                                    T.C. Memo. 2012-72



                           UNITED STATES TAX COURT



        JAMES E. BUTLER, JR., AND SUSAN C. BUTLER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 1752-09.                         Filed March 19, 2012.



       David D. Aughtry, William E. Buchanan, Kristen S. Lowther, and Alan F.

Rothschild, Jr., for petitioners.

       John T. Arthur, Jeffrey S. Luechtefeld, and Christopher Pavilonis, for

respondent.
                                         -2-

                           MEMORANDUM OPINION


      WELLS, Judge: Respondent determined income tax deficiencies of

$2,525,213 and $694,694, and penalties pursuant to section 6662(a)1 of

$505,042.60 and $138,938.80 with respect to petitioners’ 2003 and 2004 tax years

(years in issue), respectively. The issues we must decide are: (1) whether the

conservation easements petitioners donated to Chattahoochee Valley Land Trust

(CVLT) with respect to two properties near Columbus, Georgia, constitute qualified

conservation contributions pursuant to section 170(h); (2) the proper values of those

conservation contributions; (3) whether the conservation easements petitioners

donated to Chattowah Open Land Trust (COLT) with respect to property in Early

and Calhoun Counties, Georgia, constitute qualified conservation contributions

pursuant to section 170(h); (4) the proper value of those conservation contributions;

and (5) whether petitioners are liable for the accuracy-related penalty pursuant to

section 6662(a).




      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986 (Code), as amended, and Rule references are to the Tax Court Rules
of Practice and Procedure.
                                         -3-

      For convenience, we proceed first with general background findings of fact

and then combine our remaining findings of fact with respect to each separate issue

with our opinion regarding each of those issues.

General Background

      Some of the facts and certain exhibits have been stipulated. The parties’

stipulations of fact are incorporated in this opinion by reference and are found

accordingly. At the time they filed their petition, petitioners resided in Georgia.

      Petitioner James E. Butler has long been interested in conservation. During

the late 1980s, Mr. Butler offered his services pro bono as lead counsel in litigation

that successfully prevented the construction of a hazardous waste incinerator in

Taylor County, Georgia. During the late 1990s, Mr. Butler served on the Georgia

Board of Natural Resources. During the early 2000s, Mr. Butler and several other

individuals founded CVLT, and Mr. Butler served on its board.

      The purpose of forming CVLT was to encourage landowners to donate

conservation easements to the organization. In part to encourage other landowners

to contribute easements on their properties, during 2003, Mr. Butler contributed a

conservation easement to CVLT on 393.33 acres of his property in Muscogee

County outside of Columbus, Georgia. At the same time, petitioner Susan C.

Butler contributed a conservation easement to CVLT on 12.7 acres of her property
                                         -4-

across Hubbard Road from Mr. Butler’s property in Muscogee County. We refer to

the foregoing properties as the Muscogee County properties. Before petitioners

contributed those conservation easements, Mr. Butler resigned from the board of

CVLT.

      During the years in issue, petitioners owned all of the interests in Kolomoki

Plantation, L.L.C. (L.L.C.), a Georgia limited liability company with its principal

place of business in Georgia. During 2003, the L.L.C. contributed a conservation

easement on 1,780 acres of property in Calhoun and Early Counties, Georgia. We

shall refer to the property the L.L.C. owned in Calhoun and Early Counties as

Kolomoki Plantation or Kolomoki. The L.L.C. contributed the easement on

Kolomoki Plantation to COLT. COLT has since changed its name to the Georgia

Land Trust, but it still operates as COLT for purposes of monitoring easements that

were donated before the organization changed its name. During 2004, the L.L.C.

contributed a conservation easement to COLT on an additional 2,450 acres of

Kolomoki Plantation. The L.L.C. passed through to petitioners the charitable

contribution deductions with respect to its donations during 2003 and 2004, and

petitioners claimed those deductions on their joint return for each year.2


      2
      The unified audit and litigation procedures of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 401, 96 Stat. at
                                                                      (continued...)
                                         -5-

      Throughout the process of donating the conservation easements, Mr. Butler

relied upon Alan Rothschild, Jr., an attorney with the Columbus, Georgia, law firm

Hatcher Stubbs, and Charles D. Johnson, C.P.A. Mr. Butler has relied upon and

worked with Mr. Rothschild for many years. Mr. Johnson has served as Mr.

Butler’s accountant for more than two decades. Mr. Butler engaged Conservation

Advisors, L.L.C. (Conservation Advisors), a real estate firm specializing in

conservation conveyances, to advise him regarding the process of donating the

conservation easements. Conservation Advisors helped petitioners plan and execute

the steps needed to donate the easements, including the engagement of

environmental consultants and appraisers. Mr. Rothschild reviewed and revised the

deeds of conservation easement (conservation deeds) and related documents on

behalf of petitioners and the L.L.C.

      Petitioners timely filed their individual income tax returns for the years in

issue. They attached to their income tax returns appraisal reports with respect to the

conservation easements. The L.L.C. timely filed Forms 1065, U.S. Return of




      2
       (...continued)
648, do not apply to the L.L.C. because it qualifies as a small partnership under sec.
6231(a)(1)(B)(i) and did not elect pursuant to sec. 6231(a)(1)(B)(ii) to have TEFRA
apply. See Wadsworth v. Commissioner, T.C. Memo. 2007-46.
                                          -6-

Partnership Income, for the years in issue. It attached to those returns appraisal

reports for the conservation easements on the Kolomoki property.

      The appraisal reports submitted with the returns filed by petitioners and the

L.L.C. determined that the proper values of the conservation easements with respect

to each of the properties were as follows:

                        Muscogee County properties            Kolomoki Plantation
                       James Butler  Susan Butler             2003          2004

Before                  $6,520,000         $294,000       $14,693,000     $13,139,000
After                    1,799,000          103,000        12,143,000      10,157,235
                                             1
Enhancement                 37,000             7,000           -0-              45,600
                                                                           2
Easement value           4,684,000          191,000         2,550,000        2,936,000
      1
          The $7,000 enhancement is already reflected in the after value of $103,000.
      2
          The appraiser rounded this number in his report.

Mr. Johnson handled the preparation and filing of petitioners’ 2003 and 2004

income tax returns. Relying primarily upon Mr. Johnson and Mr. Rothschild, Mr.

Butler read the first several pages of his tax return and skimmed the rest of it but did

not review it in detail. He read at least one of the appraisal reports for the Kolomoki

Plantation conservation easements, but he does not remember reading any of the

other reports.

      After conducting an examination of petitioners’ 2003 and 2004 income tax

returns, respondent determined that petitioners failed to establish that their
                                          -7-

contributions of conservation easements to CVLT and COLT were qualified

conservation contributions pursuant to section 170(h). In the alternative,

respondent determined that the appraisal reports submitted by petitioners failed to

establish the proper value of the conservation easements.3 Respondent timely

issued a notice of deficiency to petitioners. Petitioners timely filed a petition with

this Court.

Allocation of the Burden of Proof

      As a preliminary matter, we consider petitioners’ contention that the burden

of proof has shifted to respondent pursuant to section 7491(a). Generally, the

Commissioner’s determination of a deficiency is presumed correct, and the

taxpayer has the burden of proving it incorrect. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Section 7491(a)(1) provides an exception that places

the burden of proof on the Commissioner as to any factual issue relevant to a

taxpayer’s liability for tax if: (1) the taxpayer introduces credible evidence with

respect to that issue; and (2) the taxpayer satisfies certain other conditions,

including substantiation of any item and cooperation with the Commissioner’s

requests for witnesses, documents, other information, and meetings. Sec.


      3
        However, respondent did not argue at trial or in his briefs that petitioners
failed to submit qualified appraisals with their returns. See sec. 1.170A-13(c)(2),
Income Tax Regs.
                                           -8-

7491(a)(2); see also Rule 142(a)(2). The taxpayer bears the burden of proving that

the taxpayer has met the requirements of section 7491(a). Rolfs v. Commissioner,

135 T.C. 471, 483 (2010), aff’d, ___ F.3d ___ (7th Cir. Feb. 8, 2012).

      At trial, respondent conceded that petitioners fully cooperated during

respondent’s examination of their returns. Accordingly, the requirements of section

7491(a)(2)(B) have been met. However, respondent contends that petitioners have

not introduced credible evidence with respect to any of the factual issues in the case.

Respondent contends that all the evidence petitioners submitted either fails to

address the issues or lacks credibility.

      We must decide whether petitioners introduced “credible evidence” with

respect to each of the factual issues. For purposes of section 7491(a)(1), “credible

evidence” means “‘evidence which, after critical analysis, the court would find

sufficient upon which to base a decision on the issue if no contrary evidence were

submitted (without regard to the judicial presumption of IRS correctness).’”

Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th Cir. 2005) (quoting Griffin v.

Commissioner, 315 F.3d 1017, 1021 (8th Cir. 2003), rev’g T.C. Memo. 2002-6),

aff’g T.C. Memo. 2003-212; see also Geiger v. Commissioner, 279 Fed. Appx. 834,

835 (11th Cir. 2008), aff’g T.C. Memo. 2006-271; Higbee v. Commissioner, 116

T.C. 438, 442-443 (2001).
                                         -9-

      As we explain below, we conclude that petitioners produced credible

evidence as required by section 7491(a) with respect to the factual issues regarding

whether their conservation easements satisfied the requirements of section 170(h).

With respect to those issues, therefore, the burden of proof shifts to respondent

pursuant to section 7491(a)(1). Because both sides presented extensive evidence

regarding the factual issues relating to the valuation of the conservation easements

and we decide those issues on the basis of a preponderance of the evidence, the

allocation of the burden of proof on those issues is immaterial. See Knudsen v.

Commissioner, 131 T.C. 185, 189 (2008).4

Issue 1. Whether Petitioners’ Contribution of a Conservation Easement on the
Muscogee County Properties Was a Qualified Conservation Contribution Under
Section 170(h)

                                     Background

      Through numerous purchases over the course of about 25 years, Mr. Butler

assembled a contiguous parcel of land totaling approximately 418 acres. The

property is situated south of Smith Road, east of Whitesville Road, and north of

Hubbard Road in Muscogee County, Georgia, north of the city of Columbus. The

property is about a half-mile west of Interstate 185 and just south of the Harris


      4
       Accordingly, we need not address petitioners’ alternative argument that the
burden of proof should shift to respondent because respondent’s notice of deficiency
was “excessive and erroneous”.
                                         - 10 -

County line. Looking east from Whitesville Road, the property’s irregular shape

vaguely resembles a fox with its mouth open: two small portions of the property

abut Smith Road to the north (the mouth); three small portions abut Whitesville

Road to the east (the legs); and a larger portion abuts Hubbard Road to the south

(the bushy tail). Pritchett Road, a dead-end road, bisects the property. Petitioners

constructed an estate-style residence on approximately 24.5 acres on the north side

of Pritchett Road (Butler estate). That portion of the property constituting the Butler

estate is not subject to the easement. The parties refer to the tract of land assembled

by Mr. Butler as the James Butler property. We will also use that appellation, but

we do not include the Butler estate when we refer to the James Butler property.

      The remainder of the James Butler property is undeveloped, with the

exception of two existing residences. The property includes both pastureland and

forested areas. The topography is rolling, with steeper slopes in the portion of the

tract north of the Butler estate. The steepest hills are in the northwest corner and

along the northeast boundary of the tract. The southern portion, just north of

Hubbard Road, is gently rolling. That portion is unusually flat for northwestern

Muscogee County. The southern portion is also less rocky than the northern
                                        - 11 -

portion. During 2003, the James Butler property had access to sewer and water

only along the southeastern corner of the property on Hubbard Road.

      In addition to the James Butler property, petitioners’ Muscogee County

properties also include a 12.7-acre, roughly rectangular tract just south of Hubbard

Road. Ms. Butler purchased that property during the 1980s. The parties refer to

that tract as the Susan Butler property. The Susan Butler property is moderately

sloped toward the south and west, where it borders two creeks. During 2003, it had

access to water and sewer along Hubbard Road. The Susan Butler property is

undeveloped.

      Columbus is one of the largest cities in Georgia. At the time of the 2000

census, the population of Muscogee County was 186,291. During the early 2000s,

the population in and around Columbus was growing, and the primary direction of

development growth was to the north of Columbus, in the area between Pierce

Chapel Road (about five miles east of Interstate 185) to the east and the

Chattahoochee River to the west. The northeastern part of Muscogee County was

also growing, but property there was not as desirable because access to downtown

Columbus was not as easy. Similarly, Harris County to the north was growing but

not as rapidly because of its distance from downtown Columbus and because it had

fewer amenities and services.
                                        - 12 -

      Although the neighborhood of the James Butler property remained rural and

was only 35% developed during 2003, it was becoming attractive to developers as a

result of the pattern of growth in Muscogee County. During 2003, Mr. Butler

received three unsolicited offers from developers who wanted to purchase a small

portion of that property. On July 18, 2003, William White of Sedgefield Properties,

L.L.C., offered to purchase 75 acres along Hubbard Road for $17,500 per acre. The

75-acre portion of the property Mr. White wanted to purchase was the southernmost

portion of the James Butler property, a portion shaped roughly like a square fronting

Hubbard Road. That portion was south of Pritchett Road, separated from Pritchett

Road by another 40-acre tract owned by Mr. Butler that Mr. White did not offer to

purchase. After Mr. Butler declined that offer, Mr. White offered to purchase a 42-

acre subset of that 75-acre tract for $20,000 per acre. Mr. Butler again declined to

sell. On August 21, 2003, another developer, Kenneth Brown of Leary & Brown,

Inc., offered to purchase the same 42-acre tract, the southernmost portion of the

James Butler property, for $33,000 per acre. Mr. Butler also refused that offer.

      Mr. Butler was not interested in selling his land to developers because he

wanted to preserve it. On November 25, 2003, petitioners conveyed conservation

easements to CVLT on the Muscogee County properties. The conservation
                                         - 13 -

easements cover the entirety of the Susan Butler property and 393.33 acres of the

418-acre tract (i.e., the James Butler property but not the Butler estate).

      Although the conservation deeds significantly restrict petitioners’ use of the

Muscogee County properties, they permit limited agricultural and recreational use

and reserve a total of 12 lots for development. Both of the conservation deeds begin

with nearly identical recitals, proclaiming general conservation purposes. The

conservation deeds then provide certain rights and duties to the grantor and grantee.

A list of permitted uses and practices labeled “Exhibit ‘B’” is attached to the

conservation deeds and provides:

            The following uses and practices, though not an exhaustive recital of
      permitted uses and practices, are hereby deemed to be consistent with the
      Purpose and are expressly permitted.

             1. Agricultural activities. To conduct small scale farming, ranching, or
      other agricultural activities including raising, managing and breeding livestock
      and planting, raising and harvesting agricultural crops. However, there shall
      be no large scale agricultural activities permitted on the Property such as
      feedlots, pig farms, commercial poultry farms, or similar uses which have the
      potential to negatively impact the Conservation Values.

             *           *          *             *        *           *          *

             3. Water resources. To maintain, enhance, and develop water
      resources on the Property in accordance with applicable state and federal
      regulations, for permitted agricultural uses, fish and wildlife uses, domestic
      needs and private recreation. Permitted uses include, but are not limited to,
      the following: the right to restore, enhance and develop water resources,
      including ponds; to locate, construct, repair, and maintain irrigation
                                           - 14 -

      systems; to develop animal watering facilities; and to construct, repair and
      maintain dams, spillways, docks, gazebos and related recreational structure
      appurtenant thereto.

             *          *          *          *          *           *            *

             6. Maintenance and structures. To maintain, repair, remodel, and
      make limited additions to any existing or subsequently constructed structures
      and improvements expressly permitted by this Easement. * * * Grantor
      reserves and retains the right to construct, maintain and repair a single family
      residence, garage and barn or single multipurpose outbuilding on each of the
      eleven (11) two-acre building sites shown in the Baseline Documentation (the
      “Building Sites”). Reconfiguration of the Building Sites, but not expansion,
      may be permitted if Grantor requests in writing and Grantee approves such
      reconfiguration. Grantor further reserves and retains the right to construct,
      maintain and repair structures ancillary to the uses permitted in paragraphs 1
      and 2 above [agricultural and recreational uses], such as a cattle barn, horse
      barn, and sheds, so long as such structures do not materially impair the
      Conservation Values.

The conservation deed with respect to the Susan Butler property reserves only 1

two-acre building site, not the 11 reserved on the James Butler property.

      In addition to the permitted uses described above, both conservation deeds

permit commercial timber harvesting provided that CVLT approves the timber

management plan submitted by the grantor. They also permit the removal of trees

for agricultural or aesthetic purposes and the planting of nonnative species without

any approval from the grantee. Additionally, the conservation deeds expressly

permit a wide variety of recreational activities such as noncommercial hunting,

fishing, horseback riding, boating, and hiking; the construction of fences provided
                                        - 15 -

that they do not result in “demonstrable degradation to the Conservation Values”;

the construction of roads and trails to access permitted building sites and to

accommodate timber management; and the use of agrichemicals “using methods and

dosages which achieve the desired result while minimizing the impact upon non-

noxious foliage and vegetation.” The grantor is permitted to sell any or all of the

permitted building sites and any other portion of the property subject to the

easement.

      The conservation deeds require that the grantor notify CVLT before

undertaking some of the permitted actions (but no notice is required with respect to

others), provide that any costs of enforcing the conservation deeds will be paid by

the grantor, and provide that the grantor waives any defense of laches, estoppel, or

prescription. The conservation deeds also provide that CVLT has the right, upon

prior notice to the grantor, to enter the property to monitor compliance with the

terms of the conservation deeds. CVLT is empowered to require the restoration by

the grantor of any portion of the property damaged by a violation of the

conservation deeds. Since the donation of the conservation easements during 2003,

CVLT has been monitoring the Muscogee County properties annually to ensure that

the conservation values are not being damaged by any uses of the properties

inconsistent with the conservation deeds.
                                         - 16 -

      The conservation deeds contain a list of prohibited uses in “Exhibit ‘C’”.

That list includes uses such as mineral exploitation, “commercial or industrial

facilities (other than those necessary in the operation or uses of the Property

expressly permitted by this Easement)”, dumping, billboards, commercial towers,

and mobile homes or recreational vehicles (except for temporary parking). The

conservation deeds do not permit the general public to access the properties.

      The conservation deeds state that if any of their provisions are found

ambiguous, “an interpretation consistent with the Purpose and said Code Sections

that would render the provision valid shall be favored over any interpretation that

would render it invalid.”

      The “Baseline Documents” to which the conservation deeds refer consist of

reports prepared by environmental consultants Stacy Mote and Erin Bouthillier

(collectively, environmental consultants). We shall refer to those documents as the

environmental reports. The environmental reports state that the environmental

consultants were engaged for the purpose of conducting a “baseline environmental

inventory” so that “an assessment of [each] * * * property’s natural importance

can be made and future management and monitoring practices can be evaluated.”

Consistent with that purpose, the environmental reports describe the natural

features of the Muscogee County properties at the time of the easement
                                         - 17 -

contributions. Regarding the conservation value of the James Butler property, the

environmental report with respect to that property states:

             Overall, the * * * Property provides a significant wildlife resource for
      the region and enhances the natural aesthetics of the area. With access to a
      major waterway corridor and a variety of ecological communities, this site
      offers forage, nesting habitat, and shelter. * * * All of these functions and
      values are also beneficial to the public in the form of cleaner air and water;
      plentiful game for hunting; and natural beauty in the area.

The environmental report with respect to the Susan Butler property uses identical

language to describe its ecological value. The environmental reports provide a list

of wildlife species that Ms. Mote and Ms. Bouthillier observed on the properties

and a list of wildlife species that have been observed by others in the general area of

the properties that normally live in habitats similar to the habitat provided by the

properties. The reports state that the properties, in their then-current state, provide

habitat similar to the habitat preferred by several wildlife species listed as threatened

or endangered. However, the environmental consultants did not actually observe

any endangered species on the Muscogee County properties, and the only

threatened species they observed was the plumleaf azalea, which the State of

Georgia considers threatened.

      With respect to the James Butler property, the environmental report notes that

timber and agricultural activities have “altered some of the native plant
                                        - 18 -

communities” and that a small herd of horses kept on the property “may have a

limited impact on Heiferhorn Creek; however, by keeping the herd small and

limiting the access to a small portion of the creek, water quality impacts should be

minimal.” That report also notes that the larger tract has been used for grazing

livestock and harvesting in the recent past and that, although those practices “have

impacted the natural communities on-site”, they “have also provided a

diversification in habitat that may have not occurred previously.”

      The environmental reports provide the following conclusions and

recommendations (using identical language in both reports):

             The preservation of the Butler Tract will be valuable in protecting the
      unique natural resources in this rapidly developing area. Heiferhorn Creek
      and its drainage ways are important water features that serve to attract
      wildlife, filter pollutants, and recharge groundwater * * *. These waterways
      also have a high likelihood of supporting federally and state protected mussel
      and fish species. The many habitats on-site host a wide variety of plant and
      animal species. * * *

              With limited development of the property, the wildlife components of
      this site will continue to flourish. In order to minimize future impacts, we
      recommend that all timber practices comply with Forestry Best Management
      Practices, keeping stream management zones and using suitable erosion
      control techniques.

Except for those brief conclusions, the environmental reports do not address how

the conservation value of the properties would be affected by the permitted uses

described in the conservation deeds.
                                        - 19 -

      Petitioners later submitted supplemental environmental reports, also authored

by Ms. Bouthillier and Ms. Mote, during 2010 (supplemental environmental

reports). The supplemental environmental reports include a new section in which

the environmental consultants more specifically address how the conservation deeds

protect conservation purposes as provided in the Code and the regulations. The

supplemental environmental reports specifically identify certain high quality

terrestrial and aquatic communities found on the properties:

             During the 2002 surveys, high quality terrestrial communities were
      identified on the Butler Tract in the northern portion of the site and along the
      ridge/slopes paralleling the drainageways. These communities were
      Oak-Hickory-Pine Forests and Granite Outcrops further described in the
      Baseline Report as Mixed Upland Forest and Rock Outcrops. The rocky
      character of these significant habitats made it difficult to farm or timber over
      the years; thus allowing a more mature canopy of hardwoods to persist. The
      rocky substrate also provides habitat for several of the species listed above.

