United States Tax Court

Agency decision

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164 T.C. No. 6

RANCH SPRINGS, LLC, RANCH SPRINGS INVESTORS, LLC,

TAX MATTERS PARTNER,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 11794-21.

Filed March 31, 2025.

—————

P is the tax matters partner of LLC, which claimed

on its 2017 return a charitable contribution deduction for a

conservation easement donation. The easement was

granted upon rural land in Shelby County, Alabama. The

property was zoned A–1 Agricultural, which permitted agricultural and light residential use only.

LLC had acquired the land for $6,500 per acre in December 2016. In December 2017 an appraiser hired by LLC

valued the land at $236,673 per acre, asserting that its

highest and best use (HBU) was limestone mining. Relying

on this appraisal, LLC on its 2017 return claimed a charitable contribution deduction of $25,814,000 for a qualified

conservation contribution under I.R.C. § 170(h).

R commenced an examination of LLC’s return, disallowed the charitable contribution deduction in its entirety, and asserted penalties. R issued P a Notice of Final

Partnership Administrative Adjustment, and P timely petitioned this Court.

Held: The transaction by which LLC acquired the

property in December 2016 occurred at arm’s length between a willing seller and a willing buyer, both with

Served 03/31/25

reasonable knowledge of relevant facts and neither being

under any compulsion to buy or sell. The per-acre price

upon which the parties agreed, $6,500, provides very

strong evidence as to the fair market value of the property

before the easement was granted.

Held, further, P failed to establish that the HBU of

the property before the granting of the easement was limestone mining. The property was zoned A–1 Agricultural

and P failed to prove that rezoning to permit mining use

was reasonably probable.

Held, further, assuming arguendo that limestone

mining was a permissible use, the version of the income

method P’s experts used to determine the “before value” of

the property is erroneous as a matter of law because it

equates the value of raw land with the net present value of

a hypothetical limestone business conducted on the land.

A knowledgeable willing buyer would not pay, for one of the

assets needed to conduct a business, the entire projected

value of the business.

Held, further, the “before value” of the property was

$720,500, or $6,550 per acre, as determined by R’s expert

using the comparable sales method. Subtracting from the

“before value” the property’s conceded “after value,” or

$385,000, the value of the easement was $335,500.

Held, further, because the claimed value of the easement exceeded the correct value by 7,694%, LLC is liable

for a 40% penalty for a gross valuation misstatement under

I.R.C. § 6662(h).

—————

Simon P. Hansen, Anthony J. DeRiso III, Charles E. Hodges II, Darianne

DeLeon, and Jeffrey A. Kaplan, Jr., for petitioner.

Brett Chmielewski, Maria S. de Sam Lazaro, Anna L. Boning, Rishi K.

Jain, Eric R. Skinner, Justin D. Scheid, Casey N. Epstein, and Sarah M.

Raben, for respondent.

LAUBER, Judge: This is a syndicated conservation easement

(SCE) case, with a fact pattern that has become painfully familiar. In

December 2016 Ranch Springs, LLC (Ranch Springs), purchased

110 acres of farmland in rural Alabama for $715,000, or $6,500 per acre.

That approximated the going rate for similar property in the neighborhood during 2014–2020.

One year and six days later, Ranch Springs granted a conservation easement over the property. On its Federal income tax return for

2017, it claimed for this donation a charitable contribution tax deduction

of $25,814,000. It asserted that the “before value” of the farmland—i.e.,

the value of the land before being encumbered by the easement—was

$236,673 per acre. It thus took the position that the land had appreciated by 3,641% in 12 months.

The appraisal accompanying the return, prepared by Claud

Clark III, asserted that the “highest and best use” (HBU) of the farmland was development as a limestone quarry. To value the easement,

Mr. Clark hypothesized—and discounted to present value—the cashflow

that supposedly could be derived from operating a limestone quarry on

the property for 35 years. He opined, in other words, that the value of

the raw land was equal to the assumed value of the hypothetical mining

business.

The property’s zoning classification permitted only agricultural

and light residential use. Petitioner failed to establish a reasonable

probability that the land could be rezoned to permit use as a limestone

quarry. Because mining was not a legally permissible use, it was not

the property’s HBU.

Assuming arguendo that rezoning approval could have been secured, petitioner failed to prove that a limestone quarry would have been

financially feasible, given the laws of supply and demand. In any event,

the appraisal methodology implemented by Mr. Clark is wholly illogical

and erroneous as a matter of law. No rational buyer with knowledge of

all relevant facts would pay, for one asset needed to operate a business,

the entire future value of the business.

We conclude here, as we did in J L Minerals, LLC v. Commissioner, T.C. Memo. 2024-93, at *3, that the valuation of the conservation

easement “was an outrageous overstatement,” wholly untethered from

reality. Employing the comparable sales method, as backstopped by the

price actually paid to acquire the property in December 2016, we find

that its “before value” was $6,550 per acre and that the value of the

easement was $335,500. Because the value claimed on Ranch Springs’

return ($25,814,000) exceeded the value of the easement by 7,694%,

Ranch Springs is liable for the 40% gross valuation misstatement penalty. See § 6662(a), (h). 1

FINDINGS OF FACT

The following facts are derived from the pleadings, five Stipulations of Facts with attached Exhibits, one oral stipulation on the record,

numerous trial Exhibits, and the testimony of fact and expert witnesses

admitted into evidence at trial. Ranch Springs is an Alabama limited

liability company (LLC) classified as a TEFRA partnership for its short

taxable period ending December 31, 2017. 2 Petitioner, Ranch Springs

Investors, LLC, its tax matters partner (TMP), had its principal place of

business in Georgia when the Petition was timely filed.

Several of the fact witnesses petitioner called were friends, acquaintances, or business associates of Thomas (Tom) and Robert (Bob)

Lewis, the prime movers behind the SCE transaction. Other witnesses

had invested in SCE deals and thus had a direct or indirect stake in the

outcome of this case. While generally showing good recall of many facts

from the 2016 and 2017 period, they sometimes expressed inability to

recall certain facts about matters that might be regarded as unhelpful

to petitioner’s position. Because of these witnesses’ selective inability to

recall pertinent facts, the Court has been required to make credibility

determinations.

The Sun Valley Tract

Harpersville is a small town in Shelby County, Alabama. It is a

largely rural community about 30 miles southeast of Birmingham. Its

population at times relevant to this case was about 1,700. One witness

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. We round

all monetary amounts to the nearest dollar.

2 Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, governed the tax treatment and audit process for many partnerships, including Ranch Springs.

compared it to Mayberry, the fictional setting of The Andy Griffith Show,

where “everybody knows everybody.”

Jason Carpenter is an experienced businessman who originally

worked in the tobacco industry. In 2012 he and his wife decided to venture into the cattle business. They purchased 88 acres of land in

Harpersville. That sale closed in March 2012 for $627,200, or $7,127

per acre. The Carpenters intended to use the land for cattle grazing.

The Carpenters decided to put their cattle business into an LLC.

In December 2013 they formed Sun Valley Farms, LLC (Sun Valley), for

that purpose. On January 31, 2014, Sun Valley purchased another

105 acres, adjacent to the tract the Carpenters already owned, for

$517,500, or $4,929 per acre. Four days later the Carpenters contributed the 88-acre tract to Sun Valley. As of February 2014 Sun Valley

thus owned 193 acres of contiguous farmland in Harpersville (Sun Valley Tract).

The Sun Valley Tract was surrounded by agricultural and residential property. Several homes were directly adjacent to it. It was

bounded on one side by Sun Valley Road, which passed by 50–60 residences and numerous farms. On its other side the Sun Valley Tract had

frontage along Highway 280, which abuts Ranch Road. Highway 280 is

a major four-lane highway that connects Birmingham with points south.

The approximate location of the Sun Valley Tract—referred to on this

map as the Ranch Springs property, which was carved from it—is shown

below:

Approximately 20 acres of the Sun Valley Tract were characterized as “farmland of statewide importance.” Another 88 acres consisted

of “prime farmland.” At all relevant times, the property was zoned “A–1

Agricultural,” a zoning category that permitted agricultural and light

residential use only.

The Carpenters grazed cattle on the Sun Valley Tract starting in

2012. Mr. Carpenter assiduously maintained the property, and he frequently encountered chunks of limestone when using his agricultural

equipment. Limestone outcroppings were plainly visible at multiple locations on the property.

II.

The Lewis Brothers

Tom and Bob Lewis are longtime Alabama residents with lifelong

experience in the coal mining business. Tom Lewis, who testified at

trial, studied geology and began working at Birmingham Coal & Coke

(BCC) in 1978. He and his brother built their careers at BCC, which

operated surface mines and supplied much of its coal to an Alabama

electric utility.

In 2009 the Lewis brothers were approached by Tim McCollum

with a different sort of business proposition. Mr. McCollum had just

purchased, at a bank foreclosure sale, the Meadows property, an 18-hole

golf course in Harpersville. It was situated on Highway 280 near the

Carpenters’ property. Jason Rudakas, Tom Lewis’s son-in-law, stated

that the golf course was “right across the road” from the Sun Valley

Tract. Another witness estimated that it was a quarter of a mile away.

The Meadows property consisted of 200 acres. Mr. McCollum

paid $750,000, or $3,750 per acre, for it. Needing help to finance the

acquisition, he approached the Lewis brothers about a partnership or

joint venture, to which they agreed.

The Lewis brothers evaluated several options for developing the

golf course property. They allegedly considered a residential development but concluded that the market for that many homes did not exist.

They considered some sort of sports complex that would include athletic

fields. They ultimately rejected these options and commissioned a report from Bhate Geotechnical Engineering (Bhate) to investigate the

property’s potential for development as a limestone quarry. Bhate

drilled 3 boreholes on the 200-acre property. On the basis of the drilling

results, Bhate asserted that the golf course would be worth $41 million

if developed as a limestone mine.

The Lewis brothers had some experience with limestone and aggregates. They had mined limestone at their coal mine sites, and they

used aggregates in their coal mine reclamation projects. Owing in part

to utilities’ diminished appetite for coal, BCC was undergoing financial

stress around this time, and it eventually filed for bankruptcy in 2015.

Given their surface mining experience and ownership of the necessary

mining equipment, pursuing an opportunity to mine aggregates appeared to be a logical step to diversify their business away from coal.

Indeed, Tom Lewis testified that he and his brother “wanted to move

into the limestone [mining] business in [Shelby County].” 3

Notwithstanding their alleged desire to move into the limestone

mining business in Shelby County, and notwithstanding the Bhate report’s assertion that a limestone quarry on the Meadows property might

be worth $41 million, the Lewis brothers did not pursue this limestone

mining opportunity. According to Tom Lewis, the opportunity did not

work out “timing wise” with their efforts to exit the coal business.

Instead, the Lewis brothers donated the golf course to the Town

of Harpersville and claimed charitable contribution deductions on their

tax returns, using the Bhate report to support the deductions claimed.

Tom Lewis said he could not remember the total amount of the deductions they reported, but he thought it was less than $41 million.

When the Town acquired the golf course, the property had been

derelict for several years and was overgrown with weeds. The Town

and/or its lessee spent more than $1 million rehabilitating the property.

The Meadows golf course eventually reopened during the administration

of Mayor Don Greene, who was elected in 2016. He viewed the reopening of the golf course as a major achievement of his (and the prior

mayor’s) administration. The Town of Harpersville owned the golf

course during 2016 and 2017 and continues to own it today.

III.

Negotiations for Purchase of the Ranch Springs Property

In 2016 the Carpenters decided to list most of the Sun Valley

Tract for sale. On July 16, 2016, Judy Naugle, a realtor representing

the Carpenters, listed 175 acres—90% of the Tract—on the Multiple

Listing Service (MLS). The acreage was listed as three separate parcels:

a 25-acre and a 45-acre parcel, each priced at $7,500 per acre, and the

original 105-acre parcel, priced at $7,013 per acre. These listing prices

were determined by analyzing the prices at which nearby properties had

recently been sold. The Carpenters intended to retain the residual

3 Mr. Rudakas expressed the view that, during 2016 and 2017, limestone mining was a more attractive business than coal mining because (1) limestone mining was

much less heavily regulated; (2) permits for coal mining had to be renewed every

5 years, as opposed to 60 years for limestone; (3) limestone could be profitably extracted

from much shallower mines; and (4) the coal business was under economic stress

whereas the aggregates business was allegedly booming.

18 acres, which included their personal residence and a residence that

they used as rental property.

In late August 2016 Bob Lewis approached Ms. Naugle about the

MLS listing for the Sun Valley Tract. He and Mr. Rudakas met with

Ms. Naugle and the Carpenters during the first week of September. Mr.

Lewis informed them of his belief that the Sun Valley Tract had the potential for development as a limestone mine. “Knox Group” limestone,

which underlies the Sun Valley Tract, is very common throughout the

region. There is nothing special or unique about the limestone on the

Sun Valley Tract. Surface mapping shows that this limestone formation

covers almost all of Shelby County.

During a subsequent meeting to discuss possible acquisition of

the property, Bob Lewis brought out a geological map and showed Mr.

Carpenter the seams of limestone that underlay the property. Mr. Carpenter credibly testified that Mr. Lewis emphasized “the value of the

limestone” during this meeting. Mr. Lewis indicated that he intended

to speak with (or had already spoken with) the Mayor of Harpersville

about opening a limestone quarry.

Although emphasizing the limestone potential of the Sun Valley

Tract, Messrs. Lewis and Rudakas suggested that an attractive, taxadvantageous, alternative would be to place a conservation easement on

the land. They explained that a partnership could be formed to exploit

this opportunity. They proposed that the Carpenters contribute a portion of the Sun Valley Tract to the partnership in exchange for cash and

a partnership interest.

On September 6, 2016, Mr. Rudakas sent Mr. Carpenter, and

asked him to sign, a draft “membership interest purchase agreement”

(MIP agreement) for such a partnership. At a later date Mr. Carpenter

was given an organizational chart for the proposed venture. The organizational chart resembled those used in many SCE transactions.

Mr. Rudakas and the Lewis brothers preferred that Mr. Carpenter participate as a partner in the proposed SCE venture, as opposed to

selling the land to them outright, for at least two reasons. First, the

partnership could then tack onto the Carpenters’ holding period for the

land, and it could thus consummate an SCE transaction in 2016, rather

than having to hold the land for a year to qualify for long-term capital

gain treatment. See §§ 1231(a)(3)(A)(i), (b)(1), 1223(2). Second, if the

Carpenters contributed rather than sold the land, the partnership would

not have to pay cash up front and wait a year to get reimbursed by investors.

Draft iterations of the MIP agreement indicated that the Carpenters might receive as much as $7,000 per acre for the Sun Valley Tract,

roughly equal to their asking price. But Mr. Rudakas explained that a

one-year holding period for the land would impose some risk on the partnership. For that reason, the price the partnership would be willing to

pay might be reduced if the Carpenters declined to join as partners.

Mr. Carpenter sought advice about this proposal from his lawyer,

his accountant, and “a friend who conserved property in the past.” On

September 15, 2016, Mr. Carpenter emailed Mr. Rudakas and thanked

him “for taking the time Tuesday to help me better understand the process of the Conservation Easement and how it would relate to the property.” But “based on the guidance and advice” that he and his wife had

received, they declined to participate in the proposed SCE venture.

After a 6-week quiet period, Mr. Rudakas reopened the negotiations in November 2016. During November and December he negotiated

intensely with Mr. Carpenter and Ms. Naugle. Numerous versions of an

MIP agreement were exchanged with a view to addressing the Carpenters’ concerns. These drafts were reviewed and marked up by Mr. Carpenter’s attorney.

On December 6, 2016, Ms. Naugle emailed Mr. Rudakas at the

Carpenters’ direction and reconfirmed their decision not to participate

in any form of SCE venture. She explained that “the current proposed

purchase/partnership transaction will not satisfy the concerns [the Carpenters] have regarding potential liabilities.” She informed Mr. Rudakas that the Carpenters wished “to do a straight out purchase of the

property,” acknowledging their awareness that “this may change the

price that you are willing to pay.”

Mr. Rudakas finally acquiesced to the Carpenters’ proposal for an

outright sale. But he insisted that the Carpenters execute a “drilling

access agreement” authorizing exploratory drilling on portions of the

Sun Valley Tract. Mr. Rudakas made clear that the sale could not close

until exploratory drilling on the Tract had been completed and the drilling results analyzed. The parties had extensive discussions regarding

the exact number of acres that would be purchased. Mr. Carpenter understood that the acreage purchased needed to be sufficient to satisfy

the requirements for a limestone quarry.

On December 6, 2016, the parties executed a contract whereby

Red Mountain Resources, LLC (Red Mountain), agreed to purchase

“122+/− acres” of the Sun Valley Tract for $793,000, or $6,500 per acre.

Red Mountain was controlled by the Lewis brothers. The contract was

later revised to specify the purchase of only 110 acres, but at the same

per acre price of $6,500.

