Recovering From Conservation Easement Losses

Conservation easement investments, often marketed as a way to preserve land and secure valuable tax deductions, have become a legal minefield for many investors. As the IRS cracks down on syndicated conservation easement transactions, numerous investors are facing disallowed tax deductions, audits and significant financial penalties. For those affected, recovering from these losses can be an overwhelming process.

Sonn Law Group, a nationally recognized leader in investment fraud cases, specializes in helping investors recover from these complex financial setbacks. With extensive experience representing clients nationwide, our attorneys are well-versed in the intricacies of syndicated conservation easement transactions. They’re committed to providing expert legal support to those impacted by these problematic investments.

What Are Conservation Easements?

Conservation easements are legal agreements that protect land by limiting future development while allowing the landowner to retain certain property rights. These agreements are used to preserve the land’s ecological, scenic or historic value, often in partnership with land trusts or conservation organizations. By placing land under a conservation easement, property owners can ensure the land remains protected for future generations while benefiting from its use in approved ways, such as for agriculture or recreation.

Land trusts and landowners often collaborate to:

• Protect natural habitats for wildlife and plants
• Preserve open spaces and scenic landscapes
• Maintain working farms and forests
• Safeguard historic sites or culturally important structures
• Ensure public access for recreational or educational purposes

The primary incentive for landowners and investors to participate in conservation easements is the potential for tax benefits. These include:

• Federal Income Tax Deduction: Investors can claim a charitable deduction on qualified conservation easements based on the difference between the land’s value before and after the easement is placed. This deduction can amount to up to 50% of their adjusted gross income (AGI).
• State Tax Benefits: Some states provide additional tax credits for conservation easement donations.
• Property Tax Relief: Local jurisdictions often reduce property taxes for land placed under a conservation easement.
• Estate Tax Benefits: Conservation easements can reduce the taxable value of an estate, offering savings on estate taxes for heirs.

While these tax advantages are a significant draw for investors, syndicated conservation easement transactions — where groups of investors pool resources to buy land and claim deductions — have come under increased scrutiny from the Internal Revenue Service (IRS). These transactions, often flagged for inflated appraisals and improper tax filings, can lead to audits, disallowed deductions and severe financial penalties for investors.

However, the IRS closely scrutinizes these transactions, and only properly valued easements are eligible for deductions, making professional guidance essential.

Syndicated Conservation Easements: Risks and IRS Scrutiny

Syndicated conservation easements have become a focal point of IRS scrutiny due to their potential for abuse as tax avoidance schemes. Unlike traditional conservation easements, which focus on preserving land, syndicated easements involve groups of investors pooling resources to purchase property with the primary goal of obtaining tax benefits. Once the conservation easement is placed on the property, investors claim a charitable tax deduction based on its appraised value, often leading to deductions far exceeding their initial investment.

In a typical syndicated deal, a promoter creates a legal entity, such as a partnership, to acquire the land. Investors are then brought in to purchase shares in this entity. After placing the conservation easement on the property, an appraiser assigns a value to the easement — often significantly inflated compared to the purchase price of the land. Investors claim tax deductions proportional to their share of the appraised value, which can sometimes be multiple times their original investment.These transactions have drawn significant regulatory attention. The IRS, along with the Senate Finance Committee, has flagged syndicated conservation easements as potentially abusive tax shelters for several reasons:

• Inflated Appraisals: Many syndicated deals rely on inflated valuations of the conservation easement, allowing investors to claim outsized deductions.
• Excessive Deductions: Investors frequently claim deductions that far exceed their actual financial contribution to the land purchase, sometimes by four times or more.
• Questionable Conservation Intent: In some cases, the transactions appear to prioritize tax benefits over genuine conservation efforts, casting doubt on the legitimacy of the easements’ conservation purpose.

In response to these issues, Congress passed the Consolidated Appropriations Act of 2023, which generally denies deductions for syndicated conservation easements where the claimed deduction exceeds 2.5 times the initial investment.

