US Tax Court, 2012 TC Memo 35, February 6, 2012: Determines fair market value of conservation easement by analyzing highest and best use and comparable sales, rejecting taxpayers’ claim that highest and best use was other than the properties’ present use.

At issue was the value of property before donation of conservation easements donated as qualified conservation contributions. The Petitioners (taxpayers) argued the “before” highest and best use of the properties was gravel mining, which was not the use of the properties at the time of the donation, and that there were no comparable sales for that use. Respondent IRS argued the “before” highest and best use of the properties was the then current use, agriculture, and there were comparable sales. The Court agreed with the IRS.

The Court wrote that fair market value (FMV) of property “is presumed to be the use to which the land is currently being put absent proof to the contrary”. “When asserted highest and best use differs from current use, the use must be reasonably probable and have real market value…. Where the asserted highest and best use of property is the extraction of minerals, the presence of the mineral in a commercially exploitable amount and the existence of a market ‘that would justify its extraction in the reasonably foreseeable future’ must be shown.”

The Memorandum states that the in evaluating the “before” highest and best use, “the main question we are faced with is whether it was reasonable to conclude that a hypothetical willing buyer in [the year in question] would have considered the Subject Properties as the site for construction of a gravel mine. The evidence shows they would not. See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 339 (2011) (finding taxpayer’s asserted highest and best use was “certainly inconsistent with the * * * evidence in this case”). The Court found unpersuasive the conditions assumed or asserted by the Petitioners’ experts to reach their conclusion that gravel mining was the “before” highest and best use.

Having concluded that the highest and best use was the properties’ present use as agricultural, the Court then reviewed comparable sales of agricultural properties to determine the before value.

Decision available at

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