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United States Tax Court
T.C. Memo. 2026-68
MALIBU VALLEY LAND, LLC, SPECTRUM DEVELOPMENT, INC.,
TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
__________
Docket No. 20442-19.
Filed August 17, 2026.
__________
Vivian D. Hoard and Adam R. Young, for petitioner.
Lori A. Amadei, Henry C. Bonney, Paulmikell A. Fabian, Virgil C.
Southall, and Richard L. Wooldridge, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GREAVES, Judge: This case involves a noncash charitable
contribution deduction reported for tax year 2014. Malibu Valley Land,
LLC (MVL), reported a deduction of $32,075,000 for its grant to the
Mountain Recreation & Conservation Authority (MRCA) of a perpetual
conservation easement over 297.84 acres of real property with entitled
development rights (conservation easement) on December 30, 2014
(donation date). In a Notice of Final Partnership Administrative
Adjustment (FPAA), the Internal Revenue Service (IRS or respondent)
disallowed the deduction for failure to comply with the technical
requirements of section 170. 1 In the alternative, respondent asserts
that the conservation easement was worth $4,650,000.
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
Served 08/17/26
2
[*2] The parties agree that in this case the income approach provides
credible evidence of value, distinguishing this case from recent
conservation easement cases before this Court. The wide valuation gap
between the parties turns largely on a single issue: the property’s
development potential. The record leaves no question that the property
has development potential and attendant value. The property is the
subject of one of the oldest vesting tentative tract maps in the State of
California and enjoys a location that is far superior to large-acre tracts
just miles away. Determining the extent of that value, however,
requires us to delve into underdeveloped portions of California land-use
law stretching back nearly four decades.
FINDINGS OF FACT
The following facts are derived from the pleadings, the stipulation
of facts with attached exhibits, and the testimony of fact and expert
witnesses admitted into evidence at trial. MVL was a California limited
liability company that is subject to TEFRA for its taxable year ending
December 31, 2014. 2 Spectrum Development, Inc. (petitioner or
Spectrum), was MVL’s tax matters partner. MVL had its principal place
of business in California when the petition was filed. After concessions,
the issues before the Court are (1) whether MVL had the requisite
donative intent to claim a charitable contribution deduction for the
conservation easement, (2) the value of the conservation easement,
(3) whether the investment interest limitations apply to $450,000 of
interest MVL paid to a creditor, and (4) whether accuracy-related
penalties apply. 3
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure.
Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA), Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, governed the tax
treatment and audit procedures for many partnerships, including MVL.
2
3 In its petition, petitioner also argues that respondent erred in adjusting the
amounts of capital contributions and distributions for MVL. However, petitioner failed
to address these adjustments to any meaningful extent at trial or on brief. We
therefore conclude that petitioner has abandoned any arguments or contentions
related to these issues. See Thiessen v. Commissioner, 146 T.C. 100, 106 (2016)
(“[I]ssues and arguments not advanced on brief are considered to be abandoned.”);
Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003); Nicklaus v. Commissioner, 117
T.C. 117, 120 n.4 (2001); see also Rule 151(e)(4) and (5) (requiring that a party’s brief
set forth and discuss the points and arguments on which the party relies). Respondent
3
[*3] I.
Location, Location, Location
The Santa Monica Mountains region of Los Angeles (LA) County,
California, offers a retreat for the wealthy looking to escape the hustle
and bustle of the city. Those who have sought this refuge include King
Gillette, a business tycoon of the shaving industry; equestrian
aficionados looking for large rural estates; and hip-hop star Ye
(previously known as Kanye West).
The 297.84 acres over which MVL granted the conservation
easement and a contiguous 18.43 acres sit within the Santa Monica
Mountains region (together, subject property). The subject property is
approximately 3 miles south of Calabasas, 6 miles north of Malibu, and
25 miles from downtown LA. The region is serviced by four major
highways that connect to the Ventura Freeway and the Pacific Coast
Highway. The subject property is approximately four miles south of the
Ventura Freeway and abuts Mulholland Highway, a secondary scenic
highway that provides access to the interior of the region.
A portion of the subject property lies within the Mulholland
Scenic Corridor. Since at least 1981, LA County has imposed additional
safeguards to restrict development in this scenic corridor to preserve the
character of the area. The subject property also hosts rare species of
plants and animals. LA County designated southern portions of the
subject property as areas containing sensitive environmental resources
of the highest significance, rarity, and diversity (H1) and sensitive
environmental resources of high significance, rarity, or diversity (H2).
Aside from a few high-end subdivisions, the area surrounding the
subject property remains largely undeveloped as of the donation date
because of long-running conservation efforts to preserve the area’s
beauty and resources by the State of California, LA County, and private
donors. One such resource is the Stokes Canyon watershed, one of the
most pristine watersheds in the Santa Monica Mountains region. To
protect this watershed and other resources, state and local government
agencies purchased and dedicated open spaces in the area to public
recreation. One of the subject property’s largest neighbors is the King
Gillette Ranch, a 588-acre parcel now part of the Malibu Creek State
Park.
The King Gillette Ranch is owned by MRCA, a quasihas conceded that MVL satisfied the other technical requirements of section 170 and
that the property was not inventory.
All dollar amounts have been rounded to the nearest whole dollar.
4
[*4] governmental entity charged with preservation and education.
MRCA purchased the ranch in the 2000s for $33 million and converted
it into a recreational and educational destination.
The subject property features varied topography, including
rugged peaks and ridges, steep canyons, rolling hills, and pastoral
valleys. Much of the property is sloped, and in 2004 LA County
designated several of its slopes as significant ridgelines. 4 These
ridgelines offer views of the surrounding mountains, canyons, and
valleys. The ocean is not visible from the subject property.
II.
Ownership and Development of a Vesting Tentative Tract Map
A.
Acquisition and Entitlement
Brian Boudreau’s involvement with the subject property started
in 1978 when he was 11 years old. His father, Charles Boudreau, was a
highly experienced real estate advisor and dealer in the Santa Monica
Mountains region. He bought attractive land, perfected entitlements to
build on the land, and flipped the now-entitled land to developers.
Charles was also a religious man, and he took his son with him to
weekly services at the Claretian Theological Seminary located near the
subject property. The Claretian Theological Seminary had substantial
land holdings in the area. Given Charles’s knowledge of real estate, the
Claretian Theological Seminary asked him to act as its real estate
advisor.
In this role Charles became friends with the Claretian Theological
Seminary’s trust advisor. They worked together to manage the church’s
property holdings for over six years. Eventually, the pair determined
that the church should dispose of most of its real estate. For a buyer,
they looked no further than Charles.
On May 22, 1978, the Claretian Theological Seminary sold 443
acres in the Santa Monica Mountains region (Boudreau Family Land) to
Malibu Valley Farms, Inc., an entity owned by Charles. Charles took
the most logical step with his background: He considered adding
entitlements to the land for future development. In 1984 the California
legislature adopted the vesting tentative tract map scheme, which, as
4 A significant ridgeline is one that has been identified as a scenic resource
because it is highly visible and dominates the landscape. LA County, Cal., LA County,
Cal. Planning and Zoning Ord. 2004-0072, § 1 (Dec. 7, 2004).
5
[*5] discussed infra, generally permits developers, upon approval of a
vesting tentative map, to rely on the local ordinances in effect when the
subdivision application was deemed completed, rather than ordinances
adopted later in the development process. See Cal. Gov’t Code
§ 66498.9(b) (West 2014); see also id. §§ 66498.1 through 66498.9.
Charles set his sights on this new entitlement.
The Subdivision Map Act generally requires approval of
subdivision applications, subject to limited exceptions that are not
relevant here. Id. § 66426. It establishes a two-step approval process.
First, the subdivider submits a tentative map proposing the division of
property into five or more lots. Id. The local agency reviews the
tentative map for compliance with applicable local law. Id. §§ 66473.5,
66474. In LA County, the tentative tract map is reviewed by the County
Board of Supervisors. Approval of a tentative map does not create legal
lots; it merely establishes a framework for future development. Id.
§ 66429.
Legal lots are created in the second step, when the subdivider
submits a final map for approval and recordation. This final map is
more detailed than the tentative map and must depict the required
infrastructure and improvements to serve the new lots. Id. §§ 66456,
66456.2, 66457. It must substantially conform to the approved tentative
map, satisfy any conditions that the local agency placed on the tentative
map, and comply with subdivision ordinances applicable when final
approval is sought. Id. § 66458(a). In LA County, the final map is
reviewed by the County Board of Supervisors. A subdivider may not sell
lots before the final map is recorded. Id. § 66499.30(a).
Because development and final approval of the subdivision can
take years—and local ordinances may change during that time—the
legislature adopted the vesting tentative tract map scheme. 5 See id.
§ 66498.9(b); see also id. §§ 66498.1 through 66498.9. A vesting tentative
tract map generally “locks in” the local ordinances, policies, and
standards in effect when the application is deemed complete. Id.
§ 66498.1(b).
Vesting tentative maps apply only to residential
5 The rights conferred by a vesting tentative tract map have not materially
changed since the statute was adopted.
It is unclear from the record what, if any, additional application requirements
applied to a vesting tentative tract map as compared to a tentative tract map at the
time Charles applied. As of the donation date, the LA County Code required only that
the map be labeled with “Vesting Tentative Map.” LA County, Cal., Code § 21.38.040
(2014).
6
[*6] subdivisions and may be filed whenever the Subdivision Map Act
requires a tentative map, that is, in step 1 of the approval process. Id.
§§ 66498.7, 66498.1(a). Much as with a tentative tract map, the local
agency reviews the application to determine compliance with local
ordinances, policies, and standards in effect at the time the application
was complete. Id. §§ 66498.1(b), 66474.2(a). If approved, the vesting
tentative tract map confers the right to proceed with development in
“substantial compliance with the [local] ordinances, policies, and
standards” in effect when the application was complete, subject to
reasonable conditions imposed before recordation. Id. §§ 66498.1(b) and
(c), 66498.6.
The vested rights conferred by a vesting tentative tract map are
limited. Id. § 66498.6(b). A subdivider receives no vested development
rights with respect to state or federal law. Id. In addition, the vested
development rights do not last indefinitely. The vesting tentative tract
map has an initial life of at least one year, as set by the local agency, but
it may be extended for various reasons including progress in recording
a portion of the map, permitting delays, or litigation. Id. § 66498.5(b)
and (c). If a subdivider satisfies the conditions of approval and complies
with the local law in effect when the vesting tentative tract map was
approved, the local agency must approve and record a final map that
substantially conforms with the vesting tentative tract map. See id.
§ 66474.1. Because the vesting tentative tract map does not create legal
lots, the lots proposed on a vesting tentative tract map cannot be sold
until the final map is recorded. Id. § 66499.30(a).
B.
Drafting of Vesting Tentative Tract Map 45465
Charles, through his entity Malibu Valley Farms, Inc., retained
HMK Engineering to prepare Vesting Tentative Tract Map 45465
(VTTM) that covered a portion of the Boudreau Family Land, including
the subject property. On July 15, 1987, HMK Engineering provided
Charles with a draft VTTM setting forth 81 proposed lots. HMK
Engineering made subsequent amendments to the map before it was
completed in 1988. The VTTM is depicted below, as amended in 1988: 6
6 This depiction, offered by petitioner, matches the plans HMK Engineering
designed in 1987 and amended in 1988. We have superimposed the coastal zone
boundary from other maps in evidence. This map is offered solely for illustrative
purposes.
7
[*7]
The VTTM area is bisected by Stokes Canyon Road, a two-lane
paved roadway that runs diagonally through the tract. This road serves
as the primary dividing line for purposes of our discussion. The portion
of the VTTM area west of Stokes Canyon Road consists of 23 lots, each
planned for a single-family residence. Development activity before the
donation date was concentrated on this western portion. Although it is
not part of the subject property, the western portion provides useful
information regarding the procedures and costs associated with
development in accordance with the VTTM.
Its topography is
comparable to the rest of the VTTM area.
Our focus is on the portion of the VTTM area east of Stokes
Canyon Road. This area includes the subject property and an equestrian
center. In total, the VTTM shows 56 lots east of Stokes Canyon Road on
the subject property, each intended for a single-family residence. The
contiguous 18.43-acre portion of the subject property is a triangular
parcel immediately east of Stokes Canyon Road. The VTTM depicts
three lots on this contiguous portion. Immediately east of this parcel
lies the 297.84-acre portion encumbered by the conservation easement.
This portion is irregularly shaped and is depicted on the VTTM as
containing 53 lots. Finally, south of the subject property, near the
intersection of Stokes Canyon Road and Mulholland Highway, is an
equestrian center. The equestrian center predates the VTTM and did
not receive entitlements under the VTTM because it is a commercial
property.
The final feature of note is the line running diagonally across the
property. This line marks the boundary of the coastal zone established
under the California Coastal Act (Coastal Act). The subject property
8
[*8] south of the line is within the coastal zone (southern portion), 7
while the subject property north of the line lies outside of it (northern
portion). 8 The California Coastal Commission (Coastal Commission)
has primary authority over development within the coastal zone. Cal.
Pub. Res. Code §§ 30300, 30330. On the subject property, 22 lots are in
the northern portion 9 and 34 lots are in the southern portion. 10
The northern portion is approximately 191.65 acres, and the
southern portion is approximately 124.35 acres. 11 As of the donation
date, the northern portion was zoned A1 (Light Agricultural), while the
southern portion was primarily zoned RL20, which permits one singlefamily residence per 20 acres. A small section of the southern portion
was zoned RL10, which permits one single-family residence per 10 acres.
As discussed in greater detail infra, subdivision within the coastal
zone is complicated and expensive. Accordingly, subdividers seek to
avoid it where possible. The Coastal Act nevertheless provides a
7 The coastal zone generally extends from the coast to 1,000 yards from the
mean high tide line of the sea. Cal. Pub. Res. Code § 30103(a) (West 2014). In
significant habitat or recreation areas, it extends inland to the lesser of the first major
ridgeline or five miles from the mean high tide line of the sea. Id.
8 The unincorporated area north of the coastal zone to approximately the 101
Freeway is referred to as the “North Area” and is subject to specific provisions
governing development. Land Use Pres. Def. Fund v. Cnty. of L.A., No. B190846, 2007
WL 686733, at *1 n.2 (Cal. Ct. App. Mar. 8, 2007).
9 These lots are designated by the following numbers: 26–43, 64, 65, 80, and
81. On average these lots are 8.7 acres with a 1.02-acre building pad. Lots 80 and 81
are the largest lots at 112.96 acres and 34.25 acres, respectively.
10 The following 13 lots are bisected by the coastal zone boundary: 44, 54, 55,
60–63, 66–68, 76, 77, and 79. We include these lots in the southern portion. The
portions of these lots located within the coastal zone are governed by the Coastal Act.
Sierra Club v. Cal. Coastal Comm’n, 111 P.3d 294, 303 (Cal. 2005) (holding that when
a lot straddles the coastal zone boundary, the Coastal Commission retains jurisdiction
over development for the portion of the lot within the coastal zone). Petitioner provided
no analysis on the process of reconfiguring these lots to exclude the portions located in
the coastal zone, which can be a years-long process. Nor did any expert opine on
whether LA County would review the necessary lot adjustments as in substantial
compliance with the VTTM. Consequently, we will treat these 13 lots as part of the
southern portion of the subject property.
11 Neither party provided us with the exact acreage of either part of the subject
property. To determine the approximate acreage in the northern portion, we added
together the sizes of the lots identified as being located in the northern portion. Our
estimate is consistent with estimates from LA County in the record.
Even though the northern portion contained more acreage, it had fewer lots
than the southern portion because of its difficult terrain.
9
[*9] procedure to request an adjustment to the coastal zone boundary
from the Coastal Commission. Cal. Pub. Res. Code § 30103(b). In 1987
Charles invoked that procedure and asked the Coastal Commission to
move the coastal zone boundary line such that the lots proposed on the
property to the west of Stokes Canyon Road would be outside the coastal
zone.
The Coastal Commission denied this request, concluding that the
proposed boundary adjustment would be inconsistent with the policies
of the Coastal Act. The Commission found that moving the boundary
would place a portion of the proposed development beyond the Coastal
Commission’s jurisdiction, and ultimately beyond LA County’s
oversight. Without that oversight, the Coastal Commission explained
that it could not preserve scenic and visual resources, protect
environmentally sensitive areas, or limit development consistent with
applicable density policies. The Coastal Commission determined that
any further subdivision of the affected land would require participation
in its transfer development credit program 12 to limit new development
in the region and ensure that the proposed boundary adjustment would
be consistent with the Coastal Act.
C.
Submission and Approval of the VTTM
In 1987 Malibu Valley Farms, Inc., submitted applications for the
VTTM, a conditional use permit, and an oak tree permit. 13 As discussed
above, approval of the VTTM entitles the developer to build in
accordance with the approved map, subject to any conditions expressly
reserved in the VTTM. Cal. Gov’t Code §§ 66498.1(b) and (c), 66498.6.
