By Richard Rubin
The IRS is clamping down on a tax-avoidance technique that turns charitable land-conservation donations into moneymaking opportunities.
Investor solicitations for what are known as syndicated conservation easements promise to turn $100,000 into $400,000 or more in tax deductions, making them attractive to households in the top tax bracket. In one publicly-documented Tennessee deal, a restaurateur's $35,000 investment became about $53,000 within months, subsidized by U.S. taxpayers. Interviews and public documents suggest more than 100 such deals likely have taken place -- with each transaction often saving many individual investors tens of thousands of dollars or more.
Such transactions are popular in Georgia and neighboring states, where teams of investment advisers, lawyers, appraisers and land trusts leverage land-rights donations into business deals offering speedy profits. They say such transactions protect land and efficiently spread tax deductions, from landowners who don't have enough income to use them to taxpayers who do.
The syndicates' recent growth and professionalization alarm many tax lawyers and land trusts, who say the transactions rely on inflated appraisals and sell tax breaks reminiscent of abusive 1980s tax shelters.
To combat the tactic, the Internal Revenue Service last week labeled the most aggressive deals as "listed transactions," requiring syndicators and taxpayers to red-flag their tax returns for deals since 2009. That is creating uncertainty this week for transactions structured to meet the year-end tax deadline.
Syndicated conservation easements remain legal, but the IRS notice flagged deals with a deduction-to-investment ratio of 2.5 to 1 or more as questionable tax-avoidance techniques that its auditors will challenge. The agency can deny tax deductions, impose penalties on appraisers for overstating land values and penalize people who don't report their involvement as much as $100,000.
"It's going to make anybody engaging in this think twice," said Tim Lindstrom, a Virginia tax lawyer critical of syndicated easements.
Charitable contributions aren't supposed to be profitable for donors, said Mr. Lindstrom, who has reviewed deals for clients and told them they could succeed if they are willing to bet they won't get audited.
"They have no idea what the property is," he said. "They are being sold on a deal in which they can invest a dollar and get $5 in tax deductions."
Syndicated deals represent the latest challenge for conservation easements, which have endured repeated IRS scrutiny overinflated appraisals, weak cases for conservation and technical foot-faults. Congress made an expansion of the break permanent last year and ignored limits proposed by the Obama administration.
Established nonprofits have been trying to distance themselves from syndicators, who have sprung up partly to monetize land that developers bought before property values collapsed during the 2007-2009 recession.
"The IRS has taken an important first step in stopping donations structured to give donors back more than they give," said Andrew Bowman, president of the Land Trust Alliance, a trade group.
A Treasury Department spokeswoman said the government's move would "support" the partnerships as one way to preserve land "while preventing bad actors from receiving an artificially inflated tax deduction."
Ron Levitt, an Alabama attorney who defends easement donations against audits, called the IRS action a holiday-season "stink bomb"requiring people to disclose information the government already largely has.
"This is as close as you can get to treating people like they're criminals, and these people are not criminals," Mr. Levitt said. "It's sort of like going squirrel hunting with an elephant gun."
For decades, typical conservation easements have been a popular tax-saving strategy for wealthy landowners, including President-elect Donald Trump. He has used the break at least four times, including a 2005 promise not to build houses on a New Jersey golf course he owns, yielding him up to $39.1 million in deductions, according to local records.
Ordinary conservation easements work like this: A landowner whose property contains important ecological features donates an easement to a nonprofit land trust, permanently restricting development. An appraiser estimates the value before and after the restrictions. The landowner counts the diminution in value as a charitable contribution and takes a deduction.
The breaks are more valuable to top-bracket taxpayers, who are able to maximize them. Enter syndicators, who have created a mini-industry by scouting properties, assembling deals, and pitching investors on multitiered structures, sometimes through private placement of securities.
"It's 'here's the package, here's the appraisal, here's the opinion letter, here's the LLC agreement, send us a check,' " said Steve Small, a Massachusetts lawyer specializing in conservation easements. "The trick, the key, to all of these is an inflated appraisal."
In Georgia, some syndicators argued for appraising land like a functioning quarry and not like undeveloped property requiring permitting and rezoning, according to the state. Another Georgia deal offered investors a deduction worth $438,596 for a $100,000 investment -- exactly what's needed to yield a 100% return in the top state and federal tax brackets. Another Georgia deal relied on an appraisal comparing property without sewer access to land with sewer lines, causing "serious concerns" for Georgia officials checking eligibility for a state tax credit.
The IRS action last week is unfair, arbitrary and overly broad, and the next administration and Congress should review it, said Randy Bampfield, legal committee co-chair of Partnership for Conservation, an industry group formed in August as the IRS was scrutinizing syndicators. "Partnerships provide an important source of private funding to finance needed conservation projects, especially when the current owner is land-rich but cash-poor and might otherwise be forced to sell to a developer," he said.
Syndicated deals are usually secret, but a pending Securities and Exchange Commission case placed rare details, documents and communications into the public record. The SEC case is about how the transaction was structured, not the tax law itself.
Documents show a Charlotte, N.C., accountant, Ed Lloyd, working with Shawn Hooks, a Georgia woman who works with Firehouse Subs restaurants. She had the year-end problem most business people want and hate: Increasing income and a potentially hefty tax bill.
A co-worker connected Ms. Hooks with Mr. Lloyd, who peddled a solution he pitched to other clients. Make a $35,000 "contribution into the land trust," he told Ms. Hooks in an email, and reap enough deductions to save $53,000 in taxes.
Five days after e-mails with Mr. Lloyd, Ms. Hooks's "contribution" bought part of a Wyoming LLC investing in a deal called Piney Cumberland, involving land in rural Van Buren County, in Tennessee.
To justify a donation exceeding $10 million on a 440-acre parcel, the 2012 plan envisioned a maximum use of 116 residential lots, in a county whose population rose by 169 between 2000 and 2015.
Several local real-estate agents said the valuation of over $20,000 an acre sounded extraordinarily high. "I don't know what it would be unless they found gold," said agent Tom Foster of nearby McMinnville, Tenn.
Mr. Levitt, whose firm helped structure the transaction, said he didn't recall details of the deal but added that valuations aren't always black and white. Rick Sharpless, Mr. Lloyd's attorney, said as far as he knows, the IRS never challenged any easement his client was involved in.
Ms. Hooks didn't respond to an opportunity to comment for this article.
Bill Clabough, executive director of the Foothills Land Conservancy, which accepted that easement, said his group doesn't second-guess appraisals and instead focuses on analyzing conservation benefits and enforcing the easement. In this instance, he said, it was "a great piece of property" with a beautiful creek.
Ms. Hooks got the tax break she sought. In an affidavit, she said was "very satisfied" with Mr. Lloyd and made another conservation easement investment the next year.
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(END) Dow Jones Newswires
December 29, 2016 12:13 ET (17:13 GMT)
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