                                  T.C. Memo. 2020-79



                           UNITED STATES TAX COURT



                    THERON E. JOHNSON, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 30283-15.                            Filed June 8, 2020.



      Larry D. Harvey and Julia R. Prendergast, for petitioner.

      Sara J. Barkley, Gretchen W. Altenburger, and Tamara L. Kotzker, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      PUGH, Judge: In a notice of deficiency dated September 25, 2015,

respondent determined the following deficiencies and penalties:1


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                          (continued...)
                                         -2-

[*2]                                                         Penalty
                Year                 Deficiency            sec. 6662(a)
                2012                  $24,244                 $4,849
                2013                   16,703                  3,341
                2014                   26,607                  5,321

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

entitled to deduct certain expenses on his Schedules F, Profit or Loss From

Farming, for the years in issue and (2) the valuation of a conservation easement

covering 116.14 acres of land in Delta County, Colorado.

                               FINDINGS OF FACT

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

facts are incorporated in our findings by this reference. Petitioner resided in

Colorado when he timely filed his petition.




       1
       (...continued)
Revenue Code of 1986 (Code), as amended and in effect for the years in issue, and
Rule references are to the Tax Court Rules of Practice and Procedure. All
monetary amounts are rounded to the nearest dollar.
       2
        On March 28, 2019, the parties filed a stipulation of settled issues in which
respondent conceded that petitioner is not liable for a sec. 6662(a) penalty for any
of the years in issue, and the parties agreed to adjustments in whole or in part for
deductions on petitioner’s Schedule A, Itemized Deductions, and Schedule F, for
each of the years in issue.
                                        -3-

[*3] I. Petitioner and His Ranch

      Petitioner is the president of Diversified Innovative Products Co., Inc.,

formerly Innovative Manufacturing Co., LLC (Dip Co), a company that

manufactures and sells disposable ink pans for printing presses. Dip Co

manufactures the disposable ink pans at its facility in Delta, Colorado. Petitioner

and the rest of Dip Co’s management work from home offices because the

manufacturing facility does not have enough office space for them all to work

there regularly.

      Before the years in issue petitioner’s home office was at his ranch in Paonia,

Delta County, Colorado (ranch). Petitioner purchased the ranch, which then was

vacant land, on February 2, 2002, for $200,000. The ranch is in the North Fork

Valley of the Gunnison River between Paonia, Colorado, and Hotchkiss,

Colorado, approximately 25 miles from Dip Co’s manufacturing facility.

      The ranch is a combination of pasture and naturally vegetated riparian

wetlands that includes 25 acres of irrigated fields from dedicated water rights and

another 25 acres of subirrigated pastures that draw water from the property’s

creek, springs, and ponds by using open ditches along with man-made dams and

gated pipes that petitioner built and installed. The ranch also provides a habitat

for an extensive wildlife population that frequently grazes on the property, such as
                                         -4-

[*4] large herds of elk, deer, and numerous other animals, including one

endangered species, the leopard frog.

      Petitioner uses the ranch for agricultural activities such as cattle ranching

and farming, including raising hay. After purchasing the ranch he built a 3,500-

square-foot single-family house and several outbuildings to use for his agricultural

activities, including a barn, a hay shed, a loafing shed, and a shop for repairing and

welding farming equipment.3

II. Conservation Easement

      In 2004 petitioner became aware of the concept of conservation easements.

He determined that granting a conservation easement over the ranch would allow

him in effect to create a private wildlife reserve but still be able to engage in his

ranching and farming activities.

      On December 18, 2007, petitioner granted a conservation easement

(Conservation Easement) to Colorado Open Lands (COL), a Colorado nonprofit

corporation,4 pursuant to a deed of conservation easement (deed). The deed


      3
       The record does not include petitioner’s total cost for these improvements.
As discussed below, respondent’s expert determined the replacement cost for all of
the improvements is $590,000.
      4
       COL had previously inspected the ranch in 2004. Petitioner’s expert,
Arnold Butler, worked with COL at the time and conducted the inspection, but he
                                                                   (continued...)
                                        -5-

[*5] encumbered 116.14 acres of the ranch (including the land on which

petitioner’s house stands) along with the water rights associated with the ranch,

leaving the remaining 5 acres unencumbered.5 It restricted the encumbered area

from being subdivided, used as a feedlot, or used for commercial activities. It also

restricted all construction within the encumbered area except for a five-acre area

that was designated a “building envelope”.6 The deed limited constructed floor

space inside the building envelope to 6,000 square feet for single residential

improvements and a cumulative maximum of 30,000 square feet for all

improvements.7




      4
       (...continued)
did not value the ranch until 2019.
      5
        The deed describes a 116.14-acre conservation easement. Rare Earth
Science, LLC, prepared a Present Conditions Report (RES report) for the ranch on
October 26, 2007, as part of the conservation easement process. Page 1 reports the
116.14-acre conservation easement, but it states the ranch’s total acreage
(including the 5 unencumbered acres) to be 121.7 rather than 121.14.
      6
         This five-acre area included petitioner’s house and several outbuildings
that petitioner had built before he granted the Conservation Easement. It is
separate from the five unencumbered acres, which was vacant land.
      7
        It also allowed agricultural improvements that did not exceed 10,000
square feet.
                                        -6-

[*6] III. Petitioner’s Move to Telluride

      Petitioner continued to live and work at the ranch after he granted the

Conservation Easement to COL. While petitioner completed most of his work for

Dip Co from his home office, his responsibilities as Dip Co’s president required

travel for at least one week per month to attend industry events and meet with

clients and the other members of Dip Co’s management. Many of these events and

meetings took place outside Colorado, so petitioner often traveled by air. The

closest airports to the ranch are in Montrose and Grand Junction, Colorado, an

hour or more away.

      Because of his long commute from the ranch to these airports, as well as an

economic downturn in the Delta County area affecting the quality of schools for

his children, petitioner moved to Telluride, Colorado, in August 2011. His

Telluride property is approximately 120 miles south of the ranch, but only 4 miles

from the nearest airport.

