In a significant development for tax pros and taxpayers, the IRS announced a time-limited settlement offer targeting certain taxpayers involved in Syndicated Conservation Easement (SCE) transactions.
This initiative is set to begin in July with IRS settlement offer letters being sent to certain taxpayers. It represents an important opportunity for eligible participants to resolve their tax disputes and achieve closure on these controversial arrangements.
What are syndicated conservation easement transactions?
These transactions, often called scams or tax shelters, exploit a tax break intended to encourage the preservation of open land. In regular conservation easements, landowners give up development rights to a piece of open – and often pristine – land in exchange for a tax break However, in the syndicated version promoters purchase idle land, obtain an appraisal for far more than its purchase price, place the land into a pass-through entity, and then sell shares of the entity to investors who are looking for a tax deduction.
Scope and eligibility of the IRS syndicated conservation easement settlement
The settlement offer is directed specifically at taxpayers whose SCE transactions are currently under audit by the IRS's Large Business & International (LB&I) and Small Business and Self-Employed (SB/SE) divisions.
It's important to note that this offer does not extend to all SCE participants. Taxpayers with cases pending in the United States Tax Court are explicitly excluded from this initiative, as are those who do not receive a formal letter from the IRS.
Terms of the syndicated conservation easement settlement
While the IRS has not disclosed the full details of the settlement terms, the announcement indicates that participants will be required to make "substantial concession of the income tax benefits" derived from these transactions (IR-2024-174). Additionally, the settlement will involve the application of penalties, though the specific nature and extent of these penalties remain undisclosed.
Tax pros should be aware that clients who receive an offer letter but choose not to participate may face more severe consequences. The IRS has stated that these taxpayers will continue to be subject to enforcement actions, including the potential full disallowance of charitable contributions associated with the SCE and the imposition of all applicable penalties
Context and rationale behind the decision
The IRS's decision to offer this settlement opportunity comes amid intensified scrutiny and enforcement actions against SCE transactions. These arrangements have consistently appeared on the IRS's "Dirty Dozen" list of tax scams, signaling the agency's view of them as abusive tax avoidance schemes.
The legal landscape surrounding SCEs has been increasingly unfavorable for taxpayers. In the last 4 years, the U.S. Tax Court has issued several opinions that have cast doubt on the validity of these transactions. Notable cases include:
- Plateau Holdings, LLC v. Commissioner (T.C. Memo. 2020-93)
- TOT Property Holdings, LLC v. Commissioner (T.C. Docket No. 5600-17, unpublished bench op., Nov. 22, 2019)
- Mill Road 36 Henry, LLC v. Commissioner (T.C. Memo. 2023-129)
- Oconee Landing Property, LLC v. Commissioner (T.C. Memo. 2024-25)
- Savannah Shoals, LLC v. Commissioner (T.C. Memo. 2024-35)
- Buckelew Farm, LLC v. Commissioner (T.C. Memo. 2024-52)
In these cases, the Tax Court consistently found that the true value of the conservation easements was significantly lower than the amounts claimed by taxpayers, often representing only a small fraction of the reported value.
Read about these cases and more on CCH AnswerConnect (may require a subscription).
Criminal proceedings
The IRS's announcement also highlights the criminal aspect of syndicated conservation easement enforcement. At least nine individuals have entered guilty pleas in connection with these schemes, and two promoters were found guilty and sentenced to 25 and 23 years in prison. These criminal proceedings underscore the seriousness with which the government views SCE transactions and the potential consequences for those involved in promoting or participating in them.
Legislative action affecting Syndicated Conservation Easement
Tax pros should also be aware of recent legislative developments affecting syndicated conservation easements. The SECURE 2.0 Act, passed in December 2022, introduced new limitations on deductions for specific charitable contributions under Internal Revenue Code section 170.
These provisions, which apply to contributions made after December 29, 2022, represent an additional tool in the government's efforts to curb perceived abuses in this area.
Implications for tax pros
This settlement initiative presents both opportunities and challenges for tax pros and their clients. On the opportunity side, it offers a potential path to resolution for clients who may be facing significant tax liabilities and penalties. The IRS has characterized the syndicated conservation easement settlement offer as "the most effective and efficient way for taxpayers to bring finality to the transactions and achieve tax certainty."
However, tax pros should carefully weigh the pros and cons of participation for each client. Factors to consider include:
- The strength of the client's position considering recent Tax Court decisions
- The potential for full disallowance and maximum penalties if the offer is rejected
- The client's financial ability to meet the settlement terms
- The impact of accepting the settlement on any related state tax issues
What’s more, tax pros should be prepared to advise clients who do not receive settlement offers or are ineligible to participate. These taxpayers may face continued audits, appeals, or litigation, requiring ongoing representation and strategic planning.
Moving forward: how tax professionals should handle SCE transactions
The IRS's settlement initiative for SCE transactions represents a significant development in the ongoing controversy surrounding these arrangements. Tax pros should carefully follow the details of the settlement offer as they emerge. This initiative may signal a shift in the IRS's approach to resolving syndicated conservation easement disputes, potentially influencing future enforcement actions and compliance strategies.
Tax pros will play a crucial role in helping taxpayers navigate this complex and evolving area of tax law. Whether advising on settlement participation or continuing to defend against IRS challenges, the expertise of tax pros will be instrumental in achieving the best possible outcome.
Read the original news release: IR-2024-174 IRS sending settlement offer letters in July to certain taxpayers who participated in Syndicated Conservation Easement transactions
