Butler v. Comm'r

T.C. Memo. 2012-72

UNITED STATES TAX COURT

JAMES E. BUTLER, JR., AND SUSAN C. BUTLER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1752-09. Filed March 19, 2012.

David D. Aughtry, William E. Buchanan, Kristen S. Lowther, and Alan F.

Rothschild, Jr., for petitioners.

John T. Arthur, Jeffrey S. Luechtefeld, and Christopher Pavilonis, for

respondent.

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MEMORANDUM OPINION

WELLS, Judge: Respondent determined income tax deficiencies of

$2,525,213 and $694,694, and penalties pursuant to section 6662(a)1 of

$505,042.60 and $138,938.80 with respect to petitioners’ 2003 and 2004 tax years

(years in issue), respectively. The issues we must decide are: (1) whether the

conservation easements petitioners donated to Chattahoochee Valley Land Trust

(CVLT) with respect to two properties near Columbus, Georgia, constitute qualified

conservation contributions pursuant to section 170(h); (2) the proper values of those

conservation contributions; (3) whether the conservation easements petitioners

donated to Chattowah Open Land Trust (COLT) with respect to property in Early

and Calhoun Counties, Georgia, constitute qualified conservation contributions

pursuant to section 170(h); (4) the proper value of those conservation contributions;

and (5) whether petitioners are liable for the accuracy-related penalty pursuant to

section 6662(a).

1

Unless otherwise indicated, section references are to the Internal Revenue

Code of 1986 (Code), as amended, and Rule references are to the Tax Court Rules

of Practice and Procedure.

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For convenience, we proceed first with general background findings of fact

and then combine our remaining findings of fact with respect to each separate issue

with our opinion regarding each of those issues.

General Background

Some of the facts and certain exhibits have been stipulated. The parties’

stipulations of fact are incorporated in this opinion by reference and are found

accordingly. At the time they filed their petition, petitioners resided in Georgia.

Petitioner James E. Butler has long been interested in conservation. During

the late 1980s, Mr. Butler offered his services pro bono as lead counsel in litigation

that successfully prevented the construction of a hazardous waste incinerator in

Taylor County, Georgia. During the late 1990s, Mr. Butler served on the Georgia

Board of Natural Resources. During the early 2000s, Mr. Butler and several other

individuals founded CVLT, and Mr. Butler served on its board.

The purpose of forming CVLT was to encourage landowners to donate

conservation easements to the organization. In part to encourage other landowners

to contribute easements on their properties, during 2003, Mr. Butler contributed a

conservation easement to CVLT on 393.33 acres of his property in Muscogee

County outside of Columbus, Georgia. At the same time, petitioner Susan C.

Butler contributed a conservation easement to CVLT on 12.7 acres of her property

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across Hubbard Road from Mr. Butler’s property in Muscogee County. We refer to

the foregoing properties as the Muscogee County properties. Before petitioners

contributed those conservation easements, Mr. Butler resigned from the board of

CVLT.

During the years in issue, petitioners owned all of the interests in Kolomoki

Plantation, L.L.C. (L.L.C.), a Georgia limited liability company with its principal

place of business in Georgia. During 2003, the L.L.C. contributed a conservation

easement on 1,780 acres of property in Calhoun and Early Counties, Georgia. We

shall refer to the property the L.L.C. owned in Calhoun and Early Counties as

Kolomoki Plantation or Kolomoki. The L.L.C. contributed the easement on

Kolomoki Plantation to COLT. COLT has since changed its name to the Georgia

Land Trust, but it still operates as COLT for purposes of monitoring easements that

were donated before the organization changed its name. During 2004, the L.L.C.

contributed a conservation easement to COLT on an additional 2,450 acres of

Kolomoki Plantation. The L.L.C. passed through to petitioners the charitable

contribution deductions with respect to its donations during 2003 and 2004, and

petitioners claimed those deductions on their joint return for each year.2

2

The unified audit and litigation procedures of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 401, 96 Stat. at

(continued...)

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Throughout the process of donating the conservation easements, Mr. Butler

relied upon Alan Rothschild, Jr., an attorney with the Columbus, Georgia, law firm

Hatcher Stubbs, and Charles D. Johnson, C.P.A. Mr. Butler has relied upon and

worked with Mr. Rothschild for many years. Mr. Johnson has served as Mr.

Butler’s accountant for more than two decades. Mr. Butler engaged Conservation

Advisors, L.L.C. (Conservation Advisors), a real estate firm specializing in

conservation conveyances, to advise him regarding the process of donating the

conservation easements. Conservation Advisors helped petitioners plan and execute

the steps needed to donate the easements, including the engagement of

environmental consultants and appraisers. Mr. Rothschild reviewed and revised the

deeds of conservation easement (conservation deeds) and related documents on

behalf of petitioners and the L.L.C.

Petitioners timely filed their individual income tax returns for the years in

issue. They attached to their income tax returns appraisal reports with respect to the

conservation easements. The L.L.C. timely filed Forms 1065, U.S. Return of

2

(...continued)

648, do not apply to the L.L.C. because it qualifies as a small partnership under sec.

6231(a)(1)(B)(i) and did not elect pursuant to sec. 6231(a)(1)(B)(ii) to have TEFRA

apply. See Wadsworth v. Commissioner, T.C. Memo. 2007-46.

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Partnership Income, for the years in issue. It attached to those returns appraisal

reports for the conservation easements on the Kolomoki property.

The appraisal reports submitted with the returns filed by petitioners and the

L.L.C. determined that the proper values of the conservation easements with respect

to each of the properties were as follows:

Muscogee County properties Kolomoki Plantation

James Butler Susan Butler 2003 2004

Before $6,520,000 $294,000 $14,693,000 $13,139,000

After 1,799,000 103,000 12,143,000 10,157,235

1

Enhancement 37,000 7,000 -0- 45,600

2

Easement value 4,684,000 191,000 2,550,000 2,936,000

1

The $7,000 enhancement is already reflected in the after value of $103,000.

2

The appraiser rounded this number in his report.

Mr. Johnson handled the preparation and filing of petitioners’ 2003 and 2004

income tax returns. Relying primarily upon Mr. Johnson and Mr. Rothschild, Mr.

Butler read the first several pages of his tax return and skimmed the rest of it but did

not review it in detail. He read at least one of the appraisal reports for the Kolomoki

Plantation conservation easements, but he does not remember reading any of the

other reports.

After conducting an examination of petitioners’ 2003 and 2004 income tax

returns, respondent determined that petitioners failed to establish that their

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contributions of conservation easements to CVLT and COLT were qualified

conservation contributions pursuant to section 170(h). In the alternative,

respondent determined that the appraisal reports submitted by petitioners failed to

establish the proper value of the conservation easements.3 Respondent timely

issued a notice of deficiency to petitioners. Petitioners timely filed a petition with

this Court.

Allocation of the Burden of Proof

As a preliminary matter, we consider petitioners’ contention that the burden

of proof has shifted to respondent pursuant to section 7491(a). Generally, the

Commissioner’s determination of a deficiency is presumed correct, and the

taxpayer has the burden of proving it incorrect. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Section 7491(a)(1) provides an exception that places

the burden of proof on the Commissioner as to any factual issue relevant to a

taxpayer’s liability for tax if: (1) the taxpayer introduces credible evidence with

respect to that issue; and (2) the taxpayer satisfies certain other conditions,

including substantiation of any item and cooperation with the Commissioner’s

requests for witnesses, documents, other information, and meetings. Sec.

3

However, respondent did not argue at trial or in his briefs that petitioners

failed to submit qualified appraisals with their returns. See sec. 1.170A-13(c)(2),

Income Tax Regs.

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7491(a)(2); see also Rule 142(a)(2). The taxpayer bears the burden of proving that

the taxpayer has met the requirements of section 7491(a). Rolfs v. Commissioner,

135 T.C. 471, 483 (2010), aff’d, ___ F.3d ___ (7th Cir. Feb. 8, 2012).

At trial, respondent conceded that petitioners fully cooperated during

respondent’s examination of their returns. Accordingly, the requirements of section

7491(a)(2)(B) have been met. However, respondent contends that petitioners have

not introduced credible evidence with respect to any of the factual issues in the case.

Respondent contends that all the evidence petitioners submitted either fails to

address the issues or lacks credibility.

We must decide whether petitioners introduced “credible evidence” with

respect to each of the factual issues. For purposes of section 7491(a)(1), “credible

evidence” means “‘evidence which, after critical analysis, the court would find

sufficient upon which to base a decision on the issue if no contrary evidence were

submitted (without regard to the judicial presumption of IRS correctness).’”

Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th Cir. 2005) (quoting Griffin v.

Commissioner, 315 F.3d 1017, 1021 (8th Cir. 2003), rev’g T.C. Memo. 2002-6),

aff’g T.C. Memo. 2003-212; see also Geiger v. Commissioner, 279 Fed. Appx. 834,

835 (11th Cir. 2008), aff’g T.C. Memo. 2006-271; Higbee v. Commissioner, 116

T.C. 438, 442-443 (2001).

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As we explain below, we conclude that petitioners produced credible

evidence as required by section 7491(a) with respect to the factual issues regarding

whether their conservation easements satisfied the requirements of section 170(h).

With respect to those issues, therefore, the burden of proof shifts to respondent

pursuant to section 7491(a)(1). Because both sides presented extensive evidence

regarding the factual issues relating to the valuation of the conservation easements

and we decide those issues on the basis of a preponderance of the evidence, the

allocation of the burden of proof on those issues is immaterial. See Knudsen v.

Commissioner, 131 T.C. 185, 189 (2008).4

Issue 1. Whether Petitioners’ Contribution of a Conservation Easement on the

Muscogee County Properties Was a Qualified Conservation Contribution Under

Section 170(h)

Background

Through numerous purchases over the course of about 25 years, Mr. Butler

assembled a contiguous parcel of land totaling approximately 418 acres. The

property is situated south of Smith Road, east of Whitesville Road, and north of

Hubbard Road in Muscogee County, Georgia, north of the city of Columbus. The

property is about a half-mile west of Interstate 185 and just south of the Harris

4

Accordingly, we need not address petitioners’ alternative argument that the

burden of proof should shift to respondent because respondent’s notice of deficiency

was “excessive and erroneous”.

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County line. Looking east from Whitesville Road, the property’s irregular shape

vaguely resembles a fox with its mouth open: two small portions of the property

abut Smith Road to the north (the mouth); three small portions abut Whitesville

Road to the east (the legs); and a larger portion abuts Hubbard Road to the south

(the bushy tail). Pritchett Road, a dead-end road, bisects the property. Petitioners

constructed an estate-style residence on approximately 24.5 acres on the north side

of Pritchett Road (Butler estate). That portion of the property constituting the Butler

estate is not subject to the easement. The parties refer to the tract of land assembled

by Mr. Butler as the James Butler property. We will also use that appellation, but

we do not include the Butler estate when we refer to the James Butler property.

The remainder of the James Butler property is undeveloped, with the

exception of two existing residences. The property includes both pastureland and

forested areas. The topography is rolling, with steeper slopes in the portion of the

tract north of the Butler estate. The steepest hills are in the northwest corner and

along the northeast boundary of the tract. The southern portion, just north of

Hubbard Road, is gently rolling. That portion is unusually flat for northwestern

Muscogee County. The southern portion is also less rocky than the northern

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portion. During 2003, the James Butler property had access to sewer and water

only along the southeastern corner of the property on Hubbard Road.

In addition to the James Butler property, petitioners’ Muscogee County

properties also include a 12.7-acre, roughly rectangular tract just south of Hubbard

Road. Ms. Butler purchased that property during the 1980s. The parties refer to

that tract as the Susan Butler property. The Susan Butler property is moderately

sloped toward the south and west, where it borders two creeks. During 2003, it had

access to water and sewer along Hubbard Road. The Susan Butler property is

undeveloped.

Columbus is one of the largest cities in Georgia. At the time of the 2000

census, the population of Muscogee County was 186,291. During the early 2000s,

the population in and around Columbus was growing, and the primary direction of

development growth was to the north of Columbus, in the area between Pierce

Chapel Road (about five miles east of Interstate 185) to the east and the

Chattahoochee River to the west. The northeastern part of Muscogee County was

also growing, but property there was not as desirable because access to downtown

Columbus was not as easy. Similarly, Harris County to the north was growing but

not as rapidly because of its distance from downtown Columbus and because it had

fewer amenities and services.

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Although the neighborhood of the James Butler property remained rural and

was only 35% developed during 2003, it was becoming attractive to developers as a

result of the pattern of growth in Muscogee County. During 2003, Mr. Butler

received three unsolicited offers from developers who wanted to purchase a small

portion of that property. On July 18, 2003, William White of Sedgefield Properties,

L.L.C., offered to purchase 75 acres along Hubbard Road for $17,500 per acre. The

75-acre portion of the property Mr. White wanted to purchase was the southernmost

portion of the James Butler property, a portion shaped roughly like a square fronting

Hubbard Road. That portion was south of Pritchett Road, separated from Pritchett

Road by another 40-acre tract owned by Mr. Butler that Mr. White did not offer to

purchase. After Mr. Butler declined that offer, Mr. White offered to purchase a 42-

acre subset of that 75-acre tract for $20,000 per acre. Mr. Butler again declined to

sell. On August 21, 2003, another developer, Kenneth Brown of Leary & Brown,

Inc., offered to purchase the same 42-acre tract, the southernmost portion of the

James Butler property, for $33,000 per acre. Mr. Butler also refused that offer.

Mr. Butler was not interested in selling his land to developers because he

wanted to preserve it. On November 25, 2003, petitioners conveyed conservation

easements to CVLT on the Muscogee County properties. The conservation

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easements cover the entirety of the Susan Butler property and 393.33 acres of the

418-acre tract (i.e., the James Butler property but not the Butler estate).

Although the conservation deeds significantly restrict petitioners’ use of the

Muscogee County properties, they permit limited agricultural and recreational use

and reserve a total of 12 lots for development. Both of the conservation deeds begin

with nearly identical recitals, proclaiming general conservation purposes. The

conservation deeds then provide certain rights and duties to the grantor and grantee.

A list of permitted uses and practices labeled “Exhibit ‘B’” is attached to the

conservation deeds and provides:

The following uses and practices, though not an exhaustive recital of

permitted uses and practices, are hereby deemed to be consistent with the

Purpose and are expressly permitted.

1. Agricultural activities. To conduct small scale farming, ranching, or

other agricultural activities including raising, managing and breeding livestock

and planting, raising and harvesting agricultural crops. However, there shall

be no large scale agricultural activities permitted on the Property such as

feedlots, pig farms, commercial poultry farms, or similar uses which have the

potential to negatively impact the Conservation Values.

* * * * * * *

3. Water resources. To maintain, enhance, and develop water

resources on the Property in accordance with applicable state and federal

regulations, for permitted agricultural uses, fish and wildlife uses, domestic

needs and private recreation. Permitted uses include, but are not limited to,

the following: the right to restore, enhance and develop water resources,

including ponds; to locate, construct, repair, and maintain irrigation

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systems; to develop animal watering facilities; and to construct, repair and

maintain dams, spillways, docks, gazebos and related recreational structure

appurtenant thereto.

