T.C. Memo. 2009-94
UNITED STATES TAX COURT
NICK R. HUGHES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6395-06. Filed May 6, 2009.
P granted a conservation easement to a qualified
conservation organization and claimed a $3,100,000
charitable contribution deduction on his 2000 Federal
income tax return. R determined a deficiency on the
basis that P overstated the amount of his charitable
contribution by $1,107,625.
Held: P is liable for the deficiency.
Joseph H. Thibodeau and Vincent M. Lane, for petitioner.
Sara J. Barkley and Tamara L. Kotzker, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: On December 28, 2000, petitioner granted a
conservation easement to the Valley Land Conservancy, a Colorado
nonprofit corporation locally referred to, and doing business
under a filed trade name, as the Black Canyon Regional Land
Trust, Inc.1 He claimed a $3,100,000 charitable contribution
deduction on his 2000 Form 1040, U.S. Individual Income Tax
Return, for doing so. In a February 7, 2006, notice of
deficiency respondent disallowed $1,107,625 of the deduction,
resulting together with some other small adjustments2 in the
determination of an alleged $437,153 Federal income tax
deficiency for petitioner’s 2000 tax year. This case is before
the Court on a petition for redetermination of that deficiency.
The issue for decision is the amount of petitioner’s charitable
contribution for Federal income tax purposes.
1
See Colo. Rev. Stat. sec. 38-30.5-102 (2000); see also sec.
1.170A-14(a), Income Tax Regs. (“A qualified conservation
contribution is the contribution of a qualified real property
interest to a qualified organization exclusively for conservation
purposes.”).
2
Respondent also determined that petitioner had $3,503 of
unreported interest income, $401 of unreported dividend income,
and $10 of “other income”, and that a $118 itemized deduction
limitation adjustment to Schedule A, Itemized Deductions, was
necessary. Petitioner has conceded these issues.
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FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts and accompanying exhibits are hereby incorporated by
reference into our findings. At the time he filed his petition,
petitioner resided in Colorado.
Petitioner granted the conservation easement at issue over
two nearby properties: A 1,950-acre property referred to by the
parties as the Bull Mountain parcel and a 463.35-acre property
referred to by the parties as the Sylvester parcel. Both parcels
are in a mountainous region in Gunnison County, Colorado,
approximately 18 miles northeast of Panonia, Colorado. The
properties’ elevation ranges from approximately 6,900 feet to
8,185 feet above sea level.
Gunnison County is approximately 3,260 square miles in size,
making it about twice the size of Rhode Island.3 The U.S. census
for 2000 indicated a population of 13,956, which results in an
overall population density of 4.3 people per square mile.4 In
2000 approximately half of the county’s population was in the
city of Gunnison and the town of Crested Butte, which together
3
U.S. Census Bureau, United States Summary: 2000--
Population and Housing Unit Counts 29 (2004); see United States
v. Bailey, 97 F.3d 982, 985 (7th Cir. 1996) (taking judicial
notice of census information with respect to life expectancy).
4
U.S. Census Bureau, Colorado: 2000--Population and Housing
Unit Counts 8 (2003).
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constituted less than 4 square miles.5 The census also found
that the 673.51-square-mile area in which the Bull Mountain and
Sylvester parcels are located has a population of 488, resulting
in a population density of less than 1 person per square mile.6
The Federal Government owns much of the county’s land.
The Bull Mountain and Sylvester parcels lie southwest of the
intersection of the two public roads that service their immediate
area: State Highway 133 (north-south) and County Road 265 (east-
west). County Road 265 dead-ends at its intersection with State
Highway 133. The Sylvester parcel abuts County Road 265,
commonly known as Buzzard Divide, on its northern border. The
Bull Mountain parcel is located south of the Sylvester parcel and
is separated from it by a 1/4-mile-wide strip of property owned
by an unrelated third party. The Bull Mountain parcel does not
abut either of the two roads.
Property in the area has historically been used for
agricultural purposes with some isolated residential use. The
Bull Mountain and Sylvester parcels have historically been used
for cattle ranching and recreational purposes.
5
Id.
6
Id.
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I. The Bull Mountain Parcel
The Bull Mountain parcel features rolling, brush-covered
hills and two permanent streams. A national forest borders the
parcel to the west, and views of the Ragged Mountains are
available to the north and east. Petitioner purchased the parcel
from Million Agricultural Investment, Ltd. (Million), on October
6, 1999, for $1,535,000 or $787 per acre.
When petitioner purchased the Bull Mountain parcel, it did
not have direct access to either State Highway 133 or County Road
265. However, petitioner could use access easements that had
been acquired by previous owners of the parcel to travel to and
from both roads.
To access State Highway 133, petitioner could use an
easement along a road through property owned by the Theodore R.
Eck Trust (Eck), petitioner’s neighbor to the east. To access
County Road 265, petitioner could use two easements along the
Narrows Road, which runs north from the parcel through property
owned by Spadafora Ranches, Inc. (Spadafora), and continues
northeast through property owned by McIntyre Livestock Corp.
(McIntyre). The easement over McIntyre’s property was limited to
agricultural use.7
7
The parties dispute whether the easement over Spadafora’s
property was also limited to agricultural use. To resolve the
issue, petitioner attempted to introduce at trial a document
dated Apr. 14, 1978, in which Spadafora granted McIntyre--which
(continued...)
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II. The Sylvester Parcel
The Sylvester parcel is essentially an irregular, long,
brush-covered ridge, which, like the Bull Mountain parcel, has
views of the Ragged Mountains to the north and east. Petitioner
purchased the Sylvester parcel from Gerald and Connie Rentz on
September 18, 2000, for $671,350 or $1,449 per acre.
The Sylvester parcel had direct access to County Road 265
along its northern border. In addition, petitioner could use
easements acquired by the previous owner to travel to and from
7
(...continued)
owned the Bull Mountain parcel at the time--and McIntyre’s
successors and assigns forever an unrestricted access easement
over Spadafora’s property. Respondent objected to the
admissibility of the document on the basis that petitioner did
not provide a copy to respondent at least 14 days before trial,
as required by the Court’s standing pretrial order. We reserved
judgment on the issue.
Despite respondent’s objection, we will admit the document
into evidence. First, the Gunnison County Clerk and Recorder has
certified the document as a “true and exact copy” of a document
recorded in Gunnison County’s publicly available real estate
records. As such, we can take judicial notice of it. See Joseph
v. U.S. Civil Serv. Commn., 554 F.2d 1140, 1147 n.12 (D.C. Cir.
1977); see also Van Woudenberg v. Gibson, 211 F.3d 560, 568 (10th
Cir. 2000), abrogated on other grounds by McGregor v. Gibson, 248
F.3d 946 (10th Cir. 2001); see also sec. 7453; Fed. R. Evid. 201;
Rule 143(a). Unless otherwise indicated, all Rule references are
to the Tax Court Rules of Practice and Procedure. Second, on the
record before us we cannot conclude that respondent was
prejudiced by not receiving the document at least 14 days before
the trial. See Freije v. Commissioner, 125 T.C. 14, 16 n.2
(2005).
