May 23, 2019

Colorado Court of Appeals: Department of Revenue’s Challenge to Conservation Easement Tax Credits Barred by Statute of Limitations

The Colorado Court of Appeals issued its opinion in Markus v. Brohl, Exec. Dir. of Colorado Department of Revenue on Thursday, October 23, 2014.

Conservation Easement Tax Credits—Review Period by Department of Revenue—Summary Judgment.

In 2004, three pairs of landowners created conservation easements (CEs) on their lands, had them appraised, and sold them to the Otero County Land Trust for a portion of their appraised value. They applied part of the CE tax credits to their 2004 income tax liability. The landowners (CE donors) carried forward the remainder of the CE credits, some for personal use and some for the use of third parties.

On September 28, 2009, the Colorado Department of Revenue (Department) disallowed the entire CE tax credit of one pair of landowners because of a purported deficiency in the appraisal. For the same reason, in April 2010, the Department disallowed the claims of CE tax credits of the each of the second pair of landowners. The disallowances, under a four-year limitations period, affected only the donors’ use of claimed CE credits in the 2005–08 tax years.

On cross-motions for summary judgment, the CE donors argued that the four-year limitations period had expired before the Department acted to disallow their tax credits. The Department argued that the limitations period commenced each time a CE donor or transferee applied a CE tax credit to his or her tax liability and that it could evaluate the original claims for purposes of disallowing the use of credits for the 2005–08 tax years. The district court entered summary judgment in favor of the CE donors.

On appeal, the Department argued that the district court erred in its limitations determination, and that there was a genuine issue of material fact precluding summary judgment as to whether the CE donors had filed false or fraudulent tax returns. The Court of Appeals found that the applicable general statute of limitations was four years, and the time period commenced at the filing of a tax return. Under this system, the Court was inclined to side with the Department.

However, CRS § 39-22-522 specifically addresses the tax consequences of a CE. Under that statute, claimed CE tax credits may be transferred to third parties, who are then bound by “the same statute of limitations” as the CE donor. The Court supported an interpretation where a purchaser–transferee would have a low risk of disallowance of the CE credits by the Department. Here, because the Department did not challenge the validity and value of the CE tax credits prior to April 15, 2009, it was barred from disallowing them.

The Department also argued that there was a genuine issue of material fact as to whether the CE donors filed false or fraudulent tax returns that precluded summary judgment. After reviewing the record, the Court found no genuine dispute of any material fact. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

SB 13-221: Requiring an Application for a Tax Certificate for the Donation of a Perpetual Conservation Easement

On Friday, March 15, 2013, Sen. Steve King introduced SB 13-221 – Concerning an Application and Review Process for Issuing Tax Credit Certificates for a State Income Tax Credit Allowed for the Donation of a Perpetual Conservation Easement. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

Current law allows a landowner to claim a state income tax credit of up to $375,000 for donating all or a portion of a perpetual conservation easement to a qualified organization. Landowners are also allowed to transfer all or a portion of a credit to another taxpayer, known as a transferee. Currently, a conservation easement tax credit cannot be claimed or used by the landowner or transferred to another taxpayer unless a tax credit certificate is issued by the division of real estate (division) in the department of regulatory agencies.

The executive director of the department of revenue (department) has the authority, for good cause shown and in consultation with the division and the conservation easement oversight commission (commission), to review and accept or reject, in whole or in part, the appraised value of the conservation easement, the amount of the tax credit being claimed, and the validity of the tax credit based upon the federal and state statutes and regulations in effect at the time of the donation. Under the current process, the department reviews conservation easement tax credit claims and uses for compliance with applicable requirements after the landowner or transferee files a tax return with the department.

The bill requires a landowner to file an application for a conservation easement tax credit certificate with the division and have certain aspects of the conservation easement donation reviewed and approved by the division director and the commission before a tax credit certificate is issued. The bill sets forth provisions governing the following:

  • The authority and responsibilities of the division, the division director, the commission, and the department in the tax credit certificate application review process, including the authority of the commission to delegate its authority to the division director;
  • The required documentation to be included with an application for a tax credit certificate;
  • The payment of a fee to cover the costs of administering the tax credit certificate application review process;
  • The process for identifying potential deficiencies with a conservation easement donation for which a landowner is applying for a tax credit certificate, notifying the landowner of the potential deficiencies, and obtaining additional information from the landowner to address the potential deficiencies; and
  • The process for approving an application or, if an application is denied, conducting settlement negotiations and appealing the denial.

A landowner may also request an optional preliminary advisory opinion from the division director and the commission regarding a proposed conservation easement donation. The opinion would be advisory only and would not constitute approval of a tax credit certificate application or a tax credit claim. The bill was introduced on March 15 and is assigned to the Finance Committee.