      Before moving to Telluride petitioner phased out his cattle ranching

business, but he continued farming at the ranch after he moved. He began

sharecropping hay with his neighbor during the years in issue and drove to and

from the ranch to handle irrigation issues and drag the fields as the hay grew. His

neighbor mowed and bailed the hay in exchange for half of it and paid $50 per ton
                                        -7-

[*7] for the other half. Petitioner did not profit from sharecropping, but the

activity allowed him to preserve his water rights on the ranch; he was required to

use those rights every year or he would lose them.

      Petitioner drove between Telluride and the ranch in a pickup truck that he

had purchased for $23,000 in approximately 2014 for his ranching business.

Aside from sharecropping, petitioner sometimes drove to the ranch in the pickup

truck to inspect and maintain the property and for personal activities, such as

hunting on the property with his children, and he sometimes worked on Dip Co

matters while there. Petitioner used a Microsoft Outlook calendar to coordinate

his schedule and travel, but his calendar entries often did not state whether

meetings took place in person or by telephone. He did not keep a log segregating

the miles driven for his farming business from the miles driven for other activities.

IV. Petitioner’s Tax Returns and Examination

      Petitioner timely filed his Form 1040, U.S. Individual Income Tax Return

for tax year 2007. Included with his 2007 return was a Schedule A, on which he

claimed a $610,000 charitable contribution deduction for the Conservation

Easement. During tax years 2007 through 2011 petitioner deducted a combined

carryover of $265,051 related to the Conservation Easement. For the years in
                                        -8-

[*8] issue he deducted carryover amounts of $74,557, $57,306, and $51,401,

respectively.8

      Petitioner’s returns for the years in issue also included Schedules F on

which he reported farming income of $1,200, $2,795, and $2,653, respectively.

Petitioner offset this income in part with farming expense deductions. The

deductions in issue, which respondent adjusted in whole or in part, are listed

below:9




      8
        Petitioner deducted a combined carryover of $178,628 related to his
charitable contributions for 2015, 2016, and 2017. Those years are before the
Court at docket No. 6364-19.
      9
        Petitioner also reported $22 and $142 of expenses for 2013 and 2014,
respectively, under other expenses entitled “office”. The stipulation of settled
issues states that petitioner is not entitled to deduct other expenses related to
“office supplies”, but no entry related to office supplies is listed among
petitioner’s specified other expenses for 2013 or 2014. Petitioner did not address
these deductions in his briefs, so we conclude the “office supplies” concession to
apply to the “office” expenses.
                                        -9-

[*9]             Expense             2012             2013              2014
        Car and truck               $1,816            $188                 ---
        Repairs and
          maintenance                1,881            2,583            $8,702
        Misc.                        1,125              ---                ---
        Meals                          164              330               445
        Accounting                     350              350               613
        Gasoline, fuel, and
          oil                          653            3,029             2,583
        Insurance
          (other than health)           ---             312              2,799
        Travel                          ---             207                137
        Software                        ---             175                ---
        Dues                            ---              ---                   45
        Depreciation and
          sec. 179 expense           5,310            3,533            24,756

       In the notice of deficiency respondent denied petitioner’s charitable

contribution deduction for each year on the ground that he had already deducted

more than the Conservation Easement’s value for previous tax years. Respondent

also adjusted in whole or in part petitioner’s Schedule F deductions for the years

in issue. As a result of those adjustments respondent determined that petitioner

owed an additional $24,244, $16,703, and $26,607 of income tax for 2012, 2013,

and 2014, respectively.
                                          - 10 -

[*10]                                  OPINION

I. Burden of Proof

         Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section

7491(a)(1) provides that if, in any court proceeding, a taxpayer introduces credible

evidence with respect to any factual issue relevant to ascertaining the liability of

the taxpayer for any tax imposed by subtitle A or B, the Commissioner shall have

the burden of proof with respect to that issue. See Higbee v. Commissioner, 116

T.C. 438, 441-442 (2001). Petitioner makes no argument that the conditions for

shifting the burden of proof have been met. He therefore bears the burden of

proof.

II. Schedule F Deductions

         Section 162 allows a taxpayer to deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade or business. Sec.

162(a); sec. 1.162-1(a), Income Tax Regs. An expense is “ordinary” if it is

“normal, usual, or customary” in the taxpayer’s trade or business or it arises from a

transaction “of common or frequent occurrence in the type of business involved”.

Deputy v. du Pont, 308 U.S. 488, 495 (1940). An expense is “necessary” if it is

“appropriate and helpful” to the taxpayer’s business although it need not be
                                       - 11 -

[*11] absolutely essential. Commissioner v. Tellier, 383 U.S. 687, 689 (1966)

(quoting Welch v. Helvering, 290 U.S. at 113). But a taxpayer may not deduct

personal, living, or family expenses unless the Code expressly provides otherwise.

Sec. 262(a). Whether an expense satisfies the requirements of section 162 is a

question of fact. Cloud v. Commissioner, 97 T.C. 613, 618 (1991) (citing

Commissioner v. Heininger, 320 U.S. 467, 473-475 (1943)).

      A taxpayer must prove his entitlement to any deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers, therefore, are required to

maintain sufficient records to establish the amount of any deduction. Sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.; see also Higbee v. Commissioner, 116 T.C. at

440. Under the Cohan rule, the Court may estimate the amount of an expense if

the taxpayer is able to demonstrate that he has paid or incurred a deductible

expense but cannot substantiate the precise amount, so long as he produces

credible evidence that gives a basis for the Court to do so. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).

      Section 274 imposes strict substantiation requirements superseding the

Cohan rule for certain expenses, including those for travel. See sec. 274(d); see
                                        - 12 -

[*12] also Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5(c)(2)(iii), Income Tax Regs.;

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985). For expenses such as an automobile used for business purposes,10 a

taxpayer must substantiate by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement: (1) the amount of the expense, (2)

mileage for each business use of the vehicle as well as the total mileage for all

purposes during the taxable period, (3) the time and place of the travel or use, and

(4) the business purpose of the expense. Sec. 274(d)(4); sec. 1.274-5T(b)(6),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985); see also Shea

v. Commissioner, 112 T.C. 183, 186-188 (1999) (disallowing travel-related

business expense deductions because the taxpayer failed to comply with the

“stringent substantiation requirements of section 274”).

