T .C . Memo! 2009-9 4

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COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No .

6395-06 .

P granted a conservation easement to a qualified

conservation organization .a d ,claimed a-$3,100,000charitable contribution ded ction on his 2000 . Federal

income tax return . R determined a deficiency on the

basis that P overstated the amount o"f his charitable

contribution by $1,107,625 .

Held : P is liable for the deficiency .

Joseph H . Thibodeau and Vin6ent M . Lane , for petitioners

Sara J . ..Barkley and Tamara

. Kotzker, for respondent .

- 2 MEMORANDUM FINDINGS OF FACT AND OPINIO N

WHERRY,

Judge :, On December 28, 2000, petitioner granted a

conservation easement to the Valley Land Conservancy, a Colorado

nonprofit corporation locally referred to, and doing business

under a'filed trade name, as the Black Canyon Regional Lan d

Trust,

Inc .' He claimed a $3,100,000 charitable contribution

Ih ~'

deduction on his 2000 Form 1040 , U .S . Individual Income Tax

Return,~ for doing so . In a February 7 1 , 2006, notice of

deficiency respondent disallowed $1,107, 625 of the deduction,

resulting together with some other small adjustments2 in the

determination of an alleged $ 437,153 Federal income tax

deficiency for petitioner ' s 2000 tax year . This case is before

the Court on a petition for redetermination of that deficiency .

The issue for decision is the amount of petitioner ' s charitable

contribution for Federal income tax purposes .

'See Colo . Rev . Stat . . sec . 38-30 .5-102 (2000) ; see also sec .

1 .170A-14(a), Income Tax Regs . ("A qualified conservation

contribution is the contribution of a qualified real property

interest to a qualified organization exclusively for conservation

purposes ") .

2Respondent also determined that petitioner had $3,503 of

unreported interest income, $401 of unreported dividend income,

and $10 of "other income", and that a $118 itemized deduction

limitation adjustment to Schedule A, Itemized Deductions, was

necessary . Petitioner has conceded these issues .

- 3 FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits re hereby incorporated b y

reference into our findings . At the time .he filed .his petition ,

petitioner resided in Colorado .

Petitioner granted the conservation easement at issue ove r

two nearby properties : A 1,950-acre property referred to by the .

parties as the Bull,Mountain par~el and a 463 .35-acre property ,

referred to by the parties as the Sylvester parcel . Both parcels

are in a mountainous region in Gunnison County, Colorado,

approximately 18'miles northeast of Panonia, Colorado . The

properties' elevation ranges from approximately 6,900 feet to

8,185 feet above seal-evel .

Gunnison County is approximately 3,260 square miles in,size ,

making it about twice the size of Rhode Island 3

The U .S .-census

for 2000 indicated a population f 13, :956,, which results in an

overall population density of 4 .3 people per square mile .'

.In

2000 approximatel y roximately half of the county's population was in th e

city of Gunnison and the town o f Crested Butte, 'which, togeth r~ .

3U .S . Census Bureau, United States Summary : 2000-Population and Housing Unit Counts 29_ (2004) ; see United States

v . Bailey , 97 F .3d 982, 985 (7th Cir . 1996) (taking judicial

notice of census information with respect to life expectancy ;)

4U .S . Census Bureau, Colora

Unit Counts 8 (2003) .

2000--Population and Housing

- 4 constituted less than 4 square miles .', The census also foun d

that~the 673 .51-square-mile area in which the Bull Mountain and

Sylvester,parcels are located has a population : of 488, resulting

in a . population . density of less than 1 person per square mile . '

The Federal Government owns much of the county's land .

pThe .Bull Mountain and Sylvester parcels lie-southwest of the

intersection of the two public roads that service their immediate

area : State Highway 133 (north-south) and County Road 265 (eastwest) . '!County Road 265 dead-ends at its intersection with State

Highway 133 . The Sylvester parcel abuts County Road 265, ,

commonly . known as Buzzard Divide, on its northern border . . The

Bull Mountain parcel is located south of- .the Sylvester parcel an d

is separated from it by a 1/4-mile-wide strip-of property owned

by an unrelated third party . The .Bull .Mountain parcel does not

abut either of the two roads .

Property in the area has historically been used for

agricultural purposes with some isolated residential use .. Th e

Bull'Mountain .and Sylvester parcels have historically been used

for cattle ranching and recreational purposes .

'Id .

Id .

- 5 -

The Bull Mountain Parce l

The Bull Mountain parcel features rolling, brush-covere d

hills and two permanent•streams .

A national'forest borders th e

parcel to the west, and,views of the'Ragged Mountains ar e

available to the north and east .

Petitioner purchased the parcel

from Million Agricultural Investment,'Ltd . (Million), on Oc t ober

6, 1999, for $1,535,000 or $787

er acre .

When petitioner purchased' t e'Bull Mountain parcel, it di d

not have direct access to either State Highway 133 or County Roa d

265 . However, petitioner could

se access easements that had

been acquired by previous owners of the parcel to travel to, an d

from both roads .

To access State Highway 133, petitioner could use a n

easement along a road through pr perty owned by the`TheodoreR .

Eck Trust (Eck), petitioner's neighbor to the east . To access

County Road 265, petitioner coul use two easements along the

Narrows Road, which runs north from the parcel .through propert y

owned by Spadafora Ranches, Inc ; .

(Spadafora), and continues

northeast through property owned by McIntyre Livestock Corp .

(McIntyre) .

The easement over McIntyre's property was limited t o

agricultural 'use . '

'The parties dispute whether the easement over Spadafora's

property was also limited to agricultural use . To resolve the

issue, petitioner attempted to introduce at trial a documentj

dated Apr . 14, 1978, in which Spadafora granted McIntyre--whic h

(continued . . .)

- 6 II .

The Sylvester Parce l

The Sylvester parcel is essentially an irregular, long,

brush-covered ridge, which, like the Bull Mountain parcel, has

views of the Ragged Mountains to the north and east . Petitione r

purchased the Sylvester parcel .from,Gerald and Connie Rentz o n

.September ;,18, 2000, for $671,350 or $1,449 per acre . .

The Sylvester parcel had direct access to County Road 265

along its northern border . in addition, petitioner could use

easements acquired by the previous owner to travel-to and fro m

( . . . continued )

owned the Bull Mountain parcel at the time'-and Mclntyre's

successors and assigns forever an unrestricted access easement

over Spadafora's property . Respondent objected to the

admissibility of the document on the basis that petitioner did

not provide a copy to respondent at'least 14 days before trial,

as required by . the Court's standing pretrial order . We reserved

judgment on the issue .

:Despite respondent's .objection, we will admit the document

into evidence . First, the Gunnison County Clerk and Recorder has

certified the document as a "true and exact copy" of a document

recorded in Gunnison County's publicly available real estate

records .' i!As such, we can take judicial notice of it . See Joseph

v . U .S .'Civil Serv . Commn . , 554 F .2d 1140, 1147 n .12 (D .C . Cir .

1977) ; see also Van Woudenberg v . Gibson ,' 211 F .3d 560, 568 (10th

Cir . 2000), abrogated on other grounds by McGregor v . Gibson , 248

F .3d 9461'(10th Cir . 2001) ; see also sec . 7453 ; Fed . R . Evid . 201 ;

Rule 143(a) . Unless otherwise indicated, all Rule references are

to the Tax Court Rules of Practice and Procedure . Second, on the

record before us we cannot conclude that respondent was

prejudiced by not receiving the document at least 14 days before

the triali!E See Freije v . Commissioner , 125 T .C . 14, 16 n .2

(2005) .

