Two Tax Court rulings expose overvalued conservation easements

Editor: Michael J. Mondelli, J.D.

Two recent Tax Court opinions, Beaverdam Creek Holdings, LLC, T.C. Memo. 2025–53, and Ranch Springs, LLC, 164 T.C. No. 6 (2025), underscore the IRS’s continued enforcement focus on overvalued conservation easements. Both cases reveal how speculative valuations, unsupported highest–and–best–use assumptions, and flawed appraisals can render multimillion–dollar charitable deductions for the contribution of a conservation easement virtually worthless. Although both cases involved valuations based on forgone use of the land in question for quarrying activities, they carry critical implications for tax professionals advising clients on charitable contributions of easements on other types of real property.

Beaverdam Creek Holdings: Unrealized quarry dreams

In Beaverdam Creek Holdings, the taxpayer claimed a nearly $22 million noncash charitable contribution deduction for donating a conservation easement on undeveloped land in Georgia. The easement covered approximately 85 acres of property purported to have granite quarry potential. The valuation relied primarily on a discounted–cash–flow (DCF) method, asserting that the land’s highest and best use before the donation was as a granite quarry.

The Tax Court accepted that quarrying was the property’s highest and best use. However, it held the taxpayer’s valuation relied on its two experts’ unrealistic projections of a quarry’s commercial potential, overestimating the market value of the granite produced and underestimating mining and processing costs. The court instead assigned the easement a value of just under $200,000, based on more grounded income projections and comparable sales.

Because the taxpayer’s deduction exceeded 200% of the court–determined value, the 40% gross valuation misstatement penalty under Sec. 6662(h) applied. The court noted that a qualified appraisal, even if it substantially complies procedurally under Regs. Sec. 1.170A–13(c), cannot support a deduction that lacks credibility.

Ranch Springs: A familiar pattern of overstatement

In Ranch Springs, the taxpayer asserted a $25.8 million deduction for the donation of an easement on rural property in Alabama. The valuation again relied on a DCF model, premised on the notion that the land could be used for limestone mining.

The Tax Court, however, was unconvinced by this highest–and–best–use assumption. The land was zoned for agricultural use, and according to the court, there was not a reasonable probability that the land could be rezoned for use as a limestone quarry. The court found that even if the land could be rezoned for use as a limestone quarry, the taxpayer failed to prove this use would be financially feasible and that the version of the income method the taxpayer’s experts used was erroneous as a matter of law because it equated the value of raw land with the net present value of a hypothetical limestone business conducted on the land. The court in addition emphasized that the taxpayer’s expert witnesses’ valuation was based on unrealistic development scenarios.

Rather than rely on hypothetical business income, the Tax Court favored a comparable–sales approach reflecting the property’s actual use and surrounding market data. The result: a reduced easement value of $335,500. As in Beaverdam Creek, because the claimed value of the easement by the taxpayer wildly exceeded the valuation determined by the Tax Court, the court again upheld the imposition of the Sec. 6662(h) gross valuation misstatement penalty against the taxpayer.

Emerging themes in conservation easement litigation

These two decisions illustrate a clear and growing judicial intolerance for inflated conservation easement deductions. Several takeaways emerge from these and other courts’ holdings:

• Highest and best use must be realistic: The Tax Court has repeatedly insisted that highest and best use must be reasonably probable and legally achievable. Speculative uses such as mining operations without at least a likelihood of obtaining necessary permits will not support massive valuations, even if they seem theoretically possible.
• DCF models are not a silver bullet: Although the income approach is acceptable under valuation standards, the court disfavors its use when the projected business activity lacks supporting evidence. Unless the taxpayer can show active steps toward development, the court will likely dismiss such models as unreliable.
• Comparable sales are more persuasive: When appraisers base their analysis on arm’s-length sales of similar properties in the same geographic region, their conclusions are more likely to be accepted. The Tax Court places greater weight on observable market data than on speculative projections.
• Procedural compliance alone is not enough: A qualified appraisal that meets the procedural and documentation requirements of Regs. Sec. 1.170A-13(c) does not immunize the taxpayer from penalties if the underlying valuation itself is flawed. Substantive accuracy remains paramount.
• Independence matters: The courts scrutinize the relationship between taxpayers and appraisers or consultants. Valuations prepared by individuals with financial interests in or personal connections to the transaction may be given little weight.

Practical guidance for tax professionals

Tax advisers guiding clients on conservation easement contributions must go beyond ensuring proper documentation. It is essential to evaluate whether the claimed valuation is defensible both technically and practically. Professionals should:

• Scrutinize the highest and best use: Is it legally allowed under current zoning? Are permits in progress? Has the client taken any steps toward development?
• Avoid inflated income projections: Do not rely solely on DCF methods unless the client has credible, documented plans to monetize the property.
• Use independent appraisers: Select qualified professionals who are free of financial interest in the outcome and who apply a market-based valuation framework.
• Perform a reasonableness check: If the claimed deduction appears wildly disproportionate to the purchase price or local sales data, the IRS and courts are likely to push back.
• Disclose and document everything: A clean and complete appraisal file with clear support for assumptions and data inputs helps withstand audit scrutiny.

Basing advice on the facts

The Tax Court’s recent opinions in Beaverdam Creek Holdings and Ranch Springs reaffirm the need for grounded, credible, and well–supported valuations in conservation easement deductions. While the qualified conservation contribution incentive under Sec. 170(h) remains valuable, the IRS and judiciary are quick to disallow deductions that rest on fantasy economics or paper–thin assumptions. As conservation easement litigation continues to evolve, practitioners must provide clients with rigorous, reality–based advice to navigate this increasingly complex terrain.

Editor

Michael J. Mondelli, J.D., is a director in the Tax Advisory Group, with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mondelli at mmondelli@singerlewak.com.

Contributors are members of or associated with SingerLewak LLP.