Years after identifying a pattern of potentially abusive land conservation deals, the IRS has offered to settle a number of pending cases with a warning that it is the best deal participants will get.
Tax code Section 170(h) allows for substantial tax deductions if land owners donate the right to develop their property in order to conserve it.
The offer targets syndicated conservation easements in particular, where promoters come together to encourage investors to purchase ownership interests in property through partnerships, using promotional materials that may suggest that prospective investors can get a share of the tax deduction worth significantly more than their investment amount. The IRS has flagged those types of deals on its most recent “Dirty Dozen” list of alleged tax scams.
The IRS on Thursday announced a settlement offer that would resolve some pending cases before the U.S. Tax Court. The offer, which will be mailed to an unspecified number of taxpayers involved in litigation with the IRS, follows a string of legal victories in the agency’s crackdown on the alleged tax shelters.
No ‘Sweetheart Deal’
The offer will specify that the deduction for the contributed easement will be completely disallowed and the partnership will have to pay the full amount of tax, penalties, and interest owed. But investor partners would be allowed to deduct their cost of acquiring their partnership interests and pay a penalty reduced by between 10% to 20%.
Partners who “provided services” in connection with any syndicated conservation easement transaction will have to pay the maximum penalty, usually a 40% penalty, without any deduction for costs.
“This is no sweetheart deal—and it should not be one,” said Andrew Bowman, president and CEO of the Land Trust Alliance, a national conservation organization that has consistently opposed the deals. “This is an emphatic reminder to all investors that they should steer clear of abusive conservation easement tax shelters.”
Partnership for Conservation, a group that supports syndicated easements, said the settlement offer falls short.
“While P4C welcomes the acknowledgement that timely and costly litigation is not a solution, the settlement offer being made is not a true solution,” P4C board chairman and president Robert Ramsay said in an emailed statement.
“It is imperative that the IRS provide guardrails to help well-intentioned taxpayers conserve land and follow the law,” Ramsay said. “At the same time, Congress must act to strengthen the integrity and accessibility of conservation easements while also providing bright red lines to the IRS to protect taxpayers who follow the letter and intent of the law.”
The IRS is likely choosing taxpayers for the settlement that it has the strongest cases against based on legal precedent established already, former IRS Commissioner John Koskinen said. He left the agency in 2017 when the crackdown on syndicated conservation easements was already underway.
“I think the assumption behind the settlement is any reasonable assessment of an individual case will agree with the IRS that the best course for the taxpayers in the partnership is to settle,” Koskinen said.
IRS Winning Streak
The announcement of a settlement offer follows a string of recent IRS victories over whether conservation easements satisfied a tax code requirement to protect the conservation purpose “in perpetuity.”
Tax Court Senior Judge Mark Holmes wrote in a dissent that the court’s May ruling in Oakbrook Land Holdings, LLC v. Comm’r to uphold conservation easement regulations would probably mean that “hundreds or thousands of taxpayers” will lose their deductions for failing to meet the protected-in-perpetuity requirement.
The Tax Court on Tuesday ruled in the IRS’ favor in three separate conservation easement cases, upholding $36 million in total disallowed deductions.
Former acting IRS Commissioner Steven Miller told Bloomberg Tax Thursday that now is a good time for the IRS to try to offer a settlement under favorable terms for the agency.
“They have the wind at their back because they’ve been successful in court, for the most part, and especially lately,” Miller said.
In its announcement, the IRS noted the government’s victories in several syndicated conservation easement cases and encouraged taxpayers to consult with a qualified adviser on the offer.
“Taxpayers should not expect to settle their docketed Tax Court cases on better terms,” the agency said.
Wyden Welcomes News
Senate Finance ranking member Ron Wyden (D-Ore.) said in a statement that the settlement offer is a sign that the IRS is taking this issue seriously.
“Today’s announcement shows that IRS is continuing aggressive enforcement action against these tax cheats, and underscores the need for additional Congressional action,” Wyden said.
Wyden and Senate Finance Chairman Chuck Grassley (R-Iowa) have subpoenaed several individuals as part of an investigation into the transactions. A spokesman for Grassley said Thursday that the investigation is independent of what the IRS is doing, indicating it will continue.
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