Kenneth M. Brooks & Anita Wolke Brooks

United States Tax Court

T.C. Memo. 2022-122

KENNETH M. BROOKS AND ANITA WOLKE BROOKS,
Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

—————

Docket No. 28206-15. Filed December 19, 2022.

—————

Matthew Jay Howard and Kenneth D. Hall, for petitioners.

Shannon E. Craft, John T. Arthur, and Christopher D. Bradley, for
respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge: Respondent issued a notice of deficiency to
petitioners, Kenneth M. Brooks and Anita Wolke Brooks, in which he
disallowed carryover charitable contribution deductions relating to
petitioners’ interest in the Kenneth Brooks and Anita Wolke Brooks
Family, LLC’s noncash charitable contribution of a conservation
easement. The questions presented are whether petitioners are
(1) entitled to deduct carryover charitable contributions of $657,135
$763,835, and $743,862 and (2) liable for accuracy-related penalties
pursuant to section 6662(h), 1 for the 2010, 2011, and 2012 tax years,
respectively.

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Served 12/19/22
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[*2] FINDINGS OF FACT

The parties filed a Stipulation of Facts, which is hereby
incorporated by reference into our findings. When the Petition was filed,
petitioners resided in Virginia. On December 15, 2006, the Kenneth
Brooks & Anita Wolke Brooks Family, LLC 2 (LLC), which is co-owned
by petitioners, purchased 85.314 acres of real property known as Cotton
Row Farm in Liberty County, Georgia, for $1,350,000. On the same day,
the LLC subdivided the property into two parcels of 44.113 and 41.201
acres.

A. Easement Deed and Attachments

The LLC granted and recorded a conservation easement over the
41.201-acre parcel (encumbered parcel) on December 27, 2007, to
Liberty County, Georgia, a political subdivision of the State of Georgia
and a qualified organization pursuant to section 170(h)(3).

The deed granting the easement (Easement Deed) provides that

Grantor, for and in consideration of the sum of ten dollars
($10.00) and other good and valuable consideration and in
consideration of the covenants, mutual agreements,
conditions and promises herein contained, does hereby
grant unto the Grantee, its successors and assigns, forever
a conservation easement as defined in O.C.G.A. §§ 44-10-1
et seq. in perpetuity, over the Protected Property of the
nature and character and to the extent herein set forth.

The Easement Deed does not otherwise refer to any consideration paid
by Liberty County to petitioners or their LLC (the grantor).

The restrictions placed on the use of the encumbered parcel
include, among others, that the donor shall not “construct buildings,
means of access, or other structures on the Conserved Property”;
“excavate, dredge, mine, or remove loam, gravel, soil, rock, sand, coal,
petroleum or other materials from the Conserved Property”; “dike,
drain, fill, dredge, or otherwise remove the wetlands on the Conserved
Property”; “harvest the Conserved Property”; “display billboards, signs
or advertisements on or over the Conserved Property”; or “dump or place
soil, trash, garbage, waste, vehicles, appliances, machinery or other
materials on the Conserved Property.” However, the LLC reserved

2 The LLC is not subject to the TEFRA provisions. See § 6231(a)(1)(B)(i).
 3

[*3] enumerated rights (1) to construct and use, with certain
restrictions, two paddocks, a barn with up lighting and down lighting on
its one-acre parcel, rail fencing, underground and overhead utilities, and
five acres for agricultural activity; (2) to cut, burn, or remove certain
plants and trees to protect or restore the natural state of the encumbered
parcel; (3) to harvest timber to construct the paddocks; (4) to plant
indigenous trees and shrubs; (5) to make certain modifications to
encourage growth of certain native animal and insect species; (6) to
maintain or replace existing road beds, paths and all other land features
and structures; and (7) to use the encumbered parcel for personal
enjoyment not adverse to the conservation values. Notice must be
provided to Liberty County before exercising any of the reserved rights.

The terms of the Easement Deed include, in relevant parts, that
the terms and conditions are “set forth herein”; that the grantor agreed
to “convey and donate” the easement “as set forth herein”; and that the
covenants, mutual agreements, conditions and promises were “herein
contained.” The Easement Deed does not state whether it constitutes
the entire agreement between the parties.

Attached to the deed and identified as Exhibit A is a document
titled “Boundary Description and Protected Property Reference.” The
first page includes a half-page description of the property’s location, one
map showing the outside boundaries of the 41.201-acre parcel subject to
the easement, and a second map adding only that the parcel is bisected
by an unidentified element.

Attached to the deed and identified as “Exhibit B: Baseline
Survey Summary” is a document titled “Conservation Easement
Baseline Documentation Report” (Baseline Report). The report was
prepared by Frank McIntosh, a biologist employed at the time by
Georgia Land Trust, Inc. The report consists of five pages. The cover
sheet provides basic information such as names and dates. The second
page is the “Abstract,” which identifies the property owner, size, and
location, as well as providing directions and references to the Easement
Deed. The third page, “Condition of Property,” reiterates the boundary
description from Exhibit A and provides one paragraph each describing
the “Land Use and Current Use,” “Roads and Access,” and “Hydrology.”
Descriptions are limited to “[m]uch of the property” being “grassy
pasture” and providing that there are “isolated hardwoods throughout
the interior of the property.” The roads are described generally as “well-
maintained dirt roads,” one of which “runs roughly through the center
 4

[*4] of the property.” One section, labeled “Improvements,” states
simply: “Access roads.”

The fourth page, “Geological Information,” provides information
about the general area but no specific facts about the encumbered
parcel. The final substantive page consists of three paragraphs, or half
a page, describing 60% of the property’s soil types; general “Ecological
Features” such as “habitat for a variety of birds and game animals”; and
“Public Benefits” such as “some viewshed protection,” “isolated
wetland,” and “diminution of downstream flow” to “assist protection of
Payne Creek and the marshes associated with it and the Newport River
System.” The final page, titled “Declaration of Property Condition,”
provides that an authorized representative of Liberty County
acknowledges that the report is an accurate representation of the
condition of the encumbered parcel and includes several signatures.
There are no attachments or pictures following the report. The
Easement Deed authorizes Liberty County to enter the encumbered
parcel to conduct inspections to ensure ongoing compliance.

