The Internal Revenue Service (IRS) has recently released new regulations to address syndicated conservation easement transactions, just in time for the annual end-of-year tax shelter season. This comes after the IRS faced legal action for not complying with the Administrative Procedures Act (APA) in their previous notice. The proposed regulations, which are expected to be enacted in compliance with the APA this time, follow the Secure 2.0 Act of 2022. This new act disallows a deduction for qualified conservation easement contributions made by S-corporations or partnerships if the contribution exceeds the member's tax basis in the entity by 250%. Additionally, the regulations impose new reporting requirements for entity members seeking deductions based on the conservation easement transactions.
Syndicated conservation easements are tax shelters where a piece of land is placed in an LLC and membership interests in the entity are sold to investors seeking tax deductions. Promoters inflate the value of the land, and an appraiser assigns an exaggerated valuation. The land is then subject to a conservation easement, generating an artificial tax deduction that is passed on to investors who take the deductions on their personal tax returns.
A recent U.S. Tax Court case highlights an example of gross overvaluation of a conservation easement within an LLC. In this case, property in Georgia, originally purchased for $315,000, is valued at $9 million and donated for conservation purposes through an easement. Similar plans for senior-living developments with nearby parcels of land were never realized and also donated for conservation easements to claim large deductions. The U.S. Tax Court limits the LLC's deduction to its tax basis in the property ($416,563) and imposes accuracy-related penalties.
In another case in Georgia, Jack Fisher and James Sinnott are convicted of wire fraud, aiding and assisting in the filing of false tax returns, and subscribing to false tax returns in connection with their sale of syndicated conservation easements. They use funds from their clients to purchase land and property holding companies, then have the tax shelters donate the land or easements shortly after acquisition. They obtain inflated valuations for the donations through appraisals, significantly higher than what they actually paid for the properties.Fisher and Sinnott engage in fraudulent activities by backdating false documents to deceive the IRS, according to provided information. These documents, including subscription agreements, payment documents, engagement letters, and other records, were used to claim exaggerated charitable contribution deductions on tax returns. The scheme resulted in clients receiving fraudulent tax deductions for purchasing units in illegal tax shelters. Through these false and inflated deductions, Fisher, Sinnott, and others received over $41 million in backdated or delayed payments.
The defendants were involved in selling fraudulent tax deductions totaling more than $1.3 billion through this scheme. The press release does not specify how much of these deductions were ultimately disallowed by the IRS, but it suggests that individuals who invested in dedicated conservation easement lands may be dissatisfied with the outcome.
An appraiser named Walter "Terry" Douglas Roberts II, linked to syndicated conservation easement deals, has pleaded guilty to conspiring with others to defraud the United States. Roberts admitted to inflating some of his appraisals by at least 70% in 18 such deals. This information is based on a report dated May 12, 2023.
In summary, while syndicated conservation easements offer significant tax deductions, it appears that these deductions may not hold up in the U.S. Tax Court. Those involved in such schemes may face penalties, and there is a moderate chance that both promoters and accomplices could end up in prison. However, it should be noted that there are still promoters willing to assist individuals with investing in conservation easement tax shelters. Nevertheless, it is wise to avoid engaging in such schemes to prevent self-inflicted harm.