In the past year, the IRS has ramped up its investigations into fraud due to a tax shelter known as a Syndicated Conservation Easement (SCE). The Department of Justice, as well as the Department of the Treasury and the IRS have recently begun to place heavy scrutiny over what they see as fraudulent SCE schemes.
What is an SCE?
A Conservation Easement is an agreement that a property owner makes with the government to donate land they own. This agreement allows for the property’s land to be kept in a state of conservation in perpetuity. This agreement benefits the government in that it allows land deemed worthy of conservation to be maintained at a lower cost (than if the government was the sole owner) and it benefits the land owner in that it allows them reduce their tax burden (based on an appraisal of the land).
A Syndicated Conservation Easement on the other hand is somewhat different. Some people consider investing in SCEs because they do not own land that the government might not deem to be of conservation priority. So in order to participate in the tax break a person might consider investing in a group conservation easement, hence the title of ‘syndicated.’ This tax break tool was considered to comply with the law but the IRS has rebuffed this in recent statements due to fraud in the SCE. The most common being the land’s appraisal is grossly inflated so that the owner can sell more parcels at higher. In return the people selling the land promote to investors that they can earn a tax benefit on their investment, in some cases up to a 4 to 1 return (e.g. a $400k tax savings for an investment of $100k into an SCE).
A Syndicated Conservation Easement (SCE) is meant to apply to a group of generally higher tax bracket individuals who don’t own property worthy of conservation but want to participate in this program and receive the tax break. The SCE is promoted by land owners so that the property can be sold in smaller parcels. The “investors” (or part owners) can buy a portion of the land being placed in the SCE and thereby earn a proportionate amount of the tax break.
The IRS and other government agencies have made it clear that they are investigating Syndicated Conservations Easement Schemes. If you are a CPA or have helped create, promote, or sell SCEs you should be seeking legal advice on how to properly comply with the law and not subject yourself to prosecution or civil lawsuits from investors seeking to recoup their investment as well as taxes that were improperly sheltered along with penalties and interest.
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