If you are thinking about investing or have already invested in a Syndicated Conservation Easement (SCE), you should be aware that the IRS is cracking down on these deductions. Although some conservation easement deductions are legitimate, this tax strategy has been labeled an abusive tax shelter by the IRS, where promoters convince investors to put their money into the easement in exchange for a tax deduction. However, if the IRS rules the deduction to be fraudulent, the investor stands to lose the deduction and incur penalties and interest.
Whether you’ve invested in an SCE or are still considering it, this post outlines the elements you should consider. Our team of SCE tax attorneys are able to provide you with tailored and effective solutions on this matter.
Tax Credits for Conservation Easements
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.
What Are Syndicated Conservation Easements
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.
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.
Are Syndicated Conservation Easements Legitimate?
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.
Consequences of the IRS Denying Your SCE Deduction
Let’s say you save $100,000 in tax due to a SCE, 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.
Felony Charges and Imprisonment for SCE Promoters
In 2024, a high-profile case about SCE abuse led to several felony convictions. Jack Fisher, a CPA from Atlanta, allegedly started selling fraudulent deductions in 2013, and his co-conspirator, James Sinnott, allegedly joined the scheme five years later. According to the DOJ, they allegedly sold over $1.3 billion in fraudulent deductions, costing the IRS over $450 million in tax revenue losses. Fisher was sentenced to 25 years in prison, while Sinnot was sentenced to 23 years.
The two men allegedly sold the SCE deductions to high-income clients and used their earnings to buy millions in luxury purchases. However, they also allegedly cycled some of the money back into the scam and used some investor funds to buy more land, which they often got appraised for more than ten times its purchase price within days of buying it. They also allegedly backdated and falsified documents sent to the IRS. Both men have been ordered to pay over $440 million each in restitution to the United States.
Victor Smith and William Tomasello also face charges for their alleged roles in the crime. Tomasello and Smith allegedly earned commissions for promoting and selling this illegal tax shelter, and Smith’s accounting firm also allegedly earned millions in commissions for selling the deductions to his clients. They both face up to five years in prison.
Six additional defendants have pled guilty to criminal conduct related to this incident. This is certainly not the first or the last case focused on this type of crime – check out this overview of five recent Tax Court cases on SCE. The IRS CI Special Agents are focused on holding people who promote and engage in tax evasion schemes responsible.
Voluntary Disclosure
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. 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.
How to Report Abusive Tax Shelters
If you believe that someone is promoting an abusive tax shelter, such as a syndicated conservation easement scam, you can report them to the Office of Tax Shelter Analysis (OTSA). You can make a report by emailing the IRS tax shelter hotline, faxing the IRS at 844-201-5535, or sending a letter to the agency at Internal Revenue Service, 1973 North Rulon White Blvd., LB&I: OTSA – M/S 4916, Ogden, UT 84201. You can report anonymously if you like.
The Bottom Line
Conservation easements were designed to provide tax incentives for conserving land. However, the program is currently being widely abused in ways that cost the government money and do nothing to conserve land. To learn more, check out our guide to how Tax Court cases have affected investors.
Get Help With Conservation Easement Deductions Today
If you are a landowner interested in the benefits of a conservation easement or an investor who is worried about your CSE deductions, you should reach out to a tax attorney. We can talk with you about what to expect when you invest in an SCE.
At Wiggam Law, we specialize in helping clients with a wide range of tax problems. Don’t let the IRS find out that you have claimed a fraudulent deduction. Instead, get help today. Being proactive is critical when you’re dealing with this type of issue. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting with one of our tax attorneys today.