Originally published on Forbes.com.
Last month, I wrote about the Department of Justice beginning to crack down on abusive conservation easement syndications. DOJ is seeking an injunction against people associated with EcoVest Capital, which according to Peter Elkind of Fortune is the most prolific syndicator of conservation easements.
I explained the concept behind conservation easement deductions in that piece last month (and other coverage over the last several years). Here we are going to discuss them from the point of view of investors, which greatly simplifies things. To an investor, the program is something of a black box.
The Black Box
An investor (Let’s go with Terry for a name) in an EcoVest deal pays them some money. Before Form 1040 for that year is due, Terry will get a K-1 showing a charitable contribution that is a multiple of the amount invested (probably between four or five times). So Terry will get back more than the investment in tax savings. That, of course, is the essence of the deal as far as Terry is concerned.
In a few years, the property as encumbered by the easement is sold by the partnership. Terry will then get some of the original investment back. Terry needs to make sure the return preparer includes all required disclosures.
What To Do Now?
But now Terry has heard that DOJ is calling the deals all sorts of nasty names. They literally refer to the persons named having “ill-gotten gains”. Terry put $20,000 into a 2017 deal and $20,000 into a 2018 deal. Tax savings federal and state were $30,000 in 2017 and are projected about the same for 2018. What should Terry do?
I was actually asked that question. Not by anybody who has ever been my client, just to be clear.
What Are The Stakes?
Worst case, as far as I can figure, Terry might have to give back the $30,000 in savings from 2017 along with a 40% penalty. In principle, Terry might avoid the penalty by filing an amended return (or returns if there were state savings) which leaves the question of what to do about 2018.
What To Do About Return Not Yet Filed
The 2018 question is a lot easier to answer. Terry should ask for the $20,000 back from EcoVest and consider supplementing the fourth-quarter estimate, although that probably won’t make much difference.
I spoke with EcoVest investor relations and they made it clear that they won’t just cut a check. Their point of view is that DOJ has arbitrarily struck demanding that five hard-working people, who are connected to EcoVest one way or another, are being asked to take up different work. Due to the government shutdown, they have not been able to respond.
The EcoVest representative who only gave me his first name indicated that a statement has been sent out to the twenty or so broker-dealers that they use. I haven’t gotten my hands on a copy of that yet.
If Terry has the stomach for this sort of thing there could be complaints to various regulatory bodies which might encourage EcoVest to reconsider. I think the stakes are too low to engage a lawyer.
Assuming the refund exercise is fruitless, Terry should plan on going on extension. EcoVest has indicated that the K-1s will be issued. But even if they are issued, my inclination would be to extend based on the assumption that the tax savings will not be available and see what develops.
My partner often chides me about procrastinating. She is usually right. I’ve yet to see the dirty dishes spontaneously clean themselves, but I can keep hoping. Here, though, procrastination is the right answer. It is reasonable to hope or infer that there will be more relevant information by September when you should plan on finalizing your extended return (See Reilly’s Seventeenth Law of Tax Planning – Don’t cut your deadlines close)
And The Prior Years?
I don’t give audit lottery advice, but this circumstance is different. I really don’t think that Terry should amend the 2017 return and give back the tax savings. When you get a K-1, you are supposed to put on your return what the K-1 shows. What Terry should do is verify that the correct disclosures were included with the 2017 return and, if not, possibly amend for that.
I really think that engaging a tax attorney is premature. You don’t know for sure that your deal is going to be attacked and what the actual outcome will be. If you have the means (and you should if you were a qualified investor), plan to have your tax saving plus 40% or so liquid in a couple of years. Kiss it goodbye mentally now, which will cut your stress a lot. If it develops, as is not that unlikely, that you get to keep it, I think you should donate it to a legitimate conservation organization as a kind of penance for having profited from these shenanigans, but that is just me moralizing.
My Sympathies
In EcoVest vs DOJ, I am rooting for DOJ. Syndication of conservations easement charitable deductions is a travesty. It doesn’t even make good nonsense.
The investors are a different story. From what I can gather, somebody told them that these deals are legitimate and there is a sense in which that is true. So they have some sympathy from me. As Learned Hand wrote:
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Future investors get less sympathy. IRS Notice 2017-10 indicates the syndicated conservation easements are listed transactions. Reilly’s Fourteenth Law of Tax Planning – If something is a listed transaction, just don’t do it.
Update
EcoVest has issued a statement which explains in greater detail their disagreement with DOJ and their determination to fight in court. You can read it here.
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