Most recent conservation easement cases have concerned technical requirements for deduction. Few have delved deeply into the determination of the easement’s fair market value. However, the Tenth Circuit recently weighed in on the determination of the highest and best of the property, a key factor in valuation. Esgar v. Comm’r, 2014 WL 889614 (Mar. 7, 2014). The taxpayers in this case donated easements on land that was adjacent to land that the taxpayers had used for gravel mining. The taxpayers argued that the highest and best use of the eased property prior to the easement was gravel mining, while the IRS argued that the highest and best use was agriculture. The Tax Court considered expert reports from both sides and determined that while it would have been physically possible to mine the property at issue, there was no demand for it in the near future. Using the comparable sales of agriculture lots, the Tax Court determined easement values equal to less than 1/10th of what the taxpayers originally claimed on their return.
The taxpayers argued that the Tax Court erred in determining the highest and best use value by looking at current use rather than future development. The Court of Appeals disagreed, finding that the Tax Court properly applied the legal standard, which is to objectively assess the pre-easement highest and best use. Any determination of what that highest and best use was (i.e., agriculture or future development) could only be reversed for clear error, a very difficult standard to meet. In this case, the Tax Court did not clearly err because there was evidence to support its conclusion that gravel mining was not reasonably foreseeable in the future. The Court of Appeals also rejected the Taxpayers’ claim that the Tax Court improperly relied on eminent domain cases, which look at the “highest and most profitable use” of the property prior to a taking, noting that several other easement cases have likewise relied on the eminent domain precedent. The Court of Appeals concluded that the requirements of Treasury regulations in determining highest and best use value of a conservation easement do not materially differ from the calculation of property value in the eminent domain context.
Finally, the Court of Appeals addressed the Tax Court’s determination that sale of state tax credits generated from the easement constituted short term capital gain. The Court of Appeals agreed with the Tax Court that there was no right in the state tax credits until the conservation easement was donated, thus the holding period of the credits began at the time of the donation.