IRS procedures for syndicated conservation easement settlements
Additional procedures for taxpayers selected for settlements discussed
TAX ALERT |
The IRS recently released Chief Counsel Notice 2021-001 (CC Notice), and corresponding news release (IR-2020-228), discussing Chief Counsel’s settlement initiative for certain pending Tax Court cases involving abusive syndicated conservation easement transactions. The notice piggybacks on the IRS’s Aug. 31, 2020 news release (IR-2020-196), announcing the successful completion of the first settlement under its initiative to resolve certain docketed cases involving these transactions. The settlement initiative began in earnest in June when the IRS announced (IR-2020-130) that it would offer settlements in certain cases involving abusive syndicated conservation easement transactions. Chief Counsel has sent settlement letters to dozens of partnerships involved in transactions believed to be abusive and whose cases are pending before the U.S. Tax Court.
Reportable syndicated conservation easement transactions
On Dec. 23, 2016, the IRS issued Notice 2017-10 designating certain syndicated conservation easements as listed transactions. These are transactions entered into on or after Jan. 1, 2010, where an investor receives promotional materials, either oral or written, that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction that equals or exceeds an amount that is two and a half times (250%) their initial investment. The investor purchases the interest, either directly or indirectly, in the pass-through entity which holds real property. The pass-through entity contributes a conservation easement encumbering the property to a tax-exempt entity and allocates, directly or through one or more tiers of pass-through entities, a charitable contribution deduction to the investor. The investor then reports a charitable contribution deduction on its income tax return. At issue in these transactions is the fair market value of the conservation easement and in turn, the charitable contribution deduction.
Transactions that are substantially similar to those described in Notice 2017-10 are also listed transactions. Under Notice 2017-10, taxpayers who participate in these transactions are required to file a Form 8886, Reportable Transaction Disclosure Statement, with their tax returns and with the Office of Tax Shelter Analysis.
In 2018, the IRS Large Business and International Division added syndicated conservation easement transactions to its Compliance Campaigns to ensure the easement contributions meet the legal requirements for a deduction and that the fair market values are accurate. In 2019, the IRS added the transactions to its annual “Dirty Dozen” list of tax scams. Also in 2019, the IRS announced (IR-2019-182) a significant increase in enforcement actions through coordinated examinations conducted through the IRS Small Business and Self-Employed Division, Large Business and International Division, and Tax Exempt and Government Entities Division, and through investigations by the IRS's Criminal Investigation division. Over the intervening months, the Tax Court has ruled in the IRS’s favor in many cases brought before it challenging the validity of syndicated conservation easements. In the June 2020 news release (IR-2020-130), the IRS announced the creation of two new offices to actively investigate the transactions, the Promoter Investigation Coordinator and the Office of Fraud Enforcement.
In June 2020, the IRS Office of Chief Counsel began mailing settlement offers to certain eligible taxpayers that would allow them to resolve certain docketed cases on standardized terms. The key terms of the settlement offer include:
- Disallowance of the deduction for the conservation easement in full.
- All partners have to 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.
In August 2020, the IRS announced (IR-2020-196) its completion of the first settlement under the syndicated conservation easement transaction settlement initiative. On Oct. 1, 2020, the IRS released the present news release (IR-2020-228) announcing the CC Notice including additional information aimed at addressing frequent questions relating to the settlement initiative. Of note, the news release also announces that the IRS soon publish updates to the Conservation Easement Audit Technique Guide, which will set out new arguments that taxpayers can expect the IRS to make in cases involving such transactions. The IRS warns that while some promoters have attempted to distinguish the cases decided for the IRS by claiming that their promoted transactions are different and do not contain the same flaws, the IRS believes it has many grounds for disallowing the tax benefits claimed from such abusive transactions.
Taxpayers should be aware of the IRS’s expanded enforcement procedures relating to syndicated conservation easements. Although the settlement initiative currently only applies to cases docketed in the Tax Court, the IRS has indicated that it may be willing to extend settlements towards new Tax Court cases. Taxpayers should consult their tax advisors to determine if they have the type of reportable transaction described in Notice 2017-10 and how to best proceed given the IRS’s enforcement procedures.