                        109 T.C. No. 16



                    UNITED STATES TAX COURT



CHARLES H. BROWNING, JR., AND PATRICIA L. BROWNING, Petitioners
        v. COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 16336-94, 20287-95.       Filed November 25, 1997.



         H county has a program to preserve farmland by
    purchasing development rights from landowners. Under
    that program, Ps conveyed an easement to the county in
    consideration of a cash downpayment and an installment
    note. Ps claimed a charitable contribution on the
    basis that they had made a “bargain sale” of the
    easement to the county. The consideration received by
    Ps from the county was consistent with consideration
    paid by the county to other participating landowners
    under the program. Relying on sec. 1.170A-14(h)(3)(i),
    Income Tax Regs., R argues that evidence of
    consideration paid by the county under the program is
    determinative of the fair market value of the easement.
         Held: Because Ps have shown that the market
    created by the county under the program was populated
    by sellers intending to make gifts to the county and
    was not determinative of fair market value, Ps are
    entitled to present evidence of the fair market value
    of their land before and after the conveyance of the
                                 - 2 -


     easement. Held, further, fair market value of easement
     determined. Held, further, economic benefit of
     charitable contribution deduction, tax-free interest,
     and tax deferral from installment sale are not part of
     amount realized by petitioners; amount realized and
     charitable contribution determined.




     James L. Thompson, Lewis R. Schumann, and Glenn M. Anderson,

for petitioners.

     Susan T. Mosley and Warren P. Simonsen, for respondent.



     HALPERN, Judge:     These consolidated cases involve the

following determinations by respondent of deficiencies in

petitioners’ Federal income taxes:

                    Year                 Deficiency
                    1990                   $16,910
                    1991                     3,481
                    1992                     7,720
                    1993                     4,013

The issue in dispute is the amount (if any) of petitioners’

charitable contribution on account of petitioners’ conveyance to

Howard County, Maryland, in 1990 of an easement relating to

certain real property.

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.
                               - 3 -


                         FINDINGS OF FACT

Introduction

     Some facts have been stipulated and are so found.      The

stipulation of facts filed by the parties, along with

accompanying exhibits, is incorporated herein by this reference.

     Petitioners resided in Woodbine, Maryland, at the time the

petitions herein were filed.

Subject Property

     The real property that is the subject of this case is a

52.44 acre tract of land located at 1874 Florence Road, Woodbine,

Howard County, Maryland (the land and Howard County or the

county, respectively).   The land has been in Mrs. Browning's

family for six generations and was acquired by petitioners in

1987 following the death of Mrs. Browning’s parents.    The

principal use of the land is agricultural.   The land is situated

between tracts of land owned by William Barnes, to the north (the

Barnes tract), and by Gene Mullinix, to the south (the Mullinix

tract).

Conveyance

     By deed of easement dated December 14, 1990 (the conveyance

date), petitioners conveyed to Howard County an easement

restricting development of the land (the easement).    In

consideration thereof, petitioners received $30,000 in cash
                               - 4 -


immediately and Howard County’s agreement to make installment

payments of an additional $279,000 over a period of approximately

30 years (for a total sales price of $309,000).   The bulk of the

sales price ($235,000) is to be paid at the end of the 30-year

installment period.   Interest on the unpaid balance of the sales

price is payable at a minimum rate of 8 percent a year.




Land Preservation Program

     Howard County acquired the easement pursuant to the county’s

Agricultural Land Preservation Program (the Program).    The

Program is the county’s primary tool for preserving farmland.

Pursuant to the Program, the county purchases development rights

from landowners and holds those rights in perpetuity.    The only

permissible use of land in the Program is agricultural use.     A

landowner’s participation in the Program is voluntary.    The

objective of the Program is to support the agricultural community

by helping to keep the county’s land base available for farming

and by minimizing the impact of residential development in

agricultural areas.

     Prior to 1989, Howard County was limited in that, by law,

the most it could pay for development rights was 50 percent of

the fair market value of the subject land.   In 1989, Howard
                                - 5 -


County invigorated the Program by removing the purchase price

limitation and by adopting a new financing mechanism involving

installment purchase agreements.    The installment purchase

agreements were to have a term of approximately 30 years, which

the county believed allowed it to leverage its accumulated funds

over an extended period.    The county’s obligation to make

installment payments was described by the county as a general

obligation of the county.    The county advised interested

landowners that potential benefits of a sale to the county

included tax-exempt interest on the installment obligation, the

deferral of taxes on capital gains, and a charitable contribution

deduction.

     Although, after 1988, Howard County was not limited by law

in what it could pay for development rights, the county initially

adopted a policy of paying no more than $6,500 an acre (later

increased to $6,600) (the limitation).    The maximum price was

paid for the best qualified farmland as determined by a formula

adopted by the county, and lesser amounts were paid for lesser

qualified farmland.    The limitation was adopted as a budgetary

constraint because the county had limited funds to purchase

development rights to the 20,000 to 30,000 acres it wished to

encumber.    Given Howard County’s knowledge of the value of

farmland in the county, the limitation was fixed so as to produce
                                - 6 -


a price equal to only a portion (50 to 80 percent) of the maximum

expected fair market value of development rights.    In the case of

each acquisition of development rights pursuant to the Program,

before an offer was made by Howard County, the county obtained an

appraisal of the value of the subject property both encumbered

and unencumbered by the development restriction.    The price

offered by the county was always less than the reduction in fair

market value indicated by the appraisal.

Market for Development Rights

     During 1990, the only purchaser of development rights to

farmland in Howard County was the county, under the Program.




