Important Tax Updates Concerning Conservation Easements

Otten Johnson Alert March 2012

Important Court Decision Regarding Colorado Conservation Easement Tax Credits

On March 15, 2012, the Colorado Court of Appeals announced its decision in Kowalchik v. Brohl. The Court's opinion in Kowalchik includes two key findings that will significantly impact the rights of Colorado taxpayers who purchased state conservation easement income tax credits from conservation easement donors. First, the Court found that a conservation tax credit transferee (or buyer) is not required to be joined as a party in litigation concerning the underlying tax credit between the tax credit transferor (or seller) and the Colorado Department of Revenue (the "Department"). In holding that the buyer's interests are sufficiently aligned with the seller's interests, and that the Colorado tax credit statute establishes that tax credit sellers are designated tax matters representatives of their buyers, the Court rejected the argument that failure to require the joinder of a tax credit buyer denies the buyer due process rights before the Department. Second, the Court held that tax credit buyers are "taxpayers" under the tax credit statute, and are therefore subject to liability for deficiencies, penalties and interest under the statute. We do not know whether either party plans to appeal the decision. One consequence of this decision is that tax credit buyers will be bound by the results of litigation pursued by the Department against their tax credit sellers, without the buyers having been joined as a party to the litigation. Legislation passed in 2011 to clarify the rights of tax credit sellers and buyers expressly gives tax credit buyers the right to intervene in litigation concerning tax credits they have purchased. The circumstances of each case vary in determining whether tax credit buyers should pursue intervention as an appropriate legal strategy.

Fate of Enhanced Federal Tax Incentives for Conservation Easements Remains Uncertain

The enhanced federal income tax incentives for charitable contributions of conservation easements, which were passed as a part of the Pension Protection Act of 2006, expired on December 31, 2011. These enhanced incentives raised the threshold amount of permissible income tax deductions from 30% of adjusted gross income ("AGI") to 50%, expanded the permitted carry-forward period for the deduction from five to fifteen years, and made other important improvements benefitting farmers, ranchers, and forest landowners. The expiration of the enhanced incentives saw the federal tax benefits of conservation contributions return to their previous levels. Due to the contentious political battles surrounding the payroll tax cut and debt ceiling increase, the national conservation community was unable to get Congress to extend the enhanced incentives in 2011. Currently, bills to reinstate the enhanced incentives and make them permanent have the sponsorship of a majority of the members of both the House of Representatives and the Senate. However, the extension of the enhanced conservation incentives faces a unique political climate in 2012, with the presidential election and the expiration of several other major tax provisions. Landowners considering donating all or part of the value of a conservation easement over their property should pay close attention to this important tax benefit. We will provide updates regarding the status of the enhanced conservation incentives as they occur.

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