In a case involving the donation of a conservation easement, the Tax Court ruled that the charitable contribution deduction was 100 times less than estimated by the appraiser.
Although the $3.245 million contribution deduction was supported by an appraisal conducted by a qualified appraiser, the court refused to accept the appraisal report, calling it unreliable and irrelevant. Instead, the court accepted the appraisal conducted by the IRS’s experts, which valued the charitable contribution at $31,280. (See Boltar LLC v. Commissioner (136 TC No. 14, April 5, 2011).
In 2003, Boltar granted an easement to a land trust restricting the use of approximately eight acres of land in Indiana. In addition to the property that was the subject of the tax litigation, Boltar also owned a number of contiguous parcels of land, much of which was forested wetlands. The parcel affected by the easement was zoned for single-family residences.
In determining the fair market value of a qualified conservation easement, the regulations generally look to the value of comparable easements. If there are an insufficient number of comparable easements, then the regulations state that the value of the contributed easement is equal to the difference between the fair market value of the property it encumbers, before the granting of the restriction, and the fair market value of the encumbered property after the granting the restriction.
In other words, when there are insufficient sales to determine the value of the easement, then a before-and-after valuation approach must be used.
Boltar engaged the services of an appraiser who valued the unencumbered property at $3.27 million. The appraiser determined that the highest and best use for the eight acres would be a 174-unit condominium development, consisting of 29 hypothetical buildings, each containing six units. The appraiser reduced this amount by the enhancement in value of Boltar’s adjacent properties as a result of the donation of the easement.
The IRS’s appraiser determined the highest and best use of the property was development of eight to 16 single-family homes, making the unencumbered property worth $100,600.
The IRS argued that condominiums could not be built on the property, which was zoned for single-family homes. The IRS further argued that the hypothetical 29-building condominium project cited by Boltar’s appraiser was designed for a 10-acre site, while the land that was the subject of the easement was no more than eight acres.
Before the trial commenced, the IRS filed a motion to exclude Boltar’s appraisal report on the basis that the report was neither reliable nor relevant. The IRS argued that Boltar’s appraiser failed to:
- Properly apply the before-and-after methodology
- Value all of Boltar’s contiguous landholdings
- Take into consideration zoning restraints and density limitations
- Consider pre-existing conservation easements
As a result, the IRS contended that Boltar’s appraiser valued the land by reference to a hypothetical development project that could not fit on the land, was not economically feasible to construct and would not be legally permissible to be built in the foreseeable future.
The IRS argued that Boltar’s appraiser departed from the legal standard to be applied in determining the highest and best use of property and instead determined a value “based on whatever use generates the largest profit, apparently without regard to whether such use is needed or likely to be needed in the reasonably foreseeable future.”
The Tax Court concluded that the valuation submitted by Boltar’s appraiser was not sufficiently based on facts or data, and the report did not state the facts or data as support for the conclusions. The court found that the report was too speculative and unreliable to be useful. As a result, the court ruled that the report was inadmissible.
Without Boltar’s valuation report, the court had only the report of the IRS’s appraiser in evidence. Boltar offered no defense against the IRS’s appraiser. As a result, the court upheld the valuation as determined by the IRS.