DOJ is sending a message to tax professionals – particularly CPAs – who are involved in the syndicated conservation easement (SCE) industry. The message is “Be afraid. Be very afraid.” That is my reading of a recent press release about Georgia CPA Herbert E. Lewis indicted for SCE schemes involving fraudulent charitable contributions.
DOJ releases like to lay it on thick noting that Lewis is indicted on one count of conspiring to defraud the United States, 24 counts of wire fraud, 32 counts of aiding and assisting in the preparation of false federal tax returns and 5 counts of filing false federal tax returns. They go on to add that he faces five years on the conspiracy charge, twenty years on each wire fraud count, three years on each aiding and assisting count and three years on each false filing count. You can do the math if you want. It runs into centuries.
About Syndicated Conservation Easements
Generally you cannot take a charitable deduction for donating a partial interest in property. A “qualified conservation contribution” (QCC) is an exception to that ruled. You can take a deduction for a “restriction granted in perpetuity” (an easement) on real property to a qualified organization. Quite often the organization is a land trust.
Since there is not a lot of buying and selling of easements, the deduction is usually the fair market value (FMV) of the property before the easement less the FMV after the easement. It is the before value where there are a lot of shenanigans. The SCE industry maintains that the valuation principles for a before value of a property are somehow different when there is going to be an easement.
Robert Ramsay of Partnership For Conservation (P4C) in a Tax Notes Article stated that the notion that a conservation easement’s value cannot exceed the current value of the land is a myth. I analyzed that notion here. Simply put ownership of land is a “bundle of rights”. One of those rights is the right to make changes to the property that will make it more valuable. That one right cannot be worth more than the whole property. This is why I consider SCE an industry based on nonsense.
SCE requires easements to be worth a multiple of what that property was, generally very recently, acquired for. The partnership interests in the deals that form the basis of the indictment were generally priced to give the investors a charitable deduction four or more times their investment. So the promoters need an easement value four times what they paid for the property just to break even. And it appears that everybody involved was more than breaking even by quite a bit.
The Deals
There are twelve investment vehicles mentioned in the indictment. They have names like Inland Capital Investment Fund 2014, Coastal Property Holdings and Eastern Sierra Holdings 2018. Easements on 8,236 acres yielded charitable contributions of $956 million. That works out to $116,076 per acre. Assuming a 37% rate the tax subsidy for the easements would be just shy of 43,000 per acre if the deductions held up.
The Other Players
Generating $956 million in dubious tax deductions requires teamwork. Much of the team is unnamed. There is Accountant A, the Founder of Accounting Firm 1. They are a coconspirator. There is Promoter A, also a CPA and a partner at Accounting Firm 2. There are also coconspirators Promoter B, Attorney A, Appraiser 1 and Appraiser 2. We do get one name. That would be coconspirator Stein Agee who was a partner at Accounting Firm 2 and prepared some of the partnership tax returns.
Stein Agee and his brother Corey Agee, both Georgia CPAs like Mr. Lewis, pled guilty to one count of conspiracy to defraud the United States because of their role in SCE in December 2020. The deals in the Agee pleas are, not surprisingly, among those listed in the Lewis indictment.
Attorney Peter Goldberger commented to me at the time that their quick plea to a single count was a sign that they had worked out a deal. Stein’s attorneys commented that he had accepted full responsibility for his conduct and is fully cooperating with the government. Despite our formidable reputation CPAs do not swear omerta with one another. So if this goes to trial we can anticipate Mr. Stein testifying against his fellow CPA.
The Charges
On the conspiracy charge the indictment indicates it was the object of the conspiracy for Lewis and his coconspirators to unjustly enrich themselves and their clients through fraudulent tax shelter transactions. The “fraudulent transactions” were the deals outlined above which provided four or more dollars in charitable deduction for each dollar invested. Once the ratio was set Lewis would start marketing even before the deal was fully designed. Part of the window dressing was a vote by the partners as to whether they wanted to give the property away or develop it. There was never any doubt about how the vote would come out.
A great defense for Lewis might be for him to argue that he sincerely believed that the shelters were legitimate. If you believe the lawyers and the appraisers they are legitimate. There is some other conduct alleged in the indictment that is probably indefensible. In at least five of the deals, not all the units were sold before year end. In order to share in the partnership’s charitable deduction you have to be a partner in the year the donation is made. Partners admitted afterwards would not get a share of the deduction, making it pretty pointless. So it is alleged that Lewis participated in backdating checks and documents.
