Conservation Easements Valued in Charitable Deduction Disputes

The Tax Court, in 13 consolidated cases involving denied charitable contribution amounts for related conservation easements, determined the appropriate valuation methods for the contended parcels. (Excelsior Aggregates LLC, (5/30/2024) T.C. Memo 2024-60)

Three partnerships — Excelsior Aggregates LLC (EAG), Alabama S&G (ASG), and Barnes-Escambia Properties LLC (BEP) — donated property interests in 13 parcels that are part of Big Escambia Tract in rural Alabama. In total, the partnerships claimed $187 million in charitable contribution deductions under Code Sec. 170(a)(1) across easement deductions and fee simple deductions. There was no easement deduction claimed by BEP, but all three took fee simple deductions.

The IRS denied a combined $30 million on the partnerships’ returns for tax year 2014 and issued Notices of Final Partnership Administrative Adjustments (FPAAs) to each partnership.

The Tax Court determined that in each case, “the donee received during the taxable year 100% of the real property interests within each parcel, which equates to the parcel’s ‘before’ value.” These “before” values were used to determine the total allowable charitable contribution deduction.

Appraisals for each partnerships were originally done by the same individual, who appraised the two conservation easements based on the highest and best use (HBU) of each parcel. The appraiser determined the HBU was commercial sand and gravel mining (S&G mining), which the partnerships’ and IRS’ expert witnesses sparred over at trial.

Ultimately, the Tax Court found that the HBU of the parcels, “before granting the easements, was silviculture, recreation, and limited residential use, with potential mining of remaining S&G reserves for local consumption,” siding with the IRS.

For the BEP parcel, the Tax Court agreed with one of the petitioner’s witnesses, who “appropriately tailored” his comparative sales analysis to the parcel’s “noncontiguous nature.”

“His separate appraisals allowed him to select transactions involving properties whose location, size, topography, usage, and physical characteristics more precisely resembled those of the ten constituent sub-parcels,” read the opinion.

Previously, in one of the now-consolidated cases, the Tax Court granted partial summary judgment to the IRS, finding that the agency complied with Code Sec. 6751(b)‘s written supervisory approval requirement for penalties assessed under Code Sec. 6662 and Code Sec. 6662A. In its decision issued November 4, 2021, the Tax Court wrote that a civil penalty approval form was signed before the FPAA was issued.

In its May 30 opinion, the Tax Court indicated future orders and decisions are forthcoming based on the valuations.