Originally published on Forbes.com May 8th, 2014
Hugh Culverhouse Jr. inherited the Tampa Buccaneers from his father, but did not hang onto the team for very long. He may also have inherited his father’s talent for tax litigation. Although Hugh Culverhouse Sr seems to have amassed much of his fortune from shrewd real estate investments, he was a well known tax attorney based in Jacksonville, having previously handled high profile cases while working for the IRS. It may seem odd to look at a case that ends up with a charitable deduction dis-allowance of nearly $4 million as a victory, but when you consider how taxpayers generally fare in easement cases it really is.
Palmer Ranch Holdings LLC, (PRH) which is directly and indirectly 100% owned by Hugh Culverhouse Jr., claimed a charitable deduction of $23,942,500 for the donation of an easement on 82.19 acres of land to Sarasota County, Florida in 2006. The land is now used for a public park, a community garden, a conservation area, and preserved open space.
Unlike its position in some easement donation cases, the IRS was willing to allow that the easement was worth something – not quite $7 Million. Then of course there is that nasty 40% accuracy penalty. The Tax Court, in its decision, did not allow the entire deduction, but it did allow most of it – $19,955,014. That valuation takes the 40% penalty off the table and the Court also ruled that the 20% accuracy-related penalty did not apply. Planners will probably be studying this case closely. Here are some of the highlights.
The big problem with valuing conservation easements is that conservation easements are not bought and sold all that much. So what you end up having to do is value the same property with and without the easement. It can end up being rather hypothetical, since you are trying to establish what the property could be worth if you did something that now you are promising not to do. In several cases, the IRS has been able to establish that easements were actually worthless, since they did not add significantly to already existing restrictions. I compared easements like that to renouncing my super powers.
The parcel had a history of zoning problems and conservation concerns. There is a bald eagle nest on the property and it is within a wildlife corridor. The IRS valued the property based on how it is currently zoned. The PRH appraisal was based on obtaining a higher density and allowing for multi-family housing. The IRS harped on the former zoning problems, environmental issues and likely neighborhood opposition to multi-family housing.
The Tax Court was dismissive of the prior zoning problems.
The June 2004 denial related only to a portion of parcel B-10. That portion did not include the eagle nest zone. Looking at that denial in conjunction with the ordinance, we believe the BOCC was concerned that the development application did not consider the nearby eagle nest zone, wetlands, and wildlife corridor. Moreover, that June 2004 denial (as well as the ordinance) was the result of a three-to-two vote. The closeness of the vote suggests that the BOCC’s decision could have changed over time, especially when a later application protects the eagle nest zone, the wetlands, and the wildlife corridor. Accordingly, this rezoning history does not eliminate the reasonable probability on the valuation date of a successful rezoning.
The Court was not impressed with the government’s other arguments and found that there was a “reasonable probability” that the parcel could be rezoned.
The Tax Court did adjust the taxpayer’s valuation because it appeared that the hot real estate market in the area had begun to soften in 2006.
According to his own admission, Mr. Durrance should not have applied a steady 1.5% appreciation factor to parcel B-10 for the months after the market hit its peak in 2005. Even if property values did not decline in 2006, we think they likely stagnated. Accordingly, we will reduce petitioner’s appraisal by the amount of 2006 appreciation Mr. Durrance calculated. This results in a “before value” of $21,005,278.
The disagreement between the taxpayer and the IRS on the “after” value of the property was not as marked in absolute terms. The higher the “before” value the greater the donation, but a higher “after” value means a lower donation. The Tax Court went with the taxpayer’s value.
As far as the penalty went, the Court looked favorably on the advisers who had been involved.
Palmer Ranch retained an experienced tax attorney to advise it on how to donate the conservation easement in compliance with section 170(h). That attorney retained Mr. Durrance, who respondent stipulated was a qualified appraiser providing a qualified appraisal. Palmer Ranch also retained WilsonMiller to provide advice on the relevant land planning, zoning, and other land use regulations relevant to the donated property. Respondent does not dispute that the conservation easement satisfied all the requirements for a qualified donation of a conservation easement as specified in section 170(h). Therefore, we have no trouble finding these advisers to have at least an adequate level of expertise.
This decision might give a bit of a boost to people involved in donations of conservation easements. Results in Tax Court have been pretty dismal of late, but this case shows that the technique can work well when properly executed.
You can follow me on twitter @peterreillycpa.