An established Baldwin County property appraiser is a defendant in an 80-page civil complaint (embedded below) filed by the Department of Justice in Georgia late last year, one of six targeted for their alleged involvement in an “abusive” tax scheme involving conservation easement syndicates.
The complaint claims Magnolia Springs-based appraiser Claud Clark III appraised at least 187 conservation easements between 2009 and 2016, including at least 58 for syndicates. It further alleges the partners in those 58 syndicates reported more than $1.85 billion in “grossly overstated” federal tax deductions, leading the Treasury Department to suffer “losses through tax refunds wrongfully issued and taxes uncollected” in an amount “yet to be fully determined.”
Conservation easement syndicates generally, as described in the complaint, are “state law entities … taxed as a partnership, a pass-through entity, for federal tax purposes.” The complaint explains how the syndicates are generally formed as LLCs, “taxed as partnerships 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.
Along with Clark, the complaint names as defendants conservation easement consultant Nancy Zak, Atlanta-based real estate investment firm EcoVest and three of its principals.
According to his website, after starting his appraisal career in Mobile, Clark opened Claud Clark, III, P.C. in Magnolia Springs in 1991. The website touts Clark’s experience completing “more than 200 conservation/historic easement appraisals.”
Perhaps the most well publicized of those appraisals was Kiva Dunes, a resort community and golf course on the Fort Morgan peninsula that was granted a conservation easement in 2002. When Clark’s appraisal of Kiva Dunes was challenged and upheld in U.S. Tax Court in 2009, it awarded a $31 million tax break to grantor D&E Investments, an LLC incorporated by husband and wife Elbert Allen (“Larry”) and Abbie Drummond, heirs to the coal mining Drummond Company.
In tax court, the IRS argued the property was only worth $10 million.
A 2009 story in the Press-Register about the court’s decision in the case began, “Appraiser Claud Clark doesn’t often invent a fake subdivision just to establish land values, but that’s what he did to the Kiva Dunes Golf Course on Fort Morgan.”
In the article, mentioning the golf course had been losing money and the existing lots were almost sold out, Clark explained how he inflated the value of the property by drawing up a hypothetical subdivision with 370 lots. Because many of the hypothetical lots were on existing lakes and water hazards on the golf course they were appraised as “waterfront,” while lots with the highest elevations received added value “for their views of the Gulf of Mexico and Mobile Bay.”
Clark’s office referred Lagniappe to his attorney for comment on this story and the attorney declined.
But appraiser Philip Paulk, whose $10 million appraisal on the Kiva Dunes property was cited by the IRS in the tax court case in 2009, said this complaint has likely been years in the making.
“At the time the IRS would bring these cases, but they didn’t know how to settle them,” Paulk said. “I was on the stand for four or five hours, but the [IRS] attorney never redirected. Their methodology … what it boils down to is they didn’t know how to attack it.”
Paulk explained that appraising the value of a conservation easement is “not that much different than any other appraisal … you evaluate the highest and best use and market data … anyone reading that report should come to same conclusion you did.”
But since the Kiva Dunes case, Paulk has seen appraisals skyrocket.
“I’ve since seen worse than that,” he said, noting how more recently, appraisers are using the potential mineral values of unimproved land to appraise “200 acres or less for $45 million or more.”
In 2017, roughly a year before the complaint was filed, the IRS issued a notice warning anyone involved in conservation easements may face “certain responsibilities” as a result.
“The IRS has gotten more sophisticated and better organized after they lost some cases they should have never lost, so now people are taking note,” Paulk said.
Virginia attorney Timothy Lindstrom agrees. He wrote the book “A Tax Guide to Conservation Easements” and travels the country to counsel groups about the legal parameters of investing, all the while warning against inflated appraisals.
“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,” he explained. “The syndication structure, there’s nothing inherently wrong with it, but the way many of them work depends on getting land the [syndicate] acquires for very little and getting an appraisal that says it’s worth a whole lot … 300 to 400 percent more in a very short time.
“But you don’t find that land over and over and over again — we’re talking about hundreds of deals — there are just not that many great deals,” he continued.
“What you ultimately have to ask, the people who invest in these are not investing because the are concerned about conservation — they know nothing about the land. They’ve been sold this investment by a broker, so if they are investing to make a profit … and they have the land they have, why would they give that land away when they can sell it for $36 million? It makes no sense.”
Treasury Department guidelines establish provisions for determining the fair market value of conservation easements.
Among those are determining the “highest and best use” of the property within reason, considering whether its potential use is physically possible, legally permissible and financially feasible. The appraisal must also consider comparable market sales and if none are available, the fair market value is “equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.”
Noting he allegedly earned “substantial fees” for his services, the complaint states Clark “continually and repeatedly … relied upon inappropriate assumptions, utilized inappropriate methodology and used various techniques to improperly inflate the value” of the easements in some cases by “hundreds of thousands, if not millions, of dollars.”
The complaint is the result of “considerable time and resources” expended by IRS employees including revenue agents, engineers and appraisers who spent a “substantial number of hours examining the conservation easement syndicates and appraisals.”
Claiming the defendants’ clients remain liable for any unpaid federal tax owed for participating in the scheme, the government also complains the scheme “undermines public confidence in the fair administration of the federal tax system, and encourages noncompliance with the internal revenue laws.”
In a press release calling the syndicates “shams,” IRS Commissioner Charles P. Rettig said “we will take every enforcement option available, including civil and criminal penalties … Cheating on your taxes will not be tolerated.”
Lindstrom was even more blunt:
“My role so far has been telling clients not to get involved … as a tax lawyer, I can’t practice law on the basis of probability,” he said. “I have to assume these deals will be audited and if it’s audited, [clients] will lose any deductions, pay back what they owe and pay very significant penalties, 40 percent or more plus interest. It will be a disaster for them.”
Lindstrom said although it may not be a matter of public record, the IRS knows who the investors are. Still, he admits the case is likely an uphill battle and the complaint could ultimately serve as simply a tool to discourage further investment in conservation easement syndicates.
“The IRS is understaffed, it’s a huge bureaucracy and getting everybody to focus on this will take a while,” he said. “[The investors] have an awful lot of money to defend themselves with and [the defendants] have one of the best law firms in the U.S. … it’s far from being a slam dunk.”
Clark and Zak have yet to respond to the complaint, but in late February, EcoVest denied the claims.
“The EcoVest Parties emphatically deny the government’s allegations of fraud and other misconduct, and look forward to clearing their good name at trial at the earliest available date for the court,” the defendants said in a filing first reported by the Atlanta Business Chronicle. “Federal law has long sought to encourage the preservation of natural resources and undeveloped land by providing tax deductions for conservation easements. Far from seeking to subvert the law, the evidence will show that the EcoVest parties went to great lengths to ensure that all of their projects fully complied with the law.”
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