Liberty County is in southeastern coastal Georgia. Hampton
Island Preserve, where Cotton Row Farm is located, is approximately 15
miles southeast of Hinesville, the largest city in Liberty County. The
area surrounding Hampton Island Preserve is relatively rural and
lightly populated. A portion of Hampton Island Preserve has been zoned
as a planned unit development (PUD). Cotton Row Farm was never part
of the Hampton Island Preserve PUD. The first phase of construction of
Hampton Island Preserve, which consisted of 100 acres of lakes, eight
miles of limestone road, 20 acres of paddocks, two guest residences, and
four miles of trails, was completed in 2005. As of the date the
conservation easement was granted, 36 lots and seven farm properties
in Hampton Island Preserve had been sold, but only two of the lots had
been developed with homes.

Cotton Row Farm is mostly wooded, consisting of
premerchantable pine plantations with smaller areas of natural
hardwoods and some recently cut areas. It is a quarter mile east of
Interstate 95. The nearest interchange to access the interstate is at
least four miles away. The public road is accessed via an ingress and
egress easement over private property owned by an unrelated party;
there is no public road touching Cotton Row Farm.
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[*5] B. Charitable Contribution Deduction Claimed

The LLC claimed a charitable contribution deduction of
$5,100,000 on its Form 1065, U.S. Return of Partnership Income, for the
contribution of the easement to Liberty County for the taxable year
ending December 31, 2007. A Form 8283, Noncash Charitable
Contributions, with an appraisal summary was attached to the LLC’s
2007 tax return. The Form 8283 reported that the donated property was
a qualified conservation contribution on a 41.201-acre tract of vacant
land; that the donation was valued at $5,100,000; and that the property
was purchased on December 15, 2006. The adjusted or cost basis of the
donated property was reported as $1,350,000, the cost basis of the entire
85.314-acre contiguous parcel, instead of the cost basis of only the
41.201-acre encumbered parcel. Petitioners claimed a deduction of
$748,702 on their Form 1040X, Amended U.S. Individual Income Tax
Return, for the 2007 taxable year resulting from their interest in the
LLC’s contribution deduction and carried forward the remaining
deduction of $4,351,298 to future tax years. 3

C. Expert Valuations

Each party provided its own expert to value the conservation
easement. There were no sales of comparable conservation easements
during the relevant period. Both experts calculated the fair market
value of the easement by subtracting the value of Cotton Row Farm after
the granting of the easement from the value before the granting of the
easement.

Both experts determined that the highest and best use of Cotton
Row Farm before recordation of the Easement Deed was residential
subdivision and development. As of December 2007, the encumbered
parcel could be developed into no more than ten subparcels with a
minimum lot size of five acres. However, that restriction would change
if the encumbered parcel were to become part of the Hampton Island
Preserve PUD. The experts agreed that when determining the legal
permissibility of a particular “highest and best use,” the appraiser may
consider the likelihood that the subject property could be rezoned to
result in a better return on investment.

3 Relevant to the instant case, petitioners carried forward $657,135 of the

remaining deduction to their 2010 income tax return, $763,835 to their 2011 income
tax return, and $743,862 to their 2012 income tax return.
 6

[*6] Petitioners’ expert, Mr. Miller, applied the income approach 4 to
determine the potential value, less expenses, of developing and selling
single family homes on Cotton Row Farm. Mr. Miller concluded that
before the Easement Deed, the property could be developed into 42 lots,
sold over a period of several years at $400,000 per lot. Mr. Miller then
calculated that the property’s value in December 2007, one year after it
was sold for $1,350,000, was $7,660,000.

Mr. Miller relied on several steps, each with its own calculation,
to arrive at the present value of Cotton Row Farm. He relied on six lot
sales from the Hampton Island Preserve to arrive at the estimated sale
price of $400,000 per lot. 5 He acknowledged that in contrast to the six
sold lots, the encumbered parcel lots would lack marshland, a golf
course, and lake or river views; provide less privacy; and be farther from
existing amenities. To estimate development costs, Mr. Miller relied on
actual costs of the adjacent Hampton Island Preserve development. He
estimated a total cost of $1,316,868, or $31,354 per lot, for 42 lots. He
did not analyze whether Hampton Island Preserve’s larger size resulted
in per-lot savings unavailable to a smaller development. He analyzed
peak market trends of six coastal area, amenity-based, high-end
developments beyond Hampton Island Preserve with absorption rates
ranging from 0.82 to 8.87 sales per month, to arrive at an estimated
absorption rate of eight lots per year. On the basis of a survey of
discount rates for similar developments in the southeastern United
States, Mr. Miller determined that the average discount rate in the third
quarter of 2007 was 22.57%; in the calculations for the encumbered
parcel, he used a rounded 23% discount rate.

Mr. Miller’s analysis relies entirely on development of the LLC’s
property. He mischaracterized the zoning of the encumbered parcel but
opined that the error did not affect his conclusions because there was a
reasonable probability that the property could be rezoned for denser
development through incorporation into the Hampton Island Preserve
PUD. Mr. Miller misidentified the property’s location in relation to, or

4Respondent’s expert considered and rejected the income approach because
Cotton Row Farm was not being used as an income-producing property and did not
have a preliminary plat. He determined that using the development approach “would
be speculative and would not improve upon the results” of the sales comparison
approach.
5 Mr. Miller calculated two other potential resale prices: relying on four sales

of varied resale lots between April 2003 and July 2007, he calculated a price per lot of
$1,749,750; relying on a variety of 42 new lot sales between April 2003 and July 2007,
he calculated an average new lot price of $1,166,762.
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[*7] in other words, its access to, Interstate 95. Nevertheless, he
assumed that the encumbered parcel’s zoning would be changed and
that the increased development would actually occur on the basis of a
letter provided by the president of Hampton Island, LLC. The letter
waived restrictions on the subdivision pursuant to the declaration of
covenants and concluded that the property “shall be subject only to the
restrictions of Liberty County.” The president of Hampton Island, LLC,
has no influence over nor can he overrule Liberty County’s zoning
regulations. There was no similar document from Liberty County in
support of a change in zoning. When the easement was granted, the
encumbered parcel had neighboring properties other than those owned
by Hampton Island, LLC. There was no document from owners of
adjacent properties in support of rezoning the encumbered parcel or its
annexation to the Hampton Island Preserve PUD. Mr. Miller described
the immediate neighborhood as comprising single family homes.

