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Colorado allowed conservation easement credit recipients to use their credits to receive a limited refund provided that the State had exceeded constitutional tax collection limits under the taxpayer bill of rights Colo. Rev. Stat. § 39-22-522(5)(b). The refund in certain circumstances could reach a maximum of $50,000. Unused credits could be carried forward for up to 20 tax years or transferred to certain eligible taxpayers. Colo. Rev. Stat. § 39-22-522(5)(a), (7). Transferees may use their credits only to offset a tax liability. Colo. Rev. Stat. § 39-22-522(7). Transferees are ineligible for a refund and may not transfer their credits.
Petitioner taxpayers donated a conservation easement on land they owned, and received $260,000 of conservation easement income tax credits from the state. They incurred professional fees as part of the sale. Such credits were transferable to other taxpayers, and the taxpayers sold a portion of those credits to unrelated third parties. On their tax return, the taxpayers treated the sales as capital gains, and claimed an allocated portion of the professional fees they incurred as adjusted basis in the state tax credits they sold. Respondent, the Commissioner of Internal Revenue (IRS), determined that the state income tax credits that petitioners sold were not capital assets and that petitioners had no adjusted basis in the credits. The parties filed cross-motions for partial summary judgment.
The court agreed with the taxpayers' argument that the transferable state tax credits constituted capital assets for income tax purposes. However, the IRS was correct that the taxpayers had neither basis, nor a long-term holding period, in the state tax credits. A government-granted tax credit was not a contract right. Nothing in the Colorado statutes created a contract. Had the taxpayers used their credits to offset their state income tax liability rather than selling them, they would likely not have constituted income to the taxpayers.