Esgar Corporation v. Commissioner (Esgar II)

U.S. Court of Appeals, Tenth Circuit, No. 12-9009, March 7, 2014: Highest and best use in easement appraisal must be most reasonably probable in the reasonably near future.

Esgar appealed the decision of the Tax Court in Esgar v. Commissioner (Esgar I), US Tax Court, 2012 TC Memo 35, February 6, 2012. In Esgar I the Tax Court calculated the fair market value of a donated conservation easement. In doing so it determined the “before” value of the property using as the highest and best use the property’s present use as agricultural, and rejected Esgar’s claim that highest and best use was gravel mining, a hypothetical use. The Esgar I court also held the income from the sale of Esgar’s transferable tax credits from the State of Colorado was a short term capital gain because the time Esgar held the tax credit (two weeks) was the relevant holding period, not Esgar’s holding period for the underlying property.

On appeal the court upheld the Tax Court regarding the definition of highest and best use, saying the appropriate standard is “the use that was most reasonably probable in the reasonably near future.” The court cited prior rulings that a highest and best use, if it is not the current use, must be realistic, a use “for which the property is adaptable and needed or likely to be needed in the reasonably near future,” and one that would occur with reasonable probability and “closeness in time.” The court said this is the same standard as required by Treasury Regulation § 1.170A-14 (h)(3)(ii). The court found it was not clear error for the Tax Court to determine that gravel mining was not the highest and best use but the current use, agriculture, was. The court also held that it is acceptable to refer to eminent domain case decisions for precedent in determining highest and best use in qualified conservation contribution cases.

Before reaching this conclusion the court considered Esgar’s contentions about the appropriate rules of evidence. It found that section 7491 of the Tax Code did not shift the burden of proof to the IRS, because both parties produced evidence. The court also found that the Tax Court was reasonable in finding that preponderance of evidence favored the IRS.

The court also upheld the Tax Court holding that the income from the sale of Colorado conservation easement tax credits was a short term capital gain.

The decision can be found by searching at

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