Current developments in taxation of individuals: Part 2

This semiannual update surveys recent federal tax developments involving individuals. It summarizes notable cases, rulings, and guidance on a variety of topics issued during the six months ending October 2025. The update was written by or on behalf of the AICPA Individual and Self–Employed Tax Technical Resource Panel.

Part 1 of this update, which appeared in last month’s Tax Adviser,¹ covered a wide range of material, while Part 2 deals solely with charitable contributions, including donations of conservation easements.

Sec. 170: Charitable, etc., contributions and gifts

Second Circuit affirms restriction on charitable SALT cap workarounds

In State of New Jersey v. Bessent,² the Second Circuit upheld IRS regulations that significantly limit the deductibility of contributions to state–administered charitable programs when taxpayers receive state tax credits in return. Specifically, the court held that taxpayers who make a charitable contribution in exchange for a state tax credit have received a quid pro quo and must reduce their charitable deduction by the value of the credit. According to the court, this approach aligns with Sec. 170’s legislative history and is neither arbitrary nor capricious.

The Tax Cuts and Jobs Act, P.L. 115–97, imposed a $10,000 limitation (the SALT cap) on the state and local tax deduction for individuals ($5,000 in the case of married taxpayers filing separately) for tax years after Dec. 31, 2017. Prior to that time, individual taxpayers who itemized deductions were able to deduct their state and local taxes in full (subject to certain limitations).

In response to the SALT cap, New Jersey, Connecticut, New York, and the village of Scarsdale, N.Y., enacted state–administered charitable programs to help mitigate the impact of the limitation on their residents. These programs allowed residents to receive a state or local tax credit in exchange for a contribution to a state–administered charitable fund; the credits ranged from 85% to 95% of the contribution. The states and Scarsdale argued that taxpayers who made contributions into these funds should be able to deduct these payments in full as charitable contributions on their federal income tax return, unimpeded by the SALT cap and without any reduction for the value of the state tax credit received in exchange, effectively converting a state tax payment into a charitable contribution deduction.

The IRS issued a notice of proposed rulemaking on Aug. 27, 2018, to address these charitable programs.³ After a comment period, the regulations were finalized on June 13, 2019 (the final rule).⁴ According to the final rule, a taxpayer who makes a charitable contribution to a state–administered charitable fund in exchange for a state tax credit has received a benefit or a quid pro quo. Therefore, the taxpayer is required to reduce their charitable contribution deduction by the amount of any state or local tax credit received,⁵ unless the state or local tax credit is worth 15% or less of the taxpayer’s contribution.⁶

After the final rule was implemented, the states and Scarsdale filed a lawsuit in district court against the IRS, arguing that the final rule’s interpretation of Sec. 170 was not only arbitrary and capricious but also inconsistent with the statute. The states and Scarsdale also argued that the IRS exceeded its statutory authority in light of the Supreme Court’s subsequent decision in Loper Bright Enterprises v. Raimondo.⁷ The district court held in favor of the IRS, prompting the states and Scarsdale to appeal the case to the Second Circuit.

Sec. 170(c)(1) defines a charitable contribution as including a “contribution or gift to or for the use of … a State … or any political subdivision [thereof]” so long as “the contribution or gift is made for exclusively public purposes.” Because the statute does not define what constitutes a “contribution” or “gift,” courts rely on case law for guidance. The case law not only clarifies the meaning of these terms but also establishes the quid pro quo principle embedded within Sec. 170. In short, under this principle, a payment to a tax–exempt entity cannot qualify as a charitable contribution if the donor expects to receive a substantial benefit in return. If the donor receives a benefit that is either “commensurate with the payment” or “the reason for making the payment,” then the payment is a quid pro quo rather than a gift.⁸ However, if the donor voluntarily contributes money or property to a charitable organization in excess of the value of any benefit received in return, then the excess may qualify as a charitable contribution.⁹

The appellants contended that the state tax credits received in exchange for contributions to their charitable programs did not constitute a quid pro quo. They argued that if the motivation to receive a tax benefit deprived a gift of its charitable nature, then all charitable gifts would be inherently nondeductible. The court rejected this reasoning, clarifying that the presence of a quid pro quo does not depend upon the subjective motivations of the donor but rather on the objective features of the transaction. Although donors may have various subjective motivations, these motivations do not invalidate the charitable contribution itself. As the Tax Court explained in Mill Road 36 Henry, LLC,¹⁰ the subjective intent behind a donation does not alter the objective reality that a bona fide transfer to a charitable organization has been made. Thus, a donor’s state of mind neither negates one’s eligibility for a charitable contribution deduction, nor does it establish the existence of a quid pro quo.

