# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 2013-51

UNITED STATES TAX COURT
RMM
JOHN CRIMI, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nbs. 13252-09, 13262-09,
20519-09, 22374-09,
22417-09, 22531-09.

Filed February 14, 2013.

Frank Agostino, Soh-Yung E. Son, Lawrence M. Brody, and Jeremy M.

Klausner, for petitioners

Sze Wan Florence Char, Lydia A. Branche, and Jamie J. Song, for
respondent.

'Cases of the following petitioners are consolidated herewith: Susan Crimi,
docket No. 13262-09; John C. Crimi, docket No. 20519-09; Edward Mintel and

Angela Mintel, locket Nos. 22374-09 and 22417-09; and John J. Crimi and Charla
Crimi, docket Np. 22531-09. Petitioners John Crimi, in docket No. 13252-09, and
John C. Crimi, ih docket No. 20519-09, are the same individual.

SERVED Feb 14 2013

-2[*2]

MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judae: In July 2004 petitioners transferred to Morris county, New

Jersey (county), more than 65 acres of undeveloped land for $1,550,000 in what
they maintain was a part-sale, part-gift transaction. Petitioners reported the value
of the land for Federal income tax purposes as $2,950,000 and they claimed, as the
case was for each claiming petitioner or couple, charitable contribution and related
carryover deductions for 2004 and 2005. In separate notices of deficiency issued
to each petitioner or couple, respondent determined deficiencies and disallowed
the deductions in full on the grounds that petitioners did not meet the requirements
of section 170.2 Petitioners petitioned the Court to redetermine the deficiencies
under section 6213, and we consolidated these cases pursuant to Rule 141.
Following concessions,3 we decide two issues. First, we decide whether the fair
2All section references are to the Internal Revenue Code (Code) in effect for
the years at issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure.
3The parties have stipulated petitioner Susan Crimi in docket No. 13262-09
is entitled to full relief from joint and several liability for 2004 under sec. 6015(c).
The parties agreed petitioners received the following ordinary income in 2004 and
2005 from his, her, or their interests in county Concrete Corp. (Concrete), an S
corporation of which they are shareholders:
(continued...)

-3 [*3] market value of the subject property on the contribution date exceeded the
consideration received from the county. We hold it did to the extent stated herein.
Second, we decide whether petitioners' charitable contribution and excess
carryover deducti3ns are disallowed on account of lack of substantiation. We hold
they are not.

FINDINGS OF FACT
I.

Preliminaries
Some facts were stipulated. We incorporate by this reference the stipulation

of facts and the accompanying exhibits. Each petitioner or couple resided in New
Jersey when he, she, or they petitioned the Court.
II.

Petitioners

Petitioners in these cases are John C. Crimi (petitioner) and Susan Crimi
(Ms. Crimi)(collectively, Crimis), who were married in June 1973 and divorced in

3(...continued)

Petitioner(s)

Docket No.

2004

2005

John Crimi
John C. Crimi
Edward and Angela Mintel
Edward and And,ela Mintel

13252-09
20519-09
22374-09
22417-09

$156,086
N/A
7,319
N/A

N/A
$100,604
N/A
4,717

John J. Crimi anld Charla Crimi

22531-09

7,320

N/A

[*4] March 2005, as well as John J. Crimi (John) and Angela Crimi Mintel, who
are the Crimis' children, and their respective spouses.
III.

Concrete
At all relevant times, petitioner was the president and majority shareholder

of Concrete, an S corporation with a fiscal year ended September 30. The
shareholders of Concrete (and their percentage of ownership) were petitioner
(approximately 88% shareholder), the John J. Crimi Irrevocable Ten Year
Managed Trust (John's trust) (approximately 4% shareholder), the Anthony J.

Crimi Ten Tear Managed Trust (Anthony's trust) (approximately 4% shareholder),
and the Angela M. Crimi Irrevocable Ten Year Managed Trust (Angela's trust)
(approximately 4% shareholder). John is the beneficiary of John's trust; Angela is
the beneficiary of Angela's trust; and the beneficiary of Anthony's trust is not a
party to these cases. We collectively refer to John's trust, Anthony's trust, and
Angela's trust as the trusts. Petitioner is the only shareholder directly involved in
Concrete's business.
Concrete is in the business of manufacturing ready-mix concrete, sand, and
crushed gravel products. Concrete owns six plants, two of which were closed at

the time of trial, through which the company sells gravel, mulch, and masonry and
landscaping materials to homeowners and contractors. Petitioner, individually or

-5[*5] through Concrete, has since before 2004 purchased and sold real estate in
New Jersey, and h has pursued the development of certain properties into a

residential subdivision.
IV.

The Allen Wood Steel Property and the Subject Property

A.

The llen Wood Steel Property

Portions of the land contributed to the county, formerly the Allen Wood
Steel property, was before 1979 mined extensively for its magnetite iron ore.
Included on the Allen Wood Steel property was the Scrub Oaks Mine, one of the
largest and oldest iron ore mines in New Jersey, reaching a total depth of 3,400
feet.
B.

The Crimis' Acquisition of the Allen Wood Steel Property

In August 1979 the Crimis and Concrete purchased for $1,000 per acre 439
acres of land making up the Allen Wood Steel property, located partly in Mine
Hill Township, New Jersey (township), and partly in the adjoining Borough of
Wharton, New Je sey (Wharton). Initially, the Allen Wood Steel property was
purchased for its natural resources. More specifically, in the years following the
acquisition, a portion of the Allen Wood Steel property (approximately 125 acres)
was used for sand and gravel reserves; a separate part (approximately 51 acres)
was developed into an industrial park; and the balance (approximately 263 acres)

-6[*6] was zoned for residential use in the township and in Wharton.4 Over time,
petitioner came to pursue development of a portion of the Allen Wood Steel
property for residential subdivision, including three adjacent parcels of land
(subject property) at issue in these cases.5

C.

The Subject Property

The subject property, approximately 65.5 acres of mostly vacant land, is
located within the township's single-family residential and townhouse zoning
areas. The subject property is encumbered by an approximately 13-acre utility
easement, reducing the net developable land of the subject property to
approximately 52.5 acres. The indicated equalized value (i.e., property value for
real property tax assessment purposes) of the subject property in 2004, consisting
entirely of undeveloped land, was $1,005,851.

'Testimony was elicited at trial to the effect that 200 acres only was zoned
for residential development. We understand the balance of the Allen Wood Steel
property, or 263 acres, to have been zoned for residential development purposes.
5The subject property included block 101, lot 1 (owned by Concrete); block
201, lot 1 (owned by Ms. Crimi); and block 702, lot 12 (owned by petitioner). At
various points between 2002 and through 2004, portions of the subject property
were regranted to individuals in order to effect the transfer to the county. Our
references to the subject property are to the foregoing parcels as modified
following the regrants.

-7[*7] The subject property sits on the easterly facing slope of Iron Mountain. The

property's topography, affected by years of ore mining, is extremely rugged with
open mining pits, prior excavations, and sinkhole pockmarks on the surface. The
effects of the ore mining activity are, however, confmed and remediable. For
example, properly sealing shaft No. 1 of the Scrub Oaks Mine, considered to be a
critical hazard associated with developing the subject property, would cost
approximately $30,000.6 Notwithstanding the defects, and as discussed more fully
below, petitioner ipvestigated subdivision of the subject property in or about 1997.
The subject property did not receive preliminary or final approvals for the
proposed subdivision nor any related approvals; e.g., sewer and water allocation
approvals, soil er sion and sediment control approvals, utilities approvals, or (as
explained below) wetland transition averaging buffer approvals. This is not to say
that the approvals could not have been obtained, but rather that no such approvals
had been applied for or received. As a practical matter, preliminary approvals
typically could háve been obtained in 18 months whereas final approvals typically
took upwards of 3 years to secure. We observe that as the number of lots to be

6The Scrub Oaks Mine was a steep-angled mine that ran through the middle
of the proposed subdivision and on which a road was proposed to be built. The
shaft was improperly sealed in 1973 and needed to be resealed before the road
could be safely built atop it.

-8[*8] placed into the subdivision increased, e.g., from 35 to 44, the approval
process tended to grow more difficult.
Freshwater wetlands, including Granney Brook, are located on the subject
property. Granney Brook, which divided the subject property north to south, is
classified as a category 1 watercourse, trout production waters. Granney Brook,
by virtue of its status as a category 1 watercourse, was recognized as the most
protected type of watercourse in the State of New Jersey. See generally N.J. Stat.

Ann. secs. 13:9B-7 (West 2003), 58:16A-67 (West 2006). Specifically, New
Jersey law required a 50-foot vegetated buffer from atop of each bank to be
provided in the area surrounding the watercourse. After April 2003 New Jersey
also required that certain wetlands on the subject property, including Granney
Brook, maintain a 300-foot transition area (i.e., buffer) in which most (if not all)
development was prohibited. The 50-foot buffer eliminated roughly 160,000
square feet (3.6 acres) of developable land from the subject property, and the 300foot buffer eliminated approximately 320,000 square feet (7.3 acres) of
developable land from the subject property. Modifying the buffer zones, while not
impossible, required extensive waivers and mitigation.

[*9] V.

A.

Failed Development and the Eventual Preservation of the Subject
Property
Overview of the 1997 Proposed Residential Subdivision

Petitioner has at all relevant times been a considerable real property owner
in, and substantial payor of property taxes to, the township. In or around 1997
petitioner proposed to develop 58 acres (ostensibly making up the subject
property) plus 72 acres he, Ms. Crimi, or Concrete owned in Wharton into a
single-family and townhouse subdivision that was to be named Irondale Manor.7
The Irondale Manor project, in toto, was to encompass 130 acres spanning two
municipal jurisdictions and was to result in the subdivision of 189 single-family
residential building lots. In addition to the residential dwellings, petitioner
proposed to construct utilities, drainage improvements, and an internal roadway

system.
B.

The Township's Preliminary Review of Irondale Manor

As a prep ratory step in developing Irondale Manor, petitioner hired James

Brown, a profes ional engineer, to prepare a preliminary subdivision plan for the
Irondale Manor subdivision in the township (Irondale Manor plan). Mr. Brown
completed the Irondale Manor plan on or around January 30, 1997. The Irondale

7In addition to the properties making up the subject property, the township
portion of the Irondale Manor project was to also include block 702, lot 10.

- 10 [*10] Manor plan, proposing a 59-lot subdivision of the subject property, was
submitted to the township's planning board (board) for preliminary review. On
March 11, 1997, the township held a regular board meeting at which the attendees
conducted a completeness review of the Irondale Manor plan.8 The board
determined that the Irondale Manor plan was incomplete and that it was
appropriate to withhold review until Mr. Brown submitted to the board, among
other items, an Environmental Impact Statement (EIS).9 The board also noted that
petitioner should be prepared to address issues of wetlands, detention basis, and

8Under New Jersey land use law, a developer may request that the board
provide an informal review of a concept plan for a development for which a
developer intends to prepare and submit an application for development. N.J. Stat.
Ann. 40:55D-10.1 (West 2008). This informal review is known as a completeness
review. As noted in Kite v. Twp. of Pennsville Planning Bd., 2010 WL 693941
(N.J. Super. Ct. App. Div. 2010), "[c]ompleteness review is an administrative
process to determine whether an application can proceed. It is not a review or
hearing on the merits and does not require a public hearing. Its purpose is to
determine whether the applicant has submitted sufficient documentation to
proceed to a hearing on the merits." (Internal quotation marks omitted and
alteration in original).
Some New Jersey townships require applicants to file an Environmental
Impact Statement for all preliminary subdivisions. See, e.g., N.J. Stat. Ann. sec.
13:19-6 (West 2003) (for a development in coastal areas); Dowel Assocs. v.
Harmony Twp. Land Use Bd., 956 A.2d 349, 353-354 (N.J. Super. Ct. App. Div.
2008); In re Application of State of New Jersey, 2007 WL 1574403 (N.J. Super.
Ct. App. Div. 2007); Taft v. Upper Freehold Twp. Planning Bd., 2007 WL
1261121 (N.J. Super. Ct. App. Div. 2007). Our search for a copy of the Township
Code, assuming one exists, did not return any results.

- 11 [*11] depressions associated with the subject property. Mr. Brown, who attended
the meeting, stated that petitioner would submit the missing items as well as an

EIS.
C.

The Completeness Review Letter

Six days after the completeness review meeting, on March 17, 1997, John
Cilo, Jr., the board's engineer and planner, sent to the board's chairman a letter
(completeness review letter) detailing upwards of 65 items to be addressed before
the Irondale Man r plan would be approved. The many defects cited in the
completeness review letter were not unusual when compared with other
completeness review letters typically issued for a major subdivision plan. The
more significant defects noted were a letter of interpretation that was needed from
the NJDEP to determine the extent the wetlands associated with Granney Brook;
the location of mines under certain lots; the required stormwater management and
detention; and the necessary approvals or permits with respect to sanitary sewer
and water, wetland disturbances, stream encroachment. Petitioner was made
aware of the conipleteness review letter as well as the issues that needed to be
addressed befor the township might approve the Irondale Manor subdivision.

- 12 -

[*12] D.

