The Eleventh Circuit recently issued its highly-anticipated decision in Palmer Ranch Holdings Ltd. v. Comm'r, No. 14-14167, 2016 WL 453975 (11th Cir. Feb. 5, 2016), the appeal of a taxpayer-friendly Tax Court decision (T.C. Memo. 2014-79) that we discussed in a previous blog post. Sirote lawyers David Wooldridge and Ronald Levitt have been quoted about this decision in the BNA Daily Tax Report published on February 6, 2016 (click here for that Article). For different reasons, the Tax Court's decision was appealed by both the IRS and the taxpayer. The IRS argued that the Tax Court erred in agreeing with the taxpayer that the highest and best use of the property was for moderate density residential (“MDR”) development. While the taxpayer was satisfied with the adoption of its highest and best use argument, the taxpayer appealed the approximately 20% discount the Tax Court applied to the value reached by the taxpayer's appraiser.
Rejecting the IRS's highest and best use argument, the Eleventh Circuit agreed with the Tax Court that it was reasonably probable that the highest and best use of the property was MDR because the property could be rezoned (even though prior attempts to do so had failed). Despite finding that the Tax Court erred in failing to consider whether the development was “needed or reasonably likely to be needed” (a mandatory element of the highest and best use test), the Eleventh Circuit concluded the error was harmless because the local “market clearly demanded MDR-level development.”
The Eleventh Circuit also rejected the IRS's argument that the property's history of failed rezoning attempts showed that the property had a different highest and best use. Instead, the court explained that “the test for highest and best use already bakes in some adjustment for development risk” because “[i]f there is too high a chance that the property will not achieve the proposed use in the future, then the use is too risky to qualify” as the highest and best use of the property. So in spite of the history of the Zoning Board rejecting previous rezoning attempts, the Court noted the County's specific action, which noted what was necessary to secure the zoning change approval. Thus, the Eleventh Circuit found that the best evidence of the Zoning Board's determination ended up being their official statement. Hearing minutes of prior decisions were rejected as hearsay.
After affirming the Tax Court's highest and best use conclusion, the Eleventh Circuit found error both in the Tax Court's reliance on evidence not in the record and in its failure to explain why it departed from the comparable-sales analysis used by both parties' experts to value the easement. The Eleventh Circuit instructed that to the extent the court chooses to use different methods or data from that set forth in the appraisals, the departure must be explained and the court's analysis and any adjustments to the values reached by the appraisers should be based solely on facts in the record. Because the Tax Court discounted the value based on evidence outside of the record and failed to explain its departure from the method of valuation used by both parties, the case was remanded with instructions to “stick with the comparable-sales analysis or explain its departure”.
We believe Palmer Ranch is important as it provides clarity about the reasonable probability standard and suggests how to corroborate and substantiate reasonable probability. This case also makes clear that, when coming up with highest and best use, an appraiser needs to consider the future, which does not always mean the immediate future. The Court indicated that the reasonably near future can be several years down the road, without using 20-20 hindsight.