Syndicated conservation easement (SCE) cases are swamping the Tax Court. If you want to schedule a Tax Court trial in Atlanta, the center of the industry, you may have to wait a while. For the last year or so, decisions have been going in favor of the government as valuations at large multiples of a recent selling price have met with judicial scorn. There is a theory that an easement on a property can be worth more than what the entire property will sell for. Until very recently that theory has only been heard in the court of public opinion from industry advocates. The Tax Court has rejected the theory in two cases. Both cases are on their way up to the Eleventh Circuit. If this theory is accepted it could have profound effects beyond the SCE industry.
The Industry Based On Dubious Thinking
The development of the syndicated conservation industry was exposed in a Senate Finance Committee report in 2020, which I covered. Its genesis was a 2009 Tax Court opinion about a deal that was basically legitimate – Kiva Dunes Conservation, LLC. Kiva Dunes is a golf course on the Gulf Coast. A lot of migratory birds were stopping there, so it is one golf course that had a great conservation purpose. The owners wanted to keep it as a golf course and were seeking more capital. Somebody came up with the idea of admitting partners who would be allocated the deduction from donating a conservation easement. The IRS fought them on valuation, but the taxpayers mostly prevailed.
The decision sparked a plethora of deals in which land was acquired and in relatively short order syndicated. Shortly after syndication there would be a conservation easement donated at a large multiple of the value for which the the entire property had recently changed hands. The value would be a lesser multiple of what the investors had contributed, typically four to five times. Essentially the investors were paying their taxes at fifty cents on the dollar more or less. The investigation indicated that this is how the deals were typically marketed.
When I first heard of the notion, I thought it was the stupidest idea I had ever heard. The market for undeveloped land is imperfect, but there are usually some smart people involved in it. So if you go out and acquire several parcels, the average price you pay will be around fair market value. Ownership of land is a bundle of rights. When you donate an easement, you are giving up part of the bundle. So except in some sort of extraordinary circumstance, an easement on a recently acquired property will be worth a fraction, possibly a larger fraction, but not a multiple, of what was recently paid for it.
The Senate Finance Committee report noted:
“Since then, promoters of syndicated conservation-easement transactions have been relying on the Kiva Dunes opinion to aggressively market such transactions involving inflated appraisals for lands that often appear to have questionable commercial values, at least at the values claimed by the promoters”
The most interesting comment in the report was that the “engine of every syndicated conservation-easement transaction” is an inflated appraisal.
The Industry Theory
A theory developed in the industry that the valuation of property for purposes of a conservation easement deduction was somehow different from valuing it for other purposes. The Senate Finance Committee report quoted from an email string:
“conservation easement appraisal is very different from a normal real estate appraisal since it takes in to account all future economic benefit on the land and takes future value discounted to present day.”
The Senate Finance Committee report included an article by Robert Ramsay, president of Partnership for Conservation (P4C). P4C was the industry trade group. The article discussed “myths” about the industry and included this one:
“Myth 7: A conservation easement’s value cannot exceed the current value of the land.
Reality: A conservation easement’s value is the value of the development rights that are forfeited in perpetuity when an easement is placed. Treasury’s own regulations require that these rights be valued based on the land’s highest and best use. When the existing state of land is different from its highest and best use, giving up the opportunity to develop the land forgoes substantial value. It is that value that the law permits as a deduction. The IRS ignores Treasury regulations, and years of court cases, when it asserts that a conservation easement deduction cannot exceed the value of the land itself. If the IRS wants to change these rules, it must do so through a legitimate rulemaking process, but it has not done so.”
Until recently, as far as I can tell, this theory had not been tested in court. The firm of Jones Day has made arguments in three cases that explain how recently acquired land can be worth a large multiple of its acquisition price. Two of the cases, Ranch Springs LLC and Beaverdam Creek Holdings LLC, have already failed in Tax Court. Appeals to the Eleventh Circuit have been filed in those cases. The other case is Desoto Holdings LLC (Docket Number 13013-20). The case is ongoing but the brief where arguments are laid out is available.
Ranch Springs
Ranch Springs may be the most important case, because it was designated a regular opinion (TC) rather than a memorandum opinion (TCM). It’s a pretty lawyerly concept, but my understanding is the TC opinions have more value as precedent than TCM opinions. The property involved in Ranch Springs, 110 acres in rural Alabama was acquired for $715,000. One year and a few days later a conservation easement was placed on the property. The easement was valued at $25,814,000. This was based on a highest and best use of the property being a limestone quarry with the dollars representing the discounted cash flow from running the quarry for 35 years.
Since there is not a lot of buying and selling of easements in profit driven transactions, they are generally valued using an indirect method sanctioned as an option in the regulations. The easement value is the value of the property without the easement less the value of the property encumbered by the easement. Jones Day argues that there is no need for the before and after rubric. The value of the easement is the discounted cash flow from mining that is being given up.
I am really intrigued by the concept of forsaking the before and after rubric and valuing the easement directly. Fair market value generally requires a hypothetical willing buyer and willing seller. Where is the willing buyer who will pay millions of dollars or anything at all to save the Ranch Springs property from being mined? Without the before and after rule, there does not seem to be much value in a conservation easement, if the willing buyer is a requirement of value.
The other argument that Jones Day is putting forth addresses the Achilles heel of the SCE industry. Appraisal standards refer to the sales comparison approach as being the preferred method with the income approach coming in second. The problem for SCE deals is that there is always a comparable sale that looks really bad for them. That is the sale of the property itself not very long before the donation. Jones Day addresses this problem by arguing that in order for the sale to be a real comparable it has to be between a buyer and a seller operating in the same market. In order to represent fair market value a sale has to be “fair”. A sale with a seller incapable of bringing the property to highest and best use to one who can is not fair.
