Fair Market Value and Uncertainty Regarding Highest and Best Use

4 Pages Posted: 24 Jul 2014

Date Written: June 23, 2014


This article argues that the Tax Court’s valuation in Palmer Ranch Holdings v. Commissioner, T.C. Memo. 2014-79, did not reflect the property’s true fair market value because it failed to account for uncertainty regarding the property’s highest and best use. In Palmer Ranch Holdings, a conservation easement case, the court applied the valuation approach originally endorsed by the Tax Court in Hilborn v. Commissioner, 85 T.C. 677 (1985), which requires the court to first decide the property's highest and best use (using a reasonable probability standard) and then to determine the fair market value given the highest and best use decided in the first step. This article explains why the two-step approach exaggerates the fair market value of property when there is uncertainty regarding its highest and best use. The evaluation of the highest and best use of property should be a component of fair market value rather than a separate step.

Keywords: conservation easement, fair market value, charitable contribution, tax, Tax Court, valuation

JEL Classification: K34

Suggested Citation

Montague, John, Fair Market Value and Uncertainty Regarding Highest and Best Use (June 23, 2014). 143 Tax Notes 1425 (2014), Available at SSRN: https://ssrn.com/abstract=2470282
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