If you are have suffered losses or have had adverse tax consequences investing in a conservation easement, you may be able to pursue recovery of your losses through securities arbitration or litigation. Please call Kons Law Firm at (860) 920-5181 for a FREE, NO OBLIGATION consultation to discuss your investment loss recovery options.
Conservation Easement Investment Loss Recovery Options
A conservation easement provides for the preservation of property by permanently restricting development, commercial, industrial and other intrusive uses on the protected property. Donors who follow the requirements set for in section 170 of the Internal Revenue Code (“IRC”) may be eligible for a federal income tax deduction equal to the value of their donation of the land that they purchased. The value of the easement donation, as determined by qualified appraisers, equals the difference between the fair market value of the property before and after the easement takes effect.
To make conservation easements attractive to investors, over the past decade certain conservation easement syndicators and promoters may have dramatically over-inflating the price of the donated land to maximize the tax deduction. As a result, conservation easements were sold as investments to high-income earners and high net worth invest0ors offering a return of 250% or more on every dollar investment through tax avoidance. Although disguised as legitimate, socially conscious investments, in reality certain conservation easement investments were nothing more than abusive tax scheme to defraud the IRS through the use of defective and fraudulent appraisals exposing unsuspecting investors to pay massive back taxes, interest, penalties, legal fees, and interest.
In late 2016, the IRS issued IRS Notice 2017-10 (amended by IRS Notice 2017-29), designated certain conservation easement transactions as “listed transactions”, meaning their participants must disclose to the IRS on their tax returns their participation in the transaction. IRS Notice 2017-10 applies to certain syndicated conservation easement transactions are listed transactions if entered into on or after January 1, 2010, and is targeted at those prospective investors who receive oral or written promotional materials offering the possibility of a charitable donation deduction of at least 2.5 times their investment.
Investors who purchased conservation easements that fit the scope of 2017-10 may have been pay required to forfeit their investment and pay massive back taxes, interest, penalties, legal fees, and interest as a result of an unsuitable conservation easement investment.
The Federal Government Investigates Abusive Conservation Easement Investments
On December 23, 2016, the IRS issued Notice 2017-10, announcing that certain syndicated conservation easement transactions are listed transactions if entered into on or after January 1, 2010. Notice 2017-10 applies to those prospective investors who receive oral or written promotional materials offering the possibility of a charitable donation deduction of at least 2.5 times their investment. A typical transaction covered by Notice 2017-10 involves the advertised investment in a pass-through entity that owns real property or acquires real property for the purpose of encumbering the property with a conservation easement.
In December 2018, the Department of Justice filed a complaint against Nancy Zak, Claud Clark III, EcoVest Capital Inc., Alan N. Solon, Robert M. McCullough, and Ralph R. Teal, Jr., seeking an injunction from organizing, promoting, or selling an allegedly abusive conservation easement syndication tax scheme. According to the complaint filed in the U.S. District Court for the Northern District of Georgia, the defendants’ scheme revolves around donations of conservation easements and corresponding tax benefits from those donations. Defendants also allegedly rely on grossly overvalued appraisals as part of their scheme. The suit alleges EcoVest and its promoters organized, promoted, and sold at least 96 conservation easement syndicates resulting in the syndicates reporting over $2.0 billion of tax deductions from overvalued and improper “qualified conservation contributions,” and have passed those tax deductions through to the thousands of customers of defendants’ scheme, resulting in hundreds of millions of dollars of tax harm.
Given the scale of this abuse, in March 2019, the United States Senate Committee on Finance launched an investigation into the potential abuse of syndicated conservation easement transactions, which may have allowed certain taxpayers to game the tax code and deprive the federal government of billions of dollars in revenue. The Brookings Institution found that this practice cost the federal government more than $3 billion dollars in 2014 alone, and estimated that it has cost even more in the years since.
As a result of this heightened enforcement environment following IRS Notice 2017-10, investors who purchased conservation easements may have been pay required to forfeit their investment and pay massive back taxes, interest, penalties, legal fees, and interest as a result of an unsuitable conservation easement investment.
Brokerage and Investment Advisory Firms Have a Duty to Conduct Proper Due Diligence on Conservation Easements
Securities broker-dealers and investment advisory firms have a regulatory duty to ensure that any investments they recommend to customers are suitable for them – which includes conservation easement investments. This is especially important for brokerage and investment advisory firms selling private placement investments like syndicated conservation easement investments.
FINRA rules and common law fiduciary duties require that securities broker-dealers and investment advisers conduct a suitability analysis when recommending securities to investors that will take into account the investors’ knowledge and experience. The brokerage or investment advisory firm must make reasonable efforts to gather and analyze information about the customer’s other holdings, financial situation and needs, tax status, investment objectives and such other information that would enable the firm to make its suitability determination. For investment advisers, they are required to make sure that the investment is in the best interests of the client.
In addition to ensuring that securities are suitable for its customers on an individual level, FINRA Rule 2111 (NASD Rule 2310) also states that a securities broker must have reasonable grounds to believe that a recommendation to purchase, sell or exchange a security is suitable for the customer. This “reasonable-basis” suitability requirement means that in the context of private placement investments like syndicated conservation easements.
Investment advisors, brokers, brokerage firms “may not rely blindly upon the fund manager for information concerning the fund,” nor may it rely on the information provided by the fund manager lieu of conducting its own reasonable investigation. Investment advisory and brokerage firms can be held liable for investment losses and adverse tax consequences that stem from a failure to conduct adequate due diligence, or for breach of fiduciary duty.
Conservation Easement Investors May Be Able to Pursue Recovery of their Losses and Tax Consequences
Fortunately for investors, they may be able to pursue recovery of their investment or tax losses in Conservation Easement Investments, or Ecovest Conservation Easements, through securities arbitration or litigation against the investment adviser, stockbroker, brokerage firm that recommended an unsuitable conservation easement investment to them.
If you are have suffered investment losses or have had adverse tax consequences from a conservation easement investment or in an EcoVest conservation easement, you may be able to pursue recovery of your losses through securities arbitration or securities litigation. Please call Kons Law Firm at (860) 920-5181 for a FREE, NO OBLIGATION consultation to discuss your investment loss recovery options.
Kons Law Firm represents investors nationwide in securities arbitration and litigation matters. To learn more about the Firm’s securities litigation and FINRA arbitration practice, please visit www.investmentlossattorney.com.