                        T.C. Memo. 2000-94



                      UNITED STATES TAX COURT



               KATHERINE STRASBURG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1953-98.                     Filed March 20, 2000.



     Harry J. Kaplan, for petitioner.

     Marion T. Robus, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     PARR, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes of $427,680 for 1993 and

$114,840 for 1994 and accuracy-related penalties under
                               - 2 -

section 6662(h)1 for gross valuation misstatement of income of

$171,072 for 1993 and $45,936 for 1994.

     After concessions,2 the issues for decision are:     (1)

Whether $1,080,000 was the fair market value of a conservation

easement (the MLR easement) granted by petitioner to the Montana

Land Reliance (MLR) in 1993.   We hold it was $800,000.    (2)

Whether $290,000 was the fair market value of an amendment to the

MLR easement granted by petitioner in 1994.    We hold it was.   (3)

Whether petitioner is liable for an accuracy-related penalty

under section 6662(h) in 1993 or 1994.    We hold she is not.

                        FINDINGS OF FACT

     The parties submitted this case partially stipulated. The

stipulation of facts and the attached exhibits are incorporated

herein by this reference.   At the time the petition herein was

filed, petitioner resided in Atherton, California.

     From September 15, 1992, until the present, petitioner has

been the fee-simple owner of an approximately 320-acre tract of




     1
      Unless otherwise indicated, 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.
     2
      Respondent originally determined that the value of the
conservation easement granted by petitioner to the Montana Land
Reliance in 1993 was zero, and that the value of a modification
of this easement in 1994 was zero. However, respondent now
concedes that the value of the conservation easement in 1993 was
$275,000.
                               - 3 -

real property located in the upper Boulder River Valley in Sweet

Grass County, Montana.

     By deed dated September 9, 1993, petitioner conveyed to MLR

an open-space easement in gross over the real property, including

in perpetuity the right to restrict subdivision of the real

property.   Section V of the MLR easement specifically provided,

in relevant part, that the following uses of the property were

inconsistent with the easement:

          A. Subdivision. The division, subdivision or de
     facto subdivision of the Premises, except as provided
     in Section III, paragraph H.[3]

               *     *     *      *    *     *     *

          C. Commercial facilities. The establishment of
     any commercial or industrial facilities * * *
     including, but not limited to, guest ranching, * * *
     campground, trailer park * * *

               *     *     *      *    *     *     *

          F. Construction. The construction of any
     structures except as otherwise provided in Section III,
     paragraphs D or E.[4]

          G. Roads. The construction of roads except in
     connection with ranching and other agricultural uses;
     fishing and other recreational uses; and, residential
     access. Any road constructed for one or more of such
     purposes shall be sited and maintained so as to


     3
      Sec. III, par. H of the easement allows petitioner to
divide the real property into two parcels.
     4
      Sec. III, pars. D and E allows petitioner to maintain and
repair the existing structures and to construct two additional
single-family residences, respectively. In 1994, petitioner
modified the MLR easement to allow the additional construction of
only one single-family residence.
                              - 4 -

     minimize adverse impact on the significant ecological
     and aesthetic values of the Premises. Any road
     construction shall be subject to the prior written
     approval of Grantee.

              *     *     *     *     *     *     *

          H. Commercial feed lot. The establishment or
     maintenance of any commercial feed lot, defined for
     purposes of this Easement as a facility used for the
     purpose of receiving, confining and feeding of
     livestock for hire.

              *     *     *     *     *     *     *

          M. Game or fish farms, or kennels. The raising
     or confinement of wild game, native or exotic fish,
     other exotic animals, or dogs for commercial purposes.
     The owner(s) or caretaker may, however, have and raise
     dogs or game birds for their own personal use and
     enjoyment.

          N. Hunting and commercial fishing. Hunting of
     any kind, or commercial fishing except as provided in
     Section III, paragraph B.[5]

              *     *     *     *     *     *     *

          O. Commercial timber harvest.   Commercial timber
     harvest of any kind.

     By amendment to deed dated November 17, 1994, petitioner

relinquished the right to build one of the two additional single-

family residences specifically reserved in the MLR easement on

the real property, thereby making a further gift to MLR.




