There is nothing there … except maybe a nice fat deduction.
I have previously written about so-called Syndicated Conservation Easements in two articles, the first being, The IRS Leaves A Lump Of Coal For Syndicated Conservation Easements In Notice 2017-10 (12/27/2016), and the second being, DOJ Sues To Shut Down Syndicated Conservation Easement Tax Shelter Promoters (12/20/2018).
For those unfamiliar with the topic, a conservation easement is typically a landowner’s dedication of a part or all of a parcel of land towards some presumably laudable conservational purpose, such as the preservation of wetlands.
In dedicating land to that purpose, the landowner may get a deduction equal to the value of the land that has been dedicated ― and of course any time there is a deduction for just about anything, the tax shelter promoters come scurrying out of the woodwork like so many roaches. Here, the roaches are the promoters of so-called syndicated conservation easements, which are pre-packaged deals that have the singular aim of creating as large a deduction as possible and with only the slightest lip-service towards anything like actual conservation.
A hypothetical example would be this: Picture 160 acres of grasslands in remote Kansas, which might on a good day sell for maybe $1,000 per acre. The promoter sets up an LLC, buys the 160 acres for $160,000 and then creates elaborate plans to put a golf resort on the property. The promoter finds a friendly appraiser who values the golf resort at $40 million. The promoter next syndicates the deal by selling 10 interests in the LLC for $100,000 each to taxpayers who are looking for a tax shelter.
Now we get to the really juicy stuff. The promoter then dedicates the grassland to conservation, and takes a deduction for the LLC not at the $160,000 purchase price of the property, but instead based upon the $40 million value of the proposed golf course. This deduction is then carved up among the 10 taxpayers, so that for a cost of $100,000 each, they each get a $4 million deduction through their K-1 loss distributions. The promoter keeps the $1 million for selling the interests, less of course the $160,000 paid for the property.
Before this all took place, the property was just grasslands in remote Kansas where nobody in their right mind would want to go to a golf resort. After all this took place, the property is still just grasslands in remote Kansas where nobody in their right mind would want to go to a golf resort, i.e., utterly nothing changed on or about the 160 acres itself. But, 10 taxpayers just generated a $4 million conservation easement deduction for themselves at a cost of only $100,000 each, and the promoter just pocketed $840,000 for the paper effort in going through this charade.
Don’t think that the promoters are actually doing much good for conservation, as in reality they are just taking dollars away from what might be legitimate conservation projects.
In my third installment on the subject, we now get a glimpse of the ensuing litigation fallout from the IRS’s efforts against syndicated conservation easement shelters a/k/a SCE shelters. That glimpse comes courtesy of an Original Class Action Complaint filed in the U.S. District Court for the Northern District of Georgia at Atlanta.
But first, let me give the necessary caveat that a Complaint is nothing like an adjudication of the issues that it contains but simply a number of allegations which can be utterly true or utterly false, and recalling the lawyer’s saying that “any fool with $500 can file a Complaint”.
The Complaint in this case is 175 pages long, which folks can read for themselves. The gist of the Complaint, which is brought by an initial group of five plaintiffs who allegedly got burned in a conservation easement shelter, is that an Atlanta CPA firm named Aprio LLP and its partner Robert Greenberger conspired with various law firms, property appraisers, and others, to create a bunch of SCE shelters, which were then sold to taxpayers who later got burned when the IRS showed up and denied the taxpayers’ deductions and also slammed them with substantial penalties. Among the named defendants in the case is Nancy Zak, who was featured prominently in the U.S. Department of Justice’s lawsuit to shut down SCE shelter promoters.
The Complaint goes on to allege that while taxpayers were told they were getting “independent” appraisals and opinion letters in regard to these SCE shelters, in fact it was all pre-packaged and pre-arranged by all these groups. It further alleges that the defendants effectively covered up that one of the involved real estate appraisers “was suspended for his role in preparing various sham appraisals during the year prior to the Appraisal he performed ….” and that later Aprio and Greenberger attempted to keep certain documents away from their own clients so that those documents would not fall into the hands of the IRS.
Filed by Dallas attorney David Deary, who has a long history of recognized successes with class-action cases like these, the first goal of the Complaint is to certify a class action by all taxpayers, and the second goal is to recover against the named defendants under a variety of theories, including violations of U.S. and Georgia RICO statutes, and for professional negligence, breach of fiduciary duty and fraud. The Complaint all seeks that the defendants disgorge what the Complaint contends is their ill-gained profits from selling SCE shelters.
What is not in the Complaint is whether the IRS has or has not started the process to assess the defendants with tax shelter promoter penalties, which can be quite harsh. If not, then the Complaint gives the IRS a veritable roadmap to start its investigation.
If you ever wanted to know how an SCE shelter is put together, the allegations of the Complaint give a pretty good description, and it is well worth the read.
Tax shelters are not easy to kill off, since often the promoters are making so much money off these deals that they decide to keep going no-matter-what, even if their clients later get wrecked by the 40% substantial understatement penalty. This is because the promoters usually realize that their reputations will forever shot and this is their last chance to make a few bucks before the doors close to them permanently.
Thus, class action suits by involved taxpayers who were (falsely) told by promoters that everything was 100% kosher is the only way for them to recoup their losses. These lawsuits necessarily extend to those who aided and abetted the promoters, if not outright conspired with them, because they made money off these shelters too and should be forced to give that money back to make up taxpayer losses. Expect many such class action lawsuits against SCE shelter promoters.
How could these taxpayers have protected themselves? It was easy: They should have gone and obtained their own truly-independent second opinions from qualified tax counsel, instead of allowing themselves to be spoon-fed by tax law firms that were either very friendly with the promoters (who were sending them paying business) if not outright conspiring with them. Truly independent counsel would have said “No way! Run!” to taxpayers, and the taxpayers then would have avoided their own penalties and probably many thousands of dollars in attorney fees in dealing with the IRS.
The IRS warned promoters of SCE shelters as early as December of 2016 that these deals were bad, yet the promoters kept pre-packaging and selling them as if nothing had changed whatsoever ― this was the product of greed mixed with hubris ― but after that the promoters did have to more actively try to pull the wool over the eyes of their taxpayer participants, through bogus appraisals and tax opinion letters what weren’t worth the paper they were written on. And that’s where the conspiracy really gets rolling.
Frankly, the IRS needs to get much more aggressive in pursuing promoter penalties against all the persons involved in selling tax shelters, and not just the SCE shelter ― I’ve said the same thing about so-called microcaptive insurance tax shelters. And, very probably, neither the SCE shelter nor the microcaptive shelters are really going to end until the DOJ sends somebody to jail.
The more quickly that some high-profile promoters do the perp walk, the better for future taxpayers who might otherwise get unwittingly caught up in these schemes. My good friends at the DOJ, please take notice.
Original Class Action Complaint in Lechter v. Aprio, LLP, N.D.Ga. No. 1:20-MI-99999-UNA (Filed 3/26/2020).