Appraiser’s Error Results in Severe Penalties For Taxpayers who Convey Conservation Easement

more+
less-

In November 2013, the United States Tax Court upheld the charitable deduction for a conservation easement claimed on the taxpayers’ income tax return but reduced its value and upheld the 40 percent gross valuation misstatement penalty.

In 2006, taxpayers George Gorra, a real estate professional, and Leila Gorra, a former tax attorney, executed a conservation deed of easement with the Trust for Architectural Easements on their Upper East Side townhouse in Manhattan.  The purpose of the easement was to protect the building, which was soon after certified by the National Park Service as a “certified historic structure” for a charitable contribution for conservation purposes.”

As a result of the easement, the taxpayers took a charitable deduction on their 2006 and 2007 United States income tax returns.  To do so, they hired a qualified appraiser who, comparing the fair market value of the property before and after the easement, determined that the value of the easement was 11 percent of the property’s market value, or $605,000.  The IRS issued Notices of Deficiencies for 2006 and 2007, disallowing in their entirety the charitable deductions arising from the conservation easement.

In Gorra, T.C. Memo 2013-254 (2013), the U.S. Tax Court held that the charitable deduction was allowable because the taxpayers conveyed a qualified real property interest, the contribution was made exclusively for conservation purposes, and they obtained a qualified appraisal.[1]  However, the Tax Court held that the easement was overvalued because the properties to which the conservation easement property was compared to were too dissimilar.

The Court found that the easement resulted in a 2 percent, not 11 percent, reduction in value.  This reduced the fair market value of the easement from $605,000 to $104,000, which was calculated using the list price the taxpayers previously used to sell their property and not the appraiser’s assumed value.

Finally, the Tax Court upheld the 40 percent gross valuation misstatement penalty assessed against the taxpayers.  Because the originally claimed valuation ($605,000) was more than 200 percent of the court-determined valuation ($104,000), the 40 percent penalty automatically applied.  Under existing tax law, abatement of penalties based on reasonable cause is not permitted for gross valuation misstatements.

It is clearly important for taxpayers to seek qualified assistance when valuing and deducting conservation easements.  Despite the fact that the taxpayers obtained in good faith a qualified appraisal, they were still assessed a 40 percent penalty because of the appraiser’s errors.

[1] Although the valuation on the appraisal was incorrect, the appraisal itself was proper because it provided a detailed description of the property, the property’s physical condition, the valuation method used to determine fair market value, and the specific basis for the valuation.