On May 13, 2026, the IRS opened a new, time-limited settlement window for taxpayers caught in conservation-easement and historic-preservation-easement disputes (IR-2026-65). For partnerships and investors who have spent years in examination or in the Tax Court, it is the most concrete off-ramp the Service has offered in some time — and it runs on a short, individualized clock. The terms are decidedly better than what these cases have produced in litigation, but they are not generous, and the deadline is unforgiving.
The deduction, and the abuse the IRS is targeting
Section 170(h) allows a charitable deduction for a “qualified conservation contribution” — the donation of a qualified real property interest, typically a perpetual easement restricting development, to a qualified organization, exclusively for conservation purposes. The deduction generally equals the difference between the property’s value before the easement and its value afterward.
The abuse the IRS has pursued is the syndicated conservation easement: a pass-through entity acquires real property, places an easement on it, and allocates to its investors a charitable deduction built on a vastly inflated “before” valuation — frequently several times the cash the investors put in. The inflated appraisal is the engine of the shelter, and it is exactly what the before-and-after method is meant to police.
How the government got here
The IRS has been dismantling these deals for nearly a decade. It identified syndicated easements as listed transactions in Notice 2017-10, then weathered a wave of Administrative Procedure Act challenges — taxpayers argued, often successfully, that the Service had skipped notice-and-comment rulemaking (Green Valley Investors v. Commissioner, 159 T.C. 80 (2022), invalidating Notice 2017-10; following Mann Construction v. United States, 27 F.4th 1138 (6th Cir. 2022)). Treasury answered by issuing final regulations on October 8, 2024 that re-listed these transactions through proper rulemaking. Congress reinforced the attack in December 2022 by enacting § 170(h)(7), which disallows a partnership-level easement deduction to the extent it exceeds 2.5 times the partners’ basis — the bright line that now defines the abusive transaction.
The litigation record is lopsided. The IRS reports that the Tax Court has, on average, allowed only about 6% of the originally claimed deduction and sustained a 40% gross valuation misstatement penalty (§ 6662(h)) on participants. Prior settlement initiatives since 2020 resolved 405 cases, with roughly a third of offers accepted.
The new settlement terms
IR-2026-65 builds on those prior offers but sharpens the incentive with a tiered, time-limited penalty. Eligible partnerships receive an individualized settlement letter, and the clock starts on the date of that letter.
The core economics are the same throughout the window: the charitable contribution deduction is disallowed in full, and the partnership is allowed instead an “other deduction” roughly equal to its out-of-pocket costs (generally the cash contributed, as reflected on Schedule M-2). Interest accrues as required by law, but no payment is due at the moment the partnership elects in. Non-docketed Bipartisan Budget Act cases are resolved by closing agreement; docketed cases by stipulated decision. What changes over time is the penalty — 10% if the partnership settles within the first 90 days, 20% for the next 45, and, after day 135, no program at all: only a “hazards of litigation” resolution that the IRS says generally yields a deduction of just 5% to 7% and the full 40% penalty.
Who is eligible — and who is not
The offer is not open to everyone in an easement dispute; it reaches a defined set of partnerships, and the IRS controls who receives a letter.
| Eligible to settle | Not eligible |
|---|---|
| Partnerships with easement cases in the Tax Court that have not been tried or settled | Cases tried and awaiting an opinion |
| Partnerships still under IRS examination | Cases on appeal to a U.S. Circuit Court |
| Up to ~500 taxpayers whose prior settlement offers expired or were rejected | Cases already settled or conceded |
| Up to ~175 partnerships never previously offered an initiative | Cases bound to a test case already tried |
| Cases with trial set within 30 days of the announcement | |
| Designated test cases (unless all bound cases agree to settle) |
How the bill gets paid
Collection depends on the partnership-audit regime. For TEFRA cases — generally tax years 2017 and earlier — individual investors receive notices stating what they owe once the settlement is processed. For Bipartisan Budget Act cases — 2018 and later — the partnership itself is liable unless it elected to “push out” the adjustment to its partners; if the partnership cannot pay, the investors are billed.
Is it a good deal?
For most eligible partnerships, the honest answer is usually yes — not because the terms are kind, but because the alternative is worse. The deduction is gone either way: the Tax Court has been allowing roughly 6% and imposing a 40% penalty. Against that backdrop, conceding the deduction now for a 10% penalty, with no payment required to elect, is a materially better outcome than litigating to a near-certain loss at four times the penalty. Critics fairly note that the terms echo the IRS’s existing docketed-case settlement, and a partnership with a genuinely defensible valuation or a live procedural defense may rationally decline. But those are the exceptions — and the clock does not wait for deliberation.
The practical takeaway
Any partnership or investor with a live conservation-easement exposure should determine now — before a letter arrives or its clock runs — whether it is likely eligible, what its out-of-pocket “other deduction” would be, and how a 10% settlement compares to its litigation hazards and its real ability to fund a defense through appeal. The cost of that analysis is small; the cost of missing the window is the 40% penalty and a deduction cut to a handful of cents on the dollar.