On appeal from a decision by the Tax Court, the Eleventh Circuit ruled against the IRS in a conservation easement case involving the valuation of the charitable contribution. The Tax Court, in Palmer Ranch Holdings, Ltd. v. Commissioner, No. 14-14167, 2016 WL 453975 (11th Cir. Feb. 5, 2016), held that the value proposed by the taxpayer was overstated, but not as much as the IRS had determined. Specifically, the taxpayer and the IRS disagreed on the highest and best use value of the property. The taxpayer had a highest and best use value of $25.2 million based on the development of 360 dwelling units, and the IRS had a highest and best use value of $7.75 million based on the development of 100 dwelling units. The Tax Court came to the conclusion that the appropriate highest and best use value was $21,005,278. Both parties appealed the decision.
The IRS argued that the Tax Court erred in determining the highest and best use because it accepted the assumption of rezoning which was not reasonably probable. There was no consideration of whether the proposed 360 units were “needed or likely to be needed,” and the Tax Court did not consider the effects of the zoning history to reduce the value. In addressing the first issue, the Eleventh Circuit determined that the facts on the record suggest that the county “would, in reasonable probability, approve such development.”
As to the second issue, the Eleventh Circuit agreed that the Tax Court should have considered whether the development was needed, but determined that the error was harmless. The Court made this decision because “the evidence clearly shows that, in 2006, the market for MDR-level development was bullish.” During the time of the conveyance, the residential housing developments in the area were “effectively sold out,” which increased the demand for the residential development on this parcel. The IRS argued that another development remained vacant at the end of 2012, and in the beginning of 2013, but the court pointed out that what matters is “what appeared needed or likely to be needed” at the time of the conveyance.
Finally, in addressing the IRS’s last argument, the court stated that “the test for highest and best use already bakes in some adjustment for development risk.” The risk of rezoning was considered and it was determined that “there was substantially no risk” that the parcel would not be rezoned to allow the development of 360 dwelling units or more.
Once the court had dealt with all the IRS arguments, they turned their attention to the taxpayer’s argument that there should not have been any adjustment at all. The court concluded that the Tax Court’s decreased valuation methodology was improper because, among other reasons, it was under-explained. Therefore, the court remanded the case to determine the proper reduction in valuation, if any. The court specifically instructed the Tax Court to “stick with comparable-sales analysis” provided by the taxpayer or “explain its departure” based on the evidentiary record. This is another case that the courts have been forced to battle over appropriate valuation and valuation methodology. In this case, the Tax Court and the 11th Circuit were less than enamored with the IRS methodology.
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