That sort of thing, backdating, probably goes on in lots of deals of all sorts. Or at least I once heard from somebody who heard it from somebody else that there was a lot of that going on back in the day. Doing it in these sorts of deals which are already questionable is a really bad idea. What is an even worse idea is sending emails in March about getting into a prior year deal. Sending someone an email on January 22, 2018 indicating that they need to send in a check dated December 29, 2017 is also not a very good idea.
The wire fraud is essentially the electronic filing of his clients returns. Attorney Goldberger wrote me that it is unusual to find this charge in tax cases of this sort and that it is ordinarily prohibited by DOJ Tax Division policy. But that policy can be waived. It sets him up, if convicted, to have to disgorge any fees that he received. And the aiding and assisting filing false tax returns is, of course, the client tax returns effected by the charitable contributions. Note that there is a little redundancy going on.
The final counts “subscribing to false tax returns” concern Lewis’s own return. According to the indictment Lewis set up entities to receive commissions that he earned. The entities were earned by his kids. Shifting income to your kids – talk about the good old days. If that was the only thing that you did, I believe the chance of being criminally charged for it would be remote.
Some Analysis
One of my sources indicates that the person named in the indictment, Lewis, probably has a deal in place and that the real targets are the unnamed people. Attorney Goldberger, on the other hand, indicates that it may be the other who have cut deals. He wrote me:
The first thing that jumps out are the references on pages 15-17 to “Promoter A,” “Promoter B,” “Attorney A” and “Accountant 1.” The context suggests that these individuals were professional associates of Lewis who have made deals and are cooperating against him. From this, you might infer several disparate things. First, at least three defense attorneys have assessed the situation and recommended that in this case it would appear to be better not to be in the government’s crosshairs, even if it means accepting a conviction (or, at least, a painful civil settlement. Second, it suggests that the prosecutors have a more interesting case to present to a jury, with live, insider witnesses, not just IRS agents testifying about how they analyzed records. Third, from the defense point of view it provides counsel with more targets to attack, if these individuals are (or come off as) sleazy. And given that one of them is (or was) an attorney, the CPA-defendant may be in a position to claim a good faith belief in the validity of the transactions, based on legal advice.
Of course that “good faith belief” will not help him with backdating and finagling on his own return. This is where the CPA fear factor strikes me. By throwing CI against the SCE industry, all of a sudden things that would have likely slid by or at the worst generated penalties become criminal matters.
As far as the possible sentences go, as a practical matter the centuries that DOJ implies in its release are not going to happen. Although judges are allowed discretion, sentencing generally falls within guidelines that are almost as complicated as tax determination as you can see here. In a case like this the size of the tax loss is critical. Attorney Goldberger’s gave me an analysis of how it might work out:
Any case with a “tax loss” of between $250M and $550M implicates a base offense level of 34, and if the sentencing court determines that unusually “sophisticated means” were used to carry out the offense, then another two levels are added. Even with no other enhancements, that triggers a recommended Guidelines sentence upon conviction (assuming no prior record) of 188 to 235 months, i.e., about 15 to about 20 years’ imprisonment. A prompt guilty plea could knock 2 or 3 levels off that Guideline, but you still don’t end up below 135 to 168 months (about 11 to 14 yrs). There is no mandatory minimum, however, so a judge in her discretion could sentence much lower (or even higher).
Do We Need More Laws?
Joshua Lynsen of the Land Trust Alliance alerted me to the DOJ release. LTA is advocating the Charitable Conservation Easement Program Integrity Act as part of the solution to abuses in this area. The act tracks the IRS listed transaction definition which kicks in when easement deductions are over 250% of a partner’s basis.
In principle the bill should kill the SCE industry, but I really dislike the implication that 250% might be reasonable for a recently acquired property. Killing the SCE industry would take the deduction away from high income, but possibly low net worth, individual. like the physicians in Rome GA who may have been the proving ground for this travesty. If the 250% evolves into a sort of bright line, it would allow wealthy people to essentially acquire mountain and seaside retreats for free.
The Real Source Of CPA Stress
My brother and sister CPAs in the sort of practice I spent my career in are coming off a really tough couple of tax seasons, probably worse than any of the nearly forty I went through before I retired in 2018. Nonetheless, I don’t think the workload is the source of stress that gets CPAs in trouble. What gets us in trouble is envy.
Unless you have an odd specialty, to make good money in public accounting, you have to associate with and cultivate people who make much better money than or are much wealthier than you can ever expect to become. That is what caused the Big 4 firms to sell their birthright for a mess of pottage by peddling bogus shelters around the turn of the millennium. They were too big to be driven out of business by IRS and DOJ, but that might not be the case with the CPAs caught up in the SCE industry. It is not going to be pretty.
Originally published on Forbes.com.
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