Syndicated Conservation Easements: IRS Offers Settlements While Warning of Continued Pursuit
The IRS continues its crackdown on syndicated conservation easements. On June 25, the agency issued a limited-time settlement offer to taxpayers who are already in litigation over cases involving these easements. The settlement proposal has strict conditions and offers little incentive for some investors other than ending litigation and the related accruing attorneys’ fees.
The move follows an IRS announcement late last year that it was stepping up enforcement actions around syndicated conservation easements. The IRS called these deals abusive schemes, and included syndicated conservation easements in its 2019 list of tax scams called the Dirty Dozen.
In these structures, promoters syndicate ownership interests in real property through partnerships. The real property is then suddenly deemed to be of significantly more value because at its best use it can be developed. Instead of developing, partners vote to donate the property as a conservation easement to a charity or land trust and end up with a deduction equal to their share of the fair market value of the donated property. Key in the structures the IRS is targeting are marketing materials promoting the possibility that investors might be entitled to a share of a conservation easement contribution deduction equal to or as high as two and a half times their investment.
IRS on Winning Streak
The IRS’s recent settlement offer comes only a few days after the US Tax Court ruled in favor of the agency and denied the charitable deductibility of three conservation easements involving almost over 2,500 acres of land in Tennessee and Georgia and about $36 million in disallowed deductions. In fact, the IRS has had a string of wins denying the charitable deductibility of the easements since this spring, including one involving almost 700 acres on four properties in Effingham County worth $20 million in disallowed deductions.
Settlement Terms Strict for Investors, More So for Promoters
The limited settlement offer was mailed to taxpayers whose cases are already on the docket at the US Tax Court. The terms of the offer include:
The conservation easement charitable deduction is disallowed in full.
All partners, including syndicators, must agree to settle.
Prior to settlement, the partnership must pay all taxes, penalties and interest (which accrues from the date the tax was due).
Partners who were investors can deduct the cost of acquiring their interest and will pay a reduced penalty of 10 to 20%.
Partners who were more than investors and provided services for any part of the syndicated conservation easement transaction must pay the maximum penalty (normally 40%) and receive no deduction for their costs.
In its announcement, the IRS warned taxpayers that these would be the best settlement terms available to docketed Tax Court cases and that it would continue to litigate cases to the fullest extent. Yet sponsors, or partners who played more than an investment role, have little incentive to settle other than ending the litigation.
Consult An Experienced Tax Attorney
Taxpayers who are in litigation with the IRS over a syndicated conservation easement and received a settlement letter should consult an attorney to review all alternatives before entering settlement negotiations.
Investors in any of these easements should consider consulting an attorney in light of the IRS’ November 2019 announcement about stepping up enforcement in this area.
If you have more questions about syndicated conservation easement transactions, please contact Wiggam & Geer at (404) 609-1300 or by visiting our website. One of our experienced Atlanta tax lawyers or Atlanta tax settlement attorneys would be happy to speak with you.