applicable terms.

“The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions,” said Commissioner Chuck Rettig in the announcement.

However, the IRS is offering a settlement for those already in Tax Court regarding these matters to clear out some older cases and generate some revenue for the IRS. The U.S. Tax Court has already held in the government’s favor in several opinions and orders in these types of cases, and the IRS is confident that the Tax Court will continue to rule in the government’s favor.

Key Component of the Settlement Offer
Some of the key terms in the settlement offer are:

  • The deduction for the contributed easement is disallowed in full.
  • All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
  • "Investor" partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10% to 20% depending on the ratio of the deduction claimed to partnership investment.
  • Partners who provided services in connection with any syndicated conservation easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with no deduction for costs.

To further encourage taxpayers to consider this settlement, the IRS has stated “taxpayers should not expect to settle their docketed Tax Court cases on better terms. Based on cases the Independent Office of Appeals has encountered to date, and the existing state of the law, taxpayers should not later expect a better result than what is provided in this settlement offer.”

Unfortunately, one issue not addressed in the notice is those taxpayers that obtained independent tax advice or appraisals before entering into the investment. Those who obtained the independent advice should have partner level defenses that are not considered in this type of settlement. Those in this situation will want to make their position known to the IRS attorney’s considering the case prior to agreeing to any settlement as it can materially affect their ability to challenge penalties.

The Importance of the Settlement Offer
Based on the wording in the announcement, it is clear that the IRS is not taking these transactions lightly and they are ready, and willing, to litigate any non-settled case to the fullest extent possible. It sounds like this settlement offer should be carefully and seriously considered.

Dealing with the IRS and Tax Court can be complex and time consuming. Ensure you have the right representation to help you make sense of your tax liability.

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