      To substantiate by adequate records, a taxpayer must provide an account

book, a log, or similar record and documentary evidence which together are

sufficient to establish each element with respect to an expenditure. Sec. 1.274-

      10
        Sec. 274(d)(4) provides that no deduction shall be allowed without
substantiation for “listed property (as defined in section 280F(d)(4))”. Sec.
280F(d)(4) defines the term “listed property” to mean, in addition to other
property, any passenger automobile or any other property used as a means of
transportation.
                                        - 13 -

[*13] 5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,

1985). Without adequate records, a taxpayer may still substantiate expenses with

sufficiently detailed written or oral statements and other corroborative evidence

showing that he incurred the expense. See id. subpara. (3)(i), 50 Fed. Reg. 46020;

see also Freeman v. Commissioner, T.C. Memo. 2009-213, 2009 WL 2958663, at

*6-*7 (holding that a taxpayer may substantiate business expenses subject to

section 274(d) where the records were lost or destroyed “through circumstances

beyond the taxpayer’s control”). Although a contemporaneous log is not required,

corroborative evidence to support a taxpayer’s reconstruction “must have a high

degree of probative value to elevate such statement” to the level of credibility of a

contemporaneous record. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985); see also Freeman v. Commissioner, 2009 WL

2958663, at *7.

      Generally, expenses that a taxpayer incurs in commuting between his home

and his place of business are personal and nondeductible. Commissioner v.

Flowers, 326 U.S. 465, 473-474 (1946); Heuer v. Commissioner, 32 T.C. 947, 951

(1959), aff’d per curiam, 283 F.2d 865 (5th Cir. 1960); secs. 1.162-2(e), 1.262-

1(b)(5), Income Tax Regs. However, expenses incurred for traveling between two

or more places of business may be deductible as ordinary and necessary business
                                        - 14 -

[*14] expenses under section 162 if incurred for business reasons. Steinhort v.

Commissioner, 335 F.2d 496, 503-504 (5th Cir. 1964), aff’g and remanding T.C.

Memo. 1962-233; Heuer v. Commissioner, 32 T.C. at 953; see also Fausner v.

Commissioner, 55 T.C. 620 (1971) (permitting section 162 deductions for travel

between jobs or job locations). But if one of the places of business is the

taxpayer’s residence, the residence must be the taxpayer’s principal place of

business for the trade or business the taxpayer conducts at those other locations.

See Strohmaier v. Commissioner, 113 T.C. 106 (1999); Curphey v. Commissioner,

73 T.C. 766, 777-778 (1980); Beale v. Commissioner, T.C. Memo. 2000-158,

2000 WL 631398, at *5-*6; cf. Mazzotta v. Commissioner, 57 T.C. 427, 429

(1971) (holding that a taxpayer could not deduct expenses for traveling between

his residence and his employment merely because he conducted a second business

at home), aff’d, 467 F.2d 943 (2d Cir. 1972).

      In addition, a taxpayer may deduct the entire cost of “section 179 property”

as a current expense for the year the property is placed in service.11 Sec. 179(a). If

the property is used for both business and other purposes, then the portion of the

property’s cost that is attributable to the business use is eligible for expensing


      11
        Sec. 179(d)(1)(C) defines “section 179 property” to include certain
property used in the “active conduct of a trade or business.”
                                       - 15 -

[*15] under section 179 but only if more than 50% of the property’s use is for

business purposes. See sec. 1.179-1(d), Income Tax Regs.; see also sec. 280F(b);

Whalley v. Commissioner, T.C. Memo. 1996-533, 1996 WL 687033, at *9

(holding that “[t]o claim expensing or depreciation for * * * [listed] property

pursuant to sections 179 and 280F, respectively, a taxpayer must establish that

business use exceeds 50 percent”). Taxpayers must meet the heightened

substantiation requirements of section 274(d) for proving the business use of

“listed property”. See Singh v. Commissioner, T.C. Memo. 2009-36, 2009 WL

349745, at *1.

      Petitioner reported travel-related and car and truck expenses under sections

162 and 179, respectively, on his Schedules F for the years in issue. The primary

evidence he submitted in support of his claimed travel-related and car and truck

expense deductions is a Microsoft Outlook calendar reflecting his travel during the

periods in issue, supplemented by his testimony.12 He used the calendar for all

appointments and events, including those related to his work at the ranch, his work

for Dip Co, and his personal activities. Many of the entries on his calendar note




      12
        Petitioner also submitted insurance payment receipts and his 2016 Form
1040 as evidence supporting his expense deductions for his pickup truck.
                                       - 16 -

[*16] only that he traveled to and/or from the ranch;13 they do not note the purpose

for his visit (hay farming business, Dip Co work, property maintenance, or

personal).

      Without that information we cannot determine which of petitioner’s trips

was for a business purpose as required under section 162. See Rutz v.

Commissioner, 66 T.C. 879, 882-886 (1976) (disallowing business expense

deductions because the taxpayer could not establish the business purpose for each

expense); Longino v. Commissioner, T.C. Memo. 2013-80 (disallowing travel-

related business expense deductions because the taxpayer did not differentiate his

travel purposes between business and personal), aff’d, 593 F. App’x 965 (11th Cir.

2014); Olagunju v. Commissioner, T.C. Memo. 2012-119 (holding the taxpayer’s

broad testimony and receipts insufficient to establish the business purpose of his

travel). For the same reason, neither can we determine whether petitioner’s use of

the pickup truck for his hay farming business (or DipCo) exceeded 50% of his

total use as required by section 179. See Barmes v. Commissioner, T.C. Memo.

