Crowell attorneys examine the surge of syndicated conservation easement lawsuits against the IRS and offer tips for determining whether to pursue such litigation.
The US Tax Court is seeing a surge of lawsuits filed by partnerships against the IRS over the federal government's historically aggressive approach to disallowing charitable contribution tax deductions for syndicated conservation easement transactions, known as SCETs.
This approach has only intensified in recent years with the IRS consistently listing conservation easements among its "Dirty Dozen" list of tax shelter scams.
The most recent wave of lawsuits filed against the IRS by these partnerships argue that the agency has failed to provide the partnerships with a basis for their conclusion that the charitable contributions are disallowed.
All parties will be keeping a watchful eye on these new cases and the new administration to get a sense of any coming changes.
While SCETs are often fact-intensive and integrate property valuations by third party appraisers, the new suits allege that the IRS declared that the land appraisals were inaccurate and should have been appraised at $0, without much explanation.
Legal outcomes from the US Tax Court generally have been unfavorable to syndicated conservation easement partnerships of late. But the IRS has been pressing to resolve these disputes in part because the agency and Tax Court are drowning in these fact-intensive litigations.
Despite the IRS's settlement efforts, these new lawsuits may show that SCET partnerships are anticipating a change in the new administration's attitude concerning these tax structures. The 2025 "Dirty Dozen" doesn't list syndicated conservation easements, potentially signaling that this administration doesn't see these arrangements as an enforcement priority.
Billy Long's confirmation as IRS commissioner leaves open the possibility that the agency may shift its enforcement priorities away from SCETs.
With a new commissioner to set priorities—especially one who has previously endorsed tax credits aimed at individuals and small businesses—the IRS may focus its limited resources on more pressing matters, such as implementation of the new tax bill once passed. These new suits could be an effort by partnerships to take advantage if an enforcement shift occurs.
Partnerships also could be expecting that staff reductions will affect the IRS's vigor in pursuing SCETs. Regardless of priorities, the IRS won't have the resources it had under the Biden administration to pursue detailed administrative reviews or litigation of SCETs. Taxpayers may see this as a negotiation advantage if they, in contrast, have the money and patience to continue fighting adjustments.
Further, partnerships may be waiting for potential favorable appellate decisions in SCET cases from circuit courts. Some recent SCETs cases have been appealed, and more even more recently decided cases could soon join. Taxpayers hoping that circuit courts will push back on the Tax Court's rulings regarding valuation methods may be waiting for decisions in these cases to set a new direction for the IRS and Tax Court.
For example, in Jackson Crossroads, the Tax Court found in favor of the partnerships on two technical issues but rejected the partnerships' valuations and thus dramatically reduced the value of the charitable contribution and imposed penalties. This matter is now on appeal to the US Court of Appeals for the Eleventh Circuit, and the government's brief is due in late July.
Investors in these partnerships may be asked if they wish to take an IRS settlement or pursue litigation. They should consider the following:
Litigation can be expensive. But to taxpayers hoping the above-listed factors will turn the tide, it will be potentially worth it to retain more of their charitable deductions and avoid civil penalties. Taking a chance with litigation could have a payoff, but it may mean a capital contribution to fund the fight.
Risk appetite and patience are crucial factors. Even litigants weighing appeals should consider what a potential settlement with the IRS might look like.
The case may take years to resolve. Tax litigation can take years to work their way through the Tax Court. Even if the IRS is open to negotiation, the process could be lengthy, especially as Long sets a new agenda. Investors also may want to consider making deposits with the IRS in the amount of an estimated liability to stop the running of interest on any potential future liability. If the partnerships prevail, taxpayers can request a return of the deposit.
Given resource constraints, and the shared goal of ending expensive and time-consuming audits, negotiations, and litigations, there still may be an opportunity to bring finality to these disputes—and do so in a more favorable way for the IRS and partnerships alike.
Partnerships are well-positioned to come to the negotiating table with concrete proposals for resolution.
First, to maximize chances of settlement, partnerships must accept that the valuations on which their original claims were based are likely not a productive starting point. Identifying a valuation method or amount that represents a compromise will make more headway with the IRS, which has routinely denied valuations and adjusted values to $0. Partnerships should educate their partners about the expense and recent taxpayer losses to set expectations on potential settlement outcomes.
Second, partnerships should communicate to the IRS that not settling the matter will result in a protracted and resource-intensive fight. Partnerships should make clear that an exploration of the issues will involve a full examination of the facts and input from multiple experts. Faced with lengthy litigation, the resource-strapped IRS may decide that a reasonable settlement is the best outcome.
Third, given the recent IRS settlement initiatives and taxpayer wins, partnerships should be ready to present any unique aspects of their SCETs to assuage concerns that a resolution in the matter would set a dangerous precedent, or is out of line with other settlements. Partnerships must remember that they must sell the resolution not only to the IRS line-level staff but also to more senior-level staff who approve these resolutions.
With a new tax bill on the way, and a smaller and less experienced IRS staff to respond, resolving the SCET matters and clearing the Tax Court docket would benefit everyone.
Originally published in Bloomberg Law, June 26, 2025.
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