Land grab could burn investors

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Promoters of syndicated conservation easements tout them as being a great deal for investors and preservation. Promoters purchase a piece of property, do an assessment of how much that property would be worth if developed, then sell parts of the conservation easement to taxpayers looking for income tax deductions.

But there are concerns that the assessments for many of the syndicated conservation easements are hyper-inflated, costing the government a huge sum while providing few actual conservation benefits.

Take the case of Matt Mills’ Legacy Mining property near Keels Creek and the Kings River. Drilling there by GeoTechnical Services, starting in the summer of 2019, alarmed neighbors concerned that a limestone quarry on the property could damage water wells, property values, caves, sinkholes and local roads inadequate for heavy truck traffic.

At the first meeting of residents, a property owner neighboring the Legacy Mining property said he talked to workers on the site, and that people should not to be concerned. The intention of Mills, who is a principal with the investment firm 60 West, was not to establish a limestone quarry, but to split the property into Limited Liability Companies (LLC) that would then place the 600 acres into syndicated conservation easements. It turns out that is exactly what happened.

The Legacy Mining property was purchased for $1,000,000. There were unknown expenditures for the exploratory drilling, and then there was a gross offering for three syndicated conservation easements for a total of $26 million, according to information on the website of the Securities and Exchange Commission. (See Independent Feb. 5 “No quarry mining near Kings River.”)

But the cost to taxpayers for preserving the Kings River property was far more than $26 million. The investor/taxpayers are provided with a preliminary appraisal valuation that is four times greater than the amount of the gross offering. The amount of the preliminary deduction, therefore, is estimated on a reasonable basis to be about $100 million.

If an individual has a federal and state tax rate of 45 percent, the investors/taxpayers realize close to two or more times their investment. This makes the cost to the taxpayers roughly $45 million.

What benefit does the public get from the preservation of the 600 acres near the Kings River? No public access is allowed, and there is no active conservation management for protection of rare species or removal of invasive species. Neither of the land trusts that accepted the conservation easements on the property is in Arkansas or certified by the Land Trust Alliance.

Road widening activities in the area discharged large amounts of sediment into streams. The underlying karst topography was disrupted by extensive drilling. The drilling, according to informed sources, was not necessary to establish limestone reserves in the area, which can be estimated by a surface evaluation of limestone outcroppings.

This was not the first such syndicated conservation easement deal in Carroll County. Mills is also the owner of Ozark Southern Stone near Elk Ranch, which was purchased for about $3.4 million. After purchasing that existing limestone quarry, Mills purchased 238 acres surrounding the mine for $600,000.

In 2018, the 238 acres surrounding Ozark Southern Stone were divided into six LLCs that entered into syndicated conservation easements with a gross offering of $36 million from investors. Assuming a preliminary appraised value four times the gross offering, the estimated tax deduction would be about $144 million. Assuming the 45 percent tax rate, the cost to taxpayers would be about $65 million.

That makes the total cost to the government/the taxpayers of $110 million for just those two deals in Carroll County. The promoters and sponsors walked away with $62 million on a $1.6-million initial land investment.

Even more mind-boggling is that this has been happening across the country. In November 2019, IRS commissioner Chuck Rettig announced an escalation including the launch of criminal investigations to help prevent abuses of syndicated conservation easements.

“We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions,” Rettig said. “Three IRS divisions are now conducting coordinated examinations of syndication deals after identifying 125 ‘high-risk cases,’ and outside contractors have been hired to assist with the investigative load. More than 80 tax court cases are now pending against partnerships that used the syndicated easement deduction.”

“Boy, it isn’t like the old days, when people were fearful of the IRS,” Steven Miller, who spent 25 years working for the IRS including in enforcement, said.

There has been bi-partisan support for reform. It is estimated the Charitable Conservation Easement Program Integrity Act of 2019 would produce $7.1 billion in additional tax revenue through 2021, but the bill has yet to come out of the committee.

How will the IRS fare taking on these syndicated conservation tax promoters making huge profits? It will be tough considering that Congress has been starving the IRS for revenue. With millions of dollars of profit, these syndicators have almost unlimited funding for lawyers to go up against the IRS.

Legitimate conservation easements deserve tax credits. And the massive proliferation of the sham syndicated conservation easements puts legitimate projects at risk.

Be careful about jumping into this game if you’re a taxpayer looking for a great deal. If the deduction is determined to be bogus, not only could the taxpayer lose the amount of the deduction but also get an IRS penalty of 40 percent.

Becky Gillette