The revised contract substituted Ranch Springs for Red Mountain

as the buyer. Ranch Springs had been formed in October 2016. Its initial members were the Lewis brothers, their children, and Yellowhammer Developments (Yellowhammer). The members of Yellowhammer

were Mr. Rudakas and Brian Lewis, Bob Lewis’s son.

Sun Valley executed the drilling access agreement on December

7, 2016. The exploratory drilling was conducted between December 7

and 13. The drilling was supervised by AquaFUSION, Inc. (AFI), which

later prepared a report addressing the feasibility of operating a limestone quarry on the property.

On December 22, 2016, Ranch Springs purchased the 110-acre

parcel from Sun Valley for $715,000, or $6,500 per acre. This parcel

consisted of 100 acres from the Carpenters’ 105-acre tract and 10 acres

from their 88-acre tract. We will refer to this 110-acre parcel—on which

a conservation easement was granted one year and six days later—as

the Ranch Springs Property.

During negotiations for purchase of the Ranch Springs Property,

Mr. Rudakas assured Mr. Carpenter that the partnership “wouldn’t be

doing anything with the land” and that Sun Valley could lease it back

for cattle grazing on a year-to-year basis. For several years after the

purchase, Sun Valley did in fact lease the Ranch Springs Property (then

subject to a conservation easement) for cattle grazing. The Carpenters

continued to reside on the remainder of the Sun Valley Tract until 2022,

when they sold it to a farmer for about $6,000 per acre.

IV.

AFI’s Exploratory Drilling on the Sun Valley Tract

AFI drilled 10 holes on the property. Nine of these holes were

made using “air-rotary drilling.” Air-rotary drilling causes small chips

of subsurface material to be blown up and out of the drill hole, enabling

the chips to be collected for examination. Air-rotary drilling is considered preliminary, because the chips collected are not necessarily representative of the subsurface material because of the potential for sample

mixing and contamination. We will refer to the 9 drillholes created by

air-rotary drilling as “boreholes.”

“Diamond core drilling” is a more reliable (and expensive) exploratory technique. It enables the exploration team to recover a solid cylinder of subsurface material from the top to the bottom of the drillhole.

We will refer to drillholes created by diamond core drilling as “coreholes.”

AFI drilled only one corehole on the Ranch Springs Property. The

single corehole was drilled to a depth of 225 feet, and only 210 feet of

subsurface material were recovered for testing. In its feasibility analysis, AFI nevertheless presupposed a quarry pit that was 385 feet deep.

Exploratory drilling provides data, not only about subsurface

minerals, but also about “overburden,” i.e., commercially worthless material on top of the mineral layer. Overburden must be removed, transported, and stored to gain access to the minerals below. The greater the

overburden, the higher the quarry’s operational costs would be. Exploratory drilling also provides data about the subsurface presence of Athens shale, undesirable material that must be removed and cannot be

considered part of the limestone mineral resource.

AFI’s 10 drillholes revealed overburden varying in depth between

8 feet and 80.5 feet. The depth and thickness of the overburden increased rapidly toward the easternmost portion of the Sun Valley Tract.

Three boreholes encountered Athens shale. Athens shale also appeared

in at least two visible outcroppings on the Tract, in areas where AFI

chose not to drill. AFI proposed storing this overburden and deleterious

material on the northern edge of the Ranch Springs Property along highway 280, in a pile up to 75 feet high.

Land Prices in Shelby County

Whenever real property is sold in Shelby County by recorded

deed, the Office of the Shelby County Property Tax Commissioner (Tax

Office) receives a copy of the deed. According to its records, 64 large

parcels of vacant land (i.e., parcels consisting of 45+ acres) were sold in

arm’s-length transactions between October 2014 and September 2020.

The median sale price for these parcels was $4,253 per acre, and the

average sale price was $6,935 per acre. The highest price paid during

this 6-year period was $35,320 per acre, for a 47-acre parcel of timberland sold in March 2018.

Della Pender has been a realtor in Harpersville since 1991. In

her experience, parcels of agricultural land comparable in size to the

Ranch Springs Property typically sold during 2017 for $3,500 to $4,500

per acre. The highest price she could recall having been paid for agricultural land in Harpersville was $8,500 per acre. That price was paid

for an 80-acre tract with frontage along Highway 280, which was purchased by a developer for use as a residential subdivision.

In December 2015 Locust Creek, LLC (Locust Creek), purchased

a 177-acre tract in the neighboring town of Vincent, Alabama, roughly

3 miles from the Ranch Springs Property, for $825,000, or $4,661 per

acre. Locust Creek was owned by the Lewis brothers and Mr. Rudakas.

They allegedly believed that the HBU of the Locust Creek tract was

limestone mining. Instead, they granted a conservation easement on

the property, which they valued for charitable contribution purposes at

$24,907,471. See Locust Creek LLC v. Commissioner, No. 13011-20 (T.C.

filed Nov. 9, 2020).

In December 2016 Bradford Resources, LLC (Bradford Resources), acquired a 151-acre tract in Harpersville, roughly 3 miles from

the Ranch Springs Property. As confirmed by the RT–1 form that accompanied the deed, the market value that the Tax Office placed on the

Bradford Resources parcel was $647,320, or $4,294 per acre. 4 Bradford

Resources was owned by the Lewis brothers and Mr. Rudakas. They

allegedly believed that the HBU of the Bradford Resources tract was

limestone mining. Instead, they granted a conservation easement on

the property, which they valued for charitable contribution purposes at

$24,874,151. See Bradford Resources LLC v. Commissioner, No. 1301220 (T.C. filed Nov. 9, 2020).

In December 2016 Tanyard Farms, LLC (Tanyard Farms), acquired a 138-acre tract in Harpersville, roughly 3 miles from the Ranch

Springs Property. As confirmed by the RT–1 form that accompanied the

deed, the market value that the Tax Office placed on the Tanyard Farms

parcel was $556,808, or $4,049 per acre. Tanyard Farms was owned by

the Lewis brothers and Mr. Rudakas. They allegedly believed that the

HBU of the Tanyard Farms tract was limestone mining. Instead, they

granted a conservation easement on the property, which they valued for

4 The RT–1 form is a sales validation document used to determine the transfer

tax associated with a transfer of real property. This form must be submitted to the

Tax Office with the deed if the deed does not indicate the value of the property transferred.

charitable contribution purposes at $24,612,000. See Tanyard Farms,

LLC v. Commissioner, No. 11216-21 (T.C. filed June 14, 2021).

In December 2016 Sunnydale Springs, LLC (Sunnydale Springs),

acquired a 190-acre tract in Harpersville, roughly 3 miles from the

Ranch Springs Property, for $850,000, or $4,474 per acre. Sunnydale

Springs was owned by the Lewis brothers and Mr. Rudakas. They allegedly believed that the HBU of the Sunnydale Springs tract was limestone mining. Instead, they granted a conservation easement on the

property, which they valued for charitable contribution purposes at

$23,701,000. See Sunnydale Springs, LLC v. Commissioner, No. 1447923 (T.C. filed Sept. 11, 2023).

In October 2014 Lhoist North America (Lhoist) purchased two

parcels of undeveloped land, totaling 240 acres, in Calera, within Shelby

County, about 29 miles southeast of Harpersville. As of 2017 Lhoist was

the ninth largest producer of aggregates in the United States. For several years it had operated the O’Neal quarry in Calera; in 2017 that

quarry produced about 5.5 million tons of limestone. Lhoist paid $2.56

million, or $16,000 per acre, for the 160-acre parcel it acquired in October 2014. It paid $1.44 million, or $17,976 per acre, for the 80-acre parcel it acquired concurrently.

In November 2017 Town Creek, LLC (Town Creek), purchased a

93-acre parcel in Calera for $600,000, or $6,452 per acre. Town Creek

was owned by the Lewis brothers and Mr. Rudakas. In 2019 Town

Creek donated the property to a foundation, reporting that the parcel

was worth $26.95 million, or $289,775 per acre.

VI.

Possibility of Rezoning the Ranch Springs Property

Because the Ranch Springs Property, like the rest of the Sun Valley Tract, was zoned “A–1 Agricultural,” Ranch Springs would have had

to secure rezoning approval to use the 110-acre parcel as a limestone

quarry. Ranch Springs owned the property throughout calendar year

2017. But at no point did it file an application with the Town of Harpersville seeking to have the property rezoned. And that was so even though

the Lewis brothers supposedly believed that a rezoning application

would be viewed favorably.

Rather than file a rezoning application, Mr. Rudakas asked an

Atlanta law firm, Bloom Parham (Bloom firm), to address the possibility

of rezoning. In a letter dated April 25, 2018, the Bloom firm concluded:

“[W]e think there is a reasonable probability that the Property can be

rezoned to M–1 [Industrial] and issued a special exception that allows

for mining, as long as there is not strong neighbor opposition to the mining request.” 5

The Bloom letter explained the process for rezoning requests in

Harpersville. Because the Town did not have a zoning classification that

explicitly permitted mining, the landowner would have to go through a

two-step process. First, he would need to secure approval from the

Harpersville Planning and Zoning Commission (Zoning Commission) to

change the zoning classification from Agricultural to M–1 Industrial.

Upon receipt of a rezoning application, the Zoning Commission

would post notices about the proposed change and directly notify neighbors who owned land near the property sought to be rezoned. If the

Zoning Commission approved the change after a public hearing, the application would then go to the Town Council, which would make the final

decision. The mayor cannot unilaterally approve a zoning change, although he would have a vote as a member of the Town Council.

If the Town Council approved the zoning change after a public

hearing, the landowner would then have to go the Harpersville Board of

Adjustment (Board) to secure approval for a “special exception.” The

Board would consider whether the proposed mining use was “compatible” with the M–1 Industrial classification, and it might hold another

public hearing before making its decision. If the Board deemed the mining use “compatible,” it could approve a “special exception” allowing the

mining use.

The Bloom letter concluded that “the rezoning/special exception

process is highly political and will turn on neighbor support/opposition.”

Because the Town had no specified criteria governing the evaluation of

rezoning requests, the process would be “influenced heavily by the

amount of support or opposition by neighbors of the subject Property.”

The Bloom firm spoke with Mayor Greene, whose term began in November 2016. He “emphasized the political nature of the [rezoning] decision

(i.e., neighbor support/opposition is the driving factor).”

The Bloom letter explained that similar considerations would

drive any request for a “special exception.” The Town’s zoning ordinance

provided that the Board could approve a zoning modification only upon

5 The letter did not mention that a conservation easement had been granted on

the Ranch Springs Property in December 2017, which would have precluded its conversion to mining use in April 2018, when the letter was drafted.

determining that the proposed use “will not tend to impair the health,

safety, convenience or comfort of the public, including that portion of the

public occupying the property immediately contiguous to the parcel of

land which the modification concerns.” According to the Bloom letter,

the Board’s analysis would thus “focus[] on the health, safety, convenience, and comfort to the public, specifically with respect to immediately

neighboring parcels of land.” The letter noted that the western edge of

the Ranch Springs Property “abuts several properties zoned R–1 Residential. It will be imperative to get these neighbors’ support during the

rezoning/special exception process.”

Neither Ranch Springs nor its agents did any outreach to immediate neighbors or other Harpersville residents during 2016–2018 to

gauge the level of community support for (or opposition to) a limestone

quarry. The Bloom firm likewise conducted no investigation of this kind.

It interviewed the Town Clerk and Mayor Greene, who served as Mayor

from November 2016 through October 2020. Both indicated that fair

consideration would be given to any rezoning request. But they would

provide no assurance about the fate of such a request, emphasizing that

the outcome “would be heavily influenced by whether or not neighboring

property owners oppose the request.”

Given these noncommittal responses, the Bloom letter placed

fairly strong reliance on a September 6, 2016, letter signed by Theo Perkins. Mr. Perkins served as Mayor of Harpersville from 2004 through

October 2016 and is also its current mayor. Mr. Rudakas supplied this

letter to the Bloom firm.

The September 6, 2016, letter is addressed to “Strategic Red

Mountain, LLC, c/o Robert Lewis.” The letter stated the author’s understanding that “Strategic Red Mountain, LLC is interested in purchasing

a controlling interest in a company who owns a tract of land” and was

“intent on using the Property for mining limestone.” The letter states

that the tract of land to which it referred was shown on a map “attached

as Exhibit A.” The letter says that, “if requested by you or the current

owners, the City would certainly approve a rezoning, special use, or conditional use to allow mining in these properties [sic].”

Mayor Perkins testified very credibly at trial. Besides serving as

Harpersville’s current mayor, he is a pastor of the Liberty Christian

Church. He explained that Bob Lewis drafted the September 6, 2016,

letter and requested that he (the mayor) sign it. Mayor Perkins explained that, in stating that Harpersville “would certainly approve a

rezoning,” he meant only that the Town would give fair and openminded consideration to a rezoning request.

The Bloom firm appended to its report a copy of the September 6,

2016, letter bearing Mayor Perkins’s signature. But the copy thus appended did not include an “Exhibit A,” which would have identified the

property to which the author was referring. At trial Mayor Perkins testified that the property map attached as Exhibit A to the letter he signed

was not a map of the Ranch Springs Property, but rather was a map of

the Tanyard Farms property (also called the Tanyard Dairy property),

in which the Lewis brothers and Mr. Rudakas also had an interest. 6 In

other words, Mayor Perkins testified that the letter he signed addressed

a possible rezoning of the Tanyard Farms property. He could not recall

a meeting that involved a discussion of the Ranch Springs Property, to

which he referred as the “Carpenter property.”

Mr. Rudakas testified after Mayor Perkins had completed his

trial testimony. Mr. Rudakas testified that Bob Lewis wrote the letter

in question and that he (Mr. Rudakas) typed it up. Mr. Rudakas then

allegedly printed out four identical copies of the letter, one for each of

four properties (including Ranch Springs and Tanyard Farms) in which

the Lewis brothers were interested. Although the Town of Harpersville

letterhead appears at the top of the letter, Mayor Perkins had testified

that this was not the letterhead the Mayor’s office used in 2016. Mr.

Rudakas said that he “must have created the letterhead,” seeking to replicate its font and style when typing up Mr. Lewis’s draft on his computer.

The copy of Mayor Perkins’s letter that was supplied to the Bloom

firm and Mr. Clark did not include an Exhibit A. Mr. Rudakas admitted

that he did not preserve any copy of the letter with an Exhibit A attached. After searching his files, Mr. Rudakas could find only one copy

of the letter, with no Exhibit. Petitioner was unable to produce at trial

any copy of the September 6, 2016, letter with an Exhibit A attached. 7

6 Tom Lewis acknowledged that he had participated in a partnership with an

interest in the Tanyard Farms property. A conservation easement was eventually

granted on that property, and the appraisal was based on the assumption that limestone mining was its HBU. See supra pp. 13–14.

7 In early 2018 Tom Lewis met with Mayor Greene, who succeeded Mr. Perkins

as mayor, to discuss possible rezoning of land in Harpersville for use as limestone

quarries. On June 1, 2018, Mayor Greene sent the Lewis brothers a standard letter

At trial respondent called as witnesses two members of the Zoning Commission who held office during 2016 and/or 2017. Ms. Pender

(the realtor mentioned earlier) is a lifelong resident of Harpersville and

has served on the Zoning Commission since 2005. She inherited her

parents’ home, which is on a tract 300 feet from the Ranch Springs Property. Her sister owned a 2-acre parcel that abutted the Ranch Springs

Property.

Ms. Pender stated her belief that most members of the Harpersville community would have opposed a limestone quarry on the Sun Valley Tract. She explained that most homes in Harpersville relied on shallow wells for their drinking water. Concerns about contamination of the

water supply, and about deleterious runoff into the Coosa River 2 miles

south of the Town, would have been at the top of residents’ worry list.

She believed residents would likewise be concerned about traffic congestion on local roads from trucks hauling aggregate. She credibly testified

that she, as a member of the Zoning Commission, would have voted

against a proposal to rezone the Ranch Springs Property for use as a

quarry.

Dale Glasscock is the largest landowner in Harpersville, owning

roughly 11% of the total acreage within the Town limits. His property

is less than half a mile from the Ranch Springs Property, extending

roughly two miles south all the way to the Coosa River. He was appointed to the Zoning Commission in 2017 by Mayor Greene and remained a member of the Commission at the time of trial.

Mr. Glasscock credibly testified that, to his knowledge, no one had

ever submitted an application to rezone land in Harpersville for use as

a quarry. If such a request were submitted, he believed that the public

hearing at which the request was considered would be “standing room

only.” He echoed Ms. Pender’s view that residents would be chiefly concerned about damage to their water supply system, traffic congestion,

noise, and dust from the quarry operation. More generally, he believed

that residents would have viewed a quarry as inconsistent with the

“easy [rural] environment” they prized.

