Marching Through Georgia – Class Action Lawsuits Against Conservation Syndicators

The state of the conservation syndication easement industry brings to mind one of my favorite Kingston Trio songs – Everglades.

Where a man can hide and never be found

And have no fear of the bayin’ hound

But he better keep it movin’ and don’t stand still

If the skeeters don’t get him then the gators will

Last week there were four Tax Court decisions disallowing deductions totaling over $20 million claimed by partnerships sharing Effingham Managers LLC as tax matters partner. The swarm of revenue agents disallowing deductions are the skeeters. And then there is that DOJ effort against the industry leader Ecovest. DOJ can be one mean gator.

But another gator may now be causing even more aggravation. Class action attorneys led by David Deary have filed two lawsuits against promoter groups. Jay Adkisson covered Lechter et al v Aprio LLP et al on Forbes.com on March 28. That was the very day I started my Paycheck Protection frenzy from Tylertown Mississippi, which is why I did not get to it.

On July 3, 2020, Deary filed a complaint on behalf of William N. Turk, Carlita B. Turk, Norman Radow and “all others similarly situated”. There are thirty defendants.

The plaintiffs invested in syndicated conservation easement partnerships and the IRS has issued Final Partnership Administrative Adjustments. Mr. Deary told me that the issuance of the FPAA is the point at which the investors are in a position to claim damages. In both cases, there was a Tax Court petition filed and the cases are presently docketed – Lakepoint Land II LLC and Industrial S&G LLC.

The Problem With Syndicated Conservation Easements

For what the problem is with syndicated conservation easements is I will refer you to my piece- Syndicated Conservation Easements – An Industry Based On Nonsense. It is just not possible to buy land and shortly give away the development rights and come out ahead from the tax savings without fibbing on the valuation. The market for commercial real estate is imperfect, but it does have quite a few very smart people

A Massive Conspiracy

At this point all there is is a complaint and as Jay Adkisson pointed out in his piece, a complaint is a very one-sided narrative:

“Complaint is nothing like an adjudication of the issues that it contains but simply a number of allegations which can be utterly true or utterly false, and recalling the lawyer’s saying that “any fool with $500 can file a Complaint”.”

The picture that the complaint paints is of a massive conspiracy.

“This case involves the development and implementation of a fraudulent scheme to sell a flawed and defective tax-savings strategy: a Syndicated Conservation Easement Strategy (the “SCE Strategy”)…..

……the Defendants utilized a prepackaged collection of misrepresentations, omissions, deficient form documents, faulty conservation easement deeds, and bogus appraisals to promote, sell and implement the SCE Strategy, which the Internal Revenue Service (the “IRS”) has determined, as structured and implemented, does not comply with the requirements of Section 170(h) of the Code”

There are lawyers, accountants, consultants, not-for-profit leaders, appraisers and wild turkeys among the defendants. The complaint does not suggest that the wild turkeys were in on it, although it does not absolve them. The rest of the bunch. They are all bad.

The Mastermind

According to the complaint, the mastermind is Timothy Pollock, now retired from the law firm Morris, Manning & Martin. Pollock is still listed on the firm’s website where we learn that:

“Mr. Pollock is well known for his expertise related to conservation easement transactions. He has acted as lead tax counsel in over 250 syndicated and non-syndicated transactions over the past eight years. He was a founding board member of Partnership for Conservation (“P4C”), a diverse national coalition of stakeholders in more than 40 states representing the entire conservation easement ecosystem, where he served for two years. He remains an active member of P4C.”

Included in his “Representative Experience” we find:

“Representation of landowners and partnership donors of conservation easements involving more than $1 billion of federal charitable deductions.” (Emphasis added)

I was unable to contact Mr. Pollock, but I did reach Simon R. Malko, the Managing Partner of Morris, Manning. Mr. Malko had no comment on the litigation.

Atlantic Coast Conservancy

Atlantic Coast Conservancy Inc. stands out among the defendants along with its CEO Robert Keller. ACC and Keller also appear as defendants in the Aprio case filed in March. They were featured in a 2017 ProPublia piece by investigative reporter Peter Elkind – The Billion-Dollar Loophole.

Doctor Keller (he has a Ph.D. in conservation biology from Wake Forest University) had no comment for me either about the litigation or the state of the industry generally.

When it comes to ACC and Keller, a different narrative might be that he is passionate about conservation and considers any land set aside a victory for the future. The cost to the federal government in tax revenue is immaterial. This would be consistent with the Partnership For Conservation view that the true value for computing the deduction is a highest and best use future value that is entirely detached from the current market for raw land.