     5
      According to sec. III, par. B of the easement, petitioner
does have the right to use the real property for fishing as to
herself, her family, employees, and invitees in accordance with
State and Federal regulations, so long as the levels of intensity
are "not detrimental to the quality of fishing."
                               - 5 -

     The easement gifts in 1993 and 1994 were legally valid in

accordance with the terms thereof and are binding on petitioner

and "all future owners and tenants".   Petitioner did not receive

consideration from MLR for the easement gifts.

     During all relevant periods, MLR was an organization

described in section 501(c)(3), and donations of qualified

conservation easements to it are deductible under section 170(h).

The MLR easement executed by petitioner on September 9, 1993, and

recorded on September 13, 1993, is a "qualified conservation

contribution" under section 170(f)(3)(B)(iii) and (h).    In

addition, the amendment executed in favor of MLR by petitioner on

November 17, 1994, and recorded on November 29, 1994, is a

"qualified conservation contribution" under section

170(f)(3)(B)(iii) and (h).

     Petitioner's property is a spectacular piece of property

surrounded by the Gallatin National Forest on three sides.

Properties surrounded by nondeeded National Parks are known as

inholdings.   Petitioner's property is properly classified as an

inholding.

     Petitioner's property is approximately 320 acres in size and

is situated on the floor of the Boulder River Valley.    It is

irregular in shape and ranges from gently to moderately sloping

native rangeland and timber-covered land.   The Boulder River, a
                                - 6 -

well-known fishing stream, runs through the property; a bridge

provides full access to both sides of the property.

     The valley where the property is located is narrow and

surrounded by subalpine mountain peaks that are 7,000 to 10,000

feet above sea level.    The property directly adjoins the Natural

Bridge State Monument.   The Natural Bridge State Monument has a

unique rock bridge over the Boulder River, as well as a falls

area, and is a popular natural attraction.   The areas to the

south of the property are mostly rugged forest, and there are

only a few deeded parcels within the forest.

     Petitioner's property is adjoined by a Forest Service public

road, so the property has direct access to public roads.

Utilities are installed along the roadway and into the property.

State Highway 298, the road that provides access to the Gallatin

National Forest, runs through the northwest corner of the

property and provides good access for the property.   There is

further access around the property by wheel and track roads.     The

property is physically suitable for subdivision.

     Petitioner's property has some buildings, including the

owner's house, a caretaker's house, a guest cabin, and a

bunkhouse.   The owner's and caretaker's houses are complete

residences; the guest cabin has no kitchen, and the bunkhouse has

no plumbing.
                               - 7 -

     The property is subject to no zoning restrictions but is

governed by the Sweet Grass County Master Plan of the Upper

Boulder River Planning Area Growth Policy (Growth Policy).     The

Growth Policy discourages subdivisions of six or more lots.6

Under Montana law, petitioner's property could be divided into

two 160-acre parcels without prior county approval.   Then,

pursuant to the Growth Policy, the two 160-acre parcels may be

divisible into 5 parcels, respectively, for a total of 10

parcels.   Although petitioner's property may be divisible in this

manner, the development potential of petitioner's property was

not known at the time it became encumbered with the MLR easement.

The development potential would not be known unless and until

petitioner presented a request for a proposed subdivision to

Sweet Grass County for approval.   In the absence of such

approval, petitioner's property could be divided into five

parcels of 40 acres or more without violating any of the

published policies of the Growth Policy.7


     6
      In this regard, the Growth Policy states:

          2. Major subdivisions (six or more lots).
     Subdivisions may impair the local canyon character and
     influence general social change. The board feels that
     the desires of area residents are to maintain the local
     character, generally excluding major subdivisions.
     7
      The Growth Policy describes three general land use
categories: Suburban residential, rural residential, and open
and resource land. Suburban residential has a maximum density of
one dwelling per acre. Rural residential property has a maximum
                                                   (continued...)
                               - 8 -

                              OPINION

Issue 1. Whether $1,080,000 Was the Fair Market Value of the
Easement in 1993

     The principal issue for decision is the value of the MLR

easement.   The easement satisfies the requirements of a

"qualified conservation contribution" provided by section 170(h).

