IRS Syndicated Easement Offer Is Worth Investors’ Consideration

The IRS earlier this month announced its latest settlement initiative for syndicated conservation easement transactions. The settlement initiative largely preserves the core economic framework of prior offers while introducing several procedural modifications.

Given the IRS’s overall winning record in US Tax Court and a partnership’s potential costs of a trial loss, investors should carefully assess their partnership’s litigation prospects in deciding whether to take the settlement offer.

In the new offer, the partners keep a deduction equivalent to their investment, pay a 10% penalty on the new tax, and pay interest on the total amount calculated from the original due date of the return until paid in full.

The offer will stand for 90 days, after which the penalty increases to 20%. After another 45 days, the penalty increases to 40% with a litigation-risk deduction of approximately 5% to 7% of the original deduction.

Partnerships still under audit will receive the offer, but full participation is no longer required, unlike in previous examination level offers. Although full participation is largely unworkable, this does appear to supplant a better examination level offer of only 5% penalties, a 21% tax rate (far below the maximum 37% or 39.6% an investor would face), and a deduction for cost.

There is one distinctly positive change: With limited exceptions, the IRS will make the offer to all partnerships, including those that already rejected it.

Investors Voting No

The IRS sees no meaningful litigation risk in these cases. The Tax Court consistently rules for the agency and, in Veribest Vesta, LLC, even threatened that, “continuing to pursue similarly incredible, nonsensical, and, quite frankly, smelly arguments may result in sanctions on petitioner or its counsel.” I hope someone “cracks the code” for partnerships, but it isn’t looking good.

Still, only 32% of partnerships have accepted the settlement offer since 2020, according to the announcement. Why?

Some investors believe—not without reason—that their partnership can win. For example, the IRS has committed the procedural blunder of an untimely final partnership adjustment, resulting in a total victories for Bayou Serpent Property, Agate Holdings, and Olivian Holdings; the IRS got caught backdating a supervisory penalty approval form in LakePoint Land II, and a handful of other cases, wiping out those penalties; and the Green Valley decision in 2022 invalidated Notice 2017-10 on Administrative Procedure Act grounds.

However, the IRS responded to Green Valley by issuing formal regulations in October 2024 re-designating these transactions as listed transactions. A partnership can’t count on an untimely final partnership adjustment or final partnership administrative adjustment.

Following LakePoint Land II, the IRS and the Office of the Chief Counsel investigated penalty approvals in 829 docketed cases, according to a Treasury Inspector General for Tax Administration report issued May 1. The IRS found seven backdated approval forms and discovered that “disciplinary actions ranged from non-disciplinary counseling letters to written reprimands.” TIGTA recommended the IRS communicate to employees that it is “not appropriate to backdate penalty approvals.”

These cases were huge victories for the partnerships, but they weren’t watershed moments. On the merits, the Tax Court record has been consistently one-sided against syndicated partnerships.

The most common explanation for rejecting an offer—the one I have heard most frequently from investors themselves—is that they were hoping for a better offer. Perhaps the IRS would blink. Perhaps a new administration with different priorities would push a more favorable offer through. Neither happened.

The new initiative confirms that the economic terms aren’t going to improve any time soon. The removal of the upfront lump-sum payment requirement from examination stage partnership offers is more workable (although apparently less favorable). The renewal of the offer to partnerships that previously rejected it is a positive development. But a 10% penalty and deduction for cost is, and will remain, the offer for the foreseeable future.

Cost of Rejection

Below is a relatively conservative example comparing the offer with a trial loss. The example assumes a partner invested $100,000 in a syndicated easement that generated a $430,000 deduction.

The 10% penalty settlement:

• Deduction disallowed in full; investor keeps deduction for out-of-pocket costs ($100,000)
• Net income inclusion: $330,000 (the disallowed deduction above investment)
• At a 37% marginal rate: $122,100 in additional tax
• 10% gross valuation misstatement penalty on that tax: $12,210
• Total before interest: $134,310

Hazards/litigation outcome with 5% of deduction allowed and a 40% penalty:

• $430,000 × 5% = $21,500 deduction allowed (vs. $430,000 claimed)
• Net income inclusion: $408,500
• Tax at 37%: $151,145
• 40% penalty: $60,458
• Total before interest: $211,603

A trial loss is 57% more expensive before interest, which the IRS calculates from the original due date of the investment year return through full payment.

What to Do

Whether voting to settle, or rolling the dice on a trial, making a deposit under Section 6603 of the tax code to pause interest accrual is the most effective financial step for any investor in one of these cases.

Beyond that, Abdo and Kwong opened the door to an argument that no interest should have accrued during the Covid-19 pandemic. Investors should discuss this and other potential interest abatement or refund arguments with their advisers.

Investors should calculate what a rejected offer followed by a loss at trial could cost, and weigh that against the odds of victory for their partnership. Investors evaluating whether to reject the renewed settlement offer will likely need to consider the increasingly one-sided litigation record alongside the possibility of partnership-specific procedural defenses.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

John Kirbo is a senior attorney at Wiggam Law in Atlanta, where he represents clients in complex tax disputes.

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