Eleventh Circuit Finds for Taxpayer in Conservation Easement Deduction Dispute

In Palmer Ranch Holdings, Ltd., v. Commissioner, 812 F.3d 982 (11th Cir. 2016), the Eleventh Circuit affirmed a lower tax court’s determination of a land parcel’s “highest and best use” but reversed the court’s reduced valuation on the same parcel.

Palmer Ranch, Inc., attempted a sale of land, labeled B-10, which encompassed a wildlife corridor that served as a secure feeding pathway for nesting bald eagles. After the plans for sale were thwarted, Palmer Ranch donated a conservation easement on the B-10 parcel to Sarasota County. It then sought to deduct the easement’s value from that year’s tax returns. The IRS disallowed the deduction finding that Palmer Ranch had overvalued the easement’s worth.

Palmer Ranch set the value at $25,200,000 on the assumption that the “highest and best use” was residential development. The IRS’s calculations led them to value the parcel at a more modest $7,750,000. The tax court held in favor of Palmer Ranch regarding the highest and best use, but revalued the parcel at $21,005,278. The parties cross-appealed.

The Eleventh Circuit held that the tax court did not err in determining the land parcel’s highest and best use was at the zoning level for dense residential development. It agreed with the tax court that B-10’s rezoning history left open a reasonable probability that the Sarasota Board of County Commissioners (the “Board”) could eventually approve a dense residential development on the parcel. The court relied on the Board’s past voting record, rather than extrinsic meeting minutes that the IRS sought to include for consideration.

The Eleventh Circuit next noted that the tax court had erred in failing to make the requisite market-demand inquiry. The Eleventh Circuit deemed the error to be harmless, however, since at the time B-10 was valued “the Sarasota market clearly demanded [dense residential] development.” Id. at 999. The Eleventh Circuit likewise held that the tax court did not clearly err in failing to consider the effect of B-10’s negative zoning history on hypothetical willing buyers of the parcel. The court here reasoned that “the test for highest and best use already bakes in some adjustment for development risk.” Id. at 1000.

Finally, the Eleventh Circuit addressed the tax court’s accounting of stagnation in property values in reducing the property values. It noted that the tax court could determine its own valuation based on the whole of the evidentiary record, nonetheless, the court still found fault in the tax court’s valuation method. Since both parties’ appraisers used the comparable-sales method and since the tax court neither voiced disapproval nor acknowledged or explained its departure from that method the tax court affirmed. The Eleventh Circuit held that the tax court must at minimum explain on remand why it departed from the comparable-sales method in valuing the property. If not able to explain their reasoning, the tax court should “stick with the comparable sales analysis.” Id. at 1004.

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