The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Another Conservation Easement Tax Court Case - Mostly in Taxpayer's Favor
Aug 06, 2014
There are multiple Tax Court rulings on conservation easements each year. In the Schmidt v. Commissioner case issued today, the Tax Court ruled mostly in favor of the taxpayer, but not totally.
The Schmidt's lived in Colorado for many years and purchased about 40 acres of land in northern El Paso County. They attempted to get this acreage along with another 60 acres platted as a 2.5 acre lot sub-division. However, before they got the final plat, they decided to grant a conservation easement on the property and turn it into one 40 acre home lot.
When valuing a conservation easement, you must determine the value of the property before the easement and the value after the easement. The difference in value becomes the charitable deduction amount. In the case of the Schmidt's, their apprisal determined the before easement value was $1.6 million and the after easement value was $400,000 for a net contribution deduction of $1.2 million.
The IRS audited the return and assessed additional income tax of about $500,000 for tax years 2003-2006 and additional penalties of about $100,000. Since the charitable deduction was so large, the Schmidt's could only deduct it over a four-year period. In the IRS original assessment, they disallowed the entire charitable contribution claiming it did not meet the requirements under Section 170. However, the parties had agreed that it met the requirements and the only dispute was the value of the contribution easement.
The IRS appraiser valued the property at $750,000 for the before easement value and $270,000 for the after easement value for a net deduction of $480,000. As usual the Tax Court disagreed with both values and came up with their own valuations; however, the valuations were much closer to the taxpayer's values than the IRS. The Court found that the before easement value to be $1,422,445 which was $180,000 lower than the taxpayer's value but almost $700,000 higher than the IRS.
On the after easement value, the court used the IRS value of $270,000 which actually helped the taxpayer since if they had used the taxpayer's value of $400,000 the easement deduction would have been $130,000 lower. The ultimate final charitable deduction was determined to be $1,152,445, which ended up only being $47,555 lower than the taxpayer's original deduction. This resulted in the taxpayer not owing any penalties at all and instead of owing $600,000 of taxes and penalties, the final number is probably about $20,000 plus interest.
One final interesting nugget from the decision was reference to the "Preble's meadow jumping mouse" which has been listed as a threatened species. This mouse is about 9" in length with large hind feet and a tail that is about 6 inches long. The issuance of the final plat had been delayed by the presence of this mammal.
Many of these conservation easement cases go against the taxpayer. It is always nice to review one where the taxpayer wins (or at least the win was 96% of the original deduction).