Judge Joseph Goeke of the United States Tax Court has recently issued an opinion that sheds light on the syndicated conservation easement industry. In his opinion on Savanah Shoals LLC- TC Memo 2024-35, he made it clear that the industry is based on inflated valuations and abusive tax shelters. The industry involves investors acquiring property and selling it to investors who would benefit from a conservation easement deduction. This practice has come under scrutiny for its questionable valuation methods.
The concept of syndicating easement deductions gained popularity after the Kiva Dunes decision in 2009. This decision involved a golf course on the Gulf Coast that wanted to preserve its land as a golf course rather than for housing. The owners brought in investors who could benefit from the conservation easement deduction. The IRS initially sought to reduce the deduction but the Tax Court ruled in favor of the taxpayers. However, in recent years, the industry has come under fire for inflated valuations that result in excessive deductions.
The valuation problem in the syndicated conservation easement industry revolves around the concept of highest and best use of the property. Partnerships argue that the value of a conservation easement should be based on the highest and best use of the property, which may not have been realized at the time of acquisition. This argument allows for inflated valuations and excessive deductions, which the IRS has been challenging in audits and litigation.
The IRS has been focused on technical flaws, or “foot faults,” in these cases, rather than on the valuation of the easements. However, Judge Joseph Goeke’s recent opinion has shifted the focus to valuation. In the case of Savannah Shoals, the valuation of the easement was a contentious issue. The taxpayers claimed a $23 million deduction for the easement, while the IRS expert put the value at $100,000. This valuation gap led to a dispute over the true value of the conservation easement.
The valuation of the conservation easements in these cases is crucial, as it determines the tax benefits that investors receive. In the case of Savannah Shoals, the IRS appraiser based the valuation on comparable sales and determined that the highest and best use of the property was for low-density residential and recreational uses. The taxpayers’ experts, on the other hand, projected the value based on a hypothetical aggregate mine on the property. The discrepancy in valuation methods led to a significant difference in the value of the easement.
Judge Goeke’s analysis emphasized the importance of fair market value in determining the value of a conservation easement. He highlighted the need for realistic valuations that reflect the actual market value of the land. The case of Savannah Shoals serves as a cautionary tale for investors and professionals involved in the syndicated conservation easement industry. The inflated valuations and excessive deductions could have serious consequences for both investors and tax advisers.
Overall, the recent opinion on Savannah Shoals sheds light on the issues plaguing the syndicated conservation easement industry. The focus on valuation and fair market value highlights the need for more stringent regulations and oversight in the industry. Investors and professionals involved in these deals should be wary of inflated valuations and questionable practices that could lead to legal and financial repercussions in the future.