The EIS

Connolly Environmental, Inc. (CEI), produced to petitioner an EIS on or
about March 25, 1997. The EIS stated as follows:
Areas of freshwater wetlands are found on the [subject]
property. These are associated with Spring Brook and its tributaries,
including Granney Brook. Spring Brook and Granney Brook flow in
a north, northeasterly direction and are tributary to Jackson Brook in
the Rockaway River watershed of the Passaic River Drainage.
Freshwater wetlands and waters are natural features which are
regulated by the New Jersey Department of Environmental; [sic]
Protection (NJDEP). The wetlands and state open waters are in the
process of being delineated and the delineation will be submitted by
* * * [CEI] to NJDEP for confirmation in a Letter of Interpretation
(LOI). The wetland areas associated with Granney Brook are
vegetated with a Red Maple, Spicebush, Skunk Cabbage association.
Since the on-site wetlands are tributary to the Passaic River Drainage
they are anticipate [sic] to be classified by NJDEP as * * * [U.S.
Environmental Protection Agency] priority wetlands. In addition onsite wetlands have been confirmed by NJDEP as documented habitat
for a threatened and endangered species. Therefore, the resource
classification of these wetlands will be "exceptional" and transition
areas of 150.0 feet will be imposed. These designations will affect
the manner in which the site is developed but will not pose any
major impediment to site development.
The EIS also noted that in addition to a variety of other wildlife species, the wood
turtle was observed on the subject property. The New Jersey Administrative Code
listed the wood turtle as a threatened species in 2003, N.J. Admin. Code sec. 7:7A,

Appendix 1 (2003), meaning the wood turtle might become endangered if

- 13 [*13] conditions surrounding it began to or continued to deteriorate, id. sec. 7:25-

4.1 (2001).
E.

Petitioner's Decision Not To Pursue Residential Development

Petitioner did not revise the Irondale Manor plan or pursue preliminary or
final approvals with respect to the subdivision. In 1997 or 1998, following
discussions with the township's mayor and administrator, Barry Lewis, petitioner
opted not to purshe residential development of the subject property. The record
does not explain the reason (if any) petitioner decided not to develop the subject
property; nor does the record clarify the scope of petitioner's discussions with the
mayor.

F.

Municipalities' Interest in Preserving Irondale Manor

In or about 1999 or 2000 Wharton, the municipality abutting the township,
sought to acquire approximately 130 acres of land for open space purposes; i.e.,
land to be set aside, dedicated, designated, or reserved for public or private use or

enjoyment or for the use and enjoyment of nearby land owners and occupants. See

N.J. Stat. Ann. sec. 40:55D-5 (West 2008). Among the land identified as potential
open space was a portion of Irondale Manor situated in Wharton. Administrative
officials for the township similarly expressed their desire to acquire the subject
property to preserve open space and as a means of avoiding further development

- 14 [*14] in the township. The township's town administrator, Mr. Lewis, approached
petitioner as to petitioner's interest in preserving the subject property for open
space purposes. Petitioner was willing to listen to the administrator's proposal;
and during preliminary discussions, petitioner indicated his belief that the subject
property was worth approximately $3 million. Petitioner subsequently procured
an appraisal, purporting to value the subject property.

VI.

The 2000 Appraisal
In or around March 2000 petitioner hired Alan D. Jones and Charles V.

Beyer of Beyer Williams Associates (Beyer Williams) to appraise the subject
property.i° In an appraisal report on a residential subdivision known as Irondale

Manor dated March 21, 2000 (2000 appraisal), Messrs. Jones and Beyer
determined the fee simple market value of the subject property as $2.95 million as

of March 2, 2000.
The 2000 appraisal used the direct sales comparison approach to value the
subject property. The 2000 appraisal determined that the highest and best use of
1°The parties have stipulated the report valued approximately 64.5 acres,
consisting of block 201, lot 1 (approximately 31.73 acres), block 702, lot 12
(approximately 9.07 acres), and block 101, lot 1 (approximately 23.72 acres).
However, page 7 of the 2000 appraisal states that it valued part of block 101, lot 1,
and its summary states that it valued pad of block 101, lot 7. Moreover, the
subject property included block 101, lot 1 (owned by Concrete); block 201, lot 1
(owned by Ms. Crimi); and block 702, lot 12 (owned by petitioner).

- 15 [*15] the subject property was single-family residence development. The 2000
appraisal stated the report as being "for discussion purposes with township
officials." The 2Ô00 appraisal assumed that the estimate of value would not be
negatively affect d by the possible location of wetlands on or around the property.
The 2000 appraisal stated that the author was not aware of any mines or mine
shafts on the subject property.
The 2000 appraisal noted that the subject property had not received formal
approvals of any type, and consequently, the 2000 appraisal considered the land
bulk residential land. The 2000 appraisal used a standard of market value as
opposed to fair nïarket value, and it did not include a statement that the report was
prepared for income tax purposes. The 2000 appraisal was made more than four

years before the ransfer date, and the appraisal did not appraise the property as of
that date. Nor did the appraisal include the date or expected date of the
contribution. The 2000 appraisal assumed that the subject property would not be

negatively affected by the possible location of the wetlands on or around the
property, and it tated the appraisers' erroneous understandings that there were no
mines on the sulject property.

- 16 [*16] The 2000 appraisal stated that
The owner [sic] has received various inquiries from reputable land
developers * * * about the availability of the tract. These offers were
in the range of $1,350,000 to $1,550,000 or $20,924 per acre or
$24,024 per acre respectively. These offers are considerably less than
our estimated value of $2,950,000 or $45,722 per acre. This is
appropriate as these offers reflect quick closing transactions with
absolutely no contingencies. * * *
The 2000 appraisal concluded that the market value of the property valued
(i.e., three of the four lots included with the subject property) was $2,950,000 as of
March 2, 2000. Messrs. Jones and Beyer signed the 2000 appraisal. The parties
have stipulated Mr. Jones is a qualified appraiser.
VII.

The Preservation Partnership

The township was unable to purchase the subject property outright because
of financial constraints, and in mid-2002 the town administrator identified
alternate funding sources in the form of a partnership among the township, the
Morris County Municipal Utilities Authority (MCMUA) acting on behalf of
Morris County (county), and the Morris Land Conservancy (conservancy)
(collectively, preservation partnership) to preserve the subject property for open
space purposes. Under the preservation partnership agreement, the county

contributed $1.5 million from its open space trust fund, MCMUA paid $50,000,

- 17 [*17] and the township paid for soft costs, including survey and environmental
costs."

On October 8, 2003, the Crimis and Concrete entered into a contract of sale
with the county to sell the subject property to the county for $1,550,000. Under
the contract, the subject property was sold subject to "a perpetual easement in
favor of the Morris County Municipal Utilities Authority for the conservation of
the natural open space character of its property" and the transfer in perpetuity to
MCMUA all of the Crimis' and Concrete's interest and title to certain water and
land rights".

"Respondent argues for the first time on his posttrial brief that only the
county was the donee. In their reply, petitioners contend the members of the
preservation partnership along with the county were the donees. While the record
supports petitioners' contention, we also believe, as we will explain later in this
opinion, the preservation partnership was acting on behalf of the county under
New Jersey's agency principles.
"These rights included:
[the Crimis' and Concrete's] rights, title and interest, in perpetuity, to
all water in, upon, under and throughout the property together with
the absolute right to reasonably extract, remove, pump and store the
same at, in, upon and throughout the property and to construct,
maintain, improve, renew, replace, enlarge and operate such works,
wells, pipelines and other facilities as shall be useful and convenient
in the development by the MCMUA of its Water System, as defined
in N.J.S.A. 40:14B-3(8), as the same may be amended and
supplemented.

- 18 [*18] Mr. Lewis reported the contract of sale to the township's board during its
regular meeting held on May 25, 2004. The minutes of the meeting show Mr.
Lewis advised the board that the Crimis and Concrete had entered into the sale
contract with the preservation partnership for the acquisition and preservation of
the subject property. Mr. Lewis also indicated on a map the properties to be
acquired and designated as open space.

VIII. 2003 Appraisal
In or around February 2003 MCMUA hired Robert Cooper of Landmark I
Appraisal, LLC, to appraise two lots making up the subject property as well as a
portion of the third lot making up the subject property." In an appraisal report
dated April 2, 2003 (2003 appraisal), Mr. Cooper determined the market value of
the property appraised to be $1.9 million as of March 6, 2003. The land appraised
totaled approximately 74.8 acres (as compared with the approximately 65 acres
making up the subject property). The 2003 appraisal used the sales comparison
approach to value the property in question, and even though the appraisal
recognized that the indicated value should be obtained from three approaches and
reconciled in a final value estimate, the 2003 appraisal used only one approach.

"The 2003 appraisal valued block 702, lot 12, block 201, lot 1, and a
portion of block 101, lot 1.

- 19 [*19] IX.

Transfer of the Subject Property and Apportionment of Value

On or about July 30, 2004 (contribution date or valuation date), the Crimis
and Concrete deeded the subject property to the county for $1,550,000. For
Federal income tai purposes, however, petitioners treated the subject property's
market value as $2.95 million, the appraised amount under the 2000 appraisal.
The claimed $2,950,000 market value was apportioned among the three parcels on
the basis of their assessed values for real estate tax purposes. Specifically,
petitioners apportioned the stated market value as follows:
Property

Owner

Block 101, lot 1 Concrete
Block 201, lot 1 Ms. Crimi
Block 702, lot 12 Petitioner
Total
X.

Apportioned
market value

$1,810,149
942,578
197,273
2,950,000

August 16 Letter

On August 16, 2004, the township's administrator, Mr. Lewis, wrote and
signed a letter (Aùgust 16 letter) to the Crimis and Concrete acknowledging the

contribution of block 101, lot 1, block 201, lot 1, and block 703, lot 12. The
August 16 letter was provided and signed by Mr. Lewis on the township's
letterhead, which in part stated: "On behalf of the MCMUA, the Morris Land

Conservancy, and the Township of Mine Hill and its residents, I would like to

- 20 [*20] express our deep appreciation for your generosity in making this donation
and allowing us to preserve this valuable and environmentally important
property." The August 16 letter also included the following statement:
As you know, this property was appraised by Beyer Williams
Associates for a total value of TWO MILLION NINE HUNDRED
AND FIFTY THOUSAND DOLLARS ($ 2,950,000) and you
conveyed the property to the Morris County MUA, the Morris Land
Conservancy and the Township of Mine Hill for a total of ONE

MILLION FIVE HUNDRED AND FIFTY-FIVE THOUSAND
DOLLARS ($1,550,000), and making a charitable donation to our
open space preservation efforts of the remaining equity in the amount

of ONE MILLION FOUR HUNDRED THOUSAND DOLLARS
($1,400,000).
XI.

Mr. LaForge and Sobel
Michael LaForge was at all relevant times licensed in New Jersey as a

certified public accountant and member of Sobel & Co., LLC (Sobel), which was a
reputable regional C.P.A. firm established in 1956 that has over 75 accountants.
Mr. LaForge joined Sobel in 1980 and has been a member of the firm since 1987.
By 2004 Mr. LaForge had provided accounting, tax, and financial services to Mr.
Crimi and Concrete for over 24 years as their accountant. Since at least 1990 Mr.
LaForge had been in charge of managing the client relationship with Mr. Crimi
and Concrete on behalf of Sobel, and on the basis of that engagement he was
intimately familiar with the financial affairs of Mr. Crimi and Concrete. Mr.

-21[*21] LaForge, who was experienced in preparing tax returns reporting charitable
contributions, prepared each of the returns at issue.
XII. Federal Income Tax Returns, Notices of Deficiency, and Amended Answer
A.

Overview

Petitioners claimed charitable contribution deductions totaling $1.4 million,
calculated as the difference between the subject property's market value as stated

in the 2000 appraisal ($2,950,000) and the 2004 sale price ($1,550,000). More
specifically, the leductions inured to petitioners' benefit either by virtue of their

direct ownershij in the subject property (in the case of the Crimis) or by virtue of
their direct or in irect ownership interest in Concrete (in the case of petitioner,
John and Charla Crimi, and Edward and Angela Mintel). We consider the Federal
income tax return reporting of each deduction for each taxpayer for each year.
B.

Cor crete
1.

2004 Concrete Return and Notice of Deficiency

Concrete filed Form 1120S, U.S. Income Tax Return for an S Corporation

(2004 Concrete eturn), for the taxable year ending September 30, 2004. The 2004
Concrete return blaimed charitable contribution deductions totaling $1,147,792, of
which $859,054 was attributable to that parcel on the subject property owned by
Concrete; i.e., block 101, lot 101. Concrete, by virtue of its election to be treated

- 22 [*22] as an S corporation, passed through to its shareholders (i.e., petitioner and
the trusts) their distributive share of income, gains, losses, deductions, and credits.
The trusts in turn passed through to their respective beneficiaries the trusts' items
of income, gains, losses, deductions, and credits. Thus, Concrete's $859,054
charitable contribution deduction was allocated to petitioner and the trusts, and
reported to them on Schedules K-1, Shareholder's Share of Income, Deductions,
Credits, etc., as follows:
Shareholder

Contribution

Petitioner
John's trust
Anthony's trust
Angela's trust

$753,104
35,316
35,319
35,315

Total'

859,054

'Notwithstanding the fact that the 2004 Concrete return reported Concrete's
charitable contribution deduction as $859,054, the parties stipulated the charitable
contribution deduction allocated to the shareholders was $859,055. We accept the
amounts allocated to the shareholders as the amounts reported on the return, not
the amounts stipulated by the parties. Cf. Jasionowski v. Commissioner, 66 T.C.
312, 318 (1976) (the Court need not accept stipulations contrary to facts disclosed
by the record).
The 2004 Concrete return, prepared and signed by Mr. LaForge, attached
copies of the 2000 appraisal, the second page of Form 8283, Noncash Charitable

- 23 [*23] Contributioiis, and the August 16 letter." The Form 8283 described the
donated property as "Land Block 1, Lot 1" and summarized the physical condition
of the donated property as undeveloped land as described in the attached 2000
appraisal. Mr. Lewis, in his capacity as the township administrator, signed the
Form 8283 on behalf of the members of the preservation partnership.
Responden disallowed the charitable contribution deduction of $859,054 as
claimed on the 2004 Concrete return. By virtue of Concrete's status as a flowthrough entity, th disallowance resulted in individual adjustments to the
shareholders' 2004 returns.15
2.

