The Irs Is Auditing 100% Of The Abusive Syndicated Conservation Easements
According to a recent article, IRS National Fraud Counsel Carolyn Schenck agreed that the timelines and valuations asserted in many syndicated conservation easement scenarios are over the top, potentially to the point of being a badge of fraud. The IRS is auditing 100 percent of these cases, Schenck said. Were finding that these transactions are abusive, riddled with outlandish facts, questionable dealings, and papered with documents that on their face raise issues to even the least discriminating eye.
Irs Outreach Efforts To Taxpayers Investing In Syndicated Conservation Easements
On March 19, 2019, the IRS issued IR-2019-47. This notice included several tax avoidance schemes that made the IRS 2019 Dirty Dozen list of tax scams for taxpayers to avoid. The IRS included syndicated conservation easements in the Dirty Dozen list and described specific facts and circumstances about transactions in which taxpayers should avoid investing based on the manner in which the syndicators and promoters structured the transaction.
Generally, although the law provides that a charitable contribution deduction is not allowed unless the donor contributes the donors entire interest in property to qualified charitable or not-for-profit organizations, the law carved out an exception to the general rule for a qualified conservation contribution that meets certain legal and factual criteria. If the donor complies with the criteria, then the donor may claim a charitable contribution deduction for the fair market value of a conservation easement donated to certain organizations.
Prior to the IRS issuing IR-2019-47, the IRS became aware that some promoters and syndicators had been syndicating conservation easement transactions that appeared to comply with the law but in substance failed to comply with the specific legal and factual criteria for taxpayers to claim a charitable contribution deduction.
How Does A Syndicated Conservation Easement Deduction Work
When a property owner creates a conservation easement on their property, the ability to develop that land in the future is restricted to protect its conservation value. Those limitations in development can decrease the value of the property. The IRS created tax benefits for landowners who create conservation easements to help defray the loss in value.
Promoters of syndicated conservation easements see an opportunity to make money by potentially defrauding the government and investors alike. They enact this scheme in stages:
- They start with creation of pass-through entities that bring together investors in these partnerships or LLCs.
- Investors are charged a fee, as well as providing their investment funds.
- The pass-through entities purchase land.
- They obtain an overvalued appraisal of the land.
- They may claim to have obtained multiple appraisals and taken the lowest one.
- That appraised value is substantially higher than the fair market value of the land.
- They obtain a conservation easement on the land.
- They then donate the land to a charitable entity often a land trust.
- They may provide opinion letters from attorneys that claim the transaction is legal.
- They obtain a tax deduction based on the appraised value.
- The tax deductions are passed on to the investors.
- Those deductions typically exceed the original investment and fees.
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Acep Fiscal Year 2023 Enrollment Information
- ACEP applications received after this date will be considered for funding in FY 2024
- Application eligibility determinations not established by this date will be considered for funding in FY 2024
- Applications selected for funding agreements not obligated by this date will be considered for funding in FY 2024.
Benefits Of Buying A Land Or Property With A Conservation Easement
Smart Way to Buy a Property or Land on the Cheap
Buying a conservation land or property means adhering to the terms of the easement. Despite the restrictions of an easement, investing in such property can result in major savings. Its a good investment and a smart way to buy a property or a land on the cheap for those who are willing to deal with the restrictions.
Major Tax Savings
Investing in conservations easements has been alluring for investors as oftentimes, the deductions on their taxes are far more than the amount that they put into the easement. The amount to be deducted is identified once an appraisal is done with land being valued according to the highest and best use of it. After which, the land is then valued factoring in the conservation easement . The charitable contribution amount spells the difference between the two assessments.
Buying a Land with Only a Portion of It is Considered a Conservation Easement
It is also possible to purchase a property or land where only a portion of it is considered a conservation land. This way, there are not so much restrictions to deal with. An example is buying a land with 25% of it falls under easement .
Conserve Some Unique Land Features / Owning a Land with Distinct Features
Another advantage of investing in a property or land with easement is that you are able to conserve some unique land features or a vegetation . This results to owning a landing with distinct features .
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The Irs Pursuit Of Fraudulent Sales Of Syndicated Conservation Easements
The IRS has a strong interest in pursuing syndicated conservation easements as abusive transactions that are tax shelter schemes. They were labeled as one of the Dirty Dozen investments worthy of IRS investigation in 2019. The IRS Commissioner was clear about their position in a Notice published late that year, stating:
We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions. Every available enforcement option will be considered, including civil penalties and, where appropriate, criminal investigations that could lead to a criminal prosecution.
Syndicated conservation easement schemes also garnered congressional attention, and the Senate Committee on Finance also launched an investigation of them in March 2019. They published their findings in a comprehensive report in August of 2020. As part of that investigation, they examined the largest promoter of SCEs, EcoVest Capital. In March of 2020, the IRS reported data to the committee tallying the number of transactions they audited.