Colorado Court of Appeals: Parcel of Property Does Not Qualify as Agricultural Because it Is Too Small and Has a Residential Improvement

The Colorado Court of Appeals issued its decision in Andrew v. Teller County Board of Equalization on June 21, 2012.

Property Taxes—Nonagricultural Classification.

Respondent Teller County Board of Equalization (BOE) placed a nonagricultural classification on petitioner’s (taxpayer) land. Petitioner appealed the Board of Assessment Appeals’ (BAA) denial of her challenges. The Court of Appeals affirmed the BAA’s ruling.

The subject property is a thirty-five-acre parcel that taxpayer purchased in 1998. It is in a subdivision containing other thirty-five- and twenty-acre parcels. By 2010, nineteen of the parcels had improvements and seventeen were vacant. All the parcels are subject to a conservation easement established in 1990 for the preservation of wildlife habitat. The easement permits building areas of up to two acres on each parcel for residential purposes.

Taxpayer constructed a residence and received a certificate of occupancy in August 2009. Through the 2009 tax year, based on the conservation easement, the parcel was classified as agricultural land. Based on the completion of the residence, the county assessor changed the classification for the 2010 tax year to residential land.

Taxpayer challenged the reclassification before the BAA. She relied on the conservation easement, as well as farming and forestry uses on the land. The BOE asserted that the parcel is less than eighty acres and contains a residence, and that the other bases for agricultural classification had not been established. The BAA denied the petition and upheld the BOE’s classification.

Taxpayer had the burden of proof in the BAA proceedings to show any qualifying basis for classifying the subject parcel as agricultural. The Court looked to CRS § 39-1-102(1. 6)(a)(III), which governs the classification of land as agricultural for property tax purposes based on a perpetual conservation easement. Under this section, the parcel clearly does not qualify, because it is too small and has a residential improvement.

Summary and full case available here.

Colorado Court of Appeals: Landowners Who Sold Property Rights Not Allowed to Sever Shares in Mutual Ditch Company from Land in Violation of Previously Existing Conservation Easement

The Colorado Court of Appeals issued its opinion in Mesa County Land Conservancy, Inc. v. Allen on June 7, 2012.

Conservation Easement—Mutual Ditch Shares—Summary Judgment—Injunctive Relief.

In this dispute over a conservation easement encumbering mutual ditch shares, defendants Sam and Susie Allen appealed the trial court’s judgment (1) granting summary judgment in favor of plaintiff Mesa County Land Conservancy, Inc. (Mesa Land Trust); (2) denying the Allens’ motions for summary judgment; and (3) granting injunctive relief in favor of Mesa Land Trust. The judgment was affirmed.

In 1990, the United States, acting by and through the Farmers Home Administration, granted a deed of conservation easement (1990 Easement) to Mesa Land Trust. The conservation easement covered 140 acres of land and provided that “[a]ll water rights held at the date of this conveyance shall remain with this land.” It was recorded in the Mesa County real estate records. At the time of the conveyance, the United States held nine shares of capital stock in a mutual ditch company, the Big Creek Reservoir Company (Big Creek Shares).

The Allens purchased the property in 1993, subject to the 1990 Easement and their deed specifically referred to the Big Creek Shares. In 2007, the Allens sold the property, but purported to exempt the Big Creek Shares from the conveyance. Mesa Land Trust sought declaratory and injunctive relief against the Allens for violating the terms of the 1990 Easement by attempting to sever the Big Creek Shares from the land.

The Allens filed two motions for summary judgment on grounds that the Big Creek Shares were not encumbered by the 1990 Easement because it did not comply with CRS § 38-30.5-104(5) or with article 8 of Colorado’s Uniform Commercial Code (UCC). Mesa Land Trust moved for summary judgment, seeking a declaratory judgment that the Big Creek Shares could not be exempted from the conveyance. The trial court issued a permanent injunction in favor of Mesa Land Trust, requiring the Allens to convey the Big Creek Shares to the purchasers and prohibiting them from severing them from the property. The Allens appealed.

In 2003, the General Assembly amended certain parts of the conservation easement statutes. The Allens argued that the 1990 Easement is invalid because the definition of “conservation easement” in the relevant statute in effect in 1990 did not authorize encumbrance of water rights; and (2) the 1990 Easement does not comply with the notice requirements of the 2003 amendment of CRS § 38-30.5-104(5). Mesa Land Trust argued that the 1990 Easement is valid because the definition of conservation in the statute in effect when the 1990 Easement was created—the 1976 statute—allowed water rights to be encumbered, and if the 2003 amendment to the notice requirement applies retroactively, it is unconstitutionally retrospective.

The Court of Appeals determined that (1) the statutory language was ambiguous before the 2003 amendments; (2) the legislature intended to clarify, and not to change, the statute; and (3) the statute includes a provision that the 2003 amendment applies to previously created conservation easements. Therefore, the Court held that the legislature intended the statute to apply retroactively. It then considered whether it was unconstitutionally retrospective.

