SCOTT SIMON, HOST:
A little good news now from the massive omnibus spending bill Congress passed in the lame duck session. There's legislation now to finally curtail something that sounds like a good idea - donating land to the government to maintain open spaces - but has ended up costing taxpayers a lot of money every year. Peter Elkind covers government and business for ProPublica and joins us now. Thanks so much for being with us.
PETER ELKIND: Good to be with you, Scott.
SIMON: Syndicated conservation easements - I know everybody knows what they are, but just remind us, if you could.
ELKIND: Conservation easements provide a very generous tax break, and it's an incentive to conserve valuable open land from development. And in return, it provides a very generous charitable tax deduction. So that was the concept behind conservation easement donations.
SIMON: What happened?
ELKIND: Over time, an industry sprung up, mostly starting in Georgia, that exploited the tax deduction and turned it into a profit-making venture - a very valuable profit-making venture. These promoters would buy up tracts of land that were sitting idle which really had very little in the way of real conservation value. And they would claim that if it was developed for maybe a luxury resort or a solar mine or gravel mine, that it was actually worth 10 or 20 times what they had just paid for it months earlier. And then they would attract rich investors by dangling offers of a big tax break with them, and they'd divide up the charitable deduction.
SIMON: What are some examples that stand out to you?
ELKIND: One is an abandoned golf course outside of Greenville, S.C. It had sat vacant for a decade. It was next to a trailer park. And finally, the owners cut the asking price to about 5 1/2 million. And they sold it in 2016 to syndicated easement promoters, who then attracted investors. They claimed this was the perfect site for single-family home development. And this land that they bought for around 5 1/2 million was suddenly worth 40 million - eight times what they paid for it. Bingo. Investors got $4 in deductions or so for every dollar they invested. They made a profit. The promoters made big fees.
And the key part for all this was appraisals, where an appraiser would come in and make this massively inflated assessment of what the value was based on a sort of hypothetical notion of a development of some kind that was very improbable. And it was sort of in plain sight. But it became a growing problem, as - you know, as sort of clever promoters - and these are financial advisers; these are lawyers; these are accountants - began pitching these deals, and the industry got bigger and bigger, and more of them took place. And very quickly, you know, by 2016 or so, the amount of deductions taken for syndicated deals, which are questionable, greatly exceeded the amount of deductions taken for traditional deals.
SIMON: And how will this new legislation affect what's going on?
ELKIND: Well, the new legislation - they basically say that it bars any tax deduction - any charitable deduction for contribution - that's more than 2 1/2 times the amount a partner invested. So that basically allows them to deduct what they put into the deal but not make a profit from it.
SIMON: Why did members of Congress catch this and not the IRS?
ELKIND: Basically, the syndicators and their investors defied the IRS. I mean, usually the IRS saying this is a scam shut something down. But there was so much money involved here that it didn't work. And these deals are so profitable that a lot of these partnerships routinely established special audit reserves to fight the IRS of as much as $1 million. So on the IRS level, the IRS was kind of outmanned, and the profits were - you know, the risk of being audited, the risk of losing an audit case - the investors and the promoters were betting it was worth taking the gamble. And ultimately, the IRS commissioner begged - in congressional testimony - begged Congress to help and do what the IRS was unable to do.
SIMON: Peter Elkind of ProPublica. Thanks so much for being with us.
ELKIND: Good to be with you. Thanks for having me. Transcript provided by NPR, Copyright NPR.
