Easement $1.3B Tax Fraud Case Signals Big Enforcement Lessons

A federal jury last month convicted two of the three defendants in the first syndicated conservation easement tax fraud trial. It was a win for the government, which had alleged that the defendants planned, promoted, and sold over $1.3 billion in abusive syndicated conservation easements that were actually just tax shelters.

Jack Fisher and a lawyer who worked with Fisher, James Sinnott, were convicted of conspiracy to commit wire fraud, aiding and assisting the filing of false tax returns, and subscribing to false tax returns. Clayton Weibel, an appraiser who worked on the easements and was tried with Fisher and Sinnott, was acquitted.

Setting Precedent

Promoters and others involved in the formation of syndicated conservation easements should be on high alert for possible civil and criminal investigations and enforcement by the Department of Justice and the IRS. Investors who used syndicated conservation easements to reduce their tax liability in past years should also ensure they understand what liabilities they may incur if those transactions are found to be a sham, including tax, interest, and possible penalties.

They also should ensure that all documentation is in order and preserve any information received about the investment, including tax opinions and other professional advice they relied on to make the investment or in filing a return. These could be crucial to a defense if the IRS asserts penalties.

The law that created conservation easements hasn’t been repealed, and there are still opportunities to place easements on property that will result in valid tax deductions. This case is a roadmap of the badges that draw the IRS’s attention, and thus is also a map of what to avoid.

For example, quick turnaround from sale to donation, backdating of documents, appraisals that are quadruple the purchase price, and deductions that dwarf investment are hallmarks of structures that are bound to draw enforcement scrutiny. Taxpayers and advisers alike should be wary of transactions with these characteristics.

Broader Impact

Tax-advantaged structures have always drawn the IRS’s attention for potential abuse, even where a transaction has its roots in legitimate structures and purposes. Conservation easements were blessed by Congress and the IRS as valid ways to incentivize worthwhile behavior—that is, the protection of land for a conservation purpose.

Syndication of that tax advantage was at first seen as a way to expand participation to taxpayers beyond those wealthy enough to own land worth conserving by themselves. However, when the activity in this space ballooned, representing billions of dollars in tax deductions, the IRS began to suspect that conservation wasn’t at the heart of the transactions. This is true for other types of transactions and should be a cautionary tale for taxpayers investing in tax-advantaged structures.

Lessons Learned

Obtain independent advice and retain a record. Any taxpayer engaging in a donation, sale, easement, or other transaction that will result in a tax benefit should consult with a tax adviser before doing so. If they decide to proceed, all steps, motivations, understandings, and evaluations should be well documented.

In the syndicated conservation easement case, professionals such as lawyers, accountants, and appraisers were accused of wrongdoing and being part of the scheme. Their alleged participation emphasizes the need for taxpayers considering investment to obtain independent advice from a professional who has nothing to gain from participation in the structure.

Be wary of promoted tax-planning structures. This case reminds us to be wary of tax planning that comes as a pre-packaged and promoted plan. Every taxpayer has a different tax and investing profile, and therefore should be skeptical of a “one size fits all” tax plan that is being sold repeatedly.

Don’t ignore red flags. Details such as backdating documents, and promoters using proceeds to buy luxury items, may have increased the hazards for the defendants who were convicted in this case. However, the core of the case remains the same as many other tax shelter prosecutions—if it seems too good to be true, it probably is.

While Congress uses credits and deductions to encourage certain behavior, such as retaining employees, investing in clean energy, and conserving environmentally significant property, tax benefits associated with those behaviors are proportionate. Anyone promising a “free” tax credit or deduction is selling you something. This case reminds us: buyer beware.

The case is: USA v. Lewis et al, C.C.N.D. Ga., 1:21-cr-00231, Conviction 9/22/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

S. Starling Marshall is co-chair of Crowell & Moring’s tax group and a member of the litigation group. She is a trial lawyer with more than 15 years of experience and has represented clients before federal and state courts, arbitration panels, and administrative tribunals.

Carina Federico is a partner in Crowell & Moring’s tax group. She advises on wide-ranging, complex tax issues including transfer pricing, investment tax credits, research and experimentation credits, and energy credits.