Timeshare Tax Shenanigans End With Large Penalties

When I saw the Ninth Circuit decision in the case of James Tarpey, something about it was familiar. It turns out that the opinion by Judge McKeown upholding a penalty of over $8 million dollars was the finale of a story I picked up on October 1, 2016 with Lawyer Subject To Injunction Defends Timeshare Charitable Deduction Appraisals.

“Justice Department announced that a federal court in Helena, Montana has permanently barred attorney James Tarpey and two companies he founded – Project Philanthropy Inc (d/b/a Donate for a Cause) and Time Share Closings Inc (d/b/a Resort Closings Inc) from promoting an “allegedly” abusive timeshare donation scheme.”

Just shutting the operation down was not enough. There had to be consequences. There is an assessable penalty under Code Section 6700 on promoters and others involved in the organization of or sale of abusive tax shelters, if false statements or value exaggerations are involved. The penalty can be 50% of the promoter’s gross revenue from the scheme. As it happens Tarpey’s scheme which involved overvaluing timeshare interests pales in comparison to the syndicated conservation easements that now clog the Tax Court.

The Opinion

This was an appeal from a district court decision and it was down to fighting about the fine points of the penalty. The basic scheme was that Tarpey set up a charity and a title transfer company (Resort Closings). People who regretted buying timeshare units could donate them to the charity paying a fee for the transfer. That got them out from under the ongoing maintenance fees and (Here is where it goes from good to great) gets them a charitable contribution deduction based on appraisals that Tarpey arranged.

That the charity, Project Philanthropy d/b/a Donate for a Cause, sold the timeshare interests for a fraction of their appraised value was immaterial in Tarpey’s opinion. In 2016, he wrote me about the allegation that the appraisals were inflated.

“They were not inflated. This is supported by recent case law: Cypress Condominium Association, Inc. vs Katrina S Scarborough as Property Appraisers, et al. In that case, the Florida court found that consumer-to-consumer sales prices did not represent arms-length transactions and therefore should not be considered in the equation to determine valuation for state tax-assessment purposes. Rather, the court concluded that resort sales prices were a better determining factor of fair market value.”

Apparently that argument, which seems quite meritorious to me, did not fly in district court and all that was left to argue about were fine points as to how the penalty was computed. The penalty applied to appraisals done by others because Tarpey should have known they were not qualified. The scope of the activity being penalized was the entire timeshare donation business and not just the funds directly coming from false statement appraisals. It was also proper to included funds deposited into an escrow account managed by Resort Closings in the penalty computation.


This ruling is of more interest in how it makes us reflect on the timeshare industry and also tax shenanigans particularly those involving gifts of property of dubious value. The Tax Court is currently backlogged with cases involving extremely dubious conservation easement donations. Tarpey’s scheme actually gets a lot more sympathy from me. People burdened with a timeshare paid his entities some money, hopefully got out from under their obligation and got some of their original investment back from the benefit of a tax deduction. And according to its 990s anyway some of the money raised from selling the timeshare interests was distributed to actual charities.

I had an ambivalent attitude toward timeshares based on the experience of a couple I know quite well. Call them Robin and Terry. They bought a timeshare in the late eighties. They were enticed by a free dinner or something, but when presented with the offer, Robin, who is no dope, did some mental math and concluded it was pretty a good deal. As it happens they were well positioned to take advantage of the trading benefits and when push came to shove they could use the week that they owned.

Over the years Robin became a little more disgruntled as they realized there had been lying involved in the first presentation and subsequent presentations indicated that the flaws in the original deal required spending money on an upgrade. They resisted the temptation. On net Robin felt OK, because the vacations were pretty nice. Robin and Terry split up and Terry got the timeshare. I decided to ask Terry about what they thought.

“The timeshare was good in the short term, cause it forced us to take vacations. Other than that it was terrible. Scheduling a year in advance was tough. And after we did the big trips, a week in Newport every year was too much. I would have preferred a couple of long weekends, somewhere else. Getting rid of it was next to impossible. I lucked out because I saw an ad for someone buying them. I only got $3,000, but at least I didn’t have to pay to get rid of it. Lots of timeshare buyback scams. Overall, not a good experience. We could have purchased a lot of hotel rooms for $15,000.

My conclusion is that it probably never makes sense to buy a timeshare at retail and I find it disturbing that there is an entire industry dedicated to persuading people to make a bad decision. And it is not a one and done bad purchase, but it involves a continuing obligation. I still enjoy going to the presentations now and again. I always imagine the presenter just having come out of the Always Be Closing speech by Alec Baldwin in Glengarry Glen Ross.

You can get a somewhat more balanced view from Are Timeshares Worth It? Here Are The Benefits And Risks by Amy Fontinelle and Rachel Witowski onForbes Advisor. One of their key observations is:

“Timeshares do not retain their value, let alone increase in value. If you want to sell your timeshare on the secondary market, you will be competing with people who are practically giving their timeshares away. “

It Gets Worse

Sadly it does not end there. Apparently many of the people who will claim to help you get out of timeshare obligations are also running scams, which was arguably the case with Tarpey. I spoke with Andrew Meyer of Finn Law Group PA, whose site covered the Tarpey decision with Dangers of Timeshare Donation Schemes. Andy recommended a recent video by John Oliver which sums it up pretty well.

The complications of exiting a timeshare to get out from under a purchase obligation and perpetual maintenance fees will depend on the vagaries of the company you are dealing with and state law where the property is located and in your domicile. There is also how it might affect your credit rating and the possibility of getting tagged with income from the discharge of indebtedness.

How Is This Like Syndicated Conservation Easements?

Sometime in the early days of this millennium I began hearing ads on the radio that rather than sell or trade in my car I could get a lot more money by donating it to charity and taking a tax deduction. You and I both know it does not really work that way. There was a crackdown on that and a new reporting requirement for charities. Tarpey’s scheme was really a variation on that. People would take something that was close to worthless and take a deduction for about what they had paid for it. I think if I had been defending somebody on audit, I would have tried to argue that if the charitable contribution is not allowed, they should be allowed a theft loss for the original purchase transaction. I doubt it would have worked but it was worth a try.

Syndicated conservation easements take the principle to a whole new level. Consider this excerpt from the government‘s brief in Savannah Shoals, LLC filed last month in Tax Court.

“On December 28, 2017, Savannah Shoals Investment, LLC (Shoals Investments), paid $515,000 for a 92 percent ownership interest in Savannah Shoals, LLC (Shoals), which at the time had only one major asset: a 103-acre parcel of land in Hart County, Georgia. That same day, Shoals donated a conservation easement – a partial interest – over those 103 acres to the Southeast Regional Land Conservancy, Inc. (SERLC), and then shortly thereafter claimed a $23 million charitable contribution”

The transfer was necessary presumably because the developers getting out from under the property for $515,000 couldn’t use an eight figure charitable contribution themselves. That went to investors. Reports are that the Tax Court in Atlanta is clogged with cases of this sort. It is a story that has been ongoing. You can see a summary of my coverage here.

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