2/4/22 - Breaking News - Investor Alert

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. “We’re 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 Will Challenge The Validity of Syndicated Conservation Easements

At the February 2, 2022 American Bar Association Section of Taxation virtual meeting Thomas A. Cullinan , counselor to IRS Commissioner Charles Rettig said, “We may only argue value in particular cases that we want to use as litigating tools, but we are preparing to also argue economic substance, [the non-independence of the appraiser], that the partnership was invalid, substance over form, step transaction, and many others.”

IRS Confident It will Win where Inflated Valuations are Present

According to Cullinan, in addition to invoking the tax shelter tools, the IRS will start focusing more on fighting what it sees as inflated valuations. Cullinan added, The agency is confident that it will win on that issue in syndicated conservation easement cases.

Syndicated Conservation Easement Investors are Warned to Beware of Recent IRS Rulings Regarding Inflated Valuations

In TOT Property Holdings LLC v. Commissioner, 1 F.4th 1354 (11th Cir. 2021), the court called the taxpayer’s argument “dubious” for asserting that the property tripled in value over just 17 days.

Many of the Syndicate Conservation Easement were appraised at much higher values than what the court called dubious in the recent case.

Syndicated Conservation Easements Named on IRS 2019 “Dirty Dozen” Tax Scams

The Internal Revenue Service announced a significant increase in enforcement actions for syndicated conservation easement transactions, a priority compliance area for the agency.

Syndicated conservation easements are private placements that promise tax deductions worth four to four-and-a-half times a person’s investment. Some syndicated conservation easement deals are offering investors charitable contribution deductions on taxes for large amounts.

According to the IRS, coordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS' Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.

According to an IRS Notice: The Treasury Department and the IRS have become aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to claim charitable contribution deductions in amounts that significantly exceed the amount invested. In such a syndicated conservation easement transaction, a promoter offers prospective investors in a partnership or other pass-through entity (“pass-through entity”) the possibility of a charitable contribution deduction for donation of a conservation easement.

Goodman & Nekvasil is investigating potential securities fraud claims involving the liability that sale agents and broker-dealers may have for improperly recommending conservation easements (tax shelter land deals) to unsuspecting investors.

International Assets Advisory Shuts Down Conservation Easement Deals After IRS Scrutiny

According to a report from InvestmentNews:

International Assets Advisory last year raised more than $3 million for one syndicated conservation easement tax shelter and was ready to raise more. But after the IRS recently issued a notice about the deals, the firm has essentially curtailed plans to raise more money for one deal and canceled plan for others, said the firm’s president Ed Cofrancesco. “We were in the middle of the deal when the IRS notice came out in December,” said Mr. Cofrancesco. “That made it a much smaller deal. We probably won’t do anymore.”

The syndicated easement sold by International Assets Advisory, Land Investors was promoting a potential deduction of four-and-a-half times the investor’s initial investment, Mr. Cofrancesco said. The clients who bought the deal were properly informed of the IRS guidelines and went ahead with the investment, he added.

The IRS notice that said the federal government was concerned about valuations placed on such deals. Promoters of the deals are currently “using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment.”

IRS Offers Settlement for Syndicated Conservation Easements; letters being mailed to certain taxpayers with pending litigation

According to the IRS:

The Internal Revenue Service Office of Chief Counsel announced today a time-limited settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions. Taxpayers eligible for this offer will be notified by letter with the applicable terms.

The settlement offer would bring finality to these taxpayers with respect to the syndicated conservation easement issues in their docketed U.S. Tax Court cases. The settlement requires a concession of the income tax benefits claimed by the taxpayer and imposes penalties.

"The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions," said IRS Commissioner Chuck Rettig. "These abusive transactions undermine the public's trust in private land conservation and defraud the government of revenue. Ending these abusive schemes remains a top priority for the IRS."

