The Irresistible Allure Of Abusive Conservation Tax Deductions

Taxes

There is no such thing as bad publicity. That may be what is proved by the continuing growth of the syndicated conservation easement industry in 2018 in the face of dire warnings from the IRS. According to a recent IRS report publicized by the Senate Finance Committee, the number of participants increased from 14,000 to 16,900 and the total amount of deductions claimed went from $6.8 billion to $9.2 billion.

Unscrupulous Actors

The report notes that the deals are made possible by a small number of unscrupulous actors – 34 appraisers who provided valuations on some 296 syndicated conservation easement transactions.

I don’t know. That seems pretty harsh. There are also the financial planners who have been selling these deals. I mean the sales force is really the tip of the spear when it comes to expanding the market. The medical community in Rome GA only has so much income to shelter. I recently heard from somebody from one of the winning states in the Late Unpleasantness who bought a 2018 deal, but chickened out and did not take the deduction and was trying to figure out what to do.

The Data

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The IRS is basing its numbers on the disclosure forms that it has received (Form 8886). The IRS designated certain syndicated conservation easements to be “listed transactions” in January 2017. Forms were required to be filed for all transactions after January 1, 2010, if the statute was still open as of December 31, 2016. The penalties for not filing Form 8886 are extremely nasty.

The IRS received 39,619 disclosures in 2017. Remember that is the catch-up year. In 2018, they received 15,499 forms which mostly related to 2017 transactions. I find it surprising that there were still a lot of 2017 deals – Reilly’s Fourteenth Law of Tax PlanningIf something is a listed transaction, just don’t do it. Lobbyists were pressuring Congress to pressure the IRS to back off on its enforcement. So the party continued.

What is really amazing is that it grows with the 2019 filings which relate mostly to 2018 transactions. Those are up to 17,182. Anecdotally, people tend to sign up for these things at year-end when they have a good idea of how much income they have to shelter. On December 18, 2018, DOJ got into the act filing a complaint against some of the biggest players in the industry.

Hard To Pass Up

Syndicated conservation easements originated in the southeast, particularly around Atlanta and Rome GA. Although that is where the brains remain, the investors are now spread across the country. A couple of people contacted me about them from various places outside the South. I had to tell them that they should not work, but there was a chance that they would.

More to the point, I could not tell them of anything else that was anywhere near as good that they had not already done. It is December 1. You have a high salary but not much in the way of wealth. Let’s assume a state where you get itemized deductions and use a 40% marginal rate to make the math easy. You pay $10,000 and get a $50,000 deduction (Eliminating outliers the IRS indicates that the average multiple went from 4.92 in 2018 to 5.06 in 2019). That saves you $20,000. Essentially, up to a point, you are paying your taxes for fifty cents on the dollar.

When I reached out to other professionals about what you could do for a high salary person with no net worth, whose employer did not want to play ball, I did not get much in the way of answers. A few of them assumed away my assumption about the employer.

The Woe Of High Income Low New Worth

In my coverage of syndicated conservation easements, I have attracted one critic who berates me occasionally. He refuses to identify himself. One of his key statements relevant here is:

What is the difference between a well-meaning “philanthropist” who wants to preserve a $10M property for the good of the Public Domain, and 15 neurosurgeons who also want to preserve the exact same $10M property for the good of the Public Domain? If your answer is anything other than “none”, then you are an elitist snob who needs to read the Constitution.

Wealthy people can avoid taxes by avoiding income recognition. They can then double down with that by taking a charitable contribution for the untaxed appreciation. That is not something available to people with high income, but not much wealth.

That is the allure of these deals.

About The Newer Deals

Something that I have not seen discussed is the effect of the new partnership audit regime on deals from 2018 on. The deals are typically structured for there to be a put on the conserved property for a negligible amount, so the expectation is that the investor partners will be out in a year or two.

The default under the new audit regime is that the IRS goes against the assets of the partnership first. Then they go against the partners who are there at the time of the adjustment. (There are elections that can change that). It strikes me as not improbable that both those cupboards will be relatively bare, but they have to be gone through before they go after the investors who got the deduction.

I have not been able to figure out how that is going to work. My one prediction is that it will not end well and that if I am spared I will still be writing about litigation around these deals in a decade.

And I am afraid that it is not going to end well for professionals caught up in this frenzy after DOJ and the class action attorneys are done with them.

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