Document Number
15-79
Tax Type
Land Preservation Tax Credit
Description
Land Preservation Tax Credit
Topic
Land Preservation Tax Credit
Date Issued
04-22-2015

April 22, 2015

Re:      § 58.1-1821 Application:  Land Preservation Tax Credit

Dear *****:

This will reply to your letter in which you contest the Department's adjustments to the Land Preservation Tax Credit (the "Credit") application submitted by ***** (the "Taxpayer").  I apologize for the delay in responding to your appeal.

FACTS

In February 2008, the Taxpayer, a limited liability company (LLC), donated a fee simple interest in a tract of land located in the ***** (County A).  Pursuant to the conveyance, the Taxpayer registered the donation with the Department for purposes of the Credit.  The Taxpayer requested and was awarded Credit based on an appraisal by an unrelated third party appraiser contracted by the Taxpayer.

The Credit was allocated to the owners, a husband and wife, of the Taxpayer. The owners claimed a portion of the total Credit on their Virginia income tax returns filed for the 2008 and 2009 taxable years.  The husband died in 2010.  The joint income tax return for 2010 and the wife's income tax return for 2011 each reported a loss, so the Credit was not utilized for those years.

A subsequent review of the Taxpayer's application raised questions about the value of the conveyance for which the Credit was granted.  As a result, the Department commissioned an appraisal from an independent third party appraiser.  Based on this appraisal, the Credit was revalued.  The Taxpayer appeals the revaluation of the Credit, contending its appraiser followed accepted professional standards and the donation was properly valued in its appraisal.  The Taxpayer has provided an additional appraisal to support its position.  The Taxpayer also asserts that the Department did not adjust the Credit issued to the husband and wife within the limitations period.

DETERMINATION

Virginia Code § 58.1-512 provides a Credit for 40% of the fair market value of real property or an interest in real property donated to an eligible charitable organization or instrumentality of the Commonwealth for qualifying land conservation purposes.  In order to qualify for the Credit, a donation of an interest in real property must qualify as a charitable deduction under Internal Revenue Code (IRC) § 170(h).

Treasury Regulation § 1.170 et seq. governs charitable contributions.  Under Treas. Reg. § 1.170A-13(c)(3)(ii), a qualified appraisal must include the appraised fair market value of the property on the date of the contribution.  Treas. Reg. § 1.170A-1(c)(2) further states the fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts.  In the Taxpayer's case, the issue is the correct valuation of the easement.

Virginia Code § 58.1-512.1 C provides in pertinent part:

The fair market value of any property with respect to a qualified donation shall not exceed the value for the highest and best use (i) that is consistent with existing zoning requirements; (ii) for which the property was adaptable and needed or likely to be needed in the reasonably near future in the immediate area in which the property is located; (iii) that considers factors such as, by way of illustration and not limitation, slopes, flood plains, and soil conditions of the property; and (iv) for which existing roads serving the property are sufficient to support commercial or residential development in the event that is the highest and best use proposed for the property.

Donative Property Description

A fee simple interest in approximately seven acres of an approximately 43 acre tract of land consisting of seven lots owned by the Taxpayer was donated. This tract was located in a commercial development.  The subject property was rectangular in shape and stretched across the rear of each of the seven lots.  An approximately 200 foot buffer was located behind the subject property.  A portion of the property lies within a flood zone.

The adjacent commercial development was zoned for general business use, but the Taxpayer's tract was zoned for general industrial use.  However, the County has indicated that it would readily rezone the property for general business purposes. 

Civil war military action occurred on and around the subject property.  The deed of transfer recognized the historical significance of the site, and as such, restricted any development from occurring on the property.

