                       T.C. Memo. 2009-145



                      UNITED STATES TAX COURT



KIVA DUNES CONSERVATION, LLC, E.A. DRUMMOND, TAX MATTERS PARTNER,
                           Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13196-06.               Filed June 22, 2009.



     David M. Wooldridge, for petitioner.

     Linda J. Wise and John W. Sheffield, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   By notice of final partnership administrative

adjustment (FPAA), respondent disallowed a charitable

contribution deduction claimed by Kiva Dunes Conservation LLC

(Kiva Dunes) for its grant to the North American Land Trust

(NALT) of a perpetual conservation easement covering a golf
                                   - 2 -

course that it owned.       Respondent also determined that a section

66621 accuracy-related penalty applies.

       After trial, respondent conceded on brief that Kiva Dunes is

entitled to a section 170(a)(1) charitable contribution deduction

for 2002.       Consequently, the issues remaining for our decision

are:       (1) The value of the perpetual conservation easement, and

therefore, the amount of the allowable deduction under section

170(f)(3)(B)(iii) and (h); and (2) whether a section 6662

accuracy-related penalty applies.

                            FINDINGS OF FACT

       Some of the facts and certain exhibits have been stipulated

by the parties.       The stipulation of facts is incorporated in this

opinion, and the stipulated facts are so found.      The tax matters

partner of Kiva Dunes is E.A. Drummond, the petitioner.      We will

refer to E.A. Drummond as petitioner when we refer to him in his

capacity as tax matters partner and Mr. Drummond when we refer to

him in his individual capacity.       At the time of the filing of the

petition, the principal place of business for Kiva Dunes was in

Alabama.




       1
      All section references are to the Internal Revenue Code, as
amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                              - 3 -

     On June 6, 1992, Mr. Drummond purchased real property on the

Fort Morgan Peninsula2 in Baldwin County, Alabama, from the

Resolution Trust Corporation for $1,050,000 (RTC property).     The

RTC property is 12.5 miles west of the intersection of Alabama

Highways 59 and 180 and consists of approximately 228 acres south

of Highway 180 and approximately 23 acres north of Highway 180.

     On December 10, 1993, Mr. Drummond formed D&E Investments,

LLC (D&E), an Alabama limited liability company that elected to

be taxed as a partnership for Federal income tax purposes.     By

quitclaim deed dated January 26, 1994, Mr. Drummond conveyed his

interest in the RTC property to D&E.

     During 1994 D&E initiated the development of a residential

resort community on the RTC property consisting of a gated,

residential subdivision (the Kiva Dunes subdivision)3 and a Jerry

Pate-designed 140.9-acre golf course (Kiva Dunes Golf Course).

The planned resort community also features swimming pools, tennis

courts, and beach access.




     2
      The Fort Morgan Peninsula lies between the Gulf of Mexico
on the south and Mobile Bay and Bon Secour Bay on the north. The
peninsula is approximately 22 miles long and ranges in width from
1.2 miles to 3.1 miles. U.S. Highway 180 runs east-west through
the peninsula. In total, Baldwin County has 32 miles of gulf
coastline that is consistently ranked as one of the most
beautiful beach destinations in the United States.
     3
      The Kiva Dunes subdivision consists of 163 residential
lots, 30 of which are on the beach.
                                 - 4 -

     During 1995 Kiva Dunes Golf Course was completed and opened

to the public,4 and soon thereafter the individual residential

lots began selling.

     On December 26, 2002, Mr. Drummond formed Kiva Dunes, an

Alabama limited liability company, that elected to be taxed as a

partnership for Federal income tax purposes.    On December 27,

2002, D&E executed a warranty deed conveying Kiva Dunes Golf

Course to Kiva Dunes.

     On December 31, 2002, Kiva Dunes placed a perpetual

conservation easement (easement) on Kiva Dunes Golf Course and

donated the easement to NALT.5    Kiva Dunes filed a Form 1065,

U.S. Return of Partnership Income, for the tax period ended

December 31, 2002, on which it claimed a charitable contribution

deduction of $30,588,235 for the easement.    This amount was based

on an appraisal prepared by petitioner’s expert in the instant

case, Claud Clark (Mr. Clark).    Kiva Dunes also reported a

$35,000 cash contribution to NALT.

     Respondent issued an FPAA to Kiva Dunes determining that it

was not entitled to the claimed deduction for the easement or the




     4
      During 1996 Kiva Dunes Golf Course was rated the No. 2
public golf course in the United States.
     5
      A permitted use of the encumbered property could be that of
a golf course, a park, or an agricultural enterprise.
Contemporaneously with the contribution of the easement to NALT,
Kiva Dunes leased Kiva Dunes Golf Course, subject to the
easement, to D&E for the purpose of operating the golf course.
As of trial, D&E continued to operate the golf course.
                                 - 5 -

$35,000 cash contribution and that a section 6662 accuracy-

related penalty applies.6

                                OPINION

     A taxpayer is entitled to deduct, pursuant to section

170(a), a qualified conservation contribution made within a

taxable year.    Sec. 170(c), (f)(3)(B)(iii), (h); see Hughes v.