In any event, the language in the document is vague and does
not totally resolve the issue. Moreover, as we will see,
petitioner’s access over Spadafora’s property is inconsequential
to our ultimate conclusion.
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County Road 265. An easement over Spadafora’s property permitted
petitioner to travel west from the parcel to the Narrows Road and
then to travel north along the road to McIntyre’s property.
Another easement permitted him to continue northeast along the
Narrows Road through McIntyre’s property. Neither of these
easements was restricted to any particular use.
The Sylvester parcel’s access easements mostly overlapped
the Bull Mountain parcel’s easements with two exceptions: (1)
The Sylvester parcel’s easement over Spadafora’s property did not
permit petitioner to travel south along the Narrows Road to the
Bull Mountain parcel and (2) the Bull Mountain parcel’s easement
over Spadafora’s property did not permit petitioner to travel
east to the Sylvester parcel.
III. The Conservation Easement
In a December 28, 2000, “Deed of Conservation Easement In
Gross”, petitioner granted the Valley Land Conservancy the
development rights, “as defined by section 2031(5)(D) [sic]
* * * except as specifically reserved herein”,8 over the Bull
Mountain and Sylvester parcels. As a result, petitioner and “his
successors and assigns forever” were prohibited from, among other
things, subdividing the parcels, constructing buildings or other
8
All section references are to the Internal Revenue Code of
1986, as amended an in effect for the tax year at issue. There
is no sec. 2031(5)(D) in the Internal Revenue Code, however. For
the purposes of this case we shall assume the intended reference
was to sec. 2031(c)(5)(D).
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structures except for a single-family residential dwelling on
each parcel, and using the parcels for any commercial,
residential, or industrial uses not specifically permitted. The
deed refers to the Bull Mountain and Sylvester parcels as “two
legally distinct and separately deeded properties”.
In connection with preparing and filing his 2000 Federal
income tax return, petitioner engaged Appraisal Associates of
Colorado, Inc., and its coowner, Pamela M. Sant, to appraise the
conservation easement. Ms. Sant is a Residential Member of the
Appraisal Institute and a Certified General Appraiser licensed by
the State of Colorado. She prepared an appraisal report, dated
March 2, 2001, in which she determined that the combined value of
the Bull Mountain and Sylvester parcels was $4,100,000 before
petitioner granted the easement and $1 million after. She
concluded that the amount of the charitable contribution was
therefore $3,100,000 and to that effect signed an IRS Form 8283,
Noncash Charitable Contributions, which petitioner attached to
his return.
On February 7, 2006, respondent sent petitioner a notice of
deficiency. Respondent disallowed $1,107,625 of the charitable
contribution deduction and determined that petitioner was liable
for a $437,153 Federal income tax deficiency. On April 3, 2006,
petitioner filed a timely petition with the Court. Among other
things, he argues that respondent has incorrectly determined that
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he is not entitled to the full $3,100,000 deduction. A trial was
held on November 1-2, 2007, in Denver, Colorado.
OPINION
I. Applicable Law
Under section 170(a), a taxpayer may claim a deduction for
any charitable contribution, including a qualified conservation
contribution, made within the taxable year. Sec. 170(c),
(f)(3)(B)(iii), (h). The parties agree that petitioner’s grant
of the conservation easement over the Bull Mountain and Sylvester
parcels was a qualified conservation contribution under section
170(h) and that he is entitled to a deduction under section
170(a). The only issue before us is the amount of the charitable
contribution and thus the allowable deduction.
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving entitlement to any claimed exemptions
or deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992). Moreover, the Commissioner’s determination of value is
normally presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Schwab v.
Commissioner, T.C. Memo. 1994-232.
Generally, the amount of a charitable contribution is the
fair market value of the contributed property at the time it is
contributed. Sec. 1.170A-1(a), (c)(1), Income Tax Regs. Fair
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market value is the price at which property would change hands
between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having a reasonable
knowledge of relevant facts. Sec. 1.170A-1(c)(2), Income Tax
Regs.
In determining the fair market value of property, we must
take into account not only the current use of the property but
also its highest and best use. See Stanley Works v.
Commissioner, 87 T.C. 389, 400 (1986); sec. 1.170A-14(h)(3)(i)
and (ii), Income Tax Regs. A property’s highest and best use is
the highest and most profitable use for which it is adaptable and
needed or likely to be needed in the reasonably near future.
Olson v. United States, 292 U.S. 246, 255 (1934). The highest
and best use can be any realistic, objective potential use of the
property. Symington v. Commissioner, 87 T.C. 892, 896 (1986).
The amount of a charitable contribution of a conservation
easement is generally the fair market value of the easement at
the time it is contributed. Sec. 1.170A-14(h)(3)(i), Income Tax
Regs. Ideally, the fair market value of a conservation easement
would be based on the sales prices of comparable easements. Sec.
1.170A-14(h)(3), Income Tax Regs. However, because conservation
easements are typically granted by deed or gift rather than sold,
comparable sales are rarely available. Symington v.
Commissioner, supra at 895. As an alternative, the so-called
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before-and-after approach is often used instead. Stanley Works
v. Commissioner, supra at 399. Under the before-and-after
approach, the fair market value of a conservation easement equals
the difference between the fair market value of the easement-
encumbered property before it is encumbered by the easement and
after. Sec. 1.170A-14(h)(3)(i) and (ii), Income Tax Regs.
The general rule for determining the amount of a charitable
contribution is modified in some situations where appreciated
property is contributed. Under section 170(e)(1)(A), the amount
of a charitable contribution of property is reduced by the amount
of gain which would not have been long-term capital gain had the
taxpayer sold the property at its fair market value at the time
of contribution. Estate of Bullard v. Commissioner, 87 T.C. 261,
268 n.4 (1986); sec. 1.170A-4(a)(1), Income Tax Regs. Long-term
capital gain is generally “gain from the sale or exchange of a
capital asset held for more than 1 year”. Sec. 1222(3). In
effect, section 170(e)(1)(A) limits the contribution amount of
appreciated property which is not long-term-capital gain property
to the property’s basis at the time it was contributed. See Lary
v. United States, 787 F.2d 1538, 1540 (11th Cir. 1986); Jones v.
Commissioner, 129 T.C. 146, 150-151 (2007), affd. 560 F.3d 1196
(10th Cir. 2009).
It follows that when a taxpayer grants a conservation
easement over appreciated real property held for less than 1
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year, the amount of the contribution must be determined with
regard to section 170(e)(1)(A). See sec. 1.170A-4(b)(1), Income
Tax Regs.; see also Strasburg v. Commissioner, T.C. Memo. 2000-
94; Griffin v. Commissioner, T.C. Memo. 1989-130, affd. 911 F.2d
1124 (5th Cir. 1990). Accordingly, the amount of the
contribution is limited to the conservation easement’s basis at
the time it is contributed. See Strasburg v. Commissioner,
supra; Griffin v. Commissioner, supra.
