This is a landmark ruling in that it strongly endorses the use of highest-and-best-use subdivision analysis for the before valuation.
And the values that were upheld were quite substantial – in excess of $200,000 per acre. Also – earlier segments of this case confirmed the qualification of the land trust – NALT - and cleared the conservation purposes test – on a golf course!
~Nancy Zak
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In Kiva Dunes Conservation LLC et al. v. Commissioner; T.C. Memo. 2009-145; No. 13196-06 (22 Jun 2009), the Tax Court approved the deduction for a gift of a conservation easement.
On June 6, 1992, Mr. E. A. Drummond purchased a parcel in Alabama from the Resolution Trust Corporation (RTC). The RTC was selling at auction various properties recovered from banks and savings and loans that had become insolvent during the 1990 real estate crash. The purchase price for the 228 acre parcel was $1,050,000.
Mr. Drummond formed B&E Investments, LLC and elected to be taxed as a partnership. He conveyed the property to the partnership and commenced development of a resort community named Kiva Dunes. The resort community began selling lots in 1995.
In 2002, he transferred 140.9 acres of property on which was placed a golf course to the Kiva Dunes LLC. On December 31, 2002, Kiva Dunes, LLC transferred a perpetual conservation easement on the golf course to the North American Land Trust (NALT). Appraiser Claude Clark was hired to determine the value of the perpetual conservation easement and he claimed a contribution deduction value of $30,588,235. Kiva Dunes also made a $35,000 cash contribution to NALT.
The IRS denied the deduction and the Tax Court proceeding ensued.
In the Tax Court, the IRS conceded that the perpetual easement did fulfill the requirements of a qualified conservation contribution and therefore would produce a charitable deduction under Sec. 170(a). The deduction would depend on a “before and after” determination of value.
Appraiser Clark determined that the highest and best use of the golf course property would be as a subdivision. The property would have permitted the creation of 370 lots. Based on comparables in the county, he determined that the value of each lot would be $170,000 and lot sales would occur at a rate of 37 per year, for a total sale period of ten years.
IRS Appraiser Philip Paulk claimed that the land would only support 300 lots, that the value per lot would be $85,000 and the sales would occur over 15 years. His estimated “before” value was approximately 1/3 of that of Mr. Clark.
The Court determined that the analysis by Claude Clark was correct with respect to the number of lots, was persuasive with his value per lot and accurate in projecting the sale duration. Therefore, the Court accepted the “before” value of $31,938,985 as claimed by Mr. Clark.
The remaining issue was the “after” value. Mr. Clark used five comparable properties within the same county to determine the value. The Court accepted his determination with an adjustment for both the improvements and previously-claimed depreciation. Based upon the before and after value establishment by Mr. Clark, the charitable deduction was approved for $28,656,004.
Editor’s Note: Mr. Clark was the most experienced appraiser in the county surrounding Kiva Dunes. He was very credible and the Tax Court accepted his interpretation of all the key valuation issues. This case highlights the importance of securing the services of a capable and respected appraiser.
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