It may come as a surprise, but conservation easements (legal agreements that permanently restrict the use of land) have become a hot topic in the tax world and a highly litigated issue in recent years. Syndicated conservation easements (SCEs) have been making headlines for all the wrong reasons.
The IRS has noted a rampant increase in the abuse of the tax deduction for conservation easements. The problem has become so pervasive that the agency has involved its Lead Development Center (LDC) to combat the practice. In conjunction with the LDC, the Department of Justice (DOJ), Senate Finance Committee Chairman Chuck Grassley (R-Iowa), and Ranking Member Ron Wyden (D-Oregon) have been working tirelessly to crack down on syndicated conservation easement abuse.
Creation of the deduction
Congress made the tax deduction for conservation easements permanent in 1980 as an incentive to promote the preservation of historic and environmentally important land. It was a commendable idea, and it has resulted in nearly 33 million acres of conserved land.
But in recent years, some have been using the provision to game the tax system. SCEs have been used to unjustly enrich those who claim the deduction and allow them to avoid paying their fair share in taxes.
Since 2003, the IRS has collected information on individuals who claim this deduction and has found that many claim inflated tax deductions for conservation easements based on questionable appraisals and land valuations. What had been intended as a preservation measure has resulted in the creation of abusive tax shelter schemes.
Investigation of conservation easements
One of the most famous people to be investigated for use of this tax break is former President Donald Trump. The New York Attorney General is examining a $25 million tax deduction taken in 2014 for conservation of the Trump National Golf Course in Los Angeles and a $21 million deduction for the former president’s Seven Springs estate in New York.
While these claims are still being scrutinized, a number of SCE cases investigated by the DOJ have led to guilty pleas. The IRS has noted an increase in abuse of the tax benefit and has announced that it is auditing (or soon will audit) 84% of the partnerships that claimed an SCE deduction in 2015-2017.
An example of such abusive transactions was brought to light in December 2020 when two Atlanta tax professionals pled guilty to schemes that helped their clients claim more than $1.2 billion in fraudulent charitable deductions.
Another case surfaced this year, when a Georgia CPA was indicted for promoting syndicated conservation easement tax schemes involving charitable tax deductions. As previously stated, this problem has become rampant, and it negatively impacts not only the IRS but also landowners and the entire economy.
With billions of dollars escaping the economy through tax evasion, it is no wonder the IRS is aggressively pursuing taxpayers who claim deductions for syndicated conservation easements (SEC) and facade easements.
What is a syndicated conservation easement (SCE)?
A syndicated conservation easement is an arrangement created by promoters who sell shares of a tract of undeveloped land to investors. The investors place money in a partnership with the intent that the land will be donated for conservation to produce a substantial tax deduction. Many of these transactions are merely tax-avoidance schemes, not legitimate investment opportunities.
In many cases, promoters of these transactions inflate the value of the conservation easement, which leads to a fraudulent charitable deduction claim by the investor. As a result of this persistent issue, the IRS issued Notice 2017-10, which identified certain syndicated conservation easements as “listed transactions,” classifying them as abusive tax shelters. This notice became effective on Dec. 23, 2016.
Settling with the IRS
The IRS has promised to shut down the promotion of abusive SCE transactions. Investors who have already invested in a syndicated conservation easement may still have options. The IRS announced on June 25, 2020 that it is extending time-limited settlement offers to taxpayers with pending cases involving conservation easements. If eligible, the taxpayer would be required to make a concession of claimed tax benefits and pay a penalty.
For investors with pending tax court litigation involving SCEs, this may be a great time to settle. Fighting the IRS is not an easy task; it requires a lot of time, money, and effort. As such, the settlement offered by the IRS may be a saving grace.
The Millionacres bottom line
A well-diversified portfolio is the goal of every investor because it could lead to more stable returns. But every investor should know that some investment opportunities may be more than they bargained for, as is the case with syndicated conservation easements. While investing in conservation easements is encouraged, most if not all syndicated strategies will lead to an IRS audit, as well as civil and criminal penalties.
Investors interested in adding a conservation easement to their investment portfolio should do their homework carefully, consult with a competent advisor, and avoid syndicated conservation easements.