Navigating The Insurance Recovery Minefield For Syndicated Conservation Easement Transactions

I. Introduction

The IRS hopes the third (official) time will be the charm for its enforcement campaign targeting syndicated conservation easement transactions (SCETs). On May 13 the agency announced a new settlement initiative for eligible cases.¹ While the terms of the initiative are not novel, the announcement signals that the IRS plans to continue — and likely expand — its decade-long enforcement campaign. While it remains to be seen if the new initiative will be more successful than the IRS’s previous settlement offers, it will likely draw serious consideration from entities, investors, and tax counsel in light of the state of SCET litigation.

This settlement initiative, like the others that came before it, presents a unique set of issues for the hundreds of entities that purchased investor section 170(h) liability insurance policies in connection with an SCET. Considering recent case law on the valuation of conservation easements, the new initiative raises an urgent and practical question for those entities and their investors: When will their insurance policy pay out?

Recent litigation in state and federal courts shows that the answer is far more complicated than policyholders expected when they paid their premiums.² The litigation concerning coverage starts with a familiar scenario: The IRS disallows a section 170(h) deduction for an easement donation leading the donor to decide it wants to accept a certain, if painful, settlement rather than continue a long-odds fight with the IRS. But adding insurance carriers to the resolution process creates new uncertainty for policyholders and their investors. The resulting litigation between policyholders and insurance carriers depicts the recovery minefield that entities considering the new settlement initiative must navigate to successfully recover the proceeds of their insurance policies.

II. The New IRS Settlement Initiative

The IRS’s SCET enforcement campaign dates back to 2016, and the government’s increasingly aggressive enforcement steps have been well documented: from the issuance of the now defunct Notice 2017-10, 2017-4 IRB 544, which identified SCETs as “listed transactions,” to the IRS’s classification of SCETs as abusive tax avoidance schemes on its annual “Dirty Dozen” list, to the targeting of advisers and third parties who provided support for the easement donors, to the criminal prosecution of some sponsors and other parties. It is unsurprising that this campaign, which sought to audit 100 percent of SCETs, created a backlog of more than 1,000 cases that now bog down the Tax Court and the IRS’s administrative process.

On May 6 the IRS announced a new settlement initiative would be coming.³ The agency revealed the terms of the initiative on May 13 and is in the process of issuing settlement notices to eligible cases.⁴

This is the IRS’s third official attempt to resolve the SCET backlog.⁵ In 2020 it announced the first SCET settlement initiative, which applied only to cases docketed before the Tax Court. That initiative (1) disallowed the entire charitable contribution deduction, (2) allowed most investors an “other deduction” equal to their out of-pocket capital contributions, and (3) added a gross valuation misstatement penalty of 10 to 20 percent of any underpayment plus accrued interest.⁶ More recently, the agency launched the syndicated conservation easement resolution initiative (SCERI) in 2024 for nondocketed cases. The SCERI offered entities a formulaic resolution that (1) disallowed the entire claimed charitable contribution deduction, (2) allowed an “other deduction” equal to the investors’ out-of-pocket capital contributions, (3) imposed an imputed underpayment for the entity at a 21 percent tax rate, and (4) added a gross valuation misstatement penalty at 5 percent of the underpayment plus accrued interest.⁷

Under the newest initiative, eligible taxpayers will receive individualized letters from the IRS regarding the settlement.⁸ Once an entity receives its letter, the terms of settlement will depend on how quickly it acts. While the tiered settlement structure is unique, the actual terms are not.

A. First Window (0-90 Days From Issuance)

If the entity elects into the settlement during the initial period, the economic terms mirror those previously offered for docketed cases:

• disallowance of the charitable contribution deduction for the easement donation;
• allowance of an “other deduction” generally equal to the investors’ approximate out-of pocket costs (often based on cash contributed amounts reflected on Schedule M-2);
• application of a gross valuation misstatement penalty at a reduced rate of 10 percent; and
• accrual of interest as required by law.

This window begins on the postmark date or date of electronic transmission of the settlement letter and cannot be extended.

B. Second Window (91-135 Days From Issuance)

If the first window passes without action, a second 45-day window opens. The terms are generally the same as above, except that the gross valuation misstatement penalty increases to 20 percent. Like the first window, this window cannot be extended.

C. Third Window (136+ Days From Issuance)

After those two windows expire, the IRS has indicated that it will settle cases before a court decision only based on “hazards of litigation.” In practical terms, the agency is suggesting that this means a charitable contribution deduction of approximately 5 to 7 percent of the claimed deduction and application of a 40 percent gross valuation misstatement penalty.⁹

D. Payment Terms

Importantly, the liability from the settlement does not have to be paid at the time of the election or before settlement. Cases not yet docketed in Tax Court will be resolved by a closing agreement or a similar document, and docketed cases will be resolved by a stipulated decision. The ultimate payment of the liability will be determined based on the applicable audit regime, with cases involving 2017 and earlier tax years governed by the 1982 Tax Equity and Fiscal Responsibility Act, and cases involving 2018 and later tax years governed by the Bipartisan Budget Act of 2015.