To test the reasonableness of his value conclusion from the
income approach, Mr. Miller analyzed two sales in Hampton Island
Preserve. One sale, in April 2003, included a 6,360-square-foot
renovated plantation-style home, a 3,520-square-foot guest cottage, a
floating boat dock, a floatplane ramp, and a barn. Both properties had
marsh and river views. Mr. Miller did not include the 2006 sale of
Cotton Row Farm to the LLC as the sale of a comparable property in his
test of reasonableness. Mr. Miller did account for some differences in
the amenities between the lots whose sales he used for his comparable
sales and the potential lots. Of the six adjustments he made, one was
downward and he was silent about two others. Overall, the adjustments
were made upwards: “Comparable #1” received a net upward
adjustment of 60% and “Comparable #2” of 15%. When specifically
asked whether he took into account “the marsh view and the golf view,
the differences between those developments and the subject property,”
Mr. Miller acknowledged that it would be “difficult to account for that,
because I don’t have a development plan.”

To determine the present value of the potential residential
subdivision and development after encumbrance by the easement, Mr.
Miller again applied the income approach. He assumed that Cotton Row
Farm would be developed only on the unencumbered parcel into 22
residential lots rather than 42. He determined a value of $3,969,900;
the encumbered parcel on its own he valued at $61,800. Although
recognizing that the undeveloped nature of the encumbered parcel
would be an amenity to the developed unencumbered parcel, he did not
increase the value of the unencumbered lots. He calculated the present
 8

[*8] value for the whole property after the granting of the easement to
be $4,030,000.

Respondent’s expert, Mr. Petkovich, considered the likelihood
that the encumbered parcel could be rezoned and developed, and he
concluded that using sales of comparable undeveloped properties was
the more accurate method of valuation. Mr. Petkovich has experience
relying on the reasonably probable legal permissibility of a potential
highest and best use to appraise property using reasonably probable
facts. One such fact Mr. Petkovich considered in the instant case was
access. The encumbered parcel had no road frontage, and without
evidence or a description of more access, he could not reasonably assume
significant larger scale development of the property. Mr. Petkovich
furthermore concluded that the encumbered parcel would not support a
more dense development, even if one had been legally permissible,
because of the lack of aesthetic features. Nevertheless, Mr. Petkovich
recognized that the potential rezoning was feasible to provide a certain
premium. Specifically, Mr. Petkovich analyzed the extent to which
adding the subject property to the Hampton Island Preserve PUD would
increase its value. Mr. Petkovich considered the rate of absorption of
lots in Hampton Island Preserve when calculating this premium. Mr.
Petkovich determined that the value of Cotton Row Farm, as of the
effective date before the conservation easement, was $1,410,000.

Mr. Petkovich determined that after recordation of the Easement
Deed, the value of the unencumbered parcel, which could still be
developed, and the encumbered parcel, which acted as open space for
recreation to benefit the unencumbered parcel, was $940,000. Mr.
Petkovich checked his value conclusions by examining a number of
purchases of easements to estimate the diminution of value associated
with the conservation easement. The purchases of easements supported
Mr. Petkovich’s determination that the conservation easement resulted
in a 90% diminution in value of the encumbered parcel and an overall
33% diminution in value of Cotton Row Farm. By subtracting the “after”
value of $940,000 from the “before” value of $1,410,000, Mr. Petkovich
concluded that the fair market value of the conservation easement on
the effective date was $470,000.

D. Notice of Deficiency and Trial

Respondent mailed to petitioners a notice of deficiency on August
21, 2015, with respect to their taxable years ending December 31, 2010,
2011, and 2012. The only adjustments in the notice were disallowances
 9

[*9] of the carryforward deductions resulting from the 2007 charitable
contribution deduction and an increase in taxable income resulting from
qualified dividend income. Respondent also determined 40% accuracy-
related penalties resulting from gross valuation misstatements
pursuant to section 6662(h). The notice did not determine or calculate
a 20% accuracy-related penalty pursuant to section 6662(a).

On September 20, 2017, seven days before the trial date,
respondent provided notice to petitioners of the existence of a Civil
Penalty Approval Form approving the penalties in issue. The Standing
Pre-Trial Order required that all documents be stipulated or provided to
opposing counsel at least 14 days before the trial date (14-day rule).
Respondent sought at trial to introduce a signed, sealed, and certified
copy of the form, which (1) states that the gross valuation misstatement
penalties under section 6662(h) applied to the easement contribution
carryforwards to 2010, 2011, and 2012; (2) is signed by the group
manager under the heading “Group Manager Approval to Assess
Penalties Identified Above”; and (3) is dated October 28, 2014, more than
nine months before respondent issued the notice of deficiency to
petitioners. Petitioners object to the admission of the form.

OPINION

The notice of deficiency is generally presumed correct, and it is a
taxpayer’s burden to rebut this presumption. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of
legislative grace, and taxpayers generally bear the burden of proving
their entitlement to the deductions claimed. 6 INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). “[D]eductions are strictly
construed and allowed only ‘as there is a clear provision therefor.’” Id.
(quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)).

