Have a Conservation Easement Dispute? The IRS Has Opened a New Settlement Opportunity

In an important recent development, the Internal Revenue Service (the “IRS”) announced last week the terms of a limited settlement opportunity for taxpayers involved in conservation easement or historic preservation easement disputes with the agency. Today, there are over 1,100 conservation easement cases (around 740 docketed cases in Tax Court and 400 cases in examination), but under this new initiative, nearly 450 cases will no longer be required to make an upfront payment of the settlement amount, and instead the liability will be subject to post-settlement collection.  Furthermore, as many as 500 cases where prior settlement offers expired or were rejected by the taxpayer will have the renewed ability to settle their cases.

IRS Conservation Easement Settlement Program Terms

The tax law allows a deduction for property owners who relinquish certain rights in land or buildings to preserve those properties for future generations.  Over time, however, the IRS and the courts have identified associated abuses, leading to legislative changes, enforcement actions, and civil and criminal judgments.  In recent litigation, the government has consistently prevailed, as on average, the Tax Court has only allowed 6% of the original claimed deduction and has generally imposed a 40% gross valuation misstatement penalty, plus interest.

Now, with this settlement initiative, eligible partnerships will receive individualized correspondence, to be issued on a rolling basis from the IRS, setting forth their specific settlement terms.  For a period of ninety days after the issuance of a settlement letter, the following terms will be available to an eligible partnership: (1) no charitable contribution deduction will be allowed; (2) an “other deduction,” in an amount determined by the IRS (generally equal to the partnership’s approximate out-of-pocket costs, typically based on cash-contributed amounts reflected on Schedule M-2), will be allowed; (3) a gross valuation misstatement penalty will apply at a rate of 10%; (4) interest will accrue as required by law; (5) the partnership will not be required to make payment at the time it elects into the initiative; (6) non-docketed Bipartisan Budget Act (“BBA”) cases will be resolved by closing agreement or similar document; (7) docketed cases will be resolved by stipulated decision; and (8) no extension of the ninety-day period will be available.

For a period of forty-five days following the close of the initial ninety-day period, eligible partnerships may settle on generally the same terms, except that the gross valuation misstatement penalty will apply at a rate of 20%.  No extension of the former period will be available.  The applicable time period will begin on the postmark date or date of electronic transmission, and each letter will specify the applicable deadlines.  After the expiration of the two periods, totaling 135 days from the date of issuance of the individualized settlement letter, cases will be resolved before a court decision only on the basis of hazards of litigation, which will usually reflect a charitable contribution deduction of approximately 5% to 7% of the claimed deduction and a 40% gross valuation misstatement penalty.

Importantly, this settlement opportunity is not available in conservation easement or historic preservation easement cases that:

1. Have been tried and are awaiting an opinion;

2. Are on appeal to one of the United States Circuit Courts of Appeals.

3. Have already settled;

4. Have agreed to be bound to another case if the test case has been tried and is awaiting final decision.

5. Have a trial that is set to commence within thirty days of the May 13, 2026 IRS announcement outlining this settlement program.

6. Are designated as test cases, unless all bound cases have settled or agree to settle under this initiative.

In cases governed by the Tax Equity and Fiscal Responsibility Act (generally involving tax years 2017 and earlier), taxpayers should expect to receive IRS notices stating the amount owed by each investor, which will be sent following IRS processing after the settlement is reached.  In cases governed by the BBA (generally involving tax years 2018 and later), if the partnership did not elect to push out the liability, the partnership will be responsible for payment, but if the partnership is unable to pay, investors will receive notices from the IRS stating the amounts owed as a result of the settlement adjustments.  If the partnership elected to push out the liability, the partnership must furnish statements to investors and the IRS describing the adjustments and amounts being pushed out, and investors must take those adjustments into account accordingly.

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Len Sprishen, J.D., LL.M.

Len Sprishen is a Partner at Schulman Lobel Advisors, LLC, where he advises individuals, partnerships, and businesses on complex tax matters, IRS controversies, tax compliance, and emerging tax legislation. With advanced degrees in law and taxation, Len helps clients navigate sophisticated tax issues with practical, strategic guidance tailored to their unique circumstances.

Questions About the IRS Conservation Easement Settlement Initiative?

Taxpayers involved in conservation easement or historic preservation easement matters should carefully evaluate the opportunities and deadlines associated with this new IRS settlement program. Whether you are currently under examination, involved in litigation, or evaluating available resolution options, understanding the potential impact of this initiative is critical.

Contact Len Sprishen or your Schulman Lobel advisor to discuss how this settlement opportunity may affect your specific situation.

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