After the Internal Revenue Service identified syndicated conservation easements as potentially abusive transactions and designated it as a listed transaction, the agency initially had some successful enforcement actions in court.
However, adopting an increasingly popular litigation tactic, litigants began attacking the means by which the initial IRS guidance was adopted, and specifically failure to comply with the requirements of the Administrative Procedures Act, which requires public notice of proposed action and opportunity for comment.
While it had been the position of the IRS traditionally that the APA did not apply to it, courts have begun to take a different view. The Tax Court initially supported the IRS’s position, and the 6th Circuit supported that position on appeal. However, the 11th Circuit reversed the Tax Court on the same issue and held that the IRS had failed to meet the requirements of the APA.
The IRS responded by starting to shift more guidance to the form of proposed regulations that hopefully comply with APA requirements. Those proposed regulations were issued in November 2023. The IRS also successfully had legislation enacted by Congress to limit the losses permitted to be claimed on syndicated conservation easements. The agency also has continued to attack in court the promoters and appraisers involved in these syndications, and has also continued to pursue the taxpayers claiming these losses in the courts, with the 6th Circuit on its side and the 11th Circuit opposed.
The SECURE 2.0 Act, enacted at the end of 2022 as part of an omnibus spending bill, included a provision that disallows a deduction for a qualified conservation easement contribution made by an entity taxed either as an S corporation or a partnership (including LLCs taxed as partnerships) if the amount of the contribution exceeds two and a half times the shareholder’s or member’s tax basis. The legislation also included reporting requirements for the shareholders or members seeking the deduction.
Now, however, in a Tax Court case arising from the 10th Circuit, the Tax Court has reversed its previous position and agreed that the syndicated conservation easement regulations were invalid, holding that the regulation’s basis and purpose statement failed to meet the procedural requirements of the APA. (Valley Park Ranch, LLC, 162 TC –, No. 6, Dec. 62,442.) With the Tax Court now aligned with the Eleventh Circuit view, Valley Park could spell trouble for the IRS position in all circuits.
There was a fairly strong dissent in the Valley Park Ranch decision, taking the position that there was no substantial basis for reversing the court’s opinion issued four years earlier. The dissenters were of the view that the failure to include a statement of basis and purpose was not fatal since the basis and purpose in the case were obvious.
It is not clear whether the IRS would see any merit in trying to appeal the Tax Court decision to the 10th Circuit. Now that the Tax Court has shifted its position, it seems less likely that any other circuit court would follow the 6th Circuit. It is also not clear that even the 6th Circuit would stick to its position.
Looking ahead
The situation in the long term still looks favorable for the IRS. It now has specific statutory authority to attack syndicated conservation easements that are too abusive under the statute. The agency can continue to revise its regulations to meet APA requirements. The reporting requirements will aid the IRS in identifying syndicated conservation easements offerings. The Tax Court has continued to deny deductions to shareholders and members of syndicated conservation easements involving gross overvaluations of property subject to the easement. Some of the principal promoters of the syndicated conservation easements have been convicted in federal court of conspiracy to commit wire fraud and aiding and abetting the filing of false tax returns. An appraiser for a number of syndicated conservation easement deals has also pleaded guilty to conspiring to defraud the U.S.
The Valley Park Ranch decision probably means that some early participants in syndicated conservation easements, before statutory changes to the law and before revised IRS regulations, may be able to continue to claim some of the significant past losses associated with their participation. However, with new legislative restrictions, new regulations, and criminal actions against the aiders and abetters, the IRS appears likely to curtail the worst abuses carried on by syndicated conservation easements in the future.
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