UNITED STATES TAX COURT

T.C. Memb. 2012 72

UNITED STATES TAX COURT

JAMES E. BUTLElí, JR., AND SUSAN C. BUTÍsER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respon lent

Docket No. 1752-09.

Filed March 19, 2012.

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

Rothschild, Jr., for petitioners.

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

respondent.

SERVED MAR 1 9 2012

-2MEMORANDUM OPINION

WELLS, J_udge: Respondent determined income tax deficiene es of

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

$505,042.60 and $138,938.80 with respect to petitioners' 2003 and 004 tax years

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

conservation easements petitioners donated to.Chattahoochee Valle Land Trust

(CVLT) with respect to two properties near Columbus, Georgia, con titute

qualified conservation contributions pursuant to section.170(h); (2) he proper

values of those conservation contributions; (3) whether the conserv tion

easements petitioners donated to Chattowah Open Land Trust (CO

) with

respect to property in Early and Calhoun Counties, Georgia, co'nstit te qualified

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

those conservation contributions; and (5) whether petitioners are li

le for the

accuracy-related penalty pursuant to section 6662(a).

1Unless otherwise indicated, section references are to the Int rnal Revenue

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

of Practice and Procedure.

-3For convenience, we proceed first with general background findings of fact

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

issue with our opinion regarding each of those issues.

General Background

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

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

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

Petitioner James E. Butler has long been interested in conser fation. During

the late 1980s, Mr. Butler offered his services pro bono as lead cou1sel in

·

litigation that successfully prevented the construction of a hazardot.s waste

incinerator in Taylor County, Georgia. During the late 1990s, Mr. 3utler served

on the Georgia Board of Natural Resources. During the early 20003, Mr. Butler

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

The purpose of forming CVLT was to encourage landowners to donate

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

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

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

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

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

across Hubbard Road from Mr. Butler's property in Muscogee Coun . We refer

to the foregoing properties as the Muscogee County properties. Befo e petitioners

contributed those conservation easements, Mr. Butler resigned from

e board of

CVLT.

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

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

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

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

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

Kolomoki Plantation or Kolomoki. The L.L.C. contributed the ease ent on

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

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

that were donated before the organization changed its name. Durin 2004, the

L.L.C. contributed a conservation easement to COLT on an additio al 2,450 acres

of Kolomoki Plantation. The L.L.C. passed through to petitioners t e charitable

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

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

2The unified audit and litigation procedures of the Tax Equi

and Fiscal

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

(continued...)

-5Throughout the process of donating the conservation easemertts, Mr. Butler

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

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

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

Butler's accountant for more than twó decades. Mr. Butler engaged Conservation

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

conservation conveyances, to advise him regarding the process of d3nating the

conservation easements. Conservation Advisors helped petitioners plan and

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

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

the deeds of conservation easement (conservation deeds) and relateel documents

on behalf of petitioners and the L.L.C.

Petitioners timely filed their individual income tax returns fo:: the years in

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

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

2(...continued)

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

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

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

-6Partnership Income, for the years in issue. It attached to those return appraisal

reports for the conservation easements on the Kolomoki property. .

The appraisal reports submitted with the returns filed by petiti ners and the

L.L.C. determined that the proper values ofthe conservation easeme ts with

respect to each of the properties were as follows:

Muscogee County properties

James Butler

Susan Butler

Before

After

Enhancement

Easement value

$6,520,000

1,799,000

37,000

4,684,000

$294,000

103,000

17,000

191,000

Kolomoki Plantation

2003

2004

$14,693,000 $13,139,000

12,143,000 10,157,235

-045,600

2,550,000

22,936,000

1The $7,000 enhancement is already reflected in the after valu of $103,000.

2The appraiser rounded this number in his report.

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

income tax returns. Relying primarily upon Mr. Johnson and Mr. R thschild, Mr.

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

did not review it in detail. He read at least one of the appraisal rep

s for the

Kolomoki Plantation conservation easements, but he does not reme ber reading

any of the other reports.

After conducting an examination of petitioners' 2003 and 20 4 income tax

returns, respondent determined that petitioners failed to establish t at their

- -7contributions of conservation easements to CVLT and COLT were qualified

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

respondent determined that the appraisal reports submitted by petitianers failed to

establish the proper value of the conservation ensements? Respondent timely

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

this Court.

Allocation of the Burden of Proof

As a preliminary matter, we consider petitioners' contention hat the burden

of proof has shifted to respondent l 541ursuant

to section 7491(a). Generally, the

Commissioner's determination of a deficiency isipresumed correct, and the

taxpayer has the burden of proving it incorrect. Rule 142(a); Welch 9. Helvering,

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

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

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

respect to that issue; and (2) the taxpayèr sati'sfieá ce'rtain other conditions,

including substantiation of any item and cooperation with the Com nissioner's

requests for witnesses, document 541,

other information, aníl meetings. Sec.

3However, respondent did not argue at trial or in his briefs that petitioners

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

Income Tax Regs.

-87491(a)(2); see also Rule l'42(a)(2). The taxpayer bears the burden o proving that

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

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

At trial, respondent conceded that petitioners fully cooperated uring

respondent's examination of their.returns. Accordingly, the require ents of

section 7491(a)(2)(B) have been met. However, respondent contend that

petitioners have not introduced credible evidence with respect to an of the factual

issues in the case. Respondent contends that all the evidence petitio ers submitted

either fails to address the issues or lacks credibility.

We must decide whether petitioners introduced "credible evi ence" with

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

evidence" means "'evidence which, after critical analysis, the court ould find·

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

submitted (without regard to the judicial presumption of IRS correc ness).'"

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

v. Commissioner, 315 F.3d 1017, 1021 (8th Cir. 2003), r_ev_'g T.C.

emo. 2002-6),

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

834, 835 (11th Cir. 2008), afEg T.C. Memo. 2006-271; Higbee v. ommissioner,

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

As we explain below, we conclude that petitioners produced credible

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

regarding whether their conservation easements satisfied the requirements of

section 170(h). With respect to those issues; therefore, the burden cf proof shifts

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

extensive evidence regarding the factual issues relating to the valuarion of the

conservation easements and we decide those issues on the basis of 2

preponderance of the evidence, the allocation of the burden of proof on those

issues is immaterial. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008).4

Issue 1. Whether Petitioners' Contribution of a Conservation Easerient on the

Muscogee County Properties Was a Qualified Conservation Contribution Under

Section 170(h)

Background

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

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

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

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

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

4Accordingly, we need not address petitioners' alternative argument that the

burden of proof should shift to respondent because respondent's nctice of

deficiency was "excessive and erroneous".

- 10 County line. Looking east from Whitesville Road, the property's irre ular shape

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

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

hitesville

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

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

. Petitioners

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

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

Butler estate is not subject to the easement. The parties refer to the t act of.land

assembled by Mr. Butler as the James Butler property. We will also use that

appellation, but we do not include the Butler estate when we refer to the James

Butler property.

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

exception of two existing residences.. The property includes both p stureland and

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

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

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

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

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

- 11 portion. During 2003, the James Butler property had access to sew r and water

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

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

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

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

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

sloped toward the south and west, where it borders two creeks. D

ng 2003, it

had access to water and sewer along Hubbard Road. The Susan B

er property is

undeveloped.

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

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

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

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

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

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

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

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

not as rapidly because of its distance from downtown Columbus ankl because it

had fewer amenities and services.

:- 12 Although the neighborhood of the James Butler property remai ed rural and

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

a result of the pattern of growth in Muscogee-County. During 2003,

. Butler

received three unsolicited offers from developers who wanted to pur hase a.small

portion of that property. On July 18, 2003, William White of Sedge eld

. .

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

per acre. The 75-acre portion of the property Mr. White wanted to p rchase was.

the southernmost portion of the James Butler property, a portion sha ed roughly

like a square fronting Hubbard Road. That portion was south of Prit hett Road,

separated from Pritchett Road by another 40-acre tract owned by Mr Butler that

Mr. White did not offer to purchase. After Mr. Butler declined that ffer, Mr.

White offered to purchase a 42-acre subset of that 75-acre tract for 20,000 per

acre. Mr. Butler again declined to sell. On-August 21, 2003, anoth r developer,

Kenneth Brown of Leary & Brown, Inc., offered to purchase the sa e 42-acre

.

tract, the southernmost portion of the James Butler property, for $3 ,000 per acre.

Mr. Butler also refused that offer.

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

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

easements to CVLT on the Muscogee County properties. The cons rvation

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

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

Although the conservation deeds significantly restrict petitioners' use ofthe

Muscogee County properties, they permit limited agricultural and r creational use

and reserve a total of 12 lots for development. Both of the conserv ion deeds

begin with nearly identical recitals, proclaiming general conservation purposes.

The conservation deeds then provide certain rights and duties to the grantor and

grantee: A list of permitted-uses and practices labeled "Exhibit 'B" is attached to

the conservation deeds and provides:

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

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

Purpose and are expressly permitted.

l'. Agricultural activities. To conduct small scale fant ing, ranching,

or other agricultural activities including raising, managing and breeding

livestock and lilanting, raising and harvesting agricultural crcps. However,

there shall be no large scale agricultural activities permitted on the Property

such as feedlots, pig farms, commercial poultry farms, or similar uses which

have the potential to negatively impact the Conservation Val ies.

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

resources on the Property in accordance with applicable state and federal

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

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

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

including ponds; to locate, construct,'repair, and maintain irr gation. .

- 14 systems; to develop animal watering facilities; and to construc , repair and

maintain dams, spillways, docks, gazebos and related recreatio al structure

appurtenant thereto. .

6. Maintenance and structures. To maintain, repair, re odel, and

make limited additions to any existing or subsequently const cted

structures and improvements expressly permitted by this Ease ent. * * *

Grantor reserves and retains the right to construct, maintain a repair a

single family residence,-garage and barn or single multipurpos outbuilding

on each of the eleven (11) two-acre building sites shown in th Baseline

Documentation (the "Building Sites"). Reconfiguration of th Building

Sites, but not expansion, may be permitted if Grantor requests in writing and

Grantee approves such reconfiguration. Grantor further reser es and retains

the right to construct, maintain and repair structures ancillary o the uses

permitted in paragraphs 1 and 2 above [agricultural and recre tional uses],

such as a cattle barn, horse barn, and sheds, so long as such st etures do

not materially impair the Conservation Values.

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

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

In addition to the permitted uses described above, both conse vation deeds

permit commercial timber harvesting pi.ovided that CVLT approves the timber

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

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

aný'ap]Sr@al-from the grantee. Additionally, the conservation deed expressly

permit a wide variety of recreational activities such as noncommere'al hunting,

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

- 15 that they do not result in "demonstrable degradation to the Conservation Values";

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

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

and dosages which achieve the desired result while minimizing the impact upon

non-noxious foliage and vegetation." The grantor is permitted to s 11 any or all of

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

easement.

The conservation deeds require that the grantor notify CVLT before

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

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

by the grantor, and provide that the grantor waives any defense of Itches, estoppel,

or prescription. The conservation deeds also provide that CVLT haa the right,

upon prior notice to the grantor, to enter the property to monitor cor apliance with

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

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

the conservation deeds. Since the donation of the conservation eastments during

2003, CVLT has been monitoring the Muscogee County properties annually to

ensure that the conservation values are not being damaged by any uses of the

properties inconsistent with the conservation deeds.

. 042

- 16 The conservation deeds contain a list of prohibited uses in "E

ibit 'C'".

That list includes uses such as mineral exploitation, "commercial or ndustrial

facilities (other than those necessary in the operation.or uses of the P operty

expressly permitted by this Easement)", dumping, billboards, comm reial towers,

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

conservation deeds do not permit the general public to access the pr perties.

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

ambiguous, "an interpretation consistent with the Purpose and said ode Sections

that would render the provision valid shall be favored over any inte retation that

would render it invalid."

The "Baseline Documents" to which the conservation deeds r fer consist of

reports prepared by environmental consultants Stacy Mote and Erin outhillier

(collectively, environmental consultants). We shall refer to those d cuments as

the environmental reports. The environmental reports state that the environmental

consultants were engaged for the purpose of conducting a "baseline 2nvironmental

inventory" so that "an assessment of [each] * * * property's natural mportance

can be made and future management and monitoring practices can b evaluated."

Consistent with that purpose, the environmental reports describe the natural

features of the Muscogee County properties at the time of the easem nt

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

environmental report with respect to that property states:

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

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

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

offers forage, nesting habitat, and shelter. * * * All of these :'unctions and

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

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

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

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

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

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

of the properties that normally live in habitats similar to the habitat 3rovided by

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

provide habitat similar to the habitat preferred by several wildlife s ecies listed as

threatened or endangered. However, the environmental consultants did not

actually observe any endangered species on the Muscogee County properties, and

the only threatened species they observed was the plumleaf azalea, .vhich the State

of Georgia considers threatened.

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

that timber and agricultural activities have "altered some of the native plant

- 18 communities" and that a small herd of horses kept on the property " ay have a

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

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

minimal." That report also notes that the larger tract has been used f r grazing

livestock and harvesting in the recent past and that, although those p actices "have

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

diversification in habitat that may have not occurred previously."

The environmental reports provide the following conclusions nd

recommendations (using identical language in both reports):

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

unique natural resources in this rapidly developing area. Heif rhorn Creek

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

wildlife, filter pollutants, and recharge groundwater * * *. Th se waterways

also have a high likelihood of supporting federally and state p otected

mussel and fish species. The many habitats on-site host a wid variety of

plant and animal species. * * *

With limited development of the property, the wildlife omponents of

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

recommend that all timber practices comply with Forestry Be t Management

Practices, keeping stream management zones and using suita le erosion

control techniques.

