Accountants Plead Guilty On $1.2 Billion In Bad Charitable Deductions

A key to good tax practice is being able to explain things to clients and prospects. Consider this remark explaining difficult to understand promotional material:

we know if we’re examined by the [IRS] they will ask for all promotion materials, so you have to be very, very careful that these look like real estate investments as compared to, you know, basically a tax shelter.

Too bad that the prospect apparently needing enlightenment was an undercover IRS Criminal Investigation agent. Don’t you just hate when that happens.

Mr. Big

The remark is attributed to someone referred to as Promoter A, in a bill of information charging accountant Corey Agee with violation of 18 USC 371 (Conspiracy to commit offense or to defraud United States). It is possible to make a reasonable inference as to Promoter A’s identity from the material in the bill of information supplemented by some additional searching. For now I will refer to him as Mr. Big.

On December 21, 2020 Stein Agee and Corey Agee, both of Georgia (Where else?), each pleaded guilty to one count of conspiracy to defraud the United States. It is the first prosecution of people for their involvement in syndicated conservation easements(SCE). It is not likely to be the last.

First They Come For The Accountants

Stein and Corey Agee are accountants. Their firm Agee Fisher Barrett LLC is a licensed Georgia CPA firm. Corey has Georgia license CPA031210. From his firm bio Stein is not a CPA. The firm was founded by the late Edward Agee and Jack Fisher. It appears that Stein and Corey were nephews of the founding Agee.

The cases moved quickly from bills of information filed on December 16 to guilty pleas in the United States District Court for the Western District of North Carolina on December 21.

Plea Bargain

Attorney Peter Goldberger, who has represented defendants in federal tax crime cases could think of only one explanation for the quick work:

A person accused of a federal crime does not plead guilty at their first appearance before a U.S. Magistrate Judge unless they have worked out a deal in advance. Another clue in support of that inference is that the pleas were to a single count, with a five year maximum, putting a cap on the defendants’ exposure to punishment in the case. The press release claims that the tax loss from their involvement in the scheme was “over $250 million in taxes.”

If you look at the U.S. Sentencing Guidelines for tax cases, that much tax loss implicates Offense Level 34. Level 34 with no prior convictions suggests a sentence in the neighborhood of 12-15 years.

So the five-year cap is a very valuable benefit/concession from the government to the defendants, which in turn implies that the defendants have promised something valuable to the govt in exchange almost certainly in the nature of “cooperation” against co-conspirators, perhaps including their former clients.

Here is an off-the-record comment from a knowledgeable observer:

Mr. Reilly:

This case indicates there’s a new pitcher on the mound. It’s genesis as both the first ever DOJ prosecution and first IRS-CI (criminal investigation) prosecution, doesn’t bode well for those trading illegally in tax benefits. this isn’t a “shot over the wall” prosecution, it’s the “wall coming down” prosecution.

SCE products aren’t produced in vacuums. there are teams of people constructing and assembling a variety of documents that support each fund’s capital raise. In the past, if one of those procedural links failed it was treated independently from the others. What this conspiracy case tells us is moving forward, is that each link infects the link it touches. That the whole chain will be viewed as corrupt.

It’s a great unveiling that stands before us as industry appraisers and accounting firms begin buckling under the pressure. None of this is rocket science, just good old tax evasion served up on a new platter. it’s time to recognize the SCE jig is up. Remember, Al Capone was broken by his accountant too..

Some Background

Syndicated conservation easements (SCE) are a mutation of a pretty benign tax benefit. If the farmer in the dell is beset by developers determined to pave paradise and turn it into a parking lot, she has the option of donating a conservation easement to a qualified not-for-profit (often a land trust). She gets an income tax deduction for the difference between the fair market value of the property (which will reflect its highest and best use) and its value as a farm.

Often the owner of a property can’t use all those tax deductions. Clever planners came up with partnership structures that allowed the benefit to be shared with investors. There is some skepticism among partnership tax experts that that really works, but apparently the IRS has not attacked from that quarter.

What has greatly exacerbated the problem is valuation abuse. Industry advocates have taken the position that the “before value” can be based on a highest and best use valuation that is not supported by the current market. That is why I concluded that SCE is an industry based on nonsense. A recent Senate investigation noted that an inflated appraisal is the “engine of every syndicated conservation easement”

Picture Of Some Deals

The bill of information gives some detail on a number of the deals that Mr. Big promoted with support from the Agee brothers.

Inland Capital Investment Fund 2013 (ICIF) involved part of a 405 acre tract in Buncombe County NC owned by Fort Myers Limited Partnership(FMLP) . Individuals A and B had purchased (FMLP) which had acquired the tract in 2011 for $650,000. Mr. Big agreed to pay $7 million for a 98% interest in FMLP in December 2013. He was using part of the money raised from ICIF investors.

On December 30, 2013 FMLP donated a conservation easement to “Land Conservancy 1” on 280.96 acres of the tract. The easement was valued at $66,214,000.

There are similar details for Southern Appalachian Investment Fund 2014 which produced a $24,240,000 deduction on a property that had been purchased for less than $5 million a year before. They were just warming up.

Coastal Property Holdings LLC had a deduction of $179,760,000 on an easement on 1,330 acres on December 30,2016. Coastal Community Partners took a $96,810,000 deduction on 863 acres in Chatham County GA in 2017.

South East Property Acquisitions LLC got 80% of the $223,050,000 deduction from Equity Investment Associates in December 2018.

All in from 2013 to 2018, there were, according to the bill of information “1.2 billion in false and fraudulent tax deductions” allocated to 1,500 wealthy individuals.

Backdating

Although, according to the bill of information the deals are all bad, there was conduct that would have been criminal even if the deals were sound. People who signed up to be partners in the deals after year end were allocated a share of the deduction from the easement donation that occurred before they had been admitted as partners.

It may well be that advocates for the SCE industry will argue that they are being tainted by some bad actors. Study of the bill of information will not comfort them:

Although facially described in promotional material as real estate investment funds, the SCE Funds were, in reality, illegal tax shelters that allowed taxpayers to buy tax deductions at the end of any given tax year…..

The DOJ release quotes IRS Commissioner Rettig:

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. (Emphasis added)

In an interesting note Commissioner Rettig, US Attorney Murray and Deputy Assistant AG Zuckerman thanked special agents of both IRS-Criminal Investigation and US Postal Inspection Service. Many years ago an old timer told me that it was actually Postal Inspectors on loan who got Al Capone. There is something to the story.

Response

I tried reaching out to the Agee brothers, their lawyers and their firm. Bothe James Wyatt and Robert Blake, who represent Stein Agee sent me the same response

Mr. Agee accepts full responsibility for his conduct and is fully cooperating with the government. 

Other Coverage

Tamar Hallerman has Atlanta accountants plead guilty to $1.2B in fraudulent charitable deductions in the Atlanta Journal-Constitution.

Grace Donnelly has Atlanta accountants plead guilty in tax fraud scheme that cost the U.S. $250 million in the Atlanta Business Chronicle.

For deeper background on conservation easement deductions here is my coverage round up.