The 2024 Syndicated Conservation Easement Settlement Initiative

Hale Shephard has an informative piece out in yesterday's Tax Notes (subscription required) detailing what he calls the Service's second syndicated conservation easement transaction settlement initiative.  Here is the introduction:

The IRS has recently launched its second major effort to dispense with cases involving syndicated conservation easement transactions (SCETs) before litigation in the Tax Court. For partnerships and partners involved with SCETs to make intelligent decisions, they first need to understand the types of challenges the IRS normally raises in SCET disputes, the reasons for and terms of the initial settlement initiative introduced by the IRS back in 2020, the reasons for and terms of the settlement initiative launched in 2024, and the types of partnerships to which the current settlement initiative might appeal. This article, which builds on several earlier ones by the same author, covers these topics and questions whether current IRS efforts focused on SCETs might undermine future IRS efforts in other areas.

Shephard notes that the settlement offers, unlike the first settlement initiative a few years ago, are largely informal.  The Service is merely sending letters to suspect taxpayers offering a settlement.  Here is his description of the proposal the Service has apparently made to several taxpayers:

The main terms of the second settlement initiative are as follows. The IRS effectively makes partners pretend that they made a cash donation to the Red Cross or some other acceptable charity instead of making a capital contribution to an SCET partnership. For example, assume that a partner made a capital contribution of $100,000 to a partnership and expected to receive a charitable donation tax deduction of $500,000. Under the second settlement initiative, the partner would essentially have to recalculate their income tax liability for all relevant years, claiming a total deduction of only $100,000. This represents a decrease of $400,000. This decline likely would result in significant federal income taxes for the partner, perhaps over multiple years.

The IRS would then impose a penalty equal to 10 percent of the total federal income tax liability after removing $400,000 in deductions, as described above.  Lastly, the IRS would impose interest charges, not only on the federal income taxes owed, but also on the 10 percent penalty. The interest charges are retroactive in the sense that they started running years ago. For instance, if the conservation easement donation occurred in 2018, then the interest started accruing against an individual partner in early 2019.

darryll k. jones