Monday, August 11, 2014

Everyone's favorite topic: valuing conservation easements

The tax court cases on conservation easements are just pouring in these days. The most recent case again concerns overvaluation of conservation easements in Colorado. Schmidt owned a 40-acre property in El Paso County Colorado. While he originally intended to work with an adjacent landowner to develop a subdivision, in 2003 he instead donated a conservation easement over his property to the county, retaining the right to develop a single-family residence thereon. He then claimed a $1.6 million tax deduction, which the IRS felt should have only been $195,000. The discussion over the valuation is interesting because both parties’ auditors assumed that he would get planning approval for a subdivision. In fact, the County seemed to support that contention. Schmidt’s auditors just seemed to think that a subdivision would make the property worth $2 million and IRS auditors concluded it would be $750,000. They also had differing values of the land with the conservation easement in place but these values did not vary by as wide of a margin ($400,000 by Schmidt and $270,000 by the IRS). The tax court agreed with the IRS that the after value was $270,000 but sided closer to Schmidt about the value before the conservation easement, valuing it at over $1.4 million. This still led to an underpayment of taxes by over $447,000. But fortunately for Schmidt’s sake, the court found reasonable cause for the underpayment and did not assess any penalties. If you want to see lots of details about appraising conservation easements, check out the full case. For me this case highlights another example of how we always get different numbers in these valuation cases. Not often that you see a court accepting either parties appraisal outright and very rare to get a case that did not end in a conclusion of underpayment. Obviously, underpayment cases are the ones most likely to proceed through the tax court process, but it still doesn’t give me a lot of confidence in these tax benefits… [Schmidt v. CIR, U.S. Tax Court, Aug. 6, 2014, 2014 WL 3866066]

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