Be Careful When You Value Farm Conversation Easements!

Many farmers want their farm to continue as farmland as long as possible.  In many circumstances, they will donate an easement to a conservation charity that will restrict the land to farming and not allow it to be developed.  In these cases, the tax laws allow the farmer to take a deduction for the “value” that has been lost due to the granting of the easement.

The tricky point is how to you value this easement.  There have been many battles with the IRS over these values and in a recent tax court case involving Esgar Corporation et al, the IRS won.  In this case, the taxpayer argued that the highest and best use for their irrigated farmland in Colorado was for gravel mining since there were gravel pits operating in their immediate vicinity.  The IRS argued that the highest and best use was as irrigated cropland and that is what the court decided.

The Court maintained that the highest and best use for any land is its current use unless the taxpayer can show a compelling reason for a different use.

In this case, the deduction that the taxpayers claimed on their original tax returns was in excess of $2 million and the final number that the court allowed was approximately $100,000.

If you are considering these types of conservation easements, it is very important that a reasonable valuation be obtained and if the conclusion that the highest and best value for your farmland is for other purposes, be prepared for a fight with the IRS.