Petitioners’ Charitable Contribution Deductions

     With respect to petitioners’ participation in the Program,

Howard County obtained an appraisal by Edward A. Griffith of the

E.A. Griffith Real Estate Co., Towson, Maryland.    Mr. Griffith is

an experienced real estate appraiser.   Mr. Griffith conducted his

appraisal as of April 10, 1990, and concluded that the fair

market value of the land was $771,600, the agricultural value of

the land was $173,052, and the value of the easement was

$598,500.
                                    - 7 -


     Mr. Griffith updated his appraisal of the land for

petitioners on February 27, 1991, and concluded that the fair

market value of the land as of December 1, 1990, remained

$771,600.    In accordance with Mr. Griffith’s appraisal of the

easement at $598,500, petitioners claimed a charitable

contribution of $289,500 during 1990, which is the difference

between the appraised value of $598,500 and the $309,000 received

for the easement from Howard County.          Because of annual

limitations on the amount of the deduction that may be claimed by

an individual on account of charitable contributions, petitioners

claimed deductions on account of the conveyance of the easement

to the county as follows:

                            1990             $52,194
                            1991              23,813
                            1992              51,645
                            1993              44,895

                            Total           $172,547

Respondent disallowed those deductions on the grounds that

petitioners had failed to substantiate the charitable

contribution resulting from the conveyance of the easement.

Expert Testimony

     Petitioners’ Experts

            Stanley O. Benning
                                 - 8 -


     Petitioners presented the expert testimony of Stanley O.

Benning, president of Benning & Associates, Inc., land planning

consultants.   Mr. Benning is registered as a landscape architect

in Maryland and other States and is an experienced land planner.

Mr. Benning has opinions as to the number of 3-acre estate lots

that could be developed on the land under three alternative

scenarios:   (1) development of the land in conjunction with both

the Barnes and Mullinix tracts, (2) development of the land in

conjunction with only the Barnes tract, and (3) development of

the land alone.   Mr. Benning is of the opinion that, under the

first two scenarios, 16 lots could be developed on the land and,

under the third scenario, 15 lots could be developed on the land.

Mr. Benning’s opinions are expressed in a report dated

September 16, 1996 (the Benning report).

          Gary Lee Sapperstein

     Petitioners presented the expert testimony of Gary Lee

Sapperstein of Sapperstein & Associates, real estate appraisers.

Mr. Sapperstein is a certified general real estate appraiser in

Maryland and other States.   Mr. Sapperstein has opinions as to

the fair market value of the easement as of the conveyance date.

Mr. Sapperstein believes that, as of the conveyance date, the

highest and best use of the land was for development into single

family residential lots.   Mr. Sapperstein has reviewed the
                              - 9 -


Benning report and, apparently, accepts its conclusions as to lot

yield:

     The * * * [Benning report] illustrates that the subject
     property’s size, shape and topography is capable of
     being developed with 15 single family residential lots.
     It should be noted that there is a potential for an
     increase in the yield to 16 lots if the property were
     to be jointly developed with the adjacent property
     owners.

Mr. Sapperstein believes that the highest and best use of the

land after conveyance of the easement is as a farm (subject to

the restrictions of the easement).

     Mr. Sapperstein was aware of previous conveyances of

development rights to Howard County under the Program, but he

concluded that there did “not exist a substantial record of ‘fair

market value’ transfers that present a meaningful or valid

comparison to the subject property.”   As a disadvantage, he

mentions the initial limit of 50 percent of fair market value of

the subject land and the subsequent per acre cap of $6,600.

Mr. Sapperstein chose to estimate the value of the easement by

using the “Before and After” approach, comparing market data for

comparable properties sold with development rights intact to

market data for properties sold for agricultural use.

Mr. Sapperstein concludes that the value of the development

rights that were sold to Howard County is the difference between

the “before” and “after” values.
                                - 10 -


     Based on his assumptions as to highest and best use and lot

yield, Mr. Sapperstein reached the conclusion that (1) if 15 lots

could be developed on the land, the fair market value of the

easement on the conveyance date was $518,000, and (2) if 16 lots

could be developed on the land, the fair market value of the

easement on the conveyance date was $563,000.       Mr. Sapperstein

provides the following tables to illustrate his calculations (the

entries for improvements reflect a dwelling on the land):

                           15 Lot Scenario

     Valuation        Land          Improvements         Total

     Before          $675,000            $375,500      $1,050,500
     After            157,000             375,500         532,500

     Easement Value (15 lots)                            $518,000

                           16 Lot Scenario

     Valuation        Land          Improvements          Total

     Before          $720,000            $375,500      $1,095,500
     After            157,000             375,500         532,500

     Easement Value (16 lots)                            $563,000

     Respondent’s Expert

          M. Ronald Lipman

     Respondent presented the expert testimony of M. Ronald

Lipman of Lipman Frizzell & Mitchell, LLC, real estate appraisers

and consultants.   Mr. Lipman is a certified general real estate

appraiser in Maryland and other States.      Mr. Lipman has an
                               - 11 -


opinion as to the fair market value of the easement as of

December 1, 1990.   Mr. Lipman believes that, as of that date, the

highest and best use of the land was for development into single

family residential lots.   As was true for Mr. Sapperstein,

Mr. Lipman believes that the highest and best use of the land

after conveyance of the easement is as a farm (subject to the

restrictions of the easement).

