Appraisals for Conservation Easements Upheld by DC Circuit Court of Appeals

July 8, 2011, 3:53 PM

The District of Columbia Circuit Court of Appeals clarified the requirements for an appraisal of a conservation easement in its opinion in Commissioner of Internal Revenue Service v. Dorothy Jean Simmons issued on June 21, 2011. The Internal Revenue Service (IRS) had challenged a Tax Court decision approving Ms. Simmons deductions in 2003 and 2004 for the donation of conservation easements on the facades of two buildings in an historic district in Washington, DC. The Court of Appeals upheld the Tax Courts decision.

The IRS argued an error by the Tax Court, claiming that the appraisals submitted to prove the fair market value of the easements did not comply with Treasury Regulation 1.170A-13(c)(3)(ii). The Court of Appeals disagreed. The Court upheld the appraisers use of the before and after approach to value the conservation easement and approved the items that the appraiser considered in making the valuation. To determine the fair market value of the property without the easement, the appraiser reviewed sales of similar properties and identified some of them in the appraisals. To determine the fair market value of the property with the easement, the appraiser (1) spoke with and considered the mindset of competent buyers and sellers and the considerations that they have actually had, or are likely to have in buying or selling a property encumbered by this easement. Specific items the appraiser cited that would lower the value of the encumbered property include the easement requirements being more stringent than local historic preservation laws, the legal exposure to the grantor if the easement were breached, and the grantees right to approve any changes to the property. --Marina Liacouras Phillips