On her 1993 tax return, petitioner claimed the fair market value

of the MLR easement was $1,080,000.

     A.   Relevant Legal Considerations

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

relevant part, that "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 "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.   The question of value is a

question of fact, necessarily arrived at after considering all

the relevant factors.   See Hamm v. Commissioner, 325 F.2d 934,

938 (8th Cir. 1963), affg. T.C. Memo. 1961-347.




     7
      (...continued)
density of one dwelling per 5 acres. However, open and resource
land has a maximum density of one dwelling per 40 acres.
                                - 9 -

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

the highest and best use of petitioner's property at the

valuation date, including potential development.   See, e.g.,

Stanley Works v. Commissioner, 87 T.C. 389, 400 (1986); Hilborn

v. Commissioner, 85 T.C. 677, 688 (1985); sec. 1.170A-14(h)(3)(i)

and (ii), Income Tax Regs.   The realistic and objective potential

uses for petitioner's property control.    See Stanley Works v.

Commissioner, supra.    Regardless of whether an owner actually

puts the property to its highest and best use, we consider "The

highest and most profitable use for which the property is

adaptable and needed or likely to be needed in the reasonably

near future".    Olson v. United States, 292 U.S. 246, 255 (1934).

Petitioner has the burden of proving the fair market value of the

MLR easement.   See Rule 142(a).

     The highest and best use of petitioner's property before the

MLR easement was as rural recreational development (RRD)

property.   RRD is a general property classification consisting of

properties with multiple uses, including recreational use.   In

addition, RRD property can be divided into smaller recreational

parcels.    RRD property does not have development as its exclusive

highest and best use, and the value of RRD property is not

predicated on its development potential.   Property that is valued

based upon its development potential is generally classified as
                               - 10 -

subdivision property.   Neither of the experts in this case

assumed petitioner's property is subdivision property.

     A conservation easement frequently is granted by deed of

gift; consequently, there is rarely an established market from

which to derive fair market value.      See Symington v.

Commissioner, 87 T.C. 892, 895 (1986).     If no comparable sales of

easements are available to determine the value, the easement is

generally valued by a "before and after" analysis, comparing the

fair market value of the property before the granting of the

easement with the fair market value of the property after the

granting of the easement.    Browning v. Commissioner, 109 T.C.

303, 315 (1997); Stanley Works v. Commissioner, supra at 399;

Hilborn v. Commissioner, supra at 688; sec. 1.170A-14(h)(3)(i),

Income Tax Regs.    The reduction in the property's value by reason

of the encumbrance is the fair market value of the easement.

     There is no mechanical application of the before and after

methodology when other reliable indicators of market value are

available.    In explaining the legislation that permitted the

deduction for qualified conservation contributions, the Senate

Finance Committee remarked about easement appraisal methodology

as follows:

     conservation easements are typically (but not
     necessarily) valued indirectly as the difference
     between the fair market value of the property involved
     before and after the grant of the easement. (See Rev.
     Rul. 73-339, 1973-2 C.B. 68 and Rev. Rul. 76-376, 1976-
     2 C.B. 53.) Where this test is used, however, the
                              - 11 -

     committee believes it should not be applied
     mechanically. [S Rept. 96-1007, at 15-16 (1980), 1980-2
     C.B. 599, 606.]

The regulations also provide that the before and after method is

used as a "general rule (but not necessarily in all cases)."

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

     B.   "Before and After" Analysis

     The parties have stipulated that the fair market value of

petitioner's property before the grant of the easement was

$2,624,000.   The parties disagree as to the fair market value of

petitioner's property after the grant of the MLR easement.   This

disagreement accounts for the extreme variance in fair market

value assigned to the easement by the parties.

     To establish the fair market value of the MLR easement, each

party offered the report and testimony of an expert witness.