Commissioner, T.C. Memo. 2009-94.    As noted above, after trial

respondent conceded that Kiva Dunes’s grant of the easement is a

qualified conservation contribution pursuant to section 170(h)

and that Kiva Dunes is entitled to a deduction under section

170(a).    Consequently, we need decide only the value of the

easement for purposes of determining the amount of the allowable

deduction and whether a section 6662 accuracy-related penalty

applies.

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving entitlement to any claimed

deductions.     INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).    Moreover, the Commissioner’s determination of value is

normally presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect.    See Rule 142(a);




     6
      Respondent stipulates that petitioner is entitled to a
charitable contribution deduction for the $35,000 cash
contribution to NALT.
                                - 6 -

Welch v. Helvering, 290 U.S. 111, 115 (1933); Schwab v.

Commissioner, T.C. Memo. 1994-232.7

     Generally, the amount of a charitable contribution 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.   Fair

market value is the price at which property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or sell and both having a reasonable

knowledge of relevant facts.   Sec. 1.170A-1(c)(2), Income Tax

Regs.

     In deciding the fair market value of property, we must take

into account not only the current use of the property but also

its highest and best use.    See 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 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).   The highest

and best use can be any realistic, objective potential use of the

property.   Symington v. Commissioner, 87 T.C. 892, 896 (1986).




     7
      Petitioner does not argue that sec. 7491(a) applies to
shift the burden of proof to respondent. Nonetheless, we decide
the instant case on the evidence in the record and need not
address which party bears the burden of proof.
                                 - 7 -

     Under circumstances where there is a substantial record of

sales of easements comparable to a donated easement, the fair

market value of the donated easement is based on the sale prices

of those comparable easements.    Sec. 1.170A-14(h)(3)(i), Income

Tax Regs.   Where, as in the instant case, there is no established

market for similar conservation easements and no record exists of

sales of such easements, the regulations provide a method to

determine fair market value:

     If no substantial record of market-place sales is
     available to use as a meaningful or valid comparison,
     as a general rule (but not necessarily in all cases)
     the fair market value of a perpetual conservation
     restriction is equal to the difference between the
     fair market value of the property it encumbers
     before the granting of the restriction and the fair
     market value of the encumbered property after the
     granting of the restriction. * * *

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

     We have used a “before and after” methodology in evaluating

conservation easements.   Browning v. Commissioner, 109 T.C. 303,

315 (1997); Hughes v. Commissioner, supra.    The parties in the

instant case agree that the before and after methodology is the

appropriate valuation method to determine the fair market value

of the easement.

     Additionally, any enhancement in the value of a donor’s

other property resulting from the easement contribution, or of

property owned by certain related persons, reduces the value of
                               - 8 -

the contribution deduction.   Sec. 1.170A-14(h)(3)(i), Income Tax

Regs.

     Valuation is not a precise science, and the fair market

value of property on a given date is a question of fact to be

resolved on the basis of the entire record.   See, e.g., Kaplan v.

Commissioner, 43 T.C. 663, 665 (1965); Arbini v. Commissioner,

T.C. Memo. 2001-141.   In the instant case, each party has offered

the report and testimony of an expert witness to establish the

value of the easement for purposes of arriving at the proper

amount of Kiva Dunes’s charitable contribution deduction.

     An expert’s opinion is admissible if it assists the trier of

fact to understand the evidence or to determine a fact in issue.

Fed. R. Evid. 702.   We evaluate expert opinions in the light of

the expert’s demonstrated qualifications and all other evidence

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

(1986).   Where experts offer competing estimates of fair market

value, we decide how to weigh those estimates by, inter alia,

examining the factors they considered in reaching their

conclusions.   See Casey v. Commissioner, 38 T.C. 357, 381 (1962).

We are not bound by the opinion of any expert witness, and we may

accept or reject expert testimony in the exercise of our sound

judgment.   Helvering v. Natl. Grocery Co., 304 U.S. 282 (1938);

Estate of Newhouse v. Commissioner, 94 T.C. 193, 217 (1990).     We

may also reach a decision as to the value of property that is
                                - 9 -

based on our own examination of the evidence in the record.

Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976),

affg. T.C. Memo. 1974-285.

Petitioner’s Expert

     Mr. Clark is a professional real estate appraiser and has

decades of experience in Baldwin County.    He has lived and worked

in the immediate vicinity of the subject property for 22 years

and owns and has owned property on the Fort Morgan Peninsula.

Mr. Clark performs more appraisal work in Baldwin County than any

other appraiser, and he has a great depth of knowledge of the

comparable properties used in valuing the easement and of the

surrounding local real estate market.

Respondent’s Expert

     Philip Paulk (Mr. Paulk) is a Member of the Appraisal

Institute (MAI).8    He has spent a substantial portion of his

appraisal career in Atlanta, Georgia.    Mr. Paulk recently moved

to, and has offices in, Birmingham, Alabama, 250 miles from Kiva

Dunes Golf Course.    Mr. Paulk has no particular expertise in

Baldwin County, and he has been to the Baldwin County, Alabama,

area only twice in connection with his appraisal of the easement.




