Looking for opportunities to reduce tax liability is common. There is nothing wrong with seeking to reduce tax exposure. The late Judge Learned Hand is famous for a commonly quoted opinion from the Second Circuit Court of Appeals, saying:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”[1]
In this writing, I intend to discuss transactions that could be thought of as a middle ground in the spectrum of tax planning strategies. Certain tax planning structures may be facially permissible under the literal text of the Internal Revenue Code, yet they are utilized in a manner the IRS characterizes as abusive. Broadly speaking, the IRS identifies certain tax planning transactions that it views as raising concern as “reportable transactions.” Taxpayers and their material advisors (as defined under the relevant authorities) are required to disclose their participation in such transactions.[2] There are five types of reportable transactions:
- Listed Transactions: An arrangement the IRS has determined to be an abusive tax avoidance scheme or one that is substantially similar to any such strategy.
- Confidential Transactions: A transaction offered to taxpayers under conditions of confidentiality where certain minimum fees have been paid to the advisor.
- Transactions with Contractual Protections: Transactions where a taxpayer has a right to a full or partial refund of fees if the intended tax results are not met, i.e. the advisor’s fees are contingent upon the tax results.
- Loss Transactions: A transaction where a taxpayer claims a loss under IRC § 165 meeting certain monetary thresholds.
- Transactions of Interest: These are transactions the IRS believes to have the potential for abusive tax avoidance, but the IRS lacks sufficient information or data to designate the planning as a listed transaction (the primary difference being applicable penalties and effect on the statute of limitations).
As stated above, participation in a reportable transaction triggers reporting obligations. Penalties apply for failure to comply with those reporting obligations. Also, higher level penalties apply to underpayments of tax attributable to reportable transactions than otherwise. Here, I focus on listed transactions which have some of the most onerous consequences for taxpayers.
Listed Transactions
Listed transactions (and those that are substantially similar) are the reportable transactions with the highest level of consequences for taxpayers. Historically, the IRS has often identified listed transactions by issuing a Notice outlining the relevant transaction.[3] However, courts have somewhat recently held that IRS Notices identifying listed transactions may be invalid if issued without compliance with applicable Administrative Procedure Act requirements.[4] Regardless of how listed transactions are designated by the IRS, such designation has meaningful consequences for taxpayers.
Treasury regulations generally require a taxpayer that has participated in a reportable transaction to file Form 8886, Reportable Transaction Disclosure Statement, with its federal income tax return for each taxable year in which participation occurs, and to send a copy of that form to the IRS Office of Tax Shelter Analysis.[5] Proper disclosure does not eliminate scrutiny, but the failure to disclose can itself trigger a stand-alone penalty regime even apart from the ultimate merits of the underlying tax position.[6]
If the taxpayer properly discloses the listed transaction, the transaction remains subject to potential IRS examination and challenge, and any resulting understatement may still be penalized. In particular, taxpayers remain subject to an accuracy-related penalty on any reportable transaction understatement.[7] The general rate is 20% where the transaction is adequately disclosed.[8] However, if the taxpayer fails to disclose a listed transaction as required, the consequences are materially more severe.
First, taxpayers may be subject to a separate penalty for failure to include required information with respect to a reportable transaction.[9] For listed transactions, the penalty is generally 75% of the decrease in tax shown on the return as a result of the transaction, subject to statutory minimum and maximum amounts.[10] In the case of a listed transaction, the minimum penalty is $5,000 for an individual and $10,000 for any other taxpayer, while the maximum penalty is $100,000 for an individual and $200,000 for any other taxpayer.[11] This penalty applies by reason of the disclosure failure itself and is not dependent on the IRS fully prevailing on the merits.
Second, nondisclosure increases the rate for accuracy related penalties on understatements.[12] Where a reportable transaction understatement is attributable to a transaction that was not adequately disclosed, the penalty rate increases from 20% to 30%.[13] In practical terms, that means a taxpayer that fails to disclose may face both the separate disclosure penalty and the higher understatement penalty if the transaction also results in an underpayment of tax.
Third, failure to disclose a listed transaction also may affect the statute of limitations. If a taxpayer does not furnish the information required under the reportable transaction disclosure rules, the statute of limitations for assessment may remain open for a longer period.[14] This creates ongoing uncertainty and extends the window during which the IRS may examine the transaction and propose adjustments. In the end, proper disclosure may not prevent an audit, but failure to disclose can significantly prolong exposure.
