Congress Readies Last-Ditch Effort to Limit Land Tax Deductions

Two years after a Senate report vilified syndicated conservation easements as sham tax shelters, congressional critics of the practice hope to pass legislation this month to deter the land transactions that have cost the Treasury billions of dollars.

The measure has bipartisan support and would cap the deduction taxpayers can take to no more than two and a half times their initial investment, a ceiling far below what many have been taking.

After years of intense lobbying by supporters of the write-off, lawmakers agreed to remove a provision that would have applied the new limits retroactively to 2016 and enabled the IRS to recoup potentially billions of dollars in past deductions.

With control of the House changing next month, this could be the last-gasp push in a multi-pronged, if sometimes stumbling bid by the government to curb conservation easements.

The US Tax Court last month appeared to shoot down an IRS effort to systematically track and audit the transactions by requiring participants to report them on a special form or face penalties. A long-running Justice Department lawsuit against a prominent player in the industry is likely headed towards a settlement.

Syndicated easements involve promoters who organize partnerships to buy land, then donate away rights to develop the land, a process that generates huge tax deductions. Both the IRS and the Senate investigators assert some investors use wildly inflated appraisals of the properties and take outsized deductions.

Investors claimed nearly $36 billion in unwarranted deductions from 2010 to 2018, according to the Land Trust Alliance, which opposes the practice. IRS reports suggest the write-offs have continued since then at a similar rate, the alliance said.

Michelle Abroms Levin, a former Justice Department Tax Division attorney, blamed the government’s failures on its overly aggressive positions.

“It’s kind of like the expression for a child that its eyes are bigger than its stomach—they are trying to bite off too much,” said Levin, who has been involved in several high-profile easement cases.

One More Time

Lawmakers hope to vote on a bipartisan retirement bill this month that will include the provision on conservation easement limits.

“The IRS has been chasing bad actors in the conservation easement space for far too long—it’s long past time we put this issue to bed,” House Ways and Means Committee Chairman Richard Neal (D-Mass.) said in a statement.

Many syndicated transaction participants use property appraisals to claim deductions more than two and a half times their initial investment, so the new law would have an impact. But it’s less punitive than previous versions that would have made the limits retroactive to 2016 and forced taxpayers to repay the amounts they previously deducted.

Senate Finance Chairman Ron Wyden (D-Ore.) said lawmakers had to drop the retroactive provision to get the votes for the legislation. Sen. Steve Daines (R-Mont.), a lead sponsor of the original bill, was hopeful it would become law this month. So, too, was Rep. Kevin Brady of Texas, the ranking Republican on Ways and Means.

“I believe in the conservation easement tax approach, but you’ve got to make sure that abuses are rooted out so that the value and the incentives stay in place,” Brady said Wednesday. Brady said he felt good about the easement provision and discussions around the retirement bill.

The syndicated easement industry has spent more than $10 million on lobbying since 2017 to successfully torpedo previous versions of the measure, sometimes at the last minute, according to data from OpenSecrets, a nonprofit that tracks money in politics.

In 2021, the provision was left out of the House version of President Joe Biden’s tax and social package after objections from Sen. Krysten Sinema (D-Ariz.). The year before, the provision was axed from a year-end funding package when a handful of Republican senators objected.

Partnership for Conservation, a group that supports syndicated easements, still opposes the bill.

“Unfortunately, the proposed changes related to conservation easements continue to penalize one specific class of donor rather than provide greater clarity for all donors wishing to choose conservation for their land,” Robert Ramsay, president of P4C, said in a statement. “The proposed bill language is very broad and would limit virtually ALL non-family-owned partnerships from choosing to conserve their land.”

Battles And A War

The legislation could end up being the most stringent new reform imposed on easement syndicates, after the government once seemed poised for a stronger crackdown.

In a lawsuit filed in 2018, the DOJ alleged the promoter EcoVest Capital and others associated with it reaped $3 billion in improper and overvalued tax deductions since 2009. “Cheating on your taxes will not be tolerated,” former IRS Commissioner Charles Rettig said at the time.

EcoVest countered that the government didn’t have enough evidence to back up its fraud claims and that the Justice Department was delaying the case.

Settlement talks were announced in September. Last month, a district court judge ordered the case closed for now, and told the parties to provide an update on their negotiations by Jan. 20.

“EcoVest made that offer on November 18, and while a process must play out over the next several weeks, we anticipate it will be acceptable to the Government,” said Sean Akins, counsel for EcoVest. “We are pleased with what we expect to be the ultimate outcome and are confident that the results will look favorably on EcoVest.”

The DOJ didn’t respond to a request for comment.

Also last month, the tax court ruled that the IRS in 2016 had improperly created the mandate that syndicated easement participants had to report their transactions.

The agency had created that requirement in 2016 for syndicated easements going back to 2010.

The government pledged to defend the rule in other courts, but it also proposed a new requirement this week that would apply to taxpayers who didn’t previously report but whose prior transactions are still within the statute of limitations for assessing taxes.

It’s unclear if that will bring a new legal challenge. In its Nov. 9 decision, the tax court declined to rule on a taxpayer challenge to the retroactivity of the old requirement because the court was already setting it aside on other grounds.

The IRS did not respond to a request for comment.

The new rule won’t be finalized for at least months and it is unclear what will happen to previously collected data. The IRS signaled in the proposed requirement that it may go further than it had previously and start imposing a shelter-related tax on nonprofit land trusts.

Gil Rothenberg, who previously headed the appellate section for the Justice Department’s Tax Division, said the government is still proceeding with other efforts to combat improper conservation easements, including on the criminal front.

The department in 2020 secured fraud conspiracy convictions against two brothers, Stein and Corey Agee, who were tied to an alleged $250 million tax scheme involving conservation easements. Also pending is a trial against seven people, including an Atlanta certified public accountant, indicted for allegedly conspiring to design and sell more than $1.3 billion in fraudulent tax deductions.

“So the government has lost some battles, but there’s still an ongoing war,” Rothenberg said.

No Slowdown

Those who keep tabs on the industry say easement deals are still going on, especially at the end of the year, when the wealthy look to reduce their annual tax bills.

Lori Faeth, a senior director at the Land Trust Alliance, said there are indications the use of such deductions is even expanding.

“Making this abuse illegal by law would be a win for honest taxpayers, a win for land conservation, and a win for the integrity of a worthy charitable program,” she said.

WealthPRIME, a company with an address in Los Altos, Calif., that advertises conservation easements as a way to “dramatically reduce income taxes” said in an October news release that “the removal of previous retroactivity language in proposed legislation means current investors will enjoy grandfather status should legislation pass in the future.”

A promotional video about syndicated easements on the company’s website features a man holding a sack of money and the promise that “conservation easements offer investors unparalleled tax savings.”

Dan Harding, president and founder of WeathPRIME, said in an email that the recent tax court ruling upheld the legality of conservation easements as a strategy for tax reduction for investors “who want to preserve the environment.” “Now that conservation easements are no longer a listed transaction, CPAs and Advisors should have confidence recommending these investments as an option for their client’s tax planning,” he said.

Steve Small, a tax attorney who has studied syndicated easements, says the pending legislation could shut down the most egregious deals.

“These people who’ve made a lot of money selling syndications will either move to another profession, or find a different tax shelter,” he said.

With assistance from Chris Cioffi.