Except for those brief conclusions, the environmental reports do no address how

the conservation value of the properties would be affected by the pe

described in the conservation deeds.

itted uses

- 19 Petitioners later submitted supplemental environmental report s,.also

authored by Ms. Bouthillier and Ms. Mote, during 2010 (supplemen:al

environmental reports).- The supplemental environmental reports in lude a new

section in which the environmental consultants more specifically ad:lress how the

conservation deeds protect conservation purposes as provided in the Code and the

regulations. The supplemental environmental reports specifically identify certain

high quality terrestrial and aquatic communities found on the properties:

During the 2002 surveys, high quality terrestrial comm nities were

identified on the Butler Tract in the northern portion of the si e and along

the ridge/slopes paralleling the drainageways. These commu ities were

Oak-Hickory-Pine Forests and Granite Outcrops further desc ibed in the

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

character of these significant habitats made it difficult to farn L or timber

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

The rocky substrate also provides habitat for several of the species listed

above.·

Oak-Hickory-Pine Forest was observed in the northern p'ortion of the

easement and along tributaries throughout the site. Numerous wildlife

species, including migratory songbirds,'were observed utiliziig this

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

transition between gently sloping to steep hillsides scatteredovith rock

outcrops. Oak-Hickory-Pine Forests within the Piedmont ecoregion have

been primarily impacted by urban sprawl within the last twer ty years.

Rock Outcrops were found within the steep slopes of the upland

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

Vernal pools within shallow depressions of these outcrops pióvide habitat

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

this type of habitat is occurring throughout Georgia due to la::k of habitat

- 20 protection. These outcrops provide potential habitat for granite stonecrop

and pool sprite.

The 2002 surveys also identified high quality aquatic co nmunities in

Heiferhorn Creek, its tributaries, and associated floodplain har wood.

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

source and has been afforded additional protection in this port'on of the

County. This large waterway flows south to southwest along e eastern

boundaries of the Butler Tract eventually discharging into the

Chattahoochee River Basin. Heiferhorn Creek and its tributar'es are

meandering systems with series of run/riffle/pool habitats. Se eral areas of

rocky shoals provide foraging areas and habitat for protected ecies.

Native plumleaf azalea populations (Rhododendron prunifoli ), a

threatened State Species, were observed along stream courses broughout

the Property.

.

, 2

The environmental consultants found only one rare, endangered, or

eatened

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

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

environmental consultants reported that the following rare, endange ed, or

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

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

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

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

labama

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

Bachman's sparrow (a bird found in open pine woods and old pastu es with dense

- 21 ground cover); and alligator snapping turtle (a reptile found in rivern, lakes,

swamps, and large ponds)

The supplemental environmental reports do not mention any of petitioners'

retained rights besides the following brief discussion of the reservec building

sites: "Even with the retained rights of 11 2-acre home.sites, the * * * [James

Butler property] would maintain the scale of rural residential open s ace

historically present in the region.'' The supplemental environmenta report for the

Susan Butler property included a similar.conclusion about the effec1 ofthe single

two-acre home site reserved on that property.

Discussion

A.

Legal Standard

Taxpayers may deduct the value of any charitable contributicns made

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

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

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

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

"qualified conservation contribution" as defined in section 170(h)( ). Sec.

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

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

- 22 real property interest" (2) to a "qualified organization" (3) "exclusiv y for

conservation purposes." Sec. 170(h)(1). The parties agree that the c ntributions

petitioners made were of qualified real property interests and that tho e

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

remaining for us to decide is whether those contributions were exclu ively for

conservation purposes.

To be considered to have been made exclusively for conservat on purposes,

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

170(h)(4)(A) defines "conservation purpose" as:

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

education of, the general public,

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

plants, or similar ecosystem,

ildlife, or

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

land) where such preservation is-(I) for the scenic enjoyment of the general public or

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

governmental conservation policy, and will yield a sig ificant public

benefit, or

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

certified historic structure.

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

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

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

preserved in perpetuity.

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

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

would permit destruction of other significant conservation interests."

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

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

this section if under the terms of the contribution a significan: naturally

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

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

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

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

conservation interests.t

Id.

.

The parties agree that petitioners' contributions do not satisfy the

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

the requirements of the second and third conservation purposes listed in section

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

retained under the conservation deeds are inconsistent with the conaervation

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

- 24 extent to which development of the tracts is explicitly permitted by t e

conservation deeds. Petitioners contend that, although the conservat'on deeds

reserve some rights for petitioners, they include language that ensure the

conservation purposes will be protected. Because, as we explain bel w, we

conclude that petitioners' contributions satisfy the section 170(h)(4)

)(ii)

conservation purpose of protecting a relatively natural habitat (conse ation

purpose), we need not address whether the contributions protect ope space

pursuant to clause (iii).

To qualify for the conservation purpose of protecting a relativ ly natural

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

protect a significant relatively natural habitat in which a fish, ildlife, or

plant community, or similar ecosystem normally lives will me t the

conservation purposes test of this section. The fact that the h itat or

environment has been altered to some extent by human activit will not

result in a deduction being denied under this section if the fisl3, wildlife, or

plants continue to exist there in a relatively natural state. *·* *

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

guidance with respect to what constitutes a "significant habitat or ecasystem":

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

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

areas that represent high quality examples of a terrestrial com unity or

aquatic community, such as islands that are undeveloped or n t intensely

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

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

- 25 . local, state, or natiònal park, nature preserve, wildlife refuge; wildefness' *

area, or other similar conservation area.

Sec. 1.170A-14(d)(3)(ii), Income Tax Regs. A "habitat" is an "'aret or

environment where an organism or ecological community normally lives or

occurs'" or the "'place where a person or thing is most likely to be f3und.'" Glass

v. Commissioner, 124 T.C. 258, 281-282 (2005) (quoting the Ameri;an Heritage

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

Cir. 2006).

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

the conservation purpose of protecting a relatively natural habitat ur(der section

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

endangered, or threatened species is normally found; (2) that is a "h gh quality"

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

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

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

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

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

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

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

- 26 "documentation sufficient to establish the condition of the property

the time of

the gift." Sec. 1.170A-14(g)(5), Income Tax Regs. The donee must 1so be given

the right to periodically inspec the property and to enforce the conse ation

restrictions, including the right to require thÈestoration of the prope ty to its

condition at the time of the donation. Id.

In deciding whether the conservation deeds preserve the conse7vation

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

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

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

conservation deeds, would the conservation purpose still be preserved?

B.

What Rights Are Reserved Under the Conservation Deeds?

As detailed above, the conservation deeds reserve numerous rights for

petitioners, subject to the overarching language of the conservation ceeds

preserving the conservation purposes

nder the terms of the conser ation deeds,

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

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

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

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

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

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

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

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

the impact upon non-noxious foliage and vegetation". They may construct dams

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

and "related recreational structures". They may clear timber for agr cultural uses,

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

of trees or other plants.

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

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

to the Conservation Values". Such conditionally permitted uses include the

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

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

agricultural or recreational use ori any portion of the property (not just the twoacre building sites), and commercial timber harvesting pursuant to Ln approved

timber management plan. CVLT has the right to determine whethe such uses

would result in degradation to the conservation values.

Although the conservation deeds reserve the above rights for petitioners,

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

- 28 compliance with the terms of the conservation deeds. In the event th t CVLT

determines that the conservation values have been damaged, it is enti led to

require that the owner restore the property, The condition of the Muscogee

County properties at the time of the contributions are documented inche

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

Regs.

The parties disagree about whether the conservation deeds restrict the

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

incorporate by reference the "Baseline Documents", which they cont:rid include

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

in locations that are consistent with the preservation of the conservat.on purposes.

Petitioners contend that the map was developed in consultation with

s. Moterand

Ms. Bouthillier so as not to disturb the conservation purposes. Resp- ndent

contends that the "Baseline Documents" cannot legally be incorpora:ed by

reference and are not effective unless separately recorded.

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

Memo. 2009-205, in which we held that unrecorded documents wer not biríding.

However, the conclusion in Herman was based upon New York Stat law; The

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

- 29 Court has held: "Where a deed or grant refers to a plat as furnishing the

description of the land conveyed, the plat itself and the words and ir arks on it are

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

such descriptive features were written out on the face of the deed·or grant itself."

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

Poole, 60 S.E.2d 371, 372 (Ga. 1950). In that case, the Georgia Supreme Court

did not make a distinction between recorded and unrecorded plats.5 At least one

Georgia court of appeals has specifically held that an unrecorded plat will be

treated as incorporated by reference in a deed. See Chi. Title Ins. Co. v.

Investguard, Ltd., 449 S.E.2d 681 (Ga. Ct. App. 1994). Accordingly, as a matter

of law, reference in the recorded conservation deed to the map showing the

location of the lots effectively made that map part of the recorded deed.

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

knowledge of any commitment if notice is "sufficient to excite atterition and put a

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

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

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

5Black's Law Dictionary 1189 (8th Ed. 2004) defines a plat as a "map

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

easements."

G0 Doughtie, 686 S.E.2d 416 (Ga. Ct. App. 2009). Purchasers who have notice of a

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

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

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

binding under Georgia State law.

C.

Do the Conservation Deeds Preserve the Conservation

Purposes in Perpetuity?

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

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

paucity of evidence addressing the central issue of whether the rese ed rights are

consistent with the conservation purpose. Petitioners directed their vidence

almost exclusively at the issue of whether the properties presently ft Ifill the

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

the time of the contributions, provided a significant "relatively natur al habitat of

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

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

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

several different ecosystems, as well as habitat where rare, endangeied, or

threatened species normally live. For instance, the supplemental en vironmental

- 31 reports describe high-quality example's of granite outcrops, oak-hickory-pine

forest, and rocky shoals ecosystems. Although the environmental consultants

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

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

or threatened species normally live.

However, we must decide whether the conservation deeds actually preserve

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

regulations.. Sometimes, when landowners preserve their properties using

conservation easements, those conseñation easements permit no development-at

all, guaranteeing that the land will continue to exist in its then-current state. In

such cases, evidence documenting a contemporanedus conservation purpose

served by the land may be sufficient to show that the conservation easements serve

the conservation purpose. Hov/ever, in the·instant case,.petitioners have reserved

rights enabling them to develop portions of their properties and con:luct other

activities that would noticeably alter the properties' current conditions.

Accordingly, we must decide whether, if the properties were develcped to the

extent permitted by the rights reserved under the conservation deed3, they would

still serve the conservation purpose.

- 32 The environmental reports prepared by Ms. Mote and Ms. Botthillier state

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

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

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

before preparing their reports. At trial, the only testimony petitioner s offered

regarding whether the retained rights were consistent with the conservation

purpose was a few exchanges between their counsel and the environmental e

consultants concerning the two-acre building sites. Regarding those sites on the

James Butler property, Ms. Bouthillier testified as follows:

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

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

children and grandchildren?

.,

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

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

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

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

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

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

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

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

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

specifically testify about petitioners' retained rights. However, she þtated that 400

- 33 acres were being preserved for wildlife and that for "400 acres to be preserved and

guided by conservation principles is really priceless". Regarding the!retained rights on the Susan Butler property, lVs. Mote

testified as follows:

Q. From a conservation easement --

A. Right.

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

which are perpetually reserved, how does that serve conservation of

relatively natural habitat for wildlife?

A. Well, I believe in the baseline they have a site set up for that twoacre, which is actually located on a -- it looks like it could be an old

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

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

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

site from what I recall.

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

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

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

A. Uh-huh.

Q. I'm sorry?

A. Yes. Yes.

. t . -34Q. And in doing that analysis was it necessary for you t determine

what would be in the conservation easement and what would be excluded -or retained out of the conservation easement?

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

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

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

areas are suitable, whether it's soil -- you know, sometimes there's soil

that's not -- that's proper enough to be able to build upon; So we look for

where the soils are, where the wetlands are, where the flood plains are. And

then we go in to look to see where you could have home sites.

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

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

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

the conservation purpose.

In support of their contention that the other reserved rights arg consistent

with the conservation purpose, petitioners point to CVLT's enforcement rights

under the conservation deeds. Petitioners contend that if they or some future

owners were to use the land in a manner inconsistent with the conservation

purposes stated in the conservation deeds, CVLT would have the right to enforce

the conservation deeds and require the owner to restore the land.

Respondent contends that the reserved rights are inconsistent with the

conservation purpose, but respondent offered no expert witness testi nony to

support his contention. Instead, respondent contends that the conservation deeds

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

conservation purpose. Respondent argues that the reserved rights could be

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

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

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

rights granted under the conservation deeds or that CVLT would otherwise permit

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

conservation purpose.

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

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

presented credible evidence--in the form of the expert testimony no:ed above, the

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

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

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

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

to no evidence that would suggest that CVLT is likely to abandon i s right to

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

failed to establish that the conservation deeds do not protect signifi;ant habitat.

- 36 Accordingly, we hold that the conservation deeds satisfy the require ents of

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

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

Muscogee County Properties

Discussion

Generally, the amount of a charitable contribution is the fair 1r arket value of

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

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

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

compulsion to buy or sell and both having a reasonable knowledge cf relevant

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

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

J

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

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

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

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

to be needed in the reasonably near future. Olson v. United States, 92 U.S. 246,

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

·-37the current use, a proposed highest and best use.requires "closeness n time" and

"reasonable probability". Hilborn v. Commissioner; 85 T.C. at 689. 1

Where a substantial reóord of comparable easement sales exis:s, the fair o

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

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

the instant case, there is no establishe'd market for similar conservation easements

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

method to determine fair market value

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

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

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

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

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

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

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

market values of conservation easements. See, e.g., Hilborn

Co missioner, 85

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

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

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

1124 (5th Cir. 1990).

