The Internal Revenue Service has completed its first settlement order with the operator of a syndicated conservation easement scheme as part of a broader crackdown on what the IRS views as abusive tax scams.
The IRS announced its first settlement in a case under an initiative announced in June under which the IRS Office of Chief Counsel offered to settle certain cases involving syndicated conservation easements. Since then, the IRS Chief Counsel has sent letters to dozens of partnerships involved in conservation easements whose cases are pending before the U.S. Tax Court.
The first settlement under the terms of the initiative is being finalized this week. Coal Property Holdings LLC and its partners agreed to the IRS’s disallowance of the entire $155 million charitable contribution deduction claimed by the company for an easement placed on a 3,700- acre tract of land in Tennessee. Last October, the Tax Court issued an opinion granting the IRS’s motion for partial summary judgment holding that the “judicial extinguishment” provisions of the easement deed did not satisfy the requirements of the tax regulations.
Under the terms of the settlement, the investor partners were allowed to deduct their cost of investing in the conservation easement transactions and they paid a 10 percent penalty, but the promoter partner was denied any deduction and paid a 40 percent penalty. The taxpayers also fully paid all the taxes, penalties and interest in accordance with the settlement. A public statement acknowledging the settlement was part of the agreement between the IRS and the taxpayer.
“We are seeing movement on these settlements,” said IRS chief counsel Mike Desmond in a statement Monday. “Given the potential for significant penalties, we anticipate more taxpayers will take similar actions and ultimately accept these offers, and we encourage them to do so.”
The IRS has been cracking down on syndicated conservation easements, and Desmond has made it one of his priorities. The schemes allow investors to claim an outsize tax benefit by investing in some property for a relatively small amount, getting an appraiser to value it at a much higher amount, then claiming the parcel of land will be set aside for conservation purposes rather than development, and taking inflated tax deductions. The schemes are typically organized by a promoter who puts together a group of investors who see conservation easements as a way to lower their taxes, rather than as a legitimate way to benefit the environment. The promoters sometimes tell investors that for every dollar they pay to the promoters, they will save two dollars on their taxes.
The schemes have attracted interest in Congress as well. Last week, the Senate Finance Committee released a report outlining how the schemes work and naming some of the largest promoters. One of the promoters, EcoVest Capital, gave its potential “investors” a spreadsheet calculator to show them exactly how much “investing” in one of their transactions supposedly would reduce their taxes, according to the report.
Senate Finance Committee chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Oregon, teamed up on the investigation last year.
“Shady tax deals often have a low profile with the public, but that doesn’t make them any less wrong,” Grassley said in a statement last week. “The conservation-easement deduction provides an important tool for the preservation of our environment, but the federal government needs to curtail the aggressiveness that goes on with these syndicated transactions. The American tax system relies on fairness and good faith compliance. This isn’t a partisan issue. Serious, fair enforcement of our tax laws is the best way to preserve that system and uphold our understanding that the law applies equally to all of us.”
He and Wyden sent letters to 14 individuals suspected of promoting the transactions asking for information and documents about the transactions. Six of them failed to voluntarily comply, according to the report, so the Finance Committee issued subpoenas to them: Robert McCullough of EcoVest Capital; Matt Ornstein and Frank Schuler of Ornstein-Schuler Investments; and Matthew Campbell, Eugene “Chip” Pearson, Jr., and Mark Pickett of EvrSource Capital. “The documents provided in this investigation confirm that syndicated conservation-easement transactions appear to be highly abusive tax shelters,” said the report.
“Since 2016 I have been deeply concerned about abuse of the syndicated conservation easement program, and the threat a few bad actors pose to a program that’s critical to preserving open lands,” Wyden said in a statement. “Our bipartisan report lays out serious and persistent abuse in the program. This is part of a larger pattern of wealthy tax cheats ripping off the American people because they know they can get away with it after years of cuts to the IRS budget. As with broader enforcement issues, cracking down on abusive syndicated conservation easements requires ensuring IRS has the resources and legal tools to do its job.”
The IRS said Monday it would continue to actively identify, audit and litigate these abusive transactions as part of its efforts to combat abuse, and that ending the abusive schemes remains a top priority.
The settlement program that the IRS announced earlier in June requires a concession of the tax benefits claimed by the taxpayers and imposes penalties:
• All partners in an electing partnership have to agree to settle to receive these terms, and the partnership needs to make a lump-sum payment representing the aggregate tax, penalties and interest for all of the partners before settlement is accepted by the IRS.
• The IRS Chief Counsel office will allow investors to deduct the cost of acquiring their partnership interests but it will require a penalty of at least 10 percent.
• Partners who are promoters of conservation easement schemes are not allowed any deductions and must pay the maximum penalty asserted by IRS (typically 40 percent).
• If less than all the partners agree to settle, the IRS may settle with those partners but will normally impose less favorable terms on the settling partners.
IRS Commissioner Chuck Rettig thanked the Chief Counsel trial team for their work on the Coal Property Holdings case. “The IRS is pleased that the partnership in the Coal Property transaction has agreed to this settlement, and we encourage other participants in qualifying easement cases to accept the terms of the Chief Counsel’s initiative,” Rettig said in a statement.
Coal Property was represented by Christopher S. Rizek and Scott D. Michel of the Washington, D.C. law firm Caplin & Drysdale. “In light of the significance of the Court’s ruling on the perpetuity issue, our client decided to take advantage of an assured penalty reduction in the IRS initiative and settle this matter under the IRS’s terms, and it is pleased that this case is resolved,” Rizek said in a statement.