Conservation Easement News from the Division of Real Estate
Due to the importance to the conservation community of the recent Federal Tax Court decision Hughes v. Commissioner of Internal Revenue issued on May 6, 2009, the Division feels it is important to comment on the case. We at DORA and the Division of Real Estate are committed to consumer protection. We are and will continue to vigorously pursue appraisers and promoters of conservation easements who engage in abusive practices. These practices erode the tax base and cause harm not only to taxpayers but also to land owners who believe in conserving private lands for the benefit of all citizens.
We were encouraged by the judicial recognition in the Hughes case of what we here at the Division have always believed. Conservation easements by their nature impact property value. Put another way, conservation easements have inherent value from a land protection perspective.
In this particular case, the IRS asserted that even though the properties in question had conservation easements on them, the property value in question was reduced by 0-10%, meaning the easement itself was essentially worth nothing. Citing an earlier tax court opinion, the judge observed that it would be "hard to imagine a prospective purchaser (of a large parcel of land) who would not have considered the restriction of the open space easement in determining price."
Importantly, the court recognized that although there might be little demand for converting agricultural land to residential development at the time an easement is granted, this may be a realistic possibility in the future and should have been considered by the IRS. Since a future buyer is precluded from placing an easement on the property because conservation easements run with the land forever, the overall market value of the land is worth less.
The court also referred to a so called "matrix" the IRS created to assist their staff in valuing Colorado land. The court said this matrix included general information that did not have a specific connection to the subject property, should not have been used and was accordingly given little weight.
Creating a significant new justification to support the value of the Colorado conservation easement program, the court observed that by granting a conservation easement in Colorado, the value of state income tax credits must be considered. Once the original taxpayer seeks a tax credit, future purchasers are precluded from granting a conservation easement and therefore from receiving the benefits of the tax credit. The court found the IRS should have considered this factor in determining the encumbered lands reduced value due to the easement.
The court also rejected the IRS’ argument that the market was not yet sophisticated enough to recognize the potential value of these credits and factor them into a fair market value. The court noted that most market value definitions assume that buyers and sellers have reasonable knowledge of relevant facts.
Under Colorado law, only certified general appraisers may value conservation easement properties. As noted by the court, the IRS expert in this (and many other cases) was not a certified general appraiser. Indeed, the IRS has informally requested such licensure and the federal Appraisal Subcommittee has refused to allow our office to license the IRS experts unless they can show compliance with the standards applicable to all other certified general appraisers. Those standards are contained in the Uniform Standards of Professional Appraisal Practice. Without imputing a lack of competence or integrity to these experts, they are not subject to the same high standards as licensees. To become a general appraiser in this state requires the completion of rigorous and demanding coursework, successfully passing the exams and demonstrating a high level of competence and experience in appraisal practice. It would be comforting if all persons claiming expert status in appraisal practices were subject to the same requirements to ensure fairness and greater consumer protection.
In summary, the Hughes case is an important decision in favor of land conservation and protection of Colorado’s conservation easement program.
Thank you,
The Colorado Division of Real Estate
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For more information, please visit the Division web site http://www.dora.state.co.us/real-estate/.