The complaint raises one issue that would call that narrative into question.

“Keller would not allow the Atlantic Coast Conservancy to receive any conservation easement donation unless Pollock agreed that Keller’s other company, ERMF, was allowed to prepare would prepare each and every Baseline Documentation Report…..

In other words, Keller had a “side hustle” that generated substantial revenue for his own personal benefit that would have otherwise gone to the ACC.”

ERMF – Environmental Research and Mapping Facility LLC – is also named as a defendant.

Georgia On My Mind

David Deary and Elkind’s ProPublica piece confirm something I have picked up from a variety of off-the record sources. This industry is a Georgia thing. The players are centered around Atlanta and Rome, Georgia.

Rome, Georgia with a population of less than 40,000 seems an improbable place to be a center of a massive tax shelter scheme, but if you look at its history, you will find that it has some colorful events including the Trail of Tears, defense by Nathan Bedford Forrest, attack by Sherman and the gift of a statue by Mussolini who liked the city’s name.

Off-the-record sources have told me that anyone in the business community in Rome who speaks negatively about the shelters will be ostracized. Another comment I got was that the phenomenon was beginning to hurt the economy as they ran out of land that was not protected.

It is worth noting that protected land has spread out from Georgia with deals in South Carolina, Florida, and Tennessee. Investors are also being sought further afield. I heard from people in Brooklyn and California who had been presented with deals.

In David Deary’s view, though, the brains are still all in Georgia, which may end up being not such a good thing for the promoters.

About David Deary

David Deary of Loewinsohn Flesle Deary Simon LLP in Dallas got his law degree from the University of Texas in 1991. He made a name for himself in the fallout from the turn of millennium tax shelters first exposed by Janet Novack in 1998 in a piece titled The Hustling of X Rated Tax Shelters.

It was Deary that led the class action effort against the major players including Jenkens and Gilchrist, which was destroyed by the fallout from the settlement. I recently covered the latest news on the JC partner most responsible for the shelters. Paul Daugredas was seeking compassionate release from the Marion Satellite Prison Camp in light of his vulnerability to Covid-19.

The class action settlements came before the criminal convictions. Mr. Deary told me that at the hearings on the class-action cases, there were usually people from DOJ taking notes.

It Might Be Worse

Assuming for the sake of argument that this is going to go from bad to worse for the syndication promoters, I think there is a chance that they will get much more crushed than the Son of Boss promoters.

The Son of Boss people were sheltering really big players from paying taxes on major liquidity events. One of the first cases I covered in that area was that of Richard Egan, the founder of EMC, selling founders stock.

The SCE strategy has a different sort of client mix than SOB did. It is more people with six figure incomes who might be saving hundred of thousands rather than millions.

More significantly, the players are regional and local. They don’t have the resources and prestige of KPMG, PWC, BDO and Deutsche Bank. I fear that as David Deary and DOJ go marching through Georgia, they will leave a trail of professional devastation that might be an overreaction.

That’s The Way It Goes

At Joseph B Cohan and Associates in the eighties, Herb Cohan, of blessed memory, seemed to be of the school that specialization is for insects, but I did end with a specialization of sorts and it was “the shelters” to distinguish it from my buddy Mikey who had “the dealerships”.

They were low-income housing partnerships mostly sponsored by community development corporations. They were horrendously complicated, although Mikey claimed automobile LIFO was harder. What is relevant here though is the infrastructure that grew up around the deals.

Joseph B Cohan and Associates got into low-income housing, because we had a lot of dentists who needed shelter. As the industry changed as the tax law changed we stayed in, because we could do the work. There were accountants, lawyers, construction companies, real estate management companies, consultants of various sorts, financial planners and the management of the not-for-profits.

People would come up with new ideas to tweak the structures, which would sometimes propagate. I don’t know if they would all have stood up to intense scrutiny, but as it happens, the IRS never came knocking during the whole quarter century I was fooling with those things. Better to be lucky than good.

That is what troubles me about much of the conspiracy narrative in the complaint.

“The accounting firms and accountants that were part of the conspiracy alleged herein (the “Return Preparers”) ……

The Return Preparers prepared the K-1s with the intent that each Plaintiff and member of the Class would utilize their respective K-1 to claim a charitable contribution deduction from the SCE Strategy …..

