IRS Victory In Easement Case Prompts An Offer Not To Be Refused

Offer For Cases Being Litigated

The IRS is following up a major Tax Court win against sketchy conservation shelters with a purportedly “take it or leave it” offer. For background you might want to check out my piece last month Syndicated Conservation Easements – An Industry Based On Nonsense. The offer is described in IR-2020-30 .

The offer applies to taxpayers with respect to syndicated conservation easement issues in docketed US Tax Court Cases. That likely represents the tip of the iceberg. In order for there to be a docketed Tax Court case there has to have already been an audit which resulted in the issuance of a notice of deficiency and the filing of a Tax Court petition.

The notices indicates that the offer is as good as it is going to get.

The Deals

Here is how the notice describes the deals.

“In 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 invest in the partnership, 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.”

The Offer

The key terms of the settlement offer which will be sent by mail are:

• 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.

I am curious as to how the second term will work, since except for the most recent deals, the obligation would be a partner obligation. Further the way these deals are structured, the partnership itself is not left with much in the way of assets other than some land, the development of which has gone from being “highly improbable anytime in the reasonably near future” to “not ever absent another shady deal”.

One of my experts who prefers anonymity wrote me:

The partnership must fully pay the tax, penalties, and interest. Many of these are TEFRA partnerships that 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? 

Was Plateau Holdings The Trigger?

The decision that I think likely triggered this notice, which I suspect was prepared some time before, was Plateau Holdings LLC (TC Memo 2020-93). As with many of the decisions Judge Lauber approved of the IRS disallowing on a technical error involving the terms of the easement. But in order to assess the penalty valuation has to be considered and that gets to the heart of the matter.

“The evidence at trial convinced us that the most compelling indicator of the Property’s “before” value was CE Fund’s purchase of a 98.99% interest in Plateau on December 18, 2012, eight days before the easements were granted. On that day Plateau’s only assets were the Pull Tight and Land South parcels, which together made up the Property. Ownership of Plateau was thus a proxy for ownership of the Property. CE Fund purchased its 98.99% interest in Plateau for $5,822,000. ….

We give no weight to the opinion of petitioner’s experts. Messrs. Wingard and Van Sant were aware of the December 2012 sale to CE Fund of a 98.99% interest in Plateau and of the October 2009 and August 2011 sales of acreage included within the Property. They addressed none of these transactions in their report.” (Emphasis added)

An Industry Based On Nonsense

These deals are based on the notion that an easement on a property can be worth a multiple of what the entire property is worth. Robert Ramsay President of Partnership For Conservation, the industry trade group, boldly made that argument on Tax Notes earlier this year.

Stephen Small, Mark Weston, Nancy A. McLaughlin and Phillip Tabas, whose credentials are a bit stronger than Ramsay’s countered with Some Dirty Realities About Syndicated Conservation Easements.

“Under the tax rules, a conservation easement is a “partial interest” in property, that is, less than the entire interest. It is obvious that the value of a partial interest in property (like a conservation easement) cannot exceed the value of the whole.”

A lot of great tax policy discussion goes on behind the Tax Notes paywall.

Should They Take The Offer?

I don’t know the litigation game well enough to have an opinion. Even before the notice I had contacted the attorneys for the taxpayers in Plateau and they declined to comment.

One of my sources, who has great credentials, but prefers to go by Factual Freddie wrote me:

It is likely a generous offer as they still are able to still claim a dollar for dollar deduction and the exposure for a 40% penalty is real. Perhaps the investors can also get a refund from the Partnership Legal Reserve fund instead of wasted legal fees. 

Keith Fogg, Clinical Professor of Law at Harvard University wrote me:

 I have seen instances where the IRS made an offer like this and was very firm. In some of those situations it did a good job of administratively going after the people who did not take the settlement and in others it did not. So, even if the settlement was the best offer to settle, people who did not accept the settlement may have benefited from not accepting it because the IRS did not have the manpower to follow up and catch everyone. Other times it does. I have also seen the IRS make a settlement and then make a different offer later which may have been in some respects better.

I have an elaborate historical analogy involving the Emancipation Proclamation and the Battle of Antietam or Sharpsburg as the ones we can now call the bad guys referred to it, but I will spare you.

Other Coverage

Lew Taishoff covered Plateau Holdings with Extinguished And Overvalued.

“True, Judge Lauber plays the Oakbrook extinguishment gambit, but goes on to slug the Plateau crew with the 40% chop. And the job he does on the Plateau’s appraisal is well worth reading in full. That should have been the opinion.

Judge Lauber does want to know how to deal with the 20% chop on whatever was left of the deduction after he demolished it. So let the parties brief that, and he’ll give me more blogfodder anon.

Footnote to my colleague Peter Reilly, CPA: Though Lumpkin was the name of a Hobbit pony, this Lumpkin is a county in GA”.

Mr. Taishoff is the only one of my blogging buddies that I have met in meatspace. I fondly remember our lunch now two years ago. We had another meet-up tentatively planned in April, but Covid-19 interfered.

Bloomberg Tax had something behind its paywall as did Amy Lee Rosen at Law360.

Reaction

The Land Trust Alliance released a statement from its CEO Andrew Bowman.

“I applaud IRS Commissioner Chuck Rettig and Chief Counsel Michael Desmond for their excellent work pursuing justice and protecting taxpayers. Their agency is now offering a firm but fair way forward for taxpayers that invested in syndicated conservation easement transactions. This is no sweetheart deal – and it should not be one. This is an emphatic reminder to all investors that they should steer clear of abusive conservation easement tax shelters.

“Congress can now put this issue to bed by passing the Charitable Conservation Easement Program Integrity Act. This bipartisan legislation is the fastest and most efficient way to stop continued abuse and save taxpayers billions of dollars.

“Because many promoters and investors continue to flout the government’s attempts to curb abuse, the need for this legislation is urgent. A coalition of leading conservation and appraisal organizations have called on Congress to pass the Charitable Conservation Easement Program Integrity Act this year. Let’s get this done.”

For what it is worth I think Land Trust Alliance is mistaken in its emphasis on new legislation. These abusive deals do not work under current law. What is needed is enforcement resources.