E. Ineligible Cases

The settlement opportunity is not available in every case. While the IRS will determine an entity’s eligibility based on the case status and other case-specific considerations, the settlement notice confirms that it will not be available in cases that:

• have been tried and are awaiting an opinion;
• are on appeal to a U.S. Circuit Court of Appeals;
• have already settled (including settlements based on hazards of litigation, concessions, or cases in which no decision has been entered);
• have agreed to be bound to another case if the test case has been tried and is awaiting final decision;
• are designated as test cases, unless all bound cases have settled or agree to settle under this initiative; or
• had a trial set to commence before June 12.

As many practitioners and donors noted, the SCERI broke with the agency’s history of making settlement initiatives for alleged tax shelters progressively less favorable. While the first and second windows of the new initiative are still not as harsh for taxpayers as the 2020 initiative, the new initiative puts the IRS back on its normal path for settlement proposals by being less favorable than the SCERI. The tiered structure of the initiative similarly indicates that this may well be the last opportunity for taxpayers seeking to resolve their cases before trial on terms more favorable than the IRS’s view of the hazards of litigation, assuming the agency remains steadfast this time around.

III. Section 170(h) Insurance Litigation

Entities that purchased section 170(h) policies must evaluate not only whether the settlement terms are acceptable, but also — and perhaps more importantly — how those terms interact with their policy’s definitions and coverage triggers.

A. The Product and Its Purpose

An investor section 170(h) liability insurance policy is an indemnity-only product that covers certain losses arising from adjustments to an insured’s covered charitable contribution deduction. Typically, insurers underwrote these policies after extensive due diligence, which usually included a review of a private placement memorandum, appraisal reports, tax opinions, technical due diligence documents, prefeasibility studies, and corporate governance documents. Most of these policies were issued after 2016, meaning most were bound after the IRS issued Notice 2017-10 identifying SCETs as listed transactions. Simply put, insurers and their underwriters knew exactly what they were insuring: the risk that the IRS would challenge the deduction, reduce or eliminate it, and impose penalties and interest.

B. What to Expect From Insurers

While the SCERI was unsuccessful in resolving a large volume of cases because of the procedural limitations of the offer, several donors with section 170(h) policies elected into the SCERI and sought coverage from their carriers. Despite writing these policies to cover only one type of risk — adjustments to the claimed easement deductions — the resulting litigation shows that many carriers intend to throw the kitchen sink at policyholders to avoid their indemnity obligations. These cases shed light on how insurers will likely respond to claims under the new settlement initiative.

1. Delay, delay, delay.

Section 170(h) policies generally require the policyholder to seek the carrier’s consent before accepting a settlement. Insurers have taken contradictory positions regarding the effect of an entity’s election into a nonbinding settlement, with some claiming that consent is required and others indicating that a nonbinding election does not implicate the settlement consent provision.

But proactively seeking an insurer’s consent or coverage position does not resolve the problem. Instead, policyholders are frequently met with extensive information requests and demands for more investigation — such as hiring independent mineral experts, preparing independent appraisals, and fully preparing for trial — before the carriers can determine if a settlement offer is reasonable. These requests require significant back-and-forth with the carrier and force policyholders to compile extensive correspondence or other documentation on issues that are, at best, tangentially related to the proposed settlement. Some requests, like those for communications with tax counsel regarding trial strategy, force policyholders to choose between cooperating in the claims process and protecting their legal rights. Still other requests harken back to the early days of the IRS’s SCET enforcement campaign, as they appear targeted at identifying (or creating) procedural foot faults that the carrier may be able to exploit in a subsequent coverage dispute.

2. Deny coverage exists.

Perhaps the most conceptually significant defense insurers have raised so far is that IRS settlements do not create a covered loss under the policy. Although terms may vary, the policies generally define losses to include “damages, judgments and settlements incurred by an insured as a result of a wrongful act by such insured causing a reduction in tax savings to an investor by reason of an adjustment.”

In most instances, the flow-through nature of the IRS’s new initiative will result in a loss under the policy that exceeds policy limits. However, in some cases, insurers have asserted that payments under the settlement initiative are restitutionary — that the investors received tax benefits they were not entitled to and the settlement merely clawed back those improper benefits.

Alternatively, insurers have argued that there is no loss under the policy because of the IRS’s allowance of the “other deduction” equal to the investors’ capital contributions, ignoring the effect of marginal tax rates and the addition of penalties and interest to each investor’s liability.

3. Make resolution as expensive as possible.

Insurers of the section 170(h) policies have attempted to inflate the cost of resolving these matters by forcing cases into binding arbitration. Like most disputes, the choice of forum has significant strategic implications. Litigation provides policyholders with a clearer path to resolution, access to a jury, broader discovery rights, and the ability to develop precedent that can be used in other cases. Arbitration, on the other hand, significantly raises the cost for policyholders, as litigation reserves must first pay arbitration fees and the fees for up to three arbitrators, and any resulting decision is not binding on other cases. Compounding those costs, insurers have recently previewed their plan to fight any consolidation of these disputes or to consider other cost-saving alternatives.