     8
      MAI is a designation awarded to qualifying members of the
American Institute of Real Estate Appraisers and within the
appraisal community is viewed as the most highly regarded
appraisal designation. See Estate of Auker v. Commissioner, T.C.
Memo. 1998-185.
                                - 10 -

Valuation of the Easement

     Each party’s expert determined before and after values of

Kiva Dunes Golf Course and considered the issue of enhancement of

other property owned by Kiva Dunes or related parties.      Each

expert’s conclusions as to the fair market value of the easement

were computed by subtracting his estimate of the after value and

of any enhancement from his estimate of the before value.

Fair Market Value of Kiva Dunes Golf Course Before Conservation
Easement

     Each of the experts concluded that the highest and best use

of Kiva Dunes Golf Course at the time of the contribution of the

easement would have been for the development of a residential

subdivision.   To reach their respective before value estimates,

both experts used a discounted cashflow analysis of estimated

revenues and costs associated with the development and sale of

lots in a hypothetical subdivision.      However, certain of their

assumptions differed in important ways; namely, the number of

lots available for sale, the average sale price of the lots, and

the rate at which the lots would sell.      The differences in their

assumptions led to a dramatic difference in their respective

before value estimates:     Mr. Clark’s was $31,938,985, and Mr.

Paulk’s was $10,018,000.9    We examine the critical assumptions


     9
      We note that it is not unusual in valuation cases that two
expert appraisers reach significantly different conclusions. The
instant case poses such a dilemma, and, consequently, the
                                                   (continued...)
                              - 11 -

made by each expert and decide the plausibility of those

assumptions in reaching an appropriate before value for Kiva

Dunes Golf Course.

     1.   Lots Available for Sale

     Mr. Clark determined that 370 lots could be developed for

sale in his hypothetical subdivision.10   Wayne Dyess (Mr. Dyess),

the planning and zoning director of the Baldwin County Zoning


     9
      (...continued)
credibility of the experts’ determinations is of paramount
importance. For our purposes, a useful tool with which to
measure the reasonableness of the experts’ assumptions is the
2005 purchase price for the Woodlands Golf Course (Woodlands).
Woodlands was approximately 15 miles (and 6 miles inland) from
Kiva Dunes Golf Course. Woodlands was purchased for $17,800,000
for the purpose of developing a residential apartment community
and was comparable in size to Kiva Dunes Golf Course.
     Petitioner argues that the Woodlands sale price “calls into
question the opinions and assumptions of Paulk concerning the
Before Value * * * and provides clear evidence that the low
Before Value assigned by Paulk was not based in reality.”
Specifically, petitioner contends “that proximity to the beach is
a significant value factor for residential uses * * *. The
popularity and high-end residential use of land on the Fort
Morgan Peninsula property gives the * * * [Kiva Dunes Golf
Course] a substantially higher value than a similar property used
for residential (apartment) purposes several miles north, away
from the beach.” After considering the evidence in the record,
we agree.
     The experts in the instant case recognize that proximity to
the beach imparts a premium to the value of real estate. With
Kiva Dunes Golf Course sitting on one of the most beautiful
stretches of coastline in the United States, a willing buyer and
a willing seller would necessarily anticipate a premium price for
the property. Mr. Paulk’s before value, which falls $7,782,000
short of the Woodlands sale price, does not reflect adequately
the superior locale of Kiva Dunes Golf Course and is not, as
petitioner persuasively argues, “based in reality”.
     10
      The subject property was zoned R-6.   This permitted the
development of six homes per acre.
                               - 12 -

Board, agreed.   Mr. Paulk concluded that a local zoning

regulation11 would limit development on the property to 300 lots.

Mr. Paulk’s conclusion, however, was based on an erroneous

interpretation of the regulation.   Specifically, Mr. Paulk’s

conclusion was based upon his determination that “gross land

area” did not include slopes, streams, ponds, watercourses,

wetlands, floodways, and floodplains.12   Consequently, Mr.


     11
      The 2002 Baldwin County Zoning Regulations, sec. 23.3(d),
provides, in relevant part, as follows:

          (d) Open Space Reservation.

                 (1) A minimum of 20 percent of the gross land
                 area shall be set aside for permanent open space
                 for the purpose of providing parks, recreational
                 facilities, pedestrian ways, and/or for con-
                 serving sensitive elements of the environment
                 including but not limited to slopes, streams,
                 ponds, watercourses, wetlands, floodways and
                 floodplains.

                 a. Stormwater detention ponds, retention
                 ponds, or similar holding basins for
                 stormwater shall not be included in the
                 20-percent open space requirement.

                 b. A minimum of 50 percent of the required
                 open space must be contiguous and must be
                 usable for passive or active recreation
                 purposes. The usable open space shall not
                 include steep slopes, streams, ponds,
                 watercourses, wetlands, floodways and/or
                 floodplains.
     12
      To the contrary, Mr. Dyess testified that gross land area
includes “everything within the boundaries of [a] particular
development”. Mr. Dyess further opined on whether 50 percent of
the open space in Mr. Clark’s conceptual plan was “contiguous and
* * * usable for passive or active recreation” purposes as
                                                   (continued...)
                              - 13 -

Paulk’s interpretation substantially reduced the available land

for lot development because he excluded the lakes and wetlands on

Kiva Dunes Golf Course.   Ultimately, Mr. Paulk admitted that Mr.