,In';;any event , the language in the document is vague ;-and does

not totally resolve the issue . Moreover , as we will see, ;

petitioner ' s access over Spadafora ' s property is inconsequential

to our ultimate conclusion .

9'.

County Road 265 . -

An easement ov r, ..Spadafora' s property permitte d

petitioner to travel . west from the parcel to the Narrows Road and

then to travel north along the .r ad to McIntyre's property ..

Another easement permitted him to continue northeast along the

Narrows Road through .McIntyre's property . Neither of-these

easements was restricted to any articular use .

The Sylvester parcel's access easements mostly overlapped

the Bull Mountain parcel's easem~nts with two exceptions : (1 )

The Sylvester parcel's easemen t ver Spadafora'spproperty did not

along - the Narrows Road to the

permit petitioner to travel sout

Bull Mountain parcel and (2) the Bull Mountain parcel's easemen t

over Spadafora's property did not permit petitioner to travel

east to the Sylvester parcel .

III .

The Conservation Easemen t

In a .December 28, 2000, "Deed of Conservation Easement . I n

Gross", petitioner granted the V lleY Land Conservancy the

development rights, "as defined Dy section 2031(5)(D) [sic ]

* * * except as specifically reserved herein",8 over the -Bull

Mountain and Sylvester parcels . As a result, petitioner andi"his

successors and assigns forever" were prohibited from, among othe r

things, subdividing the .parcels, constructing buildings or othe r

8All section references are to the Internal Revenue Code of

1986,'as amended an in effect fo r the tax year at issue . There,

is no sec . 2031(5)(D) in the Int ernal Revenue Code, however . For

the purposes'of this case we sha 11 assume the intended reference

was to sec . 2031(c)(5)(D) .

- 8 structures except for a-single-family residential dwelling on

each parcel, and using the parcels for any commercial,

residential, or industrial uses not specifically permitted . The

deed refers to the Bull Mountain and Sylvester parcels as "two

legally distinct and separately deeded properties" .

,In connection with preparing and filing his 2000 Federal

income tax return, petitioner engaged Appraisal Associates of

Colorado,{Inc ., and its coowner, Pamela M .'Sant, to appraise the

conservation easement . Ms . Sant is a-Residential Member of th e

Appraisal Institute and a Certified General Appraiser licensed,b y

the State!of Colorado . She prepared an appraisal report, dated

March 2, 2001, in which she determined that the . combined value of

the Bull Mountain and Sylvester parcels was $4,100,000 before

petitioner granted the easement and $1 million after . She

concluded that the amount of the charitable contribution" .was

therefore~$3,100,000 and to that effect signed an IRS Form 8283,

Noncash ;C]aritable Contributions,which petitioner attached to

his return .

a!On,February 7, 2006, respondent sent petitioner a notice of

deficiency . Respondent disallowed $1,107,625 of the charitable

contribution deduction and determined that petitioner was liablei

f! or a $437 !,153 Federal income tax deficiency . On April 3, 2006,

petitioner' filed a timely petition with the Court . Among other

things, he argues that respondent has incorrectly determined that

- 9 -

he is not entitled to the full $,100,000 deduction . -A .-trial wa s

held on November 1-2, 2007 ; in Denver, Colorado .

I .

Applicable-La w

Under .section 170(a), a taxpayer may claim a deduction for

any charitable contribution, including a qualified conservatio n

contribution,-made within the taxable year . Sec . 170(c) ,

(f)(3)(B)(iii), (h) . The parties a9ree .that Petitioner's gran t

of the conservation easement ove± the Bull Mountain and Sylvester

parcels was a qualified conservation contribution under section

170(h)

170(a ) .

and that he is entitled to a deduction under section

The only issue before u~ is the amount'of the charitable

contribution and thus .the allowable deduction .

Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving entitlement,-to any claimed-exemptions

or .deductions .

(1992) .

INDOPCO, Inc . v . Commissioner , 503 U .S . 79,•8 4

Moreover, the-Commissio er's determination of value i s

.normally presumed correct, and tie taxpayer bears the burde n o f

proving that the determination

s incorrect . See Rule 142(a) ;

Welch v . Helvering , 290 U .S . 111

115 (1933) ;

Schwab v .

Commissioner , T .C . Memo .,1994-2 3 2 .

Generally, the amount of a charitable contribution is th e

fair market value of the' contributed property at the time it' i s

contributed . Sec . 1 .170A-1(a)`,,I(c)(1),

Income Tax Regs . Fair

10 market value is,the price at which property would change hands

between a~willing buyer and a willing seller, neither being unde r

any compulsion to buy or sell and both having a reasonabl e

knowledge of relevant facts . Sec . 1 .170A-1(c)(2), Income Tax

Regs Nt (~

,°In'determining the fair market value of property, we must

take into account not only the current use of the property but

also its highest and best use . See Stanley Works v . ,

Commissioner , 87 T .C . 389, 400 (1986) ; sec . 1 .170A-14(h)(3)(i)

and .(ii)H',,,Income Tax Regs . A property's highest and best use is

the highest and most profitable use for which it is adaptable and

needed orl~likely to be needed in the reasonably near future .

Olson V .

United States , 292 U .S . .246, 255 (1934) . The highest

and best use can be any realistic, objective potential use of the

property .

Symington v . Commissioner , 87 T .C . 892, 896 (1986) .

The amount of a charitable contribution of a conservation

easement. :is generally the fair market value of the easement at

the time it is contributed . Sec . 1 .17OA-14(h)(3)(i), Income ;Tax

Regs . Ideally, the fair market value of a conservation

easement

would be based on the sales prices of comparable easements . Sec .

1 .170A-14(h)(3), Income Tax Regs . However, because conservation

easements .are typically granted by deed or gift rather than sold,

comparable sales are rarely available . .

Commissioner ,

Symington v .

supra at 895 . As an alternative, the so-called

- 11 -

before-and-after approach is often used instead . :

v . Commissioner ,

Stanley Work s

supra at 399 . under the before-and - afte r

approach, the fair market value

of a conservation easement equals

the difference between the fair market value of the easement

encumbered property before it is encumbered by the easement and

after . Sec . 1 .170A-14(h)(3)(i) and (ii), Income Tax Regs :

The general rule for determining the amount of a charitabl e

contribution is modified in some situations where appreciate d

property is contributed . Under section 170(e)'(l)(A), the amount

of a charitable contribution of property is reduced by the amoun t

of gain which would not have been long-term capital gain had ;th e

taxpayer sold the property at its fair market value at the time

of contribution .

Estate of Bull~rd v . Commissioner , 87 T .C .261 ,

268 n .4 (1986) ; sec . 1 .170A-4(a) (1), Income Tax Regs . Long-ter m

capital gain is generally "gain from the sale . or exchange of a

capital asset held for more than 1 year" . Sec . 1222(3) .

effect, section 170(e)(1)(A) limits the . contribution amount bf

appreciated property which is not long-term-capital gain property

to the property's basis at the time it was contributed . Seefr Lary

v . United States , 787 F .2d 1538, 1540 (11th Cir . 1986) ;

Jones v .

Commissioner , 129 T .C . 146, 150-151 (2007), affd . 560 F .3d 1196

(10th Cir . 2009) .

It follows that when a taxpayer grants a conservation

easement over appreciated real pproperty held for less than 1

12 year ;4 the,-amount of .the contribution must be determined .with

regard to . section 170(e) (1) (A) . See sec .

1 .170A -4 (b) (1)', Income

Tax Regs . ; see also Strasburg v . Commissioner , T .C . Memo . 200094 ;

Griffin v . Commissioner , T .C . Memo .` 1989-130, affd . 911 F .2d

1124 (5th~jCir .. 1990) . 'Accordingly, the amount of th e

contribution is-limited to,the conservation-easement's basis at

the .timeit is contributed . See . Strasburg v . Commissioner ,

supra ; Griffin v . Commissioner ,

supra .