Both expert witnesses testified that they used a "before and

after" method to value the MLR easement.    The experts' opinions

involved an analysis of conservation easement sales, easement-

encumbered property sales, and paired sales.8    Expert witnesses'


     8
      The analysis of conservation easement sales involved
comparing the purchase price of a conservation easement to the
fair market value of the property that is burdened by the same
conservation easement. The purchase price of the conservation
easement was divided by the fair market value of the burdened
property to derive a diminution percentage attributable to the
conservation easement involved in the comparison.

     The analysis of easement-encumbered property sales involved
a comparison of the fair market value of easement-encumbered
                                                   (continued...)
                                  - 12 -

opinions are used to aid the Court in understanding an area

requiring specialized training, knowledge, or judgment.    As the

trier of fact, we are not bound, however, by the experts'

opinions.    See Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; Chiu v. Commissioner, 84

T.C. 722, 734 (1985).    One expert may be persuasive on one

particular element of valuation while another expert may provide

more incisive help on some other element of valuation.    See

Parker v. Commissioner, 86 T.C. 547, 561-562 (1986).

Consequently, using our best judgment, we may adopt some portions

and reject other portions of expert testimony.    See Helvering v.

National Grocery Co., 304 U.S. 282 (1938).

     1.   Petitioner's Expert Witness

            a.   Qualifications

     Petitioner's expert, N. Clark Wheeler (Wheeler), has been

actively engaged in the appraisal field for 20 years.    Wheeler is


     8
      (...continued)
property with the fair market value of the same property as if it
was unencumbered by a conservation easement. The fair market
value of the property in its encumbered state was divided by the
estimated fair market value of the property in its unencumbered
state to derive a diminution percentage attributable to the
conservation easement involved in the comparison.

     The analysis of paired sales involved a comparison of the
fair market value of easement-encumbered property with the fair
market value of unencumbered property in the same general area.
The fair market value of the encumbered property was divided by
the fair market value of the unencumbered property to derive a
diminution percentage attributable to the conservation easement
involved in the comparison.
                                - 13 -

one of 19 accredited rural appraisers (ARA's) in the State of

Montana.   The ARA designation is the highest professional

designation offered by the American Society of Farm Managers and

Rural Appraisers.     Wheeler's area of expertise is the appraisal

of conservation easements throughout the western United States.

           b.    Wheeler's Methodology and Conclusion

     Wheeler used the "before and after" method to determine the

fair market value of the MLR easement in 1993.     Wheeler produced

two reports containing purported comparable sales related to the

fair market value of the MLR easement.     The first report,

produced in 1993 (the 1993 report), was Wheeler's original

analysis of the easement's fair market value.     The second report,

produced in 1998 (the 1998 report), was referred to as a

"consulting report prepared to serve as a supplement to my

original appraisal."

     The 1993 report provides Wheeler's conclusions as to the

fair market value of the MLR easement.     In the report, before the

MLR easement, Wheeler opined petitioner's property had a fair

market value of $7,500 per acre or $2.4 million (i.e., 320 acres

x $7,500).9     After the MLR easement, Wheeler concluded that


     9
      This per-acre "before" value is different from the value
stipulated by the parties. In his 1993 report, Wheeler used
petitioner's 1992 cost basis as the "before" value of
petitioner's property. Later, Wheeler agreed with respondent
that the proper fair market value of petitioner's property in
1993 before the grant of the MLR easement was $8,200 per acre or
                                                   (continued...)
                               - 14 -

petitioner's property had a fair market value of $4,125 per acre

or $1,320,000 (i.e., 320 acres x $4,125).   The difference in the

before and after values of petitioner's property was attributed

to the MLR easement, giving the easement a fair market value of

$1,080,000.   Therefore, Wheeler's 1993 report assigned a per-acre

value of $3,375 (i.e., $1,080,000 ÷ 320 acres) to the MLR

easement.