Mr. Glasscock explained that the experience of Vincent, the adjacent town, had “educated” Harpersville’s residents about the problems a

explaining the rezoning process, noting that the Zoning Commission would “certainly

take your request in consideration.” Dissatisfied with this response, Mr. Lewis

drafted, and asked the mayor to sign, a letter expressing more unequivocal support for

rezoning. Mayor Greene refused to sign that letter.

limestone quarry might entail. After a bitter debate that divided that

town, the town council had approved rezoning for a quarry to be called

White Rock. But the quarry never opened, so the promises of economic

development, jobs, and high wages were never delivered. Mr. Glasscock

stated that he, as a member of the Zoning Commission, would have

voted against rezoning the Ranch Springs Property for use as a limestone quarry. He believed that his position would have been “the consensus of most of the [community].” Mayor Greene echoed that view,

explaining that a quarry on the Ranch Springs Property “probably would

not be looked on favorably” by nearby property owners. 8

Petitioner presented no testimony at trial from any current or former member of the Zoning Commission or Board of Adjustment. Petitioner offered no analysis that attempted to gauge the level of neighborhood opposition to (or support for) a limestone quarry. Petitioner’s sole

evidence on this point consisted of testimony from one former neighbor,

Daniel Gardner, who once owned a 100-acre tract adjacent to the Ranch

Springs Property. He testified that he would not have opposed a quarry

on that site.

We discounted Mr. Gardner’s testimony. He was a member of a

partnership, Sunrise Valley, LLC, that in 2018 granted a conservation

easement on the property he formerly owned, which was half a mile from

the Ranch Springs Property on the same road. See Sunrise Valley, LLC

v. Commissioner, No. 14353-23 (T.C. filed Sept. 7, 2023). The easement

was valued at $24.18 million, and the magnitude of the charitable contribution deduction Mr. Gardner (and other investors) were allocated

was premised on the theory that the land could have been used as a

limestone quarry. For that reason, Mr. Gardner had a personal interest

in testifying that the Ranch Springs Property, which was next to his,

could have been rezoned to permit limestone mining. Whether or not

his testimony was biased, we find that it was unlikely to be representative of the views of Harpersville residents generally.

8 Harpersville residents voiced strong opposition to the proposed rezoning of

another property—half a mile down the road from the Ranch Springs Property—for

use as a veterans assisted living facility. After residents expressed concerns that the

proposed facility would be inconsistent with the use of neighboring properties and

bring unwanted noise and traffic, the Zoning Commission voted to deny the rezoning

application. It seems reasonable to conclude that residents who considered an assisted

living facility for veterans too disruptive for the neighborhood would have opposed a

limestone quarry at least as strongly.

VII.

Permitting Required for a Limestone Quarry

Apart from rezoning, multiple permits would be needed to operate

a quarry on the Ranch Springs Property. Most of the permits would

have to be secured from the Alabama Department of Environmental

Management (ADEM). These would include an air emission discharge

permit, a surface water discharge permit, a National Pollutant Discharge Elimination System permit, and (if groundwater would be affected) an Underground Injection Control permit. For a limestone

quarry, ADEM would need to notify the U.S. Environmental Protection

Agency and the U.S. Fish and Wildlife Service, and those agencies would

conduct their own reviews of the application.

ADEM engages in an extensive technical examination of all permit applications, and it is rare for an applicant to be successful on its

first try. Typically there is a back-and-forth process, with ADEM raising

questions about the applicant’s plans and requesting more information.

If ADEM tentatively approves a permit, it normally must provide the

opportunity for a public hearing.

ADEM makes its final decision to issue permits only after the

public and interagency comment periods have closed and all comments

have been considered. ADEM’s final decision is subject to an administrative appeals process. AFI admitted in its feasibility study that the

“permitting process has become more difficult as public opposition to

quarries has intensified.”

Ranch Springs never submitted an application to ADEM for any

of the required permits. Applicants commonly hire consultants to assist

them with the technicalities of this process. But there is no evidence

that Ranch Springs engaged a consultant or took any other preliminary

steps toward securing permits. Although Ranch Springs held the property throughout 2017, Mr. Rudakas testified that “[w]e weren’t ready

right at that point to start that process.”

The saga of White Rock (the proposed quarry referenced by Mr.

Glasscock) shows how lengthy the process can be. See supra pp. 18–19.

In October 2009 White Rock Quarries, LLC, filed an application to rezone property in Vincent—the town adjacent to Harpersville—for use as

a limestone mine. Nine months later, after a bitter fight, the town approved the rezoning application, but that approval was contested in a

lawsuit that went all the way to the Alabama Supreme Court. White

Rock could not complete the ADEM permitting process until the lawsuit

was concluded, and the necessary permits were not secured until 2019.

As of 2024—15 years after the initial rezoning application—the White

Rock quarry had not commenced operations.

VIII. Existing Supply of Limestone

In 2017 Shelby County had 7 well-established limestone quarries,

which produced more than 10 million tons of limestone that year. The

biggest quarries were operated by Vulcan Materials Co. (Vulcan), the

largest producer of construction aggregates in the United States; by

Martin Marietta Aggregates, Inc. (Martin Marietta), the second largest

producer; and by Lhoist, the ninth-largest producer. There were nine

quarries in neighboring counties, which produced another 5.4 million

tons of limestone annually.

A trucking company official knowledgeable about the local market credibly testified that Vulcan and Martin Marietta had a “chokehold” on the limestone aggregate market in the Shelby County area.

And the existing quarries had unused capacity. Vulcan’s Calera quarry,

which produced 3.1 million tons of limestone in 2017, typically could sell

only 85% of what it could produce. Vulcan’s Childersburg, Alabama,

quarry, 12 miles from the Ranch Springs Property, was one of Vulcan’s

three worst performing quarries in the United States. Nationwide, Vulcan reported that it was operating at 55% to 60% of capacity in 2015 and

“well below full capacity” in 2016.

IX.

Preparing for and Marketing the SCE Transaction

In January 2017 Bob Lewis and Mr. Rudakas executed the initial

operating agreement for Ranch Springs, for which they served as the

original managers. On August 22, 2017, Mr. Rudakas, acting on behalf

of Ranch Springs, engaged James Freeman and Ricky Novak, through

several entities they controlled, to assist in implementing an SCE transaction involving the Ranch Springs Property.

Messrs. Freeman and Novak were the managing partners of the

Strategic Group of Companies, which included Strategic Capital Partners, LLC (SCP), and Strategic Fund Manager, LLC (Strategic Fund).

They were in the business of arranging and helping to market SCE

transactions, performing functions commonly regarded as being

performed by “promoters.” 9 Messrs. Freeman and Novak were also registered principals of Bridge Capital Associates (Bridge Capital).

The August 2017 engagement letter stated that SCP and Bridge

Capital would offer services to Ranch Springs in three phases. During

Phase 1 SCP would determine the “minimum equity capital” to be raised

from investors and the “estimated net proceeds” that the partnership

would receive after payment of promoters’ fees and transaction costs.

These amounts would be shown in a schedule captioned “Estimated

Sources and Uses of Funds,” a standard template SCP used for its SCE

deals. After reviewing these numbers, Ranch Springs would decide

whether to move to Phase 2, during which SCP and Bridge Capital

would develop a strategy for marketing the transaction and drafting a

private placement memorandum (PPM) for circulation to potential investors. Phase 3 would cover the period after the easement was granted.

The promoters recommended an ownership structure that is common to many SCE transactions. Ranch Springs, which owned the Ranch

Springs Property, would serve as the Property Company or “PropCo.” It

would eventually be owned by an Investment Company or “InvestCo,”

and units in the InvestCo would be marketed to investors. The PropCo

would place a conservation easement on the property, and the investors

would then receive, through the InvestCo, pro rata shares of the tax deduction that Ranch Springs claimed for the easement. On August 23,

2017, Ranch Springs Investors (RSI), a Georgia LLC, was organized as

the InvestCo, with Strategic Fund (controlled by Messrs. Freeman and

Novak) as its manager.

On August 25, 2017, Mr. Rudakas engaged Mr. Clark to perform

an appraisal for a proposed conservation easement on the Ranch Springs

Property. Mr. Clark had already agreed to prepare appraisals for three

other proposed conservation easements in Harpersville, all on properties

owned by the Lewis brothers and/or Mr. Rudakas. For each project AFI

had performed (or was expected to perform) a mining feasibility study,

which Mr. Clark would use as the basis for his appraisal.

9 “Promoter” is sometimes viewed as a loaded term in the tax world because of

the penalty imposed by section 6700(a) for “promoting abusive tax shelters.” In this

Opinion we use the term “promoter” in its ordinary sense, making no determination as

to whether the activities of Messrs. Freeman and Novak, or of the entities they managed, would subject them to a civil penalty under section 6700(a), a question that is

not before us.

On November 12, 2017, Mr. Novak prepared an “investor allocations” spreadsheet for the InvestCo. This document was intended to

track the number of units purchased by investors and the tax benefits

each would receive. Even though Mr. Clark had not yet supplied a preliminary appraisal, this spreadsheet showed the “appraised value” of the

PropCo (Ranch Springs) as $26.7 million.

On November 14, 2017, Mr. Novak sent emails to 60+ potential

investors, attaching a 2-page “offering summary.” It estimated that the

Ranch Springs SCE transaction would produce a $26.27 million charitable contribution deduction, yielding investors a deduction in excess of

$4 for every $1 invested. The offering summary included a “case study”

showing how investors could “mitigate [their] effective tax rate and tax

payments.” Neither the email nor the offering summary mentioned any

benefits that might accrue by pursuing a strategy other than a conservation easement.

On November 20, 2017, Mr. Novak emailed employees at Bennett

Thrasher (BT), the accounting firm engaged to prepare Ranch Springs’

tax returns. BT was concurrently proposing year-end SCE deals to its

clients. Mr. Novak informed BT that the Ranch Springs deal would be

priced at $30,000 per unit and would generate a total charitable contribution deduction of $26.27 million. The offering would yield a “total

capital raise” of $5.7 million and would offer investors a deduction-toinvestment ratio of 4.25 to 1.

Mr. Novak asked BT whether he was “correct in assuming [that]

the total BT client needs will be similar to last year.” Mr. Novak indicated that he would “reduce the BT allocation in Ranch Springs to

30 units”—i.e., to $900,000—for the time being. But he noted that the

promoters had 3 other SCE deals expected to close by year-end 2017 and

would give BT “bigger allocations in the other 3” if BT had enough demand from its clients.

SCP and Bridge Capital prepared a confidential PPM dated November 30, 2017, offering 180.5 class A membership units in RSI (the

InvestCo) at $30,000 per unit. The PPM explained that RSI would use

the funds thus raised to purchase units in Ranch Springs (the PropCo).

RSI’s manager would then recommend to investors whether the partnership should place a conservation easement on the Ranch Springs

Property (the “conservation strategy”) or develop it as a limestone

quarry (the “investment strategy”). Assuming that investors voted for

the conservation strategy—as if there were any doubt about this—the

class A units would be allocated a charitable contribution deduction of

$24,035,537, or $4.44 for every $1 invested.

Feasibility Study and Appraisal

The PPM included an excerpt from a November 29, 2017, “restricted appraisal report” prepared by Mr. Clark. In this report Mr.

Clark incorrectly stated that “[t]here have been no sales or transfers of

the property in the last three years.” He asserted that the HBU of the

Ranch Springs Property was a limestone quarry. In positing this HBU,

he made the “extraordinary assumption” that “all necessary permits (including those related to zoning) could be obtained to operate a mine on

the property.”

Asserting that no sales of comparable properties existed, Mr.

Clark opined that the “before value” of the Ranch Springs Property

should be determined using the income approach. The version of the

income approach he used is often called the “owner-operator method.”

Under this method, the pre-easement value of the land is determined by

discounting to present value the cashflows an owner-operator supposedly could derive from conducting a limestone mining business on the

property. Mr. Clark thus posited that a prospective owner-operator

would pay—for the raw land alone—the entire net present value (NPV)

of the hypothetical mining business.

In the case of mineral property, the income approach can also be

implemented by using the “royalty income method.” This method posits

that the landowner would lease the land to a mine operator, then determines the land’s pre-easement value by calculating the discounted present value of the royalty income the landowner might receive from the

operator. Witnesses from Vulcan credibly testified that Vulcan typically

leases mineral property rather than buying it outright. And they indicated that, for aggregates, Vulcan on average pays a royalty of 5% or

less, computed on the value of production f.o.b. (free on board) mine. 10

Mr. Clark admitted that “[c]alculating the present value [of the

Ranch Springs Property] using the Royalty Income [method] would result in a substantially lower fair market value . . . , perhaps 1/10th or

10 Witnesses from Vulcan explained that an outright purchase of raw land—

commonly called a “greenfield site”—typically requires the mine operator to incur significant debt, which can be undesirable from a balance-sheet perspective. By leasing

the land instead, the operator avoids encumbering its balance sheet and incurs royalty

expenses that can be written off concurrently with the receipt of mining income.

less of the value obtained” using the owner-operator method. But he

asserted that the owner-operator method “is appropriate for this project

due to the owner [i.e., the Lewis brothers] living within close vicinity to

the property, as well as having the ability to operate the mine, rather

than having to hire someone to do so.”

Mr. Clark constructed a discounted cashflow (DCF) spreadsheet

to calculate the NPV of operating a limestone mining business on the

property for 35 years. Assuming incorrectly that the Ranch Springs

Property comprised 103 acres, he asserted that its “before value”—that

is, its value before the granting of a conservation easement—was

$26,034,064. Subtracting from the property’s “before value” its assumed

“after value” ($206,000), Mr. Clark determined a rounded value of

$25,828,000 for the easement.

Mr. Clark premised his appraisal on the “feasibility analysis” for

a limestone quarry prepared by AFI and dated November 9, 2017. This

analysis was based on geological data yielded by AFI’s drilling on the

Sun Valley Tract in December 2016, which consisted of drilling 9 boreholes and 1 corehole. See supra pp. 11–12. David Buss, the principal

author of this report, testified as an expert witness at trial.

Dr. Buss asserted in his report that the Ranch Springs Property

had nearly 23.3 million tons of “proven limestone reserves,” that a

quarry on the property would have a 35-year life, and that 700,000 tons

of limestone could be extracted and sold annually after a brief ramp-up

period. Using a DCF methodology with a 10% discount rate, Dr. Buss’s

model asserted that the NPV of the limestone resources (before taxes,

interest, depreciation, and amortization) was $38.8 million.

Dr. Buss acknowledged that he had prepared similar “feasibility

analyses” for limestone mines on 10 nearby properties in which the

Lewis brothers had invested (or in which they were considering investing). These included Bradford Resources, which Dr. Buss estimated to

have 21.49 tons of recoverable limestone; Tanyard Farms, which he estimated to have 19.23 tons of recoverable limestone; and DeSoto Holdings, which he estimated to have 19.82 tons of recoverable limestone.

See DeSoto Holdings, LLC v. Commissioner, No. 13013-20 (T.C. filed

Nov. 9, 2020). All three properties were within 3 three miles of the

Ranch Springs Property, but Dr. Buss did not take their projected

limestone sales into account when analyzing the market share that a

hypothetical quarry on the Ranch Springs Property might secure. 11

XI.

Closing the Deal

The Ranch Springs offering closed on December 12, 2017, and was

fully subscribed. Sixty-two investors purchased 180.5 class A units in

RSI, enabling the offering to reach its target of $5,415,000 ($30,000 ×

180.5 = $5,415,000). RSI paid $1,560,000 to the Lewis brothers and Yellowhammer for a 94% interest in Ranch Springs. The remaining 6% of

Ranch Springs was held by the Lewis brothers, Yellowhammer, and an

entity controlled by Messrs. Freeman and Novak. That same day Ranch

Springs amended its operating agreement to name RSI as its manager

and TMP.

The next day RSI’s manager, Strategic Fund, notified investors

that it recommended pursuing the conservation strategy. Investors

were instructed to return, within 5 days, their votes in favor of or against

that recommendation. As far as the record reveals, all investors voted

for (or were deemed to have voted for) the conservation strategy.

On December 28, 2017, Ranch Springs granted a conservation

easement over the Ranch Springs Property to Heritage Preservation

Trust, a section 501(c)(3) entity and a “qualified organization” under section 170(h)(1)(B). The deed of easement prohibited commercial development of the property but reserved numerous rights to Ranch Springs,

including the rights to use the property for agricultural, forestry, and

recreational purposes and to build structures within a designated area.

XII.

Tax Return and IRS Examination

Victoria Barry, an accountant at BT, prepared the return for

Ranch Springs’ short tax year ending December 31, 2017. The return

claimed a noncash charitable contribution deduction of $25,814,000 for

the easement. (It also reported a $58,000 deduction for a cash contribution, which the IRS did not challenge.)

11 Notwithstanding the supposed limestone mining potential of the three properties discussed in the text, conservation easements were granted on all of them. See

supra pp. 13–14. These 3 properties were carved from a larger tract, the Merrell Brothers Farm, which the Lewis brothers and Mr. Rudakas purchased in December 2016

and subdivided.

Ranch Springs attached to its return an appraisal by Mr. Clark,

dated April 20, 2018, that valued the easement as of the contribution

date. This appraisal was substantially identical to the “restricted appraisal report” he had prepared on November 29, 2017, except that it

reflected the property’s correct acreage (110 rather than 103 acres).

