Cal Bomar is a former IRS Chief Counsel Attorney, who served in the Passthroughs & Special Industries Division of IRS. Prior to that, he obtained his LL.M. in Tax from NYU.
Why is IRS Attacking Syndicated Conservation Easement Deals?
to create a syndicated conservation easement, a promoter brings together a group of investors, places them into a passthrough entity (like an LLC that is a partnership for tax purposes) that has purchased land, and then places a conservation easement on that land restricting the private use of the property in order to protect its conservation value. The partnership takes a charitable deduction for the reduction in value of the land and passes that tax deduction to the investors on Form K-1.
Conservation easements are legal when set up correctly and using the actual value of the property. In fact, easements were often marketed to investors as a way to help the environment in a way that was legal and even encouraged by Congress. Most promoters told investors that they used very conservative appraisals, using two appraisers and taking the lower of the two appraisals. Investors were often advised by an attorney and CPA that the transaction was legal. In addition to the appraisals, many were also shown opinion letters from law firms that the transactions were done legally.
IRS asserts that most syndicated conservation easement transactions are abusive. IRS points to examples of promoters who appraised land at extreme multiples over its recent purchase price. IRS also seeks to disallow deductions using technical defects, such as asserting that the deed of conservation did not meet the requirements because it did not convey the property in “perpetuity” (forever). The IRS has indicated that it may also challenge the transactions based on the partnership anti-abuse rule, economic substance and other rules or doctrines. The IRS believes that the easements have resulted in tens of billions of dollars in fake deductions since 2010.
What will 2022 hold for Conservation Easement Cases?
As of January 2022, IRS and DOJ have obtained more than a million pages of documents in their investigations of syndicated conservation easement transactions. IRS intends to audit all conservation easement deals that are not beyond the statute of limitations on assessment.
In criminal investigations, DOJ has focused heavily on promoters who took the most extreme valuation multiples and those who falsified documents (such as back dating). Most promoters of syndicated conservation easements have stopped doing new deals, but both DOJ and IRS appear to be focusing additional resources on those that continue.
Several attempts have been made to pass a bill in Congress that would retroactively disallow all of these deals after December 23, 2016, which would disallow all deductions that were more than 2 1/2 times the Taxpayer’s basis (which is essentially all of the deals). This provision was wrapped into the Infrastructure Bill– but removed at the last minute. Its inclusion was then sought in the Build Back Better Bill. The retroactive nature of the Bill and other Draconian provisions related to penalties and other issues make it an extremely bad bill that should be opposed at every turn.
We should expect an enormous amount of these cases to continue be litigated in 2022, and the continued imposition of tax and penalties at the partner level via computational adjustments as the cases conclude at the partnership level. Obtaining relief at the partner level will be vital as the cases progress– just as it is already needed in those that have already concluded. Deadlines and statutes of limitation will apply to relief available to investors, so it is important to consult with an attorney as soon as possible.
How can you contact us to obtain relief?
For speak with a conservation easement tax attorney for a detailed analysis your how to get the best result in your case, contact Bomar Law Firm at 404-841-6561.
The firm also handles other IRS tax matters, audits, tax relief and Tax Court litigation.