Syndicated Conservation Easement (SCE) products aren’t produced in vacuums. there are teams of people constructing and assembling a variety of documents that support each fund’s capital raise. In the past, if one of those procedural links failed it was treated independently from the others. What this conspiracy case tells us is moving forward, is that each link infects the link it touches. That the whole chain will be viewed as corrupt.
It’s a great unveiling that stands before us as industry appraisers and accounting firms begin buckling under the pressure.
That is what a source told me at the end of 2020 when brother accountants Stein and Corey Agee pled guilty to one count each of conspiracy to defraud the United States from their involvement with SCE. In June 2021 another shoe dropped with the indictment of CPA Herbert Lewis on one conspiracy count, just like the Agees – and 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 tax returns. On February 24, the same grand jury in the US District Court For The Northern District of Georgia Atlanta Division gives us a veritable collapsing shoe store with its first superseding indictment to the June 2021 Lewis indictment – 135 counts spread among 7 individual including Lewis.
The Players
In the Agee bill of information we were introduced to Promoter A. Promoter A believing he was speaking to someone who was a potential distributor said:
we know if we’re examined by the they will ask for all promotion materials, so you have to be very, very careful that these look like real estate investments as compared to, you know, basically a tax shelter.
Turned out it was someone from IRS CI working undercover. Don’t you just hate it when that happens ?
We now know that Promoter A was Jack Fisher of Alpharetta GA. He is the first name in the superseding indictment (SI). Mr. Fisher is a CPA. He interned with the IRS as a student at Mars Hill College, did six years with PWC in Winston Salem. After a brief stint at a regional firm in Atlanta he was one of the founders of AgeeFisherBarret LLC, an Atlanta CPA firm. He left the firm “in or around 2002” to run his own business. His Linked-in profile indicates more was going on, but the indictment focuses on Inland Capital Management (ICM). ICM is the entity which created the SCE tax shelters.
James Sinnott is a licensed attorney who worked at ICM and Preserve Communities. Kate Joy was Director of Finance and Administration of ICM beginning in 2011 moving to investor relations in 2019. She studied accounting and real estate at Georgia State University. Terry Roberts of Flat Rock, NC is an appraiser as is Clay Michael Weibel of Atlanta. Herbert Lewis and Victor Smith are both CPAs.
The Conspiracy
Former CPA Bill Ellis, who has been following the SCE industry intently, thinks that this is all quite simple and it becomes crystal clear from recent testimony in DOJ’s attack on Ecovest, another major player. That civil action seeking an injunction commenced on December 18, 2019. Treasury regulations recognize that there is not a lot of buying and selling of conservation easements. So they allow the deduction to be the difference between the fair market value of the property before the easement reduced by the fair market value of the property as encumbered by the easement.
Claud Clark, who was Ecovest’s go to appraiser was asked about that and acknowledged that that was the definition in the regulation. But he believes the definition it flawed, because they are valuing easements and it would not be correct to do it that way. SCE appraisers value the easement based on the discounted cash flow of a hypothetical highest and best use development. That is not what the property would exchange for and accordingly is not the fair market value of the property under the regulations.
In this indictment there is a table comparing property purchase prices to the valuation of the conservation easements on them. For example appraisers valued an easement on a property called Crimson Independence at $180 million. The promoters had acquired the property for $14 million a year earlier. Using a 40% tax rate that property would have yielded $72 million in tax savings to investors. Using the ratio of 4, the investors would have paid $45 million leaving $31 million for the promoters to share after covering expenses. In the properties listed in the table the average ratio between the valuation of the easement and the purchase price was 15 to 1.
I call SCE an industry based on nonsense, because there is no way that you can buy property and after a very short time give some of the rights in the property and come out cash positive without, you know, fibbing on the valuation.
Other Shenanigans
Putting aside the valuation issue, which is at the hear of the matter, the indictment alleges other activity that would be really bad even if the deals were legitimate. Most egregious was the backdating. Of course they did not want to inconvenience the people who had actually invested in the year of the donation rather than the subsequent year:
FISHER/ SINNQTT/ and JOY/ Stein Agee/ and other co-conspirators allocated unsold Tax Shelter units to a placeholder participant in their internal books named LTS. LTS was an acronym for Left To Sell/ and the //LTS entry on the books represented units of the Tax Shelter that the co-conspirators stiU had left to sell to participants after the close of the relevant tax year. By allocating the LTS units on the books to a placeholder participant/ FISHER/ JOY/ Stein Agee/ and other co-conspirators were able to issue the Schedules K-l (for clients who already purchased units in the SCE Tax Shelter) to be distributed timely to the participants without disrupting the partnership
Coming Down Hard
As you might expect there are charges of aiding and assisting in the preparation of tax returns along with the overall conspiracy charge and charges of subscribing to false tax returns. There are also wire fraud and money laundering charges. Attorney Peter Goldberger pointed out to me that prosecutors cannot routinely bring these sort of charges in tax cases without special authorization from the Tax Division The applicable guidance notes:
The Government may derive significant benefits at different stages of the litigation by using mail, wire or bank fraud charges. First, at the charging stage, the charges may support the Government’s effort to forfeit the proceeds of the fraud scheme or may enable the Government to describe the entire scheme in the indictment. Second, at trial, the charges may support the Government’s presentation of all relevant evidence of the scheme or permit flexibility in the Government’s choice of witnesses. And third, at sentencing, the charges may support the Government’s efforts to obtain full restitution.
The Tax Division will not authorize the use of mail, wire or bank fraud charges to convert routine tax prosecutions into RICO or money laundering cases, but will authorize prosecution of tax-related RICO and money laundering offenses when unusual circumstances warrant such a prosecution.
I spoke with Buddy Parker an Atlanta defense attorney, who had a long career with DOJ. He told me that he is aware of two other grand juries that are active on SCE cases. He also noted the significance of the wire fraud and money laundering counts. He told me that the indictment evidences the intent of the government to use all the tools in the tool box.
Reaction
The Land Trust Alliance released a statement by President CEO Andrew Bowman:
This criminal indictment and the allegations contained within it paint a picture of severe abuse of the federal tax incentive for conservation easement donations. For years, the Land Trust Alliance has urged Congress and federal agencies to halt this type of egregious abuse. And while we are heartened to see indictments filed, the most expedient and cost-effective solution is a legislative one.
Criminal prosecutions like this highlight the need for Congress to pass the Charitable Conservation Easement Program Integrity Act as soon as possible. This bipartisan, bicameral bill would halt the abuse, protect a critical land conservation incentive and enact safeguards to protect American taxpayers from bad actors who have made millions turning conservation easement donations into profit opportunities.
These egregious abuses of the tax code must stop. It is now on Congress to act.
Originally published on Forbes.com.
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