                       T.C. Memo. 2012-35



                    UNITED STATES TAX COURT



           ESGAR CORPORATION, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 23676-08, 23688-08,    Filed February 6, 2012.
                23689-08.



         Ps granted qualified conservation easements to a
    qualified conservation organization in 2004, reporting
    noncash charitable contributions on their respective
    2004 tax returns. R determined deficiencies in income
    tax, based in part on R’s determination that Ps had
    overstated the value of the conservation easements. R
    also determined sec. 6662(a), I.R.C., accuracy-related
    penalties against the Holmeses and the Tempels.

         Held: Ps are liable for the income tax
    deficiencies to the extent redetermined herein as the
    result of overvaluing the contributed conservation
    easements.



    1
      On Aug. 28, 2009, cases of the following petitioners were
consolidated herewith for purposes of trial, briefing, and
opinion: Delmar L. and Patricia A. Holmes, docket No. 23688-08;
and George H. and Georgetta Tempel, docket No. 23689-08.
                                 - 2 -

          Held, further, the Holmeses and the Tempels are not
     liable for sec. 6662(a), I.R.C., accuracy-related penalties.



     James R. Walker, Justin D. Cumming, and Christopher D.

Freeman, for petitioners.

     Sara Jo Barkley and Tamara L. Kotzker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   Petitioners are:      Esgar Corp. (Esgar), a

Colorado corporation which filed Forms 1120, U.S. Corporation

Income Tax Return, for the 2004, 2005, and 2006 tax years; Delmar

L. and Patricia A. Holmes (the Holmeses); and George H. and

Georgetta L. Tempel (the Tempels).       The Holmeses and the Tempels

both filed joint Forms 1040, U.S. Individual Income Tax Return,

for the 2004, 2005, and 2006 tax years.      In 2004 Esgar, the

Holmeses, and the Tempels each donated a qualified conservation

easement, reporting on Forms 8283, Noncash Charitable

Contributions, fair market values of $570,500, $867,500, and

$836,500, respectively.     Because of the limitations of section

170(b)(1)(A) and (2)(A), petitioners deducted only a portion of

the reported contributions on their 2004 tax returns and carried

the rest forward.2


     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years at issue, and all Rule references are to the Tax Court
                                                   (continued...)
                                   - 3 -

       As a result of the donations, petitioners each also received

transferable Colorado State income tax credits (State tax

credits).      They all sold a portion of their State tax credits in

2004.      Esgar and the Tempels reported the proceeds from the sale

of their State tax credits as capital gain; the Holmeses reported

their proceeds as ordinary income.

       Respondent issued Esgar and the Tempels notices of

deficiency dated June 26, 2008, and issued the Holmeses a notice

of deficiency dated June 27, 2008.         In the notices of deficiency

respondent determined, inter alia, that the conservation

easements were valueless and that any proceeds from the sales of

the State tax credits should be reported as ordinary income.

       The determined tax deficiencies, additions to tax, and

penalties were as follows

                                   Esgar

                            Penalty               Addition to Tax1
 Year      Deficiency    Sec. 6662(a)             Sec. 6651(a)(1)
 2004        $9,741          ---                      $488.70
 2005        11,990       $2,398.00                  1,199.02
 2006        10,626        2,125.20                     ---
   1
   Respondent concedes Esgar is not liable for the sec. 6662(a)
penalty for the 2005 and 2006 tax years, and Esgar concedes it
is liable for the sec. 6651(a)(1) addition to tax for the 2004
and 2005 tax years.




       2
      (...continued)
Rules of Practice and Procedure.
                                - 4 -

                            The Holmeses

                          Penalty
 Year   Deficiency     Sec. 6662(a)
 2004    $31,830         $6,366.00
 2005     24,572          4,914.00
 2006     25,894          5,178.80

                            The Tempels

                          Penalty
 Year   Deficiency     Sec. 6662(a)
 2004    $69,389         $13,877.60
 2005     24,292           4,858.40

     On August 3, 2009, respondent filed a motion for partial

summary judgment in Tempel v. Commissioner, docket No. 23689-08.

On August 31, 2009, the Tempels filed a cross-motion for partial

summary judgment.    The issue was whether the gain from the sale

of the State tax credits should be reported as ordinary income or

as capital gain and if capital gain, whether the Tempels had any

basis in their State tax credits.     This Court held, in Tempel v.

Commissioner, 136 T.C. 341 (2011), inter alia, that the State tax

credits were capital assets, the Tempels did not have any basis

in their State tax credits, and that the Tempels’ holding period

in the State tax credits was insufficient to qualify for long-

term capital gain treatment.

     We do not address any issues in this opinion that were

resolved by our Opinion in Tempel.      After concessions, the issues

left for decision are:    (1) The fair market value (FMV) of the
                                 - 5 -

qualified conservation easements petitioners granted; (2) whether

the Holmeses are liable for section 6662(a) accuracy-related

penalties for their 2004, 2005, and 2006 tax years; and (3)

whether the Tempels are liable for section 6662(a) accuracy-

related penalties for their 2004 and 2005 tax years.   As more

thoroughly explained infra, in deciding the FMV of the

conservation easements, we must determine whether the land on

which the easements were granted was better suited for gravel

mining or for agriculture.

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.   At the time it filed its petition,

Esgar’s principal place of business was in Colorado.   At the time

they filed their petitions, the Holmeses and the Tempels resided

in Colorado.

I.   Holly Property

     In 1987 Esgar, the Holmeses, the Tempels, and Kelling Fine

Foods, Inc. (Kelling Fine Foods), each acquired an undivided,

one-fourth interest in just over 2,200 acres of real property

near Holly, Colorado (Holly property).   As of 1998 the Colorado

Division of Minerals and Geology had granted permission for

mining gravel, rock, and sand on 1,479 acres of the Holly

property (1998 gravel permit).
                              - 6 -

     A.   Jensen Property

     On January 20, 1998, petitioners and Kelling Fine Foods sold

661.75 acres of the western portion of the Holly property along

with 455 shares of Buffalo Mutual Irrigation Co. (BMIC) to Robert

C. and Tanya Jensen for $500,000 (Jensen property).3   A

substantial portion of the acreage approved for mining by the

1998 gravel permit was on the Jensen property.   In the sale,

petitioners and Kelling Fine Foods reserved all of the gravel,

sand, and mineral rights in the Jensen property, subject to a

January 20, 1998, repurchase agreement (repurchase agreement).

     Pursuant to the repurchase agreement, if petitioners or

Kelling Fine Foods elected to mine any portion of the Jensen

property before January 20, 2003, they had to repurchase the

portion mined for $1,250 per crop acre.   If they elected to mine

any portion after January 20, 2003, they had to repurchase the

portion mined at a price “determined by a licensed Colorado

appraiser plus thirty percent (30%), but never more than

$1,500.00 per crop acre.”




     3
      Water rights are the right to the use of water. Under
Colorado water law, the right to use the waters of the State is
based on the priority of a party’s appropriation for a specified
amount of water, at a specified location, for specified uses.
Water rights may be held, as here, by a mutual irrigation company
or a ditch company in which the users of the water own shares
entitling them, unless otherwise expressly provided, to a pro
rata portion of the company’s water on the basis of the number of
shares owned as a percentage of all the shares in the company.
                                 - 7 -

      B.   Midwestern Farms Property

      The Holly property less the Jensen property is referred to

by the parties and this Court as the “Midwestern Farms

Property”.4    The Midwestern Farms property consists of

approximately 1,560 acres and is in Prowers County, Colorado,

west of Holly, Colorado, between U.S. Highway 50 and the Arkansas

River.     Prowers County is in southeastern Colorado, approximately

200 miles southeast of Denver.

      There is public access to the Midwestern Farms property via

Prowers County Road, farm roads, and U.S. Highway 50.      The

Burlington Northern Santa Fe (BNSF) railroad traverses the

Midwestern Farms property, and there is a rail spur on the

Midwestern Farms property.

II.   Midwestern Farms Gravel Pit

      A portion of the Midwestern Farms property and the Jensen

property is operated as an alluvial gravel pit (Midwestern Farms




      4
      In April 2002 the Holmeses transferred title to their
undivided 25-percent interest in the Midwestern Farms property to
the Delmar L. Holmes Trust and the Patricia A. Holmes Trust. As
a result, the Delmar L. Holmes Trust owned an undivided one-
eighth interest in the Midwestern Farms property and the Patricia
A. Holmes Trust owned an undivided one-eighth interest in the
Midwestern Farms property. We continue to refer to these
interests as the Holmes property.
                               - 8 -

Gravel Pit).5   The Midwestern Farms property and the Midwestern

Farms Gravel Pit are managed by the Midwestern Farms Partnership.

     Eastern Colorado Aggregates, RLLLP (E. Colorado Aggregates),

has operated the Midwestern Farms Gravel Pit, pursuant to a lease

with the Midwestern Farms Partnership, since at least 1999.

Originally, the royalty rate paid to the Midwestern Farms

Partnership by E. Colorado Aggregates was 35 cents per ton for

all rock and gravel sold and 17.5 cents per ton of any sand and

fill dirt sold.

     By an agreement dated February 28, 2004, and effective

January 1, 2004, the Midwestern Farms Partnership renewed its

lease agreement with E. Colorado Aggregates (E. Colorado

Aggregates lease).   The E. Colorado Aggregates lease allowed E.

Colorado Aggregates to mine up to 1,470 acres of the portion of

the Midwestern Farms property and Jensen property permitted by

the 1998 gravel permit.   Beginning July 1, 2004, the royalty rate

became 45 cents per ton for all rock and gravel sold and 22.5

cents per ton for any sand and fill dirt sold.




     5
      For our purposes, a gravel pit is a mine where aggregate is
extracted from an open pit. Aggregate is defined as “minerals
such as sand, gravel, and crushed stone. Aggregate is often
divided into two or more sizes including fine and coarse, which
when added to cement and water in appropriate proportions,
produces concrete. Sand is considered a fine aggregate and stone
or gravel a coarse aggregate.” Throughout this opinion we will
use aggregate, rock, and gravel interchangeably.
                                 - 9 -

       The table below lists the tons of aggregate extracted from

the Midwestern Farms Gravel Pit and the amounts of royalties

received by the Midwestern Farms Partnership from E. Colorado

Aggregates from 1999 through 2004:

                      Approximate
        Year        Tons Extracted          Royalties Received
        1999             ---                    $80,361.55
        2000             ---                    150,489.88
        2001           590,671                  196,382.77
        2002           519,013                  177,017.06
        2003           596,479                  203,111.63
        2004           998,586                  390,735.21

III. Other Gravel Pits

       A.   Prowers County

       The Midwestern Farms Gravel Pit, the J-S Pit, the

Hardscrabble Pit, and the S-C Pit rank as the four largest wet

gravel pits in Prowers County.       The Midwestern Farms Gravel Pit

is the largest.     The J-S Pit, the Hardscrabble Pit, and the S-C

Pit are operated by Carder, Inc. (Carder Company), owned by

Ronald D. Peterson.     In addition to these three pits in Prowers

County, the Carder Company also operates a pit in western Kansas,

just over the Kansas-Colorado State line, known as the Coolidge

Pit.