A conditional use permit was required to grade slopes exceeding 25%.
The oak tree permit was required to remove any oak trees within
the VTTM area. LA County, Cal. Planning and Zoning Ord. 82-0168, § 2
(July 20, 1982). In the unincorporated area of LA County, a landowner
generally may not remove or damage any oak tree with a circumference
of 25 inches or more, nor may a landowner grade, pave, trench, or
12 As discussed in greater detail infra, the transfer development credit program
generally requires a developer to retire parcels of land that could otherwise be
developed in exchange for the opportunity to record new lots in the coastal zone.
Generally, these programs are created in local coastal plans. See LA County, Cal.,
Code § 22.44.1230. The Coastal Commission also had its own transfer development
credit program.
13 The exact date that Malibu Valley Farms, Inc., submitted its application is
unclear.
10
[*10] otherwise disturb soil within an oak tree’s canopy. Id. §§ 1 and 2.
The oak tree permit application required property and construction
information, a site plan identifying the location of all oak trees, and an
oak tree report evaluating their health. Id. LA County could also
require planting replacement oak trees elsewhere on the property. Id.
An oak tree permit expired on the date specified on the permit, or if no
date was specified, one year after issuance, and could be extended for
one additional year. Id. The oak tree permit application submitted with
the VTTM sought approval to remove between 52 and 78 oak trees—less
than 3% of the oak trees within the VTTM area.
LA County reviewed the VTTM and associated permit
applications for compliance with all applicable state and local laws and
to ensure adequate environmental protection. This review process was
largely driven by the California Environmental Quality Act. This Act
requires California public agencies, including the LA County Board of
Supervisors, to conduct an environmental review of any discretionary
project and to prepare an environmental impact report (EIR) for any
project that may have a significant effect on the environment. Cal. Pub.
Res. Code § 21100(a). The VTTM qualified as a “project” under the
California Environmental Quality Act and was therefore subject to the
Act’s requirements. See id. § 21065(c).
In March 1988 LA County began to prepare a draft EIR for the
proposed VTTM, conditional use permit, and oak tree permit. The draft
EIR concluded that the proposed development would not result in any
significant environmental impacts. It further determined that the land
covered by the VTTM was not designated as a significant ecological area
or buffer area and that the proposed density complied with zoning
requirements.
LA County further found that the VTTM complied with all
applicable local ordinances, policies, and standards in effect as of the
application date, including the LA County General Land Use Plan and
the Malibu/Santa Monica Mountains Interim Area Plan (1981 Interim
Area Plan) and the Malibu Local Coastal Program Land Use Plan (1986
Malibu LCP LUP). At the time the application was deemed complete,
development in the northern portion was governed primarily by the
1981 Interim Area Plan, which emphasized preservation of the area’s
scenic resources and natural terrain. LA County, 1981 Interim Area
Plan 3 (1981). The 1981 Interim Area Plan included policies addressing
wildlife habitat and oak tree preservation and identified scenic
highways, including Mulholland Highway. Id. The plan’s map of
11
[*11] significant environmental areas did not designate any portion of
the VTTM area as a significant environmental area. Id., Natural and
Historic Resources Map. LA County concluded that the proposed VTTM
complied with these requirements.
LA County also reviewed the VTTM for consistency with the 1986
Malibu LCP LUP, which was one piece of the regulatory scheme of the
Coastal Act. At the time, the Coastal Act governed development in the
southern portion. Several Coastal Act provisions were particularly
relevant, including protections for environmentally sensitive habitat
areas, standards governing the location of new residential development,
and requirements to protect scenic and visual resources by minimizing
alterations of natural landforms.
The Coastal Act contemplates significant reliance on local
governments through local coastal programs, which consist of a land use
plan and implementing ordinances referred to as local implementation
plans. 14 When the Coastal Commission certifies both the local land use
plan and the local implementation plan, it delegates its authority over
development in the coastal zone to the local jurisdiction. Cal. Pub. Res.
Code § 30519(a). In 1986 the Coastal Commission certified the 1986
Malibu LCP LUP, but no local implementation plan had been certified.
The 1986 Malibu LCP LUP included policies requiring protection
of environmentally sensitive habitat areas, minimizing grading,
designing development to reduce impacts to physical features, and
preserving scenic and visual resources, including limiting skyline
intrusion in highly scenic areas. It also reflected concern with excess
development in the coastal zone and identified several strategies to limit
development and encourage lot retirement.
14 The land use plan is a set of policies related to the Coastal Act and is part of
the local government’s general plan. Cal. Pub. Res. Code § 30108.5. The local
implementation plan provides zoning ordinances and standards to implement the
policies of the land use plan. Id. § 30108.4. For example, a land use plan may provide
the general goal of preserving the scenic resources of an area.
The local
implementation plan would then provide the specific building requirements that
effectuate this policy such as a prohibition of building on scenic ridgetops.
When a local jurisdiction completes either part of its local coastal program,
that section is submitted to the Coastal Commission for certification. Id. §§ 30510,
30512(a), 30513(a). The Coastal Commission will conduct a public hearing and review
the land use plan and/or the local implementation plan for their compliance with the
Coastal Act. Id. §§ 30512(a), 30513(b). The Coastal Commission then votes on whether
to certify the portion of the local coastal program. Id. §§ 30512(a), 30513(b).
12
[*12] LA County found that the proposed VTTM was compatible with
the 1986 Malibu LCP LUP. In the draft EIR, LA County noted that 126
acres would be graded but concluded that the proposed grading and
development were consistent with applicable ordinances and plans
including those governing scenic resource protection in the Mulholland
Scenic Corridor. The County also found that the VTTM was consistent
with current zoning requirements, and that, with mitigation, the project
would not result in significant environmental impacts.
Consistent with the California Environmental Quality Act, LA
County circulated the draft EIR to interested agencies for review and
comment. Eight agencies commented on the draft EIR, none of which
recommended denying the VTTM. The Las Virgenes Municipal Water
District raised concerns regarding the water and sewage capacity and
recommended conditioning recordation of any final map on upgrading
the public systems. LA County adopted the recommendation.
The Coastal Commission also commented on the draft EIR,
raising concerns regarding density, cumulative impact of development
in the region, grading, impacts to environmentally sensitive areas,
removal of native vegetation, and adverse effects on visual resources.
LA County made minor revisions to the draft EIR but rejected most of
these criticisms. LA County also conditioned the approval of final maps
in the coastal zone on obtaining “any permit required for the subdivision
under the provisions of the California Coastal Act of 1976” (coastal
development permit) or demonstrating that the subdivision was
exempt. 15 Because the area lacked a fully certified local coastal program
at the time, jurisdiction over any required coastal development permit
would have rested with the Coastal Commission. 16
15 Coastal development permits are the primary mechanism used to regulate
development in the coastal zone and must be obtained before subdivision may occur in
the coastal zone. Cal. Pub. Res. Code § 30600(a).
16 Before the certification of the local coastal program, the Coastal Commission
processes coastal development permits for coastal zone land within the local
government’s jurisdiction. Cal. Pub. Res. Code § 30604(a). Once the Coastal
Commission certifies a local coastal program, the Coastal Commission delegates
primary jurisdiction to issue coastal development permits to the local jurisdiction. Id.
§ 30519(a). This delegation means that the certified local coastal program and permits
issued pursuant thereto are “not solely a matter of local law, but embody state policy.”
See Pac. Palisades Bowl Mobile Estates, LLC v. City of L.A., 288 P.3d 717, 721 (Cal.
2012) (quoting Charles A. Pratt Constr. Co. v. Cal. Coastal Comm’n, 76 Cal. Rptr. 3d
466, 471 (Ct. App. 2008)). Regardless of whether the primary authority to issue coastal
13
[*13] The California Environmental Quality Act’s final substantive
step is certification of the final EIR. Cal. Pub. Res. Code § 21100.1(a).
After holding a public hearing, LA County certified the final EIR and
approved the VTTM, Conditional Use Permit 87-058, and Oak Tree
Permit No. 87-058, finding that the project would not have a significant
environmental effect.
Certification of the final EIR in 1988
presumptively satisfied the California Environmental Quality Act for
purposes of proceeding with the approved project; a subsequent EIR
would be required only if there were substantial project changes,
changed circumstances, or new information that warranted major
revisions. See id. § 21166.
LA County initially approved the VTTM for two years, but this
period was extended each time a new final map was recorded and for
other delays. See LA County, Cal., Code § 21.38.060 (2014). The VTTM
remained in effect through the donation date.
D.
Brian Takes the Reins
Where Charles was drawn to real estate, his son Brian found his
passion in horses. From a young age Brian spent his free time mucking
out stalls at the equestrian center on the Boudreau Family Land. While
working at the equestrian center, Brian met Robert Levin, the only other
person living on the land covered by the VTTM at that time. The two
developed a close friendship through their shared interest in horses.
Around this time, Brian moved to Kentucky to pursue a career in
the horse industry. There he boarded horses and dabbled in the
bloodstock business by purchasing, selling, and breeding thoroughbreds.
One of his earliest friends in Kentucky was Jack Preston. Mr.
Preston made his fortune in real estate and oil, and he used that wealth
to support his interest in horses. Mr. Preston’s horses later won major
races, including the Kentucky Derby, the Belmont Stakes, and the
Breeders’ Cup. Through his relationship with Mr. Preston, Brian gained
access to lucrative opportunities. In one instance, Mr. Preston offered
Brian shares in award-winning horses. Brian purchased shares for
$50,000 to $100,000 each and later sold them for $2.5 million each.
development permits is held by the Coastal Commission or the local jurisdiction, the
Coastal Commission has the ultimate authority to ensure coastal development permits
are issued consistent with Coastal Act policies. Cal. Pub. Res. Code § 30330.
14
[*14] Around 1990 Charles’s health began to decline, and Brian
returned to California to help manage the Boudreau Family Land. As
part of his estate planning, Charles began transferring property to Brian
as Trustee of the Boudreau Trust of 1990. With these transfers, Brian
soon discovered that his father had obtained loans secured by the
Boudreau Family Land ranging from several hundred thousand dollars
to over $1 million, and most of the property was heavily mortgaged. He
turned to his friends for financial advice.
One such friend was Mr. Levin. In 1991 Mr. Levin lent Charles
and Brian $100,000 secured by a portion of the subject property. But
this would not be the only loan from Mr. Levin. A couple of months later,
Mr. Levin lent the pair an additional $150,000 secured by the same
portion of the subject property. Charles passed away on December 18,
1992.
Charles’s death marked the beginning of a difficult period for
Brian. In addition to the emotional toll of his father’s passing, Brian
soon fell behind on payments to his father’s creditors. Those creditors
ultimately foreclosed on substantial portions of the Boudreau Family
Land, including the subject property. Brian fought tirelessly to reclaim
the property. As he had before, he turned to friends for help. Mr.
Preston answered his call. Together they formed Malibu Canyon LP,
and with Mr. Preston’s financial backing the partnership reacquired
portions of the Boudreau Family Land, including the subject property.
The two then turned their attention to preserving the VTTM
entitlements.
Other portions of the Boudreau Family Land, however, were lost.
In 1996 Mr. Levin foreclosed on the parcel east of Stokes Canyon Road
where the equestrian center was located. Shortly after Mr. Levin took
ownership, the equestrian center burned down. In 1998 Brian helped
Mr. Levin rebuild it after a years-long regulatory fight.
E.
North Area Plan
In 2000 the LA County Board of Supervisors adopted the Santa
Monica Mountains North Area Plan (North Area Plan) to replace the
1981 Interim Area Plan. LA County Dep’t of Reg’l Plan., North Area
Plan I-1 (2000). The North Area Plan continued LA County’s emphasis
on habitat protection and hillside management. As compared to the
1981 Interim Area Plan, the North Area Plan operationalized the
general policies into detailed development requirements.
15
[*15] The North Area Plan established several policies related to
preservation, including requiring developments to protect and preserve
significant, viable habitat areas and linkages in their natural condition.
Id. IV-19. It also aimed to ensure that hillside areas retain their natural
topography and limited development on ridgelines visible from key
public lands and scenic highways. Id. IV-21. To achieve this, the North
Area Plan sought to limit grading where possible and severely limit
grading in areas of 50% or greater slope. Id. Additionally, it established
policies to prohibit skyline development and required structures to be
set back sufficiently to avoid obstructing the natural skyline. Id. IV-22.
In 2002 the Board of Supervisors established the North Area
Community Standards District to implement the North Area Plan
through zoning regulations. LA County, Cal., Code § 22.44.133. In 2004
the LA County Board of Supervisors amended the district to include
additional grading and ridgeline controls. Among other requirements,
the amended regulations required a conditional use permit for grading
exceeding 5,000 cubic yards and imposed development setbacks from
significant ridgelines with variances available only upon specified
findings. LA County, Cal., Planning and Zoning Ord. 2004-0072, § 1
(Dec. 7, 2004).
F.
The First Final Map
As with the changing development standards, ownership of the
Boudreau Family Land looked much different from that in the period
before Charles’s death. Soka University owned the land west of Stokes
Canyon Road. Malibu Canyon LP, with Mr. Preston and Brian as
partners, owned the land east of Stokes Canyon Road except for the
equestrian center, which Mr. Levin owned. The VTTM remained active
but was nearing expiration.
By 2004 LA County had extended the expiration date of the
VTTM several times under the vesting provisions of the Subdivision
Map Act. To obtain another extension, Brian had to record a final map.
Recording a final map, however, required satisfying conditions imposed
under the VTTM, including, for the majority of lots, upgrading the water
and sewage systems needed to support the proposed subdivision.
On May 26, 2004, Soka University authorized Brian, through his
development entity Malibu Canyon Development, Inc., to construct
water and sewer lines to service the VTTM area in the existing utility
right of way along Mulholland Highway and Stokes Canyon Road. On
16
[*16] June 4, 2004, Malibu Canyon Development, Inc., applied for a
coastal development permit waiver to replace existing lines located
within the coastal zone. The application represented that the project
would not require grading, affect public access or views, or require
removal of oak trees. It also stated that the work would not conflict with
the Coastal Act and that the lines would serve a parcel outside of the
coastal zone. On November 22, 2004, the Coastal Commission granted
permit waivers, determining that the lines would “serve development
and fire hydrants also located outside the coastal zone along Stokes
Canyon Road.”
In 2005 Soka University decided to divest its holdings in the
Santa Monica Mountains region and offered Brian an opportunity to
repurchase the land west of Stokes Canyon Road. Seeing a chance to
reunite the VTTM areas, he quickly agreed. On February 19, 2005, Soka
University sold that property to Malibu Canyon LP for $12 million.
Brian turned his sights to recording the first final map from the
VTTM. He applied for a final map numbered 45465-01. LA County
recorded this first final map on March 16, 2005. 17 It created a single lot
on a portion of the VTTM west of Stokes Canyon Road that was not
subject to the coastal permitting requirements applicable to land within
the coastal zone.
G.
The Long and Costly Trail to a Second Final Map
Fresh off recording the first final map, Brian wanted to maintain
the momentum to record more final maps on the VTTM. At the same
time, the ghosts of his father’s debt continued to haunt Brian. Brian
sold an unrelated San Diego property for less than the outstanding
balance of the loan that his father took out from Mr. Levin. Brian agreed
to secure the over $1 million balance of this loan with the subject
property. 18
In 2008 Brian approached Mr. Levin for additional financing to
prepare another final map for submission. Mr. Levin saw continued
value in the land and happily agreed. In April 2008 Malibu Canyon LP
borrowed an additional $4 million that was again secured by the subject
17 The sewer and water line upgrades were not complete by this point.
However, because this lot had a pre-existing single-family residence, that condition did
not apply.
18 At the time he sold the San Diego property, Brian had paid off Mr. Levin’s
previous loans secured by the subject property.
17
[*17] property. This increased the debt secured by this property to over
$5 million.
The infusion of cash did not solve Malibu Canyon LP’s financial
problems. On May 19, 2008—the day the VTTM was set to expire—
Malibu Canyon LP submitted a second final map to LA County. The
map sought to record seven lots west of Stokes Canyon Road. LA County
rejected the submission, concluding that Malibu Canyon LP had failed
to obtain a grading permit from the Regional Water Board. Malibu
Canyon LP strongly disagreed because this permit was not made a
condition when the VTTM was approved, but the decision could only be
challenged in court.
By then, Mr. Preston had invested over $18 million in preserving
the VTTM and had no appetite for protracted litigation. He chose to cut
his losses and relinquish his interest in Malibu Canyon LP. 19 Mr. Levin
got spooked by Mr. Preston’s departure, and he requested a deed in lieu
of foreclosure for the property east of Stokes Canyon Road. Brian
complied.
Despite the setback, Brian continued preservation efforts for the
VTTM. He sued LA County, and the court issued a writ of mandamus
directing LA County to record the second final map. After the litigation
concluded, the second final map was recorded on June 2, 2010, reviving
the VTTM and extending its expiration through 2014.