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

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

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

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

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

the subject property; (2) the sales are arm's±1ength transactions; and (3) the sales

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

Cattle Co. v. Commissioner, 72 T.C. 1., 19 (1979).· Because no two sales and no 3

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

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

appropriate adjustments for each to approximate the qualities of the rubject

property. Estate of Spruill v. Commissioner, 88 T.C. 1197, 1229 n.2 4 (1987);

Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. at 19. We have found the

comparable sales approach to be the most reliable indicator of value when there is

sufficient data about sales of properties similar to the subject prope

. See, e.g.,

Estate of Spruill v. Commissioner, 88 T.C. at 1229 n.24; Estate of R e v.

Commissioner, T.C. Memo. 1975-26, aff'd without published opini

1183 (9th Cir. 1977).

, 566 F.2d

- 39 Another valuation method sometimes employed is the income or discounted

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

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

to valuing real property involves discounting to present valùe the expected

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

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

behind the approach is that an investor would be willing to pay no n.ore than the

present value of a,property's anticipated future net income.

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

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

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

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

Petitioners retained three appraisers who wrote reports with respect to the

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

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

submitted by petitioners with their 2003 tax return.: vThe other'reports were

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

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

appraisers used the sales comparison approach and the discounted cashflow

- 40 analysis, also variously called the income capitalization approach or :he

subdivision analysis. However, in their reply brief, petitioners abandoned their

reliance on the discounted cashflow valuations. For that reason, we vill not

consider petitioners' discounted cashflow analyses. Respondent subnitted one

appraisal report with respect to each of the Muscogee County proper;ies. Those

reports were written by Zac Ryan.

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

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

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

below, we have adjusted the appraisers' numbers to reflect the parties' stipulation,

unless otherwise noted.

An expert's opinion is admissible if it assists the trier of fact t understand

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

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

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

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

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

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

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

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

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

also reach a decision as to value based on our own examination of11 e evidence in

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

T.C. Memo. 1974-285.

A.

.The James Butler Property

1.

The Appraisal Reports

a.

Mr. Roberts' Appraisal Report .

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

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

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

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

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

Appraisal Inst., 845 F. Supp. 592, 595 (N.D. Ill. 1994). The highes1 certification

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

designation was comparable to.the MAI (Member Appraisal Institu e) designation

given by the American Institute of Real Estate Appraisers (AIREA). Id. The

AIREA also used the designation RM, which was comparable to the society's

SRA. Id. at 595-596. During 1991, the society merged with the AI REA to form

the Appraisal Institute. Id. at 596. The Appraisal Institute kept the MAI

designation as its highest certification and kept the SRA designation as its

certification for residential appraisers. EL Within the real estate appraisal .

community, MAI is viewed as the highest regarded appraisal.desigitation. See

Schwartz v. Commissioner, T.C. Memo. 2008-117, aff'd, 348 Fed. Appx. 806 (3d

Cir. 2009); Estate of Auker v. Commissioner, T.C. Memo. 1998-18-.

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

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

Tennille, but she did not testify at trial.

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

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

2006. In that report, he had erroneously concluded that the highest

d best use of

the vacant land he was appraising was retail office space or multifa ily residential

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

To regain his appraiser's license, Mr. Roberts had to complete five c asses,

including a class on the valuation of vacant land and subdivision val2ation.

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

vacant land or subdivisions.

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

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

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

planner. Mr. Roberts wrote in his report that the lots in that plan ra ged frorn one

to four acres. He stated that those lots were compatible with the pro 3erty's

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

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

Mr. Roberts did not independently verify the feasibility of the Frenc i plan.

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

comparison approach and the discounted cashflow approach. Using the sales

comparison approach, Mr. Roberts found four comparable sales and adjusted the

value of those sales for time, location, size, and usability. He then used those

comparable sales to estimate that the before value of the James Butler property

was $10,000 per acre, or $3,933,300.

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

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

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

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

testified as follows:

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

impact on your conclusion?

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

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

the history of the property if I had known it.

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

A. It would have been a consideration.

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

property sold for $22,477 per acre during February 2004. He testifie:1 that had he

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

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

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

increased.

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

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

the following:

,

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

easement. No improvements are allowed and no analysis as ir aproved is

required. * * *

s

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

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

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

areas or recreation area on this section of the property. The 1 homesites

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

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

Mr. Roberts separately valued the 11 two-acre homesites and the re11ainder of the

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

. Roberts

7Mr. Roberts erroneously used 396.$ acres às the size of the undeveloped

(continued...)

used the sales compai.ison approach. He used the sales of five large mostly vacant

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

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

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

encumbered by conservation easements, Mr. Roberts made "usabilitly" adjustments

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

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

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

adjustments to each comparable sale for time, location; size, and ac ess, he

averaged the comparable sales and determined that the price of the :171.33-acre

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

$1,485,200.

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

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

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

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

7(...continued)

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

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

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

removing the 11 two-acre homesites, is 371.33 acres.

46Butler property in the after condition was $1,698 200. He also estimt ted that the

conservation easement enhanced the value of the unencumbered Butlèr estate by

$37,000,

b.

Mr. Eidson's Appraisal Report

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

Auburn, Alabama. Mr. Eidson has a bachelor's degree and holds the MAI

(Member of Appraisal Institute) designation from the Appraisal Insti ute. He has

more than 20 years of experience in the valuation industry, but he ha. never

appraised a conservation easement before his work for petitioners.

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

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

comparison approach and the discounted cashflow approach. For his sales comparison approach, he found four comparable sales, made various adjustments,

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

approximately $7,670,000.

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

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

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

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

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

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

County to estimate the value of the property as recreational land. A 1 of those

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

development. After making small adjustments for time and topogra3hy, Mr.

Eidson averaged those values and concluded that the value-of the encumbered

property as recreational land was $6,300 per acre.

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

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

were encumbered by conservation easements. Appraisals of those y roperties

completed by other appraisers show that the conservation easement decreased the

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

report the terms of any of those easements, nor did he attempt to ex 31ain why some

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

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

estimate that the conservation easement would decrease the value of the

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

apply the 60% diminution to his before value; he applied it to the v lue he

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

- 48 calculated that the encumbered 371.33 acres were worth $2,520 per 2cre, or

approximately $935,700.

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

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

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

approximately the same price as lots in nearby subdivisions: $70,00) each.

Although the lots would lack the amenities of the subdivision, they v/ould have

more privacy and a rural setting. He therefore estimated that the val e ofthe

James Butler property after being encumbered by the conservation e sement was

$1,705,700.

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

value ofthe Butler estate.

c.

Mr. Quillian's Appraisal Report

.

Mr. Quillian is a real estate appraiser based in LaGrange, Geo·gia. He is

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

degree and a master's degree in business administration, and he hok s the MAI

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

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

- 49 instant case. To learn how to appraise conservation easements, he tc ok a course

on the subject from the Appraisal Institute.

Mr. Quillian found that the highest and best use of the James 13utler

property-in the before condition was for residential development as a subdivision.

In one place in his report, Mr. Quillian concluded that the Jämes Bu 1er propérty

could be developed to a density of up to two houses per acre; however, in another

place, he wrote that the zoning did not permit development denser than one house

per acre. Unlike the other appraisers, Mr. Quillian used a hybrid ap roach to

value the property.; He estimated the value of the southernmost 125 acres of tlie

James Butler property using a discounted cashflow analysis, and he estimated the

value of the remainder using a sales comparisori approach.- Mr. Quillian believed

that the southernmost 125 acres were ready for immediate development but that

developers would not be as interested in the portion of the p operty north of v

Pritchett Road because its topography was not as well suited to dev ilopment.

However, he believed that, as developable land in the Columbus area became

scarcer, a developer would eventually want to purchase the northern portion. ^

In calculating the value of the northe'rn portion, Mr. Quillian found seven

comparable sales. All of the comparable sales were of properties·smallet than the

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

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

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

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

Mr. Quillian did not make aný specific adjustments to his comparablusales. He

concluded that two-ofhis seven comparable sales were the most simi ar to the

northern portion of the James Butler property, which he estimated to 3e worth

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

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

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

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

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

$25,655 per acre. During cross-examination, Mr. Quillian admitted t1at he had .

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

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

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

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

reviewed his calculations overnight andjfound that, although he had written 50, he

had actually used only 20. in his calculation. However, in his new ca culations, he

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

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

plans. His new calculations also accelerated the subdivision development

schedule so that lots with sewers would to be sold six months earliei than under

his original schedule. When questioned about his calculations during crossexamination, Mr. Quillian's responses were unclear, and he was unwilling or

unable to explain or clarify some of the assumptions and math behir.d the numbers

he produced.

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

from 2005 because the data he was using did not extend back to.20(3. In Georgia,

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

during the period from 2003 to 2005 and was very inflated during 2305.

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

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

development, he estimated its value using sales of properties that w3re ready for

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

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

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

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

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

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

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

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

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

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

the ability to landscape the properties and engage in significant recre itional

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

impossible to sell the retained lots as estate-style residences similar t3 the Butler

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

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

;

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

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

renders Mr. Quillian's conclusions regarding the value of the conservation

easement on the James Butler property largely useless.

d.

Mr. Ryan's Appraisal Report

Mr. Ryan, respondent's sole appraiser in the instant case, is a: elfsemployed

real estate appraiser based in Middleburg, Florida. He has been cert½ied to

appraise properties in Florida, Georgia, and South Carolina, and he 1 olds the MAI

designation from the Appraisal Institute. Mr. Ryan has more than 2 years of

- 53 experience appraising real estate, and he has been appraising conservation

easements since 1994, completing more than 100 conservation easement

appraisals. His clients have included the Nature Conservancy, the Georgia Land

Trust, the Georgia Department of Natural Resources, and the Florida Department

of Environmental Protection. Although Mr. Ryan has completed appraisals in 20

Georgia counties, before his engagement in the instant case, he had never

appraised a property in Muscogee County. ,

Mr. Ryan concluded that the highest and best use of the James Butler

property in the before condition was for residential development. E e used the

sales comparison approach to estimate the property's value. Unlike petitioners'

appraisers, Mr. Ryan relied only on the sales comparison approach and did not

consider the discounted cashflow method because he concluded tha: there were

sufficient comparable land sales. After finding four comparable sales and making

various adjustments, Mr. Ryan concluded that the before value of tLe James Butler

property was $12,000 per acre, or approximately $4,720,000.

.

Before determining the highest and best use of the property 11 the after

condition, Mr. Ryan devoted six pages of his report to an analysis cf the rights

encumbered by the terms of the conservation deed. He discussed 11 different

factors: title, transferability, division of the property, residential development,

- 54 industrial or commercial use, agricultural use, silvicultural use, mining, hunting v

and fishing rights, access to the þroperty, and permissible roads and 3ther

structures. For each factor, he discussed the rights permitted under t1e terms of

the conservation deed and whether those terms affected the value of the subject

property.

Mr. Ryan concluded that the highest and best use of the prope ty in the after

condition was for 11 rural estates, each combining agricultural or undeveloped

land with a two-acre building site. To estimate the value of the James Butler

property in the after condition, Mr. Rýan used several approaches. Firstly, he

compared the property in its after condition to all four of his comparable sales and

concluded that its value was inferior to all of them. Accordingly, he concluded

that the after value was at most $9,525 per acre, the adjusted value of the most

inferior comparable sale used by Mr. Ryan.

Secondly, Mr. Ryan considered three similar sales of property out of a

single tract of land. The price of one of those sales was 26% less than the other

two because that portion of the property was encumbered by a minir g lease until

2015. Mr. Ryan estimated that the permanent conservation easement on the James

Butler property would decrease its value by at least as much as the temporary :

mining lease.

- 55 Thirdly, Mr. Ryan compared the terms of the conseí·vation easement on the

James Butler property to the terms of two other conservation easemánts he had

appraised, both of which were on large tracts of rural property in Fk rida. For

each of those conservation easements, he described in detail 11 différent ways that

the easement affected the value of the encumbered property. Bo'th of the other

conservation easements were significantly more restrictive than the ;onservation

deed with respect to the James Butler property. However, because c ne of the

properties offered significantly less development potential than the ames Butler

property, Mr. Ryan concluded that the diminution in value associated with the

conservation deed on the James Butler propertý was somewhere between the

percentage diminutions in value observed on those properties, i.e., t etween 34%

and 65%. On that basis, he estimated that the conservation'easemer t reduced the

value of the James Butler property by 50% to about $6,000 per acre. Mr. Ryan did

not separately value the lots retained for building sites. He concluded that the

value of the James Butler property after.encumbrance by the conservation

easement was approximately $2,360,000.

Mr. Ryan conducted a fourth analysis to check the reasonableness'of his

conclusion. On the basis of his conclusion that the highest and best use of the

property in its after condition was for large estate-style residences, 2e considered

- 56 several sales of estate-style parcels from two developments in Musccgee County

and two in neighboring Harris County. The 20 estate parcels Mr. Ryan considered

ranged in size from 5 acres up to 18 acres and in price from $38,500 ap to

$180,000. The more expensive estate-style parcels generally were either lakefront

properties or the larger parcels. Because the potential estate-style lots on the

James Butler property would average about 36 acres, at least twice a:; large as any

of the other sales Mr. Ryan compared, he concluded that 11 large estates with twoacre building sites and the option to engage in small-scale farming of recreational

use of the remainder of the property would fetch at least $208,000 each. He

therefore concluded that the sale of nearby estate-style lots corrobortted his

conclusion about the after value of the James Butler property.

e.

Summary

.

In summary, the appraisers estimated the following before anc after values

for the James Butler property:

Roberts

Before

After

Enhancement

Easement value

$3,993,300

1,698,200

37,000

2,258,100

·

Eidson

Quillian

.]Ry_aan

$7,670,000

1,705,700

-0- .