Timeliness of Assessments

The Taxpayer contends that the Department is time barred from adjusting the amount of the Credit claimed for the taxable years ended December 31, 2008 and 2009 because no assessments were issued for those years.  Virginia Code § 58.1-312, with certain exceptions, requires the Department to assess omitted taxes within three years of the latter of the due date of the return or the actual date that the return was filed. None of the exceptions apply to this situation.  As such, the Department was required to issue assessments against the husband and wife for the taxable years ended December 31, 2008 and 2009 by May 1, 2012 and May 1, 2013, respectively.  Because no adjustments were made to the husband's and wife's 2008 and 2009 Virginia income tax returns, the Department cannot issue assessments for these taxable years to reflect any adjustment of the Credit.

However, under Va. Code § 58.1-512 D 5 a, taxpayers that have been issued a land preservation tax credit may carry over the credit for 10 consecutive years except for any taxpayer affected by the credit limitation for taxable years 2009 through 2011, who can carry the credit over for 13 consecutive years.  In this case, the wife has additional Credit that has not yet been utilized.  As such, the Department may reduce the amount of the Credit carried forward.  In addition, assessments may be issued within the three year period as specified in Va. Code § 58.1-312 resulting from any devaluation of the Credit.

Appraisals

In the valuation process, the appraisers develop a supportable estimate of market value of the property appraised.  This process involves collecting market evidence to support an analysis of value trends, the reactions of buyers and sellers in the marketplace, and a proper interpretation of these facts.  Virginia Code § 58.1-512 requires an appraisal to meet the Uniform Standards of Professional Appraisal Practice (USPAP) in order to be considered valid.  See the Guidelines for Qualified Appraisals, issued as Public Document (P.D.) 07-9 (3/12/2007).

The appraisal process typically involves three approaches in determining value: the Cost Approach, Sales Comparison Approach, and Income Capitalization Approach. A brief description of each technique follows:

The COST APPROACH: An appraisal procedure using depreciated replacement or reproduction costs of improvements, plus land value, as a basis for estimating market value.  The underlying assumption is most reliable when the improvements are relatively new and are the highest and best use of the land.

The SALES COMPARISON APPROACH: An appraisal procedure using sales prices of whole properties similar to the subject property as a basis for estimating market value.  The nature and condition of each sale are analyzed, making adjustments for dissimilar characteristics.  The Sales Comparison Approach offers a good indication of value when reliable data exists for a sufficient quantity and quality of sales in the marketplace.

The INCOME CAPITALIZATION APPROACH: An appraisal procedure using capitalization of expected future income as a basis for estimating market value.  In this approach, there is a direct relationship between the amount of income a property earns and its value.  An appropriate capitalization rate is used to estimate value based on the anticipated net operating income of the property.  Factors such as risk, time, interest on the capital investment, and recapture of the depreciating asset are considered in deriving an overall rate.  The underlying assumption in this approach is that an informed purchaser will pay no more for the subject property than would have to be paid for another property with an income stream of comparable amount, duration, and quality.  When analyzing land, the Income Capitalization approach may be presented as a discounted cash flow and is known as the Subdivision Development Approach.

The final step in the appraisal process is the reconciliation of value indications and the final estimate of value.  The appraiser considers each approach according to the quantity and quality of information available, as well as the peculiarities of the subject property, and weighs each value estimate.  The result is a final conclusion of market value for the subject.

An appraiser's opinion of value is based on the property's "highest and best use." According to the Appraisal Institute's Dictionary of Real Estate Appraisal (Third Addition, 1993, p. 171), highest and best use is defined as:

The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.  The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.

Fee Simple Donation

Prior Department public documents addressed the donation of conservation easements.  Under Treas. Reg. § 1.170A-14(h)(3), the fair market value of a conservation easement is determined by comparison to other comparable easements.  However, if there is no substantial record of comparable easements, then the fair market value of such easement, as a general rule, is the difference between the fair market value of the property encumbered by the easement before the granting of the easement and the fair market value of the encumbered property after the granting of the easement.  Treas. Reg. § 1.170A-14(h)(3) further states that when determining the before and after values of the donated easement, any property owned by the donor that is contiguous to the property restricted by the easement is included in the valuation.

