Tax Court Allows a Reduced Deduction for a Conservation Easement

This case, Seabrook Property, LLC v. Commissioner, involves a dispute over a noncash charitable contribution deduction claimed by Seabrook Property, LLC (Seabrook) for a conservation easement it granted on approximately 622 acres of land in Liberty County, Georgia. The Commissioner of Internal Revenue disallowed the deduction in full, also determining that Seabrook was subject to accuracy-related and reportable transaction penalties.

Here are the key facts of the case:

  • The Property: The land consisted of approximately 370 upland acres and 267 acres of marsh, with 1.25 miles of tidal creeks and estuarine waters, and frontage along Dickinson Creek and the Georgia coastal salt marsh.
  • The Easement: Seabrook granted a perpetual conservation easement to the Southern Conservation Trust, Inc. in 2017.
  • Claimed Deduction: Seabrook claimed a deduction of $32,581,443, based on an appraisal that valued the land at approximately $58,084 per acre before the easement. The appraisal valued the property before the easement at $37 million, and after the easement at $1.15 million.
  • Commissioner’s Disallowance: The Commissioner disallowed the deduction in full. The Commissioner also determined that Seabrook was subject to a 40% accuracy-related penalty under section 6662(h) or, in the alternative, a 20% reportable transaction understatement penalty under section 6662A and, if neither of those applied, a 20% accuracy-related penalty for an underpayment due to a substantial understatement of income tax under section 6662(b)(2) and (d) and for negligence and disregard of rules and regulations under section 6662(b)(1) and (c).
  • Prior Land Use: Before the easement, portions of the property were subject to FLPA covenants with the State of Georgia, which provided a preferred tax assessment in exchange for an agreement not to develop the land. The penalty for breaching these covenants at the end of 2017 would have been no more than $51,000.
  • Appraisal Issues: The appraisal was initially dated November 28, 2017, and was later revised on January 20, 2018, to include a 15-acre outparcel that was excluded from the easement. The initial appraisal was attached to the 2017 tax return.
  • Option Agreement: Before the easement donation, there was an Option Agreement to acquire Ms. Belford’s (a member of Seabrook) interest in Seabrook for $4.74 million. InvestCo acquired Ms. Belford’s interest in Seabrook in December 2017.
  • Expert Testimony: Both sides presented expert testimony to establish the value of the easement, including experts in real estate valuation, market analysis, and land planning.

Here’s how the Tax Court applied the law:

  • Burden of Proof: The court noted that the burden of proof is generally on the petitioner, except as otherwise provided by statute or determined by the court. The court cited Welch v. Helvering, 290 U.S. 111, 115 (1933) and Crescent Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013), stating that the IRS’s adjustments in an FPAA are presumed correct, and the taxpayer bears the burden of proving them wrong. The court also stated that the taxpayer bears the burden of proving entitlement to any deduction claimed, citing INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
    • The court noted that section 7491(c) provides that the Commissioner has the burden of production with respect to penalties, but that section does not apply to TEFRA partnership-level proceedings such as this case, citing Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 234 (2018).
    • The court explained that if a taxpayer puts forth credible evidence, the burden of proof shifts to the Commissioner as to that issue, according to I.R.C. § 7491(a)(1) and (2), and that the Commissioner has the burden of proof with respect to any “new matter” he raises per Rule 142(a). The court stated that since it did not perceive an evidentiary tie in this case, it would decide the remaining issues on the preponderance of the evidence, and cited Knudsen v. Commissioner, 131 T.C. 185, 189 (2008), supplementing T.C. Memo. 2007-340 and Bordelon v. Commissioner, T.C. Memo. 2020-26, at *11.
  • Charitable Contribution Deduction
    • Donative Intent: The court rejected the Commissioner’s argument that Seabrook lacked donative intent. The court cited United States v. Am. Bar Endowment, 477 U.S. 105, 118 (1986), stating that the "sine qua non of a charitable contribution is a transfer of money or property without adequate consideration". The court stated that a transaction with a charity that "is structured as a quid pro quo exchange" does not qualify as a charitable contribution, citing Hernandez v. Commissioner, 490 U.S. 680, 701–02 (1989).
      • The court explained that in assessing whether a transaction constitutes a “quid pro quo exchange,” the court gives most weight to the external features of the transaction, citing Hernandez v. Commissioner, 490 U.S. at 690–91, and Christiansen v. Commissioner, 843 F.2d 418, 420 (10th Cir. 1988). The court stated that if the benefit received is merely incidental to a charitable purpose, a deduction is allowable, citing McGrady v. Commissioner, T.C. Memo. 2016-233, at *25.