       According to Mr. Peterson, the Carder Company sold

approximately 540,000 tons of aggregate in 2002 and 570,000 tons
                                       - 10 -

in 2003 and 2004.         The following table shows the acres permitted

and approximate tons of aggregate extracted from the four major

Prowers County pits in 2003 and 2004.

                              Acres        Tons Extracted   Tons Extracted
             Pit            Permitted           2003             2004

 Midwestern Farms             1,479             596,479         998,586
             J-S                120             100,093          45,432
   Hardscrabble                 2761             47,566          57,116
             S-C                665             180,496         179,680
             Total            2,540             924,634       1,280,814
         1
      On the basis of Property Declaration Schedules filed by
Mr. Peterson for the Hardscrabble Pit, we conclude that
sometime in 2006 or 2007 the permitted area was extended to
cover 406 acres.

     Gravel from Prowers County is used within an approximate

100- to 150-mile radius around Prowers County, in areas including

western Kansas, east-central and northeast Colorado, southwest

Nebraska, northeast New Mexico, and the Oklahoma and Texas

panhandles.          Some gravel is backhauled out of Prowers County on

semi-tractor trucks bringing corn into Prowers County.6           Gravel

was not being transported from Prowers County to the Front Range




     6
      Backhauling occurs when a company hauls a primary commodity
from a point of origin to a point of destination and then is able
to “backhaul” a second commodity on the return trip back to the
original point of origin rather than make a “deadhead” return.
Backhauling helps reduce transportation costs in both directions.
                              - 11 -

Corridor, nor was any gravel being backhauled out of Prowers

County via rail in 2004 or 2009, when trial was held.7

      B.   District 3

      The U.S. Geological Survey keeps estimates of historical

Colorado aggregate production.   It classifies Prowers County,

along with 14 other counties, as District 3.    The following table

shows District 3’s sand and gravel production for 2000-2003:

           Year                    Tons of Aggregate
           2000                        1,499,143
           2001                        2,171,553
           2002                        1,884,952
           2003                        1,884,952

IV.   Donations of the Conservation Easements

      A.   Brian Wurst

      Brian Wurst, a certified public accountant (C.P.A.),

assisted petitioners in structuring the donations of the

conservation easements.   Mr. Wurst has a bachelor of science

degree in business administration from Kansas State University.

He is a member of Kennedy & Coe, C.P.A.s (Kennedy & Coe), has

worked as a C.P.A. in southeastern Colorado since 1984, and has




      7
      The Front Range Corridor lies along the eastern side of the
Rocky Mountains in Colorado and Wyoming and includes most of the
Colorado population and the cities of Cheyenne, Denver, Longmont,
Loveland, Broomfield, Thornton, Aurora, Lakewood, Golden,
Centennial, Fort Collins, Colorado Springs, Boulder, Pueblo,
Colorado City, and Trinidad.
                               - 12 -

assisted petitioners with their tax matters for approximately 25

years.

     Mr. Wurst first became familiar with conservation easements

in 2001 when the State of Colorado passed laws providing for

benefits to taxpayers who granted qualifying conservation

easements on their property.   Kennedy & Coe’s in-house tax

attorneys studied the Federal and State laws regarding

conservation easements and then used an outside law firm to

confirm their understanding on both the Federal and State levels.

     Mr. Wurst first discussed the donation of conservation

easements with petitioners in the fall of 2003.   He spent

approximately 8 months talking with petitioners about the

implications of granting conservation easements on their

properties and approximately 4 months putting the conservation

easements in place.   While Mr. Wurst advised petitioners that “in

our professional opinion, we could meet the requirements of the

Code sections and related regulations”, he did not advise that

they make charitable conservation easement contributions.     It was

petitioners who ultimately made the decision to enter into the

conservation easements.

     B.   Transfers of Property

     On December 2, 2004, approximately 163 acres of the eastern

portion of the Midwestern Farms property was transferred to

Esgar, the Holmeses, and the Tempels via a series of like-kind
                               - 13 -

exchanges and quitclaim deeds.8   Afterwards, Esgar and the

Tempels each owned 54.34 acres and 11-2/3 shares of BMIC, and the

Holmeses owned 54.35 acres and 11-2/3 shares of BMIC

(collectively, the subject properties).

     The subject properties were zoned irrigated, agricultural

and had historically been used as irrigated and nonirrigated

farmland.    There was physical access to all three properties, but

only the Holmes property had legal access.    The subject

properties were not permitted for any mining, but the parties

stipulated that absent the donations it was likely that the

necessary permits to mine could have been obtained.

     C.    Donations

     On December 17, 2004, Esgar, the Tempels, and the Holmeses

(or their revocable trusts) each donated a conservation easement

on the subject properties to the Greenlands Reserve (collectively

the conservation easements).

     The terms of the conservation easements grant and convey

easements in perpetuity to the Greenlands Reserve, providing it

with the    rights to preserve the natural and open space

conditions and protect the wildlife, ecological, and

environmental values and water quality characteristics of the




     8
      The stipulation of facts par. 14 indicates warranty deeds,
but the deeds themselves are quitclaim deeds without warranty.
                                - 14 -

property.    The conservation easements specifically prohibit the

mining or extraction of sand, gravel, rock, or any other mineral.

V.   Appraisals

     A.      Core Sampling and J.A. Cesare

     In September 2004, before the conservation easements were

granted, petitioners retained the geotechnical engineering firm

of J.A. Cesare and Associates, Inc. (Cesare), to perform core

sampling on the subject properties in order to determine the

potential sand and gravel resources beneath them.     Using Cesare’s

findings and reports, Dr. Charles E. Grey and his associate Brett

Schafer of the geological firm of Charles E. Grey and Associates

opined on the quantity and quality of gravel underneath the

subject properties.

     B.     William Victor (Bill) Milenski

     Petitioners engaged Bill Milenski Appraisal Service, Inc.

(Mr. Milenski), to perform an original appraisal of the

conservation easements to be used to substantiate the reported

charitable contributions on their tax returns.     Mr. Wurst

testified that he had performed due diligence before he hired Mr.

Milenski.     Mr. Wurst concluded Mr. Milenski had an extensive

history in performing appraisals and “a very credible and

conservative reputation” as an appraiser.

     Mr. Milenski determined that if the conservation easements

had not been granted, the best use of the land would have been
                               - 15 -

for gravel extraction.    On this basis he determined that the FMV

of the Holmes conservation easement was $867,500, the FMV of the

Esgar conservation easement was $570,500, and the FMV of the

Tempel conservation easement was $836,500.

      Petitioners and Mr. Wurst reviewed the appraisals Mr.

Milenski prepared.   Mr. Wurst was of the opinion that Mr.

Milenski “took a reasonable approach to determine the value.”

Respondent does not challenge whether Mr. Milenski was a

“qualified appraiser” at the time he prepared the appraisals or

whether the appraisals were “qualified appraisals” pursuant to

section 170(f)(11)(D).9

VI.   Tax Returns

      Esgar filed Forms 1120 for all years at issue.   The Holmeses

and the Tempels filed Forms 1040 for all years at issue.10    On

their respective 2004 tax returns, petitioners reported noncash

charitable contributions and claimed charitable contribution

deductions subject to the limitations of section 170(b)(1) and




      9
      Mr. Milenski’s license to practice real estate appraisal
was suspended by the State of Colorado on May 1, 2008, “FOR
OVERVALUING conservation easements”.
      10
      Pursuant to sec. 671, all of the income, deductions, and
credits against tax attributable to the Delmar L. Holmes Trust
and the Patricia A. Holmes Trust are reported on the Holmeses’
individual Federal income tax returns.
                              - 16 -

(2), carrying the remainder forward.    The following table shows

the charitable contributions reported and deductions claimed.11

              Reported
             Charitable        2004         2005        2006
            Contribution    Deduction    Deduction   Deduction
Esgar         $570,500       $25,663      $30,745     $28,097
Holmeses      867,500         88,835       92,105       86,006
Tempels       836,500        201,487       78,380        ---

     Respondent subsequently audited petitioners’ returns,

determining that the conservation easements were valueless and

that the charitable contribution deductions should be denied in

their entirety.   Respondent issued notices of deficiency, and

petitioners timely petitioned this Court in response.    Trial was

held November 4, 5, and 6, 2009, in Denver, Colorado.




     11
      Also on their 2004 tax returns, Esgar reported an $18,000
capital gain from the sale of its State tax credits; the Holmeses
reported $148,050 in ordinary income from the sale of their State
tax credits, and the Tempels reported a $77,603 short-term
capital gain from the sale of their State tax credits. The
Holmeses had received $164,625 in net proceeds but reduced this
amount by $16,575 for expenses incurred. The Tempels’ $77,603
gain was based on an amount realized of $82,500 less “basis” of
$4,897. The Tempels also claimed a $6,233 deduction on Schedule
A, Itemized Deductions, for costs related to the donation of the
Tempel conservation easement. The parties’ disagreements over
the characterization of the proceeds from the sales of the State
tax credits were resolved in our previous Opinion in Tempel v.
Commissioner, 136 T.C. 341 (2011), and are relevant here only
with regards to respondent’s allegation that the Holmeses and the
Tempels are liable for sec. 6662(a) accuracy-related penalties.
                                - 17 -

                                OPINION

I.   Burden of Proof

     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);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Sealy Power, Ltd.

v. Commissioner, 46 F.3d 382, 387 (5th Cir. 1995), affg. in part

and revg. in part T.C. Memo. 1992-168.

     However, pursuant to section 7491(a), the burden of proof on

factual issues that affect the taxpayer’s tax liability may shift

to the Commissioner where the taxpayer complies with all

requirements.    Petitioners argue section 7491(a) shifts the

burden of proof to respondent.    Respondent argues petitioners did

not meet the requirements for section 7491(a) to shift the burden

of proof.

     It is unnecessary for us to address the parties’

disagreement and determine whether the burden has shifted because

the parties have provided sufficient evidence for us to determine

the value of the conservation easements and that determination is

unaffected by section 7491(a).    See Estate of Bongard v.
                              - 18 -

Commissioner, 124 T.C. 95, 111 (2005); Trout Ranch, LLC v.

Commissioner, T.C. Memo. 2010-283.     This Court has held that

      “In a situation in which both parties have satisfied
      their burden of production by offering some evidence,
      then the party supported by the weight of the evidence
      will prevail regardless of which party bore the burden
      of persuasion, proof or preponderance. * * *
      Therefore, a shift in the burden of preponderance has
      real significance only in the rare event of an
      evidentiary tie. * * *”

Knudsen v. Commissioner, 131 T.C. 185, 188 (2008) (quoting

Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005),

affg. T.C. Memo. 2003-212); see also Martin Ice Cream Co. v.