Land Trust Or Government Agency
To sell or donate a conservation easement, farmers need to find an organization willing to own the conservation easement. Owning a conservation easement is usually referred to as holding” it and the owner is usually called the holder.” Usually, a conservation easement holder is a land trust or a government agency.
Funding to acquire conservation easements is limited. As a result, many sales are bargain sales, which stretch a holders limited conservation dollars further. The holder of the easement is responsible for monitoring and enforcing the terms of the easement, which, in general, is in perpetuity or forever. Consequently, the organization agreeing to hold the easement needs to have the capacity to monitor land under easement and to enforce the terms of the easement going forward.
So, while conservation easements, affirmative agricultural easements, and options to purchase at agricultural value are powerful tools, they are only available if there is an organization with money, capacity, and interest in acquiring and holding the easement.
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How Does The Dnr Use Conservation Easements
The DNR administers nearly 1,200 conservation easements to protect natural and scenic lands, improve fish and wildlife habitat, and conserve the states natural resource lands for the benefits of current and future generations of Minnesotans. Conservation easements maintain private land ownership while also helping the DNR achieve specific conservation goals.
How Investors May Be Harmed By Tax Schemes Associated With Syndicated Conservation Easements
When promoters of these tax schemes obtain false appraisals used to overvalue conservation easements, the resulting tax benefits are overvalued as well. Promoters of syndicated conservation easements portray the transactions as great opportunities, rather than unrealistic investment returns. Investors are lured by promises of tax benefits that are up to 2.5 to 5 times every dollar invested.
However, by investing in the pass-through entities that purchase the SCEs, investors become unwitting participants in the scheme. The IRS Notice 2017-10 makes clear that all members of a partnership will be assessed a penalty if the partnership is found to be involved in the scheme.
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What Is A Conservation Easement In California
A conservation easement is a voluntary agreement with a nonprofit land trust or government agency that allows a landowner to limit the type or amount of development on their property while retaining private ownership of the land. When completed, the conservation easement becomes part of the property deed.
Iii: 2018 Atg Roundup A Little Something For The Donor
Conservation Purposes, Baselines, Gift Substantiation, and Cash Donations
If you read through Parts I and II of the Conservation Easement ATG Takeaways, youll see two glaring differences between the 2020 and 2021 updates and the 2018 updates: There were only a few minor changes in 2018 and they mostly acknowledged new court holdings friendly to the taxpayer and contrary to prior IRS positions. You can find a redline of the 2018 ATG changes shown against the 2016 ATG here. As noted in Part I, the redline is difficult to read because of the PDF conversion and the length of the document. Below are the highlights.
The 2018 changes reflected case law that was so much better for the taxpayer. Looking back at how nice the courts were to taxpayer donors pre-2018, it is easy to see how much abusive syndicators have really brought down the wrath of khan onto easement donors in the past three years. These changes are so refreshing, comparatively:
a. Conservation Purposes:
i. Of the four permissible conservation purposes required to be protected under Section 170, easements with the purpose of preserving open space must yield a significant public benefit. The 2018 ATG added a notation that the public benefit is usually visual access from a public highway.
Lesson: Get a gift letter and dont rely on the easement to serve this purpose.
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Conservation Easements Creating Complicated Tax Issues For Investors
Many Brokerage Firms Have Sold Conservation Easements in Regulation D Private Placements for a Decade.
Conservation Easements have been a regular piece of brokerage firms arsenals, part of the package of heavy weaponry they deploy to their high net worth clientele. Packaged as Regulation D private placements, brokerage firms have sold Conservation Easements to clients based on the potential windfall they represent to an investors tax bill. Here is how they were supposed to work. Generally speaking, a conservation easement is an agreement restricting the use of land to protect its conservation values. It is a high-minded concept intended to preserve specific tracts of land for future generations and protect them from development or exploitation. This easement deprives the property owner of something of value the right to develop the property which lowers the usefulness and as such the value of the property. The Property Owner then has the right to claim a deduction on the value of the property.
These conversation easements get a little tricky when they are sold as part investment, part tax shelter. Traditionally, the investments have been structured through some form of syndication. These structures are highly complicated and can involve several permutations, but generally follow a similar structure:
Conservation Easements In The News
From 2010 to 2017, the IRS estimates that conservation-easement transactions lowered the total Federal income tax by $10.6 billion.
In 2016, the IRS issued Notice 2017.10, which declared syndicated conservation easements listed investments. This means that investors must flag these easements on their tax returns so the IRS can identify them more easily.
In 2020, the bipartisan Finance Committee Report encouraged the IRS to crack down even more on syndicated conservation easements.
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Background Abusive Transactions Involving Charitable Contributions Of Easements
In recognition of our need to preserve our heritage, Congress allowed an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations.
The IRS has seen abuses of this tax provision that compromise the policy Congress intended to promote. We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements. In some cases, taxpayers claim deductions when they are not entitled to any deduction at all . Also, taxpayers have sometimes used or developed these properties in a manner inconsistent with section 501. In other cases, the charity has allowed property owners to modify the easement or develop the land in a manner inconsistent with the easement’s restrictions.