     Wheeler stated in his 1993 report that petitioner's property

had "excellent potential [for development] before easement and

this use is now precluded beyond the development of three

residential sites."    It is noted that Wheeler made the following

statement early in his 1993 report:

     In general, the value reflections suggested by sales sold
     under easement are related to the most basic restrictive
     elements of a Conservation Easement which deal primarily
     with limits on residential development on property
     subdivision. * * *

     In Wheeler's 1998 report he determined that the highest and

best use of petitioner's property was as RRD property.   Wheeler

also stated in his 1998 report that the "highest and best use of

the property as an unrestricted unit would be its sale and

division in various acreage parcels and as an unencumbered

investment property."   Since the value of RRD property is not

predicated upon subdivision/development, Wheeler placed undue



     9
      (...continued)
$2,624,000.
                               - 15 -

emphasis on this factor in his estimation of the fair market

value of the MLR easement.

     Regardless of the value attributable to development rights

associated with RRD property, Wheeler stated numerous times in

his 1998 report that the analysis of the MLR easement's fair

market value must focus on petitioner's bundle of rights.    While

a primary right that petitioner may have given up was development

of her property, according to Wheeler, there were other factors

in addition to development which lowered the fair market value of

petitioner's property in the "after easement" analysis.

     In estimating the fair market value of the conservation

easement, the parties focused on sales from Wheeler's 1998

report.    Wheeler disclosed in this report that he "has analyzed

and is aware of several sales in Montana, Idaho and Wyoming which

involved the sale of conservation easement encumbered properties

which have not reflected discounts at the time of sale."    He

stated further that "These easement properties are located in

high end development markets with very limited deeded land bases,

and in these areas large parcels are rarely exposed to the

market."   At trial, Wheeler explained that "high end development"

means "an area that had high demand for rural development or

recreation use."   In other words, Wheeler used that term in 1998

to describe properties which were "very popular" recreational

homesites.
                              - 16 -

     In Wheeler's 1998 report, he did not discuss why the market

in Sweet Grass County, especially along the Boulder River, was

not a "high-end development" market.   In Wheeler's 1993 report,

he stated that rural land located along the Boulder River in the

area surrounding petitioner's property is "rarely exposed to the

market."   He went on to state that the area surrounding

petitioner's property was "influenced by the recreational

amenities of the Boulder and Yellowstone Rivers and the Absaroka

and Beartooth Mountain ranges which are located directly south of

the subject."   Finally, Wheeler stated:   "Small-scale subdivision

has taken place along the Yellowstone and Boulder Rivers, and the

area is attracting national attention due to land purchases by

celebrities and investors who are buying smaller ranch retreats

in the area."

     Given the limited amount of river frontage property in Sweet

Grass County and its apparent recreational attractiveness to

investors, petitioner's property certainly can be said to be in a

high-end development market as that term was used by Wheeler.

Accordingly, Wheeler's omission of recent comparable sales from

other high-end development markets is questionable.

     Additionally, Wheeler stated in his 1998 report that if an

"Appraiser was analyzing a conservation easement on a property in

Jackson Hole [one of the high end development markets] * * *

easement encumbered sales in the direct area would be
                              - 17 -

considered."   However, for his 1998 report, Wheeler generally

analyzed the effects of conservation easements on property value

"in a more outlying area" in relation to petitioner's property.

Wheeler concluded that this was appropriate because petitioner's

property was "located in a market where it must compete with

properties not subject to conservation easement".   This does not

appear to be a valid reason for not including comparable sales

closer in proximity to petitioner's property in the 1998 report.

     The 1998 report analyzed 66 sales, of which 35 represented

the direct sale of conservation easements and 31 represented the

sale of property encumbered by a conservation easement.   In his

1998 report, Wheeler concluded that 11 of the purchased

conservation easements and five conservation-easement-encumbered

properties were directly comparable to petitioner's property.

     To determine whether a particular property was comparable to

petitioner's property, one must focus on the highest and best use

of petitioner's property (i.e., RRD), the property's high

recreational amenities (i.e., forest inholding along a principal

river), the market conditions surrounding petitioner's property

(i.e., "high-end development market"), and the restrictions

contained in the MLR easement.   Because Wheeler made many

assumptions in his 1998 report that were contrary to these

criteria, with two exceptions, the original 16 transactions that
                              - 18 -

were presented as most comparable by Wheeler do not appear to

apply to this analysis.