Section 170 allows individuals to deduct charitable contributions,
subject to certain percentage limitations, with a carryover of any excess
contributions. 7 See § 170(a), (b), (d). Generally, the contribution must
consist of the donor’s entire interest in the contributed property.
§ 170(f)(3)(A). However, under section 170(f)(3)(B)(iii), a deduction for a

6 Petitioners do not contend, and the Court does not find, that the burden of
proof has shifted pursuant to section 7491(a) on any of the matters before us.
7 We refer to petitioners’ deduction or contribution and the LLC’s deduction or

contribution interchangeably, as the deductions in issue resulted from petitioners’
interest as sole co-owners of the LLC.
 10

[*10] partial interest is allowed for a qualified conservation
contribution. A qualified conservation contribution is a contribution of
a qualified real property interest to a qualified organization exclusively
for conservation purposes. § 170(h)(1); Treas. Reg. § 1.170A-14(a). A
qualified real property interest is a restriction granted in perpetuity on
the use that may be made of real property, including an easement or
similar interest. Treas. Reg. § 1.170A-14(b)(2).

I. Carryover Charitable Contribution Deductions

A. Contemporaneously Written Acknowledgement Require-
ment of Section 170(f)(8)

Pursuant to section 170(f)(8)(A), “[n]o deduction shall be allowed
under subsection (a) for any contribution of $250 or more unless the
taxpayer substantiates the contribution by a contemporaneous written
acknowledgment of the contribution by the donee organization that
meets the requirements of subparagraph (B).” Subparagraph (B)
requires in pertinent part that the contemporaneous written
acknowledgment (CWA) include the amount of cash and a description of
any property other than cash contributed, and whether the donee
organization provided any goods or services in consideration for the
property. A deed of easement itself may satisfy the CWA requirement
of section 170(f)(8). See, e.g., Averyt v. Commissioner, T.C. Memo. 2012-
198.

In the absence of an explicit statement describing whether the
donee provided goods or services in exchange for the charitable
contribution, “the deed taken as a whole must prove compliance with
section 170(f)(8)(B)(ii).” French v. Commissioner, T.C. Memo. 2016-53,
at *11–12. “[F]actors that support compliance are that the deed recites
no consideration other than the preservation of the property and that
the deed contains a provision stating that the deed is the entire
agreement of the parties.” Id. at *12. The deed in French

did not include a provision stating that it is the entire
agreement of the parties. Without such a provision, the
IRS could not have determined by reviewing the
conservation deed whether [the taxpayers] received
consideration in exchange for the contribution of the
conservation easement. We conclude, therefore, that the
conservation deed taken as a whole is insufficient to satisfy
section 170(f)(8)(B)(ii).
 11

[*11] Id. at *12–13. In other words, silence in a deed serves as the CWA
that the donee provided no goods or services as consideration, in whole
or in part, only if the deed also qualifies that the terms of the deed are
the entire agreement. See Big River Dev., L.P. v. Commissioner, T.C.
Memo. 2017-166; 310 Retail, LLC v. Commissioner, T.C. Memo. 2017-
164.

The Easement Deed states that the easement was made “for and
in consideration of the sum of ten dollars ($10.00) and other good and
valuable consideration and in consideration of the covenants, mutual
agreements, conditions and promises herein contained.” The Court and
the parties agree that such text is tantamount to boilerplate, which can
be ignored. 8 See, e.g., RP Golf, LLC v. Commissioner, T.C. Memo. 2012-
282, at *10 n.7. The Easement Deed also lacks a merger or entire
agreement clause, 9 which is often the provision establishing that a deed
constitutes the entire agreement between the parties. See, e.g., Big
River Dev., T.C. Memo. 2017-166, at *11 (“The deed explicitly stated that
‘[t]his Deed reflects the entire agreement of [donor] and [donee]’ and that
‘[a]ny prior or simultaneous correspondence, understandings,
agreements, and representations are null and void upon execution
hereof, unless set out in this instrument.’ The deed of easement thus
negated the provision or receipt of any consideration not stated
therein.”); 310 Retail, LLC, T.C. Memo. 2017-164, at *16–17 (“The deed

8 Numerous state courts have also recognized that such text may mean that no
real consideration was given, that the consideration was nominal, or that the
consideration was substantial but was not disclosed. See, e.g., Young v. Fellows, 37
Conn. L. Rptr. 918 (Conn. Super. Ct. 2004); Boyers v. Boyers, 565 S.W.2d 658 (Mo. Ct.
App. 1978); Van Dyke v. Carol Bldg. Co., 115 A.2d 607, 609 (N.J. Super. Ct. App. Div.
1955) (“In a deed by one other than a fiduciary the true consideration is usually not
stated, but is expressed in the phrase ‘One dollar and other good and valuable
consideration.’”); Fry v. Emmanuel Churches of Christ, Inc., 839 S.W.2d 406 (Tenn. Ct.
App. 1992); Bale v. Allison, 294 P.3d 789 (Wash. Ct. App. 2013).
9 For text recognized as a standard merger clause in Georgia, see First Data

POS, Inc. v. Willis, 546 S.E.2d 781, 783 (Ga. 2001) (“[The] Agreement . . . constitutes
the entire agreement between the parties with respect to the subject matter contained
herein and supersedes all prior agreements and understandings, both oral and written
by and between the parties hereto with respect to the subject matter hereof.”), and
Ainsworth v. Perreault, 563 S.E.2d 135, 138 (Ga. Ct. App. 2002) (“This Agreement
constitutes the sole and entire agreement between the parties hereto and no
modification of this Agreement shall be binding unless signed by all parties to this
Agreement. No representation, promise, or inducement not included in this
Agreement shall be binding upon any party hereto.”). See also Authentic Agric.
Millworks, Inc. v. SCM Grp. USA, Inc., 586 S.E.2d 726, 729–30 (Ga. Ct. App. 2003)
(discussion of clause held not to be a merger clause).
 12

[*12] explicitly stated that it represented the parties’ ‘entire agreement’
and that ‘[a]ny prior or simultaneous correspondence, understandings,
agreements, and representations are null and void upon execution
hereof unless set out in this instrument.’ It thus negated the provision
or receipt of any consideration not stated therein.”); RP Golf, LLC, T.C.
Memo. 2012-282, at *10–11 (“[T]he agreement states that it constitutes
the entire agreement between the parties regarding the contribution of
the conservation easement. The Court therefore holds that the
agreement, taken as a whole, states that no goods or services were
received in exchange for the contribution.”); Averyt v. Commissioner,
T.C. Memo. 2012-198, 2012 WL 2891077, at *5 (“Additionally, the
conservation deed in the instant case . . . stipulates that the conservation
deed constitutes the entire agreement between the parties with respect
to the contribution of the conservation easement. Accordingly, the
conservation deed, taken as a whole, provides that no goods or services
were received in exchange for the contribution.”).