2000-254, 2000 WL 1137742, at *4 (disallowing travel-related deductions for two

farmers because they “did not establish the percentages of business use of the two

      13
        Respondent raised questions about several calendar entries at trial. In
discussing post-trial briefs, we singled out one conflicting entry as an example to
focus their briefs.
                                        - 17 -

[*17] automobiles”), aff’d, 12 F. App’x 415 (7th Cir. 2001). Allowing a

deduction without evidence that would allow us to make these determinations

would amount to “unguided largesse”. See Williams v. United States, 245 F.2d

559, 560 (5th Cir. 1957). And we conclude that petitioner’s evidence falls far

short of the standard we applied in Freeman v. Commissioner, 2009 WL 2958663,

at *7. Accordingly, we sustain respondent’s adjustments to petitioner’s Schedule

F travel-related and car and truck expense deductions for the years in issue.14

      We therefore need not consider respondent’s second challenge to

petitioner’s Schedule F expense deductions, namely, whether petitioner’s hay

farming qualified as an active trade or business during the years in issue.

III. Qualified Conservation Contributions

      A. General Principles

      In general, a taxpayer may not claim a deduction for a charitable

contribution of property consisting of less than the taxpayer’s entire interest in the

property. See sec. 170(f)(3). A taxpayer may deduct the value of a contribution of


      14
         The record includes receipts for some of petitioner’s other claimed
Schedule F business expense deductions, but he did not explain the expenses in
his briefs or his testimony. We will not attempt to connect the dots for him now
and therefore conclude that he has abandoned his arguments about those expense
deductions. See Thiessen v. Commissioner, 146 T.C. 100, 106 (2016); Mendes v.
Commissioner, 121 T.C. 308, 312-313 (2003).
                                        - 18 -

[*18] a partial interest in property, however, if the contribution constitutes a

“qualified conservation contribution.” See sec. 170(f)(3)(B)(iii). Respondent

does not challenge whether the Conservation Easement is a “qualified

conservation contribution” but disputes its value and therefore the amount of the

deduction.

      The amount of a charitable contribution deduction generally is the fair

market value of the contributed property at the time it is contributed. Sec. 1.170A-

1(a), (c)(1), Income Tax Regs. The parties agree that the Conservation Easement’s

fair market value should be determined by calculating the difference between the

ranch’s fair market value before and after petitioner granted the easement. See

sec. 1.170A-14(h)(3)(i), Income Tax Regs.; see also Symington v. Commissioner,

87 T.C. 892, 895 (1986); Hilborn v. Commissioner, 85 T.C. 677, 688-690 (1985).

      The parties offered case-in-chief and rebuttal expert witness reports and

testimony to establish the Conservation Easement’s fair market value. An expert’s

opinions are admissible if they assist the trier of fact to understand the evidence or

to determine a fact in issue. Fed. R. Evid. 702(a); Rule 143(g). We evaluate

expert opinions in the light of each expert’s demonstrated qualifications and the

other evidence in the record. See Parker v. Commissioner, 86 T.C. 547, 561

(1986). When experts offer competing estimates of fair market value, we
                                        - 19 -

[*19] determine how to weigh those estimates by examining the factors they

considered in reaching their conclusions. See Casey v. Commissioner, 38 T.C.

357, 381 (1962). We are not bound by an expert’s opinions and, in the exercise of

sound judgment, may accept or reject any of his opinions in full or in part. See

Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Parker v.

Commissioner, 86 T.C. at 561-562. We also may reach a determination of value

on the basis of our own examination of the evidence in the record. Silverman v.

Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.

      We consider each expert’s opinions below.

      B. Petitioner’s Expert

      For his case-in-chief and rebuttal, petitioner relied on Mr. Butler, a certified

general appraiser in Colorado who has practiced for over 40 years and appraised

hundreds of conservation easements. We recognized Mr. Butler here as an expert

in real estate appraisal. He previously has been qualified as an expert in numerous

cases involving property values of rural tracts of land in Delta County. He

testified as a fact witness about his appraisal of a conservation easement in

neighboring Gunnison County in Irby v. Commissioner, 139 T.C. 371 (2012).
                                       - 20 -

[*20] Mr. Butler used the sales comparison approach to determine the

Conservation Easement’s value. He noted that he did not use the income approach

because “ranch properties are not typically sold based upon their income.”

      C. Respondent’s Experts

      For his case-in-chief and rebuttal, respondent relied on Michael Nash, a

certified general appraiser in Colorado who has practiced for 40 years and

appraised conservation easements throughout the State. We recognized Mr. Nash

here as an expert in real estate appraisal. We previously recognized Mr. Nash as

an expert in real estate appraisal in Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010-283, 2010 WL 5395108, aff’d, 493 F. App’x 944 (10th Cir. 2012).

Like Mr. Butler, Mr. Nash used the sales comparison approach to determine the

Conservation Easement’s value.

      For his rebuttal respondent also relied on Gary Trudgeon, a certified general

appraiser in the State of Colorado who has practiced for 45 years. Mr. Trudgeon

has worked as an appraiser for the IRS since 2008 and completed approximately

15 conservation easement appraisal reports. We recognized Mr. Trudgeon here as

an expert in real estate appraisal, like Mr. Butler and Mr. Nash.
                                       - 21 -

[*21] D. Arguments and Analysis

             1. Highest and Best Use

      In deciding a property’s fair market value, we first take into account its

highest and best use. See Symington v. Commissioner, 87 T.C. at 896; Stanley

Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986); sec. 1.170A-

14(h)(3)(i) and (ii), Income Tax Regs. A property’s highest and best use also is

the highest and most profitable use for which it is adaptable and needed or likely

to be needed in the reasonably near future. Olson v. United States, 292 U.S. 246,

255 (1934); Hilborn v. Commissioner, 85 T.C. at 689.

