A new report from the Senate Finance Committee warns that the nation is being ripped off by various conservation easement schemes.
Unless the schemes are halted, according to the panel chaired by Sen. Chuck Grassley, R-Iowa, they could undermine the nation's self-reporting tax system and "sow pessimism among all Americans about the fairness of our tax laws."
The committee was unified in confirming "a number of taxpayers" likely have profited "from gaming the tax code and deprived the federal government of billions of dollars in revenue."
"Shady tax deals often have a low profile with the public, but that doesn’t make them any less wrong," Grassley said. "The conservation-easement deduction provides an important tool for the preservation of our environment, but the federal government needs to curtail the aggressiveness that goes on with these syndicated transactions. The American tax system relies on fairness and good faith compliance. This isn't a partisan issue. Serious, fair enforcement of our tax laws is the best way to preserve that system and uphold our understanding that the law applies equally to all of us."
The schemes involve someone buying a parcel of land, and then it is given a valuation "so inflated above their original purchase prices that they cannot reasonably be characterized as anything other than abusive tax shelters."
Investors contribute large amounts of cash and then a conservation easement is created on the property, limiting its future use.
That lowers the land's value, and since it's a conservation easement, the drop in value is tax deductible.
The committee found the IRS "has strong reason for taking enforcement action against syndicated conservation-easement transactions, as it has to date. Furthermore, in light of the continued use of these abusive transactions despite the issuance of IRS Notice 2017-10, Grassley and Wyden believe Congress, the IRS and the Treasury Department of should take further action to preserve the integrity of the conservation-easement tax deduction."
The study cited an easement scenario in which investors contributed about $2.1 million in cash. They then claimed deductions of $10.5 million on their taxes and benefited by tax bills that were reduced by $4.1 million, even though the parcel had been acquired for only about $770,000 a few months earlier.
In the interim, an appraiser valued the easement at $11.3 million.
In another incident, land purchased for $3.1 million was given a "pre-conservation easement" value of $18.4 million.
In Florida, taxpayer-investors claimed $919 million worth of deductions through conservation easements on 1,300 acres of land, reducing their income taxes by about $377 million.
In another Florida scheme, promoters valued land at up to $71,000 per acre at the same time other buyers were paying only $274 per acre for neighboring parcels. Another scheme involved operators valuing a reclaimed phosphate mine at "upwards of $164,000 per acre at a time when no one actually wanted to buy that land for even $3,495 per acre."
The committee report cited the obligation for taxpayers "to be honest in reporting their income and claiming deductions on their tax returns."
"Both the promoters and the taxpayer-investors in these deals understood them simply as tax shelters," the report said.
The investigation looked at hundreds of thousands of pages of documents.
In order for America's tax system to work, the report said, "it is critical for taxpayers to generally believe the system is fair – even if a taxpayer does not like paying over his or her hard-earned money to the government, he or she knows his or her neighbors must so do as well."
"If this understanding breaks down, so too could a culture of compliance in our self-reporting system. If syndicated conservation-easement transactions continue to exist in the form they have over the past decade, they risk not only depriving the government of billions of dollars of revenue but also degrading the general understanding that our nation's tax laws apply equally to us all."
The report found the IRS estimated that between 20100 through 2017, "syndicated conservation-easement transactions generated $26.8 billion in charitable deductions for the transactions' investors. Assuming such deductions reduced reportable income that would have otherwise been taxes at the then-existing top federal income tax rate of 39.6 percent, these transactions collectively lowered the taxpayer-investors' federal income tax bills by approximately $10.6 billion."
The hundreds of deals that fall into the category have involved "doctors lawyers … professional athletes, rock stars, entertainers and other celebrities."
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