Syndicated Easement Scrutiny Forges New Front With RICO Lawsuit

April 1, 2020, 8:46 AM

A class-action claiming that the promoters of syndicated conservation easements knew from the outset that their deals violated tax laws is a new legal avenue for aggrieved investors as the Internal Revenue Service and the Justice Department grind through their own crackdowns.

The investors’ attempt to use the Racketeer Influenced and Corrupt Organization Act “is a hard battle,” probably aimed at forcing a settlement, said Frank Agostino, founder and president of Agostino & Associates P.C. who was previously an attorney for the IRS and the federal government.

But the class action case, which he and other attorneys said appears to be the first of its type in the conservation easement space, may help the IRS in its probes of promoters, appraisers, law firms and accounting firms involved in assembling or blessing the tax-shelter deals. The IRS gets the benefit of hearing all of the depositions in the case and any evidence that’s uncovered.

By claiming the Georgia deals were fraudulent from the outset, the plaintiffs forfeit their ability to claim to the U.S. Tax Court that the deductions they took were appropriate, Agostino said. If the IRS disallows a taxpayer’s deduction or finds that the value of the donated rights was inflated, the taxpayer may both lose the deduction and face significant penalties.

“They have a class that is looking to destroy the defendants—to find every problem, every nuance,” Agostino said. “And by doing that, the IRS wins.” Bloomberg Tax reached out to several defendants listed in the lawsuit but none could be reached for comment.

Merits of the Lawsuit

Individuals can give land to conservation groups and take a charitable deduction for its appraised value, as they might with a work of art. The deals the DOJ and IRS targeted, and which the Georgia investors are now pursuing, involve promoters selling shares in partnerships that buy land and donate it to a conservation organization.

The abuse occurs when the land value is based on an appraisal that includes unrealistic or fabricated estimates for potential development, which can generate tax deductions several times the properties’ purchase price.

The deals in question took place several years before the IRS in December 2016 issued a notice declaring certain syndicated conservation easements as “listed transactions,” or tax shelters. Specifically, the notice listed transactions where investors receive promotional material offering the possibility of a charitable deduction worth at least 2 1/2 times their investment.

Bryan Kelley CEO of Webb Creek Management Group LLC, a company that has taken part in similar transactions, said in an email that the investors’ lawsuit was “prematurely filed on the mistaken assumption that the Internal Revenue Service’s scrutiny of syndicated easement transactions means that all syndicated easement transactions violate the Internal Revenue Code.” Neither the IRS nor the courts have ever made such a pronouncement, he said. Kelley isn’t named in this new lawsuit.

The IRS has pledged to aggressively audit easement promoters and file criminal charges when warranted, and the Justice Department in 2018 sued one of the largest promoters, EcoVest Capital Inc., saying its deals have resulted in “hundreds of millions of dollars of tax harm” to the government. The DOJ alleges that EcoVest’s deals amount to “nothing more than a thinly veiled sale of grossly overvalued federal tax deductions under the guise of investing in a partnership.”

That case is pending. Ecovest has vigorously defended itself and the legality of its deals, and vowed to remain in business. Nancy Zak, one of the defendants in the DOJ case, is also named in the new lawsuit.

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and ranking member Ron Wyden (D-Ore.) are also investigating these transactions.

The Phases

The Land Trust Alliance, a Washington-based association of conservation groups that has opposed syndicated easements, declined comment on the lawsuit, which was filed in the U.S. District Court for the Northern District of Georgia.

“We will be closely watching this case as it progresses and as we continue our work on Capitol Hill,” said Andrew Bowman, president and chief executive officer. The alliance is pushing a measure in Congress that would restrict the transactions.

Partnership for Conservation, a group that supports syndicated easements, said the lawsuit was dubious.

“It is important to note that the recitals in the lengthy complaint are no more than unproven allegations. While we can’t comment on a particular case, we expect the defendants will paint a different picture when they respond,” said Robert Ramsay, board chairman and president of P4C.

Some law firms have been offering free consultations to those who have invested in these transactions. Epperson & Greenidge P.A., a law firm with offices in Florida and Pennsylvania, has asked investors to get in touch if they bought these investments from a financial adviser or stockbroker. Goodman & Nekvasil P.A., another Florida-based law firm, says on its website that it’s investigating claims against broker dealers and sales agents for “improperly recommending conservation easements.”

Agostino said this is the first class action he’s seen in the syndicated conservation easement space, but that these are typical in situations where there’s a tax shelter that’s gotten the IRS’s attention. “It’s part of the playbook,” he said.

The case is Lechter v. Aprio, LLP, N.D. Ga., No. 1:20-cv-01325.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu@bloombergtax.com; Allyson Versprille in Washington at aversprille@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Bernie Kohn at bkohn@bloomberglaw.com

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