Tax breaks aren’t unusual for conservation easements donated to land trusts or governments. Congress created the incentive in 1980 for owners who pledge to never develop their properties, which has led to preservation of more than 30 million acres. President Joe Biden has made environmental preservation a priority, even as he seeks to boost IRS enforcement. Promoters of the syndicated deals say their valuations are legitimate and that the IRS is unfairly targeting them.

The IRS is escalating prosecutions, civil suits and audits of deals sold as partnerships to multiple investors. The agency said some promoters are cheating by inflating what the land would be worth if developed—and thereby any tax benefits. Just last month, the IRS cited syndicated conservation easements as a prime target of a new office that will clamp down on promoters of abusive tax schemes.

The crackdown involves “many hundreds of employees from lawyers down through agents,” Rettig told the Senate panel last month.

In 2018, the most recent year for which data is available, 16,900 people invested in syndicated conservation easements, claiming $9.2 billion in tax deductions, the IRS estimates. A preliminary review of 2019 transactions suggests they “continued at a similar rate,” said Nikole Flax, who was promoted by Rettig last month to commissioner of the agency’s Large Business & International Division. The increased enforcement means “auditing every single new transaction, including all of 2019, until we see that the abuse has stopped,” Flax said.

'Significant Risk'
The Financial Industry Regulatory Authority, or Finra, warned in 2018 that some broker-dealers it oversees were conducting inadequate due diligence of syndicated conservation easement offerings. The lapses included failures to investigate red flags—such as the “significant risk” that the IRS would disallow tax deductions and question land appraisals underpinning them, Finra said. The regulator declined to comment for this story.

The U.S. Securities and Exchange Commission didn’t return a request for comment.

In a 2017 email pitch attached to a U.S. lawsuit, promoter Seth Peabody, then with DDS Tax and Accounting, told a dentist in Las Vegas, New Mexico, that a $50,000 commitment would yield a $200,000 deduction and “reduce your tax by another $100,000+/-.”

Peabody told the dentist that David Mirolli, a broker whose registrations include Kalos Capital, would contact him. Since early 2020, Kalos has agreed to pay $345,000 to settle two disputes involving Mirolli’s customers, Finra records show. It wasn’t clear if those disputes were related to Peabody or to syndicated conservation easements.

Peabody, Mirolli and Kalos didn’t respond to requests for comment. The dentist also didn’t respond to a request for comment, and it wasn’t clear from the lawsuit documents how much he invested in such deals.

Promoter Fees
The attraction of syndicated conservation easements is simple for promoters: money. According to a Senate Committee on Finance report last year, promoters set aside as much as 12% of cash from investors to compensate those who help sell the deals, and they often retain far more for themselves. In some cases, that means less than half of what investors pay may go into acquiring land and other direct costs. The report also said the investments are mostly marketed as tax-cutting vehicles.

One example is a proposed development in North Myrtle Beach, South Carolina, known as Ocean Grove Resort. Promoter EcoVest Capital Inc. raised $18 million from 193 investors for a deal involving property purchased for $5 million. Investors overwhelmingly voted to donate an easement rather than develop the land into 1,660 multi-family units. An appraisal set the value of the easement, allowing investors to claim $80.6 million of deductions from their taxable income, which reduced their tax bills by $30.2 million and generated a deal fee for EcoVest of $2 million, according to the Senate report.

In 2018, the Justice Department sued EcoVest, four promoters and an appraiser, later claiming they created $3 billion in tax deductions through 138 syndicated easements. Those deals amounted to a “thinly veiled sale of grossly overvalued federal tax deductions under the guise of investing in a partnership,” according to the government. The U.S. seeks to bar EcoVest and the others from organizing and promoting partnerships that syndicate investors in conservation easements. One promoter has settled.