The purpose of the carriers’ procedural fencing is clear. With policy limits estimated at well over $1 billion, insurers would rather that policyholders just give up on each potential settlement initiative, regardless of whether settlement might be the best option for the policyholder’s investors. Without a proactive plan considering both the coverage and tax issues inherent in a settlement, these tactics can leave policyholders and their investors frustrated with no certainty about their carriers’ position regarding coverage under each insurance policy.

IV. Conclusion

Insurers sold the section 170(h) insurance product to provide a measure of security for investors in SCETs — a safety net against the very IRS enforcement actions that those insurers knew were coming when they reviewed the private placement memorandum, appraisals, and tax opinions — and collected a substantial premium for coverage. But as recent litigation makes clear, policyholders face a minefield in getting from IRS disallowance to insurance recovery, with many procedural traps, definitional ambiguities, and aggressive insurer tactics along the way.

The new settlement initiative presents the same fundamental tension between entities and their investors that want to resolve their ongoing disputes in light of the unbroken chain of negative precedent, and insurers that insist the policies should not have to pay out despite the millions in premiums that policyholders paid for coverage. Entities that want to minimize this tension need to start managing the claims process today. Review your policy’s terms, and seek advice from experienced coverage counsel who understands the inner workings of section 170 and the recent Tax Court precedent. Taking these proactive steps now can help you and your investors sidestep the mines that lie along the path to recovery.

Footnotes

1 IR-2026-65

2 Arbor Creek Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv 00346 (N.D. Ga. 2025); Ashwood Gap Partners LLC v. Wesco Insurance Co., No. 25CV-1690-3 (Ga. Super. Ct. 2025); Bear Mountain Partners LLC v. Wesco Insurance Co., No. 25CV-1687-3 (Ga. Super. Ct. 2025); Birch Terrace Partners LLC v. Wesco Insurance Co., No. 25CV-1689-2 (Ga. Super. Ct. 2025); Blackjack Cove Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv 00347 (N.D. Ga. 2025); Bugwood Farms Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00343 (N.D. Ga. 2025); Camden Cove Partners LLC v. Wesco Insurance Co., No. 25CV-1690-3 (Ga. Super. Ct. 2025); Delta Ridge Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00345 (N.D. Ga. 2025); Dogwood Bluff Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv 00344 (N.D. Ga. 2025); Franklin Woods Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00341 (N.D. Ga. 2025); Governor Point Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00342 (N.D. Ga. 2025); Harvest Trails Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00340 (N.D. Ga. 2025); Hollow Oak Partners LLC v. Wesco Insurance Co., No. 25CV-1691-1 (Ga. Super. Ct. 2025); Indian Trails Partners LLC v. Wesco Insurance Co., No. 2:25-cv-00331 (N.D. Ga. 2025); Jackson Point Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00338 (N.D. Ga. 2025); Jones Crossing Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00339 (N.D. Ga. 2025); Liberty Mutual Insurance Europe SE v. Fishtail Creek Investors LLC, No. 4:25-cv-00195 (S.D. Ga. 2025); Marshall Point Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv-00336 (N.D. Ga. 2025); Parker Springs Partners LLC v. Wesco Insurance Co., No. 26CV-0777-3 (Ga. Super. Ct. 2026); Sunny Pines Partners LLC v. Fidelis Underwriting Ltd., No. 2:25-cv 00337 (N.D. Ga. 2025); Willow Bend Partners LLC v. Wesco Insurance Co., No. 25CV-1695-1 (Ga. Super. Ct. 2025).

3 See IRS, “Conservation Easements” (last updated May 6, 2026).

4IR-2026-65.

5 Many practitioners will recognize that the terms of this initiative, at least in the first stage, mirror the settlement offers that the Office of Chief Counsel started making to certain docketed cases in 2024. While that campaign was likely the most successful push to date to resolve SCET cases, the agency never announced it as an official settlement initiative.

6 IR-2020-130.

7 IR-2024-174.

8 While the IRS announcement specifies that the offer will be extended to “eligible partnerships,” most of the entities involved with SCETs are state law limited liability companies that are taxed as partnerships under the code.

9 In practice, the amount of the deduction allowed by the IRS in a “hazards” settlement generally seems to be the value of the conservation easement deduction as determined by the IRS’s trial expert and bolstered by recent Tax Court decisions on value, which have ranged from around 0.15 to 13.36 percent of the reported property value. See, e.g., North Donald LA Property LLC v. Commissioner, T.C. Memo. 2026-19, at 1; Seabrook Property LLC v. Commissioner, T.C. Memo. 2025-6, at 44-45.

Originally published by Tax Notes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.