     Montgomery County is adjacent to Howard County.    Mr. Lipman

was aware that, in Montgomery County, sales of development

rights, known as “Transferable Development Rights” (TDRs), occur

with some frequency.   Mr. Lipman testified that a Montgomery

County landowner who conveys a TDR gives up the right to

residential development and is left with land available only for

agricultural or similar use.   He believes that sales of TDRs in

Montgomery County are at prices that represent “a true indication

of arms length negotiations for the totality of the development

rights”.   Mr. Lipman believes that Montgomery County sales of

TDRs present “dependable comparable sale[s] in the context of

development rights valuation and can be used as direct sales

comparisons.”   Mr. Lipman notes that Howard County's instructions

to their appraisers state:   “By law, Howard County may not pay

more for the easement than fifty (50) percent of the appraised

fair market value of the property.”     (Fn. ref. omitted.)
                              - 12 -


Mr. Lipman recognizes that Howard County landowners may accept a

price from the county below the before and after differential in

value of their land.   He concludes:

          Accordingly, while the Montgomery County sales of
     TDR’s adequately represent the totality of monetary
     award and therefore are dependable vis-a-vis the direct
     comparison approach, development rights sales in Howard
     County do not reflect those characteristics.
     Therefore, the Howard County sales themselves do not
     constitute full consideration and we cannot use them
     from a direct comparison perspective. * * *

Mr. Lipman considers data from Montgomery County sales of TDRs

that “would suggest development rights values for property in

Howard County by direct comparison in the range of $6,000 to

$6,500”.   Nevertheless, he concludes:   “After considering this

data, we believe that the before and after approach to value is a

more accurate measure of the subject’s development rights.”

During his oral testimony, Mr. Lipman agreed that data from

Montgomery County sales of TDRs is irrelevant to determining the

fair market value of the easement.

     Based on his assumptions as to highest and best use,

Mr. Lipman reached the conclusion that the fair market value of

the easement on December 1, 1990, was $367,000.    Mr. Lipman

provided the following table to illustrate his calculations (the

entries for improvements reflect a dwelling on the land):
                               - 13 -


                              Land           Impvts.         Total

Before Value                $524,000        $387,300       $912,000
Less: After Value            157,000         387,300        545,000

Easement Value (rounded): $367,000             N/A         $367,000



                               OPINION

I.    Introduction

       Petitioners assert that they made a bargain sale of the

easement to Howard County and that they are entitled to claim a

charitable contribution equal to the difference between the fair

market value of the easement and the amount realized from the

sale.    Respondent contends that petitioners have failed to

demonstrate that the fair market value of the easement exceeded

the amount realized from the sale.      There is no dispute regarding

petitioners' satisfaction of any other requirements set forth in

section 170 and the regulations thereunder, including whether the

contributed property (if any) constitutes a “qualified

conservation contribution” under section 170(h)(1).     Therefore,

the only issues we must address are the fair market value of the

easement and the amount realized from the sale.

II.    Principal Provisions of Law

       Section 170(a)(1) provides the following general rule with

respect to charitable contributions:
                                - 14 -


     There shall be allowed as a deduction any charitable
     contribution (as defined in subsection (c)) payment of
     which is made within the taxable year. A charitable
     contribution shall be allowable as a deduction only if
     verified under regulations prescribed by the Secretary.

     Section 1.170A-1(c)(1), Income Tax Regs., provides in

pertinent part:    “If a charitable contribution is made in

property other than money, the amount of the contribution is the

fair market value of the property at the time of the

contribution”.    Fair market value, as defined by the regulations,

“is 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.”    Sec. 1.170A-1(c)(2), Income Tax Regs.

     Section 1.170A-7(c), Income Tax Regs., provides that, except

as provided in section 1.170A-14, Income Tax Regs., the amount of

the deduction under section 170 in the case of a partial interest

in property is the fair market value of the partial interest at

the time of the contribution.

     Section 1.170A-14(h)(3)(i), Income Tax Regs., in part,

provides as follows:

     The value of the contribution under section 170 in the
     case of a charitable contribution of a perpetual
     conservation restriction is the fair market value of
     the perpetual conservation restriction at the time of
     the contribution. See §1.170A-7(c). If there is a
     substantial record of sales of easements comparable to
     the donated easement (such as purchases pursuant to a
                               - 15 -


       governmental program), the fair market value of the
       donated easement is based on the sales prices of such
       comparable easements. If no substantial record of
       market-place sales is available to use as a meaningful
       or valid comparison, as a general rule (but not
       necessarily in all cases) 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
       property after the granting of the restriction. * * *

III.    Arguments of the Parties

       Petitioners, relying principally on the testimony of their

experts, contend that the fair market value of the easement on

the conveyance date was $563,000.1      Petitioners argue that the

amount realized on the sale of the easement is $309,000, and,

therefore, the amount of the charitable contribution is $254,000.

       Respondent argues that petitioners’ conveyance of the

easement to Howard County did not constitute a bargain sale

because the amount paid by Howard County to petitioners was in


1
     Petitioners recognize that $563,000 is less than the
$598,500 (1) determined by Mr. Griffith in his appraisal as the
fair market value of the easement and (2) used by petitioners in
determining their claim of a $289,500 charitable contribution on
account of their sale of the easement to Howard County.
Petitioners ask that their return be “corrected to read * * *
$254,000” for the fair market value of the contributed portion of
the easement to Howard County. Because of the annual limitation
on the amount of the deduction that may be claimed by an
individual on account of charitable contributions, see sec.
170(b), petitioners’ requested correction does not affect the
deficiencies determined by respondent for the years in question.
We need deal no further with the consequence of petitioners’
request for a correction of their return.
                             - 16 -


line with the amount that the county paid generally for

development rights under the Program and, thus, represented the

fair market value of the easement.    Respondent relies on section

1.170A-14(h)(3)(i), Income Tax Regs., which prescribes a

methodology for determining the fair market value of donated

easements of the type conveyed by petitioners to the county.

