Calculating Conservation Easement Settlement Initiative Benefits

Abstract

Following its recent success against syndicated conservation easements (“SCEs”), the IRS announced a Settlement Initiative (“SI”) on June 25, 2020 to “bring finality” to taxpayers battling the IRS on SCE issues. The IRS has been suspicious of conservation easements since 2016, when it first designated SCE transactions as “listed transactions.” In 2019, the IRS announced a “significant increase in enforcement actions” related to SCE transactions as SCEs made the IRS’ “Dirty Dozen” list of tax scams. This increase in enforcement actions has primarily resulted in IRS victories in the Tax Court. Thus, the IRS announced the SI to leverage its favorable outcomes against the taxpayers. Some critics are skeptical of the SI, claiming that the IRS has only been winning SCE cases on technical grounds and that the IRS does not hold as strong of a position as it claims on the true issues surrounding SCEs.7 Accordingly, many suggest that few taxpayers will take part in the SI. However, the IRS urges taxpayers to take a “hard, realistic look at their cases” with independent counsel.

The settlement offer is time-limited and only offered to certain taxpayers with pending docketed Tax Court cases regarding SCE transactions. The IRS claims that there are about 80 relevant cases docketed. The full settlement offer will be sent out by mail to those eligible. However, the June announcement (IR-2020-130) outlines the “four key terms of the settlement offer.” The first two parts of this article examine the SI offer and consider how a participant who actually closes on the offer is affected. Specifically, Part I of this article provides an overview of the SI’s general terms and conditions the IRS requires to be met before an offer recipient can participate. Part II examines the applicable SI financial benefits and also puts into perspective any concessions a participant has to make. Part III concludes this article by calculating the financial results of different sample taxpayers including: (1) taxpayers who are never audited by the IRS; (2) taxpayers who accept and close on the offer; (3) taxpayers who decline the offer and continue litigation with the IRS. Ultimately, the goal of this article is to provide decision making context in preparation for potential future settlement initiatives.