Commissioner, 110 T.C. 189, 210 n.16 (1998) (holding that the

allocation of the burden of proof was immaterial because the

court’s conclusions were based on the preponderance of the

evidence).

II.   Applicable Law

      Section 170 allows a taxpayer a deduction for a qualified

conservation contribution made during the taxable year.    Sec.

170(a), (c), (f)(3)(B)(iii), (h).    Respondent does not challenge

whether the conservation easements are “qualified conservation

contributions”.   Rather, respondent disputes their value and

hence the amounts of the section 170 deduction petitioners are

allowed.

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

relevant part:
                            - 19 -

     The value of the contribution under section 170 in the
     case of a charitable contribution of a perpetual
     conservation restriction is the fair market value of
     the perpetual conservation restriction at the time of
     the contribution. See section 1.170A-7(c). If there
     is a substantial record of sales of easements
     comparable to the donated easement (such as purchases
     pursuant to a governmental program), the fair market
     value of the donated easement is based on the sales
     prices of such comparable easements. If no substantial
     record of market-place sales is available to use as a
     meaningful or valid comparison, as a general rule (but
     not necessarily in all cases) the fair market value of
     a perpetual conservation restriction is equal to the
     difference between the fair market value of the
     property it encumbers before the granting of the
     restriction and the fair market value of the encumbered
     property after the granting of the restriction. * * *

     The parties agree that there are no sales of comparable

easements and that the before and after method is the appropriate

method to use in valuing the conservation easements.   This method

requires us to calculate “the difference, if any, in the value of

the [properties] with and without the easement”.   Hilborn v.

Commissioner, 85 T.C. 677, 688 (1985).

     The parties agree the FMV of the Subject Properties after

the conservation easements were granted (after value) was $24,000

for the Esgar and Tempel Properties and $27,000 for the Holmes

property.   Their disagreement is the FMV of the Subject

Properties before the conservation easements were granted (before

value).

     FMV is defined as the “price at which the property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having
                                - 20 -

reasonable knowledge of any relevant facts.”   Sec. 1.170A-

1(c)(2), 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.”   Kiva Dunes Conservation, LLC v. Commissioner, T.C.

Memo. 2009-145.

     The FMV of property must be evaluated considering the

property’s 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.    While highest and best use can be any

realistic, objective potential use of the property, it is

presumed to be the use to which the land is currently being put

absent proof to the contrary.    United States v. L.E. Cooke Co.,

Inc., 991 F.2d 336, 341 (6th Cir. 1993); Symington v.

Commissioner, 87 T.C. 892, 896 (1986).    At the center of the

parties’ disagreement over the before value is their disagreement

over the highest and best use of the Subject Properties before

the easements were donated.   Petitioners argue that it was gravel

mining, whereas respondent argues that it was agriculture.

     Where, as here, an asserted highest and best use differs

from current use, the use must be reasonably probable and have

real market value.   United States v. 69.1 Acres of Land, 942 F.2d

290, 292 (4th Cir. 1991); see also Stanley Works v. Commissioner,

supra; United States v. Consol. Mayflower Mines, Inc., 60 F.3d
                               - 21 -

1470, 1476-1477 (10th Cir. 1995).    “Any suggested use higher than

current use requires both ‘closeness in time’ and ‘reasonable

probability’”.    Hilborn v. Commissioner, supra at 689.   Any

proposed uses that “depend upon events or combinations of

occurrences which, while within the realm of possibility, are not

fairly shown to be reasonably probable” are to be excluded from

consideration.    Olson v. United States, 292 U.S. 246, 257 (1934).

     Where the asserted highest and best use of property is the

extraction of minerals, the presence of the mineral in a

commercially exploitable amount and the existence of a market

“that would justify its extraction in the reasonably foreseeable

future” must be shown.    United States v. 69.1 Acres of Land,

supra at 292.    “There must be some objective support for the

future demand, including volume and duration.   Mere physical

adaptability to a use does not establish a market.”    United

States v. Whitehurst, 337 F.2d 765, 771-772 (4th Cir. 1964); see

also United States v. 494.10 Acres of Land, 592 F.2d 1130, 1132

(10th Cir. 1979) (stating that “if the ‘future’ is beyond or very

much beyond the ‘near future,’ the use becomes speculative”).12




     12
      We acknowledge that we are citing cases where the issue
was just compensation in an eminent domain or condemnation
setting. Fair market value “does not vary according to whether
the taxpayer is seeking a charitable deduction for property
contributed or an adequate and just compensation for property
condemned.” Klopp v. Commissioner, T.C. Memo. 1960-185.
                              - 22 -

III. Expert Opinions

     Both parties have offered reports and testimony of expert

witnesses to establish the before value and the highest and best

use of the Subject Properties.

     We evaluate expert opinions in light of each 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 determine 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 an expert’s
     opinions and may accept or reject an expert opinion in full
     or in part in the exercise of sound judgment. See Helvering
     v. Natl. Grocery Co., 304 U.S. 282, 295 (1938); Parker v.
     Commissioner, supra at 561-562. We may also reach a
     determination of value 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.

Evans v. Commissioner, T.C. Memo. 2010-207.

     There are three widely accepted methods of estimating the

FMV for any property:   Comparable sales, income capitalization

(or discounted cashflow), and replacement cost.   The parties

disagree as to which method is appropriate in this case.

Respondent’s expert used the comparable sales method, which

calculates FMV by looking for sales of property in the same

market with similar characteristics that were made at arm’s

length.   Petitioners’ experts used the discounted cashflow (DCF)

method, which calculates FMV by preparing a reasonable estimate

of future income over time and discounting it to present value.

We briefly summarize each expert’s opinion.
                                - 23 -

     A.   Petitioners’ Expert--Gene Cruikshank

     Mr. Cruikshank received a degree in agriculture from

Colorado State University.   He has been a real estate broker

since 1980, specializes in farm and ranch sales, and is licensed

in Kansas, Oklahoma, Colorado, and New Mexico.   Mr. Cruikshank

belongs to the Realtors Land Institute, a branch of the National

Association of Realtors, and is an accredited land consultant.

He has been an expert witness approximately seven or eight times

before in both Federal and State court.

     Petitioners rely on Mr. Cruikshank’s opinion to argue no

comparable sales existed.    Mr. Cruikshank analyzed small parcel

sales in the Lower Arkansas Valley to determine whether any were

bought for gravel production.13   He determined none were, stating

he could not find “any small parcel (40-60 acres) sales that were

sold either specifically for gravel or with the intent of future

gravel development”.   He stated “buyers * * * [were] more

interested in crop production, water, soils, and location rather

than gravel.”   Mr. Cruikshank prepared a rebuttal report in which

he stated he could not find any gravel-motivated sales for

parcels of 160 acres or less.




     13
      The area in which the Subject Properties are located is
generally known as the Lower Arkansas Valley.
                              - 24 -

     B.   Petitioners’ Expert--Robert B. Frahme

     Mr. Frahme’s professional life has spanned 42 years and

includes geological and appraisal work.    He is a certified

general appraiser in Colorado, a certified professional geologist

according to the American Institute of Professional Geologists,

and a certified mineral appraiser according to the American

Institute of Mineral Appraisers.   He is a member of the Appraisal

Institute with MAI designation and is a member of the Society for

Mining, Metallurgy, and Exploration.14    Mr. Frahme has been an

expert witness before in both Federal and State courts.

     Mr. Frahme opined that “The ultimate highest and best use”

of the Subject Properties was gravel mining but did not reach

“any conclusion of value”.   Mr. Frahme’s conclusion was

conditioned on (1) the three properties’ being assembled and (2)

deferral of gravel mining to allow time for gravel markets to

mature.   Assemblage was necessary because otherwise it would be

difficult to mine the Esgar and Holmes Properties and “nearly

impossible” to mine the Tempel property.    An adequate deferral

period was necessary “because gravel markets are generally in

equilibrium”.   According to Mr. Frahme, demand in Prowers County




     14
      The MAI designation is held by appraisers who are
experienced in the valuation and evaluation of commercial,
industrial, residential, and other types of properties and who
advise clients on real estate investment decisions.
                                - 25 -

would increase when demand in the Front Range Corridor increased

“given the available rail transport”.

     Mr. Frahme’s theory was that gravel could be backhauled to

the Front Range on trains bringing coal to a coal-fired power

generation plant being built in the vicinity of the Subject

Properties.15   Mr. Frahme determined rail transport to the Front

Range was possible “By looking at a railroad map”; however, he

did not consult or talk with any railroad employees.    He also did

not consult coal companies to see whether they would consider

backhauling gravel on coal trains.

     Mr. Frahme failed to analyze supply.   He never considered

gravel mines closer to the Front Range than Prowers County or

whether the existing Prowers County mines could handle any

potential increase in demand.    Mr. Frahme also never opined as to

when demand would mature, despite his conclusion’s resting on an

adequate deferral period to allow for this to happen.   He simply

concluded that “In a pessimistic case” (use of a higher discount

rate), the highest and best use ceases to be mining after 14 to

15 years and in an “optimistic case” (use of a lower discount



     15
      Mr. Frahme’s report included a list of highway projects,
including the “Ports to Plains Corridor”, a proposed highway
route to run from the Texas/Mexico border to Denver, and
potential wind power and gas developments projects. The report
seemingly indicated that he thought these projects might also
cause an increased demand for aggregate in Prowers County
although there is no indication as to when demand would increase
and by how much.
                              - 26 -

rate), the highest and best use ceases to be mining after 23 to

25 years.

     C.   Petitioners’ Expert--Gerald K. Ebanks

     Mr. Ebanks has been a geologist since 1985.   He is a

Certified Petroleum Geologist and a member of the American

Association of Petroleum Geologists.   He has previously testified

as an expert in both this Court and U.S. District Courts.    He was

hired to give an opinion on the FMV of the Subject Properties.

     According to Mr. Ebanks, gravel resources have intrinsic

value and one need only multiply the quantity by the current

market price to determine FMV.   Mr. Ebanks was unaware that the

before highest and best use of the Subject Properties was even at

issue.

     Using DCF analysis, Mr. Ebanks calculated the before value

of the Subject Properties as gravel-producing properties in two

scenarios:   (1) As three individual gravel-producing properties

and (2) as an assembled gravel-producing property.   He concluded

the following tons of aggregate were minable from each of the

Subject Properties:16

     16
      The amount of gravel that can be mined from a property
depends in part on setbacks and pit walls. Setbacks are strips
of unmined land between pit walls and property lines, and they
can vary in size. Mr. Ebanks determined the setback and pit wall
steepness on the basis of conversations with Prowers County
gravel operators and by observing Prowers County mining methods,
concluding a 50-foot setback and 70-degree pit wall were
appropriate. In a reduced setback scenario, i.e., the Subject

                                                     (continued...)
                              - 27 -

          Property     Individual Operation   Assembled Operation
           Esgar             1,718,235             1,845,537
           Holmes            2,490,324             2,797,195
           Tempel            2,358,425             2,968,388
             Total           6,566,984             7,611,120

     According to Mr. Ebanks, production would begin on May 1,

2005, with the mines operating at full production by June.     Mr.

