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The February 19, 2026, decision of the United States Tax Court, which rejected the valuation of the charitable contribution of a conservation easement, is most informative because it turned on the highest and best use (HBU) of the property.
Without getting into all the gory details, the taxpayer’s appraisal accompanying its federal income tax return depicted the HBU of the farmland tract on which the easement was placed as development for a clay mine.
In rejecting the claimed deduction, the Tax Court noted that at the time of the easement donation, the property’s zoning classification was agricultural and that the taxpayer “failed to establish a reasonable probability that the land could be rezoned to permit use for clay mining.” The Court also found that the taxpayer failed to prove that developing a clay mining operation would have been financially feasible.
Concluding that the claimed conservation easement valuation was “an outrageous overstatement wholly untethered from reality,” the Tax Court reduced the claimed value of the easement from $115,391,000 to $175,824! Substantial penalties levied by the Internal Revenue Service were sustained by the Court for the bloated claimed deduction.
Focusing on the zoning classification of the property, ever since the ruling of the Connecticut Supreme Court in the 1968 case Budney v. Ives, Connecticut law has recognized that the reasonable probability of a change in zoning restrictions may be considered in the determination of compensation for property taken by eminent domain. "It cannot be doubted,” the Supreme Court ruled, “that both a prospective purchaser and seller on the open market would consider the probability of a change in zoning restrictions affecting property which they considered buying and selling where such a change was reasonably probable in a reasonably near future. Accordingly, were such a change reasonably probable and not merely a remote or speculative possibility, the probability may properly be considered in the determination of the fair value of property taken by eminent domain.”
The “reasonable probability” rule has been extended by Connecticut to the valuation of real estate in other contexts, such as ad valorem tax appeals. The Tax Court’s application of that rule is consistent with the law in many other jurisdictions.
North Donald LA Property LLC et al. v. Commissioner of Internal Revenue, United States Tax Court.
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About Our Property Tax and Valuation Law Blog
Alerts, commentary, and insights from the attorneys of Pullman & Comley’s Property Tax and Valuation practice with timely information for businesses, nonprofits and individuals in commercial property tax appeals and eminent domain matters.