Tax Court Slashes $10 Million Easement Deduction to $612,000
Paul-Adams Quarry Trust, LLC v. Commissioner (Tax Court 2025)
The Tax Court valued a 2017 conservation easement at $612,000 and imposed the 40% gross valuation misstatement penalty after rejecting the partnership’s $10,234,108 claimed value.
Holding
The easement’s fair market value was $612,000, not $10,234,108. The appraisal attached to the return met the “qualified appraisal” requirement because the appraiser was qualified, but only narrowly so.
The 40% penalty for a gross valuation misstatement under § 6662 (h) applies. The vagueness challenge to this section and related regulations fails. A decision will be entered under Rule 155.
Why It Matters
Confirms that the valuation of unimproved land for easement purposes rests on comparable sales where available, even if the land has potential mineral use.
Reiterates that a “qualified appraiser” inquiry focuses on donor knowledge of an appraiser’s deception, not on disagreements about valuation outcomes.
Applies the gross valuation misstatement penalty where the claimed value exceeds 200% of the correct value, without a reasonable cause defense.
Provides a worked example of rejecting the highest and best use, premised on speculative quarry operations lacking credible market support.
Timeline
December 22, 2017: Partnership grants conservation easement over about 207 acres in Elbert County, Georgia.
April 9, 2018: Appraisal by Mr. Fletcher dated and attached to the 2017 return.
March 19, 2021: IRS issues FPAA disallowing the easement deduction and asserting penalties.
Eight-day trial: Parties present expert testimony on valuation and use.
2025: Tax Court opinion by Judge Toro fixes the value and sustains the 40% penalty.
Key Facts
Claimed deduction: $10,234,108 for the conservation easement, plus $10,000 cash gift.
Appraisal inputs: “Before” value $10,545,088; “after” value $310,980; easement value $10,234,108.
Property: Approximately 207 acres with an abandoned pit quarry; industrial zoning.
Commissioner’s expert (Sheppard): Comparable sales approach; selected per-acre “before” value of $4,750.
Court’s valuation: Easement worth $612,000.
Statutory or Regulatory Framework
§ 170 allows a deduction for charitable contributions, with substantiation rules for contributions over $500,000 requiring a qualified appraisal by a qualified appraiser. Treas. Reg. § 1.170A-13(c)(3), (5); § 1.170A-1(c) defines fair market value. § 6662 imposes penalties for valuation misstatements, increased to 40% for gross valuation misstatements; § 6664(c)(3) removes reasonable cause relief for gross misstatements of charitable contribution property.
Arguments
Taxpayer argued:
Due to interactions suggesting inflated valuation, the appraiser was not “qualified” under the knowledge regulation.
The highest and best use included a viable dimension stone quarry, which supported a high “before” value via an income approach.
Comparable sales used by the Commissioner were not sufficiently comparable or were time-mismatched.
§ 6662(h) and related regulations are unconstitutionally vague.
IRS argued:
The appraisal satisfied formal requirements, but the valuation should rely on comparable sales reflecting market transactions for similar properties.
The claimed quarry use was not reasonably probable based on market demand and operational evidence.
The correct easement value is $612,000; the claimed value triggers the gross valuation misstatement penalty.
Court’s Reasoning
Qualified appraisal: The appraiser remained a “qualified appraiser” because the record did not show donor knowledge of an agreement or deception that would cause a reasonable person to expect a false overstatement.
Fair market value standard: The Court applied the willing buyer, willing seller standard and weighed expert opinions, accepting reliable aspects and its own review of the record.
Highest and best use: Actual use was vacant holding; quarrying was not reasonably probable in the near term, given demand, production history, and objective performance data.
Comparable sales: For vacant, unimproved property, comparable sales are generally most reliable, including sales of LLC interests shortly after property contribution where they reflect underlying property value.
Sales timing challenges: Disputes about comparability and timing go to weight, not admissibility; subsequent sales without intervening changes can inform value as of the valuation date.
Penalty: Because $10,234,108 is far more than 200% of $612,000, the misstatement is gross; reasonable cause relief is unavailable under § 6664(c)(3).
Constitutional claim: The Court rejected the vagueness challenge.
Forward-Looking Implications
Comparable sales of mineral-area properties and entity-interest transactions that mirror underlying asset value will continue to anchor unimproved land valuation for easements.
Highest and best use premised on quarrying will require credible market evidence of reasonably probable extraction and demand, not only geological potential.
Gross valuation misstatement penalties remain a central enforcement tool where claimed values exceed 200% of the correct value.
The “qualified appraiser” knowledge regulation turns on evidence of donor knowledge of deception by the appraiser, narrowing disqualification arguments absent proof of collusion.
TEFRA partnership posture places both proof and production burdens on the partnership in penalty disputes.
Result
Decision under Rule 155 reflecting a $612,000 easement value and application of the 40% gross valuation misstatement penalty under § 6662(h).
The Takeaway
Easement valuation follows market evidence from comparable sales when quarry operations are not reasonably probable. Without a reasonable cause defense, significant gaps between claimed and supported values will trigger the 40% penalty.
List of Citations
I.R.C. § 170 and Treas. Reg. § 1.170A-1, -13: Substantiation and fair market value standards for noncash charitable contributions.
I.R.C. §§ 6662, 6664(c)(3): Gross valuation misstatement penalty and reasonable cause carve-out for charitable property.
Oconee Landing, T.C. Memo. 2024-25; Ranch Springs, 164 T.C.; Seabrook Property, T.C. Memo. 2025-6: Comparable sales and valuation guidance in easement cases.
Mill Road 36 Henry, T.C. Memo. 2023-129: Appraiser qualification focus under the knowledge regulation.
