Syndicated Conservation Easements Case Study
When it comes to US tax, the general consensus is that US taxpayers want to pay less of it. For some taxpayers who may work in a W-2 job and have a high income, there are not many (legitimate) deductions that they can take beyond maxing out their 401(k). As the taxpayer earns more and more money, deductions such as IRA contributions and actively participating in passive activity phase out as well. In recent years, the IRS has been aggressively cracking down on alternative routes some taxpayers try to take, such as Malta Personal Retirement Schemes. This has led to tax promoters across the globe trying to sell US Taxpayers on the idea of the syndicated conservation easement transaction as a way to utilize charitable deductions to reduce adjusted gross income. As you may imagine, the Internal Revenue Service is not keen on these types of investments and has initiated litigation as well as updated the dirty dozen tax list to include syndicated conservation easements. The syndicated conservation easement transaction has also been deemed a “Listed Transaction” that generally requires the filing of Form 8886 and may result in tax shelter penalties. Beyond the tax implications of a syndicated conservation easement transaction, when these types of easements are located overseas in countries like Panama and Costa Rica — it may serve as a catalyst for other issues such as FBAR, FATCA, and Form 3520. Let’s walk through a case study example of how this works.
High-Income Earner, Out of Deductions
Leah is a W-2 employee who earns mid-six figures. While each year she maxes out her retirement contributions, her net-effective income tax rate is still around 33% to 35%. Leah wants to try to reduce her tax liability without doing anything downright fraudulent such as forming a fake business in order to claim false “consultant deductions” or exaggerating other deductions in order to bring down her income. Leah’s friend tells her about a tax promoter that she spoke with that offers a strategy to reduce tax liability.
Tax Promoter (Flow-Through)
Leah speaks with a tax promoter who explains to her how the syndicated conservation easement transaction works. This particular tax promoter works overseas and has a parcel of land that his flow-through entity has purchased that is being appraised. While the parcel of land is not that impressive from the pictures the promoter provided to Leah, the promoter explains that it is actually very valuable and expects the appraisal to be worth several million dollars. Leah is offered the opportunity to buy into the scheme in which she will pay $25,000 and create her own disregarded entity. The promoter guarantees that her deduction will be somewhere between $150,000 and $250,000.
The Parcel of Land Appraised for High Value
As the promoter explained, the appraisal comes in close to $10 million and the promoter goes through all the necessary hoops in order to facilitate the completion of the charitable donation. Thus, the portion that flows through to Leah and her disregarded entity will net her an $80,000 savings on her tax return and significantly reduce her income tax liability.
Why Does the IRS Dislike Syndication Conservation Easements?
The primary reason why the Internal Revenue Service dislikes this type of deduction is that the parcel of land is totally overvalued. Especially in foreign countries where appraisals are not held to the same standards as in the United States — sometimes it is as simple as having an overseas local real estate agent appraise the property. The property is then appraised for an amount of money that does not reflect the true value of the charitable contribution — which means the taxpayer has artificially reduced their tax liability. And, from an IRS perspective, if the Internal Revenue Services believes the taxpayer had no rational or reasonable basis to believe that this type of deduction was proper — it could lead to potential fraud penalties and other noncompliance issues. Taxpayers have to be very careful before buying into a Syndicated Conservation Easement investment opportunity.
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