Respondent argues that there is a universe of sales of

development rights to the county under the Program, that that

universe constitutes a substantial record of sales of comparable

development rights, and that there were no other sales of

development rights in the county during 1990.   Relying on section

1.170A-14(h)(3)(i), Income Tax Regs., respondent denies the

relevance of any appraisal evidence that would support any

different (greater) fair market value.   Thus, by, in effect,

defining the fair market value of the property transferred by

what the county paid for it, respondent denies that petitioners

made a bargain sale to the county; denying that they made a

bargain sale, respondent denies that they made a charitable

contribution.

     Alternatively, respondent argues that the fair market value

of the easement is no greater than $367,000 and that the

“valuable benefits” received by petitioners, including the

$309,000 and the anticipated charitable contribution deductions,
                              - 17 -


must be subtracted from that figure to determine properly the

amount of the charitable contribution.2

IV.   Analysis of the Fair Market Value of the Easement

      A.   Introduction

      A bargain sale is a transfer of property that is in part a

sale or exchange and in part a gift.   See section 1.1001-1(e)(2)

Example (3), Income Tax Regs., which provides as follows:

      A transfers property to his son for $30,000. Such
      property in A’s hands has an adjusted basis of $30,000
      (and a fair market value of $60,000). A has no gain
      and has made a gift of $30,000, the excess of $60,000,
      the fair market value, over the amount realized,
      $30,000.

Where the bargain sale is to a charitable organization, the gift

generally constitutes a charitable contribution.   See sec.


2
     It should be noted that, in making the alternative argument,
respondent does not rely on the following sentences of sec.
1.170A-14(h)(3)(i), Income Tax Regs.:

      If, as a result of the donation of a perpetual
      conservation restriction, the donor or a related person
      receives, or can reasonably expect to receive,
      financial or economic benefits that are greater than
      those that will inure to the general public from the
      transfer, no deduction is allowable under this section.
      However, if the donor or a related person receives, or
      can reasonably expect to receive, a financial or
      economic benefit that is substantial, but it is clearly
      shown that the benefit is less than the amount of the
      transfer, then a deduction under this section is
      allowable for the excess of the amount transferred over
      the amount of the financial or economic benefit
      received or reasonably expected to be received by the
      donor or the related person. * * *
                              - 18 -


1.170A-4(c)(2)(ii), Income Tax Regs.   “In order for a conveyance

to constitute a charitable contribution as a bargain sale the

seller must make the conveyance with the requisite charitable

intent and the fair market value of the property on the date of

the sale must in fact exceed the sales price.”   Grinslade v.

Commissioner, 59 T.C. 566, 577 (1973); accord Waller v.

Commissioner, 39 T.C. 665, 677 (1963); see also Stark v.

Commissioner, 86 T.C. 243, 255-256 (1986) (taxpayer who makes a

bargain sale to charity is entitled to claim a charitable

contribution equal to the difference between the fair market

value of the property and the amount realized from the sale).     It

is clear from respondent’s briefs that respondent is not

challenging petitioners’ charitable intent (“respondent would

concede that petitioners’ evidence as to the subjective beliefs

of the parties is persuasive on the issue of donative intent”),

but is arguing that the fair market value of the easement did not

exceed the amount realized from its sale:   “[P]etitioners bear

the burden of showing that what they received in exchange for the

deed of easement was not commensurate with the value of the

property exchanged.”   Therefore, we shall first determine the

fair market value of the easement on the conveyance date.

     B.   Section 1.170A-14(h)(3)(i), Income Tax Regs.

     The general rule is that the amount of a charitable

contribution made in property is the fair market value of the
                              - 19 -


property at the time of the contribution.    Sec. 1.170A-1(c)(1),

Income Tax Regs.3   That is no less the general rule if the

charitable contribution is of a partial interest in property,

sec. 1.170A-7(c), Income Tax Regs., including a perpetual

conservation restriction such as the easement.    Sec. 1.170A-

14(h)(3), Income Tax Regs.   The preferred way of determining fair

market value is by applying the marketplace standard found in the

regulations to the property contributed.    See sec. 1.170A-

1(c)(2), Income Tax Regs. (“fair market value is 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”).

In the absence of a well-established market for property of the

type contributed, however, the marketplace standard of the

regulations may be difficult to apply.   See, e.g., Symington v.

Commissioner, 87 T.C. 892, 895 (1986) (“Unfortunately, since most

open-space easements are granted by deed of gift there is rarely




3
     In this case, the contributed property (if any) is the
difference between the fair market value of the easement and the
amount realized from the sale. See supra sec. IV.A. A
determination of the fair market value of the contributed
property (if any), independent of an examination of the fair
market value of the easement and the amount realized from the
sale would be difficult at best. Therefore, we shall determine
the fair market value of the easement and derive the fair market
value of the contributed property (if any) therefrom.
                             - 20 -


an established market from which to derive the fair market

value.”).

     In the case of a perpetual conservation restriction, if the

market for such restrictions is not well established, it is

usually necessary to value the restriction by applying a “before

and after” analysis; i.e., a comparison of the fair market value

of the donor's property unencumbered by the restriction with the

fair market value of the property after the conveyance of the

restriction, with any diminution of value to be ascribed to the

fair market value of the restriction.   See, e.g., Symington v.

