A recent Tax Court memorandum opinion[1] presents a thorough illustration of the Court’s approach to valuation disputes in syndicated conservation-easement transactions. As is historically typical in these transactions, the case involved a partnership interest sale shortly before the donation and an associated appraisal asserting a dramatic increase in value when compared to the original purchase price of the relevant partnership interests. The Court’s analysis rested on conventional principles, wielded with close attention to economic reality. For practitioners, the opinion offers a substantive review of how the Court parses valuation assumptions, weighs market data, and evaluates the credibility of appraisals, particularly where the claimed deduction differs greatly from recent arm’s-length purchase prices.
Background and Structure of the Transaction
Lake Jordan Holdings, LLC, a Georgia limited liability company, treated as a partnership for Federal income tax purposes, owned a single 165-acre tract of land in Elmore County, Alabama. The property, largely rural and undeveloped, was characterized by rolling terrain, limited road access, and minimal utility infrastructure. Shortly before the conservation easement was donated, twenty-four investors purchased a ninety-six percent (96%) interest in the LLC for approximately $583,000. Not long after that acquisition, the partnership granted a conservation easement over its land and claimed a charitable contribution deduction of $12,740,000 for the 2017 short tax year.
The magnitude of the claimed deduction relative to the recent partnership-interest purchase price became an immediate focal point in the litigation. The IRS issued a Final Partnership Administrative Adjustment disallowing the deduction and assessing penalties, and the matter proceeded to the Tax Court for resolution. At the center of the dispute was the valuation of the easement under the standard “before-and-after” methodology.[2]
The Appraisal and the Highest-and-Best-Use Assumption
The appraisal supporting the deduction asserted that the highest and best use of the property before the easement was the development of a lakeside residential subdivision. Based on that assumption, the appraiser valued the land in excess of $13 million before the easement and only a few hundred thousand dollars afterward, yielding the deduction amount claimed on the return.
The Court examined this assumption closely. As the appraisal standards require, the highest and best use must be reasonably probable, legally permissible, physically possible, and financially feasible.[3] The Court found that the taxpayers’ development scenario failed these tests. The property’s remote location, the absence of utilities, the terrain’s limitations, and the lack of demonstrable market demand for a development of the scale envisioned collectively undermined the claim that residential subdivision represented the parcel’s most profitable and likely use. The Court also noted that significant infrastructure improvements would have been necessary to make such development feasible, none of which was evidenced in the record.
The appraisal’s inflated hypothetical lot prices and speculative build-out projections further diminished its persuasive value. In cases involving unimproved land, the comparable-sales method often offers the most reliable indicator of fair market value, particularly when comparable rural acreage sales exist within the region.[4] Given the lack of feasibility with respect to the inflated projections, the Court concluded that the appraisal’s assumptions were not grounded in market reality and therefore could not support the claimed deduction.
The Court’s Valuation Analysis
Having rejected the speculative development-based valuation, the Court turned to comparable-sales data. The opinion referenced several recent transactions involving similar lake-adjacent or recreational acreage, which, after adjustments for location, access, and physical characteristics, pointed to a per-acre value significantly lower than the taxpayers’ asserted figure. Based on this method, the Court determined that the appropriate per-acre valuation was $8,344, resulting in a total “before value” of approximately $1.38 million for the entire 165-acre parcel.
Because the parties had stipulated to an “after value” of $285,000, the Court calculated the fair market value of the easement at $1,091,760. The deduction was therefore reduced to roughly eight percent (8%) of the amount claimed. The substantial divergence between the appraised value and the amounts paid by investors for the LLC interests further supported the Court’s conclusion.
The Penalties for Gross Valuation Misstatement
The IRS imposed various accuracy-related penalties, including a forty-percent (40%) penalty applicable to gross valuation misstatements[5] which applies when the value claimed is 200 percent (200%) or more of the correct amount. In this case, the discrepancy surpassed one thousand one hundred percent (1,100%). The Court therefore found that the penalty applied. The taxpayers argued that they acted with reasonable cause and in good-faith reliance on a qualified appraisal. However, in a case of a “gross valuation misstatement,” there is no reasonable cause defense available,[6] and as such, the Court declined to even address any such defense asserted by the taxpayer.
Syndication Features and the Court’s Broader Concern
Although the Court did not find it necessary to invalidate the deduction on technical easement-compliance grounds, it viewed the transaction through the lens of heightened scrutiny, which is typical with respect to cases involving syndicated conservation easements. The presence of promotional materials offering outsized tax benefits, investor acquisition of partnership interests shortly before the claimed deduction, and valuations disproportionate to recent arm’s-length transactions collectively cast doubt on the economic motivations underlying the arrangement. In Lake Jordan, these elements reinforced the Court’s concern that the valuation was manufactured to support a tax-centric investment rather than derived from a genuine fair market valuation of conserved property.
Conclusion
The Tax Court’s opinion provides a detailed and instructive examination of how valuations related to conservation easements and substantially similar donations (i.e. fee simple) must be constructed to withstand judicial review. Even where the donation satisfies the structural requirements for deductibility, the valuation must rest on credible, market-grounded evidence. The opinion points to the importance of aligning appraisals with comparable-sales data when dealing with undeveloped land, and it highlights the risks inherent in speculative or aspirational highest-and-best-use analyses unsupported by relevant market indicators. It also underscores the significance of recent real-world purchase prices, especially when investors acquire controlling partnership interests contemporaneously with, or shortly before, the donation.
For taxpayers and advisers, the lesson is straightforward. A charitable deduction valuation must reflect economic reality, not projected possibilities removed from the realities of the local market. The severe reduction in the allowable deduction in this case, together with the imposition of the forty percent (40%) penalty for gross valuation misstatement, demonstrates the consequences of relying on unsupported or inflated valuation models. The Tax Court makes clear it will not permit a deduction to stand on assumptions divorced from the land’s actual characteristics, surrounding economic context, and objective indicators of value. The scrutiny applied in Lake Jordan reaffirms that careful documentation, credible appraisal methodologies, and adherence to grounded valuation principles are essential to sustaining a charitable deduction of this nature.
[1] Lake Jordan Holdings, LLC v. Commissioner, T.C. Memo. 2025-123.
[2] Treas. Reg. § 1.170A-14(h)(3)(i).
[3] Treas. Reg. § 1.170A-14(h)(3)(ii).
[4] Buckelew Farm, LLC v. Commissioner, T.C. Memo 2025-52.
[5] IRC § 6662(h).
[6] Mill Road LLC v. Commissioner, T.C. Memo 2023-129.
