More on Abusive Conservation Easements (12/28/19)

Peter Reilly has a good discussion on an abusive conservation easement.  IRS Grinch Ruining Christmas For Syndicated Conservation Easements (Forbes 12/24/19), here.  The fatal flaw in such easements is the valuations (dare I say bullshit valuations).  These are just variations of many shelters in the 1970s and early 1980s where the fatal flaw was the valuations.  They are therefore just a variation of bullshit tax shelters when the crux of the shelter is major overvaluations.

Peter points to the IRS News Release, IR-2019-213, here, Excerpts from the release:

On Dec. 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, the Tax Court sustained in its entirety the IRS's determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40% gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return. 

"In denying the deductions and upholding the 40% gross valuation misstatement penalty, the Tax Court confirmed that aggressive syndicated easement transactions simply will not survive scrutiny," said IRS Commissioner Chuck Rettig. "We will not stop in our coordinated pursuit of these abusive transactions while seeking the imposition of all available civil penalties and, when appropriate, various criminal options for those involved." 

"If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax advisor to consider your best available options," Rettig added.

Peter's posts are usually very good, and this is not exception.

Also, in a related development, in United States v. Zak (N.D. Ga. Dkt. 18-cv-05774-AT Order dated 12/10/19, here), the Court considered a government suit against allegedly abusive shelter promoters.  The Court rejects the defendants' motions, except for one count against Zak which is dismissed without prejudice.

Key excerpts from the Order are (emphases supplied by JAT):

"The Government alleges that defendants ran a “conservation easement syndication scheme.'"

* * * * 

The Government laid out eleven discrete steps that represent the “general pattern” the defendants took in enacting their conservation easement offerings. (Doc. 1 at 18–22.) In brief, according to the Government, the defendants first formed an LLC to take ownership of a piece of land, then hired an appraiser to provide an appraisal of the land, which would be used later in tax filings. (Id. at 18–19.) The defendants then marketed ownership interests in the LLC – whose value is derived only from the possible future tax benefit of converting the land to a conservation easement – to wealthy persons who may seek to maximize their tax benefits. (Id. at 19–20.) The marketing of the LLC clearly explains how the conservation easement might benefit a person in a particular tax bracket by reducing his or her tax burden substantially. (Id.) Once all stakes are sold, the LLC designates the land as a conservation easement, finalizes the appraisal of the land’s value, and prepares its own tax return. (Id. at 20–21.) The LLC is formed as a pass-through entity, so the sizable tax benefit it incurs for designation of the land is then passed through it to the investors themselves. (Id. at 16.) The investors list the conservation easement tax burden on their personal income tax returns, reducing their own tax liability. (Id. at 21–22.)

The Government characterizes defendants’ conservation easements as a “syndication scheme” that violates section 6700 of the tax code. (Doc. 1 at 64.) The Government alleges that defendants collectively participated in 96 different conservation easement transactions resulting in over $2 billion of federal tax deductions. (Doc. 1 at 2–3.) The Government alleges that defendant Zak “organized, promoted, and sold the conservation easement syndicates through several entities over the years,” and that she is responsible for approximately $381 million of the $2 billion in tax deductions. (Doc. 1 at 7, 3.) The Government further alleges that Zak,

assisted in the organization and promotion of conservation easement syndicates by providing a number of services including: providing guidance in planning ownership structure, negotiating agreements with land trusts and appraisers, assisting in the highest and best use determination, recommending legal counsel for legal and tax review, and managing the preparation and distribution of required IRS tax forms.

(Doc. 1 at 7–8.) The Government alleges that Clark provided appraisals of the land that overvalued the land substantially, knowing that the false appraisal was to be used to file for artificially-inflated tax returns. (Doc. 1 at 54–58.) 

* * * * 

In many respects, this is not a normal case. Defendants generally do not dispute participating in the activities that the Government alleges in the complaint. Rather, defendants and the Government have diametrically-opposed positions as to whether those activities are in fact lawful. Defendants believe their activities were lawful and allowed by the tax code. The Government believes the activities unlawfully exploited a portion of the tax code, and that by causing false statements to be filed in the income tax returns of their “investors,” defendants have defrauded the investors and the Government itself.  

