The Colorado Court of Appeals issued its opinion in Kowalchik v. Brohl, Executive Director, Colorado Department of Revenue on March 15, 2012.
Conservative Easement—Tax Credits—Transferees—Taxpayer—Tax Liability—Tax Matters Representative—Joinder of Parties—Due Process.
In this dispute involving conservation easement (CE) tax credits, defendant Barbara Brohl, Executive Director of the Colorado Department of Revenue (Department), petitioned for interlocutory review of the trial court’s orders in favor of plaintiffs. The orders were affirmed in part and reversed in part, and the case was remanded.
Plaintiffs donated CEs purportedly generating several million dollars of CE tax credits. They sold these credits to transferees, who claimed the credits on their state income tax returns or retained them for use against future tax liability. The Department disallowed all of the claimed tax credits. The trial court held that people who purchased CE tax credits from plaintiffs (1) are not within the statutory definition of “taxpayer” under CRS § 39-22-522(1); (2) have no tax liability for deficiencies, interest, and penalties for the improper claim of a tax credit; (3) need not be joined as necessary parties to this action under C.R.C.P. 19(a); and (4) may be given notice of this proceeding by mail rather than being personally served under C.R.C.P. 4.
The Department argued that the General Assembly intended to require transferees to be parties. The General Assembly added CRS § 39-22-522.5, which provided detailed court procedures as an alternative to administrative review, but did not require participation by transferees. Instead, the new section provided transferees with an absolute right to intervene. By acquiring a CE credit and claiming it as a deduction, a transferee agrees to be represented by its “tax matters representatives” (TMRs) under CRS § 39-22-522(7)(i). The sale of CE tax credits creates a sufficient alignment of interests between transferees and TMRs, who understand that they are acting in a representative capacity. Therefore, due process does not require joinder of transferees under C.R.C.P. 19(a) in litigation where the transferee is represented by its TMR. Further, mailing notice of this proceeding to all transferees and allowing this action to proceed without service of a summons and complaint on each transferee who chooses not to intervene satisfies due process. Finally, the court’s holding that a transferee is not a “taxpayer,” subject to deficiencies, interest, and penalties, was reversed.