A Costly Lesson in Valuing Conservation Easements

Donating a conservation easement can lead to significant tax deductions for individuals and businesses. However, a new Tax Court case, Savannah Shoals, LLC, Green Creek Resources, LLC (TC Memo 2024-35, 3/26/24), highlights the risks of improper valuations and incomplete documentation. The IRS denied a $23 million deduction, and the taxpayer faced a steep penalty for overvaluation.

This case serves as a critical reminder: Always obtain a qualified, independent appraisal when making noncash charitable donations.

Understanding Conservation Easement Deductions

Under the tax code, a charitable deduction is available when real estate is donated to a qualified charity for conservation purposes. These may include:

1. Preserving land for outdoor recreation or scenic enjoyment by the public.
2. Protecting wildlife habitats or natural resources.
3. Advancing government conservation policies.

The deduction amount is based on the fair market value (FMV) of the property at the time of donation. However, the IRS imposes strict appraisal requirements to prevent inflated deductions.

Tax Law Requirements for Noncash Charitable Deductions

To claim a deduction exceeding $5,000, donors must:

1. Obtain a qualified appraisal from an independent appraiser.
2. Complete IRS Form 8283, including an appraisal summary.
3. Attach the appraisal to the tax return (if required).
4. Ensure the appraisal meets IRS standards, including:
   1. A detailed property description.
   2. The appraiser’s qualifications.
   3. The valuation method and supporting data.

Failure to meet these requirements can disqualify the deduction entirely.

Case Breakdown: What Went Wrong?

Key Facts:

1. In 2007, the LLC purchased 436 acres in Georgia for $5.2 million (~$12,000 per acre).
2. Planned development stalled due to the 2008 recession and financing issues.
3. The company defaulted on a $2.1 million construction loan in 2010.
4. Between 2013 and 2016, the LLC rejected multiple purchase offers ranging from $1.3 million to $1.5 million (~$3,000–$3,500 per acre).
5. In 2017, upon selling the business, it donated a conservation easement on 103 acres.
6. The LLC claimed a $23 million charitable deduction for the easement.

IRS Challenge & Tax Court Ruling:

The IRS disallowed the entire deduction, citing two major issues:

1. Failure to attach a qualified appraisal to the tax return.
2. Inconsistent appraisal summary information.

Good News:

The Tax Court disagreed with the IRS on reporting violations. It ruled that the LLC did meet basic reporting requirements, making it eligible for a deduction.

Bad News:

The court found that the actual FMV of the easement was only $480,000—a drastic reduction from the $23 million claimed.

To make matters worse, the LLC faced a 40% penalty for gross valuation misstatement, as the claimed deduction exceeded 200% of the actual value.

Key Takeaways: Avoid Costly Appraisal Mistakes

1. Invest in a Qualified Appraisal – A low-cost or non-expert appraisal can jeopardize a multi-million-dollar deduction.
2. Ensure Appraisal Consistency – Discrepancies in valuation reports raise red flags with the IRS.
3. Understand Fair Market Value – Just because you reject offers doesn’t mean the property is worth more. FMV is based on objective market data, not expectations.
4. Meet IRS Documentation Rules – Form 8283 and appraisal reports must be accurate and filed properly.
5. Be Realistic About Valuations – Overstating deductions can lead to severe penalties, as seen in this case.

As a professional – Revolutionize your tax workflow with our complete suite of tools: onboarding links, initial interviews, compliance planning, calendars, messaging, task management, and TaxMan for advanced tax research. Please sign up. Our resource directory also offers valuable links to assist in managing various financial and legal aspects of a business or individual.