                              T.C. Memo. 2016-233



                         UNITED STATES TAX COURT



 PHYLLIS E. MCGRADY AND CHRISTOPHER R. ANTONIACCI, Petitioners
       v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 20602-12, 11142-13.             Filed December 22, 2016.



      John Paul Barrie, for petitioners.

      Jonathan E. Behrens, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: On their Federal income tax return for 2007, petitioners

reported a noncash charitable contribution of $4.7 million. This contribution com-

prised two distinct gifts, which were components of a complex conservation plan

in Bucks County, Pennsylvania. Petitioners donated to the township in which they

lived a qualified conservation easement on their 25-acre homestead property, and
                                         -2-

[*2] they donated to a tax-exempt conservation organization a fee simple interest

in an adjoining 20-acre parcel of undeveloped land. Unable to use this deduction

fully in 2007, they claimed carryover charitable contribution deductions for 2008-

2011.

        The Internal Revenue Service (IRS or respondent) disallowed these deduc-

tions in full. It contended that petitioners lacked donative intent; that they failed

to satisfy various reporting requirements; that they overvalued the donated proper-

ty; and that they received return benefits in exchange for their gifts. The IRS de-

termined deficiencies as follows:

                          Year                 Deficiency

                          2007                  $338,614
                          2008                   308,960
                          2009                   260,405
                          2010                   506,296
                          2011                    86,102

The IRS also determined accuracy-related penalties under section 6662(h), com-

puted as 40% of the underpayments, and in the alternative under section 6662(a),

computed as 20% of the underpayments.1 We conclude that petitioners are enti-

tled to charitable contribution deductions for both gifts, albeit in amounts

        1
        All statutory references are to the Internal Revenue Code (Code) in effect
for the tax years in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] smaller than they claimed, and that they are not liable for accuracy-related

penalties.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated by this reference. Petitioners resi-

ded in Pennsylvania when they filed their petitions.

A.    Petitioners’ Acquisition of Parcel A and Parcel B

      In 1994 Edward and Sarah Rorer owned 182 acres of land in Upper Make-

field Township in Bucks County, Pennsylvania (Township). This land comprised

five contiguous but separate tax map parcels. What we will call Parcel B or the

homestead property was a 25-acre tract of partially improved land. It included a

single-family residence, dating in part to the 17th century, and several nearby out-

buildings. The outbuildings included a cottage, a guest house, garages, and a large

barn once used as an airplane hangar. This residential complex was located to-

ward the southern border of Parcel B. What we will call Parcel A was a 20-acre

tract of unimproved land that adjoined Parcel B to the west.

      The remaining 137 acres, comprising three separate tax map parcels, sur-

rounded Parcels A and B to the west, south, and east. We will refer to this acreage

as the Rorer Tract. The Rorer Tract was undeveloped, consisting of woodlands
                                         -4-

[*4] and cleared land used for farming. The Rorer Tract, like Parcels A and B,

was zoned “CR-1” by the Township. This meant that all 182 acres could be

developed as of right into single-family homes with a minimum lot size of one

acre.

        In February 1995 petitioners purchased Parcel B from the Rorers for $1.5

million. At the time of purchase the Rorers granted petitioners an informal, unre-

corded easement to use a gravel farm road across the Rorer Tract. This road pro-

vided a back entrance to the homestead property from Aqueduct Road, which

bounded the Rorer Tract to the south. Petitioners used this back entrance during

severe winter weather, when the main driveway leading to the residence from the

north could become impassable.

        At the time they acquired Parcel B, petitioners also received from the Rorers

an option (exercisable within 5 years) to purchase Parcel A and an option (exer-

cisable within 10 years) to purchase the Rorer Tract. In November 2000 peti-

tioners exercised the former option and purchased Parcel A for $500,000. We will

sometimes refer to Parcels A and B collectively as the McGrady/Antoniacci Tract.

        In January 2005 petitioners informed the Rorers of their intention to exer-

cise their option to purchase the Rorer Tract. The option agreement stipulated that

the purchase price was to be the average of three independent appraisals of that
                                        -5-

[*5] property. The local real estate market was extremely strong during 2003-

2005; the Rorers had received offers for the Rorer Tract substantially in excess of

$10 million from several developers. The average of the three appraisals stipula-

ted in the option agreement yielded a required purchase price of $13.4 million.

Petitioners could not afford this price, and in July 2006 they terminated the option

agreement.

B.    Development of the Environmental Conservation Plan

      The Township was committed to protecting land in its natural state and

preserving as far as possible the agricultural heritage of Bucks County. It sought

to accomplish these goals in various ways, e.g., by purchasing or receiving conser-

vation easements and by providing incentives for “conservation subdivisions.”

Conservation subdivisions allowed limited residential development: Expensive

homes would be dispersed across a large area, with the land surrounding these

residential “envelopes” being covered by conservation easements.

       Between 1996 and 2005 the Township’s residents authorized bond issu-

ances of up to $31 million to raise funds for preservation of open space. To guide

the use of these funds, the Township, a governmental unit as defined in section

170(c)(1), developed an “open space plan” in consultation with the Heritage Con-

servancy (Heritage), a nonprofit organization dedicated to environmental conser-
                                        -6-

[*6] vation in Bucks County and adjoining areas. Heritage is tax-exempt under

section 501(c)(3) and is an organization eligible to receive “qualified conservation

contributions” under section 170(h)(1) and (3). In May 2005 the Township and

Heritage identified the Rorer Tract and the McGrady/Antoniacci Tract as among

the most significant unpreserved properties remaining in the area.

      Petitioners shared the Township’s conservation values. In December 2005

they contacted Heritage to express their interest in preserving the Rorer Tract,

which they then held an option to purchase. In January 2006 they hired Gregory

Glitzer, an experienced civil engineer, to outline possible development scenarios.

He prepared numerous sketch plans. He advised that if all 182 acres were devel-

oped to their full commercial potential, they could accommodate at least 60 resi-

dential units and (under a “cluster development” model) possibly as many as 218

residential units. He sketched plans for a 9-lot residential development on Parcel

A and a 10-lot residential development on Parcel B.

      As an alternative, Mr. Glitzer in March 2006 sketched plans for a nine-lot

“conservation subdivision” carved out of the Rorer Tract and the southern portion

of Parcel A. Under this plan, the McGrady/Antoniacci Tract would be enlarged to

include a portion of the Rorer Tract not needed for the proposed subdivision, and a
                                         -7-

[*7] conservation easement would be placed over all of petitioners’ property

except the residential envelope on Parcel B.

      In early spring 2006 Richard Zaveta, an experienced local developer, ex-

pressed his willingness to pay $6 million for eight building lots as shown on Mr.

Glitzer’s sketch for the Rorer Tract, with the ninth lot being sold to another party.

The Township gave preliminary approval to this sketch plan. It also expressed its

willingness to contribute at least $4 million to purchase a conservation easement

over the Rorer Tract, conditioned on petitioners’ conveying conservation ease-

ments over Parcels A and B.

      Subsequent negotiations among the parties were affected by two develop-

ments. First, petitioners terminated the option agreement in July 2006 because

they could not afford the $13.4 million purchase price for the Rorer Tract.

Second, Mr. Zaveta sensed that the housing market was weakening and insisted on

scaling back his commitment. This meant that he would require more than the

eight lots initially envisioned and would pay substantially less for each lot.

      Lengthy negotiations ensued among petitioners, the Rorers, the Township,

Heritage, Mr. Zaveta, and their various representatives. On December 11, 2006,

Mr. Glitzer prepared the final conservation subdivision plan, which reflected the

parties’ ultimate agreements. The elements of this plan, which were
                                        -8-

[*8] implemented in various steps during the following months, can be

summarized as follows.

      • Petitioners agreed to convey to Heritage, as a charitable contribution, a fee

simple interest in Parcel A. They executed a donation agreement dated January

24, 2007, and the deed was recorded in Heritage’s name on February 7, 2007.

Heritage agreed to deliver to the Township, and subsequently did deliver for

consideration of $100,000, a conservation easement over Parcel A.

      • Petitioners agreed to convey to the Township, as a charitable contribution,

a conservation easement over Parcel B. They executed a donation agreement to

this effect on February 1, 2007, and formally conveyed the easement on July 10,

2007. Petitioners retained the right to make improvements to their residence and

the existing outbuildings within a two-acre residential envelope.