Subtracting from the property’s assumed “before value” ($26,034,064)

its assumed “after value” ($220,000), Mr. Clark determined a rounded

value of $25,814,000 for the easement.

The IRS selected the return for examination and assigned the

case to Revenue Agent (RA) Timothy Neighbors. At the conclusion of

his examination, RA Neighbors recommended assertion of the 40% penalty for a gross valuation misstatement under section 6662(e) and (h) or

(in the alternative) a 20% accuracy-related penalty for a substantial valuation misstatement, a reportable transaction understatement, negligence, or a substantial understatement of income tax. See §§ 6662(a)

and (b)(1)–(3), (c)–(e), 6662A(b). RA Neighbors’s immediate supervisor

at the time, Supervisory Revenue Agent Gregory Burris, approved these

penalty recommendations. By Order served October 17, 2023, we held

that Mr. Burris’s approval was timely and that the IRS had satisfied the

supervisory approval requirements of section 6751(b)(1).

On March 22, 2021, the IRS issued petitioner a Notice of Final

Partnership Administrative Adjustment (FPAA) disallowing in its entirety the deduction claimed for the conservation easement. The FPAA

determined that Ranch Springs had not established that it made a contribution or gift in 2017 and had otherwise failed to show that it had

satisfied all the requirements of section 170. The FPAA alternatively

determined that, if Ranch Springs had complied with applicable regulatory requirements, it had failed to establish that the value of the easement exceeded zero. The IRS determined a 40% penalty for a gross valuation misstatement and (in the alternative) a 20% penalty under the

provisions of section 6662 mentioned above. Petitioner timely petitioned

for readjustment of partnership items.

XIII. Tax Court Trial

Petitioner’s Experts

Claud Clark

We recognized Mr. Clark as an expert in real estate appraisal.

His direct testimony consisted of a cover letter dated October 24, 2023,

to which he attached a copy of his appraisal dated April 20, 2018. See

supra pp. 24–25, 27.

David Buss

We recognized Dr. Buss as an expert in geologic investigation,

subsurface field investigation, and financial analysis. His direct testimony consisted of a cover letter dated October 27, 2023, to which he attached a copy of the AFI feasibility analysis dated November 9, 2017.

See supra pp. 25–26.

Michael Wick

Michael Wick is a vice president of John T. Boyd Co., a mining

and geological consulting firm. We recognized him as an expert in the

mining industry, quarrying operations, mineral reserves, mineral market analyses, and production and distribution. He was retained to perform “a valuation of the limestone underlying the [Ranch Springs Property].” Like Mr. Clark and Dr. Buss, he employed an owneroperator/DCF model to develop “a going concern valuation . . . for the

site.”

Mr. Wick posited a limestone quarry with a 28-year life. He assumed that the quarry would sell 100,000 tons of limestone in its first

year of operation, ramping up to 511,000 tons in year 5, then increasing

by 1.7% annually (the estimated rate of population growth). Mr. Wick

did not project annual sales of 700,000 tons—the annual volume assumed by Messrs. Buss and Clark—until year 24. Mr. Wick assumed

that the hypothetical quarry, after its 5-year ramp-up period, would capture 6% of the aggregates market in Shelby County and the five surrounding counties. On the basis of these assumptions he determined

the fair market value (FMV) of “the Ranch Springs Property mineral

and associated mining rights” to be $18 million as of December 28, 2017.

Respondent’s Experts

Bart Stryhas

Dr. Stryhas is a geologist with more than 40 years of domestic and

international mining experience. He is employed by SRK Consulting,

Inc. (SRK), which has expertise in a wide range of mineral resource and

engineering disciplines, with offices in 20 countries on 6 continents. He

has audited numerous geologic investigations and exploration projects

and is a member of the American Institute of Professional Geologists.

We recognized Dr. Stryhas as an expert in geology, mineral exploration,

and mineral resource estimation and classification.

Dr. Stryhas’s principal opinion was that the AFI report erred in

classifying the limestone underlying the Ranch Springs Property as a

“proven limestone reserve.” According to Dr. Stryhas, this limestone is

properly classified as an “inferred mineral resource,” viz., a mineral resource whose quantity and quality is estimated on the basis of limited

geological evidence and sampling. As compared to a “proven mineral

reserve,” an “inferred mineral resource” inspires a relatively low level of

geological confidence.

Neal Rigby

Dr. Rigby is a mining engineer with 49 years of experience in the

international mining industry. He was a founding partner of SRK’s U.K.

division and served as SRK’s global chairman for 15 years. He is a member of the Institute of Materials, Mining, and Metallurgy, and the American Institute of Mining, Metallurgical, and Petroleum Engineers. We

recognized him as an expert in mineral evaluations, mineral financing,

and mineral reporting.

Dr. Rigby agreed with Dr. Stryhas that, given the limited exploratory work AFI had done, the limestone beneath the Ranch Springs

Property could be classified only as an “inferred mineral resource.” “Inferred resources,” he explained, “do not have the completed technical

work to demonstrate that the project will be viable.” “To be considered

a viable mining project,” in his view, “the technical work to support Reserves must be completed to the prefeasibility or feasibility level.”

Dr. Rigby opined that AFI’s technical work—analyzing data from

9 boreholes and one corehole drilled to a depth of 225 feet—did not establish that the Ranch Springs Property could feasibly be exploited as a

limestone quarry. Alleging numerous deficiencies in the AFI report, he

concluded that “the Ranch Springs project is simply too early stage and

the knowledge base too low upon which to base a quarry design and development plan other than on a conceptual basis.” 12

12 Seeking to supplement the modest drilling work AFI had done in 2016, petitioner commissioned additional drilling on the Ranch Springs Property in April 2024.

Petitioner sought to call Jim Stroud as a witness to testify about the results of that

drilling. By Order served June 13, 2024, we granted respondent’s Motion in Limine to

Andrew Sheppard

Mr. Sheppard has been a licensed commercial real estate appraiser in Alabama and elsewhere for 26 years. During his career he

has appraised 58 mineral properties at various stages of development

(including proposed, operating, and depleted mines). He holds the MAI

designation from the Appraisal Institute. We recognized him as an expert in real estate appraisal.

Mr. Sheppard opined that the Ranch Springs Property should be

characterized, for valuation purposes, as an “exploratory stage mineral

property.” Citing valuation texts and peer-reviewed articles, Mr. Sheppard concluded that the appropriate methodology for determining the

FMV of such property is the sales comparison approach. He searched

for transactions involving similarly sized parcels, where the parties

knew that minerals were present, but where no entitlements (such as

required zoning and permits) had yet been obtained that would allow

the minerals to be mined.

Mr. Sheppard selected three comparable sales. The first was the

Carpenters’ sale of the subject property to Ranch Springs for $6,500 per

acre in December 2016. The second was the sale of a 74-acre parcel in

Calera for $6,466 per acre in December 2016. Mr. Sheppard confirmed

that there was limestone on this property, that it was located in a “heavily active” quarrying market, and that exploratory drilling had been conducted on the property before the sale. The third comparable was the

sale of a 197-acre parcel in Chelsea, Shelby County, for $6,738 per acre

in June 2016. This property, like the other two, was on a major highway

and had visible limestone outcroppings. Rather than using the property

for mining, the buyer decided to develop it into a residential subdivision.

After making appropriate adjustments to these sale prices, Mr.

Sheppard concluded that the “before value” of the Ranch Springs Property was $720,500, or $6,550 per acre. Again employing the comparable

sales approach, he determined an “after value” of $385,000 for the property, or $3,050 per acre. By stipulation in its Posttrial Brief, petitioner

exclude Mr. Stroud’s testimony. His proposed report, dated May 17, 2024, consisted of

expert testimony, and the Court had set October 27, 2023, as the deadline to exchange

and lodge with the Court opening expert reports. Because the Stroud report was not

timely exchanged with respondent, and because it failed in other respects to comply

with the requirements of Rule 143(g) governing expert witness reports, we excluded it

from evidence. And because Mr. Stroud’s report consisted of expert testimony, we declined to let him testify at trial as a fact witness.

accepts the “after value” determined by Mr. Sheppard. Subtracting the

“after value” from the “before value,” Mr. Sheppard concluded a value of

$335,500 for the easement.

OPINION

Burden of Proof

The IRS’s determinations in a notice of deficiency or an FPAA are

generally presumed correct, though the taxpayer can rebut this presumption. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);

Republic Plaza Props. P’ship v. Commissioner, 107 T.C. 94, 104 (1996).

Deductions are a matter of legislative grace, and taxpayers generally

bear the burden of proving their entitlement to the deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Section 7491 provides that the burden of proof on a factual issue

may shift to the Commissioner if the taxpayer satisfies specified conditions. Among these conditions are that the taxpayer must have “introduce[d] credible evidence with respect to [that] factual issue,”

§ 7491(a)(1), and must have “complied with the requirements under this

title to substantiate any item,” § 7491(a)(2)(A). Petitioner has not satisfied these requirements with respect to any factual issue that has salience in deciding the questions presented. The burden of proof thus remains on petitioner.

II.

Qualified Appraisal

Section 170(f)(11) disallows a deduction for certain noncash charitable contributions unless specified substantiation and documentation

requirements are met. In the case of a contribution of property valued

in excess of $500,000, the taxpayer must obtain and attach to his return

“a qualified appraisal of such property.” § 170(f)(11)(D). An appraisal

is “qualified” if it is “conducted by a qualified appraiser in accordance

with generally accepted appraisal standards” and meets requirements

set forth in “regulations or other guidance prescribed by the Secretary.”

§ 170(f)(11)(E)(i).

To be a “qualified appraiser,” an individual must have “earned an

appraisal designation from a recognized professional appraiser organization or ha[ve] otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary.”

§ 170(f)(11)(E)(ii)(I). The individual must “regularly perform[] appraisals for which [he] receives compensation” and meet “such other

requirements as may be

§ 170(f)(11)(E)(ii)(II) and (III).

prescribed

the

Secretary.”

Respondent agrees that Mr. Clark met most of the requirements

listed above at the time he prepared the appraisal attached to Ranch

Springs’ 2017 return. For two reasons, however, respondent urges that

the appraisal was not a “qualified appraisal” prepared by a “qualified

appraiser.” We reject both arguments. 13

First, respondent urges that Mr. Clark neglected to follow the

Uniform Standards of Professional Appraisal Practice (USPAP) when

preparing his appraisal. We have recently held that an appraiser’s failure to strictly follow USPAP does not render his appraisal per se “nonqualified.” Rather, it is simply a factor to be considered in assessing its

persuasiveness. See Seabrook Prop., LLC v. Commissioner, T.C. Memo.

2025-6, at *31–32; J L Minerals, T.C. Memo. 2024-93, at *36–37;

Buckelew Farm, LLC v. Commissioner, T.C. Memo. 2024-52, at *48–49;

Savannah Shoals, LLC v. Commissioner, T.C. Memo. 2024-35, at *27

n.25. We reach the same conclusion here.

Second, respondent contends that Mr. Clark was not a “qualified

appraiser” by virtue of the “Exception” set forth in Treasury Regulation

§ 1.170A-13(c)(5)(ii). It provides that an individual is not a qualified

appraiser with respect to a particular donation “if the donor had

knowledge of facts that would cause a reasonable person to expect the

appraiser falsely to overstate the value of the donated property.” This

will be true, for example, if “the donor and the appraiser make an agreement concerning the amount at which the property will be valued and

the donor knows that such amount exceeds the fair market value of the

property.” Ibid.; see Oconee Landing Prop., LLC v. Commissioner, T.C.

Memo. 2024-25, at *39–45 (finding that an appraiser was not “qualified”

by virtue of this regulation), supplemented by T.C. Memo. 2024-73.

As we explain below, we find that that Mr. Clark wildly overvalued the Ranch Springs Property and that his methodology was deficient

in many respects. But we are not convinced that Ranch Springs’ principals were aware of any facts suggesting that Mr. Clark would “falsely

. . . overstate” the value of the easement, which requires a showing of

13 Failure to secure a “qualified appraisal” is not fatal to the allowance of a

charitable contribution deduction “if it is shown that the failure to meet such requirement[] is due to reasonable cause and not to willful neglect.” § 170(f)(11)(A)(ii)(II).

Given our disposition, we need not decide whether petitioner could satisfy this test.

deception or collusion. See Oconee Landing, T.C. Memo. 2024-25,

at *44–45. The trial produced little or no evidence of either.

Mr. Clark based his appraisal largely on AFI’s “feasibility analysis,” which estimated the value of the limestone resources on the property at $38.8 million. The Lewis brothers knew that Mr. Clark was relying on AFI’s analysis. There is no evidence that the Lewis brothers

were aware of facts suggesting that AFI had falsely overstated the value

of the minerals. Indeed, the Lewis brothers had received a geological

report from Bhate several years previously, which estimated that the

golf course across the road would be worth $41 million if developed as a

limestone mine. See supra pp. 7–8.

In short, in the absence of evidence that Ranch Springs’ principals

believed AFI’s analysis to be false, it is difficult to charge them with

knowledge that Mr. Clark’s appraisal was false, since Mr. Clark derived

the central components of his appraisal directly from AFI’s analysis. For

purposes of this case, we thus conclude that Mr. Clark was a “qualified

appraiser” and that the appraisal attached to Ranch Springs’ 2017 return was a “qualified appraisal.”

III.

Valuation

Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a gift of property other than money, the amount of the contribution is generally equal

to the FMV of the property at the time of the gift. See Treas. Reg.

§ 1.170A-1(a), (c)(1). The regulations have provided, for a very long time,

that the FMV of property for charitable contribution purposes is “the

price at which the property would change hands between a willing buyer

and a willing seller, neither being under any compulsion to buy or sell

and both having reasonable knowledge of relevant facts.” Id. para.

(c)(2). Valuation is not a precise science, and the value of property on a

given date is a question of fact to be resolved on the basis of the entire

record. See Kaplan v. Commissioner, 43 T.C. 663, 665 (1965).

The FMV of real property should reflect its HBU on the valuation

date. See Mitchell v. United States, 267 U.S. 341, 344–45 (1925); Stanley

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

§ 1.170A-14(h)(3)(i) and (ii). A property’s HBU is the most profitable,

legally permissible, use for which the property is adaptable and needed,

or likely to be needed in the reasonably near future. Olson v. United

States, 292 U.S. 246, 255 (1934); Symington v. Commissioner, 87 T.C.

892, 897 (1986). If different from the current use, a proposed HBU thus

requires both “closeness in time” and “reasonable probability.” Hilborn

v. Commissioner, 85 T.C. 677, 689 (1985).

To support their positions regarding valuation the parties retained experts who testified at trial. We assess an expert’s opinion in

light of his or her qualifications and the evidence in the record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986). When experts offer competing opinions, we weight them by examining the factors the experts

considered in reaching their conclusions. See Casey v. Commissioner, 38

T.C. 357, 381 (1962).

We are not bound by an expert opinion that we find contrary to

our judgment. Parker, 86 T.C. at 561. We may accept an expert’s opinion in toto or accept aspects of his or her testimony that we find reliable.

See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Boltar,

L.L.C. v. Commissioner, 136 T.C. 326, 333–40 (2011) (rejecting expert

opinion that disregards relevant facts). And we may determine FMV

from our own examination of the record evidence. See Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.

“Market prices” typically do not exist for conservation easements.

See Symington, 87 T.C. at 895; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60, at *30. For that reason, courts usually

value easements indirectly using a “before and after” approach, seeking

to determine the reduction in property value attributable to the easement. See Treas. Reg. § 1.170A-14(h)(3)(i); cf. Browning v. Commissioner, 109 T.C. 303, 320–24 (1997). Under that approach, the value of

the easement is deemed equal to the FMV of the real estate before the

easement was granted (“before value”), minus the FMV of the real estate

as encumbered by the easement (“after value”).

“Before Value” of the Ranch Springs Property

Prior Transactions Involving the Property

“The best evidence of a property’s FMV is the price at which it

changed hands in an arm’s-length transaction reasonably close in time

to the valuation date.” Excelsior Aggregates, T.C. Memo. 2024-60,

at *31; see Estate of Spruill v. Commissioner, 88 T.C. 1197, 1233 (1987)

(“[T]he price set by a freely negotiated agreement made reasonably close

to the valuation date is persuasive evidence of fair market value.” (citing

Ambassador Apartments, Inc. v. Commissioner, 50 T.C. 236, 244 (1968),

aff’d per curiam, 406 F.2d 288 (2d Cir. 1969))); Estate of Newberger v.

Commissioner, T.C. Memo. 2015-246, 110 T.C.M. (CCH) 615, 616–17

(observing that no evidence is more probative of a donated property’s

FMV than its direct sale price). For example, in Corning Place Ohio,

LLC v. Commissioner, T.C. Memo. 2024-72, at *28–29, we found that the

most persuasive evidence of a property’s FMV was its actual sale price

15 months before the contribution. Accord, e.g., Wortmann v. Commissioner, T.C. Memo. 2005-227, 90 T.C.M. (CCH) 336, 339–40 (finding that

the most persuasive evidence of the property’s FMV was its actual sale

price 17 months before the contribution).