Another problem arises in connection with historic easements, particularly façade easements. Here again, some taxpayers are taking improperly large deductions. They agree not to modify the façade of their historic house and they give an easement to this effect to a charity. However, if the façade was already subject to restrictions under local zoning ordinances, the taxpayers may, in fact, be giving up nothing, or very little. A taxpayer cannot give up a right that he or she does not have.
What Does It Mean When A Property Has A Conservation Easement
When a property has a conservation easement, it means that the property owner made an agreement with a land trust or government agency to permanently limit possible uses of the land. This is a voluntary, legal action that can be made to protect the lands conservation values.
When a property has a conservation easement, the current owner is still allowed to own and use their land. They also retain the right to sell it, or pass it down to their heirs. The conservation easement is permanent, so none of these actions will terminate it. The restrictions of the easement stay in place, even when the land is inherited or sold.
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Syndicated Conservation Easements As Tax Schemes
Some conservation easement syndicators and promoters over-inflated the price of the donated land to maximize the tax deductions, which made the investments more attractive to investors. In fact, some conservation easements were promoted as offering 2.5- to 5-times or more on every dollar invested through tax avoidance these investments were sold to high-income earners and high net worth individuals. These conservation easement investments were tax schemes that intended to defraud the IRS with fraudulent appraisals, leaving investors to face audits and pay substantial legal fees, interest, millions of dollars in back taxes, and substantial penalties.
In March 2019, the United States Senate Committee on Finance launched an investigation into the potential abuse of syndicated conservation easement investments that may have allowed taxpayers to game the tax code and deprive the federal government of more than $3 billion in revenue in 2014 alone it has cost even more in the years since.
In October 2020, the Senate Finance Committee introduced a bill that will protect conservation easements from abuse, save taxpayers billions of dollars and promote conservation around the country.
In April 2021, IRS Commissioner Charles Rettig told a Senate panel that 28,000 taxpayers are under examination. The IRS has challenged $21 billion in tax deductions that are claimed for syndicated conservation easement investments from 2016 through 2018.
What Are The Disadvantages Of A Conservation Easement
Cons:
- A conservation easement is typically perpetual.
- A future owner or your heirs may not have the same affinity for conservation as you do.
- The future value of the property will likely be diminished as a result of the restrictions of the easement.
- Not all land will qualify for a conservation easement.
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How Much Is My Conservation Easement Worth
Impact On the Value Of the Land The value of a conservation easement is determined by a qualified appraiser. The appraiser determines the value of the land before the conservation easement and subtracts the value of the land after the conservation easement to determine at the value of the conservation easement.
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Epperson & Greenidge is investigating brokerage firms that recommended GWG L Bonds to investors
On April 20, 2022 GWG Holdings, Inc. filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas . According to an article in the Wall Street Journal, published on the same day, the bankruptcy was due to accounting issues…
Did you buy a conservation easement investment from a financial advisor or stockbroker? If so, your investment may be worthless if the conservation easement was overvalued based on an improper appraisal a practice that may be rampant in the industry. It could also trigger back taxes, penalties, interest, and a potential audit by the IRS.
Our law firm is investigating financial advisors and brokers who sell these conservation easement investments, and we may be able to help you recover your losses.
These investments are marketed as lucrative tax haven investments, with promises of an immediate return of 40% or more while also benefitting the environment.
Financial advisors and brokers selling these conservation easement investments often receive large commissions of 10% to 12% from the investments sponsors and may not be disclosing the true risks of these investments to investors.
Our firm has published a detailed analysis of the case, which can be found here.
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Irs And Doj Continue High Priority Civil And Criminal Enforcement Actions Against Abusive Syndicated Conservation Easement Transactions And Schemes
As a result of the recent Tax Court decisions, guilty pleas and indictments with more expected in the near future, the governments determined and relentless efforts to identify, audit, investigate and prosecute syndicated conservation easement abusive tax shelter schemes, their syndicators, appraisers and the tax professionals who promote them remain unabated.
The IRS high priority to continue auditing and investigating syndicated conservation easement transactions is evidenced by publishing in January 2021 its revised Publication 5464, Conservation Easement Audit Technique Guide. The breadth and scope of Publication 5464 and the IRSs seriousness of purpose to flesh out abusive syndicated conservation easement abusive tax shelter schemes is evident by reviewing its eleven-page index and its 117 pages of subject matter guidance for auditors and revenue agents.Investors who continue to invest in syndicated conservation easement abusive tax shelter schemes and transactions need to come to terms with the fact that their charitable contributions deductions will be disallowed and they will incur substantial tax, penalties and interest and, perhaps in some cases, face potential criminal prosecution.
1 Blacks Law Dictionary, Ninth Edition, page 1587.2 Supra., page 585