      • The Rorers agreed to sell to the Township, for $5,615,000 in a bargain

sale, a conservation easement over the Rorer Tract. Heritage agreed to purchase

the Rorer Tract from the Rorers, subject to this easement, for $6,085,000. The

sum of these amounts, plus the tax savings the Rorers anticipated from the bargain

sale, approximated the $13.4 million purchase price for the Rorer Tract that had

been determined under the original option agreement. The initial agreements were
                                        -9-

[*9] executed on February 1, 2007; the easement was formally conveyed on June

28, 2007; and the deed was formally executed on July 10, 2007.

      • Heritage, as the owner of Parcel A and the Rorer Tract, agreed to sell to

Mr. Zaveta 10 residential lots as set forth in the final conservation subdivision

plan, in exchange for consideration of $5,175,000. Heritage concurrently agreed

to sell an 11th lot to an unrelated party for $425,000. The initial agreements were

executed on February 1, 2007. The Township’s board of supervisors formally ap-

proved the final conservation subdivision plan on June 6, 2007, and the relevant

deeds were formally executed on July 10, 2007.

      • Petitioners agreed to donate, and did donate in the form of cash and com-

mon stock, $275,000 to Heritage to cover its transaction costs in acquiring the

Rorer Tract and securing development approval from the Township. Of this sum,

$268,000 was contributed during 2007.

      The agreements described above left the parties $485,000 short of the total

needed to meet the requirements set by the Rorers and Mr. Zaveta. To enable the

deal to close, petitioners agreed to purchase from Heritage, for $485,000, a 37-acre

parcel of land carved out from Parcel A and the Rorer Tract. Heritage had no in-

terest in owning this land outright. It offered this acreage to Mr. Zaveta, but he

declined. He explained that home buyers in this market were typically satisfied
                                        - 10 -

[*10] with a five-acre lot; that they would not pay appreciably more for additional

acreage subject to a conservation easement; and that ownership of such acreage

would require the homeowners’ association to charge substantial additional fees to

cover maintenance, security, and insurance costs.

      We will refer to this 37-acre parcel as the buy-back parcel. Mr. Zaveta and

an official from Heritage testified that this parcel represented land that was in

effect “left over.” This land was not needed for the conservation subdivision

given the location of the 10 residential envelopes, which were situated along the

access road on the southern and western portions of Parcel A and the Rorer Tract.

And this land could not be used for any other development purpose because it was

fully covered by conservation easements.

      By purchasing the buy-back parcel, petitioners acquired a U-shaped tract of

land, completely subject to conservation easements, that surrounded Parcel B,

their homestead property, to the west, south, and east. As a result of this acquisi-

tion, petitioners increased their aggregate land ownership from 45 acres (Parcel A

+ Parcel B) to 62 acres (Parcel B + buy-back parcel). The ultimate configuration

of petitioners’ real estate thus came to resemble, to some degree, the configuration

envisioned in Mr. Glitzer’s March 2006 sketch, which called for the partition of
                                        - 11 -

[*11] Parcel A and the enlargement of petitioners’ homestead property to include

undeveloped portions of Parcel A and the Rorer Tract.

      In July 2007 Heritage and Mr. Zaveta submitted to the Township a detailed

development proposal for the new subdivision, which was to be called Creeks

Bend. This proposal included a private access road for the 10 new residences,

which would be placed (to the extent possible) on top of the old gravel farm road

that ran through the Rorer Tract. This placement of the road was designed to max-

imize conservation values by minimizing disruption of pristine land.

      Petitioners were granted a formal, recorded easement to use this access road,

on essentially the same terms as applied to their prior use of the gravel farm road.

Petitioners paid nothing for this easement, and they were not required to contribute

either to the cost of constructing the access road or to the costs of annual mainten-

ance and upkeep (such as snow removal). Petitioners continued to use this access

road as a back entrance to their property during winter weather and occasionally to

bring in heavy farm equipment.

C.    Tax Return and Examination

      Petitioners timely filed their 2007 Federal income tax return reporting a

noncash charitable contribution of $4.7 million. This amount reflected a valuation

of $2.35 million for the donation of Parcel A to Heritage and a valuation of $2.35
                                        - 12 -

[*12] million for the donation of the conservation easement to the Township.

Petitioners included with their return properly executed Forms 8283, Noncash

Charitable Contributions, covering both gifts, as well as appraisals of both

properties completed in late 2007 by Vincent D. Quinn. Because of statutory

limitations, petitioners were unable to claim the entire charitable contribution

deduction for 2007. They accordingly deducted $987,830 on their 2007 return and

claimed carryover deductions of $928,318, $872,481, $1,665,366, and $246,006

on their returns for 2008, 2009, 2010, and 2011, respectively.

      On June 5, 2012, the IRS timely issued a notice of deficiency for 2007-

2010, and on April 4, 2013, the IRS timely issued a notice of deficiency for 2011.

These notices disallowed in their entirety the deductions petitioners claimed for

donating the easement to the Township and Parcel A to Heritage. The notices also

determined accuracy-related penalties. Petitioners timely petitioned this Court for

redetermination of these deficiencies and penalties.

      We consolidated the two cases for trial, briefing, and opinion. At the outset

of trial respondent moved to amend his answer to assert an increased deficiency by

disallowing a deduction for petitioners’ $268,000 contribution of cash and stock to

Heritage. We denied this motion as untimely and prejudicial to petitioners.
                                        - 13 -

[*13] D.     Expert Testimony

      1.     Vincent D. Quinn

      Petitioners offered, and the Court recognized, Vincent D. Quinn as an expert

in the valuation of residential real estate. Mr. Quinn, who performed the apprai-

sals that accompanied petitioners’ 2007 return, has more than 40 years of experi-

ence appraising commercial and residential real estate, including residential subdi-

visions. Certified as an appraiser by the State of Pennsylvania, he is a member of

the Appraisal Institute and holds its MAI designation.

      Mr. Quinn has appraised 50 to 100 properties in Bucks County during the

last 10 years. He credibly testified that real estate valuations in Bucks County are

usually determined on a per-lot basis for properties that have development poten-

tial and on a per-acre basis for properties with no development potential. He testi-

fied that developers themselves evaluated real estate by determining how many

“buildable lots” they could extract from it and get approved. Because a per-acre

appraisal would not capture the property’s actual development potential, Mr.

Quinn testified that a developer would not find it relevant or useful.

      Mr. Quinn performed his original appraisal of Parcel A on November 11,

2007, listing its effective date as January 23, 2007, the day before petitioners do-

nated Parcel A to Heritage. He determined that the highest and best use of Parcel
                                        - 14 -

[*14] A was for single-family residential development. On the basis of a sketch

plan prepared by Mr. Glitzer, he determined that this development could comprise

nine building lots ranging in size from 1.3 to 3.5 acres. Employing these assump-

tions and comparable sales of multi-lot properties, he determined that the fair mar-

ket value of Parcel A on a per-lot valuation was $2.35 million.

      Mr. Quinn performed his original appraisal of the conservation easement on

December 5, 2007, listing its effective date as July 10, 2007, the date on which pe-

titioners formally conveyed the easement to the Township. He determined that the

highest and best use of Parcel B before placement of the easement was single-

family residential development. On the basis of another sketch plan prepared by

Mr. Glitzer, Mr. Quinn determined that this development could comprise 10 buil-

ding lots ranging in size from 1.1 to 5.0 acres. On the basis of comparable sales of

multi-lot properties, he concluded that the fair market value of this tract on a per-

lot valuation was $3 million. Subtracting from this figure what he determined to

be the value of Parcel B after placement of the conservation easement, he conclu-

ded that the easement had a fair market value of $2.35 million.

      In August 2015 Mr. Quinn prepared follow-up appraisals of Parcel A and of

the easement, again as of January 2007 and June 2007, respectively. With respect

to Parcel A, he made adjustments to his comparable sales that increased the value
                                       - 15 -

[*15] of each lot by about $5,500, yielding an overall value increase of $50,000.

With respect to the easement, he made adjustments to his comparable sales that de-

creased the “after” value of Parcel B by $350,000 and increased the value of the

easement to $2.7 million. According to Mr. Quinn’s follow-up appraisals, there-

fore, the aggregate value of petitioners’ charitable contributions was $5.1 million

($2.4 million + $2.7 million), as opposed to the $4.7 million reported on their

2007 tax return.

      2.     Leonard J. Patcella

      Petitioners offered, and the Court recognized, Leonard J. Patcella as an ex-

pert in real estate appraisal and the valuation of conservation easements. He has

more than 40 years of appraisal experience and has appraised more than 700

properties in Bucks County alone. Certified as an appraiser by the State of Penn-

sylvania, he is a member of the Appraisal Institute and holds its MAI designation.