In this case, the donation was a fee simple interest in the subject property.  Treas. Reg. § 1.170A-14(h)(1) provides that "[t]he value of the contribution under section 170 in the case of a contribution of a taxpayer's entire interest in property other than a qualified mineral interest is the fair market value of the surface rights in the property contributed."

Taxpayer's Appraisals

The Taxpayer submitted two appraisals.  In addition to the appraisal submitted with its Credit application, a second appraisal was submitted at the request of the Department. The sales comparison approach was used with each submitted appraisal.

Appraisal submitted with the Application

The first appraisal appraised the entire 43 acre tract prior to the donation at $16.16 million.  The appraisal appraised the entire tract after the donation at $13.16 million.  As such, the total value of the donation was appraised for $3.0 million, which was the difference between the "before value" of the entire tract with the "after value" of the entire tract.

The Taxpayer contends that the valuation method utilized in the first appraisal met the requirements of USPAP because Standards Rule 1-2 (e)(v) states that an appraisal must identify the characteristics of each physical segment of the property.  This standard only addresses identifying the character of the property.  Standards Rule 1-4 (e) provides that when the value of a whole property has been established and the appraiser seeks to value a portion of the property, the value of each part must be tested by the analysis of such data.  The appraisal submitted with the application did not value the actual donated property; rather, it valued the entire tract of land which contained the donated parcel before and after the donation and valued the donation as the difference.  As such, the appraisal violated Standards Rule 1-4 (e) of USPAP and is not considered a valid appraisal under Va. Code § 58.1-512.

Second Appraisal

The Taxpayer also provided an additional appraisal for the subject property.  This appraisal valued the property at approximately $1.37 million.  The appraiser valued the donated property by determining a price per usable square foot for comparable properties, which was then multiplied by the entire square footage of the subject property to determine the value.

The Taxpayer's second appraisal values the donated property significantly higher than the Department's Appraisal.  The difference in value results primarily because the Department's Appraisal significantly reduced the value of the portion of the property located in the flood plain and another portion of the property due to lack of access.  The Taxpayer's second appraisal did not address the additional costs of constructing a road and sewer.

The Taxpayer contends that there was no potential diminution in value due to the parcel being located in a flood plain because the risk of flood is remote.  The appraisal states that the existence of the flood plain did not affect his valuation.  The Taxpayer also asserts that a geographical information system (GIS) map included in the Department's Appraisal erroneously placed the subject property in a buffer that does not exist.  Regardless as to whether the GIS map was or was not accurate, the Taxpayer's appraiser did not rely on the GIS map in his analysis.

Appraisal Commissioned by Department

As mentioned above, the Department commissioned an independent third party appraisal (the "Department's Appraisal") subsequent to the Taxpayer's appeal.  This appraisal valued the subject property at $0.267 million.  The appraiser determined that approximately one-third of the property was usable as commercial property and approximately one-third of the subject property was of minimal value because it was in a flood plain.  It also determined that approximately another third of the property would lack access because of the portion of the property that lied within the flood plain.  The appraiser found comparables for both commercial property and property located in a flood plain.  He also found comparables for property whose value would only be maximized if adjoined to other property.  The appraiser determined a value per acre for the three types of property and then subtracted an amount to bring in a road and water and sewer.

CONCLUSION

Both the Taxpayer's second appraisal and the Department's Appraisal have been thoroughly reviewed.  The opinion of valuation of the subject property offered by the Department's Appraisal appears reasonable and had the best analysis.  Accordingly, it is my determination that the Department's Appraisal represents the most accurate valuation of the donated property.  Based on this determination, the Credit has been properly revalued to reflect the opinion of valuation offered by the Department's Appraisal.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rulings and Decisions section of the Department's website.  If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M .Burns
Tax Commissioner

 

 

AR/1-5127846669.B

Rulings of the Tax Commissioner

Last Updated 05/08/2015 16:10