SCE Settlements: Benefits and Considerations for Investors

SCE Settlements for Investors

In an attempt to reduce litigation and potentially help taxpayers, the IRS has offered settlements to qualifying investors of syndicated conservation easements (SCE). The agency began sending out letters to qualifying taxpayers in June 2024. If you have received a settlement offer, you have limited time to accept it, and you should consider consulting with an attorney about the pros and cons of this decision.

If the IRS has not offered you a settlement, you still face a high audit risk and possible criminal exposure for your SCE-related deductions. To get guidance on SCE investments, charitable deductions, settlements, and legal cases, contact us at Wiggam Law today.

Our SCE attorneys can answer your questions, help you negotiate with the IRS, and represent you in Tax Court if needed.

Benefits of the IRS’ Settlement Offer

The IRS’ SCE settlement offers significant benefits to taxpayers. If they decide to accept the settlement, they get to retain part of their deduction, face reduced penalties, and bring closure to the situation. The terms vary slightly for taxpayers with docketed vs. non-docketed cases, but the terms for both are generally favorable compared to many recent decisions reached in the United States Tax Court. Here are more details on the benefits.

Deduction Allowed for Cost

The IRS has offered investors the chance to retain a deduction related to their cost basis. In contrast, many valuation-focused cases that the Tax Court has recently decided have reduced their deductions by more than 90%.

Some deductions were disallowed entirely in cases where the IRS was able to rely on criteria other than valuation. Taxpayers who qualify for this offer can ensure that they don’t lose the entirety of their deduction. At the very least, they will still be able to claim a deduction equal to the cash they contributed.

Reduced Penalties

Taxpayers who accept the settlement will still incur a penalty, but it’s significantly lower than the penalty incurred by investors who’ve had their deductions significantly reduced or disallowed in Tax Court. The settlement includes a penalty of 10% of the underreported tax for docketed cases and a 5% penalty for undocketed cases. In contrast, many Tax Court cases have led to 40% gross valuation misstatement penalties and, less commonly, 75% civil fraud penalties.

When you’re dealing with an understatement worth millions of dollars, this saves a significant amount of money. Taxpayers save between $200,000 and $350,000 for every million in underreported income compared to a valuation misstatement penalty. The settlement penalties are also lower than fraud penalties to the tune of $550,000 to $700,000 per million of unreported income.

Lower Tax Rates for Nondocketed Cases

Unfortunately, investors with docketed cases who accept the IRS’ offer will have to pay tax at their individual income tax rates, which can be as high as 39.6%. Investors with non-docketed cases, however, will enjoy the corporate tax rate on their unreported income. As long as all of the partners agree to the settlement, the partnership will pay the 21% corporate rate, which is significantly lower than the top individual income tax rate.

Predictability

Investors who accept an offer can figure out exactly what they owe the IRS, and they can make plans to get back into compliance. They don’t have to worry about what portion of their deduction the Tax Court will allow or disallow. They don’t have to worry about excessive penalties. They don’t have to deal with the unpredictable nature of litigation. Instead, they can simply focus on dealing with the tax liability.

Considerations for Investors Thinking About SCE Settlements

You should consult a knowledgeable tax attorney before accepting the IRS’ settlement offer. They can talk with you about your unique case and help you make the right decision for your situation. Although there are a lot of similarities between most SCE investments, there are also a lot of nuances, and before moving forward, you should get guidance about your specific situation. Here are some of the elements you may want to consider:

Revised Settlement Offers

The 2024 SCE settlement offers are likely to be the last offers extended to taxpayers with currently active cases. Still, the IRS may offer another more appealing settlement for investors in the future.

The IRS offered a SCE settlement in 2020. That settlement also disallowed the charitable easement contribution deduction, allowing investors to deduct their costs. However, it had slightly higher penalties for investors than the IRS’s latest settlement offer.

In 2020, the IRS offered SCE investors settlement penalties of 10 or 20%. Partners who provided services or helped promote the syndication of the easement were offered a 40% penalty as part of this offer. The 2024 offer, as discussed above, limited penalties to 5 or 10%. The fact that the newest offer is a bit more appealing has created skepticism in some circles, but when dealing with this type of case, you want to avoid making emotion-based decisions and be sure that you work with an attorney who can help you make a well-informed choice.

Single Payment

The newest settlement offer requires partners to pay the delinquent tax in a lump sum, and if the partnership is not able to raise the funds, the offer is not available. Unfortunately, if one or more partners disagree with the settlement, there is no effective way to force them to contribute capital.

Most limited partnerships do not have the authority to require partners to contribute capital. In this situation, the recourse would generally be to dissolve that partner’s interest, which is not an effective deterrent.

In the case of partners that refuse to participate in the settlement, the remaining partners have two options. They can contribute a larger payment so that the partnership can accept the IRS’s offer and avoid litigation. Or they can move forward without accepting the offer and put their fate in the hands of their attorney and the Tax Court.

The Full Cooperation Requirement

The IRS’ SCE settlement offer requires all partners to cooperate fully with the IRS during the resolution process. Being cooperative includes providing the IRS with the information its auditors and examiners requested. However, if the information implicates the partners in criminal activities, they may want to assert their Fifth Amendment rights, and unfortunately, the settlement offer is not clear on whether or not these types of assertions will cause the IRS to reject the settlement.

Risk of Criminal Prosecution

Unfortunately, the settlement does not prevent the IRS from investigating criminal activity or recommending criminal prosecution of any individual or entity involved in the transaction. However, as indicated above, if you agree to pursue the settlement, you also agree to cooperate and provide information, and this creates a contradiction where you may implicate yourself or others depending on the situation. Again, this is why it’s critical to consult with an attorney.

At Wiggam Law, we have experience helping investors, landowners, and other taxpayers deal with syndicated conservation easements on all kinds of different levels. If you need guidance with these complicated investments, are considering a settlement, or need representation for a legal case, contact us today. We will work with you to get the best result for your case. Schedule a consultation with our team or call us at (404) 233-9800.