       Like Mr. Quinn, Mr. Patcella determined that the highest and best use of

Parcel A and Parcel B was residential development and relied on Mr. Glitzer’s

sketch plans to determine the number of buildable lots. Employing a per-lot anal-

ysis but adding several comparable sales to the group selected by Mr. Quinn, Mr.

Patcella determined that the fair market values of Parcel A and the Parcel B ease-

ment, as of the relevant valuation dates, were $2,160,000 and $1,460,600, respec-
                                        - 16 -

[*16] tively. Mr. Patcella separately appraised the buy-back parcel and the ease-

ment petitioners received over the Creeks Bend access road. He determined that

the fair market value of the buy-back parcel (subject to the conservation ease-

ments) was $221,700 and that the fair market value of the driveway easement was

no more than $12,000.

      3.     Michael J. Acquaro-Mignogna

      Respondent offered, and the Court recognized, Michael J. Acquaro-Mig-

nogna as an expert in real estate appraisal with a specialization in residential sub-

divisions. Mr. Acquaro-Mignogna has more than 30 years of experience apprai-

sing real estate, mostly in Bucks County, although he has not previously per-

formed an appraisal of a conservation easement. Certified as an appraiser by the

State of Pennsylvania, he is a member of the Appraisal Institute and holds its MAI

and AIGRS designations.

      Mr. Acquaro-Mignogna’s testimony departed from that of Messrs. Quinn

and Patcella in two major respects. First, while agreeing that the highest and best

use of Parcel A was residential development, he opined that the highest and best

use of Parcel B before placement of the easement was continued use as a single-

family “estate property.” Second, in determining Parcel A’s value for residential

development, he used a per-acre analysis based on comparable sales of raw land,
                                       - 17 -

[*17] rather than a per-lot analysis based on comparable sales of multi-lot

properties.

      Employing these approaches, Mr. Acquaro-Mignogna determined that the

fair market value of Parcel A, as of the relevant valuation date, was $920,000. He

determined that the fair market value of the Parcel B conservation easement, as of

the relevant valuation date, was between $190,000 and $390,000. He was unable

to determine a value for the buy-back parcel, and he concluded that the easement

petitioners received over the Creeks Bend access road was worth about $29,000.

                                     OPINION

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, though the taxpayer can rebut this presumption. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace,

and taxpayers generally bear the burden of proving their entitlement to the deduc-

tions claimed. INDOPCO v. Commissioner, 503 U.S. 79, 84 (1992). Petitioners

contend that respondent bears the burden of proof for two reasons: (1) they have

satisfied the requirements of section 7491(a) for shifting the burden of proof and

(2) respondent raised a “new matter” in his answer. See Rule 142(a)(1). Because

we decide all factual issues on a preponderance of the evidence, we need not de-
                                         - 18 -

[*18] cide who has the burden of proof. See sec. 7491(a); Estate of Turner v.

Commissioner, 138 T.C. 306, 309 (2012).

I.    Charitable Contribution Deductions

      Section 170(a)(1) allows a deduction for any charitable contribution made

within the taxable year. If the taxpayer makes a charitable contribution of proper-

ty other than money, the amount of the contribution is generally equal to the fair

market value of the property at the time the gift is made. See sec. 1.170A-1(c)(1),

Income Tax Regs. A deduction is generally not allowed for a gift of property con-

sisting of less than the donor’s entire interest in that property, but there is an

exception for (among other things) a “qualified conservation contribution.” Sec.

170(f)(3)(A), (B)(iii). This exception applies where: (1) the taxpayer makes a

contribution of a “qualified real property interest,” (2) the donee is a “qualified

organization,” and (3) the contribution is “exclusively for conservation purposes.”

Sec. 170(h)(1). The parties agree that the Parcel B conservation easement peti-

tioners conveyed to the Township satisfies these requirements.

      Where the value of contributed property exceeds $5,000, no deduction is

allowed unless the taxpayer obtains a “qualified appraisal” of such property. Sec.

170(f)(11)(C). A qualified appraisal is “an appraisal of such property which * * *

is conducted by a qualified appraiser in accordance with generally accepted stand-
                                        - 19 -

[*19] ards and any regulations or other guidance prescribed * * * [by the Secre-

tary]. Sec. 170(f)(11)(E)(i)(II). A taxpayer claiming a deduction for a contribu-

tion of property whose value exceeds $5,000 must attach to his return a fully com-

pleted “appraisal summary.” See sec. 1.170A-13(c)(2), Income Tax Regs. The

IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson

v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Where (as

here) a contribution of property is valued in excess of $500,000, the taxpayer must

attach to his return not only an appraisal summary but also a copy of the appraisal

itself. Sec. 170(f)(11)(D).

      Respondent contends that petitioners’ charitable contribution deductions

should be denied in their entirety on the theory that they lacked donative intent

and/or failed to satisfy statutory and regulatory reporting requirements. If we re-

ject these threshold arguments, respondent contends that petitioners’ deductions

should be reduced substantially on the theory that they overvalued the donated

property and/or received a return benefit that partially offsets the value of their

gifts. We consider these arguments in turn.
                                        - 20 -

[*20] A.     Donative Intent

      “The sine qua non of a charitable contribution is a transfer of money or

property without adequate consideration.” United States v. Am. Bar Endowment,

477 U.S. 105, 118 (1986). If a transaction with a charity “is structured as a quid

pro quo exchange”--i.e., if the taxpayer receives from the charity property or

services equal in value to what he conveyed--there is no “contribution or gift”

within the meaning of the statute. Hernandez v. Commissioner, 490 U.S. 680,

701-702 (1989).

      In assessing whether a transaction constitutes a “quid pro quo exchange,”

we give most weight to the external features of the transaction, avoiding imprecise

inquiries into taxpayers’ subjective motivations. See Hernandez, 490 U.S. at

690-691; Christiansen v. Commissioner, 843 F.2d 418, 420 (10th Cir. 1988). “If it

is understood that the property will not pass to the charitable recipient unless the

taxpayer receives a specific benefit, and if the taxpayer cannot garner that benefit

unless he makes the required ‘contribution,’ the transfer does not qualify the tax-

payer for a deduction under section 170.” Costello v. Commissioner, T.C. Memo.

2015-87, at *27; see Christiansen, 843 F.2d at 420-421; Graham v. Commissioner,

822 F.2d 844, 849 (9th Cir. 1987), aff’g 83 T.C. 575 (1984), aff’d sub nom.

Hernandez v. Commissioner, 490 U.S. 680.
                                        - 21 -

[*21] The external features of the transactions at issue show that petitioners’ gifts

were not part of a “quid pro quo exchange.” Petitioners conveyed a fee simple in-

terest in Parcel A to Heritage on January 24, 2007. This was an outright gift that

petitioners could not claw back. Their conveyance of Parcel A was not condi-

tioned on Heritage’s provision of any return benefit, and Heritage in fact supplied

petitioners with no return benefit.

      The same is true of petitioners’ conveyance to the Township, on July 10,

2007, of a conservation easement over Parcel B. Petitioners retained the right to

make improvements to their 2-acre residential envelope; their gift took the form of

an easement over the remaining 23 acres. That gift was made with no strings at-

tached. The grant of the easement was not conditioned on the Township’s pro-

vision of any return benefit, nor was it made in the expectation that the Township

would supply a return benefit.

      In urging that there was a “quid pro quo exchange,” respondent focuses

chiefly, not on any specific benefit petitioners received, but on their supposed abil-

ity to steer the entire set of transactions in a way that benefited them. In respond-

ent’s view, petitioners were motivated by a desire to protect their privacy and to

prevent suburban development from spoiling the attractive views from their resi-

dence. Noting that petitioners were involved in the negotiations from the outset,
                                        - 22 -

[*22] respondent surmises that the Township and Heritage, if not ceding

petitioners actual control, allowed them to guide the transactions in a direction that

achieved their personal goals.

      In support of this characterization, respondent notes that the final conserva-

tion subdivision plan grew out of the March 2006 sketch by Mr. Glitzer, whom pe-

titioners had hired. Under that plan, most of the residences in the Creeks Bend

subdivision were south of the access road, at a considerable distance from petition-

ers’ homestead. And by acquiring the buy-back parcel for what respondent re-

gards as the bargain price of $485,000, petitioners secured a 37-acre “cushion” of

pristine land that separated their homestead property from the Creeks Bend sub-

division on all three sides.