      Both Mr. Butler and Mr. Nash began their respective analyses by

determining the ranch’s highest and best use before and after petitioner granted the

Conservation Easement. Mr. Butler determined the highest and best use before the

Conservation Easement was as a residential and agricultural property with the

potential to be divided into three 40-acre house sites, and after the Conservation

Easement was as a nonsubdividable agricultural and residential parcel with a

single-family home in the building envelope and another single-family home on

the remaining 5 unencumbered acres. Mr. Nash determined that the highest and

best use before the Conservation Easement was as a residential and agricultural

property with the potential to be divided into one to three working/recreational
                                         - 22 -

[*22] ranches, and after the Conservation Easement was as one

recreational/working ranch allowing size-restricted residences and agricultural

structures for the encumbered acres and a residential parcel or an assemblage for

the remaining five unencumbered acres.

      Respondent argues that Mr. Butler incorrectly determined the ranch’s

highest and best use before and after petitioner granted the Conservation

Easement. His rebuttal expert, Mr. Trudgeon, contended that Mr. Butler

incorrectly considered the ranch to be in an area with substantial demand for

residential development and did not consider the impact of certain topographical

features on the ranch’s potential for further residential development.15

       Mr. Butler and Mr. Nash both determined nearly identical highest and best

uses for the ranch, however, including residential use. We therefore conclude that

the highest and best use for the ranch before the Conservation Easement is as an

agricultural and recreational site with the potential to be split into three 40-acre

residential single-family home sites and after the Conservation Easement is as an

agricultural site with one residence on the encumbered land and one residence on

the 5 unencumbered acres.


      15
        Mr. Nash stated at trial that those topographical features are not atypical
to Western Colorado and would not materially impede development.
                                        - 23 -

[*23]         2. Before Value

        Both Mr. Butler and Mr. Nash determined the ranch’s fair market value

before petitioner granted the Conservation Easement by completing a direct

comparable sales analysis, which involved comparing the ranch to properties sold

in the Delta County area that they considered to be comparable. Mr. Butler

considered seven comparable properties whose sale prices ranged from $6,568 to

$12,313 per acre,16 while Mr. Nash considered six comparable properties whose

sale prices ranged from $2,558 to $8,276 per acre.17

        To account for each property’s differences from the ranch, Mr. Butler and

Mr. Nash both used sales and market data in the Delta County area to determine

necessary adjustments for each comparable. But they used different methods to

determine their respective adjustments.




        16
         Mr. Butler contends that the Conservation Easement did not affect the
improvements, so he did not consider them when he selected his comparable
properties. We explain Mr. Butler’s treatment of improvements in more detail
infra note 18.
        17
        Mr. Nash considered improvements on the ranch when he selected his
comparable properties, and he removed the value of any improvements both from
the ranch’s before value and each comparable property’s sale price in his analysis.
                                        - 24 -

[*24]                a. Mr. Butler’s Quantitative Valuation

        Mr. Butler used a quantitative approach. He first adjusted each comparable

property’s sale price to match the market conditions for the ranch as of the date

petitioner granted the Conservation Easement (December 2007) by determining

the monthly appreciation rates for four of the seven comparables, as well as paired

sales of two other properties that he determined were not comparable to the ranch.

Deriving a range of rates from 0.4% to 5%, Mr. Butler determined that a 1.5%

monthly appreciation rate adjustment was reasonable. Mr. Butler also considered

the 1% monthly appreciation rate listed in the multiple listing service (MLS)

statistics, but he rejected that rate because “one very low or one very high sale

could skew the indicated rate.”

        Mr. Trudgeon criticized Mr. Butler’s monthly appreciation rate adjustment

as being overstated and based on sales that were unreliable to indicate changing

market conditions. Mr. Trudgeon contended that the MLS 1% rate was more

reliable since the rate was based on an analysis of over 100 transactions from a

three-year period.

        Mr. Butler next adjusted each comparable property’s sale price to account

for location and size differences between each comparable and the ranch. Because

the ranch is close to two major town centers, Paonia and Hotchkiss, he first
                                        - 25 -

[*25] adjusted four of the sales by 15% for properties that are farther south near a

smaller town center, Crawford, Colorado. He then adjusted each sale by 5% if the

property’s size was within 40 acres of the size of the ranch or 10% if the

difference was greater than 40 acres. Mr. Butler noted in his report that “the

comparison of several of the other sales to each other suggest that the market does

not make size adjustment[s]”. However, on the basis of the limited market base

and his history of appraisal work in Delta County, Mr. Butler determined that a

land size adjustment was necessary.

      Both Mr. Nash and Mr. Trudgeon criticized Mr. Butler’s land size

adjustment for not reflecting Mr. Butler’s own data. Mr. Nash contended that the

comparable properties Mr. Butler used for his analysis showed an average price

difference of 14% when adjusting for size relative to the ranch. Mr. Nash

determined that a more reasonable land size adjustment to reflect this average

price difference would be 10% downward for the sales of properties whose size

was within 40 acres of the ranch and 20% downward for the sales of properties

that were more than 40 acres smaller than the ranch.

      Mr. Butler next adjusted each comparable property’s sale price to account

for other differences between each comparable and the ranch, including the
                                         - 26 -

[*26] amount of irrigated land, the topography, and any improvements.18 He noted

in his report that his market analysis for his irrigated land adjustment was

“contrary to normal market characteristics” and “suggests that there is no

adjustment” to be made. He adjusted for this difference because the amount of

each property’s irrigated land “reveal[ed] the contributory value of the * * *

[comparable property’s] development potential.” Mr. Butler also stated that

because the area is “so much influenced by potential house sites, some of the

agricultural value of * * * [the irrigated land for] the properties is mitigated.”

      Mr. Butler’s adjustments resulted in prices ranging from $8,617 to $10,713

per acre. He then analyzed which properties were most similar to the ranch to

further narrow his range to $9,262 to $10,713 per acre. Using this range, he

concluded the ranch’s fair market value before petitioner granted the Conservation

Easement to be $9,500 per acre and $1,150,000 for all 121.14 acres, excluding

improvements.

