Key Takeaways
The IRS has introduced a time limited settlement opportunity aimed at resolving conservation easement disputes currently under review or in litigation. The initiative outlines defined settlement terms, structured timelines and reduced uncertainty compared to continuing through the courts. Taxpayers should carefully evaluate eligibility, deadlines and potential outcomes when considering participation.
The Internal Revenue Service (IRS) recently announced a new settlement opportunity for taxpayers involved in certain conservation easement disputes. This time-limited offer specifically targets syndicated conservation easement transactions that are currently being litigated in the U.S. Tax Court and generally involve promoter-organized deals with multiple investors. The initiative also applies to some historic preservation easement disputes and is designed to resolve a large inventory of pending cases on terms the IRS says are more favorable than results taxpayers have generally achieved in court.
Understanding the Settlement Opportunity
Conservation easements are legal agreements where a landowner limits the development of their property to protect its natural value. In exchange for this protection, the owner can often claim a federal income tax deduction. While many of these transactions are legitimate, the IRS has expressed concern over syndicated arrangements. These often involve inflated appraisals and complex structures designed to give investors tax deductions that far exceed their original investment.
The IRS says the new initiative builds on prior settlement programs offered since 2020 while addressing barriers that may have discouraged participation. A key change is that eligible partnerships generally will not be required to make payment when they elect into the initiative. According to the announcement, more than 1,100 conservation easement cases remain pending, including roughly 740 docketed in Tax Court and about 400 still in Exam, underscoring why the agency is using a structured settlement framework to resolve disputes more efficiently.
Important Deadlines and Requirements
The IRS will send individualized settlement letters to eligible partnerships on a rolling basis. Each letter will outline the specific settlement terms and applicable deadlines. The response period begins on the letter’s postmark date or the date of electronic transmission.
Once a settlement letter is issued, eligible partnerships may choose between two settlement periods.
Initial 90-day period
During the first 90 days, the IRS will disallow the charitable contribution deduction associated with the conservation easement. Instead, the IRS generally will permit an alternative deduction reflecting the partnership’s approximate out-of-pocket costs, often tied to cash contributions reported on Schedule M-2. A 10% gross valuation misstatement penalty will apply, interest will continue to accrue as required by law, and no payment is required at the time the partnership elects into the initiative.
Resolution mechanics depend on the posture of the case. Non-docketed Bipartisan Budget Act matters generally will be resolved through a closing agreement or similar document, while docketed Tax Court cases will be resolved by stipulated decision. Extensions of this 90-day period are not available.
Additional 45-day period
If the initial window closes, eligible partnerships have an additional 45 days to accept the settlement. The terms remain largely the same, except the gross valuation misstatement penalty increases to 20%. No extensions are available for this period.
After both periods expire, for a total of 135 days from the date the settlement letter is issued, cases typically will be resolved only based on litigation risk. In those situations, taxpayers should expect a significantly reduced allowed deduction, generally 5% to 7% of the amount originally claimed, along with a 40% gross valuation misstatement penalty and accrued interest.
Key Terms of the Settlement
The settlement terms require substantial concessions. Most notably, participants must concede the full charitable contribution deduction originally claimed for the easement. In place of that deduction, the IRS generally will allow a limited alternative deduction tied to the partnership’s actual out-of-pocket costs.
Penalties and interest remain central components of the settlement framework. The gross valuation misstatement penalty is 10% during the initial settlement window and increases to 20% during the subsequent period. Interest accrues in accordance with applicable law. A notable feature of the initiative is that many eligible partnerships are not required to make payment at the time they elect into the settlement.
When This Opportunity Is Not Available
This settlement initiative does not apply to every conservation easement or historic preservation easement dispute. According to the IRS, the opportunity is unavailable in cases that fall into the following categories:
- Cases that have been tried and are awaiting an opinion
- Cases currently on appeal before a United States Circuit Court of Appeals
- Cases that have already settled, including those resolved based on litigation risk or conceded matters where no decision has been entered
- Cases that are bound to another matter where the test case has been tried and is awaiting final decision
- Cases scheduled for trial within 30 days of the IRS announcement
- Cases designated as test cases, unless all related cases have settled or agree to settle under this initiative
Final eligibility is determined by the IRS based on the procedural status of the case and other case-specific administrative considerations.
Additional Information on How Payment Works
For matters governed by the Tax Equity and Fiscal Responsibility Act (TEFRA), which generally applies to tax years 2017 and earlier, investors should expect to receive IRS notices outlining the amounts owed after the settlement is finalized and the Tax Court decision becomes final.
For matters governed by the Bipartisan Budget Act (BBA) of 2015, which generally applies to tax years 2018 and later, payment responsibility depends on whether the partnership elected to push out the adjustments. If no push-out election was made, the partnership remains responsible for payment. If the partnership cannot pay, investors may receive IRS notices reflecting their share of the liability. Where a push-out election was made, the partnership must provide statements to investors and the IRS detailing the adjustments, which investors must then take into account on their own returns.
Why Consider Settling?
For many taxpayers, the primary benefit of this settlement is certainty. Tax litigation can be expensive, time consuming and unpredictable, and the IRS has emphasized that taxpayers who continue litigating these cases often face sharply reduced deductions, substantial penalties and interest if they lose. Accepting the settlement may allow eligible partnerships and investors to resolve the dispute on defined terms, avoid the uncertainty of trial and move forward more quickly.
Navigating IRS disputes can be a complex and stressful process. It is important to evaluate the costs and benefits of any settlement offer carefully before making a final decision. Our Windham Brannon team is here to help. If you have any questions or need support, please reach out to Tomika Bullet or your Windham Brannon advisor today.
FAQ Section
Who is eligible for this settlement opportunity?
Eligible taxpayers generally include partnerships involved in syndicated conservation easement disputes that are currently under IRS examination or in Tax Court, subject to specific case criteria.
What are the key deadlines to respond?
Taxpayers have an initial 90 day period to accept the settlement, followed by a limited additional 45 day window with increased penalties if they do not act within the first timeframe.
What happens to the original deduction?
Participants must give up the full charitable contribution deduction and instead may receive a reduced deduction based on actual out of pocket costs.
Why might taxpayers consider settling?
Settling can provide greater certainty, reduce legal costs and help avoid the risk of significantly lower deductions, higher penalties and ongoing interest if the case is litigated further.
