First Criminal Cases from Abusive Syndicated Conservation Easements (12/23/20; 12/29/20)

Abusive conservation easements have been a topic on this blog for some time now.  See here.  DOJ and the IRS have noised about criminal prosecutions, but until this past week none have surfaced.  Now, we have two criminal cases with a pre-wired plea on the filing of the criminal informations.  See DOJ Press Release: Atlanta Tax Professionals Plead Guilty to Promoting Syndicated Conservation Easement Tax Scheme Involving More Than $1.2 Billion in Fraudulent Charitable Deductions (12/21/20), here. 

Relevant excerpts from the press release are:

According to court documents, from at least 2013 through 2019, S. Agee and C. Agee, then partners at an Atlanta accounting firm, marketed, promoted, and sold together with co-conspirators,  investments in fraudulent syndicated conservation easement (SCE) tax shelters. The SCE tax shelters were designed to produce tax deductions for high-income taxpayers through partnerships that purported to make “real estate investments.” In truth, the partnerships were a sham, lacking economic substance and serving no legitimate business purpose. The placement of conservation easements over the real estate was a foregone conclusion, which fraudulently enabled the investors to shelter their income from the IRS with no economic risk and to claim substantial tax deductions to which they were not entitled. S. Agee, C. Agee, and their co-conspirators marketed the SCE tax shelters by promising investors that for every $1 invested in the partnership, the investor would receive more than $4 in charitable tax deductions. 

“The defendants’ and their co-conspirators' criminal conduct enabled their clients to claim more than $1.2 billion in fraudulent tax deductions and generated hundreds of millions of dollars of tax loss to the United States,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department's Tax Division.

* * * *

Conservation easements were created by Congress to be a key tool used for protecting environmentally and historically important land. The donated conservation easement typically restricts the use or development of land in order to protect its conservation value. When legitimately created and used in compliance with the Internal Revenue Code, the conservation easement can both protect the environment and provide tax incentives. By contrast, abusive SCEs are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of legitimate business purpose.

According to court documents, S. Agee and C. Agee additionally solicited investors after the end of the tax year and advised them to backdate payments and documents to make it appear that the “investments” were timely made before the end of the tax year. S. Agee and C. Agee also prepared and assisted in the preparation of false tax returns for clients who agreed to invest in the SCE shelters. In exchange for their promotion of the abusive SCE tax shelters, between 2013 and 2019, S. Agee and C. Agee each received more than $1.7 million in commissions.

S. Agee and C. Agee both pleaded guilty to one count of conspiracy to defraud the United States which carries a maximum penalty of five years in prison. They also face a period of supervised release, restitution, and monetary penalties.

The CourtListener dockets for these cases are:  Stein Agee, here, and Corey Agee, here.

Details are set forth in the Stein Agee Criminal Information and Factual Basis available at CourtListener here and here.  I have not attempted to determine if there are material differences in the fact patterns for Stein and Corey Agee, but have instead focused generally on Stein Agee.  As with conspiracy charges generally, the details are summarized in cascading fashion in the Manner and Means and Overt Acts paragraphs of the Criminal Information (pars. 103 and 104, pp. 21-30 (repeated in the Factual Basis, pars. 101 and 102, pp. 22-31)).  Those wanting to know at least the summary details should focus on those paragraphs.

JAT Comments:

Note:  I have substantially revised the Comments portion to present the materials in a way that I think will be helpful to Tax Crimes students, focusing on the potential sentencing considerations indicated by the Agee pleas.

1. These are pleas in each case to a single count of conspiracy, 18 USC § 371.  That count has a maximum five year incarceration period.  That means that each of the Agees cannot be sentenced to more than 5 years incarceration.  The balance of this discussion will focus on Stein Agree, although it will be generally applicable to Corey Agee as well.

2. The first step in the sentencing is to determine the Guidelines sentencing range.  For economic crimes, such as tax crimes, the principal driver in determining the sentencing range is the economic loss, called tax loss for tax crimes.  See SG §2T1.1. and §2T4.1.  The latter is the tax table that provides base offense levels based upon ranges for the tax loss attributable to the conduct involved in the plea (plus any relevant conduct, which I discuss below).

3.  In the plea, the parties stipulated:

104. Tax Loss: While the overall tax loss attributable to the conspiracy is more than $250 million, the parties agree that the tax loss attributable to the Defendant, for purposes of U.S.S.G. S 2T1.4(a)(1), and from which the Defendant is not shielded by U.S.S.G. S 1B1.8, is more than $25 million, but not more than $65 million. More specifically, the parties agree that the tax loss is approximately $45,646,720 million, consisting of estimated tax losses associated with the SCE Funds ICIF 2013 and CCP, described above, each of which the Defendant admits were tax shelters and a part of the conspiracy's fraudulent scheme.

