Correction to APA Non-Compliance | IRS Issues Proposed Regulations for Syndicated Conservation Easements

We have been heavily involved in advising on and defense of conservation easement charitable contributions authorized under section 170, Title 26 of the Internal Revenue Code. Whether in formation of compliant arrangements or in defense of allegedly tax non-compliant transactions, Freeman Law has seen or reported on just about every issue that can be dug up from the Code or the related Treasury Regulations. See Freeman Law Insights blog archives for Conservation Easements or search “conservation easements” on our Insights blog.

In early November 2022, Freeman Law—in its ever-timely Tax Court in Brief blog—provided a focused report on the pivotal syndicated conservation easement opinion from the U.S. Tax Court in Green Valley Investors, LLC v. Comm’r.

Since I manage the Tax Court in Brief blog for the Firm, I can report that my colleague, Matthew Roberts, enthusiastically accepted the blog assignment (as he does any time I submit a Tax Court blog assignment to his care). Based on review of Green Valley, Mr. Roberts concluded that the Tax Court found that the IRS Notice 2017-10 is a legislative rule that was improperly issued by the IRS without notice and comment as required under the Administrative Procedures Act, 5 U.S.C. §§ 551-559. Mr. Roberts keenly noted that, according to the U.S. Tax Court, Notice 2017-10 must be set aside under the APA, thus rendering the penalties that the IRS was assessing pursuant to 26 U.S.C. § 6662A unlawful.

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Syndicated Conservation Easements: IRS Scrutiny Continues

On May 2, 2022, the Wall Street Journal published two detailed articles authored by Richard Rubin on the subject of syndicated conservation easements: Conservation Tax-Break Deals Keep Flowing Despite IRS Crackdown (WSJ 2022.05.02) and How a Georgia Pine Farm Became a Significant Tax Deduction (WJS 2022.05.02). In the first article, the author notes that IRS data released in 2020 showed syndicated easement deductions climbing from $6 billion in 2016 to $9.2 billion in 2018. And, the author quotes the head of the IRS’s business and international division as stating, “We don’t feel like we’ve seen the full impact of our [the IRS’s] efforts just yet. . . . We view it as abusive and problematic, and we will continue to throw significant enforcement tools” at abusive syndicated conservation easement tax shelters.

In the second article, the author focuses on a specific 434-acre pine-tree farm in Georgia and its dedication for conservation purposes pursuant to a syndicated easement arrangement. The author writes, “In 2020, some McGinnis family members sold off three-fifths of the property for $310,000. By the end of 2021, the . . . land had been sold again, this time to a business that raised $10.7 million from investors in a land-conservation deal. That transaction could yield its investors millions of dollars more in tax deductions—as well as scrutiny from the Internal Revenue Service.” Rubin writes that billions of dollars of tax revenue are at stake in abusive syndicated conservation easement tax shelters.

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Settlements Begin In Syndicated Conservation Easement Transaction Initiative

As part of a continuing effort to combat abusive transactions, the Internal Revenue Service announced the completion of the first settlement under its initiative to resolve certain docketed cases involving syndicated conservation easement transactions.

On June 25, 2020, the IRS Office of Chief Counsel announced that it would offer to settle certain cases involving abusive syndicated conservation easement transactions. Since then, Chief Counsel has sent letters to dozens of partnerships involved in these transactions whose cases are pending before the U.S. Tax Court.

“We are seeing movement on these settlements,” said IRS Chief Counsel Mike Desmond. “Given the potential for significant penalties, we anticipate more taxpayers will take similar actions and ultimately accept these offers, and we encourage them to do so.”

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The Internal Revenue Service announced today a significant increase in enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency.

Coordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’ Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.

“We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions. Every available enforcement option will be considered, including civil penalties and, where appropriate, criminal investigations that could lead to a criminal prosecution,” said IRS Commissioner Chuck Rettig. “Our innovation labs are continually developing new, more extensive enforcement tools that employ advanced techniques. If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax advisor to consider your best available options. It is always worthwhile to take advantage of various methods of getting back into compliance by correcting your tax returns before you hear from the IRS. Our continued use of ever-changing technologies would suggest that waiting is not a viable option for most taxpayers.”

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