United States Court of Appeals, Tenth Circuit, No. 11-9006, August 16, 2012: Upholds Tax Court’s value of conservation easement & use of evidence.
In the Tax Court case (Trout Ranch I, T.C. Memo. 2010-283; No. 14374-08, December 27, 2010. http://preservationlawdigest.com/2010/12/30/trout-ranch-llc-v-commissioner/), the taxpayer argued that only the comparable sales appraisal method could be used because data on sales of comparables conservation easements was available, and the easement was therefore worth $2.2 million. The IRS, relying on a before-and-after valuation, asserted the easement had zero value. The Court, based on facts and circumstances, found none of the other sales of easements were comparable and accordingly only the before-and-after method was proper and in accordance with the regulation. The Court then constructed its appraisal by estimating the number and prices of the developable lots, the costs of their development and sale, and other parameters. The Tax Court decided the easement had a value of $560,000.
On appeal, Trout Ranch asserted the Tax Court should not have admitted as evidence the appraisals by the two IRS appraisers (Nash and Garone). Trout Ranch argued that there was comparable sales data, that the regulations give preference to use of comparable sales data for valuations and when such data is available the appraisal must give it due consideration. In the Court’s words, Trout Ranch was arguing that that the IRS appraisers, “were not reliable experts because they failed even to consider the comparable sales method. This assertion is false. Both experts acknowledged the comparable-sales method in explaining their appraisal; they simply chose not to follow it…. But under the Treasury regulations, they had no duty to explain why they chose one method over the other; they had only to choose the appropriate method and apply it correctly. Treas. Reg. § 1.170A-14(h)(3)(i). The notion that some form of preliminary analysis was required and that an expert’s failure to provide it could undermine the reliability of his analysis, seems to have been pulled from thin air.”
(The Court agreed that if comparable sales data were available, the regulations require the appraisal to be based on that data rather than the before-and-after method. Treas. Reg. § 1.170A-14(h)(3)(i). The Court also said that discounted cash-flow models to determine the present value of the property’s future revenue “remains an accepted method for determining the value of a real estate interest where no comparable sales are available”.)
The Court addressed the rules of evidence in these conservation easement valuation appeals. It said that the Tax Court’s own valuation is a question of fact and should be reviewed on appeal only for “clear error”, in the same way an appeals court would review any question of fact.
Trout Ranch also objected to the Tax Court use of some data, from the IRS appraisals, that post-dated the date of donation of the easement. The Court held that such evidence is admissible. “A regulation fixing the fair market value at the time of contribution,” the Court wrote, “does not necessarily restrict the evidence to be considered in determining fair market value.”
Lastly, the Court reviewed whether the charitable deduction should be subject to the limitation of 30% of the taxpayer’s contribution base for the taxable year, per Code § 170(b)(1)(B)(i), rather than the 50% limitation in § 170(b)(1)(A). The Court upheld the Tax Court’s holding that it depends “on the type of organization to which the easement was donated, which is best determined at the partnership level.” (Trout Ranch, an LLC, had elected to be taxed as a partnership.)
Decision available at http://www6.lexisnexis.com/publisher/EndUser?Action=UserDisplayFullDocument&orgId=2569&topicId=123930006&docId=l:1725583315&isRss=true&Em=4&md5=0cb17b28633cd3f4072b1086a13b5f&sendDate=20120819 and http://scholar.google.com/scholar_case?q=%22TROUT+RANCH,+LLC.+v.+COMMISSIONER+OF+INTERNAL+REVENUE%22&hl=en&as_sdt=2,22&as_ylo=2012&as_yhi=2012&case=909507390047886455&scilh=0