Champions Retreat Golf Founders, LLC v. Comm’r, T.C.

The Tax Court, on remand from the 11th Circuit, which decided that the taxpayer was entitled to a charitable donation for a donation of a conservation easement, valued that interest to determine the amount of the donation deduction. Both parties presented valuation opinions from expert appraisers. The Tax Court then analyzed the expert appraisals’ evidence to arrive at the easement’s value. The Tax Court determined that the highest and best use of the property before and after the grant of the easement was the key to the determination of the value of the easement.

Findings of fact.

The Tax Court summarized the facts from the original opinion and set forth additional findings relating to the valuation of the easement.

The golf course.

Champions Retreat was formed in 2001 to own and operate a golf course. It built a 27-hole golf course. The golf course was funded by selling 67 residential lots in Founders Village. Player, Palmer, and Nicklaus each designed one of the nine-hole courses. The Creek Course was the westernmost and almost wholly surrounded Founders Village. A portion of the golf course was within a floodplain. FEMA prepared flood insurance maps for where Champions Retreat was located.

Development restrictions.

The opinion went through the various limits within the multiple subsections of the Riverwood Plantation. The golf course was in a PUD development area. The golf course was in a section of Riverwood Plantation called the Reserve.

The easement.

“On December 16, 2010, Champions Retreat conveyed an easement to the North American Land Trust (NALT) that covered 348.51 acres of the golf course (easement area). The easement restricted what Champions Retreat could do with the easement area, including prohibiting the division of easement areas into lots. The easement area includes 25 of the 27 holes in their entirety, most of the 2 remaining holes, and the driving range.”

The subsequent sale.

In October 2014, the golf course was sold for $4,453,000. Before the sale, the golf course declaration was amended to delete the use restriction. Champions Retreat had to purchase additional land and build a maintenance facility for $1.75 million.

Champions Retreat’s reporting position.

Champions Retreat claimed a $10.4 million charitable contribution deduction on its 2010 partnership tax return for its grant of the easement to NALT. Included in the filing was an appraisal by Claud Clark III using the “before and after” method to value the easement. Clark concluded the highest and best use of the property before the easement was a residential subdivision.

Expert witnesses.

The Tax Court noted that its value determination was based on evaluating competing expert opinions. It summarized the experts and opinions as follows:

• Claud Clark III—petitioner, i.e., Taxpayer Champions Retreat, again hired Clark to provide an expert report. The Tax Court recognized Clark as an appraiser competent to value conservation easements. He opined that the value of the easement was $10.9 million.

• Thomas Wingard—petitioner also offered Wingard to opine the highest and best use of the property. Wingard had been an MAI for 30 years. He had special training in the valuation of easements. Wingard opined that the highest and best use of the property was as a partial residential development. 

• David G. Pope—offered by the respondent (IRS), Pope had been an appraiser for 33 years, specializing in hotels and golf properties. He opined that the highest and best use of the property before and after the easement grant was as an operator of a golf course. Because the highest and best use remained the same before and after, Pope valued the easement at $20,000.

Opinion.

Burden of proof.

Resolution of the valuation dispute did not depend on which party has the burden of proof but rather on the preponderance of evidence in the record.

Valuation principles.

The deduction of a partial interest in property if it qualifies as a “qualified conservation contribution.” The 11th Circuit Court determined Champions Retreat was entitled to a deduction for granting the easement. The contribution amount was equal to the property’s fair market value at the date of the contribution. Since there was no established market for easements, the fair market value  here “is equal to the difference between the fair market value of the property it encumbers before granting the restriction and the fair market value of the encumbered property after the granting of the restriction.” Treas. Reg. § 1.170A-14(h)(3)(i). The Tax Court used this method to value easements. Both parties agreed on the before and after method applied here. 

Experts’ reports.

Highest and best use.

First, determining fair market value required determining the highest and best use of the property. Clark and Wingard found the highest and best use before the easement as a residential subdivision with an 18-hole golf course. Pope determined the highest and best use before the easement to be the operation of a 27-hole golf course. All three agreed that the highest and best use after the easement was operating a 27-hole golf course.

Almost the entire difference in the valuations was due to the difference in opinion regarding the highest and best use. The Tax Court concluded that the stronger argument was the petitioner’s argument that the highest and best use was as a residential subdivision and operation of an 18-hole golf course. The parties disagreed only as to the Bluff golf course part. Clark determined that developing residential lots would be legally permissible and that the demand was there.

Wingard also opined that the highest and best use prior to the easement would be as a full or partial residential development. He noted that some properties would be more difficult due to physical attributes, but utilities were available for development. Demand for residential property in the area led him to believe that redevelopment was financially feasible and would yield a higher return than use as a golf course.

Pope believed that the highest and best use before the easement was as a golf course. Pope concluded that, at the end of 2010, the demand for additional lot development “was limited.” He concluded that, at the end of 2010, it was financially feasible to continue operating the property as a golf course. Pope also argued that, before the Easement, the property was already subject to restrictions that would make residential development a remote possibility. The Tax Court was unpersuaded by this argument.

The Tax Court concluded, based on the evidence, that the highest and best use of the property before the easement was as a partial residential development together with an 18-hole golf course.

Fair market value.

The Tax Court noted the three approaches to value and noted that, in this case, the proper method is determined by law. The subdivision development method was a variation of the income approach and was recognized by the Tax Court. The Tax Court then discussed the six steps in determining the value under this method. The Tax Court then discussed first the fair market value of the property before the easement. It noted that Pope’s method assumed the wrong highest and best use and was unhelpful to the Court.

The court discussed the steps Clark used in developing his fair market value. Clark used the partial redevelopment of the property into a residential development. It included several tables outlining the various calculations the experts used to determine the fair market value both before and after the granting of the easement. (Editor’s note: The tables are excellent and very understandable. What is of interest to the BV professional is that the Tax Court was overturned at the circuit court level and thus had to determine the easement’s fair market value.) We do not include here any of the discussions from the court regarding the computations. Suffice it to say that the discussion and conclusion relate to the methodology concerning real property appraisals.

Fair market value conclusion.

While the Tax Court believed that Clark’s value was too high, it rejected Pope’s assertion that the easement’s value was de minimis. “[W]e are hard pressed to imagine that a prospective purchaser would not have considered easement restrictions material in determining the purchase price.”

“On the basis of the record before us, giving due consideration to our observation at the trial of the fact witnesses and the experts, we conclude that the easement’s fair market value in 2010 was $7,834,091.”