Court values Morgan Run’s $26 million easement claim at $1.165 million

Morgan Run attempted to turn a $1.2m property into a $26m tax deduction by reference to a warehouse that didn't exist at all. The Court wasn't having any of it. The end result was an easement value of $1,165,000 plus a 40% penalty for the rather creative maths.

Holding

The Tax Court found that the conservation easement on Morgan Run had a fair market value of $1,165,000 as of December 20, 2016. It upheld the 40% gross valuation misstatement penalty. That's the end of the valuation issue and the penalty issue, although further proceedings will continue prior to a decision being entered.

Why It Matters

• A proposed use needs evidence beyond an appraisal assumption. Morgan Run failed to establish probable rezoning, physical feasibility, or market demand for its proposed distribution center. Each requirement independently constrained the valuation.

• The recent acquisition remained powerful evidence. The Court treated the transfer for approximately $1.2 million plus a retained partnership interest as an arm’s-length transaction. A partnership structure and a lender-negotiated mortgage reduction did not show that the price lacked market significance.

• The penalty consequence differs from an ordinary valuation dispute. Section 6664(c)(3) bars the reasonable-cause defense for a gross valuation misstatement involving charitable contribution property. The 40% rate applies to the attributable tax underpayment, not to the amount of the deduction or the land’s value.

• The ruling has a defined scope. This memorandum opinion applies established valuation principles to a detailed factual record. It does not establish a new valuation formula or finally allow a $1,165,000 deduction. Other deductibility requirements and further proceedings remain outside this valuation ruling.

Key Facts

Morgan Run was about 232 acres located near Bessemer, AL. It was residential in zoning, had quite a bit of rolling terrain, streams and wetlands. It abutted an existing residential subdivision and a small municipal airport. The previous owners had been looking to do residential development on it and at the end of 2016 roughly half the lots in the adjacent subdivision were still unsold.

Greenwood Partners sold the land to Morgan Run in November 2016 for approximately $1.2m and a 1% share in Morgan Run. The Court described it as arm's length regardless of how you looked at it. The lender actually knocked down the mortgage to effect the sale.

On 20th December 2016 Morgan Run donated a conservation easement (a restriction on the use of the land for conservation purposes) to National Farmer's Trust. The easement covered 230.37 acres. Morgan Run reserved four half acre parcels for possible residential development.

Morgan Run claimed a $26m charitable contribution deduction on its 2016 return (filed April 18 2017) which assumed a mixed use development with single family homes, townhomes, senior living and commercial space. The promoters had provided the investors with targeted deduction amounts prior to engaging the appraisers.

The IRS issued its final partnership administrative adjustment (the Notice adjusting partnership tax items) on January 10, 2020. It disallowed the deduction entirely and alternatively valued the easement at no more than $989,357. That original alternative valuation is different from the $1,165,000 valuation the IRS ultimately supported at trial.

For the April 2026 trial Morgan Run gave up on its original mixed use residential concept. Thomas Spears, the expert, put forward a proposal for a 780,000 sq ft distribution facility and valued the unrestricted property at $20m. The Court confined the trial to valuation.

Statutory and Regulatory Framework

• Section 170 and Treasury Regulation § 1.170A-1 generally measure a charitable gift of property by fair market value: the price informed, willing parties would agree upon without compulsion.

• Treasury Regulation § 1.170A-14(h)(3) supports the before-and-after method for valuing an easement. The method subtracts the property’s value with the restriction from its value without the restriction.

• Highest and best use means the most profitable reasonably available use. The proposed use must satisfy legal, physical, financial, and productivity requirements. A different future use requires evidence of reasonable probability and proximity in time.

• Section 6662(h) imposes a 40% penalty for a gross valuation misstatement. Section 6664(c)(3) excludes reasonable-cause relief for that category of misstatement involving charitable contribution property.

• Rule 142(a) placed the burden of proof on Morgan Run. The partnership did not seek a burden shift under section 7491.

Arguments

Taxpayer argued:

• The county would likely rezone the property for industrial use, or the City of Bessemer would annex it as part of airport expansion.

• Sales of industrial properties near Atlanta and Savannah supported a substantially higher value.

• The recent transfer did not provide reliable arm’s-length evidence because of its partnership structure and the sellers’ asserted financial distress.

• The IRS appraiser inadequately verified comparable sales, relied on bank-owned properties, failed to consider industrial use, and insufficiently supported his market adjustment.

Government argued:

• The appropriate use remained an investment holding for possible future residential development.

• Local roads, terrain, zoning, and market evidence did not support the proposed distribution center.

• Nearby residential land sales supported a $1.63 million value before the easement and a $465,000 value afterward.

• The claimed value warranted the gross valuation misstatement penalty.

Court’s Reasoning

• Rezoning lacked concrete support. Neither Morgan Run nor the prior owner had pursued industrial rezoning. Spears provided no communications with county officials that established probable approval. County testimony identified road limitations and a history of neighborhood traffic and noise complaints. The airport’s proposed northern expansion remained an unfunded concept, not a developed project supporting probable annexation.

• The physical and financial evidence also failed. The Court excluded the concept-plan report supporting the proposed building for failing to meet expert-evidence requirements. Spears did not adequately address the site’s approximately 200-foot elevation change. General economic data did not establish local demand for a distribution center of this size. The Court also gave no evidentiary weight to the unsupported construction budget.

• The actual transfer contradicted the higher valuation. The sellers and buyers were unrelated. Morgan Run offered no evidence that the sellers faced financial compulsion. Instead, their years of marketing and negotiations showed efforts to obtain acceptable terms. The retained 1% interest required consideration in the price; it did not make the transaction non-arm’s-length. The IRS expert estimated total consideration at no more than $1.4 million after including that interest.

• Local comparable sales supported the IRS valuation. Ray Kinney selected nearby residentially zoned tracts with similar development prospects. He verified sales through county records, downweighted foreclosure transactions, and supported a 30% time adjustment using housing prices, building permits, and land sales. The Court accepted his $1.63 million unrestricted value, treating that amount as an IRS concession.

• The industrial comparables failed independently. Even assuming industrial use, the Georgia transactions did not support Spears’s valuation. Those properties had different markets, industrial zoning, infrastructure, road access, terrain, and usable acreage. Spears did not adequately adjust for those differences or substantiate his rejection of closer transactions.

• The remaining property value mattered. Kinney’s $465,000 value after the easement better accounted for the four reserved homesites. His comparable sales preceded the valuation date, while Spears’s occurred afterward. Subtracting $465,000 from $1.63 million produced the $1,165,000 easement value.

• The return value triggered the gross-misstatement penalty. The $26 million claimed value exceeded the correct value by more than 2,000%. The Court applied section 6662(h) and the statutory exclusion of reasonable-cause relief. The opinion does not analyze supervisory penalty approval under section 6751(b); it provides no basis for a broader claim that the IRS complied with that provision.

Result

$1,165,000 easement value, 40% penalty, and more proceedings to come.

The Takeaway

If you're valuing an easement you need actual evidence of zoning potential, site realities, actual buyers and market demand at the time of donation. Changing your story in court doesn't in any way take the price you just paid for the land out of the equation.