Ebanks concluded that approximately 10,000 tons of aggregate per

month could be extracted from each property during the startup

phase and 41,000 tons of aggregate per month from each property

in full production.   Mr. Ebanks used an effective combined,

blended royalty rate of 43.58 cents per ton on the basis of the

figures in the E. Colorado Aggregates lease and a discount rate

of 9.10 percent.17

     On the basis of the analysis described above, Mr. Ebanks

determined the before value of the Subject Properties by

discounting the anticipated royalty cashflow stream that could be

realized from the operation of a gravel mining operation(s).    His

conclusions were:


     16
      (...continued)
Properties were assembled, no setback would be necessary on one
side of the Esgar and Holmes Properties and on two sides of the
Tempel property.
     17
      Mr. Ebanks combined the royalty rates in the E. Colorado
Aggregates lease of 45 cents per ton of rock anticipated to be
sold and 22.5 cents per ton of sand anticipated to be sold to get
a effective, combined, blended royalty rate of 43.58 cents per
ton.
                                  - 28 -

          Property            50-Foot Setback    Reduced Setback
           Esgar                 $625,013            $657,711
           Holmes                 848,321             930,250
           Tempel                 812,718             972,606

     Mr. Ebanks did not consider potential problems such as

finding an operator for the gravel pit(s) and admitted he did not

“know who might potentially quarry these pits”.     He did not

perform a supply and demand analysis, nor did he know whether

pit(s) on the Subject Properties could start up and compete

effectively given the existence of other pits in the area.

     D.    Petitioners’ Expert--John R. Emmerling

     At trial petitioners’ expert Mr. Emmerling was admitted as

an expert, but respondent objected to the admissibility of his

report.    We allowed the report into evidence, subject to

respondent’s objection, reserving ruling on the objection.       Mr.

Emmerling graduated from the University of Colorado Boulder with

a dual degree in real estate and marketing.     He has worked in

real estate for 37 years, including being involved in over 7,500

appraisals, 10 or 12 of which involved sand and gravel property.

He is a Colorado Certified General Appraiser and is a member of

the Appraisal Institute with MAI designation.

            1.     Mr. Emmerling’s Report

     Mr. Emmerling’s report summarized, and in certain situations

corrected, the conclusions of petitioners’ other experts.       In
                              - 29 -
addition to reviewing the other experts’ reports, Mr. Emmerling

reviewed the historic production records of gravel in Prowers

County between 2000 and 2008 and the historic production records

of gravel on the Midwestern Farms Gravel Pit.

     Mr. Emmerling concluded gravel mining was the highest and

best use of the Subject Properties.    Like Mr. Frahme, his

conclusion was contingent on the Subject Properties’ being

assembled and allowing for an adequate deferral period in order

for demand in Prowers County to mature.

     Mr. Emmerling agreed with Mr. Ebanks that approximately 7.6

million tons would be extracted from the Subject Properties as

assembled.   However, while Mr. Ebanks concluded each of the

Subject Properties would produce 492,000 tons per year, Mr.

Emmerling concluded all three Properties together would produce a

total of 492,000 tons per year.

     Like Mr. Ebanks, Mr. Emmerling used a discount rate of 9.10

percent and an effective royalty rate of 43.58 cents per ton.    He

performed a DCF analysis assuming a deferral of 4, 6, or 10

years.   His DCF analysis was based on

     simply a what-if, that on delayed production I disagreed
     with Mr. Ebanks from the standpoint of from my interviews
     and other reports that I read, that they were not going to
     open this pit and start selling gravel in 2005, that it
     would be delayed. You know, I reported information on, you
     know, two, six, and ten years. There was no specific reason
     for that, and I could have done 15 and 25 years and just
     from my understanding of the discounted cash flow, that the
     value would have still exceeded the value that was placed on
                                       - 30 -
property as far as the conservation easement as I understand it
today.

         Mr. Emmerling concluded the following values in his “what-

if” scenarios:

                           2008 (5-                2010 (2.5-
                            percent                  percent
                            growth                   growth
 Property         2008       rate)       2010         rate)      2014
Esgar         $535,806     $547,600     $456,134    $481,393    $332,962
Holmes        747,771       772,694      633,165     674,184    458,656
Tempel        783,071       806,646      663,870     707,144    479,435
Assembled    1,427,909     1,554,540   1,217,589   1,367,641    892,441

     Mr. Emmerling did not analyze supply or opine as to when

demand would mature although he did state realization of income

from sand and gravel production as a revenue source “will not be

experienced in the near-term”.

             2.    Evidentiary Objection

     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; ASAT, Inc. v. Commissioner, 108 T.C.

147, 168 (1997).         Whether Mr. Emmerling’s report and testimony

will be received in evidence and considered in determining the

FMV of the easements depends on the application of principles

expressed in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579,

591 (1993), as related to rules 702 and 703 of the Federal Rules

of Evidence.
                                - 31 -
       Rule 702 of the Federal Rules of Evidence provides that a

qualified expert may testify:

       If scientific, technical, or other specialized knowledge
       will assist the trier of fact to understand the evidence or
       to determine a fact in issue, a witness qualified as an
       expert by knowledge, skill, experience, training, or
       education, may testify thereto in the form of an opinion or
       otherwise, if (1) the testimony is based upon sufficient
       facts or data, (2) the testimony is the product of reliable
       principles and methods, and (3) the witness has applied the
       principles and methods reliably to the facts of the case.

       In Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148 (1999),

the Supreme Court applied the same standard to expert testimony

that was not “scientific”.    The Supreme Court has stressed the

trial court’s “gatekeeper” function in excluding evidence that is

not reliable.    Daubert v. Merrell Dow Pharms., Inc., supra at

597.    “The trial court retains broad discretion in assessing an

expert’s reliability and making its ultimate determination of

reliability.”    Attorney Gen. of Okla. v. Tyson Foods, Inc., 565

F.3d 769, 779 (10th Cir. 2009).

       Although special considerations apply to jury trials, the

Daubert analysis is not limited to jury trials.    See id. (“while

Daubert’s standards must still be met, the usual concerns

regarding unreliable expert testimony reaching a jury obviously

do not arise when a * * * court is conducting a bench trial); see

also Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1302

(Fed. Cir. 2002).
                               - 32 -
     Respondent argues that Mr. Emmerling’s report was

“Essentially * * * based on the opinions and analysis of

Cruikshank, Frahme, and Ebanks, not on independent data and

information”.   Respondent asserts Mr. Emmerling “performed no

independent analysis” and that his “reports are not based on a

reliable foundation.”

     Petitioners argue that “Mr. Emmerling used a generally

accepted methodology, and applied it in a very straightforward

manner.   His testimony and report will assist the Court in

determining the value of the Petitioners’ charitable contribution

deduction.”   We agree with petitioners and will admit Mr.

Emmerling’s report.   See Kumho Tire Co. v. Carmichael, supra at

152 (a “trial judge must have considerable leeway in deciding in

a particular case how to go about determining whether particular

expert testimony is reliable”).   We will accord it, however, only

as much credence, if any, as we conclude it deserves after our

analysis of the entire case record.

     E.   Respondent’s Expert--Kevin McCarty

     Mr. McCarty is a real estate appraiser who has appraised

approximately 50 gravel properties and 150 conservation

easements.    He is designated a Certified General Appraiser in

Colorado and in Wyoming.

     Mr. McCarty determined that the before highest and best use

of the Subject Properties was agriculture.     He determined mining
                               - 33 -
was not the most productive use because there was an adequate

supply of and no additional demand for gravel in Prowers County

in the foreseeable future.    He concluded:   “The dominance by the

two major gravel operators leaves little room available either

for expansion by these operators or the entrance of a new

operator”.   He estimated that the Midwestern Farms Pit itself had

35 years worth of gravel remaining and the other three large pits

had between 25 and 75 years worth of gravel remaining.

     Mr. McCarty relied on a sales comparison analysis to

determine the before value of the Subject Properties.18    Mr.

McCarty analyzed 22 sales, all within the Arkansas River

bottomland, with sale prices for the land itself (excluding

improvements and water rights) ranging between $155 and $1,813

per acre.    He adjusted the price of each sale to account for

differences in location, size, access, quality of underlying

gravel resources, and timing, and then classified each sale as a

good, fair, poor, or weak comparison to the Subject Properties.



     18
      Mr. McCarty analyzed the Holmes property differently from
the Esgar and Tempel Properties. He calculated the value of the
Holmes property using the contiguous parcel rule because the
Holmes property was adjacent to the Midwestern Farms property and
in the mineral rights in the Jensen property. See sec. 1.170A-
14(h)(3)(i), Income Tax Regs. However, he found that the value
of the Holmeses’ interest in the Midwestern Farms property and in
the mineral rights in the Jensen property did not change as a
result of the donation of the Holmes conservation easement and
therefore this had no effect on value. Mr. McCarty also
differentiated the Holmes property from the Esgar and Tempel
Properties on the grounds that it had legal access and was next
to an operating gravel pit, the Midwestern Farms Gravel Pit.
                              - 34 -
     Mr. McCarty determined 3 of the 22 sales--sales 4, 11, and

17--offered “Good” comparisons to the Holmes property.19   Using

these comparisons, Mr. McCarty determined that a reasonable land

value was $400 per acre (54.35 x 400 = $21,740, which Mr. McCarty

rounded up to $22,000 total).20   He then determined the BMIC water

shares were worth $1,200 per share (11.66 x $1,200 = $13,992,

which Mr. McCarty rounded up to $14,000 total).   In total, Mr.

McCarty determined the before value of the Holmes property was

$36,000.

     Mr. McCarty determined 8 of the 22 sales--sales 3, 5, 6, 7,

8, 11, 13, and 16--offered a “Fair” comparison to the Esgar and

Tempel Properties.   These eight sales were of properties adjacent

to the Arkansas River that were close to the Esgar and Tempel

Properties; six occurred within 2 years of the valuation date,

and many had mineral reserves underlying the properties.   After

adjusting for water rights, the sale prices of the underlying

land of the eight properties ranged from $160 per acre to $473

per acre.   Using these comparisons, Mr. McCarty determined that a

reasonable land value was $350 per acre (54.34 x 350 = $19,019,

which Mr. McCarty rounded down to $19,000 total).   As with the



     19
      Sale 4--2,692 acres were sold for $430,700 or $160 per
acre. No water rights or improvements were involved. See infra
pt. V.C.1. for a description of sales 11 and 17.
     20
      We note that on page 117 of Mr. McCarty’s report for the
Holmes property he mistakenly states a value of $350 per acre for
the Holmes property.
                               - 35 -
Holmes property before value, he determined that the BMIC water

shares were worth $14,000.   In total, Mr. McCarty determined the

before value of the Esgar and Tempel Properties was $33,000.

