IRS victories in conservation easement cases spurs interest in settlement offers
The Tax Court struck down four more abusive syndicated conservation easement transactions last week, prompting the IRS to call on any taxpayer involved in such transactions who receives a settlement offer from the Service to accept it soon.
These time-limited settlement offers, announced last month, are only being made to certain taxpayers with pending docketed Tax Court cases involving this type of abusive transaction, the IRS emphasized.
“The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions,” said IRS commissioner Chuck Rettig (pictured) in a statement Monday. “These abusive transactions undermine the public’s trust in private land conservation and defraud the government of revenue. We strongly recommend that participants seek the advice of competent, independent advisors. Ending these abusive schemes remains a top priority for the IRS.”
Abusive syndicated conservation easement transactions have been of concern to the IRS for several years. Some promoters have downplayed the significance of the string of recent court decisions holding in the government’s favor, arguing that their cases are somehow different or that those decisions might be reversed on appeal, according to the IRS.
“These promoters ignore common sense and argue that the real dispute is about value, neglecting to explain how the reporting of short-term appreciation, often exceeding many multiples of reality, could possibly withstand judicial scrutiny,” the IRS said.
“Taxpayers should ignore this nonsense, take an objective look at their cases, and cut their losses,” said IRS chief counsel Mike Desmond in a statement. “Abusive transactions, like settlement offers, do not get better with time, and this is a good opportunity to get out.”
In typical listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement.
After the investors put money into it, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.
In fact, professional liability experts see conservation easements as spiking the next wave of malpractice claims against accountants and tax preparers.
”Accountants run the risk of professional liability claims from a variety of activities,” observed Ricard Jorgensen, president and chief underwriting officer of CPAGold. He cited several potential risk exposures:
1. As an agent or marketer for a promoter of a syndicated conservation easement;
2. As part of the recommended product in a portfolio of investments of a wealth management client;
3. As a referral source to a syndicated conservation easement promoter;
4. As an aggressive deduction in the tax returns of a high net worth individual;
5. As a conservative deduction in the tax returns of a high net worth individual.
“Each risk exposure brings with it unique challenges and depending upon the degree of risk,” Jorgensen said. “We recommend that a CPA firm should plan to take steps to mitigate the possibility of a claim arising from abusive syndicated conservation easement transactions.”