Clark’s 370-lot subdivision was viable.   We conclude that it was

reasonable to assume that 370 lots could be developed on Kiva

Dunes Golf Course.13




     12
      (...continued)
required by the regulation. Initially, Mr. Dyess stated: “In
looking at (the plan), not having the exact numbers, typically it
doesn’t look like they’re going to have the 50-percent. To be
definitive, we’d want to see the numbers”. Ultimately, Mr. Dyess
conceded that the plan design could be adjusted to meet the
contiguous requirement. Notably, however, he never suggested
that such an adjustment would require a reduction in the number
of lots available or the elimination of any of the proposed
manmade lakes.
     13
      Respondent takes the position that the presence of a local
beach wildlife inhabitant of the area near Kiva Dunes Golf
Course, the federally protected Alabama beach mouse, would have a
profound impact on the development of the proposed subdivision.
Specifically, respondent contends that Mr. Clark did not account
for the time and cost that would be associated with securing the
necessary permits in developing the property. From the evidence
before us, we are not persuaded that the presence of the Alabama
beach mouse would have significantly affected the development of
Kiva Dunes Golf Course. We note that Mr. Paulk’s report makes no
reference to the Alabama beach mouse, and there is no adjustment
in Mr. Paulk’s values to account for any potential delay or
expense associated with the potential impact that the presence of
the Alabama beach mouse might have on the development. Indeed,
both experts agree that projected sales of the hypothetical lots
would have begun closing on Dec. 31, 2003. Moreover, Aaron
Valenta, a regional habitat conservation plan coordinator for the
Fish and Wildlife Service, testified that Kiva Dunes Golf Course
does not fall within the Alabama beach mouse’s critical habitat.
Ultimately, no evidence or testimony was offered that would
support a finding that the presence of the Alabama beach mouse
would prevent the development of the proposed subdivision.
                               - 14 -

     2.    Average Lot Price

     Mr. Clark concluded that the initial lot price in his

hypothetical subdivision would average $170,000.    In reaching

this value, Mr. Clark considered a number of variables:    The

quality of the lots, market demand, and comparable sales.

     Mr. Clark’s conceptual plan proposed the enlargement of

several lakes and the creation of several pool and recreation

areas on Kiva Dunes Golf Course.   Consequently, approximately 70

percent of his proposed lots (258 out of 370) would front the

lakes.    Both experts agree that this lake frontage factor alone

would have a significant impact on lot value.   Additionally, Jim

Edgmon (Mr. Edgmon), an agent of D&E and manager of Kiva Dunes

Golf Course, testified that all of the lots would have access to

the amenities of the adjacent Kiva Dunes subdivision, including

the use of tennis courts, swimming pools, beach walkovers, and

dedicated areas on the beach itself.    Moreover, the lots in the

hypothetical subdivision would frequently have beautiful views of

Mobile Bay.

     Mr. Clark also considered the market for house lots in

Baldwin County in reaching his initial lot price.    The total

population in Baldwin County from 1990 through 2000 (the period

shortly before the valuation date) increased 42.87 percent.14


     14
      Mr. Edgmon testified that Baldwin County was the “second-
fastest-growing county in Alabama and maybe the top 50 or 70 in
                                                   (continued...)
                                - 15 -

Total households during that same period correspondingly

increased 49.38 percent, and the median home price increased 88.2

percent.15    Mr. Clark opined that the population surge, coupled

with a dwindling supply of available home sites,16 would increase

demand, and the selling price, for the proposed lots.

     As a final consideration, Mr. Clark looked to local sales of

properties he believed were nearest in quality to the proposed

lots.     He noted several 2002 sales of developed lots (land price

computed by extraction)17 in the neighboring Martinique

Development (Martinique).18    Martinique’s sales ranged from

$160,000 to $306,700.     Mr. Clark also examined several 2002 and

early 2003 sales of “off-of-the-beach” lots at the Kiva Dunes

subdivision ranging in price from $110,000 to $160,000.    In




     14
      (...continued)
the country.”
     15
      The statistical data for population and household growth
was included in Mr. Paulk’s report.
     16
      Mr. Clark testified that neighboring subdivisions were
approaching sellout.
     17
      Extraction is a method of estimating land value in which
the depreciated cost of the improvements on the improved property
is estimated and deducted from the total sale price to arrive at
an estimated sale price for the land. Appraisal Institute, The
Appraisal of Real Estate 335 (12th ed. 2001). Mr. Paulk offered
no criticism as to Mr. Clark’s extraction values.
     18
      Martinique is approximately 1 mile east of Kiva Dunes Golf
Course off Highway 180. It is a single-family development with
ample lakes, a swimming pool, tennis courts, and convenient
access to the beach.
                               - 16 -

highlighting his Kiva Dunes subdivision comparables, Mr. Clark

stressed that their quality and size were inferior to those of

the proposed lots.19

     In contrast, Mr. Paulk determined that the initial lot price

in his hypothetical subdivision would average $85,000.   In

arriving at that number, Mr. Paulk testified, he averaged the

2001 sale prices of just two interior lots sold at the Kiva Dunes

subdivision.20   In other words, Mr. Paulk assumed that two of the

least desirable lots in the Kiva Dunes subdivision would be of

comparable quality to that of the hypothetical lots.21   Mr.

