The 11th Circuit U.S. Court of Appeals has affirmed that a taxpayer grossly overvalued a conservation easement on a tract of land in Georgia, which resulted in the disallowance of a multi-million-dollar charitable deduction and a 40% gross valuation misstatement penalty. (Savannah Shoals, LLC v. Commissioner,2026 WL 2056291, 7/16/2026)
Easement donation and Tax Court ruling
In 2017, Savannah Shoals, LLC, donated a conservation easement over a 103-acre property in Hart County, Georgia. On its tax return, it claimed a $23 million charitable contribution deduction under IRC § 170. This value was based on the assertion that the property’s “highest and best use” before the easement was as an aggregate quarry. The IRS rejected the deduction and assessed a 40% gross valuation misstatement penalty.
The taxpayer challenged the IRS’ determination in the U.S. Tax Court, but the court agreed with the IRS, finding that the proposed quarry was not the highest and best use of the property because it was not a viable use. The court concluded that the property’s value before the easement was $580,000, and its value after the easement was $100,000, resulting in a correct deduction of only $480,000.
11th Circuit upholds market demand analysis
On appeal, Savannah Shoals argued that the Tax Court applied the wrong legal test to determine the property’s highest and best use. The taxpayer contended that the court failed to use a required four-factor test to determine the property’s highest and best use, instead determining the property’s highest and best use solely on a market and demand analysis.
The 11th Circuit disagreed, finding no such requirement in the regulations or relevant case law. Instead, the appeals court found that the proper framework for determining a property’s highest and best use, drawn from Reg § 1.170A-14(h)(3)(ii) and foundational cases, focuses on whether a proposed use is “‘reasonably probable,’ ‘legal,’ ‘physically possible,’ and ‘financially feasible.'”
Moreover, since the parties’ primary disagreement was whether a quarry was a “financially feasible” use of the property, the Tax Court properly focused its analysis on whether the market would have supported a quarry on the property, and concluded it was “highly unlikely.” The appeals court found that the “court’s methodology and reliance on market demand was consistent with the appropriate legal standard.”
The appeals court also rejected the taxpayer’s assertion that a use is “financially feasible” simply because it might produce any positive return, noting that the analysis must be grounded in market realities.
Valuation and penalty affirmed
When rejecting the taxpayer’s proposed “highest and best use,” the Tax Court determined that the taxpayer’s experts overestimated demand for aggregate and failed to properly account for competition from at least seven other quarries located closer to population centers like Greenville and Athens. These competitors had significant “delivered price advantage[s]” due to lower transportation costs. These findings were sufficient to support the Tax Court’s rejection of a quarry as the property’s highest and best use.
After the Tax Court rejecting a quarry as the property’s highest and best use, the court based its valuation on the property’s use for low-density residential and recreational purposes. This resulted in an easement value of $480,000. Because the taxpayer’s claimed deduction of $23 million was substantially more than 200% of the correct amount, the 11th Circuit affirmed the Tax Court’s imposition of the 40% gross valuation misstatement penalty.
For more information about the gross valuation misstatement penalty, see Checkpoint’s Federal Tax Coordinator 2d ¶ V-2208.
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