Just this morning, the IRS just announced a new, time-limited settlement initiative for conservation easement and historic preservation easement cases. And the agency is making clear that it views continued litigation as increasingly risky for taxpayers.
The new initiative offers eligible taxpayers significantly more favorable terms than the results taxpayers have generally achieved in Tax Court. Under the program, eligible partnerships may resolve cases with no charitable contribution deduction, but with an “other deduction” for approximate out-of-pocket costs and a substantially reduced gross valuation misstatement penalty, that is, 10% during the initial 90-day window, increasing to 20% during a subsequent 45-day period. After those windows expire, the IRS says cases generally will settle only on traditional “hazards of litigation” terms, which the agency describes as typically involving allowance of only 5%–7% of the claimed deduction and a 40% penalty.
The IRS’ successes in challenging what it deems as abusive conservation easement cases has been well-documented by the tax press. Today’s announcement reflects the government’s continued success in conservation easement litigation. According to the IRS, recent Tax Court cases have resulted, on average, in taxpayers preserving only about 6% of claimed deductions while sustaining substantial penalties and interest.
Recent Tax Court opinions also continue to reinforce the IRS’s procedural and substantive positions in these disputes. For example, in Palmwood Holdings, LLC v. Commissioner, the Tax Court recently upheld the IRS’s compliance with Section 6751(b)’s supervisory approval requirements for penalties, including a civil fraud penalty asserted during litigation. While Palmwood addressed a procedural issue rather than the underlying valuation dispute, it reflects the broader trend of courts rejecting taxpayer challenges in syndicated easement cases.
The practical takeaway is that the IRS appears intent on using both favorable precedent and settlement pressure to reduce the inventory of pending easement disputes. Taxpayers with pending conservation easement matters, especially docketed Tax Court cases or BBA partnership proceedings — should evaluate the new initiative carefully and reassess litigation exposure in light of the government’s continued success in court.
This alert is for informational purposes only and does not constitute legal or tax advice. Taxpayers should consult counsel regarding the specific facts and procedural posture of their matters.