$3 billion later, settlement ends government case over Atlanta tax shelters

Some investors may still be on the hook, as IRS pursues audits and penalties for what it considers abusive tax deductions

The pitch was simple. Want a big break on federal income taxes? Invest in tax shelters promoted by an Atlanta firm and get a contribution deduction worth four times the money you put in.

Investors snatched up the deals, taking more than $3 billion in federal tax deductions over about a decade.

Eventually, that caught the attention of federal officials.

Attorneys for the government filed suit in 2018, accusing the promoters of pushing “a thinly veiled sale of grossly overvalued federal tax deductions under the guise of investing in a partnership.” And a powerful U.S. Senate Committee in 2020 labeled such transactions as “shady tax deals” for wealthy investors — with the Atlanta promoters as a prime example.

Now, the promoters and EcoVest Capital, the Atlanta company that offered the investments, have agreed to a permanent injunction barring them from promoting, selling or otherwise facilitating federal tax benefits for shelters known as syndicated conservation easements.

However, the agreement, signed by U.S. District Judge Amy Totenberg on March 20, won’t have an immediate impact.

That’s because EcoVest stopped selling the shelters in 2021, and federal legislation that President Biden signed in December may effectively end many such deductions.

Nor does the settlement require the defendants to pay penalties or the $130 million the Department of Justice had sought to disgorge money the defendants were paid for the transactions. Instead, the agreement stipulates that the defendants make a payment of $6 million to resolve all claims, a document shows. That settlement payment “is in an amount that is less than it would have likely cost to try the case,” said Sean Akins, of the Washington, D.C., law firm Covington & Burling, counsel for EcoVest.

Government attorneys declined to comment.

If there are any penalties involving such transactions, they could fall on investors. The IRS has labeled many of the deductions a scam, and it has been pursuing audits and penalties against thousands of taxpayers who claimed them. Hundreds of cases are still pending at U.S. Tax Court.

Georgia an epicenter

Conservation easements allow property owners to take a charitable deduction from their taxes for donating property development rights to a charitable organization. The goal is to conserve environmentally important land that is facing developmental pressures.

But the government has long contended that many of the deductions involved property that never would have been developed. And often, IRS said, appraisals of the properties were grossly inflated to increase the value of the deductions.

Former President Donald Trump is among those accused of exploiting the deduction. Investigators say he and his organization procured “massively” inflated appraisals through fraud and misrepresentation for two properties. One was a driving range at the Trump National Golf Club in Los Angeles which the organization was never likely going to develop because of the site’s instability, according to a September 2022 complaint by the New York State Attorney General.

Most of the cases the government has fought, though, involve syndicated conservation easements, where promoters sold shares of property to investors, giving them the rights to the tax deductions. Government data shows the syndicated deals resulted in about $36 billion of tax deductions from 2010 to 2018.

Many of those transactions were concentrated in what Boston University School of Law professor Theodore S. Sims, with colleagues Alan Feld and Jacob Nielsen, calls the “Southeast Triangle” of Georgia, South Carolina and Eastern Tennessee. Those are places where promoters found sizable amounts of inexpensive, undeveloped land over which they claimed conservation easement deductions, he said.

The Senate report described EcoVest as one of the most aggressive promoters of the shelters. And valuations of its properties were key issues in the government’s lawsuit.

In one case, EcoVest investors paid a total of $1.7 million for ownership interests in 323 acres of wooded, unimproved land in Georgia. The appraiser, defendant Claude Clark III, valued the property at nearly $6.3 million, according to the lawsuit.

Another EcoVest case involved a project called Cypress Cove Marina involving property in South Carolina. EcoVest paid about $1 million to acquire the unimproved land, the government said in court filings. “Six months later, Clark — assuming eventual construction of a residential development — valued the same property at nearly $40 million, pre-easement,” the document says.

That drove up the resulting charitable contribution deduction to $39.7 million, the difference between Clark’s before and after valuations, the government said.

Credit: EcoVest

Credit: EcoVest

In addition to EcoVest and Clark, defendants in the lawsuit are EcoVest owners Alan Solon of Georgia and Ralph Teal of South Carolina; EcoVest senior vice president and CFO Robert McCullough of Georgia; and Nancy Zak of Georgia, a conservation manager who planned and executed conservation easement donations and syndicates, according to court documents.

In 2021, Zak agreed to a permanent injunction and to pay an amount specified in a written settlement agreement. That agreement has not been made public.

The case against the other defendants appeared headed to trial until settlement discussions began late last year.

In agreeing to the injunction and reaching settlement, the defendants did not admit to any wrongdoing. Akins, the counsel for EcoVest, said the Department of Justice agreed to resolve the case on the company’s proposed terms.

“While EcoVest was confident it would have prevailed at trial, its primary goal is to avoid further costly litigation and focus its resources on behalf of the best interests of its existing investors,” he said in a written statement.

He also said that EcoVest stopped sponsoring real estate investments with a conservation option after 2021 and shifted its business to other real estate development and investment opportunities, with a focus on affordable housing.

Separate criminal cases

Meanwhile, the government has filed criminal charges against other promoters of syndicated conservation easements.

The first federal criminal case involving syndicated conservation easements involved two Georgia men. In December 2020, brothers Stein Agee of Canton and Corey Agee of Atlanta pleaded guilty to conspiracy for their roles in developing, promoting and selling investments in the shelters to high-income taxpayers.

The second federal criminal case involving syndicated conservation easements also involves Georgians and is scheduled for trial in July. According to prosecutors, the tax shelters involved resulted in more than $1.3 billion in false and fraudulent tax deductions for wealthy taxpayers.

The defendants structured the shelters to guarantee a deduction worth at least four times what each investor paid, relying on grossly inflated appraised values to boost deductions, the indictment alleges. The defendants — an Alpharetta CPA, two Atlanta CPAs, a Suwanee attorney, two licensed appraisers — have been charged with wire fraud, money laundering, aiding in the preparation of false tax returns and other crimes.

They have pleaded not guilty.

Going forward, the federal legislation passed late last year will likely put an end to most syndicated conservation easement transactions. A bipartisan provision in the spending bill caps the deduction that taxpayers can take to no more than 2.5 times a property’s purchase price. That’s a measure IRS had long sought.

The provision applies to contributions after Dec. 29, 2022. The Office of Management and Budget has said that this measure could generate $12 billion in additional tax revenue through 2027. Sims, the Boston University School of Law professor, said the legislation should put a stop to the most transparently fraudulent deals. However, the legislation does not address the issue of inflated appraisals of other conservation easements, nor whether the properties donated are actually environmentally important.