Commissioner, supra at 895 & n.5, which states as follows:

          This method has been approved by the Internal
     Revenue Service, see Rev. Rul. 73-339, 1973-2 C.B. 68,
     as clarified by Rev. Rul. 76-376, 1976-2 C.B. 53, and
     endorsed by Congress in connection with the adoption of
     the Tax Treatment Extension Act of 1980, see S. Rept.
     96-1007 (1980), 1980-2 C.B. 599, 606.

Nothing in section 1.170A-14(h)(3)(i), Income Tax Regs. (the PCR

valuation regulation), contradicts that analysis; indeed, the PCR

valuation regulation adopts the serial approach described:    “If

no substantial record of market-place sales is available to use

as a meaningful or valid comparison”, the general rule is a

before and after approach.

     Respondent, however, argues that the second substantive

sentence of the PCR valuation regulation, see supra sec. II.,

which sets forth the marketplace sales analysis, is the beginning
                              - 21 -


and end of the inquiry into the fair market value of the

easement, notwithstanding evidence to support a finding that

sales of development rights in Howard County occur in an

inhibited market.   Respondent, thus, seeks to preclude

petitioners from using appraisal evidence to establish a greater

value.   We believe that respondent's interpretation of the

regulation is misguided.

     The first substantive sentence of the PCR valuation

regulation, see supra sec. II., establishes the general rule that

the value of the contribution under section 170 of a perpetual

conservation restriction is the fair market value of the

restriction at the time of contribution.   When there is evidence

to support a finding that marketplace sales of such restrictions

are unreliable, blind application of the second substantive

sentence, which provides a method for determining the amount

required by the rule of the first substantive sentence, would

ignore the purpose of the regulation.4   Essentially, respondent's


4
     Respondent's interpretation of the PCR valuation regulation
would produce indefensible results in the context of an easement
market consisting only of bargain sales (such as a governmental
program with a price limitation). For example, assume that
petitioners' assertions are correct and that Howard County pays
no more than 50 to 80 percent of the fair market value of
easements pursuant to the Program. Respondent's interpretation
of the regulation would lead to the conclusion that the first
participant in the Program, assuming the absence of any other
similar governmental programs and of evidentiary problems, may
employ before and after valuation to establish the fair market
                                                   (continued...)
                                - 22 -


interpretation of the PCR valuation regulation narrowly focuses

on whether there exists a substantial record of sales of

comparable easements, irrespective of whether a comparison of the

sale of the subject easement to such sales of comparable

easements would yield the proper amount of the deduction under

section 170.   That misguided approach fails to recognize that a

substantial record of sales of comparable easements must provide

a “meaningful or valid comparison” to be considered a record of

comparable sales.   Sec. 1.170A-14(h)(3)(i), Income Tax Regs.

(third substantive sentence).

     The meaningful or valid comparison standard serves the

purpose of determining the proper amount of the deduction under

section 170 by establishing the fair market value of the

contributed property rights and does not serve the function of

determining some market value of the subject easement as an

independent objective.   Indeed, other portions of the PCR

valuation regulation support that assertion.   In the case of a

charitable contribution of a perpetual conservation restriction

covering a portion of the contiguous property owned by a donor

and the donor’s family, the amount of the deduction under section



4
 (...continued)
value of the easement conveyed because of the nonexistence of
comparable sales records, but the 100th participant would be
limited to establishing a value for the easement conveyed that is
no more than 50 to 80 percent of its fair market value.
                                - 23 -


170 is the difference between the fair market value of the entire

contiguous parcel of property before and after the granting of

the restriction.   Sec. 1.170A-14(h)(3)(i), Income Tax Regs.

(fourth substantive sentence).    Sales of easements comparable to

the donated easement covering a portion of the contiguous

property owned by the donor and the donor’s family and, thus, the

market value of such easements are irrelevant.

     In conclusion, we must examine the applicability of the

second substantive sentence of the PCR valuation regulation in

light of its role in determining the proper amount of the

deduction under section 170.    Therefore, we are not required to

accept the substantial record of sales of development rights to

Howard County under the Program as determinative of the fair

market value of the easement when there is evidence to support a

finding that those sales occur in an inhibited market.

     D.   Uninhibited Markets

     Notwithstanding the establishment of a market to which

reference may be had for sales data, such data may not yield a

demonstration of the fair market value of a particular property

(or an interest in property) if general conditions or those

affecting particularly the sales that have actually transpired do

not “fairly” reflect the circumstances surrounding the specific

property to be valued.   Estate of Wright v. Commissioner,

43 B.T.A. 551, 555 (1941).   That general proposition limiting the
                               - 24 -


use of market data was established early in the development of

the tax law by the Court of Appeals for the Third Circuit in

Heiner v. Crosby, 24 F.2d 191, 193 (3d Cir. 1928), with respect

to shares of stock:

           The fair market price or value of stock at a
     particular time is a question of fact, to be determined
     from all the circumstances. Market price implies the
     existence of a market, of supply and demand, of sellers
     and buyers. Sales are always evidence of a market
     price, but the statute requires that, in “ascertaining
     the gain derived from the sale,” there must be not
     simply a “market price,” but a “fair market price.”
     Sales made at a particular time and place may be
     significant, but the price paid is not necessarily
     decisive of fair market price or value. The fact of
     sales, in itself and without regard to the
     circumstances under which the sales were made, does not
     conclusively establish either statutory fair market
     price or value. Sales made under peculiar and unusual
     circumstances, such as sales of small lots, forced
     sales, and sales in a restricted market, may neither
     signify a fair market price or value, nor serve as the
     basis on which to determine the amount of gain derived
     from the sale. In such cases resort must be had to
     evidence to determine “fair value.” Offers made in
     good faith and opinions of intelligent men experienced
     in the business are admissible to show fair value.
     * * *

