The big news last week for those who follow the controversy around syndicated conservation easements (SCE) is the extremely harsh sentences handed down by Judge Timothy Batten to CPA Jack Fisher and lawyer James Sinnott.  Fisher got 25 years and Sinnott 23 years.  There is also restitution to be paid $455,855,755 from Fisher and $443,760,035 from Sinnott.  Most of the coverage so far has been based on this DOJ press release. This piece will take a somewhat deeper dive giving you some background and reactions.  We’ll start with a bit of background.

About Syndicated Conservation Easements

Generally in order to take a deduction for a charitable contribution you have to give something away entirely. Code Section 170(h) (Qualified Conservation Contribution) carves out an exception to that rule allowing a deduction for placing a permanent restriction on a property, which is what an easement is.  Like any other contribution the deduction is the fair market value of what you are giving away.  Remember though, what you are giving away is the easement.  You are keeping the property.  The best way to determine fair market value is comparable sales.  Unfortunately there is a not a lot of buying and selling of easements, so the regulations allow the value to be the value of the property before the easement is placed on it (the before value) minus the value of the property after the easement is placed on it.

The “before value” is generally where the problem is. What the proponents of SCE have argued is that in determining the before value for a conservation easement donation comparable sales are not really that relevant since what you are giving a development potential.  If a conservation easement is just part of a property that is valued based on comparable sales, it is not possible to buy property and within a very short time have an easement on that property be worth a significant multiple of what you paid for the whole property.  This debate ended up being a major factor in the sentencing as we will see.

About Sentencing

When DOJ puts out a press release about an indictment they will note what the maximum penalty is on each of the counts.  The numbers can be quite impressive when there are a lot of counts, but generally sentences on multi-count convictions are nowhere near the statutory maximum.  To predict a sentence you need to look at “the guidelines”.

There are federal sentencing guidelines established by the federal court system.  The guidelines are advisory, but when a judge exercises their discretion to go outside the guidelines they have to explain their reasoning.  The guidelines are not as complicated as the Tax Code, but they are complicated enough.

You need to determine an “offense level” and a “criminal history category”.  There is a table which is a sort of grid with the rows being offense level and the columns being criminal history.  Find the right cell and you get a range in months. Offense level 1 is 0-6 regardless of criminal history.  Offense level 43 is life regardless of of criminal history.  The offense level is determined by adding or subtracting various factors from a base level for the offense, all of which can be debatable.

The thing is when you are dealing with tax shenanigans the base level is determined by the computed “tax loss”. $2,500 or less gives you a base offense level of 6 which at criminal history category 1 is 0-6 months.  $100,000 brings you  a base level of 16 which is 21-27 months in category 1,

The probation officer computed the same offense level for both Fisher and Sinnott. The tax loss for each of them was greater than $250 million which is a base level of 34.  They get points added for sophisticated means, encouraging others to violate internal revenue laws, being organizers of leaders and abuse or position of trust and special skill bringing them to 44.  An offence level of 44 is enough for a life sentence.  There are no life sentences for tax crimes which is where the multiple counts come into play.  The statutory maximum for Fisher is 225 years and for Sinnott it is 91 years.

It Mostly All About The Tax Loss-Sinnott

Sinnott’s attorneys were arguing for a sentence of no more than 8 years. They strongly objected to the government’s tax loss computation which was based on taking the appraised value subtracting what was paid for the property and multiplying by 35%.  They note that even the recent law passed by Congress to rein in SCEs allows for the possibility that the easement might be worth 2.5 times the cost of the property and that the discounted cash flow method used in the appraisals was properly disclosed.  They also note that the codefendant appraiser Clay Weibel was acquitted.  Although they see the burden to prove how overstated the appraisals were to be on the government, they suggest as a possible answer that they were off by 30% which is what Fisher indicated in recorded phone conversations.

That adjustment would bring the tax loss down to “only” $110,017,303.85.  A further adjustment would be to use the standard 28% rate rather than the 35% rate would bring it down to $88,013,843.08.  Either of those numbers brings the offense level down to 30 which at criminal history I calls for 97 – 121 months.  Going a step further and eliminating any appraisals done by the not-guilty Clay Weibel brings  the tax loss all the way down to $35 million which is level 28 calling for 78 to 97 months.

