State disputes $15 million of tax credits

Probe could take shine off program that saves lands

By Jerd Smith, Rocky Mountain News

Published December 8, 2007 at 12:30 a.m.

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Photo by Barry Gutierrez / The Rocky

Cattle get an afternoon drink from a pond on the Shanahan Ranch in Boulder County. Tracts such as this have been preserved from development by a state tax credit for conservation easements.

Photo by Barry Gutierrez / The Rocky

A Colorado program helps preserve places such as the Shanahan Ranch from development and has made the state a leading light in land preservation. But tax officials allege that inflated assessments of some properties have led to fraudulently generous tax credits.

Photo by Ken Papaleo / The Rocky

Boulder has agreed to buy a conservation easement on the Hogen Ranch along Colorado 93 in south Boulder County. Landowners are permitted to resell the tax credits.

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Colorado is seeking repayment of $15 million of tax credits granted as part of an innovative incentive program to save endangered lands.

And that amount is likely to grow as part of a massive audit the Colorado Department of Revenue has undertaken to determine whether the tax credits were overvalued or were claimed on lands that weren't endangered.

The Revenue Department's investigation, one of the largest it has ever undertaken, is looking at more than 10,000 tax returns claiming the credits since 2001. During that time, more than $274 million of conservation credits were claimed from Colorado's treasury alone.

The Internal Revenue Service and the state's divisions of real estate and security also are investigating the credits, the people who received them and the appraisers who valued the land.

The investigations threaten to put the brakes on Colorado's nationally recognized efforts to protect its crown jewel landscapes.

Colorado ranks No. 2 in the nation in its use of conservation easements, protecting more than 1.2 million acres.

The state is now protecting land faster than it's being developed, according to the Colorado Conservation Trust. About 170,000 acres of private lands were protected in each of the past two years, while 90,000 acres were developed, the trust reported.

Success and abuse

Fourteen other states have similar programs, but Colorado has one of the most generous tax credits - 50 percent of the value of the easement up to $375,000, according to the IRS.

Colorado also is one of just three states that allow the sale or transfer of tax credits, the IRS says.

The lucrative, flexible nature of the credits has made them wildly popular and helped build Colorado's star status in the conservation world.

But it also has made the program expensive for the state and an easy vehicle for unscrupulous business people.

"Colorado's benefit is very attractive," said Ron Schultz, senior technical adviser to the IRS team investigating conservation easements here and nationwide.

"It's significant in amount, and it is also transferrable to others. That's very unusual - to allow a transfer to folks who aren't involved in the easement."

The ability to transfer tax credits is what gives the program its muscle, conservation advocates say.

How it works

For example, a rancher sells an easement to a nonprofit land trust or a city or county for less than its value. This reduces the cost to the land trust or government agency, which agrees to maintain the easement and make sure its use is consistent with its conservation purpose.

Because the rancher didn't take full payment for the land, the difference is considered a charitable donation that qualifies for a tax credit. When the deal is complete, the rancher can sell the credit, usually for about 80 cents on the dollar, if his income isn't large enough to make use of the full tax credit.

The practice has allowed vast swaths of land to be placed under conservation easements at 40 percent to 60 percent of their open market price, before they could be developed. The goal is to save scenic lands that might have succumbed to fast-paced growth.

Great Outdoors Colorado, which uses lottery proceeds to protect endangered lands, has spent nearly $73 million to help purchase conservation easements since 2000, the year the innovative tax credits took effect.

County open space programs and nonprofit land trusts have spent millions more.

Was it worth it? In some instances, no.

As the program has grown more appealing, the motivation for fraud and abuse also has grown.

Last month, the Colorado Division of Real Estate launched an investigation into appraisers, issuing 29 subpoenas. Already, one appraiser has been sanctioned.

The Colorado Division of Securities is examining whether companies were formed to pursue inflated appraisals that pumped up sales prices on land and generated larger tax credits. In such cases, governments lose tax money, and trusts or government agencies could pay too much for easements on land with inflated appraisals.