             Oak-Hickory-Pine Forest was observed in the northern portion of the
      easement and along tributaries throughout the site. Numerous wildlife
      species, including migratory songbirds, were observed utilizing this valuable
      habitat for feeding and nesting. The slopes within this habitat transition
      between gently sloping to steep hillsides scattered with rock outcrops.
      Oak-Hickory-Pine Forests within the Piedmont ecoregion have been primarily
      impacted by urban sprawl within the last twenty years.

             Rock Outcrops were found within the steep slopes of the upland
      hardwood forest located north of the main lake and along Heiferhorn Creek.
      Vernal pools within shallow depressions of these outcrops provide habitat to
      fragile ecosystems within Georgia. Decline of many species that rely on this
      type of habitat is occurring throughout Georgia due to lack of habitat
                                            - 20 -

      protection. These outcrops provide potential habitat for granite stonecrop and
      pool sprite.

             The 2002 surveys also identified high quality aquatic communities in
      Heiferhorn Creek, its tributaries, and associated floodplain hardwood.
      Heiferhorn Creek is located within the 7 mile radius of a water supply source
      and has been afforded additional protection in this portion of the County.
      This large waterway flows south to southwest along the eastern boundaries of
      the Butler Tract eventually discharging into the Chattahoochee River Basin.
      Heiferhorn Creek and its tributaries are meandering systems with series of
      run/riffle/pool habitats. Several areas of rocky shoals provide foraging areas
      and habitat for protected species. Native plumleaf azalea populations
      (Rhododendron prunifolium), a threatened State Species, were observed
      along stream courses throughout the Property.

The environmental consultants found only one rare, endangered, or threatened

species on the Muscogee County properties: the plumleaf azalea, a plant that

grows in the moist soils of ravines in hardwood forests. However, the

environmental consultants reported that the following rare, endangered, or

threatened species may be found in habitats similar to those found on the

Muscogee County properties: granite stonecrop (a plant found in partially shaded

granite outcrops); relict trillium (a plant found in ravines in hardwood forests);

shoals spiderlilly (a plant found in rocky shoals of major streams); Alabama

milkvine (a plant found on slopes and bluffs in dense hardwood forests);

Bachman’s sparrow (a bird found in open pine woods and old pastures with dense
                                         - 21 -

ground cover); and alligator snapping turtle (a reptile found in rivers, lakes,

swamps, and large ponds).

      The supplemental environmental reports do not mention any of petitioners’

retained rights besides the following brief discussion of the reserved building sites:

“Even with the retained rights of 11 2-acre home sites, the * * * [James Butler

property] would maintain the scale of rural residential open space historically

present in the region.” The supplemental environmental report for the Susan Butler

property included a similar conclusion about the effect of the single two-acre home

site reserved on that property.

                                       Discussion

A.    Legal Standard

      Taxpayers may deduct the value of any charitable contributions made

during the tax year pursuant to section 170(a)(1). Generally, taxpayers are not

entitled to deduct gifts of property that consist of less than the taxpayers’ entire

interest in that property. Sec. 170(f)(3). However, taxpayers are permitted to

deduct the value of a contribution of a partial interest in property that constitutes a

“qualified conservation contribution” as defined in section 170(h)(1). Sec.

170(f)(3)(B)(iii). For a contribution to constitute a qualified conservation

contribution, the taxpayer must show that the contribution is (1) of a “qualified
                                          - 22 -

real property interest” (2) to a “qualified organization” (3) “exclusively for

conservation purposes.” Sec. 170(h)(1). The parties agree that the contributions

petitioners made were of qualified real property interests and that those

contributions were made to qualified organizations. Accordingly, the only issue

remaining for us to decide is whether those contributions were exclusively for

conservation purposes.

      To be considered to have been made exclusively for conservation purposes, a

contribution must satisfy the requirements of section 170(h)(4) and (5). Section

170(h)(4)(A) defines “conservation purpose” as:

            (i) the preservation of land areas for outdoor recreation by, or the
      education of, the general public,

             (ii) the protection of a relatively natural habitat of fish, wildlife, or
      plants, or similar ecosystem,

            (iii) the preservation of open space (including farmland and forest land)
      where such preservation is--

                    (I) for the scenic enjoyment of the general public, or

                   (II) pursuant to a clearly delineated Federal, State, or local
             governmental conservation policy, and will yield a significant public
             benefit, or

             (iv) the preservation of an historically important land area or a certified
      historic structure.
                                         - 23 -

In order for a contribution to be deductible, it must satisfy one of the contribution

purposes under section 170(h)(4). Section 170(h)(5) provides that no contribution

will be treated as exclusively for a conservation purpose unless that purpose is

preserved in perpetuity.

      Section 1.170A-14(e)(2), Income Tax Regs., disallows any deduction where

the conservation easement would preserve one of the conservation purposes “but

would permit destruction of other significant conservation interests.”

      For example, the preservation of farmland pursuant to a State program for
      flood prevention and control would not qualify under paragraph (d)(4) of this
      section if under the terms of the contribution a significant naturally occurring
      ecosystem could be injured or destroyed by the use of pesticides in the
      operation of the farm. However, this requirement is not intended to prohibit
      uses of the property, such as selective timber harvesting or selective farming
      if, under the circumstances, those uses do not impair significant conservation
      interests.

Id.

      The parties agree that petitioners’ contributions do not satisfy the requirement

of section 170(h)(4)(A)(i) or (iv). Petitioners contend that they satisfy the

requirements of the second and third conservation purposes listed in section

170(h)(4)(A). Respondent disagrees and contends that the rights petitioners

retained under the conservation deeds are inconsistent with the conservation

purposes listed in section 170(h)(4)(A)(ii) and (iii). Respondent focuses on the
                                         - 24 -

extent to which development of the tracts is explicitly permitted by the conservation

deeds. Petitioners contend that, although the conservation deeds reserve some

rights for petitioners, they include language that ensures the conservation purposes

will be protected. Because, as we explain below, we conclude that petitioners’

contributions satisfy the section 170(h)(4)(A)(ii) conservation purpose of protecting

a relatively natural habitat (conservation purpose), we need not address whether the

contributions protect open space pursuant to clause (iii).

      To qualify for the conservation purpose of protecting a relatively natural

habitat under section 170(h)(4)(A)(ii), the regulations require that the donation:

      protect a significant relatively natural habitat in which a fish, wildlife, or plant
      community, or similar ecosystem normally lives will meet the conservation
      purposes test of this section. The fact that the habitat or environment has
      been altered to some extent by human activity will not result in a deduction
      being denied under this section if the fish, wildlife, or plants continue to exist
      there in a relatively natural state. * * *

Sec. 1.170A-14(d)(3)(i), Income Tax Regs. The regulations offer the following

guidance with respect to what constitutes a “significant habitat or ecosystem”:

      Significant habitats and ecosystems include, but are not limited to, habitats
      for rare, endangered, or threatened species of animal, fish, or plants; natural
      areas that represent high quality examples of a terrestrial community or
      aquatic community, such as islands that are undeveloped or not intensely
      developed where the coastal ecosystem is relatively intact; and natural areas
      which are included in, or which contribute to, the ecological viability of a
                                             - 25 -

      local, state, or national park, nature preserve, wildlife refuge, wilderness area,
      or other similar conservation area.

Sec. 1.170A-14(d)(3)(ii), Income Tax Regs. A “habitat” is an “‘area or

environment where an organism or ecological community normally lives or occurs’”

or the “‘place where a person or thing is most likely to be found.’” Glass v.

Commissioner, 124 T.C. 258, 281-282 (2005) (quoting the American Heritage

Dictionary of the English Language 786 (4th ed. 2000)), aff’d, 471 F.3d 698 (6th

Cir. 2006).

      Pursuant to the regulations cited above, a conservation easement will satisfy

the conservation purpose of protecting a relatively natural habitat under section

170(h)(4)(A)(ii) if it protects an area (1) that is an environment where a rare,

endangered, or threatened species is normally found; (2) that is a “high quality”

example of an ecosystem; or (3) that contributes to the ecological viability of a

park or other conservation area. Sec. 1.170A-14(d)(3)(ii), Income Tax Regs.

      Any interest retained by the donor “must be subject to legally enforceable

restrictions * * * that will prevent uses of the retained interest inconsistent with

the conservation purposes of the donation.” Sec. 1.170A-14(g)(1), Income Tax

Regs. When the donor reserves rights that, if exercised, would have the potential

to impair conservation interests, the donor must provide the donee with
                                          - 26 -

“documentation sufficient to establish the condition of the property at the time of the

gift.” Sec. 1.170A-14(g)(5), Income Tax Regs. The donee must also be given the

right to periodically inspect the property and to enforce the conservation restrictions,

including the right to require the restoration of the property to its condition at the

time of the donation. Id.

      In deciding whether the conservation deeds preserve the conservation

purpose in perpetuity, we must first decide the extent to which the conservation

deeds permit the properties to be altered from their current state. The second issue

we must decide is: If the properties were developed to the extent permitted by the

conservation deeds, would the conservation purpose still be preserved?

B.    What Rights Are Reserved Under the Conservation Deeds?

      As detailed above, the conservation deeds reserve numerous rights for

petitioners, subject to the overarching language of the conservation deeds

preserving the conservation purposes. Under the terms of the conservation deeds,

petitioners or future owners may partition the James Butler property into 11

smaller tracts averaging 36 acres, each of which would include a 2-acre building

site on which a home and a garage could be constructed. Petitioners similarly

retain the right to build on one two-acre building site on the Susan Butler property.

The deeds permit the construction of roads or driveways to access the buildings.
                                        - 27 -

Petitioners or future landowners may operate small-scale farms, both keeping

livestock and raising crops. On those farms, they may use agrichemicals to

eliminate “noxious weeds” subject only to the exhortation that they “minimiz[e] the

impact upon non-noxious foliage and vegetation”. They may construct dams to

create ponds for recreation or irrigation, and they may construct docks, gazebos,

and “related recreational structures”. They may clear timber for agricultural uses,

clear brush and remove trees for “aesthetic” purposes, and plant nonnative species

of trees or other plants.

       In addition to those rights, the conservation deeds also permit a wide variety

of other uses provided that those uses do not result in “demonstrable degradation to

the Conservation Values”. Such conditionally permitted uses include the

construction of fences, the construction of other roads besides those that access the

building sites, the construction of an unlimited number of barns and sheds for

agricultural or recreational use on any portion of the property (not just the two-acre

building sites), and commercial timber harvesting pursuant to an approved timber

management plan. CVLT has the right to determine whether such uses would result

in degradation to the conservation values.

       Although the conservation deeds reserve the above rights for petitioners, they

also permit CVLT to periodically enter and inspect the property to ensure
                                        - 28 -

compliance with the terms of the conservation deeds. In the event that CVLT

determines that the conservation values have been damaged, it is entitled to require

that the owner restore the property. The condition of the Muscogee County

properties at the time of the contributions are documented in the environmental

reports, as contemplated by section 1.170A-14(g)(5)(i), Income Tax Regs.

      The parties disagree about whether the conservation deeds restrict the

location of the building sites. Petitioners contend that the conservation deeds

incorporate by reference the “Baseline Documents”, which they contend include the

environmental reports and a map stipulating the placement of the building sites in

locations that are consistent with the preservation of the conservation purposes.

Petitioners contend that the map was developed in consultation with Ms. Mote and

Ms. Bouthillier so as not to disturb the conservation purposes. Respondent

contends that the “Baseline Documents” cannot legally be incorporated by reference

and are not effective unless separately recorded.

      We agree with petitioners. Respondent cites Herman v. Commissioner, T.C.

Memo. 2009-205, in which we held that unrecorded documents were not binding.

However, the conclusion in Herman was based upon New York State law. The

relevant State law in the instant case is that of Georgia, and the Georgia Supreme
                                         - 29 -

Court has held: “Where a deed or grant refers to a plat as furnishing the description

of the land conveyed, the plat itself and the words and marks on it are as much a

part of the grant or deed, and control so far as limits are concerned, as if such

descriptive features were written out on the face of the deed or grant itself.” State v.

Ga. Ry. & Power Co., 80 S.E. 657, 659 (Ga. 1913); see also Spencer v. Poole, 60

S.E.2d 371, 372 (Ga. 1950). In that case, the Georgia Supreme Court did not make

a distinction between recorded and unrecorded plats.5 At least one Georgia court of

appeals has specifically held that an unrecorded plat will be treated as incorporated

by reference in a deed. See Chi. Title Ins. Co. v. Investguard, Ltd., 449 S.E.2d 681

(Ga. Ct. App. 1994). Accordingly, as a matter of law, reference in the recorded

conservation deed to the map showing the location of the lots effectively made that

map part of the recorded deed.

      Additionally, by Georgia statute, subsequent purchasers are deemed to have

knowledge of any commitment if notice is “sufficient to excite attention and put a

party on inquiry shall be notice of everything to which it is afterwards found that

such inquiry might have led.” Ga Stat. Ann. sec. 23-1-17 (LexisNexis 1982); see

also Dejoo v. Suntrust Mortgage, Inc., 668 S.E.2d 245 (Ga. 2008); Lesser v.


      5
       Black’s Law Dictionary 1189 (8th Ed. 2004) defines a plat as a “map
describing a piece of land and its features, such as boundaries, lots, roads, and
easements.”
                                         - 30 -

Doughtie, 686 S.E.2d 416 (Ga. Ct. App. 2009). Purchasers who have notice of a

commitment are subject to that commitment. Ga. Stat. Ann. sec. 23-1-16

(LexisNexis 1982). Consequently, we conclude that the restrictions on the location

of the lots in the conservation deeds and the map referenced therein are binding

under Georgia State law.

C.    Do the Conservation Deeds Preserve the Conservation
      Purposes in Perpetuity?

      Despite the voluminous record in this case, which includes multiple expert

reports and trial testimony from both of the environmental consultants, there is a

paucity of evidence addressing the central issue of whether the reserved rights are

consistent with the conservation purpose. Petitioners directed their evidence

almost exclusively at the issue of whether the properties presently fulfill the

conservation purpose. Petitioners established that the properties, as they existed at

the time of the contributions, provided a significant “relatively natural habitat of

fish, wildlife, or plants, or similar ecosystem”, within the meaning of section

170(h)(4)(A)(ii). Testimony from the environmental consultants at trial and in

their reports established that the properties contained high-quality examples of

several different ecosystems, as well as habitat where rare, endangered,

orthreatened species normally live. For instance, the supplemental environmental
                                         - 31 -

reports describe high-quality examples of granite outcrops, oak-hickory-pine

forest, and rocky shoals ecosystems. Although the environmental consultants

identified only one threatened species living on the Muscogee County properties, we

are persuaded that the properties include habitats where some rare, endangered, or

threatened species normally live.

      However, we must decide whether the conservation deeds actually preserve

the conservation purpose in perpetuity, as required by the Code and the regulations.

Sometimes, when landowners preserve their properties using conservation

easements, those conservation easements permit no development at all, guaranteeing

that the land will continue to exist in its then-current state. In such cases, evidence

documenting a contemporaneous conservation purpose served by the land may be

sufficient to show that the conservation easements serve the conservation purpose.

However, in the instant case, petitioners have reserved rights enabling them to

develop portions of their properties and conduct other activities that would

noticeably alter the properties’ current conditions. Accordingly, we must decide

whether, if the properties were developed to the extent permitted by the rights

reserved under the conservation deeds, they would still serve the conservation

purpose.
                                        - 32 -

      The environmental reports prepared by Ms. Mote and Ms. Bouthillier state

that their purpose was to describe the property as it existed before the donation of

the conservation easements, and the reports do not mention the conservation deeds

or give any indication that the environmental consultants reviewed the deeds before

preparing their reports. At trial, the only testimony petitioners offered regarding

whether the retained rights were consistent with the conservation purpose was a few

exchanges between their counsel and the environmental consultants concerning the

two-acre building sites. Regarding those sites on the James Butler property, Ms.

Bouthillier testified as follows:

             Q. And from a conservation perspective what do you perceive insofar
      as the significance of the reserved rights as to, say, homes for Mr. Butler’s
      children and grandchildren?

             A. You know, I think [the] setting of the property really hits home
      when you drive out to that site. And if you look there is such a variety of
      topography out there -- there’s rolling hills, there’s flat bottoms, there’s
      water. And so there’s this atmosphere of rural nature even though you’re ten
      minutes from town. And it naturally sets itself up for places to enjoy that
      property. And we worked with a land planner and with environmental
      constraints and looking at the property to come up with some areas that might
      be suitable for house sites in the future for his descendants.

Other than the above testimony about the building sites, Ms. Bouthillier did not

specifically testify about petitioners’ retained rights. However, she stated that 400
                                        - 33 -

acres were being preserved for wildlife and that for “400 acres to be preserved and

guided by conservation principles is really priceless”.

      Regarding the retained rights on the Susan Butler property, Ms. Mote testified

as follows:

              Q. From a conservation easement --

              A. Right.

            Q. -- perspective and a wildlife perspective with the 12 acres, ten of
      which are perpetually reserved, how does that serve conservation of relatively
      natural habitat for wildlife?

              A. Well, I believe in the baseline they have a site set up for that two-
      acre, which is actually located on a -- it looks like it could be an old
      homestead area with a livestock corral like within the center of the property.
      It’s back off of Hubbard Road. I’m not sure if you can -- I don’t even think
      you can see it from Hubbard Road. And so it’s relatively in the center of the
      site from what I recall.

             Q. And so -- all right. Would your conclusion be the same as your
      earlier comments about relatively natural habitat for wildlife in light of that
      two-lot reservation -- that two-acre reservation?

              A. Uh-huh.

              Q. I’m sorry?

              A. Yes. Yes.

              *           *         *            *         *          *           *
                                             - 34 -

             Q. And in doing that analysis was it necessary for you to determine
      what would be in the conservation easement and what would be excluded --
      or retained out of the conservation easement?

             A. It was. The -- where we wanted to do -- because you can’t just go
      in and put, you know, a large high-rise or several homes on a -- in a wetland.
      So we have to go out first and find out what areas are there, what areas are
      suitable, whether it’s soil -- you know, sometimes there’s soil that’s not --
      that’s proper enough to be able to build upon. So we look for where the soils
      are, where the wetlands are, where the flood plains are. And then we go in to
      look to see where you could have home sites.

The foregoing testimony was directed only at the issue of whether the reserved

rights to build on the home sites are consistent with the conservation purpose.

Petitioners offered no testimony that the other reserved rights are consistent with the

conservation purpose.

      In support of their contention that the other reserved rights are consistent with

the conservation purpose, petitioners point to CVLT’s enforcement rights under the

conservation deeds. Petitioners contend that if they or some future owners were to

use the land in a manner inconsistent with the conservation purposes stated in the

conservation deeds, CVLT would have the right to enforce the conservation deeds

and require the owner to restore the land.

      Respondent contends that the reserved rights are inconsistent with the

conservation purpose, but respondent offered no expert witness testimony to support

his contention. Instead, respondent contends that the conservation deeds
                                         - 35 -

fail to address how the reserved rights can be exercised so as not to thwart the

conservation purpose. Respondent argues that the reserved rights could be

exercised in ways that would destroy the habitats and high-quality ecosystems on

the property. However, respondent did not introduce any evidence in support of

that argument or any evidence that CVLT would be likely to fail to enforce its rights

granted under the conservation deeds or that CVLT would otherwise permit

petitioners or their successors to use the land in a manner inconsistent with the

conservation purpose.

      Although the record on the issue of whether the conservation deeds preserve

the conservation purpose in perpetuity is sparse, we conclude that petitioners have

presented credible evidence--in the form of the expert testimony noted above, the

overarching rights granted to CVLT in the conservation deeds themselves, and the

annual monitoring conducted by CVLT--that the conservation deeds preserve the

conservation purpose, and the burden of proof therefore shifts to respondent. As

noted above, respondent offered no contrary expert witness testimony and pointed

to no evidence that would suggest that CVLT is likely to abandon its right to

enforce the conservation deeds. Consequently, we conclude that respondent has

failed to establish that the conservation deeds do not protect significant habitat.
                                        - 36 -

Accordingly, we hold that the conservation deeds satisfy the requirements of section

170(h)(4)(A)(ii) and section 1.170A-14(d)(3), Income Tax Regs.

Issue 2. The Proper Values of the Conservation Contributions With Respect to the
Muscogee County Properties

                                      Discussion

      Generally, the amount of a charitable contribution is the fair market value of

the contributed property at the time it is contributed. Sec. 1.170A-1(a), (c)(1),

Income Tax Regs. Fair market value is the price at which property would change

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

compulsion to buy or sell and both having a reasonable knowledge of relevant facts.

Sec. 1.170A-1(c)(2), Income Tax Regs.

      In deciding the fair market value of property, we must take into account not

only the current use of the property but also its highest and best use. See Stanley

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

1.170A-14(h)(3)(i) and (ii), Income Tax Regs. A property’s highest and best use

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

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

255 (1934); Hilborn v. Commissioner, 85 T.C. 677, 689 (1985). If different from
                                         - 37 -

the current use, a proposed highest and best use requires “closeness in time” and

“reasonable probability”. Hilborn v. Commissioner, 85 T.C. at 689.

      Where a substantial record of comparable easement sales exists, the fair

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

comparable easements. Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Where, as in

the instant case, there is no established market for similar conservation easements

and no record exists of sales of such easements, the regulations provide another

method to determine fair market value:

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

Id. We have often applied the “before and after” approach to determine the fair

market values of conservation easements. See, e.g., Hilborn v. Commissioner, 85

T.C. 677 (1985); Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646

F.3d 6 (D.C. Cir. 2011); Kiva Dunes Conservation, L.L.C. v. Commissioner, T.C.