The adjusted basis of a conservation easement is equal . to

that portion of the .-adjusted basis of the entire property which

bears the 'same ratio to the adjusted basis-'of the entire property

as the-fair market value of the contributed property bears to the

fair market value of the entire property . Sec . 1 .170A4(c) .(1)(ii), Income Tax Regs . ; see Strasburg v . Commissioner , ,

supra . Put another way, the basis-of,a conservation

easement i s

equal to :the adjusted basis of the entire property reduced by the

percentage decrease,.in-the .entire property's fair market value a s

a result of the conservation easement . :

II .

Expert Witnesse s

Each party has offered the report and testimony of an expert

witness to-establish the . amount of petitioner's charitable

contribution . An expert's opinions are admissible if they assist

the trier .of fact to understand .the evidence or-to determine a

fact in issue . .

.Fed . R . Evid . 702 . We'! ;evaluate expert opinions

- 13

in light of each expert ' s demonstrated qualifications and all

other evidence in the , record . S~e Parker v . Commissioner , 86

T .C . 547, 561

( 1986 ) .

Where experts offer competing estimates o f

fair market value, we determine how to weigh those estimates by, :

inter alia,

examining the factors they considered in reaching

their conclusions .

(1962 ) .

See Casey v .

Commissioner,

38 T :C . 357, 381

We are not bound by an expert's opinions and may accep t

.or reject an expert opinion in full or in part . in the exercise o f

sound judgment .

295 (1938 ) ;

See Helveri nq . vl. Nat . Grocery Co . , 304 .U .S .l282 ,

Parker v : Commissioner ,

supra at 561 - 562 . We may

also reach a determination of value based on our own examin a t ion

Silverman v . Commissioner , 53 8

of the evidence in the record .

F .2d 927, 933

( 2d Cir . 1976 ),

affg . T .C . Memo .

1974-285 .

Petitioner ' s'Expert

Petitioner ' s expert, Mark S .~Weston ,

has a bachelor of arts

degree in English literature and a master of arts degree-i n

library and information science .

He is a certified genera l

appraiser in the State of Colorado and has been a member of the

Colorado Board of Real Estate Ap ; raisers since 1999 . Since the

mid-1990s he has written several publications and given a number

of presentations on valuing conservation-easements .

Mr . Weston

wrote two appraisal reports with respect to the conservatio I

easement over the Bull Mountain and Sylvester parcels :

- 14 original report, dated March 3 0 , 2001, and a supplemental report ,

dated September 28, 2007 .

In his reports Mr . Weston used the before-and-after approach

and concluded that the fair market value of the conservation

easementl'was $2,926,700 . He determined that the fair market

values of,the Bull Mountain and Sylvester parcels, befor e

petitioner granted-the easement, were $3,509,568 and $832,752

(both $1,80 .0 per acre9), respectively . iI Referring to section

170(e)(1)(A) and the fact that petitioner purchased the Sylvester

parcel,less than 1 year before he granted the easement, Mr .

Weston used the Sylvester parcel's adjusted basis, $671,350, in

his calculations instead of its fair market value . In addition,

he rounded the . Bull Mountain parcel's fair market value to

$3,509,650, resulting in a total before figure for both parcels

of $4,181,000 . He then determined that this figure was reduced

by 70 percent when petitioner granted the easement .

91n his original report--in the narrative section on p . 44-Mr . Weston twice stated that the value of the Bull Mountain and

Sylvester parcels was "at the average rate of $1,900 per,, acre ."

However,'ilhe used $1,800 per acre in his subsequent numerical

calculations and also referred to the $1,800-per-acre figure in

his supplemental report . Because his report does not explicitly

explain how he calculated the average value per acre of the two

parcels, we cannot be certain which figure Mr . Weston intended .

While this discrepancy on such an important fact is not

comforting, we will assume that his references to $1,900 per acre

were typographical errors .

- 15

Respondent' s' Exper t

Respondent's expert, Kerry

. Packard, has bachelor o f

science and a master of engineering degrees . He has been an y

engineer revenue agent with the' nternal Revenue Service sinc e

1982 . In that role he has conducted field investigations and has

{

made value estimations .with . respect to real and personal property

and has prepared valuation, technical, and' engineering reports .

He has experience valuing conservation easements and ranch land

and has completed several,American Institute of Real Estat e

Appraisal courses .

In his report, dated September 28, 200 7 , he also used they

before-and-after approach and concluded that the fair market,

value of the conservation easement was between $0 and $238 ;135 .1 0

He further determined that the fair market values of the Bul l

Mountain and Sylvester parcels beforercontribution of the .

easement were $1,706 , 250 ($875 per,acre ) Wand $671,350 (rounded to

$1,449 per acre), respectively .

Mr . Packard referenced section . .

170(e )( 1)(A), but because he fo nd'that the Sylvester parcel did

not appreciate after petitioner purchased it, he concluded tha t

it did not apply . He rounded the fair market value of the Bul l

Mountain parcel to $1,710,000,

for both parcels of $2,381,350 .

iesulting in a total before figur e

He then determined that thi s

" Respondent has not asserted an increased deficiency in

light of Mr . Packard's 'conclusions . .

- 16 -

figure was reduced by 0 to 10 percent when petitioner contribute d

the easement .

Expert Witness Issue s

The, parties have raised two issues with respect to the

expert witnesses . First, the probative value-of both experts'

reports ;ad testimony has been called r.into question . Petitione r

asserts .!that Mr . Packard is biased, 11 lacks appropriat e

qualifications, made numerous mistakes, and did not prepare his

report iniaccordance with the Uniform Standards of Professional

Appraisal Practice (USPAP) . Petitioner also argues that .,we

should give Mr . Packard's report less weight . because respondent

did not ;,assert an increased deficiency,! 1 in light of Mr . Packard' s

conclusions . Respondent counters that ;,Mr . Weston is biased12 an d

made numerous mistakes . We have considered the parties argument s

and, as,appropriate, have evaluated the experts', reports and

testimony accordingly .13 . We do not find that Mr . Packard' s

."In his brief, petitioner states that Mr . Packard's report

is "unable to claim even a pretense at"objectivity or

independence" and "is merely the expression of the (decidedly

biased) opinion of a career IRS valuation engineer (lacking in

requisite',credentials and professional accreditation) . "

"Respondent points to preliminary valuation notes in Mr .

Weston's,Iwork file, which contain the handwritten notation "Nick

wants it j; Bigger!!" next to a valuation of the Bull Mountain

parcel at $2 .4 million to $2 .7 million .

13See . Brown v . Se . Pa . Transp . Auth . (In re Paoli R .R . Yard

PCB Litig fl , 35 F .3d 717 ; 744-745 (3d Cir . 1994) ("A judge

frequently should find an expert's methodology helpful even whe n

ii (continued . . .)

report should be given less weight on the basis that respondent

did not assert an increased deficiency .,

Petitioner did no t

provide any support for this argument, and :we have found none .

Second, at trial respondent moved-,to strike from the record '

Ms . Sant's March 2, 2001, appraisal report and a December 121,

2003, engineer's report by IRS Engineer Lloyd Philip Kinney .'

We had admitted those reports in~o evidence, in part, so tha t

petitioner could use them to cross-examine Mr . Packard .

Respondent asserts, however, that petitioner never mentioned the

reports during cross-examination . We reserved judgment on the

issue in order r to .obtain & ,trans ript- of the cross- .examinatio n

but will now deny respondent 's motion .