Accord, e.g., Berry Petroleum Co. & Subs. v. Commissioner,

104 T.C. 584, 637-638 (1995) (generally, best evidence of value

is actual sales:    “However, prices obtained at forced sales, at

public auctions, or in restricted markets may not be the best

criteria of value, particularly when other evidence shows that

the property would sell at a higher price under different

circumstances.”).
                                - 25 -


     We have found sales data not to be indicative of fair market

value where property was sold to the highest bidder at an

“unrestricted auction”, with no minimum bid or number of bids

required, and there was evidence that the property had an

intrinsic value far in excess of the auction sales price and

could have been sold under other circumstances at a considerably

higher price.   McGuire v. Commissioner, 44 T.C. 801, 809 (1965);

see also Stollwerck Chocolate Co. v. Commissioner, 4 B.T.A. 467,

471 (1926) (“Nor is the evidence of the price at which some of

the stock of the taxpayer was sold to the public sufficient in

our minds to establish the value either of the stock or assets

acquired, in the absence of some showing as to the manner and

volume in which sales were made.”).      In Gillette Rubber Co. v.

Commissioner, 31 B.T.A. 483, 491 (1934), we rejected as

determinative of the fair market value of certain common stock “a

price known to be a low one, purposely made so to secure the good

will of * * * [former] stockholders and give them a chance to

recoup [their prior losses].”

     On brief, respondent recites:

          Petitioners contend that the cash paid by Howard
     County for the development rights to their property
     does not represent the fair market value of the
     development rights. This argument is largely based on
     two factors: 1. petitioners did not believe the cash
     payments represented the fair market value of the
     property conveyed; and 2. Howard County did not intend
     to pay them fair market value for their easement.
                              - 26 -


In response, respondent concedes that petitioners’ evidence as to

the subjective beliefs of the parties (petitioners and Howard

County) is persuasive on the issue of donative intent.   See supra

sec. IV.A.   We take that response as a concession by respondent

that petitioners and the county intended a bargain sale; i.e., a

part sale part gift.   Certainly, that conclusion is supported by

the testimony of petitioner Charles Browning (the $6,000 an acre

received for the easement “couldn’t possibly represent the fair

market value of the easement”) and Donna Mennitto, administrator

of the Program (“It was never the intention of the County to pay

the full easement value and we do not believe that we ever did

with the information that we had available.”), and, thus, we

accept respondent’s concession and so find.   Moreover, we believe

that the record supports a finding that, under the Program

generally, at the time petitioners conveyed the easement to the

county and before, participants in the Program intended to make a

gift to the county by way of a bargain sale of development

rights.   We have the testimony of two participants in the Program

as to that point, petitioner Charles Browning and his neighbor,

Gene Mullinix.   In addition, Mr. Mullinix, who was a chairman of

the board that supervised the Program and served on that board

for 10 years, testified that the board that ran the Program never

paid “full” fair market value for any easement that it purchased

under the Program.   Ms. Mennitto’s testimony as to the procedures
                              - 27 -


followed to implement the Program, including publication of the

Program, public hearings at which properties offered to the

Program were presented for comment, the limitations on what the

county would pay, and the appraisal process designed to insure

that the county did not pay the full amount of the value of the

development rights indicated by that appraisal, all convince us

that participants in the Program generally intended to make a

gift to the county by way of a bargain sale of development

rights, and we so find.

     Of course, our finding that participants in the Program

intended a bargain sale is not determinative that there was a

bargain sale.   Nevertheless, it is determinative that the

universe of sales to the county under the Program does not

represent a universe populated with sellers all of whom (or,

perhaps, even, any of whom) were looking for the best deal

(highest price) possible.   Sales data from that universe, thus,

are not reflective of a market populated by buyers and sellers

each trying to maximize profits by searching for the lowest

(buyers) or highest (sellers) price possible.   Any “market price”

based on evidence from that market is not a market price fairly

reflective of the price the easement would fetch in an

uninhibited market.   It is not a “fair” market price within the

meaning of Heiner v. Crosby, 24 F.2d at 193, nor are the sales

“market-place” sales within the meaning of section 1.170A-
                                  - 28 -


14(h)(3)(i), Income Tax Regs., available to use as a “meaningful

or valid” comparison to the sale of the easement.

     E.   Before and After Valuation

            1.   Introduction

     The market for sales of development rights to the county

under the Program was not an uninhibited market, but was a market

characterized by sellers intending to make gifts to the county by

way of bargain sales; therefore, petitioners are entitled to show

the fair market value of the easement by evidence of the fair

market value of the land before and after the conveyance of the

easement.    Sec. 1.170A-14(h)(3)(i), Income Tax Regs. (third

substantive sentence).    We shall now consider the expert

testimony presented by both parties with respect to those values.

            2.   After Value

     The parties' expert appraisers, Messrs. Sapperstein (for

petitioners) and Lipman (for respondent), agree that the highest

and best use of the land after the conveyance of the easement to

the county is as a farm.       Both experts value the land subject to

the easement at $157,000.       Therefore, we find that the after

value of the land subject to the easement on the conveyance date

was $157,000.

            3.   Before Value

     Messrs. Sapperstein and Lipman also agree that the highest

and best use of the land before the conveyance of the easement to
                              - 29 -


the county was for development into single family residential

lots.   Both appraisers look to sales price data from sales of

comparable properties sold for residential development purposes

to determine the value of the land before conveyance of the

easement.   Mr. Lipman is of the opinion that the comparison

should be made on both a “per acre” and “per raw lot” basis.     He

reports, however:   “Unfortunately, at least from the standpoint

of this appraisal, we do not have an engineer’s estimate of lot

yield for the subject property.   Accordingly, we will depend

primarily on value from a per acre perspective.”   Mr. Lipman is

of the opinion that the value of the land before conveyance of

the easement was $10,000 an acre (for a total value of $524,400).