The Second Circuit also emphasized that donors to these state–administered charitable programs were motivated not by a federal charitable deduction but, rather, a state income tax credit. Courts have consistently held that the federal charitable contribution deduction under Sec. 170 does not constitute a specific, measurable benefit or a quid pro quo. If the federal tax deduction under Sec. 170 represented a quid pro quo, then the deduction itself would never be allowed, and Sec. 170 would serve no purpose. Further, in traditional quid pro quo cases, the party providing the measurable benefit is typically the recipient of the donation, whereas the federal tax deduction is a benefit provided by the U.S. Treasury.¹¹

Thus, to determine the presence of a quid pro quo, the critical inquiry is whether the transaction includes an objective, measurable, and specific return flowing back to the donor, not whether the donor was subjectively motivated to receive a tax benefit. Applying this standard, the court found that a taxpayer who donates to a charitable program in exchange for a state tax credit clearly receives a specific, measurable benefit: a reduction to their state tax liability. From the donor’s perspective, this benefit is functionally equivalent to receiving a cash payment from the state. As the court explained, “the practical consequence of a donation to New York’s fund, for example, is indistinguishable from the State handing the donor a stack of cash worth 85% of her contribution.” Based on this paradigm, the court believed that the charitable funds established by the appellants would receive contributions only if the donors received a state tax credit in return. In fact, following the publication of the final rule, contributions to these charitable funds “all but dried up.” This reinforced the court’s conclusion that donors were primarily motivated by the state tax credit these programs offered rather than pure charitable intent.

For these reasons, the Second Circuit affirmed the district court’s ruling and held that the final rule properly applied the quid pro quo principle by reducing the donor’s charitable contribution deduction to account for any state tax credit received.

Charitable contribution deduction disallowed due to lack of substantiation

In two unrelated cases, the Tax Court disallowed the taxpayers’ charitable contribution deductions after concluding that the strict substantiation requirements of Sec. 170 were not met.

In Besaw,¹² the taxpayer’s 2019 federal income tax return included a noncash charitable contribution deduction of $6,760. Form 8283, Noncash Charitable Contributions, was attached to the return and included the names and addresses of each charitable donee, along with short descriptions of the donated items. However, the taxpayer did not include the dates of the contributions or the value of the donated items on Form 8283.

The IRS selected the taxpayer’s return for examination and requested additional support to substantiate his $6,760 noncash charitable contribution deduction. In response to this request, the taxpayer provided the IRS with receipts from the donee organizations; however, these receipts did not include descriptions or values of the items donated. The taxpayer also submitted “noncontemporaneous” documents summarizing the items donated, the charitable donees, and the “cost/current value” of the donated items. After reviewing the taxpayer’s submission, the IRS issued a notice of deficiency disallowing the entire $6,760 deduction for failing to satisfy the Sec. 170 substantiation requirements.

Under Sec. 170(f)(8), contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment letter from the charitable organization. For noncash charitable contributions, this letter must include a description of the property contributed. To be considered contemporaneous, the letter must be obtained on or before the date the taxpayer files their return or the due date (including extensions) for filing the return (whichever is earlier). Regs. Sec. 1.170A–13(b) imposes similar rules for noncash property donations, requiring taxpayers to substantiate each contribution with a receipt from the donee, including the name of the donee, the date and location of the contribution, and “[a] description of the property in detail reasonably sufficient under the circumstances.”¹³ Finally, if the deduction being claimed exceeds $500, then the taxpayer must also maintain records related to the property’s manner of acquisition and cost basis.¹⁴

In making its decision, the court focused on the fact that none of the taxpayer’s charitable contribution receipts contained descriptions of the property donated, even though receipts of this type were not impractical to obtain from the donees. For this reason, the court concluded that the taxpayer did not comply with the Sec. 170 substantiation requirements. Therefore, he was not entitled to a charitable contribution deduction.