There are several concepts to unpack in this stipulation.  First, the tax loss at a minimum includes the tax loss attributable to the count of conviction.  Here, the count of conviction is a conspiracy count that probably would cover as “relevant conduct” the tax loss attributable to the conspiracy  Readers may recall that, under Pinkerton liability, members of a conspiracy may be convicted of crimes committed by co-conspirators within the scope of the conspiracy.  The Guidelines adopt a similar concept in its definition of “relevant conduct” which permits loss beyond the count of conviction to be included in the sentencing economic loss calculations.  SG §1B1.3.(B) (including crimes committed in “jointly undertaken criminal activity (* * * whether or not charged as a conspiracy) all acts * * * of others that were (i) within the scope of the jointly undertaken activity, (ii) in furtherance of that criminal activity, and (iii) reasonably foreseeable in connection with that criminal activity, that occurred during the commission of the count of conviction * * * *.  (I won’t delve into the differences between this definition of relevant conduct for Guidelines calculations and Pinkerton liability for the substantive crime.)  But, the stipulation quoted above indicates that the overall loss that might otherwise have been used for Stein Agee’s tax loss calculation was $250 million.  My calculation is that the indicated Guidelines offense with the other indicated factors (sophisticated means (2 levels upward), acceptance of responsibility (3 levels downward) and manager or supervisor (3 levels upward) is 36, which produces an indicated Guidelines range of 188-234 months.

Second, however, the stipulation provides that a major portion of the tax loss otherwise includible is excluded under SG 1B1.8, so that with the exclusion, the tax loss is greater than $25 million.  Under the tax loss table that will result in a sentencing offense level of 30, which produces an indicated Guidelines range of 97-121 months.  I have not previously seen this SG 1B1.8, so I thought I would address that briefly:

SG § 1B1.8, titled Use of Certain Information, provides:

(a) Where a defendant agrees to cooperate with the government by providing information concerning unlawful activities of others, and as part of that cooperation agreement the government agrees that self-incriminating information provided pursuant to the agreement will not be used against the defendant, then such information shall not be used in determining the applicable guideline range, except to the extent provided in the agreement.

The application notes provide further detail 

5. This guideline limits the use of certain incriminating information furnished by a defendant in the context of a defendant-government agreement for the defendant to provide information concerning the unlawful activities of other persons. The guideline operates as a limitation on the use of such incriminating information in determining the applicable guideline range, and not merely as a restriction of the government's presentation of such information (e.g., where the defendant, subsequent to having entered into a cooperation agreement, provides such information to the probation officer preparing the presentence report, the use of such information remains protected by this section).

4.  There are two more sentencing matters worthy of note (pars. 105-106):  (i) Stein Agee is a manager or supervisor of the criminal activity but not an organizer or leader, which, under SG § 3B1.1(b) will increase the sentencing level by 3 (rather than 4 for organizer or leader); and (ii) the count of conviction involves sophisticated means which, under SG § 2T1.1(b)(2) will increase the sentencing level by 2.  

5. The calculations indicating a range of 97-121 months exceed the maximum sentence than can be imposed under the five-year conspiracy count of conviction.  Within the conduct charged (conspiracy), there were undoubtedly other crimes that could have been charged.  For example, almost certainly tax evasion (§ 7201), tax perjury (§ 7206(1)), aiding and assisting (§ 7206(2), tax obstruction (§ 7212(a)), under either direct or Pinkerton liability.  So, the Agees got a good deal in a cap on their potential incarceration substantially below the Guidelines range.  I have discussed this gambit in a prior blog:  Guidelines Calculations Games -- More on the Chernick Plea (Federal Tax Crimes Blog 8/3/09), here, where I refer to an article I wrote on the Andrew Fastow plea deal in the Enron fiasco which involved major economic loss and resulting Guidelines calculations well in excess of that permitted by the two counts of conviction permitting only a maximum of 10 years sentence.

6.  Finally, after the Guidelines calculations are made, the sentencing judge still has considerable Booker discretion to vary below the Guidelines (which in this case would be 5 years because of the single count of conviction cap).  Based on inferences  I draw from the plea documents, I presume that there will likely be a substantial Booker variance below the 5-year cap.  We'll see.