Conservation Easements and the Valuation Conundrum

Abstract

For more than fifty years, taxpayers have been able to claim a federal charitable income tax deduction under Internal Revenue Code § 170(h) for the donation of a conservation easement or a façade easement. For just as long, the deduction has been subject to abuse, including valuation abuse. Dismayed by the expenditure of significant judicial and administrative resources to combat abuse in the easement donation context, the Treasury Department recently proposed reforms, including reforms to address valuation abuse. The reforms were proposed in somewhat of an analytical vacuum, however, because there has been no comprehensive analysis of the easement valuation case law. This article fills that void. It examines the easement valuation case law and discusses the most common methods by which taxpayers or, more precisely, their appraisers overvalue easements. It also proposes alternative reforms informed by the lessons learned from the case law. Concise summaries of the relevant facts and holdings of the cases are included in appendices.

Keywords: conservation easement, facade easement, valuation, valuation abuse, appraisal, before and after method, sales comparison approach, subdivision development analysis, discounted cash flow analysis, reproduction cost approach, reasonable probability of rezoning, 170(h), Whitehouse, Palmer Ranch

JEL Classification: E62, H20, K11, K34, Q24