Memo. 2009-145; Griffin v. Commissioner, T.C. Memo. 1989-130, aff’d, 911 F.2d

1124 (5th Cir. 1990).
                                         - 38 -

      An appraiser may use the comparable sales method, or another accepted

method, to estimate the before and after values of the property. Hilborn v.

Commissioner, 85 T.C. at 689. An appraiser using the comparable sales method,

also known as the market-data approach or sales comparison approach, finds sales

of properties that meet three criteria: (1) the properties themselves are similar to the

subject property; (2) the sales are arm’s-length transactions; and (3) the sales have

occurred within a reasonable time of the valuation date. Wolfsen Land & Cattle Co.

v. Commissioner, 72 T.C. 1, 19 (1979). Because no two sales and no two

properties are ever identical, the appraiser then considers aspects of the comparable

transactions such as time, size, or other significant features and makes appropriate

adjustments for each to approximate the qualities of the subject property. Estate of

Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987); Wolfsen Land & Cattle

Co. v. Commissioner, 72 T.C. at 19. We have found the comparable sales approach

to be the most reliable indicator of value when there is sufficient data about sales of

properties similar to the subject property. See, e.g., Estate of Spruill v.

Commissioner, 88 T.C. at 1229 n.24; Estate of Rabe v. Commissioner, T.C. Memo.

1975-26, aff’d without published opinion, 566 F.2d 1183 (9th Cir. 1977).
                                         - 39 -

      Another valuation method sometimes employed is the income or discounted

cashflow approach. See Trout Ranch, LLC v. Commissioner, T.C. Memo.

2010-283; Losch v. Commissioner, T.C. Memo. 1988-230. The income approach

to valuing real property involves discounting to present value the expected

cashflows from the property. See, e.g., Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010-283; Losch v. Commissioner, T.C. Memo. 1988-230. The theory

behind the approach is that an investor would be willing to pay no more than the

present value of a property’s anticipated future net income.

      Additionally, when using the before and after valuation approach, any

enhancement in the value of a donor’s other property resulting from the easement

contribution, or of property owned by certain related persons, reduces the value of

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

      Petitioners retained three appraisers who wrote reports with respect to the

Muscogee County properties: David Roberts, Gregory Eidson, and Rudolph

Quillian. Mr. Roberts’ reports were completed at the time of the contributions and

submitted by petitioners with their 2003 tax return. The other reports were

retrospective valuations prepared in anticipation of the instant litigation. To value

the Muscogee County properties in their before conditions, all of petitioners’

appraisers used the sales comparison approach and the discounted cashflow
                                         - 40 -

analysis, also variously called the income capitalization approach or the subdivision

analysis. However, in their reply brief, petitioners abandoned their reliance on the

discounted cashflow valuations. For that reason, we will not consider petitioners’

discounted cashflow analyses. Respondent submitted one appraisal report with

respect to each of the Muscogee County properties. Those reports were written by

Zac Ryan.

      The appraisal reports do not agree on the precise acreage of the James Butler

property. In their stipulations, the parties agreed to use 393.33 acres as the acreage

of the James Butler property. Accordingly, in the findings and analysis below, we

have adjusted the appraisers’ numbers to reflect the parties’ stipulation, unless

otherwise noted.

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

the evidence or to determine a fact in issue. Fed. R. Evid. 702. We evaluate

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

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

offer competing estimates of fair market value, we decide how to weigh those

estimates by, inter alia, examining the factors they considered in reaching their

conclusions. See Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not

bound by an expert’s opinion and may accept or reject an expert opinion in full or
                                        - 41 -

in part in the exercise of sound judgment. See Helvering v. Nat’l Grocery Co.,

304 U.S. 282, 295 (1938); Parker v. Commissioner, 86 T.C. at 561-562. We may

also reach a decision as to value based on our own examination of the evidence in

the record. Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g

T.C. Memo. 1974-285.

A.    The James Butler Property

      1.     The Appraisal Reports

             a.    Mr. Roberts’ Appraisal Report

      Mr. Roberts is a real estate appraiser with the firm Tennille & Associates,

Inc., based in Boone, North Carolina. He holds the SRA (Senior Residential

Appraiser) designation with the Appraisal Institute.6 He has been a real estate


      6
        The SRA designation was formerly the certification given by the Society of
Real Estate Appraisers (society) to residential appraisers. Appraisers Coalition v.
Appraisal Inst., 845 F. Supp. 592, 595 (N.D. Ill. 1994). The highest certification of
the society was the SRPA (Senior Real Property Appraiser). Id. That designation
was comparable to the MAI (Member Appraisal Institute) designation given by the
American Institute of Real Estate Appraisers (AIREA). Id. The AIREA also used
the designation RM, which was comparable to the society’s SRA. Id. at 595-596.
During 1991, the society merged with the AIREA to form the Appraisal Institute.
Id. at 596. The Appraisal Institute kept the MAI designation as its highest
certification and kept the SRA designation as its certification for residential
appraisers. Id. Within the real estate appraisal community, MAI is viewed as the
highest regarded appraisal designation. See Schwartz v. Commissioner, T.C. Memo.
2008-117, aff’d, 348 Fed. Appx. 806 (3d Cir. 2009); Estate of Auker v.
Commissioner, T.C. Memo. 1998-185.
                                              - 42 -

appraiser for 26 years, and he has been appraising conservation easements since

1998. Mr. Roberts received assistance in preparing his report from Pattie J.

Tennille, but she did not testify at trial.

       During 2009, the North Carolina Appraisal Board suspended Mr. Roberts’

license because of errors he committed in an appraisal report completed during

2006. In that report, he had erroneously concluded that the highest and best use of

the vacant land he was appraising was retail office space or multifamily residential

use. Such use was not permitted under the zoning laws applicable to that property.

To regain his appraiser’s license, Mr. Roberts had to complete five classes,

including a class on the valuation of vacant land and subdivision valuation.

Before completing those courses, Mr. Roberts had no formal training on valuing

vacant land or subdivisions.

       Regarding the James Butler property, Mr. Roberts concluded that its highest

and best use was as a 222-lot subdivision. He relied on a subdivision plan

developed by Larry French (the French plan), a Columbus-area subdivision

planner. Mr. Roberts wrote in his report that the lots in that plan ranged from one

to four acres. He stated that those lots were compatible with the property’s

zoning, which was A-1 agricultural. However, on cross-examination, Mr. Roberts
                                        - 43 -

admitted that the French plan actually shows lot sizes as small as half an acre. Mr.

Roberts did not independently verify the feasibility of the French plan.

      Mr. Roberts used two approaches to value the property: the sales comparison

approach and the discounted cashflow approach. Using the sales comparison

approach, Mr. Roberts found four comparable sales and adjusted the value of those

sales for time, location, size, and usability. He then used those comparable sales to

estimate that the before value of the James Butler property was $10,000 per acre, or

$3,933,300.

      When Mr. Roberts wrote his appraisal report, he was unaware of the offers

that Mr. White and Mr. Brown had made on the James Butler property. When he

was asked by petitioners’ counsel what effect the knowledge of those offers would

have had on his estimate of the value of petitioners’ properties, Mr. Roberts testified

as follows:

            Q. Had you known about * * * [the offers], what would have been the
      impact on your conclusion?

             A. Well, I would have considered the offers. I would back them up
      and try to, obviously, still use closed sales, but I would have reported it in the
      history of the property if I had known it.

              Q. All right. Could it have affected your ultimate conclusion?

              A. It would have been a consideration.
                                          - 44 -

Mr. Roberts also was unaware that a 164-acre tract just south of the Susan Butler

property sold for $22,477 per acre during February 2004. He testified that had he

been aware of that pending transaction during 2003 when he was completing his

appraisal report, it would have increased his estimate of the value of petitioners’

properties. However, he did not indicate by how much his estimate would have

increased.

      With respect to the highest and best use of the James Butler property after

petitioners had granted the conservation easement, Mr. Roberts wrote in his report

the following:

             The easement area * * * is vacant land encumbered by a conservation
      easement. No improvements are allowed and no analysis as improved is
      required. * * *

               *          *          *             *       *          *          *

             The highest and best use of the subject property, considering the
      conservation easement granted on a 396.5 acre portion of the land tract,
      would be for open meadows, hiking trails, hunting area, horseback riding
      areas or recreation area on this section of the property. The 11 homesites
      excluded from the easement area would allow for single family structures to
      be built within the boundaries of this section of the property.

Mr. Roberts separately valued the 11 two-acre homesites and the remainder of the

393.33 acres, i.e., 371.33 acres.7 To value the 371.33-acre portion, Mr. Roberts

      7
          Mr. Roberts erroneously used 396.5 acres as the size of the undeveloped
                                                                         (continued...)
                                       - 45 -

used the sales comparison approach. He used the sales of five large, mostly vacant

lots as comparable sales. Only one of the properties in Mr. Roberts’ comparable

sales, a 46.8-acre tract in North Carolina, was burdened with a conservation

easement. To adjust for the fact that the other comparable properties were not

encumbered by conservation easements, Mr. Roberts made “usability” adjustments

ranging from zero to minus 50%. His adjustments were based upon his estimate,

using factors he did not explain, of how much the conservation easements would

have detracted from the value of those comparable properties. After making other

adjustments to each comparable sale for time, location, size, and access, he

averaged the comparable sales and determined that the price of the 371.33-acre

portion of the James Butler property was $4,000 per acre, for a total of $1,485,200.

      Mr. Roberts then used a discounted cashflow analysis to value the 11

remaining two-acre lots, which he estimated to be worth $77,000 each. After

estimating an absorbtion rate and expenses, Mr. Roberts discounted the lot sales to

arrive at $213,000. In total, Mr. Roberts estimated that the value of the James

Butler property in the after condition was $1,698,200. He also estimated that the

      7
        (...continued)
portion because he neglected to subtract the unencumbered 24.5 acres of the Butler
estate. As noted above, the parties agreed in their stipulations that the correct
acreage was 393.33 acres. Accordingly, the correct acreage, after removing the 11
two-acre homesites, is 371.33 acres.
                                        - 46 -

conservation easement enhanced the value of the unencumbered Butler estate by

$37,000.

             b.    Mr. Eidson’s Appraisal Report

      Mr. Eidson is a self-employed commercial real estate appraiser based in

Auburn, Alabama. Mr. Eidson has a bachelor’s degree and holds the MAI (Member

of Appraisal Institute) designation from the Appraisal Institute. He has more than

20 years of experience in the valuation industry, but he had never appraised a

conservation easement before his work for petitioners.

      Mr. Eidson concluded that the highest and best use of the property in the

before condition was for residential development. Mr. Eidson used both the sales

comparison approach and the discounted cashflow approach. For his sales

comparison approach, he found four comparable sales, made various adjustments,

and estimated that the James Butler property was worth $19,500 per acre, or

approximately $7,670,000.

      Mr. Eidson’s appraisal report is silent regarding the highest and best use of

the property in its after condition. Mr. Eidson used the sales comparison approach

to separately value the encumbered 371.33 acres of the James Butler property, the

11 remaining two-acre lots, and the Butler estate.
                                         - 47 -

      To value the encumbered portion, Mr. Eidson applied a two-step approach.

First, Mr. Eidson used three sales of recreational land from nearby in Muscogee

County to estimate the value of the property as recreational land. All of those

properties were inferior to the James Butler property and were not suited for

development. After making small adjustments for time and topography, Mr. Eidson

averaged those values and concluded that the value of the encumbered property as

recreational land was $6,300 per acre.

      For his second step, to estimate the effect of the conservation easement on

the James Butler property, Mr. Eidson examined seven sales of properties that

were encumbered by conservation easements. Appraisals of those properties

completed by other appraisers show that the conservation easements decreased the

sale prices of the encumbered properties by 40% to 84%. Mr. Eidson did not

report the terms of any of those easements, nor did he attempt to explain why some

of the easements decreased the value of the properties they encumbered by twice

as much as other easements. Instead, he used the average of those percentages to

estimate that the conservation easement would decrease the value of the

encumbered portion of the James Butler property by 60%. However, rather than

apply the 60% diminution to his before value, he applied it to the value he

estimated on the basis of sales of inferior recreational land. He therefore
                                        - 48 -

calculated that the encumbered 371.33 acres were worth $2,520 per acre, or

approximately $935,700.

      With respect to the 11 remaining two-acre lots, Mr. Eidson searched for

comparable sales of two-acre lots surrounded by conservation easements, but he

was unable to find any such sales. Instead, he estimated that the lots would sell for

approximately the same price as lots in nearby subdivisions: $70,000 each.

Although the lots would lack the amenities of the subdivision, they would have more

privacy and a rural setting. He therefore estimated that the value of the James

Butler property after being encumbered by the conservation easement was

$1,705,700.

      Mr. Eidson concluded that the conservation easement did not enhance the

value of the Butler estate.

              c.    Mr. Quillian’s Appraisal Report

      Mr. Quillian is a real estate appraiser based in LaGrange, Georgia. He is

employed by General Valuation Services, L.L.C. Mr. Quillian holds a bachelor’s

degree and a master’s degree in business administration, and he holds the MAI

designation from the Appraisal Institute. He has 35 years of experience appraising

real estate, but he had never valued a conservation easement before his work in the
                                        - 49 -

instant case. To learn how to appraise conservation easements, he took a course on

the subject from the Appraisal Institute.

      Mr. Quillian found that the highest and best use of the James Butler property

in the before condition was for residential development as a subdivision. In one

place in his report, Mr. Quillian concluded that the James Butler property could be

developed to a density of up to two houses per acre; however, in another place, he

wrote that the zoning did not permit development denser than one house per acre.

Unlike the other appraisers, Mr. Quillian used a hybrid approach to value the

property. He estimated the value of the southernmost 125 acres of the James Butler

property using a discounted cashflow analysis, and he estimated the value of the

remainder using a sales comparison approach. Mr. Quillian believed that the

southernmost 125 acres were ready for immediate development but that developers

would not be as interested in the portion of the property north of Pritchett Road

because its topography was not as well suited to development. However, he

believed that, as developable land in the Columbus area became scarcer, a

developer would eventually want to purchase the northern portion.

      In calculating the value of the northern portion, Mr. Quillian found seven

comparable sales. All of the comparable sales were of properties smaller than the

James Butler property, ranging in size from 30.5 acres up to 163.8 acres. Despite
                                        - 50 -

the fact that he identified the northern portion as not yet ready for development, the

comparable sales he used were all purchases by developers who intended to use the

properties to construct subdivisions or, in one case, apartment buildings. Mr.

Quillian did not make any specific adjustments to his comparable sales. He

concluded that two of his seven comparable sales were the most similar to the

northern portion of the James Butler property, which he estimated to be worth

$18,000 per acre. That value was somewhere in between the values of the

properties in those two comparable sales. Mr. Quillian did not offer any other

explanation for his belief that $18,000 per acre was an appropriate value.

      With respect to the southernmost 125 acres, Mr. Quillian calculated, using the

discounted cashflow method, that the value of the property was $3,206,871, or

$25,655 per acre. During cross-examination, Mr. Quillian admitted that he had

made an error in his discounted cashflow calculation when he wrote that 50 lots

could be developed without building any new roads on the property. Indeed, only

19 lots could have been developed without the construction of a new road. During

redirect testimony on the following day, Mr. Quillian testified that he had reviewed

his calculations overnight and found that, although he had written 50, he had

actually used only 20 in his calculation. However, in his new calculations, he

changed the number of lots that had access to sewer lines from 41 to 59.
                                         - 51 -

Nevertheless, he concluded that development costs would be the same under both

plans. His new calculations also accelerated the subdivision development schedule

so that lots with sewers would to be sold six months earlier than under his original

schedule. When questioned about his calculations during cross-examination, Mr.

Quillian’s responses were unclear, and he was unwilling or unable to explain or

clarify some of the assumptions and math behind the numbers he produced.

      In constructing his discounted cashflow analysis, Mr. Quillian used lot sales

from 2005 because the data he was using did not extend back to 2003. In Georgia,

as in the rest of the United States, the housing market had appreciated rapidly during

the period from 2003 to 2005 and was very inflated during 2005.

      Mr. Quillian’s report had a number of problems. Although he stated that the

northern portion was not yet desirable to developers and would not have sold for

development, he estimated its value using sales of properties that were ready for

development. Additionally, all of the comparable sales he used were smaller than

the James Butler property, but he did not make any adjustment for size. When he

constructed his discounted cashflow analysis, he erred in his decision to base his

estimate for lot prices on prices from 2005 instead of 2003, despite the fact that lot

prices during 2005 were significantly higher than during 2003. He made several
                                         - 52 -

other errors in constructing his discounted cashflow analysis and was unable to

satisfactorily correct for those errors. Additionally, Mr. Quillian failed to identify

the correct highest and best use for the property in its after condition: He did not

recognize that the encumbered 371.33 acres could be broken up and bundled with

the building sites and did not indicate awareness of certain retained rights such as

the ability to landscape the properties and engage in significant recreational

activities. Those oversights led him to conclude erroneously that it would be

impossible to sell the retained lots as estate-style residences similar to the Butler

estate and that there would be no market for those lots.

      As noted above, petitioners have now abandoned their reliance on the

discounted cashflow valuations. Because Mr. Quillian did not use another method

to value the southernmost 125 acres, petitioners’ decision to abandon that method

renders Mr. Quillian’s conclusions regarding the value of the conservation easement

on the James Butler property largely useless.

             d.     Mr. Ryan’s Appraisal Report

      Mr. Ryan, respondent’s sole appraiser in the instant case, is a self-employed

real estate appraiser based in Middleburg, Florida. He has been certified to appraise

properties in Florida, Georgia, and South Carolina, and he holds the MAI

designation from the Appraisal Institute. Mr. Ryan has more than 25 years of
                                          - 53 -

experience appraising real estate, and he has been appraising conservation

easements since 1994, completing more than 100 conservation easement appraisals.

His clients have included the Nature Conservancy, the Georgia Land Trust, the

Georgia Department of Natural Resources, and the Florida Department of

Environmental Protection. Although Mr. Ryan has completed appraisals in 20

Georgia counties, before his engagement in the instant case, he had never appraised

a property in Muscogee County.

      Mr. Ryan concluded that the highest and best use of the James Butler

property in the before condition was for residential development. He used the sales

comparison approach to estimate the property’s value. Unlike petitioners’

appraisers, Mr. Ryan relied only on the sales comparison approach and did not

consider the discounted cashflow method because he concluded that there were

sufficient comparable land sales. After finding four comparable sales and making

various adjustments, Mr. Ryan concluded that the before value of the James Butler

property was $12,000 per acre, or approximately $4,720,000.

      Before determining the highest and best use of the property in the after

condition, Mr. Ryan devoted six pages of his report to an analysis of the rights

encumbered by the terms of the conservation deed. He discussed 11 different

factors: title, transferability, division of the property, residential development,
                                         - 54 -

industrial or commercial use, agricultural use, silvicultural use, mining, hunting and

fishing rights, access to the property, and permissible roads and other structures.

For each factor, he discussed the rights permitted under the terms of the

conservation deed and whether those terms affected the value of the subject

property.

      Mr. Ryan concluded that the highest and best use of the property in the after

condition was for 11 rural estates, each combining agricultural or undeveloped land

with a two-acre building site. To estimate the value of the James Butler property in

the after condition, Mr. Ryan used several approaches. Firstly, he compared the

property in its after condition to all four of his comparable sales and concluded that

its value was inferior to all of them. Accordingly, he concluded that the after value

was at most $9,525 per acre, the adjusted value of the most inferior comparable sale

used by Mr. Ryan.

      Secondly, Mr. Ryan considered three similar sales of property out of a single

tract of land. The price of one of those sales was 26% less than the other two

because that portion of the property was encumbered by a mining lease until 2015.

Mr. Ryan estimated that the permanent conservation easement on the James Butler

property would decrease its value by at least as much as the temporary mining lease.
                                         - 55 -

      Thirdly, Mr. Ryan compared the terms of the conservation easement on the

James Butler property to the terms of two other conservation easements he had

appraised, both of which were on large tracts of rural property in Florida. For each

of those conservation easements, he described in detail 11 different ways that the

easement affected the value of the encumbered property. Both of the other

conservation easements were significantly more restrictive than the conservation

deed with respect to the James Butler property. However, because one of the

properties offered significantly less development potential than the James Butler

property, Mr. Ryan concluded that the diminution in value associated with the

conservation deed on the James Butler property was somewhere between the

percentage diminutions in value observed on those properties, i.e., between 34%

and 65%. On that basis, he estimated that the conservation easement reduced the

value of the James Butler property by 50% to about $6,000 per acre. Mr. Ryan did

not separately value the lots retained for building sites. He concluded that the value

of the James Butler property after encumbrance by the conservation easement was

approximately $2,360,000.

