Two Recent Court Decisions Highlight Charitable Contribution Deduction Abuse

Two unrelated federal court decisions last week demonstrate the creativity of individuals seeking to promote the abusive use of the charitable contribution deduction. One involved guilty verdicts in a massive syndicated conservation easement case and the other a default judgment on liability for marketing of an inflated valuation scheme.

The U.S. Department of Justice announced the guilty verdict with a press release titled Two Tax Shelter Promoters Found Guilty in Billion-Dollar Syndicated Conservation Easement Tax Scheme. Here are some details from the press release:

A federal jury sitting in Atlanta convicted Jack Fisher and James Sinnott today 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. Fisher was also convicted of money laundering.

. . . .

According to court documents and evidence presented at trial, 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.

. . . .

In total, the defendants sold over $1.3 billion in fraudulent tax deductions through this scheme.

Interestingly, a third defendant was acquitted. And it appears that the testimony of an accountant, who had previously pleaded guilty for his role in the scheme (likely the guilty plea reported here), was an important part of the government’s case. It also appears that an appraiser who pleaded guilty earlier this year was involved in the same scheme.

The liability was found by a federal district court in American Properties, Co. G.P. v. The Welfont Group, LLC, et al. The plaintiff alleged that “it sold real property below market value based on Defendants’ false representation that it would receive a substantial tax deduction for doing so.” The plaintiff further alleged that the grounds for the deduction was to have been a purported qualified appraisal of $4,755,000 issued in connection with the plaintiff’s sale of the property to a charity for $2,160,000, which the IRS determined was not a qualified appraisal and that was under any conditions undermined by an alter ego of one of the defendants immediately purchasing the property from the charity for $2,650,000. Because the defendants did not appear to defend themselves, the court entered a default judgment as to liability under several state causes of action based on the plaintiff’s factual allegations. but declined to determine the damages amount (asserted by the plaintiff to be $1,321,013)  at this time as the plaintiff is still appealing the IRS’ adverse determination against it on audit.

Lloyd Mayer