November 29, 2022
IRS pushing settlement of syndicated conservation easement disputes
Anyone with a pending U.S. Tax Court syndicated conservation easement matter who has received a settlement offer from the IRS should speak with an experienced tax attorney as soon as possible to understand the pros and cons of this offer before it expires.
The IRS is serious about stopping fraudulently inflated syndicated conservation easement deductions that significantly reduce tax liability. We previously wrote an article that explains what a syndicated conservation easement is and how some people are taking advantage of the transaction to underpay their taxes by unlawfully inflating the value of related charitable deductions.
What is the syndicated conservation easement transaction?
The basic structure of the transaction stems from available charitable tax deductions for donating real estate easements to nonprofit land trusts that preserve the properties for future generations. Promoters often facilitate these transactions using pass-through entities such as partnerships to structure such a donation. The promotor aggressively entices taxpayers to invest in the entity, through which the promoter facilitates the charitable donation.
The IRS does not directly tax income of partnerships and similar entities. Rather, those that own the entity pay taxes on their own returns for the entity’s income that is “passed through” to them. The promotors attract investors by telling them they can take a greatly inflated deduction on the charitable donation of the real estate, depriving the IRS of the proper amount of tax revenue.
Sometimes, the promotor will try to support the claimed deduction with an inflated real estate assessment based on the previous nature, use or potential of the land parcel, rather than on its value encumbered with a conservation easement.
IRS trying to settle conservation easement disputes
The IRS has focused intensely on abusive syndicated conservation easements since at least 2017 and on June 25, 2020, announced that the agency was making settlement offers – with expiration dates – to certain taxpayers with pending disputes against the IRS in the U.S. Tax Court on this issue.
The settlement offers went out to the targeted taxpayers only by letter detailing the offered settlement terms, which include that the taxpayer concede the overinflated deduction and pay associated taxes, interest and penalties. The IRS will fully disallow the deduction and all partners to the transaction must agree to the settlement. The amount of penalty will vary with a partner’s involvement level.
The agency says that no taxpayer should expect any better terms than those offered and that if they do not accept it, the government will vigorously prosecute the case.
Taxpayers considering settlement should consult with informed legal counsel
Because the U.S. Tax Court has frequently held in favor of the IRS on this issue – including four collectively disallowing syndicated conservation easement deductions worth almost $21 million on July 9, 2020 – the agency recommends that anyone considering the settlement offer get legal advice from an experienced tax attorney who is not affiliated with the original promotor or any aspect of the transaction. In a July 13 news release, the agency urged those who have received the settlement offers to “accept [them] soon.”
Innocent investors who trusted what the promotors said about the value of deductions should carefully weigh their options. If you have received one of these offers, it is important to talk to a lawyer as soon as possible. You should understand the ramifications of acceptance as well as the risks of going forward with the case in Tax Court before you accept or reject, but time is of the essence since the offers will expire.