Atlanta Conservation Easements Attorney

The basic concept of a conservation easement is simple. A landowner agrees not to develop part or all of their land, and they donate an easement to a qualified land trust. Then, they earn a tax deduction worth the money they are forgoing by not developing the land. The easement attaches to the land; if the owner sells the land, the next buyer cannot develop it either.

The IRS has special terms for these charitable deductions. Individuals can claim a credit worth up to 50% of their income (100% for farmers/ranchers) and roll the credit forward for 15 years. In contrast, deductions for most donations of appreciated property are limited to 30% of an individual’s income and can only be rolled forward five years.

Additionally, some states offer tax credits for conservation easement donations, which can make them even more valuable. “

A syndicated conservation easement works just like a regular conservation easement, but it allows multiple investors to own the land and divvy up the deductions between themselves. The Tax Reform Act of 1976 created this deduction and was made permanent in 1980. However, claims have skyrocketed in recent years as some people have decided to abuse this charitable tax break.

Here’s how the abuse happens. A “promoter” creates an LLC to buy undeveloped land for cheap. Then, they get an appraiser to say what the land would be worth if they developed it, and the appraiser inflates the valuation. When the promoter donates the conservation easement, the appraisal creates the value of the deduction. Then, the promoter sells shares in the LLC to investors in exchange for the value of the tax deductions.

Syndicated conservation easements can provide a legitimate way for landowners to get tax credits for agreeing to conserve their land. However, many landowners (especially people who have owned land for generations) do not have income high enough to benefit from the tax credits.

Because of that, some landowners take out conservation easements, and then they sell the tax deductions to other entities. If you are selling a tax deduction or a state tax credit, make sure that you work with a trustworthy credit broker. Also, consult with a tax attorney or CPA to see how to report the income you received from the sale.

If you’re an investor who wants to buy tax credits or tax deductions related to conservation easements, you should also ensure that you work with trustworthy brokers. Also, be aware that the IRS has labeled syndicated conservation easements as one of the biggest tax scams happening right now.

Let’s say you save $100,000 in tax due to a SCE that you invested in for $50,000, and the IRS selects your return for an audit and disallows your claim. At that point, you lose the deduction, and your tax bill increases by $100,000. You also incur an accuracy-related penalty of 40% because the understated tax was due to a gross valuation misstatement. Plus, interest applies on top of that amount back-dated to the original due date of the tax return.

At this point, you are out the $50,000 investment, plus you owe $140,000 in tax and even more once the IRS tacks on the interest. Your gamble has resulted in a significant loss. Unfortunately, you are responsible for the information on your tax return, and even working with an abusive tax shelter is generally not an excuse that can help you avoid penalties or other consequences.

You can make a refundable tax deposit with the IRS to stop or suspend the running of interest on any liability you owe to the IRS as a result of the audit. There are also settlements you can pursue at the state level. You should contact a tax attorney to discuss your options to reduce your total exposure as an investor.

Conservation easements are legal, however, the syndicated conservation easement promoters have developed a means for taxpayers to benefit from the charitable deduction — in a way not envisioned by the US Tax Code. With a syndicated conservation easement, taxpayers invest in a partnership that owns real property. The partnership then places a conservation easement on that property, and then deducts the fair market value of the property — but with the pre-easement value often overstated. Taxpayers who invest in syndicated easements typically save a significant amount of money on their income taxes. The IRS views these transactions as illicit tax shelters, and are attempting to shut syndicated conservation easement transactions down.

Here’s how the abuse happens. A “promoter” creates an LLC to buy undeveloped land for cheap. Then, they get an appraiser to say what the land would be worth if they developed it, and the appraiser inflates the valuation. When the promoter donates the conservation easement, the appraisal creates the value of the deduction. Then, the promoter sells shares in the LLC to investors in exchange for the value of the tax deductions.

Here’s a quick example. Say the promoter forms All Natural Land LLC and buys land for $1 million. The promoter has Sneaky Appraiser write a report estimating that the land’s value if developed, would be $10 million. Then, the promoter sets up a conservation easement to get approximately a $9 million tax credit. At this point, the promoter sells shares in All Natural Land LLC to investors. Let’s say he sells 90 shares for $50,000 each.

The investors spend $50,000 because they know that, in return, they get a tax deduction that saves them approximately $100,000 in tax. The result is that the promoter has received $4.5 million for the land that they just bought for $1 million, and the IRS has lost millions of dollars in tax revenue. Often, this process can happen in just weeks or days from the date they purchased the land.

This alleged scam is costing the IRS billions every year, and the agency is cracking down. The IRS has also stated that all conservation easement donations are considered listed transactions and must be accompanied by an appraisal.