* * * * * * *

6. Maintenance and structures. To maintain, repair, remodel, and

make limited additions to any existing or subsequently constructed structures

and improvements expressly permitted by this Easement. * * * Grantor

reserves and retains the right to construct, maintain and repair a single family

residence, garage and barn or single multipurpose outbuilding on each of the

eleven (11) two-acre building sites shown in the Baseline Documentation (the

“Building Sites”). Reconfiguration of the Building Sites, but not expansion,

may be permitted if Grantor requests in writing and Grantee approves such

reconfiguration. Grantor further reserves and retains the right to construct,

maintain and repair structures ancillary to the uses permitted in paragraphs 1

and 2 above [agricultural and recreational uses], such as a cattle barn, horse

barn, and sheds, so long as such structures do not materially impair the

Conservation Values.

The conservation deed with respect to the Susan Butler property reserves only 1

two-acre building site, not the 11 reserved on the James Butler property.

In addition to the permitted uses described above, both conservation deeds

permit commercial timber harvesting provided that CVLT approves the timber

management plan submitted by the grantor. They also permit the removal of trees

for agricultural or aesthetic purposes and the planting of nonnative species without

any approval from the grantee. Additionally, the conservation deeds expressly

permit a wide variety of recreational activities such as noncommercial hunting,

fishing, horseback riding, boating, and hiking; the construction of fences provided

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that they do not result in “demonstrable degradation to the Conservation Values”;

the construction of roads and trails to access permitted building sites and to

accommodate timber management; and the use of agrichemicals “using methods and

dosages which achieve the desired result while minimizing the impact upon non-

noxious foliage and vegetation.” The grantor is permitted to sell any or all of the

permitted building sites and any other portion of the property subject to the

easement.

The conservation deeds require that the grantor notify CVLT before

undertaking some of the permitted actions (but no notice is required with respect to

others), provide that any costs of enforcing the conservation deeds will be paid by

the grantor, and provide that the grantor waives any defense of laches, estoppel, or

prescription. The conservation deeds also provide that CVLT has the right, upon

prior notice to the grantor, to enter the property to monitor compliance with the

terms of the conservation deeds. CVLT is empowered to require the restoration by

the grantor of any portion of the property damaged by a violation of the

conservation deeds. Since the donation of the conservation easements during 2003,

CVLT has been monitoring the Muscogee County properties annually to ensure that

the conservation values are not being damaged by any uses of the properties

inconsistent with the conservation deeds.

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The conservation deeds contain a list of prohibited uses in “Exhibit ‘C’”.

That list includes uses such as mineral exploitation, “commercial or industrial

facilities (other than those necessary in the operation or uses of the Property

expressly permitted by this Easement)”, dumping, billboards, commercial towers,

and mobile homes or recreational vehicles (except for temporary parking). The

conservation deeds do not permit the general public to access the properties.

The conservation deeds state that if any of their provisions are found

ambiguous, “an interpretation consistent with the Purpose and said Code Sections

that would render the provision valid shall be favored over any interpretation that

would render it invalid.”

The “Baseline Documents” to which the conservation deeds refer consist of

reports prepared by environmental consultants Stacy Mote and Erin Bouthillier

(collectively, environmental consultants). We shall refer to those documents as the

environmental reports. The environmental reports state that the environmental

consultants were engaged for the purpose of conducting a “baseline environmental

inventory” so that “an assessment of [each] * * * property’s natural importance

can be made and future management and monitoring practices can be evaluated.”

Consistent with that purpose, the environmental reports describe the natural

features of the Muscogee County properties at the time of the easement

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contributions. Regarding the conservation value of the James Butler property, the

environmental report with respect to that property states:

Overall, the * * * Property provides a significant wildlife resource for

the region and enhances the natural aesthetics of the area. With access to a

major waterway corridor and a variety of ecological communities, this site

offers forage, nesting habitat, and shelter. * * * All of these functions and

values are also beneficial to the public in the form of cleaner air and water;

plentiful game for hunting; and natural beauty in the area.

The environmental report with respect to the Susan Butler property uses identical

language to describe its ecological value. The environmental reports provide a list

of wildlife species that Ms. Mote and Ms. Bouthillier observed on the properties

and a list of wildlife species that have been observed by others in the general area of

the properties that normally live in habitats similar to the habitat provided by the

properties. The reports state that the properties, in their then-current state, provide

habitat similar to the habitat preferred by several wildlife species listed as threatened

or endangered. However, the environmental consultants did not actually observe

any endangered species on the Muscogee County properties, and the only

threatened species they observed was the plumleaf azalea, which the State of

Georgia considers threatened.

With respect to the James Butler property, the environmental report notes that

timber and agricultural activities have “altered some of the native plant

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communities” and that a small herd of horses kept on the property “may have a

limited impact on Heiferhorn Creek; however, by keeping the herd small and

limiting the access to a small portion of the creek, water quality impacts should be

minimal.” That report also notes that the larger tract has been used for grazing

livestock and harvesting in the recent past and that, although those practices “have

impacted the natural communities on-site”, they “have also provided a

diversification in habitat that may have not occurred previously.”

The environmental reports provide the following conclusions and

recommendations (using identical language in both reports):

The preservation of the Butler Tract will be valuable in protecting the

unique natural resources in this rapidly developing area. Heiferhorn Creek

and its drainage ways are important water features that serve to attract

wildlife, filter pollutants, and recharge groundwater * * *. These waterways

also have a high likelihood of supporting federally and state protected mussel

and fish species. The many habitats on-site host a wide variety of plant and

animal species. * * *

With limited development of the property, the wildlife components of

this site will continue to flourish. In order to minimize future impacts, we

recommend that all timber practices comply with Forestry Best Management

Practices, keeping stream management zones and using suitable erosion

control techniques.

Except for those brief conclusions, the environmental reports do not address how

the conservation value of the properties would be affected by the permitted uses

described in the conservation deeds.

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Petitioners later submitted supplemental environmental reports, also authored

by Ms. Bouthillier and Ms. Mote, during 2010 (supplemental environmental

reports). The supplemental environmental reports include a new section in which

the environmental consultants more specifically address how the conservation deeds

protect conservation purposes as provided in the Code and the regulations. The

supplemental environmental reports specifically identify certain high quality

terrestrial and aquatic communities found on the properties:

During the 2002 surveys, high quality terrestrial communities were

identified on the Butler Tract in the northern portion of the site and along the

ridge/slopes paralleling the drainageways. These communities were

Oak-Hickory-Pine Forests and Granite Outcrops further described in the

Baseline Report as Mixed Upland Forest and Rock Outcrops. The rocky

character of these significant habitats made it difficult to farm or timber over

the years; thus allowing a more mature canopy of hardwoods to persist. The

rocky substrate also provides habitat for several of the species listed above.

Oak-Hickory-Pine Forest was observed in the northern portion of the

easement and along tributaries throughout the site. Numerous wildlife

species, including migratory songbirds, were observed utilizing this valuable

habitat for feeding and nesting. The slopes within this habitat transition

between gently sloping to steep hillsides scattered with rock outcrops.

Oak-Hickory-Pine Forests within the Piedmont ecoregion have been primarily

impacted by urban sprawl within the last twenty years.

Rock Outcrops were found within the steep slopes of the upland

hardwood forest located north of the main lake and along Heiferhorn Creek.

Vernal pools within shallow depressions of these outcrops provide habitat to

fragile ecosystems within Georgia. Decline of many species that rely on this

type of habitat is occurring throughout Georgia due to lack of habitat

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protection. These outcrops provide potential habitat for granite stonecrop and

pool sprite.

The 2002 surveys also identified high quality aquatic communities in

Heiferhorn Creek, its tributaries, and associated floodplain hardwood.

Heiferhorn Creek is located within the 7 mile radius of a water supply source

and has been afforded additional protection in this portion of the County.

This large waterway flows south to southwest along the eastern boundaries of

the Butler Tract eventually discharging into the Chattahoochee River Basin.

Heiferhorn Creek and its tributaries are meandering systems with series of

run/riffle/pool habitats. Several areas of rocky shoals provide foraging areas

and habitat for protected species. Native plumleaf azalea populations

(Rhododendron prunifolium), a threatened State Species, were observed

along stream courses throughout the Property.

The environmental consultants found only one rare, endangered, or threatened

species on the Muscogee County properties: the plumleaf azalea, a plant that

grows in the moist soils of ravines in hardwood forests. However, the

environmental consultants reported that the following rare, endangered, or

threatened species may be found in habitats similar to those found on the

Muscogee County properties: granite stonecrop (a plant found in partially shaded

granite outcrops); relict trillium (a plant found in ravines in hardwood forests);

shoals spiderlilly (a plant found in rocky shoals of major streams); Alabama

milkvine (a plant found on slopes and bluffs in dense hardwood forests);

Bachman’s sparrow (a bird found in open pine woods and old pastures with dense

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ground cover); and alligator snapping turtle (a reptile found in rivers, lakes,

swamps, and large ponds).

The supplemental environmental reports do not mention any of petitioners’

retained rights besides the following brief discussion of the reserved building sites:

“Even with the retained rights of 11 2-acre home sites, the * * * [James Butler

property] would maintain the scale of rural residential open space historically

present in the region.” The supplemental environmental report for the Susan Butler

property included a similar conclusion about the effect of the single two-acre home

site reserved on that property.

Discussion

A. Legal Standard

Taxpayers may deduct the value of any charitable contributions made

during the tax year pursuant to section 170(a)(1). Generally, taxpayers are not

entitled to deduct gifts of property that consist of less than the taxpayers’ entire

interest in that property. Sec. 170(f)(3). However, taxpayers are permitted to

deduct the value of a contribution of a partial interest in property that constitutes a

“qualified conservation contribution” as defined in section 170(h)(1). Sec.

170(f)(3)(B)(iii). For a contribution to constitute a qualified conservation

contribution, the taxpayer must show that the contribution is (1) of a “qualified

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real property interest” (2) to a “qualified organization” (3) “exclusively for

conservation purposes.” Sec. 170(h)(1). The parties agree that the contributions

petitioners made were of qualified real property interests and that those

contributions were made to qualified organizations. Accordingly, the only issue

remaining for us to decide is whether those contributions were exclusively for

conservation purposes.

To be considered to have been made exclusively for conservation purposes, a

contribution must satisfy the requirements of section 170(h)(4) and (5). Section

170(h)(4)(A) defines “conservation purpose” as:

(i) the preservation of land areas for outdoor recreation by, or the

education of, the general public,

(ii) the protection of a relatively natural habitat of fish, wildlife, or

plants, or similar ecosystem,

(iii) the preservation of open space (including farmland and forest land)

where such preservation is--

(I) for the scenic enjoyment of the general public, or

(II) pursuant to a clearly delineated Federal, State, or local

governmental conservation policy, and will yield a significant public

benefit, or

(iv) the preservation of an historically important land area or a certified

historic structure.

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In order for a contribution to be deductible, it must satisfy one of the contribution

purposes under section 170(h)(4). Section 170(h)(5) provides that no contribution

will be treated as exclusively for a conservation purpose unless that purpose is

preserved in perpetuity.

Section 1.170A-14(e)(2), Income Tax Regs., disallows any deduction where

the conservation easement would preserve one of the conservation purposes “but

would permit destruction of other significant conservation interests.”

For example, the preservation of farmland pursuant to a State program for

flood prevention and control would not qualify under paragraph (d)(4) of this

section if under the terms of the contribution a significant naturally occurring

ecosystem could be injured or destroyed by the use of pesticides in the

operation of the farm. However, this requirement is not intended to prohibit

uses of the property, such as selective timber harvesting or selective farming

if, under the circumstances, those uses do not impair significant conservation

interests.

Id.

The parties agree that petitioners’ contributions do not satisfy the requirement

of section 170(h)(4)(A)(i) or (iv). Petitioners contend that they satisfy the

requirements of the second and third conservation purposes listed in section

170(h)(4)(A). Respondent disagrees and contends that the rights petitioners

retained under the conservation deeds are inconsistent with the conservation

purposes listed in section 170(h)(4)(A)(ii) and (iii). Respondent focuses on the

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extent to which development of the tracts is explicitly permitted by the conservation

deeds. Petitioners contend that, although the conservation deeds reserve some

rights for petitioners, they include language that ensures the conservation purposes

will be protected. Because, as we explain below, we conclude that petitioners’

contributions satisfy the section 170(h)(4)(A)(ii) conservation purpose of protecting

a relatively natural habitat (conservation purpose), we need not address whether the

contributions protect open space pursuant to clause (iii).

To qualify for the conservation purpose of protecting a relatively natural

habitat under section 170(h)(4)(A)(ii), the regulations require that the donation:

protect a significant relatively natural habitat in which a fish, wildlife, or plant

community, or similar ecosystem normally lives will meet the conservation

purposes test of this section. The fact that the habitat or environment has

been altered to some extent by human activity will not result in a deduction

being denied under this section if the fish, wildlife, or plants continue to exist

there in a relatively natural state. * * *

Sec. 1.170A-14(d)(3)(i), Income Tax Regs. The regulations offer the following

guidance with respect to what constitutes a “significant habitat or ecosystem”:

Significant habitats and ecosystems include, but are not limited to, habitats

for rare, endangered, or threatened species of animal, fish, or plants; natural

areas that represent high quality examples of a terrestrial community or

aquatic community, such as islands that are undeveloped or not intensely

developed where the coastal ecosystem is relatively intact; and natural areas

which are included in, or which contribute to, the ecological viability of a

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local, state, or national park, nature preserve, wildlife refuge, wilderness area,

or other similar conservation area.

Sec. 1.170A-14(d)(3)(ii), Income Tax Regs. A “habitat” is an “‘area or

environment where an organism or ecological community normally lives or occurs’”

or the “‘place where a person or thing is most likely to be found.’” Glass v.

Commissioner, 124 T.C. 258, 281-282 (2005) (quoting the American Heritage

Dictionary of the English Language 786 (4th ed. 2000)), aff’d, 471 F.3d 698 (6th

Cir. 2006).

Pursuant to the regulations cited above, a conservation easement will satisfy

the conservation purpose of protecting a relatively natural habitat under section

170(h)(4)(A)(ii) if it protects an area (1) that is an environment where a rare,

endangered, or threatened species is normally found; (2) that is a “high quality”

example of an ecosystem; or (3) that contributes to the ecological viability of a

park or other conservation area. Sec. 1.170A-14(d)(3)(ii), Income Tax Regs.

Any interest retained by the donor “must be subject to legally enforceable

restrictions * * * that will prevent uses of the retained interest inconsistent with

the conservation purposes of the donation.” Sec. 1.170A-14(g)(1), Income Tax

Regs. When the donor reserves rights that, if exercised, would have the potential

to impair conservation interests, the donor must provide the donee with

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“documentation sufficient to establish the condition of the property at the time of the

gift.” Sec. 1.170A-14(g)(5), Income Tax Regs. The donee must also be given the

right to periodically inspect the property and to enforce the conservation restrictions,

including the right to require the restoration of the property to its condition at the

time of the donation. Id.

In deciding whether the conservation deeds preserve the conservation

purpose in perpetuity, we must first decide the extent to which the conservation

deeds permit the properties to be altered from their current state. The second issue

we must decide is: If the properties were developed to the extent permitted by the

conservation deeds, would the conservation purpose still be preserved?

