On May 13, the IRS announced yet another opportunity for taxpayers involved in conservation easement disputes to settle their case. A day later, Treasury Assistant Secretary for Tax Policy and Acting IRS Chief Counsel Ken Kies elaborated on the settlement offer and previewed forthcoming initiatives.
Latest Conservation Easement Settlement Offer
Kies, speaking on May 14 at a Tax Council Policy Institute event, described efforts to identify improper conservation easements as a bipartisan matter. He highlighted the Senate Finance Committee’s 2020 bipartisan report on abusive syndicated conservation-easement transactions.
That report found that while the tax incentives under IRC § 170(h) for conservation easements have bipartisan support, in recent years, syndicated conservation-easement transactions have been used by high-income taxpayers to reduce their federal and state tax obligations. The report concluded that these transactions “involve land valuations that appear so inflated above their original purchase prices that they cannot reasonably be characterized as anything other than abusive tax shelters.”
The IRS previously announced settlement opportunities for taxpayers with conservation easement disputes in 2020 and 2024. Before releasing the latest settlement offer, Kies said he spoke with Finance Chair Mike Crapo (R-ID) and Ranking Member Ron Wyden (D-OR).
Kies noted that “courts have responded appropriately one time after another” to these arrangements, denying “most or all” of the charitable contribution deduction and imposing up to a 40% penalty. “These are not close calls,” he added.
Kies contrasted the latest offer with prior settlement offers. In those earlier offers, taxpayers had to pay penalties on underpayments and saw their deduction limited to estimated out-of-pocket costs. But Kies stressed that even under those terms, 32% of settlement offers were accepted and 405 cases were resolved.
However, to resolve the remaining over 1,100 easement cases — including more than 700 in Tax Court and 400 under exam or appeal — Kies said “we need to do better.” As compared to the prior initiatives, the latest version doesn’t require partnerships to pay tax due up front to accept the settlement offer, he explained. He described the up-front payment requirement as a “showstopper” in prior offers. Doing away with that requirement “clearly makes it more feasible for taxpayers to be able to enter into these transactions,” Kies added.
Improper Valuation Targeted
“Let me just say that’s not the last initiative that we’re going to have,” Kies said of the recent conservation easement settlement offer. Beyond cracking down on misuse of easements — whether historic or conservation — Kies said the IRS is focused on improper valuation generally.
Kies explained that transactions aimed at abusing the charitable deduction are “morphing,” but the underlying abuse ultimately comes down to improper valuation. He described one such new scheme where a promoter buys a “truckload” of medical supplies, contributes these to a charity, and then claims a multimillion-dollar charitable deduction.
Other forthcoming initiatives, said Kies, will focus on captive insurance cases and economic substance doctrine issues.
“We’re not going to stop with dealing with the easement cases,” said Kies, “we’re going to also deal with other abuses.”
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