The adjusted basis of a conservation easement is equal to
that portion of the adjusted basis of the entire property which
bears the same ratio to the adjusted basis of the entire property
as the fair market value of the contributed property bears to the
fair market value of the entire property. Sec. 1.170A-
4(c)(1)(ii), Income Tax Regs.; see Strasburg v. Commissioner,
supra. Put another way, the basis of a conservation easement is
equal to the adjusted basis of the entire property reduced by the
percentage decrease in the entire property’s fair market value as
a result of the conservation easement.
II. Expert Witnesses
Each party has offered the report and testimony of an expert
witness to establish the amount of petitioner’s charitable
contribution. An expert’s opinions are admissible if they assist
the trier of fact to understand the evidence or to determine a
fact in issue. Fed. R. Evid. 702. We evaluate expert opinions
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in light of each expert’s demonstrated qualifications and all
other evidence in the record. See Parker v. Commissioner, 86
T.C. 547, 561 (1986). Where experts offer competing estimates of
fair market value, we determine how to weigh those estimates by,
inter alia, examining the factors they considered in reaching
their conclusions. See Casey v. Commissioner, 38 T.C. 357, 381
(1962). We are not bound by an expert’s opinions and may accept
or reject an expert opinion in full or in part in the exercise of
sound judgment. See Helvering v. Nat. Grocery Co., 304 U.S. 282,
295 (1938); Parker v. Commissioner, supra at 561-562. We may
also reach a determination of value based on our own examination
of the evidence in the record. Silverman v. Commissioner, 538
F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285.
A. Petitioner’s Expert
Petitioner’s expert, Mark S. Weston, has a bachelor of arts
degree in English literature and a master of arts degree in
library and information science. He is a certified general
appraiser in the State of Colorado and has been a member of the
Colorado Board of Real Estate Appraisers since 1999. Since the
mid-1990s he has written several publications and given a number
of presentations on valuing conservation easements. Mr. Weston
wrote two appraisal reports with respect to the conservation
easement over the Bull Mountain and Sylvester parcels: An
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original report, dated March 30, 2001, and a supplemental report,
dated September 28, 2007.
In his reports Mr. Weston used the before-and-after approach
and concluded that the fair market value of the conservation
easement was $2,926,700. He determined that the fair market
values of the Bull Mountain and Sylvester parcels, before
petitioner granted the easement, were $3,509,568 and $832,752
(both $1,800 per acre9), respectively. Referring to section
170(e)(1)(A) and the fact that petitioner purchased the Sylvester
parcel less than 1 year before he granted the easement, Mr.
Weston used the Sylvester parcel’s adjusted basis, $671,350, in
his calculations instead of its fair market value. In addition,
he rounded the Bull Mountain parcel’s fair market value to
$3,509,650, resulting in a total before figure for both parcels
of $4,181,000. He then determined that this figure was reduced
by 70 percent when petitioner granted the easement.
9
In his original report--in the narrative section on p. 44--
Mr. Weston twice stated that the value of the Bull Mountain and
Sylvester parcels was “at the average rate of $1,900 per acre.”
However, he used $1,800 per acre in his subsequent numerical
calculations and also referred to the $1,800-per-acre figure in
his supplemental report. Because his report does not explicitly
explain how he calculated the average value per acre of the two
parcels, we cannot be certain which figure Mr. Weston intended.
While this discrepancy on such an important fact is not
comforting, we will assume that his references to $1,900 per acre
were typographical errors.
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B. Respondent’s Expert
Respondent’s expert, Kerry L. Packard, has bachelor of
science and a master of engineering degrees. He has been an
engineer revenue agent with the Internal Revenue Service since
1982. In that role he has conducted field investigations and has
made value estimations with respect to real and personal property
and has prepared valuation, technical, and engineering reports.
He has experience valuing conservation easements and ranch land
and has completed several American Institute of Real Estate
Appraisal courses.
In his report, dated September 28, 2007, he also used the
before-and-after approach and concluded that the fair market
value of the conservation easement was between $0 and $238,135.10
He further determined that the fair market values of the Bull
Mountain and Sylvester parcels before contribution of the
easement were $1,706,250 ($875 per acre) and $671,350 (rounded to
$1,449 per acre), respectively. Mr. Packard referenced section
170(e)(1)(A), but because he found that the Sylvester parcel did
not appreciate after petitioner purchased it, he concluded that
it did not apply. He rounded the fair market value of the Bull
Mountain parcel to $1,710,000, resulting in a total before figure
for both parcels of $2,381,350. He then determined that this
10
Respondent has not asserted an increased deficiency in
light of Mr. Packard’s conclusions.
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figure was reduced by 0 to 10 percent when petitioner contributed
the easement.
C. Expert Witness Issues
The parties have raised two issues with respect to the
expert witnesses. First, the probative value of both experts’
reports and testimony has been called into question. Petitioner
asserts that Mr. Packard is biased,11 lacks appropriate
qualifications, made numerous mistakes, and did not prepare his
report in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP). Petitioner also argues that we
should give Mr. Packard’s report less weight because respondent
did not assert an increased deficiency in light of Mr. Packard’s
conclusions. Respondent counters that Mr. Weston is biased12 and
made numerous mistakes. We have considered the parties arguments
and, as appropriate, have evaluated the experts’ reports and
testimony accordingly.13 We do not find that Mr. Packard’s
11
In his brief, petitioner states that Mr. Packard’s report
is “unable to claim even a pretense at objectivity or
independence” and “is merely the expression of the (decidedly
biased) opinion of a career IRS valuation engineer (lacking in
requisite credentials and professional accreditation).”
12
Respondent points to preliminary valuation notes in Mr.
Weston’s work file, which contain the handwritten notation “Nick
wants it Bigger!!” next to a valuation of the Bull Mountain
parcel at $2.4 million to $2.7 million.
13
See Brown v. Se. Pa. Transp. Auth. (In re Paoli R.R. Yard
PCB Litig.), 35 F.3d 717, 744-745 (3d Cir. 1994) (“A judge
frequently should find an expert’s methodology helpful even when
(continued...)
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report should be given less weight on the basis that respondent
did not assert an increased deficiency. Petitioner did not
provide any support for this argument, and we have found none.
Second, at trial respondent moved to strike from the record
Ms. Sant’s March 2, 2001, appraisal report and a December 12,
2003, engineer’s report by IRS Engineer Lloyd Philip Kinney.14
We had admitted those reports into evidence, in part, so that
petitioner could use them to cross-examine Mr. Packard.
Respondent asserts, however, that petitioner never mentioned the
reports during cross-examination. We reserved judgment on the
issue in order to obtain a transcript of the cross-examination
but will now deny respondent’s motion.
We note that petitioner asked Mr. Packard several questions
about the exhibits during cross-examination, including: (1)
13
(...continued)
the judge thinks that the expert’s technique has flaws sufficient
to render the conclusions inaccurate.”); Whitehouse Hotel Ltd.
Partnership v. Commissioner, 131 T.C. __, __ (2008) (slip op. at
24) (“This and other courts have found that an expert’s valuation
opinion that does not fully comport with USPAP is still
admissible although it may or may not be helpful.”); Laureys v.