B. What Rights Are Reserved Under the Conservation Deeds?

As detailed above, the conservation deeds reserve numerous rights for

petitioners, subject to the overarching language of the conservation deeds

preserving the conservation purposes. Under the terms of the conservation deeds,

petitioners or future owners may partition the James Butler property into 11

smaller tracts averaging 36 acres, each of which would include a 2-acre building

site on which a home and a garage could be constructed. Petitioners similarly

retain the right to build on one two-acre building site on the Susan Butler property.

The deeds permit the construction of roads or driveways to access the buildings.

- 27 -

Petitioners or future landowners may operate small-scale farms, both keeping

livestock and raising crops. On those farms, they may use agrichemicals to

eliminate “noxious weeds” subject only to the exhortation that they “minimiz[e] the

impact upon non-noxious foliage and vegetation”. They may construct dams to

create ponds for recreation or irrigation, and they may construct docks, gazebos,

and “related recreational structures”. They may clear timber for agricultural uses,

clear brush and remove trees for “aesthetic” purposes, and plant nonnative species

of trees or other plants.

In addition to those rights, the conservation deeds also permit a wide variety

of other uses provided that those uses do not result in “demonstrable degradation to

the Conservation Values”. Such conditionally permitted uses include the

construction of fences, the construction of other roads besides those that access the

building sites, the construction of an unlimited number of barns and sheds for

agricultural or recreational use on any portion of the property (not just the two-acre

building sites), and commercial timber harvesting pursuant to an approved timber

management plan. CVLT has the right to determine whether such uses would result

in degradation to the conservation values.

Although the conservation deeds reserve the above rights for petitioners, they

also permit CVLT to periodically enter and inspect the property to ensure

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compliance with the terms of the conservation deeds. In the event that CVLT

determines that the conservation values have been damaged, it is entitled to require

that the owner restore the property. The condition of the Muscogee County

properties at the time of the contributions are documented in the environmental

reports, as contemplated by section 1.170A-14(g)(5)(i), Income Tax Regs.

The parties disagree about whether the conservation deeds restrict the

location of the building sites. Petitioners contend that the conservation deeds

incorporate by reference the “Baseline Documents”, which they contend include the

environmental reports and a map stipulating the placement of the building sites in

locations that are consistent with the preservation of the conservation purposes.

Petitioners contend that the map was developed in consultation with Ms. Mote and

Ms. Bouthillier so as not to disturb the conservation purposes. Respondent

contends that the “Baseline Documents” cannot legally be incorporated by reference

and are not effective unless separately recorded.

We agree with petitioners. Respondent cites Herman v. Commissioner, T.C.

Memo. 2009-205, in which we held that unrecorded documents were not binding.

However, the conclusion in Herman was based upon New York State law. The

relevant State law in the instant case is that of Georgia, and the Georgia Supreme

- 29 -

Court has held: “Where a deed or grant refers to a plat as furnishing the description

of the land conveyed, the plat itself and the words and marks on it are as much a

part of the grant or deed, and control so far as limits are concerned, as if such

descriptive features were written out on the face of the deed or grant itself.” State v.

Ga. Ry. & Power Co., 80 S.E. 657, 659 (Ga. 1913); see also Spencer v. Poole, 60

S.E.2d 371, 372 (Ga. 1950). In that case, the Georgia Supreme Court did not make

a distinction between recorded and unrecorded plats.5 At least one Georgia court of

appeals has specifically held that an unrecorded plat will be treated as incorporated

by reference in a deed. See Chi. Title Ins. Co. v. Investguard, Ltd., 449 S.E.2d 681

(Ga. Ct. App. 1994). Accordingly, as a matter of law, reference in the recorded

conservation deed to the map showing the location of the lots effectively made that

map part of the recorded deed.

Additionally, by Georgia statute, subsequent purchasers are deemed to have

knowledge of any commitment if notice is “sufficient to excite attention and put a

party on inquiry shall be notice of everything to which it is afterwards found that

such inquiry might have led.” Ga Stat. Ann. sec. 23-1-17 (LexisNexis 1982); see

also Dejoo v. Suntrust Mortgage, Inc., 668 S.E.2d 245 (Ga. 2008); Lesser v.

5

Black’s Law Dictionary 1189 (8th Ed. 2004) defines a plat as a “map

describing a piece of land and its features, such as boundaries, lots, roads, and

easements.”

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Doughtie, 686 S.E.2d 416 (Ga. Ct. App. 2009). Purchasers who have notice of a

commitment are subject to that commitment. Ga. Stat. Ann. sec. 23-1-16

(LexisNexis 1982). Consequently, we conclude that the restrictions on the location

of the lots in the conservation deeds and the map referenced therein are binding

under Georgia State law.

C. Do the Conservation Deeds Preserve the Conservation

Purposes in Perpetuity?

Despite the voluminous record in this case, which includes multiple expert

reports and trial testimony from both of the environmental consultants, there is a

paucity of evidence addressing the central issue of whether the reserved rights are

consistent with the conservation purpose. Petitioners directed their evidence

almost exclusively at the issue of whether the properties presently fulfill the

conservation purpose. Petitioners established that the properties, as they existed at

the time of the contributions, provided a significant “relatively natural habitat of

fish, wildlife, or plants, or similar ecosystem”, within the meaning of section

170(h)(4)(A)(ii). Testimony from the environmental consultants at trial and in

their reports established that the properties contained high-quality examples of

several different ecosystems, as well as habitat where rare, endangered,

orthreatened species normally live. For instance, the supplemental environmental

- 31 -

reports describe high-quality examples of granite outcrops, oak-hickory-pine

forest, and rocky shoals ecosystems. Although the environmental consultants

identified only one threatened species living on the Muscogee County properties, we

are persuaded that the properties include habitats where some rare, endangered, or

threatened species normally live.

However, we must decide whether the conservation deeds actually preserve

the conservation purpose in perpetuity, as required by the Code and the regulations.

Sometimes, when landowners preserve their properties using conservation

easements, those conservation easements permit no development at all, guaranteeing

that the land will continue to exist in its then-current state. In such cases, evidence

documenting a contemporaneous conservation purpose served by the land may be

sufficient to show that the conservation easements serve the conservation purpose.

However, in the instant case, petitioners have reserved rights enabling them to

develop portions of their properties and conduct other activities that would

noticeably alter the properties’ current conditions. Accordingly, we must decide

whether, if the properties were developed to the extent permitted by the rights

reserved under the conservation deeds, they would still serve the conservation

purpose.

- 32 -

The environmental reports prepared by Ms. Mote and Ms. Bouthillier state

that their purpose was to describe the property as it existed before the donation of

the conservation easements, and the reports do not mention the conservation deeds

or give any indication that the environmental consultants reviewed the deeds before

preparing their reports. At trial, the only testimony petitioners offered regarding

whether the retained rights were consistent with the conservation purpose was a few

exchanges between their counsel and the environmental consultants concerning the

two-acre building sites. Regarding those sites on the James Butler property, Ms.

Bouthillier testified as follows:

Q. And from a conservation perspective what do you perceive insofar

as the significance of the reserved rights as to, say, homes for Mr. Butler’s

children and grandchildren?

A. You know, I think [the] setting of the property really hits home

when you drive out to that site. And if you look there is such a variety of

topography out there -- there’s rolling hills, there’s flat bottoms, there’s

water. And so there’s this atmosphere of rural nature even though you’re ten

minutes from town. And it naturally sets itself up for places to enjoy that

property. And we worked with a land planner and with environmental

constraints and looking at the property to come up with some areas that might

be suitable for house sites in the future for his descendants.

Other than the above testimony about the building sites, Ms. Bouthillier did not

specifically testify about petitioners’ retained rights. However, she stated that 400

- 33 -

acres were being preserved for wildlife and that for “400 acres to be preserved and

guided by conservation principles is really priceless”.

Regarding the retained rights on the Susan Butler property, Ms. Mote testified

as follows:

Q. From a conservation easement --

A. Right.

Q. -- perspective and a wildlife perspective with the 12 acres, ten of

which are perpetually reserved, how does that serve conservation of relatively

natural habitat for wildlife?

A. Well, I believe in the baseline they have a site set up for that two-

acre, which is actually located on a -- it looks like it could be an old

homestead area with a livestock corral like within the center of the property.

It’s back off of Hubbard Road. I’m not sure if you can -- I don’t even think

you can see it from Hubbard Road. And so it’s relatively in the center of the

site from what I recall.

Q. And so -- all right. Would your conclusion be the same as your

earlier comments about relatively natural habitat for wildlife in light of that

two-lot reservation -- that two-acre reservation?

A. Uh-huh.

Q. I’m sorry?

A. Yes. Yes.

* * * * * * *

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Q. And in doing that analysis was it necessary for you to determine

what would be in the conservation easement and what would be excluded --

or retained out of the conservation easement?

A. It was. The -- where we wanted to do -- because you can’t just go

in and put, you know, a large high-rise or several homes on a -- in a wetland.

So we have to go out first and find out what areas are there, what areas are

suitable, whether it’s soil -- you know, sometimes there’s soil that’s not --

that’s proper enough to be able to build upon. So we look for where the soils

are, where the wetlands are, where the flood plains are. And then we go in to

look to see where you could have home sites.

The foregoing testimony was directed only at the issue of whether the reserved

rights to build on the home sites are consistent with the conservation purpose.

Petitioners offered no testimony that the other reserved rights are consistent with the

conservation purpose.

In support of their contention that the other reserved rights are consistent with

the conservation purpose, petitioners point to CVLT’s enforcement rights under the

conservation deeds. Petitioners contend that if they or some future owners were to

use the land in a manner inconsistent with the conservation purposes stated in the

conservation deeds, CVLT would have the right to enforce the conservation deeds

and require the owner to restore the land.

Respondent contends that the reserved rights are inconsistent with the

conservation purpose, but respondent offered no expert witness testimony to support

his contention. Instead, respondent contends that the conservation deeds

- 35 -

fail to address how the reserved rights can be exercised so as not to thwart the

conservation purpose. Respondent argues that the reserved rights could be

exercised in ways that would destroy the habitats and high-quality ecosystems on

the property. However, respondent did not introduce any evidence in support of

that argument or any evidence that CVLT would be likely to fail to enforce its rights

granted under the conservation deeds or that CVLT would otherwise permit

petitioners or their successors to use the land in a manner inconsistent with the

conservation purpose.

Although the record on the issue of whether the conservation deeds preserve

the conservation purpose in perpetuity is sparse, we conclude that petitioners have

presented credible evidence--in the form of the expert testimony noted above, the

overarching rights granted to CVLT in the conservation deeds themselves, and the

annual monitoring conducted by CVLT--that the conservation deeds preserve the

conservation purpose, and the burden of proof therefore shifts to respondent. As

noted above, respondent offered no contrary expert witness testimony and pointed

to no evidence that would suggest that CVLT is likely to abandon its right to

enforce the conservation deeds. Consequently, we conclude that respondent has

failed to establish that the conservation deeds do not protect significant habitat.

- 36 -

Accordingly, we hold that the conservation deeds satisfy the requirements of section

170(h)(4)(A)(ii) and section 1.170A-14(d)(3), Income Tax Regs.

Issue 2. The Proper Values of the Conservation Contributions With Respect to the

Muscogee County Properties

Discussion

Generally, the amount of a charitable contribution is the fair market value of

the contributed property at the time it is contributed. Sec. 1.170A-1(a), (c)(1),

Income Tax Regs. Fair market value is the price at which property would change

hands between a willing buyer and a willing seller, neither being under any

compulsion to buy or sell and both having a reasonable knowledge of relevant facts.

Sec. 1.170A-1(c)(2), Income Tax Regs.

In deciding the fair market value of property, we must take into account not

only the current use of the property but also its highest and best use. See Stanley

Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986); sec.

1.170A-14(h)(3)(i) and (ii), Income Tax Regs. A property’s highest and best use

is the highest and most profitable use for which it is adaptable and needed or likely

to be needed in the reasonably near future. Olson v. United States, 292 U.S. 246,

255 (1934); Hilborn v. Commissioner, 85 T.C. 677, 689 (1985). If different from

- 37 -

the current use, a proposed highest and best use requires “closeness in time” and

“reasonable probability”. Hilborn v. Commissioner, 85 T.C. at 689.

Where a substantial record of comparable easement sales exists, the fair

market value of the donated easement is based on the sale prices of those

comparable easements. Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Where, as in

the instant case, there is no established market for similar conservation easements

and no record exists of sales of such easements, the regulations provide another

method to determine fair market value:

If no substantial record of market-place sales is available to use as a

meaningful or valid comparison, as a general rule (but not necessarily in all

cases) the fair market value of a perpetual conservation restriction is equal to

the difference between the fair market value of the property it encumbers

before the granting of the restriction and the fair market value of the

encumbered property after the granting of the restriction. * * *

Id. We have often applied the “before and after” approach to determine the fair

market values of conservation easements. See, e.g., Hilborn v. Commissioner, 85

T.C. 677 (1985); Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646

F.3d 6 (D.C. Cir. 2011); Kiva Dunes Conservation, L.L.C. v. Commissioner, T.C.

Memo. 2009-145; Griffin v. Commissioner, T.C. Memo. 1989-130, aff’d, 911 F.2d

1124 (5th Cir. 1990).

- 38 -

An appraiser may use the comparable sales method, or another accepted

method, to estimate the before and after values of the property. Hilborn v.

Commissioner, 85 T.C. at 689. An appraiser using the comparable sales method,

also known as the market-data approach or sales comparison approach, finds sales

of properties that meet three criteria: (1) the properties themselves are similar to the

subject property; (2) the sales are arm’s-length transactions; and (3) the sales have

occurred within a reasonable time of the valuation date. Wolfsen Land & Cattle Co.

v. Commissioner, 72 T.C. 1, 19 (1979). Because no two sales and no two

properties are ever identical, the appraiser then considers aspects of the comparable

transactions such as time, size, or other significant features and makes appropriate

adjustments for each to approximate the qualities of the subject property. Estate of

Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987); Wolfsen Land & Cattle

Co. v. Commissioner, 72 T.C. at 19. We have found the comparable sales approach

to be the most reliable indicator of value when there is sufficient data about sales of

properties similar to the subject property. See, e.g., Estate of Spruill v.

Commissioner, 88 T.C. at 1229 n.24; Estate of Rabe v. Commissioner, T.C. Memo.

1975-26, aff’d without published opinion, 566 F.2d 1183 (9th Cir. 1977).

- 39 -

Another valuation method sometimes employed is the income or discounted

cashflow approach. See Trout Ranch, LLC v. Commissioner, T.C. Memo.

2010-283; Losch v. Commissioner, T.C. Memo. 1988-230. The income approach

to valuing real property involves discounting to present value the expected

cashflows from the property. See, e.g., Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010-283; Losch v. Commissioner, T.C. Memo. 1988-230. The theory

behind the approach is that an investor would be willing to pay no more than the

present value of a property’s anticipated future net income.

Additionally, when using the before and after valuation approach, any

enhancement in the value of a donor’s other property resulting from the easement

contribution, or of property owned by certain related persons, reduces the value of

the contribution deduction. Sec. 1.170A-14(h)(3)(i), Income Tax Regs.