Petitioners contend that although the Easement Deed lacks a
merger or entire agreement clause, when taken as a whole it
nevertheless qualifies its terms as the entire agreement. Specifically,
petitioners point to the use of the word “donation” and to two references
that the terms of the donation are set forth “herein.” We do not find that
use of the word “donation” necessarily implies that there was no
consideration given, in whole or in part. Neither do we read “herein” to
necessarily mean “exclusively herein.” Even when taken together, these
provisions do not qualify the terms of the Easement Deed as the
exclusive and entire agreement.

Petitioners contend that there were, in fact, neither additional
negotiations or agreements regarding the terms of the contribution
outside of the Easement Deed, nor cash, goods, or services provided by
Liberty County to petitioners or the LLC in consideration for the
easement donation. Such contentions are irrelevant, however, to
determining compliance with the CWA requirement. 10 Proving the facts
that should have been included in the CWA cannot replace the strict
substantiation requirements of section 170(f)(8). The entire deduction
must be disallowed. See § 170(f)(8)(A); Addis v. Commissioner, 374 F.3d
881, 887 (9th Cir. 2004) (“The deterrence value of section 170(f)(8)’s total

10 Petitioners’ contention that they relied upon their tax return preparer and

legal advisers to provide all documentation required for them to legally claim the
charitable contribution deduction is also irrelevant as there is no professional reliance
or reasonable cause exception to the CWA requirement.
 13

[*13] denial of a deduction comports with the effective administration of
a self-assessment and self-reporting system.”), aff’g 118 T.C. 528 (2002).

The Easement Deed does not meet the requirements of section
170(f)(8) and, consequently, cannot serve as the CWA required by the
statute. Petitioners do not contend, and we do not find, that any other
documents in the record would satisfy the CWA requirement.
Petitioners therefore do not satisfy the requirements of section 170(f)(8),
and the deductions claimed for the contribution of the conservation
easement must be disallowed as a matter of law.

B. Baseline Document Requirements of Treasury Regulation
§ 1.170A-14(g)(5).

Respondent contends that even if petitioners meet the CWA
requirement, they fail to meet the requirements of Treasury Regulation
§ 1.170A-14(g)(5)(i).

The deduction for charitable contributions shall be allowed only
if verified under regulations prescribed by the Secretary. § 170(a)(1).
When the donor reserves rights the exercise of which may impair the
conservation interests of the property, the donor must provide
documentation sufficient to establish the condition of the property.
Treas. Reg. § 1.170A-14(g)(5)(i). The Baseline Report is the only
baseline documentation submitted into evidence. At most, the baseline
documentation also includes Easement Deed Exhibit A preceding the
Baseline Report. We therefore must address whether these are
sufficient, under Treasury Regulation § 1.170A-14(g)(5)(i), to establish
the condition of the property at the time of the gift.

The regulation describes the sorts of items that may constitute
adequate baseline documentation. 11 The regulation describes examples

11 Section 6001 requires that taxpayers maintain records “sufficient to show

whether or not such person is liable for tax” and, in so doing, “comply with such rules
and regulations as the Secretary may from time to time prescribe.” Treasury
Regulation § 1.6001-1(e) requires that such records “shall be retained so long as the
contents thereof may become material in the administration of any internal revenue
law.” This Court has repeatedly held that the burden falls on taxpayers to maintain
and present these records. See, e.g., Bailey v. Commissioner, T.C. Memo. 2012-96, 2012
WL 1082928, at *17 (“[T]axpayers are required to retain their books and records as
long as they may become material.” (citing Treas. Reg. § 1.6001-1(e))), aff’d, No. 13-
455, 2014 WL 1422580 (1st Cir. Mar. 14, 2014); Marcus v. Commissioner, T.C. Memo.
1988-3, 1988 Tax Ct. Memo LEXIS 3, at *55 (“Obviously, the records must be retained
until completion of proceedings in this Court.”).
 14

[*14] of information that, if included, would establish the condition of a
property at the time of a gift. For example, “survey maps from the
United States Geological Survey” could show “the property line and
other contiguous or nearby protected areas.” The Baseline Report
provides a metes and bounds property description but does not include
a survey map. Exhibit A includes similarly general maps lacking in
detail.

Documentation may include “[a]n aerial photograph of the
property at an appropriate scale taken as close as possible to the date
the donation is made” or “[o]n-site photographs taken at appropriate
locations on the property.” Treas. Reg. § 1.170A-14(g)(5)(i)(C) and (D).
The Baseline Report includes no photographs.

The regulation provides that the documentation may include:

A map of the area drawn to scale showing all existing man-
made improvements or incursions (such as roads,
buildings, fences, or gravel pits), vegetation and
identification of flora and fauna (including, for example,
rare species locations, animal breeding and roosting areas,
and migration routes), land use history (including present
uses and recent past disturbances), and distinct natural
features (such as large trees and aquatic areas).

Id. subdiv. (i)(B). The Baseline Report refers to maps which were not
attached. Regarding vegetation, flora, fauna, or distinct natural
features, the document identifies the type of soil in only a portion of the
property, and it appears to have been based on a review of map data
rather than an actual inspection. The only reference to the encumbered
parcel’s vegetation is that “[m]uch of the property is now grassy pasture.
There are isolated hardwoods throughout the interior of the property.”
The Baseline Report references an “isolated wetland retained in the core
of the property” but does not identify its precise location, size, or limits.
Petitioners’ LLC retains “[t]he right to maintain, or if necessary replace,
all existing road beds, paths, and all other land features and or
structures.” The entire description of the improvements to the easement
property is “Access Roads.” There is no information regarding the roads’
locations, sizes, or conditions.