2005 Concrete Return and Notice of Deficiency

Concrete filed Form 1120S (2005 Concrete return) for the period ending
September 30, 2005, and claiming charitable contributions totaling $181,899.

"Mr. Bey r did not sign the Form 8283.
"Respondent did not determine any additions to tax or penalties in the
notices of deficiency in these cases.

- 24 [*24] C.

John C. Crimi and Susan Crimi (Docket Nos. 13252-09, 13262-09,
and 20519-09)
1.

Crimis' 2004 Return and Notice of Deficiency, and Amended
Answer

The Crimis filed Form 1040, U.S. Individual Income Tax Return (Crimis'
2004 return), for the 2004 year. The Crimis' 2004 return, prepared by Mr.
LaForge, claimed charitable contribution deductions of $540,946 with respect to
the two parcels making up the subject property petitioners owned individually; i.e.,
block 201, lot 1 and block 702, lot 12. In addition, the Crimis' 2004 return
claimed petitioner's pro rata share of the charitable contribution deduction of

$753,098 as reported on the 2004 Concrete return. Thus, the Crimis claimed
charitable contribution deductions totaling $1,294,044 relating to their donation of
the subject property. In addition, the Crimis reported capital gains of $585,516
from the sale of the two parcels making up the subject property they owned
individually. Schedule E, Supplemental Income and Loss, attached to the Crimis'
2004 return reported petitioner's pro rata share of income, losses, gains,
deductions, and credits. After aggregating the Crimis' shares of the charitable
contribution deductions and the trusts' shares of the charitable contribution

- 25 [*25] deductions, petitioners claimed charitable contribution deductions totaling

$1.4 million.16
The parties stipulated the Crimis claimed charitable contribution deductions
totaling $1.4 million and calculated as follows:

Petitioner

Claimed
fair market value Sale price

Claimed charitable
contribution deduction

Ms. Crimi
Petitioner

$942,578
197,273

$495,253
103,652

$447,325
93,621

Petitioner's pro rata
share from Concrete

1,586,872

833,780

753,098
1,294,044

Total

1We observe that despite the parties' stipulation the amounts reported do not
total $1.4 million. We are unable to reconcile this difference.

The Crimi ' 2004 return attached copies of (1) page 2 of Form 8283 for

block 702, lot 12, (2) page 2 of Form 8283 for block 201, lot 1, (3) the August 16
letter, and (4) the 2000 appraisal. The Forms 8283 attached to the Crimis' 2004
return were signed by Mr. Jones, the author of the 2000 appraisal, and
acknowledged b Mr. Lewis. The Forms 8283 described the donated property as
"Land - Block 201, Lot 1" and "Land - Block 702, Lot 12" and each summarized
the physical condition of the donated property as undeveloped land as described in
16Although the parties stipulated petitioners claimed charitable contribution
deductions totaling $1.4 million, the Crimis' 2004 return makes clear that they
claimed charitable contributions totaling $1,381,133.

- 26 [*26] the attached 2000 appraisal. Mr. Lewis, in his capacity as the township
administrator, signed the Forms 8283 on behalf of the members of the preservation
partnership.
Respondent issued to the Crimis a notice of deficiency for 2004.
Respondent disallowed charitable contribution deductions of $540,946 as claimed
on the Crimis' 2004 return with respect to the two parcels they owned which also
made up a portion of the subject property. As stated above, the Crimis claimed
charitable contribution deductions totaling $1,294,044 on their return for 2004.

The parties have stipulated the notice of deficiency issued to the Crimis for 2004
inadvertently omitted petitioner's pro rata share of Concrete's charitable

contribution in calculating the disallowed deduction. In addition, the parties
stipulated the amount of the charitable contribution deduction respondent intended
to disallow was $1,294,044. Respondent, in an amended answer, asserted a
$263,584 increase in the Crimis' 2004 tax deficiency, thereby increasing the total
deficiency due from the Crimis for 2004 to $429,613. Respondent concedes that
he bears the burden of proof with respect to the increased deficiency of $263,584.
The parties have stipulated the carryover charitable contribution for 2005 is

subject to computational adjustments due to petitioner's adjusted gross income and
due to resolution of the charitable contribution deduction for 2004.

-27[*27]

2.

John C. Crimi's 2005 Return and Notice of Deficiency

Petitioner filed Form 1040, U.S. Individual Income Tax Return (petitioner's
2005 return) for 2005 on which he elected a filing status of single and claimed an
excess charitable contribution carryover of $227,349. Respondent issued to
petitioner a notice of deficiency for 2005 on the basis of the excess charitable
contribution carryover from 2004. The parties have stipulated petitioner's
itemized deduction for 2005 is subject to computational adjustments due to the
change in petitioner's adjusted gross income and determination of charitable
deduction carryover in 2005.
D.

Joh J. and Charla Crimi (Docket No. 22531-09)

John J. and Charla Crimi filed Form 1040 for 2004 (John and Charla's 2004
return). Schedule E attached to John and Charla's 2004 return reported John's
trust's pro rata share of Concrete's items of income, deduction, gain, loss, and
credit, including charitable contribution deductions totaling $40,862. Respondent

issued to John and Charla Crimi a notice of deficiency for 2004. John and
Charla's 2005 tax year is not before the Court.

- 28 -

[*28] E.

Edward and Angela Mintel (Docket Nos. 22374-09 and 22417-09)
1.

Edward and Angela's 2004 Return and Notice of Deficiency

Edward and Angela Mintel filed Form 1040 for 2004 (Edward and Angela's
2004 return). Page 2 of Schedule E attached to Edward and Angela's 2004 return
reported Angela's trust's pro rata share of Concrete's items of income, deduction,
gain, loss, and credit, including the $35,316 charitable contribution deduction that
was attributable to the county's claimed portion of the charitable contribution.
Respondent issued to Edward and Angela Mintel a notice of deficiency for 2004.
The parties have stipulated that the only remaining issue in docket No. 22374-09
is whether Edward and Angela are entitled to the charitable contribution deduction

claimed for 2004.
2.

Edward and Angela's 2005 Return and Notice of Deficiency

Edward and Angela Mintel filed Form 1040 for 2005 (Edward and Angela's
2005 return). Respondent issued to Edward and Angela Mintel a notice of
deficiency for 2005 on the basis of the excess charitable contribution carryover
from 2004. The parties have stipulated the only remaining issue in docket No.

22417-09 is whether Edward and Angela are entitled to the charitable contribution
deduction claimed for 2004.

- 29 [*29] XIII. Preparation of Petitioners' Federal Income Tax Returns
For purposes of preparing the 2004 and 2005 Federal income tax returns for
petitioner and Con rete, Mr. LaForge had complete access to all documents
concerning petitioner's and Concrete's financial and accounting matters, which
were either at petitioner's home or in Concrete's office. In addition to 30 to 40
telephone conversátions, Mr. LaForge and petitioner met together personally six to
eight times in 2004 to discuss tax planning-related matters.
Mr. LaForge, who had known about and been regularly updated on the
contemplated part gift, part-sale transaction since 1998, requested from petitioner
a copy of the 2000 appraisal for the 2004 tax return. Petitioner provided the 2000
appraisal to Mr. LaForge as requested, knowing only that an appraisal was
necessary to claim a charitable contribution deduction. The 2000 appraisal was
the only appraisal petitioner provided to Mr. LaForge to prepare the returns at

issue.
Mr. LaForge was aware when he prepared the returns at issue that the Code
and the regulations specified detailed requirements for claiming a charitable
contribution deduction. He also knew that the 2000 appraisal did not meet each of
the rules to be coñsidered a qualified appraisal even though the Code and the
regulations required petitioners to obtain a "qualified appraisal" before claiming a

- 30 [*30] charitable contribution deduction. Knowing the 2000 appraisal did not meet
the literal requirements to be a qualified appraisal, he consulted with and was

advised by Ken Hydock" of Sobel's tax department, who determined the 2000
appraisal was a valid appraisal in substantial compliance with the regulations.
Outside of explaining to petitioner that an appraisal of the subject property was
required in order to claim a charitable contribution deduction, Mr. LaForge did not
explain to petitioners any other rules for claiming a charitable contribution
deduction. Mr. LaForge did not explain that the 2000 appraisal did not comply
with the rules for a qualified appraisal. Nor did Mr. LaForge advise petitioner that
there was at least a possibility that petitioner would not prevail on the substantial
compliance argument. Mr. LaForge did not advise petitioner to obtain a new
appraisal, and he did not give petitioner reason to seek advice as to the value of
the subject property as of the contribution date.
XIV. Examination of Petitioners' Returns

Respondent selected petitioners' returns for the years at issue for audit, and
he assigned Revenue Agent Christine Gallagher to examine those returns. During
the examination, petitioner hired Mr. Jones to perform an updated appraisal of the

subject property. Petitioner or Mr. LaForge submitted to respondent an appraisal
"Mr. Hydock held a law degree and was a C.P.A.

-31[*31] of the subject property dated June 20, 2007 (2007 appraisal). The 2007
appraisal, prepared and signed by Mr. Jones and Thomas S. Kachelriess of
Professional Appráisal Associates, valued the subject property as of July 30, 2004.

XV. 2007 Appraisal
The 2007 appraisal valued the subject property at $5,225,000 as of the
contribution date. It also included the date of contribution and the accurate
acreage that was transferred. It also contained a statement that the appraisal was
prepared for "Internal Revenue purposes."
XVI. Trial of These Cases

A.

Over iew

A trial was held in New York, New York (Newark trial session), on
December 16, 2012, and from December 22 through December 23, 2012. Four
fact witnesses and four expert witnesses testified at the trial.

B.

Expert Testimony
1.

Petitioners' Expert Witnesses

a.

Mr. Blethen

Petitioners offered Marvin R. Blethen as an expert on civil engineering
and mining engineering, and the Court recognized Mr. Blethen as an expert on
mining engineeri g. Mr. Blethen holds a bachelor of science degree in mining

- 32 [*32] engineering from West Virginia University, a master's degree in mining
engineering from the University of Idaho, and a master of business administration
degree from the Troy State University. Mr. Blethen has more than 30 years'
experience as a professional engineer, and he is licensed as a professional engineer
in 12 States. He is a member of the National Society of Professional Engineers
and the Society of Mining Engineers.
b.

Mr. Holenstein

Petitioners offered, and the Court recognized, Michael Holenstein as an
expert on real estate valuation. Mr. Holenstein holds a bachelor of arts and
science degree from Upsala College, and he has achieved the MAI designation
from the Appraisal Institute. He is a licensed certified general real estate appraiser
in New Jersey, New York, and Pennsylvania, and the State of New Jersey has
certified him as a tax assessor. He has been qualified as an expert in at least one
Federal bankruptcy court, in the Tax Court of New Jersey, in the Superior Court of
New Jersey, and before various quasi-judicial boards in connection with
condemnation proceedings.

-33 [*33]

2.

Respondent's Expert Witnesses

a.

Mr. Rinaldi

Responde t offered, and the Court recognized, Anthony J. Rinaldi as an
expert in real estate valuation. Mr. Rinaldi holds a bachelor's degree in applied
science from New York University, and he has around 35 years' experience
appraising real e tate. He is a member of the Appraisal Institute and the American
Society of Appraisers, and he holds the MAI designation.
b.

Mr. Morris

Responde t offered, and the Court recognized, Jeffrey Morris as an expert
in civil engineering. Mr. Morris has more than 32 years of experience in
engineering, all öf which was with Boswell Engineering in New Jersey. He earned
a bachelor of sci nce degree in civil engineering from Lehigh University. He is a
licensed as a professional engineer, a professional land surveyor, a professional
surveyor, a professional planner, and a certified municipal engineer. He is a
member of the New Jersey Society of Professional Land Surveyors and the New
Jersey Society of Municipal Engineers and a past president of the Society of
Professional Engineers.

- 34 [*34] C.