Petitioners retained three appraisers who wrote reports with respect to the

Muscogee County properties: David Roberts, Gregory Eidson, and Rudolph

Quillian. Mr. Roberts’ reports were completed at the time of the contributions and

submitted by petitioners with their 2003 tax return. The other reports were

retrospective valuations prepared in anticipation of the instant litigation. To value

the Muscogee County properties in their before conditions, all of petitioners’

appraisers used the sales comparison approach and the discounted cashflow

- 40 -

analysis, also variously called the income capitalization approach or the subdivision

analysis. However, in their reply brief, petitioners abandoned their reliance on the

discounted cashflow valuations. For that reason, we will not consider petitioners’

discounted cashflow analyses. Respondent submitted one appraisal report with

respect to each of the Muscogee County properties. Those reports were written by

Zac Ryan.

The appraisal reports do not agree on the precise acreage of the James Butler

property. In their stipulations, the parties agreed to use 393.33 acres as the acreage

of the James Butler property. Accordingly, in the findings and analysis below, we

have adjusted the appraisers’ numbers to reflect the parties’ stipulation, unless

otherwise noted.

An expert’s opinion is admissible if it assists the trier of fact to understand

the evidence or to determine a fact in issue. Fed. R. Evid. 702. We evaluate

expert opinions in light of each expert’s qualifications and the evidence in the

record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986). Where experts

offer competing estimates of fair market value, we decide how to weigh those

estimates by, inter alia, examining the factors they considered in reaching their

conclusions. See Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not

bound by an expert’s opinion and may accept or reject an expert opinion in full or

- 41 -

in part in the exercise of sound judgment. See Helvering v. Nat’l Grocery Co.,

304 U.S. 282, 295 (1938); Parker v. Commissioner, 86 T.C. at 561-562. We may

also reach a decision as to value based on our own examination of the evidence in

the record. Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g

T.C. Memo. 1974-285.

A. The James Butler Property

1. The Appraisal Reports

a. Mr. Roberts’ Appraisal Report

Mr. Roberts is a real estate appraiser with the firm Tennille & Associates,

Inc., based in Boone, North Carolina. He holds the SRA (Senior Residential

Appraiser) designation with the Appraisal Institute.6 He has been a real estate

6

The SRA designation was formerly the certification given by the Society of

Real Estate Appraisers (society) to residential appraisers. Appraisers Coalition v.

Appraisal Inst., 845 F. Supp. 592, 595 (N.D. Ill. 1994). The highest certification of

the society was the SRPA (Senior Real Property Appraiser). Id. That designation

was comparable to the MAI (Member Appraisal Institute) designation given by the

American Institute of Real Estate Appraisers (AIREA). Id. The AIREA also used

the designation RM, which was comparable to the society’s SRA. Id. at 595-596.

During 1991, the society merged with the AIREA to form the Appraisal Institute.

Id. at 596. The Appraisal Institute kept the MAI designation as its highest

certification and kept the SRA designation as its certification for residential

appraisers. Id. Within the real estate appraisal community, MAI is viewed as the

highest regarded appraisal designation. See Schwartz v. Commissioner, T.C. Memo.

2008-117, aff’d, 348 Fed. Appx. 806 (3d Cir. 2009); Estate of Auker v.

Commissioner, T.C. Memo. 1998-185.

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appraiser for 26 years, and he has been appraising conservation easements since

1998. Mr. Roberts received assistance in preparing his report from Pattie J.

Tennille, but she did not testify at trial.

During 2009, the North Carolina Appraisal Board suspended Mr. Roberts’

license because of errors he committed in an appraisal report completed during

2006. In that report, he had erroneously concluded that the highest and best use of

the vacant land he was appraising was retail office space or multifamily residential

use. Such use was not permitted under the zoning laws applicable to that property.

To regain his appraiser’s license, Mr. Roberts had to complete five classes,

including a class on the valuation of vacant land and subdivision valuation.

Before completing those courses, Mr. Roberts had no formal training on valuing

vacant land or subdivisions.

Regarding the James Butler property, Mr. Roberts concluded that its highest

and best use was as a 222-lot subdivision. He relied on a subdivision plan

developed by Larry French (the French plan), a Columbus-area subdivision

planner. Mr. Roberts wrote in his report that the lots in that plan ranged from one

to four acres. He stated that those lots were compatible with the property’s

zoning, which was A-1 agricultural. However, on cross-examination, Mr. Roberts

- 43 -

admitted that the French plan actually shows lot sizes as small as half an acre. Mr.

Roberts did not independently verify the feasibility of the French plan.

Mr. Roberts used two approaches to value the property: the sales comparison

approach and the discounted cashflow approach. Using the sales comparison

approach, Mr. Roberts found four comparable sales and adjusted the value of those

sales for time, location, size, and usability. He then used those comparable sales to

estimate that the before value of the James Butler property was $10,000 per acre, or

$3,933,300.

When Mr. Roberts wrote his appraisal report, he was unaware of the offers

that Mr. White and Mr. Brown had made on the James Butler property. When he

was asked by petitioners’ counsel what effect the knowledge of those offers would

have had on his estimate of the value of petitioners’ properties, Mr. Roberts testified

as follows:

Q. Had you known about * * * [the offers], what would have been the

impact on your conclusion?

A. Well, I would have considered the offers. I would back them up

and try to, obviously, still use closed sales, but I would have reported it in the

history of the property if I had known it.

Q. All right. Could it have affected your ultimate conclusion?

A. It would have been a consideration.

- 44 -

Mr. Roberts also was unaware that a 164-acre tract just south of the Susan Butler

property sold for $22,477 per acre during February 2004. He testified that had he

been aware of that pending transaction during 2003 when he was completing his

appraisal report, it would have increased his estimate of the value of petitioners’

properties. However, he did not indicate by how much his estimate would have

increased.

With respect to the highest and best use of the James Butler property after

petitioners had granted the conservation easement, Mr. Roberts wrote in his report

the following:

The easement area * * * is vacant land encumbered by a conservation

easement. No improvements are allowed and no analysis as improved is

required. * * *

* * * * * * *

The highest and best use of the subject property, considering the

conservation easement granted on a 396.5 acre portion of the land tract,

would be for open meadows, hiking trails, hunting area, horseback riding

areas or recreation area on this section of the property. The 11 homesites

excluded from the easement area would allow for single family structures to

be built within the boundaries of this section of the property.

Mr. Roberts separately valued the 11 two-acre homesites and the remainder of the

393.33 acres, i.e., 371.33 acres.7 To value the 371.33-acre portion, Mr. Roberts

7

Mr. Roberts erroneously used 396.5 acres as the size of the undeveloped

(continued...)

- 45 -

used the sales comparison approach. He used the sales of five large, mostly vacant

lots as comparable sales. Only one of the properties in Mr. Roberts’ comparable

sales, a 46.8-acre tract in North Carolina, was burdened with a conservation

easement. To adjust for the fact that the other comparable properties were not

encumbered by conservation easements, Mr. Roberts made “usability” adjustments

ranging from zero to minus 50%. His adjustments were based upon his estimate,

using factors he did not explain, of how much the conservation easements would

have detracted from the value of those comparable properties. After making other

adjustments to each comparable sale for time, location, size, and access, he

averaged the comparable sales and determined that the price of the 371.33-acre

portion of the James Butler property was $4,000 per acre, for a total of $1,485,200.

Mr. Roberts then used a discounted cashflow analysis to value the 11

remaining two-acre lots, which he estimated to be worth $77,000 each. After

estimating an absorbtion rate and expenses, Mr. Roberts discounted the lot sales to

arrive at $213,000. In total, Mr. Roberts estimated that the value of the James

Butler property in the after condition was $1,698,200. He also estimated that the

7

(...continued)

portion because he neglected to subtract the unencumbered 24.5 acres of the Butler

estate. As noted above, the parties agreed in their stipulations that the correct

acreage was 393.33 acres. Accordingly, the correct acreage, after removing the 11

two-acre homesites, is 371.33 acres.

- 46 -

conservation easement enhanced the value of the unencumbered Butler estate by

$37,000.

b. Mr. Eidson’s Appraisal Report

Mr. Eidson is a self-employed commercial real estate appraiser based in

Auburn, Alabama. Mr. Eidson has a bachelor’s degree and holds the MAI (Member

of Appraisal Institute) designation from the Appraisal Institute. He has more than

20 years of experience in the valuation industry, but he had never appraised a

conservation easement before his work for petitioners.

Mr. Eidson concluded that the highest and best use of the property in the

before condition was for residential development. Mr. Eidson used both the sales

comparison approach and the discounted cashflow approach. For his sales

comparison approach, he found four comparable sales, made various adjustments,

and estimated that the James Butler property was worth $19,500 per acre, or

approximately $7,670,000.

Mr. Eidson’s appraisal report is silent regarding the highest and best use of

the property in its after condition. Mr. Eidson used the sales comparison approach

to separately value the encumbered 371.33 acres of the James Butler property, the

11 remaining two-acre lots, and the Butler estate.

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To value the encumbered portion, Mr. Eidson applied a two-step approach.

First, Mr. Eidson used three sales of recreational land from nearby in Muscogee

County to estimate the value of the property as recreational land. All of those

properties were inferior to the James Butler property and were not suited for

development. After making small adjustments for time and topography, Mr. Eidson

averaged those values and concluded that the value of the encumbered property as

recreational land was $6,300 per acre.

For his second step, to estimate the effect of the conservation easement on

the James Butler property, Mr. Eidson examined seven sales of properties that

were encumbered by conservation easements. Appraisals of those properties

completed by other appraisers show that the conservation easements decreased the

sale prices of the encumbered properties by 40% to 84%. Mr. Eidson did not

report the terms of any of those easements, nor did he attempt to explain why some

of the easements decreased the value of the properties they encumbered by twice

as much as other easements. Instead, he used the average of those percentages to

estimate that the conservation easement would decrease the value of the

encumbered portion of the James Butler property by 60%. However, rather than

apply the 60% diminution to his before value, he applied it to the value he

estimated on the basis of sales of inferior recreational land. He therefore

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calculated that the encumbered 371.33 acres were worth $2,520 per acre, or

approximately $935,700.

With respect to the 11 remaining two-acre lots, Mr. Eidson searched for

comparable sales of two-acre lots surrounded by conservation easements, but he

was unable to find any such sales. Instead, he estimated that the lots would sell for

approximately the same price as lots in nearby subdivisions: $70,000 each.

Although the lots would lack the amenities of the subdivision, they would have more

privacy and a rural setting. He therefore estimated that the value of the James

Butler property after being encumbered by the conservation easement was

$1,705,700.

Mr. Eidson concluded that the conservation easement did not enhance the

value of the Butler estate.

c. Mr. Quillian’s Appraisal Report

Mr. Quillian is a real estate appraiser based in LaGrange, Georgia. He is

employed by General Valuation Services, L.L.C. Mr. Quillian holds a bachelor’s

degree and a master’s degree in business administration, and he holds the MAI

designation from the Appraisal Institute. He has 35 years of experience appraising

real estate, but he had never valued a conservation easement before his work in the

- 49 -

instant case. To learn how to appraise conservation easements, he took a course on

the subject from the Appraisal Institute.

Mr. Quillian found that the highest and best use of the James Butler property

in the before condition was for residential development as a subdivision. In one

place in his report, Mr. Quillian concluded that the James Butler property could be

developed to a density of up to two houses per acre; however, in another place, he

wrote that the zoning did not permit development denser than one house per acre.

Unlike the other appraisers, Mr. Quillian used a hybrid approach to value the

property. He estimated the value of the southernmost 125 acres of the James Butler

property using a discounted cashflow analysis, and he estimated the value of the

remainder using a sales comparison approach. Mr. Quillian believed that the

southernmost 125 acres were ready for immediate development but that developers

would not be as interested in the portion of the property north of Pritchett Road

because its topography was not as well suited to development. However, he

believed that, as developable land in the Columbus area became scarcer, a

developer would eventually want to purchase the northern portion.

In calculating the value of the northern portion, Mr. Quillian found seven

comparable sales. All of the comparable sales were of properties smaller than the

James Butler property, ranging in size from 30.5 acres up to 163.8 acres. Despite

- 50 -

the fact that he identified the northern portion as not yet ready for development, the

comparable sales he used were all purchases by developers who intended to use the

properties to construct subdivisions or, in one case, apartment buildings. Mr.

Quillian did not make any specific adjustments to his comparable sales. He

concluded that two of his seven comparable sales were the most similar to the

northern portion of the James Butler property, which he estimated to be worth

$18,000 per acre. That value was somewhere in between the values of the

properties in those two comparable sales. Mr. Quillian did not offer any other

explanation for his belief that $18,000 per acre was an appropriate value.

With respect to the southernmost 125 acres, Mr. Quillian calculated, using the

discounted cashflow method, that the value of the property was $3,206,871, or

$25,655 per acre. During cross-examination, Mr. Quillian admitted that he had

made an error in his discounted cashflow calculation when he wrote that 50 lots

could be developed without building any new roads on the property. Indeed, only

19 lots could have been developed without the construction of a new road. During

redirect testimony on the following day, Mr. Quillian testified that he had reviewed

his calculations overnight and found that, although he had written 50, he had

actually used only 20 in his calculation. However, in his new calculations, he

changed the number of lots that had access to sewer lines from 41 to 59.

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Nevertheless, he concluded that development costs would be the same under both

plans. His new calculations also accelerated the subdivision development schedule

so that lots with sewers would to be sold six months earlier than under his original

schedule. When questioned about his calculations during cross-examination, Mr.

Quillian’s responses were unclear, and he was unwilling or unable to explain or

clarify some of the assumptions and math behind the numbers he produced.

In constructing his discounted cashflow analysis, Mr. Quillian used lot sales

from 2005 because the data he was using did not extend back to 2003. In Georgia,

as in the rest of the United States, the housing market had appreciated rapidly during

the period from 2003 to 2005 and was very inflated during 2005.

Mr. Quillian’s report had a number of problems. Although he stated that the

northern portion was not yet desirable to developers and would not have sold for

development, he estimated its value using sales of properties that were ready for

development. Additionally, all of the comparable sales he used were smaller than

the James Butler property, but he did not make any adjustment for size. When he

constructed his discounted cashflow analysis, he erred in his decision to base his

estimate for lot prices on prices from 2005 instead of 2003, despite the fact that lot

prices during 2005 were significantly higher than during 2003. He made several

- 52 -

other errors in constructing his discounted cashflow analysis and was unable to

satisfactorily correct for those errors. Additionally, Mr. Quillian failed to identify

the correct highest and best use for the property in its after condition: He did not

recognize that the encumbered 371.33 acres could be broken up and bundled with

the building sites and did not indicate awareness of certain retained rights such as

the ability to landscape the properties and engage in significant recreational

activities. Those oversights led him to conclude erroneously that it would be

impossible to sell the retained lots as estate-style residences similar to the Butler

estate and that there would be no market for those lots.

