IRS is Winning the Conservation Easement War - Or Is It?

Another week and another IRS victory in a conservation easement deduction dispute. This week the losing taxpayers were the individuals in Carter v. Commissioner, T.C. Memo. 2020-21. A partnership donated an easement but retained certain rights as to specific parts of the covered property that were inconsistent with the easement's conservation purposes, causing the individual taxpayers who owned the partnership to lose their claimed deductions, which in the aggregate were in the millions of dollars. (The IRS' attempt to impose penalties failed because of a procedural error, however.)

UPDATE: And on Wednesday, the IRS won another conservation easement in Tax Court. In Railroad Holdings, LLC v Commissioner, T.C. Memo 2020-22, the court found that an extinguishment provision failed to ensure that the easement was protected in perpetuity and so the claimed $16 million charitable contribution deduction failed.

This decision came in the wake of an IRS news release late last year that touted the agency's successful challenge of a syndicated conservation easement transaction in TOT Property Holdings, LLC v. Commissioner (U.S. Tax Court, Dec. 13, 2019). In the news release, the IRS "urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area."

Yet all may not be as rosy for the IRS as it appears. Last month ProPublica published an article focusing on syndicated conservation easements titled The IRS Tried to Crack Down on Rich People Using an "Abusive" Tax Deduction. It Hasn't Gone So Well. According to the article, the DOJ, IRS, and congressional crackdown on these vehicles "seems to be having, at best, a limited effect." It noted that IRS Commissioner Chuck Rettig testified last April that the deals had not declined. It also reported that there are now three IRS divisions engaged in coordinated examinations relating to 125 identified "high-risk cases" and more than 80 Tax Court cases pending. In addition, the article cited evidence that large-scale deals were still in process as recently as last fall. It therefore remains to be seen whether the IRS' continuing war against improper deductions relating to conservation easements, whether syndicated or otherwise, will in fact be won.

Lloyd Mayer