Malibu Canyon LP was not the only party reacting to the VTTM’s
survival. German American Bank had acquired a note that was secured
by the land west of Stokes Canyon Road. Once the VTTM was
reinstated, the bank moved to foreclose, alleging delinquent payments.
The dispute settled in 2011 with Malibu Canyon LP agreeing to pay the
bank $3 million by June 2012 in exchange for the land.
The short turnaround to pay $3 million appeared fatal. Malibu
Canyon LP had lost its principal financing partner and depleted its
resources through litigation. Brian sought financing from local brokers
to no avail. Then, seven days before the $3 million was due, an
unexpected visitor arrived at Brian’s front door. Don Hankey, a
billionaire who made his fortune on subprime car loans, had heard about
19 Malibu Canyon LP continued in existence after Mr. Preston relinquished his
interest because Brian’s other entities owned partnership interests.
18
[*18] Brian’s predicament from local bankers. He came to Brian’s house
to discuss funding the settlement.
Mr. Hankey ultimately lent Malibu Canyon LP $4.2 million to
satisfy the German American Bank obligation and finance development
on the land west of Stokes Canyon Road. The loan came with a
condition: Mr. Hankey insisted that Brian begin building homes on the
lots created by the second final map to ensure repayment. Brian had
never built a house, but he needed the financing and remained
determined to see the project through. Malibu Canyon LP began
constructing homes on several of the seven lots using construction loans:
Parcel
Details
1
Pre-existing single-family home built before the second final map.
2
Malibu Canyon LP built a single-family home on this lot in 2017 that sold
in the same year.
3
Transferred to Malibu Valley Partners, LLC. 20 Vacant as of trial.
4
Transferred to Malibu Valley Partners, LLC. Malibu Valley Partners, LLC,
built a single-family home on this parcel in 2023 that sold in 2024.
5
Malibu Canyon LP built a single-family home in 2017. Occupied by Brian
after his house burned down.
6
Transferred to Malibu Valley Partners, LLC. Malibu Valley Partners, LLC,
built a single-family home on this parcel in 2021 that sold in 2022.
7
Malibu Canyon LP built a single-family home on this lot in 2017 that sold
in 2019.
These lots shared topography similar to that of the subject property,
including slopes exceeding 25% and 50%.
H.
Creation of MVL and Talk of an Easement
The sun was shining again on the Boudreau Family Land: Malibu
Canyon LP had a new financial partner in the form of Mr. Hankey and
the VTTM was active. Mr. Levin saw this as an opportunity to move
20 Malibu Valley Partners, LLC, is a California limited liability company
associated with Brian.
19
[*19] onto greener pastures and focus on raising his daughter after a
contentious divorce. He had substantial wealth and was not concerned
about recovering his full investment in the land. Mr. Levin offered Brian
the property east of Stokes Canyon Road—excluding the equestrian
center—for $1.5 million, a price he considered below market. He did not
seek other potential buyers, list the property for sale, contract with a
broker, or have the property appraised before selling it to Brian.
Brian jumped at the opportunity to acquire the subject property.
In April 2013 Mr. Levin sold the property to Diamond West Realty, Inc.,
a brokerage firm Brian owned. In exchange, Mr. Levin received two
notes with face values of $944,700 and $555,300, respectively (Levin
notes). Each note carried 10% interest and was payable on March 31,
2016. Even if paid early, the notes required payment of all interest that
would have accrued through March 31, 2016.
On November 25, 2013, Brian formed MVL, a partnership for
federal tax purposes, with Brian owning 99% and his wholly owned
corporation Spectrum owning 1%. On December 2, 2013, Diamond West
Realty, Inc., transferred the subject property to MVL in exchange for
MVL’s assumption of the Levin notes.
Managing the Boudreau Family Land was stressful for Brian, but
it also gave him the ideal setting to pursue trail riding. Around 2013
Mr. Hankey, also an avid horseman, began joining Brian on rides across
the subject property. Mr. Hankey was struck by the surrounding Santa
Monica Mountains, which offered some of the most pristine trails in the
country. During one ride with Brian, Mr. Hankey raised the idea of
placing a conservation easement on the subject property. Mr. Hankey
was interested in a conservation easement both for tax reasons and to
preserve the land for his continued enjoyment.
Around the same time, Mr. Hankey and his son purchased land
adjacent to the subject property. Mr. Hankey had been in contact with
Forever Forests, LLC, a conservation consulting firm, and he asked
Brian to speak with them. At first, this disheartened Brian. He had
hoped that Mr. Hankey would fund development of the subject property,
but Mr. Hankey saw personal use of the subject property as more
valuable than the returns from large-scale development. Brian was
torn. He wanted to carry on his father’s vision of recording the entire
VTTM, but he also felt obligated to repay Mr. Levin. Seeing no other
viable option, Brian reluctantly agreed.
20
[*20] III.
A.
Conservation Easement Donation
Transfer Development Credits
Throughout the conservation easement process, Brian kept his
eye on developing the remainder of the Boudreau Family Land. By the
donation date, however, the regulatory landscape governing
development in the Santa Monica Mountains had materially changed.
On October 10, 2014, the Coastal Commission certified the Santa
Monica Mountains Local Coastal Program (2014 LCP), including its
land use plan and implementing provisions. Following certification of
the 2014 LCP, development within the coastal zone required a coastal
development permit consistent with the certified 2014 LCP and the
Coastal Act. Cal. Pub. Res. Code § 30604(a). Although authority to
grant coastal development permits was delegated to LA County, the
Coastal Commission retained appellate jurisdiction. Id. § 30603(a)(2),
(4).
As relevant here, the 2014 LCP imposed substantial additional
constraints on subdivision within the coastal zone as compared to the
1986 Malibu LCP LUP. The program requires a subdivider to obtain
one transfer development credit for each newly created lot within the
coastal zone. One transfer development credit generally requires
retirement of approximately 20 acres of qualifying coastal land.
Transfer development credits are awarded only after the director of the
Department of Regional Planning certifies compliance with all
requirements to obtain the transfer development credit, including
retirement of the identified lots.
LA County, Cal., Code
§§ 22.44.1230(F)(3)(b), 22.44.630. 21 Moreover, under the 2014 LCP, a
developer could not build a structure within 50-foot horizontal and
vertical setbacks from significant ridgelines, build within 100 feet from
designated H1 habitat areas, or grade on steep slopes.
Id.
§§ 22.44.2040(B)(3), 22.44.1900(A), 22.44.1260(J).
Given the acreage retired through the conservation easement,
Brian hoped the donation would generate transfer development credits
that could be used to record new lots in the coastal zone. Before the
donation, Beth Palmer, Brian’s longtime real estate attorney, sent the
draft conservation easement deed to the LA County Department of
Regional Planning to determine whether MVL would be eligible for the
21 This section of the LA County Code was codified in 2015 after the Board of
Supervisors approved the LCP in 2014. The 2015 codification matches the LCP and
therefore, for clarity, this Opinion will cite the 2015 LA County Code where relevant.
21
[*21] transfer development credits. She did not hear back until after
the donation deed was executed.
In its response, the LA County Department of Regional Planning
stated that because the lots were on an approved tentative tract map—
not a final map—it could not determine whether the lots qualified for
the transfer development credits. It added, however, that if the
easement were recorded in the same form, it would qualify for a transfer
development credit for each 20 acres retired in the coastal zone. It
remains unclear whether MVL was ultimately entitled to credits,
though Ms. Palmer later cited the response as evidence that MVL
obtained them.
B.
Preparation and Recording
On April 9, 2014, MVL and Forever Forests, LLC, entered into a
conservation consulting services agreement. Forever Forests, LLC,
agreed to guide MVL through the conservation easement process,
including identifying a donee organization and obtaining a valuation.
On May 2, 2014, MVL, through Forever Forests, LLC, retained Thomas
Erickson to appraise the subject property. Mr. Erickson had over 40
years of experience appraising property in LA County.
Mr. Erickson met with Brian and Ms. Palmer to discuss the
property and its development potential.
Using the information
provided, Mr. Erickson valued the conservation easement at
$32,075,000. Brian believed that the valuation was low because of his
experience selling other undeveloped lots in the area. But he concluded
he could never use the full deduction during his lifetime. He therefore
did not challenge the appraisal and proceeded with the donation.
During this time, Forever Forests, LLC, contacted the MRCA to
determine whether it would accept the conservation easement. MRCA
welcomed the opportunity to neutralize the unique development rights.
By then, the VTTM was unusual even among the limited number of
vesting tentative tract maps in LA County. A report from the LA County
Department of Regional Planning showed only a small number of
vesting tentative tract maps that entitled a developer to subdivide such
a large piece of property into so many estate-sized lots, and few of those
predated the North Area Plan.
MVL’s ownership changed before the donation date.
On
September 26, 2014, Mr. Hankey purchased a 75% limited partner
interest from Brian for $3.55 million. Mr. Hankey paid $1.55 million of
22
[*22] that amount directly to Mr. Levin to satisfy the outstanding debt
and accrued interest on the Levin notes. By the donation date, MVL’s
ownership was as follows: Spectrum (0.225%), Brian (22.275%), Beth
Palmer (2.5%), and Mr. Hankey (75%).
On December 30, 2014, MVL recorded a grant of a conservation
easement over the subject property to MRCA. On March 16, 2015, Lisa
Soghor, MRCA’s deputy executive officer, executed a letter titled
“Acknowledgement of Charitable Donation,” confirming MRCA’s receipt
of the easement and stating that MVL received no goods or services in
exchange.
IV.
Events Surrounding the Subject Property After the Donation
Before turning to tax reporting and procedural history, we note
several relevant postvaluation events. After the donation, Brian and his
entities continued development of the additional portions of the VTTM
area.
In 2021 Malibu Valley Partners sought LA County approval to
amend a portion of the VTTM covering the area west of Stokes Canyon
Road. The amendment proposed relocating four lots out of the coastal
zone and adjusting the corresponding lot sizes, lot lines, and grading
volumes. Malibu Valley Partners submitted this request to the LA
County Department of Regional Planning. In response, LA County
prepared and certified an addendum to the final EIR addressing the
amendment’s incremental environmental effects. 22 This addendum was
not circulated for public review. Cal. Code Regs. tit. 14, § 15164(b) and
(c) (2014). A hearing officer approved the amendment on July 28, 2021,
finding it consistent with the North Area Plan and the 2014 LCP.
Concerned citizens appealed the hearing officer’s decision to the
LA County Regional Planning Commission (RPC). After receiving
public comments and holding a hearing, the RPC considered whether
the North Area Plan and the 2014 LCP applied to the proposed
development.
If these more recent laws applied, the proposed
development in the amendment might conflict with these laws. The
RPC expressly determined that they did not apply to the amendment
because the VTTM locked in the development laws in 1988. On
November 3, 2021, the RPC approved the amendment.
22 The record does not identify which office of LA County prepared the
addendum.
23
[*23] The decision was then appealed to the LA County Board of
Supervisors, the highest level within the LA County Department of
Regional Planning. After a public hearing, the Board of Supervisors
denied the appeal and approved the application on July 26, 2022. In its
written findings, the Board of Supervisors agreed with the RPC that the
North Area Plan and the 2014 LCP did not apply. It also found the
addendum to the final EIR sufficient because no statutory trigger
required preparation of a new EIR. All proposed development in these
phases would occur outside the coastal zone.
The final event of note after the donation date was that around
2022, Mr. Levin sold the equestrian center to Brian.
V.
Tax Reporting
On March 24, 2015, Mr. Erickson finalized his appraisal report.
MVL then turned to Cherri Skoczek, Brian’s certified public accountant
for over 30 years, to prepare its tax return. Ms. Skoczek prepared MVL’s
Form 1065, U.S. Return of Partnership Income, for the short tax year
ending December 31, 2014. She did not advise on the reasonableness of
the appraisal or the deductibility of the conservation easement donation.
MVL timely filed Form 1065 for the tax year beginning September
26, 2014, and ending December 31, 2014, and attached Form 8283,
Noncash Charitable Contributions, to the return. 23 On Form 8283 MVL
reported a $32,075,000 conservation easement donation; the value was
based on Mr. Erickson’s appraisal. MVL also attached MRCA’s
contemporaneous written acknowledgment and Mr. Erickson’s
appraisal report. In addition to the noncash charitable contribution
deduction, MVL reported $450,000 of interest expense related to the
Levin notes that were paid off using Mr. Hankey’s capital contribution.
VI.
Audit and Tax Court Petition
Respondent selected MVL’s 2014 information return for
examination. The audit was assigned to Revenue Agent (RA) Yan Zhao,
who enlisted the help of IRS Engineer Peter Crane to prepare an
appraisal valuing the conservation easement. After determining that
the charitable contribution deduction should be disallowed for failure to
23 It is unclear who prepared the Form 8283, though Ms. Skoczek
acknowledged that she reviewed the Form 8283 and stated that she would have
informed Ms. Palmer or Brian if anything appeared incorrect.
24
[*24] comply with the technical requirements of section 170, RA Zhao
turned her attention to penalties. By June 6, 2018, RA Zhao began
drafting Form 886–A, Explanations of Items, determining the
applicability of accuracy-related penalties under section 6662 for a gross
valuation misstatement, a substantial valuation misstatement, and
negligence.
She also considered the penalty for a substantial
understatement of income tax and concluded no partnership-level
defenses would apply.
RA Zhao also prepared Form 5701, Notice of Proposed
Adjustment (NOPA), addressing penalties. On December 19, 2018, she
submitted the NOPA to Team Manager Johnson for approval. The
NOPA referenced Form 886–A and stated that penalties would be
determined at the partner level. Team Manager Johnson signed the
NOPA on the same day and returned it to RA Zhao. RA Zhao compiled
the appraisal, the signed NOPA, and Form 886–A into the 30-day
package and sent it to MVL.
On August 21, 2019, respondent issued an FPAA disallowing the
conservation easement deduction in full. Respondent also determined
an accuracy-related penalty for a gross valuation misstatement, and, in
the alternative, an accuracy-related penalty for negligence or a
substantial understatement of income tax would apply. Respondent
further disallowed MVL’s interest expense deduction for lack of
substantiation and, alternatively, contended that the expense should
have been added to MVL’s basis in the subject property.
Petitioner filed a petition with this Court for readjustment. On
January 17, 2020, respondent filed his answer in which IRS Attorney
Lori Amadei asserted an alternative accuracy-related penalty for a
substantial valuation misstatement.
Her immediate supervisor,
Associate Area Counsel Aely Ullrich, signed the answer.
VII.
Trial
The parties presented the following expert witnesses at trial to
address the value of the easement. Each expert’s report was received as
the witness’s direct testimony under Rule 143(g)(2).
25
[*25] A.
Petitioner’s Experts
1.
Charles Hewlett
Charles Hewlett, the managing director of a real estate consulting
company, was qualified as an expert in real estate market analysis and
financial feasibility analysis for single-family subdivisions. In his
opening report Mr. Hewlett addressed the highest and best use of the
subject property and market feasibility for the residential lots. He
concluded that the highest and best use was a 56-lot residential
community of large custom homes. He based this conclusion on the
rights conveyed under the VTTM, strong buyer demand, and rising
home values. Using eight comparable lots, he estimated that as of
December 30, 2014, the average lot on the subject property would sell
for $1,417,000 with annual appreciation.
He also provided an
absorption schedule and projected land appreciation rates.
Mr. Hewlett’s rebuttal report criticized Stuart DuVall’s valuation
report, challenging Mr. DuVall’s selection of comparable properties and
his market-trend adjustments. He also faulted Mr. DuVall’s assumption
of a flat 3% annual appreciation in lot values after the donation date.
2.
William Cunningham
William Cunningham is a professional civil engineer employed by
Diamond West, Inc. 24 Mr. Cunningham has worked on the VTTM since
2013 as the engineer of record. At trial, he was qualified as an expert in
land development, civil engineering, engineering for the VTTM,
engineering cost estimates, and VTTM-related land use permitting.
Mr. Cunningham’s opening report addressed the physical
feasibility of subdividing the subject property under the VTTM. He
prepared final engineering plans consistent with the VTTM and
developed direct cost estimates. He estimated total engineering costs,
including grading and other lot improvements, at $17,121,708, or
approximately $305,745 per lot. He also opined that it would take one
year to obtain clearances necessary to record final maps and that this
process could overlap with the coastal development permit request
process.
24 Diamond West, Inc., and Diamond West Realty, Inc., are two separate
entities. While Brian initially owned an interest in Diamond West, Inc., he divested
his interest after the donation around 2017.
26
[*26] Mr. Cunningham’s rebuttal report challenged Mr. DuVall’s
assumptions regarding applicable land use policies and the lot
configuration used in Mr. DuVall’s valuation. Mr. Cunningham
specifically opined that the North Area Plan and the 2014 LCP do not
apply to the VTTM.
3.
