Texas Conservation Easement Attorney for Taxpayers Facing IRS Investigations Targeting Conservation and Façade Easement Deductions
Through the Pension Protection Act of 2006, Congress allowed a number of income tax deductions for owners of property who donated certain rights of ownership in order to preserve the property for future generations. The intent of Congress was to encourage property contributions that would preserve our heritage.
Of late, the IRS has been aggressively auditing taxpayers who take advantage of these income tax deductions. Tax Attorney Lawrence Brown is often contacted by individuals for assistance with issues related to conservation and façade easements. Lawrence Brown is a former Trial Attorney with the Department of Justice Tax Division. His private practice focuses on resolving complex tax disputes including those related to conservation and façade easements.
Common Issues in IRS Conservation and Façade Easement Investigations
When used correctly, conservation and façade easements can afford high-income and high-net-worth taxpayers access to significant tax savings. Since the enactment of the Pension Protection Act, conservation and façade easements have proven to be extremely popular tax mitigation tools for taxpayers who own (or have the ability to acquire) eligible properties. Each year, taxpayers use conservation and façade easement deductions to avoid billions of dollars in federal income tax liability.
To qualify for a deduction, a conservation or façade easement must meet several statutory requirements. These requirements include:
- Granted for Preservation Purposes – To qualify under the Pension Protection Act, an easement must be granted “for preservation of land areas for outdoor recreation, protection of habitat, protection of open space, or preservation of historically important land area or buildings.”
- Granted with Charitable Intent – The grant of the easement must be made “with charitable intent and without receipt of adequate consideration,” including without any expectation of a direct or indirect benefit to the taxpayer.
- Deed of Easement to a Qualifying Organization – The easement must be granted via a deed that states its conservation-focused purpose, the restrictions on the taxpayer’s use of the property, and permissible uses of the property. It must also include provisions for enforcement by the donee, which must be a qualifying non-profit organization.
- Contribution of Full Interest – To qualify for an income tax deduction, a taxpayer’s charitable contribution must consist of the taxpayer’s entire interest in the subject property, unless the contribution is a qualified conservation contribution.
- Granted in Perpetuity – Perpetuity is a “fundamental requirement” for the property owner to claim a conservation easement deduction. Both the grant of the easement and the conservation purpose of the easement must be perpetual.
Along with failure to meet these requirements, the IRS looks for several other red flags when scrutinizing taxpayers’ deductions. The IRS has identified the following “abuses” as warranting investigations and potential criminal prosecution:
- Taxpayers taking inappropriately large deductions (deductions for capital gain property are generally limited to 30 percent of the taxpayer’s contribution base, while deductions for qualified conservation easements can be up to 50 percent in most cases);
- Taxpayers using or developing properties in a manner inconsistent with the conservation and façade easement rules;
- Charities allowing taxpayers to modify their easements or develop their properties in a manner that is inconsistent with their easements;
- Claiming façade easement deductions when taxpayers were already prohibited from modifying their properties under local zoning ordinances; and,
- Working with promoters who provide assistance with structuring and executing fraudulent tax avoidance schemes.
Syndicated Conservation Easements: An Area of Emphasis for the IRS
In addition to targeting taxpayers for claiming fraudulent individual conservation and façade easement deductions, the IRS is also targeting those who participate in syndicated conservation easements. The IRS currently includes syndicated conservation easements on its “Dirty Dozen” list, which highlights some of its main enforcement priorities. As the IRS explains:
“Syndicated conservation easements are arrangements that make the Dirty Dozen list . . . . In abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested. These abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.”
As you can see from the IRS’s language, it does not look favorably upon syndicated conservation easements. Allegations of using syndicated conservation easements to avoid federal income tax liability can lead to invasive and high-risk investigations that carry the potential for serious criminal charges. In Notice 2017-10, the IRS outlines some of the key factors it considers when determining whether a syndication arrangement warrants scrutiny, including:
- The promoters of the syndicated conservation easement identify a pass-through entity that owns real property or form a pass-through entity to acquire a piece of property;
- The promoters syndicate ownership interests in the pass-through entity either directly to participating taxpayers or through multiple tiers of pass-through entities;
- The promoters indicate that taxpayers may be entitled to a share of a charitable contribution deduction that equals or exceeds 2.5 times their investment;
- The promoters obtain an appraisal that substantially inflates the value of the conservation easement “based on unreasonable conclusions about the development potential of the real property;” and/or,
- The promoters receive a fee or other consideration (which may include an interest in the pass-through entity that owns the encumbered property) in exchange for their services.