The record here includes persuasive evidence of this sort. The

110-acre Ranch Springs Property is largely coterminous with the

105-acre parcel the Carpenters purchased in January 2014. They purchased that parcel (through Sun Valley) for $517,500, or $4,929 per acre.

In July 2016 Ms. Naugle, a realtor representing the Carpenters, listed

the 105-acre parcel for sale for $738,500, or $7,013 per acre. On December 6, 2016, Red Mountain agreed to purchase 122 acres of the Sun Valley Tract for $793,000, or $6,500 per acre. The contract was later revised

to reduce the acreage to 110 acres, with Ranch Springs substituted as

the buyer, while retaining the same per-acre price of $6,500. On December 22, 2016, Ranch Springs purchased the 110-acre parcel from Sun

Valley for $715,000, or $6,500 per acre. 14

Petitioner does not dispute that the Carpenters and Ranch

Springs were unrelated parties dealing at arm’s length. But it asserts

that $6,500 per acre—the agreed-upon sale price—was not “the price at

which the property would change hands between a willing buyer and a

willing seller, neither being under any compulsion to buy or sell and both

having reasonable knowledge of relevant facts.” Treas. Reg. § 1.170A1(c)(2). First, it contends that the Carpenters were not “willing sellers,”

having assertedly acted under a “compulsion to sell.” In effect, petitioner asserts that the December 2016 sale was a “distress sale.” Second, petitioner contends that the Carpenters lacked “reasonable

knowledge of relevant facts” because they did not know the exact quality

and quantity of the limestone underneath their property.

Mr. Carpenter testified very credibly at trial. He explained that

he and his wife decided to sell part of the Sun Valley Tract to raise cash

to pay legal fees he had incurred in unrelated litigation. The couple had

14 Mr. Clark in his appraisal took no account of this prior transaction, erroneously stating that “[t]here have been no sales or transfers of the property in the last

three years.”

other assets they could have accessed for this purpose: Mr. Carpenter

had an IRA, and his wife had a sizable annuity investment. But an IRA

distribution would have been taxed in full as ordinary income, whereas

a sale of real estate would generate tax only on the gain. And Mr. Carpenter was reluctant to suggest liquidation of his wife’s annuity to satisfy an obligation arising from his personal business activities.

Contrary to petitioner’s view, these facts do not show that the

Carpenters were under a “compulsion to sell.” People often sell assets

to raise cash to satisfy their desires or meet their obligations. They may

liquidate assets—stocks, bonds, mutual funds, or real estate—to pay for

their children’s education, to buy a new home, to pay medical bills, or to

treat their family to an extended vacation. Selling an asset for such a

purpose provides no evidence that the seller is under a “compulsion to

sell.”

Sellers like the Carpenters typically attempt to raise cash in a

tax-efficient manner. If a couple owns two assets worth $1 million, one

with a basis of zero and the other with a basis of $800,000, they will

often choose to sell the latter to minimize the tax bite. That is exactly

what the Carpenters did—after consulting their tax adviser—by selling

a portion of the Sun Valley Tract at a modest gain instead of taking a

large IRA distribution. After selling the 110 acres to Ranch Springs, the

Carpenters retained 83 acres on which they continued to reside.

The December 2016 sale bore none of the earmarks of a “distress

sale.” Distress sales commonly occur when sellers are forced to sell when

they do not want to sell, e.g., because market conditions are highly adverse or because they would incur a large loss. See, e.g., Estate of DeBie

v. Commissioner, 56 T.C. 876, 894–95 (1971) (finding a distress sale

where the taxpayer did not try to sell the property “until it only had

30 days in which to vacate its premises”); Adams v. Commissioner, T.C.

Memo. 1995-142, 69 T.C.M. (CCH) 2297, 2299 (finding a distress sale

where the taxpayer was unemployed, two years in arrears in property

taxes, and behind on mortgage payments).

Petitioner has supplied no evidence that the real estate market in

Shelby County was “distressed” at year-end 2016. To the contrary, petitioner asserts that the market for limestone aggregate was booming in

part because real estate conditions were so favorable. And far from taking a loss, the Carpenters achieved a reasonable gain. They purchased

the 105-acre parcel for $4,912 an acre in January 2014, and they sold

the 110-acre parcel for $6,500 an acre in December 2016. They thus

realized a gain of $1,588 per acre, or roughly 32%, on an asset they had

held for three years. That is not an earth-shattering profit, but it supplies no evidence that the sale was a “distress sale.”

Four other facts confirm our conclusion that the Carpenters did

not act under any “compulsion to sell.” First, Mr. Carpenter testified

firmly and credibly that the couple would not have sold the Sun Valley

Tract if it meant taking a loss. His wife was adamant about that. A

person who would refuse to sell if it entailed taking a loss can hardly be

described as acting under a “compulsion to sell.”

Second, Mr. Carpenter credibly testified (and his conduct showed)

that he would have walked away from the transaction if raising cash

from the Sun Valley Tract required that he participate as a partner in

the SCE transaction. He consulted the lawyer to whom he owed the

legal fees about this, and they agreed that participation as a partner was

risky and ill advised. The Carpenters understood that their refusal to

participate was disappointing to the promoters and that this could reduce the price Ranch Springs was willing to pay. A party who is willing

to accept a lower price, rather than submit to unappealing conditions

attached to a higher price, cannot be described as acting under a “compulsion to sell.”

Third, the Carpenters negotiated with the Lewis brothers for

6 months regarding a possible sale. The Carpenters broke off discussions in September 2016, not wishing to be part of an SCE transaction.

It was Mr. Rudakas (not they) who reopened negotiations in November.

This temporal pattern hardly suggests that the Carpenters were desperate to unload the property. See Redstone v. Commissioner, T.C. Memo.

2015-237, 110 T.C.M. (CCH) 564, 573 (finding no distressed sale where

leisurely pace of negotiations suggested a lack of compulsion to sell).

Finally, the $6,500 per-acre price the Carpenters achieved substantially exceeded the per-acre prices nearby residents achieved when

selling land to entities controlled by the Lewis brothers. In December

2015 Locust Creek purchased a 177-acre tract in Vincent for $4,661 per

acre. In December 2016 Bradford Resources purchased a 151-acre tract

in Harpersville for $4,294 per acre. In December 2016 Tanyard Farms

purchased a 138-acre tract in Harpersville for $4,049 per acre. And in

December 2016 Sunnydale Springs purchased a 190-acre tract in

Harpersville for $4,474 per acre. See supra pp. 13–14.

The four tracts listed above consisted of agricultural land lying

within 3 miles of the Ranch Springs Property. The Lewis brothers purchased all four tracts for their supposed limestone mining potential. The

average of the acquisition prices, $4,370, was 32% lower than the price

the Carpenters achieved for their 110-acre parcel. And the median acquisition price of $4,253 per acre for large parcels of vacant land in

Shelby County during 2014–20 was 35% lower than the price the Carpenters achieved for their 110-acre parcel. Far from suggesting that the

Carpenters made a “distress sale,” this evidence suggests that they were

rather shrewd negotiators. See Lightman v. Commissioner, T.C. Memo.

1985-315, 50 T.C.M. (CCH) 266, 269–70 (finding no distressed sale

where prices received were consistent with prices obtained for similar

property during relevant period).

Petitioner next contends that the Carpenters lacked “reasonable

knowledge of relevant facts” because they did not know the exact quality

and quantity of the limestone underlying the Sun Valley Tract. AFI

conducted exploratory drilling on the property for a week in December

2016. Although the Lewis brothers did not share the results of that

drilling with the Carpenters, the Carpenters definitely knew that the

property had (or was alleged to have) significant potential for limestone

mining:

•

Limestone outcroppings were plainly visible at multiple locations

on the Sun Valley Tract. Mr. Carpenter assiduously maintained

the property, and he frequently encountered chunks of limestone

when using his agricultural equipment.

•

During the second meeting to discuss a proposed sale, Bob Lewis,

an experienced coal mining executive, brought out a geological

map and showed Mr. Carpenter the seams of limestone that underlay the property at various depths.

•

Bob Lewis and Mr. Rudakas assured the Carpenters that the

property could profitably be developed as a limestone quarry. Mr.

Carpenter credibly testified that Mr. Lewis emphasized “the

value of the limestone” during their meeting. Mr. Lewis indicated

that he intended to speak with (or had already spoken with) the

mayor of Harpersville about opening a limestone quarry.

•

Mr. Rudakas insisted that the Carpenters execute, and they did

execute on December 7, 2016, a “drilling access agreement” authorizing exploratory drilling on portions of the Sun Valley Tract.

Mr. Rudakas made clear that the sale could not close until the

drilling had been completed and its results analyzed. From this

condition, the Carpenters could logically infer that Ranch Springs

would not purchase the property unless the Lewis brothers regarded the drilling results as promising with respect to the proposed limestone quarry.

•

The parties had extensive discussions regarding the exact number of acres that would be purchased. Mr. Carpenter understood

that the acreage purchased needed to be sufficient to satisfy

quarry requirements. Mr. Carpenter understood, in other words,

that the Lewis brothers had gotten to the point of gauging the

exact size of the proposed quarry. This fact, coupled with the fact

that they had met with the mayor, suggested that they were serious about opening a limestone mine.

In assessing the Carpenters’ “knowledge of relevant facts,” we

consider it important that the promoters, during the 6-month negotiation period, were not seeking to hide the limestone potential of the Sun

Valley Tract. Quite the contrary: They repeatedly emphasized the

Tract’s limestone potential, hoping to persuade Mr. Carpenter to participate as a partner in the SCE transaction. This is not a case where a

clueless seller is hoodwinked by a wily buyer into selling his land at a

below-market price.

Treasury Regulation § 1.170A-1(c)(2) does not require that the

buyer and seller have perfect knowledge of all conceivable facts. It requires only that they have “reasonable knowledge of relevant facts.” The

promoters represented to the Carpenters that the Sun Valley Tract

could be developed into a profitable limestone quarry. That being so,

petitioner is in a poor position to contend that the Carpenters, in agreeing to sell the land for $6,500 per acre, lacked “reasonable knowledge of

relevant facts.”

For these reasons, we conclude that the December 2016 sale was

a transaction between “a willing buyer and a willing seller, neither being

under any compulsion to buy or sell and both having reasonable

knowledge of relevant facts.” Ibid. The Carpenters and Ranch Springs

were unrelated parties dealing at arm’s length. They negotiated for

6 months regarding the transaction. And the transaction occurred reasonably close in time to the valuation date (specifically, one year and six

days before the easement was granted). We accordingly find that the

price at which the 110 acres changed hands in December 2016—$6,500

per acre—provides very strong evidence as to the FMV of the Ranch

Springs Property on the valuation date. See Corning Place, T.C. Memo.

2024-72, at *29–30 (concluding that recent sale of subject property was

the “best evidence” of its value); Excelsior Aggregates, T.C. Memo. 202460, at *32 (same).

Other Valuation Methods

In the absence of actual transactions involving the subject property, courts typically consider one or more of three approaches to determine the property’s FMV: (1) the market approach, (2) the income approach, and (3) an asset-based approach. See Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff’d in part, vacated in part, and

remanded on another issue sub nom. JPMorgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006). In this case we consider these methods as providing a check on (or confirmation of) the $6,500 per-acre value

indicated by the price Ranch Springs paid to acquire the 110-acre parcel.

Cf. Corning Place, T.C. Memo. 2024-72, at *30–31.

In the case of vacant, unimproved property, the market approach—often called the “comparable sales” or “sales comparison”

method—is “generally the most reliable method of valuation.” Estate of

Spruill, 88 T.C. at 1229 n.24 (quoting Estate of Rabe v. Commissioner,

T.C. Memo. 1975-26, 34 T.C.M. (CCH) 117, 119, aff’d, 566 F.2d 1183 (9th

Cir. 1977) (unpublished table decision)). The comparable sales method

determines FMV by considering the sale prices realized for similar properties sold in arm’s-length transactions near in time to the valuation

date. See ibid.; Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1,

19 (1979). Because no two properties are ever identical, the appraiser

must make adjustments to account for differences between the properties (e.g., parcel size and location) and terms of the respective transactions (e.g., proximity to valuation date and conditions of sale). Wolfsen

Land & Cattle Co., 72 T.C. at 19.

The income method determines FMV by discounting to present

value the expected future cashflows from the property. See, e.g., Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 327 (2013); Marine v.

Commissioner, 92 T.C. 958, 983 (1989), aff’d, 921 F.2d 280 (9th Cir.

1991) (unpublished table decision). Income-based methods are generally disfavored when valuing vacant land that has no income-producing

history. See, e.g., Chapman Glen Ltd., 140 T.C. at 327; Whitehouse Hotel

Ltd. P’ship v. Commissioner, 139 T.C. 304, 324–25 (2012), supplementing 131 T.C. 112 (2008), aff’d in part, vacated in part and remanded, 755

F.3d 236 (5th Cir. 2014). That is because the absence of a financial track

record makes an income-based method inherently speculative and unreliable.

Highest and Best Use

The choice of valuation method is influenced in part by the HBU

of the subject property. We have defined HBU as “[t]he reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that

results in the highest value.” Whitehouse Hotel, 139 T.C. at 331 (quoting

Appraisal Institute, The Appraisal of Real Estate 277–78 (13th ed.

2008)). In short, to be a property’s HBU, a proposed use must be (1) legally permissible, (2) physically possible, (3) financially feasible, and

(4) maximally productive. See Buckelew Farm, T.C. Memo. 2024-52,

at *52.

Because property owners have an economic incentive to put their

land to its most productive use, a property’s HBU is presumed to be its

current use absent proof to the contrary. United States v. Buhler, 305

F.2d 319, 328 (5th Cir. 1962); Mountanos v. Commissioner, T.C. Memo.

2013-138, 105 T.C.M. (CCH) 1818, 1819, supplemented by T.C. Memo.

2014-38, aff’d, 651 F. App’x 592 (9th Cir. 2016). To establish an HBU

different from the current use, a taxpayer must demonstrate both the

“closeness in time” and the “reasonable probability” of the proposed use.

Hilborn, 85 T.C. at 689. Proposed uses that “depend upon events or

combinations of occurrences which, while within the realm of possibility,

are not fairly shown to be reasonably probable,” are excluded from consideration. Olson, 292 U.S. at 257. In a case such as this, our inquiry

entails “an objective assessment of how immediate or remote the likelihood is that the property, absent the [conservation] restriction, would in

fact be developed, as well as any effect from zoning . . . laws that already

restrict the property’s potential highest and best use.” Treas. Reg.

§ 1.170A-14(h)(3)(ii).

The HBU concept “is an element in the determination of fair market value.” Boltar, 136 T.C. at 336. But it is simply one element. It

does not supersede or eliminate the most important prerequisite in determining FMV, namely, that “a hypothetical willing buyer would

purchase the subject property for the indicated value.” Ibid.; see Corning Place, T.C. Memo. 2024-72, at *41; Treas. Reg. § 1.170A-1(c)(2). 15

“Legally Permissible”

The Ranch Springs Property is in a rural area, surrounded by agricultural and residential land. It was zoned A–1 Agricultural, a zoning

classification that permitted only farming and low-density residential

use (i.e., homes on one-acre lots). The property was used as pastureland

when Ranch Springs purchased it. Agricultural and light residential

use was thus the property’s presumptive HBU in December 2017.

Respondent’s expert Mr. Sheppard considered a variety of possible other uses, all of which would have required rezoning. These included higher density residential development, commercial or light industrial use, use as a landfill or large-scale solar array, and use as a

limestone quarry. After considering market factors and obstacles to rezoning, Mr. Sheppard concluded that the HBU of the Ranch Springs

Property was a continuation of its existing use, i.e., “agricultural, lowdensity residential, or passive uses as currently zoned.” He used the

term “passive uses” to refer to recreational uses (such as hiking, hunting, or fishing) that required no development.

Petitioner contends that the HBU of the Ranch Springs Property

in December 2017 was as a limestone quarry. We reject that contention.

Because the property was zoned A–1 Agricultural, a quarry was not a

legally permissible use. Petitioner submitted no credible evidence to establish a “reasonable probability” that Harpersville would approve rezoning of the Ranch Springs Property to permit its use for mining.

Ranch Springs owned the tract for an entire year before granting

the easement. But it did not submit a rezoning application or take any

other step toward securing the zoning change, special exception, and

ADEM permits that would be required to conduct mining on the land.

