A company that federal authorities say created $2 billion in fraudulent tax breaks from conserving land across the Southeast was active around the Myrtle Beach area and other parts of South Carolina.
Atlanta-based EcoVest Capital Inc. claims it has not done anything to break the law and plans to vigorously defend itself in court, Senior Vice President Robert McCullough said Thursday. The company filed an answer to the government on Wednesday, defending the actions of EcoVest, McCullough and two others connected to the firm.
The company's syndicated conservation arrangements are a type of tax loophole that has long attracted criticism, in which participants can buy shares in a holding company and then get a portion of the tax deduction when land is put into a conservation easement. It amounts to a big return for EcoVest's customers — on average a $4 tax benefit for every $1 invested, McCullough said.
The practice attracted thousands of investors across the country, according to a Justice Department filing in federal court in Georgia.
One of those investors is John Warren, the former gubernatorial candidate who forced Gov. Henry McMaster into a runoff for the Republican nomination last spring.
Though the Greenville businessman lost the Republican primary, Warren is largely expected to re-enter the Palmetto State's political arena at some point. He was, until recently, seen as a potential challenger to Sen. Lindsey Graham in 2020.
In the partially redacted tax returns for 2014 through 2016 that Warren's campaign disclosed to The Post and Courier last year, he claimed roughly $715,000 in non-cash "conservation contributions." Ecovest managed those conservation contributions, the campaign confirmed last year.
The deductions from the large charitable conservation contributions allowed Warren, the owner of a real estate lending business, to receive tax refunds totaling $122,500 over a three-year period. Warren's listed contributions were so large every year that he hit his limit on deductions and rolled over the excess to the following tax year.
"John Warren is a businessman who has made many investments and charitable contributions, including conservation easements," said Ryan Gillespie, a spokesman for Warren. "All of his investments and contributions have followed the letter of the law."
The "scheme" to secure tax breaks laid out by federal authorities in an 80-page filing in December is complex. It involves multiple limited liability companies per transaction and touches eight states.
DOJ is requesting an injunction so that the company, McCullough and four others can no longer market the syndicated partnerships that facilitated so many people to claim tax benefits. Among the four is Ralph R. Teal Jr., a Myrtle Beach man. He could not be reached by phone Friday for comment.
In EcoVest's submitted answer to the government's charges, Teal denied that he has participated in creating or promoting 45 conservation easement syndicates and denied that he "reaped substantial financial gain" from that practice, as the feds claimed.
The attempt to shutter EcoVest is the federal government's most direct swipe at potentially abusive conservation easements in at least a decade, said Steve Small, a tax attorney in Massachusetts who specializes in land conservation issues.
And one of the main examples laid out in the filing unfolded in Horry County.
A $39 million forest
Like all charitable contributions, the value of a land conservation donation can be a tax write-off. But the structure used in EcoVest's easements, the government claims, is fraudulent because it relies on inflated assessments when determining the amount of tax benefit.
It involved a tiered system of LLCs, which are often an instrument of choice in high-value real estate because they can serve to conceal the people who have ownership interest in a property. One of the LLCs was marketed to customers as a conservation partnership, also helped deflect attention from the fact that the company was promising tax benefits to investors, according to DOJ.
One example in the case is a narrow, 28-acre slice of raw, forested land wedged between the Intracoastal Waterway and S.C. Highway 31, near North Myrtle Beach's sports complex. The land, which has little adjacent development and deep-water access, is officially owned by a company called Cypress Cove Marina LLC.
An appraiser pegged the value of conserving the land in 2015 at almost $39 million, even though an intricate series of property and ownership swaps between the previous owner, Cypress Cove and another holding company, the value assigned to the property by those parties was just over $1 million, DOJ said.
But the $39 million figure was advertised to customers, who were promised a portion of the tax benefit proportional to their ownership in Cypress Cove's holding company.
Tax breaks aside, all the investors still own the property, which is closed to the general public.
In the case of the Cypress Cove land, owners were still entitled to build a recreational building, a dock into the waterway and either a single-family home or a small resort building in a portion of the site, according to the terms of the easement filed with the Horry County Registrar of Deeds.
McCullough said EcoVest's appraisals are reviewed by multiple parties. He added that his company always offers an analysis of possible land use for investors in their partnerships: Options include conservation, development or simply holding onto the land in hopes the value increases.
The partnerships have only ever chosen the conservation option.
'Risk of overreaction'
Small, who helped write the conservation tax code, said he's been speaking out against syndicated easements for at least 15 years. There's a significant difference, he said, between conservation easements that function mainly as tax shelters and those designed to protect the landscape. In his view, transactions like those done by EcoVest are purely meant for financial benefit.
"These deals exist purely and simply to generate huge and unjustifiable tax deductions for investors," Small said.
The practice also has stirred worries in South Carolina's environmental community, said Mark Robertson, executive director of the state's chapter of The Nature Conservancy. That group and others use conservation easements to protect land from development and preserve habitat.
"The syndication easements I believe are a serious, serious problem for the whole land trust land conservation community," Robertson said. "There's a great risk of an overreaction."
For its part, EcoVest has hired top-tier law and public relations firms to counter the government's attempt at reigning in the tax deductions.
The company has argued that since federal funds for land protection dried up, the company has helped fill that gap. Across South Carolina, EcoVest has helped conserve more than 10,000 acres across the state, a company spokeswoman said.
Small said syndicated easements probably will not end anytime soon. The IRS often doesn't closely check appraisal reports, he said, and the legal process for challenging the easements can stretch for years.
"The enforcement mechanism goes too slow," he said. "And there are too many people making too much money."
Andy Shain contributed to this report.