The Tax Court reached a similar conclusion in Johnson.¹⁵ In this case, the taxpayer received a notice of deficiency from the IRS in April 2021 after failing to file his 2018 tax return. In response to the deficiency, the taxpayer filed a late Form 1040, U.S. Individual Income Tax Return, which reported $43,258 in cash charitable contributions, along with other deductions and business expenses.

The taxpayer told the IRS that the contributions were made to the Family of Kaiyon, David & William Foundation Inc., a qualified Sec. 501(c)(3) public charity, which was created by the taxpayer in memory of his nephew. The taxpayer served on the board of the foundation. To substantiate the deduction, the taxpayer produced a letter from the foundation’s secretary dated Jan. 22, 2019. The letter stated that the taxpayer’s monetary donations to the foundation during 2018 were $43,258 and that no goods or services were provided by the foundation in return for the contribution.

Sec. 170(f)(8) requires charitable contributions of $250 to be substantiated by a contemporaneous written acknowledgment letter from the donee organization that specifies the amount of cash or a description of property other than cash contributed and whether the organization provided any goods or services in exchange. Sec. 170(f)(17) further provides that no deduction is allowed for any cash contribution “unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.”

At first glance, the Tax Court noted, it appeared that the taxpayer satisfied the requirements of Secs. 170(f)(8) and (f)(17) by producing the letter from the foundation. However, the Tax Court explained that a written communication from a donee charitable organization that complies with Sec. 170(f)(17) does not “irrefutably prove the fact and deductibility of the donation it attests.”

In the taxpayer’s case, for a number of reasons, including his otherwise deficient reporting on his tax return, irregularities in the letter from the foundation, and his close relationship with the foundation, the Tax Court found that the letter from the foundation was not adequate to substantiate his deduction. Moreover, the taxpayer had not produced any of his own bank records (or records from the foundation) that supported the deduction.

Although the Tax Court stated that it believed that the taxpayer likely supported the foundation with some cash donations during 2018, it found it was unable to determine the amounts of these donations, given the unreliability of the foundation’s letter and the undeveloped record before it. Thus, the court concluded that the taxpayer was not entitled to the claimed charitable contribution deduction for the contributions to the foundation.

Donations of conservation easements

In a number of recent cases, the Tax Court addressed issues involving the charitable donation of a conservation easement, which is essentially a legal agreement to preserve a piece of land for future generations by permanently limiting its development.

The conservation easements litigated in these cases were donated prior to the effective date of the SECURE 2.0 Act of 2022,¹⁶ in which Congress put a ceiling on the size of certain charitable deductions for donating such easements. This legislation generally disallows partnerships or S corporations from taking an income tax deduction for a qualified conservation contribution if the amount of the contribution exceeds 2.5 times the sum of each partner’s or S corporation shareholder’s relevant basis.¹⁷

In final regulations issued in 2024, the IRS additionally toughened substantiation and reporting requirements for noncash charitable contributions that exceed $500 — rules not limited to qualified conservation contributions.¹⁸

As noted, the cases summarized below involve conservation easements that were donated prior to these more recent legislative and regulatory developments, which were discussed in more detail in a previous individual tax update.¹⁹

Tax Court rules on conservation easement valuations

One set of recent cases on conservation easement donations addresses valuation methodology.

Valuation of easement reduced substantially: In Beaverdam Creek Holdings, LLC,²⁰ the taxpayer was found liable for a 40% gross valuation misstatement penalty after the Tax Court reduced its conservation easement charitable deduction from $21,972,000 to $193,250. Consistent with other recent conservation easement cases such as Seabrook,²¹ Ranch Springs,²²and Green Valley Investors,²³ the key issue addressed in this case was whether a conservation easement should be valued using a discounted–cash–flow (DCF) model or a comparable–sales analysis.