The Return Preparers were by no means independent accountants, but were, in fact, part of the conspiracy that designed, promoted, sold, and implemented the SCE Strategy and knew or should have known that the charitable contribution deductions the Return Preparers reported on the partnership returns and, in turn, the K-1s were neither legally nor factually supportable …..”

I’m kind of skeptical about that part, probably because I am having a “There but for the grace of God, go I” sort of feeling. I do have to say though that there were a number of shelter proposals pitched to the JBC partners for our clients that I resisted. “Mining with tax dollars” comes to mind. Four to one deductions on gold mines somewhere or other.

Other Defendants

I reached out to as many of the thirty defendants as I could find contact information for. As noted earlier I got “no comment” from a couple of the major players. There were two substantial responses.

Carol Frampton Chief of Legal Services for the National Wild Turkey Federation issued a statement:

“The NWTF is aware of the dispute involving donations made to the NWTF Research Foundation and American Upland Land Trust, LLC, but have not been officially notified of a lawsuit. We have not had the opportunity to review the court case to enable us to comment. Conservation, including land protection, is a vital part of the mission of the National Wild Turkey Research Foundation and the American Upland Land Trust”

The National Wild Turkey Federation is dedicated to “the conservation of the wild turkey and the preservation of our hunting heritage”. That begs for an ironic remark, but I will pass.

Christopher Graham of The Private Client Law Group wrote me:

“I received your separate inquiries. I can confirm that Aaron Kowan was a non-equity partner at The Private Client Law Group (“TPCLG”) from 2012 through 2015 and Jason Cordon (also mentioned in the lawsuit), who had previously worked together, joined Mr. Kowan’s team at TPCLG in 2014. In the fall of 2015, prior to the 2016 IRS notice regarding syndicated conservation easements, TPCLG and Mr. Kowan’s team mutually agreed to part ways. 

From 2012 to 2015 all conservation easement legal work was performed by Mr. Kowan and his team. There is no expertise in conservation easement syndication among the attorneys at TPCLG prior to 2012 nor from 2015 through today. No conservation easement syndicator has been represented by TPCLG since 2015.” 

Based on a cursory review of our records it appears that the only involvement of TPCLG in the matters listed in the lawsuit was advice provided by Mr. Kowan to one investor at the request of another party to the lawsuit with total fees paid to TPCLG of $2,500.”

It is worth noting that the only substantive filing beyond the complaint in the Aprio case so far came from an Atlanta accounting firm that denies any involvement at all in the deals.

“As stated herein, ———— has never been engaged by any of the Plaintiffs case for any services, and after searching its records, it has found no evidence of any communication or agreement with Plaintiffs”

Go figure.

A Practical Point

Not that I would take it to the bank but Mr.Deary told me that tax preparers who had just followed the K-1 in preparing a clients return will not get swept up in his dragnet. But I am really worried about what you are supposed to do if your client comes in with one of these things.

The strategy that I would go with is to file Form 8082 with your return and not claim the deduction on the K-1. Make a note to put in a refund claim before the statute of limitations runs in the event that the fickle finger of fate does not fall on your partnership. It is better to be lucky than good.

The IRS does have a settlement offer out, but it only applies to cases currently in Tax Court.

Other Coverage

Aysha Bagchi has More Conservation Land Deal Promoters Face Proposed Class Action. It’s behind a paywall so I don’t know if she is talking turkey at all, but the people at NWTF told me that Bloomberg was the only other venue they heard from.

Lew Taishoff has “Devil Went Down To Georgia” about the Effingham decisions. He mentions the Turk class action, but that was because I provoked him.

“My esteemed colleague Peter Reilly, CPA, solicitous for my well-being and fearing I might be suffering from insomnia, sent me yesterday morning a 168 (count ’em, 168) page complaint filed last week in USDCNDGA, entitled William N. Turk, et al. v. Morris, Manning & Martin, LLP, et al. Not suffering from insomnia, I have not read the same in detail, but it seems the Turks want to be class-action reps for all those who got taken to the cliché in these syndicated easement deals.

Y’all will recollect that the lead defendant was involved in the Son-of-BOSS mix-and-match dodges, which I principally blogged with the Billyhawks. See my blogpost “Are You Being Served?” 1/16/15.

Mr Reilly tells me lead plaintiffs’ counsel is the firm that took down Jenkens & Gilchrist, major dodgefloggers. If you have insomnia, a PACER account, and want to spring for the seventeen bucks, you can scope it out.

Me, I’ll wait until it hits justitia.com.”

Of course, you now have the link from me.