Thought-provokinganalysis and opinion on federal tax issues

Conservation Easement Partnerships

June 26, 2020

by Monte A. Jackel

The IRS recently publicly disclosed a settlement offer to conservation easement partnerships. The announcement disclosed the general terms of the offer. Among the terms was that all partners have to agree, the deduction is disallowed, penalties are imposed but the investor partners can write off the acquisition cost of the investment. See

There are several possible technical points relating to the partnership rules which could arise under this settlement. Only by seeing the actual terms of the settlement offer can one know for sure.

(1) The Internal Revenue Code grants sole power to act on behalf of the partnership to the partnership representative under section 6223. Therefore, is requiring all partners to consent actually necessary or even possible? A closing agreement can change the Internal Revenue Code if each partner signs but is this the appropriate process? See, also, 301.6223-2. And what if the partnership is not subject to the BBA rules but TEFRA or the regular Code rules?

(2) If the cost of the partnership interest to “investors” is allowed as a deduction to the partner, that cost of acquiring the partnership interest may exceed the partner’s basis in his partnership interest at time of settlement. The tax basis of the donated easement reduced the outside basis (the excess of value over basis did not reduce outside basis) and will be added back upon disallowance, but other items could cause a variance between actual outside basis and the share of basis of the donated conservation easement. What then?

(3) What about partner capital accounts? There could be a divergence there too. Tiered partnerships make the process harder.

(4) The closing agreement is going to have to also specify that the write off is not a disallowed miscellaneous itemized deduction. Etc., etc.

(5) A closing agreement, which the settlement offer will be incorporated into I assume, can say whatever the IRS and the taxpayer agree to. My questions on partnership mechanics can either be dealt with in the closing agreement for the most part or just ignored and “figure it out later”. I don’t recommend the latter. I have seen the IRS do both.

(6) What I don’t think can be cured by a closing agreement is whether the proper party is signing for the taxpayer on the form 906. Is it the partners or the partnership representative if a BBA partnership? A TEFRA partnership? An electing large partnership? A regular non-TEFRA non-BBA partnership? I would expect either TEFRA or BBA is most likely.

(7) If other than cash was contributed to the partnership, there may also be section 704(c) or 737 or 731(c) issues.

(8) If a state tax income tax or property credit was allowed for the donation, you could also have disguised sale issues under reg. 1.707-3 and 707-6.

(9) Is the closing agreement publicly disclosable? I think that the closing agreement cannot be disclosed even with redactions, although you could debate that some form of it could be released to the public. But it is a private contract. Also, it is not a section 6110 disclosable item. And even if it was, it would be too taxpayer specific to disclose I think.