Beaverdam concerned an 85–acre tract (the easement property) in Oglethorpe County, Ga. The easement property had a long history as a granite quarry, operated by Service Granite Co. Inc. (SGC) from the 1950s until 2006 and subsequently leased to Lexington Blue Granite Inc. until 2008. Following Lexington Blue’s financial difficulties and cessation of operations, the quarry on the easement property was leased and operated by another company, North Ridge Quarries, until 2012. After North Ridge Quarries ceased operations, the quarry was abandoned and remained mostly vacant as of 2017. Despite its inactivity, the easement property, which was only about three miles from a rail line spur, still possessed on–site power, sufficient water, and suitable road access for quarrying.

The events leading to the easement donation began when Carmelita Miller became the 100% sole owner of SGC after the death of her husband, daughter, and sister–in–law. Miller’s sister–in–law, Carolyn Miller, had received a $100,000 loan from a bank and pledged her interest in SGC as collateral; she died while the loan was still outstanding. Once Carmelita Miller became the sole owner of SGC, creditors continued to contact her about Carolyn’s former debt. For this reason, Miller sought to sell her interest in SGC to satisfy the loan and engaged an attorney to assist her with this endeavor.

Miller formed Beaverdam Creek Holdings LLC in June 2017, at which time SGC contributed its interest in the easement property to Beaverdam in exchange for a 99% interest in Beaverdam. SGC then sold a 97% interest in Beaverdam to an investment group, Strategic Seek One LLC (SSO), for $228,000, effectively valuing the easement property at $225,052 and enabling Carmelita Miller to pay off the debt. Notably, Beaverdam never intended to restart the quarry.

On Dec. 28, 2017, Beaverdam conveyed a conservation easement over the subject property to Foothills Land Conservancy (FLC), which permanently prohibited further mining, commercial, and industrial uses of the property. On its 2017 tax return, Beaverdam claimed a noncash charitable contribution deduction of $21,972,000, based on an appraisal of the easement property that determined a “before” value of $22,100,000 and an “after” value of $128,000. The before value was determined through a DCF analysis of a hypothetical mining operation.

Upon examination, the IRS disallowed Beaverdam’s entire easement deduction. The Service first argued that the appraisal was not a qualified appraisal because it was not prepared by a qualified appraiser in accordance with generally accepted appraisal standards. However, citing its earlier rulings from Ranch Springs and Seabrook, the Tax Court determined that an appraiser’s failure to “strictly” follow generally accepted appraisal standards does not render an appraisal nonqualified. Rather, it was “simply a factor to be considered in assessing its persuasiveness.” The court also found no evidence to suggest that Beaverdam’s principals knew the appraisers would falsely overstate the value; therefore, Beaverdam satisfied the “qualified appraiser” requirement.

The IRS also disputed the amount of Beaverdam’s charitable contribution deduction. Both parties agreed that the easement property had a value of $106,750 after the easement was granted; however, they disagreed over which method should be used to determine the easement property’s before value. Beaverdam believed that the easement property’s highest and best use was the operation of a quarry mine, which necessitated the use of a DCF model, whereas the IRS believed that the property should be valued using a comparable–sales method.

The Tax Court determined that the highest and best use of the easement property before the easement was granted was, as Beaverdam claimed, to operate a granite quarry. The court found that this conclusion was supported by the property’s long history of quarrying, its zoning designation, and the successful restarting of a similar quarry in the area. However, even though the highest and best use of the easement property was the operation of a quarry, the court believed that this did not automatically mandate the use of the DCF model in valuing the easement property. The court characterized the DCF analysis presented by Beaverdam’s experts as both unreliable and inappropriate because they did not value the underlying easement property; rather, they valued what a speculative business could do with that property. The court emphasized that equating the value of land (the easement property) with the going concern value of a business “defies economic logic and common sense.”

For this reason, the court held that the comparable–sales method offered the best evidence of market value of the easement property. In determining the property’s value under the comparable–sales method, the court leaned heavily on the actual arm’s–length sale of the subject property itself near the valuation date.

