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Politics and Government

Colorado could hand out up to $149 million in disputed conservation easement tax credits

State lawmakers want to end a decades-long dispute over lucrative conservation set-asides the state dubbed fraudulent. Some assessors call the settlement itself bogus.

Prowers County conservation easement tax credits federal tax court SB33
A real estate photo shows a Prowers County parcel, the Butte Creek and River Reserve, which was acquired for less than $1,000 an acre and immediately platted into 43 lots after the acquisition, then sold to investors who claimed conservation easement credits of $17,731 an acre. (Source: Federal tax court filing)
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Colorado lawmakers are considering a bill that would return up to $149 million to holders of conservation easement tax credits previously disqualified by the state, a revival of a decades-old scandal that appraisers say would be rewarding fraud. 

The measure, Senate Bill 33, would restore controversial easement tax credits issued from 2000 to 2013, some of which investigators called spurious and the Colorado Department of Revenue denied after reviews by teams of appraisers.

The conservation easements were originally intended to protect natural spaces while compensating family farmers and other longtime landowners for giving up their rights to develop the property. An appraiser estimated the value of the land and development rights, and the state issued tax credits that allowed the landowner to offset other taxes or get paid cash by investors who bought the credits. 

But the revenue department and many in the appraiser community said that in some cases unscrupulous tax investment advisers created partnerships or family groups to claim lucrative, overvalued credits for development that never would have happened. In one disputed case, a piece of land near Lamar that sold for $776,000 appeared to qualify for easement credits of $8 million.

“The levels of fraud were astounding,” said Bill Boortz, president of Mountain, Valley & Plains real estate assessors in Denver. “This bill is 100% free money for all. Anyone who was denied can simply be reimbursed and it’s just not OK. I know that a lot of the people who will be rewarded through this bill would be rewarded unjustly.” 

TODAY’S UNDERWRITER

Backers of Senate Bill 33 say the conservation easement program has been tightened up since the past problems to prevent fraud, and that the legislation is paired with another measure, House Bill 1233, that will further improve oversight of the payouts and future easements. But negotiations over the two bills are back and forth and remain touchy. 

Senate Bill 33 is sponsored by Sen. Jerry Sonnenberg, R-Sterling, and builds on years of legislative working groups meant to satisfy easement holders dating back as far as 20 years. The bill would also spend nearly $4 million of state money in the first year to hire 21 people and cover the legal costs of expected arbitration on the past claims. 

The $149 million for past claims is tax revenue the state will give up when it hands out credits approved by arbitrators, some of which go to investors who are looking to offset income and reduce their tax burden. 

Democrats floated ideas to pay out on the past easements only when state revenues surpass the Taxpayer’s Bill of Rights cap, the limit on how much money the state can keep and spend,  that would require refunds to the public anyway. It wasn’t clear if Sonnenberg would accept that restriction. Sen. Faith Winter, D-Westminster, said Wednesday she believes claims for the old credits will be screened properly, and she intends to sign on as a sponsor. 

Sonnenberg said families who had legitimate claims to the easement tax credits were torn apart when their claims were denied, and then sometimes clawed back by state and federal authorities. The state government created the problem by expanding easements decades ago and then failing to oversee them or give information to families, he said. 

‘I want it fixed’ 

In past years when legislators have considered fixes for the easement program, families have testified that the state rejected legitimate easements and bankrupted them as they hired alternate appraisers and attorneys to fight the rejections.            

“I want it fixed, and I want it fixed now,” said Sonnenberg, who acknowledged some of the past credits did not match the intentions of the original program. 

Some in the community of land trusts and conservation easement supporters say the two bills moving forward this week have enough “guardrails” to make sure both past and future tax credits go to those who sought them in good faith. 

“We do know that there is some concern, and we share this concern, about some of those same sort of bad actors who did abuse the system getting those payments,” said Melissa Daruna, executive director of Keep it Colorado, a coalition of conservation groups.

The tax credits were originally designed to permanently protect important wildlife habitats, river corridors or other valuable green space. The program was also intended to help farmers and ranchers who wanted to stay on their property, but needed a cash infusion for anything from operations to property taxes to estate settlements. 

The tax credits spawned a mini-industry of lawyers and tax experts who strategized new ways to expand the payments to landholders. The denials were followed by a flurry of IRS audits, subpoenas and appraiser sanctions by state officials, and lawsuits from landholders and investors who had paid for land but were blocked from taking profitable conservation credits. Colorado and the IRS further infuriated some landowners by not only denying the credits, but demanding repayments of some credits already issued. 