IV.   Subsidiary Issues

      Before addressing the parties’ arguments as to the before

highest and best use and FMV of the Subject Properties, we shall

address three subsidiary issues.

      A.   Contiguous Parcel Rule

      Respondent used the contiguous parcel rule of section

1.170A-14(h)(3)(i), Income Tax Regs., to value the Holmes

conservation easement.    See supra note 18.   Respondent urges that

use of the contiguous parcel rule was appropriate; petitioners

assert it was not.   Section 1.170A-14(h)(3)(i), Income Tax Regs.,

provides in part:

      The amount of the deduction in the case of a charitable
      contribution of a perpetual conservation restriction
      covering a portion of the contiguous property owned by a
      donor and the donor’s family as defined in section 267(c)(4)
      is the difference between the fair market value of the
      entire contiguous parcel of property before and after the
      granting of the restriction. If the granting of a perpetual
      conservation restriction after January 14, 1986, has the
      effect of increasing the value of any other property owned
      by the donor or a related person, the amount of the
      deduction for the conservation contribution shall be reduced
      by the amount of the increase in the value of the other
      property, whether or not such property is contiguous. * * *
      For purposes of this paragraph (h)(3)(i), related person
      shall have the same meaning as in either section 267(b) or
      section 707(b). * * *

      Respondent views the Holmeses’ interest in the Midwestern

Farms property and in the mineral rights of the Jensen property
                               - 36 -
as being contiguous to the Holmes property, which is across a

county road.   Petitioners contend (1) the county road breaks the

continuity; (2) because the Holmeses owned only a 25-percent

interest in the Midwestern Farms property and in the mineral

rights of the Jensen property, there was no familial cross-

ownership; and (3) the contiguous parcel regulation is invalid.

     We do not decide whether respondent’s use of the contiguous

parcel rule was appropriate or whether the regulation proffering

the rule is invalid because we agree with respondent that the

issue is moot.21   Mr. McCarty determined that the Holmeses’

interest in the Midwestern Farms property and in the mineral

rights of the Jensen property did not change because of the

donation of the Holmes conservation easement.   Therefore, use of

the contiguous parcel rule did not affect respondent’s value of

the Holmeses’ charitable contribution deduction in any way.




     21
      In his report, Mr. McCarty, using the contiguous parcel
rule, concluded the before value of the 1,281 acres he treated
for this purpose as the Holmes property was $460,000 and the
after value of the same property, which included the 54.35 acres
subject to the conservation easement, was $451,000. Respondent
has since conceded the after value of the Holmes property was
$27,000. We note respondent’s concession to a $27,000 after
value and his argument that the use of the contiguous parcel was
correct are seemingly in conflict with each other. We also note
that since the trial and filing of the briefs in this case, Natl.
Muffler Dealers Association, Inc. v. United States, 440 U.S. 472
(1979), on which petitioners in part rely, has been supplanted by
Mayo Found. for Med. Educ. & Research v. United States, 562 U.S.
__, 138 S. Ct. 704 (2011), which grants substantial deference to
the regulation in this context.
                                - 37 -
     B.    Access Easement

     The Federal Land Bank of Wichita (FLBW) obtained a Deed of

Trust on the Subject Properties from the prior owners, Gene and

Darla Hammit (the Hammits) on December 4, 1978.       The Hammits

granted an access easement over the Subject Properties to Holly

Flood Control, Drainage and Sanitation District on November 30,

1979.     The Hammits’ Deed of Trust was foreclosed by FLBW, which

obtained title via a Public Trustee’s Deed on June 14, 1985.

FLBW sold the property to petitioners on February 20, 1987.

     According to petitioners, Mr. McCarty placed “great weight

(and assigned significant negative value)” to the potential

access easement.     They assert that under Colorado law, the access

easement was voided as a junior lien in the foreclosure and that

Mr. McCarty “blindly and unprofessionally based his conclusion of

value on an incorrect assumption”.       Respondent counters that

while Mr. McCarty considered the access easement as a potential

limit on the use of the properties for gravel mining, he “did not

determine * * * [the issue alone] was sufficient to preclude or

establish that the highest and best use * * * was gravel mining”.

     Colorado law provides that

     a purchaser of property at a foreclosure sale obtains a deed
     to the property after the redemption period expires and that
     “upon the issuance and delivery of such deed . . . title
     shall vest in the grantee and such title shall be free and
     clear of all liens and encumbrances recorded or filed
     subsequent to the recording or filing of the lien on which
     the sale * * * was based.”
                              - 38 -
First Interstate Bank v. Tanktech, Inc., 864 P.2d 116, 119 (Colo.

1993) (quoting Colo. Rev. Stat. sec. 38-39-110 (1982)); see also

Colo. Rev. Stat. sec. 38-38-501 (2010).   On the basis of this

case and the statute, we agree with petitioners that the

foreclosure sale extinguished the access easement.

     We recognize that there is always a potential for litigation

to clear title.   However, we do not think that a potential buyer

of the Subject Properties would have placed emphasis on this

possibility.   There is no evidence that the Holly Flood Control,

Drainage and Sanitation District ever argued that the easement

survived the 1985 foreclosure.   As of 2004 it had been

approximately 19 years since the foreclosure sale extinguished

the access easement.   The easement was extinguished by a statute

whose “plain intent * * * is to extinguish all subordinate liens

upon foreclosure” and has a purpose which “is to allow a

transferee to rely on the state of record title.”     First

Interstate Bank v. Tanktech, Inc., supra at 119.     Therefore, we

conclude that the access easement had no effect on the before

value of the Subject Properties.

     C.   Mineral Rights Reservation

     The Corporation Special Warranty Deeds issued to petitioners

by FLBW on February 20, 1987, when petitioners purchased the

Subject Properties, reserved to the seller “all of the minerals

and mineral rights it owned prior to January 23, 1982”.       On April
                              - 39 -
14, 1989, the District Court of Prowers County, Colorado, in an

amended order granting partial summary judgment in an action to

quiet title, held that upon FLBW’s foreclosure of the Hammits’

deed of trust, any mineral rights held by the Hammits were

extinguished.

      Petitioners argue that the action to quiet title disposed of

any rights the Hammits might have had to sand and gravel on the

Subject Properties.   They argue that as for FLBW’s potential

interest, Colorado law states that “gravel and sand are not

normally treated as minerals within the meaning of a general

reservation of minerals clause.”   Kinney v. Keith, 128 P.3d 297,

306 (Colo. App. 2005).   Respondent, as he did with the access

easement, argues that while he considered the potential mineral

rights reservation, he did not think it was “sufficient to

preclude or establish that the highest and best use” was gravel

mining.

      We agree with petitioners that the 1989 order issued by the

District Court of Prowers County foreclosed any rights the

Hammits’ might have retained in minerals on the Subject

Properties.   As for FLBW, the Corporation Special Warranty Deeds

were issued to petitioners in 1987, and FLBW has never asserted

any rights in minerals on the Subject Properties.   We also agree

that “sand and gravel” are not normally considered minerals.     See

id.   As with the access easement, we recognize there is always a
                              - 40 -
potential for litigation.   And while there is no evidence of any

minerals beneath the Subject Properties, a buyer would prefer

property without any reservations.     But taking all of this into

consideration, we still conclude that the mineral rights

reservation had no or only an irrelevant, infinitely small effect

on the before value of the Subject Properties.

V.   Analysis

     Petitioners argue the before highest and best use of the

Subject Properties was gravel mining.     They urge this Court to

sustain the charitable contributions reported on their respective

2004 tax returns and if we do not sustain those claims, to accept

Mr. Emmerling’s 4-year deferral scenario values of $511,806,

$720,711, and $759,071 for the Esgar property, the Holmes

property, and the Tempel property respectively.22    Respondent

argues the before highest and best use of the Subject Properties

was agriculture and that, after subtracting the stipulated after

values, all three conservation easements are worth $9,000.

     We agree with respondent that the before highest and best

use was agricultural.   We agree with respondent that the water

rights were worth $1,200 per share or $14,000 total for each




     22
      Petitioners urge this Court to accept Mr. Emmerling’s
values without addressing the fact that Mr. Emmerling
specifically stated he did not make any conclusions as to value.
     These values take into account the stipulated after values
of $24,000 for the Esgar and Tempel properties and $27,000 for
the Holmes property.
                                - 41 -
property before the conservation easements were granted.23      We

find the Esgar and Tempel Properties were worth $1,100 per acre

(or $59,774) and the Holmes property was worth $1,150 per acre

(or $62,502.50) before the conservation easements were granted.

In total, the before value of the Tempel and Esgar properties was

$73,774 and the before value of the Holmes property was

$76,502.50.     After subtracting the stipulated after FMVs, the

Tempel and Esgar conservation easements were worth $49,774 and

the Holmes conservation easement was worth $49,502.50.

       A.   Gravel Mining Was Not the Before Highest and Best Use

       In deciding whether gravel mining was the before highest and

best use, the main question we are faced with is whether it was

reasonable to conclude that a hypothetical willing buyer in 2004

would have considered the Subject Properties as the site for

construction of a gravel mine.     The evidence shows they would

not.    See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 339

(2011) (finding taxpayer’s asserted highest and best use was

“certainly inconsistent with the * * * evidence in this case”).

Petitioners’ argument that gravel mining was the before highest

and best use is, inter alia, conditioned on (1) assemblage of the

three Subject Properties and (2) deferral in production.     We

address each separately.



       23
      Petitioners provided and we are aware of no reason to
question Mr. McCarty’s valuation of the water rights at $1,200
per share.
                               - 42 -
           1.   Assemblage

     Petitioners argue they

     have been in business together for decades * * * [and] have
     long owned land together and were the first operators of the
     Midwestern Farms Gravel Pit * * *. Respondent failed to
     acknowledge the ease with which the Petitioners could
     assemble their three parcels and begin gravel mining, had
     they chosen to do so.

     Respondent argues no evidence was presented showing

assemblage was “reasonably practicable in the foreseeable

future”.   He further argues the evidence presented contradicts

assemblage’s being a reasonable possibility.

     We agree with petitioners although we question whether a

willing buyer would have thought assemblage to be that “easy”,

considering the three Subject Properties had once been jointly

owned and were partitioned before the conservation easements were

donated.   While we expect the separation of the properties was

for purposes of claiming Federal charitable contribution

deductions and/or State tax credits, petitioners, who knew

exactly why the properties were separated, never explained to the

Court their reasons.   Regardless, we do not decide whether

assemblage was reasonable because petitioners’ argument fails as

to their second required condition, deferral in production.

           2.   Deferral in Production

     Petitioners and their experts Mr. Frahme and Mr. Emmerling

acknowledge gravel could not have feasibly been extracted from

the Subject Properties in 2004.    Mr. Frahme stated:   “Because
                              - 43 -
gravel markets are generally in equilibrium, not demanding

additional material, as of * * * [December 2004], considerable

time may be required for the ultimate highest and best use of

mining to be effective.”   But how long is a “considerable time”?

