How US Congress Finally Cracked Down on a Massive Tax Scam
Peter Elkind (ProPublica) 12 January 2023
This story was originally published by ProPublica.
After six years of failed efforts by the IRS, Justice Department and lawmakers, new legislation is expected to prevent the worst abuses of a tax-avoidance scheme that has cost the U.S.
Treasury billions of dollars. Tucked into the massive, $1.7 trillion government spending bill signed into law by President Joe Biden on Dec. 29, a provision in the law seems poised to accomplish what thousands of audits, threats of hefty penalties and criminal prosecutions could not: shutting down a booming business in “syndicated conservation easements,” which exploit a charitable tax break that Congress established to preserve open land.
Under standard conservation easements, landowners give up development rights for their acreage, often an appealing, bucolic space. In return, they receive a charitable deduction equal to the property’s development value, and the public benefits by the preservation of the land, which in some cases is made available as a park.
But as ProPublica first described in 2017, aggressive promoters built a lucrative industry through “syndicated” deals. These promoters snatched up idle land (a long-vacant golf course near a trailer park, in one example examined by ProPublica) and hired an appraiser willing to claim that it had huge, previously unrecognized development value — perhaps for luxury vacation homes or a solar farm — which they contended made it worth many times its purchase price. The promoters then sold stakes in a massive conservation easement deduction to rich investors, who made a quick profit by claiming charitable write-offs that were four to six times their investment. The promoters reaped millions in fees.
The new measure will limit taxpayers’ deduction to two and a half times their investment. That will effectively eliminate the profits that drive syndicated deals while allowing traditional conservation easements to continue. “I don’t know how the industry moves forward after the new law,” said Sean Akins, an attorney with Covington & Burling who represents multiple syndication promoters.
The path to the new law was lengthy and winding. For years, syndicated easements seemed impervious to attempts to rein them in. Since late 2016, the IRS has attempted to stymie the deals, branding them as “abusive” and among “the worst of the worst tax scams.” The agency has challenged $21 billion in deductions claimed by 28,000 syndicated-easement investors, pursued scores of tax court cases and collaborated with the Justice Department in targeting top promoters with criminal charges and civil lawsuits.
Prominent lawmakers from both parties weighed in against the abuse and, starting in 2017, introduced legislation, called the Charitable Conservation Easement Program Integrity Act, to halt the practice. According to estimates by Congress’ Joint Committee on Taxation, applying these limits to deals struck since December 2016, when the IRS first branded the practice improper, would generate an additional $12.5 billion for the U.S. Treasury through 2031.
The syndicators fought back so furiously and so effectively over multiple years that ProPublica published not one, but two stories describing how bulletproof the industry seemed. The promoters and their investors were undaunted by IRS threats. Syndication partnerships were so profitable that they set aside special “audit reserves” of as much as $1 million to do battle with the agency in tax court. Syndication firms and their newly formed Washington trade group, called the Partnership for Conservation, or P4C, spent more than $11 million, by ProPublica’s calculations, on lobbyists to protect their business before Congress. At one point, they went on the attack, seeking to strip the IRS of funds used to enforce the December 2016 notice that flagged profit-making syndicated deals as abusive and required participants to file forms reporting their involvement to the IRS.
The agency’s efforts did little to slow the volume of syndicated deals, according to congressional testimony by then-IRS Commissioner Charles Rettig in May 2022. He sounded a bit desperate when he told lawmakers: “We need congressional help.”
As Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, told ProPublica last June, “There is a tax shelter gold mine here, and they’re fighting very hard to protect it.” He added, “This is a textbook case of the power of lobbyists.”…Continue Reading
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