We note that petitioner asked Mr . Packard several question s

about the exhibits during cross-examination, : including : (1 )

13( . . .continued) .

the judge . . thinks that the expert 's technique has flaws sufficient

to render the conclusions inaccu rate :") ; Whitehouse Hotel Ltd .

Partnership v . Commissioner , 131 T .C . . , (2008) (slip opt. at

24) ("This and other courts have ,found that an expert's valuatio n

opinion that does not fully comp ort with USPAP is stil l

admissible although it may or malt' not be .helpful .") ; Laureys4'v .

1989) ("In the context o f

Commissioner , 92 T .C . 101, 129

valuation cases, we have observe d that experts may lose their

usefulness (and credibility) wh e n they merely become advocates

for the position argued by a par ty .") ; Parker v . Commissioner , 8 6

T .C . 547, 561 (1986) (stating that'the .Court will consider an

expert's qualifications when evaluating his or her expert

opinion) .

14Ms . Sant's report, Exhibit 28-P, provided the basis for

petitioner's 2000 Form 8283, and Mr . Kinney's report, Exhibit 27P, apparently provided a part of the basis for respondent's Feb .

7, 2006, notice of deficiency .

- 18 Whether the two reports were in the file that Mr . Packard was

provided when he began working on the case ; (2) whether Mr .

Packard, reviewed Ms . Sant's report ; (3) whether he . reviewed Mr .

Kinney'si~lrepor .t in a supervisory capacity ; and (4),whether and t o

what extent he relied on Ms . Sant's and Mr . Kinney's reports .

Mr . Packard responded that (1) the reports were in the file he

received,~~(2) he reviewed Ms . Sant's report, (3) .he did no t

review Mr~ Kinney's report .in,a supervisory capacity, and (4) he

.did not rely on either report to any extent, noting that "Had I

agreed with the facts and the analyses that were developed in

those reports, they would have precluded the, need for me!to have

done one . "

III .

. Analysi s

Respondent allowed $1,992,375 of the $3,100,000 charitable

contribution deduction that petitioner claimed for granting th e

conservation easement over the Bull Mountain and Sylvester

parcels .`' We must determine whether petitioner is entitled to

larger deduction and, if so,'how much larger . To do-so,`we mus t

determine the amount of petitioner's charitable contribution,

which is generally the fair market value of the conservatio n

easement .

See sec . 1 .170A-14(a) (h)(3)(i) and (ii), Income Ta x

Regs ."

Mr . Weston attempted to determine the fair market value o f

the easement based on the sales prices of comparable conservation

91easements ; however, he did not " [weigh] this 'data heavily i n

[his] analysis due to dissimilarity of the encumbered parcels

compared with-the subject property ." See sec . 1 .170A-14(h)(3),

Income Tax Regs ., We agree with Mr . Weston and find that this

data is insufficient to make a conclusion as to fair market

value . Accordingly, we must rel,'on the before-and-afte r

approach, as both Mr . .Weston and Mr . Packard have . See id

also Stanley Works V .

se e

Commissioner , 87 T .C . at 399 . To apply the

before-and-after approach, we mint determine-the fair market,

values of the Bull Mountain and

ylvester parcels befor e

petitioner granted the conserva t ion easement and after . Se c

1 .170A-14( h)(3), Income - Tax Regs

Fair Market Value of the Bull Mountain-Parcel Before

Petitioner Granted the Conservation Easement

Mr . Weston's Opinio n

Mr . Weston concluded that the Bull Mountain parcel's highest

and best use before petitioner granted the conservation easemen t

was residential development in lots ranging in size from 35

350, acres .

He believed --apparently based on, anecdotal rea l

estate agents' comments--that there was significant demand for

residential property of that size' in the area and noted several

selling points, including proxi ity to a national forest, scenic

views, relative seclusion, and abundant wildlife . Moreover,44 he

believed that Gunnison County would have, approved the change i n

the property's use from agricultural to residential .

- 20 -

He :.relied primarily on the sales comparison approach t o

determine the fair ;market value of the I . Bull Mountain parcel . 15

Under that approach the property being valued is compared with

similar properties sold in the same timeframe and geographic

area .

Schwab v . Commissioner , T .C . Memo . 1994-232 . The subject

property's fair market value Is determined by reference to the

sales prices of the comparable properties, adjusted upward to the

extent that the subject property is superior to the comparable

property-in some fashion and downward to the extent it is

inferior in some fashion . See Whitehouse Hotel Ltd . Partnership

v . Commisioner , 131 T .C .

(2008)

also Schwab v . Commissioner ,

supra

(slip .op . at 44-45) ; see

("This approach is based on

the principle that the prudent purchaser . would pay no more for a

property than the cost of acquiring an existing property with th e

same utility .") .

IJI

15Mr . Weston also used the development technique to "test

the reasonableness of the direct sales comparison technique" but

stated that he had "a greater degree of confidence in the direct

comparison technique ." The development technique is appropriate

where the,~subject property being valued is "`ripe' for

development ."

Estate of McCormick v . Commissioner , T .C .''Memo .

11995-371 .1 Under the development technique, the subject property

is treated

as if it were subdivided, . developed, and sold .

Expected proceeds from sales of the subdivided lots are reduced

by development costs and discounted over the period during which

the lots are expected to sell . See Branch v . Commissioner , T .C .

Memo .F1987-321 . Using the development technique, Mr . Weston

determined that the fair market value of the Bull Mountain parcel

was $3,695,265 .

- 21 -

For purposes of the sales cpmparison .approach, Mr . West n' s

subject property was a 2,412 .40-acre piece of land that included

both the Bull Mountain and Sylvester parcels . He valued . .the C

parcels as one, believing that they had been "assembled together"

when petitioner purchased them aLd that they "can be considered, '

contiguous by virtue of the easements that joined .these_two

parcels" . .

Mr . Weston considered sales of 12 comparable properties in

his analysis,', relying heavily on 4 sales, including the October

6, 1999, sale of the Bull Mountain parcel-to petitioner for .

$1,535,000 or $787 per acre . He made adjustments to the .sales

prices of the comparable properties to--in his view--account's-for

market conditions ,location, size, and access . With respect!. to

the October 6, 1999, sale of the Bull Mountain parcel to

petitioner, .Mr . .Weston made two significant . positive adjustments,

reflecting that the Bull Mountain parcel-had appreciated bya

prodigious and at first blush implausible<l28 percent in the

short 14 months between the date petitioner purchased the remote ,

rural parcel and the date he~ .granted the conservation easement .

Mr . Weston's first and most imp rtant adjustment was based on hi s

belief that "The value of [the Bull Mountain parcel] * * * wa s

.increased significantly by the assemblage with the [Sylveste r

Parcel], * * * due to improved acess ." His second adjustment was

due to inflation and improved market conditions during the

intervening 14 months .

In~!his supplemental report-Mr . .Weston suggested a third

reason why the fair market value of the Bull Mountain parcel was

higher than the October 6, 1999, sales .,price ; namely, becaus e

that sales price may have been below fair market value . In that

regard he made the following observation : "Reportedly, Million

had been„compelled to take title to this portion of the Property

after a!prior transaction fell through and was as a result highly

motivated to sell the Property, even at a discount, due to

financial idistress .i1 6

..Ultimately, Mr . Weston determined that the fair market value

of the combined subject property was .$1,800 per acre . Applying

that price per acre to the 1,950 acres of the Bull Mountain

parceil,,he'concluded that its fair market value before petitioner

contributed the conservation easement was $3,509,568 .

Mr . Packard's Opinio n

Mr . :iPackard found that the highest and best use of the Bull

Mountain, p'arcel before petitioner granted the conservatio n

easement was continued agricultural and recreational use .

