The United States Tax Court’s recent memorandum opinion in Arden Row Assets, LLC v. Commissioner, T.C. Memo. 2025-71, offers critical insights for tax professionals navigating settlement discussions, particularly in the context of syndicated conservation easement transactions and the Bipartisan Budget Act of 2015 (BBA) partnership audit rules. This case underscores fundamental principles of contract law applied to tax settlement agreements, emphasizing the importance of clear mutual assent, adherence to prescribed acceptance methods, and proper authority under the BBA.

Factual Background

Arden Row Assets, LLC (Arden Row), which is treated as a partnership for federal tax purposes and subject to BBA procedures, claimed a substantial noncash charitable contribution deduction of $57,080,000 for a conservation easement donated in its short 2018 taxable year. The Commissioner of Internal Revenue (Respondent) disallowed this deduction in its entirety.

Arden Row’s partnership representative is Natural Aggregates Partners, LLC (Natural Aggregates), with Matthew S. Kaynard as its designated individual. Natural Aggregates is owned by Matthew Ornstein and Frank Schuler, real estate professionals who, from 2012 to 2018, promoted and implemented approximately 138 syndicated and nonsyndicated conservation easement transactions. Natural Aggregates was specifically formed in 2018 for nonsyndicated conservation easement transactions, and Messrs. Ornstein and Schuler owned nearly all partnerships used for donations in these nonsyndicated deals.

The Arden Row transaction itself involved an entity, Underwood Assets, LLC, contributing 208.04 acres of real property to Arden Row for a 100% interest on December 11, 2018. Three days later, Natural Aggregates acquired a 98% interest in Arden Row. Arden Row’s 2018 Form 1065, U.S. Return of Partnership Income, showed cash capital contributions of $110,900 on its Schedule M–2, Analysis of Partners’ Capital Accounts.

Settlement discussions for the numerous Ornstein-Schuler cases, including Arden Row, were ongoing. The Internal Revenue Service (IRS) had previously announced a settlement initiative in 2020 for syndicated conservation easement cases, which generally involved disallowing the easement deduction, allowing deductions for investor out-of-pocket costs, and reducing penalties to 10-20% (or conceding them if supervisory approval under Internal Revenue Code Section 6751(b) was not established). Importantly, Category One partners—those who organized, marketed, or implemented the transactions, such as Messrs. Ornstein and Schuler—were not eligible for out-of-pocket cost deductions under this initiative.

A significant development arose when Welty PC, counsel for petitioner, learned that IRS personnel might have backdated a supervisory penalty approval form in another easement case, LakePoint Land II, LLC v. Commissioner. The Tax Court subsequently issued an opinion in LakePoint, holding that the form was indeed backdated and that the Commissioner was subject to sanctions. Following this, the LakePoint case settled, with the easement deduction disallowed, investor out-of-pocket costs allowed (using the investment-tier partnership’s Schedule M–2 as an approximation for administrative convenience), and all penalties conceded.

In October 2023, after respondent conceded penalties in the Arden Row case due to potential noncompliance with Section 6751(b), the National Office decided to propose settlements in Arden Row and other Ornstein-Schuler cases, allowing deductions for investor out-of-pocket costs while disallowing the easement deductions. The IRS used a template letter for these proposals, which instructed attorneys to "ADD AMOUNT FROM SCHEDULE M–2, CAPITAL CONTRIBUTED (CASH) LINE" of the investment-tier partnership. This template was specifically intended for syndicated easement cases.

On October 24, 2023, respondent sent a settlement proposal to petitioner’s counsel that incorrectly described the case as involving a "syndicated conservation easement transaction". The proposal offered to:

Disallow the $57,080,000 charitable contribution deduction.
Allow an "other deduction" of $24,586,319, stating this amount "approximates out-of-pocket costs (i.e., the estimated amount partners paid for their interest in an investment-tier partnership)" and was determined by reference to Natural Aggregates’ (the investment-tier partnership) Schedule M–2.
Concede all penalties due to noncompliance with Section 6751(b).
Require that "Respondent and Petitioner agree to resolve this case by filing a decision document".