The IRS recognizes the important role of conservation easement deductions in incentivizing land preservation for future generations. However, abusive syndicated conservation easement transactions have been of concern to the IRS for several years. In Notice 2017-10, the IRS identified certain syndicated conservation easement transactions as tax avoidance transactions and provided that such transactions (and substantially similar transactions) are listed transactions for purposes of Treasury Regulation § 1.6011-4(b)(2) and §§ 6111 and 6112 of the Internal Revenue Code. Also, in 2019, the IRS added syndicated conservation easement transactions to its annual "Dirty Dozen" list of tax scams.

Taxpayers should note that the U.S. Tax Court has held in the government's favor in several opinions and orders in syndicated conservation easement cases. The IRS realizes that some promoters may tell their clients that their transaction is "better" than or "different" from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution. When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it. 

In listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement. After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The IRS has developed a comprehensive, coordinated enforcement strategy to address abusive syndicated conservation easement transactions and has also been working closely with the U.S. Department of Justice to shut down the promotion of them. The IRS will continue to disallow the claimed tax benefits, asserting civil penalties to the fullest extent, considering criminal sanctions in appropriate cases, and continuing to pursue litigation of the cases that are not otherwise resolved administratively. This syndicated conservation easement resolution should not be deemed to have any impact on the potential criminal exposure, investigation and/or prosecution of any individual or entity that participated in or assisted or advised others in participating in a syndicated conservation easement transaction in any manner whatsoever.

The newly established Office of Fraud Enforcement and the National Fraud Counsel are coordinating with examining agents and Chief Counsel attorneys to canvas cases for additional fraud considerations, which might include assertion of the 75% civil fraud penalty, or where applicable, referrals to Criminal Investigation.

In addition, part of the IRS' strategy is the creation of two new offices that are actively investigating these transactions: the Promoter Investigation Coordinator and the Office of Fraud Enforcement. For certain taxpayers involved in syndicated conservation easements, the IRS Office of Chief Counsel has decided, however, to offer taxpayers an opportunity to resolve certain docketed cases on standardized terms. The settlement offer will be sent by mail to those eligible. Among the key terms of the settlement offer:

• The deduction for the contributed easement is disallowed in full.

• All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.

• "Investor" partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.

• Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.

Taxpayers should not expect to settle their docketed Tax Court cases on better terms. Based on cases the Independent Office of Appeals has encountered to date, and the existing state of the law, taxpayers should not later expect a better result than what is provided in this settlement offer.

"With this announcement, we encourage taxpayers and their advisors to take a hard, realistic look at their cases. They should carefully review this settlement offer. We believe this is clearly the best option for them to pursue given all of these factors," said IRS Chief Counsel Michael J. Desmond. "Those who choose not to accept the offer should keep in mind the Office of Chief Counsel will continue to vigorously litigate their cases to the fullest extent possible."

Charitable Donations for Conservation: Are Investor Returns Beyond Belief?

READ THE FINRA ARTICLE HERE: DECEMBER 10, 2021

You May Recover Losses in Conservation Easements through FINRA Arbitration

We believe that investors who have sustained losses in Conservation Easements may be able to recover their losses through a FINRA arbitration claim. If you lost money in any Conservation Easement you should seek the advice of a lawyer who has experience representing investors in investment fraud and broker negligence cases to discuss their rights.

At Goodman & Nekvasil we work on a contingency basis for every one of our clients. No recovery = no fees or costs means that, as our client, you owe us nothing unless we obtain a recovery on your behalf. Attorney’s fees are only collected if you receive a recovery, and the same is true for costs. We bear the costs of your case throughout the process, only receiving compensation if you recover some of your losses. If you don’t win a recovery, we don’t get paid. We have established a fee structure that not only represents the faith we have in our clients’ cases but also motivates our firm truly to work in your best interest. We have aligned our goals with our clients’ goals, and it allows us aggressively to pursue recoveries with all of our resources. We are devoted to achieving the best outcomes for every one of our clients.