As the court observed, SGC sold the easement property for only $225,052 in 2017. The court found this transaction to be a “ballpark before value” and a realistic indicator of the property’s worth, noting that “no reasonable person would have paid anything close to $20 million” for the property. Considering sales data from other quarries in the same area as the easement property, the court determined the before value of the easement property was $300,000. By subtracting the stipulated after value of $106,750 from its determined before value of $300,000, the court concluded that the FMV of the easement was $193,250.

Similar case: The Tax Court reached the same conclusion in a similar case, Veribest Vesta, LLC.²⁴ In 2018, Veribest Vesta LLC donated a conservation easement over 55 acres of land near Elberton, Ga. Veribest claimed a charitable contribution deduction of $20.4 million based on an appraisal that valued the underlying land using a DCF analysis for a fully functional and operating granite mine. The IRS audited the transaction and disallowed the entire deduction.

After reviewing the transaction, the Tax Court ultimately concluded that Veribest was entitled to a charitable contribution deduction of only $111,000. Citing its earlier holding in Ranch Springs, the court found that it was inappropriate for Veribest to use the DCF method to appraise the property because it conflates the value of land with the value of a hypothetical business. In conservation easement cases, according to the court, the relevant inquiry is what the underlying property is worth, not “what a speculative business could do with the property.”

Dispute over property’s highest and best use: In a bench opinion issued on May 8, 2025 (Brank Cove Capital, LLC, Gene Larson, Tax Matters Partner, Docket No. 12074–20), the Tax Court reduced the value of a syndicated conservation easement donation by nearly $11 million, rejecting the taxpayer’s argument that the property’s highest and best use was as a vacation resort.

Brank Cove Capital LLC owned 157 acres and residential buildings in Buncombe County, N.C. (the subject property). In 2016, Brank Cove engaged various consultants to study and appraise the subject property, which at the time was Brank Cove’s only asset. Based on this analysis, Brank Cove believed that the subject property’s highest and best use would be as a vacation resort consisting of short–term rental cabins.

In December 2016, BC Partners acquired a 97% interest in Brank Cove for $1.8 million in cash. Shortly thereafter, Brank Cove conveyed a conservation easement over the subject property to Atlantic Coast Conservancy, a qualified Sec. 501(c)(3) organization. On its timely filed Form 1065, U.S. Return of Partnership Income, Brank Cove attached Form 8283 and claimed a noncash charitable contribution deduction of $11,720,000 based on a before value of $12,270,000 and an after value of $550,000. The IRS audited Brank Cove’s partnership return and disallowed the entire deduction, prompting the partnership to file a petition in the Tax Court challenging the IRS’s determination.

In general, taxpayers are entitled to deduct charitable contributions under Sec. 170(a) based on the property’s FMV at the time of the donation. Because conservation easements are not typically bought and sold on the secondary market, the value of an easement is generally calculated based on the difference between the underlying property’s FMV before the easement was granted and its FMV immediately afterward, as noted above. For this purpose, the underlying property’s FMV is often evaluated based upon its highest and best use.

Thus, to determine the FMV of the subject property, the court needed to determine its highest and best use. In doing so, it considered the highest and most profitable use for which the property was adaptable and needed or likely to be needed in the reasonably near future.

Brank Cove argued for a valuation based on a 50–cabin vacation resort, while the IRS argued that the highest and best use of the subject property was rural, low–density, single–family residential home sites, recreation, and timber. Due to a lack of supporting expert testimony and substantial evidence indicating that Brank Cove’s redevelopment plan would be “potentially legally and physically impossible,” the Tax Court adopted the IRS’s highest–and–best–use determination.

In addition, based on comparable–sales data from 2014 and 2015, the Tax Court, agreeing with the IRS’s expert, found that the before value of the subject property was $1.3 million. The court relied on the $1.8 million purchase price paid by BC Partners to acquire its 97% stake in Brank Cove, which was paid at a time when the subject property was Brank Cove’s only asset, noting: “This Court has repeatedly affirmed that actual arm’s–length sales occurring sufficiently close to the valuation date are the best evidence of value.” Consequently, the court determined that Brank Cove was entitled to a charitable deduction of only $750,000 (i.e., the excess of the $1.3 million before value over an agreed–upon $550,000 after value). The court also found that Brank Cove was liable for a 40% gross valuation misstatement penalty.