     Mr. Sapperstein did not think that a dollars-an-acre basis

was a proper basis for reaching a conclusion as to the value of

the land because, in his opinion:

     Knowledgeable buyers of the subject property type, are
     typically interested in the development potential of
     the property, and are concerned with the property’s
     yield. By determining the number of lots that can be
     developed on the subject property, we remove from the
     appraisal problem any subjectivity related to the
     property’s physical characteristics (i.e., shape,
     topography, wetlands, and other possible development
     constraints). Thus, a comparison can be made on a
     “value per lot” basis with the comparable sales,
     requiring adjustment for location, site orientation,
     and accessibility.

Mr. Sapperstein is of the opinion that the value of the land

before conveyance of the easement to the county was $45,000 a
                               - 30 -


lot.    Based on the Benning report, Mr. Sapperstein assumed that

either 15 or 16 lots could be developed on the land and,

accordingly, has the opinion that the value of the land before

conveyance of the easement to the county is either $675,000 or

$720,000.

       Both Messrs. Lipman and Sapperstein are well qualified and

provided us with helpful testimony.     They both used sales of

comparable properties to value the land before the conveyance of

the easement to the county.    Indeed, they relied on many of the

same sales (of comparable properties) in reaching their

respective conclusions.    They agree that a dollar-a-lot basis is

an appropriate basis for comparison.     Because Mr. Lipman did not

have an engineer’s estimate of lot yield, he did not make a

dollar-a-lot comparison, but, instead, relied on a dollar-an-acre

comparison.    Messrs. Lipman and Sapperstein reach different

conclusions, which are difficult to reconcile because of the

different basis of comparison adopted by each.     We are not

persuaded by Mr. Sapperstein that a dollar-a-lot basis is

necessarily superior to a dollar-an-acre basis for making

comparisons (we would have preferred to have each expert use

both).    Mr. Lipman, however, at trial, agreed that “a

knowledgeable buyer of the property would buy this property based

on a lot yield as opposed to an acreage basis” and, in his
                             - 31 -


report, stated that a value of $43,700 a lot is “well supported

by the market data”.5

     Since the parties' experts appear to be in relative

agreement as to the value of the lots that the land would yield

(Sapperstein: $45,000 a lot; Lipman: $43,700 a lot), we shall

derive the before value of the land by multiplying a dollar-a-lot

value by the land's lot yield.6   In addition, we shall accept


5
     Although Mr. Lipman derived the $43,700 a lot value by
dividing his appraisal value of the land (based on a $10,000
an acre appraisal of the land) by his estimate of the number of
lots the land would yield, Mr. Lipman testified that the $43,700
a lot value would not change even if the land yielded more than
12 lots.
6
     It appears that Mr. Lipman would multiply any dollar-a-lot
value by the land's lot yield minus one lot because of the lot
underlying the improvement. Mr. Lipman testified as follows:

          If you divide 4 into 52.44 acres, you get 13 lots.
     I used 12 lots and Mr. Browning owns the house under
     which is another lot, which he has at the beginning of
     the day and he has at the end of the day. So all he is
     giving away is 12 lots, and you then follow the math,
     12 lots times $43,700, gives you a number, and if you
     take 52.44 acres times 3,000 an acre, which is the
     after value, which I think everybody agrees to, the
     difference, i.e., the value of the development rights,
     is $367,000, which is my number.

We believe, however, that petitioners' retention of certain
rights with respect to the lot underlying the improvements does
not warrant reducing lot yield for that lot in calculating the
land's before value. Adjusting the before value of the land in
the manner advanced by Mr. Lipman would undermine the basic
mechanics of the before and after valuation calculation, which is
a method used to derive the value of the easement by measuring
the difference between the before and after values of the land,
both at the land's highest and best use. Any adjustment for
                                                   (continued...)
                              - 32 -


Mr. Sapperstein's value of $45,000 a lot because it was derived

from his analysis using a dollar-a-lot comparison and not from a

calculation derivative of a dollar-an-acre comparison, i.e.,

Mr. Lipman's dollar-a-lot value.

     We shall now address the principal point of contention

between the parties, the lot yield of the land.    Based on the

Benning report, Mr. Sapperstein assumes that the land could be

developed into either 15 or 16 residential lots.    Mr. Benning is

of the opinion that, if the land were developed in conjunction

with either or both of the adjacent tracts of land (the Barnes

tract and the Mullinix tract), certain land exchanges would be

undertaken that would increase lot yield and other efficiencies

would be obtained, which would allow 16 lots to be developed on

the land.   In the absence of such joint development, Mr. Benning

is of the opinion that only 15 lots could be developed on the

land.   Mr. Lipman opined that 12 lots could be developed on the

land, but stated that the effective lot yield of the land is

13 lots (including the lot underlying the improvement).

     In determining both the highest and best use of a parcel of

land and the fair market value of the parcel resulting from such

use, the use of the parcel in conjunction with other parcels may


6
 (...continued)
petitioners' retention of rights with respect to the lot
underlying the improvements would properly be reflected in the
after value of the land.
                              - 33 -


be taken into account.   See United States v. Fuller, 409 U.S.

