On March 15, the Colorado Court of Appeals issued its much anticipated decision in Kowalchik v. Brohl. The Court determined that transferees who purchased conservation easement credits from donors of conservation easements were not required to be joined in the conservation easement litigation that has been brought pursuant to House Bill 1300. This issue was raised by the Department of Revenue (“Department”) in most cases filed pursuant to H.B. 1300, the statute authorizing trial procedures for taxpayers arguing with the Department over the validity and value of countless conservation easements credits.
By way of background, since 2001, the Department has disallowed a vast majority of conservation easement credits claimed by taxpayers. Taxpayers filed administrative appeals which were sitting in a queue with little prospect for timely resolution. Last year, the legislature passed H.B. 1300 permitting taxpayers to bypass the administrative appeals process and get their case in front of a judge who had the authority to expedite the case. These cases were required to be filed by October 1, 2011 and hundreds of cases were filed. In cases where a donor of a conservation easement sold the gross conservation easement tax credit to a transferee, the Department moved to dismiss the case or, in the alternative, to compel joinder of the transferees of the credit. The Department’s position was that unless the transferees were named as parties in the district court, the litigation would not be binding on the transferees.
The District Court rulings on this issue were divided, some in favor of the Department’s Motion to Dismiss and some denying the Department’s Motion to Dismiss. In Kowalchik, the Huerfano County District Court held that joinder was not required and denied the Department’s motion to dismiss. The Department appealed this finding to the Court of Appeals which expedited the matter. The Court of Appeals ruled last week that joinder of the transferees was not required because the transferee’s interest were represented by the donor, or Tax Matters Representative (“TMR”), who was authorized under the statute to enter into agreements with the Department regarding the validity and value of the easement and that those agreements would bind transferees. The Court of Appeals found that the legislature’s clear intent was not to require joinder of the transferees. Furthermore, the Court of Appeals determined that failure to join the transferees did not violate the transferees’ due process rights because the transferee voluntarily entered into a contractual arrangement agreeing to be represented and bound by the Tax Matter Representative with respect to the amount of the credit. Because the TMR’s and transferee’s interests are aligned and the statute clearly gives transferees the right to intervene if the transferee is not satisfied with the representation of the TMR, the procedures do not violate the transferee’s due process rights. In a final matter, the Court ruled that the transferees were taxpayers who are subject to deficiencies, interest, and penalties.
The Court of Appeals opinion is available here: CCA_2011ca2634_031512_Opinion.pdf