Real Estate Syndicator and Tax Preparer Violate Federal Tax laws
Well-respected accountants saw the potential to generate considerable fees by advising clients in a new area of the law. They initially provided advice. Slowly, many chose to build upon their expertise. They syndicated real estate transactions. They designed, or intended those transactions to take advantage of legal loopholes.
Loopholes present risks. In this case, authorities accused the accountants of wrongdoing. In the eyes of authorities, the accountants manipulated the law. As a result, those accountants faced a government investigation and criminal charges for white-collar crime.
All of the information in this case study comes from the Department of Justice press release and other articles referenced below.
State of the Industry
Governments regularly encourage and discourage certain types of individual and corporate behavior via the tax laws. Such laws remain subject to change, depending upon the agenda of the executive and legislative administrations in charge at any given point in time. Enforcement of rules and regulations under those new or changed laws is not always clear nor immediate. This lack of clarity presents risks. When professionals fail to stay abreast of changes in rules or regulations, they become vulnerable to potential sanctions or liability. The Department of Justice may prosecute those people for white-collar crimes.
Accountants, attorneys, and wealthy individuals utilize tax shelters in order to shield income from taxation. The IRS determines the legitimate use of such shelters. It also seeks to root out the abuse of those shelters. Based upon this case, the IRS clearly intends to pursue and aggressively prosecute cases involving Conservation Easements. Authorities will likely begin from the point of skepticism, analyzing the legitimacy of whether the tax shelter had legitimacy.
Background and Analysis
A cottage industry developed within the tax preparation field pertaining to conservation easements. A conservation easement serves as a voluntary and legally binding agreement between a landowner and a land trust or government agency. When landowners donate an easement to a land trust or public agency, they give away some of the rights associated with the land. The easement permanently limits uses of the donated parcel for the purposes of conservation. Importantly, for tax preparers and landowners alike, beginning in 2006, a voluntarily donated conservation easement qualified as a charitable tax deduction on the donor’s federal income tax return.
Conservation easements legitimately serve an important purpose, offering private landowners flexibility in protecting their land in perpetuity, while still making use of it today. For example, a donating landowner can retain the right to grow crops on a parcel while, at the same time, relinquishing the right to build additional structures. The land trust is responsible for making sure that a landowner adheres to the conservation terms of the easement. A landowner who has donated a conservation easement can sell the land or pass it on to heirs, with future owners of the property bound by the terms of the easement.
The percentage of deductibility increased dramatically in 2015:
- Raising the deduction a donor can take for donating a conservation easement to 50%, from 30%, of his or her annual income;
- Extending the carry-forward period for a donor to take a tax deduction for a conservation agreement to 15 years from 5 years; and
- Allowing qualifying farmers and ranchers to deduct up to 100% of their income, increased from 50%.
Stein Agee and Corey Agee were brothers. They were also business partners in the accounting firm Agee Fisher Barrett, based in Georgia. Their late father, Edward Agee, founded the firm. Wealthy Georgian families respected the firm and the Agees. The firm developed a flourishing practice. It began offering tax advice on conservation easements shortly after the legal rollout.
The Agees took note of the lucrative loophole. They created real estate investments that had minimal intrinsic value, relying primarily upon the tax shielding benefits to attract investors. They likely took comfort in pursuing this venture because the government had not prosecuted anyone previously for abusing this tax shelter.
Beginning in 2008, the Agees marketed, promoted, and sold investments in syndicated conservation easement (SCE) tax shelters. They expanded the practice aggressively between 2013 and 2018. The Agee brothers designed the SCE tax shelters to produce tax deductions for high-income taxpayers through partnerships that purported to make genuine real estate investments. In truth, however, the partnerships lacked material economic substance and served little legitimate business purpose. From the outset, the Agees intended to place a conservation easement over the real estate. Each transaction enabled investors to shelter their income from the IRS. From their perspective, substantial tax deductions would reduce the economic risk of the investment. For every $1 invested in the partnership, the investor would receive more than $4 in charitable tax deductions.
One such deal includes two individuals originally purchasing a 405-acre tract of land in Buncombe County, NC in 2011 for $650,000. Fort Meyers Limited Partnership then bought that land in December 2013. The limited partnership agreed to pay $7 million to acquire the land. Fort Meyers then donated a conservation easement to a Land Conservancy on 280.96 acres of the tract, valuing that easement at $66,214,000.
In similar deals, Southern Appalachian Investment Fund 2014 produced a $24,240,000 deduction on a property that had been purchased for less than $5 million just a year before. Several other entities took enormous deductions as well. All told, the Agees constructed shelters in excess of $1.2 billion, enabling investors to avoid over $250 million in taxes.
The Agees and nominees who served as general partners on these deals received millions of dollars in fees for constructing the transactions. Simultaneously, the Agees made the top-ten list of notable Financial Advisors in the state of Georgia.
The Internal Revenue Service (“IRS”) ignored these types of transactions for years. Over time, real estate syndicators and accountants like the Agees, kept probing the IRS’s tolerance for using these transactions. The Agees, in particular, became especially brazen in the use and abuse of Conservation Easement tax deductions. They fell under the thumb of an IRS investigation in 2019. Several different agencies with authority in these matters began cooperating to bring a case against the Agees in 2019. Those entities included special agents from the IRS Criminal Investigation Unit (“IRS-CI”) and the U.S. Postal Inspection Service. Those agencies performed the leg work for two Assistant U.S. Attorneys and two Tax Division Trial Attorneys appointed to prosecute the case.
When the Agees became aware of the investigation, they quickly pleaded guilty. They pled pursuant to a Bill of Information instead of an indictment. In our course, Compliance 101, we describe the nature of a grand jury. The grand jury requires substantial government resources. When defendants agree to plead guilty to a Bill of Information, or a Criminal Complaint, they save government resources. Sometimes, prosecutors reward defendants for that judicial economy with recommendations for leniency at sentencing. For more information on the process of white-collar crime, we recommend our course, Compliance 101.
The charges exposed the Agees to decades in prison, given the large dollar values of the transactions they constructed. The plea agreements capped their sentences out at five years each—far less than they would have received if found guilty by a jury. Investors that participated in the scheme may also face criminal charges. If the government believes those investors participated in the scheme, or if the government believes their negligence rose to the level of criminal liability, the investors could go to prison, too.
In announcing the plea agreement deal, IRS Commissioner Charles Rettig, telegraphed the fact of more to come against other real estate syndicators. “Two defendants pleaded guilty today in the first-ever criminal case by IRS-CI involving conservation easements. It should be considered the next step in the IRS’ battle against abusive SCEs. The defendants and their co-conspirators used conservation easement donations to personally enrich themselves and allow wealthy tax clients to evade their tax obligations. The charges and guilty pleas demonstrate that participation in abusive SCEs will not be tolerated. Once again, the IRS recommends that anyone who participated in an abusive SCE consult independent counsel about coming into compliance.”
All business professionals will protect their assets, and their liberty by learning about white-collar crime.
In this particular case, we learned that if it sounds too good to be true, we should be skeptical. We should consider the optics. When an IRS agent sees that an investor purchased a plot of land for less than $700k, and two years later, apportioned a valuation of nearly 100x, the government will likely begin to investigate.
Business professionals invest in themselves when they invest in compliance training. That compliance training should be specific to the industry. For example, all accounting firms would do well to learn about case studies like this one featuring the Agee family. By learning about people that faced scrutiny, investigations, and criminal prosecution, they may think more deliberately about protecting their liberty.
People don’t know what they don’t know. Compliance training can help.