     From the limited information regarding the conservation

easement sales in Wheeler's 1998 report, it is difficult to

surmise that any of these conservation easement transactions were

comparable to the MLR easement.   The limited information

regarding the conservation easement sales also makes it difficult

to determine whether any of the underlying properties involved in

these sales were comparable to petitioner's property.   Because of

the limited information in Wheeler's report, we place no reliance

on the conservation easement sales transactions.

     Wheeler included 31 sales of easement-encumbered property in

his 1998 report.   The diminution percentages attributable to the

conservation easements involved in the 31 sales were derived by

an analysis of either easement-encumbered property sales or

paired sales.   Four of the thirty-one properties in this analysis

appear to be comparable to petitioner's property.   These

properties are numbered 38, 58, 61, and 63 in Wheeler's report.10

 Each of the properties appears to have excellent potential as a

recreational homesite, high recreational amenities, and

conservation easements that are similar to the MLR easement.    In

addition, the properties were located in markets with a high



     10
      Properties 58, 61, and 63 are numbered 59, 62, and 64 in
the addendum to Wheeler's report.
                                  - 19 -

demand for such properties during 1993.    Therefore, we adopt

Wheeler's analysis of these properties as evidencing the fair

market value of the MLR easement.

     2.   Respondent's Expert

           a.    Qualifications

     Respondent's expert, Dennis C. Hoeger (Hoeger), is one of

the 19 ARA's in the State of Montana and a member of the Montana

Chapter of the American Society of Farm Managers and Rural

Appraisers.     He is also a member of the Appraisal Institute and a

certified general appraiser in the States of Montana, Wyoming,

and Idaho.

           b.    Hoeger's Methodology and Conclusion

     Hoeger used the "before and after" method to determine the

fair market value of the MLR easement in 1993.    In agreement with

the stipulations made by the parties, Hoeger opined in his report

that petitioner's property had a fair market value of $8,200 per

acre or $2,624,000 before the MLR easement.    After the easement,

he opined that petitioner's property had a value of $7,380 per

acre or $2,361,600.    Therefore, Hoeger concluded that the MLR

easement had an estimated fair market value of $275,000 in 1993.

To support his conclusion that the per-acre cost of petitioner's

property decreased 10 percent after the MLR easement, Hoeger

analyzed two easement-encumbered property sales and several

paired sales.
                              - 20 -

     Hoeger's assumptions related to his computation of the 10-

percent diminution percentage incorporated many of the factors

that are relevant to the determination of the fair market value

of the MLR easement.   While taking into account the restrictions

in the MLR easement, Hoeger focused his analysis on comparing

petitioner's property to other high recreational amenity

properties in "high end development" markets.   However, Hoeger

assumed that the highest and best use of petitioner's property

was as a recreational homesite before and after the imposition of

the MLR easement, giving no consideration to any potential lost

development in petitioner's property attributable to the MLR

easement.

     Although Hoeger's assumptions were in part correct, most of

his comparable sales were questionable.   Hoeger's analysis was

divided into the following parts:   Sales 5 and 6, sale 7, sale 8,

sales 9 through 11, sales 12 and 13, and sales 14 and 15.     Sales

5 and 6, sales 9 through 11, and sales 12 and 13 suffered from

unverifiable assumptions related to the determination of the

diminution percentage attributable to the conservation easements

involved in those sales.   The analysis of sale 7 contained

misinformation regarding critical facts surrounding the sale.

Sales 14 and 15 were questionable because the conservation

easement involved in sale 14 was dissimilar to the MLR easement.

Accordingly, only one sale (sale 8) does not suffer from some
                               - 21 -

defect.   We find that Hoeger's sale 8 is relevant to this

analysis.