Mesa Land Trust contended that the 2003 amendment is unconstitutionally retrospective solely as to the notice requirement because it impairs Mesa Land Trust’s vested rights in the Big Creek Shares. The Allens responded that Mesa Land Trust does not have any vested rights in the Big Creek Shares because the 1976 statute did not recognize conservation easements encumbering water rights as valid interests in land. The Court disagreed with the Allens, finding that the 1976 statute did authorize the creation of conservation easements encumbering water rights (this was clarified by the 2003 amendment).

The Court also agreed with the trial court that application of the 2003 notice requirement to easements that predated the enactment of that requirement would be unconstitutional. If the requirement were imposed, it would render all pre-existing conservation easements covered by that requirement invalid unless, by chance, a grantor complied with a sixty-day notice provision that did not exist when the easement was created.

Finally, the Allens argued that the Big Creek Shares are securities subject to a previous version of the UCC. The Court rejected this argument, finding that it is well established that the UCC does not apply to mutual ditch shares as they are not corporations in a legal sense but merely vehicles for individual ownership of water rights. Accordingly, the trial court’s judgment was affirmed.

Summary and full case available here.

Colorado Court of Appeals: Interlocutory Review of Trial Court Proceedings in Order to Determine Whether All Necessary Parties were Participating in Trial Court Action

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.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on March 15, 2012, can be found here.

Colorado Court of Appeals: Petition for Interlocutory Review Allowable Under C.A.R. 4.2; Merits Will Be Decided Later

The Colorado Court of Appeals issued its opinion in Kowalchik v. Brohl on February 2, 2012.

Taxation—Conservation Easement Tax Credits—Interlocutory Review

In this taxation dispute involving conservation easement tax credits, defendant Barbara Brohl, the Executive Director of the Colorado Department of Revenue (DOR), petitioned for interlocutory review of the trial court’s finding that certain individuals do not fall within the statutory definition of “taxpayer.” The petition was granted.

In Colorado, a state income tax credit is allowed for a qualifying conservation easement created on real property that a taxpayer owns and donates to a governmental entity or charitable organization. Generally, a donor taxpayer may assign to transferees all or any portion of the tax credit generated by any donation. The donor taxpayer may generate only one such tax credit per year. A transferee taxpayer may purchase credits from an unlimited number of donors and claim an unlimited number of credits against a tax liability.

Plaintiffs are numerous conservation easement donors. In tax years 2005 and 2006, plaintiffs donated fourteen conservation easements purportedly generating several million dollars worth of state tax credits. Plaintiffs then transferred credits to fifteen transferees who claimed the credits on their respective state income tax returns or retained them for use against future tax liability.

If the DOR disallows some or all of a conservation easement tax credit, a notice of disallowance, deficiency, or rejection of refund is sent to the donor of the easement who generated the credit (“tax matters representative” or TMR) and to any transferee who has used any portion of the tax credit. DOR disallowed the credits at issue in this case, sent plaintiffs notices disallowing the credits, and provided a notice informing them of the procedures created by CRS § 39-22-522.5 for resolution of tax credit disputes. Transferees are bound by the final resolution of disputes between DOR and the TMR.

Pursuant to CRS § 39-22-522.5(2), plaintiffs filed an amended complaint in the district court appealing DOR’s disallowance of the tax credits. Plaintiffs did not join the transferees. DOR moved to dismiss pursuant to C.R.C.P. 12(b)(6) or alternatively to compel plaintiffs to join the transferees pursuant to C.R.C.P. 19(a).

The trial court denied DOR’s motion. DOR moved the court to certify its order and several additional legal matters for interlocutory appeal under C.A.R. 4.2. The trial court granted the certification order with four questions for interlocutory appeal, and DOR sought interlocutory review under CRS § 13-4-102.1 and C.A.R. 4.2.

The Court or Appeals has discretion to grant an interlocutory appeal when (1) immediate review may promote a more orderly disposition or establish a final disposition of the litigation; (2) the order from which an appeal is sought involves a controlling question of law; and (3) that question of law is unresolved. The Court found these factors present in this case and granted DOR’s petition for interlocutory review, stating that a later opinion will address the merits.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on January 19, 2012, can be found here.

State Judicial Posts Information about Conservation Easement Tax Credit Appeals for Land Owners

HB 11-1300, which was passed in the 2011 Legislative Session, created an appeal process in the District Court for land owners related to conservation easement tax credits.

Colorado State Judicial has posted the following information about Conservation Easement Case Processing:

What is a Conservation Easement Case?

House  Bill 11-1300 provides that persons who hold tax credits derived from a conservation easement and who have received a notice of deficiency, disallowance, or rejection of their credit may appeal that decision through the person or entity that created the conservation easement, called the Tax Matters Representative.