      Mr. Ryan conducted a fourth analysis to check the reasonableness of his

conclusion. On the basis of his conclusion that the highest and best use of the

property in its after condition was for large estate-style residences, he considered
                                        - 56 -

several sales of estate-style parcels from two developments in Muscogee County

and two in neighboring Harris County. The 20 estate parcels Mr. Ryan considered

ranged in size from 5 acres up to 18 acres and in price from $38,500 up to

$180,000. The more expensive estate-style parcels generally were either lakefront

properties or the larger parcels. Because the potential estate-style lots on the James

Butler property would average about 36 acres, at least twice as large as any of the

other sales Mr. Ryan compared, he concluded that 11 large estates with two-acre

building sites and the option to engage in small-scale farming or recreational use of

the remainder of the property would fetch at least $208,000 each. He therefore

concluded that the sale of nearby estate-style lots corroborated his conclusion about

the after value of the James Butler property.

             e.     Summary

      In summary, the appraisers estimated the following before and after values for

the James Butler property:

                        Roberts          Eidson         Quillian         Ryan

Before               $3,993,300        $7,670,000         N/A         $4,720,000
After                 1,698,200         1,705,700         N/A          2,360,000
Enhancement              37,000             -0-           N/A             -0-
Easement value        2,258,100         5,964,300         N/A          2,360,000
                                        - 57 -

      2.     Disputed Issues

      Before analyzing the appraisers’ reports and conclusions, we must decide a

few other disputed issues.8

             a.     Zoning

      At the time of the contribution, the Muscogee County properties were zoned

A-1, which prohibited development denser than one house per acre. The

appraisers disagreed about the ease with which the properties could have been

rezoned to permit denser development. However, the developer Mr. White

credibly testified that, when he offered to buy a portion of the James Butler

property during 2003, he expected that it would be easy to change the zoning to

permit development of a subdivision with a density of more than one house per

acre. He explained that undeveloped property is frequently zoned A-1 before

development. Mr. Eidson explained that because property taxes are lower on

property zoned A-1, most landowners choose not to seek rezoning for their

property until it is developed. The record contains several examples of properties

that were rezoned from A-1 to permit denser residential development. Although the

offers made by Mr. White and Mr. Brown were contingent upon obtaining


      8
      For the reasons explained below, we decide these issues on the
preponderance of the evidence.
                                         - 58 -

rezoning, the fact that they made such offers suggests they believed rezoning would

have been pro forma. On the basis of the foregoing, we conclude that rezoning

would have been possible and that developers would have been interested in the

property in spite of its then-current A-1 zoning.

             b.       Covenants Regarding Lot Size

      Approximately 27% of the James Butler property is subject to covenants

running with the land that mandate minimum lot and house sizes.9 The 41.64 acres

just south of Pritchett Road is subject to the following restrictions: no house may be

built that has less than 2,000 square feet of heated living space and no lot may be

sold that is less than 2 acres. The 90 acres just north of Pritchett Road, including

the Butler estate, is subject to the following restrictions: no house may be built that

has less than 2,500 square feet of heated living space and no lot may be sold that is

less than 4 acres. Not including the Butler estate, the 4-acre provision applies to

65.58 acres. All of the properties with lot size restrictions were acquired from the

Pritchett brothers.

      Petitioners contend that when Mr. Butler acquired title to both tracts, the

doctrine of merger extinguished the covenants running with the land. Under

      9
       The covenants apply to 131.72 acres, but the Butler estate accounts for 24.5
of those acres. The covenants therefore apply to only 107.22 acres of the 393.33
acres of the James Butler property (27%).
                                          - 59 -

Georgia law, when some lots are burdened with covenants intended to benefit other

lots and all lots come under the same ownership, the covenants burdening the lots

generally are extinguished. See Muscogee Mfg. Co. v. Eagle & Phenix Mills, 54

S.E. 1028, 1031 (Ga. 1906). Petitioners attempted to prove that merger had

occurred through Mr. Butler’s testimony regarding his purchases of property from

the Pritchetts and his knowledge of his neighbors.10 However, Mr. Butler testified

that, in addition to the lots they sold to him, the Pritchetts sold an adjacent lot to

Dwain Tobey (Tobey lot). Because the Tobey lot has not come under common

ownership, petitioners have failed to prove that the conditions necessary for merger

have been met. Accordingly, we conclude that the land remains burdened by the

covenants requiring minimum lot sizes.




      10
         At various points during trial and in their briefs, petitioners suggested that
they were surprised when respondent raised the issue of the lot size restrictions at
trial and that respondent did not produce the evidence of the covenants in
compliance with the Court’s Standing Pretrial Order, which requires the parties to
exchange exhibits 14 days before trial. Petitioners contend that they therefore were
unprepared to present evidence proving merger. We disagree. The deeds
containing the covenants were included among the stipulated exhibits, and they were
also in Mr. Roberts’ original appraisal report, even though he failed to notice the
restrictions. Moreover, the covenants are discussed in Mr. Ryan’s report and in
respondent’s pretrial memorandum. Regardless, because the evidence in the record
shows that no merger occurred, we conclude that petitioners were not
disadvantaged.
                                         - 60 -

       Petitioners’ appraisers failed to notice the covenants restricting lot size and

therefore did not consider them when appraising the James Butler property. Indeed,

the subdivision plan used by petitioners’ appraisers showed lot sizes smaller than

those permitted under the covenants. Mr. Ryan was the only appraiser who

considered the effect of the covenants in his appraisal report. He concluded that

those restrictions decreased the value of the property, but he did not provide a

specific numeric estimate of that impact.

      Petitioners contend that the covenants restricting lot sizes would not have

affected the value of the property because four-acre “estate lots” sell at a higher

price per acre than smaller lots. However, the evidence in the record does not

support their contention. Only Mr. Quillian testified that four-acre lots would sell

for a higher price per acre than smaller lots, but he contradicted his own testimony

during cross-examination. Mr. Quillian’s testimony regarding the price per acre of

different lot sizes lacked credibility, and we give it no weight. All of the other

appraisers agreed that, other things being equal, larger lots generally sell for less on

a per-acre basis than smaller lots.11

      11
         Even if it were true that such “estate lots” sold for a premium, a restriction
on the tract that limited the freedom of developers to choose the size of lots or
houses would presumably have reduced the appeal of the tract and lowered its price.
Moreover, developers would have been free to sell four-acre lots even in
                                                                          (continued...)
                                        - 61 -

      Accordingly, we conclude that the lot size restrictions covering 27% of the

James Butler property would have decreased its value by some amount, and we will

consider that diminution in value in our analysis below. Because petitioners’

appraisers did not take into account that diminution in value, their conclusions

overstated the property’s value.

             c.     The Unaccepted Offers

      The parties disagree about how much weight the appraisers should have given

the unaccepted offers made on the southernmost portion of the James Butler

property. One of the unaccepted offers was made on the southernmost 75 acres; the

other two offers were made on only 42 acres of that same portion. Those offers

represent 19% and 11% of the entire 393.33 acres. Petitioners contend that those

offers are indicative of the value of the entire property. We do not agree and

conclude that petitioners’ contention is inconsistent with the evidence.

      During cross-examination, Mr. Eidson admitted that although in his report he

had called the topography of the James Butler property “basically level”, it would

be more accurate to call the northern portion “rolling”. Indeed, petitioners’


      11
        (...continued)
the absence of the covenants. The fact that the subdivision plan used by the
appraisers contains very few such lots strongly suggests that there was no such
premium.
                                         - 62 -

environmental consultants characterized the northern portion of the property as

steeper than rolling. Not only is the northern portion much hillier than the southern

portion, it is also much rockier. Petitioners’ environmental consultants stated that

there is “significant rock” in the northern portion, including many rocky outcrops

along the creeks. In contrast, the southernmost portion is less rocky, and the banks

of the creeks are sandy. In addition to the exposed rock, the northern portion

appears to contain significant rock beneath the surface. There are several major

rock quarries just a mile east of the James Butler property, and one of petitioners’

witnesses familiar with the area testified that “you can rest assured there’s rock

under” the property. Mr. White testified that land with rocky soil is undesirable

because excavation is very expensive and that developers therefore “stay away”

from such properties. In contrast, Mr. White was willing to offer a premium for the

southernmost portion of the James Butler property because its topography was

better than that of the neighboring land. When Mr. White identified all the

properties in Muscogee County that he considered ready for development, he did

not include any portion of the James Butler property except for the southernmost 75

acres.

         Mr. White also testified that he was willing to pay a “tremendous premium”

on the James Butler property because of its access to sewer lines. However, only
                                         - 63 -

the southernmost portion had access to sewer lines, which ran along southeastern

corner of the property bordering Hubbard Road.

      Mr. Ryan and Mr. Roberts were unaware of the unaccepted offers and

therefore did not consider them when they conducted their appraisals. Both of them

acknowledged that had they been aware of the offers, they would have considered

them. Mr. Ryan testified that after he became aware of the offers, he reconsidered

his valuation but concluded that those offers were still consistent with his appraisal

value because he had already given a much higher value to the southernmost portion

of the property. Even Mr. Roberts, petitioners’ appraiser, was reluctant to say that

the unaccepted offers would have increased his appraisal estimate.12

      Because Mr. White and Mr. Brown made offers to purchase only 11% of the

393.33 acres and because the evidence shows that that portion of the property was

significantly more desirable than the remainder, those offers are not meaningful




      12
         Mr. Roberts initially testified that he would have “considered” those offers
but that he would still have used closed sales. He later agreed that knowledge of the
offers would have increased his value. However, the latter statement was in
response to a series of leading questions by petitioners’ counsel to which we
sustained respondent’s objection. Mr. Roberts initially seemed reluctant to say that
the offers would have increased his appraisal, and we consider that testimony more
credible than his subsequent acquiescence to leading questions from petitioners’
counsel.
                                           - 64 -

indicators of the value of the entire property. Accordingly, although the unaccepted

offers are relevant evidence of the value of the portion of the James Butler property

on which they were made, they are not very helpful in deciding the value of the

entire property.

          3.     Analysis and Conclusion

          As a preliminary matter, we note that Mr. Quillian’s testimony regarding the

value of the conservation easement on the James Butler property was generally

unhelpful. On several occasions, he made inconsistent or contradictory statements,

and his testimony was generally not useful to the Court. Accordingly, in the

analysis below, we give little weight to his conclusions regarding the value of the

conservation easement on the James Butler property.

                 a.    The Before Value

          The appraisers considered the following properties comparable to the James

Butler property:

                                                              Size     Price per    2003
     1            2
ID       Appraisers   Date       Address        Sale price   (acres)      acre      Price3

 1       GE, RQ, ZR 12/22/03 Blackmon Rd.       $1,607,694    97.44    $16,499     $16,499
 2       DR, ZR      6/18/98 Garrett Rd.         3,705,500   423.25      8,755      10,863
 3       GE, ZR        12/00 Veterans Pkwy.      2,440,994   132.00     18,492      20,801
 4       GE, RQ      2/19/04 Bridgemill Dr.      3,686,265   164.83     22,500      22,280
 5       ZR          3/31/97 Garrett Rd.         2,182,268   282.73      7,718      10,057
 6       RQ           2/1/99 Hancock Rd.           900,000    62.53     14,393      17,340
 7       DR          8/16/99 Macon & Pope Rd.    2,500,000   461.00      5,423       6,407
 8       DR          10/6/00 Biggers Rd.           414,000    39.50     10,481      11,790
                                                 - 65 -
 9   RQ               3/1/02    Blackmon Rd.             960,000       32.00      30,000       32,131
10   RQ              12/1/02    Warm Springs Rd.         737,506       99.66       7,400        7,696
11   GE                 1/03    Williams Rd.           1,175,500       34.00      34,574       35,957
12   RQ              12/1/03    Osprey Cove              575,000       30.50      18,852       18,852
13   DR             12/16/03    Williams Rd.           1,697,500       60.80      27,918       27,918
14   RQ               5/1/04    McKee Rd.              1,288,000       90.50      14,232       13,956
        1
          The “ID” field contains numbers which we have assigned to each of the comparable sales
for convenience.
        2
          The entries in the “Appraisers” field are the first and last initials of each of the appraisers
who used that comparable sale in his report: GE = Gregory Eidson; RQ = Rudolph Quillian; DR
= David Roberts; and ZR = Zac Ryan.
        3
          Prices in this column have been adjusted to December 2003 prices using an estimated 4%
annual appreciation (for the reasons explained below in the text), adjusted to the nearest quarter
of a year from December 2003 (e.g., sale 2 has been adjusted to reflect 5.5 years of appreciation,
sale 4 to reflect -0.25 years, etc.).

The appraisers used a total of 14 different sales, and 4 of those sales were used by

more than one appraiser.

        The appraisers applied different rates of appreciation to adjust those sales to

December 2003 prices. Mr. Ryan interviewed a number of local market

participants who told him that appreciation ranged from 3% to 5% each year from

1997 through 2003. He used 4% appreciation per year. Mr. Roberts did not

explain how he calculated appreciation, but his numbers show that he also used

approximately 4% per year. Mr. Eidson used only 2.57% per year, which he based

on the consumer price index. Mr. Eidson’s method was inappropriate because

property values in Muscogee County during the relevant period were rising faster
                                        - 66 -

than the consumer price index. We will apply the 4% appreciation used by Mr.

Ryan and Mr. Roberts.

      Petitioners contend that it was unreasonable for Mr. Ryan to use sales from

the eastern “panhandle” of Muscogee County because land in that area was not as

valuable. They therefore contend that sales 2 and 5 are not truly comparable and

that Mr. Ryan would have known not to use sales from the panhandle if he had been

more familiar with Muscogee County. Mr. White testified that the prime area of

development in Muscogee County during 2003 was north of Columbus from the

Chattahoochee River to Pierce Chapel Road.13 Although petitioners make much of

the fact that Mr. Ryan was not from Muscogee County, neither were any of their

appraisers. Mr. Roberts and Mr. Eidson were both from out of state, and Mr.

Quillian was from two counties north of Muscogee County. Like Mr. Ryan, both

Mr. Quillian and Mr. Roberts used several sales from the “panhandle” (sales 2, 7,

10, and 14) and did not make any adjustments to compensate for the supposedly




      13
        Petitioners actually contend that Interstate 185 is the eastern border of the
prime development area, but the only evidence in the record supporting that
contention is Mr. Quillian’s testimony, which we did not find credible for the
reasons explained above in the text and infra note 14. Sale records show that Mr.
White was willing to pay similar prices for land near Interstate 185 and for land near
Pierce Chapel Road, corroborating his testimony. Pierce Chapel Road is about five
miles east of Interstate 185.
                                         - 67 -

inferior location of those sales.14 Nevertheless, because we found Mr. White to be a

credible witness and because he was most familiar with the demand for developable

land in Muscogee County during 2003, we conclude that the land in the eastern

portion of the county was somewhat less desirable than the land between the river

and Pierce Chapel Road. Properties in the latter area generally have better access to

downtown Columbus, making them more valuable.

      However, the lower land prices observed in sales 2, 5, 7, and 10 cannot be

explained entirely by their location. The property conveyed in sale 14, although

more than twice as far from Pierce Chapel Road as any of the other properties, sold

for $14,232 per acre, significantly more than any of the other properties in the

panhandle. Respondent contends that the properties in sales 2, 5, and 7 sold for

lower prices per acre because of their size. As the basis for his contention,

respondent points to the testimony of nearly all the appraisers that, other things

being equal, a property that is larger will sell for a lower price per acre. Mr. Ryan


      14
          In his report, Mr. Quillian wrote: “All sales have a relatively similar
location on the north side of Columbus * * *. Pairing * * * [sales 1 and 14], the
sales [sic] further east seems to be less desirable, not because it is ‘east’ but because
it is a greater distance from the JR Allen By-Pass”. During his testimony, Mr.
Quillian contradicted those statements in his report, testifying that the properties
further east had lower values because that entire area was less desirable. We did
not consider Mr. Quillian a credible witness, and we give no weight to that
testimony.
                                         - 68 -

considered size an important factor affecting the values of those properties in the

eastern part of the county. Indeed, sales 2, 5, and 7 were all sales of properties

significantly larger than that in sale 14.15 We are convinced that size is part of the

reason those properties sold for less per acre than properties in some of the other

comparable sales.16

      Both Mr. Roberts and Mr. Ryan considered sales of 400-acre tracts of land.

In contrast, one of the weaknesses with Mr. Eidson’s assessment of the before value

of the property is that he failed to identify any sales of properties of comparable

size; indeed, the sale 11 property was less than 10% the size of the subject property.

Although Mr. Eidson made adjustments to try to account for the size differential, it

is difficult to believe that he could have accurately made those adjustments without

considering the demand for 400-acre tracts of land in Muscogee County.




      15
        Those properties were 4.7, 3.1, and 5.1 times the size of the property in sale
14, respectively.
      16
         The property in sale 10 is only 10% larger than that in sale 14, not enough
of a difference in size to explain the dramatic difference in price per acre. Mr.
Quillian provided little information about that sale, so we do not know what other
factors may have influenced the sale price. As noted above, in his report, Mr.
Quillian explained that its low price was due to its poor access to the “JR Allen By-
Pass” and downtown Columbus.
                                        - 69 -

      Another problem with Mr. Eidson’s use of sale 11 is that sale 11 was zoned

for multifamily use, significantly increasing the value of the property. Mr. Eidson

made no adjustment for that factor, stating that the zoning of the sale 11 property

was “comparable” to that of the James Butler property. That assessment was

unrealistic. Mr. Eidson failed to make a similar adjustment with respect to another

of his comparable sales: Mr. Ryan reported that a portion of the sale 3 property was

probably going to be used for commercial purposes. Because the zoning on the

James Butler property would not have permitted commercial use, Mr. Eidson should

have adjusted for the superior use potential of the property in sale 3. As noted

above, Mr. Eidson also failed to notice the lot size restrictions affecting 27% of the

James Butler property. Finally, Mr. Eidson acknowledged during cross-examination

that his report mischaracterized the topography of the James Butler property and

that the northern portion was actually more hilly than his report described. That

mischaracterization also more generally called into question Mr. Eidson’s

objectivity. On the basis of the foregoing, we conclude that the before value for the

property was substantially less than Mr. Eidson’s estimate of $19,500 per acre.

      In contrast, the before values estimated by Mr. Roberts and Mr. Ryan were

much lower, $10,000 and $12,000 per acre, respectively. However, those
                                         - 70 -

appraisals had a few of their own problems. First, Mr. Roberts failed to consider

the lot size restrictions, which would have decreased his estimated before value.

Second, neither appraiser accounted for the fact that properties in the eastern part of

Muscogee County are not as valuable as properties in the central part of the county.

Sales 2, 5, and 7 were approximately two to three miles east of Pierce Chapel Road,

the eastern edge of the prime development zone in Muscogee County. That location

was slightly inferior to the location of the subject property, and we therefore

conclude that Mr. Roberts and Mr. Ryan should have adjusted the values of those

sales accordingly. Finally, neither Mr. Roberts nor Mr. Ryan considered sale 4, the

Bridgemill property, which was located just south of the subject property on

Whitesville Road.

      Sale 4 did not close until February 2004, but its price is nevertheless

relevant and helpful for appraising the subject property. Although Mr. White and

Mr. Brown testified that the topography of 42 to 75 acres of the subject property

was superior to that of the Bridgemill property (sale 4), they were not interested in

developing the remainder of the James Butler property. Indeed, the topography of

the remainder of the property was rocky and hillier than the portion Mr. White and

Mr. Brown wanted to buy. The influence that topography can have on value is

illustrated by the property in sale 8, which is almost directly across Whitesville
                                         - 71 -

Road from the James Butler property. Although that property was significantly

smaller than the James Butler property, it sold during October 2000 for only

$10,481 per acre. The land on the west side of Whitesville Road was generally

quite hilly, but Mr. Roberts considered the topography of the property in sale 8

comparable to that of the James Butler property. Sale 8 indicates that the value of

the northern portion of the property was significantly less than that of the southern

portion, and it appears to us to put a ceiling on the value of the northern portion.

The northern portion of the James Butler property was also inferior to the Bridgemill

property because it lacked access to utilities and because 34% of that portion of the

property was subject to a covenant restricting the size of lots and houses.17

Nonetheless, the February 2004 sale of the Bridgemill property for $22,500 per acre

shows recent demand for development in the area of the James Butler property and

it, combined with the unaccepted offers, shows that the southernmost portion of the

property was exceedingly desirable to developers.

      For the foregoing reasons, we conclude that the before value of the James

Butler property was slightly higher than the estimates provided by Mr. Roberts and

Mr. Ryan. We conclude that the appropriate before value of the property was

      17
        Although the 107.22 acres affected by the covenants restricting lot and
house size is only 27% of the total 393.33 acres, it is 34% of the northern 318.33
acres.
                                        - 72 -

$12,500 per acre, 25% more than Mr. Roberts’ before value and 4% more than Mr.

Ryan’s. As confirmation of the reasonableness of that value, it is approximately

equal to the value of the property calculated as follows: $33,000 per acre for the

southernmost 42 acres; $17,500 per acre for the next 23 acres; and $10,000 per acre

for the remaining 318.33 acres.18 Accordingly, we conclude that the before value of

the James Butler property was $4,916,600.

                b.   The After Value

      All of the appraisers stated that they were using the “before and after”

approach to value the conservation easement on the James Butler property. To

calculate the after value, they all claimed to use either a comparable sales approach

or some combination of the comparable sales approach and a discounted cashflow

approach. However, because there were no nearby sales of properties encumbered

by conservation easements, that task was difficult and the approaches the appraisers

used varied widely. Some of the methods they employed were acceptable; others

were less so.


      18
         We note that although a developer purchasing the southernmost portion of
the property may have been willing to pay $17,500 or $33,000 per acre for a small
portion of the property, the same developer would almost certainly not have been
willing to pay those prices for the southernmost portion of the property bundled with
the northern portion. Accordingly, that calculation actually establishes a ceiling on
the reasonable value of the property.
                                         - 73 -

      Mr. Roberts found five sales of land: Two of those sales were from

Muscogee County but were not encumbered by conservation easements or any other

significant restrictions; two were from distant counties in Georgia and had little

development potential because they were largely in flood zones; and one was from

North Carolina and was encumbered by a conservation easement. Mr. Roberts

attempted to make adjustments to account for the geographic disparity of the

properties in distant Georgia counties and North Carolina, but he did not explain his

reasoning and his adjustments seem like guesswork. Mr. Roberts subtracted 50% of

the value from each of the Muscogee County sales to account for the fact that the

properties were not encumbered by conservation easements. He did not explain

how he determined that a 50% adjustment was appropriate, and his approach again

seems like guesswork. We have repeatedly emphasized that it is essential for

appraisers to explain their reasoning because “‘[w]ithout any reasoned analysis, * *

* [the appraiser’s] report is useless.’” Friedman v. Commissioner, T.C. Memo.

2010-45 (quoting Jacobson v. Commissioner, T.C. Memo. 1999-401). Accordingly,

we do not accept Mr. Roberts’ estimate of the after value.

