IRS outlines terms of settlement in easement disputes

The Internal Revenue Service provided more details Wednesday about the settlements it's offering for a limited time to taxpayers involved in syndicated conservation easement and historic preservation claims disputed by the IRS as tax shelters.

The IRS announced last week that it planned to offer settlements in syndicated conservation easement cases, while also updating a special page on its website describing the various court cases it's been involved in over the years with claimants. The web page also included information about historic preservation easements, which have also provoked disputes with the tax authority. The web page notes that Congress allowed an income tax deduction for owners of property who give up certain rights of ownership to preserve their land or buildings for future generations. However, the tax deduction has been abused over the years, especially by promoters of syndicates for investors. The IRS has had mixed success with pursuing such cases, and in a 2023 case involving a company called LakePoint Land II, a court found the IRS had skirted a statutory requirement for supervisors to sign off on tax penalties before levying them. The Treasury Inspector General for Tax Administration released a report Tuesday indicating that the IRS had backdated several approvals to get around this requirement. However, the IRS has also had some recent wins in Tax Court. In one such case involving an entity called Capitol Place II, the court disallowed a $23.9 million deduction last November for failure to establish a valid conservation purpose because the building was not a certified historic structure last year. In another 2025 case, Corning Place Ohio, the court rejected a $22.6 million deduction based on speculative "air rights," describing the valuation as implausible, limiting the deduction to $900,000, and upholding a 40% penalty. 

The IRS has also offered temporary conservation easement settlements in the past to settle the backlog of cases. Since 2020, the IRS noted that it's offered settlement initiatives in these cases that were significantly more favorable than the outcomes taxpayers have generally achieved in the Tax Court. Under each of those prior initiatives, taxpayers were required to pay penalties on their underpayments and were not permitted to claim a charitable contribution deduction for the claimed donation, being limited solely to a deduction for estimated out-of-pocket costs. Nonetheless, the prior settlement initiatives resolved 405 cases, with 32% of all offers accepted. 

The new time-limited settlement opportunity aims to advance the goals of the prior initiatives while addressing barriers that may have discouraged acceptance. There are currently over 1,100 conservation easement cases (around 740 docketed cases in Tax Court and 400 cases in Exam). Under the new offer initiative, close to 450 cases will no longer be required to make an upfront payment of the settlement amount, and instead the liability will be subject to post-settlement collection as described below. Separately, up to 500 cases where prior settlement offers expired or were rejected by the taxpayer will have the renewed ability to settle their cases. The offer will also be extended to as many as 175 cases that did not previously have the opportunity to participate in an IRS settlement initiative. 

"Congress created the conservation easement deduction to encourage genuine preservation, not to subsidize tax shelters built on inflated valuations," said IRS CEO Frank Bisignano in a statement. "This settlement opportunity gives eligible taxpayers a chance to resolve these cases on terms more favorable than the results taxpayers have generally achieved in court, while allowing the IRS to continue enforcing the law in a fair and efficient way." 

The tax law allows an income tax deduction for property owners who relinquish certain rights in land or buildings to preserve those properties for future generations. Over time, however, Congress, the IRS, and courts have identified serious abuses, leading to legislative changes, enforcement actions, settlement initiatives, and civil and criminal judgments. 

In recent litigation, the IRS claimed the government has consistently prevailed. On average, the Tax Court has only allowed 6% of the original claimed deduction and has generally imposed a 40% gross valuation misstatement penalty, plus interest.

"The courts have repeatedly found abusive activity in this area, regularly sustaining major reductions in claimed deductions and significant penalties and interest," said acting IRS chief counsel Kenneth Kies in a statement. "Taxpayers and their advisors should carefully review the terms of this initiative and the substantial litigation risks of continuing to contest these cases."
 

Taxpayers can learn more about how promoters have peddled syndicated easement transactions and how badly these transactions have fared in court at Conservation Easement on IRS.gov.

Time-limited settlement

Eligible partnerships will receive individualized correspondence from the IRS, issued on a rolling basis, setting forth their specific settlement terms.

For a period of 90 days following the issuance of a settlement letter, the following terms will be available to an eligible partnership:

• No charitable contribution deduction will be allowed.
• An "other deduction," in an amount determined by the IRS, generally equal to the partnership's approximate out-of-pocket costs (often based on cash-contributed amounts reflected on Schedule M-2), will be allowed.
• A gross valuation misstatement penalty will apply at a rate of 10%.
• Interest will accrue as required by law.
• The partnership will not be required to make payment at the time it elects into the initiative.
• Non-docketed Bipartisan Budget Act cases will be resolved by closing agreement or similar document.
• Docketed cases will be resolved by stipulated decision.
• No extension of the 90-day period will be available.

 For a period of 45 days following the close of the initial 90-day period, eligible partnerships can settle on generally the same terms, except the gross valuation misstatement penalty will apply at a rate of 20%. No extension of the 45-day period will be available.

The applicable time period will start on the postmark date or date of electronic transmission, and each letter will specify the applicable deadlines.

After the expiration of the two periods, totaling 135 days from the date of issuance of the individualized settlement letter, cases will be resolved before a court decision only on the basis of hazards of litigation. In general, that will reflect a charitable contribution deduction of approximately 5% to 7% of the claimed deduction and a 40% gross valuation misstatement penalty.

The settlement opportunity isn't available in every conservation easement or historic preservation easement case. Specifically, the settlement is not available in cases:

• That have been tried and are awaiting an opinion;
• That are on appeal to one of the United States Circuit Courts of Appeal;
• That have already settled (i.e., settled based on hazards of litigation before trial or conceded, including those in which no decision has been entered);
• That have agreed to be bound to another case if the test case has been tried and is awaiting final decision;
• That have a trial set to commence within 30 days of the date of the announcement; and
• That are designated as test cases, unless all bound cases have settled or agree to settle under this initiative.

 The IRS said it will determine eligibility based on the status of the case and other case-specific considerations relevant to administration of the initiative.

Tax law differences

In cases governed by the Tax Equity and Fiscal Responsibility Act of 1982, generally involving tax years 2017 and earlier, taxpayers should expect to receive IRS notices stating the amount owed by each investor. Those notices will be sent following IRS processing after the settlement is reached and the Tax Court decision becomes final.

In cases governed by the Bipartisan Budget Act of 2015, typically involving tax years 2018 and later, if the partnership did not elect to push out the liability, the partnership will be responsible for payment. If the partnership is unable to pay, investors will receive notices from the IRS stating the amounts owed as a result of the settlement adjustments. If the partnership elected to push out the liability, the partnership needs to furnish statements to investors and the IRS describing the adjustments and the amounts being pushed out, and investors have to take those adjustments into account accordingly.