On August 25, 2020, the Senate Finance Committee Chair Chuck Grassley and the Committees’ ranking member, Ron Wyden, released a report on the Committee’s investigation into syndicated conservation easements and possible tax fraud. The report detailed the investigation made by the Committee which reviewed hundreds of thousands of pages of documents and the land databases of several states and municipalities.
The Committee found that the Internal Revenue Service (IRS) “has strong reason for taking enforcement action against syndicated conservation-easement transactions” based on the Committee’s findings of inflated land valuations vs. original purchase prices that resulted in syndicated conservation easement deductions being used as what the report characterized as “abusive tax shelters.”1
The Committee recommended that Congress, the IRS and the Treasury Department take further action to “preserve the integrity of the conservation-easement tax deduction.”2
Conservation easements serve a valuable purpose in protecting pristine land from development, providing areas for public outdoor use and enjoyment, and in preserving historically important land areas or structures.
While conservation easements date back to the early 1800s, it wasn’t until the Tax Reform Act of 1976 was passed that they were incorporated into the Internal Revenue Code by an amendment to the deduction for charitable gifts.
This amendment included deduction for the donation of a lease, option to purchase, or easement of at least 30 years over real property to a unit of government or qualifying charitable organization exclusively for conservation purposes.3 Partial interests in property are generally not deductible according to IRS rules, but conservation easements are the exception to the IRS rule.4 That exception makes it possible for groups to come together to purchase these conservation easements as a “syndicate” — or group — and still claim the tax advantages.
It is reported that in 2003, there were 5 million acres of conservation easements in the U.S. with that number jumping to between an estimated 22 and 40 million acres by 2014. 5 There are many legitimate syndicated conservation easement transactions. However, the IRS conservation easement tax deduction has generated a significant amount of scrutiny and confusion in interpretation over the years .6
It has been reported that “as many as 70 opinions have been issued on the tax treatment of conservation easement donations since 2005” with the government’s litigation focus largely being based on the accuracy of the easement valuations.7 According to the IRS, fraud is perpetrated when a securities offering is created and syndicated promoters buy land, create a conservation easement and then get an appraisal on the land that is worth well above the land’s purchase price. This happens because the appraisal is based on the potential development value of the property.
Using the inflated appraisal, the members of the syndicate are then able to take large tax deductions, with some syndicate promoters claiming that their taxpayer-investors would save two dollars on their taxes for every dollar they invest in the syndicated conservation easement.8 Those illegitimate deductions have purportedly added up to billions in lost revenue for the U.S. Treasury.
The IRS listed syndicated conservation easement schemes on its annual “Dirty Dozen” list of tax scams in March 2019. Prior to that date, on December 18, 2018, the U.S. Department of Justice (DOJ) filed a fraud lawsuit which included EcoVest Capital, one of the biggest promoters of syndicated conservation-easement transactions. In January 2020, the DOJ asked Judge Amy Totenberg of the U.S. District Court for the Northern District of Georgia to delay setting a trial date in the case for at least two years. In September 2021, the judge set the trial date in April 2023.
In a more recent enforcement action on March1, 2022, the IRS announced that a federal grand jury in Atlanta had indicted five tax shelter promoters and two appraisers in a syndicated conservation easement tax scheme involving the sale of over $1.3 billion in fraudulent tax deductions.9 It should be noted that an indictment is an allegation that must be substantiated and decided upon in a court of law.
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Our Securities Law Firm located in Detroit has more than 20 years of experience in securities litigation and holding brokers responsible for unscrupulous acts and investments. The aforementioned is an example of deception that exists with long term ramifications on investors that are not in the know. Tax fraud is no exception.
If you have questions about your investments or how your accounts are being managed, call and speak to an experienced securities attorney today.
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1,2,8 Finance Committee Releases Report on Syndicated Conservation-Easement Transactions, 8/25/2020
Link: https://www.finance.senate.gov/chairmans-news/finance-committee-releases-report-on-syndicated-conservation-easement-transactions
3,4,5,6 Understanding the Conservation Easement Tax Deduction by Anson H. Asbury
Link: https://www.fedbar.org/wp-content/uploads/2016/03/Easement-pdf-2.pdf
7 Conservation Easement Tax Deduction Coverage Round Up, 3/19/2022
Link: https://yourtaxmatterspartner.com/conservation-easement-tax-deduction-coverage-round-up-2/
9 Five Tax Shelter Promoters and Two Appraisers Indicted in Syndicated Conservation Easement Tax Scheme, 3/1/2022
Link: https://www.irs.gov/compliance/criminal-investigation/five-tax-shelter-promoters-and-two-appraisers-indicted-in-syndicated-conservation-easement-tax-scheme