We find that the Lewis brothers neglected to take these seemingly

15 Petitioner errs in suggesting that the central question in this case concerns

the “HBU value” of the property before the easement was granted. The central question concerns the FMV of the property at that time, i.e., the price that a willing buyer

would pay a willing seller for the land, both acting without compulsion and having

reasonable knowledge of relevant facts. See Treas. Reg. § 1.170A-1(c)(2). As stated in

the text, HBU is one factor in determining FMV, but it does not supersede the most

important factor, namely, that “a hypothetical willing buyer would purchase the subject property for the indicated value.” Boltar, 136 T.C. at 336.

obvious steps because (1) they feared that a rezoning application would

trigger strong neighborhood opposition and (2) they believed these steps

would be a waste of money because they had no intention of ever operating a limestone mine on the Ranch Springs Property.

In urging that rezoning was reasonably probable, petitioner relies—as did Mr. Clark and AFI—on two pieces of evidence. The first is

the April 2018 letter from the Bloom firm. But that letter did not offer

a definitive opinion that rezoning to permit limestone mining was “reasonably probable.” Rather, it concluded that rezoning might be approved “as long as there is not strong neighbor opposition to the mining

request.”

The Bloom letter explained that the rezoning process “is highly

political and will turn on neighbor support/opposition.” The firm spoke

with Mayor Greene, who “emphasized the political nature of the [rezoning] decision (i.e., neighbor support/opposition is the driving factor).”

Because the Ranch Springs Property “abut[ted] several properties zoned

R–1 Residential,” the Bloom letter advised that “it will be imperative to

get these neighbors’ support during the rezoning/special exception process.”

Neither Ranch Springs nor its agents did any outreach to immediate neighbors or other Harpersville residents during 2016–2018 to

gauge the level of community support for (or opposition to) a limestone

quarry. The Bloom firm likewise conducted no investigation of this kind.

It interviewed the Town Clerk and Mayor Greene, both of whom said

that fair consideration would be given to any rezoning request. But they

would provide no assurance about the fate of such a request, emphasizing that the outcome “would be heavily influenced by whether or not

neighboring property owners oppose the request.” 16

The evidence at trial established that neighborhood opposition

would likely have been intense. Ms. Pender and Mr. Glasscock were

members of the Zoning Commission during 2016 and 2017, and both

owned real estate near the Ranch Springs Property. Mr. Glasscock was

the largest landowner in town—he owned roughly 11% of the total acreage within the Harpersville Town limits—and his property was less

16 Petitioner asserts that neighborhood surveys are difficult to conduct because

people often respond poorly to cold-calling and door knocking. But petitioner did not

need to hire a consulting firm to do this. All it needed to do was file a rezoning application and see how neighbors reacted.

than half a mile from the Ranch Springs Property. One suspects that

his views would have carried weight.

Ms. Pender and Mr. Glasscock credibly testified that they and

most other neighbors would have opposed a limestone quarry because of

concerns about (1) contamination of the water supply, most of which

came from shallow wells; (2) deleterious runoff into the Coosa River two

miles south of the Town; (3) noise and dust from a quarry operation;

(4) traffic congestion on local roads from trucks hauling aggregate; and

(5) damage to the comfortable rural environment residents prized. They

credibly testified that, as members of the Zoning Commission, they

would have voted against a proposal to rezone the Ranch Springs Property for use as a quarry. They believed that this position “would have

been the consensus of most of the community.” Mayor Greene, who

served as Mayor during 2016–2020, echoed that view, explaining that a

quarry on the Ranch Springs Property “probably would not be looked on

favorably” by nearby property owners.

evidence on this point consisted of testimony from one former neighbor,

Daniel Gardner. We discounted his testimony because he was an investor in an SCE transaction. He thus had a personal interest in testifying

that the Ranch Springs Property, which was next to his, could have been

rezoned to permit limestone mining. See supra p. 19.

The second piece of evidence on which petitioner relies is the September 6, 2016, letter signed by Theo Perkins, who was Mayor of

Harpersville on that date. This letter was drafted by Bob Lewis and

typed up by Mr. Rudakas, who attempted to mimic the letterhead on the

Town’s official stationery. The letter was presented to Mayor Perkins

during a meeting, and he signed it at Mr. Lewis’s request.

We find this this letter has no probative value in determining

whether rezoning of the Ranch Springs Property was “reasonably probable” in December 2017, when the easement was granted. That is so for

at least three reasons:

•

Mayor Perkins’s term expired in November 2016. He would thus

have held no official position if and when a rezoning application

were submitted.

•

Rezoning applications must be approved by the Zoning Commission. The Mayor of Harpersville has no vote on that Commission

and no unilateral authority regarding zoning matters. Although

Bob Lewis drafted the letter to say that “the City would certainly

approve a rezoning . . . to allow mining,” Mayor Perkins credibly

testified that he meant only that the Town would give fair consideration to such a request.

•

Petitioner supplied no credible evidence that Mayor Perkins’s letter addressed possible rezoning of the Ranch Springs Property.

The mayor could not recall a meeting that involved discussion of

the Ranch Springs Property, to which he referred as the “Carpenter property.” Rather, he credibly testified that the meeting he

attended and the letter he signed both addressed a possible rezoning of the Tanyard Farms property, in which the Lewis brothers were also interested. See supra pp. 16–17. Petitioner could

not produce the original of the September 6, 2016, letter with an

attached Exhibit A, which would have identified the property to

which the author was referring.

At trial Mayor Perkins credibly testified that he met with Bob

Lewis only once and that, to the best of his recollection, the property

map attached as Exhibit A to the letter he signed was a map of the Tanyard Farms property. Mr. Rudakas subsequently testified that there

were multiple meetings with Mayor Perkins and suggested that the

Ranch Springs Property may have been discussed at another of those

meetings. But Mr. Rudakas admitted that he himself did not attend any

meeting with Mayor Perkins. Mr. Rudakas has a personal financial interest in the outcome of this case, and we found his testimony to lack

credibility in several respects. We credited Mayor Perkins’s testimony

over his. 17

For these reasons, we conclude that petitioner has failed to carry

its burden of proving that rezoning the Ranch Springs Property to

17 Given our finding that Mayor Perkins’s letter addressed possible rezoning of

the Tanyard Farms property, the letter seems even less helpful to petitioner. The Tanyard Farms property was three miles from the Ranch Springs Property. Assuming

arguendo that neighbors could have been persuaded to support a quarry on the Tanyard Farms property, it seems unlikely—for economic feasibility and other reasons—

that they would have rallied behind a second quarry so near the first. See Mill Road

36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, at *49 (noting that approval of

rezoning of other properties for the same use might impede or prevent such approval

for the subject property).

permit operation of a limestone quarry was “reasonably probable.” Because mining was not a legally permissible use in December 2017, and

because petitioner has not convinced us that rezoning was reasonably

probable, we hold that limestone mining was not the property’s HBU.

“Financially Feasible”

Even if Ranch Springs could have secured rezoning approval, we

find that use of the property as a limestone quarry was not financially

feasible. As we explain more fully below, the income and expense projections made by AFI and Mr. Wick were wildly optimistic. See infra

pp. 58–62. Their most significant error, however, was their unsupported

assumption that the local market could absorb additional supply of aggregates in the range of 500,000 to 700,000 tons annually. Assuming

arguendo that this volume of salable limestone existed on the property,

petitioner has failed to establish “the existence of a market ‘that would

justify its extraction in the reasonably foreseeable future.’” Esgar Corp.

v. Commissioner, T.C. Memo. 2012-35, 103 T.C.M. (CCH) 1185, 1190

(quoting United States v. 69.1 Acres of Land, 942 F.2d 290, 292 (4th Cir.

1991)), aff’d, 744 F.3d 648 (10th Cir. 2014).

In making this assumption, petitioner’s experts relied chiefly on

projected rates of economic and population growth in the local area. But

they failed to show that the needs of an expanding population could not

be met by the quarries already in operation, which had plenty of unused

production capacity. As Dr. Rigby correctly observed, existing players

can capture new demand much faster and more easily than a greenfield

site—i.e., raw land that had never been mined—that would take years

to get up and running.

In 2017 there were seven well-established limestone quarries in

Shelby County and nine more in the adjoining counties. The biggest

quarries in Shelby County were operated by Vulcan and Martin Marietta, the top two producers of construction aggregates in the United

States. A knowledgeable trucking company official credibly testified

that Vulcan and Martin Marietta had a “chokehold” on the local aggregate market.

The Shelby County quarries produced more than 10 million tons

of limestone during 2017, and the nearby quarries produced another

5 million tons. Vulcan’s Calera quarry, which produced 3 million tons

of limestone in 2017, typically sells only 85% of the limestone it can produce. Vulcan’s Childersburg quarry, which was 12 miles from the Ranch

Springs Property, was one of Vulcan’s three worst-performing quarries

in the United States. Nationwide, Vulcan reported that it was operating

at 55% to 60% of capacity in 2015 and “well below full capacity” in 2016.

These data suggest to us that Vulcan could have satisfied—virtually by

itself—the relatively modest needs of the area’s growing population. Petitioner’s experts did not convince us otherwise. See Excelsior Aggregates, T.C. Memo. 2024-60, at *35–37 (finding that gravel mining was

not a property’s HBU where there was already an adequate supply in

the market and existing suppliers could meet any new demand); Esgar,

103 T.C.M. (CCH) at 1197 (same).

The saga of White Rock confirms our view that there was little

demand for additional aggregate supply in Shelby County. In October

2009 White Rock applied to rezone property in Vincent, the town adjoining Harpersville, for use as a limestone mine. White Rock eventually

completed the ADEM permitting process in 2019. But as of 2024 no

quarry had commenced operations.

Seeking to understand why, Mr. Sheppard interviewed two local

land brokers, Vulcan’s plant manager at Childersburg, and a zoning official in Vincent. As Mr. Sheppard reported, they “were all under the

impression that the White Rock operators decided not to pursue mining

the 1,000+/− acre property.” This outcome is difficult to reconcile with

petitioner’s experts’ projections that a quarry on the Ranch Springs

Property could capture 6% or more of the local market.

Finally, the Lewis brothers’ own actions—more particularly, their

inaction—shows that limestone mining was not the HBU of the Ranch

Springs Property. Both men had spent their entire careers in mining.

They allegedly desired to diversify their business away from coal and

into limestone, which they thought held greater profit potential. They

allegedly had plenty of mining equipment and startup capital at their

disposal. But they declined to open a limestone quarry on the Ranch

Springs Property, on the Meadows golf course across the road, or on any

of the 10 nearby properties they acquired, all of which were situated over

the same limestone formation. We regard this as strong evidence that

the Lewis brothers themselves did not regard limestone mining on these

properties as “financially feasible.” See Corning Place, T.C. Memo. 202472, at *38–39 (finding that addition of a 34-story tower atop a historic

building was not the property’s HBU where experienced real estate developers chose to pursue a conservation easement instead); Oconee

Landing, T.C. Memo. 2024-25, at *40 (finding that immediate

residential development was not property’s HBU where experienced real

estate developers chose to pursue a conservation easement instead).

After considering these market factors and obstacles to rezoning,

Mr. Sheppard (respondent’s expert) concluded that the HBU of the

Ranch Springs Property was a continuation of its existing use as currently zoned. Petitioner has submitted no evidence to controvert that

conclusion, apart from embracing limestone mining as the property’s

HBU. We accordingly accept Mr. Sheppard’s opinion that the HBU of

the Ranch Springs Property in December 2017 was agricultural, lowdensity residential, and recreational use.

Comparable Sales Approach

The comparable sales approach “values property by comparing it

to similar properties sold in arm’s-length transactions around the valuation date.” Savannah Shoals, T.C. Memo. 2024-35, at *36. This

method is usually the most reliable indicator of value when sufficient

information exists about sales of properties resembling the subject property. See United States v. 320.0 Acres of Land, 605 F.2d 762, 798 (5th

Cir. 1979) (“Courts have consistently recognized that, in general, comparable sales constitute the best evidence of market value.”); Whitehouse

Hotel, 139 T.C. at 324–25 (stating that other valuation methodologies

are “not favored if comparable-sales data are available”).

The comparable sales method is based on the “principle of substitution.” It stands for the proposition that “the value of a property can

be estimated at the cost of acquiring an equally desirable substitute.”

Mill Road 36 Henry, LLC, T.C. Memo. 2023-129, at *51; see Buckelew

Farm, T.C. Memo. 2024-52, at *50 n.25, *55 (“[T]he principle of substitution . . . stands for the proposition that a hypothetical buyer will not

pay more for a given property when an alternative property is available

for less.”); Estate of Rabe, 34 T.C.M. (CCH) at 119 (“[A] prudent man will

pay no more for a given property than he would for a similar property.”).

“In the case of vacant, unimproved property . . . the comparable

sales approach is ‘generally the most reliable method of valuation . . . .’”

Oconee Landing, T.C. Memo. 2024-25, at *67 (quoting Estate of Spruill,

88 T.C. at 1229 n.24). That is because “the market place is the best

indicator of value, based on the conflicting interests of many buyers and

sellers.” Estate of Spruill, 88 T.C. at 1229 n.24 (quoting Estate of Rabe,

34 T.C.M. at 119). This general rule applies with no less force when the

unimproved property sought to be valued has potential for mineral

extraction. See J L Minerals, T.C. Memo. 2024-93, at *58; Excelsior Aggregates, T.C. Memo. 2024-60, at *38; Savannah Shoals, T.C. Memo.

2024-35, at *35.

Mr. Sheppard correctly characterized the Ranch Springs Property

as “exploratory stage mineral property.” This characterization was supported by Dr. Rigby and Dr. Stryhas, respondent’s geological experts.

They agreed that, given the modest exploratory work AFI had done—

analyzing data from drilling nine boreholes and one corehole to a depth

of 225 feet—the limestone beneath the Ranch Springs Property could be

classified only as an “inferred mineral resource.”

Petitioner’s trial expert, Mr. Wick, agreed that AFI’s exploratory

drilling did not establish any mineral “reserves,” as AFI had concluded,

but only an “indicated resource.” An “inferred mineral resource” inspires a relatively low level of geological confidence because the quantity

and quality of the minerals is estimated on the basis of limited geological

evidence and sampling. See J L Minerals, T.C. Memo. 2024-93, at *48

(finding a geological report that supported only a conclusion of an inferred resource “too preliminary” to establish the existence of commercially exploitable amounts of kaolin clay).

Given these characteristics of the Ranch Springs Property, Mr.

Sheppard properly searched for transactions involving similarly sized

agricultural parcels, where the parties knew that minerals were present, but where no entitlements (such as required zoning and permits)

had yet been obtained that would allow minerals to be mined. Under

the “principle of substitution,” such sales should reflect what willing

buyers pay willing sellers for land that has potential for mineral development, but which would require significant capital investment to determine the feasibility of that potential.

Mr. Sheppard selected sales of three comparable properties. The

first was the Carpenters’ sale of the 110-acre tract to Ranch Springs for

$6,500 per acre in December 2016. As explained previously, that was

an arm’s-length sale in which both parties were aware that the land had

potential for limestone mining. See supra pp. 34–40. Indeed, Mr. Lewis

repeatedly emphasized the property’s limestone potential in the hope of

convincing the Carpenters to participate as partners in the SCE venture. We have previously concluded that this transaction provides

strong evidence as to the FMV of the Ranch Springs Property. See supra

pp. 39–40.

Mr. Sheppard’s second comparable sale was the sale of a 74-acre

parcel in Calera for $6,466 per acre in December 2016. The largest limestone quarries in Shelby County—operated by Vulcan, Martin Marietta,

and Lhoist—were not far from Calera. See supra pp. 21, 30. Mr. Sheppard confirmed that there was limestone on this property, that it was in

a “heavily active” quarrying market, and that exploratory drilling had

been conducted on the property before the sale.

Mr. Sheppard’s third comparable sale was the sale of a 197-acre

parcel in Chelsea, Shelby County, for $6,738 per acre in June 2016. This

property, like the other two, was located on a major highway and had

visible limestone outcroppings. Rather than using the property for mining, the buyer decided to develop it into a residential subdivision.

After making appropriate adjustments to these sale prices, Mr.

Sheppard determined that the “before value” of the Ranch Springs Property was $6,550 per acre. This valuation conclusion is consistent with

other evidence in the record. Ms. Pender, a longtime realtor in Harpersville, credibly testified that agriculturally zoned land comparable in size

to the Ranch Springs Property typically sold during 2017 for $3,500 to

$4,500 per acre.

The Shelby County Tax Office maintains comprehensive records

of land sales for tax assessment purposes. According to its records,

64 large parcels of vacant land (i.e., parcels consisting of 45+ acres) were

sold in arm’s-length transactions between October 2014 and September

2020. The median sale price for these parcels was $4,253 per acre. The

average sale price was $6,935 per acre.

In December 2015 Locust Creek, which was controlled by the

Lewis brothers, purchased a 177-acre tract roughly 3 miles from the

Ranch Springs Property. They commissioned exploratory drilling on the

property (apparently supervised by AFI) during 2016. They evidently

viewed the drilling results as demonstrating significant potential for

limestone mining; indeed, Locust Creek took the position that the property would be worth almost $25 million if developed as a limestone

quarry. Given these facts, petitioner cannot seriously dispute that the

Locust Creek property was comparable to the Ranch Springs Property.