The Act permits the Tax Matter Representative to appeal through either the District Court or an enhanced administrative process.

Cases filed with the District Courts generally fall into one of two categories.

  1. The first group includes litigants that choose to leave the Department of Revenue’s (DOR) administrative appeal process without receiving a final ruling to instead have the District Court rule on the issues. It is anticipated that the majority of cases filed will fall in this group. These cases must be filed by October 1, 2011.
  2. The second group is composed of litigants that may choose to stay in the DOR appeal process, including those who may want to appeal the DOR ruling in District Court per HB 11-1300. This type of appeal will be filed at a later date.

How do I file a case if I choose to proceed through the District Court?

Cases are filed in the District Court in the county in which the property is located. If the cases are filed by an attorney, it is mandatory that they are filed electronically (e-filed) . If a litigant is proceeding without an attorney, documents must be filed in the clerk’s office at the courthouse where the property is located. In both instances, a civil filing fee applies ($224).

Who will represent the Department of Revenue?

The Attorney General will represent the Department of Revenue in cases filed in District Court.

What happens during the course of the case?

The District Court will determine, in this order:

  1. Whether the tax credit claimed was valid;
  2. The value of the tax credit, along with any outstanding taxes, penalties, and interest due;
  3. How the tax credit, outstanding taxes, penalties, and interest are apportioned among the credit holders (if applicable); and
  4. Any other outstanding disputes between tax credit holder and land owner as determined by the Court.

What counties are in each region?

HB 11-1300 divides Colorado into three regions for the purpose of conservation easement filings. The regions include the following judicial districts:

  • Region 1: 1st, 2nd, 8th, 13th, 17th, 18th, 19th, and 20th
  • Region 2: 3rd, 4th, 10th, 11th, 12th, 15th, and 16th
  • Region 3: 5th, 6th, 7th, 9th, 14th, 21st, and 22nd

Click here to see a map of the districts: District Court Map

Who do I contact with questions?

The regional Clerk of Court or his/her designee:

Where can I get more information?

Further information may be obtained by reading House Bill 11-1300 as signed by the Governor. Additional information on HB11-1300 also can be obtained at the following websites. (NOTE: the Judicial Department is not the controlling authority on these websites, thus does not endorse any information on these sites.)

Colorado Coalition of Land Trusts
Colorado Department of Revenue
CBA-CLE Legal Connection

Click here to read these Conservation Easement Case Processing on the State Judicial Website.

Division of Real Estate Proposes New Rule About Transferring Conservation Easements to Non-Certified Entities

The DORA Division of Real Estate has proposed a new rule for the conservation easement certification program. The purpose of this rule is to prevent a non-certified organization from holding a transferred conservation easement for which a tax credit is claimed. The rule applies to any nonprofit entity and any government entity that holds a conservation easement for which a tax credit is claimed.

A hearing on the proposed rule will be held on Monday, October 24, 2011 at 1560 Broadway, Suite 1250 C, Denver, Colorado 80202, beginning at 10:00 am.

Full text of the proposed rule can be found here. Further information about the rule and hearing can be found here.

DORA Division of Real Estate Adopts New Cease and Desist Rule

The Department of Regulatory Agencies’ Division of Real Estate has adopted a new permanent rule regarding conservation easements. The purpose of the rule, entitled D-1 Cease and Desist, is to fulfill the legislative directive to promulgate necessary rules concerning the state income tax credit that may be claimed for the donation of a conservation easement.

Specifically, the Division of Real Estate states that the purpose of this new rule is to define discipline authorized in CRS § 12-61-720(11). The definition will allow the Director of the Division the ability to impose discipline for noncompliance on an organization for negotiating or accepting a conservation easement if they are not in compliance with CRS § 38-30.5-104(2) and 12-61-720.

D-1 Cease and Desist

If the Division of Real Estate has reasonable cause to believe any public or private organization is not in compliance with section 38-30.5-104 (2), C.R.S. and section 12-61-720, C.R.S., the Director of the Division of Real Estate may enter a order requiring such organization to cease and desist from attempting to hold a conservation easement for which a state tax credit may be claimed.

This permanent rule will be effective on September 14, 2011.

A hearing on the new rule will be held on Monday, July 18, 2011 at the Colorado Division of Real Estate, 1560 Broadway, Suite 1250 C, Denver, Colorado 80202, beginning at 10 am.

Any interested person may participate in the rulemaking process by submitting written data, views, and arguments to the Division of Real Estate. Those interested are asked to submit their materials in writing no less than ten days prior to the hearing date. However, all materials submitted prior to or at the rulemaking hearing or prior to the closure of the rulemaking record will be considered.

Full text of the proposed changes and the new rule can be found here. Further information about rule and hearing can be found here.