Alabama REALTORS® Judicial Monitor
February 25, 2019
The Public Policy Team monitors Alabama’s courts and federal courts for impacts on the real estate industry and property laws in general. When noteworthy events occur, or important opinions are released, summaries and analysis of the cases will be provided as the Alabama REALTORS® Judicial Monitor.
For the fourth edition of the Judicial Monitor, we review three items – 1) a securities fraud by an Alabama real estate developer, 2) a U.S. Department of Justice (DOJ) enforcement action against a conservation easement tax fraud scheme, and 3) litigation involving short-term rental ordinances in several major U.S. cities.
I. Hoover, AL Real Estate Developer Pleads Guilty to Securities Fraud
- Investments in real estate are sometimes subject to the Alabama Securities Act. That law requires individuals who deal in the sale of securities to register themselves and the investments they offer with the Alabama Securities Commission (ASC).
- When dealing with real estate investment plans, make sure you have discussed them with an attorney to ensure you are following Alabama’s securities law.
II. U.S. Department of Justice Files Enforcement Action Against Conservation Easement Syndication Group
- If a promoter comes to you offering participation in an investment plan that pools investors in conservation easements through limited liability companies (LLCs) or other “pass-through” entities in return for obtaining federal tax benefits, such conduct may violate federal law and could result in significant financial and/or criminal penalties.
- Designating real property as a conservation easement should always be done with the counsel of tax professionals or attorneys specializing in tax law.
III. Update on Short-Term Rental Laws and Litigation
Short-term rental booking companies like Airbnb are aggressively pursuing litigation against regulatory schemes, particularly those established by large municipalities, which the companies argue are overly burdensome.
[i] Alabama Securities Commission Official Press Release, January 11, 2019, available here. Lewis was sentenced to three years in prison for pleading guilty to one count of securities fraud. His sentence was suspended and he was placed on probation, as well as ordered to make full restitution to the defrauded investors.
[ii] It is unlawful for a person in connection with the offer, sale or purchase of any security to employ any scheme to defraud. Ala. § 8-6-17(a)(1). A person who willfully participates in securities fraud is guilty of a Class B felony. See Ala. Code § 8-6-18(a).
[iii] Individuals acting as dealers or agents for securities transactions must register with the ASC. Ala. Code § 8-6-3(a). It is unlawful for a person to sell a security in Alabama unless he or she is registered. Ala. Code § 8-6-4.
[v] DOJ Press Release, “Justice Department Sues to Shut Down Promoters of Conservation Easement Tax Scheme Operating out of Georgia,” December 19, 2018, available here.
[vi] 26 U.S.C. § 170(f)(3)(B)(iii); 26 U.S.C. § 170(h)(1) -(5); 26 C.F.R. § 1.170A-14.
[vii] 26 C.F.R. § 1.170A-14(d)(1).
[viii] 26 U.S.C. § 170(b)(1)(E); 26 C.F.R. § 1.170A-14(h)(3)(i).
[ix] See 26 U.S.C. § 170(f)(11)(C).
[x] E.g., Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum, 19 Fl. Tax. Rev. 225 (2016).
[xi] See 26 C.F.R. § 1.170A–14(h)(3)(i).
[xii] See Whitehouse Hotel Ltd. P'ship v. Comm'r, 139 T.C. 304, 321-322, 2012 U.S. Tax Ct. LEXIS 40, *32, 139 T.C. No. 13; see also McLaughlin, supra note x, at 238.
[xiii] See 26 C.F.R. § 1.170A-14(h)(3)(ii); see also Hilborn v. Comm’r, 85 T.C. 677, 689 (1985).
[xiv] This is known as the “sales-comparison approach,” and is preferred by the IRS and the U.S. Tax Court. See McLaughlin, supra note x, at 236.
[xv] IRS Notice 2017-10.
[xx] The appraiser is alleged to have abused the “income approach” to fair market value calculation. See DOJ complaint, at pp. 31 (describing the appraiser’s methodology as the “discounted cash flow analysis”). The “discounted cash flow” methodology is a use of the disfavored “income approach” discussed previously. See McLaughlin, supra note x, at 238.
[xxi] Id., pp. 3.
[xxii] E.g. Whitehouse Hotel Ltd. P’ship v. Comm'r, 755 F.3d 236, 246 (5th Cir. 2014) (“(T)here is little precedent discussing when the use of the income approach is appropriate”). Indeed, that issue may be addressed by the defendants in this litigation.
[xxiii] See District of Columbia Bill B22-0092 (“Bill 22-92), enacted as D.C. Act 22-563. Available here.
[xxiv] Letter from District of Columbia Mayor Muriel Bowser to City Council Chairman Phil Mendelson re: Bill 22-92, January 15, 2019. Available here.
[xxv] Airbnb, Inc. v. City of New York, 2019 U.S. Dist. LEXIS 755, *3, (S.D.N.Y. Jan. 3, 2019).
[xxvi] N.Y.C. Admin. Code § 26-2101 et seq.
[xxvii] See N.Y. Multiple Dwelling Law § 4(8) (banning the rental for less than 30 days of an apartment in a building where three or more families reside).
[xxviii] The SCA, codified at 18 U.S.C. § 2701 et seq., in relevant part provides that governments can require disclosure of electronically stored information if the government “has the consent of the subscriber or customer to such disclosure.” 18 U.S.C. § 2703(c)(1)(C).
[xxix] Airbnb, Inc. v. New York City, at *41.
[xxx] Id., at *44.
[xxxi] Id., at *46.
[xxxii] Complaint of Airbnb in Airbnb Inc. v. City of Boston, pp. 3 (citing 47 U.S.C. § 230).
[xxxiii] Tim Logan, “Facing Airbnb suit, Boston to delay some short-term rental rules,” Boston Globe, November 20, 2018. On December 28, 2018 Massachusetts Governor Charlie Baker signed into law a bill that expands the state occupancy tax to include short term rentals. The law also requires that all short-term rental hosts be insured and that they register with the state. The law will take effect on July 1, 2019.