5,964,300

N/A

N/A

N/A

N/A

$4,720,000

,360,000

-02,360,000

-572.

Disputed.Issues

Before analyzing the appraisers' reports and conclusions, we must decide a

few other disputed issues.8

a.

Zoning

At the time of the contribution, the Muscogee County propert.es were zoned

A-1, which prohibited development denser than one house per acre. The- '

appraisers disagreed about the ease with which the properties could hàve been

rezoned to permit denser development. However, the developer Mr White

credibly testified that, when he offered to buy a portion of the James Butler

property during 2003, he expected that it would be easy to change the zoning to

permit development of a subdivision with a density of more than one house per

acre. He explained that undeveloped property.is frequently zoned A-1 before

development. Mr. Eidson explained that because property taxes are lower on

property zoned A-1, most landowners choose not to seek rezoning for their

property until it is developed. The record contains several example i of properties

that were rezoned from A-1 to permit denser residential development. Although

the offers made by Mr. White and-Mr. Brown were contingent upor obtairiing

8For the reasons explained below, we decide these issues on the

preponderance of the evidence.

- 58 rezoning, the fact that they made such offers suggests they believed rezoning

would have been pro forma. On the basis of the foregoing, we conclude that

rezoning would have been possible and that developers would have t eeninterested in the property in spite of its then-current A-1 zoning.

,

.

b.

Covenants Regarding Lot Size

Approximately 27% of the James Butler property is subject to covenants

running with the land that mandate minimum lot and house sizes.' T ie 41.64

acres just south of Pritchett Road is subject to the following restrictions: no house

may be built that has less than 2,000 square feet ofheated living space and no lot

may be sold that is less than 2 acres. The 90 acres just north of Pritc;1ett Road,

including the Butler estate, is subject to the following restrictions: n3 house may.

be built that has less than 2,500 square feet of heated living space an i no lot may

be sold that is less than 4 acres. Not including the Butler estate, the 4-acre

provision applies to 65.58 acres.»All ofthe properties with lot size restrictions

were acquired from the Pritchett brothers.

.

,

Petitioners contend that when Mr. Butler acquired title to both tracts, the

doctrine of merger extinguished the covenants running with the land. Under

9The covenants apply to 131.72 acres, but the Butler estate accounts for 24.5

of those acres. The covenants therefore apply to only 107.22 acres of the 393.33

acres of the James Butler property (27%).

- 59 Georgia law, when some lots are burdened with covenants intended to benefit

other lots and all lots come under the same ownership, the covenants burdening

the lots generally are extinguished. See Muscogee Mfg. Co. v. Eagl: & Phenix

Mills, 54 S.E. 1028, 1031 (Ga. 1906); Petitioners attempted to pron that merger

had occurred through Mr. Butler's testimony regarding his purchases of property

from.the Pritchetts and his knowledge of his neighbors.1° However, Mr. Butler

testified that, in addition to the lots they sold to him, the Pritchetts s aid an adjacent

lot to Dwain Tobey (Tobey lot). Because the Tobey lot has not con,e under

common ownership, petitioners have failed to prove that the conditians necessary

for merger have been met. Accordingly, we conclude that the land remains

burdened by the covenants requiring minimum lot sizes.

1°At various points during trial and in their briefs, petitioners suggested that

they were surprised when respondent raised the issue of the lot size restrictions at

trial and that respondent did not produce the evidence of the covenEnts in

compliance with the Court's Standing Pretrial Order, which require s the parties to

exchange exhibits 14 days before trial. Petitioners contend that they therefore

were unprepared to present evidence proving merger. We disagree. The deeds

containing the covenants were included among the stipulated exhib ts, and they

were also in Mr. Roberts' original appraisal report, even though he failed to notice

the restrictions. Moreover, the covenants are discussed in Mr. Ryan's report and

in respondent's pretrial memorandum. . Regardless, because the evidence in the

record shows that no merger occurred, we conclude that petitioners were not

disadvantaged.

- 60 Petitioners' appraisers failed to notice the covenants restricting lot size and

therefore did not consider them when appraising the James Butler pr3perty.

Indeed, the subdivision plan used by petitioners' appraisers showed ot sizes

smaller than those permitted under the covenants. Mr. Ryan was the only

appraiser who considered the effect of the covenants in his appraisal report. He

concluded that those restrictions decreased the value of the property, but he did

not provide a specific numeric estimate of that impact.

Petitioners contend that the covenants restricting lot sizes would not have

affected the value of the property because four-acre "estate lots" sell at a higher

price per acre than smaller lots. However, the evidence in the record does not support their contention. Only Mr. Quillian testified that four-acre lots would sell

for a higher price per acre than smaller lots, but he contradicted his cwn testimony

during cross-examination. Mr. Quillian's testimony regarding the price per acre of

different lot sizes lacked credibility, and we give it no weight. All o 'the other

appraisers agreed that, other things being equal, larger lots generally sell for less

on a per-acre basis than smaller lots."

"Even if it were true that such "estate lots" sold for a premium, a restriction

on the tract that limited the freedom of developers to choose the size of lots or

houses would presumably have reduced the appeal of the tract and k wered its

price. Moreover, developers would have been free to sell four-acre lots even in

(continued...)

- 61 Accordingly, we conclude that the lot size restrictions coverin g 27% ofthe

James Butler property would have decreased its value by some amoint; and we

will consider that diminution in value in our analysis below. Because petitioners'

appraisers did not take into account that diminution in vahie, their conclusions

overstated the property's value.

c:

The Unaccepted Offers

The parties disagree about how much weight the appraisers should have

given the unaccepted offers made on the southernmost portion óf the James Butler

property. One of the unaccepted offers was made on the southernmost 75 acres;

the other two offers were made on only 42 ácres of that same portion: Those

offers represent 19% and 11% of the entire 393.33 acres. Petitionera contend that

those offers are indicative of the value of the entire property. We do not agree and

conclude that petitioners' contention is inconsistent with the eviden e.

- .

During cross-examination, Mr. Eidson admitted that althoug in his report *

he had called the topography of the James Butler property "basically level", it

would be more accurate to call the northern·portion "rolling". i Indeed; petitioners'

"(...continued)

the absence of the covenants. The fact that the subdivision plan used by the

appraisers contains very few such lots strongly suggests that there vras no such

premium.

. - 62 -

environmental consultants characterized the northern portion of the y roperty as

steeper than rolling. Not only is the northern portion much hillier than the

southern portion, it is also much rockier. Petitioners' environmental consultants

stated that there is 'tsignificant rock" in,the northern portion, includir.g many rocky

outcrops along the creeks. In contrast, the southernmost portion is less rocky, and

the banks of the creeks are sandy. In addition to the exposed rock, tl e northern

portion appears to contain significant rock beneath the surface. There are several

major rock quarries just a mile east of the·James Butler property, anc one of

petitioners' witnesses familiar with the area testified that "you can rest assured

there's rock under" the propertyn Mr. >White testified that land with rocky soil is

undesirable because excayation is very expensive and that developers therefore .

"stay away" from such properties. In contrast, Mr. White was willing to offer a

premium for the southernmost portion of the James Butler property .ecause its

topography was better than that of the neighboring land. When Mr.

hite

identified all the properties in Muscogee County that he considered ready for

development, he did not include any portion of the James Butler property except

for the southernmost 75 acres.

Mr. White also testified that he was willing to pay a "tremendous premium"

on the James Butler prò1 541ërtÿ

becaus'e of its access to sewer lines. However, only

- 63 the southernmost portion had access to sewer lines, which ran along southeastern

corner of the property bordering Hubbard Road.

Mr.. Ryan and Mr. Roberts were unaware of the unaccepted offers and

therefore did not consider them when they conducted their appraisals. Both of

them acknowledged that had they been aware of the offers, they would have

,considered them. Mr. Ryan testified that after he became aware of the offers, he

reconsidered his valuation but concluded that those offers were still consistent

with his appraisal value because he had already given a much highe . value to the

southernmost portion of the property. Even Mr. Roberts, petitionern' appraiser,

was reluctant to say that the unaccepted offers would have increased his appraisal

estimate.12

Because Mr. White and Mr. Brown made offers to purchase cnly 11% of the

393.33 acres and because the evidence shows that that portion of the property was

significantly more desirable than the remainder, those offers are not meaningful

12Mr. Roberts initially testified that he would have "considerLd" those offers

but that he would still have used closed sales. He later agreed that knowledge of

the offers would have increased his value. However, the latter statement was in

response to a series of leading questions by petitioners' counsel to which we

sustained respondent's objection. Mr. Roberts initially seemed reluctant to say

that the offers would have increased his appraisal, and we consider that testimony

more credible than his subsequent acquiescence to leading questions from

petitioners' counsel.

- 64 indicators of the value of the entire property. Accordingly, although the

unaccepted offers are relevant evidence of the value of the portiori of the James

Butler property on which they were made, they are not very helpful in deciding the

value of the entire property.

3.

Analysis and Conclusion

As a preliminary matter, we note that Mr. Quillian's testimony regarding the

value of the conservation easement on the James Butler property was generally

unhelpful. On several occasions, he made:inconsistent or contradictcry

statements, and his testimony was generally not useful to the Court. Accordingly,

in the analysis below, we give little weight to his conclusions regarding the value

of the conservation easement on the James Butler property.

a.

The Before Value

The appraisers considered the following properties comparable to the James

Butler property:

IDI Appraisers2

1

2

3

4

5

6

7

8

GE, RQ, ZR

DR, ZR

GE, ZR

GE, RQ

ZR

RQ

DR

DR

Date

Address

Sale price

Size

Price per

2003

(acres)

acre

Price3

12/22/03 Blackmon Rd.

$1,607,694

97.44

6/18/98 Garrett Rd.

3,705,500 423.25

12/00 Veterans Pkwy.

2,440,994 132.00

2/19/04 Bridgemill Dr:

3,686,265 164.83

3/31/97 Garrett Rd.

2,182,268 282.73

2/1/99 Hancock Rd.

·

900,000

62.53

8/16/99 Macon & Pope Rd. 2,500,000 461.00

10/6/00 Biggers Rd.

414,000

39.50

$16,499 $16,499

- 8,7:·5

10,863

18,492

20,801

22,5 0400 22,280

7,7 .8

10,057

14,3! 3

17,340

5,4; 3

6,407

10,4 1

11,790

- 65 9

10

11

12

13

14

RQ

RQ

GE

RQ

DR

RQ

3/1/02

12/1/02

1/03

12/1/03

12/16/03

5/1/04

Blackmon Rd.

Warm Springs Rd.

Williams Rd.

Osprey Cove

Williams Rd.

McKee Rd.

960,000

737,506

1,175,500

575,000

1,697,500

1,288,000

32.00

99.66

34.00

30.50

60.80

90.50

30,000

7,A00

34,:i74

18,352

27,918

14,:!32

32,131

7,696

35,957

18,852

27,918

13,956

The "ID" field contains numbers which we have assigned to each of the comparable

sales for convenience.

2The entries in the "Appraisers" field are the first and last initials of eac1 of the appraisers

who used that comparable sale in his report: GE = Gregory Eidson; RQ = Rudc Iph Quillian; DR

= David Roberts; and ZR = Zac Ryan.

3Prices in this column have been adjusted to December 2003 prices usin ; an estimated

4% annual appreciation (for the reasons explained below in the text), adjusted ty the nearest

quarter of a·year from December 2003 (e.g., sale 2 has been adjusted to reflect .5 years of

appreciation, sale 4 to reflect -0.25 years, etc.).

The appraisers used a total of 14 different sales, and 4 of those sale3 were used by

more than one appraiser.

The appraisers applied different rates of appreciation to adjust those sales to

December 2003 prices. Mr. Ryan interviewed a number of local market

participants who told him that appreciation ranged from 3% to 5% cach year from

1997 through 2003. He used 4% appreciation per year. Mr. Roberts did not

explain how he calculated appreciation, but his numbers show that ne also used

approximately 4% per year. Mr. Eidson used only 2.57% per year, which he based

on the consumer price index. Mr. Eidson's method was inappropri te because

property values in Muscogee County during the relevant period we·e rising faster

- 66 than the consumer price index. We will apply the 4% appreciation used by Mr.

Ryan and Mr. Roberts.

Petitioners contend that it was unreasonable for Mr. Ryan to use sales from

the eastern "panhandle" of Muscogee County because land in that ar a was not as

valuable. They therefore contend that sales 2 and 5 are not truly comparable and

that Mr. Ryan would have known not to use sales from the panhandle if he had

been more familiar with Muscogee County. Mr. White testified that the prime area

of development in Muscogee County during 2003 was north of Columbus from the

Chattahoochee River to Pierce Chapel Road." Although petitioners bake much of

the fact that Mr. Ryan was not from Muscogee County, neither were any of their

appraisers. Mr. Roberts and Mr. Eidson were both from out of state, and Mr.

Quillian was from two counties north of Muscogee County. Like M". Ryan, both

Mr. Quillian and Mr. Roberts used several sales from the "panhandic" (sales 2, 7,

10, and 14) and did not make any adjustments to compensate for the supposedly

13PetitiOnerS aCtually contend that Interstate 185 is the eastern border of the

prime development area, but the only evidence in the record support ng that

contention is Mr. Quillian's testimony, which we did not find credib e for the

reasons explained above in the text and infra note 14. Sale records s10w that Mr.

White was willing to pay similar prices for land near Interstate 185 a,nd for land

near Pierce Chapel Road, corroborating his testimony. Pierce Chapel Road is

about five miles east of Interstate 185.