Commissioner, 92 T.C. 101, 129 (1989) (“In the context of
valuation cases, we have observed that experts may lose their
usefulness (and credibility) when they merely become advocates
for the position argued by a party.”); Parker v. Commissioner, 86
T.C. 547, 561 (1986) (stating that the Court will consider an
expert’s qualifications when evaluating his or her expert
opinion).
14
Ms. Sant’s report, Exhibit 28-P, provided the basis for
petitioner’s 2000 Form 8283, and Mr. Kinney’s report, Exhibit 27-
P, apparently provided a part of the basis for respondent’s Feb.
7, 2006, notice of deficiency.
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Whether the two reports were in the file that Mr. Packard was
provided when he began working on the case; (2) whether Mr.
Packard reviewed Ms. Sant’s report; (3) whether he reviewed Mr.
Kinney’s report in a supervisory capacity; and (4) whether and to
what extent he relied on Ms. Sant’s and Mr. Kinney’s reports.
Mr. Packard responded that (1) the reports were in the file he
received, (2) he reviewed Ms. Sant’s report, (3) he did not
review Mr. Kinney’s report in a supervisory capacity, and (4) he
did not rely on either report to any extent, noting that “Had I
agreed with the facts and the analyses that were developed in
those reports, they would have precluded the need for me to have
done one.”
III. Analysis
Respondent allowed $1,992,375 of the $3,100,000 charitable
contribution deduction that petitioner claimed for granting the
conservation easement over the Bull Mountain and Sylvester
parcels. We must determine whether petitioner is entitled to a
larger deduction and, if so, how much larger. To do so, we must
determine the amount of petitioner’s charitable contribution,
which is generally the fair market value of the conservation
easement. See sec. 1.170A-14(a), (h)(3)(i) and (ii), Income Tax
Regs.
Mr. Weston attempted to determine the fair market value of
the easement based on the sales prices of comparable conservation
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easements; however, he did not “[weigh] this data heavily in
[his] analysis due to dissimilarity of the encumbered parcels
compared with the subject property.” See sec. 1.170A-14(h)(3),
Income Tax Regs. We agree with Mr. Weston and find that this
data is insufficient to make a conclusion as to fair market
value. Accordingly, we must rely on the before-and-after
approach, as both Mr. Weston and Mr. Packard have. See id.; see
also Stanley Works v. Commissioner, 87 T.C. at 399. To apply the
before-and-after approach, we must determine the fair market
values of the Bull Mountain and Sylvester parcels before
petitioner granted the conservation easement and after. Sec.
1.170A-14(h)(3), Income Tax Regs.
A. Fair Market Value of the Bull Mountain Parcel Before
Petitioner Granted the Conservation Easement
1. Mr. Weston’s Opinion
Mr. Weston concluded that the Bull Mountain parcel’s highest
and best use before petitioner granted the conservation easement
was residential development in lots ranging in size from 35 to
350 acres. He believed--apparently based on anecdotal real
estate agents’ comments--that there was significant demand for
residential property of that size in the area and noted several
selling points, including proximity to a national forest, scenic
views, relative seclusion, and abundant wildlife. Moreover, he
believed that Gunnison County would have approved the change in
the property’s use from agricultural to residential.
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He relied primarily on the sales comparison approach to
determine the fair market value of the Bull Mountain parcel.15
Under that approach the property being valued is compared with
similar properties sold in the same timeframe and geographic
area. Schwab v. Commissioner, T.C. Memo. 1994-232. The subject
property’s fair market value is determined by reference to the
sales prices of the comparable properties, adjusted upward to the
extent that the subject property is superior to the comparable
property in some fashion and downward to the extent it is
inferior in some fashion. See Whitehouse Hotel Ltd. Partnership
v. Commissioner, 131 T.C. __, __ (2008) (slip op. at 44-45); see
also Schwab v. Commissioner, supra (“This approach is based on
the principle that the prudent purchaser would pay no more for a
property than the cost of acquiring an existing property with the
same utility.”).
15
Mr. Weston also used the development technique to “test
the reasonableness of the direct sales comparison technique” but
stated that he had “a greater degree of confidence in the direct
comparison technique.” The development technique is appropriate
where the subject property being valued is “‘ripe’ for
development.” Estate of McCormick v. Commissioner, T.C. Memo.
1995-371. Under the development technique, the subject property
is treated as if it were subdivided, developed, and sold.
Expected proceeds from sales of the subdivided lots are reduced
by development costs and discounted over the period during which
the lots are expected to sell. See Branch v. Commissioner, T.C.
Memo. 1987-321. Using the development technique, Mr. Weston
determined that the fair market value of the Bull Mountain parcel
was $3,695,265.
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For purposes of the sales comparison approach, Mr. Weston’s
subject property was a 2,412.40-acre piece of land that included
both the Bull Mountain and Sylvester parcels. He valued the
parcels as one, believing that they had been “assembled together”
when petitioner purchased them and that they “can be considered
contiguous by virtue of the easements that joined these two
parcels”.
Mr. Weston considered sales of 12 comparable properties in
his analysis, relying heavily on 4 sales, including the October
6, 1999, sale of the Bull Mountain parcel to petitioner for
$1,535,000 or $787 per acre. He made adjustments to the sales
prices of the comparable properties to--in his view--account for
market conditions, location, size, and access. With respect to
the October 6, 1999, sale of the Bull Mountain parcel to
petitioner, Mr. Weston made two significant positive adjustments,
reflecting that the Bull Mountain parcel had appreciated by a
prodigious and at first blush implausible 128 percent in the
short 14 months between the date petitioner purchased the remote,
rural parcel and the date he granted the conservation easement.
Mr. Weston’s first and most important adjustment was based on his
belief that “The value of [the Bull Mountain parcel] * * * was
increased significantly by the assemblage with the [Sylvester
Parcel] * * * due to improved access.” His second adjustment was
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due to inflation and improved market conditions during the
intervening 14 months.
In his supplemental report Mr. Weston suggested a third
reason why the fair market value of the Bull Mountain parcel was
higher than the October 6, 1999, sales price; namely, because
that sales price may have been below fair market value. In that
regard he made the following observation: “Reportedly, Million
had been compelled to take title to this portion of the Property
after a prior transaction fell through and was as a result highly
motivated to sell the Property, even at a discount, due to
financial distress.”16
Ultimately, Mr. Weston determined that the fair market value
of the combined subject property was $1,800 per acre. Applying
that price per acre to the 1,950 acres of the Bull Mountain
parcel, he concluded that its fair market value before petitioner
contributed the conservation easement was $3,509,568.
2. Mr. Packard’s Opinion
Mr. Packard found that the highest and best use of the Bull
Mountain parcel before petitioner granted the conservation
easement was continued agricultural and recreational use.
16
Mr. Weston suggested this third adjustment in his Sept.
28, 2007, supplemental report. While discussing generally
“Conditions of Sale (Motivation of the Parties)” in his original
Mar. 30, 2001, appraisal report, he explicitly chose not to make
any adjustment for financial distress for any of the comparable
sales included in his original report.
