New York fund manager Andrew Beer got an unsolicited email offer a few months ago that sounded too good to be true—join other investors to buy 276 acres of land in Mississippi, promise never to develop it, and get whopping tax deductions of as much as five times the amount invested.
The pitch was for what’s known as a syndicated conservation easement, a land deal that the Internal Revenue Service says is often an abusive tax shelter. The offer came from a family office with a website touting partnerships with Middle East wealth funds. As an added enticement, the salesman offered Beer options to insure against the risk of IRS audits and investor-liability lawsuits.
While no one has alleged anything improper with the Mississippi deal, Beer rejected it as “economically absurd.” Still, plenty of others have said “yes” to similar ones marketed across the U.S. by large networks of brokers, financial advisers, accountants and lawyers.
For some wealthy investors, expanded government crackdowns on those land deals are creating financial and legal headaches. IRS Commissioner Charles Rettig told a Senate panel last month that 28,000 taxpayers are under examination, and the agency has challenged $21 billion in tax deductions claimed for syndicated conservation easement investments from 2016 through 2018. Some investors may owe millions of dollars in back taxes, as well as substantial penalties.
One investor who requested anonymity said he put money in at least 10 deals with a promoter who sold them as a way to generate tax deductions rather than as development projects. Now, the IRS is examining those deals, said the investor, and he has answered detailed questions from criminal investigators about the promoters. The investor’s accountant has warned he may now face $8 million in back taxes and penalties if the deals are disallowed by the IRS.
The industry selling syndicated conservation easements is “facing a ticking time bomb and potentially billions of dollars in exposure through arbitrations and lawsuits,” said Kalju Nekvasil, an attorney in St. Petersburg, Florida, who is handling about 30 claims by investors against promoters and brokers.
Syndicated conservation easements aren’t typically sold by big banks like Goldman Sachs Group Inc. or UBS Group AG. Instead, they’re mostly promoted by brokers who run their own practices and are registered with little-known securities firms. They work with people outside the securities industry—such as accountants, lawyers and tax preparers—to woo doctors, entrepreneurs and other rich individuals to buy into partnerships that seek to exploit tax benefits from land conservation.
The Mississippi deal offered to Beer was the brainchild of “a brilliant CPA and tax expert” named Wesley Hudson and his Atlanta-based Otemanu Group, according to the email pitch from the family office RD Heritage Group. Hudson didn’t respond to requests for comment and RD Heritage declined to comment.
One securities firm that was paid for work on an Otemanu offering was Whitehall-Parker Securities, which was censured earlier this year in a disciplinary action unrelated to syndicated conservation easements, records show.
"If you’re not getting audited, you’re not trying hard enough.’’
Whitehall-Parker President Robert Yuloo defended the easement deals his brokers sold. In an interview, he said they’re marketed only to accredited investors “looking for alternative ways to cut taxes” and who all sign documents saying they understand the investments are highly speculative. “The leverage the IRS affords taxpayers is written in black and white,” Yuloo said. “Some CPAs are more aggressive than others. My CPA said, ‘If you’re not getting audited, you’re not trying hard enough.’”