An alleged “multi-year fraudulent scheme” involving a so-called tax-savings strategy based on the donation of inflated real estate for purported conservation purposes is at the center of a class action lawsuit.
An alleged “multi-year fraudulent scheme” involving a so-called tax-savings strategy based on the donation of inflated real estate for purported conservation purposes is at the center of a proposed racketeering class action lawsuit filed in Georgia federal court.
The 192-page complaint alleges Strategic Capital Partners and a number of other “supposedly independent and respected professionals” and firms aggressively promoted and sold numerous Syndicated Conservation Easement Strategy (SCE) transactions to upward of 1,000 proposed class members who were told they were “legal and an entirely legitimate way to serve the environment and reduce their tax bill.” Syndicated Conservation Easement Strategy transactions, when placed on a property in compliance with the Internal Revenue Code, allow the donor or donors of an easement to potentially realize a non-cash charitable contribution deduction for value by which the easement impairs the property’s value, the suit says.
While properly valued and implemented conservation easements, i.e., encumbrances placed on real estate to preserve a property for conservation purposes, can and do confer legitimate tax advantages to a donor, in addition to environmental benefits to the public, the defendants’ alleged SCE strategy, the case claims, was “not properly and legitimately valued or implemented and was never intended to be.”
Instead of guiding the plaintiffs through a legitimate conservation easement transaction, the defendants, according to the lawsuit, “utilized a prepackaged collection of bogus, grossly inflated appraisals, donations of easements that lacked a valid conservation purpose, deficient form documents, and faulty conservation easement deeds” that were delivered via “a mountain of misrepresentations and omissions” aimed at promoting, selling and implementing the SCE Strategy and the tax savings it would allegedly, and legally, provide.
“From the outset, Defendants identified and purchased real estate, not for an actual investment or conservation purpose, as they had represented to potential SCE Strategy participants, but to syndicate as many conservation easement transactions as possible to generate outlandish fees and significant land interests for themselves. Defendants then worked together to promote and implement each syndication, including by drafting and preparing various transactional documents needed to execute a conservation easement that could be claimed as a charitable contribution deduction. These documents were crucial to making the scheme appearance legitimate and legal, when, in fact, the Defendants knew the scheme was fraudulent and the documents contained numerous misrepresentations and material omissions. Plaintiffs and Class members, on the other hand, reasonably believed that the documents supported the SCE Strategy transactions and could not have recognized the misrepresentations and omissions because the documents’ content and the applicable IRS Code provisions and regulations were highly technical.”
Underlying the defendants’ “complex structures and financial shenanigans,” the lawsuit alleges, was the truth that the parties’ SCE strategy was “simply an attempt … to convey a substantial real estate interest to a co-conspiring charity” after the property’s value was “fraudulently and grossly inflated.” From there, the suit says, the defendants aimed to sell the corresponding tax deduction to the plaintiffs and other clients in exchange for “lucrative professional fees.”
“Indeed, part of the sales pitch to Plaintiffs and Class Members was the noble goal of preserving valuable land for the greater public good,” the suit reads.
The SCE strategy, as its name indicates, involved the syndication of a conservation easement transaction, or a conservation fee simple transaction, to multiple investors, which allows those who would be unable to individually participate in an otherwise capital-intensive transaction to do so, the complaint says. The lawsuit alleges that while this type of syndication is not problematic per se, the SCE strategy has been exploited by “many unscrupulous professionals like Defendants” for their own gain in tax deductions that can be generated from syndicated conservation easement transactions.
The defendants, an alleged group of “conservation easement professionals and other advisors and consultants,” deliberately banded together to lend legitimacy to an SCE strategy they utilized for their own financial gain, the proposed class action alleges. According to the complaint, the parties were able to exploit the SCE strategy, what the case calls “an attractive money-making opportunity,” due in part to the rampant oversupply of devalued real estate left in the wake of the 2008-2009 recession. Helping matters for the defendants, the suit alleges, was “a group of underemployed real estate appraisers,” some of whom “were eager and willing to provide favorable valuations in exchange for the right sum.”
The case claims “unproductive real estate” could be bought at a discount and sold to investors at a premium for the purported reason of placing upon it a conservation easement that would generate tax deductions that, due to provisions in the Internal Revenue Code, could “substantially reduce the individual participant’s tax liability.” An added shield for the defendants’ conduct, the lawsuit alleges, is the sheer complexity of the SCE strategy. From the complaint:
“And because the rules and transactions involved were highly technical, they could not be understood by laypersons such as Plaintiffs and the Class who were unlikely to question the advice being offered by reputable professionals (including blue-chip law firms and accounting firms) who purported to be experts in this area.”
The lawsuit alleges the defendants aimed to capitalize on their respective expertise in conservation easement and related tax matters to “lure successful individuals to participate” in what was represented to be bona fide conservation easement transactions.
“To do so effectively, each of the Defendants knew they needed the coordinated participation of various role players, including a sponsor, appraiser, mining or development consultant, attorney, land trust, accountant, and ‘Other Participants,’ involved in every step of the SCE Strategy,” the complaint alleges.
The defendants, the suit claims, “sought out and agreed to work with only those whom they knew through preexisting relationships and/or industry reputations” who would be willing to partner up in “this improper endeavor.”
From there, the lawsuit says that now that the United States government has begun “peeling back the layers of fraud underpinning the SCE Strategy,” it has commenced enforcement actions and levied criminal prosecutions “related to nearly identical transactions implemented by other promoters of the SCE Strategy.” The plaintiffs, as a result of relying on the defendants’ alleged misrepresentations and omissions, paid the parties “substantial fees” to take part in the “fraudulent” SCE strategy, and have in turn been or are being assessed back taxes, penalties and interest, among other damages, the case alleges.
For those who are alleged to have fallen victim to the defendants’ apparent SCE strategy plan, the benefits they hoped to reap after becoming engaged with the parties have been all but wiped out by the IRS, the lawsuit relays.
“For these Class Members, the IRS has now indicated it will disallow the charitable deductions and, in fact, has already begun disallowing the deductions at the partnership level,” the suit reads, claiming proposed class members have been saddled with substantial fees and transaction costs and exposure to back taxes, interest and additional IRS penalties.
The case alleges the defendants solicited participants in the apparent SCE strategy scheme from more than 25 states. The full list of defendants can be found on the first page of the complaint embedded below.
Get class action lawsuit news sent to your inbox – sign up for ClassAction.org’s free weekly newsletter here.