      18
        Mr. Butler explained that he did not value the ranch’s improvements
because they were not affected by the conservation easement, but he made a
downward adjustment of $950 per acre to sale No. 7 for improvements related to
“an older equipment shed and several other small agricultural improvements.”
The record does not include how Mr. Butler calculated this adjustment or any
other explanation of how he considered improvements as part of his adjustments.
Although his report and testimony were not specific, we infer from his
explanations and conclusions that his before and after valuations did not include
the ranch’s improvements.
                                          - 27 -

[*27]                b. Mr. Nash’s Qualitative Valuation

        Unlike Mr. Butler, Mr. Nash concluded that the Delta County sales and

market data was too inconsistent for him to make quantitative adjustments to the

sale prices of his comparables, so he instead used a qualitative approach. He

compared several characteristics for each comparable, including market conditions

at the time of sale, location/access, size, aesthetic appeal, zoning, and available

utilities, to evaluate the relative superiority, inferiority, or similarity of each

comparable to the ranch. He then evaluated the overall comparability of each

property to the ranch.

        Mr. Nash used these evaluations to derive prices ranging from $5,330 to

$8,276 per acre for the ranch. Because the bracketed midpoint of this range was

$6,803, which was almost the same as the per-acre sale price for the property he

determined to be the most comparable to the ranch (sale No. 4) ($6,842), he

concluded that the ranch’s fair market value before petitioner granted the

Conservation Easement was, without improvements, $6,800 per acre and $830,000
                                       - 28 -

[*28] for all 121.7 acres,19 and, including improvements, $11,668 per acre and

$1,420,000 for all 121.7 acres.20

      Mr. Butler criticized Mr. Nash’s use of qualitative adjustments for his

analysis instead of quantitative adjustments. He argued that the data related to Mr.

Nash’s comparable properties provided enough consistency to make quantitative

adjustments and making such adjustments was customary appraisal practice.

                   c. Analysis

      The validity of an expert’s comparable sales valuation method “depends to a

great extent upon the comparables selected and the reasonableness of the

adjustments made thereto.” Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C.

1, 19-20 (1979). He must adjust the sale prices of his comparables upward or

downward to reflect “various differences between the ‘comparables’ and the

property being appraised.” Talkington v. Commissioner, T.C. Memo. 1998-412,

1998 WL 792212, at *9 (citing Estate of Spruill v. Commissioner, 88 T.C. 1197,

1229 n.24 (1987)); see also Butler v. Commissioner, T.C. Memo. 2012-72, 2012

WL 913695, at *16 (holding that since “no two sales and no two properties are


      19
         Mr. Nash calculated the Conservation Easement’s value using the 121.7
acres stated in the RES report.
      20
         Mr. Nash used the replacement cost approach to calculate the value of the
ranch’s improvements. He determined the improvements’ value to be $590,000.
                                       - 29 -

[*29] ever identical,” an expert must consider “aspects of the comparable

transactions such as time, size, or other significant features and make[] appropriate

adjustments for each to approximate the qualities of the subject property”). In

other words, an expert makes positive adjustments to comparable properties “that

are inferior in some fashion to the subject property” and negative adjustments to

comparable properties “that are superior in some fashion to the subject property.”

Talkington v. Commissioner, 1998 WL 792212, at *9 n.8.

      We have accepted adjustments based on qualitative characteristics to

determine a conservation easement’s value. See Griffin v. Commissioner, T.C.

Memo. 1989-130, aff’d, 911 F.2d 1124 (5th Cir. 1990); Losch v. Commissioner,

T.C. Memo. 1988-230. We also have rejected an expert’s comparable sales

analysis where the adjustments simply used subjective labels to compare

characteristics between comparables and the subject property. See Crimi v.

Commissioner, T.C. Memo. 2013-51, at *54-*58. We held that the expert’s report

in Crimi was unreliable in part because it only “used qualitative attributes when

performing its market analysis.” Id. at *58.

      Mr. Nash primarily used subjective labels to compare characteristics

between each comparable property and the ranch. We reject his contention that

this qualitative approach was necessary because the market data around the ranch
                                         - 30 -

[*30] was too inconsistent for making any quantitative adjustments.21 Other

experts have used the market data around the ranch to make quantitative

adjustments in valuing nearby conservation easements. See Hughes v.

Commissioner, T.C. Memo. 2009-94 (both experts used the neighboring Gunnison

County market data to make quantitative adjustments). But see Trout Ranch, LLC

v. Commissioner, 2010 WL 5395108, at *8 (each expert, including Mr. Nash,

used, in part, the income approach instead of the sales comparison approach to

value a conservation easement because of the lack of comparable property market

sales around Gunnison County). Because Mr. Nash used the sales comparison

approach and failed to make the necessary quantitative adjustments to his

comparables, but made quantitative adjustments to Mr. Butler’s land size


      21
          Mr. Nash used two sales that occurred after petitioner conveyed the
Conservation Easement. Events occurring after the valuation date are not
considered in determining fair market value of the property except to the extent
that the events are reasonably foreseeable on the valuation date. See First Nat’l
Bank of Kenosha v. United States, 763 F.2d 891, 893-894 (7th Cir. 1985); United
States v. 494.10 Acres of Land in Cowley County, Kan., 592 F.2d 1130 (10th Cir.
1979); Estate of Spruill v. Commissioner, 88 T.C. 1197, 1228 (1987). The mere
fact that the sales an expert uses occurred after the valuation date is not fatal to his
determination. See Estate of Smith v. Commissioner, 57 T.C. 650, 659 (1972),
aff’d, 510 F.2d 479 (2d Cir. 1975). While sales entered into after the valuation
date can be used, adjustments need to be made to reflect market changes between
the comparable’s date of sale and the valuation date. Eugene D. Lanier, Inc. v.
Commissioner, T.C. Memo. 1998-7, 1998 WL 2859, at *9. Mr. Nash did not make
those adjustments.
                                       - 31 -

[*31] adjustments, we reject his qualitative comparable sales analysis. See

Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. at 19-21; Eugene D. Lanier,

Inc. v. Commissioner, T.C. Memo. 1998-7.

