IRS AUDITS CONSERVATION EASEMENTS AND CAPTIVE INSURANCE

On December 21, 2020, the DOJ Tax Division announced its first ever criminal guilty pleas based on the abuse of Syndicated Conservation Easements (SCE). Conservation easements are charitable tax deductions designed to incentivize the conservation of natural resources or places of historical significance. They consist of a grant of an easement by a landowner to a qualified organization, typically a non-profit, in which the parties agree to permanently restrict the development and/or use of the subject land with the purpose of achieving certain conservation goals. Stein and Corey Agee pleaded guilty to one count of criminal conspiracy to defraud the United States in the Western District of North Carolina for their role in a wide-ranging tax fraud conspiracy centered around the misuse of SCEs. Stein and Corey were partners at an Atlanta accounting firm who sold their clients investments in SCEs that were fraudulently created for the purpose of producing inflated tax deductions for these high-income taxpayers. They marketed the SCE tax shelters by promising investors that for every $1 invested in the partnership, the investor would receive more than $4 in charitable tax deductions. While Agee is the first criminal case relating to SCEs, the DOJ Criminal Tax Division has made clear they intend to aggressively pursue perpetrators of this conduct going forward. In fact, there is already an active SCE grand jury investigation in the Northern District of Georgia. As demonstrated by the Agee case, the most obvious targets of these investigations are likely to be the SCE promoters, land appraisers and accountants who help create and execute the schemes, however, wealthy tax payers utilizing these shelters to evade taxes may also be exposed, especially if they engaged in conduct designed to conceal the actual timing of their investments or willfully ignored warning signs of criminal conduct associated with executing this tax strategy. In addition to these criminal investigations, the IRS continues to prioritize civil tax examinations of syndicated conservation easements. In these audits, the IRS may disallow the deduction claimed for the conservation easement if the IRS determines that the requirements under Internal Revenue Code section 170 and regulations thereunder were not met. In particular, the IRS will disallow deductions where it determines that an appraisal overstates the value of the easement. The IRS may also impose a 40 percent penalty for a “gross valuation misstatement” among other penalties.1 On December 23, 2016, the IRS published Notice 2017-10 identifying certain syndicated conservation easement transactions as “listed transactions” and indicating that taxpayers entering into these transactions are subject to requirements to disclose the transactions to the IRS. The transactions identified in Notice 2017-10 include transactions in which an investor receives promotional materials that offer prospective investors the possibility of a charitable contribution deduction for a conservation easement that equals or exceeds 2.5 times the amount of the investor’s investment. On November 12, 2019, the IRS announced “a significant increase in enforcement actions for syndicated conservation easement transactions.”2 As of February 2020, the IRS reported that it had identified a total of 662 syndicated conservation easement transactions for the tax years 2015 to 2017 and that the IRS was either auditing or planning to audit 84 percent of the partnerships that had entered into these transactions.3 The Senate Finance Committee also conducted its own investigation of syndicated conservation easement transactions and released a report in August 2020, concluding that “the IRS has strong reason for taking enforcement action against syndicated conservation easement transactions as it has to date.”4 Taxpayers thus should expect the IRS to continue to prioritize audits of syndicated conservation easements. Finally, taxpayers may also face audits from state taxing agencies. For example, we have observed that the California Franchise Tax Board is increasing enforcement action with respect to syndicated conservation easements. MICRO-CAPTIVE AUDITS For years, the Internal Revenue Service (IRS) has audited so-called “abusive micro-captive insurance transactions.” The IRS is focused on certain captive arrangements that were marketed towards small to mid-sized businesses in a manner more akin to tax shelters. In IRS Notice 2016-66, the IRS identified these types of captive insurance arrangements. In the courts, the IRS has had a string of recent victories against these captive arrangements. For example, in three recent cases, the U.S. Tax Court has not only disallowed the deduction for insurance premiums paid but also required the captive insurance company to include the payments received in income (the “double whammy”). See Avrahami v. Commissioner, 149 T.C. 144 (2017); Syzygy Insurance Co. v. Commissioner, T.C. Memo. 2019-34; Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86. Lance Wallach receives hundreds of calls annually to help people fight the IRS and get their money back from the promoters of these scams. Google Lance Wallach and your advisor, who do you trust? 516-236-8440 Wallachinc@gmail.com