Crucially, petitioner’s attorneys, including Mr. Johnson and Mr. Norman of Welty PC, recognized that the $24,586,319 figure was incorrect for Arden Row, as it was a nonsyndicated transaction with no outside investors. They knew Natural Aggregates owned eight entities and that the $24,586,319 amount represented Natural Aggregates’ contributions to all eight entities, not just Arden Row. Mr. Welty also knew respondent had made a mistake in determining Natural Aggregates’ investor out-of-pocket costs for the Arden Row transaction.

Mr. Welty informed Mr. Schuler of the proposed $24,586,319 deduction, and Mr. Schuler authorized acceptance. However, Mr. Welty did not inform Mr. Schuler that respondent intended the deduction to be for investor out-of-pocket costs, nor did they discuss Natural Aggregates’ actual out-of-pocket costs for the Arden Row transaction. Mr. Schuler himself knew Natural Aggregates’ out-of-pocket costs were "substantially less than $24,586,319". Mr. Welty did not consult Mr. Ornstein or Mr. Kaynard (the designated individual for Arden Row’s partnership representative) before sending the acceptance letter.

Petitioner, through Mr. Welty, sent an acceptance letter on November 7, 2023, stating acceptance of the "settlement proposal" and agreement "to determine the amount of the allowed ‘other deduction’ by reference to . . . the investment-tier partnership’s Schedule M–2, Capital Contributed (Cash)".

In December 2023, IRS personnel questioned the $24,586,319 amount, recognizing it seemed too high for out-of-pocket costs. The IRS subsequently communicated that the amount did not represent approximate out-of-pocket costs and proposed changing the deduction to $110,900 (the cash capital contributions shown on Arden Row’s Schedule M–2). Petitioner refused this modification, insisting on the $24,586,319 deduction, leading to a dispute over whether a binding agreement existed. For months, the parties filed Joint Status Reports with the Court stating they had "no basis for settlement" and proposed trial dates.

Taxpayer’s Request for Relief

Despite the ongoing dispute and representations to the Court that no settlement had been reached, petitioner filed a Motion to Enforce Settlement on May 21, 2024, asserting that the exchange of letters between the parties resulted in a binding agreement.

Court’s Legal Analysis

The Tax Court began its analysis by affirming that a settlement is a contract, and general principles of contract law determine its existence. Key to contract formation is the mutual assent of the parties to its essential terms, often referred to as a "meeting of the minds," which is manifested through an offer and acceptance. While a binding settlement can be reached through the exchange of letters, the offeror retains the power to prescribe the method of acceptance. If the Commissioner conditions a settlement agreement on the execution of an additional document, such as a decision document, then its execution controls whether a binding agreement was reached.

The Court further explained that mutual assent requires an objective manifestation, and there is no mutual assent if parties attach materially different meanings to their manifestations and neither party knows the meaning attached by the other. The interpretation of contract words depends on context and prior experience. The mutual mistake doctrine applies where a contract exists, but parties made the same erroneous assumption about facts, or the written agreement does not express their actual intention. Petitioner bears the burden to prove a binding settlement agreement. A settlement agreement is generally enforceable absent fraud, coercion, mutual mistake, or other extraordinary circumstances.

Regarding the BBA partnership rules, the Court highlighted that the partnership representative has the sole authority to act on behalf of the partnership and to bind the partnership and its partners in audit or judicial proceedings. When the partnership representative is an entity, a designated individual assumes this role. Unlike previous law (TEFRA), the BBA contains no statutory provision that expressly allows an individual partner to enter into a settlement agreement with the IRS that converts partnership items into nonpartnership items or to settle their tax liability attributable to partnership-related items separately from a settlement applicable to all partners.

Application of the Law to the Facts

The Court denied petitioner’s Motion to Enforce Settlement, presenting three independent grounds for its decision.

First, the Court found no binding agreement because the prescribed method of acceptance was not met. Clause 5 of the settlement proposal clearly and unambiguously stated that "Respondent and Petitioner agree to resolve this case by filing a decision document". The Court deemed the filing of a decision document a material term, not a ministerial act. Petitioner’s subsequent actions, such as filing Joint Status Reports stating "no basis for settlement" and proposing trial dates, contradicted any assertion that a binding agreement had already been reached through the letters.