Peter Gutierrez
Peter Gutierrez, a California land use attorney, was qualified as
an expert in LA County land use approval procedures, the final map
permitting process in southern California, and the coastal development
permit process in southern California. 25
Mr. Gutierrez’s opening report addressed whether it was
reasonably probable that MVL could obtain approval to record a final
map reflecting the 56 lots shown on the VTTM. He opined that MVL
could satisfy the conditions necessary to record the final map before the
VTTM expired. He further opined that, although a 56-lot subdivision
would not likely have been approved in 2014 absent the VTTM,
development could proceed in substantial compliance with the policies
and ordinances in effect in 1988. With respect to the coastal
development permit, Mr. Gutierrez opined that LA County would
process the permit and could rely on its findings in the final EIR. He
estimated that obtaining the coastal development permit would take
approximately two years.
Mr. Gutierrez’s rebuttal report criticized Mr. DuVall’s application
of land use laws adopted after the VTTM. He also stated that in 1988
LA County did not require transfer development credits for coastal zone
development. At trial, however, he acknowledged that the Coastal
Commission had its own transfer development credit requirement at the
time of the donation.
4.
Thomas Erickson
Mr. Erickson, a certified land appraiser with experience
appraising property in LA County, was qualified as an expert in LA
County real estate valuation.
25 We have disregarded Mr. Gutierrez’s reports to the extent they express legal
conclusions. See Alumax Inc. & Consol. Subs. v. Commissioner, 109 T.C. 133, 171
(1997) (stating that legal conclusions are not proper expert testimony), aff’d, 165 F.3d
822 (11th Cir. 1999).
27
[*27] In his opening report, Mr. Erickson concluded that the
conservation easement was worth $27,425,000 as of the donation date.
He determined that the subject property’s highest and best use before
the donation was a 56-lot residential development under the VTTM. He
valued the subject property at $31 million before the conservation
easement and $3,575,000 after. 26 Mr. Erickson conducted both a market
approach, yielding an estimated $30 million, and an income approach,
yielding $31 million. He considered the income approach more reliable
because of the lack of close comparable sales.
5.
David Williams
David Williams, a valuation services director with Colliers
International Valuation & Advisory Service, was qualified as an expert
in real estate valuation in Southern California, including LA County.
In his opening report Mr. Williams valued the conservation
easement at $24.4 million as of the donation date. He concluded that
the subject property’s highest and best use before the donation was a 56lot residential development under the VTTM. He valued the property
at $29.8 million before the conservation easement and $5.4 million after.
Mr. Williams conducted both a market approach, yielding $30 million,
and an income approach, yielding $28.7 million. He reconciled the two
by giving greater weight to the market approach, resulting in a $29.8
million before value.
In rebuttal, Mr. Williams criticized Mr. DuVall’s assumption that
the land use laws in effect on the donation date governed the property.
Mr. Williams asserted that Mr. DuVall’s failure to account for the
development rights under the VTTM—specifically that the North Area
Plan and the 2014 LCP did not apply—led Mr. DuVall to an incorrect
highest and best use determination. This error spilled into Mr. DuVall’s
selection of comparable property sales and valuation. Mr. Williams also
challenged Mr. DuVall’s income approach assumptions, including his
growth and discount rates.
26 Respondent conceded the after value of the land and therefore, we need not
dive deeper into how the parties’ experts calculated the after value of the subject
property.
28
[*28] B.
Respondent’s Experts
1.
Daniel Cooper
Daniel Cooper, the president of an ecological consulting firm
specializing in LA County natural resources, was qualified as an expert
in conservation biology with a focus on assessing resources in the Santa
Monica Mountains since 2009. His opening report addressed only issues
that respondent has since conceded.
Mr. Cooper’s rebuttal report challenges Mr. Gutierrez’s time
estimate for securing the permits required to record the final map from
a biological perspective. He criticized Mr. Gutierrez’s estimate that
MVL could obtain a coastal development permit within two years. Mr.
Cooper states that a project of the scale contemplated by the VTTM
would be unprecedented in the Santa Monica Mountains and noted that
smaller single-family home projects in the region have taken
significantly longer, frequently requiring multiple redesigns before
approval.
Mr. Cooper further explained that, in his experience, LA County
began applying the requirements of the draft 2014 LCP to development
in the area in 2013. He also opined that LA County would likely require
a new EIR before a final map was recorded. In addition, he concluded
that LA County would not rely on the final EIR in connection with
MVL’s oak tree permitting. He estimated that obtaining an oak tree
permit for removal associated with a 56-lot subdivision would require at
least 12 months, including preparation for a new oak tree report and
submission of a new permit application.
2.
Matthew Jewett
Matthew Jewett, a land use consultant, was qualified as an expert
in land use planning and entitlement in the Santa Monica Mountains
Coastal Zone.
Mr. Jewett’s rebuttal report addressed Mr. Gutierrez’s land use
analysis for the southern portion of the property located within the
coastal zone. Mr. Jewett opined that it would be nearly impossible for
MVL to obtain a coastal development permit for that portion of the
property. He further determined that even if approval were possible,
the permitting process would far exceed Mr. Gutierrez’s two-year
estimate. Mr. Jewett also stated that the 2014 LCP would apply to
development under the VTTM as a matter of state law and was not
29
[*29] frozen in place by the VTTM. As a result, he concluded that MVL
would be required to comply with the transfer development credit
requirements; consequently, anything more than minimal development
on the southern portion would be financially infeasible. Finally, he
opined that if LA County required a new EIR before final approvals, this
alone could add at least one additional year to the process.
3.
Stuart DuVall
Stuart DuVall, a certified general real estate appraiser with
experience appraising land in California, was qualified as an expert in
real estate valuation.
In his opening report, Mr. DuVall concluded that the value of the
conservation easement was $4.65 million. He determined that the
property’s highest and best use before the donation was a 21-lot rural
residential subdivision with associated open space on the southern
portion of the property. He valued the property at $6.65 million before
the conservation easement and $2 million after. To estimate the before
value, Mr. DuVall applied both a market approach ($6.95 million) and
an income approach ($6.645 million). He assigned greater weight to the
income approach and ultimately adopted a before value of $6.65 million.
Mr. DuVall attached two appendices to his opening report. One
appendix, prepared by Brent Caldwell, a civil engineer, consisted of
handwritten calculations and unexplained Excel spreadsheets
purporting to estimate engineering costs associated with Mr. DuVall’s
alternative development map. The second appendix, prepared by Mr.
Jewett, addressed whether the VTTM complied with the 2014 LCP and
the North Area Plan. Mr. Jewett also estimated the cost to record the
final map for Mr. DuVall’s alternative development map. Both
appendices were marked as drafts. Neither was separately offered into
evidence, and neither author was cross-examined regarding the
contents. At trial, Mr. DuVall appeared unfamiliar with the underlying
work reflected in the appendices. For example, he could not explain
whether Mr. Jewett’s analysis considered the applicable law at the time
the VTTM application was deemed complete.
Mr. DuVall’s rebuttal reports addressed the appraisal reports of
Mr. Erickson and Mr. Williams. He challenged their highest and best
use conclusions, their selection of comparable property sales, and the
variables used in their respective income approaches.
30
OPINION
[*30]
I.
Burden of Proof
Generally, the Commissioner’s adjustments in an FPAA are
presumed correct, and the taxpayer bears the burden of proving them
wrong. See Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent
Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013); see also Rule
142(a)(1). The taxpayer bears the burden of proving entitlement to any
deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). Section 7491(a) provides that if, in any court proceeding, a
taxpayer introduces credible evidence with respect to any factual issue
relevant to ascertaining the taxpayer’s liability for any tax imposed by
subtitle A or B and meets other prerequisites, the Commissioner shall
have the burden of proof with respect to that issue. See Higbee v.
Commissioner, 116 T.C. 438, 440–41 (2001).
We need not decide whether the burden shifts to respondent
under section 7491 because the parties have provided sufficient evidence
to enable us to decide all issues by a preponderance of the evidence. See
Knudsen v. Commissioner, 131 T.C. 185, 189 (2008), supplementing T.C.
Memo. 2007-340. In this case we discerned no evidentiary tie on any
material issue of fact. See, e.g., id.
II.
Technical Requirements for a Charitable Contribution Deduction
Section 170(a)(1) allows a deduction for a charitable contribution.
Section 170(c) defines a charitable contribution as including a
“contribution or gift” to or for the use of a qualified charity. “The sine
qua non of a charitable contribution is a transfer of money or property
without adequate consideration.” United States v. Am. Bar Endowment,
477 U.S. 105, 118 (1986). If a transaction with a charity is structured
as a quid pro quo exchange—i.e., if the taxpayer receives property or
services equal in value to what it conveyed—there is no “contribution or
gift” within the meaning of the statute. Hernandez v. Commissioner,
490 U.S. 680, 701–02 (1989). To the extent that a taxpayer receives a
quid pro quo, a charitable contribution deduction is permitted only to
the extent that the value of the transferred property exceeds the value
of the benefits received. See Addis v. Commissioner, 374 F.3d 881, 885
(9th Cir. 2004), aff’g 118 T.C. 528 (2002).
In assessing whether a transaction constitutes a quid pro quo
exchange, we give the most weight to the external features of the
transaction to avoid imprecise inquiries into a taxpayer’s subjective
31
[*31] motivations. See Hernandez v. Commissioner, 490 U.S. at 690–91.
If a transaction is structured such that it is understood that the
taxpayer’s money or property will not pass to the charitable organization
unless the taxpayer receives a specific benefit in return—or the taxpayer
cannot receive the benefit unless it pays the required price—then the
transaction does not qualify for a deduction under section 170. Graham
v. Commissioner, 822 F.2d 844, 849 (9th Cir. 1987), aff’g 83 T.C. 575
(1984), aff’d sub nom. Hernandez v. Commissioner, 490 U.S. 680; see also
Costello v. Commissioner, T.C. Memo. 2015-87, at *27. By contrast, if
the benefit received is merely incidental to a charitable purpose, the
deduction is allowable. See McGrady v. Commissioner, T.C. Memo.
2016-233, at *25 (citing McLennan v. United States, 24 Cl. Ct. 102, 107
(1991), aff’d, 994 F.2d 839 (Fed. Cir. 1993)); see also Collman v.
Commissioner, 511 F.2d 1263, 1265–69 (9th Cir. 1975) (holding that a
taxpayer had the requisite donative intent when he donated property to
the county to widen the road even though he benefited from this activity
because widening the road was required to rezone his property), aff’g in
part, rev’g in part, and remanding T.C. Memo. 1973-93.
Respondent argues that MVL is not entitled to a charitable
contribution deduction because it received transfer development credits
as a result of the donation. As discussed above, transfer development
credits are awarded through an independent regulatory process as part
of a coastal development permit application. LA County, Cal., Code
§ 22.44.1230(F)(3)(b). Transfer development credits may be awarded for
retiring lots in the coastal zone under the 2014 LCP and are required to
record a new legal lot in the coastal zone. Id. §§ 22.44.1230(D)(2),
22.44.1230(B)(1)(a).
The external features of MVL’s conveyance do not support
respondent’s characterization of the donation as a quid pro quo
exchange. There is no evidence that MVL’s conservation easement
donation was contingent on securing transfer development credits. In
fact, the letter from the LA County Department of Regional Planning
regarding the potential for transfer development credits is dated after
the conservation easement was recorded. Cf. Triumph Mixed Use Invs.
III, LLC v. Commissioner, T.C. Memo. 2018-65, at *35–40 (determining
that there was a quid pro quo exchange when the donor expressly
negotiated with the donee for the exchange of real property for approval
of a concept plan). In any event, the letter did not guarantee that MVL
would receive transfer development credits for the conservation
easement donation. Accordingly, it cannot be said that MVL’s donation
was contingent on the receipt of the transfer development credits. See
32
[*32] Graham v. Commissioner, 822 F.2d at 849. If anything, the
possibility of transfer development credits was a mere incidental
benefit. See Collman v. Commissioner, 511 F.2d at 1265–69.
Respondent likens the transfer development credits to the
favorable land entitlements received upon the donation of a facade
easement in Seventeen Seventy Sherman Street, LLC v. Commissioner,
T.C. Memo. 2014-124. In Seventeen Seventy Sherman, we denied a
charitable contribution deduction because the taxpayer received
consideration in exchange for its donation and failed to establish the
value of that consideration. Id. at *28–32. There, the taxpayer sought
a zoning variance and entered into an agreement with a community
development organization under which the taxpayer would donate an
easement to the organization in exchange for a favorable
recommendation from the organization to the local planning board in
support of the variance. Id. at *9–10. Although the local planning board
was not required to accept the recommendation, it did so in
approximately 90% of cases. Id. at *30. We held that the donation was
a quid pro quo exchange because the recommendation would not have
been provided without the easement and the taxpayer expected the
recommendation to substantially increase the likelihood of approval. Id.
at *30–32. We have similarly denied a charitable contribution deduction
where a taxpayer treated the grant of a conservation easement to a
county “as a bargaining chip” to obtain a subdivision exemption from the
county that it initially refused to grant. Pollard v. Commissioner, T.C.
Memo. 2013-38, at *22–25.
Respondent’s comparisons put the cart before the horse. In
Seventeen Seventy Sherman and Pollard, the taxpayer’s transfer was
structured as the price of a specific benefit, and the benefit was provided
as part of an integrated arrangement involving the donee (or another
party acting in concert with the donee). Here, respondent does not
contend, nor does the record show, that MRCA provided any benefit to
MVL in exchange for the conservation easement. MRCA was not
involved in any determination to award transfer development credits,
did not offer to assist MVL in obtaining them, and did not provide any
recommendation or other advocacy to LA County. Cf. Stubbs v. United
States, 428 F.2d 885, 887–88 (9th Cir. 1970) (determining that the quid
was assistance in obtaining favorable zoning provided by the donee);
Hernandez v. Commissioner, 819 F.2d 1212, 1217 (1st Cir. 1987)
(determining that the quid was religious “auditing” services provided by
the donee), aff’d, 490 U.S. 680; Murphy v. Commissioner, 54 T.C. 249,
253 (1970) (determining that the quid was adoption services provided by
33
[*33] the donee); DeJong v. Commissioner, 36 T.C. 896, 899–900 (1961)
(determining that the quid was education services provided by the
donee), aff’d, 309 F.2d 373 (9th Cir. 1962). Nor did the Board of
Supervisors compel the donation to a donee of its choice. Cf. Triumph
Mixed Use Invs. III, LLC, T.C. Memo. 2018-65, at *35–40 (determining
that there was a quid pro quo exchange when the donor expressly
negotiated with the donee for the exchange of real property for approval
of a concept plan).
In sum, the record does not show that MVL’s conveyance was
conditioned on receiving transfer development credits. Any such benefit
was therefore not bargained for with MRCA and was not part of a quid
pro quo exchange. At most, the possibility of transfer development
credits was an incidental consequence of MVL’s donation. Accordingly,
MVL had the requisite donative intent to claim a charitable contribution
deduction.
III.
Valuation of the Easement
Having determined that MVL satisfied the threshold
requirements for a charitable contribution deduction, we now consider
the amount of the deduction to which MVL is entitled. If a taxpayer
makes a gift of property other than money, the amount of the
contribution generally equals the property’s fair market value at the
time of the gift. See Treas. Reg. § 1.170A-1(c)(1). The regulations define
fair market value as “the price at which the property would change
hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable knowledge of
relevant facts.” Id. subpara. (2).
Valuation is not a precise science. The value of property on a
given date is a question of fact to be resolved on the basis of the entire
record. See Kaplan v. Commissioner, 43 T.C. 663, 665 (1965). Because
there is rarely a substantial market for sales of easements comparable
to the donated easement, courts typically value conservation easements
indirectly using a “before and after” approach. See Ranch Springs, LLC
v. Commissioner, 164 T.C. 93, 128 (2025); Treas. Reg. § 1.170A14(h)(3)(i). Under that approach, the value of an easement equals the
fair market value of the property immediately before the easement was
granted (before value) minus the fair market value of the property as
encumbered by the easement (after value). Browning v. Commissioner,
109 T.C. 303, 320–24 (1997). Treasury Regulation § 1.170A-14(h)(3)(i)
provides that, where a donor grants a perpetual conservation restriction
34
[*34] covering only a portion of the contiguous property owned by the
donor, the fair market value of the restriction is the difference between
the fair market value of the entire contiguous parcel before and after the
restriction is granted. Both parties apply this rule and value the
conservation easement with reference to the 316.27-acre subject
property. We will do the same.
The parties rely on several experts to value the easement. We
evaluate an expert’s opinion in the light of the expert’s qualifications
and the evidence in the record. See Helvering v. Nat’l Grocery Co., 304
U.S. 282, 295 (1938); Estate of Mellinger v. Commissioner, 112 T.C. 26,
39 (1999). The persuasiveness of an expert’s opinion depends largely on
the facts and assumptions on which it is based. Estate of Davis v.
Commissioner, 110 T.C. 530, 538 (1998). We are not bound to accept an
expert’s opinion in whole or in part and may accept those portions we
find reliable. Helvering v. Nat’l Grocery Co., 304 U.S. at 295; Estate of
Hall v. Commissioner, 92 T.C. 312, 338 (1989). We also “may determine
fair market value on the basis of our own examination of the evidence in
the record.” Savannah Shoals, LLC v. Commissioner, T.C. Memo. 202435, at *35, aff’d, No. 24-12661, 2026 WL 2056291 (11th Cir. July 16,
2026); see also Jackson Crossroads, LLC v. Commissioner, T.C. Memo.
