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September 03, 2020

United States Senate Finance Committee Finds Syndicated Conservation Easements to be Nothing More than Abusive Tax Shelters

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The Senate Finance Committee recently concluded that certain syndicated conservation easements examined by the committee are nothing more than abusive tax shelters. As a tax attorney and business advisor, I work with many different clients and closely-held businesses. As part of the work that I do, I work with clients to lawfully minimize their federal and state tax liabilities by reviewing and implementing certain tax planning strategies. The difficulty that we run into when it comes to tax planning, however, is that clients sometimes contact us and tell us about the next great tax planning opportunity that they learned about at a cocktail party—although today it may be a “virtual bourbon happy hour.”  The conversation typically goes something like this:

Vince, I just met Jill Smith from Tax Cheat, LLC, and she advised me of this great opportunity to invest in a syndicated conservation easement partnership. The client then says: I did not really understand it. But, she told me if I invest $100,000.00, I will obtain a charitable deduction on this year’s tax return of $500,000, and will save about $200,000 in taxes this year. This is great.

The client then asks me why I did not bring this up to her, and why she is not investing in this already? Well, I say, there are several reasons. First, it is a tax shelter. Second, it lacks economic substance. Third, you may be opening yourself up to scrutiny by the Internal Revenue Service. Did you really mean to ask the IRS to examine your entire return, and scrutinize every aspect of it? Fourth, you are unlikely to find a well-qualified tax-return preparer that will stake her reputation and CPA license on it, simply to save you a few dollars. Fifth, have you ever heard of the smell test? Do you really think that you can purchase a partnership interest in a syndicated conservation easement for a $1 and receive a deduction of $5? And fifth, and maybe most importantly, have you ever received a knock on the door or a visit from a special agent with IRS CI, otherwise referred to as IRS Criminal Investigation? These individuals are arguably the best and brightest law enforcement officers out there in terms of tracking down money, scrutinizing fraud, pursuing tax evaders, and calling a duck a duck.

Vince Nardone Comment: And, as a former FBI agent, I do not say that lightly. 

Yet, we tell our clients everything I summarized above, and they still decide to invest. And, the tax promoters that brought them the deal find them an unscrupulous tax-return preparer that prepares the return, or, worse yet, the client’s long-time tax return preparer, who is concerned about losing a client, decides to take the risk and prepare the return. The difficulty clients have is that they do not know who to believe. Do they believe their long-time tax planning attorney and business advisor that they have worked with for a number of years? Or, do they believe the tax attorney and CPA that are flying in from the “big city” to sell them the next big tax planning strategy?

From my perspective, some may allow their desire to save money to cloud their judgment on what and who to believe. And, they likely fail to realize or simply disregard the fact that the tax promoting attorney and CPA that flew into town are benefiting monetarily from the investment that the client is getting ready to make. The tax promoter is generally throwing caution to the wind, ignoring all logic and common sense, and citing to us (and our clients) that they are relying on other well-qualified professionals in establishing the numbers that they are relying on, and all swear that the transactions are legitimate. Did we forget about the concept of trust but verify? And then, when you talk with your client, the client does not really understand any aspect of the transaction itself. They just see the tax savings. You then bring up the concept of, “it is too good to be true,” and they ignore that as well.  So, as a tax attorney and business advisor, what do you do?

Well, no answer just yet. The other difficulty that we have as tax attorneys is that we are also working with the IRS or other government folks, like the United States Department of Justice, and IRS CI, who generally have difficulty in pursuing criminal cases in these types of matters. The difficulty is based upon the “so-called” complexity of the transactions and the guidance of unscrupulous advisors out there that swear that the transactions are legitimate. When the government folks are confronted with these transactions, they begin to question themselves. Are we simply not understanding what is occurring? Is this too complicated for my background or experience? Am I simply not smart enough to fully understand? Is it just too difficult and there is other low hanging fruit out there that I can go after? So, rather than pushing forward and calling a duck a duck, they move onto the easier cases and leave the difficult ones for the next Eliot Ness. The tax promoters are hoping for that result. And so again, us tax and business advisors are left with answering the question of “why did you not tell me about this great investment and why have I not invested”?

So, what do we do? Well, what you do, and what you should do is advise your client that (i) because it is a fraudulent and abusive transaction, and (ii) you may be opening yourself to someone alleging that you are committing tax evasion by entering into this transaction, as well as (iii) exposing yourself to numerous draconian penalties, you should not do it. Let’s call a duck a duck, and a fraud a fraud. Fraud (or defrauding or scamming) is nothing more than a crime in which someone tricks somebody else (the IRS) to get unfair or unlawful gain (tax deductions that generate a refund). Frauds are almost always about money, either directly or indirectly. So, to my clients, why? That is all I have to ask you. Why cause yourself the pain and suffering or scrutiny of the IRS and the federal government? Do you really need that? And, I would tell my colleagues at the Justice Department, IRS, and IRS CI, you are smart enough, you do understand it, and you should not avoid it. You are the Eliot Ness. A fraud is a fraud, no matter how complicated one may suggest that it is. 

So, why do I say all of this? Well, it was not until the recent publication of Chairman Charles E. Grassley’s bipartisan investigative report from the Senate Finance Committee, and its conclusions on the abusive tax shelters, that we now have sufficient public information out there on the syndicated conservation easements. The US government has finally stepped up and concluded that these so-called syndicated conversation easement transactions are nothing more than “retail tax shelters” that let taxpayers buy tax deductions at the end of any given year, depending on how much those taxpayers would like to shelter from the IRS, with no economic risk. The general outcome is that for every dollar you invest, you receive approximately four to five dollars’ worth of tax deductions, which ultimately means that for every dollar paid to a tax-shelter promoter, the taxpayer saves two or two and a half dollars in taxes they did not pay. As the Senate concluded, these transactions are abusive in all respects. Clients and other tax professionals are now listening to us as to why you should not invest in certain syndicated conversation easements.  Why did it take so long? I really do not know. I can ask my 13-year-old son, or my two-year-old niece and they would reach the same conclusion. The fact is, just because you give something a different name, or precede it with a disclaimer, it does not change what it is. You can put lipstick on a pig, but it’s still a pig. In this instance, it is still an abusive tax shelter.

In sum, we would encourage our clients to read the full version of the Senates Syndicated Conservation Easement Transactions report, here, and form your own opinion. And, to the extent you have been approached by someone to make a similar investment, you are looking to unwind a similar investment, or you have been contacted by the IRS regarding settlement, and need to know how to handle that, let’s discuss. Finally, please note that there are absolutely legitimate conservation easement opportunities out there, including syndicated ones. The difficulty is determining which one is legitimate versus those that are not. Although I have my own opinion, I will leave the ultimate conclusion to the courts and to Congress.

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September 03, 2020

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