      • The court cited previous cases stating that the objective fact that a perpetual conservation easement was donated to a charitable organization defeated the Commissioner’s contention as to the donor’s subjective intent, and that tax benefits associated with a charitable contribution deduction are not a “quid pro quo” that negates the donor’s charitable intent, citing J L Minerals, LLC v. Commissioner, T.C. Memo. 2024-93, at *28, Buckelew Farm, LLC v. Commissioner, T.C. Memo. 2024-52, at *42, Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, at *28, and Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25, at *37, supplemented by T.C. Memo. 2024-73.
    • Qualified Appraisal and Appraiser: The court found that Seabrook met the requirements for a qualified appraisal and qualified appraiser, despite some deficiencies alleged by the Commissioner.
      • The court stated that, according to section 170(f)(11), a deduction is disallowed for noncash charitable contributions unless specific substantiation and documentation requirements are met and that for property valued over $500,000, a taxpayer must obtain a “qualified appraisal,” as defined by I.R.C. § 170(f)(11)(D) and (E)(i). The court further stated that in the case of a partnership or S corporation, the qualified appraisal requirements “shall be applied at the entity level,” according to I.R.C. § 170(f)(11)(G).
        • The court explained that Treasury Regulation § 1.170A-13(c)(3)(i) defines a qualified appraisal as a document that, among other things, relates to an appraisal made not earlier than 60 days before the date of contribution and not later than the due date of the return; is prepared, signed, and dated by a qualified appraiser; includes certain information; and does not involve an appraisal fee that violates certain prescribed rules. The court further explained that the information required by the regulations includes, among other things, an adequately detailed description of the contributed property; the date (or expected date) of the contribution; the terms of certain agreements; certain information about the appraiser and the purpose of the appraisal; the date the property was appraised; the fair market value of the property on the date of contribution; and the method and basis of valuation according to Treas. Reg. § 1.170A-13(c)(3)(ii).
        • The court stated that strict compliance with these rules is sufficient but not necessary to satisfy the regulatory requirements and that it has followed a substantial-compliance approach in similar cases, citing Bond v. Commissioner, 100 T.C. 32, 41 (1993) and Cave Buttes, L.L.C. v. Commissioner, 147 T.C. 338, 349 (2016). The court also cited Hewitt v. Commissioner, 109 T.C. 258, 265 (1997), aff’d per curiam, 166 F.3d 332 (4th Cir. 1998) (unpublished table decision). The court stated that the focus in substantial-compliance cases is “on whether the appraisals described the contributed property well enough to permit the Commissioner to understand the appraiser’s valuation methodology” citing Cave Buttes, L.L.C., 147 T.C. at 350–51.
        • The court determined that the appraisal’s description of the property was adequate, even though it did not include an exact legal description or address, because it included a tax parcel ID number, a map of the property, a survey, and pictures, citing Cave Buttes, L.L.C., 147 T.C. at 354 and Costello, T.C. Memo. 2015-87, at *17 (citing Smith v. Commissioner, T.C. Memo. 2007-368, 2007 WL 4410771, at *13, aff’d, 364 F. App’x 317 (9th Cir. 2009)).
        • The court found that the appraisal’s failure to include the specific date of contribution was not fatal since the deed of easement attached to the tax return disclosed the date, and also that the appraisal was dated November 28, 2017, and it stated that the date of appraisal was November 24, 2017 and represented that the easement would be contributed within 37 days of the date of appraisal, noting that the easement was contributed on December 28, 2017. The court cited Cave Buttes, L.L.C., 147 T.C. at 355, Zarlengo v. Commissioner, T.C. Memo. 2014-161, at *35, Emanouil v. Commissioner, T.C. Memo. 2020-120, at *40 and Simmons v. Commissioner, T.C. Memo. 2009-208, 2009 WL 2950610, at *7–8 (same), aff’d, 646 F.3d 6 (D.C. Cir. 2011).
        • The court determined that the appraisal’s omission of the FLPA covenants did not invalidate it, since those covenants could be breached at any time for a minimal penalty, and cited RERI Holdings I, LLC v. Commissioner, 143 T.C. 41 (2014) for the rule that the omission of a restriction from an appraisal may prevent the appraisal from being qualified if it is “a restriction that reasonably can be said to have some adverse impact on the value of the donated asset”.