2024-111, at *35, aff’d, Nos. 25-10744, et al., 2026 WL 822261 (11th Cir.
Mar. 25, 2026); Buckelew Farm, LLC v. Commissioner, T.C. Memo.
2024-52, at *51, aff’d, No. 24-13268, 2025 WL 2502669 (11th Cir. Sep. 2,
2025).
A.
“Before Value” of the Subject Property
1.
Prior Transactions Involving the Subject Property
The best evidence of a property’s fair market value is the price at
which it changed hands in an arm’s-length transaction reasonably close
in time to the valuation date. Ranch Springs, 164 T.C. at 128–29. Prior
sales of the subject property therefore may be highly probative. In
addition, we have held that the purchase of a partnership interest may
provide useful evidence of value where the interest acquired is nearly
100% and the partnership’s only asset is the subject property. Buckelew
Farm, T.C. Memo. 2024-52, at *56; see also Oconee Landing Prop., LLC
v. Commissioner, T.C. Memo. 2024-25, at *71–72, supplemented by T.C.
Memo. 2024-73.
Respondent points to two transactions as evidence of the subject
property’s fair market value before the conservation easement donation:
35
[*35] (1) the 2013 transfer of the subject property from Mr. Levin to
Diamond West Realty, Inc., for $1.5 million and (2) Mr. Hankey’s 2014
purchase of a 75% interest in MVL for $3.55 million. We are not
persuaded that either transaction provides reliable evidence of fair
market value because both were intertwined with preexisting
relationships and other business dealings.
a.
2013 Transfer from Mr. Levin to Diamond
West Realty, Inc.
The 2013 sale occurred in the context of a longstanding personal
and financial relationship between Mr. Levin and Brian. Mr. Levin and
Brian’s decades-long friendship appears to have animated their
business dealings, particularly when it came to the VTTM. Time and
time again—even after Brian had previously defaulted on loans—Mr.
Levin stood ready to lend Brian money to preserve the VTTM’s
development rights, often without seeking additional collateral. The
record reflects that Mr. Levin repeatedly provided Brian and his father
financing over the years to preserve the development rights associated
with the VTTM, including loans ranging from $100,000 to $4 million.
The mixing of business and friendship was not one sided on the part of
Mr. Levin. After the equestrian center burned down, Brian stood by Mr.
Levin’s side during a years-long regulatory battle to rebuild it. This
history indicates that their dealings were not purely market driven.
The circumstances of the 2013 sale likewise do not reflect an
arm’s-length transaction. Mr. Levin did not list the property, solicit
other buyers, or otherwise test the market. Instead, he sold the property
directly to Brian’s entity at a price that, on this record, appears
substantially below market. In fact, even the comparable large tract
sales offered by respondent—of tracts which are significantly inferior to
the subject property—would suggest a much higher value for the subject
property. Mr. Levin credibly explained that, after a difficult divorce, he
sought to simplify his life, divest certain holdings, and focus on raising
his daughter. He was satisfied with the wealth he had already
accumulated. We find that explanation credible, and it reinforces the
conclusion that the sale price reflected personal considerations rather
than market forces.
Respondent argues that Mr. Levin’s earlier decision to take the
property back in 2009 by deed in lieu of foreclosure shows that Mr. Levin
separated friendship from business. We disagree. That episode does not
negate the evidence that, by 2013, Mr. Levin’s priorities had shifted and
36
[*36] that the sale was motivated in substantial part by personal
considerations.
Respondent also argues that Mr. Levin’s retention of the
equestrian center until 2022 undermines his testimony that he wished
to divest his California real estate interests. We are not persuaded. The
record shows that the equestrian center and the subject property were
treated as distinct assets, particularly because the VTTM did not confer
any entitlements on the equestrian center. Mr. Levin credibly testified
that he viewed them as separate properties, and his decision to retain
one does not materially undermine his testimony regarding the other.
On this record, we find that the 2013 sale price was materially
influenced by personal considerations and was not the product of arm’slength bargaining. We therefore give it little weight in determining the
subject property’s fair market value.
b.
2014 Purchase of 75% of MVL
We likewise are not persuaded that Mr. Hankey’s 2014 purchase
of a 75% interest in MVL for $3.55 million reliably reflects the subject
property’s before value. The record indicates that the transaction
occurred against a backdrop of personal relationships and intense
financial pressure. By the time of this transaction, Brian found himself
once again in a financial pinch: The Levin notes were coming due soon
and Brian felt a personal obligation to repay his longtime friend. He did
not have the financial resources to repay the loans himself or through
his development entities. Nor could Brian rely on third-party financing
as apparent from his failed attempts to secure funding to satisfy the
German American Bank obligation.
Brian’s only remaining reliable option to repay the Levin notes
was Mr. Hankey, but as before, his capital came with a condition.
Through riding on the subject property with Brian, Mr. Hankey came to
appreciate the recreational value of the property. Mr. Hankey credibly
testified that he valued the ability to ride horses on the land and enjoy
it as an extension of his nearby residence, and that his personal benefit
outweighed potential development profit. Consequently, he conditioned
his financing on the preservation of his personal enjoyment in the
property. Faced with the pressure of satisfying the Levin notes, Brian
had no alternative but to accept Mr. Hankey’s terms. Therefore, this
price reflects idiosyncratic motivations and financial pressure rather
37
[*37] than market value and explains the discrepancy between the
partnership purchase price and the valuation supported by the record.
In addition, this transaction involved a significantly lower
ownership interest than we have previously used as a proxy for the value
of land in other cases and is further complicated by the indebtedness
secured by the property. See, e.g., Seabrook Prop., LLC v. Commissioner,
T.C. Memo. 2025-6, at *67 (using a sale of a 99% partnership interest as
evidence of fair market value of a property); J L Mins., LLC v.
Commissioner, T.C. Memo. 2024-93, at *57 (using a sale of a 98%
partnership interest as evidence of fair market value of a property);
Oconee Landing Prop., T.C. Memo. 2024-25, at *71–72 (using a sale of a
97% partnership interest as evidence of fair market value of a property).
As the ownership percentage falls below 100%, the purchase price
becomes less directly comparable to the value of the underlying real
estate because marketability and control considerations can materially
affect the value of the interest acquired. See Astleford v. Commissioner,
T.C. Memo. 2008-128, slip op. at 19–20 (applying a lack-of-marketability
discount and a lack-of-control discount to the sale of a limited
partnership interest); Estate of McCormick v. Commissioner, T.C.
Memo. 1995-371 (applying a lack of marketability and control discounts
to a limited partner interest).
Accordingly, we give the 2014
partnership-interest transaction little weight as evidence of the subject
property’s before value.
2.
Other Valuation Methods
In the absence of reliable arm’s-length transactions involving the
subject property, courts typically consider one or more accepted
valuation approaches to determine fair market value: (1) the market
approach, (2) the income approach, and (3) an asset-based approach. 27
See Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff’d in
part, vacated in part, and remanded on another issue sub nom.
JPMorgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006).
The usefulness of any approach depends on the nature of the property
and the facts of the case. See Chapman Glen Ltd. v. Commissioner, 140
T.C. 294, 325–26 (2013).
Under the market approach, an appraiser estimates fair market
value by reference to arm’s-length sales of comparable properties
27 Neither party uses the asset-based approach to value the easement. We
agree that the asset-based approach is not appropriate.
38
[*38] occurring reasonably close in time to the valuation date. See id.
at 326. Because no two properties are identical, the appraiser must
make adjustments to account for differences such as size, location,
development potential, and conditions of sale. Wolfsen Land & Cattle
Co. v. Commissioner, 72 T.C. 1, 19 (1979). The reliability of a
comparable property sales analysis depends on the comparability of the
selected properties and the reasonableness of the adjustments made. Id.
at 19–20.
Under the income approach, an appraiser estimates fair market
value by discounting to present value the expected future cashflows that
the property would generate. See, e.g., Chapman Glen Ltd., 140 T.C. at
327; Marine v. Commissioner, 92 T.C. 958, 983 (1989), aff’d, 921 F.2d
280 (9th Cir. 1991) (unpublished table decision). This approach is most
reliable where the projections rest on a credible foundation, including
market data and supportable assumptions about cost, timing, and risk.
Ranch Springs, 164 T.C. at 151; Excelsior Aggregates, LLC v.
Commissioner, T.C. Memo. 2024-60, at *33.
Both approaches must be applied in a manner consistent with the
property’s highest and best use. See Mitchell v. United States, 267 U.S.
341, 344–45 (1925); Stanley Works & Subs. v. Commissioner, 87 T.C.
389, 400 (1986); Treas. Reg. § 1.170A-14(h)(3)(ii). A property’s highest
and best use is the most profitable use that is legally permissible,
physically possible, financially feasible, and maximally productive.
Olson v. United States, 292 U.S. 246, 255 (1934); Symington v.
Commissioner, 87 T.C. 892, 897 (1986). The highest and best use is
presumed to be the property’s current use absent proof to the contrary.
Mountanos v. Commissioner, T.C. Memo. 2013-138, at *7, supplemented
by T.C. Memo. 2014-38, aff’d, 651 F. App’x 592 (9th Cir. 2016); Esgar
Corp. v. Commissioner, T.C. Memo. 2012-35, slip op. at 20, aff’d, 744
F.3d 648 (10th Cir. 2014). If a proposed highest and best use differs
from the current use, it must be reasonably probable and not
speculative. Hilborn v. Commissioner, 85 T.C. 677, 689 (1985).
The experts on both sides agree that the highest and best use of
the subject property is residential subdivision development. Each side
also relies upon both the market and the income approach. While we
agree that both approaches are relevant to determine the value of the
subject property before the easement, each side’s application falls short
of the finish line.
39
[*39] Petitioner’s experts assumed that the entire subject property
could be developed without meaningful constraints from the North Area
Plan and the 2014 LCP. Respondent’s expert Mr. DuVall adopted the
opposite assumption: The VTTM conferred no meaningful development
entitlements. These competing assumptions materially affect both the
number and the character of the lots that could be developed and
substantially reduce the reliability of each expert’s comparable property
sales analysis and cashflow projections.
As discussed infra, the subject property does not fit either
extreme.
The VTTM likely preserves preexisting development
standards for the northern portion, while development in the southern
portion remains tightly constrained by the 2014 LCP. Because different
regulatory regimes govern different portions of the property, and
because neither side offered reliable comparables capturing this
patchwork, we cannot reliably value the property as a single
undifferentiated whole.
Accordingly, the most reliable method on this record is to value
the subject property as the sum of its parts. We therefore determine the
fair market value of the northern and southern portions separately—
considering both the market and income approaches for each portion—
and then add the resulting values. See Champions Retreat Golf
Founders, LLC v. Commissioner, T.C. Memo. 2022-106, at *41
(determining the fair market value of a property by first determining
the value of different portions of the property that had varying highest
and best uses), supplementing T.C. Memo. 2018-146.
3.
Northern Portion
The northern portion lies north of the coastal zone boundary and
is highlighted below on the relevant portion of the VTTM:
40
[*40]
a.
Highest and Best Use
As noted above, a property’s highest and best use must be
(1) legally permissible, (2) physically possible, (3) financially feasible,
and (4) maximally productive. Buckelew Farm, T.C. Memo. 2024-52, at
*52. Both parties agree that the highest and best use of the northern
portion is residential subdivision development. Petitioner contends that
22 lots may be developed in their entirety in the northern portion.
Respondent contends that 21 lots may be developed in the northern
portion. Comparing petitioner’s 22 lots to respondent’s 21 lots, the
dispute is not primarily over density, but over lot configuration—an
issue driven by which development standards apply.
i.
Parties’ Lot Configurations
Petitioner’s proposed lots generally track the VTTM, placing lots
and building pads on ridge tops and other premium locations. Petitioner
acknowledges that this configuration would not comply with the
development ordinances in effect by 2014 but contends that the VTTM
vests the development standards in place when the map was deemed
complete in 1988. Petitioner’s expert Mr. Cunningham testified that the
differences between petitioner’s proposed map and the VTTM are minor
and remain in substantial compliance with the VTTM.
Respondent’s expert Mr. DuVall prepared an alternative plat map
that relocates lots and building pads to conform to the development
standards applicable in 2014. Respondent does not dispute the physical
possibility or financial feasibility of petitioner’s proposed subdivision in
41
[*41] the northern portion; the dispute concerns the legal permissibility
of petitioner’s lot configuration.
ii.
Effect of North Area Plan on VTTM
By 2014 the laws around development in the North Area had
changed dramatically from the time when Charles obtained the VTTM.
The stricter North Area Plan, rather than the 1981 Interim Area Plan,
governed development in the North Area. Given these changes, we must
determine whether development of the northern portion is governed by
the standards in effect when the VTTM was deemed complete in 1988 or
by the standards later adopted under the North Area Plan. This issue
determines the legal permissibility of each party’s proposed subdivision.
The answer follows from the vesting provisions applicable to the
VTTM. A vesting tentative tract map generally confers the right to
proceed in substantial compliance with the ordinances, policies, and
standards in effect when the local agency deemed the application
complete. Cal. Gov’t Code §§ 66498.1(b) and (c). The local ordinances,
policies, and standards in effect at the time the VTTM was deemed
complete were the 1981 Interim Area Plan and its implementing
ordinances. Respondent makes no persuasive argument that the VTTM
failed to vest the 1988 development standards for the northern portion.
We therefore conclude that the VTTM locked in the application of the
1981 Interim Area Plan and the implementing ordinances in effect when
the VTTM application was complete. The later passage of the North
Area Plan and corresponding implementing zoning ordinances did not
affect the vested rights.
Whether the VTTM complied with those standards was
determined by LA County in 1988 when it certified the final EIR and
approved the map. LA County found that the VTTM complied with the
applicable ordinances, policies, and standards, and that environmental
impacts were mitigated to less-than-significant levels. We see no reason
to second guess LA County’s determination. Accordingly, development
of the northern portion may proceed in substantial compliance with the
VTTM.
iii.
“Substantial Compliance” with VTTM
The remaining issue is whether petitioner’s proposed lot
configuration is in “substantial compliance” with the VTTM.
Petitioner’s proposed map is reproduced below; our discussion focuses
on the shaded northern portion:
42
[*42]
Whether this map is in substantial compliance with the VTTM is
ultimately determined through LA County’s subdivision approval
process. See Cal. Gov’t Code § 66474.1; see also Youngblood v. Bd. of
Supervisors, 586 P.2d 556, 562 (Cal. 1978) (“Approval of the final map
thus becomes a ministerial act once the appropriate officials certify that
it is in substantial compliance with the previously approved tentative
map.”). For valuation purposes, however, the relevant question is
whether development in substantial compliance with the VTTM was
reasonably probable as of the donation date. The record does not supply
a bright-line definition of “substantial compliance” in this context, and
the inquiry is necessarily fact dependent. We therefore look at the
evidence, including testimony from professionals experienced in LA
County subdivision practice.
Petitioner’s engineering expert, Mr. Cunningham, opined that the
lot configuration set forth in his expert report is in substantial
compliance with the VTTM. Respondent does not meaningfully dispute
that opinion. Mr. Cunningham’s proposed lot layout is nearly identical
to that set forth in the VTTM, and the differences appear only minor,
including slight lot-line adjustments to lot 64 and 65 to remove them
entirely from the coastal zone. On this record, we find it reasonably
probable that petitioner’s lot configurations in the northern portion
could be developed in substantial compliance with the VTTM.
Accordingly, development of the northern portion in accordance
with the VTTM is legally permissible, physically possible, financially
feasible, and maximally productive. We conclude that the highest and
best use of the northern portion is a 22-lot large lot subdivision
consistent with the VTTM. With that conclusion in mind, we turn to the
valuation approaches.
43
[*43]
b.
Market Approach
The market approach estimates fair market value by comparing
the subject property to similar properties sold in arm’s-length
transactions reasonably close in time to the valuation date. Savannah
Shoals, T.C. Memo. 2024-35, at *36. This approach is often the most
reliable indicator of value when there is sufficient market data for
comparable properties.
See Whitehouse Hotel Ltd. P’ship v.
Commissioner, 139 T.C. 304, 324–25 (2012) (holding that other
valuation methods are “not favored if comparable-sales data are
available”), supplementing 131 T.C. 112 (2008), aff’d in part, vacated in
part and remanded, 755 F.3d 236 (5th Cir. 2014); Estate of Rabe v.
Commissioner, T.C. Memo. 1975-26, 1975 Tax Ct. Memo LEXIS 348,
at *11 (“In the case of vacant, unimproved property the ‘market data’ or
‘comparable sales’ approach is generally the most reliable method of
valuation, the rationale being that the marketplace is the best indicator
of value, based on the conflicting interests of many buyers and sellers.”),
aff’d, 566 F.2d 1183 (9th Cir. 1977) (unpublished table decision). The
parties offered the opinion of three experts to assist in our market
analysis. As applied to the northern portion, however, the market
approach suffers from fundamental limitations that materially reduce
its reliability.