      We turn now to Mr. Butler’s quantitative comparable property sales

analysis. We generally agree with his quantitative approach. We disagree,

however, with several of his quantitative adjustments and comparables. First, we

agree with Mr. Trudgeon that Mr. Butler’s monthly appreciation rate adjustment is

too high and instead find that the MLS 1% rate is reasonable. Next, we agree with

Mr. Nash that the land size adjustments should better reflect Mr. Butler’s own

data. Next, we disagree with Mr. Butler’s adjustments for other differences as

they are too unreliable. Finally, we disagree with Mr. Butler’s selection of sales

Nos. 4 and 7 as involving suitable comparable properties.22




      22
         The prices per acre for sales Nos. 4 and 7 are $11,327 and $10,195,
respectively, after we apply the updated adjustments. These prices are
significantly higher than the prices for the other comparables. Sale No. 7 involves
the smallest number of acres (40) among all Mr. Butler’s comparables, which is
two-thirds less than the ranch, and sale No. 4 involves the largest number of acres
(195) among the comparables, over 50% more than the ranch. Mr. Butler made
several adjustments to account for these differences, but these price discrepancies
with the other comparables show that sale No. 7 is not a suitable comparable and
sale No. 4 is an outlier.
                                         - 32 -

[*32] Because we find Mr. Butler’s analysis to be the best available for the

ranch’s before value, we adjust Mr. Butler’s adjustments to reflect these criticisms

as follows:

       Sale No.                1           2         3           5         6
       Sale price
          (millions)         $0.385       $0.62     $0.65      $0.43    $0.625
       Price per acre        $6,568     $7,750    $6,701     $9,182     $7,813
       Months1                    29          7        17          10       7.5
       Rate adj.2            $8,473     $8,293    $7,840    $10,100     $8,399
       Location adj.            15%        15%       15%       ---         15%
       Size adj.              (20%)      (10%)     (10%)      (20%)      (10%)
       Adj. price per
          acre               $8,048     $8,708    $8,232     $8,080     $8,819
              1
                  Months between sale and easement (12/18/07)
              2
                  Price per acre after 1% monthly appreciation

      These calculations result in a range of prices of $8,048 to $8,819 per acre.

This range’s midpoint is $8,434 per acre. Applying this price per acre to the

ranch’s entire 121.14 acres, excluding improvements, results in a reasonable

before value of $1,021,695.

      We note that this valuation is considerably more than petitioner paid for the

ranch in 2002, an increase above the MLS monthly appreciation rate of 1% that we

adopted above. But respondent did not attack Mr. Butler’s valuation on this basis,

and Mr. Nash’s valuation of $800,000 also exceeds the MLS 1% rate. We will not

speculate on why the property might have appreciated so much (such as whether
                                         - 33 -

[*33] petitioner made changes to the property, including improvements, that

augmented the value of the land itself). As we explained above, we found Mr.

Butler’s valuation, with our adjustments, to be the best available before valuation

for the property. And as we admonished in Buffalo Tool & Die Mfg. Co. v.

Commissioner, 74 T.C. 441, 452 (1980), “in the final analysis, the Court may find

the evidence of valuation by one of the parties sufficiently more convincing than

that of the other party, so that the final result will produce a significant financial

defeat for one or the other, rather than a middle-of-the-road compromise which we

suspect each of the parties expects the Court to reach.” See also Estate of Jones v.

Commissioner, T.C. Memo. 2019-101, at *41-*42. Mr. Butler’s quantitative

analysis was not without flaws, but it was robust and more convincing than Mr.

Nash’s qualitative averaging.

             3. After Value

      Both Mr. Butler and Mr. Nash determined the ranch’s fair market value after

petitioner granted the Conservation Easement by completing another direct

comparable sales analysis along with a paired sales analysis.23 Mr. Butler

      23
         The paired sales analysis involves “a comparison of the fair market value
of a property with and without an easement.” Gorra v. Commissioner, T.C.
Memo. 2013-254, at *57. The fair market value of the property with the easement
is divided by the fair market value of the property without the easement to derive a
                                                                       (continued...)
                                       - 34 -

[*34] separately determined the value of the encumbered portion of the ranch and

the five unencumbered acres, while Mr. Nash determined the value of the entire

property.

                   a. Mr. Butler

      For the encumbered portion of the ranch, Mr. Butler considered four

properties that had been sold after being encumbered with a conservation

easement. One of the properties was near the southern portion of Delta County,

Colorado, while the other three were in Colorado but not in the same market as the

ranch (the closest property was approximately 75 miles away and the farthest was

approximately 130 miles’ driving distance away). For the five unencumbered

acres, Mr. Butler considered three small acre lots sold in the Delta County area.

      As with his before value analysis, Mr. Butler used the sales and market data

for the county of each comparable property to adjust the sale price of each. After

substantially adjusting each sale price, Mr. Butler analyzed which properties were

most comparable to the ranch for each portion of his analysis and ultimately


      23
       (...continued)
diminution percentage attributable to the conservation easement in issue. Id. at
*57-*58 (citing Strasburg v. Commissioner, T.C. Memo. 2000-94, 2000 WL
288276, at *4 n.8). We have approved this method, which we refer to as the
“percentage diminution approach”. See, e.g., Butler v. Commissioner, T.C.
Memo. 2012-72, 2012 WL 913695, at *30.
                                       - 35 -

[*35] determined a fair market value of $450,000 for the encumbered acres and

$115,000 for the five unencumbered acres, resulting in the ranch’s fair market

value after petitioner granted the Conservation Easement, excluding

improvements, being $565,000 and the Conservation Easement’s value being

$585,000.

      Mr. Butler also completed a paired sales analysis to determine whether the

diminution in value attributed to the Conservation Easement was similar to the

diminution attributed to the conservation easements for his four comparable

encumbered properties. He calculated a 50.87% diminution in value for the ranch.

For his comparables, he calculated diminutions in value of 24.64%, 37.5%,

44.16%, and 63%.24 Because the ranch’s diminution in value was within this

range of values, he concluded that his comparable sales analysis was sound.

