The IRS may be struggling to catch up with 10 million pieces of unopened mail and long waits on its phone lines, but it found time last week to issue a “time-limited settlement offer” to taxpayers who have formed partnerships to claim conservation easement deductions.
Those familiar with NTU’s work may already be aware of the IRS war on conservation easements, a long-standing tax deduction for taxpayers who place easements on their property for conservation purposes. In December 2016, during the waning days of the Obama Administration, the IRS decided that while it had no problem with individuals who took the deduction, taxpayers who formed partnerships to donate land and took the deduction were “syndicates” engaging in sham transactions and needed to be stopped. Those taxpayers have since been targeted with draconian enforcement actions, new rules issued without public input and applying retroactively, and zealous valuation denials.
The IRS has won some valuation and technical language disputes, but has struggled to convince the courts with their blanket claims that all these donations have no economic substance and partnerships engaging in them are shams. With taxpayers ready to stand on their rights, the IRS may be wondering if it really wants to proceed with thousands of litigation actions in the coming years. That may be why the settlement offer came about. From the IRS notice:
The settlement offer will be sent by mail to those eligible. 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.
Taxpayers should not expect to settle their docketed Tax Court cases on better terms. Based on cases the Independent Office of Appeals has encountered to date, and the existing state of the law, taxpayers should not later expect a better result than what is provided in this settlement offer.
"With this announcement, we encourage taxpayers and their advisors to take a hard, realistic look at their cases. They should carefully review this settlement offer. We believe this is clearly the best option for them to pursue given all of these factors," said IRS Chief Counsel Michael J. Desmond. "Those who choose not to accept the offer should keep in mind the Office of Chief Counsel will continue to vigorously litigate their cases to the fullest extent possible."
Given the unfair terms, the offer is little more than an ultimatum: we’re going to win so you should give up now and save us the costs. The harsh language used and the ominous powers of the IRS may sadly be enough to get taxpayers to crack and give in, or at least try to drive a wedge between partners and investors.
Time, however, may be on taxpayers’ side. The docket has a backlog of several years; the Tax Court last week just resolved two conservation easement cases from 2012. And Congress may yet provide formal support for the National Taxpayer Advocate’s (NTA) recommendation that the IRS abandon the waves of litigation approach in favor of issuing clear guidance on acceptable language for conservation easement agreements. In a report to Congress issued this week, the NTA noted that the Service has declined to implement the recommendation, at least for this year. The IRS’s somewhat circular reasoning: “[P]ublished guidance on conservation easements is not likely to be issued in 2020 due to other workload priorities….” Yet the government’s “workload,” represented in no small part by the massive docket surrounding conservation easement issues, could be lightened with some prudent guidance formulation.