As noted above, petitioners have now abandoned their reliance on the

discounted cashflow valuations. Because Mr. Quillian did not use another method

to value the southernmost 125 acres, petitioners’ decision to abandon that method

renders Mr. Quillian’s conclusions regarding the value of the conservation easement

on the James Butler property largely useless.

d. Mr. Ryan’s Appraisal Report

Mr. Ryan, respondent’s sole appraiser in the instant case, is a self-employed

real estate appraiser based in Middleburg, Florida. He has been certified to appraise

properties in Florida, Georgia, and South Carolina, and he holds the MAI

designation from the Appraisal Institute. Mr. Ryan has more than 25 years of

- 53 -

experience appraising real estate, and he has been appraising conservation

easements since 1994, completing more than 100 conservation easement appraisals.

His clients have included the Nature Conservancy, the Georgia Land Trust, the

Georgia Department of Natural Resources, and the Florida Department of

Environmental Protection. Although Mr. Ryan has completed appraisals in 20

Georgia counties, before his engagement in the instant case, he had never appraised

a property in Muscogee County.

Mr. Ryan concluded that the highest and best use of the James Butler

property in the before condition was for residential development. He used the sales

comparison approach to estimate the property’s value. Unlike petitioners’

appraisers, Mr. Ryan relied only on the sales comparison approach and did not

consider the discounted cashflow method because he concluded that there were

sufficient comparable land sales. After finding four comparable sales and making

various adjustments, Mr. Ryan concluded that the before value of the James Butler

property was $12,000 per acre, or approximately $4,720,000.

Before determining the highest and best use of the property in the after

condition, Mr. Ryan devoted six pages of his report to an analysis of the rights

encumbered by the terms of the conservation deed. He discussed 11 different

factors: title, transferability, division of the property, residential development,

- 54 -

industrial or commercial use, agricultural use, silvicultural use, mining, hunting and

fishing rights, access to the property, and permissible roads and other structures.

For each factor, he discussed the rights permitted under the terms of the

conservation deed and whether those terms affected the value of the subject

property.

Mr. Ryan concluded that the highest and best use of the property in the after

condition was for 11 rural estates, each combining agricultural or undeveloped land

with a two-acre building site. To estimate the value of the James Butler property in

the after condition, Mr. Ryan used several approaches. Firstly, he compared the

property in its after condition to all four of his comparable sales and concluded that

its value was inferior to all of them. Accordingly, he concluded that the after value

was at most $9,525 per acre, the adjusted value of the most inferior comparable sale

used by Mr. Ryan.

Secondly, Mr. Ryan considered three similar sales of property out of a single

tract of land. The price of one of those sales was 26% less than the other two

because that portion of the property was encumbered by a mining lease until 2015.

Mr. Ryan estimated that the permanent conservation easement on the James Butler

property would decrease its value by at least as much as the temporary mining lease.

- 55 -

Thirdly, Mr. Ryan compared the terms of the conservation easement on the

James Butler property to the terms of two other conservation easements he had

appraised, both of which were on large tracts of rural property in Florida. For each

of those conservation easements, he described in detail 11 different ways that the

easement affected the value of the encumbered property. Both of the other

conservation easements were significantly more restrictive than the conservation

deed with respect to the James Butler property. However, because one of the

properties offered significantly less development potential than the James Butler

property, Mr. Ryan concluded that the diminution in value associated with the

conservation deed on the James Butler property was somewhere between the

percentage diminutions in value observed on those properties, i.e., between 34%

and 65%. On that basis, he estimated that the conservation easement reduced the

value of the James Butler property by 50% to about $6,000 per acre. Mr. Ryan did

not separately value the lots retained for building sites. He concluded that the value

of the James Butler property after encumbrance by the conservation easement was

approximately $2,360,000.

Mr. Ryan conducted a fourth analysis to check the reasonableness of his

conclusion. On the basis of his conclusion that the highest and best use of the

property in its after condition was for large estate-style residences, he considered

- 56 -

several sales of estate-style parcels from two developments in Muscogee County

and two in neighboring Harris County. The 20 estate parcels Mr. Ryan considered

ranged in size from 5 acres up to 18 acres and in price from $38,500 up to

$180,000. The more expensive estate-style parcels generally were either lakefront

properties or the larger parcels. Because the potential estate-style lots on the James

Butler property would average about 36 acres, at least twice as large as any of the

other sales Mr. Ryan compared, he concluded that 11 large estates with two-acre

building sites and the option to engage in small-scale farming or recreational use of

the remainder of the property would fetch at least $208,000 each. He therefore

concluded that the sale of nearby estate-style lots corroborated his conclusion about

the after value of the James Butler property.

e. Summary

In summary, the appraisers estimated the following before and after values for

the James Butler property:

Roberts Eidson Quillian Ryan

Before $3,993,300 $7,670,000 N/A $4,720,000

After 1,698,200 1,705,700 N/A 2,360,000

Enhancement 37,000 -0- N/A -0-

Easement value 2,258,100 5,964,300 N/A 2,360,000

- 57 -

2. Disputed Issues

Before analyzing the appraisers’ reports and conclusions, we must decide a

few other disputed issues.8

a. Zoning

At the time of the contribution, the Muscogee County properties were zoned

A-1, which prohibited development denser than one house per acre. The

appraisers disagreed about the ease with which the properties could have been

rezoned to permit denser development. However, the developer Mr. White

credibly testified that, when he offered to buy a portion of the James Butler

property during 2003, he expected that it would be easy to change the zoning to

permit development of a subdivision with a density of more than one house per

acre. He explained that undeveloped property is frequently zoned A-1 before

development. Mr. Eidson explained that because property taxes are lower on

property zoned A-1, most landowners choose not to seek rezoning for their

property until it is developed. The record contains several examples of properties

that were rezoned from A-1 to permit denser residential development. Although the

offers made by Mr. White and Mr. Brown were contingent upon obtaining

8

For the reasons explained below, we decide these issues on the

preponderance of the evidence.

- 58 -

rezoning, the fact that they made such offers suggests they believed rezoning would

have been pro forma. On the basis of the foregoing, we conclude that rezoning

would have been possible and that developers would have been interested in the

property in spite of its then-current A-1 zoning.

b. Covenants Regarding Lot Size

Approximately 27% of the James Butler property is subject to covenants

running with the land that mandate minimum lot and house sizes.9 The 41.64 acres

just south of Pritchett Road is subject to the following restrictions: no house may be

built that has less than 2,000 square feet of heated living space and no lot may be

sold that is less than 2 acres. The 90 acres just north of Pritchett Road, including

the Butler estate, is subject to the following restrictions: no house may be built that

has less than 2,500 square feet of heated living space and no lot may be sold that is

less than 4 acres. Not including the Butler estate, the 4-acre provision applies to

65.58 acres. All of the properties with lot size restrictions were acquired from the

Pritchett brothers.

Petitioners contend that when Mr. Butler acquired title to both tracts, the

doctrine of merger extinguished the covenants running with the land. Under

9

The covenants apply to 131.72 acres, but the Butler estate accounts for 24.5

of those acres. The covenants therefore apply to only 107.22 acres of the 393.33

acres of the James Butler property (27%).

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Georgia law, when some lots are burdened with covenants intended to benefit other

lots and all lots come under the same ownership, the covenants burdening the lots

generally are extinguished. See Muscogee Mfg. Co. v. Eagle & Phenix Mills, 54

S.E. 1028, 1031 (Ga. 1906). Petitioners attempted to prove that merger had

occurred through Mr. Butler’s testimony regarding his purchases of property from

the Pritchetts and his knowledge of his neighbors.10 However, Mr. Butler testified

that, in addition to the lots they sold to him, the Pritchetts sold an adjacent lot to

Dwain Tobey (Tobey lot). Because the Tobey lot has not come under common

ownership, petitioners have failed to prove that the conditions necessary for merger

have been met. Accordingly, we conclude that the land remains burdened by the

covenants requiring minimum lot sizes.

10

At various points during trial and in their briefs, petitioners suggested that

they were surprised when respondent raised the issue of the lot size restrictions at

trial and that respondent did not produce the evidence of the covenants in

compliance with the Court’s Standing Pretrial Order, which requires the parties to

exchange exhibits 14 days before trial. Petitioners contend that they therefore were

unprepared to present evidence proving merger. We disagree. The deeds

containing the covenants were included among the stipulated exhibits, and they were

also in Mr. Roberts’ original appraisal report, even though he failed to notice the

restrictions. Moreover, the covenants are discussed in Mr. Ryan’s report and in

respondent’s pretrial memorandum. Regardless, because the evidence in the record

shows that no merger occurred, we conclude that petitioners were not

disadvantaged.

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Petitioners’ appraisers failed to notice the covenants restricting lot size and

therefore did not consider them when appraising the James Butler property. Indeed,

the subdivision plan used by petitioners’ appraisers showed lot sizes smaller than

those permitted under the covenants. Mr. Ryan was the only appraiser who

considered the effect of the covenants in his appraisal report. He concluded that

those restrictions decreased the value of the property, but he did not provide a

specific numeric estimate of that impact.

Petitioners contend that the covenants restricting lot sizes would not have

affected the value of the property because four-acre “estate lots” sell at a higher

price per acre than smaller lots. However, the evidence in the record does not

support their contention. Only Mr. Quillian testified that four-acre lots would sell

for a higher price per acre than smaller lots, but he contradicted his own testimony

during cross-examination. Mr. Quillian’s testimony regarding the price per acre of

different lot sizes lacked credibility, and we give it no weight. All of the other

appraisers agreed that, other things being equal, larger lots generally sell for less on

a per-acre basis than smaller lots.11

11

Even if it were true that such “estate lots” sold for a premium, a restriction

on the tract that limited the freedom of developers to choose the size of lots or

houses would presumably have reduced the appeal of the tract and lowered its price.

Moreover, developers would have been free to sell four-acre lots even in

(continued...)

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Accordingly, we conclude that the lot size restrictions covering 27% of the

James Butler property would have decreased its value by some amount, and we will

consider that diminution in value in our analysis below. Because petitioners’

appraisers did not take into account that diminution in value, their conclusions

overstated the property’s value.

c. The Unaccepted Offers

The parties disagree about how much weight the appraisers should have given

the unaccepted offers made on the southernmost portion of the James Butler

property. One of the unaccepted offers was made on the southernmost 75 acres; the

other two offers were made on only 42 acres of that same portion. Those offers

represent 19% and 11% of the entire 393.33 acres. Petitioners contend that those

offers are indicative of the value of the entire property. We do not agree and

conclude that petitioners’ contention is inconsistent with the evidence.

During cross-examination, Mr. Eidson admitted that although in his report he

had called the topography of the James Butler property “basically level”, it would

be more accurate to call the northern portion “rolling”. Indeed, petitioners’

11

(...continued)

the absence of the covenants. The fact that the subdivision plan used by the

appraisers contains very few such lots strongly suggests that there was no such

premium.

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environmental consultants characterized the northern portion of the property as

steeper than rolling. Not only is the northern portion much hillier than the southern

portion, it is also much rockier. Petitioners’ environmental consultants stated that

there is “significant rock” in the northern portion, including many rocky outcrops

along the creeks. In contrast, the southernmost portion is less rocky, and the banks

of the creeks are sandy. In addition to the exposed rock, the northern portion

appears to contain significant rock beneath the surface. There are several major

rock quarries just a mile east of the James Butler property, and one of petitioners’

witnesses familiar with the area testified that “you can rest assured there’s rock

under” the property. Mr. White testified that land with rocky soil is undesirable

because excavation is very expensive and that developers therefore “stay away”

from such properties. In contrast, Mr. White was willing to offer a premium for the

southernmost portion of the James Butler property because its topography was

better than that of the neighboring land. When Mr. White identified all the

properties in Muscogee County that he considered ready for development, he did

not include any portion of the James Butler property except for the southernmost 75

acres.

Mr. White also testified that he was willing to pay a “tremendous premium”

on the James Butler property because of its access to sewer lines. However, only

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the southernmost portion had access to sewer lines, which ran along southeastern

corner of the property bordering Hubbard Road.

Mr. Ryan and Mr. Roberts were unaware of the unaccepted offers and

therefore did not consider them when they conducted their appraisals. Both of them

acknowledged that had they been aware of the offers, they would have considered

them. Mr. Ryan testified that after he became aware of the offers, he reconsidered

his valuation but concluded that those offers were still consistent with his appraisal

value because he had already given a much higher value to the southernmost portion

of the property. Even Mr. Roberts, petitioners’ appraiser, was reluctant to say that

the unaccepted offers would have increased his appraisal estimate.12

Because Mr. White and Mr. Brown made offers to purchase only 11% of the

393.33 acres and because the evidence shows that that portion of the property was

significantly more desirable than the remainder, those offers are not meaningful

12

Mr. Roberts initially testified that he would have “considered” those offers

but that he would still have used closed sales. He later agreed that knowledge of the

offers would have increased his value. However, the latter statement was in

response to a series of leading questions by petitioners’ counsel to which we

sustained respondent’s objection. Mr. Roberts initially seemed reluctant to say that

the offers would have increased his appraisal, and we consider that testimony more

credible than his subsequent acquiescence to leading questions from petitioners’

counsel.

- 64 -

indicators of the value of the entire property. Accordingly, although the unaccepted

offers are relevant evidence of the value of the portion of the James Butler property

on which they were made, they are not very helpful in deciding the value of the

entire property.

3. Analysis and Conclusion

As a preliminary matter, we note that Mr. Quillian’s testimony regarding the

value of the conservation easement on the James Butler property was generally

unhelpful. On several occasions, he made inconsistent or contradictory statements,

and his testimony was generally not useful to the Court. Accordingly, in the

analysis below, we give little weight to his conclusions regarding the value of the

conservation easement on the James Butler property.

a. The Before Value

The appraisers considered the following properties comparable to the James

Butler property:

Size Price per 2003

1 2

ID Appraisers Date Address Sale price (acres) acre Price3

1 GE, RQ, ZR 12/22/03 Blackmon Rd. $1,607,694 97.44 $16,499 $16,499

2 DR, ZR 6/18/98 Garrett Rd. 3,705,500 423.25 8,755 10,863

3 GE, ZR 12/00 Veterans Pkwy. 2,440,994 132.00 18,492 20,801

4 GE, RQ 2/19/04 Bridgemill Dr. 3,686,265 164.83 22,500 22,280

5 ZR 3/31/97 Garrett Rd. 2,182,268 282.73 7,718 10,057

6 RQ 2/1/99 Hancock Rd. 900,000 62.53 14,393 17,340

7 DR 8/16/99 Macon & Pope Rd. 2,500,000 461.00 5,423 6,407

8 DR 10/6/00 Biggers Rd. 414,000 39.50 10,481 11,790

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9 RQ 3/1/02 Blackmon Rd. 960,000 32.00 30,000 32,131

10 RQ 12/1/02 Warm Springs Rd. 737,506 99.66 7,400 7,696

11 GE 1/03 Williams Rd. 1,175,500 34.00 34,574 35,957

12 RQ 12/1/03 Osprey Cove 575,000 30.50 18,852 18,852

13 DR 12/16/03 Williams Rd. 1,697,500 60.80 27,918 27,918

14 RQ 5/1/04 McKee Rd. 1,288,000 90.50 14,232 13,956

1

The “ID” field contains numbers which we have assigned to each of the comparable sales

for convenience.