"This is a very serious thing," said Chris West, executive director of the Colorado Cattlemen's Agricultural Land Trust. "The whole conservation community is looking at this. We have to find a way to keep these deals out of the system, because they keep legitimate deals from getting done."

Problems with the conservation tax credits started cropping up almost as soon as the law took effect in 2000. Since then, it's been amended five times. Last year, changes were made to tighten appraisal standards and require some public filing of transaction documents.

Now a special task force is eyeing ways to fix the system, without taking it off the books entirely. No one's quite sure what to do.

"This is a fairly new credit," said John Vecchiarelli, senior director of taxation in the state Revenue Department. "People are trying to make changes that make it more fair and more geared to producing the result we're looking for. Like anything that's new, you have to refine it until you reach the proper equilibrium."

Fear of the future

The controversy is deeply disturbing to Colorado's fierce conservation advocates, who've fought hard to create land trusts and open space programs across the state. These are the entities that hold the easements and ensure their terms are enforced forever, that the land isn't later developed or misused.

Has the state moved too fast? Conservation experts say no.

Boulder County operates one of the largest open space programs in the state, protecting about 90,000 acres - 55,000 through outright purchases and 35,000 using easements.

Ron Stewart, the county's director of open space, said it's critical that the tax credits continue to be used.

"Given the development pressure this state faces, the kind of place we're going to be will be affected greatly by the amount of land that gets preserved," Stewart said.

Most worrisome to conservation groups is that landowners will walk away from the program because they fear tax audits or prosecution.

The Conservation Trust estimates more than 1 million acres of scenic landscapes still lack protection.

Jill Ozarski, executive director of the Colorado Coalition of Land Trusts, said it's important that Colorado maintain its momentum in protecting land.

"We're hoping these investigations will have a chilling effect on those trying to abuse the process. People who are doing legitimate easements should not be afraid. The important thing is to move forward."

History of the tax credit in Colorado

1999: Colorado lawmakers pass law creating conservation easement tax credit program; allows landowners to sell tax credits to others.

2000: Law takes effect.

2002: Colorado lawmakers amend law to increase amount of money claimed.

2003: Colorado Department of Revenue begins auditing returns, initially a few at a time.

2004: Internal Revenue Service issues a "Yellow Light Notice" warning that those who claim tax credits for conservation easement deals will be subject to intense scrutiny.

2005: IRS begins massive round of audits on tax credits linked to conservation easements in Colorado and nationwide. 2006: Colorado's senators, Ken Salazar and Wayne Allard, warn IRS to back off scrutiny; IRS ups the ante, suggesting it may allow credits for easements only for lands designated as habitat for endangered species; IRS eventually backs down.

2007: Colorado legislature tightens rules governing use of conservation easements, including new requirements for appraisals setting the dollar value of the easements. That value helps determine purchase price and value of tax credits. * Colorado Division of Real Estate and Division of Securities begins investigation into use of inflated appraisals and possible fraud by land trusts and private companies seeking to protect land to generate tax credits that can be sold.

Top 10 groups holding easements

Rankings based on acres held:

Acres funded Name Acres by GOCO*

1. Colorado Cattlemens Agricultural Land Trust 199,643 93,817

2. Colorado Open Lands 148,373 23,651

3. Colorado Division of Wildlife 124,916 11,950

4. Rocky Mountain Elk Foundation 107,531 10,059

5. The Nature Conservancy 102,981 32,991

6. Palmer Land Trust 52,223 4,167

7. Yampa Valley Land Trust 36,051 13,329

8. Black Canyon Regional Land Trust 33,488 155

9. Mesa Land Trust 31,430 5,025

10. Greenlands Reserve 26,408 0

Why use conservation easement tax credits to protect land?

They can be used to protect land without having to purchase it outright, and that means nonprofit land trusts and open space programs don't have to spend as much to shelter endangered lands. It also means they have fewer responsibilities for managing the land than if they owned it directly.

An easement protects the land's scenic qualities forever, while allowing the original owner, such as a rancher, to continue ranching.

Colorado has taken the practice a step further by offering tax credits that the landowner can sell. This is important especially for cash-poor ranchers, who can sell the credits, adding to the incentive to protect land instead of selling it to developers for more cash.

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