      We are unpersuaded by respondent’s characterization of these events. Peti-

tioners were indeed involved in the negotiations from the outset, but this was in-

evitable: They owned Parcel A and Parcel B, they held an option to acquire the

Rorer Tract, and it was obvious that any successful conservation plan would re-

quire a substantial economic contribution from them. They negotiated for 18
                                       - 23 -

[*23] months with the Rorers, the Township, Heritage, and Mr. Zaveta to

determine the economic contributions that each party would be required to make.2

      There is no evidence that petitioners had the power to manipulate these ne-

gotiations or that the other parties made meaningful concessions to them. The

Township and Heritage were single-mindedly dedicated to accomplishing the

maximum degree of environmental conservation consistent with the financial re-

alities they confronted. The Township’s representative credibly testified that pe-

titioners asked for nothing in exchange for their contribution and that they held no

sway over the conservation subdivision planning.

      Mr. Zaveta was committed to achieving an environmentally sensitive subdi-

vision plan that would yield him the greatest economic profit. He credibly testi-

fied that he never discussed lot placement with petitioners and that his focus was

maximizing the market value of the new subdivision. He explained that the lots in

the Creeks Bend subdivision were sited mostly to the south of the access road for

      2
        Respondent notes that the various conservation transactions were inter-
related and dependent on one another. That is correct, but it does not mean that
petitioners received a quid pro quo. Petitioners donated Parcel A to Heritage; they
donated an easement over Parcel B to the Township; they contributed $268,000 to
Heritage to cover its transaction costs; and they supplied $485,000 of cash in ex-
change for the (relatively worthless) buy-back parcel. Had petitioners not actively
participated in the negotiations, it is possible that even more might have been re-
quired of them. Being relieved of an obligation to provide more does not consti-
tute a quid pro quo negating the value of what one has provided.
                                        - 24 -

[*24] two reasons: (1) there was not enough room to put them on the north side,

given the proximity of petitioners’ southern boundary line; and (2) if sited to the

north, several houses would have looked out on petitioners’ former airplane

hanger, which was not a desirable view. With more-than-ample acreage available

below the access road, it was not in Mr. Zaveta’s economic interest to have his

multi-million-dollar homes situated cheek-by-jowl with petitioners’ property.

      Respondent insists that the buy-back parcel was very valuable to petitioners

because it protected them on all sides from residential development. But petition-

ers were already protected from residential development by the conservation sub-

division plan, which barred additional homes within Creeks Bend, and by the prior

placement of conservation easements over the buy-back parcel. Petitioners did not

need to purchase the buy-back parcel in order to get this protection; they already

had it. Petitioners purchased the buy-back parcel for $485,000 in order to supply

the cash needed to close the deal; far from garnering a quid pro quo thereby, they

likely paid more for this acreage than it was worth. See infra pp. 48-49.

      In deciding whether petitioners had the requisite donative intent, we look to

the external features of the transaction to ascertain whether they expected to re-

ceive a quid pro quo that canceled out their charitable gifts. We do not find the

expectation of any such quid pro quo. Whenever a homeowner places a conserva-
                                       - 25 -

[*25] tion easement over his property, or a neighbor places a conservation

easement over neighboring property, the homeowner in a sense “benefits” by

having natural landscapes rather than suburban sprawl in his immediate surround-

ings. When the Township approved a conservation subdivision on the Rorer

Tract, petitioners may be said to have “benefited” because the Rorer Tract sur-

rounded their property. But petitioners were mere incidental beneficiaries of this

action. Heritage and the Township executed these transactions not to benefit pe-

titioners or the Creeks Bend homeowners but to accomplish their charitable pur-

poses of conserving rural and agricultural land. See McLennan v. United States,

24 Cl. Ct. 102, 107 (1991) (upholding charitable contribution deduction where

“[a]ny benefit which inured to * * * [the taxpayer] from the conveyance was

merely incidental to an important, public spirited, charitable purpose”), aff’d, 994

F.2d 839 (Fed. Cir. 1993).

      B.     Reporting and Substantiation Requirements

      For contributions of $250 or more, a taxpayer must obtain a “contempor-

aneous written acknowledgment” (CWA) from the donee. See sec. 170(f)(8)(A).

A CWA must include (among other things) whether the donee organization fur-

nished any goods or services in exchange for the gift and (if so) a description and

good-faith estimate of the value of such goods or services. For contributions of
                                       - 26 -

[*26] property whose value exceeds $5,000, the taxpayer must attach to his return

a fully completed appraisal summary on Form 8283. Sec. 1.170A-13(c)(2)(i)(B),

Income Tax Regs. The appraisal summary must be signed and dated by the donee

and must set forth specified information, including “a statement explaining * * *

the amount of any consideration received from the donee for the contribution.” Id.

subpara. (4)(ii)(H). An important goal of the appraisal summary is to “foster dis-

closure of ‘dual payment’ or quid pro quo contributions.” Boone Operations Co.

v. Commissioner, T.C. Memo. 2013-101, at *7 (quoting Viralam v. Commissioner,

136 T.C. 151, 171 (2011)).

      The Township and Heritage supplied petitioners with timely CWAs for the

contributions in question. And petitioners attached to their 2007 tax return Forms

8283 properly executed by both organizations and by Mr. Quinn as appraiser. Re-

spondent contends that all of these documents were deficient because they failed

to disclose and value quid pro quos that petitioners allegedly received.

      We find no merit in this argument. As explained previously, petitioners re-

ceived no quid pro quo in terms of ability to manipulate the overall conservation

transactions to their benefit. See supra pp. 21-24. As we discuss below, petition-

ers did receive one (rather small) return benefit when the dust settled, namely, a

recorded easement over the Creeks Bend access road, which provided rear access
                                         - 27 -

[*27] to their homestead property. See infra pp. 50-52. But there is no evidence

that the Township or Heritage was aware of this easement arrangement when it

executed the CWA, or that Mr. Quinn was aware of it when he performed his ap-

praisals and executed the Forms 8283. And petitioners understandably regarded

this easement as having no material value because it simply continued the informal

easement they previously enjoyed over the Rorer Tract. We find that the CWAs

and Forms 8283 complied with all statutory and regulatory requirements and that

petitioners reasonably relied on all four documents.

      C.     Valuation

      Petitioners contend that the fair market value of their donation to Heritage

of a fee simple interest in Parcel A was at least $2.35 million, and that the fair

market value of their donation to the Township of a conservation easement over

Parcel B was likewise at least $2.35 million. Respondent contends that the value

of Parcel A was $920,000 and that the value of the conservation easement was be-

tween $190,000 and $390,000. We conclude that the appropriate values lie in

between these poles.

             1.     General Principles

      The fair market value of property is the price at which it would change

hands between a willing buyer and a willing seller, neither being under any com-
                                        - 28 -

[*28] pulsion to buy or sell and both having reasonable knowledge of the relevant

facts. See sec. 1.170A-1(c)(2), Income Tax Regs. The willing buyer and the

willing seller are hypothetical persons, rather than specific individuals or entities.

See Estate of Bright v. United States, 658 F.2d 999, 1005-1006 (5th Cir.1981);

Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990). Fair market value

is a question of fact and is measured on the applicable valuation date. See sec.

170(a); Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 324 (2013); sec.

1.170A-1(c)(1), Income Tax Regs. In determining fair market value, the trier of

fact must draw appropriate inferences from all relevant evidence of value. See

Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125 (1944); Helvering

v. Nat’l Grocery Co., 304 U.S. 282, 294 (1938).

      Fair market value reflects the highest and best use of the property on the

valuation date. See Mitchell v. United States, 267 U.S. 341, 344-345 (1925);

United States v. Meadow Brook Club, 259 F.2d 41, 45 (2d Cir.1958); Symington

v. Commissioner, 87 T.C. 892, 896 (1986); Stanley Works & Subs. v. Commis-

sioner, 87 T.C. 389, 400 (1986). We have defined “highest and best use” as “[t]he

reasonably probable and legal use of vacant land or an improved property that is

physically possible, appropriately supported, and financially feasible and that re-

sults in the highest value.” Whitehouse Hotel Ltd. P’ship v. Commissioner, 139
                                         - 29 -

[*29] T.C. 304, 331 (2012) (quoting Appraisal Institute, The Appraisal of Real

Estate 277 (13th ed. 2008)), aff’d in part, vacated in part, and remanded on other

grounds, 755 F.3d 236 (5th Cir. 2014).

      We typically consider one or more of three approaches to determine fair

market value: (1) the market approach, (2) the income approach, and (3) the asset-

based approach. Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003),

aff’d in part, vacated in part, and remanded on another issue sub nom. J.P. Morgan

Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006). Determining which

method to apply presents a question of law. See Chapman Glen Ltd., 140 T.C. at

325-326. Here, all three expert witnesses agreed that the market approach supplies

the appropriate methodology, and we concur in that assessment.