      As part of their approach to estimating the after value of the James Butler

property and under the guise of the comparable sales method, Mr. Eidson and Mr.
                                        - 74 -

Ryan both employed a method that we have labeled the “percentage diminution

approach”. See Friedberg v. Commissioner, T.C. Memo. 2011-238. That

approach might also be thought of as the “comparable easements approach”. As

applied by the appraisers here, the percentage diminution approach consisted of

finding other properties encumbered by conservation easements, ascertaining how

much those conservation easements decreased the values of the underlying

properties, and applying that percentage diminution to the subject property to

determine its after value.

      Although the appraisers labeled the method they applied the comparable

sales method, the two approaches are distinct. In contrast to the percentage

diminution approach, an appraiser using the comparable sales method finds sales

of similar properties encumbered by easements and makes appropriate price

adjustments for time, size, or other significant features. Wolfsen Land & Cattle

Co. v. Commissioner, 72 T.C. at 19. Once similar sales have been found and

proper adjustments made, the appraiser uses those adjusted sale prices to

determine the after value of the property being appraised. Hilborn v.

Commissioner, 85 T.C. at 690; Wolfsen Land & Cattle Co. v. Commissioner, 72

T.C. at 19. Perhaps the most significant difference between the comparable sales
                                        - 75 -

method and the percentage diminution method is that the former requires the

appraiser to find properties that are close to the property being appraised.

      The percentage diminution approach Mr. Eidson and Mr. Ryan employed as

part of their appraisals has been accepted by the Court in prior cases. See, e.g.,

Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C.

Memo. 2000-94; Johnston v. Commissioner, T.C. Memo. 1997-475; Losch v.

Commissioner, T.C. Memo. 1988-230. The method has been employed most often

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

are not available for the locale of the property being appraised. See Hughes v.

Commissioner, T.C. Memo. 2009-94; Losch v. Commissioner, T.C. Memo. 1988-

230. When estimating a percentage reduction associated with an easement on a

given property, it is essential that an appraiser provide adequate explanation and

analysis to justify the percentage. Scheidelman v. Commissioner, T.C. Memo.

2010-151.

      From our examination of our past cases dealing with appraisals applying the

percentage diminution method, we discern at least two important elements that must

be part of the appraiser’s analysis. The first element the appraiser must consider is

whether the properties have the same highest and best use. Hughes v.

Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C. Memo.
                                        - 76 -

2000-94. A conservation easement that changes the property’s highest and best use

will have a more dramatic impact on the property’s value than one that does not.

Hughes v. Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C.

Memo. 2000-94. Similarly, conservation easements will have different effects on

the values of properties with different highest and best uses. Hughes v.

Commissioner, T.C. Memo. 2009-94; Strasburg v. Commissioner, T.C. Memo.

2000-94.

      The second element the appraiser must consider is the similarity of the terms

of the conservation easements; unless the appraisal report includes details about the

terms of those other easements, the percentages the appraiser purports to derive are

of little utility. Strasburg v. Commissioner, T.C. Memo. 2000-94; Johnston v.

Commissioner, T.C. Memo. 1997-475; Losch v. Commissioner, T.C. Memo.

1988-230 . Other things being equal, a very restrictive easement will decrease the

value of a property more than a less restrictive easement. Strasburg

v. Commissioner, T.C. Memo. 2000-94; Johnston v. Commissioner, T.C. Memo.

1997-475. Accordingly, we will consider both of those elements in our analyses

of Mr. Eidson’s and Mr. Ryan’s use of the percentage diminution approach.

      As noted above, Mr. Eidson applied a two-step approach to estimating the

after value. He began by finding comparable properties that were already
                                        - 77 -

somewhat undesirable because of their unsuitability for development. All of those

properties were inferior to the James Butler property. He then further reduced the

values of those properties by a percentage diminution that he calculated on the

basis of the effect of other conservation easements. However, Mr. Eidson did not

discuss the terms of any of the other conservation easements. He acknowledged

that many of the other easement transactions had different highest and best uses,

and he stated that those transactions “are not directly comparable” to the

conservation easement on the subject property. The other conservation easements

indicated reductions in value of 40% to 84%, but Mr. Eidson did not attempt to

explain why some of those easements reduced the value of the underlying property

by more than twice as much as others. Indeed, he provided no details regarding

the restrictions imposed by the easements. That omission is significant. We do not

assume, as Mr. Eidson appears to have done, that those dramatically different

reductions in value were random. Rather, we believe those variations were caused

by differences in the transactions, especially differences in terms of the underlying

easements and the highest and best uses of the properties.19 Because he did not

compare the terms of the conservation easements, Mr. Eidson’s analysis is missing

      19
       Because Mr. Eidson’s report is devoid of details regarding the restrictions
imposed by those easements, we cannot definitely say why any of those easements
reduced the value of the underlying property by more than another.
                                         - 78 -

the second of the elements essential to the sound application of the percentage

diminution approach, i.e., an analysis of the similarity of the conservation

easements. See Strasburg v. Commissioner, T.C. Memo. 2000-94; Johnston v.

Commissioner, T.C. Memo. 1997-475; Losch v. Commissioner, T.C. Memo.

1988-230. Accordingly, we conclude that the percentage diminution approach

portion of his analysis is not useful.

      Even if Mr. Eidson’s application of the percentage diminution approach had

not been deficient, his two-step method would nonetheless have overestimated the

effect of the conservation easement. He should have applied any percentage

diminution to his estimate of the before value of the James Butler property itself, not

to a different value that he derived by comparing sales of inferior properties.

      However, Mr. Eidson’s first step does provide some useful data regarding the

value of undevelopable land in Muscogee County. As noted above, Mr. Eidson

failed to appropriately adjust his comparable sales to reflect market appreciation.

After correcting for that error, using 4% annual appreciation, and without adjusting

for topography, the comparable sales of undevelopable land range in price from

$5,943 to $6,492 per acre, with an average of about $6,300 per acre. The subject

property has topography superior to that of those properties, but its usability is

inferior because of the conservation easement. Although the terms
                                         - 79 -

of the conservation easement permit many of the uses for which buyers would

want to possess undevelopable land (e.g., recreation, light farming, and sparse

development), it imposes additional legal obligations. The superior topography of

the subject property will offset that inferiority to some extent. Accordingly, we

conclude that $6,300 per acre represents a useful estimate of the after value of the

subject property.

      Mr. Ryan was the only appraiser to identify rural estate homesites as the

highest and best use of the property after the donation of the conservation

easement, a conclusion we find acceptable given the rights reserved by the

conservation deeds. Like the other appraisers, Mr. Ryan was unable to find any

comparable sales of encumbered properties close to the James Butler property.

Mr. Ryan applied several different methods to estimate the conservation

easement’s effect on the after value, using triangulation to narrow the possible

range for that value. Mr. Ryan’s first two points of reference were the lowest-

priced comparable sale in Muscogee County (sale 5 above) and a 15-year mining

lease that decreased the value of the encumbered property by 26%. Mr. Ryan

concluded that the conservation easement on the subject property would decrease

its value by at least 26%, leaving it below the price of the property in sale 5.
                                        - 80 -

Although both of those conclusions have some merit, they do not come very close to

determining an after value for the subject property.

      For his third point of reference, Mr. Ryan employed the percentage

diminution approach using two conservation easements on rural properties. Unlike

Mr. Eidson, Mr. Ryan was careful to analyze the terms of each of those

conservation easements and compare them to the easement on the James Butler

property. However, his analysis had two shortcomings. Firstly, the “comparable”

conservation easements were both significantly more restrictive than the one on the

James Butler property. Because of that difference, both of those easements resulted

in a greater relative reduction in value than the easement on the James Butler

property. Although Mr. Ryan attempted to account for that fact, his attempt to do

so was unavoidably inexact.

      Secondly, it is unclear whether either of the properties had the same highest

and best use as the James Butler property. Mr. Ryan stated that the first of his two

comparable properties was unsuited for development and therefore had an inferior

highest and best use. That fact led him to conclude that the subject property’s value

would be reduced by more than the 34% reduction observed on his first comparable

property, even though that property was encumbered by a more restrictive easement.

Mr. Ryan’s report stated that the second property had development potential and
                                         - 81 -

that its zoning permitted some commercial development. Although the commercial

zoning would make part of the second property relatively more valuable, the price

per acre for that property reflects its rural environs, and Mr. Ryan did not explain

whether any development was likely in the relatively near future. Mr. Ryan

concluded that the value of the James Butler property would be reduced by less than

the 65% observed on his second comparable easement property because its terms

were more restrictive than those of the conservation easement on the subject

property. Mr. Ryan did not attach much precision to his estimate using the other

encumbered properties, stating only that they indicated the effect of the conservation

easement on the James Butler property would be a reduction of 34% to 65%.

      Although not inconsistent with his conclusion that the conservation easement

reduced the property’s value by 50%, Mr. Ryan’s approach does not offer strong

support for that conclusion. His valuation is little bolstered by his consideration of

estate lots in Muscogee County because, inter alia, he did not apply the discounted

cashflow method, which he would have needed to do in order to accurately estimate

the value of the property as separate sales of estate lots. Although we recognize

that valuation is far from an exact science, Mr. Ryan’s analysis seems very

imprecise.
                                        - 82 -

      Nonetheless, because Mr. Ryan’s valuation is consistent with Mr. Eidson’s

estimate of the value of undevelopable land in Muscogee County, we conclude that

a diminution in value of 50% is acceptable and further conclude that the after value

of the James Butler property was $6,250 per acre, or $2,458,300. Because only one

of the four appraisers concluded that the conservation easement added any value to

the Butler estate, we conclude that the conservation easement did not enhance its

value. Accordingly, we conclude that the value of the conservation easement

donated by petitioners with respect to the James Butler property was $2,458,300.

B.    The Susan Butler Property

      1.     The Appraisal Reports

             a.    Mr. Roberts’ Appraisal Report

      Mr. Roberts concluded that the highest and best use of the Susan Butler

property before being encumbered by the conservation easement was for

residential development. As with the James Butler property, Mr. Roberts

appraised the Susan Butler property using both the comparable sales method and

the discounted cashflow method. He used the same comparable sales despite the

fact that the Susan Butler property was only about 3% of the size of the James

Butler property. Using the comparable sales method and making adjustments, he
                                         - 83 -

concluded that the before value of the Susan Butler property was $15,000 per acre,

or $191,000.

      To estimate the after value of the Susan Butler property, Mr. Roberts applied

the same method he used to estimate the after value of the James Butler property.

He concluded that the 10.7 acres encumbered by the conservation easement were

worth $5,000 per acre, or about $54,000 and that the 2-acre building site was worth

$77,000, which he discounted to $49,000 using the discounted cashflow method.

He therefore estimated that the total after value of the Susan Butler property was

$103,000.

               b.   Mr. Eidson’s Appraisal Report

      Mr. Eidson concluded that the highest and best use of the unencumbered

Susan Butler property was residential development. Mr. Eidson applied the same

appraisal approach as he did with the James Butler property, using both the

discounted cashflow method and the comparable sales method. Like Mr. Roberts,

he used the same comparable sales that he used for the James Butler property

despite the fact that the Susan Butler property was a fraction of the size of the

James Butler property. He made adjustments to try to account for that size

discrepancy. On the basis of his sales comparison approach, Mr. Eidson estimated
                                        - 84 -

that the Susan Butler property was worth $40,000 per acre, or approximately

$510,000.

      To estimate the after value of the Susan Butler property, Mr. Eidson applied

the same two-step method he used on the James Butler property. He estimated that

the encumbered 10.7 acres were worth $39,500 in total, or about $3,700 per acre.

He estimated that the value of the reserved two-acre building site was

$80,000. He therefore estimated that the total after value of the Susan Butler

property was $119,500.

             c.     Mr. Quillian’s Appraisal Report

      Mr. Quillian concluded that the highest and best use of the Susan Butler

property before the conservation easement was for single-family residential

development. Unlike Mr. Roberts and Mr. Eidson and unlike his valuation of the

James Butler property, Mr. Quillian used only the comparable sales method to

appraise the Susan Butler property. He concluded that because there were sufficient

comparable sales of similarly sized and situated tracts of vacant land, the

comparable sales method would be more accurate than the discounted cashflow

approach. Also unlike Mr. Roberts and Mr. Eidson, Mr. Quillian did not reuse the

same comparable sales that he used to value the James Butler property. Instead, he

found sales of properties that were more similar in size to the Susan Butler
                                          - 85 -

property. After making various adjustments to his comparable sales, he concluded

that the before value of the Susan Butler property was $30,000 per acre, or about

$381,100.

      To estimate the after value of the Susan Butler property, Mr. Quillian found

six sales of land encumbered by conservation easements in rural counties in south

Georgia. He stated that none of the properties were comparable to the Susan Butler

property. Besides their rural locale, the properties were also significantly larger

than the Susan Butler property, ranging from 125 acres up to 3,250 acres. He did

not describe the terms of the easements on those properties, but he stated that, to the

best of his knowledge, the rights were “equal” to those under the conservation deed

on the Susan Butler property. The sale prices for those properties ranged from $400

per acre up to $1,764 per acre. With no explanation, Mr. Quillian deduced from

those sales that the value of the encumbered 10.7 acres of the Susan Butler property

was $5,000 per acre. On the basis of sales of nearby lots, he estimated that the two-

acre building site would sell for $75,000, resulting in a total after value for the

Susan Butler property of about $128,500.

             d.     Mr. Ryan’s Appraisal Report

      Mr. Ryan agreed with the other appraisers that the highest and best use of the

property before being encumbered by the conservation easement was for residential
                                        - 86 -

development. He agreed with Mr. Quillian that the best method for appraising the

property was the comparable sales method. Like Mr. Quillian, Mr. Ryan did not

use the same comparable sales to value both the James Butler property and the

Susan Butler property; instead, he selected sales of properties that were closer in

size to the Susan Butler property. After adjusting the prices of his comparable sales

for various factors including size, Mr. Ryan concluded that the before value of the

Susan Butler property was $20,000 per acre, or about $254,000.

      Unlike the other appraisers, Mr. Ryan identified a rural estate homesite as

the highest and best use of the property after the donation of the conservation

easement. He analyzed the terms of the conservation deed and determined that, in

addition to the two-acre building site, the owner would be able to conduct small-

scale farming, landscaping, and extensive recreational activities. On the basis of

that determination, he estimated the value of the property by examining sales of

comparable estate-style lots in Muscogee and Harris counties. He examined 20

sales of estate lots ranging in size from 5 acres up to 18 acres and prices ranging

from $40,000 to $180,000. After considering the merits of different comparable

sales and comparing factors such as location, size, and scenic features like
                                                 - 87 -

lakefronts, Mr. Ryan concluded that the Susan Butler property’s after value as an

estate lot was $150,000.

                   e.     Summary

          In summary, the appraisers estimated the following before and after values for

the Susan Butler property:

                              Roberts           Eidson                 Quillian            Ryan

Before                       $191,000           $510,000           $381,100              $254,000
After                         103,000            119,500            128,500               150,000
Easement value                 88,000            390,500            252,600               104,000

          2.       Analysis and Conclusion

                   a.     The Before Value

          The appraisers considered the following properties as comparable to the

Susan Butler property:

                                                                          Size     Price per     2003
     1              2
ID       Appraisers       Date        Address             Sale price     (acres)      acre       Price3

 1        GE, ZR         12/22/03   Blackmon Rd.     $1,607,694  97.44 $16,499                 $16,499
 2        DR              6/18/98   Garrett Rd.       3,705,500 423.25   8,755                  10,863
 3        GE                12/00   Veterans Pkwy.    2,440,994 132.00 18,492                   20,801
 4        GE              2/19/04   Bridgemill Dr.    3,686,265 164.83 22,500                   22,280
 7        DR              8/16/99   Macon & Pope Rd. 2,500,000 461.00    5,423                   6,407
 8        DR              10/6/00   Biggers Rd.         414,000  39.50 10,481                   11,790
11        GE                 1/03   Williams Rd.      1,175,500  34.00 34,574                   35,957
12        RQ              12/1/03   Osprey Cove         575,000  30.50 18,852                   18,852
13        DR            12/16/03    Williams Rd.      1,697,500  60.80 27,918                   27,918
15        RQ               6/1/01   Whitesville Walk    200,000   7.53 26,578                   29,316
16        ZR              9/20/01   Greystone Ct.     1,280,000  45.20 28,319                   30,931
17        ZR            11/15/02    Warm Springs Rd.    579,700  37.97 15,268                   15,879
                                                 - 88 -
18     RQ             12/1/03    Mobley Rd.                 580,000      15.88     36,522       36,522
19     ZR            12/22/03    Whitesville Rd.          1,266,500      29.80     42,500       42,500
20     RQ              4/1/04    Moore Rd.                   80,000       4.20     19,048       18,862
21     RQ             12/1/04    Moore Rd.                   87,400       4.20     20,833       20,032
22     RQ              1/1/05    Whitesville Rd.            175,000       8.79     19,909       19,143
        1
          The “ID” field contains numbers which we have assigned to each of the comparable sales
for convenience. Because some of the appraisers used the same sales in their appraisal of the
James Butler property, we have included those sales with the same identifying numbers, and we
have continued the numbering of the new comparable sales with 15, where we left off in our
previous table.
        2
          The entries in the “Appraisers” field are the first and last initials of each of the appraisers
who used that comparable sale in his report: GE = Gregory Eidson; RQ = Rudolph Quillian; DR
= David Roberts; and ZR = Zac Ryan.
        3
          Prices in this column have been adjusted to December 2003 prices using an estimated 4%
annual appreciation (for the reasons explained in the text above), adjusted to the nearest quarter
of a year from December 2003 (e.g., sale 2 has been adjusted to reflect 5.5 years of appreciation,
sale 4 to reflect -0.25 years, etc.).

As noted in the table above, we have adjusted the above prices to December 2003

prices to reflect 4% annual appreciation. Unlike the James Butler property, no part

of the Susan Butler property was substantially more development-ready than

another. That fact makes estimating the before value of the Susan Butler property a

simpler process. Among the 17 sale records above, there are a number of properties

that are very similar to the Susan Butler property without requiring significant

adjustments to account for various factors.

        Despite the availability of sales of similar properties, Mr. Roberts and Mr.

Eidson used the same comparable sales for both the James Butler property and the

Susan Butler property. Given the drastic difference in size between those two

properties and between the “comparable” properties and the Susan Butler property,
                                         - 89 -

we question their failure to use sales of more similarly sized properties. Although

they tried to account for differences in size between the Susan Butler property and

those in their comparable sales, their adjustments appear unsupported and their

resulting valuations do not match the observed sales of similarly sized properties

in Muscogee County. Neither Mr. Roberts nor Mr. Eidson provided an adequate

rationale for his failure to find sales of properties that were of comparable size.

Accordingly, we will give little weight to Mr. Roberts’ and Mr. Eidson’s estimates

of the before value of the Susan Butler property.

      Because we conclude that there is a sufficient number of truly comparable

sales, we will exclude some of the sales that we do not find comparable.

Properties in sales 11, 13, 15, 16, 18, and 19 were all zoned for denser

development than the Susan Butler property. Those differences in zoning resulted

in substantially higher prices for those properties, ranging from $27,918 to

$42,500 per acre. Properties in sales 15, 16, 18, and 19 were also significantly

closer to downtown Columbus, further inflating their prices. Properties in sales 2,

3, 4, and 7 were substantially larger than the Susan Butler property, deflating their

prices. Accordingly, we will not consider those sales except insofar as we

consider sale 4, of the Bridgemill property, as a point of reference. Finally, we

will not consider sale 8 because the property was inferior to the Susan Butler
                                          - 90 -

property in two respects: it had less desirable topography and lacked access to

sewer lines, resulting in a significantly lower price of $11,970 per acre.

      The properties in the other six sales were all either close to the Susan Butler

property or similarly situated vis-a-vis downtown Columbus. They demonstrate a

relatively narrow range of prices, from $15,879 to $20,032 per acre. We will

consider a few minor adjustments to those prices to account for the following

differences in the properties:

      Size       2003
ID   (acres)    $/Acre      Superior qualities             Inferior qualities

 1    97.44    $16,499                              No sewer, size
12    30.50     18,852                              Partial flood zone, topography, size
17    37.97    15,879 Slightly denser development   Size
20     4.20    18,862 Size
21     4.20    20,032 Size                          No sewer
22     8.79    19,143 Size                          No sewer, 20% flood zone

Properties in sales 1, 12, and 22 were generally inferior to the Susan Butler property

while properties in sales 21 and 17 had offsetting qualities and that in sale 20 was

generally superior. On the whole, we believe that the Susan Butler property would

have commanded a slightly higher price than any of those properties.

      We also consider sale 4, the Bridgemill site, because of its proximity to the

Susan Butler property both in time and geography. The Bridgemill property sold a
                                         - 91 -

few months after the valuation date for $22,500 per acre. As noted above, Mr.

White considered that property inferior to the choicest sections of the James Butler

property, but Mr. White did not indicate any interest in the Susan Butler property

and it was not one of the properties in Muscogee County that he considered ready

for development. Accordingly, we infer that the Susan Butler property was

somewhat inferior but generally similar in quality to the Bridgemill site, which was

just south of it. Because the Bridgemill site was much larger, the Susan Butler

property would have sold for a relatively higher price per acre, offsetting its inferior

quality to some degree.

      On the basis of the foregoing, we conclude that the Susan Butler property was

worth $22,000 per acre in the before condition, or $279,400.

             b.     The After Value

      For the same reasons we explained above with respect to the James Butler

property, we conclude that Mr. Eidson’s and Mr. Roberts’ methods of appraising

the after value of the Susan Butler property were unacceptable and overestimated

the loss in value attributable to the easement.

      Mr. Quillian attempted to use the comparable sales method to estimate the

after value of the property, but the only sales of easement-encumbered land that he

was able to find were sales of large tracts in rural portions of south Georgia.
                                         - 92 -

Although he attempted to correct for the differences due to size and location, he did

not explain his adjustments and his conclusion seems arbitrary. He also failed to

describe the terms of the easements encumbering the south Georgia properties he

considered. Those failures were significant, and consequently we attach little

weight to Mr. Quillian’s conclusion regarding the after value.