While petitioners did “not have to show an imminent demand for

the [aggregate] from [their] property”, they did have “to show

that * * * [it would] be needed and wanted at a near enough point

in the future to affect the current value of the property.”

United States v. 69.1 Acres of Land, 942 F.2d at 294.   In the

absence of a market’s being established, any projection of income

becomes little more than speculation and conjecture.    Cloverport

Sand & Gravel Co., Inc. v. United States, 6 Cl. Ct. 178, 198-199

(1984) (concluding that the existence of a market that would

justify extraction in the reasonably foreseeable future must be

shown).   Petitioners assert that “it was reasonable to conclude

that as of 2004, the market for aggregate in Prowers County was

poised to explode”.

     According to Mr. Frahme and Mr. Emmerling, demand will

increase and mining will begin when (1) demand in the Front Range

increases and (2) gravel can be backhauled from Prowers County to
                                   - 44 -
the Front Range.24       The evidence does not establish that this was

a possibility in the reasonably foreseeable future.

                    a.    Increased Demand in the Front Range

     There is sufficient evidence that as of 2004, demand in the

Front Range was increasing because of the difficulty in

permitting there.    Yet there is a difference in an increased

demand in the Front Range and an increased demand for aggregate

from Prowers County in the Front Range.       Petitioners never

address this.   Rather, they assume all that must be shown is a

way for gravel to be transported from Prowers County to the Front

Range.    They do not consider gravel mines closer to the Front




     24
      Even though petitioners appear to abandon Mr. Ebanks’
opinion, we briefly address it. Mr. Ebanks fails to recognize
that the establishment of a market is necessary, stating that
gravel resources have intrinsic value and one need only multiply
the quantity by the current market price to determine FMV. Mr.
Ebanks was wrong. “[L]and having a sand or gravel content may
not be valued on the basis of conjectural future demand for it.
There must be some objective support for the future demand,
including volume and duration.” United States v. Whitehurst, 337
F.2d 765, 771-772 (4th Cir. 1964); see also United States v. 69.1
Acres of Land, 942 F.2d 290, 294 (4th Cir. 1991) (stating that
the taxpayer “has to show that there is a reasonable probability
that the sand will be needed and wanted at a near enough point in
the future to affect the current value of property”).
     Mr. Ebanks assumed production could start immediately after
a 5-month permitting process and that each of the Subject
Properties would produce 10,000 tons per month during a 2-month
startup phase and 41,000 tons per month (or 492,000 tons per
year) once full production was reached in June 2005. Not only
did Mr. Ebanks never address a market; he never explained how the
Subject Properties could produce and sell 1,011,000 tons of
gravel in 2005 and 1,476,000 tons of gravel in 2006 when all
Prowers County gravel pits together produced only 1,450,000 tons
of gravel in 2005.
                              - 45 -
Range or contradict the statement of respondent’s rebuttal

expert, Paul T. Banks, Jr.:

     even if such rail haul is viable at some point in the
     future there are several large, permitted sand and
     gravel mines, with very high volumes of remaining
     reserves, located adjacent to [the same rail line going
     through Prowers County], in Pueblo County, perhaps 70
     or 80 miles closer to the Front Range. If rail haul to
     the Front Range becomes viable, there are large
     permitted sites in Cheyenne, Wyoming and near Canon
     City, Colorado that have existing rail infrastructure
     to transport sand and gravel products.

     In his report, Mr. Frahme acknowledged that the closer to

the Front Range, the better the quality of aggregate reserves.

His argument for an increased demand in Prowers County relied on

the difficulty in permitting in the Front Range and the fact that

Prowers County reserves were better than those even further away.

While we do not necessarily disagree with Mr. Frahme’s

statements, we question why he did not address reserves adjacent

to the BNSF rail line closer to the Front Range than Prowers

County.   In conclusion, the record contains no evidence that

mines closer to the Front Range than those in Prowers County were

not satisfying and could not continue to satisfy the increasing

Front Range demand.

     A related problem with an increased demand for Prowers

County aggregate in the Front Range is that even if demand in

Prowers County did increase, there is no evidence that the

existing Prowers County mines could not handle the increased

demand.   Mr. McCarty estimated that 39,060,000 tons of aggregate
                               - 46 -
remained in the four pits, with 23,660,000 tons in the Midwestern

Farms Pit itself.25   Petitioners disagree with Mr. McCarty,

stating respondent speculates “as to the amount of gravel

existing in Prowers County.   Respondent’s data does not address

the market”.

     Neither petitioners nor their experts provided us with an

estimate of remaining aggregate.   Petitioners own the land on

which the Midwestern Farms Pit is situated and chose not to

provide information on the amount of aggregate remaining.      Their

failure to introduce evidence “which, if true, would be favorable

to * * * [them], gives rise to the presumption that if produced

it would be unfavorable.”   See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).

     Additionally, petitioners’ experts Mr. Ebanks (and Mr.

Emmerling) calculated that there was approximately 7.6 million



     25
      The Midwestern Farms Gravel Pit had average production
from 2001-04 of 676,000 tons per year. Mr. McCarty estimated
that on the basis of this production, the Midwestern Farms Gravel
Pit had a life of 35 years; 676,000 x 35 = 23,660,000. The S-C
Pit produced on average 203,000 tons per year from 2001-04; and
on the basis of this, Mr. McCarty estimated it had a life of 50
years (for an estimated total production of 10,150,000 tons).
The J-S Farms Pit produced on average 63,000 tons per year from
2001-04; and on the basis of this, Mr. McCarty estimated it had a
life of 25 years (for an estimated total production of 1,575,000
tons). The Hardscrabble Pit produced on average 49,000 tons per
year from 2001-04; and on the basis of this, Mr. McCarty
estimated it had a life of 75 years (for an estimated total
production of 3,675,000 tons); 23,660,000 + 10,150,000 +
1,575,000 + 3,675,000 = 39,060,000.
                                - 47 -
tons of mineable aggregate on the Subject Properties, a number

which is not in dispute.26   If there was over 7 million tons of

estimated aggregate beneath approximately 160 acres, we find it

incredible that petitioners are disputing the statement that over

24 million tons lie beneath more than 1,400 acres.   The

Midwestern Farms Pit has been in operation since the 1990s, and

in its busiest year only 1 million tons of aggregate was mined.

Other than petitioners’ unsupported statements, the record

contains no evidence that this pit alone, the largest in Prowers

County, does not have enough supply to satisfy an increased

demand.

                 b.   Backhauling Gravel From Prowers County

     Petitioners argue coal trains traveling to Prowers County on

the BNSF railroad could backhaul gravel to the Front Range on

their return trips.   We address three problems with this logic.

                          (1)   Unloading Facility

     An unloading facility in the Front Range is necessary.

Michael Ray, BNSF Railroad’s manager of economic development for

Colorado and Wyoming, testified there was no facility in the

Front Range capable of unloading aggregate, although Front Range

Aggregates has land where they have proposed building an


     26
      Mr. Frahme acknowledged that “A supply analysis must be
conducted in order to accurately assess the level of competition
expected as an aggregate producer new to the market area. * * *
There were four quarries that would have been able to serve the
Holly market area competitively”. Yet he still did not analyze
supply.
                                - 48 -
unloading facility.27   While Mr. Banks stated there were unloading

facilities immediately north of Denver in Commerce City and

perhaps a still active facility east of Denver in Aurora, there

is no evidence on which rail line these unloading facilities were

situated or whether these facilities still existed in 2004.

                          (2)   Willing Coal Company

     Backhauling gravel requires a willing coal company.

Petitioners rely on coal trains going to (1) the Lamar Power

Plant and (2) the Tri-State Generation Plant.    Mr. Ray testified

that coal trains carrying coal to the Lamar Power Plant and

returning through Denver empty provided an opportunity for

backhauling.   However, the Lamar Power Plant did not begin

burning coal until 2007 or 2008.    According to unsupported

testimony at trial, Tri-State Generation (Tri-State) began

exploring the construction of an electric power generation plant

in the Lower Arkansas Valley in 2001 and authorized the

acquisition of land in 2005.    However, whether Tri-State’s

proposed plant would be run on nuclear, coal, or natural gas had

not been determined even as recently as 2009, when this case was

tried.




     27
      If the unloading facility is built, Front Range Aggregates
will bear the construction costs. Petitioners fail to address
how this would affect royalty prices.
                                - 49 -
                          (3)   Trains

     There are differences between gravel and coal trains.   Mr.

Ray credibly explained that gravel is normally shipped on 90-car

steel open-top gondola trains, while coal is typically shipped on

120-car aluminum open-top hopper trains.   Gravel and coal should

not be commingled; thus the rail cars need to be cleaned between

each load.   The record contains no evidence as to the time and

cost of this cleaning process.28

                          (4)   Conclusion and Testimony

     Testimony at trial establishes that backhauling gravel from

Prowers County to the Front Range was not a reasonably

foreseeable possibility in 2004.    Ira Paulin, the former owner of

the Carder Company, explained that the Carder Company did not

ship its aggregate by rail because it was not feasible.29


     28
      An additional problem is that coal trains typically
average 6 days per round trip or 60 cycles per year. Backhauling
gravel adds approximately 3 days to the trip, allowing the train
to make only 40 cycles per year.
     We acknowledge that the coal train currently bringing coal
to the Lamar Power Plant only makes two trips per month.
However, this is considered highly unusual, and there is no
evidence as to how long this practice will continue. And if
backhauling on these trains is feasible, we question why it was
not being done as of the time of trial.
     29
      Petitioners, citing Mr. Paulin’s testimony, argue that
“Carder, Inc. did not consider rail-hauling because they sold all
rock and gravel they could produce and carried no excess
inventory.” Petitioners misconstrue Mr. Paulin’s testimony. Mr.
Paulin testified that during his time at Carder Company,
approximately half of what was produced was backhauled on semi-
tractor trucks that had brought corn into the Lower Arkansas
Valley from Nebraska. He did testify that “there were times that
                                                   (continued...)
                              - 50 -
Petitioners ignore the Carder Company and rely on the fact that

the Midwestern Farms Pit had shipped gravel before.    This Court

wonders why the Midwestern Farms Pit had ceased shipping gravel

at the time the easements were donated.   Petitioners, as part-

owners of the Midwestern Farms Pit, could have provided the

evidence to answer this question, yet did not do so.

     B.   Conclusion on Highest and Best Use

     The before highest and best use of the Subject Properties

was agriculture.   The evidence does not support petitioners’

argument that it was aggregate mining.    While it would have been

physically possible to mine the properties in 2004 (or in the

future), there was no unfilled demand and there was no unmet

market.   The record contains no evidence to support petitioners’

assertion that this was to change in the reasonably foreseeable

future.   Olson v. United States, 292 U.S. at 257; United States

v. Whitehurst, 337 F.2d at 771-772.    Having established the

before highest and best use, we turn to the before value.