      Both Mr. Nash and Mr. Trudgeon criticized the 50.87% diminution in value

Mr. Butler attributed to the Conservation Easement. They argued that the

diminution percentage was unreasonably high and not supported by Mr. Butler’s

own data. They also disputed the accuracy of the largest diminution in value

(63%) of Mr. Butler’s comparables.


      24
        Mr. Butler’s report misstates this property’s diminution in value to be
65% instead of 63%.
                                         - 36 -

[*36]               b. Mr. Nash

        Mr. Nash considered four properties (excluding improvements) that had

been sold after being encumbered with a conservation easement. These four

properties were in Colorado, but none was in the same market as the ranch (the

closest property was approximately 60 miles away and the farthest was several

hundred miles away). Mr. Butler criticized Mr. Nash’s failure to consider at least

one local comparable encumbered property for his after value analysis.

        As with his before value analysis, Mr. Nash used a qualitative approach to

evaluate the relative superiority, inferiority, or similarity of several characteristics

of each comparable property to the ranch. He then evaluated the overall

comparability of each property to the ranch and derived prices ranging from

$3,947 to $5,031 per acre for the ranch. Because the bracketed midpoint of his

range was $4,489 per acre, he concluded that the ranch’s fair market value after

petitioner granted the Conservation Easement was, excluding improvements,

$4,500 per acre and $550,000 for all 121.7 acres, and, including improvements

$9,367 per acre and $1,140,000 for all 121.7 acres.

        Mr. Nash also completed a paired sales analysis to determine the diminution

in value that should be attributed to the Conservation Easement. He examined the

diminution attributed to the conservation easements for his four comparable
                                       - 37 -

[*37] encumbered properties and calculated diminutions in value of 38%, 41%,

34%, and 19%. He concluded that a 33% diminution in value should apply.25 Mr.

Nash then adjusted the seven sales from his before value analysis downward by

33% to derive a range of prices from $3,571 to $5,545 per acre for the ranch.

Because the bracketed midpoint of this range was $4,584, he concluded the

ranch’s fair market value after petitioner granted the Conservation Easement to be,

excluding improvements, $4,560 per acre and approximately $555,000 for all

121.7 acres, and, including improvements, $9,409 per acre and $1,145,000 for all

121.7 acres.

      The two fair market values Mr. Nash calculated from his two separate

analyses differed by approximately 1%. He determined that the paired sales

analysis value provided a more credible indication of fair market value, so he

concluded that the ranch’s fair market value when excluding improvements was

$555,000. Mr. Nash added in the $590,000 worth of improvements and calculated

the ranch’s full fair market value after petitioner granted the Conservation




      25
         Mr. Nash calculated this value by excluding the 19% diminution in value,
calculating the average for the remaining diminutions (35%), and then multiplying
that average by 95% to account for the five unencumbered acres. We note that his
resulting 33% diminution in value is the same as averaging all four data points
including the 19% diminution.
                                      - 38 -

[*38] Easement to be $1,145,000 and the Conservation Easement’s value to be

$275,000.

                   c. Analysis

      Both experts’ postencumbrance direct comparable sales analyses suffer from

a lack of suitable comparables.26 Specifically, all of Mr. Nash’s comparables and

all but one of Mr. Butler’s encumbered comparables were in different markets

throughout Colorado far from the ranch. All of the comparables for each expert,

including Mr. Butler’s local comparable in Delta County, required significant

adjustments. Where the comparables are relatively few in number, we look for a

greater similarity between comparables and the subject property. Cf. Estate of

Heck v. Commissioner, T.C. Memo. 2002-34. We do not find any of these to be

suitable comparables for the ranch.27 We therefore reject both experts’

postencumbrance direct comparable sales analyses. See Chapman Glen Ltd. v.

Commissioner, 140 T.C. 294, 343 (2013) (rejecting an expert’s comparable sales



      26
         Mr. Nash’s postencumbrance direct comparable sales analysis also suffers
from the same lack of quantitative adjustments problem we discussed above for
his before-value direct comparable sales analysis. See Wolfsen Land & Cattle Co.
v. Commissioner, 72 T.C. 1, 19-20 (1979).
      27
        Since we reject both experts’ comparables, we need not go into their
adjustments in detail; likewise, we need not evaluate Mr. Butler’s direct
comparable sales analysis for the five unencumbered acres.
                                       - 39 -

[*39] in part because the properties “were for the most part not comparable” to the

subject properties).

      We conclude, however, that their comparables are acceptable to determine a

proper diminution in value. See Butler v. Commissioner, 2012 WL 913695, at *30

(stating that the diminution in value approach “has been employed most often

where, as in the instant case, comparable sales of easement-encumbered properties

are not available for the locale of the property being appraised”). The experts’

diminution in value analyses were similar in that each expert used four

comparables that included a significant outlier. Specifically Mr. Butler used a

comparable with a 63% diminution in value that was almost 20% higher than any

other comparable’s value, while Mr. Nash used a comparable with a 19%

diminution in value that was 15% lower than any other comparable’s value.

      Experts lose their usefulness and credibility when they include unreasonably

high or low values in their analyses. See Zarlengo v. Commissioner, T.C. Memo.

2014-161, at *45. As we are not bound by the values computed by either expert,

we can remove the outlier values from each expert’s analysis. See id. The

midpoints for each expert’s remaining range of values are only a little more than

2% apart (35.42% for Mr. Butler and 37.6% for Mr. Nash). We find these ranges

of values to be much more useful and will adopt the midpoint between these two
                                        - 40 -

[*40] ranges--36.5%--as a reasonable diminution of value. Applying this adjusted

diminution in value to the ranch’s before value results in an after value of

$648,776.

      E. Conclusion

      Starting with the $1,021,695 before value for the ranch and applying the

Conservation Easement’s 36.5% diminution in value results in an after value of

$648,776. Accordingly, we conclude that the Conservation Easement’s value is

$372,919.

      Any contentions we have not addressed we deem irrelevant, moot, or

meritless.

      To reflect the foregoing,


                                                      Decision will be entered under

                                                 Rule 155.