2

The entries in the “Appraisers” field are the first and last initials of each of the appraisers

who used that comparable sale in his report: GE = Gregory Eidson; RQ = Rudolph Quillian; DR

= David Roberts; and ZR = Zac Ryan.

3

Prices in this column have been adjusted to December 2003 prices using an estimated 4%

annual appreciation (for the reasons explained below in the text), adjusted to the nearest quarter

of a year from December 2003 (e.g., sale 2 has been adjusted to reflect 5.5 years of appreciation,

sale 4 to reflect -0.25 years, etc.).

The appraisers used a total of 14 different sales, and 4 of those sales were used by

more than one appraiser.

The appraisers applied different rates of appreciation to adjust those sales to

December 2003 prices. Mr. Ryan interviewed a number of local market

participants who told him that appreciation ranged from 3% to 5% each year from

1997 through 2003. He used 4% appreciation per year. Mr. Roberts did not

explain how he calculated appreciation, but his numbers show that he also used

approximately 4% per year. Mr. Eidson used only 2.57% per year, which he based

on the consumer price index. Mr. Eidson’s method was inappropriate because

property values in Muscogee County during the relevant period were rising faster

- 66 -

than the consumer price index. We will apply the 4% appreciation used by Mr.

Ryan and Mr. Roberts.

Petitioners contend that it was unreasonable for Mr. Ryan to use sales from

the eastern “panhandle” of Muscogee County because land in that area was not as

valuable. They therefore contend that sales 2 and 5 are not truly comparable and

that Mr. Ryan would have known not to use sales from the panhandle if he had been

more familiar with Muscogee County. Mr. White testified that the prime area of

development in Muscogee County during 2003 was north of Columbus from the

Chattahoochee River to Pierce Chapel Road.13 Although petitioners make much of

the fact that Mr. Ryan was not from Muscogee County, neither were any of their

appraisers. Mr. Roberts and Mr. Eidson were both from out of state, and Mr.

Quillian was from two counties north of Muscogee County. Like Mr. Ryan, both

Mr. Quillian and Mr. Roberts used several sales from the “panhandle” (sales 2, 7,

10, and 14) and did not make any adjustments to compensate for the supposedly

13

Petitioners actually contend that Interstate 185 is the eastern border of the

prime development area, but the only evidence in the record supporting that

contention is Mr. Quillian’s testimony, which we did not find credible for the

reasons explained above in the text and infra note 14. Sale records show that Mr.

White was willing to pay similar prices for land near Interstate 185 and for land near

Pierce Chapel Road, corroborating his testimony. Pierce Chapel Road is about five

miles east of Interstate 185.

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inferior location of those sales.14 Nevertheless, because we found Mr. White to be a

credible witness and because he was most familiar with the demand for developable

land in Muscogee County during 2003, we conclude that the land in the eastern

portion of the county was somewhat less desirable than the land between the river

and Pierce Chapel Road. Properties in the latter area generally have better access to

downtown Columbus, making them more valuable.

However, the lower land prices observed in sales 2, 5, 7, and 10 cannot be

explained entirely by their location. The property conveyed in sale 14, although

more than twice as far from Pierce Chapel Road as any of the other properties, sold

for $14,232 per acre, significantly more than any of the other properties in the

panhandle. Respondent contends that the properties in sales 2, 5, and 7 sold for

lower prices per acre because of their size. As the basis for his contention,

respondent points to the testimony of nearly all the appraisers that, other things

being equal, a property that is larger will sell for a lower price per acre. Mr. Ryan

14

In his report, Mr. Quillian wrote: “All sales have a relatively similar

location on the north side of Columbus * * *. Pairing * * * [sales 1 and 14], the

sales [sic] further east seems to be less desirable, not because it is ‘east’ but because

it is a greater distance from the JR Allen By-Pass”. During his testimony, Mr.

Quillian contradicted those statements in his report, testifying that the properties

further east had lower values because that entire area was less desirable. We did

not consider Mr. Quillian a credible witness, and we give no weight to that

testimony.

- 68 -

considered size an important factor affecting the values of those properties in the

eastern part of the county. Indeed, sales 2, 5, and 7 were all sales of properties

significantly larger than that in sale 14.15 We are convinced that size is part of the

reason those properties sold for less per acre than properties in some of the other

comparable sales.16

Both Mr. Roberts and Mr. Ryan considered sales of 400-acre tracts of land.

In contrast, one of the weaknesses with Mr. Eidson’s assessment of the before value

of the property is that he failed to identify any sales of properties of comparable

size; indeed, the sale 11 property was less than 10% the size of the subject property.

Although Mr. Eidson made adjustments to try to account for the size differential, it

is difficult to believe that he could have accurately made those adjustments without

considering the demand for 400-acre tracts of land in Muscogee County.

15

Those properties were 4.7, 3.1, and 5.1 times the size of the property in sale

14, respectively.

16

The property in sale 10 is only 10% larger than that in sale 14, not enough

of a difference in size to explain the dramatic difference in price per acre. Mr.

Quillian provided little information about that sale, so we do not know what other

factors may have influenced the sale price. As noted above, in his report, Mr.

Quillian explained that its low price was due to its poor access to the “JR Allen By-

Pass” and downtown Columbus.

- 69 -

Another problem with Mr. Eidson’s use of sale 11 is that sale 11 was zoned

for multifamily use, significantly increasing the value of the property. Mr. Eidson

made no adjustment for that factor, stating that the zoning of the sale 11 property

was “comparable” to that of the James Butler property. That assessment was

unrealistic. Mr. Eidson failed to make a similar adjustment with respect to another

of his comparable sales: Mr. Ryan reported that a portion of the sale 3 property was

probably going to be used for commercial purposes. Because the zoning on the

James Butler property would not have permitted commercial use, Mr. Eidson should

have adjusted for the superior use potential of the property in sale 3. As noted

above, Mr. Eidson also failed to notice the lot size restrictions affecting 27% of the

James Butler property. Finally, Mr. Eidson acknowledged during cross-examination

that his report mischaracterized the topography of the James Butler property and

that the northern portion was actually more hilly than his report described. That

mischaracterization also more generally called into question Mr. Eidson’s

objectivity. On the basis of the foregoing, we conclude that the before value for the

property was substantially less than Mr. Eidson’s estimate of $19,500 per acre.

In contrast, the before values estimated by Mr. Roberts and Mr. Ryan were

much lower, $10,000 and $12,000 per acre, respectively. However, those

- 70 -

appraisals had a few of their own problems. First, Mr. Roberts failed to consider

the lot size restrictions, which would have decreased his estimated before value.

Second, neither appraiser accounted for the fact that properties in the eastern part of

Muscogee County are not as valuable as properties in the central part of the county.

Sales 2, 5, and 7 were approximately two to three miles east of Pierce Chapel Road,

the eastern edge of the prime development zone in Muscogee County. That location

was slightly inferior to the location of the subject property, and we therefore

conclude that Mr. Roberts and Mr. Ryan should have adjusted the values of those

sales accordingly. Finally, neither Mr. Roberts nor Mr. Ryan considered sale 4, the

Bridgemill property, which was located just south of the subject property on

Whitesville Road.

Sale 4 did not close until February 2004, but its price is nevertheless

relevant and helpful for appraising the subject property. Although Mr. White and

Mr. Brown testified that the topography of 42 to 75 acres of the subject property

was superior to that of the Bridgemill property (sale 4), they were not interested in

developing the remainder of the James Butler property. Indeed, the topography of

the remainder of the property was rocky and hillier than the portion Mr. White and

Mr. Brown wanted to buy. The influence that topography can have on value is

illustrated by the property in sale 8, which is almost directly across Whitesville

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Road from the James Butler property. Although that property was significantly

smaller than the James Butler property, it sold during October 2000 for only

$10,481 per acre. The land on the west side of Whitesville Road was generally

quite hilly, but Mr. Roberts considered the topography of the property in sale 8

comparable to that of the James Butler property. Sale 8 indicates that the value of

the northern portion of the property was significantly less than that of the southern

portion, and it appears to us to put a ceiling on the value of the northern portion.

The northern portion of the James Butler property was also inferior to the Bridgemill

property because it lacked access to utilities and because 34% of that portion of the

property was subject to a covenant restricting the size of lots and houses.17

Nonetheless, the February 2004 sale of the Bridgemill property for $22,500 per acre

shows recent demand for development in the area of the James Butler property and

it, combined with the unaccepted offers, shows that the southernmost portion of the

property was exceedingly desirable to developers.

For the foregoing reasons, we conclude that the before value of the James

Butler property was slightly higher than the estimates provided by Mr. Roberts and

Mr. Ryan. We conclude that the appropriate before value of the property was

17

Although the 107.22 acres affected by the covenants restricting lot and

house size is only 27% of the total 393.33 acres, it is 34% of the northern 318.33

acres.

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$12,500 per acre, 25% more than Mr. Roberts’ before value and 4% more than Mr.

Ryan’s. As confirmation of the reasonableness of that value, it is approximately

equal to the value of the property calculated as follows: $33,000 per acre for the

southernmost 42 acres; $17,500 per acre for the next 23 acres; and $10,000 per acre

for the remaining 318.33 acres.18 Accordingly, we conclude that the before value of

the James Butler property was $4,916,600.

b. The After Value

All of the appraisers stated that they were using the “before and after”

approach to value the conservation easement on the James Butler property. To

calculate the after value, they all claimed to use either a comparable sales approach

or some combination of the comparable sales approach and a discounted cashflow

approach. However, because there were no nearby sales of properties encumbered

by conservation easements, that task was difficult and the approaches the appraisers

used varied widely. Some of the methods they employed were acceptable; others

were less so.

18

We note that although a developer purchasing the southernmost portion of

the property may have been willing to pay $17,500 or $33,000 per acre for a small

portion of the property, the same developer would almost certainly not have been

willing to pay those prices for the southernmost portion of the property bundled with

the northern portion. Accordingly, that calculation actually establishes a ceiling on

the reasonable value of the property.

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Mr. Roberts found five sales of land: Two of those sales were from

Muscogee County but were not encumbered by conservation easements or any other

significant restrictions; two were from distant counties in Georgia and had little

development potential because they were largely in flood zones; and one was from

North Carolina and was encumbered by a conservation easement. Mr. Roberts

attempted to make adjustments to account for the geographic disparity of the

properties in distant Georgia counties and North Carolina, but he did not explain his

reasoning and his adjustments seem like guesswork. Mr. Roberts subtracted 50% of

the value from each of the Muscogee County sales to account for the fact that the

properties were not encumbered by conservation easements. He did not explain

how he determined that a 50% adjustment was appropriate, and his approach again

seems like guesswork. We have repeatedly emphasized that it is essential for

appraisers to explain their reasoning because “‘[w]ithout any reasoned analysis, * *

* [the appraiser’s] report is useless.’” Friedman v. Commissioner, T.C. Memo.

2010-45 (quoting Jacobson v. Commissioner, T.C. Memo. 1999-401). Accordingly,

we do not accept Mr. Roberts’ estimate of the after value.

As part of their approach to estimating the after value of the James Butler

property and under the guise of the comparable sales method, Mr. Eidson and Mr.

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Ryan both employed a method that we have labeled the “percentage diminution

approach”. See Friedberg v. Commissioner, T.C. Memo. 2011-238. That

approach might also be thought of as the “comparable easements approach”. As

applied by the appraisers here, the percentage diminution approach consisted of

finding other properties encumbered by conservation easements, ascertaining how

much those conservation easements decreased the values of the underlying

properties, and applying that percentage diminution to the subject property to

determine its after value.

Although the appraisers labeled the method they applied the comparable

sales method, the two approaches are distinct. In contrast to the percentage

diminution approach, an appraiser using the comparable sales method finds sales

of similar properties encumbered by easements and makes appropriate price

adjustments for time, size, or other significant features. Wolfsen Land & Cattle

Co. v. Commissioner, 72 T.C. at 19. Once similar sales have been found and

proper adjustments made, the appraiser uses those adjusted sale prices to

determine the after value of the property being appraised. Hilborn v.

Commissioner, 85 T.C. at 690; Wolfsen Land & Cattle Co. v. Commissioner, 72

T.C. at 19. Perhaps the most significant difference between the comparable sales

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method and the percentage diminution method is that the former requires the

appraiser to find properties that are close to the property being appraised.

The percentage diminution approach Mr. Eidson and Mr. Ryan employed as

part of their appraisals has been accepted by the Court in prior cases. See, e.g.,

Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C.

Memo. 2000-94; Johnston v. Commissioner, T.C. Memo. 1997-475; Losch v.

Commissioner, T.C. Memo. 1988-230. The method has been employed most often

where, as in the instant case, comparable sales of easement-encumbered properties

are not available for the locale of the property being appraised. See Hughes v.

Commissioner, T.C. Memo. 2009-94; Losch v. Commissioner, T.C. Memo. 1988-

230. When estimating a percentage reduction associated with an easement on a

given property, it is essential that an appraiser provide adequate explanation and

analysis to justify the percentage. Scheidelman v. Commissioner, T.C. Memo.

2010-151.

From our examination of our past cases dealing with appraisals applying the

percentage diminution method, we discern at least two important elements that must

be part of the appraiser’s analysis. The first element the appraiser must consider is

whether the properties have the same highest and best use. Hughes v.

Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C. Memo.

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2000-94. A conservation easement that changes the property’s highest and best use

will have a more dramatic impact on the property’s value than one that does not.

Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C.

Memo. 2000-94. Similarly, conservation easements will have different effects on

the values of properties with different highest and best uses. Hughes v.

Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C. Memo.

2000-94.

The second element the appraiser must consider is the similarity of the terms

of the conservation easements; unless the appraisal report includes details about the

terms of those other easements, the percentages the appraiser purports to derive are

of little utility. Strasburg v. Commissioner, T.C. Memo. 2000-94; Johnston v.

Commissioner, T.C. Memo. 1997-475; Losch v. Commissioner, T.C. Memo.

1988-230 . Other things being equal, a very restrictive easement will decrease the

value of a property more than a less restrictive easement. Strasburg

v. Commissioner, T.C. Memo. 2000-94; Johnston v. Commissioner, T.C. Memo.

1997-475. Accordingly, we will consider both of those elements in our analyses

of Mr. Eidson’s and Mr. Ryan’s use of the percentage diminution approach.

As noted above, Mr. Eidson applied a two-step approach to estimating the

after value. He began by finding comparable properties that were already

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somewhat undesirable because of their unsuitability for development. All of those

properties were inferior to the James Butler property. He then further reduced the

values of those properties by a percentage diminution that he calculated on the

basis of the effect of other conservation easements. However, Mr. Eidson did not

discuss the terms of any of the other conservation easements. He acknowledged

that many of the other easement transactions had different highest and best uses,

and he stated that those transactions “are not directly comparable” to the

conservation easement on the subject property. The other conservation easements

indicated reductions in value of 40% to 84%, but Mr. Eidson did not attempt to

explain why some of those easements reduced the value of the underlying property

by more than twice as much as others. Indeed, he provided no details regarding

the restrictions imposed by the easements. That omission is significant. We do not

assume, as Mr. Eidson appears to have done, that those dramatically different

reductions in value were random. Rather, we believe those variations were caused

by differences in the transactions, especially differences in terms of the underlying

easements and the highest and best uses of the properties.19 Because he did not

compare the terms of the conservation easements, Mr. Eidson’s analysis is missing

19

Because Mr. Eidson’s report is devoid of details regarding the restrictions

imposed by those easements, we cannot definitely say why any of those easements

reduced the value of the underlying property by more than another.