     29
      (...continued)
* * * [Carder Company] could have sold more if we could have
produced more”, yet when asked when this occurred he stated:
“when the road building was really going good, well, it was
probably a good number of the years in the ‘80s and early ‘90s.”
While the current owner of the Carder Company, Ron Peterson, also
testified there were times when the Carder Company carried little
inventory, we give his testimony less weight because it is self-
serving as he has placed conservation easements on land he owned
and can potentially benefit from a high valuation in this case.
Additionally, Mr. Paulin testified that landowners were willing
to lease their land to Carder Company, indicating that if Carder
Company wanted to extract more gravel, they could have done so.
                             - 51 -
     C.   Before Value

     The comparable sales approach is generally the most reliable

indicator of value when there is sufficient information about

sales of properties similar to the subject property.     See Estate

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

Estate of Rabe v. Commissioner, T.C. Memo. 1975-26, affd. without

published opinion 566 F.2d 1183 (9th Cir. 1977).    The comparable

sales 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.     Hughes v.

Commissioner, T.C. Memo. 2009-94.     “Real property may be unique

and the comparable sales too few to establish a conclusive market

price, ‘but that does not put out of hand the bearing which the

scattered sales may have on what an ordinary purchaser would have

paid for the claimant’s property.’”     United States v. Whitehurst,

supra at 775 (quoting United States v. Toronto, Hamilton &

Buffalo Nav. Co., 338 U.S. 396, 401 (1949)).    Comparable sales

require this Court to determine whether the properties were

sufficiently comparable to the property being valued and whether

the buyer and seller were both informed regarding all of the

factors relevant to the land’s value.     Terrene Invs., Ltd. v.

Commissioner, T.C. Memo. 2007-218.
                                  - 52 -
       Petitioners argue there were no comparable sales.     We

disagree.30      Mr. Cruikshank was the only one of petitioners’

experts who looked at potential comparable sales, opining that as

of 2004 “in dealing with farmland buyers and investors, gravel

has not been a primary consideration and only seems to be an

afterthought if considered at all”.        Mr. Cruikshank’s testimony

and report reinforces our conclusion that no separate market

existed for gravel properties in 2004.       Gravel was not a “primary

consideration” because there was no separate market.

            1.    Two Sales

       Two of the sales provided by Mr. McCarty--sale 11 (GP

Ranches property) and 13 (City Farm property), were instrumental

both in our conclusion as to the before value and our conclusion

supra part V.A. that gravel mining was not the highest and best

use.



       30
      Petitioners argue that DCF analysis is the only proper
method to use in valuing gravel properties, citing Cloverport
Sand & Gravel Co. v. United States, 6 Cl. Ct. 178 (1984), and
Terrene Invs., Ltd. v. Commissioner, T.C. Memo. 2007-218, as
their support. In Cloverport Sand & Gravel Co. v. United States,
supra at 194, the Claims Court stated: “Because the plaintiff’s
property is an income producing property capable of producing a
stream of income derived from what both parties concede is the
property’s highest and best use, the income capitalization
approach is a preferable valuation method.” Mr. Ebanks was an
expert in Terrene, where DCF analysis was also used. Petitioners
state “Ebanks report in this matter cases follows the methodology
accepted and utilized in the Terrene case, subject to minor
adjustments as recommended by the Court in the Terrene memorandum
opinion”. Petitioners fail to recognize that in both Cloverport
Sand & Gravel Co. and Terrene, highest and best use had already
been established and the DCF analysis reflected that use.
                               - 53 -
                 a.    Sale 11--GP Ranches Property

     The 2,398 acre GP Ranches property was bought by GP Ranches,

LLC (GP Ranches), in July 2004 along with 3,108 shares of Lamar

Canal water rights for $2,008,000.31    After subtracting the value

of the water rights, $411 per acre was attributable to the land

and underlying gravel.

     This property borders the Arkansas River, Highway 50, and

the BNSF railroad.    Importantly, the GP Ranches property was core



     31
      At trial Mr. Nyquist, one of the owners of GP Ranches,
testified that the GP Ranches property was sold for $2,050,000.

     A memorandum was prepared by one of the partners in GP
Ranches before the GP Ranches property was purchased. The
memorandum opens with the statement that the property has
“several potential profit centers including traditional
agricultural, recreational hunting, water rights, real estate
development and conservation easements all in one property”. The
memorandum goes on to state:

     We anticipate that easements will generate cash flow through
     out holding period * * *. There has been a recent flurry of
     conservation easements in this area that have been placed on
     properties protecting them from gravel mining. The
     appraisals that have been done placed the value of the
     gravel between $14,000 and $18,000 per acre * * *. Using
     the lower end of the established appraised range per acre at
     $14,000 and subtracting out the residual land value of
     $1,000 per acre yields a net $13,000 per acre value that can
     be placed on a conservation easements.

The memorandum lays out the value of the State tax credits and
Federal charitable contribution deductions available to those who
donate conservation easements. This memorandum convinces us that
purchasers of property in 2004 did not anticipate a heightened
demand for gravel anytime in the near future even though
properties such as the GP Ranches property were “known for * * *
[their] gravel reserves”, but rather placed value on other
attributes such as water rights associated with properties or the
ability to place conservation easements on property.
                                 - 54 -
sampled before it was bought with significant gravel resources

found beneath the property.     A portion of the property was

permitted for mining in 2009.     We find this property comparable

to the Subject Properties, with the major difference being the

size.   The Subject Properties were a combined 163 acres whereas

the GP Ranches property was 2,398 acres.

     Petitioners ignore the 2004 sale of the GP Ranches property.

Instead they place value on (1) Mr. Peterson’s, the current owner

of the Carder Company, testimony that in 2008, he offered to mine

the GP Ranches property and (2) Karl Nyquist’s, one of GP

Ranches’ owners, testimony that as of the date of trial, a

portion of GP Ranches was under a contract to sell for $10,000

per acre, 40 percent being attributable to gravel and 60 percent

to water storage.    Mr. Nyquist further testified, as of trial, GP

Ranches was in final negotiations with Front Range Aggregates

regarding mining the permitted portion.     Mining would begin

sometime in 2010 and once mining began, the gravel would be

transported away from Prowers County via rail.     None of the

above-mentioned contracts were provided to this Court.     Even if

they are as advertised, we are valuing the Subject Properties as

of 2004--and as of 2004, a future demand for gravel was not

affecting market prices.

                    b.   Sale 13--City Farm Property

     The 1,875 acre City Farm property was bought by Mr. Peterson

in December 2004 along with 666 shares of water rights for
                              - 55 -
$776,000.   After subtracting the value of the water rights, $160

per acre was attributable to the land and underlying gravel

reserves.   The City Farm property is adjacent to a railroad, the

Arkansas River, and the Hardscrabble Pit.   Mr. Peterson testified

he bought the property for agricultural use and did not core

sample the property before purchase.   Portions of this property

have since been placed in conservation easements.

     Like the GP Ranches property, we find this sale comparable,

with the main difference being the size.    We acknowledge that the

seller, the City of Lamar, and the buyer, Mr. Peterson, may not

have had actual knowledge of the quantity and quality of gravel

underneath this property.   While petitioners emphasize that none

of Mr. McCarty’s comparisons are truly comparable because none

were between “knowledgeable parties”, we find this disingenuous.

Mr. Peterson is a gravel pit operator, and governmental entities

generally operate gravel pits.   Further, “parties to such

transactions are presumed to have taken into consideration all

the elements of value to be attributed to the land.”    United

States v. 494.10 Acres of Land, 592 F.2d at 1132.    But see

Terrene Invs., Ltd. v. Commissioner, supra (ignoring two sales

because the property was sold before either party knew there was

sand and gravel beneath the property).32


     32
      We also looked at sale 17, where the 3,360 acre Butte
Creek property was purchased as part of a distressed sale in July
2006 along with 1,440 shares of water rights for $1,925,000. The
                                                   (continued...)
                               - 56 -
          2.   Large Acreage

     Petitioners do not address how the amount of acreage affects

property values, but Mr. McCarty states:     “Per-acre values tend

to decrease with increasing size.”      See also Akers v.

Commissioner, 799 F.2d 243, 246 (6th Cir. 1986) (agreeing with

this Court that the closer in size a property is, the more

comparable it is), affg. T.C. Memo. 1984-490; Estate of

Kolczynski v. Commissioner, T.C. Memo. 2005-217 (noting premium

paid for smaller parcels); Pope & Talbot, Inc. & Subs. v.

Commissioner, T.C. Memo. 1997-116 (concluding the larger the




     32
      (...continued)
Butte Creek property is catty corner across the river from the
Midwestern Farms Gravel Pit and was briefly mined in 2007 by the
Carder Company. The Butte Creek property was not core sampled
before purchase. We find this property comparable, but because
it was part of a distressed sale, the sale of the GP Ranches
property and City Farm property are more comparable and therefore
we rely primarily on those two sales.
     The buyer was Butte Creek and River Reserve LP/CO Water &
Land, LLC, of which Mr. Peterson was a part owner. Mr. Peterson
testified as to the purchase of the Butte Creek property yet
never specified the acreage of the property. In Mr. McCarty’s
comparable sales, the sale price is listed as $1,925,000 and the
site size as 3,360 acres. However, in the comments section, he
states the “sale was taken in two parcels by the same people”,
with the north having more gravel potential. The north parcel
compromised 1,238 acres and was apparently sold for $1,400,000
($1,130.86 per acre) and the south parcel compromised 915 acres
and sold for $525,000 ($573.77 per acre). The sales price for
each individual parcel adds up to $1,925,000 yet the acreage does
not. Rather 1,238 + 915 = 2,153 acres. The map included in Mr.
McCarty’s report indicates about five 640 acre sections are
involved, thus we conclude the 3,360 acres figure is probably
correct.
                                  - 57 -
parcel the higher the appropriate discount), affd. 162 F.2d 1236

(9th Cir. 1999).   Which brings us to sales 10 and 15.

                   a.   Sale 10

     On April 9, 2004, 126.38 acres were sold for $1,084.     After

subtracting water rights, each acre was valued at $831.     The

property was next to an operating gravel pit, and while the

property was not core sampled before purchase, the buyers

obtained data on the adjacent property (City Farm property).

                   b.   Sale 15

     On December 28, 2005, 145.66 acres were sold for $380,100 or

$2,610 per acre.   After subtracting water rights, each acre was

valued at $1,813.33     A 38-acre portion of the property had been

permitted for mining in 1998, and about 10 acres had been mined.

