IRS Offers to Settle Abusive Syndicated Conservation Easement Shelters Pending in Tax Court (6/26/20)

In IR-2020-13, here, the IRS announces that it will offer to settle Conservation Easement Syndication shelters of the BS genre that are currently pending in the Tax Court.  The settlement offer will be made by mail in each pending case.  The announcement says that the following will be the key terms.

• 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.

Keep in mind that these are not all the terms but only the key terms.  And, I suppose, as presented, they may only be summaries of the key terms so that the actual key terms summarized may present different nuances than one can derive from the summaries.  As I learn more details or obtain more documents or links that may be helpful, I will do update revisions to this blog entry.

One of the key points regarding the offer, it will be made only in those cases pending before the Tax Court.  Cases in the IRS administrative pipeline are not within the scope of the offer as stated.  (Query, will Appeals make the same offer because, once a case gets to Appeals, the same incentive to clear the cases will be presented, because the next step will be litigation in the Tax Court?)

Peter Reilly has a good early discussion of the offer:  IRS Victory In Easement Case Prompts An Offer Not To Be Refused (Forbes 6/25/20), here.  Highly recommended.  And, from knowing Peter and his special interested in the abusive Syndicated Conservation Easement Shelters, he is likely to have more posts as the settlement offer plays out.

In email correspondence with Peter, I offered the following off-the-cuff (meaning not fully considered) comments.  I offer those off-the-cuff comments (modified and expanded but again without detail thought) just for early consideration, but if I have time to try to refine them, I will do so here.

1. The key excerpt, I think, is this:

The IRS realizes that some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution.  When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.

2. The penultimate paragraph says that taxpayers not excepting should not expect better terms.  But, as suggested by the above quote, what about those taxpayers who really do have better cases than the very bad cases (i.e., their documents meet the technical requirements of the regulation and their valuation is not grossly inflated as much as the more abusive ones)?  They will have better litigating hazards and the IRS should be willing to settle on a litigating hazards of their cases rather than insisting that one size fits all.

3. The partnership must full pay the tax, penalties and interest.  Many of these are TEFRA partnerships which are not liable for the tax, penalties and interest.  They will have to work out with the partners how they can pay into the partnership so it can pay.  And a question would be what happens if the partnership or its partners cannot full pay?  Will the IRS not offer some ability for installment or even compromise if the liability is admitted at partnership and partner levels?

4. I am not sure how the penalty works.  Note that the partnership must pay the tax, penalties and interest in full (presumably a 20% penalty), but the next bullet point says that partners must “pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.”  I have not tried modeling for how that would work, but doesn’t it seem to be inconsistent with the requirement that the partnership pay the penalties in full?  I suppose that the partners could compute their partner level tax, penalties and interest and pay the amount into the partnership which could then pay.  But, if that is the intent, it is not worded that way.

5. Partners who “serviced” the scam or any Syndicated Easement scam get hammered with the 40% penalty.  I suppose that one hammer the IRS may have over those guys is the 75% civil fraud penalty, but if the IRS does not fire that cannon to at least hold  out a carrot, I am not sure why any service partner would want to participate, because he gets nothing from the settlement.  And then, if there is such a service partner, can he effectively preclude the settlement because, as I read it, all partners must agree.

6. Finally, what if it is a service partner who was not involved in the scam but simply provided some services unrelated to the scam?  For example, a real estate lawyer might do the deed work but not involved otherwise (e.g., knew nothing about the gross overvaluation).  What about a secretary compensated by the partnership who bought some small amount of partnership interest or was compensated with such an interest? What the IRS should go after is the ones who knowingly participated in the scam and made outsized money for their participation.

7.   As to what advice to give clients as to whether to settle:  It is solely cost and risk assessment.  For the abusive syndicates, this is better than they will get in the litigation, and hence on a cost and risk assessment, it is pretty good.  And significant further litigation costs (lawyers, experts, etc.) will be avoided (at least for those that have not yet been tried).  So, for the abusive ones, I think a good and ethical lawyer would advise to settle.

8. But, the key is where the particular syndication stands in the continuum between really abusive and those that are, at worst, only slightly abusive (at the latter end of the continuum the risk would not be as great as the really abusive ones).  I think that the syndications the IRS targets have been the really abusive valuations (as well as defects in the documents) so that continuum may not be very broad on the pending cases and indeed even the best in that bunch (aka data set) might have no reasonable possibility/probability of a better outcome.

9.  As stated, the offer will only be made to "syndicated" conservation easement transactions.  In Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, here, the LLC was put together by an entrepreneur who attracted local investors solely for the economic value of the land the LLC purchased.  After the acquisition, he became aware of the conservation easement deduction opportunity and convinced his investors to make the contribution.  The Tax Court said (Slip Op. 13 n. 8) (emphasis supplied):

Syndicated conservation easements are transactions in which “a promoter offers prospective investors in a partnership or other pass-through entity (‘passthrough entity’) the possibility of a charitable contribution deduction for donation of a conservation easement.” I.R.S. Notice 2017-10, 2017-4 I.R.B. 544, 545. The easement at issue in this case is not a syndicated conservation easement.

So, if a non-syndicated conservation easement arrangement is not distinguishable in the defects (deeding defects and valuation) in the contribution from a syndicated one, will it not get the same settlement offer?  Will not offering the settlement to non-syndicated conservation easement arrangements be an abuse of IRS discretion?

10.  Note that Oakbrook, though not a syndicated offering, did have sufficient facts to avoid the penalties, so that the settlement offer would have been worse for that offering although it had the key characteristics of the syndicated offering.  The potential for avoiding penalties in certain cases such as Oakbrook might cause some syndicated offerings to reject the offer, but they should be very wary for, I think, the result in Oakbrook was heavily driven by the fact that it was not a syndicated offering, despite having the key aspects of an abusive syndicated offering.  Those contemplating not accepting the offer if it is made should do so only with skilled and experience counsel to assess the litigating hazards and cost/benefit.