Petitioners have failed to comply with the requirements in
Treasury Regulation § 1.170A-14(g)(5). The purpose of the baseline
documentation requirement is “to protect the conservation interests
 15

[*15] associated with the property, which although protected in
perpetuity by the easement, could be adversely affected by the exercise
of the reserved rights.” Id. subdiv. (i). While the Easement Deed
authorizes Liberty County to enter the encumbered parcel to conduct
inspections to ensure ongoing compliance, the information in the
Baseline Report is insufficient for us to evaluate whether changes fall
within the limits of the reserved rights. The deed allows for the
harvesting of forests on the property but only for construction of two
paddocks. The document does not describe the sizes or locations of the
forests, so it would be at minimum difficult and at maximum impossible
to gauge whether the amount harvested was reasonable for the
construction of two paddocks. The deed prohibits petitioners’ LLC from
“[d]iking, draining, filling, dredging or removal of wetlands.” The
Baseline Report does not provide a map or sufficiently detailed
descriptions to establish the wetlands’ location, size, or limits at or near
the time of the gift, so it would be difficult to impossible to identify any
change. The property owners may maintain or replace existing roads,
but without knowing the location of the access roads at the time of the
donation, it is difficult or impossible to prove whether a new road
replaces an old one. The requirement that the property owner alert
Liberty County to any exercise of the reserved rights is insufficient; it
relies on the property owner to police itself when it is precisely their
actions which the baseline requirement is intended to police.

The deficiencies in the Baseline Report undermine the protection
of the conservation interests associated with the encumbered parcel and
cannot be said to comply with the regulation’s requirements.
Accordingly, this is also a basis on which petitioners’ LLC’s claimed
deduction must be disallowed.

C. Substantiation Requirements of Treasury Regulation
§ 1.170A-13(c).

Congress acted to address the problem of overvaluing charitable
contributions in the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No.
98-369, § 155(a), 98 Stat. 494, 691–92. In relevant part the statute
requires anyone claiming a deduction under section 170 for a
contribution of property valued at more than $5,000 to attach an
appraisal summary and include certain information, including the cost
basis and acquisition date of the contributed property, to the return on
which the deduction is first claimed.
 16

[*16] Instead of reporting its basis solely in the 41.201-acre parcel over
which it granted an easement, the LLC reported its basis in the entire
85.314 acres purchased in 2006. The LLC therefore reported a basis of
roughly twice its actual basis in the encumbered parcel.

The purpose of the requirement to report cost basis in donated
property was “to alert the Commissioner, in advance of audit, of
potential overvaluations of contributed property and thereby deter
taxpayers from claiming excessive deductions in the hope that they
would not be audited.” RERI Holdings I, LLC v. Commissioner, 149 T.C.
1, 16–17 (2017) (first citing Staff of S. Comm. on Finance, 98th Cong.,
S. Prt. No. 98-169 (Vol. 1), at 444 (Comm. Print 1984); then citing Staff
of J. Comm. on Taxation, 98th Cong., General Explanation of the
Revenue Provisions of the Deficit Reduction Act of 1984, at 503–04
(Comm. Print 1984); and then citing Hewitt v. Commissioner, 109 T.C.
258, 264 (1997), aff’d, 166 F.3d 332 (4th Cir. 1998)), aff’d sub nom. Blau
v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). Respondent contends
that by reporting a cost basis of more than twice its actual basis, the
LLC failed to alert the IRS to the extent of its potential overvaluation,
thereby defeating the purpose of the requirement. Further, respondent
contends that this error leaves the appraisal summary in less than the
fully completed state required by the regulations, see Treas. Reg.
§ 1.170A-13(c)(2)(i), and that therefore the claimed deduction must be
disallowed.

The failure to fully complete an appraisal as required by Treasury
Regulation § 1.170A-13(c)(2)(i) may be independently sufficient to
warrant disallowance of the deduction. See § 170(f)(11)(A)(i).
Petitioners might be allowed a deduction despite the shortcomings,
however, if their failure was due to “reasonable cause and not to willful
neglect.” See § 170(f)(11)(A)(ii)(II). “Reasonable cause” requires a
taxpayer to exercise ordinary business care and prudence. See, e.g.,
United States v. Boyle, 469 U.S. 241, 246 (1985); Presley v.
Commissioner, T.C. Memo. 2018-171, at *66, aff’d, 790 F. App’x 914
(10th Cir. 2019). Whether a taxpayer had reasonable cause is a fact-
intensive inquiry that requires examination of all the facts and
circumstances. Presley, T.C. Memo. 2018-171, at *66; Crimi v.
Commissioner, T.C. Memo. 2013-51, at *99. If a taxpayer alleges
reliance on the advice of an accountant, return preparer, or other tax
professional, the taxpayer must show that he “actually relied in good
faith on the professional’s advice.” Crimi, T.C. Memo. 2013-57, at *99;
see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98–99
(2000), aff’d, 299 F.3d 221 (3d Cir. 2002); Treas. Reg. § 1.6664-4(c)(1)
 17

[*17] (requiring that the taxpayer have “reasonably relied in good faith
on [the] advice”).

Petitioners contend that reporting the $1,350,000 cost basis of the
entire 85.314-acre property, rather than only the cost basis of the
41.201-acre encumbered parcel, was a scrivener’s error. They further
contend that despite this error, they provided sufficient information in
the rest of the return and attachments to adequately disclose the
relevant facts of their conservation easement donation.