As discussed in greater detail below, for taxpayers targeted in syndicated conservation easement investigations, challenging the federal government’s evidence of willfulness can be a key defense strategy in many cases. While the IRS generally won’t excuse taxpayers who fall victim to promotion schemes from coming into compliance, those who do not intentionally violate the law should not be at risk for criminal prosecution.
Defending Against Allegations of Claiming Fraudulent Conservation or Façade Easement Deductions
When facing allegations of claiming fraudulent conservation or façade easement deductions from the IRS or IRS CI, taxpayers must work closely with experienced defense counsel to protect themselves. While these allegations can present substantial risks, taxpayers will have viable defenses in many cases. Even if it is not possible to avoid liability entirely, executing a strategic defense can still result in a substantial reduction in any back taxes, interest and penalties owed.
As with all federal tax-related allegations, defending against allegations of fraudulently claiming a conservation or façade easement starts with gaining a clear and comprehensive understanding of the facts at hand. Once we know all of the relevant circumstances, then we can advise you regarding the best way to approach your case. Some examples of potential defense strategies in these cases include:
Demonstrating Compliance with All Pertinent Statutory and Regulatory Requirements
In some cases taxpayers will be able to avoid liability by affirmatively demonstrating compliance with all pertinent statutory and regulatory requirements. While taxpayers must be extremely careful when voluntarily submitting information to the IRS (or IRS CI), there are circumstances in which this can be an efficient and highly effective defense strategy. If you have fully complied with the requirements for taking a conservation or façade easement deduction—and if you have the documentation to prove it—our Texas conservation easement attorney team can help you decide if this is the best path forward.
Arguing Lack of Willfulness (or Lack of Evidence of Willfulness) to Evade or Defeat Tax
The federal tax evasion statute requires evidence that a taxpayer “willfully” attempted to evade or defeat tax in order to justify criminal prosecution. If you inadvertently violated the requirements for claiming a charitable deduction, or if you fell victim to a fraudulent syndicated conservation easement promotion scam, you may be civilly liable, but you are not a criminal. Our Texas conservation easement attorney team can challenge the government’s evidence of willfulness in order to mitigate your potential exposure to the greatest extent possible.
Arguing Lack of Evidence Substantiating Allegations of Tax Evasion or Tax Fraud
While demonstrating strict compliance is one way to avoid prosecution for tax evasion and tax fraud, as a targeted taxpayer, you do not have the burden of proof. Instead, the burden of proof rests with the federal government. Thus, if the IRS (or IRS CI) is unable to gather sufficient evidence to substantiate allegations that you unlawfully claimed a conservation or façade easement deduction, this is enough to establish that prosecution is unwarranted.
Demonstrating the Inadmissibility of Key Evidence Due to Constitutional Violations or Procedural Miscues
Even if the federal government has the evidence it needs to prove that you intentionally attempted to evade tax liability through a fraudulent conservation or façade easement or inflated easement deduction, prosecutors won’t be able to secure a conviction if they can’t use their evidence in court. Constitutional violations and procedural miscues can render the government’s evidence inadmissible—and, if the government can’t use its evidence against you, prosecution is unwarranted in this scenario as well.
Negotiating a Settlement Agreement or Offer in Compromise
If you are not in a position to avoid liability entirely, you may still be able to substantially mitigate your liability by negotiating a settlement agreement or offer in compromise. At Brown, P.C., we have decades of experience helping taxpayers informally resolve major tax controversies without charges being filed. While our first priority will be to determine if grounds exist to overcome the government’s allegations against you, we will also enter into negotiations with the IRS on your behalf if it makes sense to do so.
Ultimately, the best way to approach your case depends on the circumstances involved. In all cases, however, taking a proactive approach to your defense will ensure that you preserve as many opportunities as possible. If you are facing scrutiny from the IRS (or IRS CI) in relation to conservation or façade easement deductions claimed on your federal returns, we encourage you to request a confidential consultation at Brown, P.C.
Request a Confidential Consultation with a Texas Conservation Easement Attorney
Please contact Brown, PC for counsel, advice and representation related to conservation and façade easement issues. The firm is centrally located with main offices in the Dallas-Fort Worth, Texas metroplex and represents clients from throughout the United States and abroad. Call 888-870-0025 or e-mail the law firm through this Web site for legal counsel regarding issues relating to conservation and façade easements.