There are also collateral considerations beyond the taxpayer’s own filing obligations. Material advisors with respect to listed transactions have separate disclosure and list maintenance obligations, including filing Form 8918 and maintaining lists of advisees and other required information.[15] A material advisor that fails to comply may face substantial penalties, including penalties for failing to file the required disclosure and for failing to provide the required list upon IRS request.[16] Although those rules do not directly impose liability on the taxpayer, they can increase the likelihood that the IRS will identify and examine the transaction.
Syndicated Conservation Easement Transactions
A current example, syndicated conservation easements, illustrates how these rules operate in practice and provides a listed transaction that may arguably be substantially similar to other transactions promoted in the marketplace. The purpose of this writing is not to discuss the good or bad of syndicated conservation easement transactions, outline the arguments for/against the intended tax results, update on the outcome of the ongoing voluminous litigation, or summarize the recently updated IRS settlement offer. Rather, I raise syndicated conservation easements here because they both are illustrative of IRS action on what they perceive to be an abusive transaction and are consistent with other transactions that are being proposed in the market (which could be considered substantially similar as discussed below).
In 2024, the IRS finalized regulations designating syndicated conservation easements as listed transactions.[17] Those regulations identify four steps of the listed transaction[18]:
- A taxpayer receives promotional materials that offer investors in a pass-through entity the possibility of being allocated a charitable deduction which equals or exceeds 2.5 times the amount of the taxpayer’s investment;
- The taxpayer acquires an interest in the pass-through entity that owns or acquires real property;
- The pass-through entity contributes a conservation easement on its real property and allocates a charitable contribution deduction to the taxpayer; and
- The taxpayer claims a charitable contribution deduction with respect to the contribution of the real property interest on the taxpayer’s Federal income tax return.
As can be seen, the nature of the transaction is fairly simple. A taxpayer invests in a pass-through entity (a tax partnership) which then places a conservation easement on the entity’s real property resulting in a charitable deduction for the taxpayer at least 2.5 times the taxpayer’s investment. The 2.5 multiple is important because that approximates when investment in the easement fund is likely to create “profit” for the taxpayer from the charitable deduction. As an example, if $100,000 is invested and a $250,000 deduction is obtained, then that deduction results in $92,500 of tax savings at the current top federal income tax rate of 37%. Much more than that 2.5 multiple and the taxpayer has experienced a net economic gain from the transaction, realized through a charitable deduction based largely on the value of the relevant property interests. Clearly, the IRS strongly disfavors transactions structured primarily to generate an immediate net economic profit solely through tax deductions especially when that net gain may be realized with what the IRS would argue to be inflated valuations.
Substantially Similar Transactions
Any transaction that is “substantially similar” to a listed transaction is subject to the same disclosure obligations and consequences as the actual listed transaction.[19] The listed transaction regulations describe “any transaction that is expected to obtain the same or similar types of tax consequences that is either factually similar or based on similar tax strategy” as being “substantially similar” to the listed transaction.[20] “The term substantially similar must be broadly construed in favor of disclosure.”[21] As such, merely because a transaction is not identical to the actual listed transaction does not mean a taxpayer is exempt from the disclosure burdens and other consequences of having entered into a listed transaction.
Promoters package transactions in many ways to generate claimed tax savings. Recently, there have been a number of planning structures marketed involving charitable donations of non-cash assets. This has become so prevalent that the IRS has included “non-cash assets charitable contribution schemes” in its annual Dirty Dozen.[22] The IRS has particularly targeted donations of art.[23] In that release, the IRS mentions more than 60 audits completed “with more in the works.” IRS representatives have informally raised concerns with donations of medical equipment in exchange for charitable deductions.
I raise art donations, donations of medical equipment, or donations of other non-cash assets here due to the “substantially similar” consideration. If a taxpayer receives promotional materials indicating that investment in a pass-through entity which will donate non-cash assets to charity results in a charitable deduction at least equal to 2.5 times the taxpayer’s investment, is that substantially similar to a syndicated conservation easement, especially when substantially similar is to be broadly construed? If a transaction uses similar mechanics to generate similar tax benefits, taxpayers should assume the IRS may view it as substantially similar.
In my experience, promoters sometimes claim that a strategy not materially different from a listed transaction that is intended to produce near identical tax results (i.e. a charitable deduction yielding a net gain for the investor), is not substantially similar, for example merely that it does not involve real property or the granting of an easement, and, therefore, does not necessitate disclosure.[24] Especially in light of the significant consequences for failing to disclose a listed transaction, it would seem that taxpayers should err on the side of caution by disclosing transactions that arguably could be substantially similar even if there are credible grounds otherwise. When promoters strongly argue against doing so when there are significant common elements, I believe that raises serious questions about the credibility of the promoter.