We have held that Congress specifically passed DEFRA’s
heightened substantiation requirements to prevent the Commissioner
from having to sleuth through the footnotes of millions of returns. Belair
Woods, LLC v. Commissioner, T.C. Memo. 2018-159, at *20. We cannot
find that, in reporting roughly twice the accurate cost basis, petitioners
substantially complied with DEFRA. See Loube v. Commissioner, T.C.
Memo. 2020-3, at *22-23. Accordingly, petitioners failed to meet the
requirements of Treasury Regulation § 1.170A-13(c)(2)(i), and this is
also a basis on which the deduction must be disallowed.

II. Penalties

For each of the years in issue, respondent determined in the
notice of deficiency a 40% accuracy-related penalty resulting from a
gross valuation misstatement pursuant to section 6662(h). The
Commissioner bears the burden of production with respect to an
individual’s liability for any penalty, including the accuracy-related
penalty. § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
To meet that burden, the Commissioner must come forward with
sufficient evidence indicating that it is appropriate to impose the
relevant penalty. Higbee v. Commissioner, 116 T.C. at 446. Once the
Commissioner has met the burden of production, the taxpayer bears the
burden of proving that the penalty is inappropriate. See Rule 142(a);
Higbee, 116 T.C. at 446–49.

A. Respondent’s Burden of Production: Section 6751(b)(1)

Respondent’s burden of production includes showing proper
written approval of the initial penalty determination by an immediate
supervisor. § 6751(b)(1).

The Standing Pre-Trial Order required that all documents be
stipulated or provided to opposing counsel by September 13, 2017, the
last day under the 14-day rule. Respondent did not stipulate or provide
 18

[*18] the Civil Penalty Approval Form (Approval Form) to petitioners’
counsel by September 13, 2017. Pursuant to Rule 131(b), an unexcused
failure to comply with a standing pretrial order may subject a party to
sanctions. One such sanction may be the exclusion of evidence offered
in violation of the 14-day rule. Kanofsky v. Commissioner, T.C. Memo.
2006-79, aff’d, 271 F. App’x 146 (3d Cir. 2008). In weighing the
appropriate sanction for violation of the 14-day rule, the Court considers
whether the opposing party was prejudiced by the failure. See
Thompson v. Commissioner, T.C. Memo. 2011-291, 2011 WL 6382704,
at *2 (“The pretrial order does not mandate exclusion . . . .”); Morris v.
Commissioner, T.C. Memo. 2008-65, 2008 WL 704208, at *1, aff’d, 431
F. App’x 535 (9th Cir. 2011).

Petitioners contend that respondent’s violation of the 14-day rule
prevented them from asserting a defense that respondent had failed to
satisfy his burden and thus resulted in significant prejudice. Petitioners
also contend that accepting the Approval Form would result in the
imposition of the penalty against petitioners without following required
procedure. Since Graev v. Commissioner, 149 T.C. 485 (2017),
supplementing and overruling in part 147 T.C. 460 (2016), wherein we
required the Commissioner to come forward with sufficient evidence
indicating that the imposition of a penalty subject to section 6751(b)(1)
was approved properly under this section, this Court has routinely found
that reopening the record to admit the Civil Penalty Approval Form into
evidence serves the interest of justice and is not prejudicial. See, e.g.,
Degourville v. Commissioner, T.C. Memo. 2022-93. Petitioners did not
raise compliance with section 6751(b)(1) before or, substantively, during
trial and nevertheless received the form before the record was closed. It
is therefore even more appropriate to accept the form into evidence.

Accordingly, respondent has met his burden of production as to
the penalty. We conclude that the requirements of section 6751(b)(1)
have been met because the Civil Penalty Approval Form shows written
supervisory approval of the initial penalty determination before
issuance of the notice of deficiency, and petitioners have not shown that
approval was actually required before that date. See Frost v.
Commissioner, 154 T.C. 23, 34–35 (2020); Hatfield v. Commissioner,
T.C. Memo. 2022-59, at *7.

B. Gross Valuation Misstatement

We have held that petitioners are not entitled to the carryover
charitable contribution deductions and that there is consequently an
 19

[*19] underpayment of tax on each of petitioners’ returns in issue.
Section 6662(h)(1) imposes an accuracy-related penalty if any part of an
underpayment of tax required to be shown on a return is due to, among
other things, one or more gross valuation misstatements. A gross
valuation misstatement includes any valuation misstatement where the
value of the property claimed on the tax return is 200% or more of the
correct value. § 6662(h)(2)(A). The taxpayer may not rely on a
reasonable cause, good-faith defense against imposition of the section
6662(h) penalty with respect to gross valuation misstatements of
charitable contribution properties. § 6664(c)(2); Chandler v.
Commissioner, 142 T.C. 279, 293 (2014). If imposed, the penalty is 40%
of the portion of the underpayment of tax to which the section applies.
§ 6662(h)(1).

The amount of a charitable contribution deduction pursuant to
section 170(a) is the fair market value of the donated property at the
time of the charitable contribution. 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). Relevant to
the instant case, the value of a conservation easement donation is “the
fair market value of the perpetual conservation restriction at the time
of the contribution.” Treas. Reg. § 1.170A-14(h)(3)(i). Respondent must
therefore show that petitioners’ valuation of the conservation easement
was 200% or more of the correct valuation. See 6611, Ltd. v.
Commissioner, T.C. Memo. 2013-49, at *75.

Petitioners’ LLC claimed on its 2007 return 12 that the
conservation easement in issue had a fair market value of $5,100,000.
For the penalties to apply, we would have to find that the value of the
conservation easement was $2,550,000 or below. Petitioners now
contend the easement value at the time of donation was $3,630,000.
Respondent contends the easement value was $470,000.

