Another settlement offer planned in IRS conservation easement cases

The IRS plans to issue a settlement offer to eligible partnerships involved in syndicated conservation easement transactions, which have long been a focus of enforcement operations, with hundreds of cases now in the courts.

The IRS also updated its conservation easement website to add information on abusive conservation easement transactions, recent court decisions, and warning signs for investors, according to a news release.

“Congress created the conservation easement deduction to encourage genuine preservation, not to subsidize abusive tax shelters,” IRS CEO Frank Bisignano said in the release, issued Wednesday. The updated website “highlights the serious risks taxpayers face when they are sold inflated tax benefits disguised as conservation,” he said.

Court cases

The Tax Court has used adjectives such as “ludicrous,” “baseless,” and “outrageous” in its rulings against conservation easement values, the IRS said in the release.

“The courts have repeatedly rejected abusive conservation easement arrangements, often sustaining major reductions in claimed deductions and significant penalties,” Kenneth J. Kies, acting IRS chief counsel, said in the release. “Taxpayers and their advisers should carefully review the updated information and the settlement terms when they are announced.”

Courts have, however, found that the IRS had improperly backdated penalty approvals in some conservation easement cases. For example, in Lakepoint Land II, LLC, the IRS settled the case in Tax Court in 2023 after admitting that it backdated a penalty approval form. The issue seeped into other cases, according to the Treasury Inspector General for Tax Administration, which concluded in a report released May 1 that the IRS had backdated penalty approvals in seven cases and conceded over $68 million in penalties.

Early this year, Kies said the Tax Court has about 700 syndicated conservation easement cases and 400 more are headed there.

Previous offers

The IRS has made at least three previous offers for conservation easement cases, most recently in June 2024, when it made a time-limited settlement offer to certain taxpayers that participated in syndicated conservation easements and similar transactions. Four years earlier, it made a settlement offer to taxpayers with pending Tax Court cases. In October 2005, syndicated conservation easement transactions were included in a settlement initiative for taxpayers that voluntarily came forward.

The IRS has consistently disallowed the tax benefits claimed by taxpayers in abusive syndicated conservation easement transactions, which have appeared on the IRS’s Dirty Dozen list of tax scams multiple times. 

2022 legislation

In December 2022, Congress passed the SECURE 2.0 Act of 2022 (Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328). Section 605 of the legislation, which applies to contributions made after Dec. 29, 2022, helps curb syndicated conservation easement abuse by disallowing a deduction for a partnership’s or S corporation’s qualified conservation contribution if the amount of the contribution is more than 2.5 times the sum of each partner’s or shareholder’s relevant basis in the partnership or S corporation, subject to certain statutory exceptions.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.