Another matter is what is happening with the other players.  This gives you some insight into the sentencing game that DOJ plays with people who cooperate.  Stein and Corey Agee are not yet sentenced but there is a five year cap on those sentences because there was only one count in the bill of information that they pled guilty to. I covered their plea in December 2020.   Jim Benkoil is similarly situated as are Ralph Anderson and Victor Smith.  Randall Lenz got one year probation.  Terry Roberts got a year.

Similar Story For Fisher

Those other sentences are one of the major arguments raised by Fisher’s attorneys who suggested that a five year sentence is enough for him, since it would put him at the top of the heap.  Fisher is 71 years old.  Using the IRS standard life table there is a better than 90% chance that his 25 years is effectively a life sentence. The attorneys note that this is the first prosecution involving conservation easements and that there is an entire industry of promoters.  They go on to argue that there is no need for deterrence since legislation passed while the case was going on has made fraud in conservation easements impossible.  For what it is worth I would say that it has been made somewhat more difficult, but far from impossible.  Fisher’s attorneys make similar arguments on the tax loss.

On Fisher the government notes that the statutory maximum sentence considering all the counts was 225 years.  They asked for thirty as opposed to the five that Fisher was looking for.  With 25 years, effectively life when considering Fisher is 71, the court clearly leaned toward the government.

In defending its tax loss computation the government argues that the best estimate for the true fair market value of the land before the easement was the price that Fisher and Sinnott paid, which was often just days before the donation.  They cite TOT Property Holdings and Mill Road for precedent.  Those are recent cases.  The older valuation cases tend to be about property that was owned by the donors for a considerable period.

Let’s move on to other reactions.

Excessive Sentences

Attorney Peter Goldberger is my go to guy on criminal matters. His office focuses on appeals of federal criminal cases including sentencing and Supreme Court petitions.  He views the sentences as clearly excessive.

“From what I read, the U.S. Sentencing Guidelines recommended life sentences in these cases. While no tax offense carries the potential of a literal life sentence, as a murder statute would, the sentences imposed in these cases require service of more time than the average life expectancy of a person of the defendants’ age (about 15 years for a 70 year old male, according to the CDC), so in effect life sentences were imposed. The federal sentencing statute requires that each sentence be “no greater than necessary” to achieve the proper public purposes of punishment — recognition of the seriousness of the offense, deterrence, protection of the public, etc. It seems to me, and I think that any fair-minded person would agree, that these sentences greatly exceed that degree of severity, probably by about 100%. In other words, a sentence half as long, or somewhat less, would serve any of the proper purposes of criminal prosecution and punishment.  Would any accountant or tax lawyer be deterred from committing a massive fraud by the prospect of serving life in prison if caught, but not deterred by the prospect of a ten year sentence? The Sentencing Guidelines, unfortunately, are designed to give dominant weight to the amount of “tax loss”, in ways that really go haywire at the upper levels. No matter how seriously you view these particular tax frauds, it seems to me that the sentences are plainly excessive.

Do I also need to point out that the Guidelines are a set of suggestions from a presidentially-appointed Commission?  The law requires judges to “consider” them, but they are not binding on judges, who in fact “vary downward” (decline to follow the Guidelines, by going lower) in significantly more than half of all criminal tax cases.”

Criminal Tax Expert – What About The Taxpayers?

Jack Townsend wrote the book on tax crimes – literally. The Tax Crimes textbook published by Carolina Academic Press has him as the lead author. In his commentary on the DOJ release on his Federal Tax Crimes blog, Mr. Townsend has a rather interesting proposition.  He argues that DOJ should go after some of the investors criminally.

“My only comment relates to what I call the elephant in the room—the taxpayers willfully participating in such schemes. My experience in these elaborate abusive shelters is that well-heeled taxpayers are also complicit. Those taxpayers who are complicit feel (or at least hope) that the blizzard of paper (including fake opinions and appraisals) and participation of facially expert promoters will protect them from penalties, civil and criminal, thus giving them cost-free access to the audit lottery. But those who consulted independent counsel (and many, probably most, did at least in the Son-of-Boss shelters and, I suspect, in the Syndicated Conservation Easement Shelters) would have known the shelters did not work.”