The fair market value of the easement is based on the sale prices
of comparable easements if there exists a substantial record of sales of
comparable easements. Treas. Reg. § 1.170A-14(h)(3)(i). When, as here,

12 The section 6662(h) gross valuation misstatement penalty applies to any

portion of an underpayment for a year to which a deduction is carried that is
attributable to a gross valuation misstatement for the year in which the carryover of
the deduction arises. Fakiris v. Commissioner, T.C. Memo. 2017-126, at *30,
supplemented by T.C. Memo. 2020-157; Treas. Reg. § 1.6662-5(c).
 20

[*20] there is not a substantial record of comparable easement sales, 13
“the fair market value of a perpetual conservation restriction is equal to
the difference between the fair market value of the property it
encumbers before the granting of the restriction and the fair market
value of the encumbered parcel after the granting of the restriction.” Id.
In a case such as this involving a conservation restriction covering
property that is contiguous to property owned by a donor, “[t]he amount
of the deduction . . . is the difference between the fair market value of
the entire contiguous parcel of property before and after the granting of
the restriction.” Id. We therefore must value the encumbered and
unencumbered parcels combined before and after the granting of the
easement.

Where the “before and after” analysis is used, “the fair market
value of the property before contribution of the conservation restriction
must take into account not only the current use of the property but also
an objective assessment of how immediate or remote the likelihood is
that the property, absent the restriction, would in fact be developed.”
Id. subdiv. (ii). Additionally, if the conservation easement “allows for
any development, however limited, on the property to be protected, the
fair market value of the property after contribution of the restriction
must take into account the effect of the development.” Id.

We agree with the determination made by respondent’s expert,
Mr. Petkovich, that the value of the subject property as of the effective
date before the conservation easement was $1,410,000. This valuation
is consistent with the $1,350,000 price petitioners paid for the subject
property only one year earlier in an arm’s-length transaction for cash.
His valuation explicitly accounted for the possibility of the property’s
being annexed and developed into the Hampton Island Preserve PUD.

We also agree with Mr. Petkovich’s assessment that the income
approach was too speculative to yield an accurate valuation. The Court
has upheld the application of the income approach when valuing
easements with a highest and best use as subdivision development. See,
e.g., Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283, aff’d, 493
F. App’x 944 (10th Cir. 2012); Kiva Dunes Conservation, LLC v.

13 As stated in the Findings of Fact, Mr. Petkovich did examine a number of

purchases of comparable easements to check his valuation. Although the number of
purchases was not substantial, the values involved supported Mr. Petkovich’s
determination, discussed below, that the conservation easement resulted in a 90%
diminution in value of the encumbered parcel and an overall 33% diminution in value
of Cotton Row Farm.
 21

[*21] Commissioner, T.C. Memo. 2009-145, 2009 WL 1748862. When
the income approach is used, the Court examines the critical
assumptions made by each expert appraiser to decide the plausibility of
those assumptions in reaching the appropriate values. Kiva Dunes
Conservation, LLC v. Commissioner, 2009 WL 1748862, at *4. The
assumptions made by petitioners’ expert, Mr. Miller, are insufficiently
plausible to support his valuation. 14 Mr. Miller did not cite any reason,
and petitioners provided no support, for the contention that Liberty
County would approve a zoning change. He also provided no basis, and
petitioners provided no evidence, for presuming that neighboring
property owners who granted easement access to the nearest highway
and main roadway would support such development. The letter from
the Hampton Island, LLC, president does not speak to either of these
barriers to development. Furthermore, Mr. Miller himself recognized
the difficulty in accounting for the difference between a property being
valued and comparable properties when there is no development plan.

Even if we were to find that development was plausible, Mr.
Miller’s calculations include significant errors inflating his valuation.
Mr. Miller incorrectly identified the zoning of the subject property;
stated an incorrect location of the subject property in relation to
Interstate 95; and identified the immediate neighborhood as comprising
single family homes when all of Hampton Island Preserve had only two
homes built at the time of the easement donation. He insufficiently
accounted for differences between comparable developments and the
subject property because he had no development plan. Using the
development costs from Hampton Island Preserve was unreasonable
without adjusting for the fact that the per-unit development cost would
be higher for a smaller development. Furthermore, he erred on the
highest possible number of lot developments and the highest possible
absorption rate and rounded up the discount ratio. Even in analyzing
sales of comparable properties to verify the reasonableness of his

14 Respondent contends that the Court should exercise its authority to reject

Mr. Miller’s opinion as to the value of the conservation easement in full because he has
a history of dishonesty; he plagiarized portions of his report; and the report includes
errors of both commission and omission which culminate in a conclusion of value that
is incredible. See, e.g., Chiu v. Commissioner, 84 T.C. 722 (1985) (rejecting an expert’s
testimony as incredible when the expert’s opinion of value was so exaggerated as to
make it unrealistic); Fuchs v. Commissioner, 83 T.C. 79, 99 (1984); Dean v.
Commissioner, 83 T.C. 56, 75 (1984); Buffalo Tool & Die Mfg. Co. v. Commissioner, 74
T.C. 441, 452 (1980) (finding that experts may lose their usefulness when they merely
become advocates for the position argued by a party). We need not rule on the
contention, as we find Mr. Petkovich’s analysis to be correct on the merits.
 22

[*22] valuation, Mr. Miller used extreme examples and figures. One of
only two sales he relied on for his calculation occurred more than four
years before the effective date of the easement deed and included
significant improvements. The values of both properties were adjusted
upwards, one by 60%. He ignored the fact that the 2006 sale of the
property in issue would have provided an arm’s-length and very
appropriate comparable to a theoretical sale in 2007.

We agree with respondent’s contention that aside from the issues
detailed above, Mr. Miller’s ultimate conclusion appears incredible as a
practical matter. He determined a fair market value for the
conservation easement, a subset of property rights, nearly six times the
per-acre amount for which the LLC had purchased the fee simple
interest in Cotton Row Farm just 377 days earlier. We agree with Mr.
Petkovich’s assessment that subtracting the after value of $940,000
from the before value of $1,410,000 yields a fair market value for the
conservation easement of $470,000 on its effective date. Accordingly, we
hold that petitioners are liable for the 40% accuracy-related penalty
resulting from a gross valuation misstatement pursuant to section
6662(h) as determined for each of the years in issue.

To reflect the foregoing,

Decision will be entered for respondent.