The principal value-driving attribute of the northern portion is
the VTTM. The VTTM is significant because it predates the adoption of
the North Area Plan and therefore preserves development rights that
are materially more favorable than those available for most large tracts
in the area by the donation date. Properties with comparable vested
subdivision rights are rare. A report from the Department of Regional
Planning indicates that only a limited number of vesting tentative tract
maps remained active for large-lot subdivision development in the
region, and even fewer predate the North Area Plan. This unusual
feature complicates the application of the market approach, which rests
on the principle of substitution.
None of the experts identified a sale that closely resembled the
hypothetical sale of the northern portion as of the donation date. The
only expert who offered a sale involving properties entitled under a
vesting tentative tract map was Mr. Williams. But the record lacks
sufficient information to evaluate whether the vesting rights in that
transaction were comparable to those conferred by the VTTM. For
example, the report does not identify when the vesting tentative tract
44
[*44] map was approved, which prevents us from assessing whether it
likewise predates the North Area Plan.
Moreover, the purported comparable properties involved
materially different development rights. It contemplated approximately
314 single-family residences on lots ranging from 5,000 square feet to
0.5 acre—an intensity of development far exceeding that contemplated
in the northern portion. Without reliable evidence to quantify how
differences in density, lot size, and resulting end-product values would
affect price, we would be left to speculation in attempting to adjust that
sale to the subject property.
We do not require perfectly comparable properties. But we do
require sufficient market evidence to make reasoned and supportable
adjustments. Wolfsen Land & Cattle Co., 72 T.C. at 19. Here, the
experts did not provide a reliable basis to adjust the proffered sales to
account for the VTTM’s unique development entitlements and the
substantial differences in density and lot characteristics. Accordingly,
we give little weight to the market approach in valuing the northern
portion. See Champions Retreat Golf Founders, T.C. Memo. 2022-106,
at *28–29 (rejecting the market approach when the record lacked
information sufficient to “determine whether the lots sold were
comparable, how they might have been similar or different, and whether
(or what) adjustments were necessary to make those lots comparable to
the property at issue in this case”); Glade Creek Partners, LLC v.
Commissioner, T.C. Memo. 2020-148, at *37–40 (rejecting the market
approach when the experts provided poor comparable properties and
failed to provide reliable adjustments to account for differences in the
properties), supplemented by T.C. Memo. 2023-82, aff’d in part, vacated
in part, and remanded, No. 21-11251, 2022 WL 3582113 (11th Cir. Aug.
22, 2022); Estate of Wineman v. Commissioner, T.C. Memo. 2000-193,
slip op. at 29–30 (rejecting an expert’s valuation approach because it was
“far too conclusory,” suffered “generally from a dearth of data,” and
“lack[ed] an adjustment grid” that would enable the Court to analyze
the sale of comparable properties).
c.
Income Approach
The income approach estimates the fair market value of property
by discounting to present value the future cashflows the property is
expected to generate. See Chapman Glen Ltd., 140 T.C. at 327; Marine,
92 T.C. at 983; Champions Retreat Golf Founders, T.C. Memo. 2022-106,
at *21. For undeveloped land intended for subdivision, appraisers
45
[*45] commonly apply a variation of the income approach known as the
subdivision development method.
See Champions Retreat Golf
Founders, T.C. Memo. 2022-106, at *22; Crimi v. Commissioner, T.C.
Memo. 2013-51, at *64–65. That method values raw land by modeling
the property as if it were subdivided, improved, and sold as finished lots
over an absorption period. Champions Retreat Golf Founders, T.C.
Memo. 2022-106, at *22; Crimi, T.C. Memo. 2013-51, at *64–65.
The subdivision development method generally requires the
following inputs: (1) the number of finished lots; (2) the projected retail
value of each finished lot, derived from comparable lot sales; (3) the
development and absorption schedule; (4) direct and indirect
development costs, including permitting and infrastructure; and (5) a
market-derived discount rate to convert net proceeds to present value.
See Crimi, T.C. Memo. 2013-51, at *64–65 n.28 (citing Appraisal
Institute, The Appraisal of Real Estate 370–76 (13th ed. 2008)).
Depending on the circumstances, the model may also include
appropriate adjustments for marketability and development risk. See
id.
We have observed that the income approach is often most reliable
when applied to an existing income-producing business with a track
record of revenues and expenses. See Ranch Springs, 164 T.C. at 151.
When applied to vacant land, the approach can be highly sensitive to
assumptions, and unsupported projections have undermined income
analyses in many conservation easement cases. See, e.g., Savannah
Shoals, T.C. Memo. 2024-35, at *36 (“Income valuation methods are not
favored when valuing vacant land with no income-producing history
because they are inherently speculative and unreliable.”). For that
reason, we must carefully examine the plausibility of the critical
assumptions underlying the model. See Ranch Springs, 164 T.C. at 151;
Kiva Dunes Conservation, LLC v. Commissioner, T.C. Memo. 2009-145,
slip op. at 10–11.
This case presents unusual features that support consideration of
the subdivision development method. Both parties’ experts applied the
method, and respondent defended its use on brief. More importantly,
the key income and expense variables are grounded in real-world
development experience. Although the northern portion itself had not
been developed as of the valuation date, Brian and his entities had
development experience with the VTTM, including construction of
finished lots and homes west of Stokes Canyon Road on terrain with
similar hillside constraints. The cost estimates relied upon by petitioner
46
[*46] were also supported by Mr. Cunningham, who worked directly on
development of the VTTM and other projects in the region. In addition,
after the valuation date, the subject property was further developed into
finished and recorded lots, providing additional real-world context for
development costs and timing. Cf. Ranch Springs, 164 T.C. at 151–53
(criticizing the income method when the experts had to estimate income
and expenses without any basis in reality); Seabrook Prop., T.C. Memo.
2025-6, at *66 (rejecting cost estimates that left “ample room to doubt
the costs”).
The revenue side of the model is likewise more supportable than
in many cases. The experts agree that comparable sales of large
undeveloped tracts with similar highest and best use are scarce in the
area, particularly given the VTTM’s unique vesting characteristics.
Nevertheless, the experts were able to identify sales of finished lots that
more closely resemble the lots contemplated for the northern portion
(northern portion lots). Those finished-lot comparables provide a firmer
basis for estimating retail lot values than the sales of large, unentitled
tracts.
Finally, the income approach is more manageable here because
the development and absorption period is relatively short. The experts’
models do not require projecting costs and revenues decades into the
future; as discussed below, the relevant period is approximately four
years. The parties also agree that most development costs can be
modeled on a per-lot basis, which allows us to adopt reliable components
of each model and adjust them to reflect our findings regarding
permissible lot yield.
For these reasons, we consider the income approach, using the
subdivision development method, to determine the fair market value of
the northern portion. We therefore turn to the specific variables used in
the parties’ models.
i.
Number and Character of Lots
As discussed in our highest and best use analysis, development of
the northern portion may proceed in substantial compliance with the
VTTM as drawn by Mr. Cunningham. We therefore use 22 lots as the
lot-yield input in our income approach. Mr. Cunningham’s plan—and
the VTTM—contemplate a gated subdivision. Other than the gate, no
community amenities are included in the subdivision design.
47
[*47]
ii.
The Value of Each Lot
Having determined that 22 ridgeline and otherwise desirable lots
are feasible on the northern portion, we turn to the value of each finished
lot. 28
a)
Mr. Erickson’s Comparable Lot
Sales
Petitioner’s expert Mr. Erickson relied on sales of finished lots in
three nearby communities that he considered comparable to the lots
contemplated for the northern portion: (1) The Estates at the Oaks of
Calabasas (The Estates), (2) Hidden Hills, and (3) County Ridge.
The Estates is a gated enclave within the larger Oaks of
Calabasas development, approximately three to four miles north of the
subject property. It consists of 55 homes on large lots and sits
approximately 250 to 400 feet higher in elevation than the subject
property. The Estates includes such substantial amenities as a
clubhouse, a pool, tennis courts, and a gym, as well as convenient access
to Ventura Freeway and nearby retail.
•
Estates 1 (April 2014): 1.72-acre vacant finished lot; 1-acre
(43,560 sf) building pad; panoramic hilltop views; sold for $2.675
million ($61/sf of building pad).
•
Estates 2 (July 2013): 1.63-acre vacant finished lot; 1-acre (43,560
sf) building pad; panoramic hilltop views; sold for $2.6 million
($60/sf of building pad).
•
Estates 3 (August 2013): 1.75-acre vacant finished lot; 0.95-acre
(41,382 sf) building pad; panoramic hilltop views; sold for $2.6
million ($63/sf of building pad).
•
Estates 4 (April 2013): 0.83-acre vacant finished lot; building pad
took up the entire lot; interior location with partial mountain
view; sold for $1.85 million ($51/sf of building pad).
Hidden Hills is a gated community of more than 300 homes,
roughly five to six miles north of the subject property, with an
28 The experts based their income approach on all the lots in their proposed
subdivision. We have renumbered the comparable lots continuously for added clarity
in our analysis.
48
[*48] equestrian focus. It offers extensive amenities, including three
equestrian arenas, tennis courts, a pool, a recreation center, and a movie
theater.
•
Hidden Hills 1 (December 2013): 1.55-acre vacant finished lot;
1.1-acre (47,916 sf) building pad; good valley/mountain views;
sold for $3.25 million ($68/sf of building pad).
•
Hidden Hills 2 (December 2013): 1.98-acre vacant finished lot;
1.25-acre (54,450 sf) building pad; good valley/mountain views;
sold for $3.75 million ($69/sf of building pad).
•
Hidden Hills 3 (October 2013): 1.03-acre vacant finished lot;
building pad comprised the entire lot; no view; sold for $1.925
million ($43/sf of building pad).
•
Hidden Hills 4 (July 2012): 7.07-acre vacant finished lot; 3.53acre (153,767 sf) building pad; sold for $3.55 million ($23/sf of
building pad).
County Ridge is a small nine-lot subdivision just north of the
subject property on Stokes Canyon Road. It is not gated, offers no
amenities, and comprises lower-value homes.
•
Subdivision 1 (January 2014): 5.24-acre partially graded vacant
lot; 0.7-acre (30,492 sf) building pad; no paved access; not on a
ridgeline; sold for $850,000 ($28/sf of building pad). 29
Mr. Erickson compared these sales to the lots contemplated for
the northern portion, evaluating factors including amenities, views,
topography, building-pad size, and development synergy. He classified
most sales in The Estates and Hidden Hills as superior, primarily
because of their amenity packages and established community
character. He treated Hidden Hills 4 as similar on the theory that its
unusually large size captured reverse economies of scale. He classified
Subdivision 1 as inferior because it lacked a guarded gate and was
associated with lower value homes.
On the basis of this set of sales and his qualitative adjustments,
Mr. Erickson concluded that the northern portion lots should be valued
above $28 per square foot of building pad (Subdivision 1) and below the
29 Mr. DuVall opined that this sale price should be adjusted upward to
$1 million to account for market trends.
49
[*49] amenity-rich sales in The Estates and Hidden Hills. He then
grouped the 56 VTTM lots into clusters based on acreage and building
pad size, and he then priced them primarily as a function of buildingpad area. He valued lots between $30 and $40 per square foot of building
pad but did not explain how he selected a particular figure within that
range for any given cluster. For the largest lots, he applied $30 per
square foot to the building pad area and then assigned the remaining
acreage a value of $10,000 per acre, again without clearly explaining the
basis for that residual acreage value. Using this methodology, Mr.
Erickson derived an average lot value of $1,890,803.
b)
Mr. Williams’s Comparable Lot
Sales
Petitioner’s expert Mr. Williams relied on four finished lot sales
drawn from a wider geographic area.
•
Subdivision 2 (April 2015): 1.15-acre vacant finished lot with a
net acreage30 of 0.5 acre; sold for $1.47 million. The lot was in
Malibu Park, a luxury coastal community approximately 9.3
miles southwest of the subject property within the coastal zone.
It had mountain and ocean views and included an active building
permit and architectural plans for a 6,700-square-foot residence.
•
Subdivision 3 (July 2014): 1.91-acre lot with an approximately
0.49-acre (21,344 sf) developable flat pad; sold for $1.175 million.
The property was in San Diego, approximately 114.8 miles
southeast of the subject property.
•
Subdivision 4 (October 2013): 3.02-acre vacant finished lot with
approximately 1.02 acres of net developable area; sold for $1.28
million. The lot was approximately 8.3 miles southwest of the
subject property and had ocean views. It was also subject to a
partial trail easement on the southern end.
•
Subdivision 5 (July 2013): 2.07-acre vacant finished lot with
approximately 0.44 acre of net developable area; sold for $1.33
million. The lot was in the gated Country Estate subdivision
approximately 51 miles east of the subject property in San Diego
County.
30 It is unclear from Mr. Williams’s report whether net acreage refers to the
building pad size.
50
[*50] Mr. Williams compared these lots to the northern portion lots,
considering lot size, views, neighborhood characteristics, location, and
market conditions. He performed a qualitative ranking of each lot and
sale as superior, similar, or inferior and then derived a per-lot value for
the northern portion lots.
He treated Subdivision 2 as slightly superior because it had ocean
views and active building permits, though he considered its smaller size
to be an offsetting factor. Mr. Williams treated Subdivision 4 and
Subdivision 5 as similar to the northern portion lots, reasoning that
their superior views and gated settings were offset by inferior location,
market conditions, and lot characteristics. These sales bracketed his
indicated per-lot value between $1.28 million (Subdivision 4) and $1.33
million (Subdivision 2). On the basis of this set of sales, Mr. Williams
concluded that the northern portion lots should be valued at $1.3 million
per lot.
c)
Mr. Hewlett’s Comparable Lot
Sales
Rounding out petitioner’s experts, Mr. Hewlett likewise identified
sales he considered relevant to finished-lot pricing. Unlike the
remaining experts, Mr. Hewlett does not offer an appraisal report.
Consequently, we will not rely on the sales he identified in our market
analysis. Instead, his report focuses on quantifying the effects of various
qualities of the comparable property sales, including appreciation due to
the passage of time, effect of ZIP Code on prices, and the effect of size on
the price per acre.
d)
Mr. DuVall’s Comparable Lot
Sales
Respondent’s expert Mr. DuVall searched for sales of finished lots
in 2013 and 2014 and identified ten transactions, including
Subdivision 1, which we discussed supra.
i)
Large Tract Transaction
Mr. DuVall also relied on a bulk tract transaction involving
approximately 67 acres about 0.7 miles north of the subject property.
The tract had entitlements for seven single-family residences. Dry
utilities were available from the street, and rough grading of the
building pads had been completed.
51
[*51] In June 2013 the tract owner (a real estate company) entered a
joint venture with the buyer (a homebuilder). The buyer acquired the
tract and borrowed development funds from the tract owner. The
parties agreed to an average price of $656,000 per finished lot and
estimated lot-finishing costs of $177,000 per lot. On the basis of these
terms, Mr. Duvall inferred a tract value of approximately $3.35 million
after accounting for the parties’ cost estimates. In another portion of
the record, Mr. Williams also referenced this transaction and calculated
a purchase price of $4.6 million, though he did not disclose his
methodology.
ii)
Individual Lot Sales
•
Subdivision 6 (January 2014): 25.26-acre vacant finished lot
approximately four miles southeast of the subject property; sold
for $1 million. The lot had two graded building pads (1 acre
(43,560 sf) and 0.5 acre (21,780 sf)). Mr. DuVall calculated a
combined price of approximately $15 per square foot of building
pad. The property included a meadow in the southern portion and
steep sloping hills/mountains in the northern portion. It was in
the coastal zone.
•
Subdivision 7 (December 2013): 24.5-acre vacant finished lot with
a 1.5-acre (65,340 sf) graded building pad on top of a knoll; sold
for $1.25 million ($19/sf of building pad). The lot was in The
Reserve at Lobo Canyon, approximately 6.5 miles west of the
subject property, and was subject to the North Area Plan. At the
time of sale it had approved plans for a large house, a guest house,
and a six-car garage.
•
Subdivision 8 (April 2014): 16.5-acre unfinished lot; sold for
$600,000. The lot was subject to the North Area Plan.
•
Subdivision 9 (May 2014): 10.3-acre vacant unfinished lot; sold for
$450,000. It included an approximately 0.25-acre (10,890 sf)
building pad and was adjacent to the VTTM area west of Stokes
Canyon Road. The lot was primarily hillside.
•
Subdivision 10 (February 2014): 10.3-acre finished lot in the
Abercrombie Estates subdivision; approximately 1-acre (43,560
sf) building pad; sold for $1.25 million ($29/sf of building pad).
The lot was approximately three miles west of the subject
property in the coastal zone. At the time of sale the Coastal
Commission had approved plans for an 8,000-square-foot
52
[*52] residence. A stream on the lot separated the building pad from
hillside terrain. The building pad had uphill views.