Judge Lauber’s ruling against the taxpayer presents a strong statement.
“Held, further, assuming arguendo that limestone mining was a permissible use, the version of the income method P’s experts used to determine the “before value” of the property is erroneous as a matter of law because it equates the value of raw land with the net present value of a hypothetical limestone business conducted on the land. A knowledgeable willing buyer would not pay, for one of the assets needed to conduct a business, the entire projected value of the business.” (Emphasis added)
Beaverdam Creek
Beaverdam Creek LLC owned an 85 acre tract in Oglethorpe County, Georgia that was the site of a recently abandoned granite quarry. The LLC acquired the tract for $225,000. In less than a year a conservation easement was donated with a valuation of $21,972,000. That was based on the discounted cash flow of a hypothetical granite mine.
The acquisition price was set aside as a comparable because the seller, a 75-year old woman in poor health could not get a quarry going. There were similar objections to the other sales that the IRS appraiser had counted as comparable. It is pretty much the same argument, The only way to value the easement is by the discounted cash flow. There is no need for before and after values. But if you must do before and after there are no comparable sales because none of the sellers was ready to go into the quarrying business.
The notion that Beaverdam was, itself, all set to start quarrying is somewhat questionable, given that there were investors who bought in expecting an immediate tax deduction, but I did not see that issue being considered.
Judge Goeke’s holding was similar to Lauber’s in Ranch Springs except that he had issues with the IRS valuation and increased the before value to $300,000. His words were rather harsh.
“While we do not completely agree with respondent’s position, it is not unreasonable. On the other hand, BC Investors’ position is absurd”. He goes on “… because the valuation BC Investors argues for is completely untethered from reality, it produced no sales data that remotely supports its DCF analyses. BC Investors asks us to trust speculative, unconvincing business valuation projections over the accumulated knowledge of the market in the “Granite Capital of the World”.”
Desoto Holdings
Desoto Holdings is not yet decided. What we have to go on is the brief filed by Jones Day on July 14, 2025. They take a lot of care to distinguish this case from Ranch Springs. Trial was completed on May 13, 2025. At stake is a total disallowance of a $25,341,000 charitable contribution.
First off they argue that the IRS appraiser did not make enough inquiries to determine the highest and best use which they had as “agricultural and light residential”. According to the briefs the property was bought by Merrell Brothers, a biosolids management company which had injected the land with tens of millions of gallons of biosolid. According to epa.gov., EPA typically uses the term “biosolids” to mean sewage sludge that has been treated to meet the agency’s regulatory requirements and is intended to be land applied as a soil conditioner or fertilizer.
According to the brief, though, the land was turned into some sort of dystopian hellscape making profitable agriculture and residence out of the question. Merrell Brothers lost money by farming the land to the tune of $3,061. The point of all this is that all the comparable sales are wrong. Of course, the property is ideal for a limestone quarry, which drives a value of more than $20 million.
“This case is different in that Respondent’s proposed HBU use has been rendered effectively impossible because of the historic application of biosolids at this property. Said differently, the Court can find for Petitioner but limit its holding (if it so chooses) to cases in which the same type of historic use (application of biosolids) is present to the same incredible level (tens of thousands of tons).”
The brief states that the issue if the fair market value of the conservation easement restriction not the value of the raw land. There is a relatively brief discussion about what a bad job the IRS appraiser did by not considering all the you know that has been injected in the property along with persistent chemicals and the financial pressure the seller was under on one of the comparable.
There is then quite a lengthy analysis of what a marvelous limestone quarry there might have been on the Desoto property and the superiority of discounted cash flow as a valuation model. According to the brief DCF is not a business valuation because it does not include any intangible assets or property such as intellectual property, goodwill, brand recognition, customer loyalty, contracts, or organizational capital.
The most significant distinguishing factor emphasized in the brief is that Vulcan Materials Company purchased a greenfield quarry site in September 2023 from Rocky Bottom LLC. Vulcan paid $27.5 million. The seller, also a participant in the aggregate market, had purchased the property in 2020 from a timber company for $1,810,000. Carroll County, GA continues to assess the property at $1,874,583.
Although Jones Day has an argument there that may win under the before and after method, they still make the argument for just valuing the restriction directly.
“In this case, the “perpetual conservation restriction” is the inability to use the land for any purpose, including for its HBU to extract and sell limestone aggregate. That “charitable contribution” can be directly valued, without any need to resort to the before-and-after rubric, which the governing regulation explicitly makes optional.”
I still see a problem with that direct valuation method. Would the recipient, Atlantic Land Trust Conservancy, have paid over $20 million for the easement?
Reflection
The appeals of Ranch Springs and Beaverdam in the Eleventh Circuit promise to be exciting thanks to the extreme positions staked out by Judge Lauber on one side and Jones Day on the other. Lauber ruled that discounted cash flow valuation of land is erroneous as a matter of law. That pretty much settles it for almost all of the syndicated deals I have seen or heard about.
Jones Day’s theory about valuing the easements directly with discounted cash flow as the only acceptable method is interesting, but not necessarily a game changer. The big question mark I see with direct valuation is where all the willing buyers are. What could be game changing if accepted is their theory that in order for a sale to be comparable, it must be between a thoroughly capable buyer and a thoroughly capable seller. I could see that making many properties incomparable which could make for complications beyond syndicated easements.