While syndicated conservation easements may seem attractive for their potential tax benefits, they carry substantial risks. Investors should carefully consider the possible financial repercussions and consult qualified tax professionals to ensure compliance with all relevant laws and regulations.

Understanding the Consequences of Unsuitable Syndicated Conservation Easements

Some real estate brokers and financial advisors have recommended syndicated conservation easement investments without fully disclosing the associated risks. These investments were often presented as low-risk ways to secure significant tax deductions, but many investors were unaware of the financial risks tied to IRS challenges. Unscrupulous advisors failed to conduct proper due diligence or fully explain the potential repercussions, leaving investors vulnerable to serious financial consequences.

The IRS has been actively challenging the tax deductions claimed in many of these syndicated conservation easement transactions. The agency’s primary focus has been on disallowing deductions due to inflated appraisals and improper filings. As a result:

• Disallowed Deductions: The IRS has frequently disallowed tax benefits, leaving investors unable to claim the expected deductions.
• Tax Court Rulings: In many cases, the U.S. Tax Court has upheld the IRS’s disallowance of these deductions, leading to significant financial penalties for investors.
• Penalties and Fines: Investors caught in these transactions have faced substantial penalties, including a 40% penalty for gross valuation misstatements. In some cases, civil fraud penalties of up to 75% can apply, compounding the financial loss.

Beyond the immediate loss of anticipated tax benefits, investors are often hit with additional costs:

• Back Taxes and Interest: When deductions are disallowed, investors are required to pay back the taxes they avoided, along with interest that can accumulate over several years.
• Financial Loss: These challenges result in financial losses from the disallowed deductions as well as out-of-pocket penalties, legal fees and audit-related expenses.

The financial burden can be overwhelming for investors misled into these unsuitable syndicated conservation easement investments. The combination of back taxes, penalties and audit-related costs often far exceeds the value of the initial investment, making it essential for affected individuals to seek legal recourse.

Legal Recovery Options for Conservation Easement Losses

Investors who have suffered financial losses due to unsuitable or fraudulent syndicated conservation easement investments have several legal options for recovery. These options are designed to hold brokers and financial advisors accountable for failing to conduct adequate due diligence or misrepresenting the nature of these transactions.

Investors have the right to seek compensation through:

• FINRA Arbitration: Many disputes between investors and their brokers are resolved through arbitration overseen by the Financial Industry Regulatory Authority (FINRA). This process provides a structured platform where evidence of unsuitability or broker misconduct is presented, leading to potential recovery of losses.
• Securities Litigation: In more complex cases, litigation may be pursued, especially when fraud or gross negligence is involved. By taking the case to court, investors can seek full financial recovery through a legal process that holds brokers and advisors accountable.
• Settlement Negotiations: Sometimes, claims can be settled before formal arbitration or litigation. This approach allows for faster resolution and may lead to a favorable outcome without the need for a drawn-out legal process.

Sonn Law Group has successfully represented numerous clients who suffered from unsuitable syndicated conservation easement investments. Our attorneys leverage their securities law expertise to navigate these cases’ complexities. We have recovered substantial losses for clients in cases where brokers or financial advisors failed to conduct adequate due diligence or misrepresented the investments. Whether through arbitration, litigation or settlement negotiations, Sonn Law Group’s proven track record speaks for itself.

How Sonn Law Group Can Help

Dealing with conservation easement losses can be overwhelming, but you don’t have to face it alone — Sonn Law Group is here to help. Our team specializes in evaluating the suitability of these investments, filing legal claims through FINRA arbitration or litigation, and assisting clients with IRS audits related to disallowed deductions and penalties. We have extensive experience holding brokers and advisors accountable for failing to properly assess or disclose risks, and we work to ensure that investors receive the compensation they deserve.

With a national presence and extensive experience in investment fraud cases, Sonn Law Group is well-positioned to handle your case. Contact us today for a free consultation to explore your legal options and start the process of recovering your losses.