Two years ago I wrote about the IRS making pre-packaged conservation easement deals (known as “syndicated conservation easements”) in my article The IRS Leaves A Lump Of Coal For Syndicated Conservation Easements In Notice 2017-10.
These are basically deals where the promoter takes piece of property of dubious value, sticks it into an LLC, and then sells shares of the LLCs to folks needing year-end tax shelters. The promoter then gives an easement on the property which “conserves” it for some public purpose, such as to preserve wetlands, and — Voila! — a deduction is created for the LLC for some crazy value, which is then passed through to the folks needing deductions. In Notice 2017-10, the IRS made these deals “Listed Transactions”, which in English is the IRS’s way of saying, “these deals are abusive, so quit doing them.”
Fast-forward two years to a new holiday season, the holidays being for the profits generated by the sales of year-end tax shelters of all shapes and sizes, and we have reason to revisit syndicated conservation easements. This year’s Santa Claus is not the IRS, but instead the Department of Justice, which has filed a complaint seeking to stop a group out of Georgia from continuing to sell conservation easement deals. You can read the complaint here, which contains the DOJ’s allegations of how the group operated.
Named in the complaint as defendants are Nancy Zak, Claud Clark III, Ecovest Capital, Inc., Alan N. Solon, Robert M. McCullough, and Ralph R. Teal Jr.
The complaint alleges that as early as 2009, Zak start organizing and selling syndicated conservation easements. In 2010, Zak started working with defendants Clark (a real estate appraiser) and Colon to further promoter syndicated conservation easements. Eventually, the balance of the defendants joined the scheme and also promoted or assisted with the tax shelter. Among other things, the complaint alleges that the appraisals were unrealistically high and other false representations of value were made.
The group advertised conservation easements through the following subtle advertisement, which is included in the complaint:
In DOJ ComplaintU.S. Department of Justice
The complaint alleges that the defendants’ conservation easement deals “lack economic substance and are shams”, mainly because they were organization for no bona fide business purpose but rather simply to serve as tax shelters. The complaint also alleges that the defendants promoted at least 96 syndicated conservation easement deals that lead to over $2 billion — yep, billion with a “b” — in questionable charitable deductions.
The most amazing thing is that after Notice 2017-10 came out in 2016, the defendants continued to promote these deals, according to the complaint, to the tune of 27 additionally conservation easement deals after Notice 2017-10 was released. This was not only stopping at the red light, but blasting through the intersection at 100 mph in a school zone.
The DOJ seeks an injunction against the defendants to finally make them stop selling syndicated conservation easement deals, and to quit providing wild appraisals for folks to rely upon in filing their tax returns. Interestingly, the DOJ also seeks an injunction against Clark, the real estate appraiser, for being a “tax return preparer” by way of his providing appraisals that were relied upon by taxpayers.
More devastating for these defendants, the DOJ also seeks disgorgement from the defendants of all the profits they made from these deals.
ANALYSIS
At the very least, this should finally put the kibosh on the sale of syndicated conservation easement deals, at least as to promoters who are smart enough not to want to end up on the similar end of a DOJ lawsuit.
But outside of these deals in particular, there is a special lesson here in the example of the real estate appraiser, Clark, who himself may not have promoted these deals but who is alleged to have provided the false factual basis that the other promoters relied upon in doing these deals. This should be a warning shot to similar professionals, not just real estate appraisers, but those who are relied upon in other iffy deals, such as the insurance actuaries that are relied upon for risk-pooled captive insurance companies electing under Internal Revenue Code 831(b).
There is also the issue of whether the DOJ’s action here is a harbinger of a return to their days of prolific “promoter injunction” lawsuits against the sellers of tax shelters. Or, for that matter, whether the DOJ will next go from seeking injunction to bringing criminal indictments against promoters of tax shelter deals.
Stay tuned.
This article at https://goo.gl/FD5vSP