Paulk’s proposed lots would not front the lakes, would not have

views of Mobile Bay or any lakes, and would be far removed from

the amenities of the Kiva Dunes subdivision.   We conclude that

Mr. Paulk’s assumptions are not realistic because they fail to

rely on comparable lot characteristics.



     19
      As set forth above, Mr. Clark testified that the majority
of lots in the proposed subdivision would front lakes. In his
report, Mr. Clark’s data is suggestive of the appeal and premium
value of lake front property in Baldwin County. For instance,
“lake view” lots at Tannin Village averaged $22.88 per square
foot, whereas “open view” lots at the Kiva Dunes subdivision
averaged only $14.16 per square foot. “Limited view” lots at the
Kiva Dunes subdivision averaged a mere $8.65 per square foot.
     20
      Lot 113 sold for $108,865, and lot 69 sold for $55,685.
The actual average for these lots, $82,275, was then increased 3
percent for appreciation to arrive at a reconciled initial value
per lot of $85,000, rounded.
     21
      In his report, Mr. Paulk expressly states that his
conclusions as to initial lot price are “Based on recent interior
lot sales at Kiva Dunes.” (Emphasis added.)
                               - 17 -

     Mr. Paulk’s testimony at trial is inconsistent with his

appraisal in several respects.   In his report Mr. Paulk stresses

that “Most lots in the [proposed] development will have water

views of the onsite lakes”.   Moreover, Mr. Paulk reports that the

proposed subdivision closely resembles Martinique, yet he does

not give any consideration to the actual sale prices of its lots

in computing his initial lot price.     For instance, he lists the

average selling prices of lots at developments Morgantown22

($74,000), Peninsula23 ($42,500), and the Kiva Dunes subdivision

($82,275), yet he curiously assigns a value for average lot sales

for Martinique at zero.24   As set forth above, Martinique lots

were selling for much more than the residential lots at the Kiva

Dunes subdivision.

     We conclude that Martinique possesses many of the

characteristics of Mr. Clark’s hypothetical subdivision and

provides the most accurate representation of the quality and

value of the proposed lots.   Mr. Paulk’s assumption that the

quality of the proposed lots would mirror that of two inferior



     22
      Morgantown is a single-family residential development on
the south side of Highway 180 approximately one-half mile west of
Kiva Dunes Golf Course.
     23
      Peninsula is a single-family residential golf course
community on the north side of Highway 180 approximately 5 miles
west of Highway 59.
     24
      Mr. Paulk designates the average lot sale price for
Martinique in a separate section as “N/A”, the only such property
to receive that designation in his report.
                                - 18 -

lots at the Kiva Dunes subdivision is unavailing.     We conclude

that Mr. Clark’s analysis is persuasive and that an initial lot

price of $170,000 for the hypothetical subdivision is reasonable.

     3.     Absorption Rate

     Mr. Clark assumed that his 370-lot subdivision would sell

out in 10 years, averaging sales of 37 lots per year.     In making

his assumption, he compared absorption data from local

developments, including the Kiva Dunes subdivision and

Martinique.     Mr. Paulk, on the other hand, assumed his 300-lot

subdivision would sell out in 15 years, averaging sales of 20

lots per year.     Mr. Paulk appears to have relied exclusively on

absorption data from Martinique to forecast his absorption rate.

     Both experts relied on Martinique in support of their

respective assumptions on the issue of the proper absorption

rate.     Indeed, as set forth above, the quality of the lots at

Martinique, its amenity package, and its location mirror those of

the proposed subdivision.     Accordingly, we conclude that

Martinique is a useful gauge of an appropriate absorption rate.

     Sales at Martinique were brisk during 2000 (25 sales).25       A

former sales agent at Martinique to which Mr. Clark’s report

refers indicated that sales were “slowed by the construction

pace”, and that “the lots could have sold out much quicker” had



     25
      Sales for 2001 totaled 22, and sales reported for half of
2002 totaled 14.
                                 - 19 -

they been sold as vacant lots.     Mr. Clark testified that the

demand for vacant lots was “feverish” as existing developments

were approaching sellout, and Mr. Paulk’s data in his report

corroborates Mr. Clark’s conclusions.     For instance, by 2005 the

Kiva Dunes subdivision, Morgantown, and Martinique had sold out.

     Considering that the proposed plan would have had more than

three times as many lots available for purchase as Martinique,26

we conclude that a sales forecast of 37 lots per year is

reasonable.

     Having found Mr. Clark’s assumptions as to the available

lots for sale (370), initial lot price ($170,000), and annual

rate of lot sales (37 per year) reasonable, we need not address

in detail the remaining assumptions made by the experts in

deriving their respective before value opinions, as they are

largely offsetting.     To illustrate, if we incorporate Mr. Clark’s

aforementioned assumptions into Mr. Paulk’s discounted cashflow

computation, leaving intact Mr. Paulk’s remaining assumptions as

to lot appreciation (3 percent), developer’s profit (12 percent),

sales commissions (6 percent), closing/marketing costs (3

percent), property taxes ($504/lot), and discount rate (12

percent), Mr. Paulk’s before value would amount to $29,948,799.27


     26
          Martinique comprises 104 developed lots.
     27
      Mr. Clark estimated lot appreciation at 5 percent;
developer’s profit at 20 percent; sales commissions at 6 percent;
                                                   (continued...)
                             - 20 -

If we further incorporate respondent’s concession on brief as to

Mr. Clark’s 5-percent lot appreciation rate, Mr. Paulk’s before

value would increase an additional $2,365,759.   Ultimately, with

the foregoing substitutions, Mr. Paulk’s before value

($32,314,558) would exceed Mr. Clark’s before value ($31,938,985)

by $375,573.28

     We conclude that Mr. Clark’s testimony is credible and his

assumptions are reasonable and amply supported by the evidence

presented at trial and in his report.   Moreover, we conclude that

the Woodlands sale is corroborative evidence of the

reasonableness of Mr. Clark’s conclusions.   Accordingly, we

assign a before value to Kiva Dunes Golf Course of $31,938,985.