      The market approach--sometimes called the “sales comparison” approach--

is normally used to value residential property. It values the subject property by

reference to the prices paid for similar properties that were sold near the valuation

date. See Estate of Spruill v. Commissioner. 88 T.C. 1197, 1229 n.24 (1987);

Wolfsend Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19 (1979). Because two

pieces of real estate are rarely identical, the prices of the comparable properties are

adjusted to create parity between those properties and the subject property. The

reliability of the market method depends upon the comparability of the properties
                                        - 30 -

[*30] selected and the reasonableness of the adjustments made to their prices.

Wolfsend Land & Cattle Co., 72 T.C. at 19-20.

      An expert witness’ opinion is admissible if it assists the trier of fact to un-

derstand the evidence or to determine a fact in issue. Fed. R. Evid. 702. We eval-

uate expert opinions in light of the expert’s qualifications and the evidence in the

record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986). When experts of-

fer differing estimates of fair market value, we weigh those estimates by examin-

ing (among other things) the factors they considered in reaching their conclusions.

See Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not bound by a par-

ticular expert’s opinion and may accept or reject it in whole or in part. See Hel-

vering v. Nat’l Grocery Co., 304 U.S. at 295; Parker, 86 T.C. at 561-562. We may

also determine a fair market value based on our own examination of the evidence

in the record. See Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976),

aff’g T.C. Memo. 1974-285.

             2.    Fee Simple Interest in Parcel A

      The parties agree that the fair market value of Parcel A must be determined

according to its highest and best use and that the highest and best use of Parcel A

in January 2007 was residential development. The parties disagree chiefly on two

points: (1) whether “comparable sales” are sales of raw land at a per-acre price or
                                         - 31 -

[*31] sales of multi-lot properties at a per-lot price and (2) if we adopt the latter

approach, what downward adjustment should be applied to the comparable sale

prices to account for the fact that Parcel A had no development approvals in place.

      Mr. Quinn based his appraisal on Mr. Glitzer’s November 2006 sketch plan,

which showed a nine-lot development on Parcel A. Because Parcel A was zoned

CR-1, it theoretically could accommodate up to 20 residences on one-acre lots.

However, given the Township’s conservation priorities and the existence of a

creek on the parcel’s north side, Mr. Glitzer believed that a nine-lot development

was the densest proposal likely to receive approval.

      Adopting this premise, Mr. Quinn selected as his comparable properties

multi-lot properties intended for residential development. Two of these properties

were in the Township and three were elsewhere in Bucks County. Before

adjustments, the sale prices were as follows:

      Property        Date            Price           # Lots        Price per lot

  Creeks Bend         7/07        $5.18 million         10           $517,500
  Rockbridge          5/06         0.85 million          3            283,333
  Broad Street        8/05         1.34 million          6            223,499
  Brookshire          6/05         7.25 million         29            250,000
  Rapuano Farm        6/04         6.01 million         20            300,500
                                       - 32 -

[*32] Unlike Parcel A, each of these multi-lot properties was sold with develop-

ment approvals already in place. Among the adjustments Mr. Quinn needed to

make to his comparable prices, therefore, was a downward adjustment to account

for the expense and uncertainty of getting Township approval for a nine-lot resi-

dential development on Parcel A. He made a 10% adjustment for this purpose.

He concluded that a larger adjustment was unnecessary because: (1) Mr. Glitzer’s

sketch plan was conservative and incorporated much of the planning necessary to

secure approval and (2) Mr. Glitzer’s firm served as the Township’s engineers and

would able to use this experience to expedite the approval process.

      After making other adjustments to the comparable properties’ prices, Mr.

Quinn determined a per-lot value ranging between $240,625 and $362,854. He

concluded that Parcel A’s value should fall near the middle of this range at

$288,888 per lot. He accordingly determined that Parcel A’s total value at the

time of donation was $2,600,000 ($288,888 × 9 lots).

      Mr. Quinn then performed an “enhancement” analysis that he thought was

required by section 1.170A-14(h)(3), Income Tax Regs. The purpose of this anal-

ysis was to determine a downward adjustment to Parcel A’s value to account for

the expected placement by Heritage of a conservation easement upon it, which

would benefit petitioners’ adjacent homestead property. After consulting market
                                        - 33 -

[*33] data, Mr. Quinn estimated that Heritage’s placement of a conservation

easement over Parcel A would enhance the value of Parcel B by $200,000. Sub-

tracting that sum from $2,600,000, he determined in his expert report a final dona-

tion value for Parcel A of $2,400,000. This figure was $50,000 higher than his

original 2007 appraisal because of refinements to his comparable sale prices.

      Petitioners’ second expert, Mr. Patcella, agreed with Mr. Quinn in employ-

ing a per-lot analysis. He selected as his comparable sales three of Mr. Quinn’s

sales and three other sales of multi-lot properties. One of his properties was in the

Township and five were elsewhere in Bucks County, as follows:

      Property        Date          Price           # Lots       Price per lot

  Highland Road  6/04           $5.46 million         20           $273,000
  Durham Road    2/04            2.76 million         25            110,380
  Matthews Ridge 4/06            2.90 million         16            181,250
  Chapman Corner 7/06            3.69 million         22            167,509
  Broad Street   8/05            1.34 million          6            223,499
  Brookshire     6/05            7.25 million         29            250,000

      Mr. Patcella’s comparable properties had development approvals in place or

were sold contingent on the buyer’s receiving approval for the desired number of

lots. While sharing Mr. Quinn’s view that the Township would likely approve a

nine-lot development on Parcel A fairly quickly, Mr. Patcella determined that Mr.

Quinn’s 10% downward adjustment was too small and concluded that an adjust-
                                       - 34 -

[*34] ment of 15% to 20% would be more appropriate. After making other

adjustments that he believed appropriate, he determined an average value of

$240,000 per lot for the comparable properties, yielding a total value of

$2,160,000 ($240,000 × 9 lots) for Parcel A as of the valuation date.

      Respondent’s expert, Mr. Acquaro-Mignogna, testified that a per-lot valua-

tion would be too speculative because it was uncertain how many lots the Town-

ship would actually approve for development on Parcel A. He accordingly select-

ed sales of raw land as his comparables and used the per-acre sale prices of these

properties as his index of Parcel A’s value. He selected the following sales as

comparables:

      Property            Date          Price          # Acres     Price per acre

  New Hope Road           3/06       $0.51 million      16.35           $31,254
  Lower York Road         9/05        5.45 million     106.00            51,415
  Lower York Road 2       5/05        4.55 million     106.00            42,925
  Ridgeview Drive         8/05        2.15 million      47.07            45,677
  Old York Road            3/05       1.00 million      30.42            32,873

      Whereas Parcel A was zoned CR-1 (single-family residences on one-acre

lots), three of Mr. Acquaro-Mignogna’s comparable properties were zoned for

agricultural use only, and the other two were zoned for mixed agricultural and

residential use. None of his comparables was in the Township although all were

in Bucks County. After adjusting the comparable sale prices he determined an
                                       - 35 -

[*35] average sale price of $46,000 per acre; he accordingly valued Parcel A at

$920,000 ($46,000 × 20 acres). If sales of multi-lot approved properties were to

be used as comparables, as Messrs. Quinn and Patcella believed appropriate, Mr.

Acquaro-Mignogna expressed the view that a downward price adjustment of 50%

to 75% would be necessary to render those properties comparable to Parcel A.

      We agree with the per-lot approach employed by petitioners’ experts. Since

Parcel A’s highest and best use was residential development, the most likely buyer

of Parcel A would be a residential developer. Mr. Zaveta was an experienced res-

idential developer, and he credibly testified that residential developers in Bucks

County formulate their land offers by reference to the number of buildable lots that

the acreage is expected to yield. If that is how prospective buyers of Parcel A

would formulate their offers, that would seem the most logical route to deter-

mining Parcel A’s fair market value.

      We are unpersuaded by respondent’s submission that this per-lot approach

is too speculative. While no one could know for sure whether the Township

would approve a nine-lot development on Parcel A, Mr. Glitzer had considerable

experience in these matters and credibly testified that such approval was likely.

Messrs. Quinn and Patcella, likewise experienced in the ways of Bucks County,

seconded that opinion.
                                        - 36 -

[*36] The evidence established that a developer contemplating purchase of unim-

proved land in Bucks County would either make a full-price offer contingent on

development approval’s being secured or make his best estimate as to the like-

lihood of getting the desired approval and discount his offer accordingly. In either

event, the developer would formulate his offer on a per-lot, not on a per-acre,

basis. The possibility that the expected number of buildable lots might not be

approved is adequately accounted for by making an appropriate downward ad-

justment to the sale prices of the comparable properties.