- 23 -
Although he believed that residential development in lots of 35
acres or more was legally permissible, physically possible, and
financially feasible, he did not think it was the “maximally
productive use” of the property because of the limited demand for
residential lots in the area, as reflected by “limited demand for
developable lands” in the area.
Mr. Packard relied on the sales comparison approach to
determine the fair market value of the Bull Mountain parcel. He
used the Bull Mountain parcel itself as the subject property and
compared it with nine comparable properties, making adjustments
for access, size, water rights, tree cover, and market
conditions. He placed great reliance on the October 6, 1999,
sale of the Bull Mountain parcel to petitioner and one other
sale. His only adjustment to the October 6, 1999, sales price of
the Bull Mountain parcel was a positive adjustment because
“properties were generally increasing in value” during the 14
months between the sale and petitioner’s grant of the easement.
Mr. Packard ultimately determined that the fair market value
of the Bull Mountain parcel before petitioner granted the
conservation easement was $875 per acre or $1,710,000 after
rounding. This value reflects that the Bull Mountain parcel
appreciated in value by 11 percent.
- 24 -
3. Discussion
To determine the fair market value of the Bull Mountain
parcel, both experts used the sales comparison approach, relying
heavily on the October 6, 1999, sale of the parcel to petitioner.
We think that this was the appropriate approach to take. After
all, the best evidence of fair market value is a recent sale of
the property at issue. See Wortmann v. Commissioner, T.C. Memo.
2005-227 (“we find that the most persuasive evidence of the
subject property’s value as of the contribution date is the
actual sale of the subject property 17 months before the
contribution”). For the purposes of our analysis, we will focus
on the October 6, 1999, sale.17
There are three major issues that divide the experts.
First, they do not agree whether there was demand for residential
property in the area. Second, they do not agree that the Bull
Mountain parcel’s access was improved after petitioner purchased
the Sylvester parcel. Third, they do not agree that petitioner
purchased the Bull Mountain parcel at a discount due to the
seller’s financial distress. Each of these issues has a
significant effect on the fair market value of the Bull Mountain
parcel, and we will address each separately.
17
Because we will not consider other comparable properties
in our analysis, we need not address the parties’ disputes over
other adjustments, such as adjustments due to location, size, and
water rights.
- 25 -
i. Demand for Residential Property
The demand for residential property in the Bull Mountain
parcel’s neighborhood is an important consideration because it
affects the parcel’s highest and best use and because high demand
for residential property would suggest a higher fair market
value.
Although Mr. Weston acknowledged, in his March 30, 2001,
report, that “To date there has not been a significant amount of
development in this part of Gunnison County”, he indicated that
“The northwestern portion of Gunnison County is beginning to see
an increase in demand for vacant land suitable for development”
and that “property values are appreciating rapidly at the present
time.” Despite his statement that “This growth is not explosive,
however”, he projected that demand was so high that if the Bull
Mountain parcel were subdivided into 39 parcels of 35 acres or
more, the subdivided parcels could have been sold within 5 years.
Citing local realtors, he concluded that there was “strong demand
for residential sites of this size and character in the current
market” and that “The lack of sales activity involving smaller
parcels in this area is due entirely to a lack of supply.”18
18
In her report, Ms. Sant also concluded that demand for
residential property in the area was high: “Prices are
increasing and demand is moderate to strong. The difficulty in
this area is the lack of available smaller acreage parcels.
* * * The subject due to its location and physical
characteristics is well suited and desirable for residential use
(continued...)
- 26 -
Mr. Packard found to the contrary, noting simply that “If
demand for residential parcels was strong, it is reasonable to
expect that a developer would have shown interest in [the Bull
Mountain parcel].” He stated that “There is little, or no,
residential development activity in the market area of the
subject property” and “While there are isolated small-acreage
land purchases that have occurred for the purpose of building a
home, there has been no planned development of large parcels.”
Based on the evidence before us we find that there was
little to no demand for residential property of the type
suggested by Mr. Weston at the time petitioner granted the
conservation easement. In addition, we do not see a trend of
increasing demand at that time, either. Mr. Weston’s assertions
otherwise lack evidentiary support.
The experts did acknowledge that the property to the Bull
Mountain parcel’s east--property owned by Eck and adjacent to
State Highway 133--was divided into twelve 35-acre residential
parcels and sold from 2002 through 2006. That evidence and the
prolonged 4-year absorption rate does not persuade us that there
was significant demand for that type of property, even with
18
(...continued)
and is a convenient drive time from Carbondale.” We note,
however, that reaching Carbondale requires one to traverse
McClure Pass, the summit of which is 8,755 feet. This is not
high by Colorado standards but would be a problem or cause a
delay on snowy days.
- 27 -
relatively good access, in 2000. First, the Eck sales occurred
after the valuation date in this case, and we are therefore
limited in our consideration of them.19 Second, even if we could
consider those sales, they reflect much lower demand than Mr.
Weston has suggested. Specifically, although Mr. Weston
indicated that thirty-nine 35-acre-or-more residential parcels
could be sold within 5 years, it apparently took Eck 4 years to
sell just twelve 35-acre parcels with better access and a
comparable nearby location.
Mr. Weston has also noted the existence of smaller lots,
including some of less than 1 acre, to the north of the Bull
Mountain parcel. Although those lots may exist, there is no
evidence that they had been sold or even offered for sale at the
time petitioner granted the conservation easement. Accordingly,
they do not support Mr. Weston’s claims regarding demand.
Because we conclude that there was limited demand for
residential property in the Bull Mountain parcel’s neighborhood
around the time petitioner granted the easement, we also conclude
that the highest and best use of the Bull Mountain parcel before
19
See Estate of Spruill v. Commissioner, 88 T.C. 1197, 1228
(1987) (“It is well settled that, in examining all the relevant
facts and circumstances, events occurring subsequent to the
valuation date are not considered in determining fair market
value, except to the extent that such events were reasonably
foreseeable on the valuation date”.).
- 28 -
petitioner granted the easement was continued agricultural and
recreational use.20
ii. Access to the Bull Mountain Parcel
Both experts agree that the Bull Mountain parcel did not
have ideal access to public roads when petitioner purchased it on
October 6, 1999. The road to Highway 133 was long and rough, and
the Bull Mountain parcel’s easement over McIntyre’s property to
access County Road 265, which was a gravel road not always plowed
in the winter,21 was limited to agricultural purposes. Mr.
Weston asserts, however, that when petitioner purchased the
Sylvester parcel, the agricultural restriction over McIntyre’s
property was lifted. In his words: “there was created a much
better and unrestricted access route that led from County Road
265 all the way down into the larger Bull Mountain Ranch tract.”
Based predominantly on this belief and the synergy created by the
assemblage of the two parcels, he determined that the Bull
20
Because the highest and best use of the parcel was not
residential development, the development technique for valuing it
is not appropriate. As a result, we will disregard Mr. Weston’s
development technique analysis as well as the experts’ and
parties’ disputes over how that technique was applied. But had
we considered it and factored in realistic development costs and
access problems together with a realistic absorption rate, it
would not have materially affected our valuation of the
conservation easement.
