Easement cases before the Tax Court can offer some interesting insights and guidance to BV professionals. A recent case involved the valuation of a conservation easement donation for a charitable deduction. The deduction is figured by determining the fair market value of the property before the donation and subtracting the FMV after the donation. In this case, the donation involved an easement on undeveloped real estate. The opposing valuation experts agreed that the highest and best use for the property was as a residential subdivision and development. But the donors’ valuation expert came up with a value that was “incredible as a practical matter,” as the court put it. He mischaracterized the zoning according to the court and valued the property as fully developed. He also did not consider a prior transaction involving the property. The IRS expert concluded that the valuation should be based on the property being undeveloped. The two valuations were miles apart.
The court sided with the IRS expert, and, because the donors’ valuation was 200% or more of the correct valuation, they were hit with the 40% gross valuation misstatement penalty. Plus, the court disallowed the deduction because the donors failed to get proper substantiation of the donation—the easement deed alone was not sufficient.
The case is Brooks v. Comm’r, T.C. Memo 2022-122; 2022 Tax Ct. Memo LEXIS 122, and a case analysis and full court opinion are available on the BVLaw platform.