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the second of the elements essential to the sound application of the percentage

diminution approach, i.e., an analysis of the similarity of the conservation

easements. See Strasburg v. Commissioner, T.C. Memo. 2000-94; Johnston v.

Commissioner, T.C. Memo. 1997-475; Losch v. Commissioner, T.C. Memo.

1988-230. Accordingly, we conclude that the percentage diminution approach

portion of his analysis is not useful.

Even if Mr. Eidson’s application of the percentage diminution approach had

not been deficient, his two-step method would nonetheless have overestimated the

effect of the conservation easement. He should have applied any percentage

diminution to his estimate of the before value of the James Butler property itself, not

to a different value that he derived by comparing sales of inferior properties.

However, Mr. Eidson’s first step does provide some useful data regarding the

value of undevelopable land in Muscogee County. As noted above, Mr. Eidson

failed to appropriately adjust his comparable sales to reflect market appreciation.

After correcting for that error, using 4% annual appreciation, and without adjusting

for topography, the comparable sales of undevelopable land range in price from

$5,943 to $6,492 per acre, with an average of about $6,300 per acre. The subject

property has topography superior to that of those properties, but its usability is

inferior because of the conservation easement. Although the terms

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of the conservation easement permit many of the uses for which buyers would

want to possess undevelopable land (e.g., recreation, light farming, and sparse

development), it imposes additional legal obligations. The superior topography of

the subject property will offset that inferiority to some extent. Accordingly, we

conclude that $6,300 per acre represents a useful estimate of the after value of the

subject property.

Mr. Ryan was the only appraiser to identify rural estate homesites as the

highest and best use of the property after the donation of the conservation

easement, a conclusion we find acceptable given the rights reserved by the

conservation deeds. Like the other appraisers, Mr. Ryan was unable to find any

comparable sales of encumbered properties close to the James Butler property.

Mr. Ryan applied several different methods to estimate the conservation

easement’s effect on the after value, using triangulation to narrow the possible

range for that value. Mr. Ryan’s first two points of reference were the lowest-

priced comparable sale in Muscogee County (sale 5 above) and a 15-year mining

lease that decreased the value of the encumbered property by 26%. Mr. Ryan

concluded that the conservation easement on the subject property would decrease

its value by at least 26%, leaving it below the price of the property in sale 5.

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Although both of those conclusions have some merit, they do not come very close to

determining an after value for the subject property.

For his third point of reference, Mr. Ryan employed the percentage

diminution approach using two conservation easements on rural properties. Unlike

Mr. Eidson, Mr. Ryan was careful to analyze the terms of each of those

conservation easements and compare them to the easement on the James Butler

property. However, his analysis had two shortcomings. Firstly, the “comparable”

conservation easements were both significantly more restrictive than the one on the

James Butler property. Because of that difference, both of those easements resulted

in a greater relative reduction in value than the easement on the James Butler

property. Although Mr. Ryan attempted to account for that fact, his attempt to do

so was unavoidably inexact.

Secondly, it is unclear whether either of the properties had the same highest

and best use as the James Butler property. Mr. Ryan stated that the first of his two

comparable properties was unsuited for development and therefore had an inferior

highest and best use. That fact led him to conclude that the subject property’s value

would be reduced by more than the 34% reduction observed on his first comparable

property, even though that property was encumbered by a more restrictive easement.

Mr. Ryan’s report stated that the second property had development potential and

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that its zoning permitted some commercial development. Although the commercial

zoning would make part of the second property relatively more valuable, the price

per acre for that property reflects its rural environs, and Mr. Ryan did not explain

whether any development was likely in the relatively near future. Mr. Ryan

concluded that the value of the James Butler property would be reduced by less than

the 65% observed on his second comparable easement property because its terms

were more restrictive than those of the conservation easement on the subject

property. Mr. Ryan did not attach much precision to his estimate using the other

encumbered properties, stating only that they indicated the effect of the conservation

easement on the James Butler property would be a reduction of 34% to 65%.

Although not inconsistent with his conclusion that the conservation easement

reduced the property’s value by 50%, Mr. Ryan’s approach does not offer strong

support for that conclusion. His valuation is little bolstered by his consideration of

estate lots in Muscogee County because, inter alia, he did not apply the discounted

cashflow method, which he would have needed to do in order to accurately estimate

the value of the property as separate sales of estate lots. Although we recognize

that valuation is far from an exact science, Mr. Ryan’s analysis seems very

imprecise.

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Nonetheless, because Mr. Ryan’s valuation is consistent with Mr. Eidson’s

estimate of the value of undevelopable land in Muscogee County, we conclude that

a diminution in value of 50% is acceptable and further conclude that the after value

of the James Butler property was $6,250 per acre, or $2,458,300. Because only one

of the four appraisers concluded that the conservation easement added any value to

the Butler estate, we conclude that the conservation easement did not enhance its

value. Accordingly, we conclude that the value of the conservation easement

donated by petitioners with respect to the James Butler property was $2,458,300.

B. The Susan Butler Property

1. The Appraisal Reports

a. Mr. Roberts’ Appraisal Report

Mr. Roberts concluded that the highest and best use of the Susan Butler

property before being encumbered by the conservation easement was for

residential development. As with the James Butler property, Mr. Roberts

appraised the Susan Butler property using both the comparable sales method and

the discounted cashflow method. He used the same comparable sales despite the

fact that the Susan Butler property was only about 3% of the size of the James

Butler property. Using the comparable sales method and making adjustments, he

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concluded that the before value of the Susan Butler property was $15,000 per acre,

or $191,000.

To estimate the after value of the Susan Butler property, Mr. Roberts applied

the same method he used to estimate the after value of the James Butler property.

He concluded that the 10.7 acres encumbered by the conservation easement were

worth $5,000 per acre, or about $54,000 and that the 2-acre building site was worth

$77,000, which he discounted to $49,000 using the discounted cashflow method.

He therefore estimated that the total after value of the Susan Butler property was

$103,000.

b. Mr. Eidson’s Appraisal Report

Mr. Eidson concluded that the highest and best use of the unencumbered

Susan Butler property was residential development. Mr. Eidson applied the same

appraisal approach as he did with the James Butler property, using both the

discounted cashflow method and the comparable sales method. Like Mr. Roberts,

he used the same comparable sales that he used for the James Butler property

despite the fact that the Susan Butler property was a fraction of the size of the

James Butler property. He made adjustments to try to account for that size

discrepancy. On the basis of his sales comparison approach, Mr. Eidson estimated

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that the Susan Butler property was worth $40,000 per acre, or approximately

$510,000.

To estimate the after value of the Susan Butler property, Mr. Eidson applied

the same two-step method he used on the James Butler property. He estimated that

the encumbered 10.7 acres were worth $39,500 in total, or about $3,700 per acre.

He estimated that the value of the reserved two-acre building site was

$80,000. He therefore estimated that the total after value of the Susan Butler

property was $119,500.

c. Mr. Quillian’s Appraisal Report

Mr. Quillian concluded that the highest and best use of the Susan Butler

property before the conservation easement was for single-family residential

development. Unlike Mr. Roberts and Mr. Eidson and unlike his valuation of the

James Butler property, Mr. Quillian used only the comparable sales method to

appraise the Susan Butler property. He concluded that because there were sufficient

comparable sales of similarly sized and situated tracts of vacant land, the

comparable sales method would be more accurate than the discounted cashflow

approach. Also unlike Mr. Roberts and Mr. Eidson, Mr. Quillian did not reuse the

same comparable sales that he used to value the James Butler property. Instead, he

found sales of properties that were more similar in size to the Susan Butler

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property. After making various adjustments to his comparable sales, he concluded

that the before value of the Susan Butler property was $30,000 per acre, or about

$381,100.

To estimate the after value of the Susan Butler property, Mr. Quillian found

six sales of land encumbered by conservation easements in rural counties in south

Georgia. He stated that none of the properties were comparable to the Susan Butler

property. Besides their rural locale, the properties were also significantly larger

than the Susan Butler property, ranging from 125 acres up to 3,250 acres. He did

not describe the terms of the easements on those properties, but he stated that, to the

best of his knowledge, the rights were “equal” to those under the conservation deed

on the Susan Butler property. The sale prices for those properties ranged from $400

per acre up to $1,764 per acre. With no explanation, Mr. Quillian deduced from

those sales that the value of the encumbered 10.7 acres of the Susan Butler property

was $5,000 per acre. On the basis of sales of nearby lots, he estimated that the two-

acre building site would sell for $75,000, resulting in a total after value for the

Susan Butler property of about $128,500.

d. Mr. Ryan’s Appraisal Report

Mr. Ryan agreed with the other appraisers that the highest and best use of the

property before being encumbered by the conservation easement was for residential

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development. He agreed with Mr. Quillian that the best method for appraising the

property was the comparable sales method. Like Mr. Quillian, Mr. Ryan did not

use the same comparable sales to value both the James Butler property and the

Susan Butler property; instead, he selected sales of properties that were closer in

size to the Susan Butler property. After adjusting the prices of his comparable sales

for various factors including size, Mr. Ryan concluded that the before value of the

Susan Butler property was $20,000 per acre, or about $254,000.

Unlike the other appraisers, Mr. Ryan identified a rural estate homesite as

the highest and best use of the property after the donation of the conservation

easement. He analyzed the terms of the conservation deed and determined that, in

addition to the two-acre building site, the owner would be able to conduct small-

scale farming, landscaping, and extensive recreational activities. On the basis of

that determination, he estimated the value of the property by examining sales of

comparable estate-style lots in Muscogee and Harris counties. He examined 20

sales of estate lots ranging in size from 5 acres up to 18 acres and prices ranging

from $40,000 to $180,000. After considering the merits of different comparable

sales and comparing factors such as location, size, and scenic features like

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lakefronts, Mr. Ryan concluded that the Susan Butler property’s after value as an

estate lot was $150,000.

e. Summary

In summary, the appraisers estimated the following before and after values for

the Susan Butler property:

Roberts Eidson Quillian Ryan

Before $191,000 $510,000 $381,100 $254,000

After 103,000 119,500 128,500 150,000

Easement value 88,000 390,500 252,600 104,000

2. Analysis and Conclusion

a. The Before Value

The appraisers considered the following properties as comparable to the

Susan Butler property:

Size Price per 2003

1 2

ID Appraisers Date Address Sale price (acres) acre Price3

1 GE, ZR 12/22/03 Blackmon Rd. $1,607,694 97.44 $16,499 $16,499

2 DR 6/18/98 Garrett Rd. 3,705,500 423.25 8,755 10,863

3 GE 12/00 Veterans Pkwy. 2,440,994 132.00 18,492 20,801

4 GE 2/19/04 Bridgemill Dr. 3,686,265 164.83 22,500 22,280

7 DR 8/16/99 Macon & Pope Rd. 2,500,000 461.00 5,423 6,407

8 DR 10/6/00 Biggers Rd. 414,000 39.50 10,481 11,790

11 GE 1/03 Williams Rd. 1,175,500 34.00 34,574 35,957

12 RQ 12/1/03 Osprey Cove 575,000 30.50 18,852 18,852

13 DR 12/16/03 Williams Rd. 1,697,500 60.80 27,918 27,918

15 RQ 6/1/01 Whitesville Walk 200,000 7.53 26,578 29,316

16 ZR 9/20/01 Greystone Ct. 1,280,000 45.20 28,319 30,931

17 ZR 11/15/02 Warm Springs Rd. 579,700 37.97 15,268 15,879

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18 RQ 12/1/03 Mobley Rd. 580,000 15.88 36,522 36,522

19 ZR 12/22/03 Whitesville Rd. 1,266,500 29.80 42,500 42,500

20 RQ 4/1/04 Moore Rd. 80,000 4.20 19,048 18,862

21 RQ 12/1/04 Moore Rd. 87,400 4.20 20,833 20,032

22 RQ 1/1/05 Whitesville Rd. 175,000 8.79 19,909 19,143

1

The “ID” field contains numbers which we have assigned to each of the comparable sales

for convenience. Because some of the appraisers used the same sales in their appraisal of the

James Butler property, we have included those sales with the same identifying numbers, and we

have continued the numbering of the new comparable sales with 15, where we left off in our

previous table.

2

The entries in the “Appraisers” field are the first and last initials of each of the appraisers

who used that comparable sale in his report: GE = Gregory Eidson; RQ = Rudolph Quillian; DR

= David Roberts; and ZR = Zac Ryan.

3

Prices in this column have been adjusted to December 2003 prices using an estimated 4%

annual appreciation (for the reasons explained in the text above), adjusted to the nearest quarter

of a year from December 2003 (e.g., sale 2 has been adjusted to reflect 5.5 years of appreciation,

sale 4 to reflect -0.25 years, etc.).

As noted in the table above, we have adjusted the above prices to December 2003

prices to reflect 4% annual appreciation. Unlike the James Butler property, no part

of the Susan Butler property was substantially more development-ready than

another. That fact makes estimating the before value of the Susan Butler property a

simpler process. Among the 17 sale records above, there are a number of properties

that are very similar to the Susan Butler property without requiring significant

adjustments to account for various factors.

Despite the availability of sales of similar properties, Mr. Roberts and Mr.

Eidson used the same comparable sales for both the James Butler property and the

Susan Butler property. Given the drastic difference in size between those two

properties and between the “comparable” properties and the Susan Butler property,

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we question their failure to use sales of more similarly sized properties. Although

they tried to account for differences in size between the Susan Butler property and

those in their comparable sales, their adjustments appear unsupported and their

resulting valuations do not match the observed sales of similarly sized properties

in Muscogee County. Neither Mr. Roberts nor Mr. Eidson provided an adequate

rationale for his failure to find sales of properties that were of comparable size.

Accordingly, we will give little weight to Mr. Roberts’ and Mr. Eidson’s estimates

of the before value of the Susan Butler property.

Because we conclude that there is a sufficient number of truly comparable

sales, we will exclude some of the sales that we do not find comparable.

Properties in sales 11, 13, 15, 16, 18, and 19 were all zoned for denser

development than the Susan Butler property. Those differences in zoning resulted

in substantially higher prices for those properties, ranging from $27,918 to

$42,500 per acre. Properties in sales 15, 16, 18, and 19 were also significantly

closer to downtown Columbus, further inflating their prices. Properties in sales 2,

3, 4, and 7 were substantially larger than the Susan Butler property, deflating their

prices. Accordingly, we will not consider those sales except insofar as we

consider sale 4, of the Bridgemill property, as a point of reference. Finally, we

will not consider sale 8 because the property was inferior to the Susan Butler

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property in two respects: it had less desirable topography and lacked access to

sewer lines, resulting in a significantly lower price of $11,970 per acre.