Concurrent Witness Procedure

The Court, following a pretrial request from the parties, directed the expert
witnesses to testify concurrently. The procedure was implemented in substantially
the same way as in Rovakat, LLC v. Commissioner, T.C. Memo. 2011-225, 102

T.C.M. (CCH) 264, 271 (2011). Insofar as the record includes five appraisals (the
2000 appraisal, the 2004 appraisal, the 2007 appraisal, Mr. Rinaldi's appraisal
report, and Mr. Holenstein's appraisal) indicating a proffered value of $660,000,

as with Mr. Rinaldi's appraisal, to $5,225,000, as with the 2007 appraisal, we
cannot overstate the importance of concurrent witness testimony in these cases.
We describe more fully in the opinion section the benefits of the concurrent
testimony and the impact on our analysis.
D.

Petitioners' Motion To Shift the Burden of Proof

Petitioners orally moved the Court at trial to shift the burden of proof to
respondent with respect to the remaining factual issues in dispute.

OPINION
I.

Overview
Section 170(a)(1) generally allows taxpayers a deduction for any charitable

contribution made during the taxable year. Where, as here, the taxpayers receive a
substantial benefit in return for a contribution of property, a deduction is permitted

- 35 [*35] only to the extent that (1) the fair market value of the donated property
exceeds the fair market value of the benefit conferred, and (2) the excess
contribution is made with charitable intent and without the receipt or expectation
of receipt of adeq ate consideration. _Sg_e Hernandez v. Commissioner, 490 U.S.

680, 690 (1986); United States v. Am. Bar Endowment, 477 U.S. 105, 116-117
(1986); see also Rolfs v. Commissioner, 135 T.C. 471, 480 (2010), aff'd, 668 F.3d
888 (7th Cir. 2012). Taxpayers seeking to deduct charitable contributions must
satisfy strict substantiation requirements fixed by reference to the amount of the
deduction claimed. See generally sec. 1.170A-13, Income Tax Regs. As relevant
here, for a contribution of property for which a deduction of more than $500,000 is
claimed, taxpayers must obtain and attach to the Federal income tax return first
claiming the deduktion a qualified appraisal of the property. Sec. 170(f)(11)(A),
(C), (D). Also relevant here is that taxpayers must substantiate a contribution of
property for which a deduction of $250 or more is claimed with a
contemporaneous written acknowledgment by the donee organization including
the following information: (1) the amount of cash and a description of any
noncash property contributed; (2) a statement as to whether the donee organization
provided to the d nor any goods or services in whole or partial consideration for
the contributed property; and (3) a description and a good-faith estimate of the

- 36 [*36] value of any goods or services the donee organization provided. Sec.
170(f)(8)(A) and (B). The substantiation requirements under section 170 are
cumulative; that is, the substantiation requirements for a noncash contribution of
more than $500,000 also include those for a contribution of $250 or more.
II.

Parties'Arguments
Respondent argues that petitioners are not entitled to the claimed charitable

contribution deductions for three main reasons. First, he claims petitioners failed
to obtain from the county a contemporaneous written acknowledgment as required
by section 170(f)(8). Second, he asserts petitioners failed to attach to their Federal
income tax returns a qualified appraisal as required by section 170(f)(11), section
1.170A-13(c), Income Tax Regs., and the Deficit Reduction Act of 1984

(DEFRA), Pub. L. No. 98-369, sec. 155, 98 Stat. at 691. Third, citing a highest
and best use of conservation, he maintains the subject property's fair market value
was $660,000 on the contribution date. Along that line, respondent argues that
insofar as the value of the subject property did not exceed the consideration the
preservation partnership paid, no deduction is allowed under section 170(a).18
18On brief, respondent abandons Mr. Rinaldi's alternative premise that the
fair market value of the subject property was $1,510,000, and he is deemed to have
waived that argument. See Rule 151(e)(4) and (5); Estate of Johnson v.

Commissioner, T.C. Memo. 2001-182, 82 T.C.M. (CCH) 206, 234 (2001).(and
(continued...)

- 37 [*37] With respect to his final argument, respondent argues in the alternative that
the fair market value of the subject property is limited to the consideration paid by
the preservation partnership, or $1,550,000.
Petitioners assert that they transferred the subject property to the county in a
part-sale, part-gift transaction, at which time the fair market value of the property
was $3,760,000.19 Petitioners claim entitlement to charitable contribution
deductions totaling $2,210,000; i.e., the difference between the claimed fair
market value of the subject property on the contribution date ($3,760,000) and the
consideration received from the county ($1,550,000). In that regard, petitioners
now assert that the fair market value of the subject property was higher than
initially reported on their Federal income tax returns for the years at issue, and
they (with the exception of John J. and Charla Crimi in docket No. 22531-09)
"(...continued)

cases cited thereat), affd, 129 Fed. Appx. 597 (11th Cir. 2005). Rather than
relying on Mr. Rinaldi's alternative development premise, respondent asserts for
the first time on brief his alternative position that the subject property's fair market
value on the valuation date is limited to the consideration the preservation
partnership paid to acquire the subject property, or $1,550,000.
19Although petitioners claim on brief that the fair market value of the subject
property was $3,761,000 on the valuation date using a 44-lot subdivision
hypothesis, Mr. Holenstein was clear at trial that he valued a 44-lot subdivision at
$3,760,000. We understand petitioners to rely on the opinion of Mr. Holenstein,
and consequently, we recognize their claimed fair market value of the subject
property as $3,760,000 and we shall refer to this amount throughout this opinion.

- 38 [*38] claim entitlement to refunds for 2005.20 Additionally, petitioners assert that
they actually or substantially complied with the recordkeeping requirements of
section 170(f)(8) and (11), and DEFRA sec. 155, or alternatively, that the
reasonable cause exception of section 170(f)(11)(A)(ii)(II) precludes disallowance
of the charitable contribution deductions.

IV.

Burden of Proof
The taxpayers generally bear the burden of proof in a deficiency proceeding

such as this, see Rule 142(a), and the Commissioner ordinarily bears the burden of
proof as to any increased deficiency, id. The parties stipulate respondent bears the
burden of proof in respect of petitioner's pro rata share of Concrete's charitable
contribution deduction ($859,065) because that adjustment, pleaded by amended
answer, increased the deficiency. See Rule 142(a).
Petitioners moved the Court at trial to shift the burden of proof with respect
to all factual issues not shifted to respondent under Rule 142(a). We decline to do
so, and therefore, we will issue an order denying petitioners' motion. Section
7491(a) may, in certain limited circumstances, operate to shift the burden of proof
to the Commissioner with respect to any factual issue relevant to determining the

20Because petitioners John J. and Charla Crimi's 2005 tax year is not before
the Court, we do not include them as claiming entitlement to a refund for 2005.

- 39 [*39] taxpayers' Federal income tax liability. It is permitted to shift the burden of
proof to the Commissioner only after the taxpayers introduce credible evidence as
to the factually disputed issues and prove that they have complied with all relevant
substantiation and recordkeeping requirements and have cooperated with the
Commissioner's reasonable requests for witnesses, information, documents,

meetings, and interviews. Sec. 7491(a)(2)(A) and (B).
We conclude that petitioners have not satisfied the substantiation and
recordkeeping requirements for the burden of proof to shift to respondent as to all

issues. As we explain in section VI.B, we decline to decide that petitioners
complied with thë substantiation and recordkeeping requirements of section
170(f)(11), section 1.170A-13(c)(3), Income Tax Regs. or DEFRA sec. 155.
While reasonable cause may excuse their noncompliance for purposes of a
deduction under section 170(f)(11)(A)(ii)(II), no parallel exception exists under

section 7491. Accord H.R. Conf. Rept. No. 105-599, at 241 (1988), 1998-3 C.B.
747, 995 ("Taxpa ers who fail to substantiate any item in accordance with the
legal requirement of substantiation will not have satisfied the legal conditions that
are prerequisite to claiming the item on the taxpayer's tax return and will
accordingly be unable to avail themselves of this provision regarding the burden
of proof. Thus, if a taxpayer required to substantiate an item fails to do so in the

- 40 [*40] manner required * * *, this burden of proof provision is inapplicable." (Fn.
refs. omitted.)); see Quinn v. Commissioner, T.C. Memo. 2012-178, 103 T.C.M.

(CCH) 1945, 1946-1947 (2012) (burden of proof did not shift absent evidence
substantiating charitable contribution deductions); Kendrix v. Commissioner, T.C.

Memo. 2006-9, 91 T.C.M. (CCH) 666, 668 (2006); see also Boltar, L.L.C. v.
Commissioner, 136 T.C. 326, 340 (2011) (burden of proof did not shift to the
Commissioner in the absence of credible evidence on value); NHUSS Trust v.

Commissioner, T.C. Memo. 2005-236, 90 T.C.M. (CCH) 374, 378 (2005)
(same)." Accordingly, the burden of proof as to all issues not shifted to
respondent under Rule 142(a) remains with petitioners.
IV.

The Experts' Reports and Testimony
A.

Approach to Evaluating the Experts' Opinions

An expert witness may be allowed to testify in a proceeding before this
Court when his or her scientific, technical, or other specialized knowledge might
help us to understand the evidence or decide a fact in issue. See Fed. R. Evid. 702.
"We are mindful of our decision to shift the burden of proof to the
Commissioner in Dunlap v. Commissioner, T.C. Memo. 2012-126, 103 T.C.M.
(CCH) 1689 (2012). In Dunlap, the taxpayers obtained a qualified appraisal and a
contemporaneous written acknowledgment as required under sec. 170(f)(8) and
(11). Because petitioners failed to likewise establish that they satisfied the
requirements of sec. 170(f)(8) and (11), we decline to treat Dunlap as controlling
on the issue of whether the burden of proof shifts to respondent.

-41 [*41] An expert qualified to testify in a judicial proceeding owes a duty to the
Court that transcends the duty to his or her client insofar as the expert must present
his or her opinion, as well as the facts, data, and analysis on which he or she
relied, neutrally and candidly. Estate of Halas v. Commissioner, 94 T.C. 570, 577578 (1990); see also Estate of Mitchell v. Commissioner, T.C. Memo. 2002-98, 83

T.C.M. (CCH) 1524, 1530 (2002); Wagner Constr., Inc. v. Commissioner, T.C.
Memo. 2001-160 81 T.C.M. (CCH) 1869, 1890 (2001). Experts who breach their
duty to the Court in order to advance their client's litigating position compromise
their usefulness.

e are mindful of the "cottage industry of experts who function

primarily in the niarket for tax benefits", see Boltar, L.L.C. v. Commissioner, 136
T.C. 326, 335 (2Q11), and our concerns about the helpfulness of expert testimony
in one recent case, and in these cases, led us to have the experts testify
concurrently, see Rovakat, LLC v. Commissioner, 102 T.C.M. (CCH) at 271; see

also Michael R. Devitt, "A Dip in the Hot Tub: Concurrent Evidence Techniques
for Expert Witne ses in Tax Court Cases", 118 J. Tax'n 213 (Oct. 2012)
(discussing the concurrent testimony process more fully). The concurrent
testimony in these cases enabled us to more easily separate the reliable portions of
the expert reports from the unreliable, and consequently, to expedite our
decisionmaking rocess.

- 42 [*42] Our discretion to accept or reject an expert's analysis in whole or in part is

broad. Helvering v. Nat'l Grocery Co., 304 U.S. 282, 294-295 (1938); see also
Whitehouse Hotel Ltd. P'ship v. Commissioner, 615 F.3d 321, 330 (5th Cir. .
2010), vacating and remanding 131 T.C. 112 (2008); Malachinski v.

Commissioner, 268 F.3d 497, 505 (7th Cir. 2001), a£f'g T.C. Memo. 1999-182, 77
T.C.M. (CCH) 2092 (1999); Sammons v. Commissioner, 838 F.2d 330, 333-334
(9th Cir. 1988), aff's in part, rev'a in part T.C. Memo. 1986-318, 51 T.C.M.
(CCH) 1568 (1986); Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir. 1986),

aff'g in part, rev'g in part T.C. Memo. 1983-200, 45 T.C.M. (CCH) 1283 (1983).
At times, an expert helps us to decide a case. ,, Booth v. Commissioner, 108

T.C. 524, 573 (1997); Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274,

302 (1996); see also M.I.C. Ltd. v. Commissioner, T.C. Memo. 1997-96, 73
T.C.M. (CCH) 2098, 2103 (1997); Estate of Proios v. Commissioner, T.C. Memo.
1994-442, 68 T.C.M. (CCH) 645, 649 (1994). Other times, he or she does not.
E_g, Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148, 101 T.C.M.

(CCH) 1702, 1714 (2011), as supplemented T.C. Memo. 2011-244, 102 T.C.M.
(CCH) 388 (2011); Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283,
100 T.C.M. (CCH) 581, 585 (2010), aff'd, __ Fed. Appx. _ (10th Cir. Aug. 16,
2012); Ludwick v. Commissioner, T.C. Memo. 2010-104, 99 T.C.M. (CCH) 1424,

- 43 [*43] 1425-1426 (2010); Estate of Scanlan v. Commissioner, T.C. Memo. 1:996331, aff'd without published opinion, 116 F.3d 1476 (5th Cir. 1997); Mandelbaum
v. Commissioner, T.C. Memo. 1995-255, 69 T.C.M. (CCH) 2852 (1995), affd.
without publishëd opinion, 91 F.3d 124 (3d Cir. 1996). We need not accept an
expert's opinion in its entirety, see Parker v. Commissioner, 86 T.C. 547, 562
(1986), and we are not bound by an expert's opinion that is contrary to our own

judgment, see Cliiu v. Commissioner, 84 T.C. 722, 734 (1985).
B.