•
Subdivision 11 (March 2014): 5.4-acre semifinished vacant lot in
Palo Comado Estates, an equestrian-oriented community; sold for
$1.35 million. The property consisted of two legal lots that
together were restricted to one single-family residence under a
conditional use permit.
It was approximately five miles
northwest of the subject property in Agoura Hills. The lot
included a large, level building area, a stream, oak woodland, and
hillside terrain. The rear quarter of the lot was deed restricted
as open space.
•
Subdivision 12 (May 2014): 4.25-acre lot consisting of two
contiguous tracts; sold for $882,000. The parties allocated
$332,000 to a 1.57-acre tract with a 0.3-acre (13,068 sf) building
pad and $550,000 to a 2.68-acre tract with a 0.75-acre (32,670 sf)
building pad. Together these lots sold for $19/sf of building pad.
These lots were not finished.
•
Subdivision 13 (March 2013): 3.5-acre finished lot with an
approximately 2-acre (87,120 sf) graded building pad in the
Vintage at Hidden Park subdivision; sold for $725,000 ($8/sf of
building pad). 31 The lot was approximately 4.5 miles west of the
subject property in the Santa Monica Mountains, was subject to
the North Area Plan, and had panoramic views of Malibu Creek.
For these transactions, Mr. DuVall emphasized the sales of
finished and mostly finished lots. He gave the greatest weight to
Subdivision 1 and Subdivision 10. He considered Subdivision 10
superior because it had a large, level building pad. On the basis of this
analysis, Mr. DuVall concluded that the northern portion lots should be
valued at $1.1 million per lot.
e)
Our Analysis
The record describes numerous lot sales offered by the parties as
evidence of the value of the northern portion lots. We must determine
which sales provide the most reliable guidance.
31 Mr. DuVall applied a 20% upward adjustment for the value of this lot to
account for market trend.
53
[*53] Under Mr. Cunningham’s design, the 22 lots on the northern
portion average 8.7 acres in gross area with an average building pad of
approximately 1.02 acres (43,996 sf). 32 These lots are generally larger
than the lots emphasized by petitioner’s experts and smaller than
several lots emphasized by respondent’s expert. None of the appraisal
experts provided consistent quantitative adjustments that would allow
us to reconcile the comparable sales to the subject lots with precision.
The testimony nevertheless supports several valuation principles that
guide our analysis.
First, the experts generally agree that larger lots tend to sell for
less on a per-acre basis than smaller lots—a phenomenon often
described as reverse economies of scale.
The principle reflects
diminishing marginal utility: Once a buyer has sufficient land to
accommodate a residence and desired privacy, additional acreage
typically contributes less to value than the first acre or two. This
concept is well established in valuation practice and caselaw. See
Oconee Landing Prop., T.C. Memo. 2024-25, at *71 (“It is also well
established that smaller parcels (other things being equal) generally sell
for higher per-acre prices than larger parcels.”); see also Estate of
Giovacchini v. Commissioner, T.C. Memo. 2013-27, at *96; Estate of
Kolczynski v. Commissioner, T.C. Memo. 2005-217, slip op. at 16.
However, the record reflects that small properties that do not have
meaningful excess acreage beyond the building pad sell for significantly
less than properties with some excess acreage.
Second, location is critical. The Santa Monica Mountains
constitute a distinct high-end market characterized by limited supply of
finished lots and strong demand driven by natural amenities, views,
proximity to preserved open space, and privacy. This area was a magnet
for celebrities and other high net worth individuals. Comparable
property sale prices from materially different markets therefore
warrant caution. Third, the record supports the general proposition that
finished lots in established gated communities tend to command a
32 Lots 80 and 81 were significantly larger than the remaining lots on the
northern portion and pull the average lot size higher. The only expert that attempted
to price these lots separately from the remaining lots was Mr. Erickson. However, his
analysis and selection of a price of $10,000 per acre for the excess acreage was wholly
without support in his report or the record more broadly. Therefore, we are without a
sufficient basis to price these lots separately. Our approach of determining the price
per average lot adequately compensates for any distortion these lots would otherwise
have on the valuation.
54
[*54] premium over standalone lots, reflecting community, character,
security, and amenity package.
Fourth, the record also supports adjusting comparable property
sale prices. Although Mr. Hewlett did not prepare an appraisal report
and we do not rely on his sales analysis, he offered several calculations
that are useful for limited purposes. He provided a quantitative
illustration of reverse economies of scale. His reverse-economies
analysis supports the general proposition that differences in lot size can
materially affect unit pricing. 33 He also provided and estimated market
trend appreciation rates for the subject property’s ZIP Code that
respondent’s expert Mr. DuVall agrees are reasonable. We agree and
adjust the comparable sale prices below to reflect those time trends. 34
Mr. Hewlett also attempted to quantify location premiums by
comparing sales of four-bedroom homes across ZIP Codes and
subdivisions. While that analysis provides a general sense of the
magnitude of potential neighborhood effects, it has limited utility here
because the subdivisions used in his analysis do not align consistently
with the finished-lot comparables offered by the other experts. We
therefore do not apply a separate location premium adjustment, though
we consider location qualitatively in weighing the comparable property
sales.
With these principles in mind, we first exclude certain sales. We
give no weight to the sales of Subdivision 3 and Subdivision 5, which are
in the San Diego region and therefore reflect different market forces.
We likewise give no weight to the sale of Subdivision 2, which is in a
coastal-zone market and included active permits and architectural
plans. The record does not allow us to isolate the value of those permits
and plans from the land value, and the permitting premium is likely
substantial in the coastal zone.
33 We do not apply the formulas he derived but instead use them to assist in
our qualitative analysis.
34 Mr. Hewlett provided appreciation rates for select months in 2013 and 2014:
April 2013 at 19%; July 2013 at 14%; November 2013 at 6%; December 2013 at 4%;
March 2014 at 4%; and October 2014 at 1%. For the appreciation rates not expressly
provided by Mr. Hewlett, we have assumed constant linear appreciation between the
two closest months. For example, Mr. Hewlett did not provide appreciation rates for
the three months between July 2013 and November 2013. Between July and
November 2013 the rate of appreciation declined by 8%. We have assumed
appreciation declined over this time by 2% monthly such that the appreciation rates
were 12% for August 2013, 10% for September 2013, and 8% for October 2013.
55
[*55] Neither do we give weight to the Large Tract joint venture
transaction. Unlike the other transactions, it was not a straightforward
land sale. The parties structured it as a joint venture with seller
financing and development cost assumptions. Mr. DuVall and Mr.
Williams derived materially different implied prices for the tract ($3.35
million and $4.6 million, respectively), reflecting the uncertainty
inherent in extracting a land value from the transaction terms. On this
record, we cannot reliably determine the price at which the tract
changed hands.
Finally, we give no weight to the sales of Subdivision 8,
Subdivision 9, and Subdivision 12. These lots are unfinished and
therefore are poor comparisons to the northern portion lots. As
discussed infra, the fact that development in the region is costly and
takes several years would significantly reduce the prices of these
comparable property sales as compared to the northern portion lots.
We therefore focus on the remaining finished and semifinished lot
sales. The experts valued the northern portion lots using two related
metrics: (1) price per square foot of building pad and (2) price per
finished lot. We begin with the building-pad metric. 35
i)
Price per Square Foot of
Building Pad
Both parties envision a luxury residential community with large
custom homes on each lot. Large custom homes require an adequate
building pad to support the intended development. The average
building pad on the northern portion lots is 43,996 square feet. The
comparable lots offered by the experts include building pads ranging
from approximately 30,000 square feet to over 150,000 square feet.
The record does not establish the average building pad size
required to support a large custom home. Given the wide range of
building pad sizes in the comparable properties, we focus initially on the
extreme outliers to determine whether building pad size appears to
materially affect the price per square foot.
Hidden Hills 4,
35 Only Mr. Erickson determined a price of the subject property based on the
size of the building pad. On occasion, the other experts offered the size of the building
pad located on their selected comparable lots. To the extent we can determine the size
of the building pad, we consider these other comparable property sales in this analysis.
The information regarding the following comparable lot sales is not sufficient to be
useful: Subdivision 4, Subdivision 8, and Subdivision 11.
56
[*56] Subdivision 6, Subdivision 7, and Subdivision 13 have the largest
building pads among the filtered comparables, each in excess of 65,000
square feet. These sales reflect the lowest price per square foot of
building pad by a substantial margin. This suggests diminishing
marginal returns once a building pad reaches a certain size.
Accordingly, we do not rely on the sales of Hidden Hills 4, Subdivision
6, Subdivision 7, and Subdivision 13 in valuing the northern portion lots
as a function of building pad size.
Excluding these outliers leaves the sales of the following
comparable properties for consideration: Estates 1, Estates 2, Estates 3,
Estates 4, Hidden Hills 1, Hidden Hills 2, Hidden Hills 3, Subdivision 1,
and Subdivision 10. Because the appraisal experts did not quantify
adjustments according to building pad size, we likewise take a
qualitative approach. We discuss the remaining comparable property
sales in descending order of superiority to the sales of the northern
portion lots.
The sales of Estates 1, Estates 2, Estates 3, Hidden Hills 1, and
Hidden Hills 2 are far superior. These lots have roughly comparable
building pad sizes but substantially less excess acreage. When a buyer
is purchasing a luxury lot primarily to be able to build a large custom
home, the building pad is the principal driver of value, and additional
acreage beyond the pad contributes less on a unit basis. We therefore
would expect the northern portion lots—each with substantial excess
acreage—to sell for a lower price per square foot of building pad than
these comparable sales.
These developments also offered superior views due to elevation
and, more significantly, high-end gated amenities such as recreation
facilities, equestrian areas, and community centers. Mr. Erickson
opined that these amenities would not warrant a material adjustment
because purchasers of large lots tend to build their own amenities. We
are not persuaded. Mr. Erickson did not cite any market data
supporting that proposition.
Moreover, the amenities in these
developments go beyond what could reasonably be recreated on an
individual’s lot. For example, the Estates included a substantial
community center, and Hidden Hills had multiple equestrian arenas.
The amenities add value to these lots that cannot be ignored. We
therefore find that the amenities materially contribute to the value of
these lots and render them significantly superior to the northern portion
lots. After adjustments for market conditions, these sales reflect prices
between $63 and $72 per square foot of building pad. We would expect
57
[*57] the northern portion lots to sell for less than the low end of that
range.
The sales of Estates 4 and Hidden Hills 3 present a different
story. Like the prior lots, these lots benefit from superior community
amenities. However, unlike the prior lots, their lot characteristics are
inferior to the northern portion lots. Both are on flatter terrain and lack
ridgeline mountain views. In addition, their configuration provides
little or no excess acreage beyond the building pad itself. Balancing
these factors, we find these sales are only slightly superior to the sales
of the northern portion lots. After adjustments for market conditions,
Estates 4 sold for $61 per square foot of building pad, and Hidden Hills
3 sold for $46 per square foot of building pad. We would expect the
northern portion lots to sell for slightly less than $46 per square foot of
building pad.
The sale of Subdivision 10 is inferior to the sales of the northern
portion lots. This lot is broadly similar in finished condition and has a
comparable building pad size. It is also in a gated community without
meaningful amenities. However, its views are inferior because the
building pad is adjacent to the road and lacks the ridgeline mountain
views that distinguish the northern portion lots. Subdivision 10 also
benefited from Coastal Commission approved building plans. We do not
view that factor as increasing its value relative to the northern portion
lots. The northern portion lots lie outside the coastal zone and would
not require Coastal Commission approval. Both would still require
ordinary local permitting. Moreover, as discussed above, application of
the coastal zone development regulations, such as the setback
ordinance, would reduce a lot’s market value relative to an otherwise
similar lot outside the coastal zone. After adjustments for market
conditions, Subdivision 10 sold for $30 per square foot of building pad.
We would expect the northern portion lots to sell for more than this.
The sale of Subdivision 1 is also inferior to the sale of the northern
portion lots. Although geographically close to the subject property, it
was only partially finished and lacked necessary road improvements. It
was not in a gated community and did not offer the ridgeline views that
are a key feature of the northern portion lots. We therefore would expect
the northern portion lots to sell for more than Subdivision 1 on a priceper-square-foot building pad basis.
Considering the above sales, we find that the price of the northern
portion lots is best supported by a range between approximately $46
58
[*58] (Hidden Hills 3) and $30 (Subdivision 10) per square foot of
building pad. We select $40 per square foot of building pad. Neither
Hidden Hills 3 nor Subdivision 10 captures the ridgeline views that are
the primary selling feature of the northern portion lots. The record
supports the conclusion that views materially increase the price per
square foot of building pad in luxury subdivisions. Within the luxury
subdivision sales, lots with meaningful views sold for approximately $15
more per square foot of building pad than lots without comparable views.
Comparing sales within the same development controls for many
external variables, including subdivision location and shared amenities.
Although we cannot factor in every lot-specific variable (such as
configuration), the consistent magnitude of this differential supports a
meaningful upward adjustment for the northern portion lots’ superior
views. Applying $40 per square foot of building pad to the average
building pad size of 43,996 square feet yields an indicated value of
$1,759,840 per lot.
ii)
Price per Lot
Mr. Williams and Mr. DuVall estimated the value of the northern
portion lots by comparing each lot as a whole to the comparable lot sales.
The average northern subject property lot is 8.7 acres. Reviewing the
comparable sales on a per-lot basis, we find that much of our analysis
above remains applicable.
The sales of Estates 1, Estates 2, Estates 3, Hidden Hills 1, and
Hidden Hills 2 are all superior to the sales of the northern portion lots
because those developments offer high-end amenities. However, those
lots are substantially smaller than the northern portion lots, and lot size
is expected to affect the per-lot purchase price. The question is the
magnitude of that effect. Mr. Williams opined that small lots generally
sell for less than large lots. This is a commonsense proposition. But Mr.
Williams did not provide a quantitative framework to measure how
much lot size affects per-lot pricing in this market.
Mr. Hewlett picked up the reins and offered a useful illustration
of the relationship between lot size and pricing through his market data.
Mr. Hewlett analyzed sales in the area between 2010 and 2014 for
properties priced over $500,000 that consist of 10 acres or less. His
scatter plot graph showed a strong negative exponential relationship
between lot size and price per acre: The smallest lots sell at the highest
prices per acre, and the price per acre declines rapidly as lot size
59
[*59] increases to approximately two acres. Beyond that point, the
decline levels off. His scatter plot is reflected below:
Although Mr. Hewlett’s analysis was expressed on a per-acre
basis, it is useful in understanding how lot size affects the overall perlot purchase price. For small lots, a high price per acre may still yield a
modest per-lot price because the buyer is purchasing less acreage. For
larger lots, a lower price per acre is offset by the buyer’s purchasing more
acres. But as lot size increases, the incremental effect of additional
acreage diminishes.
Mr. Hewlett’s examples illustrate the point. Under his model, a
two-acre lot would sell for $912,657, while an eight-acre lot would sell
for $1,014,061—an increase of only about $100,000. Thus, while smaller
lots generally sell for less than larger lots, the per-lot price differential
narrows substantially once lots exceed roughly two acres. With these
principles in mind, we return to the comparable property sales.
The sales of Estates 1, Estates 2, Estates 3, Hidden Hills 1, and
Hidden Hills 2 remain far superior. In addition to the superior
amenities, these lots are around two acres—substantially smaller than
the 8.7-acre northern portion lots. Mr. Hewlett’s data indicates that
increasing lot size from roughly two acres to nine acres has only a
modest effect on per-lot price. Thus, the size difference does not
overcome the substantial superiority of the amenities in these
developments. After adjustments for market conditions, the lowestpriced lot among these sales sold for $2,768,625. We would expect the
northern portion lots to sell for less.
60
[*60] The sale of Hidden Hills 4 is likewise superior. It shares the highend amenities of the other Hidden Hills and Estates sales, but unlike
the two-acre lots discussed above, it is 7.07 acres—closer in size to the
northern portion lots. The slightly smaller size would tend to reduce its
price relative to an otherwise similar 8.7-acre lot. But the superior
amenities substantially outweigh any modest size adjustment. After
adjustments for market conditions, Hidden Hills 4 sold for over $4
million. We would expect the northern portion lots to sell for
significantly less.
The sales of Estates 4 and Hidden Hills 3 are only slightly
superior. Like the other Estates and Hidden Hills, these lots benefit
from superior amenities. But as discussed above, these lots also have
material drawbacks relative to the northern portion lots, including
inferior views and lot configurations that provide little to no excess land
beyond the building area. These lots are also smaller—approximately
one acre—which would tend to reduce their per-lot price. After
adjustments for market conditions, the lowest priced lot sold for
$2,079,000. We would expect the northern portion lots to sell for slightly
less.
The sale of Subdivision 11 is slightly inferior.
