In recent months, the IRS has continued its attack on syndicated conservation easement transactions. Many syndicated partnerships are now under IRS audit or have cases pending before the US Tax Court. Moreover, the IRS has had a string of recent victories in cases where the US Tax Court, on technical grounds, disallowed the entire charitable contribution deduction that was claimed by the partnership. The IRS is also conducting civil and criminal investigations of promoters, appraisers, tax return preparers and other advisors involved in these transactions. Investors often face unique issues during the course of these proceedings and investigations.
In some instances, IRS Agents and IRS Criminal Investigation Special Agents have contacted syndicated conservation easement investors to request documentation and other information relating to the investor’s participation in the transaction. Some investors are also being required to participate in interviews with the IRS. The IRS has indicated that it would utilize its summons authority to compel investors to comply with these requests.
| Eversheds Sutherland Observation: A partner of the syndicated partnership, or an advisor to the syndicated conservation easement transaction, should consider seeking qualified legal advice if contacted by the IRS regarding a civil or criminal investigation. |
For certain syndicated conservation easement transactions that are currently docketed in the US Tax Court and generally with respect to which no partner is under criminal investigation, the IRS is offering the partners in the partnership a limited settlement opportunity. Generally, under the terms of the settlement, which was first announced on June 25, 2020, the partnership and all partners would be required to agree to settle and to execute settlement documents, and the partnership would be required to pay a settlement amount plus interest. In general, the settlement amount payable by the partnership would be computed by aggregating a tax underpayment amount and penalty amount for each partner of the partnership.
The amount of the tax underpayment and penalty that would be includable in the settlement amount would be greater with respect to certain partners, including any partner who promoted or received fees for certain services, was a donee of any easement or fee simple interest, or was a material advisor, in any syndicated conservation easement transaction or similar transaction. For any such partner, no deduction would be allowed and the partner would be subject to the maximum penalty asserted by the IRS (typically 40%) on the partner’s tax underpayment. For other partners, the tax underpayment amount generally would be computed as if the partner was allowed an ordinary income tax deduction in the year of investment equal to the partner’s net out-of-pocket costs to participate in the transaction, and the penalty amount of the partner would be based on a penalty between 10% and 20%, depending on the amount of the charitable deduction originally claimed by the partner in relation to the partner’s investment in the partnership. The settlement amount that would be payable by the partnership pursuant to the settlement would also include any penalty of the partnership or any partner for failing to properly disclose the transaction on IRS Form 8886.
| Eversheds Sutherland Observation: Because any settlement amount would be determined by aggregating the tax underpayment and penalty amounts with respect to each partner individually, any settlement computation would require separate analysis of the applicable circumstances of, and resulting consequences to, each partner. The partners may have diverging interests in deciding whether to participate in the settlement, including on account of differences in potentially applicable penalties and partner-level defenses to the same, which defenses would be waived under the terms of the settlement. Further, while an accepted settlement offer generally would bring finality to the syndicated conservation easement matter docketed before the US Tax Court with respect to an investor, the IRS has stated that the settlement generally would have no impact on any potential criminal exposure, investigation, and/or prosecution of any individual or entity that participated in, assisted, or advised others in participating in such a transaction. |
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