California’s FTB is offering amnesty for syndicated conservation easements and captive insurance company tax deductions. Both investments are highly-sophisticated, often-fraudulent tax schemes. I’ve been getting lots of calls recently from taxpayers who invested in one of these for their generous tax write-offs, but who are now under FTB audit. If the FTB finds a syndicated conservation easement or captive insurance company investment is not legitimate, then the taxpayer is subject to a 40 percent penalty, plus a doubling of the interest rate. Unfortunately, many of these transactions are not legitimate because so many were peddled by hucksters who successfully seduced people into yet another “too good to be true” scam. How do they work?
Syndicated Conservation Easements
The promoter buys a piece of swampland or a golf course and contributes it to a partnership. Investor/taxpayers buy into the partnership. Then the partnership files a deed with the county recorder donating a “conservation easement” to the general public. The easement provides that this land will never be developed. To the extent that the easement decreases the value of the land, it’s a charitable donation deductible on a tax return. The usual scheme, however, uses a wildly inflated pre-easement valuation of the land, much higher than the acquisition cost that the partnership had. Taxpayers often get first-year tax reductions of three times their investment. If it’s too good to be true, it almost always is. Read here for more the risks and shaky rewards of this tax scheme.
Captive Insurance Companies
A company (call it ScamCo) creates a wholly-owned insurance firm as its subsidiary. Then ScamCo insures against unusual and unlikely events, such as a “terrorist attack”. ScamCo pays huge premiums for this insurance to the newly-created, wholly-own insurance firm. The insurance premiums are deductible to ScamCo, and received tax-free (up to $1.2 million annually) by the insurance firm subsidiary. The insurance firm subsidiary pays no claims, and rebates ScamCo’s premiums at the end of the year. If the insurance firm subsidiary inflates the premiums with no regard to actuarial tables or reality (which is often the case), then the end result is a whirlpool of money going tax-free between the ScanCo and its insurance firm subsidiary. Read more here.
The audits of these transactions and the ensuing litigation can take quite a toll on the taxpayer. Even though the promoters have lots of money and hired top-notch Washington attorneys to defend their “business models,” the FTB (and IRS) both also have deep pockets and many ways to harass the promoters and their clients. Some promoters are being prosecuted criminally; others are facing federal or state cases to enjoin them from every touching another person’s tax return again. The tax benefits generally flow through partnerships and LLCs; the tax authorities have sought to adjust the tax returns of these entities. I know of one promoter whose entities have set aside a $3 million war chest to pay for attorney fees in active audits. The tax authorities also can and have audited taxpayers directly, such as the ones now parading through my doors.
FTB Offers Amnesty
Relief is in sight for taxpayers who fell for one of the schemes not holding up under FTB audit scrutiny. My clients are receiving offers from the FTB to amend their returns, disclaim the benefits, pay the taxes they evaded, and receive amnesty from the impending penalties. I recommend taxpayers seriously consider taking the amnesty deal. It’s what I have recommended most often to my clients. Why? Especially if the conservation easement or captive insurance company was one of the legitimate ones?
While it hurts to give up a legitimate tax benefit, the cost of proving that the syndicated conservation easement or captive insurance firm is legitimate is extremely high. The FTB has targeted conservation easements and captive insurance firms as highly suspect and is formally going after them. That means it’s committing huge resources to scrutinizing tax returns that contain them, and fighting most of them. Sure, you can resist, fight back and hope to win, but the government is greatly advantaged in that fight, and California taxpayers greatly disadvantaged. Tax authorities have extraordinary power and discretion. Even if a taxpayer has the money to fight the government attorneys with unlimited budgets, it will take a long time to resolve these audits, and the outcome is as likely to favor the FTB as the taxpayer. By the way, the IRS is also coming after these schemes equally hard. Under the circumstances, I’m mostly counseling clients to take the amnesty – cut your losses and move on. Life is short. Enjoy it.
Are you being audited for a tax-write you took on an investment in a syndicated conservation easement or captive insurance company? Are you considering investing in one for the tax benefit? Let’s talk about the legitimacy of your plan and its likelihood of withstanding FTB scrutiny.
August 5, 2023