In syndicated conservation easements, promoters twist a provision of the tax law allowing for conservation easements by using inflated appraisals of undeveloped land (or, in a few specialized cases, the facades of historic buildings) and partnership arrangements without a legitimate business purpose.
The only purpose of these abusive arrangements is to scam the tax system with massively inflated tax deductions and to create substantial payments for promoters.
It is unfair that wage-earners pay their fair share year after year, while high-net-worth persons can, under the pretext of a real estate investment, escape millions of dollars in tax through inflated conservation easement contributions.
My data is anecdotal, but I believe that SCEs were a means through which HENRY was able to receive the tax benefits of conservation easements. High Earner Not Yet Wealthy is an acronym for HENRY.
(I wish I could alter the acronym to make it gender-neutral, but I’ll stay with it for now. They are the pronoun of choice for my HENRY.
My anecdotal data suggests that the few individuals who have phoned me considering this for themselves have been HENRY types.
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And the genesis of SCE is heavily centred on Rome, Georgia, which was a medical hub. Very likely to be a HENRY is a 40-year-old surgeon.
Marjorie Taylor Green, who was not exactly an IRS supporter, utilized the SCE controversy against her primary opponent John Cowan, a physician with ties to several of the players.
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In response to a request for SCE substitutes, I will discuss the following Beyond the obvious, such as boosting contributions to retirement accounts, I could not find anything that could be done for HENRY based on my discussions with various tax experts.
HENRY’s SCEs are highly individualized. As we discovered through a few criminal indictments, the selling season can occasionally extend into the following year, which begins in December of that year.
In November or early December, HENRY’s tax professional develops an accurate prediction of the company’s tax liability, allowing him to purchase an SCE interest that effectively pays a substantial portion of the tax for approximately fifty cents on the dollar.
Rich individuals do not require the assistance of promoters to take advantage of the conservation easement deduction. They can afford to purchase the property and donate the easement after a few years.
Without a greatly inflated valuation, an SCE cannot function. SCEs are predicated on the notion that the easement on a property can be worth a substantial amount more than what the complete property will sell for. For this reason, I consider SCE to be a nonsensical industry.
Does this imply, however, that other donors of easements on land they have likely held for a long time are not also employing unjustified valuations? Authors believe not.
Abusive Valuations Extend Beyond Syndication
The authors are objecting to the fact that the current proposed regulation to combat abuse is confined to syndicated deals.
They also observe that the suggested ceiling of 2.5 times the property’s cost basis for properties owned for less than three years is extremely generous and are concerned that it could be interpreted as a blessing for valuations just below that limit.
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Efforts to prevent the misuse of conservation easements that are limited to syndicated easements will be ineffective in addressing the issue. A quick review of the relevant facts and the Tax Court Memorandum ruling in Oakbrook Land Holdings suffices to illustrate this conclusion.
The typical SCE against which the government has taken administrative action involves four to five times the participants’ investments in the syndicate as income tax deductions.
In contrast, Duane Horton’s Oakbrook Land Holdings, whose contribution the court specifically noted was “not a syndicated conservation easement,” claimed a “charitable” deduction that was greater than 7.50 times the cost of the (recently acquired) land over which the easement was given.
It is important to note that the four or five times multiple in SCE is based on the money invested by investors, not what the promoters paid for the real estate. However, they do make a valid point.