Expbrt Reports

1.

Overview

In total, fo r appraisal reports were admitted into evidence relevant to the
fair market value of the subject property: the 2000 appraisal; the 2007 appraisal;
Mr. Holenstein's appraisal report revised November 30, 2011 (Holenstein report);
and Mr. Rinaldi's appraisal report dated November 9, 2011 (Rinaldi report). We
focus on the latte two. Also, two engineering reports were accepted into evidence

as to the feasibili y of developing the subject property into a residential
subdivision: an undated engineering viability analysis by Mr. Morris (Morris
report); and a ground-penetrating radar survey by Mr. Blethen dated November 4,

2011 (Blethen report). We also focus on these reports. We refer to Messrs.

- 44 [*44] Morris and Blethen as the engineers, and we refer to Messrs. Rinaldi and
Holenstein as the appraisers. We begin with the engineers' reports.
2.

The Engineers' Reports
a.

The Morris Report

The Morris report is an engineering viability analysis of the proposed 59-lot
subdivision plan petitioner submitted to the township in 1997. Citing various
factors affecting the developability of the subject property into a 59-lot
subdivision, primarily the "environmentally sensitive character of the [subject]

property", the Morris report concluded it was not feasible to develop the subject
property into a subdivision of so many lots. Instead, the Morris report concluded
that "the most number of lots that have any possibility of approval from the
submitted subdivision are 44 lots." The Morris report also noted that additional
unknown areas including wetlands, mine holes, or potentially endangered species
might further reduce the number of developable lots.

Notwithstanding his conclusion that the subject property was developable
into, at most, a 44-lot subdivision, Mr. Morris offered engineer's cost estimates of
the onsite and offsite improvements for a 59-lot subdivision. Examples of the .
required improvements included infrastructures such as roadways, drainage,
utilities, sanitary sewers, and other items mandated by ordinance and New Jersey's

- 45 [*45] Residential Site Improvement Standards. The Morris report also estimated
the cost of additional items cited as defects in the completeness review letter; e.g.,
an additional watei·main extension, sidewalk grading, streetlights, trees, signs, and
stormwater managëment facilities. Additionally, the Morris report added a 20%
contingency to all construction costs as allowed by New Jersey law. See N.J. Stat.
Ann. sec. 40:55D-53a. The Morris report reviewed land use regulations in effect
in January 1997, a well as municipal, county, and State regulations promulgated

between 1997 and July 30, 2004.
b.

The Blethen Report

Fundamentally, the Blethen report communicated Mr. Blethen's fmdings as
to the presence of possible mine tunneling or mine shaft activity in the vicinity of
the proposed Irondale Manor subdivision. To determine the effects of the mining
activity, Mr. Blethen engaged a third party, GeoModel, Inc. (Geo), to perform a
ground-penetrating radar (GPR) survey of the subject property. The GPR survey,
a generally accepted technique in the mining field, uses equipment to reflect radio
or sonic pulses of of the earth's bedrock to image the subsurface of the subject
property. The imäged results are intended to show variations in the property's
subsurface.

- 46 [*46] The results of the GPR survey, and Mr. Blethen's visual site inspection,
detected prior mines on the subject property. The Blethen report concluded that
the mine shafts should be sealed to a depth of at least 25 feet, and Mr. Blethen
testified at trial that the effects of the mines could be remediated for approximately
$110,000. The Blethen report and Mr. Blethen's trial testimony, in toto,
established the feasibility of developing the subject property into a residential
subdivision so long as the prior effects of the mining operations were remediated
by a competent engineer.
c.

Preliminary Conclusions as to Engineers' Reports

We found the Morris and Blethen reports to be reasonable, reliable, and for
the most part, consistent with respect to the feasibility of developing the subject
property into a residential subdivision. As explained more fully below, we accept
the ultimate conclusion of each: with respect to the Morris report, we accept that
the subject property was developable into a 44-lot residential subdivision at a cost
of approximately $2 million (without regard to extraordinary development costs).
With respect to the Blethen report, we accept that the aftereffects of earlier mining
activity could be remediated to develop the property into a residential subdivision

at a cost of approximately $110,000.

- 47 [*47]

3.

The Appraisers' Reports
a.

The Holenstein Report

The Holenstein report, as submitted to the Court before trial, estimated the
subject property's fair market value as $4.5 million on the valuation date on the
basis of a highest and best use of residential development as a 59-lot subdivision."
During the concurrent testimony, after the engineers agreed that the subject
property was possibly developable into 44-lot subdivision, a conclusion with
which Mr. Holenstein came to agree, Mr. Holenstein revised his report to estimate
the claimed fair niarket value of the subject property at $3,760,000 on the
valuation date." We summarize the Holenstein report as written, and note where
appropriate the impact of Mr. Holenstein's acquiescence that the subject property

"Mr. Holenstein initially concluded the subject property was developable as
a 59-lot subdivisi n because he erroneously understood the subdivision plan to be
a fully engineered plan, meaning that the subdivision application complied with all
regulations, planÉing guidelines, and engineering design criteria needed to obtain
full and final appËoval. In reaching his conclusion, Mr. Holenstein initially relied
upon a 2007 letteË from Mr. Cilo, though he reduced his estimate of the number of
developable lots ývhen faced with the completeness review letter and contrary
testimony offered concurrently by his peer experts.
"As discussed elsewhere in this opinion, Messrs. Morris and Blethen agreed
further that develbping the subject property into a 40-lot residential subdivision, as
opposed to a 44-lot subdivision, would be more expeditious. To this point, Mr.
Holenstein estimated the fair market value of the subject property as a 44-lot
subdivision at $3;538,000.

- 48 [*48] was potentially developable into a 44-lot subdivision rather than a 59-lot
subdivision.
As just mentioned, Mr. Holenstein regarded the highest and best use ofthe
subject property as residential development of a 59-lot subdivision. In reaching
his conclusion as to the property's highest and best use, Mr. Holenstein relied
upon the proposed Irondale Manor plan submitted to the board in 1997 and
conversations with Mr. Blethen concluding that mine remediation could be largely
completed using materials native to the land. However, the Holenstein report did
not account for costs associated with mine remediation so as to enable
development of the property as a residential subdivision.
The Holenstein report used the market data approach to value the subject
property. In this regard, Mr. Holenstein selected 34 purportedly comparable sales
divided into two sets: the first set, comprising comparables 1 through 17, was
sales of residential lots for which subdivision was not required; the second set,
comprising comparables 18 through 34, was sales of raw land lots in which
subdivision was intended. As to the first set of comparables, Mr. Holenstein
performed a comparable sales analysis to understand the conceivable profit
potential of a fully developed subject property. Mr. Holenstein adjusted each
comparable in the first set for size, market conditions, location, and physical

- 49 [*49] attributes, e.g., access, topography, and the presence of wetlands. Mr.
Holenstein acknowledged at trial that the first set of comparables was irrelevant,
though he noted that group did not contribute greatly to his opinion of value.24
Accordingly, we set aside the first set of comparables in our analysis as they are
not relevant to the issue of the subject property's fair market value.25
As to the second set of comparables, the group on which we focus our
primary attention,

. Holenstein completed a comparable sales analysis of those

properties and the subject property. Specifically, he adjusted each comparable for
size, market conditions, location, and the presence or absence of approvals, e.g.,
the status of development approvals. He also applied the principle of diminishing
returns, the premise that adding more units beyond a certain point (the point of
diminishing returns) will result in lower per-unit returns. See Appraisal Institute,

The Appraisal of Real Estate 40 (13th ed. 2008). The second set of comparables,

24We do not credit the Holenstein report's claim that the developed lots (i.e.,
comparables 1 through 17) and the undeveloped lots (i.e., comparables 18 through
34) were correlated to determine the final estimated value of $4.5 million. Mr.
Holenstein testified at trial that the first set of comparables "doesn't make any
great contributioni to [his] final conclusion of value." Assuming a correlation was
made as to the first and second set of comparables as the report suggests, we will
infer from Mr. Holenstein's testimony that the correlation did little to the final
conclusion of value.
2sPetitioners' brief is consistent in that they do not discuss comparables 1
through 17 with any specificity.

- 50 [*50] and the adjustments imposed to derive an adjusted sale price for each, were
as follows:
Units
No. Sale date Sale price sold'

Price
Adjustments for
Adjusted
per unit Market Location Density Approvals sale price

18 9/25/2003 $585,000 5 $117,000 7%
19 3/1/2002 1,100,000 6
183,333 19%
20 5/14/2003 3,300,000 100
33,000 10%
21 1/27/2005 8,500,000 156
54,487 (4%)
22 9/30/2002 1,200,000 15
80,000 15%
23 3/2/2004 2,700,000 12 225,000 3%
24 7/27/2004 1,375,000 13
105,769
25 3/12/2002 8,147,320 95
85,761 19%
26 4/29/2003 9,240,000 66 140,000 10%
27 8/20/2004 3,250,000 245
72,222
28 11/16/2005 1,700,000 5
340,000 (10%)
29 1/17/2003 1,050,000 10
105,000 12%
30 10/27/2003 1,200,000 6
200,000
6%
31 9/23/2004 1,600,000 9
177,778 (1%)
32 12/8/2004 1,300,000 10
130,000
5%
33 7/3/2002 1,275,000 7
182,143
17%
34 12/19/2002 1,000,000 8
125,000 13%
Unadjusted mean
138,617

(5%)
20%
15%
(5%)
(30%)
(5%)
(5%)
(10%)
(10%) (5%) -

. (20%)
(20%)
-

$124,924
207,836
43,445
60,174
91,730
185,918
100,547
81,707
107,838
71,890
289,443
· 117,888
201,535
158,071
123,026
201,783
141,137
135,817

1We understand the reference to "units" to be to the number of developable lots.

2As discussed infra p. 77, the number of developable lots associated with comparable 27
was 60 lots and not 45 lots as stated in the Holenstein report. After adjusting the number of
developable lots associated with comparable 27 from 45 lots to 60 lots and applying adjustments
as determined by Mr. Holenstein, the adjusted sale price is reduced to approximately $54,167
($3,250,000 sale price divided by 60 lots).

With respect to the market adjustment, the Holenstein report observed that
the real estate market in 2004 was experiencing a sustained period of appreciation,
and it noted that the contribution date occurred near the peak of market velocity.

Mr. Holenstein adjusted the comparable sales, as appropriate, to compensate for

- 51 [*51] market differences between the contribution date and the date on which the
comparable property was sold. For example, Mr. Holenstein determined that
market adjustments were not necessary for comparables 24 and 27 because the sale
of those properties was consummated in July 2004, the same month in which the
subject property was sold to the county.
With respect to the location adjustment, the Holenstein report compared the
proximity of each comparable to the subject property and adjusted the comparable
sales in such a way as to neutralize the effects of convenience to services and
commuter roadwÊys, median home prices, general economics within the area, and
overall market appeal. More specifically, the location adjustment was applied
with regard for thþ conformity of subdivisions as compared with an isolated lot.
As to the density adjustment, the Holenstein report deemed comparables that
includes townhouses and condominiums to be inferior to the subject property, and

as a result, adjusted the comparables upwards. As to the approvals adjustment, the
Holenstein report noted that properties with full approvals tend to sell for a
premium as compared with properties which have only preliminary approvals or
approvals as of right.
The Holenstein report observed that the indicated value of comparables 18
through 34 reflected a range from $33,000 per lot to $340,000 per lot. Then, the

- 52 [*52] Holenstein report used statistical modeling to derive a per-lot value equal
to $76,953.26 The Holenstein report next concludes that the fair market value of
the subject property on the valuation date was $4,540,000, calculated as $76,953
per unit times 59 lots, rounded to the nearest thousand.
b.

The Rinaldi Report
i.

Overview

The Rinaldi report presented two alternative valuation hypotheses: a
conservation premise and a development premise. Under the former conservation
premise, which indicated a market value of $660,000, Mr. Rinaldi performed a
comparable sales analysis of vacant lands with a highest and best use of
conservation. Under the latter development premise, which indicated a market
value of $1,510,000, Mr. Rinaldi completed a subdivision development analysis of
the subject property to calculate the aggregate value of the individual lots with
26The Holenstein report's statistical model plotted the adjusted sale price of
each comparable against its respective lot size and derived what we understand to
be the diminishing rate of return indicated by a power curve, i.e., an exponential
function with a power of -0.3585; the correlation, which represents how well a
regression line fits a set of data, was stated to be of 83.7%. The Holenstein report
went on to use polynomial curve fitting to determine an indicated per-lot value
equal to $76,953. Precisely, the Holenstein report multiplied the per-lot value of
$331,951 by the product of 59 lots raised to the -0.03585 power, or 0.231819, to
interpolate (curve fit) the subject property's per-lot fair market value. The
indicated value per lot of $76,593 was calculated as $331,951 multiplied by
0.231819.

- 53 [*53] adjustments for hard and soft costs, the cost of approvals, the time to
develop the site, and associated risks. We consider each premise in turn.
ii.