            Sale 8

     Sale 8 represented the December 1994 sale for $695,000 of

approximately 157 acres located on the west side of Glacier

National Park on the North Fork of the Flathead River in Montana.

Hoeger stated that an analysis of this sale by Warren Illi

(Illi), a certified appraiser in Montana, "indicates that the

sale price was not adversely affected by the conservation

easement."    Illi testified at trial and was certified as an

expert.   Illi has been an appraiser for more than 30 years and

has been involved in the appraisal of "several hundred"

conservation easements.    Copies of Illi's appraisal, containing

data related to sale 8, were provided to the Court.

     Illi used sale 8 to determine the diminution in value

attributable to a conservation easement's being granted on a

different 40-acre piece of property also located in the North

Fork of the Flathead River in Montana.    In stating his rationale

for including sale 8 in his analysis, Illi provided insight into

this case.    Recognizing that sale 8 did not fit the historic

trend of diminution of values in Montana, Illi nonetheless stated

that the fact that Sale 8 showed no loss in value "is not

surprising."    He went on to explain:

     The Forest Service's aggressive program to buy in fee
     or encumber all river front lands with conservation
                              - 22 -

     easements, has severely restricted the supply of such
     lands. Thus the remaining owners can ask almost
     whatever they want, with a likelihood of getting their
     asking price. Even though a property cannot be
     subdivided, it can serve as a country estate for the
     well-to-do. * * * There is a portion of the buying
     public who will acquire easement encumbered property
     without a price discount even with restricted
     subdivision and development opportunity. This is
     especially so if the property supply is greatly
     restricted. Sale [8] indicates no value loss due to
     easement imposition.

     Wheeler described the area surrounding the location of sale

8 (i.e., North Fork of the Flathead River) as a "high end

development" market.   Additionally, Illi's appraisal described

sale 8 as a "superb country estate for recreational use" where

"all of the surrounding public land is undeveloped and will be

managed for wildlife and primitive style recreation uses."

Considering that the market in the North Fork area was similar to

the market surrounding petitioner's property, and that sale 8's

highest and best use was most likely as RRD property, sale 8 was

a valid comparable sale.

     Additionally, Illi's rationale supporting the value assigned

to the easement in sale 8 seems to apply directly to petitioner's

property.   The property is located in a market where the supply

of Boulder River property is severely restricted.   Therefore, it

is probable that a portion of the buying public will not pay

less for petitioner's property even if it is encumbered by the

MLR easement.
                               - 23 -

     3.   Final Determination of MLR Easement's Fair Market Value

           a.   Diminution in Petitioner's Property's Market Value

     Recognizing that the MLR easement interferes not only with

petitioner's right to subdivide her land but also with numerous

other rights, this Court believes that it is appropriate to use

the comparable sales from the experts' opinions to approximate

the total loss in value of petitioner's property attributable to

the MLR easement.

     As discussed above, five sales from the experts' opinions

are comparable to petitioner's property.   Four of these sales

come from Wheeler's 1998 report, and one sale comes from Hoeger's

report.   These comparable sales demonstrate that diminution

percentages of 50, 35, 40,11 35, and 0 are associated with the

grant of a conservation easement.   Accordingly, this Court holds

that the diminution in petitioner's property in the after-

easement analysis was 32 percent, the average of these five

comparable sales.

          b.    Section 170 Limitation on Petitioner's Deduction

     Applying the 32-percent diminution rate to the stipulated

"before" fair market value of petitioner's property results in



     11
      A table in Wheeler's 1998 report describes sale 61 as
having a 45-percent diminution; however, in his 1993 report,
Wheeler states that the same sale has a 40-percent diminution.
On the basis of a review of Wheeler's analysis of sale 61 in his
1993 and 1998 reports, we find that sale 61 has a 40-percent
diminution.
                              - 24 -

the MLR easement's having a fair market value of $839,680 in 1993

(i.e., $2,624,000 fair market value before the easement x 32

percent).   However, because the "before" fair market value of

petitioner's property is not the same as petitioner's cost basis

in the property, the charitable contribution deduction related to

the MLR easement is limited by section 170(e)(1)(A).