      Mr. Ryan was the only appraiser to carefully consider the terms of the

conservation deed and to determine that the highest and best use of the property

after being encumbered by the conservation easement was for a rural estate. We

agree with his determination and generally found his appraisal method of

considering sales of other rural estates to be acceptable. However, we believe that

he failed to adequately consider the reduction in value from the conservation

easement. The conservation easement would require any owner of the Susan Butler

property to comply with the terms of the conservation deed. Even if those terms do

not interfere with the normal use of rural estate lots, they do impose additional

requirements on the owner, making the Susan Butler property less attractive.

Consequently, we believe Mr. Ryan’s after value should be adjusted downward

slightly to $140,000.

      That value is slightly more than the March 2003 sale price of an interior

13.5-acre estate lot in the north of Harris County, a significantly inferior location.
                                         - 93 -

That property sold for $130,000, or approximately $134,000 adjusted to December

2003 pricing. Several sales of interior estate lots in Muscogee County during 1999

show that, adjusted to December 2003 prices, estate lots of about six to seven acres

sold for approximately $140,000. Because the Susan Butler property is twice as

large as those lots, we believe its size would make it as attractive as those smaller

lots despite the conservation easement. Consequently, those sales indicate that

$140,000 is an acceptable estimate of the after value for the Susan Butler property.

Accordingly, we conclude that the value of the conservation easement petitioners

donated with respect to the Susan Butler property was $139,400.

Issue 3. Whether Petitioners’ Contribution of a Conservation Easement on the
Kolomoki Plantation Properties Was a Qualified Conservation Contribution Under
Section 170(h)

                                     Background

         Petitioners acquired the property known as Kolomoki Plantation through three

separate purchases during 2001. In all, petitioners acquired approximately 5,600

acres.

         The Kolomoki Plantation is in Early and Calhoun Counties in the

southwestern corner of Georgia. During 2004, Early County had a population of

approximately 12,091, and Calhoun County had a population of approximately
                                          - 94 -

6,320. Both Calhoun and Early Counties are primarily agricultural, and the area is

very rural. The closest stores and schools are in Blakely, a small town

approximately eight miles south of Kolomoki Plantation.

      Viewed from the north, Kolomoki Plantation’s irregular shape resembles a

pointing dog, its front leg raised to indicate the presence of game. That shape is

appropriate because the property is primarily a “shooting plantation”, though it is

also used for agriculture and silviculture. Kolomoki Plantation is similar to other

nearby shooting plantations, which are common in the neighborhood. The property

has been used as a shooting plantation for at least three decades, but petitioners

have converted more of the agricultural land into quail habitat since they acquired

the property.

      Improvements on Kolomoki Plantation include a main lodge with guest house,

a headquarters office, a maintenance barn, a manager’s house, a grain storage

facility, four tenant houses, two equipment shelters, kennels, and a hayfield cabin.

The main lodge and guest house overlook a 25-acre pond, the largest of seven

manmade ponds on the property. Near the main lodge, petitioners maintain a

hayfield of approximately 30 acres, which includes fenced pasture for horses. That

field has been used as a landing strip for private aircraft.
                                         - 95 -

      On December 29, 2003, the L.L.C. contributed to COLT a conservation

easement on 1,780 acres of Kolomoki Plantation (2003 easement). Referring to the

above description of the property’s shape as a pointing dog, the 2003 easement

covered the portions of the property corresponding to the dog’s hind legs and tail,

its front legs, and its snout. It did not cover the torso or the remainder of the head.

On December 23, 2004, the L.L.C. contributed a second easement on 2,450

additional acres of Kolomoki plantation (2004 easement). The 2004 easement

covered various noncontiguous portions of the property not covered by the 2003

property. The remainder of the property that is not subject to either the 2003 or

2004 easement has been reserved for use as a wetland mitigation bank.20

      Petitioners engaged Louis E. Clark to appraise the 2003 and 2004

easements. Mr. Clark prepared appraisal reports that the L.L.C. attached to its

2003 and 2004 Forms 1065. During the course of his examination, respondent


      20
        A mitigation bank is “a wetland, stream, or other aquatic resource
area that has been restored, established, enhanced, or (in certain circumstances)
preserved for the purpose of providing compensation for unavoidable
impacts to aquatic resources permitted under Section 404 [of the Clean Water
Act] or a similar state or local wetland regulation.” U.S. Environmental
Protection Agency, Mitigation Banking Factsheet, available at
http://www.epa.gov/owow/wetlands/facts/fact16.html. The mitigation bank receives
“compensatory mitigation credits” commensurate with the amount of wetlands
restored, which it may sell to third parties who must purchase such credits before
they can damage existing wetlands. Id.
                                          - 96 -

reviewed Mr. Clark’s reports and raised various questions about them. Mr. Clark

prepared a supplemental report in which he attempted to address those questions.

Unfortunately, Mr. Clark died on May 30, 2009, and was therefore unavailable to

testify at trial. In preparation for the instant litigation, petitioners engaged R. Bryan

Almand to perform a retrospective valuation of the 2003 and 2004 easements. Mr.

Almand testified at trial.

      The deeds of conservation easement through which the L.L.C. conveyed the

2003 and 2004 easements to COLT significantly restrict petitioners’ use of

Kolomoki Plantation, but nonetheless reserve a number of rights. The 2004

conservation deed amends several portions of the 2003 conservation deed,

enlarging the portion of the property encumbered by the easement and permitting

the encumbered property to be subdivided into 15 tracts instead of only 5. The

2004 amendment also applies to the 2003 easement, and both the 2003 and 2004

conservation easements are subject to the same restrictions. Because both the

2003 and 2004 easements are subject to the 2003 conservation deed as amended

by the 2004 amendment, we shall refer to only one conservation deed. The

conservation deed begins with a series of recitals, proclaiming general

conservation values and purposes. It incorporates by reference three attachments: a

legal description of the property, a forest management plan, and a baseline
                                          - 97 -

documentation report. Article II of the conservation deed details certain rights that

are expressly prohibited, restricted, permitted, or reserved.

      The conservation deed permits all existing agricultural, grazing, and

horticultural uses of Kolomoki Plantation to continue. Additionally, it permits

areas that were once fields but in which there is now growing timber, as described

in the baseline documents, to be reclaimed for agricultural use at any time. The

maps in the baseline documents (i.e., the environmental reports) show that the land

available for cultivation makes up at least 75% of the easement area.21 The

conservation deed allows the use of agrichemicals such as fertilizers, insecticides,

herbicides, pesticides, and rodenticides provided their use does not have a

“demonstrable detrimental effect on the Conservation Purposes”. The deed

prohibits certain industrial agricultural practices such as feed lots, and it prohibits

the importation of game farm animals other than whitetail deer or game birds. It

permits the commercial operation of hunting clubs and the lease of land for

hunting purposes. It also permits commercial timber harvesting consistent with a

timber management plan approved by COLT provided that such timber harvesting

is not “detrimental to the scenic, historic, natural area and rare species habitat


      21
         Such land includes the land on the maps labeled “Crop field”, “Brushy
field”, “Planted Pine/Open Pine Forest”, and “Horse Pasture and Barn”.
                                         - 98 -

protection, wildlife and game habitat protection, and sustainable forestry

purposes”.

      The conservation deed prohibits the dumping of nonbiodegradable wastes on

the property, but permits the dumping of biodegradable wastes removed from the

property as long as such wastes are not visible from roads and are at least 200 feet

from any watercourse. Mining, excavation, and dredging are prohibited except

insofar as those resources are used on the property itself and only if the area

excavated is restored to the appropriate grade.

      The conservation deed permits Kolomoki Plantation to be subdivided into up

to 15 tracts of land, provided that each tract is at least 200 acres. Any subdivided

portion of the original property remains subject to the terms of the conservation

deed. The L.L.C. may transfer any of the subdivided lots to any purchaser, but for

transfers made after December 31, 2013, transfers to anyone other than one of

petitioners’ descendants are subject to a transfer fee of 0.5% of the purchase price

that is payable to COLT’s stewardship fund.

      The owner of any subdivided portion of less than 500 acres is permitted to

build the following structures on a 5-acre building envelope: a single-family

residence; an unlimited number of nonresidential buildings such as garages,

gazebos, sheds, boat houses, and other recreational facilities; a secondary
                                        - 99 -

residential building for each additional 100 acres beyond the first 100 acres; and

farm buildings of not more than 4,500 square feet under roof. Such residential

buildings may be rented to tenants. Additionally, with permission from COLT, the

owner may construct any such nonresidential agricultural and recreational structures

“as may be reasonably necessary for the uses permitted”. The owner of any

subdivided portion of more than 500 acres is permitted to construct a headquarters

site of up to 15 acres, which may contain the following structures: two residential

dwellings; one lodge for temporary guests; three guest houses; and any number of

sheds, barns, kennels, garages, picnic shelters, and barns “reasonably necessary to

conduct permitted activities”. The total ground coverage under roof at each

headquarters site is not to exceed 15,000 square feet.   Although no house on the

headquarters site may be used as condominiums or apartments for tenants, the

houses may be leased, including to paying members of a hunting club. The location

of all headquarters sites and building envelopes is subject to approval by COLT.

      The conservation deed permits the construction of permeable roads and

driveways to access any permitted structure. It also permits the owner to construct

and maintain a private grass airstrip to access Kolomoki Plantation. The

conservation deed allows the construction of new ponds and lakes in locations
                                        - 100 -

subject to the approval of COLT. Except for the uses and activities expressly

granted under the conservation deed, the deed prohibits all other development.

Additionally, the conservation deed prohibits any use that would impair or destroy

significant conservation values. The conservation deed does not permit the public to

enter Kolomoki Plantation.

      The conservation deed grants COLT the right to enter Kolomoki Plantation

periodically to inspect the property and ensure that the landowners are complying

with the terms of the conservation deed. Staff from COLT visit Kolomoki

Plantation twice a year to ensure that petitioners are complying with the terms of the

conservation deed. COLT also has the right, if it determines that the conservation

values have been damaged, to require that the owners restore Kolomoki Plantation

to the condition required by the conservation deed.

      The baseline documentation referred to in the conservation deed consists of

reports prepared by the environmental consultants, Ms. Mote and Ms. Bouthillier.

Those environmental reports are identical in all material respects to the

environmental reports Ms. Mote and Ms. Bouthillier prepared with respect to the

Muscogee County properties. Although they describe different properties and list

different species, the conclusions and recommendations in both sets of reports are

nearly identical and use the same language. As with the Muscogee County
                                       - 101 -

properties, the environmental consultants provided supplemental environmental

reports in 2010, which include a new section in which they more specifically

address conservation purposes as provided in the Code and the regulations. The

supplemental environmental reports specifically identify certain high-quality

terrestrial and aquatic communities found on Kolomoki Plantation. For instance, the

supplemental report with respect to the 2003 easement stated:

            During the 2003 surveys, high quality aquatic and terrestrial
      communities were identified on all of the Kolomoki Tract subparcels (North
      Lane, Odom, and U.S. 27). These communities were described in the
      Baseline Report as Hardwood Forest, Pine Forest, Open/Brushy Fields, and
      Open Water.

             The Upland Hardwood Forests occur primarily on the North Lane and
      U.S. 27 subtracts of the Kolomoki Tract. These areas are primarily sandy
      loams with a high diversity of mature upland hardwood trees. Much of the
      native upland hardwood forests in this region have been cut down for farming
      and silviculture use. Upland Hardwood Forests provide habitat for species on
      the state, federal, and CWCS [Comprehensive Wildlife Conservation Strategy
      for Georgia] High Priority Species lists.

            Pine Forests and Open/Brush Fields provide suitable habitat for
      migratory song birds, reptiles, and small mammals that have been listed as
      species deserving of protection. Pine Forests and Open/Brush Fields were
      found on all of the Kolomoki Tract. Managing the pine areas for long leaf
      pine and encouraging brushy open areas will continue to attract many wildlife
      species which are protected or species of concern.

             The 2003 surveys also identified high quality aquatic communities in
      Little Kolomoki Creek and Spring Creek, their tributaries, and associated
      floodplain hardwoods.
                                        - 102 -

The supplemental report with respect to the 2004 easement identified similar high-

quality ecosystems on that portion of Kolomoki Plantation.

      Although the environmental consultants did not find any rare, endangered, or

threatened species on Kolomoki Plantation, they identified habitat on the property

that is normally home to several species that are considered rare, endangered, or

threatened: variable-leaf Indian plantain (a plant found in swamps and muddy

streams); Florida willow (a plant found in swamps and muddy streams); chaffseed (a

plant found on the edges of ponds and wet grassy areas); spotted bullhead (a fish

found in large streams with moderate current and rocky bottoms); bluestripe shiner

(a fish found in large creeks with rocky bottoms); Bachman’s sparrow (a bird found

in open pine woods and old pastures with dense ground cover); and alligator

snapping turtle (a reptile found in rivers, lakes, swamps, and large ponds).

      The supplemental environmental reports do not mention any of the L.L.C.’s

retained rights besides the following brief discussion of the reserved building

envelopes: “Even with the retained rights for building envelopes, the Kolomoki

Tract would maintain the scale of rural residential open space historically present in

the region. High quality of life associated with open space and wildlife is

exemplified in the Kolomoki Tract.”
                                        - 103 -

                                     Discussion

A.    Legal Standard

      The legal standard with respect to whether the L.L.C.’s contributions of the

conservation easements on Kolomoki Plantation were “qualified conservation

contributions” under section 170(h) is the same as that explained above with respect

to the Muscogee County properties. For the reasons explained below, we conclude

that the L.L.C.’s contributions satisfy the section 170(h)(4)(A)(ii) conservation

purpose of protecting a relatively natural habitat (conservation purpose).

Accordingly, we need not address petitioners’ alternative argument that the

contributions protect open space pursuant to section 170(h)(4)(A)(iii).

      We must consider what rights are reserved under the conservation deed and

decide whether, if Kolomoki Plantation were developed to the extent permitted by

the conservation deed, the conservation purpose would be preserved in perpetuity as

required by section 170(h)(5)(A).

B.    What Rights Are Reserved Under the Conservation Deeds?

      As described above, the conservation deed preserves numerous rights for

the L.L.C., subject to the overarching language in the conservation deed preserving

the conservation purposes. The L.L.C. may subdivide the portion of Kolomoki

Plantation encumbered by the conservation easement into 15 smaller plots of at least
                                       - 104 -

200 acres and sell off those portions of the property. After December 31, 2013, any

of those sales to anyone other than one of petitioners’ descendants would be subject

to a 0.5% transfer fee. Any subsequent owners of those properties would be able to

operate them as farms, private shooting plantations, or hunting clubs. Although

farming is not permitted in areas of older forests, such areas make up a small

percentage of the property. The conservation deed imposes a few restrictions on the

manner of farming, including prohibitions on certain industrial farming practices and

limits on the use of chemicals that would result in demonstrable damage to the

ecosystems on the property. Similarly, although commercial timber harvesting is

permitted, the conservation deed and the forest management plan limit the manner in

which such harvesting may occur.22




      22
        The parties disagree about whether the conservation deed effectively
incorporates by reference the unrecorded environmental reports and the forest
management plan. For the reasons explained above with respect to a similar dispute
regarding the conservation deeds on the Muscogee County properties, we agree
with petitioners that those documents were appropriately incorporated by reference
under Georgia law. Accordingly, the restrictions in those documents are applicable.
                                        - 105 -

C.    Does the Conservation Deed Preserve the Conservation
      Purposes in Perpetuity?

      As with respect to the conservation easements on the Muscogee County

properties, the record concerning whether the conservation deed preserves the

conservation purpose in perpetuity is sparse. Although the environmental reports

and supplemental environmental reports show that Kolomoki Plantation as it existed

in 2003 and 2004 provided significant relatively natural habitat, those reports do not

establish that the conservation deed effectively preserves that relatively natural

habitat. At trial, Ms. Bouthillier testified as follows regarding the reserved rights on

the Kolomoki Plantation:

             Q. And you’re familiar with some of the retained rights on both sets of
      properties. And with respect to the retained rights on Kolomoki from an
      ecological point of view there are retained rights for a lodge if there’s a 500-
      acre -- are you familiar with those limitations?

             A. Yes, sir.

            Q. Do you view that as a good thing or a bad thing from an ecological
      perspective.

             A. I think that reserving the right to have future areas and have access
      to those areas is important, because it involves the usage by other people. So
      if you’ve got -- for instance, if you’ve got a large tract of land -- thousands of
      acres -- with access to road what I see day in and day out is those areas
      become dumping grounds because -- just the other day last week I spoke with
      somebody and he said, “I haven’t been to this part of my property in 25
      years.” And so at that point in time, you know, people had been dumping on
                                           - 106 -

      his property. And so I think it’s important to maintain like-minded people to
      have access to the conservation properties.


             Q. And would you include in that like-minded group hunters?

             A. Yes, sir.

Ms. Mote agreed, also testifying that the building envelopes did not interfere with

the conservation purpose. She stated:

      You know, if we have -- if we put a structure in a spot on 500 acres -- one
      structure, two structures, five structures -- versus going in and mowing the
      whole thing down and putting in half-acre, one-acre lots that’s a huge
      difference. So, you know, it’s not going to affect that significantly with that
      small amount of structures on a 500-acre parcel.

As with our discussion above concerning the conservation easements on the

Muscogee County properties, we conclude that petitioners have presented credible

evidence--in the form of the expert testimony described above, the overarching

rights granted to COLT in the conservation deed, and the evidence that COLT

regularly monitors Kolomoki Plantation--that the conservation deed preserves the

conservation purpose, and the burden of proof therefore shifts to respondent.

Because respondent offered no contrary expert witness testimony and pointed to no

evidence that would suggest that COLT is likely to abandon its right to enforce the

conservation deeds, we conclude that petitioners have established that the

conservation deed protects significant habitat and therefore satisfies the
                                         - 107 -

requirements of section 170(h)(4)(A)(ii) and section 1.170A-14(d)(3), Income Tax

Regs.

Issue 4. The Proper Value of the Conservation Contributions with Respect to
Kolomoki Plantation

                                       Discussion

A.      The Admissibility of the Clark Reports

        Mr. Clark wrote appraisal reports with respect to the 2003 and 2004

conservation easements on Kolomoki Plantation (Clark reports). Because Mr. Clark

died before trial, he was unable to testify about those reports. The parties agree that

the Clark reports are admissible for the nonhearsay purposes of showing what

petitioners relied upon when they calculated their deductions and showing that

petitioners cooperated with respondent during his examination. The parties also

agree that because of Mr. Clark’s unavailability to testify, the reports constitute

hearsay if offered for the truth of the matters contained therein. However,

petitioners contend that the Clark reports are admissible pursuant to one or more

hearsay exceptions. Respondent disagrees.

        Generally, hearsay is “a statement, other than one made by the declarant

while testifying at the trial or hearing, offered in evidence to prove the truth of the

matter asserted.” Fed. R. Evid. 801(c). The term “statement” includes written
                                         - 108 -

assertions. Fed. R. Evid. 801(a)(1). Hearsay is not admissible to prove the truth of

the matter asserted unless an exception to the hearsay rule applies. See Fed. R.

Evid. 802, 803, 804, 807. In general, we will not admit an appraisal report as

evidence of fair market value unless the author of the report testifies at trial and is

available for cross-examination. Van Der AA Invs., Inc. v. Commissioner, 125 T.C.

1, 7 (2005); see also Evans v. Commissioner, T.C. Memo. 2010-207; Droz v.

Commissioner, T.C. Memo. 1996-81. We have applied that general rule to exclude

an appraisal report where the appraiser died before trial and therefore was

unavailable to testify.23 See Waddell v. Commissioner, 86 T.C. 848, 878 (1986),

aff’d, 841 F.2d 264 (9th Cir. 1988).

      Petitioners contend that the Clark reports are admissible under rule 804(b)(1)

of the Federal Rules of Evidence, which states:

      23
         Petitioners contend that other courts have admitted reports from deceased
experts, and they cite two cases in support of that contention. In United States v.
Parks, 68 F.3d 860 (5th Cir. 1995), the court dismissed the criminal defendant’s
argument that the Government’s delay in bringing charges had prejudiced the
defendant because, inter alia, the author of some appraisal reports died before trial.
In dismissing the defendant’s argument, the Court of Appeals noted that the trial
court had admitted the appraisal reports because the Government had not objected
to their admission. The admissibility of those reports was not at issue in that case,
and it therefore does not support petitioners’ contention. The second case cited by
petitioners, United States v. Thevis, 84 F.R.D. 57 (N.D. Ga. 1979), has nothing to
do with the admissibility of expert reports. Rather, the issue in that case concerned
the admissibility of a murdered witness’s prior testimony before a grand jury.
Accordingly, neither of the cases petitioners cited supports their contention.
                                        - 109 -

      Former testimony. Testimony given as a witness at another hearing of the
      same or a different proceeding, or in a deposition taken in compliance with
      law in the course of the same or another proceeding, if the party against
      whom the testimony is now offered, or, in a civil action or proceeding, a
      predecessor in interest, had an opportunity and similar motive to develop
      the testimony by direct, cross, or redirect examination.[24]

Petitioners contend that the Clark reports are admissible under that exception

because respondent interviewed Mr. Clark during respondent’s examination and

because Mr. Clark submitted supplemental reports in response to questions raised

during the examination. We disagree. Respondent’s interview with Mr. Clark

during the examination of petitioners’ returns was not at a hearing and respondent




      24
           Effective December 1, 2011, Fed. R. Evid. 804(b)(1) was amended to read:

      (b) The Exceptions. The following are not excluded by the rule against
      hearsay if the declarant is unavailable as a witness:

               (1) Former Testimony. Testimony that:

                     (A) was given as a witness at a trial, hearing, or lawful
                     deposition, whether given during the current proceeding or a
                     different one; and

                     (B) is now offered against a party who had--or, in a civil case,
                     whose predecessor in interest had--an opportunity and similar
                     motive to develop it by direct, cross-, or redirect examination.

