Conservation Easement Tax Credits–The Changing Status of Transferees
Recent changes to Colorado law concerning challenges to the disallowance of conservation easement tax credits may have a significant impact on transferees of those credits. For many years, Colorado has provided tax incentives to landowners who donate conservation easements on their Colorado properties. An incentive system of state income tax credits was created to provide a source of income for landowners donating such easements. These tax credits were designed to be used as a reduction of the landowner’s Colorado income tax, but they can also be sold and transferred to third parties.
Over the years, expansion of the conservation easement tax credit program has proved very valuable to landowners. Inevitably, however, some of the claimed tax credits were disallowed, and the final determination of the validity of these credits was a cumbersome and lengthy process. In 2011, the General Assembly enacted procedural changes designed to create a more efficient and equitable process for resolving disputes. House Bill 11-1300 created new judicial procedures for disallowed conservation easement tax credits. The transferor of the credits, known as the tax matters representative or “TMR,” can now appeal directly to the district court by waiving his or her right to an administrative hearing with the Colorado Department of Revenue. As an incentive, the Bill provided that penalties and interest would be suspended during the appeal and the requirement to post a bond was waived. The new law is codified at C.R.S. §39-22-522.5 et seq. (The “Statute”).
Under the Statute, a transferee of a tax credit can intervene in the appeal as a matter of right. However, the TMR is responsible for representing and binding the transferees with respect to all issues affecting the credit, and final resolution of disputes are binding on transferees. These provisions leave the transferees in a somewhat unusual position in that they are allowed to intervene in the action, but the TMR is responsible for prosecuting the case. Numerous questions have arisen about the necessity of joining transferees, and the transferee’s responsibilities with respect to certain tax issues.
On March 15, 2012, the Colorado Court of Appeals entered its opinion in Kowalchik v. Brohl, Executive Director Colorado Department of Revenue, 12 COA 49. The Court held that although “final resolution of disputes regarding the tax credit between [DOR] and the tax matters representative…shall be binding on transferees,” the transferees are not necessary parties to the action. The Court held that when a transferee acquires a conservation easement credit and claims it as a deduction, the transferee necessarily agrees to be represented by its tax matters representative. Also, the sale of the tax credits creates a sufficient alignment of interest between the transferees and tax matter representatives, who understand they are acting in a representative capacity. Accordingly, the Court concluded that an appeal could proceed without service of a summons and complaint on a transferee who chooses not to intervene, and mandatory joinder is not necessary.
The second issue decided in Kowalchik is whether a transferee is considered a “taxpayer.” The plaintiff in Kowalchik argued that even if a transferee is a taxpayer under the Statute, the transferee should not be subject to liability because only a donor can claim a credit for the donation of a conservation easement. The Court rejected this argument. The Court relied on the language of the Statute and the common usage of the term taxpayer, and held that excluding transferees from the meaning of taxpayer would be contrary to the DOR’s regulations. The Court concluded that transferees may therefore be liable for deficiencies, interest, and penalties if disallowance of the tax credits is upheld.
As more appeals are being heard by the district courts, the law on conservation easement tax credits will continue to evolve. Tax credit transferees need to pay careful attention to the changing landscape of the appeals process, including their rights and obligations with respect to their claimed tax credits.