Fair Market Value of Kiva Dunes Golf Course After Conservation
Easement

     The experts agree that immediately after the charitable

contribution, the highest and best use of Kiva Dunes Golf Course

was the continued operation of the golf course.29   However, in


     27
      (...continued)
closing costs/overhead at 3 percent; and a discount rate at 9.5
percent.
     28
      We do not, however, decide that petitioner is entitled to
a higher before value than that determined by Mr. Clark.
     29
      During 2007 Mr. Clark prepared and submitted a
supplemental report in which he opined on the economic health of
the golf industry for 2007. At trial, he testified that his new
data (information Mr. Clark admits would not have been available
to a hypothetical buyer and seller during 2002) suggests that the
continued operation of Kiva Dunes Golf Course as a golf course
                                                   (continued...)
                              - 21 -

determining the after value of Kiva Dunes Golf Course, the

experts used very different methodologies.   Mr. Paulk used an

income approach.   He divided a capitalization rate into a number

that he represented was the 2002 net income of Kiva Dunes Golf

Course.   Mr. Paulk determined the after value to be $8,808,000.

In contrast, Mr. Clark concluded that the economic health of Kiva

Dunes Golf Course during 2002 was too poor to support an income

capitalization approach.   Instead, he found sales of “comparable”

properties that he analyzed and adjusted to reach an after value

of $1,050,750.

     In determining his after value, Mr. Paulk divided a

capitalization rate (12 percent) into a number that he

erroneously represented was the 2002 net income of Kiva Dunes



     29
      (...continued)
would not be the highest and best use of the property. In
support of his “new position”, Mr. Clark highlighted a recent
golf course closure, diminishing rounds played in Baldwin County,
and recent losses sustained by several local courses. On brief,
respondent argues vociferously that “[Mr.] Clark’s vacillation on
the highest and best use of the property after the donation
presents insurmountable obstacles for petitioner in establishing
the fair market value of the property after the donation.” We
disagree.
     The fair market value of Kiva Dunes Golf Course should be
based on its highest and best use on its valuation date. See
Stanley Works v. Commissioner, 87 T.C. 389, 400 (1986); sec.
1.170A-14(h)(3)(ii), Income Tax Regs. In other words, the
information Mr. Clark used to determine the highest and best use
of the property must be limited to information that would have
been available to the hypothetical buyer or seller on the date of
the donation. Accordingly, we assign no weight to Mr. Clark’s
supplemental report or his testimony insofar as it relates to the
highest and best use of Kiva Dunes Golf Course.
                                  - 22 -

Golf Course--$1,056,970.30      The error was that, in calculating

the 2002 net income, Mr. Paulk failed to account for all of the

expenses listed on D&E’s 2002 tax return,31 as well as reserves

in lieu of depreciation.32      The table below summarizes the

omitted categories of expense that, when subtracted from Mr.

Paulk’s computed 2002 net income, result in a negative number:

            Description                      Expense

          Salaries & wages                   $756,421
          Employee benefits                   126,435
          Repairs/maintenance                  64,037
          Taxes & licenses                     28,565


     30
      At trial, Mr. Edgmon testified that the 2002 net income
for Kiva Dunes Golf Course was a “negative number”.
     31
      D&E’s return was audited for taxable year 2002. The IRS
did not propose any adjustments to the expense categories on the
return or challenge whether any of the listed expenses were
ordinary or necessary.
     32
      We recognize, and both experts agree, that depreciation
does not figure into an appraisal value computation. However,
Mr. Paulk admitted that appraisal principles require that an
alternative, similar concept be substituted to reflect the
economic cost of maintaining and/or replacing equipment required
for the operation of the golf course. Examples of such items
relevant for such purposes would include, but are not limited to,
maintenance vehicles, maintenance equipment, irrigation systems,
and golf carts. In appraisal parlance, a “reserve” reflects this
anticipated cost of replacement and maintenance. Mr. Paulk made
no attempt to determine the amount of an appropriate reserve in
his after value analysis. On brief, respondent argues that an
appropriate reserve would not approximate D&E’s depreciation
deductions because D&E depreciated under an accelerated method
(i.e. double declining balance method) and claimed a special
depreciation allowance of 30 percent under sec. 168(k). We agree
with respondent that an appropriate reserve does not mirror the
claimed depreciation deductions in the instant case. However, it
is not necessary to determine an appropriate reserve as D&E’s
remaining expenses more than offset D&E’s 2002 income.
                                - 23 -

       Rent                                104,587
       Depreciation/“Reserve”              594,266
         Total                           1,674,311

     At trial, Mr. Paulk admitted that he was provided D&E’s 2002

tax return before he submitted his appraisal.   We therefore place

no reliance on Mr. Paulk’s after value determination.