Development Premise

Mr. Rinaldi engaged Mr. Morris to perform an engineering viability analysis
of the subject property; namely, the Morris report. Relying on the Morris report,
Mr. Rinaldi estimated the market value of the subject property as if developing the
parcel into a 44-löt subdivision were possible. However, this exercise was made
futile by Mr. Rinaldi's predetermination that the prospect of developing the
subject property was "highly speculative" because of the pending Highlands Act.
He nonetheless completed a comparison of comparable sales of developed lots and
adjusted the comparables for market conditions, time, size, physical factors, and
approval status. He accounted for the sellout period, i.e., the time necessary to
obtain approvals, improve the sites, and sell the individual lots. He forecasted
revenues from the sales over the sellout period. He deducted from the revenue

development and extraordinary costs as estimated in the Morris report. He applied
a discount rate of 9% to the holding period to determine the final net present
value of the subject property. The discount rate was calculated from the PwC
Korpacz Real Estate Investor Survey (2d Quarter 2004), as well as other factors.

- 54 [*54] Mr. Rinaldi selected six comparable sales in Morris County from June 2000
through May 2004, and he adjusted each comparable's value for market
conditions, physical factors, size, and time required,to obtain approvals, improve
the site, and sell the individual lots (i.e., the sellout period). Each comparable sale
was for a developed lot with approvals. Mr. Rinaldi then forecasted revenues
from the sale of 44 lots, and he deducted from expected revenues extraordinary,
but not ordinary, development costs. Mr. Rinaldi reasoned it was not necessary to
subtract nonextraordinary development costs because the comparable finished lots
already accounted for the cost of developing the subject property.
Mr. Rinaldi identified six claimed comparable sales, and he compared those
properties to the subject property mostly on the basis of qualitative factors, such as
convenience, demographics, size, and other physical features. Mr. Rinaldi
ascribed to each comparable property subjective labels such as "similar,"
"superior", "inferior", "negative", and "positive". Specifically, the Rinaldi report
compares the comparables to the subject property as follows:
Year Number Price
Sale of sale of lots per lot

LocationLocationconvenience demographics

1
2
3
4
5
6

Similar
Superior
Superior
Similar .
Superior
Similar

2000
2001
2002
2002
2003
2004

108
17
10
84
6
110

$62,222
59,000
110,000
48,214
97,500
66,818

Superior
Inferior
Similar
Superior
Superior
Superior

Physical
factors

Overall

Negative Similar
Positive Superior
Positive Superior
Negative Superior
Positive Superior
Negative Inferior

Similar
Superior
Superior
Superior
Superior
Similar

Size

- 55 [*55] Mr. Rina di observed a range of $48,214 per lot to $110,000 per lot with an
unweighted mean of $73,959 per lot and a median of $64,520 per lot. Mr. Rinaldi
placed greater emphasis on comparables 1 and 6, properties he considered to be
most similar to the subject property. On the basis of his analysis, which consisted
of little more than we have summarized here, Mr. Rinaldi determined the unit lot
value of the subject property to be no more than $80,000 per lot. The unit lot
value assumed a hypothetical sale to a developer who would pay $2,025,684 to
improve the subject property. As explained below, Mr. Rinaldi then accounted for
various soft costs and extraordinary development costs associated with the subject
property.

Mr. Rinaldi determined a five-year sellout period, three years for approvals
and two years for site work and selling of the lots. He discounted over five years
the value of tl e subject property using a discount rate of 9%. Mr. Rinaldi also
deducted the ollowing soft costs and extraordinary development costs:
1) Site lan approval, including engineering
and/or legal expenses and municipality and/or
county engineering review fees
$250,000
2) Permits and inspections, including performance
bonds
150,000
3) Extraordinary development costs
556,510
4) Soft costs, including legal, accounting, consulting,
and adininistrative fees
79,200
5) Construction interest
16,695

-56[*56] 6) Marketing, promotion, and brokerage fees
7) Real estate taxes
8) Developer's profit

Total

140,800
105,000
528,000

1,826,205

Mr. Rinaldi concluded that the market value of the subject property under
the subdivision development analysis was $1,510,000. He did not, however, adopt
the value indicated under the development premise as his final estimate of value.
Mr. Rinaldi reasoned that whether the subject property could be subdivided
was "highly speculative in view of the August 10, 2004, effective date of the
Highlands Act and the uncertainty relative to the ultimate Highlands restrictions
that are in addition to the [NJDEP] regulations existing as of the July 30, 2004,
valuation date." Mr. Rinaldi explained that approvals had not been secured by the
valuation date and, as he posited, were unlikely to be obtained because the
Highlands Act was effective August 10, 2004. On the basis of his conclusion,
which appears to have failed to appreciate that the subject property was in the
planning area but not the preservation area, Mr. Rinaldi turned to his alternative
conservation premises to ascertain the subject property's value as of the
contribution date.
iii.

Conservation Premise

Under his primary conservation premise, Mr. Rinaldi concluded that the

highest and best use of the subject property was partly for conservation and partly

- 57 [*57] for development as three two-acre residential lots. As to the six acres
designated for development, Mr. Rinaldi estimated the market value of each twoacre lot to be $120,000; $360,000 in total. Mr. Rinaldi calculated the value of
each developable lot as the $80,000 unit lot value increased by 50% (an additional
$40,000) because, as he concluded, there was no significant cost to develop the
lots. As to the 59.64 acres designated for conservation, Mr. Rinaldi estimated the
market value of those lots on the basis of 12 claimed comparable sales to be no
more than $5,000 per acre, or approximately $300,000 in total. Thus, adding the
market values of the subject property under the development prong ($360,000) and
the conservation prong ($300,000) indicated the subject property's market value
under the alternative approach as $660,000.
c.

Preliminary Conclusions as to Appraisers' Reports

On brief, as with cross-examination, each party aims more to discredit the

opposing party's appraiser than to prove the reliability and accuracy of their own
expert appraiser. Petitioners, citing Daubert v. Merrell Dow Pharm., Inc., 509

U.S. 579, 584-587 (1993), maintain Mr. Rinaldi failed to use a valid methodology
to determine the ubject property's fair market value. Petitioners also claim that
Mr. Rinaldi's an lysis is result driven, resulting in an erroneous determination of

the subject property's highest and best use and inconsistent testimony as to the

- 58 [*58] effect of the Highlands Act on the fair market value of the subject property.
Respondent, quoting Boltar, L.L.C. v. Commissioner, 136 T.C. at 336, asserts that
the Holenstein report is "'so far beyond the realm of usefulness'" that we ought
not consider it. We agree with both parties that the appraisers' reports are not
wholly reliable, but we will not disavow in full the Holenstein report or the
Rinaldi report because we find each helpful in its own right for determining the
fair market value of the subject property.
At the outset, we note that the Rinaldi report is unreliable on its face in that
it contains numerous computational errors. More importantly, the Rinaldi report is

also empirically unsound in that it incorrectly applied the subdivision development
approach to derive the market value of the subject property under the development
premise, and used qualitative attributes when performing its market analysis. The
Rinaldi report used the market data approach to estimate a per-lot market value of
no more than $80,000. Mr. Rinaldi testified on cross-examination that the
properties he selected as comparables were undeveloped lots with approvals rather
than developed lots without approvals. After arriving at a value per undeveloped
lot, Mr. Rinaldi subtracted the development costs and performed a discounted
cashflow analysis to arrive at the "net present 'as is' land value." As discussed
below, Mr. Rinaldi incorrectly reduced the value of an undeveloped lot by

- 59 [*59] development costs rather than subtracting those costs from the value of a
developed lot as required under the subdevelopment method of the income
approach. As to the Holenstein report, it suffices to note here that it failed to take
into account certain extraordinary costs not present in the comparables used in Mr.
Holenstein's com15arables analysis.
To be sure, the importance of concurrent testimony in these cases cannot be
overstated; the ex erts' dialogue straightaway focused on the core issues in
dispute, namely, the subject property's highest and best use, the impact of pending
environmental legislation, and the role of preliminary and final approvals in
comparable properties under the market approach. Additionally, the concurrent
testimony elucidated shortcomings with the Rinaldi and Holenstein reports and
resulted in the experts' reaching agreement as to at least two issues in dispute: the
subject property's highest and best use and the number of developable lots to be

included in a subdivision development analysis. Although we find the testimony
of both Mr. Holenstein and Mr. Rinaldi helpful in understanding the facts relevant
to the fair market value of the subject property, we decline to accept either expert's
conclusion as to the subject property's fair market value because, as the concurrent
testimony highli hted, each suffers from critical errors in analysis and application.

- 60 [*60] Accordingly, we shall reconstruct the subject property's fair market value
aided by common sense, the experts' reports, and the benefit of their concurrent
testimony.
V.

Valuation of the Subject Property and Critique of Experts' Reports
A.

Measure of Value

The amount of a charitable contribution deduction under section 170(a) is
generally equal to the fair market value of the property on the date of contribution.
Sec. 1.170A-1(a), (c)(1), Income Tax Regs. Fair market value has been defmed as
the price at which property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both and
having reasonable knowledge of relevant facts. United States v. Cartwright, 411

U.S. 546, 551 (1973); Bank One Corp. v. Commissioner, 120 T.C. 174, 304-306
(2003), aff'd in part, vacated in part and remanded sub nom. J.P. Morgan Chase &

Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006); see also sec. 1.170A-1(c)(2),
Income Tax Regs. The fair market value of the property to be valued reflects the
highest and best use of the property on the valuation date. Stanley Works & Subs.

v. Commissioner, 87 T.C. 389, 400 (1986); sec. 1.170A-14(h)(3)(i) and (ii),
Income Tax Regs.

- 61 [*61] Both the Rinaldi and Holenstein reports as first submitted to the Court
applied a measure of value based on "market value" as defined by the Uniform
Standards of Professional Appraisal Practice (USPAP).27 Following our
preliminary review of the appraisals before trial, we initiated a telephone
conference with the parties during which we expressed concern that the Rinaldi
and Holenstein reports each adopted market value, as opposed to fair market
value, as their measure of value. Messrs. Holenstein and Rinaldi each submitted
"USPAP Advisory Opinion 22 (2008) defines market value as
The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably,
and assuming the price is not affected by undue stimulus. Implicit in
this definition is the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby: 1.
buyer and seller are typically motivated; 2. both parties are well
informed ór well advised and acting in what they consider their best
interests; 3. a reasonable time is allowed for exposure in the open
market; 4. payment is made in terms of cash in U.S. dollars or in
terms of financial arrangements comparable thereto; and 5. the price
represents the normal consideration for the property sold unaffected
by special or creative financing or sales concessions granted by
anyone associated with the sale.
We have observed repeatedly that although market value adopts selective elements
of fair market value, the two are not identical. See, e.g., Rothman v.
Commissioner, T.C. Memo. 2012-163, 103 T.C.M. (CCH) 1864, 1873 (2012),
vacated in part on reconsideration, T.C. Memo. 2012-218, 104 T.C.M. (CCH) 126

(2012); DiDonato v. Commissioner, T.C. Memo. 2011-153, 101 T.C.M. (CCH)
1739, 1741 n.8 (2011).

- 62 [*62] letters to the Court ostensibly for the purpose of clarifying the measure of
value used. Mr. Holenstein, in his letter, compared the definition of market value
as used in the Holenstein report with the definition of fair market value required
under the regulations, and he detailed the reasons he believed his definition of
market value "reasonably comports with the definitional requirements of" fair
market value. Mr. Rinaldi, through his letter, directed the Court to substitute the

term "fair market value" wherever in his report the term "market value" appeared.
Despite his letter, Mr. Rinaldi maintained at trial that the difference between
market value and fair market value is a "technical difference in the prose".
Under section 1.170A-1(a) and (c)(1), Income Tax Regs., our measure of
value is fair market value. Market value, on the other hand, is an approximate
value for fair market value, and the two terms are not necessarily synonymous
depending on how they are defined and used. In these cases, we are satisfied that
"market value", as defined and used in Mr. Holenstein's and Mr. Rinaldi's reports,
is consistent with the term "fair market value" used in the regulations.
B.

Determination of Fair Market Value
1.

Approaches for Determining Fair Market Value

A determination of fair market value is a factual inquiry which requires the
trier of fact to weigh relevant evidence and draw appropriate inferences as to the

-63 [*63] value of the property in question. See Commissioner v. Scottish Am. Inv.

Co., 323 U.S. 119, 123-125 (1944); Helvering v. Nat'l Grocery Co., 304 U.S. at
294; Symington vj Commissioner, 87 T.C. 892, 896 (1986). Three approaches are
generally employed to measure the fair market value of property: the market
approach, the asset-based approach, and the income approach. Bank One Corp. v.
Commissioner, 120 T.C. at 307. The market approach values the subject property
by comparing the property to similar properties sold in arm's-length transactions
in or about the same period. See Estate of Spruill v. Commissioner, 88 T.C. 1197,

1229 n. 24 (1987); Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19-20
(1979). The comparable properties are adjusted to create parity between those
properties and the subject property for comparative purposes. The reliability of
the market appro ch depends largely upon the comparables selected and the
reasonableness of the adjustments made thereto. Wolfsen Land & Cattle Co. v.
Commissioner, 72 T.C. at 20. Messrs. Holenstein and Rinaldi each employed the
market approach o value the subject property.
The second valuation approach, the asset-based approach, generally values
the subject property by determining the cost to reproduce it. Bank One Corp. v.
Commissioner, 120 T.C. at 307. The experts testified at trial, and we agree, that

- 64 [*64] the asset-based approach is not a reliable approach for determining the fair
market value of the subject property.
The final valuation approach, the income approach, determines the value of
the subject property by capitalizing or discounting expected cashflows therefrom.
Property value is determined under this approach by adding the sum of the present
value of the expected cashflow and the present value of the residual value. See id.
The subdivision development method is a variation of the income approach
previously recognized by this Court. E3, Consol. Investors Grp. v.