The properties in the other six sales were all either close to the Susan Butler

property or similarly situated vis-a-vis downtown Columbus. They demonstrate a

relatively narrow range of prices, from $15,879 to $20,032 per acre. We will

consider a few minor adjustments to those prices to account for the following

differences in the properties:

Size 2003

ID (acres) $/Acre Superior qualities Inferior qualities

1 97.44 $16,499 No sewer, size

12 30.50 18,852 Partial flood zone, topography, size

17 37.97 15,879 Slightly denser development Size

20 4.20 18,862 Size

21 4.20 20,032 Size No sewer

22 8.79 19,143 Size No sewer, 20% flood zone

Properties in sales 1, 12, and 22 were generally inferior to the Susan Butler property

while properties in sales 21 and 17 had offsetting qualities and that in sale 20 was

generally superior. On the whole, we believe that the Susan Butler property would

have commanded a slightly higher price than any of those properties.

We also consider sale 4, the Bridgemill site, because of its proximity to the

Susan Butler property both in time and geography. The Bridgemill property sold a

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few months after the valuation date for $22,500 per acre. As noted above, Mr.

White considered that property inferior to the choicest sections of the James Butler

property, but Mr. White did not indicate any interest in the Susan Butler property

and it was not one of the properties in Muscogee County that he considered ready

for development. Accordingly, we infer that the Susan Butler property was

somewhat inferior but generally similar in quality to the Bridgemill site, which was

just south of it. Because the Bridgemill site was much larger, the Susan Butler

property would have sold for a relatively higher price per acre, offsetting its inferior

quality to some degree.

On the basis of the foregoing, we conclude that the Susan Butler property was

worth $22,000 per acre in the before condition, or $279,400.

b. The After Value

For the same reasons we explained above with respect to the James Butler

property, we conclude that Mr. Eidson’s and Mr. Roberts’ methods of appraising

the after value of the Susan Butler property were unacceptable and overestimated

the loss in value attributable to the easement.

Mr. Quillian attempted to use the comparable sales method to estimate the

after value of the property, but the only sales of easement-encumbered land that he

was able to find were sales of large tracts in rural portions of south Georgia.

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Although he attempted to correct for the differences due to size and location, he did

not explain his adjustments and his conclusion seems arbitrary. He also failed to

describe the terms of the easements encumbering the south Georgia properties he

considered. Those failures were significant, and consequently we attach little

weight to Mr. Quillian’s conclusion regarding the after value.

Mr. Ryan was the only appraiser to carefully consider the terms of the

conservation deed and to determine that the highest and best use of the property

after being encumbered by the conservation easement was for a rural estate. We

agree with his determination and generally found his appraisal method of

considering sales of other rural estates to be acceptable. However, we believe that

he failed to adequately consider the reduction in value from the conservation

easement. The conservation easement would require any owner of the Susan Butler

property to comply with the terms of the conservation deed. Even if those terms do

not interfere with the normal use of rural estate lots, they do impose additional

requirements on the owner, making the Susan Butler property less attractive.

Consequently, we believe Mr. Ryan’s after value should be adjusted downward

slightly to $140,000.

That value is slightly more than the March 2003 sale price of an interior

13.5-acre estate lot in the north of Harris County, a significantly inferior location.

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That property sold for $130,000, or approximately $134,000 adjusted to December

2003 pricing. Several sales of interior estate lots in Muscogee County during 1999

show that, adjusted to December 2003 prices, estate lots of about six to seven acres

sold for approximately $140,000. Because the Susan Butler property is twice as

large as those lots, we believe its size would make it as attractive as those smaller

lots despite the conservation easement. Consequently, those sales indicate that

$140,000 is an acceptable estimate of the after value for the Susan Butler property.

Accordingly, we conclude that the value of the conservation easement petitioners

donated with respect to the Susan Butler property was $139,400.

Issue 3. Whether Petitioners’ Contribution of a Conservation Easement on the

Kolomoki Plantation Properties Was a Qualified Conservation Contribution Under

Section 170(h)

Background

Petitioners acquired the property known as Kolomoki Plantation through three

separate purchases during 2001. In all, petitioners acquired approximately 5,600

acres.

The Kolomoki Plantation is in Early and Calhoun Counties in the

southwestern corner of Georgia. During 2004, Early County had a population of

approximately 12,091, and Calhoun County had a population of approximately

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6,320. Both Calhoun and Early Counties are primarily agricultural, and the area is

very rural. The closest stores and schools are in Blakely, a small town

approximately eight miles south of Kolomoki Plantation.

Viewed from the north, Kolomoki Plantation’s irregular shape resembles a

pointing dog, its front leg raised to indicate the presence of game. That shape is

appropriate because the property is primarily a “shooting plantation”, though it is

also used for agriculture and silviculture. Kolomoki Plantation is similar to other

nearby shooting plantations, which are common in the neighborhood. The property

has been used as a shooting plantation for at least three decades, but petitioners

have converted more of the agricultural land into quail habitat since they acquired

the property.

Improvements on Kolomoki Plantation include a main lodge with guest house,

a headquarters office, a maintenance barn, a manager’s house, a grain storage

facility, four tenant houses, two equipment shelters, kennels, and a hayfield cabin.

The main lodge and guest house overlook a 25-acre pond, the largest of seven

manmade ponds on the property. Near the main lodge, petitioners maintain a

hayfield of approximately 30 acres, which includes fenced pasture for horses. That

field has been used as a landing strip for private aircraft.

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On December 29, 2003, the L.L.C. contributed to COLT a conservation

easement on 1,780 acres of Kolomoki Plantation (2003 easement). Referring to the

above description of the property’s shape as a pointing dog, the 2003 easement

covered the portions of the property corresponding to the dog’s hind legs and tail,

its front legs, and its snout. It did not cover the torso or the remainder of the head.

On December 23, 2004, the L.L.C. contributed a second easement on 2,450

additional acres of Kolomoki plantation (2004 easement). The 2004 easement

covered various noncontiguous portions of the property not covered by the 2003

property. The remainder of the property that is not subject to either the 2003 or

2004 easement has been reserved for use as a wetland mitigation bank.20

Petitioners engaged Louis E. Clark to appraise the 2003 and 2004

easements. Mr. Clark prepared appraisal reports that the L.L.C. attached to its

2003 and 2004 Forms 1065. During the course of his examination, respondent

20

A mitigation bank is “a wetland, stream, or other aquatic resource

area that has been restored, established, enhanced, or (in certain circumstances)

preserved for the purpose of providing compensation for unavoidable

impacts to aquatic resources permitted under Section 404 [of the Clean Water

Act] or a similar state or local wetland regulation.” U.S. Environmental

Protection Agency, Mitigation Banking Factsheet, available at

http://www.epa.gov/owow/wetlands/facts/fact16.html. The mitigation bank receives

“compensatory mitigation credits” commensurate with the amount of wetlands

restored, which it may sell to third parties who must purchase such credits before

they can damage existing wetlands. Id.

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reviewed Mr. Clark’s reports and raised various questions about them. Mr. Clark

prepared a supplemental report in which he attempted to address those questions.

Unfortunately, Mr. Clark died on May 30, 2009, and was therefore unavailable to

testify at trial. In preparation for the instant litigation, petitioners engaged R. Bryan

Almand to perform a retrospective valuation of the 2003 and 2004 easements. Mr.

Almand testified at trial.

The deeds of conservation easement through which the L.L.C. conveyed the

2003 and 2004 easements to COLT significantly restrict petitioners’ use of

Kolomoki Plantation, but nonetheless reserve a number of rights. The 2004

conservation deed amends several portions of the 2003 conservation deed,

enlarging the portion of the property encumbered by the easement and permitting

the encumbered property to be subdivided into 15 tracts instead of only 5. The

2004 amendment also applies to the 2003 easement, and both the 2003 and 2004

conservation easements are subject to the same restrictions. Because both the

2003 and 2004 easements are subject to the 2003 conservation deed as amended

by the 2004 amendment, we shall refer to only one conservation deed. The

conservation deed begins with a series of recitals, proclaiming general

conservation values and purposes. It incorporates by reference three attachments: a

legal description of the property, a forest management plan, and a baseline

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documentation report. Article II of the conservation deed details certain rights that

are expressly prohibited, restricted, permitted, or reserved.

The conservation deed permits all existing agricultural, grazing, and

horticultural uses of Kolomoki Plantation to continue. Additionally, it permits

areas that were once fields but in which there is now growing timber, as described

in the baseline documents, to be reclaimed for agricultural use at any time. The

maps in the baseline documents (i.e., the environmental reports) show that the land

available for cultivation makes up at least 75% of the easement area.21 The

conservation deed allows the use of agrichemicals such as fertilizers, insecticides,

herbicides, pesticides, and rodenticides provided their use does not have a

“demonstrable detrimental effect on the Conservation Purposes”. The deed

prohibits certain industrial agricultural practices such as feed lots, and it prohibits

the importation of game farm animals other than whitetail deer or game birds. It

permits the commercial operation of hunting clubs and the lease of land for

hunting purposes. It also permits commercial timber harvesting consistent with a

timber management plan approved by COLT provided that such timber harvesting

is not “detrimental to the scenic, historic, natural area and rare species habitat

21

Such land includes the land on the maps labeled “Crop field”, “Brushy

field”, “Planted Pine/Open Pine Forest”, and “Horse Pasture and Barn”.

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protection, wildlife and game habitat protection, and sustainable forestry

purposes”.

The conservation deed prohibits the dumping of nonbiodegradable wastes on

the property, but permits the dumping of biodegradable wastes removed from the

property as long as such wastes are not visible from roads and are at least 200 feet

from any watercourse. Mining, excavation, and dredging are prohibited except

insofar as those resources are used on the property itself and only if the area

excavated is restored to the appropriate grade.

The conservation deed permits Kolomoki Plantation to be subdivided into up

to 15 tracts of land, provided that each tract is at least 200 acres. Any subdivided

portion of the original property remains subject to the terms of the conservation

deed. The L.L.C. may transfer any of the subdivided lots to any purchaser, but for

transfers made after December 31, 2013, transfers to anyone other than one of

petitioners’ descendants are subject to a transfer fee of 0.5% of the purchase price

that is payable to COLT’s stewardship fund.

The owner of any subdivided portion of less than 500 acres is permitted to

build the following structures on a 5-acre building envelope: a single-family

residence; an unlimited number of nonresidential buildings such as garages,

gazebos, sheds, boat houses, and other recreational facilities; a secondary

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residential building for each additional 100 acres beyond the first 100 acres; and

farm buildings of not more than 4,500 square feet under roof. Such residential

buildings may be rented to tenants. Additionally, with permission from COLT, the

owner may construct any such nonresidential agricultural and recreational structures

“as may be reasonably necessary for the uses permitted”. The owner of any

subdivided portion of more than 500 acres is permitted to construct a headquarters

site of up to 15 acres, which may contain the following structures: two residential

dwellings; one lodge for temporary guests; three guest houses; and any number of

sheds, barns, kennels, garages, picnic shelters, and barns “reasonably necessary to

conduct permitted activities”. The total ground coverage under roof at each

headquarters site is not to exceed 15,000 square feet. Although no house on the

headquarters site may be used as condominiums or apartments for tenants, the

houses may be leased, including to paying members of a hunting club. The location

of all headquarters sites and building envelopes is subject to approval by COLT.

The conservation deed permits the construction of permeable roads and

driveways to access any permitted structure. It also permits the owner to construct

and maintain a private grass airstrip to access Kolomoki Plantation. The

conservation deed allows the construction of new ponds and lakes in locations

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subject to the approval of COLT. Except for the uses and activities expressly

granted under the conservation deed, the deed prohibits all other development.

Additionally, the conservation deed prohibits any use that would impair or destroy

significant conservation values. The conservation deed does not permit the public to

enter Kolomoki Plantation.

The conservation deed grants COLT the right to enter Kolomoki Plantation

periodically to inspect the property and ensure that the landowners are complying

with the terms of the conservation deed. Staff from COLT visit Kolomoki

Plantation twice a year to ensure that petitioners are complying with the terms of the

conservation deed. COLT also has the right, if it determines that the conservation

values have been damaged, to require that the owners restore Kolomoki Plantation

to the condition required by the conservation deed.

The baseline documentation referred to in the conservation deed consists of

reports prepared by the environmental consultants, Ms. Mote and Ms. Bouthillier.

Those environmental reports are identical in all material respects to the

environmental reports Ms. Mote and Ms. Bouthillier prepared with respect to the

Muscogee County properties. Although they describe different properties and list

different species, the conclusions and recommendations in both sets of reports are

nearly identical and use the same language. As with the Muscogee County

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properties, the environmental consultants provided supplemental environmental

reports in 2010, which include a new section in which they more specifically

address conservation purposes as provided in the Code and the regulations. The

supplemental environmental reports specifically identify certain high-quality

terrestrial and aquatic communities found on Kolomoki Plantation. For instance, the

supplemental report with respect to the 2003 easement stated:

During the 2003 surveys, high quality aquatic and terrestrial

communities were identified on all of the Kolomoki Tract subparcels (North

Lane, Odom, and U.S. 27). These communities were described in the

Baseline Report as Hardwood Forest, Pine Forest, Open/Brushy Fields, and

Open Water.

The Upland Hardwood Forests occur primarily on the North Lane and

U.S. 27 subtracts of the Kolomoki Tract. These areas are primarily sandy

loams with a high diversity of mature upland hardwood trees. Much of the

native upland hardwood forests in this region have been cut down for farming

and silviculture use. Upland Hardwood Forests provide habitat for species on

the state, federal, and CWCS [Comprehensive Wildlife Conservation Strategy

for Georgia] High Priority Species lists.

Pine Forests and Open/Brush Fields provide suitable habitat for

migratory song birds, reptiles, and small mammals that have been listed as

species deserving of protection. Pine Forests and Open/Brush Fields were

found on all of the Kolomoki Tract. Managing the pine areas for long leaf

pine and encouraging brushy open areas will continue to attract many wildlife

species which are protected or species of concern.

The 2003 surveys also identified high quality aquatic communities in

Little Kolomoki Creek and Spring Creek, their tributaries, and associated

floodplain hardwoods.

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The supplemental report with respect to the 2004 easement identified similar high-

quality ecosystems on that portion of Kolomoki Plantation.

Although the environmental consultants did not find any rare, endangered, or

threatened species on Kolomoki Plantation, they identified habitat on the property

that is normally home to several species that are considered rare, endangered, or

threatened: variable-leaf Indian plantain (a plant found in swamps and muddy

streams); Florida willow (a plant found in swamps and muddy streams); chaffseed (a

plant found on the edges of ponds and wet grassy areas); spotted bullhead (a fish

found in large streams with moderate current and rocky bottoms); bluestripe shiner

(a fish found in large creeks with rocky bottoms); Bachman’s sparrow (a bird found

in open pine woods and old pastures with dense ground cover); and alligator

snapping turtle (a reptile found in rivers, lakes, swamps, and large ponds).

The supplemental environmental reports do not mention any of the L.L.C.’s

retained rights besides the following brief discussion of the reserved building

envelopes: “Even with the retained rights for building envelopes, the Kolomoki

Tract would maintain the scale of rural residential open space historically present in

the region. High quality of life associated with open space and wildlife is

exemplified in the Kolomoki Tract.”

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Discussion

A. Legal Standard

The legal standar

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