Green Shoots for Partnership Conservation Easements

Earlier this year we wrote about how the IRS had stepped up its unjustified war on taxpayers who have partnered to conserve land by having the Department of Justice file an injunction action calling into question nearly one hundred different conservation easement donations.  Congress has enacted specific tax rules to incentivize conservation easement donations, but as we noted in a previous paper, the “IRS has adopted the vaguely sinister epithet of ‘syndicated’ to describe easement deductions that are structured to allow groups of people to contribute land to conservation and share the tax incentive benefits.”

Recent interactions indicate the Executive Branch’s misplaced antagonism could be on increasingly shaky footing: during a recent hearing, the Judge in charge of the pending injunction case asked attorneys a series of questions that could undercut the Government’s entire premise for going after partnership conservation easement donations. The exchange reveals some of the same concerns we have identified with the IRS’s war on conservation easement donors and demonstrates that it is not just taxpayer advocates who view the government’s actions skeptically. U.S. District Judge Amy Totenberg is asking the right questions of the IRS too.

Here are some important excerpts with page references from the transcript that just became available of the June 10, 2019, hearing in U.S. v. Nancy Zak et al.:

The Court [Pg. 8 – 9]: Well, let me ask you one other underlying issue. The Government seems to suggest that almost by definition the use of a partnership in the context of this case is unlawful or alternatively suggestive of unlawfulness but seems to say point-blank unlawful because the conservation partnerships here are developed for the sole purpose of basically purchasing an interest in this – in the conservation easement and obtaining also the benefit of a tax credit and tax deduction for the buyers and the members of the partnership.  But I don’t really see any authority for your proposition.…

But I’m bothered by – I have to say just to sort of start off I’m bothered by the contention that the partnerships are basically inherently a scheme that is unlawful the entire sort of purpose of the easement – of the statute and the allowance of this seems to be, in fact, to permit this. And I don’t see anything that would say that it was unlawful. And I don’t think the Government pointed me to anything that said the partnerships kind of by definition are unlawful.

The Court [Pg. 10]: “Well, it is different though, isn’t it? Because, in fact, I mean, basically if we were only – your position, would essentially mean that only the very richest, who is an individual, would be able to buy the conservation easement. You are saying it couldn’t be a collection of individuals.

But the whole purpose of the law is in some ways to allow people to get the benefit of a tax credit and to help to conserve the land. So – but it is not because they are altruistic that they are doing this. It is not just a donation without a benefit to them. So it is different than many other situations where it is just a sham as a partnership or corporation.

The Court [Pg. 11]: We have a statutory structure that’s set up to in some ways incentivize this conduct. Now, it may not be being handled properly in some way here. But I don’t think that it just makes the partnership per se a sham.

The Court [Pg. 11 – 12]: But I don’t really understand what the Government is arguing in terms of, well, is it just simply that I actually have to have Mr. Rockefeller himself buy the land? Obviously, the Rockefellers, the Fords, the Steve Jobs or his heirs could buy the land.

Judge Totenberg’s questions go to the heart of the injunction action, and to the heart of the prior IRS Notice 2017-10 designating syndicated conservation easement donations as “listed transactions.” The Government has alleged that the very makeup of a partnership for the purpose of conservation easement donations is wrong, which Judge Totenberg rightfully suggests is at odds with both the letter and intent of the statute. If the Court concludes that there is nothing inherently wrong in using partnerships for conservation easement donations, a key underpinning of the Government’s case collapses.

While we hesitate to conclude that Judge Totenberg’s pointed questions are already causing the Government to rethink its position on partnership conservation easement donations, we noted some interesting remarks from IRS Chief Counsel Michael Desmond during a June 27 interview.  Regarding conservation easements, Desmond said, “I think we would  like to think more generally about keeping cases out of litigation by giving good guidance on the front end so that things don’t end up in litigation, but if that happens, how do we figure out a way to get cases like that resolved over the longer term under terms that are acceptable to both taxpayers and the IRS.”  When asked by the interviewer about the road ahead for conservation easements, Desmond said:

So we need to figure out what the long term solution is.  It’s not litigating to trial and win 500 cases and then we start settling.  There’s obviously a middle ground there somewhere. So we’re trying to think generally about how to resolve those cases over the longer term – what that framework might look like.  But I think we want to think about that not just in the isolated context of the current cases but longer term – is there a way that we can think about streamlining the litigation process, the controversy process?  So all of that is something that’s underway.

Mr. Desmond’s remarks are hardly a full admission by the IRS that its position on syndicated conservation easements is wrong, but they are a welcome acknowledgement that the IRS needs to rethink its current approach. Likewise, it is encouraging to see the Court scrutinize this executive action by calling into question the Government’s basis for its injunction. For more on this issue, check out NTU’s issue brief: Shortsighted: How the IRS’s Campaign Against Conservation Easement Deductions Threatens Taxpayers and the Environment.