The buyers intended to place conservation easements on the

property.34

           3. Petitioners’ Remaining Arguments

                   a.   Comparables

     Petitioners argue that the purchase by Valco, Inc. (Valco),

a ready-mix company, of 4.33 acres in 1994 for approximately



      33
      We note that page 96 of Exhibit 89-R, Mr. McCarty’s
report, shows that sale 15 was for $1,821 per acre. We arrive at
$1,813 on the basis of exhibit L attached to Mr. McCarty’s
report.
      34
      By placing the conservation easements on the Subject
Properties, petitioners precluded any future purchasers from
granting one and obtaining the tax benefits. This must be
factored into the determination of the FMV.
                                    - 58 -
$36,000 was “the only truly comparable sale between knowledgeable

parties”.        The president of Valco, Tom Brubaker, testified that

Valco bought the property intending to mine it and that the

acreage was in the middle of property Valco already owned.        At

the time of purchase, Valco was mining the adjacent property, and

it began mining the purchased property within a few months or a

year or two.        This sale is of little relevance to the case at

hand.        It occurred 10 years before the easements were donated,

the land was next to an operating gravel pit, mining began

shortly after the purchase, and Valco was therefore a logical

party to buy property in the middle of land they owned and

actively mined.35

                       b.   Leasing Land

     Petitioners argue that no comparable sales exist because

“gravel operators do not buy gravel land; they lease land and pay

royalties to the owner to preserve capital.”        They argue gravel-

producing properties are not typically sold while failing to

acknowledge that they sold permitted gravel-producing property

(Jensen property) in 1998 for approximately $756 per acre.


        35
      Petitioners also cite testimony given by William J.
Grasmick and Mr. McCarty. Mr. Grasmick testified that as of the
date of trial, he had 3,500 acres under a contract of sale to
Caddis Capital (Caddis property) for $14,000 per acre. The
contract was not introduced at trial, and this Court is unaware
whether closing ever occurred. Petitioners rely on Mr. McCarty’s
testimony that he appraised land north of Denver (Derr property)
at $17,000 per acre. The Derr property is not comparable because
it has a lease to mine in place and is in a much different area
from the Subject Properties (i.e., much closer to Denver).
                                - 59 -
     In his comparable sales, Mr. McCarty included a section

entitled “Permitted Gravel Sales”.       All the sales contained

permitted land, and at least two had leases to mine in place at

the time of sale.     The land on which the Hardscrabble Pit is

situated was sold in 1998, and mining began 4 months later.        The

land on which the S-C Pit is situated was sold in 1998, and at

the time of sale, the property was already leased for gravel

production.     Finally, in his comparable sales, Mr. McCarty

included as sale comparable number 8 the February 2004 sale of

land in Hamilton County, Kansas, with a permitted gravel pit with

active production at the time of sale.

           4.    What Was the Before Value

     We now address the determinative issue--the before value of

the Subject Properties.     We may reach a determination of value

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

giving fair consideration to the opinions of the experts intended

to assist us in that regard.     Silverman v. Commissioner, 538 F.2d

927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285.       We will do

so here.   We particularly focus on the following sales:      (1) GP

Ranches--$411 per acre; (2) City Farm property--$160 per acre;

(3) sale 10--$831 per acre; and (4) sale 15--$1,813 per acre.

     On the basis of these sales and the voluminous record in

this case, we conclude that a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having

reasonable knowledge of any relevant facts would have placed a
                              - 60 -
before value on the Esgar and Tempel Properties of $1,100 per

acre and a before value on the Holmes property of $1,150 per

acre.   We arrive at numbers, $1,100 and $1,150, on the higher end

because of the small acreage of the Subject Properties.    Even as

assembled, the Subject Properties are significantly smaller than

both the GP Ranches property and the City Farm property.

      We value the Holmes property higher because it has legal

access whereas the Esgar and Tempel Properties do not.

Nevertheless we believe they had access as a practical matter

over the Holmes property and could with little cost acquire legal

access over the Holmes property.   Taking into consideration the

water rights, the before value of the Esgar and Tempel Properties

was $73,774 and the before value of the Holmes property was

$76,502.50.   After subtracting the stipulated after FMVs, the

Tempel and Esgar conservation easements were worth $49,774 and

the Holmes conservation easement was worth $49,502.50.

VI.   Section 6662 Accuracy-Related Penalties

      Section 6662(a) imposes a 20-percent penalty on “any portion

of any underpayment of tax” attributable to the reasons set forth

in subsection (b).   Respondent determined the Holmeses and the

Tempels are liable under section 6662(b)(2) on account of a

substantial understatement of income tax and under section
                                - 61 -
6662(b)(3) on account of a substantial valuation misstatement.36

Only one accuracy-related penalty may be imposed with respect to

any given portion of an underpayment.    Sec. 1.6662-2(c), Income

Tax Regs.

     Respondent bears the burden of production with respect to

petitioners’ liability for the section 6662(a) penalty.37    See

sec. 7491(c).    This means that respondent “must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty.”    Higbee v. Commissioner, 116 T.C. 438, 446

(2001).

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate:     (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.     Sec. 6664(c)(1); sec. 1.6664-4(a),

Income Tax Regs.

     A.     Substantial Understatement of Income Tax

     Respondent argues the Holmeses and the Tempels are liable

for the substantial understatement penalty for their entire


     36
      The notices of deficiency issued to the Holmeses and the
Tempels indicate that respondent determined a sec. 6662(b)(1)
penalty for negligence or disregard of rules or regulations as
well. Respondent has since conceded that neither the Holmeses
nor the Tempels are liable for the negligence penalty, leaving
only the penalties for substantial understatement of income tax
and substantial valuation misstatement at issue.
     37
      Petitioners raise arguments about respondent’s
administrative handling of the sec. 6662(a) penalties. As we
find neither the Holmeses nor the Tempels are liable for a sec.
6662(a) penalty, we need not address these arguments.
                                - 62 -
deficiency.   This penalty imposes a 20-percent penalty on any

portion of an underpayment shown to be a substantial

understatement of income tax.    An understatement is the excess of

the amount of tax required to be shown on the return over the

amount of tax actually shown on the return less any rebates.

Sec. 6662(d)(2)(A).   A substantial understatement of income tax

occurs in any year where, in the case of an individual, the

amount of the understatement exceeds the greater of 10 percent of

the amount required to be shown on the return or $5,000.    Sec.

6662(d)(1)(A).   Respondent has met his burden of production.

     The potential understatement will be reduced by the portion

attributable to the tax treatment of an item if there was

substantial authority for such treatment or if the relevant facts

affecting the item’s tax treatment are adequately disclosed in

the return or in an attached statement and there is a reasonable

basis for such treatment.   Sec. 6662(d)(2)(B).   We need not

discuss these reductions because, as discussed infra, we find

that petitioners have met the reasonable cause and good faith

exception and are therefore not liable for the accuracy-related

penalty.

     B.    Substantial Valuation Misstatement

     Respondent asserts that the Holmeses and the Tempels are

liable for a substantial valuation misstatement penalty for the

portion of the deficiency attributable to their overvaluation of

the conservation easements.     Section 6662(b)(3) imposes a 20-
                              - 63 -
percent penalty on any portion of an underpayment shown to be due

to a “substantial valuation misstatement”.     This occurs when the

value of any property claimed on a tax return is 200 percent or

more of the “amount” determined to be correct.38    Sec. 6662(e).

Respondent has met his burden of production.

     C.   Reasonable Cause Exception

     Section 6664(c) provides for an exception to the accuracy-

related penalty where a taxpayer can demonstrate (1) reasonable

cause for the underpayment and (2) that the taxpayer acted in

good faith with respect to the underpayment.     Sec. 6664(c)(1).

The determination of reasonable cause and good faith “is made on

a case-by-case basis, taking into account all pertinent facts and

circumstances.”   Sec. 1.6664-4(b)(1), Income Tax Regs.    Pursuant

to section 6664(c)(2), there may be reasonable cause and good

faith in the case of any underpayment

     attributable to a substantial or gross valuation over
     statement * * * with respect to charitable deduction
     property * * * [only if]




     38
      Pursuant to sec. 6662(h), a gross valuation misstatement
occurs if the value is 400 percent or more of the amount
determined to be the correct valuation, and the penalty increases
to 40 percent of the resulting underpayment.
     The Pension Protection Act of 2006, Pub. L. 109-280, sec.
1219, 120 Stat. 1083, modified secs. 6662(c) and 6664(c)(2) with
respect to returns filed after Aug. 17, 2006. It lowered the
percentage threshold for substantial valuation misstatements to
150 percent and for gross valuation misstatements to 200 percent.
It also eliminated the reasonable cause exception for gross
valuation misstatements.
                              - 64 -
                 (A) the claimed value of the property was based
          on a qualified appraisal made by a qualified appraiser,
          and
                 (B) in addition to obtaining such appraisal, the
          taxpayer made a good faith investigation of the value
          of the contributed property.

     Petitioners argue they made a good faith investigation by

relying on their adviser and his accounting firm, by obtaining a

core sampling report of the underlying valuable gravel reserves,

and by obtaining a qualified appraisal from a qualified appraiser

(a fact that respondent does not dispute).     They assert that they

first requested assistance more than a year before the easements

were donated, that Mr. Wurst and Kennedy & Coe did extensive

research and analysis, and that an outside law firm had been

hired to ensure that any donation met the requirements of

substantiation and administration.

     [F]or a taxpayer to rely reasonably upon advice so as
     possibly to negate a section 6662(a) accuracy-related
     penalty determined by the Commissioner, the taxpayer must
     prove * * * that the taxpayer meets each requirement of the
     following three-prong test: (1) The adviser was a competent
     professional who had sufficient expertise to justify
     reliance, (2) the taxpayer provided necessary and accurate
     information to the adviser, and (3) the taxpayer actually
     relied in good faith on the adviser’s judgment. * * *

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002).39    On the basis of the


     39
      Additionally, “The advice must be from competent and
independent parties, not from the promoters of the investment” or
advisers who have a conflict of interest. Swanson v.
Commissioner, T.C. Memo. 2009-31 (citing LaVerne v. Commissioner,
94 T.C. 637, 652-653 (1990), affd. without published opinion 956
F.2d 274 (9th Cir. 1992)); see also Canal Corp. v. Commissioner,
                                                   (continued...)
                              - 65 -
evidence in this case, we conclude that petitioners met all three

prongs of this test.   Mr. Wurst was a competent professional whom

petitioners had worked with for over 25 years, petitioners

provided him with all relevant information, and petitioners

relied on Mr. Wurst’s advice in good faith.   Petitioners have

established they met the reasonable cause exception to the

accuracy-related penalty.

     The Court has considered all of petitioners’ and

respondent’s contentions, arguments, requests, and statements.

To the extent not discussed herein, we conclude that they are

meritless, moot, or irrelevant.

     To reflect the foregoing,



                                         Decisions will be entered

                                    under Rule 155.




     39
      (...continued)
135 T.C. 199, 218 (2010) (“Courts have repeatedly held that it is
unreasonable for a taxpayer to rely on a tax adviser actively
involved in planning the transaction and tainted by an inherent
conflict of interest.”). On the basis of the evidence in this
case, we conclude that Mr. Wurst was neither a promoter nor did
he have a conflict of interest. While Mr. Milenski’s appraisal
license was later suspended by the State of Colorado, he was a
qualified appraiser at the time he opined on the value of the
conservation easements at issue.
