Palmer Ranch V. Commissioner

U.S. Tax Court, T.C. Memo. 2014-79, May 6, 2014: Rezoning history to old to affect highest & best use of conservation easement land; no penalty assessed.

At issue was the fair market value of a donated qualified conservation contribution based on the “highest and best use” of the land before imposition of the conservation easement. The appraisal for the taxpayer, Palmer Ranch, reached the judgment that the land could be more intensely developed (and therefore much more valuable) than current zoning allowed if a rezoning were approve and that approval of a rezoning was probable. The IRS’ appraiser concluded that a rezoning was not reasonably probable given four factors: (1) a recent failed rezoning history, (2) environmental concerns, (3) limited access to outside roads, and (4) neighborhood opposition.

The rezoning history was that there had been a proposal more than two years before the deduction was claimed to rezone the Palmer Ranch parcel and another parcel together. The proponent of that zoning change revised it to exclude the Palmer Ranch parcel, but the rezoning petition was denied. The IRS argued that this showed a rezoning of the Palmer Ranch parcel was unlikely. The court found the legal precedents cited by the IRS to be distinguishable because the Palmer Ranch history was less recent, the environmental concerns here were less significant than in the precedent, and, in the court’s judgment, the Palmer Ranch’s appraisal accounted for various environmental concerns while the taxpayer in the cited precedent did not.  The court analyzed the circumstances of the prior rezoning denial, the concerns raise, and the vote margin of previous rezoning denial to reach essentially a political judgment about the likelihood of a future rezoning. The court’s conclusion was that the “rezoning history does not eliminate the reasonable probability on the valuation date of a successful rezoning.”

The IRS also contended that the presence of an eagle nesting area made the rezoning unlikely. The court agreed with Palmer Ranch that the rezoning history indicated that the local authorities would not automatically disapprove any development of the parcel that included the nesting area but would allow “moderate development” if it did not encroach on the nesting area.

As to road access, the IRS argued that a rezoning was unlikely because the parcel lacks the required two fully functional access points to both arterial and collector roads, and that neighborhood opposition would prevent Palmer Ranch from obtaining such access.  The court found that there was sufficient potential for the required access that this factor did not make rezoning unlikely.

The IRS tried to use the intense neighborhood opposition to the prior rezoning attempt to argue that a future rezoning would be unlikely. The court found that this argument required too many assumptions that it declined to make.

As a result of this analysis, the court found a reasonable probability that the parcel could have been successfully rezoned to allow for the development used in the taxpayer’s appraisal as justification for the highest and best use.  The court then analyzed other real estate market factors to conclude that the before value was higher than the IRS appraisal but not as high as the Palmer Ranch appraisal. It therefore allowed a somewhat lower deduction than Palmer Ranch had claimed.

The court then turned its attention to whether Palmer Ranch should be assessed a 20% accuracy related penalty for underpayment of taxes, that is, claiming a deduction higher than allowed. The IRS argued that Palmer Ranch had not acted in good faith when it failed to disclose the rezoning history to its appraiser, and therefore the resulting underpayment (based on the appraisal) was “negligence or disregard of rules or regulations.”  The court disagreed, in part based on its own discounting of the rezoning history.

Decision available at

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