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IRS Valuation Arguments & Settlement Options

V. Most Common Valuation Arguments The IRS Makes

Only if these collateral technical attacks fail will the IRS then generally resort to attacking the valuation issues surrounding the conservation easement contributed. In that regard, the IRS will generally advance the following types of arguments:

A. Highest and Best Use

The IRS will attack the conclusion reached in the appraisal over the highest and best use of the property. It does this by attempting to show that the use determined is either not physically possible, legally permissible, financially feasible or maximally productive.55

  • For example, the IRS may try to argue either that the land is not zoned to permit such a proposed development or that a zoning change to accommodate such development is not reasonably probable.56
B. Sale Comparables

The IRS will attempt to argue that the analysis provided by the taxpayer’s qualified appraiser in their qualified appraisal report concerning sales of comparables is flawed, incomplete or just plain wrong.57

VI. Settlement Options

Spurred on by numerous victories in the United States Tax Court and other courts relying upon many of the technical and valuation arguments mentioned above, the IRS recently announced a settlement initiative for investors involved in such transactions. The terms of this settlement are onerous requiring taxpayers to concede all the tax benefits claimed and imposes penalties and other terms as follows:58

  • All partners in the partnership electing to enter into the settlement must agree to settle to receive these terms and the partnership must make a lump-sum payment representing the aggregate tax, penalties and interest for all of the partners before settlement is accepted by the IRS;
  • Investors will be allowed to deduct the cost of acquiring their partnership interest, but it will require a penalty of at least 10 percent;
  • Partners who are promoters of conservation easement schemes are not allowed any deductions and must pay the maximum penalty asserted by IRS (typically 40 percent); and,
  • If less than all the partners agree to settle, the IRS may settle with those partners but will normally impose less favorable terms on the settling partners.

Following the IRS’s lead the Office of Chief Counsel also recently released a Notice explaining the settlement terms for syndicated conservation easement cases currently pending in the United States Tax Court with terms slightly different and even less favorable to taxpayers than the settlement initiative offered by the IRS.59

VII. Conclusion

Participants in Syndicated Conservation Easements face significant technical and valuation hurdles in being allowed to claim their deductions. One should always seek competent legal advice to be able to successfully wade through the thicket of laws and requirements necessary for such an easement to meet the requirements required by law. We here, at the Brager Tax Law group are willing and able to assist you in such an endeavor.

  1. See the IRS Conservation Audit Techniques Guide, supra note 36, at page 46.
  2. See, e.g., Palmer Ranch Holdings, Ltd. v. Commissioner, T.C. Memo. 2014-79.
  3. See the IRS Conservation Audit Techniques Guide, supra note 36, at page 47-48; see also Chandler v. Commissioner, 142 T.C. 279 (2014); Esgar v. Commissioner, T.C. Memo. 2012-35 aff’d 744 F.3d 648 (10th Cir. 2014); SWF Real Estate, LLC v. Commissioner, T.C. Memo. 2015-63; Rajagopalan v. Commissioner, T.C. Memo, 2020-159 (Service attacked petitioner’s use of comparable sales).
  4. See IRS News release IR-2020-196.
  5. See Chief Counsel Notice 2021-001.
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