Mountanos v. Commissioner of Internal Revenue

U.S. Tax Court, T.C. Memo. 2013-138,June 3, 2013: Deduction for conservation easement denied because more valuable highest & best use before donation not proven.

Taxpayer/petitioner (Mountanos) granted a conservation easement on an 882 acre California ranch in 2005 and claimed a deduction (spread over four years) of about $4.6 million for the value of the easement. The IRS denied the deduction, asserting that the conservation easement had no value because the highest and best use of the property before grant of the easement was not more valuable than the highest and best use afterward.  (The IRS did not question the validity of the easement as a qualified conservation contribution under section 170(h) of the Tax Code.) Mountanos had the burden of proof.

Mountanos’ evidence was expert testimony that the highest and best use before the easement was residential development and vineyard use. (The court discounted testimony about subdivision use because it found the expert who put forward that use was not qualified to appraise real estate.)  The court found that Mountanos failed to prove that either of these uses was credible.  There was no dispute that the highest and best use after donation of the conservation easement was recreational use.

The court reviewed precedents about criteria for establishing highest and best use. It said there must be “closeness in time” and “reasonable probability” of the proposed use (citing Hilborn v. Commissioner, 85 T.C. 677, 689 (1985)), without relying on events subsequent to the valuation  unless “reasonably foreseeable” on the valuation date (citing Estate of Gilford v. Commissioner, 88 T.C. 38, 52 (1987)), taking into account zoning, historic preservation and other laws and restrictions, and economic feasibility of the asserted use (citing Losch v. Commissioner, T.C. Memo, 1988-230). Accordingly, the determination of highest and best use is extremely fact dependent.

As described by the court, the property is surrounded by Federal land except for one small area. The access roads to it run through neighboring properties, including Federal land managed by the Bureau of Land Management which had granted an access easement that “limited access to the ranch for single-family use.” The court found the evidence didn’t demonstrate the necessary legal access for vineyard use and didn’t show that it was likely in the near future that the Land Management Bureau would modify the easement to allow access for vineyard use.

A permit that Mountanos did not have is required to divert water for private use from the creek that passes through the property, but the property also included other springs and two ponds. The court found the evidence didn’t prove an adequate water supply for vineyard use.

The court also found the evidence didn’t establish there was local demand for “vineyard-suitable property” or that vineyard use was economically feasible.

The evidence showed the property was under a contract pursuant to the California Land Conservation Act of 1965 (Williamson Act), Cal. Gov’t Code secs. 51200-51297.4, that limited its use and development. As to the asserted residential development use, the court found that residential development of the ranch would have violated the Williamson Act and the evidence failed to show that residential development would not violate the Williamson Act contract. In addition, the court said subdividing land subject to the Williamson Act for residential development is prohibited by section 66474.4(a) of California’s Subdivision Map Act (Cal. Gov’t Code. sec. 66410).

Because the court found the property’s highest and best use before the valuation date was not different from what it was agreed to be after the valuation date, it concluded the fair market value of the conservation easement was zero and no charitable contribution deductions could be claimed.

The court then upheld the IRS’s 40% penalty for gross valuation misstatements because the claimed valuation was infinitely larger than the valuation of zero as found by the court, thereby triggering that penalty (the trigger was a 400% overvaluation at the time the relevant tax returns were filed). The court noted the “reasonable cause and in good faith” exception to valuation misstatements does not apply to a charitable contribution deduction claimed under section 170 of the Tax code.

The decision is available at

Comments are closed.