Tax breaks for land donations subject of IRS investigation

State looking at program

Two investigations, one by the state and another by the Internal Revenue Service, could forever change land conservation within the Gunnison Valley, as incentives to participate in the state conservation easement program are being challenged.



Several Gunnison Valley landowners are being audited by the IRS as part of the agency’s investigation into the state’s conservation easement program. The IRS is reviewing transactions during 2003 that may have overvalued the donated or sold land and resulted in overpayment of tax credits. The investigation is looking into 290 tax returns statewide.
In addition to the IRS audit, the state’s Department of Regulatory Agencies (DORA) has launched an investigation into the program. The tax officials began investigating the easements after conservation groups raised questions about easement values that appeared inflated.
“We have reason to believe the practice of some of the players in the conservation easement program may put the entire program in jeopardy,” Rico Munn, director of the DORA, said in the Denver Post in December.
Under the program, landowners receive tax deductions or credits for donating or selling the conservation easement to a qualified land trust at less than fair market value.
A conservation easement is a legal agreement between a landowner and a land trust or government agency that permanently limits uses of the land in order to protect its conservation values.
In 2001, the first year the program was in place, just over $2 million in tax credits were allocated to landowners; by last year it had increased 40 times to $85 million.
Lucy Goehl, director of the Gunnison Ranchland Conservation Legacy, says the state’s investigation is founded,  but the IRS investigation is causing undo harm for landowners who have followed the rules.
“The state’s investigation is a good thing – it’s going to weed out the bad deals, and keep people from doing fraudulent things,” Goehl says. “On the other hand, people are having to defend themselves and that takes a lot of time and money.”
The IRS has found that nearly 90 percent of the conservation easements that have been reviewed in Colorado have been overvalued or had problems with the transactions.
The IRS recently made settlement offers to a number of conservation easement donors whose property values it questioned, including several in Gunnison County. The IRS has dropped the values of the questioned easements from 30 percent to 100 percent, claiming the conservation easement had no value at all.
The IRS devalued the land stating the development pressure assumed by appraisers was over-estimated.
Many of the landowners have contested the IRS’s findings and are headed to court. According to Jill Ozarski, executive director of the Colorado Coalition of Land Trusts, the nonprofit believes many of the IRS’s cases are unfounded.
Goehl says the IRS’s conclusion about development pressure is incorrect and the agency is likely to withdraw the fines.
“Development pressure here is different than urban areas, but it still exists,” Goehl says.
Landowner and former president of the Crested Butte Land Trust Sandy Leinsdorf agrees and says the Land Trust is confident that the local easements will withstand the IRS scrutiny and the public will continue to reap the benefits of open space.
However Leinsdorf also says if the IRS’s investigation doesn’t find value in the conservation easements it could negatively affect future conservation in the valley.
“It’s going to deter land owners from going through the process and it’s going to be very damaging to the conservation effort,” Leinsdorf says.  None of the conservation easements brokered by the Crested Butte Land Trust have been investigated so far.
Leinsdorf says the tax program provides an invaluable incentive and if the program were eliminated, land conservation would become expensive.
“It’s too expensive to do land conservation without tax incentives,” Leinsdorf says. 
The DOLA investigation recently issued 30 subpoenas before the year ended to those involved in conservation easement transactions, and found that at least one land trust had violated the program by overvaluing the land.
The inquiries are expected to be finished within a couple of months, according to Erin Toll, director of the Colorado Division of Real Estate, which is assisting the investigation.
Ozarski says a task force to review the program formed around the same time the investigations began, to determine if legislative change was needed. As a result state senator Jim Isgar (D-Hesperus) is introducing legislation this session to address future abuses of the program, Ozarski says.
“The mainstream conservation community wants to make sure the program is enforced properly and is transparent to the public,” Ozarski says. “The state investigation and the legislation reform are two efforts to make sure the program is not being abused, and to make sure abuse doesn’t happen again.”
Goehl says the conservation community should expect some type of change, but doesn’t anticipate the investigations will end the conservation easement program in Colorado.
“The state program is an excellent program, it just needs to be tightened up,” Goehl says.
The Colorado Coalition of Land Trusts, a nonprofit organization that supports the easements, estimates some 1.2 million acres of land (or about 2 percent) are protected through 1,500 conservation easements throughout the state. 

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