Big Escambia Ventures LLC, tax matters partner in thirteen partnerships currently in Tax Court, recently had their cases heard by Judge Albert Lauber, known as “Scholar Al”. The 13 cases were referred to as the Big Escambia Group, involving the purchase of a 4,608-acre property in Alabama for $9.5 million in 2014. The partnerships donated easements and fee interests to the National Wild Turkey Federation in a complex transaction resulting in $187 million in charitable contribution deductions. The IRS and Judge Lauber did not approve of the valuation method used in these deals.
The Senate Finance Committee released a report in 2020 on syndicated conservation easement transactions, highlighting inflated appraisals as a key issue in the industry. The Partnership For Conservation defended the practice of valuing easements based on forfeited development rights and discounted future economic benefits. This controversial valuation method played a crucial role in the Big Escambia deals, where easements were valued based on hypothetical mining operations.
Judge Lauber ruled on three of the partnerships involved in the Big Escambia Group, known as EAG, ASG, and BEP. He allowed significantly lower charitable contributions deductions than claimed by the partnerships, citing flaws in the valuation process and unreasonable assumptions about the properties’ value. The cases are considered test cases, with the remaining ten partners likely to face disallowances totaling around $175 million based on similar principles.
The investors in these conservation easement deals, many of whom are high earners, may face significant tax consequences following the disallowances of charitable deductions. The deals were structured to provide a significant deduction for every dollar invested, potentially resulting in substantial tax liabilities for investors who may have to repay the disallowed deductions. The tax implications for investors could be severe, especially if they participated in multiple syndicated conservation easement deals.
While the Tax Court historically allowed the majority of claimed conservation easement values in decided cases, a recent shift in opinions has led to more conservative rulings on valuation issues. In the case of Excelsior Aggregates, only a small portion of the claimed deduction was allowed, signaling a stricter approach to valuation methods. The trend towards more conservative rulings may have significant implications for future conservation easement transactions and their tax treatment.
The case of Big Escambia Ventures LLC and the recent Tax Court rulings highlight the complexities and controversies surrounding syndicated conservation easement deals. Judge Lauber’s decisions reflect a shift towards more conservative valuation methods and a crackdown on inflated appraisals in the industry. The impact on investors and the future of conservation easement transactions remains uncertain as stakeholders navigate the evolving landscape of tax law and valuation practices in the conservation easement market.