Commissioner, T.C. Memo. 2009-290, 98 T.C.M. (CCH) 601 (2009); Glick v.
Commissioner, T.C. Memo. 1997-65, 73 T.C.M. (CCH) 1925 (1997); Estate of
McCormick v. Commissioner, T.C. Memo. 1995-371, 70 T.C.M. (CCH) 318
(1995). The subdivision development method values undeveloped land by treating
the property as if it were subdivided, developed, and sold.28 Consol. Investors
2sThe subdivision development method consists of six primary steps. As the
first step, the subject property's highest and best use is determined. Second, the
market approach is used to identify comparable finished (developed) lots and a
per-lot value is derived. Third, anticipated gross proceeds from the sale of the
developed lots is calculated by multiplying the per-lot value by the total number of
estimated finished lots. Fourth, expected net proceeds are calculated by reducing
the expected gross proceeds by direct and indirect costs and entrepreneurial profit.
Fifth, net sales proceeds are discounted to present value at a market-derived rate
over the development and market absorption period. Sixth, appropriate discounts
for lack of marketability, partition, and market absorption are applied where
(continued...)

- 65 -

[*65] Grp. v. Commissioner, 98 T.C.M. (CCH) at 610 (citing Glick v.
Commissioner, T.C. Memo. 1997-65). We now determine the subject property's
fair market value.
2.

Determination of Highest and Best Use

To decide 1 ow to best determine the fair market value of the subject
property, we must first determine the subject property's highest and best use in
addition to its then-current use. Stanley Works & Subs. v. Commissioner, 87 T.C.
at 400; sec. 1.170A-14(h)(3)(ii), Income Tax Regs. The highest and best use of
the subject property is the highest and most profitable use for which it is adaptable
and needed or likely to be needed in the reasonably near future. Olson v. United

States, 292 U.S. 246, 255 (1934); see also Hilborn v. Commissioner, 85 T.C. 677,
689 (1985). The highest and best use of property can be any realistic, objective
potential use of the property. Symington v. Commissioner, 87 T.C. at 896.
Subsequent even s are generally not considered in determining fair market value,

Ithaca Trust Co. v. United States, 279 U.S. 151, 155 (1929), though they may be
considered to the.extent reasonably foreseeable on the valuation date, Estate of

"(...continùed)
appropriate. The resulting figure equals the indicated value of the undeveloped
land. See generally Appraisal Institute, The Appraisal of Real Estate 370-376

(13th ed. 2008).

- 66 [*66] Gilford v. Commissioner, 88 T.C. 38, 52 (1987); see also Trout Ranch, LLC
v. Commissioner, _ Fed. Appx. at ___, 2012 WL 3518564, at *7; Okerlund v.
United States, 365 F.3d 1044, 1051-1053 (Fed. Cir. 2004); Saltzman v.
Commissioner, 131 F.3d 87, 93 (2d Cir. 1997), rev'a T.C. Memo. 1994-641, 68
T.C.M. (CCH) 1544 (1994); Trust Servs. of Am., Inc. v. United States, 885 F.2d
561, 569 (9th Cir. 1989); Estate of Sachs v. Commissioner, 856 F.2d 1158, 1160
(8th Cir. 1988), rev'a 88 T.C. 769 (1987); First Nat'l Bank of Kenosha v. United
States, 763 F.2d 891, 893-894 (7th Cir. 1985); Morris v. Commissioner, 761 F.2d
1195, 1201 (6th Cir. 1985), af['g, T.C. Memo. 1982-508, 44 T.C.M. (CCH) 1036

(1982).
Petitioners contend that the highest and best use of the subject property was
for residential development as a 44-lot subdivision, proffering a fair market value
of $3,761,000. Respondent disagrees, maintaining that the highest and best use of
the subject property was part conservation and part development as three two-acre
residential lots, yielding a market value of $660,000. At trial, three experts-namely, Messrs. Morris, Blethen, and Holenstein--agreed that the highest and best
use of the subject property was for residential development as a 44-lot subdivision.

Mr. Rinaldi, on the other hand, maintained that the subject property's highest and
best use was for conservation. Fundamental to respondent's and Mr. Rinaldi's

- 67 [*67] determination that the highest and best use of the subject property was for
conservation is, according to them, that the prospects for developing the subject
property were "highly speculative" because of environmental legislation which
had passed the New Jersey State legislature before the valuation date and was
enacted into law less than two weeks after the valuation date.
We decline to conclude that residential subdivision of the subject property
in 2004 was highly speculative. The U.S. Census Bureau consistently ranks New
Jersey as the most densely populated State in the Union.29 See U.S. Census
Bureau, Statistic 1 Abstract of the United States: 2009, at 18 (128th ed. 2008). In
this context, Gov rnor James McGreevy issued Executive Order No. 4 declaring it
the law and policy of the State of New Jersey to promote smart growth and to
reduce the negative effects of sprawl. See Exec. Order No. 4 (Jan. 31, 2002),
available at http://nj.gov/info bank/circular/eoindex.htm. The New Jersey
legislature shortl thereafter adopted a "smart growth" strategy aimed at allowing

for well-planned and well-managed development to meet the economic needs of

"New Jers y accounts for 8,214 square miles of the United States' total 3.5
million square miles, making it the fifth-smallest State geographically. National
Atlas of the Unitéd States, available at http://nationalatlas.gov/articles/mapping/a_
general.html. Atithe same time, New Jersey has consistently, since at least 1980,
had between the 9th- and 1lth-highest populations of any State. U.S. Census
Bureau, Statistical Abstract of the United States: 2009, at 18 (128th ed. 2008).

- 68 [*68] its residents, while at the same time preserving open space, farmland, and
environmental resources. See Robert S. Goldsmith, "What Will Happen to
Redevelopment in New Jersey When the Economy Recovers?", 36 Rutgers L. Rec.
314, 314, 323-324 (2009) (surveying New Jersey's efforts over the past 20 years to
limit development within the State); see also N.J. Stat. Ann. sec. 52:18A-196

(West 2010).3°
To further New Jersey's commitment to preservation, on September 19,
2003, Governor McGreevy issued Executive Order No. 70 establishing the
Highlands Task Force to make recommendations intended to preserve natural
resources of and enhance the qualify of life in the New Jersey Highlands region, a
portion of the national Highlands region covering roughly 800,000 acres in 88
municipalities and all or part of 17 counties. See Exec. Order No. 70 (Sept. 19,
2003), available at http://nj.gov/infobank/circular/eoindex.htm. On June 7, 2004,

the New Jersey legislature passed the Highlands Water Protection and Planning

Act (Highlands Act), 2004 N.J. Sess. Law Serv. Ch. 120 (West), reenacted as N.J.

Stat. Ann. secs. 13:20-1 to 13:20-35 (West Supp. 2012).

3°Although the New Jersey statute enacting the smart growth policies was
not enacted until 2004, we think it reasonable to conclude that passage of this act
was not surprising given Governor McGreevy's executive order on the matter.

- 69 [*69] The Highlands Act was signed into law on August 10, 2004, less than two
weeks after the contribution date. Id. The Highlands Act reflected the New Jersey
legislature's findings that the New Jersey Highlands were an essential source of
drinking water, providing drinking water to approximately one-half of the State's
residents and a keeper of exceptional natural resources such as clean air, forest
lands, wetlands, pristine watersheds, and habitat for animals and vegetation. See
N.J. Stat. Ann. sec. 13:20-2. The New Jersey legislature also found that the New
Jersey Highlands, because of their proximity to rapidly expanding suburban areas,
was at serious risk of being fragmented and consumed by development. Id. The
Highlands Act also divided by a metes and bounds description two areas within
the Highlands region: (1) the preservation area of the Highlands Region, see id.
sec. 13:20-7(b), and (2) the planning area of the Highlands Region, see id. sec.
13:20-7(c) and (d)." The subject property was within the planning area but not

the preservation area (i.e., the Highlands Act land was not immediately subject to
the regulations).

y the end of 2003 and throughout 2004, the boundaries of the

Development in the preservation area was mandatory and strictly
regulated, while development within the planning area was discretionary and
recommended. See, e.g., N.J. Stat. Ann. sec. 13:20-10(b) and (c). The Highlands
Act, however, set specific goals with respect to the planning area, including to
identify undeveloped areas in the planning area that were not significantly
constrained by environmental limits that could be developed. See id. sec. 13:20-

11a.(6).

- 70 [*70] preservation area were uncertain and many developers routinely questioned
the impact of expected changes to land use regulations on development sites. The
New Jersey Department of Environmental Protection (NJDEP) adopted rules
protecting the Highlands region on May 9, 2005. See N.J. Admin. Code secs.

7:38-1.1 to 7:38-14.2 (2006).
Respondent contends that development of the subject property was highly
speculative because of the presence of wetlands, a protected stream, and a habitat
for an endangered species, as well as the enactment of the Highlands Act that was
"common knowledge" to participants in the real estate market. We are not
persuaded that any of these circumstances limits the highest and best use of the
subject property to conservation. As to the presence of wetlands and Granney
Brook, Messrs. Morris, Blethen, and Holenstein agreed on concurrent examination
that the watercourses did not per se prohibit development of the subject property.
Rather, the three experts agreed that the presence of the wetlands and Granney
Brook would reduce the number of developable lots from 59 to, at most, 44. We
credit as reasonable and reliable the concurrence between these experts, one of

- 71 [*71] whom testified on behalf of respondent (Mr. Morris) and two of whom
testified on behalf of petitioners (Messrs. Blethen and Holenstein)."
Nor do we accept respondent's uncorroborated allegation on brief that an
allegedly endangered wood turtle species habitated the subject property. Although
CEI's 1997 EIS noted the presence of the wood turtle on the subject property, we
reject respondent's position that the wood turtle was endangered in 2004 or at any
other relevant tinie. New Jersey administrative law recognized the wood turtle as
a threatened species in 2003 but not an endangered species. N.J. Admin. Code
sec. 7:7A, app. 1 (2003). Classification of the wood turtle as a threatened species
means the reptile was at risk of becoming endangered if conditions surrounding it
began to or conti¼ued to deteriorate. Id. sec. 7:25-4.1 (2001). Risk of extinction
is not tantamount to being extinct. Respondent has not established the effect, if
any, that a threatened but not endangered species might have on the value of the

subject property.
Finally, wë reject respondent's position that the Highlands Act made
development of the subject property highly speculative. The subject property, by
"As further evidence that the wetlands and Granney Brook stream did not
affect the develo 040ability
of the subject property, we observe that the Holenstein
report noted that a nearby residential subdivision, Harvest Run, was developed
during the late 1990s and shared stream constraints similar to those the subject
property faced.

- 72 [*72] virtue of its situs in the planning area but not the preservation area, was not
certain to have development restrictions imposed under the Highlands Act.
Rather, we regard New Jersey's "smart growth" policy as supporting the
proposition that in 2004 development of the subject property was at least equally
likely as its preservation. We also refuse to conclude that the development of the
subject property was highly speculative in view of the fact that the township,
described by one of its executives as limited in financial resources, would have
been required to incur soft costs to preserve the subject property for open spaces
if, as respondent intimates, it was a foregone conclusion that the subject property
was undevelopable. Nor do we believe the county would have paid $1.5 million to
preserve the subject property if that property was indubitably protected by the
Highlands Act. Whereas petitioners argue on brief that the effect of the Highlands
Act (if any) was to increase the subject property's value, we reject that proposition
because petitioners have failed to quantify the increase, assuming one existed. On
the basis of the foregoing, we conclude that the highest and best use of the subject
property was for residential development as a 44-lot subdivision.
3.

Mr. Holenstein's Comparable Sales Analysis

Having concluded the highest and best use of the subject property was for
residential development, we reject Mr. Rinaldi's conservation premise in his report

- 73 [*73] which valued the property at $660,000. We also note respondent is deemed
to have waived Mr. Rinaldi's development premise, which valued the subject
property at $1,510,000. See supra note 18. In any event we find the assumptions
of Mr. Rinaldi's development premise unreliable. The Rinaldi report used the
market data approach to arrive at an estimated per-lot market value of no more
than $80,000. Mr. Rinaldi testified on cross-examination, however, that the
properties he selected as comparables were undeveloped lots with approvals rather
than developed lots with approvals. In a manner similar to the subdivision
development valuátion method, Mr. Rinaldi, after having arrived at a value per
undeveloped lot, subtracted development costs and performed a discounted
cashflow analysis to derive the "net present 'as is' land value." We decline to rely
on the values for undeveloped lots proffered in the Rinaldi report because under
the subdivision development analysis we look to developed lots of comparable
properties, not undeveloped lots. Accord Consol. Investors Grp. v. Commissioner,
98 T.C.M. (CCH) at 610; Appraisal Institute, supra, at 370.
As to the Holenstein report, we find petitioners have met their burden to
prove the soundness of Mr. Holenstein's comparable sales analysis although we
believe it requires further adjustments. Mr. Holenstein testified during the
concurrent testimony phase of the trial that comparables 1 through 17 are

- 74 [*74] irrelevant when determining the fair market value of the subject property;
we agree. Each of those properties was a residential lot, i.e., one with a house
built thereon, rather than merely a developed lot with the required infrastructure
for building residential lots, e.g., roadways, utilities, etc. In this sense,
comparables 1 through 17 are irrelevant to the subdivision development analysis.
Using comparables 18 through 34, Mr. Holenstein developed a statistical
model using polynomial regression to correlate a relationship between the number
of lots into which an undeveloped parcel of land may be subdivided and the sale
price per lot. The regression analysis shows a relationship of a diminishing rate of
return. The relationship, expressed in the form of a statistical formula, see supra
note 26, allows us to determine how much the subject property which can be
subdivided into 44 lots is worth. Respondent does not challenge Mr. Holenstein's
statistical modeling and the model's assumption of "diminished returns"; nor did
Mr. Rinaldi during the concurrent testimony phase of the trial. We are persuaded
that we may rely at least in part on Mr. Holenstein's model to arrive at the subject
property's fair market value as of the valuation date.
4.