If you are thinking about investing in an SCE or have already claimed an SCE deduction, you should consult with a tax attorney. The IRS is auditing nearly all of these deductions, and despite a few small taxpayer victories, the Tax Court has upheld the government’s interest in most of these cases.

Promoters may tell clients that their investment opportunities aren’t the same as the ones that have undergone challenges in Tax Court, but before putting your money into this type of investment, you should learn more about the long-term implications of SCE transactions.

In June 2024, the IRS announced it was mailing limited-time settlement offers to taxpayers who invested in Syndicated Conservation Easements (SCEs) or similar transactions.

The 2024 offers vary based on whether your case is docketed or not, and these offers only apply if you received a settlement offer letter from the IRS. –

• Docketed cases: Partners can keep the deduction related to their cost, which is typically the amount invested, but the remaining deduction will be disallowed, and they will incur a 10% penalty. Partners will pay tax on the disallowed deduction at their individual income tax rates.
• Nondocketed cases: If all partners agree to the settlement, the deduction minus costs will be disallowed. The partnership will pay a 21% tax on the unreported income, and the penalty will be just 5% of the unreported tax liability.

With both offers, the penalties are significantly lower than the 75% civil fraud penalty or the 40% accuracy-related penalty. For non-docketed cases, the reduced tax rate offers significant savings compared to the highest possible individual tax rate of 39.6%.

If you want to avoid prolonged litigation, you may want to consider an offer carefully. The IRS has stated that it will not offer better settlement terms.

Georgia’s Voluntary Disclosure Program (VDP) can be a useful tool for taxpayers facing potential state tax exposure related to conservation easement transactions. The program is intended to encourage voluntary correction of past tax issues by offering more favorable treatment than would typically be available once the Georgia Department of Revenue initiates contact.

The primary benefit of the VDP is penalty relief. If a taxpayer comes forward before being contacted by the Department of Revenue, penalties are often waived. In addition, the state will usually limit how far back the taxpayer must go to correct filings and pay tax and interest. While the standard look-back period is generally three years, the Department has discretion to require a longer period depending on the facts.

It is important to understand that the VDP does not eliminate the underlying tax or interest owed, and acceptance is not guaranteed. The program is discretionary and negotiated on a case-by-case basis. When accepted, the taxpayer enters into an agreement with the state, files the required amended returns, and pays the agreed tax and interest in exchange for reduced enforcement risk and penalty relief.

For taxpayers with potential conservation easement liabilities, the VDP can provide a controlled, proactive way to address exposure before it escalates into audits, assessments, or litigation.

Have you received a settlement letter? An audit notice? Or other IRS communication about your SCE deduction? Are you worried about an SCE deduction you claimed on a previous year’s tax return?

If you believe that you may have committed a tax crime, you may be able to get relief from the IRS’s voluntary disclosure program. The program limits criminal exposure and may waive some penalties for qualifying taxpayers. To participate, you must contact the IRS before they contact you. It’s too late to use this program once you’re selected for an audit or under investigation.

However, the IRS says that you should always consult with a tax attorney before making a voluntary disclosure. An attorney can help you understand the implications of a disclosure and identify if you have other options, such as doing a “backdoor disclosure” by amending your return.

In the past, the IRS has offered SCE settlement offers to taxpayers who are already under litigation. There are benefits of the settlement offers but also other elements you should consider. However, if you end up with a tax liability due to a denied deduction and penalty and you cannot afford to pay, you may qualify for a settlement through the offer in compromise program.

Regardless of the situation you’re facing, we can help.

The legal team at Wiggam Law has been defending and guiding taxpayers regarding conservation easements and SCEs for years, and we can answer your questions. To learn more, contact us today to set up a consultation.

Conservation easements can provide an investment opportunity that comes with environmental benefits and tax savings for investors, but these investment vehicles have been abused at very high rates. Many investors have had their deductions disallowed years after filing, leading to an unexpected tax liability plus interest and penalties.

If you’re aware of the risks but still interested in pursuing an SCE investment, consider the following as you evaluate different opportunities:

• Promoters: How long has the promoter been in this space? How often have their partnership returns been audited? Did they pass the audits? How did they fund the legal costs for the audit and appeals?
• Land valuation process: Who is doing the appraisal? Will there be a peer review or multiple appraisals? What type of documentation does the appraisal include, especially in relation to comps or expert opinions of the highest and best use of the land?
• Valuation multiplier: As an investor, you want the highest number possible, but the higher the number, the more likely you are to face IRS scrutiny.

Before investing in a conservation easement, research its legitimacy and talk with an experienced tax attorney or accountant before finalizing your decision.