The methods of exploiting the easement credits included assessing rural or undesirable land as having potential for expensive housing developments or other buildings. Lawyers also learned to subdivide a parcel into separate easement claims and demand credits for blocking development on each parcel, with a credit of up to $260,000 on each parcel

Another alleged method of exploiting the credits, involved assessments saying land was valuable for a potential gravel pit, and then claiming credit for giving up the right to develop one. 

How many gravel pits does the state need? 

In the early 2000s, when the state of Colorado began to offer tax credits at a one-to-one swap for conservation easement losses, a cluster of about 200 easement claims were filed in southeastern Colorado which later became known as the “gravel pit” cases.

The easements were later deemed invalid and the state Department of Revenue and the IRS clawed back millions of dollars, thanks to the testimony of multiple property appraisers who evaluated each case.

Berthoud-based appraiser Kevin McCarty served with other appraisers evaluating each of the “gravel pit” easement requests for the IRS and the state Department of Revenue almost 20 years ago. 

He summarized some of the most egregious cases in written testimony to lawmakers in 2019, when the easement reparations were first proposed. He resubmitted his research for this new round of bills. 

“Based on my 34 years of experience and specifically what I saw in those appraisals, I am very disturbed by the possibility that the original appraised values could be used as a basis for reparations,” McCarty wrote in April. 

He said legislators should avoid reparations on any land deal where conservation easements were granted to subdivided land. The fact the gravel easement deals were based on land division sets them apart from the majority of conservation easements, which usually aim to prevent land division, McCarty said. 

The “gravel pit” conservation easements were proposed as a lucrative tax loophole that could earn investors a rebate on their state and federal taxes based on the value of land restrictions they allowed to be designated for natural space, investigators found.

Farmland was snapped up at auction for about $400 to $500 an acre in the southeast corner of the state, along the Arkansas River corridor in Prowers, Kit Carson, Cheyenne and Bent counties, where populations have been declining since the mid-1990s. Conservation easement bundlers subdivided farms into 40-acre lots, which were overvalued for tax purposes at their supposed highest-and-best use — a gravel mine.

Pitch brochures praised the investment of a way to rescue property from the ecological devastation of a gravel mine, leaving farmland open for wildlife and hunting.

The problem was that local gravel mines were going out of business because local demand for gravel had dropped. 

One working local gravel pit used for comparison in Kit Carson generated $5,000 in revenue per year. But appraisers claimed an adjoining easement property could theoretically generate more than $250,000 per year in annual income and hence was worth that amount in tax credits, McCarty told state lawmakers. 

Another Cheyenne County parcel would have had to generate more than 40 years of gravel production recorded for the whole county to match the projected production dollars claimed for a single year, investigators found.

Details of the filings were revealed in public documents when easement holders appealed in federal tax court, after the two taxing agencies demanded the return of the conservation easement tax rebates. 

Investors bought land for around $500 per acre and declared tax-loss values of between $10,400-$24,500 per acre, the legal briefings said.   

One investor group bought the Idler farm from the city of Lamar for $414 per acre and subdivided it into 40-acre tracts that were sold to a family group in March 2005 for $1,000 an acre. Those tracts were reassessed as gravel pit-worthy. Auditors found that nine months later, when investors filed conservation easement claims, up to $8 million in tax credit dollars were capable of being generated by those 22 parcels on land that originally had sold for $776,000.

The IRS warned in 2019 against investing in so-called syndicated conservation easements, listing the tax dodge as one of the agency’s “dirty dozen” tax scams to avoid. When the Department of Justice cracked down on conservation easement scams in Georgia in 2018 and 2020, prosecutors called the schemes “too good to be true.” 

Rep. Dylan Roberts, D-Steamboat Springs, is co-sponsoring the companion measure, House Bill 1233, that sets new rules for future tax credits. The bill would allow environmental groups and others to participate in the credits, and also create tighter tracking mechanisms for the state to watch the easements over time, Roberts said. 

“Conservation easements are for the most part, a tool in Colorado that worked incredibly well,” Roberts said. “And part of the reason why I’ve been working in this space for a few years is because I want to shore up this program and make the changes we need so that people can trust this program.” 

Boortz, the Denver-based appraiser, said he has served on the easement oversight commission and reviewed thousands of applications for credits. There are many legitimate claims that protect valuable land and help families at the same time, Boortz said. But the state rejected the hundreds of past claims for good reason, he added. 

“It’s almost like the powers that be have decided, OK, we can pay off these poor people. But it’s not just Mom and Pop rancher,” he said. “You know it’s the promoters and the years of coordinated schemes to defraud the state that will also get paid off. That’s what gives me the heartburn.”

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