Two Senate Finance Committee members applauded the IRS’ recent settlement offer to taxpayers involved in syndicated conservation easement cases but said the agency must maintain its “enforcement posture” on these abusive arrangements.
In a May 28 letter, Senators Chuck Grassley (R-IA) and Steve Daines (R-MT) told Treasury Secretary Scott Bessent that his “dedication to preserving the integrity of the conservation-easement deduction is appreciated.”
Grassley reiterated this praise days later when Bessent appeared before the Senate Finance Committee. However, the senator also urged Bessent to stay the course. “I think the department is doing the right thing, but I think you’re getting pressure to change,” Grassley told Bessent during the June 3 hearing.
Conservation Easement Case Settlement Initiative
At issue in these cases is alleged taxpayer abuse of IRC § 170(h), which allows a tax deduction for the donation of a “qualified conservation contribution.” A qualified conservation contribution is the donation of a qualified real property interest or conservation easement to a qualified organization exclusively for conservation purposes.
However, a 2020 bipartisan report revealed that high-income taxpayers were using syndicated conservation easement transactions to reduce their tax obligations. Specifically, taxpayers rely on “inflated appraisals to achieve deductions,” the report explains.
Since the report, the IRS has provided a series of time-limited settlement offers to resolve conservation easement disputes. Those settlement initiatives resolved 405 cases, according to the IRS.
With more than 1,100 cases still pending, the IRS announced a new settlement offer on May 13. That offer is available to partnerships with Tax Court cases that have not been tried or settled, as well as with cases still under IRS examination.
The IRS said it would also extend the settlement offer to up to 500 cases in which previous settlement offers expired or were rejected.
Under the latest settlement initiative, partnerships will be denied the claimed charitable contribution deduction and assessed a 10% gross valuation misstatement penalty. However, partnerships will be allowed an “other deduction” for their out-of-pocket costs. In addition, they will not be required to make payment at the time they opt into the settlement.
Treasury Should Not ‘Water Down’ Settlement Offer
In their letter to Bessent, Grassley and Daines say they see the latest settlement initiative as balancing the need to hold taxpayers accountable for their participation in the tax scheme with the need to efficiently resolve hundreds of cases.
The lawmakers also highlight the importance of the conservation easement deduction when used as intended by Congress. They explain that enforcement efforts and the latest settlement offer can help ensure the deduction remains available for legitimate use by farmers, ranchers, and landowners.
They also note their work on the bipartisan Charitable Conservation Easement Program Integrity Act, which generally limits the deduction to 2.5 times the taxpayer’s basis in the property. That act was passed in 2022 as part of the SECURE 2.0 Act.
“This cap helps ensure conservation easement donations are made for charitable purposes and not to turn a profit,” the lawmakers write. However, they warn that the cap is just one tool to combat “the most egregious abuse.” They note that claimed deductions falling under the cap “may still be illegitimate.”
Grassley emphasized the importance of cracking down on conservation easement tax shelters during the June 3 Senate Finance Committee hearing. “I encourage you and the IRS to stand by recent settlement offers — and ignore those who I think are lobbying you to water it down,” he told Bessent.
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