Easement donation limited to basis

In Glade Creek Partners, LLC,²⁵ the Eleventh Circuit affirmed a Tax Court decision limiting a partnership’s conservation easement deduction to its basis in the property rather than the property’s FMV.

As discussed in a previous individual tax update,²⁶ Hawks Bluff Investment Group Inc. transferred undeveloped real estate to Glade Creek Partners LLC in 2012 in exchange for a membership interest in Glade Creek. Shortly thereafter, Glade Creek donated a conservation easement on the undeveloped real estate. The Tax Court concluded that Glade Creek’s easement deduction was limited to basis rather than FMV, by operation of Secs. 724(b) and 170(e).²⁷ Glade Creek subsequently appealed the decision to the Eleventh Circuit.

The central dispute in this case was whether the property over which the conservation easement was granted qualified as a capital asset or inventory property in the hands of Hawks Bluff. Sec. 170(e)(1)(A) requires a taxpayer to reduce a charitable contribution deduction by the amount of any gain that would not have been long–term capital gain had the property been sold for its FMV. Under Sec. 724(b), if property is contributed to a partnership by a partner and such property was an item of inventory in the hands of the contributing partner, then any gain from its sale within a five–year period after the contribution is considered ordinary income to the partnership. Applying these provisions, the Tax Court concluded that a hypothetical sale of the easement property by Glade Creek would have yielded ordinary income because the property was inventory in the hands of Hawks Bluff. Accordingly, Glade Creek’s charitable contribution deduction should be limited to basis under Sec. 170(e)(1)(A) because the gain recognized from a hypothetical sale of the easement property would not have been characterized as long–term capital gain.

On appeal, Glade Creek challenged the factual classification of the property as inventory. However, the Eleventh Circuit found no clear error in the Tax Court’s determination that the property was inventory in the hands of Hawks Bluff (which characterized the property as inventory in its tax filings). The court also clarified that Glade Creek’s intent to donate the easement property was irrelevant to the analysis, as Sec. 724(b) is only concerned with the character of the property in the hands of the contributing partner (Hawks Bluff). Thus, the Eleventh Circuit affirmed the Tax Court’s ruling limiting Glade Creek’s deduction to basis.

The Eleventh Circuit’s decision is consistent with other rulings in this area (see Habitat Green Investments, LLC,²⁸ and Oconee Landing Property, LLC²⁹).

Tax Court denies conservation easement deduction due to lack of qualified appraisal

In a consolidated case addressing four partnerships — Rock Cliff Reserve LLC, Jack’s Creek Reserve LLC, East Village Reserve LLC, and Baker’s Farm Nature Reserve LLC³⁰ — the Tax Court disallowed over $62 million of conservation easement deductions because the partnerships failed to obtain a qualified appraisal.

In 2015, Five Rivers Conservation Group LLC (Five Rivers), the tax matters partner for all four partnerships, engaged in a series of transactions to acquire vacant land in Walton County, Ga. After acquiring the land, Five Rivers began to market the properties to investors, promising them large charitable contribution deductions from future conservation easements on the properties.

All of the partnerships had their properties appraised; however, the FMV determined by the appraiser was far greater than the price paid to acquire the properties. For example, while the Rock Cliff partnership acquired its easement property for $1.1 million, the appraiser assigned it a value of $14,414,400. Similarly, the appraiser assigned an aggregate value of $42,192,000 to the properties acquired by the Jack’s Creek, East Village, and Baker’s Farm partnerships, even though the aggregate purchase price paid was only $4,650,000. Notably, the partnerships did not engage with the appraiser to value the properties until after the purported tax benefits of the donations of conservation easements on the properties (based on the larger values) had been communicated to potential investors.

In November 2015, all four partnerships donated a conservation easement over the subject properties to the Atlantic Coast Conservancy Inc. and claimed charitable contribution deductions of over $62 million. The IRS examined the transactions and disallowed the charitable contribution deductions in their entirety, prompting Five Rivers to file a petition with the Tax Court.