Townsend suggest that prosecuting and convicting taxpayers would send a message of the deals being much more risky which would reduce the market.  He even suggests that enablers be able to reduce their sentence by providing evidence that their investors were aware the deals were no good.  That is a pretty chilling thought.  Besides possible criminal prosecution it could open the investors up to civil fraud penalty exposure.

Tax Court Watchdog

Lew Taishoff blogs the Tax Court with incredible intensity.  The Tax Court is buried in SCE cases which he refers to as “Georgia boonkdockery”.  Here is what he wrote me:

“Mr Reilly, my views (and you can print them in full): Hang ’em high, but remember, there are some legitimate conservation easements. As Judge Holmes put it in Oakbrook, “I fear that our efforts to clear cut and brush hog our way out of the volume of conservation-easement cases we have to deal with has left us a field far stumpier than when we began.” 154 T. C. 10, at p. 128. A brush-hog approach eliminates both legitimate and dodgy deals. The real issue is the phony valuations. Nail the appraisers who put forward these phony numbers. And nail the high rollers who bought into these too-good-to-be-true dodges.”

Kent Hovind’s Worst Nightmare

My regular readers will remember Robert Baty.  He is a retired IRS appeals officer who has followed other sorts of tax shenanigans most notably those of Kent Hovind and matters involving the parsonage exclusion.  I thought he might have some useful thoughts on this case. He wrote me:

“It may be that those guys were some of “worst of the worst”, and the sentences are easily justified. Alas, did the notice say they started over 15 years ago. There ought to be an easier way!

Also, the courts need to get more serious in handing out lengthy sentences to lesser tax cheats, like Glen Stoll. Glen got no jail time at all, and they’ve treated him like a choir boy because he invokes religion. They may at least be trying to revoke his probation now, and seize his hidden property, but he’s fighting them all the way and I think the Justice Department is just hoping he dies and the case goes away. Justice Department had to be nudged by the Court in his client’s criminal case to even nab Glen, and then he got treated like the only client he had during 50 years of tax cheating was the one they were then prosecuting.”

The Professor

University of Utah law Professor Nancy A. McLaughlin who has written extensively on easements wrote me:

“A 25-year prison sentence and an order to pay $458 million in restitution should give significant pause to those continuing to promote syndicated transactions under other guises, like fee simple donations. It also should give promoters being sued by investors pause, as the DOJ’s case against Fisher went a long way to exposing the blatant valuation abuses involved in these transactions”

Word On The Street

Stefan Apotheker is an attorney with Erez Law in Miami currently representing investors in claims against financial advisers, he gave me his perspective on what is currently going on. He confirms that there are a significant number of cases in Tax Court and expects that the taxpayers will mostly lose, but that it will take a long time.  He does not have a sense of DOJ’s appetite to bring on more criminal cases.  He can confirm that are some prominent promoters who have been the subjects of grand jury investigation.  I guess they are waiting for the other shoe to drop.  Some of those promoters have gotten out of the SCE business.  Apotheker expects there will be a much smaller market.  He allows that it is possible that there are legitimate deals out there.  All the ones that have crossed his desk have been obviously fraudulent tax avoidance schemes.

From An Old Hand

Joe Kristan is one of the longest serving tax blogger.  He started in 2002.  He had to take a break in 2017, but came back.  Joe was surprised by the severity of the sentences.  He compared them to the fifteen years that went to Paul Daugerdas, one of the masterminds of the Son of Boss deals.  Daugerdas is currently at a halfway house in Chicago and scheduled for release in 2026. Joe does not know how many deals are still being promoted but expects that they may be less brazen and that the sentence should get the attention of appraisers and promoters of those and other questionable shelters.  He indicated that if he had been involved in one of these, which he wasn’t. he would be talking to an attorney about offering a deal.

From A Conservation Advocate

A great deal of criticism of SCEs came from advocates for the proper use of the conservation easement deduction.  Among them was Stephen Small.  He notes that the two promoters were ordered to pay $900 million in restitution and wonders how much the total loss must have been to the government from these deals.

There Will Be More

At the trial there were some crazy jury problems, so I expect that the conviction itself and the sentence will both be appealed.  Stay tuned.  For a roundup of more than a decades worth of coverage of tax issues around easements check this post out.  I have to note the prophetic nature of the headline of one of my earliest posts – Conservation Easements A New Field For Villainy.

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Originally published on Forbes.com.

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