The IRS may find few takers for its offer to settle litigation over potentially abusive land deals, even though the agency warned investors they won’t be offered better terms.
The federal government in June announced a settlement offer to resolve pending legal cases involving syndicated conservation easements, a type of land deal that leverages a conservation tax deduction under tax code Section 170(h). The transactions are organized by sponsors who solicit multiple investors to buy interests in a property in order to qualify for the deduction, and the IRS has identified the deals as ripe for abuse.
While the IRS positioned its offer as a good one following a string of agency victories in the U.S. Tax Court, people familiar with the transactions say the offer won’t be attractive to many. They cited three limiting factors: The deal only applies to enforcement actions that have already made their way to the courts, all partners in an easement deal are required to accept the settlement for it to be valid, and the offer includes no benefit for the deal promoters.
Guinevere Moore, an attorney with the Moore Tax Law Group in Chicago, said the offer pits partners against one another.
“I quite frankly don’t know who’s gonna be likely to take this offer,” Moore told Bloomberg Tax, speculating that partners with limited involvement in a single deal may be interested in putting the issue behind them.
The offer, which is being sent to an undisclosed number of people engaged in litigation with the IRS, is the latest step in a long-running effort by the government to crack down on promoters of syndicated easement deals. The agency has made the deals an enforcement priority and the Senate Finance Committee issued subpoenas to representatives of the largest companies that have been involved in syndicated easement deals, including Ecovest Capital Inc. and Ornstein-Schuler Investments.
The settlement offer would allow investor partners in easement deals to pay a reduced penalty of between 10% to 20%. While the conservation tax deduction wouldn’t be allowed, investors who take the settlement would be allowed to deduct the cost of acquiring their partnership interests.
The terms are less favorable for promoters and others involved in organizing the transactions. According to the IRS, partners who provided services in connection with any syndicated easement transaction wouldn’t be allowed a deduction for costs and would have to pay the maximum penalty, which is typically 40%.
IRS chief counsel Michael Desmond, in a statement emailed to Bloomberg Tax, confirmed that all partners, including promoter-partners, need to agree to participate in order for a deal to be eligible for the settlement offer.
“While the IRS might be willing to settle with less than all the partners, those partners willing to settle should expect less favorable terms than if a full resolution of the case is reached,” Desmond said.
Two people familiar with syndicated easement deals who spoke to Bloomberg Tax on condition of anonymity said that while they don’t think the offer will result in many actual settlements, the strong stance IRS is taking could scare away potential investors. They said the offer, announced a few weeks before this year’s July 15 tax filing deadline, is a signal that investors in easement deals should be careful of what they include on their 2019 returns.
The agency’s announcement of the settlement offer noted the government’s success in easement litigation.
The Tax Court in May sided with the IRS in Oakbrook Land Holdings v. Commissioner, upholding conservation easement regulations. Days before the settlement offer was issued, the Tax Court issued a trio of June 23 rulings that upheld the agency’s disallowal of a combined $36 million in deductions related to the land deals.
An industry representative who wasn’t authorized to speak about the settlement offer on the record said easement sponsors feel that this government’s past victories are low-hanging fruit. The IRS may find it more difficult to win on deals made more recently, the source said, because the deals have been put together more carefully with IRS requirements in mind.
The IRS anticipated that promoters may push back against the deal. The agency, in announcing the settlement offer, urged investors to consult with an independent advisor rather than someone involved in the transaction.
“The IRS realizes that some promoters may tell their clients that their transaction is ‘better’ than or ‘different’ from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution,” the agency said. “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.”
Matt Ornstein, CEO of Ornstein-Schuler Investments, said in a statement that his firm remains “fully engaged” in an effort to resolve its issues with the IRS. The firm, one of the largest firms that previously offered these deals, says it halted easement investment opportunities at the end of 2018.
Take the Deal or Appeal?
Michelle Abroms Levin, a former Justice Department tax attorney now with Sirote & Permutt, PC in Huntsville, Ala., is part of the legal team that challenged the IRS on easement deductions in two significant cases: the Oakbrook case decided in May and a case brought by Pine Mountain Preserve LLP that is currently on appeal to the Eleventh Circuit.
Oakbrook still has time to appeal its case, while oral arguments in Pine Mountain are scheduled for Aug. 25.
Levin said that taxpayers whose cases are tied to the legal issues at play in Oakbrook and Pine Mountain will need to consider whether the tax benefit of their disputed deductions outweighs the benefits of paying a reduced penalty under the settlement and avoiding the cost of more litigation.
For example, if the Oakbrook ruling were overturned, “that would be extremely meaningful” to someone whose deduction had been disallowed based on the same regulations and who wasn’t facing any penalties, Levin said. By contrast, someone who faces 40% penalties and a disallowed deduction potentially would be better off taking the settlement and paying the penalty of between 10% and 20%, Levin said.
“Everyone’s going to have to look at their own facts and values and determine whether or not this is a good settlement,” she said.
—With assistance from Allyson Versprille and Jeffery Leon.