- 67 inferior location of those sales.14 Nevertheless, because we found Mr. White to be

a credible witness and because he was most familiar with the demand for

developable land in Muscogee County durini, 2003, we conclude that the larìd in

the eastern portion of the county was somewhat less desirable than the land

between the river and Pierce Chapel Road. Properties in the latter area generally

have better access to downtown Columbus, making them more valuable.

However, the lower land prices observed in sales 2, 5, 7, and 0 cannot be

explained entirely by their location.uThe property conveyed in sale i4, although

more than twice as far from Pierce Chapel Road as any of the other properties,

sold for $14,232 per acre, significantly more than any of the other p operties in the

panhandle. "Resþondent contends that the properties in sales 2, 5, ar d 7 sold for

lower prices per acre because of their size. As the basis for his cont:ntion,

respondent points to the testimony of nearly all the appraisers that, other things

being equal, a property that is larger will sell for a lower price per acre. Mr. Ryan

14In his report, Mr. Quillian wrote: "All sales have a relatively similar

location on the north side of Columbus * * *. Pairing * * * [sales 1 and 14], the

sales [sic] further east seems to be less desirable, not because it is 'Öast' but

because it is a greater distance from the JR Allen By-Pass".' During his testimony,

Mr. Quillian contradicted those statements in his report, testifying t1at the

properties further east had lower values because that entire area was less desirable.

We did not consider Mr.'Quillian a credible witness, and we give no weight to that

testimony.

- 68 considered size an important factor affecting the values of those properties in the

eastern part of the county. Indeed, sales 2, 5, and 7 were all sales of properties

significantly larger than that in sale 14." We are convinced that size is part of the

reason.those properties sold for less per acre than properties in some of the other

comparable sales.1

Both Mr. Roberts and Mr. Ryan considered sales of 400-acre tracts of land.

In contrast, one of the weaknesses with Mr. Eidson's assessnient of the before

value of the property is that he failed to identify any sales of properties of. .

-

comparable size; indeed, the sale 11 property was less than 10% the size of the

subject property. Although Mr. Eidson made adjustments to try to account for the

size differential, it is difficult to believe that he could have accurately made those

adjustments without considering the demand for 400-acre tracts of:lend in

Muscogee County.

15Those properties were 4.7, 3.1, and 5.1 times the size of the property in

sale 14, respectively.

16The property in sale 10 is only 10% larger than that in sale 14, not enough

of a difference in size to explain the dramatic difference in price per acre. Mr.

Quillian provided little information about that sale, so we do not knew what other

factors may have influenced the sale price.e As noted above, in his rLport, Mr.

Quillian explained that its low price was due to its poor access to the "JR Allen

By-Pass" and downtown Columbus.

- 69 Another problem with Mr. Eidson's use of sale 11 is that sale 11 was zoned

for multifamily use, significantly increasing the value of the property. Mr. Eidson

made no adjustment for that factor, stating that the zoning of the sale 11 property

was "comparable" to that of the James Butler property. That assessr ient was

unrealistic. Mr. Eidson failed to make a similar adjustment with respect to another

of his comparable sales: Mr. Ryan reported that a portion of the sak. 3 property

was probably going to be used for commercial purposes. Because tl e zoning on

the James Butler property would not have permitted commercial use, Mr. Eidson

should have adjusted for the superior use potential of the property ir sale 3. As

noted above, Mr. Eidson also failed to notice the lot size restrictions affecting 27%

of the James Butler property. Finally, Mr. Eidson acknowledged during crossexamination that his report mischaracterized the topográphy of the J|ames Butler

property and that the northern portion was actually more hilly than his repbrt

described. That mischaracterization also more generally called into question Mr.

Eidson's objectivity. On the basis of the foregoing, we conclude that the before

value for the property was substantially less than Mr. Eidson's estimate of $19,500

per acre.

.

In contrast, the before values estimated by Mr. Roberts and Mr. Ryan were

much lower, $10,000 and $12,000 per acre, respectively. However, those

- 70 appraisals had a few of their own problems. First, Mr. Roberts failed to consider

the lot size restrictions, which would have decreased his estimated before value.

Second, neither appraiser accounted for the fact that properties in the eastern part

of Muscogee County are not as valuable as properties in the central part of the

county. Sales 2, 5, and 7 were approximately two to three miles east of Pierce

Chapel Road, the eastern edge of the prime development zone in Muacogee

County. That location was slightly inferior to the lócation of the sub. ect property,

and we therefore conclude that Mr. Roberts and Mr. Ryan should have adjusted

the values of those sales accordingly. Finally, neither Mr. Roberts nor Mr. Ryan

considered sale 4, the Bridgemill property, which was located just so ath of the

subject property on Whitesville Road.

Sale 4 did not close until February 2004, but its price is nevertheless

relevant and helpful for appraising the subject property. Although Mr. White and

Mr. Brown testified that the topography of 42 to 75 acres ofthe subject property

was superior to that of the Bridgemill property (sale 4), they were not interested in

developing the remainder of the James Butler property. Indeed, the topography of

the remainder of the property was rocky and more hilly than the portion Mr. White

and Mr. Brown wanted to buy. The influence that topography can have on value is

illustrated by the property in sale 8, which is almost directly across Whitesville

- 71 Road from the James Butler property. Although that property was significantly

smaller than the James Butler property, it sold during October 2000 For only

$10,481 per acre. The land on the west side of Whitesville Road was generally

quite hilly, but Mr. Roberts considered the topography of the proper y in sale 8

comparable to that of the James Butler property. Sale 8 indicates that the value of

the northern portion of the property was significantly less than that of the southern

portion, and it appears to us to put a ceiling on the value of the northern portion.

The northern portion of the James Butler property was also inferior o the

Bridgemill property because it lacked access to utilities and because 34% of that

portion of the property was subject to a covenant restricting the size of lots and

houses.17 Nonetheless, the February 2004 sale of the Bridgemill prcperty for

$22,500 per acre shows recent demand for development in the area of the James

Butler property and it, combined with the unaccepted offers, shows that the

southernmost portion of the property was exceedingly desirable to (evelopers.

For the foregoing reasons, we conclude that the before value of the James

Butler property was slightly higher than the estimates provided by Mr. Roberts

and Mr. Ryan. We conclude that the appropriate before value of the property was

Although the 107.22 acres affected by the covenants restric ing lot and

house size is only 27% of the total 393.33 acres, it is 34% of the no thern 318.33

acres.

- 72 $12,500 per acre, 25% more than Mr. Roberts' before value and 4% more than Mr.

Ryan's. As confirmation of the reasonableness of that value, it is approximately

.

equal to the value of the property calculated as follows: $33,000 per acre for the

southernmost 42 acres; $17,500 per acre for the next 23 acres; and $10,000 per

acre for the remaining 318.33 acres.18 Accordingly, we conclude that the before

value of the James Butler property was $4,916,600.

b.

The After Value 042

All of the appraisers stated that they were using the "before and after"

approach to value the conservation easement on the James Butler property. To

calculate the after value, they all claimed to use either a comparable sales

approach or some combination of the comparable sales approach an¿ a discounted

cashflow approach. However, because there were no nearby sales of properties

encumbered by conservation easements, that task was difficult and the approaches

the appraisers used varied widely. Some of the methods they employed were

acceptable; others were less so.

18We note that although a developer purchasing the southernmost portion of

the property may have been willing to pay $17,500 or $33,000 per acre for a small

portion of the property, the same developer would almost certainly not have been

willing to pay those prices for the southernmost portion of the property bundled

with the northern portion. Accordingly, that calculation actually este blishes a

ceiling on the reasonable value of the property.

- 73 Mr. Roberts found five sales of land: Two of those sales wére from

Muscogee County but were not encumbered by conservation easements or any

other significant restrictions; two were from distant counties:in Georgia añd had

little development potential because they.were largely ilí flood zones;'and one was

from North Carolina and was encumbered by a conservation easement. Mr.

Roberts attempted to make adjustments to account for the geógraphic dispárity of

the properties in distant Georgia counties and North Carolina, but ho did not

explain his reasoning and.his adjustments seem like guesswork.·lyIr. Roberts

subtracted 50% of the value from each of the Muscogee County sales to account

for the fact that the properties were not encumberedrby conservâtior. easements.

He did not explain how he determined that a 50% adjustment was appropriate, and

his approach again seems like guesswork. We have repeatedly emphasized that it

is essential for appraisers to explain their reasoning because "'[w]it 1out any

reasoned analysis, * * * [the appraiser's] report is useless.'" Friedman v.

Commissioner, T.C. Memo. 2010-45 (quoting Jacobson v. Commis sioner, T.C.

Memo. 1999-401). Accordingly, we do not accept Mr. Roberts' e 541timate

of the

after value.

As part of their approach to estimating the after value òf the ames Butler

property and under the guise of the comparable sales method, Mr. Eidson and Mr.

- 74 Ryan both employed a method that we have labeled the "percentage :liminution

approach". See Friedberg v. Commissioner, T.C. Memo. 2011-238. That

approach might also be thought of as the "comparable easements approach". As

applied by the appraisers here, the percentage diminution approach consisted of

finding other properties encumbered by conservation easements, ascertaining how

much those conservation easements decreased the values of.the underlying

properties, and applying that percentage diminution to the subject pr 3perty to

determine its after value.

Although the appraisers labeled the method they applied the comparablesales method, the:two approaches are distinct. In contrast to the percentage diminution approach, an appraiser using the comparable sales methoifinds sales

of similar properties encumbered by easements and makes appropriate price

adjustments for time, size, or other significant features. Wolfsen Land & Cattle

Co. v. Commissioner, 72 T.C. at 19. Once similar sales have been fcund and

proper adjustments made, the appraiser uses those adjusted sale prices to

determine the after value of the property being appraised. Hilborn v

Commissioner, 85 T.C. at 690; Wolfsen Land & Cattle Co. v. Commissioner, 72

T.C. at 19. Perhaps the most significant difference between the comparable sales

- 75 method and the percentage diminution method is that the former req2ires the

appraiser to find properties that are close to the property being appraised.

The percentage diminution approach Mr. Eidson and Mr. Ryaa employed as

part of their appraisals has been accepted by the Court in prior cases, See, e.g.,

Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C.

Memo. 2000-94; Johnston v. Commissioner, T.C. Memo. 1997-475; Losch v.

Commissioner, T.C. Memo. 1988-230. The method has been employed most often

where, as in the instant case, comparable sales of easement-encumbered properties

are not available for the locale of the property being appraised. See Hughes v.

Commissioner, T.C. Memo. 2009-94; Losch v. Commissioner, T.C. Memo. 1988230. When estimating a percentage reduction associated with an easement on a 2

given property, it is essential that an appraiser provide adequate explanation and

analysis to justify the percentage. Scheidelman v. Commissioner, T.C. Memo.

2010-151.

.

From our examination of our past cases dealing with appraisels applying the

percentage diminution.method, we discern at least two.important elements that

must be part of the appraiser's analysis. The first element the appreiser must

consider is whether the properties have the same highest and best use. Hughes v.

Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner,.T.C. Memo.

- 76 2000-94. A conservation easement that changes the property's highest and best

use will have a more dramatic impact on the property's value than one that does

not. Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Ccmmissioner,

T.C. Memo. 2000-94. Similarly, conservation easements will have different

effects on the values of properties with different highest and best usen. Hughes v.

Commissioner, T.C..Memo. 2009-94; Strasburg v. Commissioner, T.C. Memo.

2000-94.

The second element the appraiser must consider is the similarity of the terms

of the conservation easements; unless the appraisal report includes details about

the terms of those other easements, the percentages the appraiser purports to

derive are of little utility. Strasburg v. Commissioner, T.C. Memo. 2000-94;

Johnston v. Commissioner, T.C. Memo. 1997-475; Losch v. Commisnioner, T.C.

Memo. 1988-230 . Other things being equal, a very restrictive easem:nt will

decrease the value of a property more than a less restrictive easement. Strasburg

v. Commissioner, T.C. Memo..2000-94; Johnston v. Commissioner, T.C. Memo.

1997-475. .Accordingly, we will consider both of those elements in o2r analyses

of Mr. Eidson's and Mr. Ryan's use of the percentage diminution approach.

As noted above, Mr. Eidson applied a two-step approach to estimating the

after value. He began by finding comparable properties that were already

- 77 somewhat undesirable because of their unsuitability for development. All of those

properties were inferior to the James Butler property. He then further reduced the

values of those properties by a percentage diminution that he calculated on the

basis of the effect of other conservation easements. However, Mr. Eidson did not

discuss the terms of any of the other conservation easements. He acknowledged

that many of the other easement transactions had different highest aid best uses,

and he stated that those transactions "are not directly comparable" to the

conservation easement on the subject property. The other conservation easements

indicated reductions in value of 40% to 84%, but Mr. Eidson did no: attempt to

explain why some of those easements reduced the value of the unde:lying property

by more than twice as much as others. Indeed, he provided no details regarding

the restrictions imposed by the easements. That omission is significant. We do

not assume, as Mr. Eidson appears to have done, that those dramatically different

reductions in value were random. Rather, we believe those variatio is were caused

by differences in the transactions, especially differences in terms of the underlying

easements and the highest and best uses ofthe properties.19 Becaus: he did not

compare the terms of the conservation easements, Mr. Eidson's analysis is missing

"Because Mr. Eidson's report is devoid of details regarding the restrictions

imposed by those easements, we cannot definitely say why any of those easements

reduced the value of the underlying property by more than another.

- 78 the second of the elements essential to the sound application of the percentage

diminution approach, i.e., an analysis of the similarity of the conservation

easements. See Strasburg v. Commissioner, T.C. Memo. 2000-94; Jchhston v.

Commissioner, T.C. Memo. 1997-475; Losch v. Commissioner, T.C.3Memo.

