Highest and Best Use in Conservation Easement Appraisals: Why Courts Trust the Market Over the Model

Most conservation easement disputes are not about whether the land deserves protection. They are about a single number: what the property was worth before the easement. That "before value" depends almost entirely on the appraiser's view of the land's highest and best use. That is where the largest deductions, and the largest disallowances, come from.

Recent court decisions show a consistent pattern. Courts accept a valuable future use only when the evidence shows real buyers would have paid for it on the valuation date. When an appraisal relies on a project that exists only in a spreadsheet, the deduction tends to collapse, often with a 40% penalty attached. This post explains what courts look for and how landowners can test an appraisal before signing a return.

How the Before Value Is Built

For most easements, the deduction equals the difference between the property's fair market value before the easement and its value after. Fair market value is the price a willing buyer and willing seller would agree on, both with reasonable knowledge of the facts. The before value must reflect the property's highest and best use, meaning the most valuable use that is legally permitted, physically possible, financially feasible, and reasonably probable.

Treasury Regulation § 1.170A-14(h)(3)(ii) adds a specific instruction: without the easement, how likely was actual development, and how soon? The appraiser must answer that objectively, with zoning and other legal limits in view. "Could be built" is not the test. "Would buyers on that date have priced it in" is closer to it.

Lesson One: The Future Use Has to Be Real

The Sixth Circuit's 2025 opinion in Corning Place Ohio affirmed denial of a $22.6 million deduction for a facade easement on a historic Cleveland building. The appraisal valued the property as though a 45-story tower could be added on top. The court found that the tower lacked credible support on every front: structural and soil analysis, regulatory feasibility, demand for that particular product, and financial feasibility.

The practical lesson: an appraiser's "as complete" scenario does not substitute for evidence. If the planned use needs facts that were never established, the court will not assume them.

Lesson Two: What You Paid Is Strong Evidence

In Ranch Springs, LLC v. Commissioner, 164 T.C. No. 6 (2025), a partnership bought about 110 acres in Alabama for $715,000 and, about a year later, claimed a $25.8 million deduction based on a hypothetical limestone quarry. The Tax Court treated the recent arm's-length purchase as very strong evidence of value. The land was zoned agricultural, no rezoning application had been filed, and the court did not find a mining use reasonably probable. It valued the easement at $335,500 and upheld the 40% gross valuation misstatement penalty.

The court also rejected the appraiser's approach of valuing the land as if it were worth the present value of an entire mining business. In its view, land and an operating enterprise are not the same asset.

Lesson Three: Models Do Not Replace Comparable Sales

A July 15, 2026 opinion, Piton Holdings, 167 T.C. No. 4, saw the Tax Court again reject a claimed limestone quarry use, this time against a $41.6 million deduction. The court valued the easement at $800,000 using comparable sales rather than the taxpayer's income model, noting how small changes in the model's assumptions drove large changes in its result. It also held that adequate disclosure does not shield a taxpayer from the valuation misstatement penalty.

Zoning and Permits Are Different Questions

One distinction gets blurred in many appraisals and in some critiques of them. Zoning decides whether the use is permitted on that parcel in the first place. A permit asks whether a specific approval would be granted for a use that zoning already allows.

• If rezoning is required, expect skepticism. You need solid evidence that the change would actually have been approved, such as similar recent rezonings, staff support, and a realistic timeline. Letters of support rarely carry much weight against likely opposition.
• If zoning already allows the use, the permit question is practical: how often the agency approves similar requests, how long approvals take, and whether any concrete barrier has surfaced.

Keeping these questions separate helps both sides evaluate the evidence fairly.

Who Are the Buyers?

Every appraisal implicitly picks a buyer pool, and that choice drives the comparable sales. A parcel with a speculative quarry or tower premise will be compared with permitted quarries or development sites. A parcel valued in its actual condition will be compared with similar raw land. In the Tax Court's view, comparables should follow the property's real condition on the valuation date, not its marketing materials.

Evidence that a buyer pool really existed includes:

• arm's-length sales of similar land at a similar stage of development,
• actual bids, options, or letters of intent from unrelated parties,
• financing a lender was willing to extend based on the claimed use, and
• approvals or commitments from governments or utilities.

Evidence that usually counts for little on its own includes internal pro formas, sponsor marketing decks, and documents generated by parties connected to the transaction.

Common Red Flags in an Appraisal

• Huge jump from the purchase price. A value many times what was paid a short time earlier needs a specific, documented explanation.
• Valuing a business instead of land. A discounted cash flow of a future mine or development, credited entirely to the land, invites rejection.
• Spending treated as value. Engineering reports and studies matter only if the market would pay more because of what they established.
• Optionality used as a back door. If the main project fails the reasonable probability test, its projected revenues cannot be recycled as an "option premium."
• Comparables from a different market. Sales of permitted or operating sites used for unpermitted raw land.

Practical Tips for Landowners

• Engage an appraiser who will explain the buyer pool and the comparable sales, not just the conclusion.
• Ask for a sensitivity analysis. If small assumption changes swing the value dramatically, a court may give the model little weight.
• Gather independent market evidence, such as offers or nearby sales, before the donation, not after an audit begins.
• Compare the claimed before value with your purchase price and any loan appraisals.
• Before joining any investor-funded deal, review the § 170(h)(7) limit that generally caps partnership easement deductions at 2.5 times investors' basis, along with the listed transaction reporting rules.
• Have your tax adviser review the appraisal before filing, since valuation penalties can reach 40%.

Key Takeaways

• The before value of an easement turns on a highest and best use that buyers would actually have priced on the valuation date.
• Corning Place, Ranch Springs, and Piton Holdings all rejected speculative development premises and favored market evidence.
• A recent arm's-length purchase price is strong evidence of value.
• Zoning changes deserve skepticism; permits for uses already allowed are judged on practical evidence.
• Comparable sales should match the property's real condition and buyer pool, not a hypothetical project.

If you are considering a conservation easement or have questions about an appraisal, schedule a consultation with SMB CPA Group. You can also contact us, read about our work with real estate professionals, or review our pricing.

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