21
Gunnison County Public Works Department, Gunnison County,
Colorado County/Plowed Roads Numerical List 2 (last viewed 2009).
- 29 -
Mountain parcel more than doubled in value after petitioner
purchased the Sylvester parcel.
Mr. Weston, who is not an attorney, never fully explained
how the agricultural restriction was lifted; and when asked
during cross-examination, he acknowledged that he was “probably
* * * not qualified to have that opinion.” Apparently, he
believed that petitioner could cross McIntyre’s property using
the Sylvester parcel’s unrestricted easement even if petitioner
was traveling to and from the Bull Mountain parcel.
There is no discernable legal support for Mr. Weston’s
position. Under Colorado law “an easement holder may not use
[an] easement to benefit property other than the dominant
estate.” Lazy Dog Ranch v. Telluray Ranch Corp., 965 P.2d 1229,
1238 (Colo. 1998) (citing 1 Restatement, Property 3d (Servitude),
sec. 4.11); WRWC, LLC v. City of Arvada, 107 P.3d 1002, 1005
(Colo. Ct. App. 2004). In Lazy Dog Ranch, the Colorado Supreme
Court cited the Restatement, which states that “unless otherwise
provided, an appurtenant easement cannot be used to serve
property other than the dominant estate. The rationale is that
use to serve other property is not within the intended purpose of
- 30 -
the servitude.”22 1 Restatement, Property 3d (Servitude), sec.
4.11, cmt. b. (2000).
Here, the unrestricted easement over McIntyre’s property is
appurtenant to the Sylvester parcel. In that regard, the benefit
of the easement passed from the parcel’s previous owners to
petitioner when he bought the parcel. In addition, the Sylvester
parcel is the dominant estate with respect to the easement
because it is the property that is benefited by it. Accordingly,
Colorado law would prohibit petitioner from using the Sylvester
parcel’s unrestricted easement to benefit property other than the
Sylvester parcel. Lazy Dog Ranch v. Telluray Ranch Corp., supra
at 1238; 1 Restatement, supra sec. 4.11. This is true even
though petitioner owned both the Bull Mountain and Sylvester
parcels. 1 Restatement, supra sec. 4.11.23
22
The Colorado Supreme Court defined some of the key terms
as follows:
An easement is said to be “appurtenant” to property
when the benefit or burden of the easement “runs with”
an interest in property. Owners of the property are
entitled to the benefit, or subject to the burden, of
the easement due to their relation to the property.
Thus, when their property interest terminates, so does
their connection to the easement. * * * The property
burdened by the easement is customarily known as the
“servient estate,” while the property benefited by the
easement is called the “dominant estate.” * * *
Lazy Dog Ranch v. Telluray Ranch Corp., 965 F.2d 1229, 1234
(Colo. 1998).
23
As an example, if a hotel owner purchases a lot in an
(continued...)
- 31 -
What this means is that the Bull Mountain parcel’s access
over McIntyre’s land was still limited to agricultural purposes
even after petitioner purchased the Sylvester parcel.
Consequently, for this and other reasons, Mr. Weston’s large
positive adjustment to the Bull Mountain parcel’s fair market
value due to improved access is unwarranted.24
A second consequence of our access analysis is that Mr.
Weston was wrong to have valued the Bull Mountain and Sylvester
parcels as a single property. Presumably Mr. Weston believed
that once petitioner owned both parcels, he could string the
parcels’ easements together to provide access between them, thus
assembling the parcels or rendering them contiguous.25 As
23
(...continued)
adjacent subdivision and that lot holds an easement appurtenant
allowing it rights to use a community beach and recreational
facilities, the hotel owner is not entitled to use the beach or
the facilities for the benefit of its hotel operation.
1 Restatement, Property 3d (Servitude), sec. 4.11, ill. 1 (2000).
In an even more extreme example, if an individual purchases two
adjoining parcels of land, one of which includes the benefit of
an appurtenant easement over another parcel, and builds a house
which straddles the borders of those two parcels, the individual
is not entitled to use the easement for access to the part of the
house built on the other parcel of land. Id. ill. 2.
24
In any event, even if access to the Bull Mountain parcel
was no longer limited to agricultural use, given our
determination that the parcel’s highest and best use was
agricultural and recreational, any positive adjustment to its
fair market value would have been much smaller than Mr. Weston’s
adjustment.
25
Mr. Weston also cited “the concept of unity of use” to
explain why the Bull Mountain and Sylvester parcels could be
(continued...)
- 32 -
explained above, this was not permissible. See Lazy Dog Ranch v.
Telluray Ranch Corp., supra at 1238.
The Bull Mountain and Sylvester parcels are two separate
properties, separated from each other by a quarter mile. In
fact, the parties stipulated that the parcels are not contiguous,
and even the conservation easement documents that petitioner
signed refer to the parcels as “two legally distinct and
separately deeded properties.” For the reasons above, the Bull
Mountain and Sylvester parcels should have been valued
separately.26
25
(...continued)
considered a single property despite the fact that they are not
contiguous. We note that in condemnation cases “Three factors
are particularly helpful in ascertaining whether property taken
is part of a single, larger tract: physical contiguity, unity of
ownership, and unity of use.” United States v. 8.41 Acres of
Land, 680 F.2d 388, 393 (5th Cir. 1982). We are not persuaded
that unity of use is a relevant concept in the case before us.
Moreover, other than some possible savings in marketing costs, we
do not perceive that development costs would be markedly reduced
given the need for separate roads and utilities for the disparate
parcels. We therefore reject Mr. Weston’s analysis on this
point.
26
There is yet another reason why the Bull Mountain and
Sylvester parcels should have been valued separately. By valuing
the two parcels together and allocating the combined price per
acre to the Bull Mountain parcel, Mr. Weston factored the
attributes of the Sylvester parcel into his determination of the
Bull Mountain parcel’s fair market value. This may have
distorted his ultimate determination of the fair market value of
the Bull Mountain parcel. This is particularly problematic here
because the Sylvester parcel was treated separately under sec.
170(e)(1)(A), leaving only the question of the Bull Mountain
parcel’s value.
(continued...)
- 33 -
iii. Evidence of a Discounted Sales Price in 1999
Mr. Weston suggested in his supplemental report that the
Bull Mountain parcel’s $1,535,000 sales price may have been a
discounted price due to the financial distress of its seller,
Million. There is insufficient evidence to support that
suggestion.
At trial Mr. Weston admitted that he did not speak with
Million’s managing partner, Aaron Million, about any financial
distress that Million may have been experiencing. Mr. Weston
appears to have based his suggestion on the fact that the Bull
Mountain parcel “had been listed for sale at a higher asking
price for years” and that the price was lowered in the year
before petitioner purchased it.
In his testimony before the Court, Mr. Million acknowledged
that the Bull Mountain parcel had been on the market for years
and that its sales price had been lowered. He noted that the
26
(...continued)
A simple, albeit extreme, example can illustrate this point.
