Home Alts News Dept. of Justice Targets Conservation Easement Sponsor

Dept. of Justice Targets Conservation Easement Sponsor

The Department of Justice filed a lawsuit in a Georgia federal court last month that seeks to shut down EcoVest.

image_pdf

The Department of Justice filed a lawsuit in a Georgia federal court last month that seeks to shut down EcoVest, a sponsor of real estate investment programs focused on conservation easements. The government claims that the tax deductions the company passed on to investors were based on “overvalued and improper” conservation contributions.

In addition to EcoVest, the complaint is seeking an order to stop Nancy Zak, Claud Clark III, Alan N. Solon, Robert M. McCullough, and Ralph R. Teal Jr., from organizing, promoting, or selling what the DOJ calls “an allegedly abusive conservation easement syndication tax scheme.”

Zak is a conservation manager, consultant, and project manager who assists in the planning and execution of conservation easement donations and conservation easement syndicates. Clark is a real property appraiser; Solon serves as a director on Ecovest’s board, as well as the company’s president and chief executive officer; McCullough serves as senior vice president and chief financial officer; and Teal is part owner of Ecovest and serves on its board.

The Internal Revenue Code allows a taxpayer to take a charitable donation deduction equivalent to the fair market value of a conservation easement, but only if certain requirements with respect to the donation of an interest in property for conservation purposes are satisfied. This deduction is referred to as the “qualified conservation contribution.”

The lawsuit alleges that Ecovest and the other defendants have organized, promoted, and sold at least 96 conservation easement syndicates that reported more than $2 billion of tax deductions from “overvalued and improper contributions, and have passed those deductions through to the thousands of customers of defendants’ scheme, resulting in hundreds of millions of dollars of tax harm.”

In a statement, EcoVest claims that it learned about the lawsuit from a DOJ press release and believes that the allegations are based on “gross misrepresentations and the complaint is without merit.”

“I deeply believe in all of our projects and investment programs. Our due diligence process is thorough and independently verified through multiple sources. That’s probably why we have been approved on so many broker-dealer platforms. When socially conscious investors have chosen to pursue conservation and limited development over full-scale development in high development corridors, the environment and the communities in which we operate benefit as well as the investors.” said Solon.

The DOJ, however, called these syndicates “shams,” claiming that they do not meet the requirements for a qualified conservation contribution under the Internal Revenue Code.

“The Department of Justice is working with our partners in the Internal Revenue Service to shut down fraudulent conservation easement shelters, which in this case were based on willfully false valuations,” said Richard E. Zuckerman, the tax division’s principal deputy assistant attorney general. “Individuals investing in these schemes with benefits that seem too good to be true should ensure they are paying their proper federal income tax liability.”

EcoVest claims that its programs are in full compliance with the legal requirements for conservation easements, which they say have helped protect nearly 20,000 acres of land. With respect to their appraisals, the company said that the assessments are made by “highly qualified appraisers” which are also corroborated by secondary reviews from independent sources. The company also said that its programs have “always been fully compliant with disclosure and reporting requirements of the IRS, the SEC and FINRA.”

“We rely upon major law firms to provide legal opinions on each of these programs before making any programs available for investment,” said Ecovest. “Only after this rigorous review process do we move forward with making real estate offerings to investors—by engaging a FINRA-registered managing broker-dealer to distribute these offerings that give investors a choice to develop the real estate, hold it for appreciation, or to donate an easement on the real estate to a land trust for the benefit of the public in perpetuity.”

The complaint argues that the “defendants knew, or had reason to know, that the statements they made to customers regarding the tax benefits were false or fraudulent.” In this regard, the complaint alleges that defendants knew the syndicates that they promoted planned to donate a conservation easement but otherwise did not plan to engage in any ongoing business activity.

The complaint also alleges that the only return on investment a customer could anticipate from “investing” in a syndicate was the tax benefit from the planned conservation easement donation, which was many times larger than the purported investment.

“When it comes to aggressive transactions marketed by unscrupulous advisors, we will take every enforcement option available, including civil and criminal penalties,” said Internal Revenue Service Commissioner Charles P. Rettig. “Cheating on your taxes will not be tolerated.”

Benjamin Razi, a partner at Covington & Burling, is representing EcoVest, along with former Deputy Secretary of the Treasury Stuart Eizenstat.

The government is seeking disgorgement of the alleged ill-gotten gains and injunctive relief, and is also requesting that the defendants provide the names and contact information for anyone who purchased interest in a conservation easement syndicate since 2009.

The legal proceedings are currently stayed due to the ongoing government shut down.

Click here to visit The DI Wire directory page.