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IRS threatening easement deals

Land conservation backers in 'shock' over tighter rules
The Internal Revenue Service is threatening to sharply limit the use of conservation easements, which have protected huge stretches of Colorado land from development.

Conservation leaders and lawyers say that in the past few weeks, IRS officials have said they believe only habitat for endangered or threatened species qualifies for tax incentives.

"We're all in a little bit of a shock," over that interpretation, said Will Shafroth, head of the Colorado Conservation Trust. The definition of qualifying land in the IRS code itself is "relatively natural habitat," he said.

An IRS spokeswoman could not be reached for comment Tuesday afternoon.

The IRS move "could damage the integrity of hundreds of legitimate conservation efforts across Colorado, as well as thousands across the country," the Colorado Coalition of Land Trusts told Sen. Ken Salazar in a recent letter, according to director Jill Ozarski.

If it stands, it "will disqualify a very large number of Colorado donations," said attorney Larry Kueter, who has handled many such easements and is counsel to the Colorado Coalition of Land Trusts. "It's not supported by law, regulations or a tax court decision."

He said the IRS may have to lose an appeal before it backs off.

The IRS is auditing 250 Colorado tax returns with conservation easement deductions and says it found that most don't meet the law or have high appraisals.

However, an IRS agent at a recent meeting with Salazar said his agency had not yet formally rejected any taxpayers' deductions, said Ozar-ski, who was at the meeting.

John Swartout, head of Great Outdoors Colorado, said the mere threat from the IRS is damaging. "The fear is: Do a conservation easement and you get an IRS audit," he said.

Colorado activists have taken a much broader view of land that holds conservation value. It includes scenic vistas along Interstate 25, habitat for favorites like bighorn sheep and homes for not-yet- threatened species, like the mountain plover, activists say.

"We're trying to protect habitat ahead of listing as an endangered species," said Swartout, whose agency gives grants for the purchase and donation of easements. "It's pre- emptive.

"For the IRS to say, 'We don't see the conservation value,' it's ludicrous."

Conservation easements have preserved nearly 1 million acres in the state, according to the Colorado Conservation Trust. The state says it has handed out $193 million of tax credits for such easements in the past six years.

Attorney Kueter said he believes 95 percent of the conservation easements in the state are legitimate, but others are questionable.

"We have tried to get the state Department of Revenue to investigate those, without much success," Kueter said. "Right now, the community thinks they can do what they want because nobody's checking."

But the IRS also is questioning appraisals that have been approved by several state and federal agencies, Shafroth said.

Conservation easements work like this: An appraiser values land at $100,000 if developed, or $40,000 if not developed. The owner donates a conservation easement to a land trust. He keeps the land now worth $40,000 because nothing can be built on it, and gets a $60,000 state tax credit. He may also get a $60,000 write-off on his federal tax return. That would cut his federal taxes about $20,000 if he's in the 33 percent tax bracket.

To qualify for the state tax credit, owners must meet requirements for the federal write-off. So the IRS definition affects both.

Conservation easements in Colorado

Counties with the largest number of acres protected by easements:

Las Animas: 146,711 acres

Costilla: 124,293 acres

Routt: 51,796 acres

Huerfano: 49,782 acres

Saguache: 49,639 acres

Total statewide: 917,875 acres

2006 The E.W. Scripps Co.

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