        • The court held that the appraisal was not required to disclose or analyze the Option Agreement because the agreement was not made by or on behalf of the donor or donee, and did not concern the use or disposition of the property. The court cited Treas. Reg. § 1.170A-13(c)(3)(ii)(D). The court stated that the regulation mentions agreements entered into by the donor related to any “use, sale, or other disposition” of the property, but not to any purchase of the property by the donor.
        • The court found that, even if there were some failures to comply with the Uniform Standards of Professional Appraisal Practice (USPAP), these failures went to the credibility and weight of the appraisal and did not cause the appraisal to fail to comply with generally accepted appraisal standards, and cited Gorra v. Commissioner, T.C. Memo. 2013-254, at *48, I.R.S. Notice 2006-96, 2006-2 C.B. 902, Whitehouse Hotel Ltd. P’ship v. Commissioner (Whitehouse I), 131 T.C. 112, 127–28 (2008), vacated and remanded on other grounds, Whitehouse Hotel Ltd. P’ship v. Commissioner (Whitehouse II), 615 F.3d 321 (5th Cir. 2010) and Jackson Crossroads, LLC v. Commissioner, T.C. Memo. 2024-111, at *29. The court also cited J L Minerals, LLC, T.C. Memo. 2024-93, at *37.
      • The court held that the appraiser, Mr. Weibel, was qualified because there was no evidence that the donors knew of facts that would cause them to expect Mr. Weibel to falsely overstate the value of the donated property. The court cited Treas. Reg. § 1.170A-13(c)(5)(ii) and Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, at *42. The court also cited CNT Invs., LLC v. Commissioner, 144 T.C. 161, 222 (2015); Superior Trading, LLC v. Commissioner, 137 T.C. 70, 91–92 (2011), supplemented by T.C. Memo. 2012-110, aff’d, 728 F.3d 676 (7th Cir. 2013) and Jackson Crossroads, LLC, T.C. Memo. 2024-111, at *25.
    • Valuation: The court determined the value of the easement by calculating the fair market value of the property before and after the easement was granted.
      • The court stated that the amount of a charitable contribution deduction for a donation of property is the "fair market value" of the property at the time of the donation, citing Treas. Reg. § 1.170A-1(c)(1) and TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1369 (11th Cir. 2021). The court also defined fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts,” citing Treas. Reg. § 1.170A-1(c)(2) and Anselmo v. Commissioner, 757 F.2d 1208, 1213 (11th Cir. 1985), aff’g 80 T.C. 872 (1983). The court also cited Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, at *27. The court cited Value, Black’s Law Dictionary (4th ed. 1968) and Interagency Land Acquisition Conference, Uniform Appraisal Standards for Federal Land Acquisitions 3 (1971).
      • The court stated that the fair market value of property on a given date is a question of fact and cited McGuire v. Commissioner, 44 T.C. 801, 806–07 (1965) and Kaplan v. Commissioner, 43 T.C. 663, 665 (1965). The court further noted it would evaluate the opinions of the parties’ experts and may accept an opinion in toto or accept aspects of it it finds reliable, citing Oconee Landing, T.C. Memo. 2024-25, at *58 and Savannah Shoals, LLC v. Commissioner, T.C. Memo. 2024-35, at *35.
      • The court noted that, because there is not a substantial record of sales of comparable easements, the easement would be valued by calculating the fair market value of the easement property before and after the easement was granted, citing TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369 and Treas. Reg. § 1.170A-14(h)(3)(i) and Esgar Corp. v. Commissioner, T.C. Memo. 2012-35, 2012 WL 371809, at *7, aff’d, 744 F.3d 648 (10th Cir. 2014).
      • The court stated that in determining the “before value,” it must consider not only the actual use of the easement property but also its highest and best use, citing TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369–70 and Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986) and Treas. Reg. § 1.170A-14(h)(3)(ii). The court further stated that the concept of highest and best use “does not eliminate the requirement that a hypothetical willing buyer would purchase the subject property for the indicated value,” citing Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60, at *47 and Corning Place, T.C. Memo. 2024-72, at *41.
