The IRS has continued its increased enforcement actions against syndicated conservation easements.1 These enforcement actions include hundreds of audits, which in turn have led to at least 80 docketed Tax Court cases.2 In these cases, the IRS has frequently disallowed the deduction for the conservation easement in full and imposed a 40-percent gross valuation misstatement penalty.3 The IRS has also initiated criminal investigations of syndicated conservation easements, which have already led to guilty pleas from two promoters, as we covered here. Taxpayers who invested in syndicated conservation easement partnerships may not have understood that the IRS would view them as abusive transactions. Taxpayers may thus be willing to enter into settlement agreements under which penalties may be avoided.
IRS Settlement Initiative
On June 25, 2020, the IRS announced a settlement initiative for syndicated conservation easement cases docketed in the Tax Court.4 The terms of the settlements under this initiative include that the deduction for the contributed easement is disallowed in full, all partners must agree to settle, and “investor” partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20%. While it has been several months since this settlement initiative was announced, it is not clear how many settlements have been reached. The IRS’s Deputy Chief Counsel (Operations), Drita Tonuzi, was recently quoted as stating that “the conservation easement settlement initiative is going really well.”5 However, only a few weeks earlier the Taxpayer Advocate had reported that “[i]t does not appear that many taxpayers have accepted the offer to date.”6
The IRS has limited this settlement initiative to taxpayers meeting the eligibility requirements set by the IRS. Office of Chief Counsel Notice CC-2021-001 states that only those partnerships with cases pending before the Tax Court that received letters from the IRS are eligible.7 It specifically provides that individual partners are not eligible and that partnerships with returns currently under examination are likewise not eligible. Furthermore, while taxpayers may in certain circumstances avoid penalties by filing “qualified amended returns,” Treasury regulations provide that this opportunity may not be available after the date a partnership is first contacted by the IRS about an audit.8
Other Settlement Opportunities
Despite the limits on eligibility for the IRS settlement initiative, there may still be other opportunities for taxpayers looking to avoid penalties on syndicated conservation easements. For federal tax purposes, filing a qualified amended return may still be possible if the partnership is not yet being audited by the IRS. In that case, filing a qualified amended return could generally avoid or reduce liability for the accuracy-related penalty.9 Taxpayers may also have the opportunity to file a qualified amended return for state tax purposes. For example, California taxpayers may be able to avoid California penalties by filing qualified amended returns with the Franchise Tax Board.10
Investors in syndicated conservation easement partnerships who have the opportunity to file qualified amended returns should weigh their options. While there is a cost of owing additional tax by no longer taking a deduction for the conservation easement, there could be a net benefit by avoiding penalties that may be imposed. This cost-benefit analysis generally involves a review of the appraisal that was used in reporting the deduction for the contribution of the conservation easement. From there one can calculate what valuation would need to be allowed for the taxpayer to break even taking into account the additional tax and penalties that would be owed on the lesser valuation amount. Given the increased enforcement actions taken against syndicated conservation easements, taxpayers who have the opportunity to file a qualified amended return should evaluate whether filing a qualified amended return may be the right decision for them.
1IRS News Release IR-2019-182 (Nov. 12, 2019).
2Id.; S. Comm. on Finance, 116th Cong., Syndicated Conservation Easement Transactions 3 (Comm. Print 2020).
3See, e.g., Plateau Holdings, LLC v. Comm’r, 119 T.C.M. (CCH) 1619 (T.C. 2020).
4IRS News Release IR-2020-130 (June 25, 2020).
5Kristen A. Parillo, IRS Easement Settlement Initiative “Going Really Well,” https://www.taxnotes.com/, Doc. 2021-3453 (Jan. 28, 2021).
6National Taxpayer Advocate, Annual Report to Congress 2020 (Dec. 31, 2020).
7Office of Chief Counsel Notice CC-2021-001 (Oct. 1, 2020).
8See Treas. Reg. § 1.6664-2(c)(3)(i)(C).
9Bergmann v. Comm’r, 98 T.C.M. (CCH) 599 (T.C. 2009).
10See Appeal of Miller (2020-OTA-166) 2020 WL 4587886, at *15.
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