Conclusion
To be clear, just because the IRS believes a transaction to be abusive does not mean courts or Congress will agree.[25] After all, many of these transactions rely on Congressionally sanctioned structures, merely handled in a way the IRS believes to go beyond what is permissible. Likewise, even if many promoters and taxpayers have used a structure abusively that does not mean that everyone using that structure is doing so abusively. However, care should be taken and diligence should be exercised.
Taxpayers can understandably be drawn to strategies that promise substantial tax mitigation, particularly in high-income brackets. Legitimate tax planning and abusive tax shelters often appear indistinguishable to those without specialized legal training. Illegitimate tax planning is often promoted by individuals with tax credentials. Therefore, how is a taxpayer to know whether to engage in a proposed planning opportunity? In short, caveat emptor applies, or, in layman’s terms, buyer beware.
Rather than quickly jumping into a tax planning structure that is purported to generate significant tax savings, even ones promoted by qualified tax professionals, become informed. Engage independent tax advisors to review the potential transaction, evaluate whether it is a listed transaction (directly or as being substantially similar), consider disclosure, and avoid reliance on promoter assurances. Taxpayers also have to be conscious about their own risk tolerance and the stress an audit of a transaction may put on them. The consequences of buying into many of these transactions and listening to advice not to disclose can be significant.
[1] Gregory v. Helvering, 69 F.2d 809 (2d Cir. 1934).
[2] IRC § 6011 and Treas. Reg. § 1.6011-4; IRC § 6111 and Treas. Reg. § 301.6111-3. When required, this reporting is made by taxpayers on IRS Form 8886 and by their material advisors on IRS Form 8918. In addition, under IRC §6112 and Treas. Reg. § 301.6112-1, material advisors must maintain certain information to be furnished to the IRS upon request.
[3] See, e.g., Notices 2000-44, 2001-16, 2002-21, 2016-66, 2017-10.
[4] See Mann Constr. Inc. v. U.S., 27 F.4th 1138 (6th Cir. 2022); Green Rock, LLC v. Internal Revenue Serv., 104 F.4th 220 (11th Cir. 2024); Green Valley Invs., LLC, 159 T.C. 80 (2022); CIC Servs., LLC v. Internal Revenue Serv., 592 F.Supp. 3d 677 (E.D. Tenn. 2022).
[5] Treas. Reg. § 1.6011-4(d) and (e).
[6] IRC § 6707A; Treas. Reg. § 1.6011-4.
[7] IRC § 6662A.
[8] Id.
[9] IRC § 6707A.
[10] IRC § 6662A(c).
[11] IRC § 6707A(b)(2)(A).
[12] IRC § 6662A.
[13] Id.
[14] IRC § 6501(c)(10).
[15] IRC §§ 6111, 6112; Treas. Reg. § 301.6111-3; Treas. Reg. § 301.6112-1.
[16] IRC §§ 6707, 6708.
[17] Treas. Reg. § 1.6011-9. I note here that the IRS had previously designated syndicated conservation easements as listed transactions by Notice 2017-10 which was later invalidated. See supra Note 4, especially Green Valley Investors, LLC, 159 T.C. 80 (2022). More recently, syndicated conservation easements providing a deduction of more than 2.5 times each partner’s basis (typically the amount invested) are completely disallowed, essentially shutting down syndicated conservation easements as a viable tax planning strategy. IRC § 170(f)(19).
[18] Treas. Reg. § 1.6011-9(b).
[19] Treas. Reg. § 1.6011-4(b)(2).
[20] Treas. Reg. § 1.6011-4(c)(4).
[21] Id. See also Interior Glass Sys. v. U.S., 927 F.3d 1081 (9th Cir. 2019); Repetto, T.C. Memo 2012-168; Turnham v. U.S., 383 F. Supp. 3d 1288 (M.D. Ala. 2019).
[22] https://www.irs.gov/newsroom/dirty-dozen-tax-scams-for-2026-irs-reminds-taxpayers-to-watch-out-for-dangerous-threats
[23] “IRS Warns Taxpayers of Improper Art Donation Deduction Promotions: Highlights Common Red Flags,” IR-2023-185. https://www.irs.gov/newsroom/irs-warns-taxpayers-of-improper-art-donation-deduction-promotions-highlights-common-red-flags
[24] Here, I note that, especially after Loper Bright Enters. V. Raimondo, 603 U.S. 369 (2024), taxpayers may have more success in challenging regulations designating a listed transaction as well as a transaction being substantially similar. See, also Drake Plastics Co. v. Internal Revenue Serv., 2026 WL 1021379 (S.D. Texas April 15, 2026).
[25] See, e.g., Summa Holdings, Inc. v. Comm’r, 848 F.3d 779 (6th Cir. 2017).
