Taxpayers Invested In Syndicated Conservation Easements Have A Limited Opportunity To Settle With The IRS
Tax Court strikes down four more abusive syndicated conservation easement transactions prompting taxpayers to accept IRS settlement offers in syndicated conservation easement cases or face a higher tax bill.
A conservation easement imposes a restriction on real property, granted in perpetuity, on the use of real property. The important role of conservation easements is to preserve land, natural habitats, open spaces, and historically important land areas. Conservation easements can include a restriction on the real property that preserves the facade of a building in a registered historic district.
The Internal Revenue Code includes tax incentives for taxpayers to contribute a a real property interest to qualified charitable organization exclusively for conservation purposes. This is referred to as a Qualified Conservation Contribution (QCC). However, abusive syndicated conservation easement transactions have been of concern to the IRS for several years.
Abusive Syndicated Conservation Easements
Commissioner Chuck Rettig stated: “The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions”.
Typical facts that the IRS has seen which the IRS believes to be support as an abusive syndicated conservation easement structure are as follows:
- Promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount.
- The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement.
- After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.
The four most recent U.S. Tax Court decisions disallowed conservation easement deductions totaling nearly $21 million.
IRS Syndicated Conservation Easements Settlement Program
On June 25, 2020, the Internal Revenue Service Office of Chief Counsel announced a time-limited settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions.
The settlement offer would bring finality to these taxpayers with respect to the syndicated conservation easement issues in their docketed U.S. Tax Court cases. The settlement requires a concession of the income tax benefits claimed by the taxpayer and imposes penalties.
Among the key terms of the settlement offer:
- The deduction for the contributed easement is disallowed in full.
- All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
- “Investor” partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.
- Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.
IRS’ Coordinated Enforcement Strategy
The IRS has developed a comprehensive, coordinated enforcement strategy to address abusive syndicated conservation easement transactions and has also been working closely with the U.S. Department of Justice to shut down the promotion of them. The IRS has stated that it will continue to disallow the claimed tax benefits, asserting civil penalties to the fullest extent, considering criminal sanctions in appropriate cases, and continuing to pursue litigation of the cases that are not otherwise resolved administratively. Furthermore, this syndicated conservation easement resolution should not be deemed to have any impact on the potential criminal exposure, investigation and/or prosecution of any individual or entity that participated in or assisted or advised others in participating in a syndicated conservation easement transaction in any manner whatsoever.
Some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution. Therefore, when deciding whether to accept the offer, any such taxpayer should consult with independent tax counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.
What Should You Do?
It should be certain that the IRS is not taking these transactions lightly and that the IRS is ready and willing to litigate any non-settled case to the fullest extent possible thus making taxpayers incur more legal fees and deal with the uncertainty of the outcome of a Tax Court trial. We encourage taxpayers who are in this situation to seek independent tax counsel. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California help you. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.