Those changes are “intended to be stylistic only” and not “to change any result in
any ruling on evidence admissibility.” Fed. R. Evid. 804 advisory committee’s note.
                                        - 110 -

did not have the opportunity to cross-examine Mr. Clark under oath. As the Court

of Appeals for the Sixth Circuit has explained:

      A hearing connotes some kind of adversarial proceeding presided over by an
      impartial third party, while “deposition” is a term of art referring to the
      out-of-court adversarial questioning of a witness under oath. Writing and
      signing a narrative affidavit during an interview with Government officers
      plainly is not the same as testimony given during a hearing or deposition.

United States v. Hunt, 521 F.3d 636, 643 (6th Cir. 2008). The interview and signed

affidavit in that case are similar to the interview with Mr. Clark and his

supplementary report in the instant case, and we find the Court of Appeals’

reasoning persuasive. We have similarly held that a signed affidavit from a

deceased attorney was not admissible under rule 804(b)(1) of the Federal Rules of

Evidence because it was “not testimony from a prior hearing or deposition and

respondent had no opportunity to cross-examine” the affiant. Escobar v.

Commissioner, T.C. Memo. 1983-205. Accordingly, we conclude that the Clark

reports are not admissible pursuant to rule 804(b)(1) of the Federal Rules of

Evidence.

      Petitioners also contend that the Clark reports are admissible pursuant to rule

807 of the Federal Rules of Evidence, under which hearsay not covered by the

exceptions in rule 803 or 804 but having “equivalent circumstantial guaranties of

trustworthiness”, is admissible:
                                        - 111 -

      if the court determines that (A) the statement is offered as evidence of a
      material fact; (B) the statement is more probative on the point for which it is
      offered than any other evidence which the proponent can procure through
      reasonable efforts; and (C) the general purposes of * * * [the Federal Rules
      of Evidence] and the interests of justice will best be served by admission of
      the statement into evidence. * * *[25]

The Court of Appeals for the Eleventh Circuit has affirmed that the residual

exception under rule 807 of the Federal Rules of Evidence is to be used “‘very

rarely, and only in exceptional circumstances’” and that it “‘appl[ies] only when

certain exceptional guarantees of trustworthiness exist and when high degrees of


      25
      Effective December 1, 2011, the applicable language of Fed. R. Evid. 807
was amended to read:

      (a) In General. Under the following circumstances, a hearsay statement is not
      excluded by the rule against hearsay even if the statement is not specifically
      covered by a hearsay exception in Rule 803 or 804:

             (1) the statement has equivalent circumstantial guarantees of
             trustworthiness;

             (2) it is offered as evidence of a material fact;

             (3) it is more probative on the point for which it is offered than any
             other evidence that the proponent can obtain through reasonable
             efforts; and

             (4) admitting it will best serve the purposes of these rules and the
             interests of justice.

Those changes are “intended to be stylistic only” and not “to change any result in
any ruling on evidence admissibility.” Fed. R. Evid. 807 advisory committee’s note.
                                        - 112 -

probativeness and necessity are present’”. United Techs. Corp. v. Mazer, 556 F.3d

1260, 1279 (11th Cir. 2009) (quoting United States v. Ingram, 501 F.3d 963, 967

(8th Cir. 2007), and United States v. Wright, 363 F.3d 237, 245 (3d Cir. 2004)).

      The Clark reports are inadmissible under rule 807 of the Federal Rules of

Evidence both because they lack equivalent circumstantial guaranties of

trustworthiness and because they are not more probative than any other evidence

available to petitioners. Petitioners argue that the Clark reports have equivalent

circumstantial guaranties of trustworthiness because they were not prepared for

purposes of litigation and because Mr. Clark held the MAI designation and was

therefore bound to high standards of accuracy. However, petitioners’ arguments run

contrary to the Court’s experience reviewing appraisal reports that taxpayers have

submitted with their returns. We have observed that there is a “cottage industry of

experts who function primarily in the market for tax benefits”, Boltar, L.L.C. v.

Commissioner, 136 T.C. 326 335 (2011), and we have frequently concluded that

appraisals submitted with taxpayers’ returns overstated the values of claimed

deductions even when those reports were prepared long before the commencement

of litigation, see id.; Jacobson v. Commissioner, T.C. Memo. 1989-606; Fannon v.

Commissioner, T.C. Memo. 1989-136. On the basis of the foregoing, we reject
                                        - 113 -

petitioners’ contention that the Clark reports have circumstantial guaranties of

trustworthiness.

      Additionally, we note that the Clark reports are not more probative than any

other evidence petitioners can produce. Indeed, petitioners have produced reports

appraising Kolomoki Plantation written by Mr. Almand.

      On cross-examination during trial, respondent effectively attacked the

conclusions of many of petitioners’ appraisers, and we conclude that it would not be

in the interests of justice to admit the Clark reports without allowing respondent to

have the opportunity to cross-examine Mr. Clark. Accordingly, we conclude that

the Clark reports are inadmissible hearsay.26

B.    Valuing the Easements on Kolomoki Plantation

      1.     The Appraisal Reports

             a.     Mr. Almand’s Appraisal Report

      Mr. Almand is a self-employed real estate appraiser in Valdosta, Georgia.

His work is primarily concentrated in southern Georgia. Mr. Almand has more




      26
        Petitioners had also sought admission of the Clark reports under the guise of
a “desk review” conducted by Mr. Quillian. Respondent filed a motion in limine to
exclude Mr. Quillian’s testimony regarding those desk reviews. However, at trial,
petitioners abandoned their attempt to have the Clark reports admitted through Mr.
Quillian. Accordingly, we have denied respondent’s motion as moot.
                                      - 114 -

than 40 years of experience appraising properties, and he holds the MAI designation

from the Appraisal Institute. His clients have included the Georgia Department of

Natural Resources, the Nature Conservancy, the Georgia Power Company, many

banks, and several railroads.

      Mr. Almand concluded that the highest and best use of Kolomoki Plantation

before the donation of the conservation easements was its current use, a working

farm and shooting plantation. To estimate the before value of the property, Mr.

Almand used the sales comparison approach. He found nine sales of comparable

properties and made various adjustments to each, including adjustments for the

value of timber and improvements. After making those adjustments, he found that

the six sales of properties he considered most comparable to Kolomoki Plantation

had adjusted prices ranging from $2,186 to $2,938 per acre. Of those sales, four

were within the range of $2,559 to $2,772 per acre. On the basis of those numbers,

Mr. Almand estimated that the before value of Kolomoki Plantation was $2,650 per

acre, or about $14,900,000.27

      Mr. Almand concluded that the highest and best use of the property was

unchanged after the donation of the conservation easements, but he noted that the

      27
        Mr. Almand included the value of improvements, which he estimated to be
$1,330,000, or $237 per acre, when he estimated the before value of Kolomoki
Plantation.
                                       - 115 -

property could no longer be subdivided into as many smaller tracts of land as it

could have been before the donation. Combined with the other restrictions imposed

by the conservation deeds, Mr. Almand concluded that the diminished subdivision

rights decreased Kolomoki Plantation’s value despite its unchanged highest and best

use. To estimate the magnitude of that effect, Mr. Almand applied the percentage

diminution approach, considering the impact of conservation easements on a number

of properties in south Georgia and north Florida. He concluded that the

conservation easement reduced the value of the encumbered portion of Kolomoki

Plantation by 40%, or by approximately $2 million.

      To estimate the value of Kolomoki Plantation before the donation of 2004

easement, Mr. Almand adjusted the 2003 after value of the property to account for

market conditions, timber growth, fluctuations in the price of timber, and the value

of timber that had been harvested during 2004. He estimated that the 2004 before

value was $2,432 per acre, or about $13,650,000.

      Mr. Almand applied the same method to value to the 2004 easement, and he

concluded that the 2004 easement also diminished the value of the encumbered

portion by 40%. He therefore estimated that the value of the 2004 easement was

$2,700,000. Mr. Almand did not consider the mitigation bank when he appraised
                                        - 116 -

the property because he reported that no portion of the mitigation bank was

approved by the U.S. Army Corps of Engineers until 2005.

             b.     Mr. Ryan’s Appraisal Report

      Mr. Ryan concluded that the highest and best use of the Kolomoki Plantation

property before the donation of the conservation easements was a combination of

agricultural, silvicultural, and recreational uses, combined with low-density rural

residential development. He noted that there was also potential to use the property

as a mitigation bank. He used the sales comparison approach to estimate the before

value of the property. He found seven sales of comparable properties, five of which

were also sales considered by Mr. Almand. Mr. Ryan adjusted the sale price of

each of those properties to account for the value of timber on each property and to

exclude value contributed by improvements, quotas, and personalty. However, he

made no adjustment to account for appreciation because he determined that the

market for shooting plantations was stable during that period. He then evaluated

each of the seven comparable properties, determining whether those properties were

superior or inferior to Kolomoki Plantation. He determined that the before value of

Kolomoki Plantation was more than $2,267 per acre but less than $2,380 per acre.

On that basis, he estimated that the value of Kolomoki Plantation was $2,300 per
                                        - 117 -

acre, or $12,880,000. Unlike Mr. Almand’s before value, Mr. Ryan’s before value

does not include the value of improvements on the property.

      Like Mr. Almand, Mr. Ryan concluded that the highest and best use of the

property was unchanged after the donation of the conservation easement. However,

he stated that the agricultural and silvicultural uses were “nominally restricted” and

the density of the property’s residential development potential was decreased. To

estimate by how much those restrictions decreased Kolomoki Plantation’s value,

Mr. Ryan used two methods: the percentage diminution approach and what he

termed a “revised sales comparison approach” in which he reconsidered whether

Kolomoki Plantation was inferior or superior to the sales of comparable properties

he already considered. When he applied the latter method, Mr. Ryan concluded that

the property was inferior to all but two of his comparable properties, and he

considered Kolomoki Plantation to be comparable to those properties after the

easement. That method led him to conclude that the 2003 after value of the property

was $2,000 per acre.

      To apply the percentage diminution approach, Mr. Ryan considered the same

three sales that he considered with respect to the Muscogee County properties,

described above. Mr. Ryan concluded that the conservation easement on Kolomoki

Plantation diminished the encumbered portion of the property by more than the 15-
                                         - 118 -

year mining lease. However, he concluded that the diminution in value was less

than the 34% or 65% diminution observed on his other two comparable sales. He

compared the terms of the 2003 easement to the easements on both of those

properties and concluded that the easement on Kolomoki Plantation was less

restrictive than either of them. He noted that the easement on the property with a

34% diminution forbade all subdivision of the 1,219-acre tract, that it permitted the

construction of only two residences and one barn, that it permitted no new road

construction, and that it had more restrictions on the agricultural and silvicultural

uses of the property than did the easement with respect to Kolomoki. Mr. Ryan

concluded that the 2003 easement diminished the value of the encumbered portion

of Kolomoki Plantation by 30%, to approximately $2,077 per acre.

      Mr. Ryan subsequently reconciled his estimate of the after value using the

percentage diminution method and his revised sales comparison approach. He

concluded that the 2003 after value of Kolomoki Plantation was $11,400,000, or

approximately $2,036 per acre. He therefore concluded that the value of the 2003

conservation easement was $1,480,000.

      Instead of merely adjusting his 2003 after value to arrive at a before value

with respect to the 2004 Kolomoki easement, Mr. Ryan again used the comparable
                                      - 119 -

sales method to analyze the property’s before value. He used the same seven sales

that he used to estimate the 2003 before value, and he also added another sale from

2004. Mr. Ryan concluded that the mitigation bank increased the property’s value

more than the conservation easement decreased it. He considered the value of

Kolomoki Plantation before the donation of the 2004 easement to be between

$2,267 per acre and $2,794 per acre, concluding that it was worth approximately

$2,400 per acre, or about $13,440,000.

      To estimate the 2004 after value, Mr. Ryan used the same two methods

described above with respect to the 2003 easement. Using his revised sales

comparison approach, he estimated that the 2004 after value of Kolomoki Plantation

was $2,100 per acre. Using the percentage diminution approach, he again estimated

that the conservation easement diminished the value of the encumbered portion of

the property by 30%. On the basis of that percentage diminution, he calculated that

the 2004 after value of Kolomoki Plantation was approximately $2,085 per acre.

Mr. Ryan reconciled his two approaches by choosing a number in the middle,

estimating that the after value was $11,700,000, or approximately $2,089 per acre.

He therefore concluded that the value of the 2004 easement on Kolomoki Plantation

was $1,740,000.
                                       - 120 -

             c.     Summary

      In summary, the appraisers estimated the following before and after values for

Kolomoki Plantation:

                     Almand 2003       Ryan 2003      Almand 2004       Ryan 2004

Before                 $14,900,000    $12,880,000      $13,650,000      $13,440,000
After                   12,900,000     11,400,000       10,950,000       11,700,000
Easement value           2,000,000      1,480,000        2,700,000        1,740,000

      2.     Petitioners’ Attempt To Impeach Mr. Ryan

      During cross-examination, petitioners attempted to impeach Mr. Ryan using

several appraisal reports he had written for other clients. Petitioners focused most of

their attention on an appraisal he completed for Longleaf, L.L.C. (Longleaf), in

which he concluded that an easement on that property diminished its value by

approximately 32%. That appraisal was used by both Mr. Almand and Mr. Ryan as

a component of their percentage diminution analyses, described above. Petitioners

contend that Mr. Ryan intentionally underestimated the value of the easement on

Longleaf’s property, which skewed the appraisals in the instant case.

      The basis of petitioners’ contention is their assertion that Mr. Ryan had a

conflict of interest when he appraised Longleaf’s property. Petitioners point out that

Mr. Ryan has frequently appraised properties for the Nature Conservancy and that

Longleaf purchased its property from the Nature Conservancy, providing Mr.
                                         - 121 -

Ryan with an incentive to underestimate the impact of the easement so that Longleaf

would overpay the Nature Conservancy for the property. Petitioners’ contention is

entirely conjectural and has no basis in fact.

      The history of the property purchased by Longleaf is a little unclear.

Originally, the land was part of a large tract owned by St. Joe Timberland Co., which

sold a portion of that tract to the Nature Conservancy or the State of Georgia during

December 2000. The Nature Conservancy subsequently placed a conservation

easement on most or all of the property it purchased and transferred most or all of

that property to the State of Georgia. Alternatively, all of the property may have

been sold originally to the State of Georgia, and the Nature Conservancy may have

subsequently purchased some of that property from the State. Eventually, a 1,219-

acre portion of the property originally owned by St. Joe Timberland Co. came to be

purchased by Longleaf.

      According to Mr. Ryan’s appraisal report of Longleaf’s property, at the time

of the appraisal during April 2002, Mr. Ryan understood that Longleaf would be

purchasing the property from the State of Georgia and donating a conservation

easement on the property to the Nature Conservancy. Although the record is

unclear, it appears that Longleaf actually purchased the property from the Nature

Conservancy. It is unclear whether Longleaf immediately donated a conservation
                                         - 122 -

easement on the property or whether it took the property subject to an existing

easement. Before Longleaf engaged Mr. Ryan, Longleaf and either the Nature

Conservancy or the State of Georgia had apparently agreed that Longleaf would

purchase the unencumbered property for $2,225,000 per acre, a price that both Mr.

Ryan and Mr. Almand agreed was slightly lower than the market price of similar

properties in the area. In his appraisal report, Mr. Ryan estimated that the before

value of the 1,219-acre tract was $2,315,000, and he estimated that the conservation

easement diminished that value by about 32%. It appears that Longleaf eventually

consummated the sale at a price of $1,495,000.

      Petitioners pointed to no evidence that shows that Mr. Ryan had a conflict of

interest when he valued Longleaf’s property or that his appraisal with respect to that

tract was untoward. Firstly, at the time he completed his appraisal, it is unclear

whether Mr. Ryan even knew that Longleaf would eventually purchase the property

from the Nature Conservancy. Secondly, Mr. Ryan disclosed to Longleaf that the

Nature Conservancy was one of his clients. He testified that he has frequently been

hired by both the buyer and seller on the same transaction because he has a strong

reputation in the appraisal community. Indeed, the strength of his experience and

reputation are evident in his list of clients, and he has even been hired by the

Georgia Land Trust, the same organization as COLT, the organization to which
                                          - 123 -

petitioners donated their easement on Kolomoki Plantation. Thirdly and finally, as

explained below, the appraisal report supports Mr. Ryan’s estimate of the after value

of the property.

          Petitioners contend that two appraisal reports completed by Mr. Ryan during

2002 on nearby properties show that he undervalued the conservation easement on

Longleaf’s property. In contrast to his estimate of the diminution on Longleaf’s

purchase, Mr. Ryan estimated that conservation easements on two other properties

he appraised during 2002 diminished the values of those properties by 59% and 62%.

However, contrary to petitioners’ contentions, an examination of those appraisal

reports shows that Mr. Ryan arrived at different values for those conservation

easements because of differences in the retained rights, especially the retained timber

rights.

          Mr. Ryan concluded that the conservation easements on all three properties

reduced each to a “lower-end silvicultural tract”. However, the values of timber

that could be harvested on those three properties were very different. The

conservation easement on the property that experienced 62% diminution required

that the property achieve and maintain an average stocking of 7 million board feet,

and even when the property had at least 7 million board feet of timber, the only

harvesting permitted was an amount equal to the annual growth rate of the timber.
                                        - 124 -

At the time the property was appraised, forestry experts opined that it would take 25

years for the timber on the property to reach 7 million board feet; Mr. Ryan wrote

that, from an economic standpoint, the value of the property was “almost equivalent

to a clearcut timber tract which must go through an extended holding period before

timber stands reach maturity and ultimate merchantability.”    Similarly, the

conservation easement on the property that experienced 59% diminution required the

owner to maintain a minimum amount of timber on the land and restricted the amount

of annual harvesting. Mr. Ryan estimated that that restriction encumbered 93% of

the merchantable timber on the property.

      In contrast, the conservation easement on Longleaf’s purchase restricted only

the amount of timber that could be harvested in the wetlands, approximately 28% of

the property. The conservation easement did not restrict the amount of timber that

could be harvested from the remainder of the property, requiring only that the

property owner develop a management plan. Accordingly, Mr. Ryan estimated that

the restrictions on silviculture with respect to Longleaf’s property diminished the

timber value by only 36%. Other than the differences related to the timber values,

Mr. Ryan’s appraisals with respect to the effect of the easements on each of those

three properties were identical. Consequently, petitioners’ argument that Mr. Ryan’s

disparate appraisal values reflect a desire to “cheat” Longleaf lacks merit.
                                        - 125 -

      Petitioners also contend that Mr. Ryan omitted what they refer to as the

“Government Purchases” section from his appraisal reports for Longleaf and in the

instant case. Petitioners contend that the “Government Purchases” section supports

their appraisal values because it states that conservation easements exhibit

diminution values in a “fairly consistent range between 50 and 70 percent”.

However, petitioners misquote Mr. Ryan and mischaracterize his reports.

      In Mr. Ryan’s two other appraisal reports from 2002, after reaching a

conclusion about the value of the conservation easement, he appended a section

titled “General Analysis of Government Acquired Conservation Easements” in which

he wrote:

      As a follow-up to the previous analysis, an additional set of data has been
      considered. This data consists of 17 purchases of conservation easements by
      government entities. Generally, this is not viewed as a reliable set of data for
      direct comparison due to the wide variations between the initial land values,
      variations in the characteristics of the tracts and variations in the extent of the
      easements * * *. Because of these variations, considerable differences existed
      in the resultant residual prices and the prices per acre, which were paid for the
      actual easements. Furthermore, considerable differences existed in the
      percentage of fee simple value that were paid. However, the sales were
      considered appropriate for viewing from the standpoint of an overall check of
      reasonableness of the estimate of value utilized for the subject.

      The transactions cited for this section of the report represent conservation
      easements that were purchased by various government agencies in the State of
      Florida * * * over the past few years. These properties ranged in size from
      190.8 to 32,134 acres and indicated residual values that ranged from $121 to
                                           - 126 -

      $1,027 per acre * * *. The prices paid for the easement acquisitions ranged
      from 27% to 97% of the total fee simple value (i.e., before value).

      In initially analyzing these sales, the extremes representing the broad range
      were studied. These extremes were reflected by two sales. The highest
      percentage paid was for the tract which also had the lowest residual land value
      * * *. It consisted of a development tract that was left with essentially no
      rights except for passive enjoyment. The lowest percentage paid * * * was for
      the tract which had the highest residual value. It consisted of a large timber
      tract which included significant volumes of merchantable timber in both the
      before and after values.

      Even after analyzing the extreme sale examples, the balance of the sale data in
      unique regard exhibits a broad spectrum in terms of residual unit value, actual
      dollar unit price paid for the conservation easement acquisition and that of
      resulting percentage of fee simple value paid for conservation easement rights.
      Analyzing this sale data from a statistical perspective, does however indicate a
      traditional “bell curve” situation. In other words, outside of the extreme
      examples, there tends to be a more general grouping of the sale data in terms
      of residual property value (on a per acre basis) and percent of fee simple value
      actually paid for the easement. This specific set of sale data, in my opinion,
      provides an ample source for a check of reasonableness in the ultimate
      estimation of value of the subject in a proposed after situation.

      When analyzed in terms of percentage of the fee simple value estimate paid
      for the conservation easement, the vast majority of examples studied (21 of
      31) exhibit a relatively consistent range of from 50% to approximately 70% of
      fee simple value (i.e., before value).

Read in context, that section does nothing to undermine Mr. Ryan’s appraisals of

Longleaf’s property or Kolomoki Plantation. Indeed, Mr. Ryan noted in that section

that the data show a “broad spectrum” of values and that fully one-third of the

Government acquisitions he examined fall outside of the 50% to 70% range.
                                         - 127 -

He explained that the percentage diminution depends heavily upon the residual rights

retained by the property owners. In his report in the instant case and in his report for

Longleaf, he carefully examined the retained rights and explained how those rights

influenced his estimate of the after value. Moreover, even in the appraisal reports in

which he included that section, it actually played no part in his estimate of the after

value. Accordingly, we reject petitioners’ contention that Mr. Ryan’s omission of

that section from his appraisal reports for Longleaf or in the instant case showed any

bias.28

          We found Mr. Ryan to be well qualified, and we considered him to be a

credible witness.