1988-230. Accordingly, we conclude that the percentage diminution approach

portion of his analysis is not useful.

Even if Mr. Eidson's application of the percentage diminution approach had

not been deficient, his two-step method would nonetheless have overestimated the

effect of the conservation easement. He should have applied any percentage

diminution to his estimate of the before value ofthe=James Butler property itself,

not to a different value that he derived by comparing sales of inferior properties.

However, Mr. Eidson's first step does provide some useful dati regarding

the value of undevelopable land in Muscogee County. As noted above, Mr.

Eidson failed to appropriately adjust his comparable sales to reflect market

appreciation. After correcting for that error, using 4% annual apprec ation, and

without adjusting for topography, the comparable sales of undevelopable land

range in price from $5,943 to $6,492 per acre, with an average of abcut $6,300 per

acre. The subject property has topography superior to that of those p:operties, but

its usability is inferior because of the conservation easement. Although the terms

- 79 of the conservation easement permit many of the uses for which buyirs would

want to possess undevelopable land (e.g.,irecreation, light farming, and sparse

development), it imposes additional legal obligations. The superior opography of

the subject property will offset that inferiority to some extent. Acco dingly, we

conclude that $6,300 per acre represents a useful estimate of the after value of the

subject property.

Mr. Ryan was the only appraiser to identify rural estate homenites as the

highest and best use of the property after the donation of the conservation

easement, a conclusion we find ácceptable given the rights reserved by the

conservation deeds. Like the other appraisers, Mr. Ryan was unable to find any

comparable sales of encumbered properties close to the James Butler property.

Mr. Ryan applied several different methods to estimate the conservation

easement's effect oníthe after value, using triangulation to narrow tl espossible

range for that value. Mr. Ryan's first t'wo'points of reference were the lowestpriced comparable sale in Muscogee County (sale 5 above) and a 15-year mining

lease that decreased the value of the encumbered property by 26%. Mr. Ryan

concluded that the conservation easeiï1ent on the subject property woüld decrease

its value by at least 26%, leaving it below the price of the property in sale 5.

- 80 Although both of those conclusions have some merit, they do not cor ae very close

to determining an after value for the subject property.

For his third point of reference, Mr. Ryan employed the percer tage

,

diminution approach using two conservation easements on rural properties.

Unlike Mr. Eidson, Mr. Ryan was careful to analyze the terms of each of those

conservation easements and compare them to the easement on the Ja3 es Butler .

property. However, his analysis had two shortcomings. Firstly, the "comparable"

conservation easements were both significantly more restrictive than the one on

the James Butler property. Because of that difference, both'of those easements

resulted in a greater relative reduction in value than the easement on the James

Butler property. Although Mr. Ryan attempted to account·for that fact, his attempt

to do so was unavoidably inexact.

Secondly, it is unclear whether either of the properties had thé same highest

and best use as the James Butler property. Mr. Ryan stated that the first of his two

comparable properties was unsuited for development and therefore had an inferior

highest and best use. That fact led him to conclude that the subject property's

value would be reduced by more than the 34% reduction observed on his first

comparable property, even though that property was encumbered by a more

restrictive easement. Mr. Ryan's report stated that the second property had

· - 81 development potential and that its zoning permitted some commercial

development. Although the commercial zoning would make part of the second

property relatitely more valuable, the price per acre for that property reflects its

rural environs, and Mr. Ryan did not explain whether any development was likely

in the relatively near future. Mr.-Ryan concluded that the value of the James

Butler property would be reduced by less than the 65% observed on his second

comparable easement property because its terms were more restrictive than those

of the conservation easement on the subject property. Mr. Ryan did not attach

much precision to his estimate using the other encumbered properties, stating oiily

that they indicated the effect of the conservation easement on the·Ja nes Butler

property would be a reduction of 34% to 65%.

Although not inconsistent with his conclusion that the conservation

easement reduced the property's value by 50%, Mr. Ryan's approach does not

offer strong support for that conclusion. His valuation is little bolst:red by his

consideration of estate lots in'Muscogee County because, inter alia, he did not

apply the discounted cashflow-method, which he would have neede d to do in order

to accurately estimate the value of the property as separate sales of pstate lots.

Although we recognize that valuation is far from an exact science, Mr. Ryan's

analysis seems very imprecise.

82 Nonetheless, because Mr. Ryan's valuation is consistent with Mr. Eidson's

estimate of the value of undevelopable land in Muscogee County, we conclude

that a diminution in value of 50% is acceptable and further concludè that the after

value of the James Butler property was .$6,250 per acre, or $2,458,300. Because

only one of the four appraisers concluded that the conservation easement added

any value to the Butler estate, we conclude that the conservation eas tment did not

enhance its value. Accordingly, we conclude that the value of the conservation

easement donated by petitioners with respect to the James Butler prcperty was

$2,458,300.

B.

The Susan Butler Property

1.

The Appraisal Reports

a.·

Mr. Roberts' Appraisal Report

Mr. Roberts concluded that the highest and best use of the Sus an Butler

property before being encumbered by the conservation easement wan for

residential development. As with the James Butler property, Mr. Roberts

appraised the Susan Butler property using both the comparable sales method and

the discounted cashflow method. He used the same comparable sales despite the

fact that the Susan Butler property was only about 3% of the size of he James

Butler property. Using the comparable sales method and making adjustments, he

- 83 concluded that the before value of the Susan Butler property was $15,000 per acre,

or $191,000.

To estimate the after value of the Susan Butler property, Mr. Roberts

applied the same method he used to estimate the after value of the JLmes Butler

property. He concluded that the 10.7 acres encumbered by the conservation

easement were worth $5,000 per acre, or about $54,000 and that the 2-acre

building site was worth $77,000, which he discounted to $49,000 using the

discounted cashflow method. He therefore estimated that the total after value of

the Susan Butler property was $103,000.

b.

Mr. Eidson's Appraisal Report

Mr. Eidson concluded that the highest and best use of the unencumbered

Susan Butler property was residential development. Mr. Eidson applied the same

appraisal approach as he did with the James Butler property, using both the

discounted cashflow method and the comparable sales method. Like Mr. Roberts,

he used the same comparable sales that he used for the James Butler property

despite the fact that the Susan Butler property was a fraction of the size of the

James Butler property. He made adjustments to try to account for that size

discrepancy. On the basis of his sales comparison approach, Mr. Eidson estimated

- 84 that the Susan Butler property was worth $40,000 per acre, or approximately

$510,000.

To estimate the after value of the Susan Butler property, Mr. Eidson applied

the same two-step method he used on the James Butler property. He estimated

that the encumbered 10.7 acres were worth $39,500 in total, or about $3,700 per

acre. He estimated that the value ofthe reserved two-acre building s ite was

$80,000. He therefore estimated that the total after value of the Susan Butler

property was $119,500.

c.

Mr. Quillian's Appraisal Report

Mr. Quillian concluded that the highest and best ùse of the Sunan Butler

property before the conservation easement was for single-family>residential

development. Unlike Mr. Roberts and Mr. Eidson and unlike his valuation of the

James Butler property,.Mr. Quillian used only the comparable sales method to

appraise the Susan Butler property. He concluded that because there were

sufficient comparable sales of similarly sized and situated tracts of vacant land, the

comparable sales method would be more accurate than the discounted cashflow

approach. Also unlike Mr. Roberts and Mr. Eidson, Mr. Quillian did not reuse the

same comparable sales that he used to value the James Butler proper y. Instead, he

found sales of properties that were more similar in size to the Susan 3utler

- 85 property. After making various adjustments to his comparable sales, he concluded

that the before value of the Susan Butler property was $30,000 per a:re, or about

$381,100.

To estiníate the after value of the Susan Butler property, Mr. Quillian found

six sales of land encumbered by conservation easements in rural counties in south

Georgia. He stated that none of the properties were comparable to the Susan 042

Butler property. Besides their rural locale, the properties were also aignificantly

larger than the Susan Butler property, ranging from 125 acres up to 1,250 acrés.

He did not describe the terms of the easements on thöse properties, but he stated

that, to the best of his knowledge, the rights were "equal'' to those uader the

conservation deed on the Susan Butler property. The sale prices for thbse

properties ranged from $400 per acre up to $1,764 per acre. With n> explanation,

Mr. Quillian deduced from those sales that the value of the encumbered 10.7 acres

of the Susan Butler property was $5,000 per acre. On the basis of sales of nearby'

lots, he estimated that the two-acre building site would sell for $75,000, resulting

in a total after value for the Susan Butler property of about $128,500.

d.

Mr. Ryan's Appraisal Report

Mr. Ryan agreed with the other appraisers that the highest and best use of

the property before being encumbered by the conservation easement was for

- 86 residential development. He agreed with Mr..Quillian that the best method for

appraising the property was the comparable sales method. Like Mr. Quillian, Mr.

Ryan did not use the same comparable sales to value both the James Butler

property and the Susan Butler property; instead, he selected sales of properties that

were closer in size to the Susan Butler property. After adjusting the prices of his

comparable sales for various factors-including size, Mr: Ryan concluded that the

before value of the Susan Butler property was $20,000 per acre, or about

$254,000.

i

Unlike the other appraisers, Mr. Ryan identified a rural estate homesite as

the highest and best use of the property after the donation of the connervation

r

easement. He analyzed the terms of the conservation deed and determined that, in

addition to the two-acre building site, the owner.would be able to conduct smallscale farming, landscaping, and extensive recreational activities. On the basis of

that determination, he estimated the value of the property by,examin.ng sales of

comparable estate-style lots in Muscogee and Harris counties.. He e>amined 20

sales of estate lots ranging in size from 5 acres up to.18 acres and prices ranging

from $40,000 to $180,000. After considering the merits of different comparable

sales and.comparing factors such as location, size, and scenic features like

- 87 lakefronts, Mr. Ryan concluded that the Susan Butler property's after value as an

estate lot was $150,000.

e.

Summary

In summary, the appraisers estimated the following before and after values

for the Susan Butler property:

Roberts

Before

After

Easement value

2.

.

$191,000

103,000

88,000

Eidson

Guillian

R_yan

$510,000

119,500

390,500

$381,100

128,500

252,600

$254,000

150,000

104,000

Analysis and Conclusion

a.

The Before Value

The appraisers considered the following properties as comparable to the.

Susan Butler property:

I_If Appraisers2

1

2

3

4

7

8

11

12

13

15

16

17

GE, ZR

DR

GE

GE

DR

DR

GE

RQ

DR

RQ

ZR

.ZR

Date

12/22/03

6/18/98

12/00

2/19/04

8/16/99

10/6/00

1/03

12/1/03

12/16/03

6/1/01

9/20/01

11/15/02

Address

Blackmon Rd.

Garrett Rd.

Veterans Pkwy.

Bridgemill Dr.

Macon & Pope Rd.

Biggers Rd.

Williams Rd.

Osprey Cove

Williams Rd.

Whitesville Walk

Greystone Ct.

Warm Springs Rd.

Price per

acre

2003

Price3

$1,607,694 97.44 $16 499

3,705,500 423.25

8 755

2,440,994 132.00 .18 492

3,686,265 164.83 22 500

2,500,000 461.00

5 423

414,000 39.50 10 481

1,175,500 34.00 34,574

575,000 30.50 18,852

1,697,500 60.80 27,918

200,000

7.53 26,578

1,280,000 45.20 28,319

579,700 37.97 15,268

$16,499

10,863

20,801

22,280

6,407

11,790

35,957

18,852

27,918

29,316

30,931

15,879

Sale price

Size

(acre_s}

- 88 18

19

20

21

22

RQ

ZR

RQ

RQ

RQ

12/1/03 , Mobley Rd.3

12/22/03 Whitesville Rd.

4/1/04 Moore Rd.

.

12/1/04 Moore Rd.

1/1/05 Whitesville Rd.

580,000

1,266,500

80,000

8'/,400

175,000

15.88 . 36,522

29.80 42,500

4.20

19,048

4.20 20,833

8.79

19,909

36,522

42,500

18,862

20,032

19,143

IThe "ID" field contains numbers which we have assigned to each of the comparable

sales for convenience. Because some ofthe appraisers used the same sales in the r appraisal of

the James Butler property, we have included those sales with the same identifying numbers, and

we have continued the numbering of the new comparable sales with 15, where we left off in our

previous table.

2The entries in the "Appraisers" field are the first and last initials of each of the appraisers

who.u 541ed

that comparable sale in his report: GE = Gregory Eidson;-RQ = Rudolph Quillian; DR

= David Roberts; and ZR = Zac Ryan.

3Prices in this column have been adjusted to December 2003 prices using in estimated

4% annual appreciation (for the reasons explained in the text above), adjusted to the nearest

quarter of a year from December 2003 (e.g., sale 2 has been adjusted to reflect 5.! years of

appreciation, sale 4 to reflect -0.25 years, etc.).

As noted in the table above, we have adjusted the above brices to December 2003

prices to reflect 4% annual appreciation. Unlike the James Butler prcperty, no

part of the Susán Butler property was substantially more developmen:-ready than

another. That fact makes estimating the before value of the Susan Butler property

a simpler process. Among the 17 sale records above, there are a number of

,

properties that are very similar to the Susan Butler property without r quiring

significant adjustments to account for various factors.

Despite the availability of sales of similar propèrties, Mr. Roberts and Mr.

Eidson used the same comparable sales for both the sames Butler pro erty,and tlÎe

Susan Butler property. Given the drastic difference in size between those two

properties and between the "comparable" properties and the Susan BLtler property,

- 89 we question their failure tò use sales of more similarly sized propert es. Although

they tried to account for differences in size between the Susan Butle: property and

those in their comparable sales, their adjustments appear unsupported and their

resulting valuations do not match the observed sales of similarly sized properties

in Muscogee County. Neither Mr. Roberts nor Mr. Eidson provided an adequate

rationale for his failure to find sales of properties that were of comp rable size.

