Just in time for the annual end-of-year tax shelter season, the Internal Revenue Service has issued proposed regulations to deal with so-called syndicated conservation easement transactions. This follows the IRS’s failure of its previous proposed regulations, Notice 2017-10, for failure to comply with the Administrative Procedures Act (APA). This new set of proposed regulations, which will presumably be enacted in proper accordance with the APA this time, follows the Secure 2.0 Act of 2022 that disallows a deduction for a qualified conservation easement contribution made by an entity taxed either as an S-corporation or partnership (the latter including an LLC taxed as a partnership), if the amount of the contribution exceeds the member’s tax basis in the entity by 250%. The regulations also impose new reporting requirements for the members of the entity who are seeking a deduction based on the entity’s conservation easement transaction.
For those not familiar with syndicated conservation easements, they are a tax shelter where a piece of land is put into an entity, usually an LLC, and then membership interests in the entity are sold to investors seeking a deduction. The promoter does some work to make the land look much more valuable than for which it was originally purchased, and an appraiser then gives the land a fancifully high valuation. The land is then made subject to a conservation easement, presumably protecting it for the environment, and generating a huge and purely-artificial tax deduction which is then passed along to the investors who purchased the membership interests, and they take the deductions on their personal returns.
An interesting recent U.S. Tax Court opinion regarding the gross overvaluation of a conservation easement within an LLC may be found in Mill Road 36 Henry LLC v. Commissioner, (U.S.T.C., Oct. 26, 2023). In that case, some unused property in Georgia was the subject of plans and other steps to convert the property into a senior-living development, but was ultimately donated to environmental purposes through a conservation easement at a valuation of $9 million, even though only a couple of years earlier the property had been purchased for $315,000. Apparently, similar plans were made for 10 other LLCs with similar nearby parcels of land to have senior-living developments, but none of those plans came to fruition either, and apparently they were all donated to conservation easements to gin up big deductions. In the end, the U.S. Tax Court saw right through the scheme, and limited the LLC’s deduction (which passed through to its members) to its tax basis in the property of $416,563 and also added that accuracy-related penalties were applicable.
Meanwhile, also in Georgia, a federal court jury convicted Jack Fisher and James Sinnott of a conspiracy to commit wire fraud, aiding and assisting with the filing of false tax returns, and subscribing to false tax returns, all in connection with their sale of syndicated conservation easements, according to a September 22, 2023, IRS press release. According to that press release:
“The evidence proved that Fisher and Sinnott used the funds raised from their taxpayer clients to buy land and property holding companies and then had the tax shelters cause the companies to donate the land or a conservation easement over the land – often within days or weeks of purchase. To reach the inflated fair market value of the donations, Fisher and Sinnott primarily used appraisals of the conservation easements and fee simple land donations at valuations often more than 10 times higher than what Fisher and Sinnott actually paid to acquire the property.
“The evidence further showed that Fisher and Sinnott backdated or instructed others to backdate false documents to present to the IRS, including subscription agreements, payment documents, engagement letters and other records. Fisher’s accountant, who testified at trial and previously pleaded guilty for his role in the scheme, prepared tax returns claiming charitable contribution tax deductions in the fraudulently inflated amounts reported in the false appraisals, resulting in fraudulent tax deductions flowing to the clients who purchased units in the abusive and illegal tax shelters. The evidence demonstrated that Fisher, Sinnott and others received more than $41 million in payments that were backdated or late for false and inflated tax deductions.
“In total, the defendants sold over $1.3 billion in fraudulent tax deductions through this scheme.”
How much of those $1.3 billion in fraudulent tax deductions were later disallowed by the IRS is not stated in the press release, but there are probably a lot of unhappy campers out there, presumably on their dedicated conservation easement lands.
Another unhappy camper is Walter “Terry” Douglas Roberts II who served as an appraiser for syndicated conservation easement deals, and plead guilty to conspiring to defraud the United States by his participation in 18 such deals where he inflated some of his appraisals by at least 70%. This is according to a May 12, 2023, IRS press release.
The bottom line is that syndicated conservation easements promise big deductions, but the reality is that the deductions will not stand up in the U.S. Tax Court, there likely will be penalties, and there is a fair to middlin’ chance that the promoters and those who assist them will end up in Club Fed. That does not mean, of course, that you cannot find some promoter out there perfectly happy and willing to help you invest in your own conservation easement tax shelter, as there are still plenty of them plying that business.
But you don’t have to shoot yourself in the foot either.