     Mr. Clark used the comparable sales method to reach his

after value.   The comparable sales method “is based upon the

commonsense approach of taking the actual sales prices of

properties similar to the subject property and then relating

these prices to the subject property.”   Wolfsen Land & Cattle Co.

v. Commissioner, 72 T.C. 1, 19 (1979).   The fair market value of

Kiva Dunes Golf Course is calculated by reference to the sale

prices of the comparable properties, adjusted upward to the

extent that the property is superior to the comparable property

in some fashion and downward to the extent it is inferior in some

fashion.   See Whitehouse Hotel Ltd. Pship. v. Commissioner, 131

T.C. __, __ (2008) (slip op. at 45); see also Schwab v.

Commissioner, T.C. Memo. 1994-232 (“This approach is based on the

principle that the prudent purchaser would pay no more for a

property than the cost of acquiring an existing property with the

same utility.”).   Mr. Clark made seven adjustments to the prices

of his comparables for differences in (1) market conditions, (2)

location value, (3) access and visibility, (4) size, (5)
                               - 24 -

availability of utilities, (6) topographical and wetland

characteristics, and (7) financing terms.

     Under ideal circumstances, there is an abundance of sales of

truly comparable properties made under similar conditions, only

minor adjustments are required, and the value is easily derived.

However, as in the instant case, when such conditions do not

exist, many factors come into play and more adjustments are

required.    As might be expected, the lack of sales of comparable

properties results in a more subjective value, highly dependent

on the independent judgment of the individual appraiser.33

     In reaching his after value, Mr. Clark identified five sales

of properties he considered “comparable”.34   Mr. Clark’s first

comparable was a 186-acre vacant parcel of land in Gulf Shores,

Alabama.    The property sold on June 4, 1992, for $5,136 per acre,

or $1 million.   The land was purchased for the purpose of



     33
      Mr. Clark testified that the limited use for which Kiva
Dunes Golf Course could be developed had a profound effect on his
adjustments to his comparables.

     [T]his is an eased property that has just about
     all of its rights stripped from it except
     recreational type uses, and if this were an uneased
     property * * * there would be different adjustments,
     but an eased property under the conservation easement
     * * * had very limited use. So whether you’ve got
     wetlands that you can’t do anything with or you’ve
     got an eased piece of property that you can’t do
     anything with, you can’t do anything with them.
     34
      All five of Mr. Clark’s sales of comparable properties
occurred in Baldwin County.
                                - 25 -

developing Woodlands as a golf course.      After adjusting the price

per acre for market conditions (+66 percent), location (-10

percent), access/visibility (-10 percent), size (-5 percent),

utilities (0 percent), topography/wetlands (+5 percent), and

financing (0 percent), Mr. Clark arrived at an adjusted value for

his first comparable of $7,140 per acre.

     The second comparable was an 818-acre vacant parcel of land

also in Gulf Shores, Alabama.    The property sold on October 12,

1994, for $6,432,500, or $7,860 per acre.      The property has 1.2

miles of frontage on the south margin of Bon Secour Bay and

approximately 1.7 miles fronting on the north row of Highway 180.

The land was purchased for the development of a residential

community, which included a golf course and tennis center.      After

adjusting the price per acre for market conditions (+47),

location (-20 percent), access/visibility (-5 percent), size (+10

percent), utilities (-20 percent), topography/wetlands (-20

percent), and financing (0 percent), Mr. Clark arrived at an

adjusted value for his second comparable of $8,674 per acre.

     The third comparable was a 320-acre vacant parcel of land in

Foley, Alabama.   The property sold on January 16, 1997, for

$5,313 per acre, or $1,700,000.    This comparable is in an area of

significant commercial development.      After adjusting the price

per acre for market conditions (+29 percent), location (-10

percent), access/visibility (-10 percent), size (+5 percent),
                              - 26 -

utilities (-5 percent), topography/wetlands (+5 percent), and

financing (+10 percent), Mr. Clark arrived at an adjusted value

for his third comparable of $6,409 per acre.

     Mr. Clark’s fourth comparable was a 190-acre parcel of land

in Foley, Alabama.   The property was sold on November 19, 1997,

for $6,842 per acre, or $1,300,000.    Mr. Clark testified that the

property was purchased by the Consumer Guaranty Corporation for

the purpose of developing a golf course.    After adjusting the

price per acre for market conditions (+0 percent), location (+5

percent), access/visibility (-5 percent), size (-5 percent),

utilities (-20 percent), topography/wetlands (+5 percent), and

financing (0 percent), Mr. Clark arrived at an adjusted value for

his fourth comparable of $7,112 per acre.