Accordingly, we will give little weight to Mr. Roberts' and Mr. Eidson's estimates

of the before value of the Susan Butler property.

Because we conclude that there is a sufficient number of truly comparable

sales, we will exclude some of the sales that we do not find comparable.

Properties in sales 11, 13, 15, 16, 18, and 19 were all zoned for denver

development than the Susan Butler property. Those differences in zoning resulted

in substantially higher prices for those properties, ranging from $27,918 to

$42,500 per acre. Properties in sales 15, 16, 18, and 19 were also significantly

closer to downtown Columbus, further inflating their prices. Prope ties in sales 2,

3, 4, and 7 were substantially larger than the Susan Butler property, deflating their

prices. Accordingly, we will not consider those sales except insofa as we

consider sale 4, of the Bridgemill property, as a point of reference. Finally, we

will not consider sale 8 because the property was inferior to the Su±an Butler

- 90 property in two respects: it had less desirable topography and lacked access to

sewer lines, resulting in a significantly lower price of $11,970 per acre.

The properties in the other six sales were all either close to the Susan Butler

property or similarly situated vis-a-vis downtown Columbus. They demonstrate a

relatively narrow range of prices, from $15,879 to $20,032 per acre. We will

consider a few minor adjustments to those prices to account for the f3110wing

differences in the properties:

Size

2003

ID

.(acre£

$fAcre

1

12

17

20

21

22

97.44

30.50

37.97

4.20

4.20

8.79

$16,499

18,852

15,879

18,862

20,032

19,143

Superior qualities

Slightly denser development

Size

Size

Size

Inferior qualities

No sewer, size

Partial flood zone, topcgraphy, size

Size

No sewer

No sewer, 20% flood zone

. .

Properties in sales 1, 12, and 22 were generally inferior to the Susan Butler

property while properties in sales 21 and 17 had offsetting qualities t nd that in

sale 20 was generally superior. On the whole, we believe that the Susan Butler

property would have commanded a slightly higher price than any of :hose

properties.

We also consider sale 4, the Bridgemill site, because of its proximity to the

Susan Butler property both in time and geography. The Bridgemill property sold a

- 91 few months after the valuation date for $22,500 per acre. As noted 2bove, Mr.

White considered that property inferior to the choicest sections of the James Butler

property, but Mr. White did not indicate any interest in the Susan Bt tier property

and it was not one of the properties in Muscogee Countý that he considered ready

for development. Accordingly, we infer that the Susan Butler þrope ty was

somewhat inferior but generally similar in quality to the Bridgemill site, which

was just south of it. Because the Bridgemill site was much larger, tl e Susan

Butler property would have sold for a relatively higher price per acre, offsetting its

inferior quality to some degree.

.

On the basis of thé foregoing, we conclude that the Susan Butler property

was worth $22,000.per acre in the before condition, or $279,400.

b.

The After Value

For the same reasons we explained above with respect to the James Butler

property, we conclude that Mr. Eidson's and Mr. Roberts' methods of appraising

the after value ofthe Susan Butler property were unacceptable and overestimated

the loss in value attributable to the easement.

.

Mr. Quillian attempted to use the comparable sales method te estimate the·

after value of the property, but the onlyisales of easement-encumbefed land that he

was able to find were sales of large tracts in rural portions of south Georgia.

-:92 Although he attempted to correct for the differences due to size and ocation, he

did not explain his adjustments and his conclusion seems arbitrary. He also failed

to describe the terms of the easements encumbering the·south Georg a properties

he considered. Those failures were significant, and consequently we attach little

weight to Mr. Quillian's conclusion regarding the after value.

Mr. Ryan was the only appraiser to carefully consider the tern s of the

conservation deed and to determine that the highest and·best use of t he property

after being encumbered by the conservation easement was for a rura estate. We

agree with his determination and generally found his appraisal method of

considering sales of other rural estates to be acceptable. However, we believe that

he failed to adequately consider the reduction in value from the conservation

easement. The conservation easement would require any owner of the Susan

Butler property to comply with the terms.ofthe conservation deed. jven if those

terms do not interfere with the normal use of rural estate lots, they do impose

additional requirements on the owner, making the Susan Butler prop:rty less

attractive. Consequently, we believe Mr. Ryan's after value should be adjusted

downward slightly to $140,000

That value is slightly more than the March 2003 sale price of an interior

13.5-acre estate lot in the north of Harris County, a significantly inferior location:

- 93 That property sold for $130,000, or approximately $134,000 adjusted to December

2003 pricing. Several sales of interior estate lots in Muscogee Cou ty during

1999 show that, adjusted to December 2003 prices, estate lots.of about six to

seven acres sold for approximately $140,000. .Because the Susan Butler property

is twice as large as those lots, we believe its size would make it as a:tractive as

those smaller lots despite the conservation easement. Consequently, those sales

indicate that $140,000 is an acceptable estimate of the after value fcr the Susan

Butler property. Accordingly, we conclude.that the value of the cor.servation

easement petitioners donated with respect to the Susan Butler property was

$139,400.

Issue 3. Whether Petitioners' Contribution of a Conservation Easerient on the

Kolomoki Plantation Properties Was a Qualified Conservation Contribution Under

Section 170(h)

Background

Petitioners acquired the property known as Kolomoki Plantation through

three separate purchases during 2001. In all, petitioners acquired approximat~ely

5,600 acres.

The Kolomoki Plantation is in Early and Calhoun Counties in the

southwestern corner of Georgia. During 2004, Early County had a population of

approximately 12,091, and Calhoun County had a population of approximately

- 94 6,320. . Both Calhoun and Early Counties are primarily agricultural, and the area is

very rural. The closest stores and schools are in Blakely, a small town 042

approximately eight miles south of Kolomoki Plantation.

Viewed from the north, Kolomoki Plantation's irregular shape resembles a

pointing dog, its front leg raised to indicate the presence of game. That shape is

appropriate because the property is primarily a "shooting plantation", though it is

I

also used for agriculture and silviculture. Kolomoki Plantation is similar to other

nearby shooting plantations, which are common in the neighborhood, .The

property has been used as a shooting plantation for at least three decLdes, but

petitioners have converted more of the agricultural land into quail ha3itat since

they acquired the property.

.

Improvements on Kolomoki Plantation include a main lodge ith guest

house, a headquarters office, a maintenance barn, a manager's house a grain

storage facility, four tenant houses, two equipment shelters, kennels, and a

hayfield cabin. The main lodge and guest house overlook a 25-acre pond, the

largest of seven manmade ponds on the property. Near the main lodge, petitioners

maintain a hayfield of approximately 30 acres, which includes fenced pasture for

horses. That field has been used as a landing strip for private aircraft.

- 95 On December 29, 2003, the L.L.C. contributed to COLT a cor servation

easement on 1,780 acres of Kolomoki Plantation (2003 easement). Referring to

the above description of the property's shape as a pointing dog, the 2003 easement

covered the portions of the property corresponding to the dog's hindlegs and tail,

its front legs, and its snout. It did not cover the torso or the remainder of the head.

On December 23, 2004, the L.L.C:contributed a second easement on 2,450

additional acres of Kolomoki plantation (2004 easement). The 2004 easement

covered various noncontiguous portions of the property not covered by the 2003

property. The remainder of the property that is not subject to either the 2003 or

2004 easement has been reserved for use as a wetland mitigation baÒ.20

Petitioners engaged Louis E. Clark to appraise the 2003 and 2004

easements. Mr. Clark prepared appraisal reports that the L.L.C. attached to its

2003 and 2004 Forms 1065. During the course of his examination, respondent

20A mitigation bank is "a wetland, stream, or other aquatic retource

area that has been restored, established, enhanced, or (in certain circumstances)

preserved for the purpose of providing compensation for unavoidable

impacts to aquatic resources permitted under Section 404 [of the C1 an Water

Act] or a similar state or local wetland regulation." U.S. EnvironmÅntal

Protection Agency, Mitigation Banking Factsheet, available at

http://www.epa.gov/owow/wetlands/facts/fact16.html. The mitigat on bank

receives "compensatory mitigation credits" commensurate with the amount of

wetlands restored, which it may sell to third parties who must purcl.ase such

credits before they can damage existing wetlands. Id.

- 96 reviewed Mr. Clark's reports and raised various questions about them. Mr. Clark

prepared a supplemental report in which he attempted to address those questions.

Unfortunately, Mr. Clark died on May 30, 2009, and was therefore utavailable to

testify at trial. In preparation for the instant litigation, petitioners engaged R.

Bryan Almand to perform a retrospective valuation of the 2003 and 2004

easements. Mr. Almand testified at trial.

The deeds of conservation easement through which the L.L.C. :onveyed the

2003 and 2004 easements to COLT significantly restrict petitioners' use of

Kolomoki Plantation, but nonetheless reserve a number of rights. Th: 2004

conservation deed amends several portions of the 2003 conservation deed,

enlarging the portion of the property encumbered by the easement an i permitting

the encumbered property to be subdivided into 15 tracts instead of only 5. The

2004 amendment also applies to the 2003 easement, and both the 20C3 and 2004

conservation easements are subject to the same restrictions. Because both the

2003 and 2004 easements are subject to the 2003 conservation deed Ls amended

by the 2004 amendment, we shall refer to only one conservation deec. The

conservation deed begins with a series of recitals, proclaiming genertl

conservation values and purposes. It incorþorates by reference three attachments:

a legal description of the property, a forest management plan, and a baseline

- 97 documentation report. Article II of the conservation deed details cer tain rights that

are expressly prohibited, restricted, permitted, or reserved.

The conservation deed permits all 042existing

agricultural, grazing, and

horticultural uses of Kolomoki Plantation to continue. Additionally3 it permits

areas that were once fields but in which there'is now growing timber, as described

in the baseline documents, to be reclaimed for agricultural use at anv time. The

maps in the baseline documents (i.e., the environmental reports) show that the land

available for cultivation makes up at least 75% of the ea 541ement

area

The

conservation deed allows the use of agrichemicals such as fertilizere; insecticides,

herbicides, pesticides, and rodenticides provided their use does not have-a

"demonstrable detrimental effect on the Conservation Purposes". Tae deed

prohibits certain industrial agricultural practices such as feed lots, a1d it prohibits

the importation of game farm animals other than whitetail deer or game birds. It

permits the commercial operation of hunting clubs and the lease of and for " hunting purposes. It also permits commercial timber harvesting cortsistent with a

timber management plan approved by COLT provided that such tin ber har'vesting

is not "detrimental to the scenic, historió, natural area and rare spec es habitat

"Such land includes the land on the maps labeled "Crop fielc", "Brushy

field", "Planted Pine/Open Pine Forest", and "Horse Pasture and Bt rn".

- 98 protection, wildlife and game habitat protection, and sustainable forestry

purposes".

; .

The conservation deed prohibits the dumping of nonbiodegrac able wastes

on the property, but permits the dumping of biodegradable wastes re noved from

the.property as long as such wastes are not visible from roads and are at least 200

feet from any watercourse. Mining, excavation, and dredging are prohibited

except insofar as those resources are used on the property itself and only if the

area excavated is restored to the appropriate grade.

The conservation deed permits Kolomoki Plantation to be sub divided into

up to 15 tracts of land, provided that each tract is at least 200 acres. Any

subdivided portion of the original property remains subject to the terms of the ·

conservation deed. The L.L.C. may transfer any of the subdivided kts to any .

purchaser, but for transfers made after December 31, 2013, transfers to anyone

other than one of petitioners' descendants are subject to a transfer fee of 0.5% of

the purchase price that is payable to COLT's stewardship fund.

The owner of any subdivided portion of less than 500 acres is permitted to

build the following structures on a 5-acre building envelope: a singl>family

residence; an unlimited number of nonresidential buildings such as garages,

gazebos, sheds, boat houses, and other recreational facilities; a secor dary

- 99 residential building for each additional 100 acres beyond the first 100 acres; and

farm buildings of not more than 4,500 square feet under roof. Such residential

buildings may be rented to tenants. Additionally, with permission from COLT, the

owner may construct any such nonresidential agricultural and recreational

structures "as may be reasonably necessary for the uses permitted". The owner of

any subdivided portion of more than 500 acres is permitted to constmet a

headquarters site of up to 15 acres, which may contain the following structures:

two residential dwellings; one lodge for temporary guests; three gue st houses; and

any number of sheds, barns, kennels, garages, picnic shelters, and b1rns

"reasonably necessary to conduct permitted activities". The total ground coverage

under roof at each headquarters site is not to exceed 15,000 square feet.

Although no house on the headquarters site may be used as condominiums or

apartments for tenants, the houses may be leased, including to paying members of

a hunting club. The location of all headquarters sites and building envelopes is

subject to approval by COLT.

The conservation deed permits the construction of permeable roads and

driveways to access any permitted structure. It also permits the owier to construct

and maintain a private grass airstrip to access Kolomoki Plantation. The

conservation deed allows the construction of new ponds and lakes in locations

- 100 subject to the approval of COLT. Except for the uses and activities e<pressly

granted under the conservation deed, the deed prohibits all other development.

Additionally, the conservation deed prohibits any use that.would impair or destroy

significant conservation values. The conservation deed does not permit the public

to enter Kolòmoki Plantation.

.

The conservation deed grants COLT the right to enter Kolomol:i Plantation

periodically to inspect the property and ensure that the landowners are complying

with the terms of the conservation deed. Staff from COLT visit Kolo noki

Plantation twice a year to ensure that petitioners are complying with the terms of..

the conservation.deed. COLT also has the right,:if it determines that the

conservation values have been damaged, to require that the owners restore

Kolomoki Plantation to the condition required·by the conservation de:d.