      • The court determined that the highest and best use of the property before the easement was residential development, and that it was not limited to “large acreage rural residential development,” citing Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d at 996 (quoting Symington v. Commissioner, 87 T.C. 892, 897 (1986)) and Olson v. United States, 292 U.S. 246, 255 (1934). The court defined highest and best use as “[t]he reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value,” citing Oconee Landing, T.C. Memo. 2024-25, at *59 (quoting Whitehouse Hotel Ltd. P’ship v. Commissioner (Whitehouse III), 139 T.C. 304, 331 (2012), supplementing 131 T.C. 112 (2008), aff’d in part, vacated in part, and remanded, 755 F.3d 236 (5th Cir. 2014)). The court also stated that the highest and best use inquiry is one of objective probabilities, citing Esgar Corp. v. Commissioner, 744 F.3d at 657.
        • The court further stated that highest and best use is presumed to be the current use absent proof to the contrary, citing Esgar Corp. v. Commissioner, 2012 WL 371809, at *7. The court also noted that a proposed highest and best use requires “closeness in time” and “reasonable probability,’ citing Hilborn v. Commissioner, 85 T.C. 677, 689 (1985) and stated that any proposed uses that depend upon events that are not “fairly shown to be reasonably probable” are to be excluded from consideration, citing Olson, 292 U.S. at 257. The court also cited Excelsior Aggregates, T.C. Memo. 2024-60, at *30 and Oconee Landing, T.C. Memo. 2024-25, at *65.
        • The court noted that, where parties proposed different uses, the court should consider if there is a high chance that the property will not achieve the proposed use, and cited TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369 (quoting Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d at 1000). The court further noted that “if a proposed use is too risky for a hypothetical willing buyer to consider the use in deciding how much to pay for the property, then the use should not be deemed the highest and best available,” citing Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d at 1000 n.14 (quoting Whitehouse II, 615 F.3d at 335).
      • The court agreed that the highest and best use of the property after the easement was recreation and agriculture.
      • The court used the comparable sales approach to value the property before the easement. The court cited Excelsior Aggregates, T.C. Memo. 2024-60, at *32 and Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff’d in part, vacated in part, and remanded on another issue sub nom. JPMorgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006).
        • The court noted that “actual arm’s-length sales occurring sufficiently close to the valuation date are the best evidence of value,” citing Buckelew Farm, T.C. Memo. 2024-52, at *56, J L Minerals, LLC v. Commissioner, T.C. Memo. 2024-93, at *55, Corning Place, T.C. Memo. 2024-72, at *28, Excelsior Aggregates, T.C. Memo. 2024-60, at *31 and ES NPA Holding, LLC v. Commissioner, T.C. Memo. 2023-55, at *14. The court noted that both it and the U.S. Court of Appeals for the Eleventh Circuit “found the purchase of a partnership interest reflective of the price that the market would pay for the Subject Property, especially when the ownership interest was nearly 100% and the only asset held by the Partnership was the Subject Property itself,” citing Buckelew Farm, T.C. Memo. 2024-52, at *56 and TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1368 and Oconee Landing, T.C. Memo. 2024-25, at *71–72.
        • The court noted that comparable sales approach “values property by comparing it to similar properties sold in arm’s-length transactions around the valuation date,” citing Savannah Shoals, T.C. Memo. 2024-35, at *36 (citing Estate of Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987) and Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19 (1979)) and Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d at 987. The court stated that because no two properties are ever identical, the appraiser must adjust the sale prices of the comparables to account for differences, citing *Savannah Shoals, T.C. Memo. 2024-35, at *36 (citing Wolfsen Land & Cattle Co., 72 T.C. at 19) and Excelsior Aggregates, T.C. Memo. 2024-60, at *33. The court stated that the reliability of a comparable sales analysis depends on the comparability of the properties selected and the reasonableness of the adjustments made to establish comparability, citing Wolfsen Land & Cattle Co., 72 T.C. at 19–20.
        • The court noted that the comparable sales approach is “generally the most reliable method of valuation” for vacant, unimproved property, citing Oconee Landing, T.C. Memo. 2024-25, at *67 (quoting Estate of Spruill, 88 T.C. at 1229 n.24) and also cited J L Minerals, LLC, T.C. Memo. 2024-93, at *58, Excelsior Aggregates, T.C. Memo. 2024-60, at *38 and Savannah Shoals, T.C. Memo. 2024-35, at *35. The court further noted that “the market place is the best indicator of value, based on the conflicting interests of many buyers and sellers,” citing Corning Place, T.C. Memo. 2024-72, at *32 (quoting Estate of Spruill, 88 T.C. at 1229 n.24).
        • The court rejected the comparables used by the petitioner’s expert, Mr. Eidson, because they were located far from the subject property, with varying amenities.
