Could buyers of transferred Virginia Land Preservation Tax Credits protect a refund claim while litigation challenged the Department's easement valuation?

Subject

Protective claim pending conservation-easement valuation litigation

Plain-English summary

Virginia did not overturn the Department's reduced conservation-easement valuation, but it said the transferred-credit buyers might protect a future refund while the valuation litigation remained pending.

Two LLCs donated conservation easements, registered Land Preservation Tax Credits using their appraisal, and transferred part of the credits to the taxpayers. The Department concluded that the easement was overvalued, relied on a third-party appraisal, reduced the credits, and assessed additional 2009 tax and interest against credit holders.

After P.D. 14-7 upheld the Department's valuation, litigation was filed challenging it. P.D. 14-125 said the taxpayers could potentially file a protective claim under Va. Code § 58.1-1824 for income tax paid. If final adjudication later changed the easement valuation and credit amount, the taxpayers would receive a refund reflecting that adjustment.

What this means for you

• Buying a transferred credit does not insulate the buyer from a later Department valuation adjustment.
• A protective claim can preserve a refund position while related valuation litigation is unresolved.
• This ruling did not decide the lawsuit or promise a refund; the result depended on the final adjudication.

Citations and references

• Va. Code § 58.1-1824.
• P.D. 14-7 (January 21, 2014), discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-125

Original ruling text

July 28, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2009.

FACTS

In December 2008, two Virginia limited liability companies, * (VLLC1) and *** (VLLC2), conveyed a conservation easement on two adjacent parcels of land to a donee. Pursuant to the conveyance of the easement, VLLC1 and VLLC2 registered their donation with the Department for purposes of the Land Preservation Tax Credit (the "Credit"). Subsequently, VLLC1 and VLLC2 transferred a portion of the Credit to the Taxpayers based on an appraisal submitted with the registration. The Taxpayers claimed the Credit on their 2009 Virginia individual income tax return.

Under examination, the Department determined that the appraisal overvalued the easement and commissioned an appraisal from a third party appraiser. Based on this appraisal, the Credit was revalued and assessments were issued to the individuals that received the transferred Credit. As a result, additional tax and interest was assessed against the Credit holders, including the Taxpayers, for the 2009 taxable year.

In April 2012, VLLC1 and VLLC2 appealed the revaluation of the credit. The

Taxpayers appealed the assessment issued to them, referencing the appeal filed by VLLC1 and VLLC2.

DETERMINATION

The Department issued Public Document (P.D.) 14-7 (1/21/2014) upholding the Department's valuation of the easement on the basis that the third party appraisal commissioned by the Department most accurately valued the easement. Subsequent to the issuance of P.D. 14-7, Valley Medical and Chapman Brothers v. Virginia Department of Taxation , Circuit Court County of Loudoun, Case No. 86252, was filed challenging the valuation of the easement.

Pending a decision in the aforementioned litigation, the Taxpayers may be able to file a protective claim pursuant to Va. Code § 58.1-1824 with respect to any income tax paid. Any adjustment of the Credit resulting from the valuation of the easement in accordance with a final adjudication would result in a payment of a refund to the Taxpayers.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5007125473.B