Taxpayers claiming a charitable contribution deduction under Sec. 170 must satisfy several strict statutory requirements, the court explained. For noncash donations greater than $5,000, the taxpayer must not only report the contribution on Form 8283, but they must also substantiate the donation with a qualified appraisal under Sec. 170(f)(11)(C). A qualified appraisal is defined as one conducted by a qualified appraiser in accordance with generally accepted appraisal standards, along with any regulations or other guidance prescribed by the IRS.³¹ Thus, a qualified appraisal must be prepared by a qualified appraiser.

The key focus of the court’s appraisal analysis was Regs. Sec. 1.170A–13(c)(5)(ii), which provides that an individual is not a qualified appraiser if the donor of the property “had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property.” The court explained that this provision applies when the donor knows facts that do or should cause the donor to expect that the appraiser will “falsely” overstate the value of the property (as opposed to just “incorrectly” overstate its value). The regulations give as an example a situation where “the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property.”

The court, applying these principles, analyzed the sequence of events leading to the donation of each conservation easement. Five Rivers negotiated the purchase of the underlying easement properties shortly before marketing them to investors. However, once the properties were acquired, the court believed, Five Rivers had a prearranged “meeting of the minds” with the appraiser to assign values to each property that would make the subsequent easement transactions financially feasible. This would explain why inflated values were assigned to each easement long before the appraiser had the opportunity to inspect the properties. Additionally, there was no evidence that Five Rivers acquired the properties at a deep discount or at a bargain; rather, the court found that the purchase price for each property was negotiated in good faith through an arm’s–length transaction.

Therefore, the court concluded that Five Rivers must have known that the true FMV of the conservation easements could not exceed the purchase price originally paid for the properties. Because Five Rivers had knowledge of facts that would cause a reasonable person to expect the appraiser to falsely overstate the value of the donated property, the court concluded that the appraiser Five Rivers used was not a qualified appraiser. Accordingly, the valuation reports accompanying the easement donations were not qualified appraisals, and the charitable contribution deductions were disallowed.

Settlement of conservation easement litigation

In Arden Row Assets, LLC,³² the Tax Court concluded that the IRS did not enter into a binding agreement with Arden Row Assets LLC during settlement negotiations related to Arden Row’s disallowed $57 million conservation easement donation.

In December 2018, Underwood Assets LLC contributed 208.04 acres to Arden Row in exchange for a 100% membership interest. Several days later, Natural Aggregates Partners LLC acquired a 98% interest in Arden Row at a time when Arden Row’s Schedule M–2 (Form 1065), Analysis of Partners’ Capital Accounts, showed cash contributions of only $110,900. Less than one week later, Arden Row donated a conservation easement to a charity and claimed a $57 million charitable contribution deduction. The IRS audited the transaction and tentatively disallowed the entire deduction.

Natural Aggregates (the tax matters partner of Arden Row) was owned by Matthew Ornstein and Frank Schuler. According to the Tax Court, Ornstein and Schuler were responsible for implementing 138 syndicated and 15 nonsyndicated conservation easement transactions. In June 2020, the IRS announced a settlement initiative for syndicated conservation easement cases, typically disallowing easement deductions but allowing investors to deduct out–of–pocket costs incurred to participate in such transactions.³³

During the audit of Arden Row’s conservation easement deduction, the IRS sent the taxpayer’s attorneys a letter that purported to show a settlement offer. The letter indicated that Arden Row’s $57 million easement deduction would be disallowed, but the partnership would be entitled to claim an “other deduction” of $24,586,319 related to out–of–pocket costs. Notably, this offer letter incorrectly described the case as a “syndicated conservation easement transaction,” even though the Arden Row transaction was not syndicated and lacked outside investors. The $24 million of out–of–pocket costs were also overstated, as they represented contributions to multiple entities owned by Natural Aggregates (not just Arden Row). Arden Row’s attorneys knew that the partnership’s actual out–of–pocket costs were substantially less than $24 million but accepted the IRS’s offer anyway. After the acceptance, the IRS discovered the mistake and decreased the settlement offer to a deduction of $110,900, which represented the actual cash capital contributions shown on Arden Row’s Schedule M–2. In response, Arden Row filed a motion with the court to enforce the original settlement offer.

