At least one independent broker-dealer is pulling back from selling tax shelter land deals that have recently drawn fresh scrutiny from the IRS.
International Assets Advisory last year raised more than $3 million for one such tax shelter and was ready to raise more. But after the IRS recently issued a notice about the deals, called syndicated conservation easements, the firm has essentially curtailed plans to raise more money for one deal and canceled plan for others, said the firm's president Ed Cofrancesco.
“We were in the middle of the deal when the IRS notice came out in December,” said Mr. Cofrancesco. “That made it a much smaller deal. We probably won't do anymore.”
Because the syndications are private placements, it is difficult to know exactly how many are sold or how much money was raised for the tax shelters in 2016. According to Larry Goff, CEO of
Triloma Securities, a wholesaling broker-dealer that sells the syndications, the market last year for the deals was likely between $300 million to $500 million.
Some syndicated conservation easement deals are offering investors charitable contribution deductions on taxes of eye-popping amounts, from four to four-and-a-half times the amount they invest, according to industry executives and analysts. That means an investor can turn a $100,000 investment into $400,000 or more of tax deductions. The IRS has raised questions about the appraisals and valuations of properties.
The syndicated easement sold by International Assets Advisory, Land Investors was promoting a potential deduction of four-and-a-half times the investor's initial investment, Mr. Cofrancesco said. The clients who bought the deal were properly informed of the IRS guidelines and went ahead with the investment, he added.
The IRS notice that said the federal government was concerned about valuations placed on such deals. Promoters of the deals are currently “using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor's investment.”
Congress has allowed an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for the future, according to the IRS. The IRS has seen abuses of this
tax provision and has seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements.
The IRS will be looking at purchases of syndicated easement deals from January 2010 through December 2016 in which investors received charitable contribution deductions of more than 2.5 times their investment.
Such syndicated conservation easements are sold through both independent broker-dealers and directly by attorneys and CPAs who create the syndications, industry observers said. Large independent broker-dealers such as LPL Financial and Ameriprise Financial have stayed away from such deals, industry sources said.
In the wake of the IRS notice, questions abound for advisers who sold the tax shelters and the clients who bought them. Will broker-dealers that sold the easements face investor complaints after clients are audited and are potentially hit with a new tax bill?
And are broker-dealers selling the high-commission private placements to accredited investors as a way to make up lost revenue from the lost sales of nontraded real estate investment trusts, which last year saw sales plummet in the wake of the industry's preparation for the Department of Labor's fiduciary rule and new industry rules that make sales charges to clients more transparent?
The key to advisers looking at such easement syndications is the quality of the appraisal and valuation, said Mr. Goff of Triloma Securities, which completed 14 such deals in 2016 and 12 a year earlier. Those syndications were typically between $7 million and $15 million.
“The problem is not that it is a four-to-one deduction, the problem is that it is not a real valuation,” Mr. Goff said. “Ninety percent of the deals I've seen in the IBD space [are] clean.”
(More: And the Golden Bull goes to…)