488, 490 (1973) (citing Olson v. United States, 292 U.S. 246, 256

(1934)); Dorsey v. Commissioner, T.C. Memo. 1990-242 (with

respect to the charitable contribution of a facade easement:

“The fair market value of the easement should be based on the

highest and best use for the property on its valuation date,

including potential development.”).    In Olson v. United States,

supra at 257, the Supreme Court noted, however:

     Elements affecting value that depend upon events or
     combinations of occurrences which, while within the
     realm of possibility, are not fairly shown to be
     reasonably probable, should be excluded from
     consideration, for that would be to allow mere
     speculation and conjecture to become a guide for the
     ascertainment of value--a thing to be condemned in
     business transactions as well as in judicial
     ascertainment of truth. * * *

     Had petitioners not conveyed the easement to the county,

certainly there was the potential for their developing the land

together with either or both of Messrs. Barnes and Mullinix.

Mr. Mullinix testified regarding joint action with petitioners;

and the parties have stipulated that, although Mr. Barnes did not

testify, his testimony would have been consistent with the

testimony of Mr. Mullinix.   Mr. Mullinix testified that there

were benefits to either developing the properties jointly or

jointly participating in the Program.   He testified that there

was no written or enforceable agreement for joint action and that

there was “some talk” about Mr. Barnes and Mr. Browning’s
                               - 34 -


developing their tracts together and his not participating,

although that would have put him “between a rock and a hard

place”.   Mr. Mullinix testified that his preference was to

participate in the Program and that, in fact, he, petitioners,

and Mr. Barnes did do so in 1990.    Petitioners have failed to

convince us that, had they not participated in the Program, joint

development was reasonably probable.    Mr. Mullinix was a chairman

of the board that supervised the Program and served on that board

for 10 years.   We think that he was strongly motivated to

participate in the Program and would have borne some sacrifice to

do so.    From the stipulation that Mr. Barnes’ testimony would

have been consistent with that of Mr. Mullinix, we are unwilling

to conclude that joint development between petitioners and

Mr. Barnes was reasonably probable had petitioners decided to

develop the land.   We believe that, had petitioners decided

against selling the easement to the county, the development of

16 lots on the land was not reasonably probable.

     We have considered the testimony of all the experts and,

although Mr. Lipman has raised some question in our mind as to

the suitability of the land for 15 lots (on account of soil

conditions and access), we have not been persuaded to disregard

Mr. Benning’s testimony, which we found competent and generally

persuasive as to the 15 lot scenario.    Accordingly, we find that

the land was capable of being developed into 15 residential lots.
                               - 35 -


At $45,000 a lot, the value of the land before conveyance of the

easement to the county would be $675,000 on a dollar-a-lot basis,

which is Mr. Sapperstein’s opinion on the basis of the 15 lot

scenario.    Therefore, we find that the before value of the land

on the conveyance date was $675,000.



            4.   Conclusion

      Both of the parties' expert appraisers, Messrs. Lipman and

Sapperstein, rejected the purchase prices paid by Howard County

under the Program as evidence of the fair market value of any of

the development rights conveyed to the county, including the

easement conveyed by petitioners.   We have considered the before

and after valuation opinions of the parties' experts and conclude

that the fair market value of the easement on the conveyance date

was $518,000.

V.   Analysis of the Amount Realized from the Sale of the Easement

      Respondent argues that, in addition to the cash payments

received and to be received by petitioners from Howard County,

petitioners received other valuable consideration:   “The record

of this case makes clear that petitioners conveyed the

development rights easement to Howard County with the expectation

of receiving valuable benefits, including cash and anticipated

charitable contributions.”    Respondent argues that the value of

tax deferral received from the installment sale of the easement
                               - 36 -


to the county, the tax-free nature of the interest on the

county’s debt, and the value of the charitable contribution

deduction all must be subtracted from the fair market value of

the easement in determining the amount of any gift to the county.

     Respondent is mistaken.   As stated, supra sec. IV.A., the

gift portion of a bargain sale is measured by the difference

between the fair market value of the property and the amount

realized from the sale.    The tax consequences described are not

part of the amount realized.   See sec. 1001(b).   Respondent’s

argument suggests that a taxpayer making a gift of stock worth

$100 to a charitable organization may be entitled to a charitable

contribution deduction of some lesser amount on account of the

economic value of the deduction.   That suggestion is untenable.

The regulations provide explicitly that, if a charitable

contribution is made in property, the amount of the contribution

is the fair market value of the property.   Sec. 1.170A-1(c)(1),

Income Tax Regs.

     Respondent's reliance on DeJong v. Commissioner, 36 T.C. 896

(1961), affd. 309 F.2d 373 (9th Cir. 1962), is misplaced.    In

DeJong, this Court found that a portion of the claimed charitable

contribution was made in anticipation of the charitable

organization providing “free” schooling to the taxpayers'

children.   The cost of that education reduced the amount of the

charitable contribution.   In this case, Howard County and
                              - 37 -


petitioners merely structured the easement conveyance in a manner

that allowed petitioners to take advantage of certain tax

benefits conferred by Congress.   None of the tax consequences

enjoyed by petitioners constitutes consideration that is to be

taken into account in determining the amount realized by

petitioners on the sale of the easement.

      Respondent has not argued that, if we fail to find that any

of the tax consequences constitutes consideration, the

consideration received by petitioners in consideration of the

conveyance of the easement to the county was other than $309,000.

Accordingly, we find that, in consideration of conveying the

easement to the county, petitioners received $309,000.

VI.   Conclusion

      On the conveyance date, petitioners made a charitable

contribution to the county in the amount of $209,000 ($518,000-

$309,000).


                                           Decisions will be entered

                                    for petitioners.