Assume that Goldacre is a 10-acre property with vast gold
deposits and a fair market value of $1,000 ($100 per acre) and
that Blackacre is a 10-acre property with no redeeming qualities
and a fair market value of $100 ($10 per acre). Valued together
Goldacre and Blackacre are still very valuable, with a fair
market value of around $1,100 ($55 per acre), because of
Goldacre’s gold deposits. If the fair market value of Blackacre
alone is determined by allocating the joint value of $55 per acre
to Blackacre, then the fair market value of Blackacre would be
$550. That result factors Goldacre’s gold deposits into
Blackacre’s fair market value, resulting in a large distortion
from its actual fair market value of $100.
- 34 -
parcel had been on the market on a for-sale-by-owner basis for
some time before he listed it with a real estate agent. It was
listed for 6 to 8 months, and at least three offers for parts of
the parcel were received, before petitioner purchased it. Mr.
Million also testified that he had moved to Fort Collins,
Colorado, 2 years before the sale of the Bull Mountain parcel to
petitioner. He testified, however, that he was not under
“duress” or “financial compulsion” when petitioner purchased the
parcel.
Mr. Lario, the real estate agent who worked with Mr. Million
to sell the parcel, testified that Million’s motivation to sell
the property may have increased after Mr. Million moved out of
the area. However, he also stated that he had no reason to think
that the sales price of the parcel to petitioner did not reflect
its fair market value.
On this evidence we cannot conclude that Million sold the
Bull Mountain parcel to petitioner at a discount or that any
positive adjustment is warranted with respect to the sales
comparison approach. The fact that the Bull Mountain parcel was
on the market for several years and that its asking price was
lowered is just as likely an indication that demand for the
parcel was limited as it is some reflection of financial
distress.
- 35 -
4. Conclusion as to the Fair Market Value of the Bull
Mountain Parcel Before Petitioner Granted the
Conservation Easement
We have determined that the October 6, 1999, sales price
should serve as the basis for determining the fair market value
of the Bull Mountain parcel before petitioner granted the
conservation easement. We have further determined that that
sales price should not be adjusted upward, as Mr. Weston
asserted, because of improved access or because the parcel was
sold to petitioner at a discount. We agree with both experts,
however, that a positive adjustment should be made because
properties in the Bull Mountain parcel’s neighborhood were
generally increasing in value between the time petitioner
purchased the parcel and when he granted the conservation
easement. Mr. Weston assumed a “very conservative appreciation
rate of 5% per year” while Mr. Packard’s ultimate conclusion
reflects 11-percent appreciation. Based on the evidence of
record we find that an 11-percent positive adjustment is generous
but reasonable. We therefore find that the fair market value of
the Bull Mountain parcel before petitioner granted the
conservation easement was $1,710,000.
B. The Fair Market Value of the Sylvester Parcel Before
Petitioner Contributed the Conservation Easement
The experts disagree on the fair market value of the
Sylvester parcel before petitioner granted the conservation
easement. Mr. Weston determined that it had appreciated in value
- 36 -
to $832,752 from its $671,350 sales price 2 months earlier.
Nevertheless, because of the restrictions imposed by section
170(e)(1)(A), he used $671,350 in his easement valuation. Mr.
Packard determined that the parcel had not appreciated in value
and was still worth $671,350. We agree with Mr. Packard that
$671,350 reflects the parcel’s fair market value before
petitioner granted the easement. As explained below, however,
even if this parcel had marginally appreciated 1 or 2 percent
based on an 11-percent-per-year appreciation rate, our ultimate
conclusion as to the amount of petitioner’s charitable
contribution with respect to the Sylvester parcel would be
unchanged because of section 170(e)(1)(A).
Because the Sylvester parcel did not appreciate in value
between the date petitioner purchased the parcel and the date he
granted the conservation easement, section 170(e)(1)(A) does not
apply. The amount of petitioner’s contribution with respect to
the Sylvester parcel is therefore the fair market value of the
conservation easement, which is in turn equal to the difference
between the fair market value of the parcel before petitioner
granted the easement ($671,350) and its fair market value
afterwards. See sec. 1.170A-14, Income Tax Regs. Put another
way, the amount of the contribution is the fair market value
before petitioner granted the easement reduced by the percentage
diminution in the parcel’s fair market value caused by the
- 37 -
easement. See, e.g., Griffin v. Commissioner, T.C. Memo. 1989-
130 (“Our evaluation of the totality of the evidence supports a
value for the easement of 20 percent of the $350,000 ‘before’
value of the property, or $70,000.”).
Accordingly, the amount of petitioner’s charitable
contribution with respect to the Sylvester parcel is exactly the
same regardless of whether the parcel appreciated in value or
not.27 Either way, the operative number is $671,350, which we
will reduce by the percentage diminution in the Sylvester
parcel’s fair market value.
C. The Fair Market Values of the Bull Mountain and
Sylvester Parcels After Petitioner Granted the
Conservation Easement
1. Mr. Weston’s Opinion
Mr. Weston determined that the fair market value of the Bull
Mountain and Sylvester parcels was diminished by 70 percent
because of the conservation easement. In reaching this
conclusion he considered the diminution in value caused by
conservation easements over six similar properties. He
determined that the diminution in value of those properties
ranged from 48 to 70-80 percent. In comparing the Bull Mountain
and Sylvester parcels with those other properties, a critical
27
If the Sylvester parcel had depreciated, we would have
used the depreciated value in our calculation. See sec. 1.170A-
14, Income Tax Regs. However, there is no evidence, and neither
expert suggests, that the parcel depreciated.
- 38 -
factor was the extent to which the easement restricted the use of
the property. He believed that the highest and best use of the
Bull Mountain and Sylvester parcels before petitioner granted the
easement was residential development and that the parcels were
limited to agricultural and recreational use after the easement.
He therefore concluded that “Due to the restrictive nature of the
subject conservation easement we are more confident at the higher
end of the range of diminution.” He provided the following
explanation in his September 28, 2007, supplemental report:
If the [Bull Mountain and Sylvester parcels] * * * had
been divided into 35-acre parcels, 68 separately
conveyable homesites could have been created, and if it
had been divided into 50-acre parcels (consistent with
our highest and best use conclusion), 48 separately
conveyable homesites could have been created. In any
event, density has been reduced by 95% to 97%. The
Easement, based on our analysis, caused a significant
diminution in the fair market value of the Bull
Mountain Ranch.
Mr. Weston supported his conclusion using the sales
comparison approach and comparing the parcels after petitioner
contributed the easement directly with other properties
encumbered by conservation easements. The comparison resulted
“in a range in value for the entire 2,412.40-acre subject
property of between $964,960-$1,688,680, bracketing our
conclusion of value developed by the percentage diminution
technique.”
- 39 -
2. Mr. Packard’s Opinion
Mr. Packard determined that the conservation easement
diminished the fair market values of the Bull Mountain and
Sylvester parcels by 0 to 10 percent. Like Mr. Weston, he
considered the diminution in value caused by conservation
easements over comparable properties. Also like Mr. Weston, he
paid particular attention to the restrictiveness of the easements
and whether they changed the highest and best use of the
properties. In his words: “The goal in analyzing an easement
encumbered property sale is to estimate the loss in value
attributable to the change in highest and best use resulting from
the conservation easement and reflected by the easement
encumbered sale price.” He indicated that when using that method
“The need to adjust for location differences is eliminated,
because the diminution in value is expressed as a percentage.”
