Syndicated Conservation Easements: When a Tax Deal Turns Into an Investment Loss

Investors Face Audits After the IRS Crackdown

Thousands of investors bought units in syndicated conservation easement deals, and many now face IRS audits, disallowed deductions, back taxes, interest, and penalties. On October 7, 2024, the Treasury Department and the IRS issued final regulations that label certain of these deals as "listed transactions," which the IRS treats as abusive tax arrangements that participants must report.

Federal prosecutors also won prison sentences against promoters. Many of these deals reached investors as private placements sold by brokers at small broker-dealers. Investors who lost money may have claims in FINRA arbitration under Regulation Best Interest, FINRA Rule 2111 (suitability), FINRA Rule 3110 (supervision), and FINRA's guidance on private placement due diligence.

How Syndicated Conservation Easements Work

In a typical deal, a promoter forms a partnership that buys land and then sells partnership units to investors. The partnership later donates a conservation easement on the land, or the land itself, to a land trust. An appraisal sets the value of that donation, and investors claim their share as a charitable deduction. The IRS says many of these appraisals were "grossly inflated." The IRS first flagged these deals as listed transactions in Notice 2017-10.

According to a 2021 Bloomberg report, about 16,900 people invested in 2018 alone and claimed $9.2 billion in deductions, based on an IRS estimate. The same report cited a Senate Finance Committee finding that promoters set aside up to 12% of investor money for sales compensation.

In January 2024, a federal judge in Atlanta sentenced CPA Jack Fisher to 25 years in prison and attorney James Sinnott to 23 years, according to the Justice Department. Prosecutors said their scheme sold over $1.3 billion in false deductions and caused a tax loss of more than $450 million. Another sponsor, EcoVest Capital, agreed in March 2023 to a court order barring it from promoting more easement deals, without admitting the government's allegations. Congress also acted. The SECURE 2.0 Act disallows a partnership's easement deduction that exceeds 2.5 times the partners' basis, for contributions after December 29, 2022.

The FINRA Rules That Apply to These Sales

Several FINRA rules apply when a broker recommends a private placement like a conservation easement fund. Regulation Best Interest, in effect since June 30, 2020, requires a broker to put the customer's interest first and to understand the risks and costs of the product. FINRA Rule 2111 imposed a similar suitability duty on earlier sales. FINRA also expects a firm to conduct a reasonable investigation of a private offering before selling it, as explained in Regulatory Notice 10-22. FINRA Rule 3110 requires firms to supervise their brokers.

For example, a broker could violate these duties by recommending a deal without checking whether the appraisal value made sense compared with the land's purchase price. A broker could also violate them by promoting the tax deduction while playing down the risk of an IRS audit and penalties.

Warning Signs and Possible Claims

Investors in these deals may have claims if their broker or firm failed to meet these duties. Warning signs include a deal that promised deductions several times larger than the investment, a land appraisal far above the recent purchase price, and high sales fees. Prosecutors said the Fisher deals promised deductions of 4.5 times the amount paid and used appraisals often more than 10 times the land's purchase price. A firm that sold such a deal without testing those numbers could face questions about whether it conducted a reasonable investigation.

Investors who received IRS notices, paid back taxes or penalties, or paid accountants and lawyers to fight an audit may be able to recover those losses. FINRA arbitration claims generally must be filed within six years of the event that gave rise to the claim, so timing matters.

Examples of Syndicated Conservation Easement Deals

Investor attorneys report investigating claims tied to many syndicated conservation easement deals. Several of the deals below list EcoVest Capital as sponsor, according to those reports. Examples include:

• Azalea Bay Resort Holdings LLC (EcoVest Capital)

• Azul Bay Resort Holdings LLC

• Belle Harbour Resort Holdings LLC (EcoVest Capital)

• Harbor Gate at Seadrift Holdings, LLC (EcoVest Capital)

• Olive Farm Holdings, LLC (EcoVest Capital)

• Queen's Cove Holdings LLC

• Santo Bay Resort Holdings, LLC (EcoVest Capital)

• Waterway Gate Grove Holdings LLC

This list is not complete. A deal's appearance on it does not mean its appraisal was improper or that any firm did anything wrong. If you invested in one of these deals or a similar one, the firm that sold it may be a source of recovery.

Lufrano Law, LLC is a national investment litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. Please contact us at (800) 627-2179 for more information if you have been the victim of investment negligence or fraud.

The content on this site reflects personal opinions and does not constitute statements of fact. No findings have been made against the firms or individuals mentioned. This blog is intended solely for educational purposes, drawing on publicly available information to provide general insights and a basic understanding of the law. It is not a substitute for legal advice.