Respondent's Challenges to the True Comparability of
Comparables 18 Through 34

While not questioning the statistical model itself, respondent challenges
only the data points used in the model by asserting that many of the properties

-75 [*75] among comparables 18 through 34 are not comparable to the subject
property. Respondent argues comparable 20 is not comparable to the subject
property because, unlike the subject property which is in the Highlands Act
planning area, comparable 20 is within the Highlands Act preservation area."
While comparable 20 may not be a true comparable, examining the model's power
curve leads us to conclude that the inclusion of comparable 20 has not materially
affected the correlation determined by Mr. Holenstein's model. Indeed, even if
one were to take pomparable 20 out of the 17 comparables used in Mr.
Holenstein's statistical model, the only effect of doing so is a slight upward
adjustment of the power curve--i.e., the per-unit sale price as a function of the
number of subdivided units would go up. In other words, the inclusion of
comparable 20 works in respondent's favor by bringing down Mr. Holenstein's
approximation of the subject property's value. This does not surprise one's
common sense since including a property situated in the preservation area would
be expected to depress the model's valuation of the subject property.
Responde t also contends comparables 18, 19, 22, 23, 24, and 28 through
34 are not true comparables because they involved significantly fewer lots than

"Comparable 20 was determined to be undevelopable by virtue of its situs
in the Highlands Act preservation area.

- 76 [*76] proposed under the 44-lot subject property. Respondent's contention misses
the point. The benefit of a regression analysis is its ability to draw a wider range
of data to produce a better approximation of the dependent valuable (i.e., the perunit price) as a function of the independent variable (i.e., the total number of
units). Thus having a large set of data across a spectrum is what makes Mr.
Holenstein's statistical model a better model than,.for example, an unweighted
averaging of a limited number of "true comparables". Indeed, attacking the
comparability of Mr. Holenstein's data without challenging the modeling itself
showcases respondent's lack of full appreciation of Mr. Holenstein's regression
analysis.
Respondent further contends comparables 23 and 28 through 34 are not
valid comparables for other reasons--comparables 23 and 34 did not require
improvements because they were essentially subdivisions on an existing street,
and comparables 28 through 33 required simple extensions and improvements. As
the model's power curve clearly shows, comparables 23 and 28 through 34 belong
to a very narrow range of data that represents comparables at the far end of the
spectrum, i.e., parcels of land that can be subdivided into 5 to 12 units. Within
this range are also comparables 18, 19, 22, and 24, and respondent does not argue
they are not true comparables because they did not require improvements or that

-77[*77] they required little improvement. Thus in terms of the level of improvement
required, this latter set of comparables (18, 19, 22, 24) are true comparables of the
subject property. Consequently we are persuaded that this latter set of
comparables has sufficiently offset or at least mitigated any distortion or statistical
noise that the outliers, i.e., comparables 23 and 28 through 34, might have
introduced--due to their being more developed parcels compared to the subject
property--into the overall model.34

As to comparable 27, pages 40 and 81 of the Holenstein report
inconsistently state the number of approved lots as 45 and 60, respectively.
Petitioners ackno#vledge this discrepancy in their reply brief when they state the

number of developable lots associated with comparable 27 is "irrelevant" in that
"it does not change the fair market value determination significantly." The record
and specifically the power curve of Mr. Holenstein's model support that
conclusion.

We are not even certain if any statistical noise attributable to the level of
required improvement of a particular property would materially alter the
correlation reached in the Holenstein report. For example, comparable 18
(undeveloped) has six units with an adjusted per-unit price of $207,836, whereas
comparable 30 (only simple improvement needed) with also six units has a less
adjusted per-unit price of $201,535.

- 78 {*78] Respondent also takes issue with the 20% adjustment Mr. Holenstein makes
to comparables 23 and 25 because each of those properties was sold with
approvals. We do not share respondent's distrust of these adjustments. The
adjustments were unchallenged in the concurrent testimony process, and we accept
the adjustments as reasonable and reliable.
Respondent finally argues that comparables 18 through 34 are not valid
comparables of the subject property because each of the sales reflected properties
sold subject to preliminary approvals or with approvals of right, whereas the
subject property had no approvals. We disagree.
New Jersey law allows a developer, such as petitioner, to apply for major
subdivision approval." N.J. Stat. Ann. sec. 40:55D-48b. Approval is required at
both the county and municipal levels. See id. secs. 40:55D-37, 40:27-6.3. As to
an application for preliminary approval, New Jersey law requires municipalities to
grant preliminary approval if the proposed subdivision complies with adopted
ordinances and the Municipal Land Use Law. See id. sec. 40:55D-48b. county
review of a subdivision application is limited to the effect of the proposed
developments on county roads and drainage facilities. Pizzo Mantin Grp. v. Twp.
"The term "developer" is defined to include the legal or beneficial owner or
owners of a lot of any land proposed to be included in a proposed development.
N.J. Stat. Ann. sec. 40:55D-4.

- 79 [*79] of Randolph, 645 A.2d 89, 94-95 (N.J. 1994); see Manalapan Holding Co.
Inc. v. Planning Bd. of Hamilton, 457 A.2d 441, 443, 445-446 (N.J. 1983) (citing
N.J. Stat. Ann. sec. 40:27-6.3). With respect to an application for fmal approval,
New Jersey law requires the developer to establish that the application conforms to
all ordinance requirements for final approval, to all conditions set forth in the
preliminary apprqval, and in the case of a major subdivision, to the standards as
delineated in the Map Filing Law (i.e., that the approved plat is acceptable for
filing with the coùnty recording officer). See N.J. Stat. Ann. sec. 40:55D-50a.
Once preliminary approval is obtained, final approval of the subdivision plan
should be a relati ely simple procedure. See 36 N.J. Prac. Land Use Law, sec.

17.13 (3d ed. 2012) (available on Westlaw).
Applying the foregoing to these cases, we are persuaded that approvals
could be secured or the subject property with a price tag. The completeness
review letter deta led about 65 defects with the Irondale Manor plan needing to be

fixed before preliminary approvals could be granted; i.e., before the plan complied
with applicable ordinance and land use law requirements. The experts, except for
Mr. Rinaldi, agreed it was feasible to develop the subject property into a
subdivision of 44 lots. Neither respondent nor the experts noted any defect in the
Irondale Manor p an (beyond those stated in the completeness review letter) to

- 80 [*80] suggest the plan did not comply with applicable ordinances and land use
law. Thus, we conclude the issue of approvals is inconsequential to the
developability of the subject property in that it could be done, albeit at a cost. As
to comparables 18 through 34 in the Holenstein report, they are also undeveloped
property but subject to approvals, which according to Mr. Holenstein's credible
testimony during the concurrent expert testimony phase of the trial means the
buyers in negotiating the sale price would have already factored in all ordinary
development costs, including time value of money, necessary to obtain approvals.
As a corollary, properties subject to approvals for our purpose are comparables of
the subject property without approvals.
5.

Preliminary Value of Subject Property Under Mr. Holenstein's

Model
We have concluded that the highest and best use of the subject property was
for residential development as a 44-lot subdivision. We have also concluded that
Mr. Holenstein's statistical analysis of comparable sales is fundamentally sound
and that petitioners have been able to show the comparables used in Mr.
Holenstein's analysis are appropriate and fit. Using Mr. Holenstein's statistical
formula, the per-lot value is $85,486 on the valuation date. Thus, we find that the

preliminary value of the subject property is $3,761,000 on the valuation date,
calculated as 44 lots times $85,486 per lot.

- 81 [*81]

6.

Extraordinary Development Costs and Inspection Fees

While we generally accept Mr. Holenstein's comparable sales analysis, we
believe it also needs certain adjustments for extraordinary costs not present in the
comparables.36 Respondent's engineering expert, Mr. Morris, determined total
construction costs associated with the subject property as $2,582,194, including
$556,510 of extraordinary costs. Petitioner's engineering expert, Mr. Blethen,
determined total construction costs to range between $2 million and $2.2 million,
with no allowance for extraordinary costs. Mr. Morris, pursuant to N.J. Stat. Ann.
secs. 40:55D-53.2 and 40-55D-53h., also made an allowance for inspection fees
related to the development of the subject property calculated as 5% of the total
construction costs. Mr. Morris calculated the inspection fees to be $107,591,
though we note tlÅat 5% of $2,582,194 is $129,110, and not $107,591 as he
determined.

As to the extraordinary costs, Mr. Morris deemed it appropriate to include
these costs in the development cost of the subject property because, he determined,

36As Mr. Holenstein points out in his report, the comparables are
undeveloped properties subject to approvals, which means the hypothetical
developer-buyer would have already factored in ordinary development costs in
negotiating the sale prices. Appropriately then in our adjustment of Mr.
Holenstein's valuation model, we need not account for the ordinary development
costs as they are älready present in the comparables' sale prices.

- 82 [*82] the subject property required extensive site development by virtue of its
environmental characteristics and steep slopes. He calculated the total
extraordinary development costs as follows: $325,770 of offsite construction
costs related to the Irondale Manor plan, $122,740 of offsite construction costs as
a result of the completeness review letter, and $108,000 for retaining walls. We
consider Mr. Morris' estimates of extraordinary costs reasonable in view of the
topography of the subject property and the slope of Iron Mountain and we accept
it. Mr. Blethen and Mr. Holenstein did not explain their decision not to include
extraordinary costs as development costs, and without reasoned analysis, we are
not persuaded. Accordingly, we conclude that there are extraordinary costs of
$556,510 associated with developing the subject property not included in the
comparable sales.analysis.
We agree with Mr. Morris' decision to make an allowance for inspection
fees equal to 5% of the total construction costs. See id. Mr. Blethen, though he
did not specifically address the inspection fees issue, states in his rebuttal report
that he generally concurs with Mr. Morris' estimates. Construing Mr. Blethen's
acquiescence to also conclude the inspection fees, we understand the parties to
agree that such an adjustment is proper. In view of the foregoing, we conclude
that an allowance for inspection fees equal to 5% of the construction costs, or

- 83 [*83] $129,110, is appropriate in figuring the development costs for the subject
property.
Mr. Blethen testified on direct that shaft number 1 of the Scrub Oaks mine
had been sealed incorrectly, and he identified that mine as a critical hazard of the
subject property because of its presence in the middle of the subject property over
which a road was to be installed. Mr. Blethen testified that the cost to rededicate
(i.e., fill and seal) this particular mine shaft was $30,000, and that the cost to fill
the remaining mine depressions was approximately $80,000. We credit Mr.
Blethen's cost estimate to remediate the mine as reasonable and reliable and we
accept it. Accordingly, we adjust the fair market value of the subject property for
$110,000 as a remediation cost associated with the mines on the subject property.
In sum, we find the value of the subject property is $2,965,840, determined
as follows :
x

Number of lots
Fair market value per lot

44
$85,486

=
=

Modified gross value
Extraordinary costs
Mine remediation costs
Inspection fees
Net proceeds

3,761,460
(556,510)
(110,000)
(129,110)
2,965,840

- 84 [*84] VI.

Substantiation Requirements of Section 170

Petitioners maintain that they have satisfied the substantiation requirements
of section 170. Specifically, they argue the August 16 letter substantiated their
charitable contribution as a contemporaneous written acknowledgment required by
section 170(f)(8). Petitioners further contend that they had obtained a qualified
appraisal required by section 170(f)(11) and that even if the appraisal they
obtained did not meet the literal requirements of section 170(f)(11) and the

regulations thereunder, it substantially complied with such requirements. Finally,
petitioners ask that any noncompliance with respect to the qualified appraisal
requirement be excused on the ground of their showing of reasonable cause.
A.

Contemporaneous Written Acknowledgment

Section 170(f)(8) requires a taxpayer to substantiate any claimed deduction
for a charitable contribution of $250 or more with a contemporaneous written
acknowledgment from the donee. Sec. 170(f)(8)(A). The contemporaneous

written acknowledgment may take any form but must include (1) the amount of
cash and a description (but not value) of any property other than cash contributed;
(2) whether the donee provided any goods or services in consideration, in whole or
in part, for the property the donor contributed; and (3) if the donee provided any

goods or service

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A403e34d9b27409ce. Public record. Not legal advice.