But the price at which the Locust Creek property changed hands, in a

December 2015 arm’s-length sale, was $825,000, or $4,661 per acre.

In December 2016 entities controlled by the Lewis brothers purchased three other tracts in Harpersville—Bradford Resources, Tanyard

Farms, and Sunnydale Springs—that were similar in size to the Ranch

Springs Property and within 3 miles of it. The Lewis brothers allegedly

believed that all three properties had limestone mining as their HBU.

They acquired these properties in arm’s-length transactions for $4,294

per acre, $4,049 per acre, and $4,474 per acre, respectively. See supra

pp. 13–14.

Mr. Clark acknowledged in his appraisal that the Harpersville

real estate market “was active” during 2015 and 2016. But he asserted

that “sales comparables were not present in sufficient quantity or similarity to use as a basis for the market approach.” He allegedly “made a

search for mining parcels similar to the Subject Property,” but he was

supposedly unable “to find any in the normal course of business.”

The market data discussed above show that Mr. Clark did not

look very hard, or that he was looking for the wrong thing. The statement in his appraisal that he searched for “mining parcels” suggests

that he restricted his inquiry to sales of operating mines or properties

that had been zoned and permitted for mining. At trial he confirmed

that he did not use the sales comparison approach “because there were

no sales of active mining mineral properties with known quantities of

minerals.” The absence of such transactions would not be surprising:

Mr. Glasscock credibly testified that no one had ever submitted an application to rezone land in Harpersville for use as a quarry.

But the Ranch Springs Property was not an operating mine, and

it had not been zoned or permitted for mining. Rather, it was raw land

that contained only an inferred mineral resource that (as Dr. Rigby credibly testified) “d[id] not have the completed technical work to demonstrate that the [mining] project will be viable.” The Ranch Springs Property, in short, was not comparable to what Mr. Clark termed a “mining

parcel.” What the Ranch Springs Property was comparable to—as Mr.

Sheppard correctly determined—were other exploratory stage mineral

properties. Mr. Sheppard’s report, coupled with the other transactions

in which the Lewis brothers engaged, shows that the going rate for exploratory stage mineral properties in the Harpersville area was in the

range of $4,500 to $6,500 per acre.

Petitioner asserts that “it is practically impossible to apply the

comparable sales method when valuing property that’s proposed for

mineral extraction,” even where that property is raw land. If exploratory drilling has been done on the subject property, petitioner insists

that no other property—no matter how ostensibly comparable—can be

treated as “comparable” unless it too has been drilled and its mineral

content definitively established.

Petitioner cites no appraisal texts or appraisal literature to support its theory, and we have discovered none. Mr. Sheppard, by contrast,

cited a recognized appraisal text for the proposition that, “[i]f the deposit

to be appraised is undeveloped and non-producing, that is, is raw land,

the sales comparison method is preferable.” Robert H. Paschall, Appraisal of Construction Rocks 3 (2d ed. 1999). And Mr. Clark acknowledged in his appraisal that “the Coal Evaluation Handbook, developed

by the U.S. Department of the Interior Bureau of Land Management,

concludes [that] the best approach for determining the Fair Market

Value of the property is by using the sales comparison approach.”

Petitioner likewise offers no judicial authority to support its novel

theory. Our Court has held for years that the comparable sales approach is usually the best method for valuing undeveloped property—

here, raw land. See supra p. 40. And we have carved out no exception

for raw land that contains minerals. See, e.g., Green Valley Invs., LLC

v. Commissioner, T.C. Memo. 2025-15, at *32–33 (using comparable

sales method to determine value of land containing limestone); J L Minerals, T.C. Memo. 2024-93, at *56 (using comparable sales method to

determine value of land containing kaolin clay); Excelsior Aggregates,

T.C. Memo. 2024-60, at *38 (using comparable sales method to determine value of land containing sand and gravel); Savannah Shoals, T.C.

Memo. 2024-35, at *35–36 (using comparable sales method to determine

value of land containing granite). The appellate courts have done the

same. See, e.g., United States v. 421.89 Acres of Land, 465 F.2d 336, 338

(8th Cir. 1972); United States v. Whitehurst, 337 F.2d 765, 775 (4th Cir.

1964) (finding valuation that ignored comparable property sales evidence in valuing alleged mineral property to be “grossly mistaken”); cf.

Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d 982, 1003–04

(11th Cir. 2016) (finding unexplained deviation from the comparable

sales method improper), aff’g in part, rev’g in part, and remanding T.C.

Memo. 2014-79.

There was nothing special or unique about the limestone underneath the Ranch Springs Property. The same limestone formation underlies virtually all of Shelby County. Given the modest exploratory

drilling AFI had done, the underlying limestone could not be classified

as a “mineral reserve” but only as an “inferred mineral resource.” And

Ranch Springs had taken no steps toward securing rezoning approval,

required permits, or other entitlements for the property. In short, the

Ranch Springs Property constituted raw land with possible potential for

mineral development. 18

As noted above, we have previously endorsed the comparable

sales method as an appropriate technique for determining the FMV of

exploratory stage mineral properties. And we have never held that

knowing the precise quantity and quality of minerals on another property is necessary to consider sale of the latter to be potentially comparable. Accord, e.g., United States v. Am. Pumice Co., 404 F.2d 336, 336

(9th Cir. 1968) (rejecting claim that mineral properties are rarely comparable due to differences in quantity and quality of minerals); see J L

Minerals, T.C. Memo. 2024-93, at *56 (rejecting contention that preliminary geology report rendered property too unique to permit its valuation under the comparable sales method).

The comparable sales method is perfectly capable of capturing

transactions involving exploratory stage mineral properties. If the market for aggregates was as robust and profitable as petitioner contends,

one would expect that mining companies and investors would be on the

lookout to acquire property in the area. This would cause land prices to

drift up to reflect this demand. But land prices in Harpersville were

quite stable between 2014 and 2020: The median per-acre sale price for

large parcels was $4,253 and the average was $6,935.

Finally, petitioner asserts that Ranch Springs would not have

been a “willing seller” at the prices indicated by Mr. Sheppard’s comparable sales analysis. Instead of selling the land, petitioner says, “a realistic alternative use to Ranch Springs would have been to operate it as

a limestone quarry.” And that would supposedly have made the land

worth $26 million.

This argument is a nonstarter for several reasons. First, the argument assumes its own conclusion, i.e., that operation of a quarry

18 Petitioner cannot plausibly dispute that the Ranch Springs Property, which

was wholly undeveloped and had been used for grazing for 20+ years, constituted “raw

land.” But petitioner in its Posttrial Briefs repeatedly equates “raw land” with the

surface interest, urging that the key question is not the value of the “raw land,” but the

value of the right to exploit the minerals beneath it. Petitioner urges a false dichotomy.

As of the valuation date, there had been no severance of the surface interest from the

subsurface interest. At year-end 2017, therefore, the FMV of the raw land equaled the

value of the right to exploit the surface interest plus the value of the right to exploit

the subsurface minerals. The question is what a willing buyer would have paid for the

land in December 2017, cognizant that ownership of the land would grant him this

entire bundle of rights.

would have been legally permissible and financially feasible, neither of

which it was. See supra pp. 42–48. Second, Ranch Springs, which was

organized to generate tax deductions for investors, had neither the ability nor the intention to operate a quarry. When attempting (unsuccessfully) to convince Mayor Greene to sign a letter voicing support for a

quarry, Tom Lewis confirmed that he had no intention of opening a

quarry. Indeed, he emphasized that there would “never, never, never”

be a quarry on the Ranch Springs Property. Finally, the “willing

buyer/willing seller” test seeks to determine the price on which a hypothetical buyer and a hypothetical seller would agree. Treas. Reg.

§ 1.170A-1(c)(2). The mindset of the specific property owner on the valuation date is irrelevant to this inquiry.

We conclude that the comparable sales approach provides the

most reliable method for determining the “before value” of the Ranch

Springs Property. Mr. Sheppard chose sales of reasonably comparable

properties. After making appropriate adjustments for his second and

third comparables, he determined a “before value” of $6,550 per acre.

Petitioner does not seriously quibble with any of Mr. Sheppard’s specific

adjustments (apart from asserting that no property can be “comparable”

unless its exact mineral content has been established). And petitioner’s

experts offered no competing comparable sales of their own to support

the value petitioner claims.

The “before value” determined by Mr. Sheppard corresponds almost exactly to the price—$6,500 per acre—that Ranch Springs paid to

acquire the 110-acre tract in December 2016. We accordingly conclude

that the value of the Ranch Springs Property before the granting of the

easement was $720,500, as determined by Mr. Sheppard.

Income Approach

Dismissing the sales comparison approach, Messrs. Clark and

Wick employed the income approach—often called the “income capitalization” method—to determine the “before value” of the Ranch Springs

Property. The income method determines FMV by discounting to present value the expected future cashflows from the property. See, e.g.,

Chapman Glen Ltd., 140 T.C. at 327; Marine, 92 T.C. at 983. The theory

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

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

Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283, 100 T.C.M.

(CCH) 581, 583, aff’d, 493 F. App’x 944 (10th Cir. 2012).

Messrs. Clark and Wick both posited that the HBU of the Ranch

Springs Property was development as limestone quarry. Premising his

appraisal on the AFI study, Mr. Clark constructed a DCF spreadsheet

to estimate the NPV of operating a limestone mining business on the

property for 35 years. Equating the assumed value of the hypothetical

mining business to the value of the land, he asserted that the “before

value” of the land—that is, its value before the granting of the easement—was $26,034,064, or $236,673 per acre. Mr. Wick adopted essentially the same methodology but employed different assumptions (e.g., a

mine with a 28-year life). He concluded that the FMV of “the Ranch

Springs [P]roperty mineral and associated mining rights” was $18 million before the granting of the easement.

We reject for numerous reasons the valuation methodology deployed by petitioner’s experts. First, both premised their DCF analyses

on the assumption that conversion to a limestone quarry was the HBU

of the Ranch Springs Property. We have rejected that assumption, ruling that petitioner failed to establish that mining was a legally permissible use (or was reasonably likely to become a legally permissible use

in the near future). The DCF analyses deployed by Messrs. Clark and

Wick thus fall of their own weight.

Second, even if mining were thought to be the property’s HBU, we

would reject the income capitalization method as deployed by Messrs.

Clark and Wick. The income method is most reliable when used to determine the value of an existing business, with a track record of growth,

income, expenses, and profits. A historical track record of this sort provides a plausible basis for projecting future revenue. The income approach is rarely appropriate when seeking to determine the value of raw

land or other undeveloped property with no existing cashflow. See, e.g.,

Chapman Glen Ltd., 140 T.C. at 327; Whitehouse Hotel, 139 T.C.

at 324–25 (noting that the income approach “has been judged an unsatisfactory valuation method for property that does not have a track record

of earnings” (quoting Whitehouse Hotel, 131 T.C. at 153)).

When the income approach is used, the Court must examine the

plausibility of the critical assumptions made by the appraiser. See Kiva

Dunes Conservation, LLC v. Commissioner, T.C. Memo. 2009-145, 97

T.C.M. (CCH) 1818, 1820. Each assumption, whether large or small,

carries with it “some risk of error.” Whitehouse Hotel, 139 T.C. at 323.

As interdependent assumptions multiply, the risk of error can increase

exponentially: “[R]elatively minor changes in only a few of [an expert’s]

assumptions [can] have large bottom-line effects.” Ibid.

We have often noted “the folly of trying to estimate the value of

undeveloped property by looking to its anticipated earnings.” Pittsburgh

Terminal Corp. v. Commissioner, 60 T.C. 80, 89 (1973), aff’d, 500 F.2d

1400 (3d Cir. 1974) (unpublished table decision). Lacking reliable data,

the appraiser inevitably must rely on a lengthy series of assumptions,

estimates, and guesstimates.

The U.S. Court of Appeals for the Fifth Circuit noted this problem

in a mining case decided 70 years ago. See Ga. Kaolin Co. v. United

States, 214 F.2d 284 (5th Cir. 1954). 19 The question in that eminent

domain case was the FMV of land whose HBU was kaolin mining. The

Fifth Circuit affirmed the district court’s rejection of the landowner’s

proposed valuation method, viz., “estimating the amount of stone in situ

and multiplying this amount by a fixed price per unit.” Id. at 286. The

court explained that the landowner’s proposed methodology involved numerous assumptions: “[W]hether or not the deposits would be mined and

[what] royalties [would be] paid would depend upon the condition of the

market, the uncertainty of the future, the demand for the product, ‘and

many other elements, on and on, in the future.’” Ibid. In short, the Fifth

Circuit upheld rejection of the income approach “largely based on its

speculativeness.” Ibid.

The speculativeness problem is obvious here, requiring the appraiser to estimate the cost of creating a limestone business from scratch

and to predict its future income, capital expenditures, and dozens of distinct cost items over a period of up to 35 years. Performed under these

constraints, the DCF method becomes highly speculative, making it inferior to the sales comparison method, which draws its conclusions from

the market. See Ambassador Apartments, 50 T.C. at 243–44 (rejecting

real estate valuation premised on the income approach in favor of market value established by recent sales); J L Minerals, T.C. Memo. 202493, at *56 (finding that the income approach would be inappropriate

even if mining were the property’s HBU); Excelsior Aggregates, T.C.

Memo. 2024-60, at *40 (same).

Third, if an income method were thought to be appropriate to determine the “before value” of the Ranch Springs Property, we would reject the owner-operator version of this method as deployed by petitioner’s experts. They both equated the value of the land with the going

19 Decisions from the Fifth Circuit issued before October 1, 1981, are binding

precedent in the U.S. Court of Appeals for Eleventh Circuit. See Bonner v. City of

Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981).

concern value of a limestone mining business conducted on the land.

That equation defies economic logic and common sense. See Van Zelst

v. Commissioner, 100 F.3d 1259, 1263 (7th Cir. 1996) (reasoning that

where “land is not a scarce resource . . . financing and entrepreneurship

are the scarce ingredients, so they will capture the economic return”),

aff’g T.C. Memo. 1995-396.

The DCF technique is routinely used by businesses to estimate

the value of an investment opportunity—e.g., the acquisition of another

company or the construction of a new factory. The DCF method seeks

to determine the NPV of future cashflows from the proposed investment.

If management views the NPV as offering an acceptable rate of return,

the company will pursue the investment.

By estimating the NPV of a hypothetical mining business, petitioner’s experts sought to determine the total value of the proposed investment as a going concern. But here we are seeking to determine the

value of raw land. The raw land is just one of the costs that would need

to be incurred in constructing the hypothetical mining business. Why

would a rational investor pay the entire NPV of the mine’s future operations in order to defray one component cost? 20

Petitioner repeatedly cites testimony from fact witnesses indicating that mining companies regularly use DCF techniques when deciding

whether to pursue a proposed mineral investment. That testimony

seemed perfectly plausible to us. But the fact that a mining company

uses a DCF in deciding whether to open a mine does not mean it would

pay the entire NPV of the mine merely to acquire the land. The cost of

acquiring access to the minerals would simply be one of the many costs

20 The same point can be illustrated by an example that does not involve mining. Suppose a landowner puts a conservation easement on a ten-acre exurban lot that

is zoned agricultural/single-family residential. An appraiser is hired to determine the

“before value” of the lot. A potential buyer of this lot could do various things with it.

He could farm it, build a modest bungalow, build a two-story house, or build a $25

million mansion. It seems obvious that a sane appraiser would determine the FMV of

the lot by searching for recent sale prices for similar residential lots. He would not

conclude that the land is worth $25 million because it could be developed into a mansion that could be sold for $25 million. Even if the appraiser believed that use as a

mansion was the lot’s HBU—a dubious proposition—he would not equate the value of

the land to the value of the fully constructed mansion. A knowledgeable willing buyer

intent on building a mansion would not pay $25 million for the land, because he would

still have to pay for construction of the house.

that are input into the spreadsheet to calculate the NPV of the proposed

mining investment.

At trial we heard testimony from fact witnesses (many of whom

worked for Vulcan) with decades of experience in the coal and aggregates business in Alabama. They consistently testified that a mining

company seeking to acquire a greenfield site will typically choose to acquire access to the minerals by lease, not by purchase. That is because

the company usually will not want to hold all that land (and accompanying debt) on its balance sheet. See supra note 10.

These witnesses explained that royalty rates for leasing mineral

property in Alabama, while more variable than in the oil and gas industry (typically 3/16), usually ranged between 8% and 12% of the value of

the production f.o.b. mine. One witness estimated that this lease cost—

i.e., the cost of acquiring access to the minerals by paying a royalty—

would be roughly 5% of the total costs of constructing the new mining

business. These witnesses were called by petitioner, and petitioner did

not challenge their testimony.

Their testimony confirms what logic tells us. Why would a mining

operator seeking to acquire a greenfield site for a quarry pay the entire

NPV of the prospective mining operation in order to purchase the land,

when it could acquire access to the mineral interest by lease for small

fraction of that sum? When asked this question, Mr. Wick replied that

“this would depend on the landowner’s willingness to lease the land.”