Although
Subdivision 11 is in an equestrian-oriented subdivision, it was only
semifinished and offered stream and woodland views rather than
ridgeline mountain views. It is also smaller than the northern portion
lots at approximately five acres. After adjustments for market
conditions, it sold for approximately $1.4 million. We would expect the
northern portion lots to sell for more.
The sale of Subdivision 4 is also slightly inferior. Subdivision 4 is
similar in finished condition and development potential. It also offers
ocean views, which could be superior to the average buyer. However, it
was subject to a partial easement crossing the front of the lot and was
not in a gated community. Moreover, it is smaller than the northern
portion lots at 3.02 acres. On balance we find the sale of Subdivision 4
inferior to the sales of the northern portion lots. After adjustments for
market conditions, it sold for approximately $1.38 million. We would
expect the northern portion lots to sell for more.
The sale of Subdivision 10 is slightly inferior. The lot lacks
ridgeline views and instead offers inferior stream views and uphill rear
exposure. However, it is larger than the northern portion lots at 10.3
acres. We would expect the larger size to increase its per-lot price,
61
[*61] though Mr. Hewlett’s data indicates the magnitude of that size
effect is modest at these acreage levels. The size difference offsets some,
but not all, of the inferiority resulting from weaker views. We therefore
treat this sale as slightly inferior and would expect the northern portion
lots to sell for more.
The sale of Subdivision 13 is inferior. Although the lot is finished,
located in a gated community, and has Santa Monica Mountain views,
it does not appear to offer the ridgeline views that are a defining feature
of the northern portion lots. It is also smaller at approximately three
acres. Subdivision 1 is also inferior. Subdivision 1 is only semifinished,
lacks ridgeline views, is not gated, and is smaller. We would expect the
northern portion lots to sell for more than these.
Finally, Subdivision 6 and Subdivision 7 are too large to provide
useful guidance. At approximately 24.5 and 25.26 acres, these sales
exceed the size range of Mr. Hewlett’s analysis and do not provide a
reliable basis for quantifying the effect of lot size at that scale.
Moreover, sales of larger lots in the record suggest pricing below $10,000
per acre, indicating that different market dynamics may apply at those
acreage levels. We therefore do not rely on these sales.
Considering the above sales, we find that the per-lot price of a
northern portion lot is between $1.404 million (Subdivision 11) and
$2.079 million (Hidden Hills 3). We select a price of $1.8 million per lot.
A value closer to that of Hidden Hills 3 is warranted because the
competing strengths and weaknesses of that lot more closely resemble
the northern portion lots than do the inferior lots at the low end of the
range. Subdivision 11, for example, is only partially finished, and
finishing a lot in this market is expensive and time consuming under
the assumptions of the hypothetical sale. Subdivision 11 is also inferior
in view and smaller in size. Hidden Hills 3 reflects a luxury-market
purchaser, and its lot-specific disadvantages (inferior views and
configuration) help balance its superior subdivision amenities. We
therefore conclude that a value modestly below the sale’s price of Hidden
Hills 3, and well above the price of the inferior sales, best reflects the
fair market value of the northern portion lots.
iii)
Reconciled Price
We must now reconcile the differing per-lot values indicated by
the two pricing frameworks discussed above. Valuing the northern
portion lots as a function of building pad size yields an indicated value
62
[*62] of $1,759,840 per lot. Valuing the lots as a whole yields an
indicated value of $1.8 million per lot.
We find both approaches informative and assign them equal
weight. The building-pad approach captures the value attributable to
the home sites, which are a principal driver of demand, but it tends to
understate the contribution of the substantial acreage beyond the pad.
The per-lot approach better reflects how the market prices large luxury
lots, including the value of excess land, but it does not isolate the
contribution of the building pad. Giving each approach equal weight,
we determine a reconciled price of $1,779,920 per lot for use in our
income approach.
iii.
Absorption Rate
The absorption rate reflects the number of lots expected to sell
each year. See Lake Jordan Holdings, LLC v. Commissioner, T.C.
Memo. 2025-123, at *20; Trout Ranch, LLC v. Commissioner, T.C.
Memo. 2010-283, slip op. at 20, aff’d, 493 F. App’x 944 (10th Cir. 2012).
Developers of large subdivisions commonly begin marketing before the
subdivision is completed or the final map is recorded. The experts agree
that several lots would sell during a pre-sale period and that, after the
initial surge, the remaining inventory would sell at a steady rate. They
disagree, however, on the number of pre-sale lots and the annual
absorption rate.
Mr. Erickson opined that 15 lots would sell during the pre-sale
period and that the remaining inventory would sell at a rate of one lot
every two months, or six lots annually. He based his pre-sale estimate
on Brian’s prediction, which he believed was reasonable. He based his
absorption rate on the marketing history of seven custom lot sales
between 2012 and 2014 in The Estates and Hidden Hills developments,
which sold between 1 month and 11 months after listing. Mr. Erickson
opined that the sales would proceed more quickly in a new subdivision
because coordinated marketing typically increases initial sale velocity.
Mr. Williams adopted Mr. Hewlett’s absorption rate analysis. Mr.
Hewlett opined that between 10 and 16 lots would sell during the presale period, and Mr. Williams selected 10 lots. For the absorption rate,
Mr. Hewlett relied primarily on household income concentration and
building permit activity in Calabasas and Hidden Hills, which increased
sharply during periods when new inventory entered the market. On the
63
[*63] basis of those calculations, he estimated absorption at eight lots
per year.
Mr. DuVall opined that five lots would sell during the pre-sale
period and that sales would proceed at 12 lots annually. He did not
explain his pre-sale assumption. He derived his absorption rate from
the sales pace of finished homes in The Vintage at Hidden Park
subdivision and increased that rate according to his expectation of
improved market conditions, without explaining the magnitude of that
adjustment.
We adopt Mr. Erickson’s assumptions: 15 pre-sale lots and an
absorption rate of 6 lots per year. Although 15 pre-sale lots is
substantial, it is well within the historic trends of the region. As Mr.
DuVall explained, in 2013, 10 vacant lots over 5 acres were sold in the
unincorporated area in the Santa Monica Mountains National
Recreation Area between Calabasas and Malibu. He reported that in
2014, the sales increased to 17 vacant lots. We would expect the total
number of sales to increase beyond this trend because of the pent-up
demand in the market. As explained in Mr. Hewlett’s report, building
permit data likewise reflects sharp increases when new inventory
entered the market, supporting the existence of pent-up demand that
would further increase the total number of sales in the region. Mr.
Erickson’s pre-sale estimate also falls within Mr. Hewlett’s stated range.
Consequently 15 pre-sale lots is reasonable.
We find Mr. Erickson’s absorption rate better supported because
it is grounded in comparable vacant lot sales in similar luxury
subdivisions. By contrast, Mr. Hewlett’s multistep model does not
adequately explain how its inputs translate into a reliable absorption
rate. We likewise reject Mr. DuVall’s absorption rate because it relies
on finished homes sales, and the record does not support treating
demand for finished homes as a proxy for demand for high-end custom
lots.
Accordingly, for our income approach, we assume 15 lot sales
during the pre-sale period with the remaining lots selling at a rate of six
lots per year.
iv.
Expenses
We turn next to the development costs for the proposed 22-lot
subdivision in the northern portion. The parties presented competing
64
[*64] estimates of the direct and indirect costs associated with
construction, permitting, and sales.
a)
Petitioner’s Experts
Both Mr. Erickson and Mr. Williams relied heavily on cost
estimates prepared by Mr. Cunningham, who based his construction
cost projections on his development experience on other portions of the
VTTM property. Mr. Cunningham estimated construction costs for the
full 56-lot subdivision at $17,121,708, or $305,745 per lot. He based that
estimate on 11 years of development experience, including work
developing the VTTM property west of Stokes Canyon Road.
For indirect costs, Mr. Erickson and Mr. Williams performed their
own analysis. With respect to real property taxes, both assumed that
the property would not be reassessed until the first lot sale. Under that
assumption, taxes would increase only by the statutory 2% annual cap
set forth in California law. After the first lot sale, both assumed that
LA County would reassess the remaining property to reflect the value of
the infrastructure improvements. Thereafter, the total property tax
burden would decline as lots were sold and associated property tax
obligations shifted to the buyers.
For the remaining indirect costs, Mr. Erickson and Mr. Williams
determined the following costs were appropriate:
65
[*65]
Indirect Costs
Mr. Erickson
Mr. Williams
Insurance
$265,000 lump sum to cover
construction phase
2% of sales
Supervision/Project
Management
$250,000 lump sum
$200,000 lump sum
Financing
8% annual interest on 60%
outstanding balance with a
1.5% loan origin fee
8% through the three
years
after
construction 36
Sales & Marketing
5% of sales
5% of sales
General &
Administrative
$0
2% of sales starting
with first lot sale
Entrepreneurial
Incentive
12% of sales
10% of sales
b)
Respondent’s Expert
Mr. DuVall likewise relied in part on third-party materials to
estimate the cost of developing the lots. For direct construction costs,
he relied on a report by Mr. Caldwell—who was not admitted as an
expert and did not testify. For planning and permitting costs, he relied
on a report by Mr. Jewett. Both materials were labeled draft reports
subject to change, and neither contained sufficient detail for us to
evaluate how the authors derived the cost figures. Mr. DuVall
performed his own estimates of certain indirect costs based on a survey
of subdivisions in LA County and Ventura County.
For property taxes, Mr. DuVall assumed that the property would
be reassessed on the donation date to fair market value, which he
derived from his market approach. He further assumed that the
property would be reassessed again at the sale of the first lot to reflect
the value of the infrastructure improvements. He then assumed taxes
would decline ratably as lots were sold. He applied the following
additional costs:
36 It is unclear from his report to what base Mr. Williams applies the 8% rate.
66
[*66]
Indirect Cost
Cost
Administrative & Overhead
1% of sales
Market, Sales & Escrow
5% of sales
c)
Our analysis
Although neither party separately calculated all expenses
specifically for a 22-lot subdivision, the record supports allocating
subdivision-related expenses on a per-lot basis. The parties agree that
a ratable allocation across the lots is reasonable. We therefore compare
the parties’ positions on a per-lot basis.
Petitioner offered the only testimony supporting a direct
construction cost estimate.
Mr. Cunningham has substantial
development experience in the region, including experience developing
the VTTM. That experience bolsters the reliability of his cost estimate.
We therefore adopt Mr. Cunningham’s construction cost estimate,
adjusted on a per-lot basis for the 22-lot subdivision. This method yields
direct costs of $305,745 per lot.
We recognize that Mr. Cunningham’s estimate may include
certain permitting costs that would not apply to the northern portion.
But any such items appear minor relative to the overall estimate and,
in any event, would be offset by other permitting costs that are required
for the northern portion but were not separately quantified in
petitioner’s model (such as oak tree permitting and replacement
requirements). We therefore find Mr. Cunningham’s estimate a
reasonable proxy for the direct permitting and construction costs of the
northern portion.
By contrast, respondent offered no expert testimony to support
direct cost estimates. Mr. DuVall relied on draft third-party reports
from individuals who did not testify as to those reports, and those
materials provide insufficient detail on their face for us to evaluate their
reliability. We therefore give them no weight.
We turn next to indirect development costs, including property
taxes, insurance, supervision and project management, sales and
marketing, administrative expenses, and financing costs. We start with
the sales and marketing expenses. All experts assumed sales and
67
[*67] marketing costs of 5% of gross sales. We find that assumption
reasonable and adopt it. The parties dispute the remaining costs.
For property taxes, the parties agree that the property would be
reassessed at the sale of the first lot to reflect the value of the
infrastructure improvements. They disagree, however, on how property
taxes should be calculated between the donation date and the first lot
sale. 37 Petitioner assumed that the property would not be reassessed on
the donation date and that taxes would continue to be based on the
historical assessed value, subject to the 2% annual cap under California
law. Respondent assumed that the donation date would trigger
reassessment of fair market value, which he derived from his market
approach, before reassessment again at the first lot sale to reflect
infrastructure improvements.
We adopt petitioner’s approach. The record does not establish
that a reassessment would occur on the donation date. Furthermore,
petitioner’s method is grounded in the historical assessment of the
subject property and reflects established assessment practices in LA
County. We therefore adopt petitioner’s assumption for purposes of this
income approach. Mr. DuVall’s method, by contrast, rests on a
substantial and inadequately supported assumption that the property
would be reassessed to fair market value on the donation date. See
Whitehouse Hotel Ltd. P’ship, 139 T.C. at 323 (discussing the risk of even
small errors in the variables input into the income method). It also
depends on Mr. DuVall’s market-approach valuation, which we rejected,
supra. Because we do not adopt respondent’s market approach
valuation nor did we calculate our own market approach valuation, we
have no reliable basis to estimate the amount of any reassessment on
the donation date. Respondent also failed to identify any authority
supporting reassessment as of the donation date under these
circumstances.
Accordingly, through the first lot sale we assume taxes are based
on the historical assessed value (adjusted by the statutory 2% annual
cap and excluding the ratable portion attributable to the southern
portion not included in the northern portion). At the first lot sale, we
37 The method advanced by each party appears permissible under the Uniform
Standards of Professional Appraisal Practice. Appraisal Found., Appraisal Standards
Bd., Uniform Standards of Professional Appraisal Practice, Standards Rule 1-4 (2014
ed.) (requiring that an appraiser weigh historic information and trends with
anticipated future events in determining expense statements).
68
[*68] assume reassessment to reflect infrastructure improvements.
Thereafter, the tax burden declines as lots are sold.
We turn now to insurance. We adopt Mr. Erickson’s insurance
estimate. Mr. Erickson’s model of insurance costs as a constructionperiod cost is supported by his analysis. Respondent did not separately
model construction insurance. We reject Mr. Williams’s estimate that
insurance would equal 2% of sales because he provided no support for
that assumption and because insurance costs are not properly modeled
as a percentage of future sale proceeds. Under Mr. Erickson’s estimate,
insurance costs are $4,732 per lot during the construction period.
We will likewise adopt Mr. Erickson’s cost estimates for
supervision/project management and construction financing. On a perlot basis, supervision and project management costs are $4,464 per lot.
Mr. Erickson estimated construction financing costs of 8% annual
interest with a 1.5% loan origination fee.
Mr. DuVall and Mr. Williams also included an administrative and
overhead line item. Neither expert explained what expenses were
included in that or whether those expenses were captured elsewhere in
the discounted cashflow model. Because we cannot determine whether
this line item duplicates other costs, we do not adopt it.
Finally, the parties differ on how they treat entrepreneurial
profit. Petitioner treated entrepreneurial incentive as a separate lineitem expense. Respondent incorporated it into the discount rate. As
discussed more infra, market sources commonly treat entrepreneurial
incentive as part of the overall discount rate rather than as a separate
line item. We therefore consider entrepreneurial incentive as part of our
discount rate analysis rather than as a distinct expense.
v.
Development Timeline
We must next determine the development timeline, including the
permitting process through construction of finished lots and recordation
of the final map. A lot cannot be sold until the final map is recorded.
Cal. Gov’t Code § 66499.30(a). The timeline adopted in this section
therefore determines when the pre-sale lots discussed above will be sold.
a)
Expert Opinions
Mr. Erickson assumed a two-year entitlement period followed by
one year of construction. He derived the entitlement period from the
69
[*69] opinions of Mr. Gutierrez and Mr. Cunningham. Mr. Gutierrez
addressed the permitting required to record a final map and opined that
the process would take approximately two years, largely because of the
time required to obtain a coastal development permit. Mr. Cunningham
addressed the timing of civil engineering and revision cycles. On the
basis of his experience with the VTTM and other developments, he
estimated that the preparation of the final tract map, final engineering
plans, and required hydrology and hydraulics reports would take
approximately three months, followed by a nine-month revision and
resubmission process. Mr. Williams likewise assumed a two-year
permitting period, on the basis of Mr. Gutierrez’s opinion, and assumed
construction would take three years.
Mr. DuVall assumed three years for planning and nine months
for construction. He based those estimates on a draft appendix prepared
by Mr. Jewett.
Respondent also offered testimony from Dr. Cooper regarding the
permitting timeline. Dr. Cooper opined that LA County would likely
require a new EIR because the final EIR was not adequately supported.
He also opined that it was unclear whether LA County would allow oak
tree removal under the prior permit or would instead require a new
application supported by an updated oak tree survey. He further opined
that a complete oak tree survey of the entire subject property could take
12 months or longer.
b)
Our Analysis
We begin with the permitting timeline. We do not rely on Mr.
DuVall’s permitting estimates because they are based on a draft report
prepared by Mr. Jewett, who did not testify and whose methodology was
not disclosed.
This leaves the opinions of Mr. Gutierrez, Mr.
Cunningham, and Dr. Cooper. As discussed above, we assume that the
northern portion is outside the coastal zone. We therefore do not include
the coastal zone development permit process in our timeline. The
coastal permit was, by all accounts, the most time-consuming
component of Mr. Gutierrez’s schedule. Removing that component
materially shortens the permitting period.
It is helpful to briefly summarize the steps required for MVL to
record a final map. As of the valuation date, the property was entitled
to developme
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