Sunday, June 28, 2020
This Is Why We Cannot Have Nice Things
I am looking at a case involving a conservation easement.
We have talked about easements before. There is nothing innately sinister about them, but unfortunately they have caught the eye of people who have … stretched them beyond recognition.
I’ll give you an example of an easement:
· You own land in a bucolic setting.
· It is your intention to never part with the land.
· It is liturgy to the beauty and awe of nature. You will never develop it or allow it to be developed.
If you feel that strongly, you might donate an easement to a charitable organization who can see to it that the land is never developed. It can protect and defend long after you are gone.
Question: have you made a donation?
I think you have. You kept the land, but you have donated one of your land-related legal rights – the right to develop the land.
What is this right worth?
That is the issue driving this area of tax controversy.
What if the land is on the flight path for eventual population growth and development? There was a time when Houston’s Galleria district, for example, was undeveloped land. Say you had owned the land back when. What would that easement have been worth?
You donated a potential fortune.
Let’s look at a recent case.
Plateau Holdings LLC (Plateau) owned two parcels of land in Tennessee. In fact, those parcels were the only things it owned. The land had been sold and resold, mined, and it took a while to reunite the surface and mineral rights to obtain full title to the land. It had lakes, overlooks, waterfalls and sounded postcard-worthy; it was also a whole lot out-of-the-way between Nashville and Chattanooga. Just to get utilities to the property would probably require the utility company to issue bonds to cover the cost.
Enter the investor.
He bought the two parcels (actually 98.99%, which is close enough) for approximately $5.8 million.
He worked out an arrangement with a tax-exempt organization named Foothills Land Conservancy. The easement would restrict much of the land, with the remainder available for development, commercial timber, hunting, fishing and other recreational use.
Routine stuff, methinks.
The investor donated the easement to Foothills eight days after purchasing the land.
Next is valuing the easement
Bring in the valuation specialist. Well, not actually him, as he had died before the trial started, but others who would explain his work. He had valued the easement at slightly over $25 million.
Needless to say, the IRS jumped all over this.
The case goes on for 40 pages.
The taxpayer argument was relatively straightforward. The value of the easement is equal to the reduction in the best and highest use value of the land before and after the granting of the easement.
And how do you value an undeveloped “low density mountain resort residential development”? The specialist was looking at properties in North Carolina, Georgia, and elsewhere in Tennessee. He had to assume government zoning, that financing would be available, that utilities and roads would be built, that consumer demand would exist.
There is a flight of fancy to this “best and highest” line of reasoning.
For example, I would have considered my best and highest professional “use” to be a long and successful career in the NFL. I probably would have been a strong safety, a moniker no longer used in today’s NFL (think tackling). Rather than playing on Sundays, I have instead been a tax practitioner for more than three decades.
According to this before-and-after reasoning, I should be able to deduct the difference between my earning power as a successful NFL Hall of Famer and my actual career as a tax CPA. I intend to donate that difference to the CTG Foundation for Impoverished Accountants.
Yeah, that is snark.
What do I see here?
· Someone donated less than 100% of something.
· That something cost about $6 million.
· Someone waited a week and gave some of that something away.
· That some of something was valued at more than four times the cost of the entire something.
Nah, not buying it.
Neither did the Court.
Here is one of the biggest slams I have read in tax case in a while:
We give no weight to the opinion of petitioner’s experts.”
The taxpayer pushed it too far.
Our case this time for the home gamers was Plateau Holdings LLC v Commissioner.