U.S. Tax Court Addresses Conservation Easement Valuation

by: Matthew Erickson
30 Nov 2022

Conservation Easement Valuation & The U.S. Tax Court

On October 17, 2022, the United States Tax Court rendered a forty-three (43) page opinion in Champions Retreat Golf Founders, LLC, Riverwood Land, LLC Tax Matters Partner v. Commissioner of Internal Revenue (hereafter “Champions Retreat”) that established the valuation for the conservation easement that was donated in 2010 and claimed as a charitable contribution deduction under IRC § 170.  The Tax Court undertook an extensive evaluation of the easement’s valuation and concluded that it was worth $7,834,091 on the 2020 valuation date.

The United States Tax Court is an adjudicative body that was formed to hear disputes of tax deficiencies determined by the Internal Revenue Service.  In the United States Tax Court, a plaintiff can have their dispute heard prior to the payment of the disputed tax.  The Tax Court was involved in this matter due to a deduction claimed by Champions Retreat on their return for their donation of a conservation easement to the North American Land Trust that covered 348.51 acres of a golf course located in Georgia.  The golf course consisted of 365.56 acres divided into three nine-hole golf courses were constructed.  These twenty-seven holes were constructed next to a residential development, which was also part of Champions Retreat’s property.  The conservation easement covered twenty-five of the twenty-seven holes and most of the remaining holes.

The Tax Court began its valuation process by reviewing the expert testimony and reports of three separate experts in the field of real estate appraisal, two from the taxpayer, and one from the government.  The Tax Court first turned to the issue of “highest and best use”, where they were tasked with “considering the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future.” As part of that analysis, they needed to look at whether the use was legally permissible, physically possible, and financially feasible.  The experts disagreed at this point.  The taxpayer’s two experts both agreed that a development of a residential housing development could be sustained on the property.  The government’s expert disagreed.  Ultimately, the court sided with the taxpayer, saying that the highest and best use of the property before the easement grant would be to have a residential development on one of the 9-hole courses and convert the remaining 9-hole courses into an 18-hole course.

Finding the highest and best use was a development of one of the courses, the court then had to find the value of the property before the easement as well as after the easement.  The difference between these two values would be the actual value of the easement grant for tax purposes.  This method, recognized in the Treasury Regulations, is often called the “before and after” method.  Beyond the before and after method, the court also needed to look at what the appropriate valuation method should be for the golf course and the proposed development.  These methods of valuation range from the sale-comparison or comparable sales method, the income approach, and the cost of replacement method.  Here, the court used both the comparable sales method and the income approach for various parts of the property, having to value the golf course separately from the developable lots.  Their analysis was long and detailed and is worth the read if you are interested in how the court goes about bridging the gap in valuation between some widely different expert reports.

The result of the court’s analysis was them finding an easement value of approximately $7.8 million.  This number came in lower than the taxpayer’s experts’ conclusions, which were around the $10 million in valuation, and higher than the government’s number which was only $20,000.  That disparity showing why it was crucial for the taxpayer to obtain an appraisal expert that property valued the real estate.  Had the government used an appraisal expert that had the correct highest and best use, it is possible that their value conclusion would have been far more persuasive to the court and, consequently, would have brought the court’s finding of value lower.

This case shows just how complicated the valuation process can be for the courts that need to make these value determinations.  Having attorneys that understand this process and know which experts to use can make or break your case when property valuation is the main issue.  From the initial intake to final resolution, an experienced tax appeal or condemnation/eminent domain attorney can help you navigate through the specifics of each individual case.  If you have any questions concerning your property tax assessment or whether you are going to get the correct value for your property the government is taking, contact McKirdy, Riskin, Olson & DellaPelle, P.C. to speak with an experienced attorney. To view the full Champions Retreat decision, click here.