But the testimony of experienced mining professionals was that leasing

is how mining operators typically acquire mineral property in Alabama.

Petitioner supplied no evidence that sellers’ reluctance to lease is a realworld problem. In any event, any reluctance could presumably be overcome by negotiating a royalty rate acceptable to the lessor. 21

21 Mr. Wick made the point that a business seeking to expand into a new market may be willing to pay a substantial premium to acquire a company in that market

rather than attempting to build from scratch. This is sometimes called a “bridgehead”

situation, where the business seeks a base from which to launch operations into the

new market. That rationale has no application here. First, Ranch Springs had no

existing business; it purchased the Ranch Springs Property for the purpose of generating tax deductions for investors. Second, the “bridgehead” rationale applies with

greatest force when an established business is seeking to expand into a new market by

acquiring an existing business. An existing business has a customer base, a knowledgeable workforce, and goodwill. Land by contrast is relatively fungible, with similar

property available at multiple locations. A business seeking to expand into a new

Mr. Clark acknowledged in his appraisal that, in the case of mineral properties, a well-recognized income approach is “the capitalized

royalty income method,” which values the mineral deposit “as if the subject’s landowner were leasing to an operator.” The royalty income

method, he explained, values the property by “discount[ing] the stream

of projected royalty income to a present value.” To implement this methodology, “[a]n appropriate royalty rate and associated discount rate

must be extracted from the market and used to capitalize the royalty

income.”

Mr. Clark admits in his appraisal that “[c]alculating the present

value of the projected income using the Royalty Income [approach]

would result in a substantially lower fair market value for a given property, perhaps 1/10th or less of the value obtained” from the owneroperator approach. This admission is consistent with the trial testimony

of the Vulcan witnesses discussed above. And we think it is fatal to the

methodology Messrs. Clark and Wick deployed. No rational mine operator would pay the entire NPV of the prospective mining business to

purchase the land if he could acquire access to the minerals by lease for

10% or less of that sum. 22

Mr. Clark asserted that the owner-operator method was nevertheless appropriate here “due to the owner [i.e., the Lewis brothers] living within close vicinity to the property, as well as having the ability to

operate the mine, rather than having to hire someone to do so.” This

rationale is wholly unconvincing. For starters, a one-sentence explanation is not enough to justify Income Approach A that generates a result

ten times higher than Income Approach B, each being recognized as

valid. Especially is that so given that mine operators looking to acquire

market would have little incentive to pay a huge premium for raw land. In any event,

the premium it decides to pay for raw land would rarely if ever equal the entire NPV

of the projected business opportunity.

22 Petitioner argues that the royalty income method is irrelevant here because

respondent did not amend his Answer to assert this theory. This argument misses the

point. Neither party contends that the royalty income method should be used to determine the “before value” of the Ranch Springs Property. But the existence of the

royalty income method, as a recognized alternative to the owner-operator method, is

logically relevant in deciding whether Mr. Clark’s embrace of the latter was reasonable. Petitioner’s assertion that respondent improperly injected the royalty income

method into the case at the eleventh hour is simply wrong. It was Mr. Clark who first

raised this issue in the appraisal attached to Ranch Springs’s 2017 return. Mr. Sheppard devotes numerous pages in his expert report to discussion of this issue; indeed,

the term “royalty” appears no fewer than 50 times in his report. And numerous fact

witnesses presented testimony about mineral royalties and royalty rates.

a greenfield site in Alabama typically do so by leasing rather than by

buying.

In any event the Ranch Springs Property was owned by a partnership whose members were high-net-worth individuals seeking tax

deductions. They owned 94% of Ranch Springs, and they explicitly rejected the “mine development option” in favor of the “conservation easement option.” The Lewis brothers owned only 3.75% of Ranch Springs,

and there is no evidence that those two men had “the ability to operate

the mine.” They had multiple opportunities to venture into limestone

mining but rejected each opportunity, allegedly because “the timing was

not right.” And assuming arguendo that the Lewis brothers had the

ability to operate a limestone mine, they would not rationally pay the

entire NPV of the prospective mining business merely to acquire the

land. 23

Finally, even if the owner-operator version of the income method

were thought appropriate to determine the “before value” of the Ranch

Springs Property, we find numerous shortcomings in petitioner’s experts’ implementation of that approach:

•

AFI in its report simply stated its estimated costs for the quarry,

without explaining what data it considered in arriving at those

numbers or what assumptions it made. Mr. Wick derived his data

from the costs of operating a granite quarry, but he failed to explain how or why he adjusted those items to reflect the costs of

operating a limestone quarry.

•

Petitioner’s experts often make wildly divergent cost estimates.

As just one example, AFI estimated drilling and blasting costs at

$0.385 per ton, whereas Mr. Wick estimated these costs at $0.90

per ton. Assuming production of 700,000 tons annually, this difference alone could generate an annual production cost increase

of $360,500, or roughly $11 million over the quarry’s assumed life.

23 The central error committed by Messrs. Clark and Wick was equating the

value of the land (one cost input to the DCF) with the total NPV of the hypothetical

mining business (the bottom-line output of the DCF). Theoretically, an NPV-oriented

method might be employed in an effort to estimate the value of the land, but only if all

other value inputs were stripped out so as to isolate the value of the land. But it would

seem illogical to conjure an imaginary business with myriad hypothetical inputs and

outputs just to back into a purported value for the land. An objective appraiser would

not turn to an NPV-oriented method given its inherent uncertainties, especially where

comparable land sales are plentiful.

This example underscores the problem inherent in using a DCF

model to estimate the FMV of raw land: “[R]elatively minor

changes in only a few of [an expert’s] assumptions [can] have

large bottom-line effects.” Whitehouse Hotel, 139 T.C. at 323.

•

In determining the market share that a quarry on the Ranch

Springs Property could command, neither AFI nor Mr. Wick considered the existing supply provided by the 16 quarries already

operating in Shelby County and adjacent counties, including

those operated by Vulcan and Martin Marietta, which held a

“chokehold” on the local market. See Excelsior Aggregates, T.C.

Memo. 2024-60, at *45 (rejecting DCF analysis that failed to account for existing supply in market); Savannah Shoals, T.C.

Memo. 2024-35, at *38 (same). AFI and Mr. Wick likewise failed

to consider the supply that would be provided by the 10+ other

limestone quarries that the Lewis brothers and Mr. Rudakas

were proposing to investors.

•

AFI assumed that a hypothetical quarry on the Ranch Springs

Property would serve a market within a 40–50 mile radius. AFI

correctly noted that this radius would include Shelby County and

portions of Jefferson, St. Clair, Talladega, Clay, Coosa, Chilton,

and Bibb Counties. But AFI used the entire population of all

8 counties to estimate the projected demand for limestone from

the Ranch Springs Property, even though much of this population

lived outside the 40–50 mile radius.

•

On the basis of its assumptions about population growth, AFI estimated that limestone demand in the relevant market would increase by 440,217 tons (in toto) during the 10-year period ending

in 2025. But AFI projected total production from the Ranch

Springs Property during this period of 5.755 million tons, or

13 times the estimated additional demand.

•

Mr. Wick assumed that a hypothetical quarry on the Ranch

Springs Property would serve a market within a 30-mile radius.

Given the high cost of transporting aggregates, this assumption

is more plausible than AFI’s assumption of a 40–50 mile radius.

But Mr. Wick assumed that the hypothetical quarry, beginning in

year 5, would capture 100% of the new demand in Shelby County

every year for the ensuing 23 years. Given the unused capacity

of the 16 existing nearby quarries, this assumption was unreasonable.

•

Petitioner’s experts projected that large-scale production would

begin almost immediately, even though the Ranch Springs Property was a greenfield site with no existing entitlements. AFI assumed that 700,000 tons of limestone would be extracted and sold

annually after a one-year ramp-up period. Mr. Clark assumed

(somewhat more conservatively) that production would begin after two years. Mr. Wick assumed (less conservatively) that production of 100,000 tons would begin in year 1. Given likely opposition to rezoning and the time required to a secure numerous

permits—the White Rock saga is telling—we find these projections wildly optimistic. And given the time value of money, deferring the mining income to future years would significantly change

the output of the DCF model.

Value of the Easement

The “before and after method” equates the value of a conservation

easement to the diminution in value suffered by the property that is encumbered by the easement. To calculate this amount we must subtract

from the “before value” of the property—here, raw land—the “after

value” of that same property. We have determined that the “before

value” of the Ranch Springs Property on the date the easement was

granted was $720,500. Petitioner has stipulated that its “after value”

was $385,000, as determined by Mr. Sheppard. The value of the conservation easement was thus $335,500.

Petitioner’s contention that the value of the easement exceeded

$25 million is premised on its assertion that the Ranch Springs Property

was worth $26,034,064, or $236,673 per acre, before the easement was

granted. But petitioner does not seriously contend that a knowledgeable

willing buyer—say an experienced mine operator—would have paid

$236,673 per acre for the Sun Valley Tract in December 2017. Indeed,

Lhoist—the ninth largest aggregates producer in the United States—in

2014 acquired 240 acres of mining property in Calera for an average

price of only $16,667 per acre. See supra p. 14. Under the “principle of

substitution,” a knowledgeable buyer would not pay $236,673 per acre

to purchase these 110 acres when it could obtain substantially equivalent land for a tiny fraction of that price.

At the end of the day, petitioner’s position appears to rest on its

assertion that the “willing buyer/willing seller” test, which governs the

valuation of property for charitable contribution purposes generally,

does not apply when the donated property is a conservation easement.

Petitioner cites no judicial precedent or other authority to support this

novel proposition. There is none.

The regulations provide that the FMV of property for charitable

contribution purposes is “the price at which the property would change

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

any compulsion to buy or sell and both having reasonable knowledge of

relevant facts.” Treas. Reg. § 1.170A-1(c)(2). “This definition, a fixture

in the Treasury Regulations since 1972, is universally acknowledged by

professional appraisers when valuing charitable contributions of property.” Seabrook Prop., T.C. Memo. 2025-6, at *35 (quoting Corning

Place, T.C. Memo. 2024-72, at *27). Mr. Clark, who prepared the appraisal attached to Ranch Springs’s return, cited this definition as the

applicable test.

In dozens of cases dating back many decades, this Court has cited

the “willing buyer/willing seller” test as the governing standard in determining the FMV of conservation easements. See, e.g., Boltar, 136

T.C. at 336; Hilborn, 85 T.C. at 688; Anselmo v. Commissioner, 80 T.C.

872, 880 (1983), aff’d, 757 F.2d 1208 (11th Cir. 1985); Seabrook Prop.,

T.C. Memo. 2025-6, at *35–36; Corning Place, T.C. Memo. 2024-72,

at *27. The Eleventh Circuit, to which appeal of this case presumably

lies, has done the same. See TOT Prop. Holdings, LLC v. Commissioner,

1 F.4th 1354, 1370 (11th Cir. 2021); Anselmo v. Commissioner, 757 F.2d

at 1212–13. Petitioner has cited no appellate authority supporting a

different conclusion.

In suggesting that the “willing buyer/willing seller” definition is

inapplicable here, petitioner relies on a sentence in Treasury Regulation

§ 1.170A-14(h)(3)(i), which addresses valuation of conservation easements. That sentence reads as follows: “The value of the contribution

under section 170 in the case of a charitable contribution of a perpetual

conservation restriction is the fair market value of the perpetual conservation restriction at the time of the contribution.” Ibid. (emphasis added

by petitioner).

According to petitioner, “the fair market value of the perpetual

conservation restriction” is the value of what the donor gives up by

granting the easement, i.e., the value of “the property rights sacrificed.”

In this case, petitioner says, the “the property rights sacrificed” consist

of the right to construct and operate a limestone quarry on the land. The

NPV of the hypothetical limestone quarry, petitioner concludes, is thus

the FMV of the easement. On this theory, it does not matter what a

knowledgeable willing buyer would pay for the land unencumbered by

the easement. The “willing buyer/willing seller” test thus goes out the

window.

This argument is wholly unconvincing. The sentence on which

petitioner relies functions as the preamble to Treasury Regulation

§ 1.170A-14(h)(3)(i). It says that “[t]he value of the contribution . . . in

the case of a charitable contribution of a perpetual conservation restriction is the fair market value of the perpetual conservation restriction.” If we replace “perpetual conservation restriction” with “X,”

this sentence says that “the value of the contribution . . . in the case of a

charitable contribution of X is the fair market value of X.”

This sentence, in other words, simply says that the value of the

contribution is equal to the FMV of the property contributed. This is

essentially a truism. What matters is how we determine the FMV of the

property contributed, i.e., the value of the perpetual conservation restriction.

The sentence on which petitioner relies provides no help in answering the latter question, but the rest of the regulation does. It says

that, if a live market for conservation easements exists, we look to data

from that market to enable a direct valuation of the perpetual conservation restriction. Treas. Reg. § 1.170A-14(h)(3). In the absence of such

data (as here), the regulation instructs us that the “before and after”

method must generally be used to value that restriction. Ibid. In essence, this method values the easement indirectly rather than directly.

The “before and after” method instructs us to determine the FMV

of the subject property—here, the undeveloped land—at two points in

time: immediately before and immediately after the easement is

granted. In determining the FMV of that property at each point, we are

required to use the “willing buyer/willing seller” formula, as we would

do in determining the FMV of any property for charitable contribution

purposes. The first sentence of Treasury Regulation § 1.170A-14(h)(3)(i)

does not “supersede” or render irrelevant the “willing buyer/willing

seller” test. To the contrary, that regulation dictates a method—the “before and after” method—that requires use of the “willing buyer/willing

seller” definition to determine the FMV of the property at both points in

time.

There is no textual or logical support for petitioner’s assertion

that the “willing buyer/willing seller” formula, which governs the

determination of property value for charitable contributions generally,

somehow does not apply when the donated property is a conservation

easement. In essence, petitioner asserts that the first sentence of Treasury Regulation § 1.170A-14(h)(3)(i) mandates use of the owner-operator

version of the capitalized income method when valuing a conservation

easement. But the regulation cannot plausibly be interpreted to say

that.

By reading this regulation to mandate use of the valuation

method petitioner prefers, petitioner is begging the question. The only

valuation method the regulation specifies—applicable when there is no

active market for purchase and sale of conservation easements—is the

“before and after” method. Petitioner does not dispute—and its expert,

Mr. Clark, agreed—that the “willing buyer/willing seller” test applies in

determining the after value of property subject to this regulation. That

being so, petitioner cannot logically contend that the same regulation

forecloses use of the “willing buyer/willing seller” test in determining the

before value of the same property.

IV.

Penalties

The Code imposes a 20% penalty for an underpayment of tax required to be shown on a return that is attributable to “[a]ny substantial

valuation misstatement.” § 6662(a), (b)(3). A misstatement is “substantial” if the value of the property claimed on a return is 150% or more of

the correct amount. § 6662(e)(1)(A). The penalty is increased to 40% in

the case of a “gross valuation misstatement.” § 6662(h). A misstatement

is “gross” if the value of property claimed on the return exceeds 200% of

the correct amount. § 6662(h)(2)(A)(i). 24

The value Ranch Springs claimed for the easement on its 2017

return was $25,814,000. We have determined that the value of the easement on the valuation date was only $335,500. The claimed value thus

exceeded the correct value by $25,478,500 or 7,694%. The valuation

misstatement was thus “gross.”

Generally, an accuracy-related penalty is not imposed if the taxpayer demonstrates “reasonable cause” and shows that he “acted in good

faith with respect to [the underpayment].” § 6664(c)(1). This defense

may be available where a taxpayer makes a “substantial” valuation

24 By Order served October 17, 2023, we held that the IRS satisfied the supervisory approval requirement for the penalties determined in the FPAA. See

§ 6751(b)(1). We accordingly address that subject no further here.

overstatement with respect to charitable contribution property. See

§ 6664(c)(3) (second sentence). But this defense is not available where

the overstatement is “gross.” See § 6664(c)(3) (first sentence). The 40%

penalty thus applies to the portion of Ranch Springs’ underpayment attributable to claiming a value for the easement in excess of $335,500.

Respondent also seeks a 20% penalty for an underpayment due to

negligence or a substantial understatement of income tax. See § 6662(a)

and (b)(1) and (2). This penalty would apply to the portion of any underpayment not attributable to the valuation misstatement. See Oconee

Landing, T.C. Memo. 2024-25, at *75 (citing Plateau Holdings, LLC v.

Commissioner, T.C. Memo. 2021-133). We have rejected respondent’s

contention that Ranch Springs is entitled to a charitable contribution

deduction of zero on the theory that it failed to secure a “qualified appraisal.” See supra pp. 31–33. Because Ranch Springs is entitled to a

charitable contribution deduction of $335,500, there is no underpayment

attributable to claiming a deduction in that amount, so the 20% penalty

does not apply.

We have considered all of the parties’ contentions and arguments

that are not discussed herein, and we find them unnecessary to reach,

without merit, or irrelevant.

To reflect the foregoing,

Decision will be entered under Rule 155.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.