Conservation easements have been in the news a lot recently. On Wednesday, March 27, 2019, the Senate Finance Committee launch a bipartisan investigation into the potential abuses involving syndicated conservation easement transactions.1 The Senate investigation is comes on the heels of an enforcement action initiated by the Department of Justice against EcoVest Capital, LLC (“EcoVest”), one of the nation’s largest sponsors of syndicated conservation easement transactions, several EcoVest executives, a prominent appraiser, Claud Clark, and fund promoter Nancy Zak. In December, the DOJ filed a lawsuit in the U.S. District Court for the Northern District of Georgia seeking to enjoin EcoVest and the individual defendants from organizing, promoting, or selling syndicated conservation easement investments and to disgorge profits derived from promoting the funds.2 The Complaint, a copy of which can be found in the linked footnote, characterizes syndicated conservation easement transactions as “a highly structured – and abusive – tax scheme” that “amounts to nothing more than a thinly veiled sale of grossly overvalued federal tax deductions under the guise of investing in a partnership.”3
The EcoVest case is interesting on many levels. The case has obvious implications for the future of syndicated conservation easement transactions: a government win would likely chill any continued activity in the sector, and even if the government losses, some would be promoters, investors, and advisors will be dissuaded from participating in future transactions out of fear that they might be the target of the next enforcement action. The case is being closely watched by industry insiders for this reason. Outside the industry the case is interesting because of the aggressiveness of the government’s action.
Until filing the Complaint against EcoVest, the government approached the fight against syndicated conservation easements in the same way it approached other tax shelters, namely through audits, enhanced reporting requirements,4 and litigation5 aimed at deterring would be participants and undermining the legal underpinnings of the transactions while collecting as much tax as possible along the way. The traditional approach, however, was time consuming and expensive, and IRS has doesn’t have the resources to audit large numbers of participants in a single type of transaction. The EcoVest case potentially signals a shift in strategy that appears more focused on deterrence, and if successful, the litigation could serve as a template for future enforcement actions.
What Makes the EcoVest Case Different?
Traditionally, the government litigates tax shelter cases by first auditing the investors, promoters, and perhaps others. IRS then issues notices of deficiency denying the benefits claimed by the participants and asserting additional tax due. The participants then usually challenge the proposed deficiency in Tax Court, or they pay the tax attributable to the deficiency and then file a refund suit in the United States Court of Federal Claims or United States District Court. If the government pursues an injunction, the proceedings are usually collateral to proceedings on the merits. Indeed, based on my review of injunctions obtained by DOJ Tax during the past 12 years,6 I did not find one instance where it sought an injunction against the promoter of a tax shelter prior to any proceedings on the merits. EcoVest appears to be unique in this regard, as none of the 96 transactions cited in the Complaint appear to have been the subject of any prior or contemporaneous litigation.
Aside from the unique posture of the litigation, something else that makes the EcoVest case different is how the litigation is being conducted and the end goal of the litigation. Normally, tax litigation is a quiet affair that receives little attention from anyone other than tax wonks, like me. There is nothing quiet, however, about DOJ. I’ve litigated against both IRS and DOJ Tax, and I while both have extremely capable and competent lawyers, DOJ Tax is far more aggressive in my experience. In typical DOJ style, it has sensationalized and publicized the EcoVest case as much as possible in order to maximize the deterrence value of the case.7 Everything about the case – from the persons named as parties to the phrasing of the allegations and the statements made in the press release – is designed to send a warning to other would be promoters and participants.
So, What is the Government Trying to Do?
Although we can only speculate, is that the government is bringing the EcoVest lawsuit primarily for its deterrent value and that winning or losing the actual case is only a secondary concern. The IRS has attempted to shutdown syndicated conservation easements for several years. Although the IRS has had some success in recent litigation, it has yet to establish broadly applicable precedents,8 and its administrative actions have failed to significantly curtail sponsors or investors from continuing to engage in the transactions. At the same time, the government’s enforcement capabilities have been severely undermined by deep budget cuts, hiring freezes, and other administrative and Congressional actions.9 Maximizing the deterrence is more important now than ever. EcoVest and its co-defendants are some of the most prominent players in the . By bringing a very public and aggressive enforcement action and by asking the court to impose one of the most draconian penalties possible short of criminal sanctions, the government sends a strong signal to other promoters and investors that they are vulnerable as well. If a significant number of promoters, investors, and other participants are deterred from involvement with future funds, the government will succeed even if it does not win the case.
What Does the EcoVest Case Mean for Other Taxpayers?
The EcoVest case is important for all taxpayers because it could serve as a template for future litigation and an attention-grabber for Congress. By placing into a poor light, or potentially making taboo, a well-intended conservation-promoting provision of the Internal Revenue Code. It is also likely that the EcoVest case will have a chilling effect deterring a significant number of promoters and participants from entering into syndicated conservation easement transactions.
- Press Release, Grassley, Wyden Launch Probe of Conservation Tax Benefit Abuse (March 27, 2019) (available at https://www.finance.senate.gov/chairmans-news/grassley-wyden-launch-probe-of-conservation-tax-benefit-abuse).
- Complaint at ¶ 1, United States v. Zak et. al., Case No. 1:18-cv-05774-AT (N.D. Ga. December 18, 2018) (available at https://www.justice.gov/opa/press-release/file/1121451/download) (“Complaint”).
- Complaint at ¶ 2.
- See Notice 2017-10, 2017-4 I.R.B. 544 (December 23, 2016) (available at https://www.irs.gov/pub/irs-drop/n-17-10.pdf) (making syndicated conservation easements listed transactions under IRC § 6011 subject to enhanced reporting requirement and penalties for noncompliance).
- According to the National Taxpayer Advocate, conservation easement transactions are among the top 10 most litigated issues between taxpayers and IRS. See National Taxpayer Advocate 2017 Annual Report to Congress 518-522 (available at https://taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_Volume1_Most-Litigated-Issues.pdf). Although IRS has successfully challenged several conservation easement transactions in court, it has been unable to establish broad applicable precedent. Most of the decisions turned on technical grounds. See, e.g. Champions Retreat Golf Founders, LLC v. Comm’r, T.C. Memo 2018-46 (denying deduction for easement on golf course for lack of conservation purpose); PBBM-Rose Hill, LTD v. Comm’r, 900 F.3d 193 (5th Cir. 2018) (denying $15,160,000 deduction based, in part, on failure to strictly comply with the extinguishment requirement in Treas. Reg. § 1.170A-14(g)(6)(i)); Harbor Lofts Associated v. Comm’r, 151 T.C. No. 3 (Aug. 27., 2018) (denying deduction based on the ground that a long-term lease did not satisfy perpetuity requirement under IRC § 170(h)(2)(C), (5)(A), and Treas. Reg. § 1.170A-14).
- A listing of all the injunctions obtained by DOJ Tax over the past 12 years is available at https://www.justice.gov/tax/program-shut-down-schemes-and-scams.
- See Press Release, Justice Department Sues to Shut Down Promoters of Conservation Easement Tax Scheme Operating out of Georgia (December 19, 2018) (available at https://www.justice.gov/opa/pr/justice-department-sues-shut-down-promoters-conservation-easement-tax-scheme-operating-out).
- See, supra at n. 5; see also National Taxpayer Advocate 2017 Annual Report to Congress at 518 (noting that 16 out of 28 cases in 2014 and 2015 were decided based on valuation adjustments).
- See Emily Horton, Center on Budget and Policy Priorities: Underfunded IRS Continues to Audit Less (April 18, 2018) (available at https://www.cbpp.org/blog/underfunded-irs-continues-to-audit-less).