Judge Joseph Goeke of the United States Tax Court has made a ruling indicating that the syndicated conservation easement industry is based on inflated values and serves as an abusive tax shelter. This industry involves investors buying property and then selling it to obtain a conservation easement deduction. The concept of syndicating easement deductions originated from the Kiva Dunes case in 2009, where investors were able to claim deductions for buying a golf course that was valuable for migratory birds. However, the IRS has been cracking down on such deductions due to the inflated appraisals in recent years.
The valuation problem in the industry revolves around determining the fair market value of the easement. Partnerships argue that the value should be based on the property’s highest and best use, which might not be reflected in the current market value. The IRS, on the other hand, focuses on comparable sales and market demand to determine the value of the easement. The recent case involving Savannah Shoals LLC highlighted the valuation discrepancy, where the original purchase price of the land was significantly lower than the claimed deduction for the easement.
The issues in these cases often stem from technical flaws or “foot faults” that the IRS uses to disallow deductions. These can include errors in reporting partnership terminations, appraisal attachments, or discrepancies in tax forms. These technical issues can complicate the valuation process, but ultimately the focus shifts to the fair market value of the easement, as seen in Judge Goeke’s decision in the Savannah Shoals case.
In the Savannah Shoals case, the valuation of the easement was based on the potential mining operations on the property. The taxpayer’s experts projected a high value based on the presence of aggregate materials, but the IRS appraiser argued that the highest and best use of the property should be based on residential and recreational purposes. The valuation discrepancy led to a significantly lower value for the easement, falling short of the claimed deduction amount.
The consequences of these inflated deductions can have a significant impact on individual investors who participated in these syndicated conservation easement deals. The potential penalties and interest on disallowed deductions could result in substantial financial losses for investors who were expecting significant tax savings. Moreover, the implications of these rulings may have broader effects on professionals and advisers involved in these deals, particularly in states where such transactions were prevalent, such as Georgia.
Overall, Judge Goeke’s decision sheds light on the problematic nature of syndicated conservation easement deals and the reliance on inflated valuations for tax deductions. The case serves as a warning to investors and professionals involved in such transactions and underscores the importance of accurate and transparent valuation practices in claiming tax deductions. As the IRS continues to crack down on these abusive tax shelters, it remains crucial for taxpayers to ensure compliance with regulations and proper valuation methods to avoid potential penalties and losses.
