Syndicated Conservation Easement

The US Tax Court recently issued decisions expressing its disdain and weariness towards taxpayers with syndicated conservation easements.  In several recent cases taxpayers claimed over-inflated charitable deductions using conservation easements.  The Tax court shot the Taxpayers down and continued to express its disdain and contempt towards syndicated conservation easements that claimed over-inflated deductions. What is a syndicated conservation easement?

A syndicated conservation easement is a partnership or group of investors that owns real estate.  The partnership will donate an easement and claim a charitable deduction equal to the fair market value of the easement.  For example, the partnership may purchase forested land.  It will donate an easement to a conservation group preventing logging on the land.  It will then claim a charitable deduction equal to the fair market value of the easement.

This seems reasonable at first glance.  If someone donates something for charitable purposes, they should be able to claim a deduction or write-off.  However, Taxpayers in many syndicated conservation easement cases were claiming charitable deductions that were several times more than their initial investment.  In the recent Lontrac Enterprises case, investors were getting tax benefits over 3 times the dollar invested.  The partnership claimed a deduction of over $70 million for a property that was worth less than $3 million.  

When the Tax Court decides such cases, it must abide by decorum.  At the same time, its opinions must methodically dissect the syndicated conservation easement.  There entities are often complex business structures the Tax Court must disassemble piece by piece as it renders its opinions.  The Tax Court’s opinions in Syndicated conservation easement cases often exceed 60 pages whereas most other Tax Court Opinions are under 20 pages.

Nevertheless, we can get an idea of what the tax court thinks by looking towards the blunt language (by Tax Court standards) used in the writing of these opinions.  In the Lontrac Enterprises case mentioned above, the Tax Court writes, “In a situation resembling the movie Groundhog Day, we once again consider a syndicated conservation easement transaction” and describes the taxpayers as having “sheer audacity.”

In the Del Monte LLC case, the Tax Court accuses the taxpayers of engaging in “cheap sophistry” and found the taxpayers’ penalties for gross valuation overstatements were “richly deserved.”  The Tax Court brutally dismissed the Taxpayer in the  Watson Lake Investments matter.  The opinion’s first words, were, “These syndicated conservation easement (SCE) cases have a familiar fact pattern, and this Opinion will have a familiar denouement.”  

The Tax Court is usually very polite and courteous with taxpayers.  Taxpayers who show up to tax court unprepared and with no receipts are usually given more courtesy than the taxpayers in the Syndicated Conservation Easement cases.  The underlying theme in these opinions is that Taxpayers were well-to-do, sophisticated, and should have known the Syndicated Conservation Easement scheme was too good to be true.

Taxpayers finding themselves in the IRS crosshairs should evaluate their approach when they face audits and potential tax court litigation.  Taxpayers should anticipate a tough and perhaps unwinnable uphill battle if they decide to take their case to Tax Court. Taxpayers should perhaps look into other strategies rather than trying to justify their over-inflated tax deductions.  

At RJS LAW, we help clients with all types of tax problems, including federal tax problems.  Our collaborative approach to tax problems can be highly effective at mitigating damages when taxpayers find themselves facing uphill battles.  Please feel free to contact us at 619-595-1655 for a no-cost consultation.