Valuation of a conservation easement for federal tax deduction purposes.

Author:Blair, Benjamin A.
Position:Recent Court Decisions on Real Estate and Valuation

Rose Hill Country Club (Club) owned a 242acre property in South Carolina consisting of a 27-hole golf course and related facilities for a neighboring residential community. The 1996 deed conveying the property to the Club contained a use restriction, requiring the property to be used "only for recreational facilities or open space" for a period of thirty years.

The Club ultimately conveyed the property to PBBM Rose Hill (PBBM) in 2002 for $2.4 million, but because the golf course was not profitable, PBBM closed it four years later in 2006, then filed for Chapter 11 bankruptcy. PBBM initiated a proceeding in the bankruptcy court to invalidate the use restriction, which was ultimately settled with the neighborhood's property owners association (POA). Specifically, the POA agreed it would not contest the removal of the use restriction, but it also obtained an option to purchase the property, which the POA ultimately exercised. The bankruptcy court entered judgments invalidating the use restriction and approving the sale price of $2.3 million.

Prior to the sale closing, PBBM conveyed a conservation easement of about 234 acres of the property to a land trust. The conservation area included the entire golf course but excluded the maintenance areas and clubhouse. In the easement deed, PBBM "voluntarily, unconditionally, and absolutely" granted the trust and its successors an easement in perpetuity to preserve the property for outdoor recreation and open space for the public benefit.

When PBBM filed its partnership tax return for that year, it claimed a charitable contribution deduction of $15.16 million for its donation of the conservation easement. The Commissioner of Internal Revenue (Commissioner) issued an administrative adjustment, which determined that PBBM was not entitled to the deduction and assessed a penalty. PBBM challenged the ruling in tax court, and after a five-day trial, the tax court concluded that the easement was not exclusively for conservation purposes, and that the value of the easement was only $100,000. PBBM appealed to the Fifth Circuit Court of Appeals.

Under the before-and-after valuation approach, the value of an easement is equal to the difference between the fair market value of the property it encumbers before and after the granting of the restriction. In the tax court proceedings, both parties' appraisers agreed that the after-value was $2.3 million. The dispute centered on the before-value, specifically debating...

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