     The fifth comparable was a 254-acre parcel of land in Foley,

Alabama.   The property sold on January 12, 2000, for $11,784 per

acre, or $3 million.   The site was improved with a number of farm

buildings.   Mr. Clark testified that the property was commonly

referred to as “one of the prettiest sites for a golf course that

there could be in Baldwin County.”     After adjusting the price per

acre for market conditions (+5 percent), location (-5 percent),

access/visibility (-5 percent), size (0 percent), utilities (-20

percent), topography/wetlands (0 percent), and financing (0

percent), Mr. Clark arrived at an adjusted value for his fifth

comparable of $8,670 per acre.
                              - 27 -

     On the basis of the average price of his five comparables,

adjusted for differences, Mr. Clark determined an after value of

$1,050,750.35

     We are mindful of the fact that in reaching his after value,

Mr. Clark did not take into consideration the highest and best

use of his comparables in the traditional sense.   He instead

selected properties that were purchased for recreational uses

that would be permitted on Kiva Dunes Golf Course.36   In other

words, Mr. Clark considered the market forces in Baldwin County

an accurate barometer of the highest and best use of a comparable

property.   We do not find Mr. Clark’s analysis in that regard to

be “fatal”, as respondent contends.

     We are satisfied that Mr. Clark’s selection of comparables

was reasonable under the circumstances and that his adjustments

to the prices of the comparables were based upon sound judgment

and a detailed knowledge of all the properties mentioned in his

report.   However, we agree with respondent that an upward

adjustment to Mr. Clark’s after value is justified in one



     35
      The average price per acre for the five comparable
properties is $7,601. Multiplying that number by the total
acreage of the easement, 140.9 acres, results in an after value
of $1,070,980, rounded. Mr. Clark inadvertently erred in two
respects in reaching his after value number--he miscalculated the
average price per acre of his five comparables at $7,500, and he
multiplied that number by 140.1 acres.
     36
      For instance, the property could be operated as a golf
course, a park, or an agricultural enterprise.
                              - 28 -

respect.   Mr. Clark’s comparables consist of unimproved land

while Kiva Dunes Golf Course’s current condition is that of an

award-winning golf course.   Consequently, an upward adjustment to

the prices of the comparables for the cost of turning the

unimproved real estate into a comparable golf course property is

warranted.

     Petitioner contends on brief that the approximate costs of

the improvements are reflected in the basis of the golf course

real estate ($1,929,456) as reported on Schedule L, Balance Sheet

per Books, of Kiva Dunes’s 2002 Form 1065.    The basis of the golf

course real estate improvements is actually $1,339,957.     We

arrived at this figure by subtracting the portion of the cost

basis attributable to the golf course real estate ($589,499) from

the 2002 cost basis of Kiva Dunes Golf Course ($1,929,456).      We

computed the proportional share of the golf course real estate

basis by dividing the total acreage for Kiva Dunes Golf Course

(140.9) by the total acreage for the RTC property (251) and

multiplying that fraction by the total purchase price for the RTC

property ($1,050,000).

     The foregoing improvement costs ($1,339,957) must be

adjusted to account for depreciation.    See Wortmann v.

Commissioner, T.C. Memo. 2005-227.     On Schedule L of its 2000

Form 1065, D&E reported a cost basis in Kiva Dunes Golf Course of

$2,501,499.   D&E depreciated the costs of improvements on Kiva
                              - 29 -

Dunes Golf Course for taxable years 2001 ($347,876) and 2002

($224,168), and its cost basis was correspondingly reduced to

$1,929,456 to reflect the deductions.37   We therefore add to

petitioner’s cost of improvements ($1,339,957) the depreciation

deductions D&E claimed for taxable years 2001 and 2002 to derive

a value for the costs of improvements on Kiva Dunes Golf Course

($1,339,957 + $347,876 + $224,168 = $1,912,001).

     Accordingly, after adjusting Mr. Clark’s after value to

account for the improvements, we conclude that the after value

for Kiva Dunes Golf Course is $2,982,981 ($1,070,980 comparable

value + $1,912,001 depreciation adjustment).

Enhancement

     Mr. Clark determined that the conservation easement enhanced

property owned by D&E north of Highway 180 by $300,000.

Respondent agrees.   We shall adjust our final value to reflect

that enhancement.

Conclusion

     On the basis of our review of all the valuation evidence,

giving due consideration to our observation at trial of the

witnesses for both parties and to the testimony of the experts




     37
      D&E did not depreciate the costs of improvements in 2000,
and there is no evidence in the record before us that D&E
depreciated any costs of improvements to the subject property
before 2000.
                             - 30 -

and their reports, we conclude that the fair market value of the

easement is $28,656,004.38

     We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them

unnecessary to reach, without merit, or irrelevant.39

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.




     38
      We reached this number by subtracting our after value
($2,982,981) as well as enhancement ($300,000) from our before
value ($31,938,985).
     39
      Respondent argues that Kiva Dunes is liable for either a
substantial or a gross valuation penalty pursuant to sec.
6662(b)(3) and (e) or (h). Sec. 6662(a) and (b)(3) imposes a
20-percent penalty on that portion of an underpayment which
results from a substantial valuation misstatement. There is a
substantial valuation misstatement if the value of any property
claimed on the return is 200 percent or more of the amount
determined to be the correct amount. Sec. 6662(e)(1)(A). Sec.
6662(h) increases the penalty to 40 percent in the case of a
gross valuation misstatement. There is a gross valuation
misstatement if the value is 400 percent or more of the value
determined to be the correct amount. Sec. 6662(h)(2)(A)(i).
     We corrected Kiva Dunes’s reported value approximately 10
percent. Accordingly, Kiva Dunes is not subject to a valuation
penalty.