          28
         We also reject petitioners’ suggestion that conservation easements diminish
the value of the underlying property in a “fairly consistent range between 50 and 70
percent”. That contention is inconsistent with the evidence in the record, including
the appraisal of petitioners’ own expert who estimated that the conservation
easement on the encumbered portion of Kolomoki Plantation diminished its value by
only 40%. Petitioners’ contention is also at odds with our prior opinions in which
we have emphasized that conservation easements do not have a uniform effect on
the values of underlying properties and that those easements must be valued after
considering facts such as the terms of the easement and the market conditions. See,
e.g., Friedberg v. Commissioner, T.C. Memo. 2011-238; Scheidelman v.
Commissioner, T.C. Memo. 2010-151; Nicoladis v. Commissioner, T.C. Memo.
1988-163. As Mr. Almand aptly explained in his report: “The magnitude of the
effect of the surrendered rights depends on how much control is given up and
whether or not they result in a change in the highest and best use of the property.”
                                        - 128 -

      3.     Analysis and Conclusion

             a.     Estimating Market Appreciation

      Mr. Almand estimated that comparable properties in the neighborhood of

Kolomoki Plantation were appreciating at 6% annually during the relevant period

whereas Mr. Ryan estimated that such properties were not appreciating at all. While

we are convinced that properties were appreciating, for the reasons explained below,

we think Mr. Almand overestimated the rate of appreciation.

      Mr. Almand’s estimate of the market appreciation was based upon a paired

sale of a similarly sized tract near Kolomoki Plantation, four paired sales of similarly

sized plantations near Thomasville, Georgia, and upon a study of sales of

smaller acreage agricultural tracts near Kolomoki Plantation. There are a number

of problems with Mr. Almand’s analysis. Firstly, when he estimated the

appreciation of properties that were bought in one year and sold several years later

(the paired sales), he accounted for improvements to the properties by simply

adding the costs of those improvements to the basis of those properties. That

method for calculating market appreciation is unsound according to Mr. Almand’s

own report: he later stated, with respect to Kolomoki Plantation, that

improvements such as cleaning up the property and improving wildlife habitat

“generally enhance the value of the property more than [they] cost.” Those are the
                                       - 129 -

same types of improvements made on the only other nearby plantation property, and

similar improvements may have been made on the Thomasville plantations though

Mr. Almand did not provide any information about improvements the owners may

have made. According to his own reasoning, Mr. Almand’s estimate of appreciation

on those properties is excessive.

      Secondly, the four paired sales of other plantation properties were from the

Thomasville, Georgia, area, which Mr. Almand acknowledged was a different

market. He nonetheless defended his use of those properties by noting that the

Thomasville market “attract[ed] a similar type of buyer.” However, whether the

Thomasville market attracted a similar type of buyer is irrelevant to whether market

appreciation near Thomasville is a good barometer of appreciation near Kolomoki

Plantation. Mr. Almand provided no other explanation for why he considered

appreciation of properties near Thomasville to be similar to appreciation near

Kolomoki Plantation.

      Thirdly, the Thomasville paired sales and the study of appreciation on smaller

properties do not apply to the same period as most of Mr. Almand’s comparable

sales. The Thomasville paired sales were purchased and held for the following years

before being sold: 2003-2007; 2004-2007; 2004-2005; and 2000-2005. In contrast,

Mr. Almand’s comparable sales are from 2000, 2001, 2002, 2002, 2002, 2002,
                                        - 130 -

2004, 2004, and 2006. Mr. Almand needed to adjust those sales to 2003 and 2004,

but his Thomasville paired sales reflect appreciation that went beyond 2004 and,

except in one case, started only in 2003 or 2004. Similarly, the study Mr. Almand

found that measured appreciation on smaller agricultural tracts examined the period

from 2000 to 2006. Although, as noted, there is scant information about appreciation

in the market for plantation properties near Kolomoki, evidence about other markets

shows that prices increased more rapidly during the mid-2000s than in the early part

of the decade.

      Fourthly, smaller agricultural tracts are a different market from large shooting

plantations, and Mr. Almand did not explain why such a study provided an accurate

measure of appreciation on shooting plantations. Mr. Ryan specifically noted that

the rate of appreciation on shooting plantations was different from the rate on other

rural properties during the relevant period.

      Fifthly, Mr. Almand failed to make any adjustment for fluctuations in the price

of timber. A timber report included with Mr. Almand’s appraisal report indicates

that timber appreciated at an annual rate of about 3% from 2000 through 2003.

Depending upon how much timber contributed to the value of the plantation

properties, omitting to adjust for such fluctuations could overstate appreciation on

the land itself. Mr. Almand adjusted for fluctuations in timber prices when he
                                         - 131 -

appraised Kolomoki Plantation; he should have done the same when he estimated the

appreciation rate on the basis of sales of other properties.

        On the basis of the foregoing, we conclude that Mr. Almand overestimated the

rate of appreciation for plantation properties near Kolomoki Plantation during the

relevant time period. However, we believe that his evidence shows at least some

modest appreciation. Accordingly, we will adjust sale prices to reflect 3% annual

appreciation.

                      b.   The Before Value of the 2003 Easement

        Mr. Almand and Mr. Ryan used five of the same comparable sales. Those

five comparable sales include the four comparable sales of properties that Mr.

Almand considered most similar to the subject property. Because the parties agree

on the comparability of those five sales and because we agree that those properties

are the most similar to Kolomoki Plantation, we will use them as the basis for our

calculation of the before value of Kolomoki Plantation. Mr. Almand and Mr. Ryan

estimated the value of the “bare land” on those properties by subtracting the

contributing value of various components of those properties as follows:

                            Size Unadjusted Personalty Improve- Bare land
    1
ID      Appraiser   Date   (acres) $/acre & quotas ments Timber $/acre

A       Almand      3/15/00 6,733    $2,428        $73     $149     $297    $1,761
                                                           2
          Ryan                                              297      446     1,685
                                       - 132 -

B     Almand 7/15/02 6,186            2,350          58      32        307    1,953
        Ryan         6,175            2,354          58      29        228    2,039
C     Almand 8/19/02 2,716            3,130          98     239       736     2,057
        Ryan                                         98     239        736    2,057
D     Almand 8/19/02 1,654            2,267         167     266        227    1,607
                                                  3
        Ryan                                        167     270        227    1,603
E     Almand 10/1/02 4,404           2,793         159      125       332     2,177
        Ryan                                       173      240       341     2,039
      1
         The “ID” field contains letters which we have assigned to each of the
comparable sales for convenience.
       2
         For comparable sale A, Mr. Ryan lumped together the contributions from
personalty, allotments, and improvements.
       3
         Mr. Ryan did not separate contributions from personalty and improvements,
but we have separated them and adjusted his figures to match the categories in the
table.

For properties C and D, both appraisers arrived at nearly identical conclusions about

the bare land value of the properties. For property D, we will use Mr. Almand’s

figure for the value of improvements and the total price per acre for the land because

Mr. Almand’s calculations use more precise information about the values of

personalty and improvements. For the remaining three properties, more analysis is

required.

      For property A, neither of the appraisers was able to ascertain exact figures

for the values attributable to improvements or timber. Mr. Ryan estimated that the

timber was valued at $3 million and improvements, personalty, and allotments at

$2 million. Although Mr. Almand was able to acquire more exact information
                                       - 133 -

about the peanut allotment, which he reported to be $488,873, he was able to

provide only rough estimates of the value of timber and personalty, which he

estimated to be worth $2 million and $1 million, respectively. He provided no

estimate for the value of other improvements, and his numbers fail to account for $1

million.29 Because of that discrepancy, we will use $2 million as the value of

improvements, personalty, and allotments, and $2.6 million as the value of timber.30

We therefore estimate that the value of the bare land is $11,750,000, which is

$250,000 more than Mr. Ryan’s estimate and $111,000 less than Mr. Almand’s.

The price per acre of bare land for property A is therefore $1,745.

      For property B, Mr. Almand and Mr. Ryan agreed that the price paid for the

property was $14,537,225, they agreed that the sale included allotments valued at

approximately $360,000, and they agreed that the improvements contributed

      29
        Mr. Ryan and Mr. Almand agree that the property sold for $16,350,000.
Mr. Almand estimated that the bare land value was $11,861,127; that the value of
timber was $2 million; that the value of personalty was $1 million; and that the value
of the peanut allotment was $488,873. The sum of those values is $15,350,000,
which is $1 million shy of the sale price.
      30
        Those numbers represent a $500,000 to $600,000 increase to Mr. Almand’s
estimates of the value of timber and the value of improvements, personalty, and
allotments. In the end, those numbers bring Mr. Almand’s estimate of
improvements, personalty, and allotments in line with Mr. Ryan’s and
approximately split the difference between their estimates of the timber value. The
record provides no reason to favor one appraiser’s estimates over the other’s: they
both verified the transaction with the same parties.
                                        - 134 -

approximately $30 per acre to the sale price. However, they disagreed about the

value attributable to timber. Mr. Almand stated that the timber was worth

$1,900,000, or $307 per acre, and Mr. Ryan stated that it was worth $1,410,000, or

$228 per acre. Mr. Almand relied on the selling broker and the appraiser for his

data, but Mr. Ryan relied on a “knowledgeable third party”. Because we consider

Mr. Almand’s source more reliable, we will use Mr. Almand’s numbers for property

B.

      For property E, the appraisers disagreed about the values of timber,

personalty, allotments, and improvements associated with Kolomoki Plantation.

Both of them relied on third parties for their information: Mr. Almand relied on

several local appraisers and the property manager, and Mr. Ryan relied on an

unidentified “knowledgeable third party”. Mr. Ryan reported that the timber was

valued at approximately $1,500,000, but Mr. Almand reported that the value was

$1,461,000, which he said was based on a cruise31 at the time of the sale. Because

Mr. Ryan’s number is simply Mr. Almand’s number rounded, we will use Mr.

Almand’s number. Mr. Almand reported that the allotments had been sold to the

Government before the sale of the property, and Mr. Ryan reported that the peanut

      31
        A timber cruise is a method of surveying the timber in a particular area to
estimate species composition, volume, grade, etc. See Willamette Indus., Inc. v.
Commissioner, T.C. Memo. 1992-407.
                                        - 135 -

allotment was $62,000, or approximately $14 per acre. That amount explains the

difference between the appraisers’ estimates of the value attributable to personalty

and quotas. We will accept that the peanut allotment was not part of the sale and

therefore will use Mr. Almand’s value for the contribution of personalty, $159 per

acre. Mr. Ryan and Mr. Almand provided very different numbers for the value of

improvements on the property. They provided similar descriptions of the

improvements on the property, but Mr. Ryan stated that the property included six

tenant houses whereas Mr. Almand said it had only one. We will assume that the

property manager to whom Mr. Almand spoke was familiar enough with the history

of the property that he knew how many tenant houses were on the property in 2002

when the sale took place. Accordingly, we will use Mr. Almand’s figure for the

value of improvements.

        On the basis of the foregoing, we will use the following sales of comparable

properties to estimate the before value of Kolomoki Plantation:

                   Size Unadjusted Personalty       Improve-               Bare land
    1
ID       Date    (acres)  $/acre   & quotas          ments        Timber     $/acre

A       3/15/00 6,733       $2,428         $73        $224        $386        $1,745
B       7/15/02 6,186        2,350          58          32         307         1,953
C       8/19/02 2,716        3,130          98         239         736         2,057
D       8/19/02 1,654        2,267         167         266         227         1,607
E       10/1/02 4,404        2,793         159         125         332         2,177
                                        - 136 -
      1
      The “ID” field contains letters which we have assigned to each of the
comparable sales for convenience.

For the reasons explained above, we will adjust those prices to December 2003

prices using an annual appreciation rate of 3%.

      On the basis of a study completed by a forester, Mr. Almand estimated that

the value of timber on Kolomoki Plantation during December 2003 was $978,175, or

approximately $175 per acre. Unfortunately, the forester who provided that estimate

did not actually conduct a cruise of the property during 2003 but rather provided a

retrospective estimate based upon an earlier cruise, growth rates, and some

information about acreage that had been depleted and other acreage that had been

planted. Mr. Ryan did not provide a numerical estimate of the value of the timber on

Kolomoki Plantation, instead characterizing it as “typical” for properties in the area.

Although Mr. Almand’s estimate of the timber is imperfect, it is the best evidence

available, and we have no reason to doubt that it provides an acceptable estimate of

the timber’s value during December 2003. Accordingly, we will use $175 per acre

to adjust the bare land prices to reflect the value of timber on Kolomoki Plantation.

      Mr. Almand calculated that the total value for all improvements on Kolomoki

Plantation during December 2003 was $1,330,000, or $237 per acre. He used that
                                        - 137 -

estimate to adjust the prices of his comparable sale properties. In contrast, Mr.

Ryan excluded the value of improvements from his estimate of the before value

because he stated that the improvements were not affected by the conservation

easement. In the table below, we provide the price per acre for each of the sales

of comparable properties adjusted for improvements and timber and adjusted

only for timber:

                  Bare land Land              Adjustment     Improve- Adjustment
    1
ID       Date      $/acre apprec.2   Timber   less improv.    ments   with improv.

A       3/15/00   $1,745   $205      $175         $2,125       $237        $2,362
B       7/15/02    1,953     89       175          2,217        237         2,454
C       8/19/02    2,057     77       175          2,309        237         2,546
D       8/19/02    1,607     60       175          1,840        237         2,077
E       10/1/02    2,177     82       175          2,434        237         2,671
          1
        The “ID” field contains letters which we have assigned to each of the
comparable sales for convenience.
      2
        As explained above, the values in this column reflect adjustment for annual
appreciation of 3%.

The average of those five comparable sales, excluding improvements, is $2,185. Or,

excluding property D, which both appraisers agreed was inferior to Kolomoki

Plantation, the average is $2,271. On the basis of those numbers, we conclude that

the 2003 before value of Kolomoki Plantation was $2,300 per acre, excluding

improvements, or $2,537 per acre including improvements. Accordingly, the total

2003 before value, excluding improvements, was $12,880,000.
                                       - 138 -

             c.    The After Value of the 2003 Easement

      Mr. Almand and Mr. Ryan reached similar conclusions about the conservation

easement’s effect on Kolomoki Plantation: Mr. Almand estimated that it diminished

the value of the encumbered portion of the property by 40%; Mr. Ryan estimated

30%. Both appraisers employed the percentage diminution approach, and Mr.

Almand relied entirely upon that method.

      Mr. Almand considered the impact of conservation easements on seven

different sales in southern Georgia or northern Florida. He considered the effect of

the conservation easements on each of those properties, reporting that they

diminished the values of the underlying properties by 30% to 60%. Contrary to

petitioners’ contention that the transaction between Longleaf and the Nature

Conservancy was the only transaction that supported a diminution in value of 30%,

five out of seven of the conservation easements considered by Mr. Almand had at

least some evidence indicating that the conservation easement diminished the value

of the underlying property by less than 40%. Mr. Almand compared many of the

encumbered properties to more than one sale of a similar unencumbered property in

order to estimate the diminution in value. Mr. Almand’s method was more

thorough than Mr. Ryan’s insofar as Mr. Ryan only considered the effect of a

conservation easement on two properties when he applied the percentage
                                       - 139 -

diminution approach. We found Mr. Almand’s analysis to be sound and his

reasoning persuasive. Accordingly, we accept Mr. Almand’s conclusion that the

2003 conservation easement diminished the value of the encumbered portion of

Kolomoki Plantation by 40%.32

      However, when Mr. Almand applied that percentage diminution to arrive at an

after value, he made an error because he also applied it to the value of improvements

on Kolomoki Plantation, which were unaffected by the conservation easement. He

acknowledged that error during his testimony at trial. We will apply the diminution

only to the value of the property excluding improvements. Reducing the before value

of $2,300 per acre by 40% yields a value of $1,380 per acre. That value applies to

1,780 acres while the value of the remainder is unchanged. Accordingly, we

conclude that the value of Kolomoki Plantation after the contribution of the 2003

easement was approximately $11,242,400. The value of the 2003 easement was

therefore approximately $1,637,600.

             d.    The Before Value of the 2004 Easement

      Mr. Almand and Mr. Ryan disagreed about whether the mitigation bank was

in place during 2004. Because he believed that it was, Mr. Ryan increased his 2004

      32
        As further confirmation of the reasonableness of the value reached by
applying a 40% diminution, that value is consistent with the value Mr. Ryan reached
when he applied his revised sales comparison approach.
                                         - 140 -

before value to reflect his estimate of the mitigation bank’s contribution to the

property’s value. We need not decide whether the mitigation bank was in place

because whatever effect its value might have on Kolomoki Plantation would increase

both the before and after value and therefore would have little effect on the value of

the conservation easement in dispute. In the interests of simplicity, therefore, we

will assume that the mitigation bank was not in place during 2004 and we will value

Kolomoki Plantation without considering it.

      Mr. Almand estimated the 2004 before value by adjusting the 2003 after

value to reflect market appreciation, timber harvesting and growth, and fluctuations

in the price of timber. However, he made several minor errors when he did so.

Firstly, instead of adjusting only the price per acre of bare land to reflect market

appreciation, he actually adjusted the price per acre for the entire property,

including timber. That calculation overstated the appreciation. He then separately

adjusted the value of timber to reflect market fluctuations in the price of timber.

However, when he made that adjustment, he neglected to consider that the

conservation easement had already decreased the value of the timber on the

encumbered portion of the property because it placed some restrictions on the timber

that could be harvested (i.e., timber could be harvested only according to the
                                         - 141 -

management plan and no timber harvesting could be detrimental to the scenic value

of the property or to the wildlife habitat). Although the value of timber on the

property decreased as a result of harvesting and falling timber prices, approximately

one-third of that timber was on land encumbered by the conservation easement, and

its value had already been somewhat diminished. Mr. Almand’s calculation

therefore slightly overstated the loss in value from falling timber prices.

      To accurately determine the 2004 before value, we will adjust the 2003 before

value of only the bare land to reflect market appreciation, and we will then add to

that value Mr. Almand’s estimate of the 2004 timber contribution ($169 per acre, $6

per acre less than the 2003 value). Finally, we will apply the 40% diminution value

to 1,780 acres, reflecting the effect of the 2003 conservation easement. Conducting

those calculations results in a 2004 before value of approximately $2,058 per acre, or

approximately $11,524,800.

             e.     The After Value of the 2004 Easement

      Both Mr. Almand and Mr. Ryan applied the same percentage diminution to the

portion encumbered by the 2004 easement as they did to the portion covered by

the 2003 easement. We agree with both appraisers that the diminution in value will
                                        - 142 -

be approximately the same for the 2004 easement. To calculate that value, we will

again begin with the 2003 before value for just the bare land. We will adjust that

value to reflect market appreciation during 2004, and we will add Mr. Almand’s

estimate of the timber contribution. We will then apply a diminution of 40% to 4,230

acres, approximately 75.5% of the property, which is the area covered by either the

2003 or 2004 conservation easement. Accordingly, we conclude that the 2004 after

value is $1,645 per acre, or $9,212,000. The value of the 2004 conservation

easement is therefore $2,312,800.

Issue 5. Whether Petitioners Are Liable for the Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty on

any underpayment of Federal income tax attributable to a taxpayer’s negligence or

disregard of rules or regulations, or a substantial understatement of income tax.

Section 6662(d)(1)(A) defines “substantial understatement of income tax” as an

amount exceeding the greater of 10% of the tax required to be shown on the return or

$5,000. Under section 7491(c), the Commissioner bears the burden of production

with regard to penalties and must produce sufficient evidence indicating that it is

proper to impose penalties. Higbee v. Commissioner, 116 T.C. at 446.

However, once the Commissioner has met the burden of production, the burden of
                                        - 143 -

proof remains with the taxpayer, including the burden of proving that the penalties

are inappropriate because of reasonable cause or substantial authority. Id. at

446-447.

      To the extent that petitioners’ tax liabilities following the redeterminations

made by the Court still exceed 10% of the tax required to be shown on their returns,

respondent has met his burden of production.

      The accuracy-related penalty under section 6662(a) is not imposed with

respect to any portion of the underpayment as to which the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1). The decision as to whether a

taxpayer acted with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all of the pertinent facts and circumstances, including the

taxpayer’s experience, knowledge, and education. Sec. 1.6664-4(b)(1), Income Tax

Regs. “Generally, the most important factor is the extent of the taxpayer’s effort to

assess the taxpayer’s proper tax liability.” Id. Reliance on professional advice may

constitute reasonable cause and good faith, but only if, considering all the

circumstances, such reliance was reasonable. Freytag v. Commissioner, 89 T.C.

849, 888 (1987), aff’d, 904 F.2d 1011 (5th Cir. 1990), aff’d, 501 U.S. 868

(1991); sec. 1.6664-4(b)(1), Income Tax Regs. Reasonable cause exists where a
                                         - 144 -

taxpayer relies in good faith on the advice of a qualified tax adviser where the

following three elements are present: “(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 Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      Petitioners presented evidence that throughout the process of donating the

conservation easements and preparing their tax returns, they relied upon Mr.

Rothschild and Mr. Johnson, their longtime attorney and accountant, respectively.

They also engaged Conservation Advisors, who helped them select the appraisers

Mr. Roberts and Mr. Clark. Both of those appraisers were qualified and had

experience appraising conservation easements. From the appraisal reports they

prepared, it is evident that they both had access to sufficient information to value the

conservation easements. We conclude that petitioners had reasonable cause and

acted in good faith with respect to their underpayment in each year. Accordingly, we

hold that petitioners are not liable for the accuracy-related penalties.
                                        - 145 -

      In reaching these holdings, we have considered all the parties’ arguments, and,

to the extent not addressed herein, we conclude that they are moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                     Decision will be entered under

                                              Rule 155.