In his report Mr. Packard included a chart that he referred
to as “the matrix”. The matrix incorporated information from 35
easement-encumbered properties and illustrated generally that the
amount of diminution caused by an easement is related to the
degree to which the easement changes a property’s highest and
best use. According to Mr. Packard, the matrix showed that the
diminution in value “for those properties that did not experience
a change in highest and best use * * * is quite small and was
often found to be 0%”.
- 40 -
In addition, Mr. Packard selected seven specific properties
from the matrix to compare with the Bull Mountain and Sylvester
parcels. Because Mr. Packard believed that the highest and best
use of the parcels before and after petitioner contributed the
easement was agricultural and recreational use, he chose
comparable properties that did not show any change in highest and
best use. After analyzing the comparables, he determined that
the fair market values of the parcels were diminished by 0 to 10
percent because of the easement.
Finally, Mr. Packard noted that there were no comparable
arm’s-length sales of easement-encumbered properties in Gunnison
County but that a similar sale involving subdivision covenants
resulted in no diminution in value.
3. Analysis
There are fundamental problems with both experts’
opinions.28 Mr. Weston’s conclusion of 70-percent diminution is
premised on his belief that the highest and best use of the Bull
Mountain and Sylvester parcels before petitioner granted the
easement was residential development. We found above that the
highest and best use of the Bull Mountain parcel was actually
continued agricultural and recreational use, and for the same
28
In light of the fundamental problems and because of the
conclusions discussed below, we need not dwell further on the
more specific problems raised by the experts with respect to the
methods and comparable properties used in their respective
analyses.
- 41 -
reason we find that the highest and best use of the Sylvester
parcel is also continued agricultural and recreational use.
Therefore, the development restrictions imposed by the easement
had much less effect on the parcels’ use than Mr. Weston has
suggested and would not warrant a 70-percent diminution in
value.29
Moreover, given our conclusions as to the fair market values
of the Bull Mountain and Sylvester parcels ($1,710,000 and
$671,350, respectively), even with 70-percent diminution in value
the amount of petitioner’s charitable contribution would not
exceed the $1,992,375 deduction that respondent has already
allowed.
With respect to Mr. Packard, we disagree with his conclusion
that the conservation easement may have had no, or only a
nominal, impact on the fair market values of the Bull Mountain
and Sylvester parcels.30 See Schwab v. Commissioner, T.C. Memo.
1994-232 (“We find it hard to imagine a prospective purchaser of
a 1,558-acre parcel of land who would not have considered the
29
We note as well that Mr. Weston’s report lacks critical
information about the comparable properties he considered; namely
the highest and best use of the properties before they were
encumbered by conservation easements. Without this information
it is impossible to tell how much effect the easements had on the
properties’ fair market values.
30
We also disagree with Mr. Packard’s use of the matrix.
Because it included general information that did not have a
specific connection to the Bull Mountain and Sylvester parcels,
we afforded it little weight in our analysis.
- 42 -
restrictions of the open-space easement in determining the
price.”). Further, he failed to consider two important factors.
First, for tax years beginning on or after January 1, 2000,
the State of Colorado allows a State income tax credit for
taxpayers who grant a qualified conservation easement on real
property located in Colorado. Colo. Rev. Stat. sec. 39-22-522(2)
(2000). At the time petitioner granted the conservation
easement, the maximum credit allowed was $100,000 per donation.
Id. sec. 39-22-522(4)(a). Any unused portion of the credit could
generally be carried forward for a maximum of 20 years. Id. sec.
39-22-522(5)(a). In addition, subject to certain limitations,
the taxpayer could transfer all or a portion of the credit to
another taxpayer. Id. sec. 39-22-522(7). Generally, the credit
a taxpayer could use was limited to the net tax liability
reported during the tax year; however, if State revenue exceeded
certain thresholds, a taxpayer could “elect to have the amount of
the credit not used as an offset against income taxes in said
income tax year refunded to the taxpayer.” Id. sec. 39-22-
522(5)(b)(I).
Mr. Packard disregarded the value of the Colorado State
income tax credits. By granting the conservation easement over
the Bull Mountain and Sylvester parcels, petitioner precluded any
future purchasers from granting a conservation easement and thus
from receiving the benefit of the tax credits. This should have
- 43 -
been at least considered in determining the parcels’ diminution
in fair market value. At trial Mr. Packard tried to explain his
lack of attention to the State credits by noting that the market
was generally not yet sophisticated enough to recognize the
potential value of the credits or factor them into fair market
value. We reject his explanation, which was based on the state
of the market at that time. For purposes of determining fair
market value, we must consider a hypothetical sale between a
willing buyer and a willing seller both having a reasonable
knowledge of relevant facts. See Arbor Towers Associates, Ltd.
v. Commissioner, T.C. Memo. 1999-213; sec. 1.170A-1(c)(2), Income
Tax Regs.
Second, Mr. Packard has seemingly neglected the possibility
that circumstances may change in the future. For example,
although there was little demand for residential property at the
time petitioner granted the easement, residential development may
be a realistic possibility in the future. In that event, the
conservation easement would nevertheless prevent petitioner or
his successors in interest from taking advantage of potentially
lucrative development opportunities. Mr. Packard should have at
least considered this possibility in his report and, if
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appropriate, reflected it in the diminution in value of the Bull
Mountain and Sylvester parcels’ fair market values.31
In sum, Mr. Weston’s determination of 70-percent diminution
is too high and Mr. Packard’s determination of 0- to 10-percent
diminution is too low. The correct percentage lies somewhere in
between; however, because of our conclusions with respect to the
fair market values of the Bull Mountain and Sylvester parcels, no
diminution in that range will lead to a larger deduction than
respondent has already allowed.
IV. Conclusion
Based on a thorough review of the evidence in this case, we
concluded that the fair market values of the Bull Mountain and
Sylvester parcels before petitioner granted the conservation
easement were $1,710,000 and $671,350, respectively. When
petitioner granted the conservation easement, the fair market
values of the parcels diminished, entitling him to a deduction.
They did not diminish so much, however, that petitioner is
31
Mr. Packard tried to explain that these two factors are of
minimal importance “in the real world”, but we are not persuaded.
To the extent future demand for residential development
could have been anticipated, any increase in fair market value
due to such demand would have had to have been discounted under
time value of money principles. There is no evidence that there
will be significant demand for residential development in the
area surrounding the Bull Mountain and Sylvester parcels in the
near to intermediate future. Accordingly, in light of the
necessary discount for the time value of money, the possibility
of future residential development does not affect our conclusion
as to the value of the conservation easement.
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entitled to a deduction larger than that which respondent has
already allowed. Accordingly, we sustain the deficiency
determined by respondent.
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered
for respondent.