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Tax Strategy: A syndicated conservation easement update

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The long efforts to put in place the enforcement mechanisms to attack syndicated conservation easements appear to at last be finalized. In October 2024, the Internal Revenue Service issued final regulations targeting syndicated conservation easements. The agency first started identifying claims for substantial conservation easement deductions by investors in syndicated partnerships back in 2016, and issued Notice 2017-10 identifying syndicated conservation easements as abusive and requiring reporting by participants. It also sought help from Congress to specifically disallow the abusive aspects of the transactions.

The syndicated conservation easement industry fought back. The industry won a court case on the basis that the notice issued by the IRS failed to meet Administrative Procedure Act requirements for notice and opportunity for comments. Lobbying efforts stymied the progress of congressional action and included efforts to strip the IRS of enforcement funds. Initial efforts to get taxpayers to accept settlement offers were frustrated by funds available for the defense of the transactions built into the deal structures.

The IRS has challenged $21 billion in deductions claimed by 28,000 syndicated conservation easement investors. Even the Land Trust Alliance, which administers traditional conservation easements, became concerned that the syndicated conservation easement activity would result in the complete loss of the conservation easement deduction. The IRS estimated that the number of syndicated conservation easement deductions grew from 249 deals in 2016, generating $6 billion in charitable deductions, to 296 deals in 2018 producing $9.2 billion in deductions. Traditional conservation easement deductions have resulted in around $1 billion in annual deductions.

Statutory action

After several years of frustration in getting Congress to address syndicated conservation easements, success was achieved with the enactment of Code Sec. 170(h)(7) in 2022. Code Sec 170(h)(7) provides that a contribution by a partnership is not treated as a qualified conservation contribution if the amount of such contribution exceeds 2.5 times the sum of each partner’s interest in the partnership. Exceptions are provided for three-year holding periods, contributions made by family pass-through entities, and contributions made to preserve a certified historic building. Reporting requirements apply to partnerships, S corporations, and other pass-through entities. The statute does not apply retroactively, but only to contributions made after Dec. 29, 2022.

Final regulations

In order to overcome the APA challenges to the syndicated conservation easement notice, the IRS began a process of issuing proposed regulations to meet APA requirements. In November 2022 the IRS issued proposed regulations that disallowed deduction for syndicated conservation easement transactions made by a partnership or an S corporation after Dec. 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner’s or S corporation shareholder’s relevant basis. The regulations also imposed new reporting requirements for the members of the entity who are seeking a deduction based on the transaction — IRS Form 8886, “Reportable Transaction Disclosure Statement.”

The final regulations were issued on Oct. 7, 2024, and are effective Oct. 8, 2024. They address three specified classes of abusive syndicated conservation easement transactions and substantially similar transactions:

1. Transactions involving contributions occurring before Dec. 30, 2022;
2. Transactions for which a charitable contribution deduction is not automatically disallowed by Code Sec. 170(h)(7); and,
3. Transactions that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.

The final regulations generally adopt the 2022 proposed regulations with clarifications of the meanings of the terms “substantially similar transactions,” the 2.5 times rule, “conservation easement,” and “participant.” The final regulations also clarify that participants and material advisors must report syndicated conservation easement transactions to the IRS that were completed in tax years that are still open. It is possible that taxpayers could be subject to both the requirements of Code Sec. 170(h)(7) and the final regulations.

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A man walks a dog near a wetland conservation area

Lam Yik/Bloomberg

Settlement offers

The IRS initiated its third settlement offer to try to dispose of many of the audits before it in June 2024. The earlier settlement offers had only limited success. However, the final regulations and growing success in the courts may push more syndicated deals into settlement. Only taxpayers who receive a settlement offer letter from the IRS are eligible for the settlement offer. The settlement offers have typically involved agreeing that the deduction for the contribution be disallowed in full; all partners must agree to settle; the partnership must pay the full amount of tax penalties and interest before settlement; partners can deduct the cost of acquiring partnership interests; and penalties can range from 10% to 20% for investor partners and up to 40% for partners active in the transaction. The settlement offers require the cooperation of partners during the resolution of the issue.

It may be difficult for some partnerships to get the consent of all partners in a deal to participate in the settlement and to be willing to cooperate in the resolution.

Criminal and civil enforcement

With Code Sec. 170(h)(7) in place, as well as now the final regulations, the Tax Court has set aside APA concerns and started to deny overvaluation of conservation easements. For example, in Mill Road 36 Henry LLC v. Commissioner, U.S.T.C. Oct. 26, 2023, the court limited the LLC’s deduction to its tax basis and added an accuracy-related penalty. A circuit court case has also rejected the claimed deductions.

Some of the key promoters of syndicated conservation easements, as well as one of the appraisers utilized by the promoters, have been convicted of fraud and falsification of documents and some have already received substantial prison sentences.

Summary

The tools now seem to be in place to curtail the syndicated conservation easement industry. There remains a lot of work for the IRS to resolve all of the transactions still under audit. It remains to be seen how helpful settlement offers will be in disposing of some of these audits.

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IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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