Eroding Conservation, Preserving Abuse — A Flawed IRS Strategy

169 Tax Notes Federal 1259 (2020)

19 Pages Posted: 18 Feb 2021

See all articles by Douglas L. Longhofer

Douglas L. Longhofer

University of Central Missouri

Katherine Jordan

affiliation not provided to SSRN

Date Written: November 23, 2020

Abstract

Conservation easements are the focus of significant legal commentary, numerous recent court decisions, and relentless audit by the IRS. The media has entered the fray, and the Senate Finance Committee (SFC) recently published S. Rep. No. 116-44, which labeled syndicated conservation easement transactions (SCETs) as highly abusive tax shelters.

Much of the commentator and congressional ire focuses — rightly so — on the valuation of the easement and the amount of the claimed charitable deduction. This is particularly true regarding SCETs. In these transactions, unrelated investors contribute funds to an entity typically organized as a partnership, and the partnership engages in a conservation transaction that generates a tax deduction for the investors. In some abusive cases, the entity has no legitimate business purpose and the value of the claimed deduction is based on an unsupported and unqualified appraisal. Unfortunately, the IRS’s litigation efforts in conservation easement transactions rarely align with these abuses.

In short, the problem with the IRS’s audit and litigation strategy is that it often ignores the true abuses, like valuation and sham entities, in favor of lower-hanging fruit such as supposed technical violations in easement deeds related to the meaning of the term “in perpetuity.” This litigation strategy ensnares legitimate conservation transactions, results in bad public policy, and frustrates the ability of donors and donee organizations to engage in property conservation.

This article argues that the IRS should refocus its litigation efforts around the sham entity doctrine, which subsumes the abusive component of many SCETs — valuation — and proposes a two-part test for application of that doctrine to SCETs. Use of the sham entity doctrine would be more in line with prior IRS litigating strategies that were deployed in tax shelter cases such as son-of-BOSS, and its successful deployment would curb abusive SCETs without frustrating legitimate conservation and preservation efforts and the policy behind the section 170(h) deduction.

Keywords: Conservation Easement, Tax Litigation

Suggested Citation

Longhofer, Douglas L. and Jordan, Katherine, Eroding Conservation, Preserving Abuse — A Flawed IRS Strategy (November 23, 2020). 169 Tax Notes Federal 1259 (2020), Available at SSRN: https://ssrn.com/abstract=3758972

Douglas L. Longhofer (Contact Author)

University of Central Missouri ( email )

Warrensburg, MO 64093-5070
United States

Katherine Jordan

affiliation not provided to SSRN

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