The baseline documentation referred to in the conservation dee:1 consists of

reports prepared by the environmental consultants, Ms: Mote and Ms. Bouthillier.

Those environmental reports are identical in all material respects to ti; e

environmental reports Ms. Mote and Ms. Bouthillier prepared with respect to the

Muscogee County properties. Although they describe different properties and list

different species, the conclusions and recommendations in both sets of reports are

nearly identical and use the same language. As with the Muscogee County

- 101 properties, the environmental consultants provided supplemental environmental

reports in 2010, which include a new section in which they more sp cifically

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

supplemental environmental reports specifically identify certain high-quality

terrestrial and aquatic communities found on Kolomoki Plantation. For instance,«

the supplemental report with respect to the 2003 easement stated:

During the 2003 surveys, high quality aquatic and terre strial

communities were identified on all of the Kolomoki Tract su parcels (North

Lane, Odom, and U.S. 27). These communities were describ(d in the

Baseline Report as Hardwood Forest, Pine Forest, Open/Brus1y Fields, and

Open Water.

.

The Upland Hardwood Forests occur primarily on the North Lane and

U.S. 27 subtracts of the Kolomoki Tract. These areas are pririarily sandy

loams with a high diversity of mature upland hardwood trees. Much of the

native upland hardwood forests in this region have been cut down for

farming and silviculture use. Upland Hardwood Forests provide habitat for

species on the state, federal, and CWCS [Comprehensive Wildlife

Conservation Strategy for Georgia] High Priority Species lista.

Pine Forests and Open/Brush Fields provide suitable habitat for

migratory song birds, reptiles, and small mammals that have been listed as

species deserving of protection. Pine Forests and Open/Brus 1 Fields were

found on all of the Kolomoki Tract. Managing the pine areas for long leaf

pine and encouraging brushy open areas will continue to attrc et many

wildlife species which are protected or species of concern.

The 2003 surveys also identified high quality aquatic communities in

Little Kolomoki Creek and=Spring Creek, their tributaries, and associated

floodplain hardwoods.

- 102 The supplemental report with respect to the 2004 easement identified similar highquality ecosystems on that portion of Kolomoki Plantation.

Although the environmental consultants did not find any rare, endangered,

or threatened species on Kolomoki Plantation, they identified habitax on the

property that is normally-home to several species that are considered rare,

endangered, or threatened: variable-leaf Indian plantain (a plant fouad in swamps

and muddy streams); Florida willow (a plant found in swamps and n.uddy

streams); chaffseed (a plant found on the edges of ponds and wet grassy areas);

spotted bullhead (a fish found in large streams with moderate currerr; and rocky

bottoms); bluestripe shiner (a fish found in large creeks with rocky bottoms);

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

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

swamps, and large ponds). .

'.

The supplemental environmental reports do not.mention any of the LL.C.'s

retained rights besides the following brief discussion of the reserved building

envelopes: "Even with the retained rights for building envelopes, the Kolomoki

Tract would maintain the scale of rural residential open space histori ally present

in the region. High quality of life associated with open space and wildlife is

exemplified in the Kolomoki Tract."

- 103 Discussion

A.

Legal Standard

The legal standard with respect to whether the L.L.C.'s contributions of the

conservation easements on Kolomoki Plantation were "qualified conservation

contributions" under section 170(h) is the same as that explained above-with

respect to the Muscogee County properties. For the reasons explain d below, we

conclude that the L.L.C.'s contributions satisfy the section 170(h)(4 (A)(îi)

conservation purpose of protecting a relatively natural.habitat (conservation

purpose). Accordingly,- we need not address petitioners' alternative argument that

the contributions protect open space pursuant to section 170(h)(4)(A)(iii).

We must consider what rights are reserved under the conserv tion-deed and

decide whether, if Kolomoki Plantation were developed to the exten permitted by

the conservation deed, the conservation purpose would be preserved, in perpetuity

as required by section 170(h)(5)(A).

B.

What Rights Are Reserved Under the Conservation Deeds?

As described above, the conservation deed preserves numerous rights for

the L.L.C., subject to the overarching language in the conservation deed

preserving the conservation purposes. The L.L.C. may, subdivide t

portion of

Kolomoki Plantation encumbered by the conservation easement into 15 smaller

- .104 plots of at least 200 acres and sell off those portions of the property. After

December 31, 2013, any of those sales to anyone other than one of petitioners'

'

descendants would be subject to a 0.5% transfer fee. Any subsequer t owners of

those properties would be able to operate them as farms, private shooting

plantations, or hunting clubs. Although farming is not permitted in treas of older

forests, such areas make up a small percentage of the property. The conservation

deed imposes a few restrictions on the manner of farming, including prohibitions

on certain industrial farming practices and limits on the use of chemicals that

would result in demonstrable damage to the ecosystems on the property.

Similarly, although commercial timber harvesting is permitted, the c3nservation

deed and the forest management plan limit the manner in which suel- harvesting

may occur.22

22The parties disagree about whether the conservation deed eff3ctively

incorporates by reference the unrecorded environmental reports and the forest

management plan. For the reasons explàined above with respect to a similar

dispute regarding the conservation deeds on the Muscogee County properties, we

agree with petitioners that those documents were appropriately incor30rated by

reference under Georgia law. Accordingly, the restrictions in those Locuments are

applicable.

- 105 C.

Does the Conservation Deed Preserve the Conservation

Purposes in Perpetuity?

I

As with respect to the conservation easements on the Muscogee County

properties, the record concerning whether the conservation deed prererves the

conservation purpose in perpetuity is sparse. Although the environn(ental reports

and supplemental environmental reports show that Kolomoki Plantation as it

existed in 2003 and 2004 provided significant relatively natural habitat, those

reports do not establish that the conservation deed effectively preser es that

relatively natural habitat. At trial, Ms. Bouthillier testified as follows regarding

the reserved rights on the Kolomoki Plantation:

Q. And you're familiar with some of the retained rights on both sets

of properties. And with respect to the retained rights on Kolo noki from an

ecological point of view there are retained rights for a lodge i'there's a 500acre -- are you familiar with those limitations?

A. Yes, sir.

Q. Do you view that as a good thing or a bad thing from an ecological

perspective.

A. I think that reserving the right to have future areas and have access

to those areas is important, because it involves the usage by cther people.

So if you've got -- for instance, if you've got a large tract of land -thousands of acres -- with access to road what I see day in and day out is

those areas become dumping grounds because -- just the other day last week

I spoke with somebody and he said, "I haven't been to this p rt of my

property in 25 years." And so at that point in time, you knov , people had

- 106 been dumping on his property. And so I think it's important to maintain

like-minded people to have access to the conservation properties.

Q. And would you include in that like-minded group hunters?

A. Yes, sir.

Ms. Mote agreed, also testifying that the building envelopes did not interfere with

the conservation purpose. She stated:

You know, if we have -- if we put a structure in a spot on 500 acres -- one

structure, two structures, five structures -- versus going in and mowing the

whole thing down and putting in half-acre, one-acre lots that's a huge

difference. So, you know, it's not going to affect that significaatly with that

small amount of structures on a 500-acre parcel.

As with our discussion above concerning the conservation easements on the

Muscogee County properties, we conclude that petitioners have presented credible

evidence--in the form of the expert testimony described above, the overarching

rights granted to COLT in the conservation deed, and the evidence that COLT

regularly monitors Kolomoki Plantation--that the conservation deed preserves the

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

Because respondent offered no contrary expert witness testimony and pointed to

no evidence that would suggest that COLT is likely to abandon its right to enforce

the conservation deeds, we conclude that petitioners have established that the

conservation deed protects significant habitat and therefore satisfies the

- 107 requirements of section 170(h)(4)(A)(ii) and section'1.170A 14(d)(3), Income Tax

Regs.

Issue 4. The Proper Value of the Conservation Contributions with Respect to

Kolomoki Plantation

Discussion

A.

The Admissibility of the Clark Reports

Mr. Clark wrote appraisal reports with respect to the 2003 anc 2004

conservation easements on Kolomoki Plantation (Clark reports). Because Mr.

Clark died before trial, he was unable to testify about those reports. The parties

agree that the Clark reports are admissible for the nonhearsay purposes of showing

what petitioners relied upon when they calculated their deductions and showing

that petitioners cooperated with respondent during his examination. The parties

also agree that because of Mr. Clark's unavailability to testify, the reports

constitute hearsay if offered for the truth of the matters contained therein.

However, petitioners contend that the Clark reports are admissible pursuant to one

or more hearsay exceptions. Respondent disagrees.

Generally, hearsay is "a statem'ent, other than one made by the declarant

while testifying at the trial or hearing, offered in evidence to prove he truth of the

matter asserted." Fed. R. Evid. 801(c). The term "statement" inclu es written

- 108 assertions. Fed. R. Evid. 801(a)(1). Hearsay is not admissible to prove the truth

of the matter asserted unless an exception to the hearsay rule applies. See Fed..R.

Evid. 802, 803, 804, 807. In general, we will not admit an appraisal report as

evidence of fair market value unless the author of the report testifies at trial and is

available for cross-examination. Van Der AA Invs., Inc. v. Commiss oner, 125

T.C. 1, 7 (2005); see also Evans v. Commissioner, T.C. Memo. 2010-207; Droz v.

Commissioner, T.C. Memo. 1996-81. We have applied that general rale to

exclude an appraisal report where the appraiser died before trial and t aerefore was

unavailable to testify." See Waddell v. Commissioner, 86 T.C. 848, :178 (1986),

aff'd, 841 F.2d 264 (9th Cir. 1988).

Petitioners contend that the Clark reports are admissible under mle

804(b)(1) of the Federal Rules of Evidence, which states:

"Petitioners contend that other courts have admitted reports frcm deceased

experts, and they cite two cases in support of that contention. In United States v.

Parks, 68 F.3d 860 (5th Cir. 1995), the court dismissed the criminal d2fendant's

argument that the Government's delay in bringing charges had prejudiced the

defendant because, inter alia, the author of some appraisal reports die i before trial.

In dismissing the defendant's argument, the Court of Appeals noted that the trial

court had admitted the appraisal reports because the Government had not objected

to their admission. The admissibility of those reports was not at issue in that case,

and it therefore does not support petitioners' contention. The second case cited by

petitioners, United States v. Thevis, 84 F.R.D. 57 (N.D. Ga. 1979), has nothing to

do with the admissibility of expert reports. Rather, the issue in that case

concerned the admissibility of a murdered witness's prior testimony before a grand

jury. Accordingly, neither of the cases petitioners cited supports their contention.

-'109 Former testimony. Testimony given as a witness at another hearing of the

same or a different proceeding, or in a deposition taken in compliance with

law in the course of the same or another proceeding, if the par:y against

whom the testimony is now offered, or, in a civil action or proceeding, a

predecessor in interest, had an opportunity and similar motive·to develop

the festimony by direct, cross, or redirect examination.24

Petitioners contend that the Clark reports are:admissible under that exception

because respondent interviewed Mr. Clark during respondent's examination and

because Mr. Clark submitted supplemental reports in response to questions raised

during the examination. We disagree. Respondent's interview with Mr. Clark

during the examination of petitioners' returns was not at a hearing aid respondent

24Effective December 1, 2011, Fed. R. Evid. 804(b)(1) was ariended to read:

(b) The Exceptions. The following are not excluded by the rule against

hearsay if the declarant is unavailable as a witness:

(1) Former Testimony. Testimony that:

(A) was given as a witness at a trial, hearing, or awful

deposition, whether given during the current proceeding or a different one; and

(B) is now offered against a party who had--or, in a civil case,

whose predecessor in interest had--an opportuni y and similar

motive to develop it by direct, cross-, or redirect examination.

Those changes are "intended to be stylistic only" and not "to change any result in

any ruling on evidence admissibility." Fed. R. Evid. 804 adyisory committee's

note.

... 110 -

did not have the opportunity to cross-examine Mr. Clark under oath. As the Court

of Appeals for the Sixth Circuit has explained:

,

,

A-hearing connotes some kind of adversarial proceeding presi ded over by

an impartial third party, while "deposition" is a term of art referring to the

out-of-court adversarial questioning of a witness under oath. Writing and

signing a narrative affidavit during an interview with Government officers

plainly is not the same as testimony given during a hearing or deposition.

United States v. Hunt, 521 F.3d 636, 643 (6th Cir. 2008). The interview and

signed affidavit in that case are similar to the interview with Mr. Cla:k and his

supplementary report in the instant case, and we find the Court of Appeals'

reasoning persuasive. We have similarly held that a signed affidavit from a

deceased attorney was not admissible under rule 804(b)(1) of the Federal Rules of

Evidence because it was "not testimony froií1 a prior hearing or deposition and

respondent had no opportunity to cross-examine" the affiant. Escobar v.

Commissioner, T.C. Memo. 1983-205. Accordingly, we conclude that the Clark

reports are not admissible pursuant to rule 804(b)(1) of the Federal Rules of

Evidence.

Petitioners also contend that the Clark reports are admissible pursuant to

rule 807 of the Federal Rules of EVidenõe, under whichihearsay notiovered by the

exceptions in rule 803 or 804 but having "equivalent circumstantial guaranties of

trustworthiness", is admissible:

- 111 if the court determines that (A) the statement is offered as evicence of a

material fact; (B) the statement is more probative on the point for which it is

offered than any other evidence which the proponent can procure through

reasonable efforts; and (C) the general purposes of * * * [the I ederal Rules

of Evidence] and the interests ofjustice will best be served by admission of

the statement into evidence. * * *

The Court of Appeals for the Eleventh Circuit has affirmed that the iesi

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