Colorado has become a battleground in the hotly contested conservation easement arena. The IRS has targeted landowners that donated conservation easements to land trusts in exchange for a federal tax deduction. The IRS is claiming that the donated conservation easements were overvalued or improperly taken altogether. Now, the Colorado Department of Revenue (CDOR) has disallowed over 600 conservation easements in their entirety and demanded that these landowners repay approximately $130 million in state tax credits taken by them or their tax credit purchasers. CDOR has made these determinations of no value although the conservation easements remain in place preventing the landowners from almost all financial uses of their land.
A conservation easement is a legal document recorded in the county clerk and recorders office that limits the use of land by conveying valuable property rights to a charitable organization like a land trust. For example, an agricultural conservation easement limits the landowner’s use of the property to farming and ranching uses and may tie water rights to the land preventing their transfer to municipalities. A mining conservation easement prohibits removal of minerals and other natural resources from the property.
When granting the conservation easement, the farmer or rancher obtains a federal charitable tax deduction equal to the value of the conservation easement. On their Colorado state tax return, they can claim tax credits in an amount also dependant on the value of the conservation easement. These tax credits are transferrable to other taxpayers. The value is supported by an appraisal of the difference between the land’s value before the restriction and the land’s value after the restriction.
Because of the extreme backlog of conservation easement administrative hearings at CDOR, the Colorado General Assembly passed the Looper bill in May, 2011. This new law allows taxpayers to appeal CDOR’s disallowance of the entire value of their conservation easements directly to district court bypassing the administrative hearing process at CDOR. Challenging CDOR’s denials directly to district court also provides the tax payer with the potential to avoid interest and penalties and the bond requirement of an administrative hearing.
The attorneys at Glade Voogt Lopez Smith are helping ranchers, farmers and other landowners with conservation easements challenge CDOR’s conservation easement denials and the resulting tax credits. We have had some substantial success in doing so including the Colorado Court of Appeals holding in Markus v. Colorado Department of Revenue (Link) where we established a four year statute of limitations after which Revenue can no longer challenge a conservation easement.
We also have represented farmers and ranchers in reviewing potential conservation easements to ensure compliance with the law preventing any future challenges from the tax authorities.