A Colorado home site developer
donated about 85% of a proposed
450-acre development as a conservation
easement to a conservation
organization. The easement restricted
uses of the property, thus reducing its
value and qualifying as a charitable
contribution. The developer claimed
a deduction of about $2.2 million,
but when the IRS audited, it said
the easement was worthless because
it did not diminish the value of the
property. The Tax Court then applied
the usual before-and-after test to
value the easement. Under such a
test, the easement’s value is the diminution
in the property’s value that the
easement caused, and the appraiser
derives that amount by comparing
the property’s value before and after
the easement. The Tax Court found
the value of the easement to be only
$560,000.

This fall, the Court of Appeals in
Denver affirmed that decision, finding
that the Tax Court acted reasonably
when it considered post-transaction
sales of comparable properties in
the before-and-after calculation.
(Nonetheless, how could the parties
doing the deal have factored into their
decision comparable sales that had
not yet even occurred at the time? In
a similar context, the Supreme Court
held in 1929 that post-death transactions
could not change the valuation
of an estate.)

What This Case Teaches:

Don’t be greedy. The appraiser
for the developer lost credibility with
the court by initially attempting to
avoid the before-and-after test. He
instead looked for other conservation
easements that had been valued and
compared those to this one. In the
end, the appraiser had to admit at
trial that he would not have done that
had the developer not pushed him
into it.