      We agree with respondent, however, that the 10% downward adjustment

made by Mr. Quinn and the 15% to 20% downward adjustment favored by Mr.

Patcella are too small. Mr. Zaveta testified that Bucks County is not “developer-

friendly” and that obtaining development approval can be a “long and arduous

process.” He noted that the approval process could take three years to complete;

even if ultimate approval was likely, the developer might incur carrying charges

and other costs for an extended period.

      On the other hand, we are unpersuaded by Mr. Acquaro-Mignona’s view

that an adjustment in the range of 50% to 75% is necessary. He provided no con-

crete data to support this estimate, and an adjustment this large is at odds with the

consensus of the other witnesses that a nine-lot development on Parcel A would
                                       - 37 -

[*37] likely be approved fairly quickly. Evaluating the witnesses’ testimony and

the record as a whole, we find that a downward adjustment of 25% to the prices of

the comparable properties selected by petitioners’ experts is appropriate to account

for the fact that Parcel A had no development approvals in place.3

      We may briefly dispose of the remaining points in dispute.

      • Respondent argues that one of Mr. Quinn’s comparable sales--Heritage’s

sale to Mr. Zaveta of the 10 lots that would become the Creeks Bend subdivision--

should be eliminated because it occurred after January 24, 2007, the date on which

petitioners conveyed Parcel A to Heritage. Mr. Patcella believed that this sale did

not furnish a useful comparison because its final pricing was “affected by too

many non-market variables,” including the conservation easements. We agree

with respondent and Mr. Patcella and will eliminate the Creeks Bend transaction

from Mr. Quinn’s set of comparable sales.

      • Mr. Quinn’s fifth comparable, Rapuano Farm, sold for $6,900,000 with

two of its 21 lots already improved with homesteads. Mr. Quinn correctly sub-


      3
        While do not agree with any of the expert witnesses’ adjustment rates, we
note that all three considered the physical characteristics of the comparable pro-
perties in determining Parcel A’s relative development potential. Mr. Quinn ad-
justed his prices for zoning, density, and approvals. Mr. Patcella adjusted his pri-
ces for site characteristics. Mr. Acquaro-Mignogna adjusted his prices for topo-
graphy, site improvements, and zoning.
                                        - 38 -

[*38] tracted from the recorded sale price the value of one homestead ($890,000),

but he neglected to subtract the value of the other homestead ($550,000). Making

that subtraction, we find that the comparable sale price for Rapuano Farm should

be $5,460,000, yielding an unadjusted per-lot price of $287,368 ($5,460,000 ÷ 19

lots) rather than $300,500.

      • Mr. Quinn noted that a nine-lot residential development would require

construction of a new bridge over the creek at the north end of Parcel A. Mr. Pat-

cella agreed, but he opined that this negative was offset by the attractive entrance

this setting would provide. Mr. Acquaro-Mignona opined that the cost of building

a new bridge would be $302,000. Considering all the testimony, we conclude that

the cost of constructing a new entrance bridge would be an infrastructure cost

borne by the developer and does not require a downward adjustment to Parcel A’s

fair market value.

      • Mr. Quinn made a $200,000 downward adjustment for “enhancement” to

the value of petitioners’ homestead on Parcel B. Section 1.170A-14(h)(3), Income

Tax Regs., provides that “[i]f the granting of a perpetual conservation restriction

* * * has the effect of increasing the value of any other property owned by the

donor,” the charitable contribution deduction allowed for the conservation

easement shall be reduced accordingly. Against his own interest, respondent
                                       - 39 -

[*39] contends (consistently with his expert’s view) that this regulation does not

apply to Parcel A, and we agree. Petitioners donated to Heritage a fee simple

interest in Parcel A, not a conservation easement. The regulation by its terms does

not apply to this transaction, so there is no basis for Mr. Quinn’s $200,000 down-

ward adjustment.

      To summarize: Although Mr. Patcella used some of the same comparables

as Mr. Quinn, we are unable to determine how Mr. Patcella in his expert report

made the downward adjustment for Parcel A’s lack of development approval. We

will accordingly use Mr. Quinn’s report to determine the fair market value of Par-

cel A. If we eliminate the Creeks Bend sale from Mr. Quinn’s set of comparables,

reduce to $287,368 the unadjusted per-lot price of Rapuano Farm, raise to 25% the

downward adjustment for Parcel A’s lack of development approval, and run these

revised numbers through Mr. Quinn’s matrix, we get a revised per-lot price of

$243,544 for the comparable properties. No further downward adjustment is re-

quired for “enhancement” to petitioners’ homestead property. We thus find the

fair market value of Parcel A to be $2,191,896 ($243,544 × 9 lots).

             3.    Conservation Easement Over Parcel B

      We turn now to the valuation of the conservation easement that petitioners

donated to the Township on July 10, 2007. Section 1.170A-14(h)(3)(i), Income
                                        - 40 -

[*40] Tax Regs., requires us to determine “the fair market value of the perpetual

conservation restriction at the time of the contribution.” The regulation elaborates

on this requirement as follows:

      If there is a substantial record of sales of easements comparable to the
      donated easement * * *, the fair market value of the donated easement
      is based on the sales prices of such comparable easements. If no sub-
      stantial record of market-place sales is available to use as a meaning-
      ful 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.

      Because a market for the purchase and sale of conservation easements rarely

exists, the value of a conservation easement is ordinarily determined using the

“before and after” approach mentioned in the regulation. Symington v. Commis-

sioner, 87 T.C. at 895; Hilborn v. Commissioner, 85 T.C. 677, 688-689 (1985).

We will employ that approach here.

                   a.     “Before” Value

      Section 1.170A-14(h)(3)(ii), Income Tax Regs., provides the following

guidance in determining the “before” value:

      [T]he fair market value of the property before contribution of the
      conservation restriction must take into account not only the current
      use of the property but also an objective assessment of how imme-
      diate or remote the likelihood is that the property, absent the restric-
      tion, would in fact be developed, as well as any effect from zoning,
                                        - 41 -

[*41] conservation, or historic preservation laws that already restrict the
      property’s potential highest and best use.

      The parties agree that the “before” value of Parcel B depends on its highest

and best use, but they disagree as to what that highest and best use was. Petition-

ers contend that the highest and best use of Parcel B prior to placement of the

easement was residential development, and their experts determined its fair market

value using essentially the same market approach that they used for Parcel A. Re-

spondent contends that the highest and best use of Parcel B before placement of

the easement was continued use as a single-home “estate property.”

      On this threshold point we agree with petitioners. Parcel B is next to Parcel

A. The two parcels are comparable in size (25 vs. 20 acres) and have roughly sim-

ilar topography. They share a northern frontage on Washington Crossing Road

and a long border running from north to south. In material respects these two par-

cels are fungible, except for the presence of a pre-existing residential compound

on Parcel B. If the highest and best use of Parcel A is residential development, as

respondent concedes, common sense suggests that residential development is also

the highest and best use of Parcel B.

      In opining to the contrary, Mr. Acquaro-Mignona started with the premise

that Parcel B with its existing improvements was worth $2.75 million. He sur-
                                        - 42 -

[*42] mised that owners of estate properties like this would insist on substantial

acreage around their residence to protect their privacy. If petitioners’ residential

envelope were reduced to two acres, as proposed in Mr. Glitzer’s 10-lot sketch

plan, Mr. Acquaro-Mignona believed that the value of the residential compound

would be reduced to $1.3 million. He further opined that the remaining 23 acres,

lacking development approvals, would be worth no more than $50,000 an acre to a

developer, or $1.15 million all told. Because the loss in value to the residential

compound occasioned by development ($1.45 million) supposedly exceeded the

price that a developer would pay for the other 23 acres ($1.15 million), Mr. Ac-

quaro-Mignona opined that residential development would make no economic

sense. He accordingly concluded that Parcel B’s highest and best use was “con-

tinued use and maintenance of the existing improvements as a single tract.”

      We are not persuaded by this line of reasoning. Parcel B, adjacent to Parcel

A and the Rorer Tract, is in an extremely desirable part of Bucks County. The

suitability of this land for residential development is shown by the fact that

numerous developers made very large offers to purchase the Rorer Tract. If

residential development represents the highest and best use of all the land sur-

rounding Parcel B, it is hard to see why its highest and best use should be differ-
                                        - 43 -

[*43] ent. Farmland does not cease to be suitable for residential development

because it has a farmhouse on it.

