Stoltmann Law Offices, P.C. is a Chicago-based investor rights law firm that offers nationwide representation to investors who suffer investment losses as a result of unscrupulous, negligent, or fraudulent misconduct of financial advisors. In a tale as old as time, people prefer to avoid paying taxes if they can do so legally. The legality of tax breaks can be a touchy and constantly developing subject. An increasingly popular way for very wealthy land owners to generate massive tax write-offs is called the “conservation easement.” Simply put, in exchange for promising not to develop land, in the name of conservation, a land owner promises not to develop the tract. By doing so, the value of the property depreciates – because it cannot be developed – and theoretically, the owner of the land gives up something of value – the right to develop and exploit the land. The land owner then gets a tax deduction, which depends on two critically important factors: 1) the value of the property before the easement; and 2) the value after the easement. The spread between these two numbers is then used as a tax deduction.
And there is where the fraud begins, according to the IRS. Recent report published by Bloombergtax describes the increasing aggression with which the IRS and Department of Justice are prosecuting conservation easement transactions as crimes. One very notable transaction being investigated by the Manhattan District Attorney’s Office involves former President, Donald Trump, and an approximate $25 million tax break he received in connection with a conservation easement on land he owned in upstate New York. The tax scam begins with the appraisal of the land at values exponentially higher than reality, to appraisals after the easement well-below reality. That increases the spread – the tax loss – taken by the owner. These appraisals are done by professional outfits with attorneys and appraisers who sign off on all of these deals, and who can find themselves in a serious lurch with authorities.
These conservation easements became increasingly complex over time, involving massive tracts of land and found themselves being marketed and sold by FINRA registered broker/dealers as Regulation D private placement investments. The purpose of this scenario for investors is the tax break for the land owners trickles-down, through a series of complicated trusts and transactions, to the investor. Sometimes investors get upwards of 10X their investment back in the form of a tax write off. Usually, the write-off is for between 2X and 6X the investment. For example, if an investor puts $25K into a conservation easement offering 4X reduction, that investor can write-off $100,000 in income for tax purposes the next year. For high income investors, that is a dream scenario.