Tax Court Judge Albert Lauber’s recent opinion in Ranch Springs 164 TC No 6 may be the beginning of the end of the long battle between syndicated conservation easement promoters and the IRS. In 2024 the IRS won a long string of cases and they continued that trend into 2025 with Capitol II Owners LLC, Seabrook Property LLC and Green Valley Investors LLC, which I covered here. So what is special about Ranch Springs? What is special is that it addresses an argument that the industry has been making in the court of public opinion, but, as far as I can tell, not in courts of law till now. The detailed version of the argument was crafted by the law firm Jones Day, a favorite of President Trump.
An Industry Based On Nonsense
More than a decade ago I got an odd phone call. It represents to me one of those paths not taken, thankfully. I had written quite a few pieces about easement valuations. My biggest source is Tax Court decisions and something that will draw me into a particular case is that it is an interesting story and easement opinions rarely failed in that regard. One of my posts that proved prescient was titled Conservation Easements A New Field For Villainy.
The call I received, which I presumed was either for consulting assistance or perhaps promotion was from some fellows who were starting a new business. They were going to buy land and then sell it to investors who would then donate conservation easements. I thought it was one of the stupidest ideas I had ever heard.
The market for unimproved land is not perfect, but the players in it are not a bunch of idiots. So if you go on a buying spree the package you assemble will likely be not that far off from average fair market value. The ownership of land is a bundle of rights. When you donate an easement you are giving away part of the bundle not the whole bundle. So an easement will be worth a percentage of what was paid for the property recently. And the tax savings will be a percentage of that.
Say the easement is a very high percentage of the value of the property. You buy the property for $5,000 and sell it to me a year later for $6,000. I take a deduction of 90% of what I paid which at say 40% saves me $2,160. Well, if I wanted to own that particular property in its natural state forevermore, that is not such a bad deal, but it is really not that exciting. In order to be exciting as a tax shelter the easement would have to be worth a multiple of the amount recently paid for the land.
Years later I would learn the industry’s answer to my puzzlement. In a Tax Notes article reproduced in Senate Finance Committee report and titled A Dirty Dozen Myths About Conservation Easements and One Sad Truth, Robert Ramsay, President of Partnership for Conservation, indicates that the notion that a conservation easement’s value cannot exceed the current value of the land is a myth. He wrote, “When the existing state of the land is different from its highest and best use, giving up the opportunity to develop the land foregoes substantial value. It is that value that the law permits as a deduction.”
I did not agree with Ramsay as I indicated in this piece. More recently when I was chatting with a lawyer about a different issue, I asked him if he knew anybody who was in any of the deals. He indicated that a friend was. He noted that no court had yet ruled on the notion that an easement on a property was totally untethered from comparable sales of the property.
As far as I have been able to tell, nobody had actually made that argument until the Jones Day team led by Simon P. Hansen raised it in the Ranch Springs case.
Some Basics
The Internal Revenue Code (IRC) mentions “qualified conservation contributions” as an exception to an exception. The first level exception is one that denies charitable contributions to partial interests. Qualified conservation contributions are an exception to that exception. There is nothing in the IRC that gives them special valuation privileges.
The regulations do give qualified conservation contributions a valuation break. The general rule for valuing contributions is fair market value:
“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”
When it comes to qualified conservation contributions, easements, there is a dearth of willing buyers. There just isn’t that much buying and selling of them. So the regulations allow another method:
“If no substantial record of market-place sales is available to use as a meaningful or valid comparison, as a general rule (but not necessarily in all cases) the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.”
The argument is usually about the “before value”. In the past residential development was the go to highest and best use for a conservation easement valuation. Lately mining has been common.
About The Valuation
Judge Lauber describes the fact pattern as one that has become “painfully familiar”. In December 2016 Ranch Springs, LLC purchased 110 acres in rural Alabama for $715,000. That $6,500 per acre approximated the going rate for similar property in the neighborhood. One year and a few days later Ranch Springs granted a conservation easement over the property to Heritage Preservation Trust. The appraisal prepared by Claud Clark III valued the easement at $25,814.000. Judge Lauber states that the $236,672 per acre in Clark’s before value for the land represents a position that the land had appreciated by 3,641% in 12 months considering that it was bought for $6,500 per acre.. This has been driving me a little crazy. By my reckoning the appreciation is only 3,541%. I don’t think that affects the outcome very much though, but I wanted to let you know I was paying attention.
According to Clark’s appraisal the highest and best use of the property was operating a limestone quarry. The value was based on the discounted present value of the cashflow from the hypothetical quarry which was projected to run for 35 years. Judge Lauber had a couple of problems with that. One was that the property was zoned agricultural and light residential and it was not established to the judge’s satisfaction that it could be rezoned.