      The linchpin for Mr. Acquaro-Mignona’s contrary conclusion is his assump-

tion that a developer would pay no more than $50,000 per acre for the 23 acres

surrounding the residential compound. The record does not support this assump-

tion. In order to exercise their option to purchase the adjacent Rorer Tract, peti-

tioners would have been required to pay $13.4 million. Since the Rorer Tract

comprised 137 acres, that translates to roughly $100,000 per acre, or double the

price Mr. Acquaro-Mignona assumed. As discussed previously, moreover, devel-

opers in Bucks County formulate their offers in terms of a per-lot price, and com-

parable properties were selling for well in excess of $200,000 per lot. Since Par-

cel B could accommodate nine lots in addition to the residential compound, it is

obvious that a developer would pay substantially more than $1.15 million for the

surrounding 23 acres.

      For these reasons, we agree with petitioners’ experts that the highest and

best use of Parcel B before imposition of the easement was residential develop-

ment. To determine this “before” value, Mr. Quinn and Mr. Patcella both em-

ployed the sales-comparison approach, using the same comparable sales they had

used to value Parcel A. Relying on Mr. Glitzer’s sketch plans, they assumed that
                                       - 44 -

[*44] Parcel B would be approved for a 10-lot development; nine of these lots

would be new residences and the tenth would be petitioners’ existing homestead.

      Because we found internal inconsistencies in Mr. Quinn’s treatment of the

residential compound,4 we will base our determination of Parcel B’s “before”

value on Mr. Patcella’s approach. He concluded, as he had concluded for Parcel

A, that each buildable lot was worth $240,000. As discussed above, we conclude

that the appropriate per-lot value derived from comparable sales is $243,544; the

fair market value of the nine lots is thus $2,191,896. Mr. Patcella determined the

value of the tenth lot, comprising petitioners’ homestead, by reference to sales of

comparable homes in Bucks County residential subdivisions. He determined this

value to be $900,000, which we find reasonable. We accordingly conclude that

the “before” value of Parcel B was $3,091,896 ($2,191,896 + $900,000).

                   b.     “After” Value

      Following imposition of the conservation easement over Parcel B, petition-

ers owned a 25-acre tract that included a two-acre residential compound, to which

they were free to make further improvements, and 23 surrounding acres, which

      4
       Mr. Quinn assumed for purposes of his valuation that all 10 lots on Parcel
B were vacant as of the valuation date. He adjusted the prices of the comparable
sales by subtracting the value of any improvements situated therein. This created
a hypothetical condition that Parcel B and all of the comparable properties were
vacant land suitable for residential development.
                                          - 45 -

[*45] were fully conserved and ineligible for any development. We must decide

the fair market value of this property.

      Mr. Quinn determined that the “before” value of Parcel B was $3.0 million

and that imposition of the easement diminished its value by $2.7 million. He thus

accorded the 25-acre homestead property an “after” value that could not exceed

$300,000. Although we do not fully understand the methodology he used to reach

this result, the result is clearly incorrect. Mr. Zaveta paid $517,500 per lot for raw

land in the Rorer Tract. Petitioners’ homestead property was improved with a

large residence dating to the 17th century, a cottage, a guest house, garages, and a

large barn, all of which were surrounded by 23 acres of pristine land. It is obvious

that Parcel B, after placement of the conservation easement, was worth substan-

tially more than $300,000.

      Mr. Patcella determined Parcel B’s “after” value by considering sales of

similar homesteads on large lots that were subject to conservation easements or

otherwise unsuitable for development (e.g., because of poor location or terrain

conditions). He selected five comparable properties in Bucks County, ranging

from 24 acres to 62 acres, each improved with an original stone house and out-

buildings. The sale prices for these properties ranged from $1.59 million to $2.45

million; the property within the Township sold for $1.65 million. On the basis of
                                       - 46 -

[*46] these comparable sales, he determined that the “after” value of Parcel B was

$1.6 million. We find Mr. Patcella’s approach reasonable and find $1.6 million to

be the value of Parcel B following imposition of the easement.

      Mr. Acquaro-Mignogna did not perform a distinct “after” valuation of

Parcel B. Rather, he valued Parcel B and the buy-back parcel together as a 62-acre

tract. This was necessary, he believed, to comply with the “contiguous parcel”

rule set forth in the regulations. See sec. 1.170A-14(h)(3)(i), Income Tax Regs.

Applying this rule, Mr. Acquaro-Mignogna determined that the 62-acre parcel had

a “before” value ranging from $3.3 to $3.5 million and an “after” value of $3.11

million.

      We reject this approach because the contiguous parcel rule has no applica-

tion here. By its terms, this rule applies only where a “perpetual conservation re-

striction * * * cover[s] a portion of the contiguous property owned by a donor.”

Id. subdiv. (i) (fourth sentence) (emphasis added). When petitioners acquired the

buy-back parcel, both it and Parcel B were fully covered by conservation ease-

ments. Perpetual conservation restrictions thus covered not a portion but the

entirety of the contiguous property that they owned. The rule respondent cites has

no sensible application when easements cover the entire contiguous property,
                                        - 47 -

[*47] since no portion of that property will then receive any incremental benefit

from being adjacent to conserved land.

      To summarize: We find the “before” value of Parcel B to be $3,091,896,

using Mr. Patcella’s methodology but substituting for his comparable per-lot price

the $243,544 value we determined previously. We find the “after” value of Parcel

B to be $1,600,000, using Mr. Patcella’s comparable-sales analysis. We thus find

that the fair market value of the conservation easement over Parcel B was

$1,491,896 ($3,091,896 ! $1,600,000).

      D.     Return Benefits

      Respondent advances a variety of arguments in contending that petitioners

received quid pro quos that negated their charitable contributions in whole or part.

We have already rejected respondent’s contentions that Heritage and/or the Town-

ship supplied petitioners with a quid pro quo by allowing them to manipulate the

overall conservation transactions to their benefit. See supra pp. 21-24. Alterna-

tively, respondent cites specific components of the transactions in contending that

petitioners received return benefits that offset their contributions in part. Three of

respondent’s points merit brief discussion.

      First, respondent contends that petitioners enjoyed a quid pro quo when

Heritage sold them the buy-back parcel for $485,000. The uniform testimony at
                                        - 48 -

[*48] trial was that the parties were $485,000 short of the sum needed to close the

deal; that no one needed the buy-back parcel, which was completely covered by

conservation easements; and that petitioners agreed to pay $485,000 for this tract

in order to get to the finish line. In deciding whether this transaction generated a

quid pro quo, the question is whether the buy-back parcel was worth more than

petitioners paid for it.

       We conclude that it was not. Mr. Patcella was the only expert who per-

formed a stand-alone appraisal of the buy-back parcel. He credibly testified that

this parcel had very little value because the conservation easements prevented any

further development of it. He accordingly valued the buy-back parcel on a per-

acre basis, which Mr. Quinn agreed was appropriate when valuing Bucks County

land with no development potential.

       Mr. Patcella selected as comparable properties seven large parcels in Bucks

County, ranging from 44 acres to 95 acres. After adjusting the sale prices to re-

move the value of any improvements, thus rendering these tracts comparable to the

buy-back parcel, he determined per-acre prices ranging from $1,586 to $13,021.

Noting that the average of the sale prices was $5,557 an acre, he concluded that

the buy-back parcel fully subject to easement was worth roughly $222,000 ($6,000

× 37 acres). Even taking the highest of the seven comparable sale prices, or
                                        - 49 -

[*49] $13,021 per acre, would yield a total value of $481,777, which is less than

the $485,000 that petitioners paid. We conclude that petitioners derived no quid

pro quo from this transaction because they likely paid more for the buy-back

parcel than it was worth.5

      Second, respondent contends that petitioners received a return benefit when

Heritage paid $7,950 of real estate transfer taxes associated with its sale of the

buy-back parcel to petitioners. Petitioners contend that, under local law, Heritage

as the seller was responsible for the transfer taxes, notwithstanding its tax-exempt

status. We agree with petitioners and conclude that they received no return benefit

on this account. See 72 Pa. Stat. and Cons. Stat. Ann. sec. 8102-C (West 2015)

(“Every person who makes, executes, delivers, accepts or presents for recording

any document or in whose behalf any document is made, executed, delivered,

accepted or presented, shall be subject to pay for and in respect to the transaction




      5
        Respondent suggests that this transaction is suspect because petitioners
thereby repurchased from Heritage substantial acreage that they had donated to
Heritage only six months previously. But the parties could have accomplished the
same end result if petitioners had partitioned Parcel A, donated to Heritage the
portion of Parcel A required for the conservation subdivision, and placed an ease-
ment over the balance of Parcel A. The township’s representative credibly testi-
fied that the parties rejected this route in favor of the route actually implemented
because getting approval to partition Parcel A would have been time consuming
and expensive if petitioners instead of Heritage had applied to do this.
                                         - 50 -

[*50] or any part thereof * * * a State tax at the rate of one per cent of the value of

the real estate[.]”).