        • The court adjusted the prices of the three comparables chosen by the Commissioner’s expert, Mr. Barber, to account for differences in location, water and marsh access, and time of sale.
      • The court rejected the income approach and discounted cash flow analysis, due to unreliable inputs and speculative assumptions. The court cited Chapman Glen Ltd., 140 T.C. at 327; Marine v. Commissioner, 92 T.C. 958, 983 (1989), aff’d, 921 F.2d 280 (9th Cir. 1991) (unpublished table decision); J L Minerals, LLC, T.C. Memo. 2024-93, at *60; Excelsior Aggregates, T.C. Memo. 2024-60, at *33; Savannah Shoals, T.C. Memo. 2024-35, at *36; Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283, aff’d, 493 F. App’x 944 (10th Cir. 2012); Excelsior Aggregates, T.C. Memo. 2024-60, at *43–44; Whitehouse III, 139 T.C. at 325 and Pittsburgh Terminal Corp v. Commissioner, 60 T.C. 80, 89 (1973), aff’d, 500 F.2d 1400 (3d Cir. 1974) (unpublished table decision); Winooski Hydroelectric Co. v. Five Acres of Land, 769 F.2d 79, 82 (2d Cir. 1985); Corning Place, T.C. Memo. 2024-72, at *37; Kiva Dunes Conservation, LLC v. Commissioner, T.C. Memo. 2009-145, 97 T.C.M. (CCH) 1818, 1820 and Whitehouse Hotel, Ltd. v. Commissioner, 755 F.3d at 246–47. The court noted that the income capitalization method is most reliable when used to determine the value of an existing business with a track record of income, expenses, profits, and growth rates and cited Excelsior Aggregates, T.C. Memo. 2024-60, at *43–44 (citing Whitehouse III, 139 T.C. at 325).
    • The court also considered the actual transaction in which Ms. Belford sold her 97% interest in Seabrook to InvestCo for $4.74 million as a valuable indicator of value, citing TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1371 and Buckelew Farm, T.C. Memo. 2024-52, at *56. The court found that the transaction was not a forced sale or a below market sale, and that the price was set with reference to the current use value of the property.
    • The court determined that the fair market value of the easement was $4,718,000, significantly lower than the $32,581,443 claimed by Seabrook. The court arrived at this figure by averaging the adjusted values of three comparable sales from the Commissioner’s expert and the price Ms. Belford received for her interest in Seabrook.
  • Penalties: Because the value claimed on Seabrook’s tax return was more than 200% of the correct value, the court imposed a 40% gross valuation misstatement penalty on the portion of the underpayment attributable to the overvaluation. The court cited I.R.C. § 6662(a), (b)(3) and (e)(1)(A). The court stated that a misstatement is “gross” if the value of property claimed on the return is 200% or more of the correct amount, according to I.R.C. § 6662(h)(2)(A)(i).
    • The court explained that, generally, an accuracy-related penalty is not imposed if the taxpayer demonstrates “reasonable cause” and shows that they “acted in good faith with respect to the underpayment,” per I.R.C. § 6664(c)(1) but that this defense is not available where the overstatement is “gross,” citing I.R.C. § 6664(c)(3), and Chandler v. Commissioner, 142 T.C. 279, 293 (2014). The court noted that the 40% penalty thus applies to the portion of the underpayment attributable to claiming a value for the easement in excess of $4,718,000 and cited Jackson Crossroads, LLC, T.C. Memo. 2024-111, at *48 and Oconee Landing, T.C. Memo. 2024-25, at *75.
    • The court noted that because Seabrook was entitled to a deduction for the correct value of the conservation easement, there is no underpayment not attributable to a valuation misstatement, and so the alternative penalties did not apply. The court cited Plateau Holdings, LLC v. Commissioner, T.C. Memo. 2021-133, at *2.
    • The court also noted that it has jurisdiction to determine partnership items and the applicability of any penalty that relates to an adjustment to a partnership item, and cited I.R.C. §§ 6221, 6226 and United States v. Woods, 571 U.S. 31, 39–42 (2013) and Oconee Landing, T.C. Memo. 2024-73, at *3–4, supplementing T.C. Memo. 2024-25.

In conclusion, the Tax Court found that Seabrook was entitled to a charitable contribution deduction for the easement, but significantly reduced the amount of the deduction based on its own valuation. The court also upheld a 40% penalty for the gross valuation misstatement. The decision underscores the importance of accurate appraisals in conservation easement donations and the potential penalties for overstating the value of contributed property.