On Dec. 21, 2020, two brothers from Georgia, Stein and Corey Agee, pleaded guilty to conspiracy to defraud the US government. The Agee brothers played a role in generating over $1.2 billion in fraudulent charitable tax deductions. Upon their guilty plea, Stein and Corey appear to have cooperated in a broader Department of Justice investigation. Eighteen months later, seven others are under federal indictment for alleged crimes as part of a syndicated conservation easement tax scheme.
The recent guilty pleas and indictments reflect just a small portion of the illicit manipulation of the otherwise highly successful conservation easement deduction. The tax benefit should continue, but the fraud and abuse of conservation easements has to stop.
Traditional conservation easements are voluntary and legally binding agreements between landowners and the federal government that are designed to help hardworking farmers, ranchers, and other property owners to protect some of our nation’s important lands. The landowners agree to refrain from certain types of development and uses on their land in exchange for a tax deduction based on the resulting loss to the market value of the property. In Montana alone, this has helped over 2,500 landowners protect 2.6 million acres of land.
Unfortunately, a relatively small number of bad actors manipulated this deduction by creating abusive tax shelters involving syndicated conservation easement (SCE) transactions in which promoters sell stakes in property to individual investors through a pass-through entity, and the promoter uses the investors’ funds to purchase land that is donated as a conservation easement. Central to the scheme is that the promoter seeks an inflated appraisal of the property had it been developed. The investors then receive a massive tax deduction calculated by the difference between exaggerated loss of market value and their initial investment.
In 2020, then-Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) completed an exhaustive investigation into SCE transactions. They found the following:
“The syndicated conservation-easement transactions examined in this report appear to be nothing more than retail tax shelters that let taxpayers buy tax deductions at the end of any given year, depending on how much income those taxpayers would like to shelter from the IRS, with no economic risk … [The] promoters told their taxpayer-investors that for every dollar the taxpayer-investors paid to the promoters, they would save two dollars on their taxes.”
The IRS estimates investors netted a whopping $10.6 billion between 2010 and 2017 through abusive SCE tax shelters. As my favorite president, Ronald Reagan, knew, such manipulation of the tax code is theft directly from the pockets of hardworking American taxpayers. In 1985, he reminded us, “[C]lever schemes to avoid paying taxes … (are) paid for by somebody else—that somebody being you.”
In trying to crack down on this fraud, the IRS in late 2016 designated syndicated easements as listed transactions—presumed tax shelters. Unfortunately, the behavior not only continued but also was exacerbated. According to IRS data for 2018, 296 syndicated transactions produced $9.2 billion in deductions, up from $6.8 billion in 2017. In contrast, an average of over 2,000 traditional easement transactions amount to only $1 billion in annual deductions. This means roughly 90% of the money flowing out of the Treasury comes from easement deductions that are likely fraudulent. And it’s beyond unacceptable—this system cannot continue to facilitate the swindle it so clearly enables today.
Sens. Debbie Stabenow (D-Mich.), Wyden, Grassley, and I are working with our Senate colleagues to advance a bill to stop these abusive tax shelters by codifying and building upon the 2016 IRS listing notice. Our Charitable Conservation Easement Program Integrity Act targets the most egregious abuses by prohibiting deductions above 250% of an investor’s purchase price, unless a pass-through entity holds the land for over three years. Under this legislation, a syndicate could no longer buy a property for $10 million, have it inaccurately appraised for over $35 million, and take more than $25 million worth of deductions.
Our bill provides a bright line that still incentivizes charitably minded property owners to conserve land but ends bad actors overrunning the system on the taxpayer’s dime. It is retroactive to the date of the IRS notice, which is when those engaged in abusive SCEs should have immediately stopped their behavior.
Critics contest the retroactive enforcement, but their argument ignores the straightforward IRS notice and reality that other suspicious tax shelters stopped after the IRS flagged them as a listed transaction. Congress assumed the same would hold true here but did not appreciate that the millions made from these shady deals changed the risk calculus for SCE operators and investors.
Opponents also are wrong to claim that going after a specific abusive tax scheme is similar to the deeply problematic, misguided efforts by the Biden administration to audit small businesses for any and every possible mistake. The abusive SCEs are not mom-and-pop shops trying to get by. They are bad actors who willfully ignored explicit warnings to stop their schemes.
That said, I am willing to compromise on the enforcement date as a way to build consensus and pass our legislation while still holding past abusers accountable in tax or criminal court. I’m also committed to ensuring the billions of dollars saved from stopping the abuse is sent directly to the American people in the form of tax cuts.
Taxpayers can and should take advantage of policies that legally lower their tax burden. But creating retail tax shelters, engaging in tax fraud, filing false returns, or committing wire fraud and other crimes cannot be tolerated.
At a minimum, folks who entangled themselves in abusive SCE tax shelters should pay back the American people. Those found guilty of crimes in pending and future court cases should receive stiff sentences on top of that. Finally, and equally important, Congress should pass our bipartisan legislation to finally stop the abuse and restore the integrity of the conservation easement deduction.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
U.S. Sen. Steve Daines brings 28 years of private-sector experience to Washington, D.C., as he serves the people of Montana in Congress. Daines serves on the Finance, Banking, Energy and Natural Resources and Indian Affairs committees, where he advocates for commonsense policies.
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