     Section 170(e)(1)(A) limits the amount that may be deducted

as a charitable contribution under section 170(a).     It provides

that charitable contributions must be reduced by the amount of

gain that would not have qualified as long-term capital gain if

the donated property had been sold at its fair market value on

the date of the donation.   See sec. 170(e)(1)(A).

     The allowable charitable contribution deduction for ordinary

income property is limited to the basis of the property donated.

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

Glen v. Commissioner, 79 T.C. 208, 212 (1982); Morrison v.

Commissioner, 71 T.C. 683, 688 (1979), affd. per curiam 611 F.2d

98 (5th Cir. 1980).   Because the MLR easement does not satisfy

the long-term capital gain holding period, i.e., petitioner

donated the easement on September 9, 1993, less than 1 year after

she purchased the property on September 15, 1992, the MLR

easement is treated as ordinary income property.     See secs.

170(e)(1)(A), 1222(3) and (4).   Therefore, the amount of
                               - 25 -

petitioner's charitable contribution deduction is limited by her

adjusted basis in the MLR easement.

     The computation of petitioner's basis in the MLR easement is

equal to that portion of the adjusted basis of the entire

property that bears the same ratio to the adjusted basis of the

entire property as the fair market value of the donated property

bears to the fair market value of the entire property.    See sec.

170(e)(2); sec. 1.170A-4(c)(1)(i), Income Tax Regs.    Therefore,

under section 170(e) and the regulations thereunder, petitioner's

allowable charitable contribution deduction for 1993 is $800,000

(i.e., $2.5 million (petitioner's 1993 adjusted basis in her

property) x 32 percent)).    See Griffin v. Commissioner, T.C.

Memo. 1989-130, affd. 911 F.2d 1124 (5th Cir. 1990).

Issue 2. Whether $290,000 Was the Fair Market Value of the 1994
Amendment to the MLR Easement.

     In November 1994, an amendment to the MLR easement was

recorded.    The amendment further restricted the property by

allowing only one additional residence rather than two as

contemplated in the MLR easement.    Wheeler assigned a value of

$290,000 to the amendment.    Hoeger concluded the amendment had a

value of zero.

     Wheeler based his conclusion on an analysis of the value of

several comparable properties.    Hoeger's analysis of the 1994

amendment included one paragraph in his report that stated the

following:
                               - 26 -

     In November, 1994 an Amendment to the Conservation
     Easement was recorded. This amendment further
     restricted the property by allowing only one additional
     residence rather than two. This restriction to one
     additional residence is not considered a significant
     restriction based on a review of the easements used in
     this report and the market for properties in the area.

We disagree.   It seems self-evident that such a restriction on

such a large property is significant.     Hoeger did not include any

further analysis of the 1994 amendment in his report.

Accordingly, we adopt Wheeler's analysis of the 1994 amendment

and hold that the fair market value of the amendment to the MLR

easement was $290,000.

Issue 3. Whether Petitioner Is Liable for an Accuracy-Related
Penalty Under Section 6662(h) in 1993 or 1994

     In the notice of deficiency, respondent determined that

petitioner was liable for accuracy-related penalties under

section 6662(h) for 1993 and 1994.      Section 6662(h) applies to a

gross valuation misstatement where the value of property claimed

on a tax return is 400 percent or more of the value determined to

be correct.    See sec. 6662(h)(2)(A), (e)(1).   However, the

penalty is imposed only when the portion of the underpayment for

the taxable year attributable to the valuation misstatement

exceeds $5,000.    See sec. 6662(e)(2).

     In this case, the value of the MLR easement claimed on

petitioner's 1993 tax return, $1,080,000, is not 400 percent, nor

even 200 percent, or more of the value determined to be correct,

$800,000.   In addition, we have accepted the value of the 1994
                             - 27 -

amendment claimed on petitioner's tax return.   Therefore, neither

section 6662(h) nor (e) applies to petitioner in 1993 or 1994.



                                        Decision will be entered

                                   under Rule 155.
