U.S. Tax Court Allows a Charitable Contribution Deduction for a Land Easement, But Also Applies a Gross Valuation Misstatement Penalty


In a recent Tax Court case,1 the court allowed a charitable deduction that the IRS had disallowed but then imposed a gross valuation misstatement penalty.2 The case dealt with a charitable contribution of a conservation easement that the IRS disallowed. While the case dealt extensively with the issues regarding the determination of the value of the easement by the experts, the note of interest for BV professionals dealt with whether or not the appraiser for the taxpayer met the requirements as a qualified appraisal.

The Tax Court agreed with the taxpayer that the appraisal the taxpayer used met the requirements for a qualified appraisal. However, the IRS attempted to disqualify the appraisal as not complying with USPAP, which the Tax Court addressed as follows:

Section 170(f)(11)(E)(i)(II) specifies, in relevant part, that a qualified appraisal must be "conducted by a qualified appraiser in accordance with generally accepted appraisal standards." Treasury Department guidance states that the Appraisal will meet the requirements if for example "the appraisal is consistent with the substance and principles of [USPAP]." (Notice 2006-96, § 3.02(2), 2006-2 C.B. at 902)

This case demonstrates once again that an appraisal does not have to comply with USPAP directly in order to be a Qualified Appraisal. It must be consistent with the “substance and principles” of USPAP. Important Distinction.

The IRS said, in the taxpayer’s expert’s report, "his departures from USPAP are significant, serious, and seemingly intentionally designed to create a report simply to justify the value hoped by the Partnership." The petitioner argued that their expert’s 2013 appraisal "substantially complies with appraisal standards because it allowed respondent to properly understand and monitor the claimed contribution." The Tax Court agreed with the taxpayer’s arguments. Full compliance with USPAP was not the full measure of reliability. (Whitehouse Hotel Ltd. P'ship v. Commissioner)

This concept of USPAP being required to be followed in the case of valuations under the IRS qualified appraiser rules continue to fester and raise its head from time to time. It is time to put it to rest. A qualified appraisal must be "conducted by a qualified appraiser in accordance with generally accepted appraisal standards." USPAP is used as an example of generally accepted appraisal standards not as the only standards to follow. 


1 Buckelew Farm, LLC v. Comm'r, T.C. Memo 2024-52; 2024 Tax Ct. Memo LEXIS 53 (April 25, 2024).

2 BVLaw subscribers can read the digest and the full opinion by accessing the BVLaw platform.

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