16Mr . Weston suggested this third adjustment in his Sept .

28, 2007, supplemental report . While discussing generally

"Conditions of Sale (Motivation of the Parties)" in his original

Mar . 30, 2001, appraisal report, he explicitly chose not to make

any adjustment for financial distress for any of the comparable

sales included in his original report .

- 2'3 Although he believed that residential development in lots oft3 5

acres or more was legally permissible, physically possible, and

financially feasible, he did not think it was the "maximallyi

productive use" of the property because of the limited demand fo r

residential lots in the area, as reflected by "limited demand for

developable lands" in the area .

Mr . Packard relied on the sales comparison approach t o

determine the fair market value of the Bull Mountain parcel .1. He

used the Bull Mountain parcel itself as the subject property ; and

compared it .with .nine comparable properties, making adjustments

for access, size, water rights, tree cover, and marke t

conditions . He placed great reliance on the October 6, 1999,

sale of the Bull Mountain parcel .to petitioner and one otherl

sale . His only adjustment to th October 6, 1999, sales price o f

the Bull Mountain parcel was a`p sitive adjustment because

"properties were generally increasing in value" .during the 14

months between the sale and Petitioner's grant of the easement .

Mr . Packard ultimately determined that the fair market value

of the Bull Mountain parcel'before petitioner granted the ,

conservation easement was $875 per acre or $1,710,000 after'

rounding . This value reflects that,the Bull Mountain parcel !

appreciated in value by 11 percent .

- 24 -

3 . -Discussion

To determine the fair market value of the Bull Mountain

parcel,, :', both experts used the sales comparison approach, ;! relying

heavily°,on the October 6, 1999, sale of the parcel to petitioner .

We think that this was,the appropriate, approach to take ., After

all, the best evidence of fair market value is a recent sale of

the property at issue . See Wortmann v Commissioner,

T .C . Memo .

20057227("we .find that the most persuasive evidence of the

subject,„property's value as of the contribution date is the

actual sale of the subject property 17 months before the

contribution") . For the purposes of our analysis, we will focus

on the October 6, 1999, sale .1 7

There are three major issues that divide the experts .

First, they do not agree whether,therewas demand for residential

property in the area . Second, they do not agree that the Bull

Mountain parcel's access was improved after petitioner purchased

the Sylvester parcel . Third, they do not agree that petitioner

purchased the Bull Mountain parcel at a discount due to th e

seller's financial distress . Each of these issues has a

significant effect on . the fair market value of the Bull Mountain

parcel, ;and we will'address each separately .

"Because we will not consider other comparable properties

in our analysis, we need not address the parties' disputes over

other adjustments, such as adjustments ; due to location, size, and

water rights .

- 2'1 5

Demand for Residential propert y

The demand for residential property in the Bull Mountai n

parcel's neighborhood is an imp o tant consideration because i t

affects the parcel's highest and best use and because high demand '

for residential property would suggest a higher fair marke t

value .

Although Mr . Weston acknowledged ,

in his March 30, 2001,

report, that " To date there has not been a significant amount o f

development in=this part of Gunnison County", he indicated tha t

"The northwestern portion of Gunnison County is beginning to'se e

an increase in demand for vacant land suitable for development"

and that "property values are appreciating rapidly at the p r e sent

time ."

Despite his statement that "This growth is not explosive,

however", he projected that demand was so high that if the Bull

Mountain parcel were subdivided into-39 parcels of 35 acres o r

more, the subdivided parcels could have been sold within 5 years .

Citing local realtors ,

he concluded that there was "strong deman d

for residential sites of this si ze and character in the curren t

market" and that "The lack of

sales activity involving smalle r

parcels in this area is due ent irely - to a lack of supply . 18

18In her report, Ms . Sant also concluded that demand for

residential property in the area was high : "Prices are

The difficulty i n

increasing and demand is moderate to strong .

this area is the lack of avail a b le smaller acreage parcels .

* * * The subject due to its location and physica l

characteristics is well suited and desirable for residential us e

(continued . . .)

- 26 Mr . Packard found to the contrary' ; noting simply that "If

demand for residential parcels was strong, it is reasonable to

expect that a developer would have shown interest, in [the Bull

Mountainparcel] ." He stated that "There is little, or no,

residential development activity in the market area of the

subject property" and "While there are isolated small-acreag e

land purchases that have occurred for the purpose of building a

home, there has been no planned development of large parcels . "

Based on the evidence before us we find that there was

little to no demand for residential property of the type,

suggested by Mr . Weston at the time petitioner granted the .

conservation easement . In addition, we do not see a trend o f

increasing demand at that time, either . Mr . Weston's assertion s

.otherwiseilack evidentiary support . ,

The experts did acknowledge that the property to the Bul l

Mountain parcel's east--property owned by Eck and adjacent to

State Highway 133--was divided into twelve 35-acre residential

parcels„sand sold from 2002 through 2006 . That evidence and the

prolonged 4-year absorption rate does not persuade us that there

was significant demand for that type of property, even wit h

18(

. . continued )

and is a .convenient drive time from Carbondale ." We note,

however, that reaching Carbondale requires one to traverse

McClure Pass, the summit of which is 8,755 feet . This is not

high,,by Colorado standards but would be a problem or cause a

delay, on. ; snowy days .

- 27 -

relatively good access',-in 2000 . First, the .Eck sales occurred

after the valuation date in this case, and we are therefore

limited in our consideration of hem :19 Second, . even if we coul d

consider those sales, they reflect much lower--demand than M

.Weston has suggested . Specifically, although, Mr . Westo n

indicated that thirty-nine 35-ac e-or - more residential parcels

could be soid . within 5'years ,

it apparently'took Eck 4 years to

sell just twelve 35 - acre parcels with better access and a

comparable nearby location .

Mr . Weston has also noted the existence of-smaller lots,

including some of less than 1 acre, to the north . of the Bull '

Mountain parcel. Although thos e lots may exist, there is n o

evidence that they had been sold or even offered for sale at

th e

time. petitioner granted the conservation easement . Accordingly ,

they do not support Mr .- Weston's claims regarding demand .

Because we conclude that t h ere 'was . 1'imited demand for .

residential property in the-Bull Mountain parcel's neighborhood

around the time petitioner granted the easement, we also conclud e

that the highest and best use of the Bull Mountain parcel befor e

19See Estate of Spruill V .

ommissioner , 8 .8 T .C . 1197, 1228 ,

in examining,all the~relevant

(1987) ("It is well settled that

occurring

subsequent to the I.

facts and circumstances , events

valuation date are not considere d in determining fair market!

value, except to the extent that such events were reasonably,

foreseeable on the valuation dat e" .) . .

- 28 petitioner granted the easement was continued agricultural and

recreational use .2 0

ii :,

Access to the Bull Mountain Parce l

Both experts agree that-the Bull Mountain parcel did not

have ideal access to public roads when petitioner purchased it on

October .6,;', 1999 . The road to-Highway 133 was long and rough, and

the Bull Mountain parcel' .s easement over McIntyre's property t o

access County Road 265, which was a gravel road not always plowed

in the winter,21 was limited to agricultural purposes . Mr .

Weston asserts, however, that when petitioner purchased-the

Sylvester parcel, the agricultural restriction over McIntyre's

property,^was lifted . . In his words : "there was created a much

better and unrestricted access route that led from County Road

265 all,the way down into the larger Bull Mountain Ranch tract ."