After reviewing the dispute, the Tax Court concluded that no binding settlement agreement existed and denied Arden Row’s motion to enforce the settlement offer. Relying on general principles of contract law, the court found that there was a lack of mutual assent, or a “meeting of the minds,” regarding the allowable deduction amount. Arden Row understood the settlement offer as a fixed deduction of $24,586,319, whereas the IRS only intended to offer a deduction for approximate investor out–of–pocket costs, consistent with its standard policy; further, Arden Row knew that the $24 million figure was overstated. Because both parties attached materially different meanings to the offer, there could not have been mutual assent.

---

Contributor

Matthew Mullaney, CPA, is a managing director, Private National Tax, with PwC US Tax LLP in Florham Park, N.J., and a member of the AICPA Individual and Self-Employed Tax Technical Resource Panel. For more information about this article, contact thetaxadviser@aicpa.org.

---

Footnotes

¹Hoxie et al., “Current Developments in Taxation of Individuals: Part 1,” 57-3 The Tax Adviser 38 (March 2026).

²State of New Jersey v. Bessent, 149 F.4th 127 (2d Cir. 2025), aff’g No. 19 CIV 6642 (S.D.N.Y. 3/30/24).

³REG-112176-18; 83 Fed. Reg. 43563.

⁴T.D. 9864; 84 Fed. Reg. 27513.

⁵Regs. Sec. 1.170A-1(h)(3)(i).

⁶Regs. Sec. 1.170A-1(h)(3)(vi).

⁷Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), overturning Chevron, U.S.A., Inc. v. National Resources Defense Council, 467 U.S. 837 (1984).

⁸Hernandez, 819 F.2d 1212, 1219 (1st Cir. 1987).

⁹American Bar Endowment, 477 U.S. 105, 118 (1986).

¹⁰Mill Road 36 Henry, LLC, T.C. Memo. 2023-129.

¹¹Oconee Landing Property, LLC, T.C. Memo. 2024-25.

¹²Besaw, T.C. Summ. 2025-7.

¹³Regs. Sec. 1.170A-13(b)(1)(iii).

¹⁴Regs. Sec. 1.170A-13(b)(3).

¹⁵Johnson, T.C. Memo. 2025-87.

¹⁶Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328.

¹⁷Sec. 170(h)(7).

¹⁸T.D. 9999; 89 Fed. Reg. 70486.

¹⁹Brennan et al., “Current Developments in Taxation of Individuals: Part 1,” 56-3 The Tax Adviser 46 (March 2025).

²⁰ Beaverdam Creek Holdings, LLC, T.C. Memo. 2025-53.

²¹Seabrook Property, LLC, T.C. Memo. 2025-6.

²²Ranch Springs, LLC, 164 T.C. No. 6 (2025).

²³Green Valley Investors, LLC, 159 T.C. 80 (2022).

²⁴Veribest Vesta, LLC, No. 9158-23, T.C. order, 6/17/25.

²⁵Glade Creek Partners, LLC, No. 23-14039 (11th Cir. 6/6/25).

²⁶Brennan et al., “Current Developments in Taxation of Individuals,” 55-3 The Tax Adviser 26 (March 2024).

²⁷Glade Creek Partners, LLC, T.C. Memo. 2023-82.

²⁸Habitat Green Investments, LLC, No. 14433-17, T.C. order, 2/10/25.

²⁹Oconee Landing Property, LLC, T.C. Memo. 2024-25.

³⁰Rock Cliff Reserve, LLC, T.C. Memo. 2025-73.

³¹Sec. 170(f)(11)(E).

³²Arden Row Assets, LLC, T.C. Memo. 2025-71.

³³IRS News Release IR-2020-130.

---

MEMBER RESOURCES

CPE self-study

Individual Tax Fundamentals —Tax Staff Essentials

Tax Staff Essentials — Individual Taxation Bundle

Tax Section resources

Annual Tax Compliance Kit

Tax Season library

Individual Income Taxation library

Planning After Tax Changes

Tax Section webcasts

For more information or to make a purchase, visit aicpa-cima.com/cpe-learning or call 888-777-7077.