What Is a Syndicated Conservation Easement (SCE)?
A syndicated conservation easement is created when a promoter organizes a group of investors and places them into a pass-through entity, typically an LLC taxed as a partnership. That partnership purchases land and then donates a conservation easement, which restricts private use of the property in order to protect its conservation value.
The partnership then claims a charitable contribution deduction based on the reduction in the property’s value caused by the easement. That deduction is passed through to investors and reported on Schedule K-1.
Are Conservation Easements Legal?
Conservation easements are legal when structured properly and supported by accurate property valuation. For years, conservation easements were marketed as a way for investors to support environmental conservation in a manner that was both lawful and encouraged by Congress.
Many promoters told investors the appraisals were conservative, often claiming they used two independent appraisers and relied on the lower valuation. Investors were commonly advised by both a CPA and an attorney that the transaction was legal, and many received legal opinion letters stating the easement complied with IRS requirements.
Why Is the IRS Challenging Syndicated Conservation Easements?
The IRS has taken the position that most syndicated conservation easement transactions are abusive tax shelters. The agency frequently points to cases where promoters allegedly inflated land valuations to extreme levels—sometimes multiples higher than the recent purchase price—to generate large charitable deductions.
In addition to valuation issues, the IRS has also attempted to disallow deductions based on technical compliance disputes, including arguments that the deed failed to properly meet the legal requirement of “perpetuity”, meaning the easement must remain enforceable forever.
The IRS has also indicated it may challenge these transactions under additional doctrines and rules, including:
- The partnership anti-abuse rule
- Economic substance
- Other IRS enforcement doctrines
The IRS has claimed syndicated conservation easements have caused the Treasury to lose more than $20 billion in improper charitable deductions since 2010.
Ongoing IRS and DOJ Enforcement in Conservation Easement Cases
As of January 2023, the IRS and DOJ had obtained over one million pages of documents during investigations into syndicated conservation easement transactions. The IRS has stated it intends to audit every SCE transaction that is still open under the statute of limitations.
In criminal cases, DOJ enforcement has focused primarily on promoters involved in:
- The most aggressive valuation inflation
- Allegations of falsified documentation (including backdating)
While many promoters have stopped offering new syndicated conservation easement deals, both the IRS and DOJ continue to devote significant resources to investigating those who remain active.
Congress Passed a Law Limiting Future SCE Transactions
After multiple legislative efforts, Congress passed a law restricting future syndicated conservation easements. Under the new law, deductions are disallowed if the claimed charitable contribution exceeds 2.5 times the taxpayer’s basis in the investment.
Conservation Easement Litigation and Partner-Level Exposure
Many syndicated conservation easement cases are proceeding to trial, and penalties can be significant. These cases often result in tax and penalties being assessed against investors through partner-level computational adjustments after the partnership-level proceeding concludes.
Because strict deadlines and statutes of limitation may apply, investors should speak with an attorney as soon as possible to preserve potential relief options.
2024 Conservation Easement Case Updates: New IRS Settlement Initiative
In 2024, more syndicated conservation easement cases moved further through the court system, and many investors began receiving settlement offers from the IRS. Over the summer, the IRS issued multiple rounds of letters proposing settlements for taxpayers whose cases were still under audit and not yet docketed in Tax Court.
As more cases approached litigation deadlines, the IRS Tax Court docket grew rapidly. To address the backlog, the IRS introduced a new settlement initiative offering more favorable terms for undocketed cases (cases under examination but not yet in Tax Court).
Like docketed cases, the IRS settlement approach typically reduces the deduction to the amount of invested capital and imposes additional tax, penalties, and interest. However, the undocketed initiative may offer reduced penalties, including:
- 5% penalty for gross valuation misstatements (compared to 10% in docketed cases)
- 21% tax rate at the partnership level (compared to the 37% rate often used in docketed cases)
Texas Conservation Easement Attorney