Based predominantly on this belief and6the synergy created by th e

assemblage of the two parcels, he determined that the Bul l

20Because the highest and best use'of the parcel was not

residential development, the development technique for valuing it

is not appropriate . As a . result, we will disregard Mr . Weston's

development technique analysis as well as the experts' and

parties' disputes over how that technique was applied . But had

we considered it and factored in realistic development costs and

aIcces:s problems together with a realistic absorption rate, i t

would not`~have materially affected our valuation of the

conservation easement .

21Gunnison County Public . Works Department , Gunnison County,

Colorado'';County/ Plowed Roads Numerical List 2,( last viewed 2009)

29 Mountain parcel more than doubled in value after petitioner

purchased the Sylvester parcel .

Mr . Weston, who is not an attorney, never fully explained

how the agricultural restriction was lifted ; and when asked

during cross-examination, he acknowledged that he was "probabl y

* * * not qualified to have that opinion ." Apparently, .he

believed that petitioner could cross McIntyre's property using

the Sylvester parcel's unrestricted easement even if petitione r

was traveling to and from the . Bu 11 Mountain parcel .

There-is no'discernable legal support for Mr . Weston's

position . Under-Colorado law-"an easement holder may not us e

[an] easement

estate ."

to benefit-property other than the dominant

Lazy Dog Ranch v ., Telluray Ranch Corp . , 9 .65 P .2d 1 .229,

1238 (Colo . 1998) (citing 1 Restatement, Property 3d .(Servitude) ,

sec . 4 .11) ;

WRWC, LLC v . City ofl Arvada , 107 P .3d-1002, 100 5

(Colo . Ct . App . 2004) . In Lazy Dog Ranch , the Colorado SuprIem e

Court cited the Restatement, which states that "unless otherwis e

provided, . an appurtenant easement cannot be used to serv e

property other than the dominant estate .',The rationale is that

use to serve other property is riot within the intended purpose of

- 30 -

the servitude . ,22 1 Restatement, Property 3d (Servitude), sec .

4 .11, cmt . b . (2000 )

,Here, the unrestricted easement over Mcintyre's property-i s

appurtenant to the Sylvester parcel . In that regard, . the benefit

of the easement passed from the parcel's previous owners to

petitioner when he bought the parcel . In addition, the Sylvester

parcel isthe dominant estate with respect to the easement

because,it is the property that is benefited by it . Accordingly,

Colorado law would prohibit petitioner :from using the Sylvester

parcel's ;; unrestricted easement to benefit property other than the

Sylvester, parcel .

Lazy Dog Ranch V .

Telluray Ranch Corp ., supra

at 1238 ;, 1 Restatement,- supra sec . 4 .11 . This is true even

though petitioner owned both the Bull Mountain and Sylveste r

parcels . 1 Restatement,

supra sec . 4 .11 .2 3

22 The Colorado Supreme Court defined some of the key terms

as follows :

An easement is said to be "appurtenant" to property

when,ithe benefit or burden of the, easement "runs with"

an interest in property . Owners of the property are

entitled to the benefit, or subject to the burden, of

the easement due to their relation to the property .

Thus, when their property interest terminates, so does

their connection to the easement . * * * The property

burdened by the easement is customarily known as the

"servient estate," while the property benefited by the

easement is called the "dominant estate . "

Lazy Dog Ranch v . Telluray Ranch Corp . , 965 F .2d 1229, 1234

(Colo . 1998) .

23As an example, if a hotel owner purchases a lot in an

(continued . . .)

What this means is that the Bull Mountain parcel's access

over McIntyre' s land was still limited to agricultural purpose s

even after petitioner purchased . the Sylvester parcel .

Consequently, for this and other reasons, Mr . Weston's large h

positive adjustment to the Bull Mountain parcel's fair market

value due to improved access is unwarranted .2 4

A second consequence of our access analysis is that Mr .

Weston was'wrong to have valued the Bull Mountain and Sylveste r

parcels as a single property .' Presumably Mr . .Weston believed

that once petitioner owned both arcels, he could string the

parcels' easements together to provide access between them, thu s

assembling the parcels or rendering them contiguous .25 As

23( . . .continued)

adjacent subdivision and that to holds an easement appurtenant

allowing it rights to use .a community beach and recreational]

facilities, the hotel owner is not entitled to use the beach'1or'

the facilities for the benefit of its,hotel operation .

1 Restatement, Property 3d (Servitude), sec . 4 .11, ill . 1 (2000)

In an even more extreme example, if an individual purchases :two

adjoining parcels of land, one of which includes the benefit~of

an appurtenant easement over another parcel, and builds a house

which straddles the borders of those two parcels, the individual

is not entitled to use the easement for access to the part of the

house built on the other parcel of land .

Id . ill . 2 . .

24In any event, even if access to the Bull Mountain parcel

was no longer limited to agricultural use, given our

determination that the parcel's highest and best use was

agricultural and recreational, any positive adjustment to its

fair market value would have been much smaller than Mr . Westonls

adjustment .

25Mr . Weston also cited "the concept of unity of use" to

explain why the Bull Mountain and Sylvester parcels .could b e

(continued . . .)

- 32 explained above, this was not permissible . See Lazy Dog Ranch v .

Telluray Ranch Corp . ,

supra at 1238 .

The Bull Mountain and Sylvester parcels are two separat e

properties, separated from each other by a quarter mile .

fact, the parties stipulated that, the parcels are not . contiguous,

and even the conservation easement . documents that petitione r

signed refer to the parcels as "two legally distinct and

separately deeded properties ." For the reasons above, the Bull

Mountain and Sylvester parcels should have been valued

separately .2 6

25( . . .continued)

considered a single property despite the fact that they are not

contiguous . We note that in condemnation cases "Three factors

are particularly helpful in ascertaining whether property taken

is part of a single, larger tract : physical contiguity, unity of

ownership, and unity of use ."

United States v . 8 .41 Acres of

Land , 680F .2d 388, 393 (5th Cir . 1982) . We are not persuaded

that unity of use is a relevant concept in the case before us .

Moreover, other than some possible savings in marketing costs, we

do not perceive that development costs would be markedly reduced

given the need for separate roads and utilities for the disparate

parcels . We therefore reject Mr . Weston's analysis on this

point .

26There is yet another reason why the Bull Mountain and

Sylvester parcels should have been valued separately . By valuing

the two parcels together and allocating the combined price per

acre to the Bull Mountain parcel, Mr . Weston factored the

attributes of the Sylvester parcel into his determination of the

Bull Mountain parcel's fair market value . This may have

distortedi'lhis ultimate determination of the fair market value of

the Bull Mountain parcel . This is particularly problematic here

because the Sylvester parcel was treated separately under sec .

170(e)(1)(A), leaving only the question of the Bull Mountain

parcel"s value .

(continued . . .)

- 33 iii .

Evidence of a Discounted Sales Price in 199 9

Mr .-Weston suggested in his supplemental report that th e

Bull Mountain parcel's $1,535,000 sales price may have been a

discounted price due to the financial distress of its seller,

Million . There is insufficient evidence to support,tha t

suggestion'.

At trial Mr . Weston-admitted that he did not speak with .

Million's managing .partner ; Aaron Million, about any financial

distress that Million may have been experiencing . Mr . Weston

appears to have based his suggestion on the fact that the . Bull

Mountain parcel "had been listed for sale at a higher askingl

price for years" and that the price was lowered-in the year

before petitioner purchased it .

In his testimony . before the Court, Mr . Million acknowledged :

that the Bull Mountain parcel had been on the market for year s

and that its sales price had .beeh lowered . He noted-that the

26( . . .continued)

A simple, albeit extreme, example can illustrate this point .

