How a Georgia pine farm became a significant tax deduction

In 2020, some McGinnis family members sold off three-fifths of the property for $310,000. By the end of 2021, the Oglethorpe County land had been sold again, this time to a business that raised $10.7 million from investors in a land-conservation deal. That transaction could yield its investors millions of dollars more in tax deductions—as well as scrutiny from the Internal Revenue Service.

The deal was typical of the “syndicated conservation easements" booming in this sliver of northeastern Georgia, which is known for granite deposits used in tombstones and statuary. For some appraisers and deal makers, the prospect of granite mining can drive up a property’s hypothetical value—and also drive up the tax deduction associated with promising not to conduct mining.

The claimed tax breaks are typically far bigger than the money spent buying the property, part of a minimarket in which high-income investors nationwide extract tax deductions instead of minerals.

“It’s all about tax shelters and selling tax shelters," said Denise Perry, executive director of the Georgia Agricultural Land Trust, who tracks easement deals across the state. “It’s all about money."

Many conservation easements, which offer tax incentives for preserving property from development, aren’t controversial. The Internal Revenue Service is focused on the proliferation of large deals in which investors are pooled into “syndications" for deductions, and the agency is auditing every syndicated-easement deal that crosses thresholds it outlined in 2016. The resulting disputes between the government and well-financed promoters have piled up in courts, with billions of dollars in tax revenue at stake.

The easement on the McGinnis property is so recent that the IRS likely won’t audit it for years. But it is an example of the kinds of transactions that are still occurring despite the stepped-up IRS enforcement.

The McGinnis property is barely distinguishable from anything else on Highway 22 north of Oglethorpe County Middle School, just a few hundred feet of forested road frontage across from a small church. There is a locked gate for the conserved property, as well as a separate locked gate for the smaller parcel that some McGinnis family members still lease to hunters.

This peaceful, bucolic parcel wasn’t selected for preservation because of unique ecological features or an urgent environmental need to prevent commercial growth. So far, Oglethorpe County hasn’t seen much growth spilling out from nearby Athens, and the population has hovered around 15,000 for the past decade.

For tax purposes, it is what is underneath the former McGinnis property that might matter. Oglethorpe County, atop a pile of granite, has long been home to rock quarries. Elberton, Ga., the self-proclaimed Granite Capital of the World, turns the region’s smooth, gray granite into cemetery headstones and statues.

So promoters canvass Oglethorpe County for property that could become a quarry—and then recruit high-income investors who claim big tax deductions for promising not to build a quarry.

Since the IRS increased enforcement of such deals in 2016, there have been about 40 easements in Oglethorpe County, mostly from partnerships and promoters around the Southeast. They have set aside more than 5,000 acres for conservation—nearly 2% of the county’s land area.

By extrapolating from claimed per-acre values in two public court cases from the county, there could be more than $500 million in federal tax deductions generated from a place where all individuals’ adjusted gross income in 2019 was $314 million and charitable-donation deductions totaled $4.7 million.

Before the 2020 sale, the land had been in the McGinnis family for nearly a century, originating with a bequest to Mr. McGinnis’s first wife, Sammi, from her godfather. In his will, Mr. McGinnis described learning to plant pine trees on the property from a local forestry expert.

“I set 22,000 pines and could not stand straight for two days," Mr. McGinnis wrote.

John W. McGinnis, the minister’s son, recalled occasional hunting trips to the land while the family still lived in the Atlanta area, before the growing pine trees made it too hard to see.

As the trees grew, the family leased the land to timber companies, generating enough money to pay property taxes and cover some college costs. When the elder Mr. McGinnis died, the land was producing annual income of nearly $10,000, which he left to his second wife, Louise, mentioning that he didn’t have much life insurance.

The land itself was split into one-fifth shares between family members. The younger Mr. McGinnis and a niece wanted to keep part of the land and retained a 40% piece, while others cashed out.

Rob Keith, a grandson of the elder Mr. McGinnis, is a music teacher who lives in Brooklyn, N.Y., and has little desire to own land in rural Georgia, especially once timber-lease money dried up and annual property-tax bills remained.

“That meant that all of us would have to come up with thousands of dollars a year for this piece of land that didn’t mean anything to us and we didn’t really want," he said.

The property was on the market for months and got only a few bites, selling in January 2020 to a local construction executive for $310,000, or about $1,200 an acre. That price was fair, particularly because timber wasn’t replanted after the prior lease ended, said Eddie Drinkard, the real-estate agent on the deal.

“It was a jungle, as a typical cutover timberland tract that’s allowed to come back on its own," he said.

The construction executive then turned the property into a hunting retreat, Mr. Drinkard said. He made it easier to get across a creek on the land and cleared open areas that made it possible to hunt deer and turkey and do dove shooting, Mr. Drinkard said.

“He just completely transformed the property from an ugly-dog cutover tract into a real nice showplace hunting tract," Mr. Drinkard said.

Then, on Dec. 16, 2021, the land was sold to Dogwood Bluff LLC, a partnership formed by Green Rock LLC, an Alabama company that was active in conservation easements but recently said it would exit the business. The deed and associated documents don’t specify a sales price, but Mr. Drinkard estimated it was about $2,650 an acre.

Typically, promoters such as Green Rock hire geologists and mineral appraisers to study sites they are thinking about buying, estimating how much earth needs to be removed and how marketable the underlying granite is.

Green Rock then raised $10.7 million for Dogwood Bluff Partners LLC, with more than $1.6 million going to brokers’ commissions or to Green Rock entities, according to a document filed with the Securities and Exchange Commission. The minimum investment was $50,000, and the offering sold out between Dec. 28 and the Dec. 30 SEC filing.

IRS officials declined to comment about any particular taxpayer or property. They have warned investors against participating in syndicated-easement deals and placed them on the agency’s “Dirty Dozen" list of abusive tax-avoidance transactions.

“Taxpayers should be extremely skeptical of contorted claims that property can be ‘worth’ more than it is really ‘worth,’" said Tom Cullinan, acting IRS chief of staff.

On Dec. 29, Dogwood Bluff LLC donated a conservation easement to Natural Resources Conservancy, a Tulsa, Okla., land trust that formed in March 2021 and accepted about 20 easements last year.

Unlike many land trusts, which refuse donations that are part of syndicated easements, NRC accepts them.

“I don’t think it is the job of the land trust to deal with landowner taxes," said Robert Gregory, the group’s founder.

Although the McGinnis heirs sold their land for about $1,200 an acre and Green Rock bought it for about $2,650 an acre, the deductions claimed for forgoing development might be much higher because of the granite. Many syndicated-easement deals include deductions of four times what investors spend; in this case, that could work out to more than $150,000 an acre.

Mr. Keith, the New York music teacher, said he knew nothing about all the deals involving his grandfather’s former land until The Wall Street Journal started contacting family members.

“It’s a complete surprise," he said.

This story has been published from a wire agency feed without modifications to the text