Second, the Court concluded there was a lack of mutual assent to the amount of the allowable deduction. The Court found that the parties attached materially different meanings to the "other deduction" in Clause 2.

Respondent’s objective manifestation: The IRS intended to allow a deduction for investor out-of-pocket costs, using the Schedule M-2 amount as an administrative convenience, consistent with its standard settlement position since 2020 and the LakePoint settlement. The proposal explicitly stated the $24,586,319 amount approximated out-of-pocket costs.
Petitioner’s (Mr. Schuler’s) understanding: Mr. Schuler, the only individual who authorized acceptance on petitioner’s side, understood and agreed to a fixed deduction of $24,586,319. He was not informed that the amount was meant to approximate out-of-pocket costs or derived from Schedule M-2, and he did not consider out-of-pocket costs in his decision. Furthermore, the Court found that neither party knew the meaning attached by the other. While Welty PC attorneys knew respondent’s true intent to offer investor out-of-pocket costs and that the $24,586,319 figure was a mistake for a nonsyndicated transaction involving multiple entities, they did not communicate this mistake to Mr. Schuler or respondent. Conversely, respondent was unaware that Mr. Schuler had only approved a settlement for a fixed amount and not for investor out-of-pocket costs. The Court rejected petitioner’s argument that the actual out-of-pocket costs were irrelevant, emphasizing that contracts must be read as a whole.

Third, the Court addressed the authority to settle under BBA partnership rules. The BBA explicitly grants the partnership representative sole authority to act on behalf of the partnership and bind all partners. In this case, Natural Aggregates was the partnership representative, and Matthew Kaynard was the designated individual. The Court found no evidence that Mr. Kaynard approved or was even consulted about the settlement. Mr. Schuler, who authorized the acceptance, lacked the authority under the BBA to bind Arden Row. Additionally, the BBA does not contain a provision that permits an individual partner, such as Mr. Schuler or Natural Aggregates as a partner of Arden Row, to settle their tax liability for partnership-related items separate from a settlement applicable to all Arden Row partners.

Conclusions

The Tax Court concluded that the exchange of letters did not result in a binding settlement agreement. This decision was independently supported by three critical findings:

The settlement proposal required the filing of a decision document, which was a material term and not fulfilled by the mere exchange of letters.
There was no mutual assent between the parties regarding the amount of the allowable deduction, as they attached materially different meanings to the terms, and neither was aware of the other’s understanding.
The settlement was not authorized by the proper party under the BBA, as the designated individual for the partnership representative did not approve it, and the BBA does not permit individual partners to settle partnership-related items separately.

Implications for Practitioners

This case serves as a crucial reminder for tax professionals engaged in settlement negotiations:

Scrutinize Settlement Offer Terms: Always carefully review the explicit terms of a settlement offer, especially any conditions for acceptance, such as the requirement to file a decision document. Do not assume such conditions are merely ministerial.
Ensure Mutual Assent: Confirm that both parties have a clear, shared understanding of all essential terms, particularly the nature and amount of any deductions or liabilities. Subjective intent is less important than objective manifestation of terms. If a discrepancy is identified, clarify it immediately.
Adhere to BBA Authority: In BBA-governed partnerships, ensure that the partnership representative, or its designated individual, is the sole party authorizing settlement, as individual partners generally lack this authority for partnership-related items.
Documentation and Communication: Maintain clear documentation of all communications and ensure consistent understanding between counsel and clients, especially when complex tax structures or prior IRS initiatives are involved. The failure of Welty PC to fully apprise Mr. Schuler of the IRS’s basis for the deduction, despite knowing the IRS’s mistake, was a critical factor in the lack of mutual assent.

The Arden Row decision highlights the rigorous application of contract law principles in Tax Court settlements and emphasizes the unique complexities introduced by the BBA framework, demanding meticulous attention from tax professionals to avoid unenforceable agreements.

Prepared with assistance from NotebookLM.