Assume that Goldacre is a 10-acre property with vast gold

deposits and a fair market value of $1,000 ($100 per acre) and

that Blackacre is a 10-acre property with no redeeming qualities

and a fair market value of $100 ($10 per acre.) . Valued together

Goldacre and Blackacre are still very valuable, with a fair"

market value of around $1,100 ($55 per acre), because of

.~I

Goldacre's gold deposits . If the fair market value of Blackacre

alone is determined by allocating the joint value of $55 per9 acre

to Blackacre, then the fair market value of Blackacre would be

$550 . That result factors Goldacre's gold deposits into

Blackacre's fair market value, resulting in a large distortion

from its actual fair market value, of $100 .

- 34 parcel had been on the market on .a for-sale-by-owner basis for

some time before he listed it with a real estate agent . It wa s

listed for 6 to 8 months, and at least three offers for parts o f

the parcel were received, before petitioner purchased it .

. 1!

Million also

testified that he had moved to . Fort Collins,

Off

Colorado,

2 years before the sale of the Bull Mountain parcel t o

petitioner . He testified, however, that he was not under

"duress" or "financial compulsion" when petitioner purchased the

parcel .

Mr . Lario, the real estate agent who worked with Mr . Million

to sell-the parcel, testified that Million's motivation to sel l

the property may have increased after Mr . Million moved out of

the area . However, he also stated that he had no reason!~to think

thati?the .;sales price of the parcel to petitioner did not reflect

its fair :! market value .

On this evidence we cannot conclude that Million sold th e

Bull Mountain parcel to petitioner at a discount or that an y

positive adjustment is warranted with respect to the sales

comparison approach . The fact that the Bull Mountain parcel was

on the market for several years and that its asking price wa s

lowered i just as likely an indication that demand for the

parcel was limited as it is some reflection of financial

distress .]

- 35 4 .

Conclusion as to the Fair Market Value of the Bull

Mountain Parcel Before Petitioner Granted the

Conservation Easemen t

We have determined that the October 6,- .1999, sales price

should serve as the basis for determining the fair market value

of the Bull Mountain parcel before petitioner granted the

conservation easement . We have urther ;determined that that,

sales price should not be-adjusted upward-,,as Mr . Weston

asserted, because of improved ac~ess or`because the parcelwa s

sold to petitioner at a discount

We agree with both experts ,

however, that a positive adjustment-should be made becaus e

properties-in the Bull Mountain arcel's neighborhood were

generally increasing in value be weep the time petitioner

purchased the parcel and when he granted the conservation I

easement . Mr . Weston assumed a "very conservative appreciation

rate of 501 per year" while--Mr . Packard's ultimate conclusion,

reflects 11-percent appreciation

Based . on the evidence o f

record we find that an 11-percen positive adjustment is generous .

but reasonable .- We therefore find that the fair market value ofthe Bull Mountain parcel before petitioner granted th e

conservation easement was $1,710 000'.

The Fair Market Value of the Sylvester Parcel Before

Petitioner Contributed the Conservation Easemen t

The experts disagree on the fair market value of the

Sylvester parcel before petitioner-granted the conservation

easement . Mr . Weston determined that it had appreciated in value

36 from its $671,350 sales price 2months earlier .

Nevertheless,

because of the restrictions imposed by sectio n

170(6) .(1) (A),

he used .$671, 350 in • his easement . valuational Mr .

Packard .igdetermined that-the parcel had . , not . appreciated in valu e

and was till worth $671,350 . We agree . with Mr . Packardttthat .

r; d

$671,350 reflects, . the parcel's, fair market value befor e

petitioner granted the easement . As . explained below ; however,

even ifoi~this parcel had . marginally appreciated 1•or 2 percen t

based on an 11-percent-per-year appreciation rate, our ultimat e

conclusion as to the amount,of petitioner's charitabl e

contribution with respect to the Sylvester parcel would b e

unchanged becaus e of section-170(e)(1)(A )

'Because the Sylvester parcel did not appreciate in value

between ;kthe date petitioner purchased the parcel and the , date . he

granted .the conservation, easement, section 170 (e),(l) (A)° does not

apply .

The amount of'petitioner's contribution with respect t o

the Sylvester parcel is therefore the fair-market value of th e

conservationteasement, :which is in turn equal to the differenc e

between the fair market value of the parcel before petitione r

granted the easement ($671,350) .: and its fair market valu e

afterwards .' See sec . 1 .170A-14, Income Tax Regs . Put-another

way, 1the amount of the contribution is the fair market valu e

before petitioner granted the easement reduced by the percentage

diminution in the parcel ' s fair market value caused by th e

37'

easement . See, e .g ., Griffin v . Commissioner, . T .C . Memo . 1989- ( .

130 ("Our evaluation of the tota~ity of'the evidence supports a f,

value for the easement of-20 percent of the $350,000 'beforeF

value of the property, or $70,000 ") .

Accordingly, . the amount of petitioner's charitable if

contribution with respect to the Sylvester parcel-is exactlythe'

same-regardlessof whether the parcel appreciated in value .or

not .27 Either way, the operative number; is $671,350, .which`w e

will reduce by the percentage dilinution .in the,Sylveste r

parcel's-fair market value .C.

f . the Bull Mountain and

The Fair Market Value s

Sylvester Parcels After Petitioner Granted th e

Conservation Easemen t

Mr .'Weston's Opinion

Mr . Weston determined that the fair market value of thepBul l

Mountain and Sylvester parcels w

diminished by 70 percen t

because of the conservation easement . in reaching thi s

conclusion he considered the diminution in value caused b y

conservation easements over six imilar properties .

determined that the diminution i value of those propertie s

ranged from 48 to 70-80 percent . In comparing the Bull Mountai n

and Sylvester parcels with those other properties, a critica l

27If the Sylvester parcel had depreciated, we-would have

used the depreciated value in our calculation . See sec . 1 .1 ;70A14, Income Tax Regs . However, there is no evidence, and neither

expert suggests, that the parcel depreciated

38 factor was the extent to which the easement restricted the use of

the property . He believed that the highest and best use ;iof the

Bull Mountain and Sylvester parcels before petitioner granted the

easement was residential development and that the parcels were

limited to agricultural and recreational use after the easement .

He therefore concluded that "Due to the restrictive nature of the

subject conservation easement we are more confident at . the higher

end of the range of diminution ." He provided the following

explanation in his September 28, 2007,, . supplemental report :

If the [Bull Mountain and Sylvester parcels] * * * had

been divided into 35-acre parcels, 68 separately

conveyable homesites could have been created, and if it

had been divided into 50-acre parcels (consistent with

our highest and best use conclusion), 48 separately

conveyable homesites could have been created . In any

event, density has been reduced by 95% to 97% . The

Easement, based on our analysis, caused a significant

diminution in the fair market value of the Bull

Mountain Ranch .

Mr . Weston supported his conclusion using the sale s

comparison approach and comparing the parcels after petitioner

contributed the easement directly with, other propertie s

III

encumbered by conservation easements .

The comparison resulted

"in a range in value for the entire 2,412 .40 - acre subject

property of between $964,960-$1,688 , 680, bracketing our

conclusion of value developed by the percentage diminution

technique l "

- 39 2 .

Mr . Packard's Opinio n

Mr . Packard determined that the conservation easemen t

diminished the fair market ; values of the Bull Mountain and

Sylvester parcels by 0 to .10 per~ent .

