Moral Hazard and Conservation Easements Result in 48 Years in Prison

The deductibility of conservation easements creates “moral hazard,” I think.  Because valuation is like economics, and that like the weather.  There’s no rhyme or reason. Except, well, don’t be a pig because pigs turn into hogs and hogs get slaughtered.  You can pass almost any straight-faced test with nearly any valuation of unimproved land.  We all do it.  We err on the high side regarding all sorts of things in life that are better on the high side. Age, by the way, ain’t one of those things. Even if you fudge just a little, that’s still moral hazard.  Conservation easements are easy money.  And for that kind of easy money some promoters can’t resist the urge to act like Vito Corleone.  Just without all the blood and guts.

Here is how one group described the moral hazard of conservation easements:

While there were signs of abusive syndicated transactions before Congress passed legislation in 2015 to make the conservation easement tax incentive permanent, it seemed to proliferate once the bill was signed into law. In addition to permanently reauthorizing the incentive, the 2015 legislation included important provisions to help low- to middle-income landowners conserve their land.

Unfortunately, a small handful of bad actors saw this as an opportunity to make a fast profit by claiming billions in unwarranted tax deductions. To make the uber-lucrative easement deals possible, promoters worked with three types of players: an appraiser who would attest to a property’s wildly unfounded development potential; a land trust willing to turn a blind eye to any wrongdoing and accept the easement donation; and investors whose desire for astounding profits trumped any fear of IRS enforcement.

Each syndicated easement transaction had its own particulars. But, as detailed in a U.S. Senate Finance Committee report, they shared many of the same troubling characteristics. Generally, promoters would purchase affordable tracts of land that had shown little potential for extensive development and then solicit investors. An appraiser would estimate the site’s value as if it were a premier destination flush with mineral rights or upscale real estate cachet. Through the rose-colored glasses of an inflated easement appraisal, a moribund property that sold for $5 million could yield an appraised easement of $50 million.

Time and again, the gambit worked. The gap between the stratospheric appraisal and the land’s actual value took form as an easement that could earn some investors as much as a $10 tax deduction for every $1 spent on the property. The boom towns were fantasy but, as castles in the air, they had generated a windfall in tax savings all the same.

Well, two days ago a federal court sentenced a CPA and his lawyer accomplice to 25 and 23 years in prison for being white collar gangsters.  Or maybe victims, depending on your viewpoint, of conservation easement moral hazard.  “What are you in for?” “Engaging in syndicated conservation easement transactions that lacked economic substance,” that’s what the verdict form says.  Their mamas must be really disappointed. The moral hazard inherent in conservation easements has probably been resolved though because the law no longer entices as much lying as these two guys facilitated.  Lying, if you can’t resist the hazard, is now capped at 250% of “relevant basis” under IRC 170(h)(7).  These guys lied at 1000% of basis.  They are both from Georgia, they shoulda known that pigs turn into hogs.  From the DOJ press release:

According to court documents and evidence presented at trial, Fisher, Sinnott and their co-conspirators sold over $1.3 billion in fraudulent tax deductions, leading to a tax loss to the IRS of over $450 million. Five other tax professionals involved in Fisher’s scheme previously pleaded guilty. Fisher was not only a pioneer in the conservation easement industry, but also one of its biggest promoters across the country. Fisher and Sinnott each made millions of dollars promoting and selling their tax shelters to wealthy taxpayers. The two men also used fraudulent deductions generated by their tax shelters on their own personal income tax returns to reduce the taxes they owed on the millions earned.

A federal jury sitting in Atlanta convicted Fisher and Sinnott on Sept. 22, 2023, of conspiracy to defraud the United States, conspiracy to commit wire fraud, aiding and assisting the filing of false tax returns and subscribing to false tax returns arising out of their fraudulent tax shelter scheme involving syndicated conservation easements dating back nearly two decades. Fisher was also separately found guilty of money laundering. One of the appraisers who was charged with Fisher and Sinnott pleaded guilty and was sentenced in November 2023. Fisher’s primary assistant, Kate Joy, who was also indicted, remains a fugitive.

The evidence proved that Fisher and Sinnott designed, marketed and sold to high-income clients abusive syndicated conservation easement tax shelters based on fraudulently inflated charitable contribution tax deductions, promising them deductions 4.5 times the amount the taxpayer clients paid to buy the deductions.  

darryll k. jones