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In The News

Cargill Salt awarded most of tax break it sought in 2003 salt ponds deal

By Paul Rogers

San Jose Mercury News, 11/14/09

In a victory for Cargill Salt, the Internal Revenue Service has awarded the company most of the tax break it had been seeking in connection with its sale six years ago of 16,500 acres of industrial salt ponds in the South Bay for wetlands restoration.

The value of the property has been sharply debated since the 2003 purchase.

The IRS concluded that the lands that Cargill sold to the state and federal government for $100 million are worth $200 million, Lori Johnson, a Cargill spokeswoman, said late Friday.

Cargill had argued they were worth $232 million. The company was seeking a tax deduction for the $132 million difference, claiming it as a donation to the public. Instead, it will get a $100 million deduction.

Some environmentalists, citing flaws in the appraisal on which the deal was based, said the lands were grossly overvalued and that Cargill deserved no tax break.

The final value has been considered critically important because it will help set a price for future public land purchases around the bay. From Napa to Fremont, biologists are attempting to restore thousands of acres of hay fields, old salt ponds and other properties back to natural conditions for ducks, fish and other wildlife.

Johnson said that although the IRS's auditors didn't agree with the full amount that Cargill claimed, they agreed to most of it, and the company feels largely vindicated.

"I would hope this would reconfirm for the residents of the Bay Area that the agencies that were involved in this played it straight," said Johnson. "The property was worth well over the amount of taxpayer money that went into it."

Environmentalists said they are disappointed.

"I'm just heartbroken. You have no idea how distressing this is," said Florence LaRiviere, co-founder of Citizens Committee to Complete the Refuge, in Palo Alto.

"As long as these fraudulent appraisals persist, we are going to have a terribly hard time acquiring what's left."

The salt ponds stretch from Hayward to San Jose to Redwood City along the bay's shoreline. Visible for their distinctive red and orange hue to passengers in airplanes flying over the bay, they have been used for a century to evaporate salt for roads, medicine and food.

But in recent years, they also have been coveted by biologists for their potential to be restored back to marshes for wildlife. The deal to acquire them six years ago set in motion the largest wetlands restoration effort on the West Coast.

Under that deal, brokered by U.S. Sen. Dianne Feinstein, D-Calif., Cargill sold 16,500 acres of salt ponds to the U.S Fish and Wildlife Service and the state Department of Fish and Game in 2003. Of the $100 million sale price, $72 million came from state bond funds, $8 million from the federal government and $20 million from the Packard, Moore, Hewlett and Goldman foundations.

But the $100 million sale price wasn't what the government and Cargill said the land was actually worth. The U.S. Fish and Wildlife Service hired an appraiser who concluded the value of the land was $243 million.
The deal became mired in controversy.

The state Department of Fish and Game released the appraisal in 2003 after the deal had closed.

It was 28 months old, despite federal rules requiring appraisals to be updated every 12 months.

The appraisal also noted that under the Clean Water Act, the ponds probably could not be filled or developed, dramatically reducing their value. It also noted salt-making rights on the Cargill ponds were worth $3,000 an acre. But the appraisal said the ponds had a "mitigation value" of up to $20,000 an acre, meaning they could be bought and restored as wetlands by developers, who are required to offset environmental damage from construction projects elsewhere.

As an example of that, the appraisal cited a proposal by the San Francisco International Airport to build new runways into the bay. But the runway project had been withdrawn before the Cargill sale closed. Without it, at the current rate of private development, it would take 165 years before all the ponds would be needed for mitigation, according to the appraisal.

In 2006, the California attorney general's office brought a misconduct complaint against the appraiser, Charles Bailey, of Mill Valley. It said he failed to adequately evaluate comparable land sales, support revenue projections for the property or explain the costs and risks of restoring wetlands. Bailey settled the case, agreeing to a censure of his license and paying a $4,000 fine.

Another appraiser who worked on the deal, Paul Talmage of San Mateo, fought the charges. In 2007, an administrative law judge ruled that his assessment of the salt ponds' value was "based largely upon unstated extraordinary assumptions and hypothetical conditions," placed him on probation for three years and ordered him to pay $36,500 for the costs of the investigation. That amount was later dropped to $12,000, and Talmage's license was restored last year by the state Office of Real Estate Appraisers.

Friday night, the IRS could not be reached for comment. As a rule, the agency does not comment on individual tax cases, however.

Appraisal debated

The original appraisal set the value of the property at $243 million. Cargill claimed slightly less, $232 million, to the IRS because one pond near the Dumbarton Bridge known as SF2 was not transferred to the public with the rest because lead bullets from a nearby duck hunting club had to be removed.

John Hansen, head of a Santa Rosa nonprofit, Integrity in Natural Resources, said he couldn't understand how the IRS awarded most of the tax break since the appraisal set a value largely based on a San Francisco International Airport runway project that was dead.

"The IRS has made a substantial error. This basically shows the inability of the IRS to do their job in a competent manner," he said. "What Cargill doesn't pay in taxes, the public has to make up."

But Cargill's Johnson said the appraisal was approved by multiple government agencies and reviewers.

"The ultimate arbiter is the IRS. They aren't exactly known for giving away money," she said. "This is something we're intensely proud of. It was the right thing to do for the bay."


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