Then there was the problem of whether there would be enough demand to support another limestone quarry in the vicinity.
Judge Lauber’s Conclusion
At any rate, Judge Lauber ended viewing the $6,500 per acre that the promoters paid for the property in 2016 as not being that far off from what the fair market value was in 2017. This has been the trend in recent cases, placing strong on emphasis on the recent sale of the property,
“Held: The transaction by which LLC acquired the property in December 2016 occurred at arm’s length between a willing seller and a willing buyer, both with reasonable knowledge of relevant facts and neither being under any compulsion to buy or sell. The per-acre price upon which the parties agreed, $6,500, provides very strong evidence as to the fair market value of the property before the easement was granted.
Held, further, P failed to establish that the HBU of the property before the granting of the easement was limestone mining. The property was zoned A-1 Agricultural and P failed to prove that rezoning to permit mining use was reasonably probable.
How Is This Opinion Different?
Ranch Springs has been designated a regular Tax Court opinion rather than a memorandum opinion. The Tax Court website indicates that a regular opinion is indicative of there being a sufficiently important legal issue. The opinion does not state what that important issue is. My money is that the important issue is this holding:
“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)
Judge Lauber notes that:
“At the end of the day, petitioner’s position appears to rest on its assertion that the “willing buyer/willing seller” test, which governs the valuation of property for charitable contribution purposes generally, does not apply when the donated property is a conservation easement. Petitioner cites no judicial precedent or other authority to support this novel proposition. There is none.”
He goes on:
“According to petitioner, “the fair market value of the perpetual conservation restriction” is the value of what the donor gives up by granting the easement, i.e., the value of “the property rights sacrificed.” In this case, petitioner says, the “the property rights sacrificed” consist of the right to construct and operate a limestone quarry on the land. The NPV of the hypothetical limestone quarry, petitioner concludes, is thus the FMV of the easement. On this theory, it does not matter what a knowledgeable willing buyer would pay for the land unencumbered by the easement. The “willing buyer/willing seller” test thus goes out the window.”
This argument is wholly unconvincing.”
I have spent some time with the petitioner’s brief to get a better understanding of the argument that Judge Lauber is rejecting. I have also been referred to a recent article on valuation with authors that largely correspond with the Jones Day legal team representing Ranch Springs.
The most interesting argument in the article was that in order for a sale to be considered at “fair market value” it must be between buyers who are both capable of bringing a property to its highest and best use in order to count as “fair”. The most interesting argument in the brief was this “Because the contribution – the foregone right to quarry the Property’s limestone – can be directly measured, there is no reason to indirectly value the contribution through application of the before-and-after rubric”.
The outcome of an appeal of this case will make for really interesting reading.
Reaction
Representatives of Ranch Springs wrote me:
“Petitioner is disappointed in the Tax Court’s opinion. We are hopeful the appellate court gives the taxpayers guidance on two points that Petitioner put forth at trial. First, to be a “comparable” sale, the buyer and seller had to know the highest and best use of the property. And second, the DCF income method specifically “strips away” the expenses and costs associated with an income-producing property and therefore is not a business valuation.”
Attorney Stephen J. Small, a noted authority in the area of land trusts and conservation easements, wrote me:
“An ‘offer’ is meaningless. A purchase price for a similar property in the relevant market is evidence of fair market value. Judge Lauber knows what he is doing. Someone in this case simply made up a novel but completely unsupportable theory.”
What Can Go Wrong For The IRS?
There is a good chance that this decision may be noticed by President Trump. The President has a well documented fondness for conservation easement deductions. Jones Day has represented the President on important matters. Several Jones Day lawyers served in the first Trump administration and at least one of them, Hashim Mooppan had just take a post at the Justice Department. What might happen if the DOJ attorneys fighting the case at the next level are encouraged to see some merit in the Jones Day argument?
I asked Lew Taishoff, who blogs the Tax Court with incredible intensity he wrote me reassuringly:
“Mr Reilly, I doubt anything so sweeping will happen in an area so narrow. The revolt over the deficit and national debt, combined with the biggest tax increase in our lifetime (for what is a tariff but a national consumption tax, that hits the poorest the hardest?), will give the party in power enough to do.”
I am also skeptical of IRS ability to actually push through the adjustments it wins to individual returns and collect the resulting tax. 2017 is the last year for which the push-through method is mandatory. The IRS when it has offered settlements has conditioned them on the partnership paying the deficiency. Both TIGTA and GAO had noted the IRS weakness in pushing through partnership adjustments in 2015. Given the recent reductions in personnel I doubt they will be better at it in at least the short term future. It may be that many investors in these deals will spend the next few years waiting for the other shoe to drop and the only penalty they suffer will be the stress.