       Finally, respondent contends that petitioners received a tangible benefit by

obtaining, for no consideration, a recorded easement affording them secondary ac-

cess to their homestead over the new Creeks Bend private road. Petitioners urge

that this easement conferred no material benefit on them. Because the Rorers had

allowed them to use the prior gravel road without payment, they contend that the

easement merely perpetuated a benefit they already enjoyed.

       Members of the Creeks Bend homeowners association were required to pay

fees to maintain the private road year round, and petitioners were exempt from

these fees. This road was extended to petitioners’ southern boundary line for their

convenience. Although the Rorers had allowed petitioners to use the old gravel

road for free, that informal easement was unrecorded and gave petitioners no

rights vis-a-vis the new owners. Because petitioners received over the new private

road a recorded easement that arose from the final conservation subdivision plan,

we conclude that it constituted a return benefit that must be valued.6

       6
       It is not entirely clear who, as between Heritage and Mr. Zaveta, should be
regarded as having provided this benefit to petitioners. Since this benefit arose as
a component of the overall conservation transaction, we think it should operate to
reduce petitioners’ charitable contribution. Alternatively, if this benefit were
                                                                        (continued...)
                                       - 51 -

[*51] Mr. Patcella did not directly value this easement. Instead, he determined the

cost of improving and upgrading the main driveway leading to petitioners’ home-

stead from the north. He did this by estimating the cost of building guardrails and

installing lighting to make the driveway less hazardous if an accident were to oc-

cur. He estimated those costs to be no more than $12,000.

      Mr. Acquaro-Mignogna used a cost-based method to value the easement.

He ascertained the cost of building the new Creeks Bend access road ($318,090)

and divided that cost by the number of residences that were entitled to use that

road. Eleven residences were entitled to use the road (the 10 homeowners in the

Creeks Bend subdivision, plus petitioners). He accordingly determined the value

of petitioners’ easement to be roughly $29,000 ($318,090 ÷ 11).

      Mr. Acquaro-Mignona’s approach is not perfect, because petitioners would

surely use the access road less frequently than the Creeks Bend homeowners. But

his approach is superior to Mr. Patcella’s: Improvements designed to reduce the

risk of accident on the main driveway do not tell us what an easement over the

Creeks Bend access road was worth. We find that Mr. Acquaro-Mignona’s ap-

      6
       (...continued)
viewed as having been supplied by Mr. Zaveta unilaterally, it would constitute an
accession to wealth includible in petitioners’ gross income. See Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Rutkin v. United States, 343 U.S.
130, 137 (1952).
                                        - 52 -

[*52] proach accomplishes rough justice and accordingly conclude that

petitioners’ charitable contribution deduction must be reduced by $29,000 to

account for this return benefit.

      To summarize: The fair market value of petitioners’ donation to Heritage of

a fee simple interest in Parcel A is $2,191,896. The fair market value of petition-

ers’ donation to the Township of a qualified conservation easement over Parcel B

is $1,491,896. Reducing the sum of these amounts by $29,000 produces a net

charitable contribution of $3,654,792 attributable to these two gifts.

II.   Penalties

      The Code imposes a 20% penalty on any underpayment of tax required to be

shown on a return that is attributable to “[n]egligence or disregard of rules or

regulations” or to a “substantial understatement of income tax.” Sec. 6662(a) and

(b)(1) and (2). An understatement is “substantial” if it exceeds the greater of

$5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A).

      The Code alternatively imposes a 20% penalty on any “substantial valuation

misstatement.” Sec. 6662(a) and (b)(3). A valuation misstatement is “substantial”

if “the value of any property * * * claimed on any return * * * is 150 percent or

more of the amount determined to be the correct amount.” Sec. 6662(e)(1)(A).

This penalty is increased to 40% in the case of “gross valuation misstatements.”
                                       - 53 -

[*53] Sec. 6662(h). A misstatement is “gross” if the value of property claimed on

a return exceeds 200% of the correct amount. Sec. 6662(h)(2)(A)(i).

      The Commissioner bears the burden of production with respect to the lia-

bility of an individual for any penalty. See sec. 7491(c); Higbee v. Commissioner,

116 T.C. 438, 446 (2001). If the Rule 155 computations show a substantial under-

statement of income tax for any of the five years at issue, respondent will have car-

ried his burden of production under section 6662(b)(2) for that year. See Cooper

v. Commissioner, 143 T.C. 194 (2014).

      With respect to a “substantial valuation misstatement,” respondent has car-

ried his burden of production as to petitioners’ contribution of the conservation

easement, because the value of that property claimed on their return ($2.35 mil-

lion) exceeds 150% of the value that we have determined to be correct

($1,491,896). Respondent has not carried his burden of production as to petition-

ers’ donation of Parcel A, because the value of that property claimed on their re-

turn ($2.35 million) does not exceed 150% of the value that we have determined to

be correct ($2,191,896). With respect to a “gross valuation misstatement,” respon-

dent has not carried his burden of production as to either property because in nei-

ther case did the claimed value exceed 200% of the value that we have determined
                                         - 54 -

[*54] to be correct. (The $29,000 benefit petitioners received from the easement

to use the Creeks Bend private road does not affect these determinations.)

      A taxpayer may defend against the negligence and substantial understate-

ment penalties by showing that he had “reasonable cause” and “acted in good

faith.” Sec. 6664(c)(1). The taxpayer bears the burden of proving reasonable

cause and good faith. Higbee, 116 T.C. at 446-447. Reasonable cause can be

shown by good-faith reliance on the advice of a qualified tax professional. Sec.

1.6664-4(b)(1), (c), Income Tax Regs. To justify such reliance, “[t]he advice must

be based upon all pertinent facts and circumstances.” Id. para. (c)(1)(i). The re-

liance defense is not available “if the taxpayer fails to disclose a fact that * * *

[he] knows, or reasonably should know, to be relevant to the proper tax treatment

of an item.” Id.

      A taxpayer must meet additional requirements in order to raise a “good

faith” defense to the substantial overvaluation penalty. “[W]ith respect to chari-

table deduction property,” this defense may be raised only if the value claimed on

the return “was based on a qualified appraisal made by a qualified appraiser” and
                                         - 55 -

[*55] if, “in addition to obtaining such appraisal, the taxpayer made a good-faith

investigation of the value of the contributed property.” Sec. 6664(c)(3).7

      We conclude that petitioners are not liable for any penalty. Regarding the

negligence and substantial understatement penalties, we find that they relied in

good faith on the appraisals performed by Mr. Quinn and on the advice of the tax

return preparer who had competently represented them for many years. Mr. Quinn

had significant experience valuing real estate in Bucks County. The comparable

properties he selected were all located in Bucks County and furnished reasonable

comparisons to Parcel A and Parcel B. Petitioners’ return preparer was likewise

knowledgeable about property donations, including conservation easements.

Petitioners made full disclosure of all relevant facts to them both.

      Regarding the penalty for substantial valuation misstatement, we find that

petitioners satisfied the additional tests that are prerequisite to raising the “good

faith” defense. Respondent does not dispute that Mr. Quinn was a “qualified

appraiser” or that the appraisal he supplied to petitioners in support of the $2.35

million easement value was a “qualified appraisal.” See sec. 6664(c)(3)(A).




      7
       Before March 30, 2010, section 6664(c)(3) existed as section 6664(c)(2).
Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, sec.
14.09(c)(1)(A)-(C), 124 Stat. at 1069
                                       - 56 -

[*56] We also find that petitioners made “a good faith investigation of the value

of the contributed property.” Petitioners were involved from the outset in the ne-

gotiations to formulate a conservation plan that would accomplish all of the par-

ties’ goals. They worked with Heritage and the Township and relied on their ex-

perts to help determine the appropriate method for making their donations. They

hired Mr. Glitzer, a well-respected civil engineer, to sketch a conservation sub-

division plan that the Township ultimately approved.

      Petitioners were aware of the high demand for land in the Township. They

knew the prices that developers had offered for the Rorer Tract, which would have

commanded a price of $13.4 million under their own option agreement. Petition-

ers understood that their property was to be valued according to its highest and

best use, which was residential development, and they believed that Mr. Quinn

had employed an appropriate valuation methodology. Considering petitioners’

testimony and the surrounding facts and circumstances, we conclude that they

made “a good faith investigation of the value of the contributed property.” See

sec. 6664(c)(3)(B).

      To reflect the foregoing,

                                                Decisions will be entered

                                       under Rule 155.