Like Mr . Weston,,he

considered the diminution in vale caused by conservation

easements -ove r comparable properties .' . Also like ,. Mr . Weston ,

paid particular attention to the restrictiveness of the easement s

and whether they . changed the highest and best use of th e

properties . In his words : "The goal in analyzing an easemen t

encumbered property sale is to estimate the loss in value ;

attributable to the change in highest and best use resultingfro m

the conservation easement and re lected .bythe easemen t

encumbered sale price ." He indicated that when using that metho d

"The need to adjust for location differences is eliminated ,

because the diminution in value is expressed as a percentage . "

In his report Mr . Packard included a chart that he referred

to as "the matrix The matrix incorporated information from

35-

easement-encumbered properties and illustrated generally th at the

amount of diminution caused by an easement is related to the?

degree to which the,easement changes a property's highest and

best use . According to Mr . Packard, the matrix showed that th e

diminution in value "for those properties that did . not exp,rience

a change in highest and best use * * * is quite small-and wa s

often found to be 0%

- 40 -

In addition Mr . Packard selected seven specific propertie s

from the matrix to compare with the Bull Mountain and Sylvester

parcels . !~Because'Mr . Packard believed,that the highest and best

use of the parcels before and after petitioner contributed th e

easement was agricultural and recreational use, he chose

comparable properties that-did not show any change in highest and

best use .9,i After analyzing the comparables, he .determined tha t

the fair market values of=the parcels were diminished by 0 to 10

percent~because of the easement .

Finally, Mr . Packard noted that there were no comparable

arm's-length sales'of easement-encumbered properties"in Gunnison

County but that a similar'sale involving subdivision covenant s

resuiotedin no diminution in valu e

Analysi s

There are fundamental problems with both experts'

opinions"' Mr . Weston's conclusion of 70-percent diminution is

premised on his belief that the highest and best use of the Bull

Mountain and Sylvester parcels before petitioner granted .,,the

easement was residential development . We found above that the

highest-and best use of the Bull Mountain parcel was actuall y

continued agricultural . and recreational use, and for the sam e

"In light of the fundamental problems and because of the

conclusions discussed below, we need not dwell further on the

more specific problems raised by the experts with respect to the

methods and comparable properties used in their respective

analyses .

- 4

reason we find that the highest and best-use of the Sylvester .

parcel is also continued"agricul Ural and"recreational use .

Therefore, the .development . restrictions . imposed by the easemen t

suggested and would not warrant-a 70-percent, diminution-in '

value . 2 9

.Moreover ., given our conclusions asto the fair market value s

of the Bull-Mountain and-Sylvester parcels ($1`,710,000 and .

$671,350, respectively), even with .70-percent-diminution in-value

the-amount of petitioner'"s chari able contribution would note .

exceed the $1,992,375 deduction that respondent has alread y

allowed .

,With respect to Mr . Packard,

we disagree with his•conclusid n

that the conservation easement may have•°had no,-or only a

nominal, impact on the fair markat•values,of the-Bull . Mountain

and Sylvester parcels .31 -See Schwab v . . .Commissioner , T ."C .Memo .

1994-232 ("We find it hard to imagine' a prospective purchaser

a 1,558-acre parcel of land who : ould not have considered th e

29We note . as --well ,that Mr . Weston',s report lacks .critical .

information about the comparable properties he 'considered ; namely

the highest and best use" of the properties before they . were .

encumbered by conservation easemlents . Without this information

it is impossible to tell how much effect the easements had on the

properties' . fair market values .

30We also disagree with Mr . Packard's use of the matrix,`

Because it included general information that did not .have a

specific connection to'the Bull ountain and Sylvester parcels,

we . afforded it little weight in our analysis .

- 42 restrictions of the open-space easement in determining the

price .") . : Further, he failed to consider two important factors .

jFirst, for tax years beginning on or after January 1, 2000,

the State ;of Colorado allows a State income tax credit fo r

taxpayers who grant a qualified conservation easement on ;;real

property located in Colorado . Colo . Rev . Stat . sec . 39-22-522(2)

(2000) ., At the time petitioner granted the conservation,

easement, .the maximum credit allowed was $100,000 per donation .

Id .

sec . i, 39-22-522 (4) (a) . . Any unused portion of the credit could

generally .-be carried forward for a maximum of 20 years .

Id .

sec .

39-22-522(5)(a) . In addition, subject :to certain limitations,

the taxpayer could transfer all or a portion of the credit to

another taxpayer .

Id .

sec . 39-22-522(7) . Generally, the credi t

a taxpayer could use was limited to the net tax liability

reported during the tax year ; however,'if State revenue exceede d

certain thresholds, a taxpayer could "elect to have the amount of

the credit not .used as an offset against income taxes in said

income tax

0 year refunded to the taxpayer ."

Id .

sec .

39-22-

522(5)(b

(5) (b)) (I) .

.J9

Packard disregarded the valuelof the Colorado Stat e

incometax credits . By granting the conservation easement over

the Bull Mountain and Sylvester parcels, petitioner precluded any

91 1

future purchasers from granting a conservation

easement and thus

from receiving the benefit of the tax credits . This should have

- 43 -

been at least considered in determining the parcels' diminution

in fair market value . At trial Mr . Packard tried to explain1hi s

lack of attention to the State credits by noting that the marke t

was generally not yet sophisticated enough to recognize th e

potential value of the credits or factor them into fair market

value . We reject his explanation, which was based on the stat e

of the market at that time . Fo r purposes of determining fai r

market value, we must consider a hypothetical sale between a

willing buyer and a willing seller both having a reasonable ,

knowledge of relevant facts . See Arbor Towers Associates, Ltd .

v . Commissioner , T .C . Memo . 1999-213 ; sec .,1 .170A-1(c)(2), income

Tax Regs .

Second, Mr . Packard has seemingly neglected the possibilit y

that circumstances may change i n the,future. For example,

although there was little demand for residential property at th e

time petitioner granted the easement, residential development may

be a realistic possibility in th ~

I future . In that event,'th o

conservation easement would neve rtheless prevent petitioner or

his successors in interest from taking advantage of potentiall y

lucrative development opportunit ies . Mr . Packard should hav e

least considered this possibilit y in his report and, i-f

44 appropriate, reflected it in the diminution in value of the Bull

Mountain : and Sylvester parcels' fair market values .3 1

,pIni,sum, Mr . Weston's determination of 70-percent diminution

is too high and Mr . Packard's determination of 0- to 10-percent

diminution is too low . The correct percentage lies somewhere in

between ; however, because of our conclusions with respect to the

fair market values of the Bull Mountain and Sylvester parcels, no

diminution in that range will lead to . a larger deduction .than

respondent has already allowed .

IV .

Conclusion

Based on a thorough review of the evidence in this case, we

concluded that the fair market values of the Bull Mountain and

Sylvester parcels before petitioner granted the conservation

easement

were $1,710,000 and $671,350,!, respectively . Whe n

{

petitioner granted the conservation easement, the fair market

values ofthe parcels diminished, entitling him to a deduction .

They did not diminish so much, however, that petitioner i s

31Mr .j~Packard tried to explain that these two factors are of

minimal importance "in the real world", but we are not persuaded .

To the extent future demand for residential development

could have been anticipated, any increase in fair market value

due to such demand would have had to have been discounted under

time value of money principles . There is no evidence that there

will be significant demand for residential development in the

area surrounding

the Bull Mountain and Sylvester parcels in the

near to ;i termediate future . Accordingly, in light of the

necessary' discount for the time value of money, the possibility

of future residential development does,,not affect our conclusion

as to the value of the conservation easement .

- 45

entitled to a deduction larger than that which respondent has

already allowed .

Accordingly ,

we sustain the deficienc y

determined by respondent .

The Court has considered all

arguments ,

requests ,

of petitioner's contentions,

and statements . . To the extent not discussed

herein, we conclude that they are meritless ,

moot, or irrelevant .

To reflect the foregoing,

Decision will be enured

for respondent .

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.