* * * * 

The Government provides three prototypical exemplars to describe the major aspects of the scheme, with some variations to reflect the adaptation of the scheme over time and place. For example, beginning on page 24 of the Complaint, the Government outlines the steps undertaken in formation and execution of “Partnership Z.” (Doc. 1 at 24–27.) In this portion of the Complaint, the Government alleges that three unnamed “Sponsors” organized Partnership Z on October 17, 2008 as a Georgia LLC with a principal place of business in Garden City, Georgia. (Doc. 1 at 24.) The Government alleges that Partnership Z owned approximately 140 acres of land in Georgia. (Id.) On December 29, 2009, the three Sponsors allegedly organized a private sale of 99 units of ownership in Partnership Z, selling each unit at a price of $8,620, plus an “operating reserve capital contribution” of $1,010 per unit. (Id. at 24–25.) On December 31, 2009, Partnership Z allegedly converted 135 acres of its land to a conservation easement. (Id.) The Government alleges that Zak and the Sponsors hired an appraiser to value the land, and the appraiser provided a report on January 11, 2010 as to the land’s value on December 1, 2009. (Id. at 26.) The Government next alleges that the appraiser knowingly overvalued the land by 200 percent or more of the correct value amount. (Id.) The appraisal allegedly valued the land at $4,592,000. (Id.) This amount allegedly created a tax deduction for each partner of $4.76 per $1.00 invested in the partnership (including the operating reserve capital contribution). (Id.) According to the Government, this means that if a partner purchased 10 units for a total of $96,300, that partner would receive a tax deduction on their personal ncome taxes of over $459,000. (Id. at 26–27.) The Government provides a table showing the “Ownership Interest” percentage and “Noncash Contribution” (the amount each partner received in tax refund) of sixteen individuals, alleged to be the 16 partners of Partnership Z. (Id. at 26–27.) The ownership percentages range from 1.0% to 22.0%, and the noncash contributions range from $45,920 to $1,010,240 among the sixteen alleged partners. (Id. at 27.) The Government alleges that Defendant Zak assisted in all aspects of the formation and sale of Partnership Z, and personally purchased units of ownership in the Partnership as well. (Id. at 25.) Defendant Zak allegedly also received a portion of the tax deduction received by Partnership Z when it converted its real property to a conservation easement. (Id.) 

* * * * 

After making its rulings on the motion, the district court continues:

The Court is concerned about the appropriate geographic scope of discovery for the case. The Government seeks leave to conduct 50 depositions, intending to conduct discovery in virtually every state. But the complaint itself only discusses transactions and LLCCs operating in a small number of states. Specifically, the Government alleges that “[d]efendants’ collective 96 conservation easement syndications involve real property, primarily vacant and unimproved parcels, in the states of Alabama, Georgia, Indiana, Kentucky, North Carolina, South Carolina, Tennessee, and Texas.” (Doc. 1 at 38.) In the next sentence, the Government alleges that the “customers” of the syndicates hale from “at least 45 different states and the District of Columbia.” (Id.) At this stage, it seems that the Government has pleaded sufficient factual allegations to allow discovery relating to transactions in those named states (Alabama, Georgia, Indiana, Kentucky, North Carolina, South Carolina, Tennessee, and Texas). There is no specific allegation in the complaint, however, that would justify allowing discovery in all 45 states in which the “customers” themselves live, especially if there is no allegation that the defendants transacted any conservation easement syndicates in those states. In any event, the Court is not prepared to authorize this broad scope of discovery based on the Complaint before it. 

Pursuant to this Court’s June 28, 2019 Order (Doc. 86), an eight-month discovery period commences upon entry of the instant order. Counsel may proceed with discovery, but shall be confined to fifteen (15) depositions per side, until further order of the Court.

The docket  entries are here.  The complaint is here and news release is here.