A federal judge in Georgia has denied a motion to dismiss a civil complaint against a prominent Baldwin County real estate appraiser who the Internal Revenue Service (IRS) alleges participated in an “abusive” tax scheme involving conservation easement syndicates.
In a complaint filed last December, the government claimed Magnolia Springs-based appraiser Claud Clark III drew up “sham” valuations for conservation easements in several states, “improperly inflating” property values, which resulted in “grossly overstated” tax deductions for investors.
Clark filed the motion to dismiss four of the five counts against him in March and oral arguments were held in June, but on Dec. 10, U.S. District Court Judge Amy Totenberg issued an order denying the motion, determining the government “adequately pleaded sufficient factual matter to state a claim that Clark’s appraisals represented a “substantial portion” of the tax returns scrutinized by the IRS and, therefore, “he may be liable.”
“In many respects, this is not a normal case,” Totenberg wrote. “Defendants generally do not dispute participating in the activities that the government alleges in the complaint. Rather, defendants and the government have diametrically opposed positions as to whether those activities are in fact lawful. Defendants believe their activities were lawful and allowed by the tax code. The government believes the activities unlawfully exploited a portion of the tax code, and that by causing false statements to be filed in the income tax returns of their ‘investors,’ defendants have defrauded the investors and the government itself.”
As described in the complaint, conservation easement syndicates are “state law entities … generally formed as LLCs … taxed as a partnership … in which customers ‘invest.’” The LLCs then act with a manager, appraiser and law firm to acquire property that can be deeded as a conservation easement, which “permanently restricts the development and/or use of land with the purpose of achieving certain conservation or preservation goals.”
Once the easement is secured, a tax preparer prepares the LLC’s tax return, including a form in which each investor’s share of the conservation easement deduction is reported, “ultimately reducing the customers’ reported tax liabilities” using what is known as a “qualified conversation deduction” in IRS code.
As Virginia attorney Timothy Lindstrom told Lagniappe in March, “the heart and soul of a conservation easement syndicate is coming up with a value for the conservation easement donation … that would allow investors to make money from tax deduction alone.”
That was Clark’s role, according to the complaint, where between 2009 and 2016, he appraised 58 properties for various syndicates, resulting in at least $1.85 billion in “grossly overstated” federal tax deductions.
“The facts alleged in the complaint lay out a scheme in which parcels of land are knowingly appraised at values far greater than their actual value,” Totenberg wrote. “The asserted facts in the complaint also clearly allege that the appraisal of the land parcels is perhaps the single most important aspect of the scheme — without the inflated appraisals, the tax returns would not be substantial, rendering the inducement to investors limp.”
The same order dismissed one count against another defendant, Nancy Zak, a conservation easement consultant who was charged similarly to Clark, although she is not an appraiser. Totenberg also reigned in the government’s scope of discovery, limiting the number of depositions to 15 per side, much fewer than the 50 the government requested. Further, rather than allow evidence from “virtually every state,” Totenberg ordered it be limited to syndicates in Alabama, Georgia, Indiana, Kentucky, North Carolina, South Caroline, Tennessee and Texas.
Parties will have an eight-month discovery window and a trial date has not yet been set.
Meanwhile, in a 130-page answer and counterclaim to the complaint filed with the court Christmas Eve, Clark denies each and every one of the government’s allegations against him, repeatedly rejecting the very existence of a “conservation easement syndication scheme.”
He also seeks a judgment and damages of his own against IRS officers including Commissioner Charles P. Rettig for “the recovery of statutory and/or actual and punitive damages” for the “intentionally, knowingly, in bad faith, grossly negligently, and/or negligently made numerous statements that constitute unauthorized and unlawful disclosures of Mr. Clark’s return information.”
Such statements, he claims, were intentionally made in press releases about the case, as well as at professional tax conferences and in statements to the media, citing an “increased zeal for enforcement in the area.”
“Mr. Clark did not authorize the IRS and [Department of Justice] DOJ Officials to disclose Mr. Clark’s return information to the general public and members of the press,” the counterclaim states. “Mr. Clark takes his ethical duty as an appraiser to protect the confidential information of his clients seriously.”
Separately, U.S. Sen. Chuck Grassley of Iowa, who chairs the Senate Committee on Finance, sent a letter to the executive director of the Alabama Real Estate Appraisers Board in July seeking “information regarding the circumstances surrounding Mr. Clark’s decision to surrender his appraisal license.”
Claiming Clark surrendered his state license in April “in lieu of an administrative hearing into allegations that he violated the State of Alabama Real Estate Appraisers Board Administrative Code and the Uniform Standards of Professional Appraisal Practice,” the committee sought a copy of Clark’s case file, “including but not limited to the complaint against Mr. Clark; information substantiating the allegation contained in that complaint; any communications between your office and Mr. Clark or his representatives, including but not limited to letters, memoranda, emails and notes … and a copy of the appraisal that is the subject of the complaint.”
Lagniappe has sought the same information from both the Appraisers Board and Grassley’s office, but as of press time, it had not been received. Clark’s office has previously referred questions about the case to his attorney, Robert Khayat of Atlanta. This story will be updated as it develops.
ORDER ON MOTION TO DISMISS
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