In a previous article, I discussed the United States Tax Court case Gemperle v. C.I.R., T.C. Memo 2016-1, wherein the Tax Court ruled that the taxpayer was not entitled to a charitable deduction for a conservation easement because the taxpayer failed to include a copy of the qualified appraisal with the tax return. Read about this case here. [insert hyperlink]
This case brings to mind a conservation easement tax appeal handled by this author several years ago. The taxpayer, a Montana rancher, had donated a conservation easement on his land to a non-profit land trust to preserve the rural nature of the land. The taxpayer obtained a qualified appraisal from an experienced Montana appraiser.
On audit, the IRS denied the deduction on the grounds that the appraisal did not meet IRS regulations for a qualified appraisal. The IRS auditor concluded that the rancher’s appraisal made an insufficient showing that there was immediate or even remote likelihood that the rural ranch property would be ever developed. The low population growth of the rural Montana county suggested the chance of development to be virtually non-existent. Thus, the IRS auditor claimed that the conservation easement did not reduce the value of the rural ranch land.
I joined the case after the matter could not be resolved by the taxpayer and appraiser during the audit. We appealed the matter to IRS Appeals and argued that the appraisal met all of the requirements of a qualified appraisal under IRC §170 and Regulation 1.170A-13(c)(3)(ii). IRS regulations require that the appraisal be conducted pursuant to generally accepted appraisal methodologies and we aimed to show IRS Appeals that our Montana appraiser followed those methodologies.
An IRS engineer submitted a report to support the IRS’s determination that the conservation easement had zero value. However, the IRS engineer failed to provide any sales data to dispute the Montana appraiser and instead provided only an unsubstantiated opinion as to an income approach to value. Further, the IRS engineer did not hold any appraiser certifications or unique qualifications that would permit him to determine whether the taxpayer’s appraisal constituted a “qualified appraisal.” The IRS engineer, located out of state, had never visited the subject property and had not demonstrated special knowledge of Montana real estate market or any previous experience with Montana conservation easements. In contrast, the taxpayer’s appraiser was a Montana certified appraiser and had lived and worked in Montana and appraised conservation easements for over 15 years.
Ultimately, we convinced IRS Appeals that the appraisal met IRS criteria since the diminution of the land value was sustained by the appraiser’s privately kept sales database which tracked sales of Montana easement-encumbered properties over a substantial period of time. The IRS Appeals officer awarded the taxpayer the entire charitable deduction.
This IRS Appeals experience demonstrates that conservation easement charitable deductions must be scrupulously documented with a qualified appraisal. However, if a qualified appraisal is obtained, IRS Appeals may more likely to side with a knowledgeable, well documented, local appraiser rather than an IRS “engineer” who has likely never seen the property, and has no particular grasp of local appraisal methodologies and properties.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP.
Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah.