                         T.C. Memo. 2010-283



                       UNITED STATES TAX COURT



    TROUT RANCH, LLC, MICHAEL D. WILSON, TAX MATTERS PARTNER,
                           Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14374-08.               Filed December 27, 2010.



     Larry D. Harvey, for petitioner.

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



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    By notice of final partnership

administrative adjustment (the notice), respondent reduced the

amount of the charitable contribution that Trout Ranch, LLC (the

partnership), claimed on its 2003 Form 1065, U.S. Return of

Partnership Income, from $2,179,849 to $485,000.   Before trial,
                                - 2 -

we granted respondent’s motion to amend his answer to reduce the

charitable contribution further to zero--that is, to increase the

proposed adjustment from $1,694,849 to $2,179,849.    By the

notice, respondent also determined that the amount of any

resulting charitable contribution deduction is limited to 30

percent of the taxpayer’s contribution base and not 50 percent of

that base.    In 2003, the partnership granted a conservation

easement on land it owned.    Because the value of that

conservation easement determines the amount of the charitable

contribution that the partnership may claim, we must determine

that value.

     Unless otherwise stated, section references are to the

Internal Revenue Code in effect for 2003, and all Rule references

are to the Tax Court Rules of Practice and Procedure.     We round

all measurements in acres and all dollar amounts to the nearest

whole number.

                          FINDINGS OF FACT

Introduction

     Some facts have been stipulated and are so found.    The

stipulation of facts and the supplemental stipulation of facts,

with accompanying exhibits, are incorporated herein by this

reference.

     When the petition was filed, the partnership’s principal

place of business was in Gunnison County, Colorado.
                                - 3 -

Background

     The partnership was formed as a limited liability company in

October 2002 and elected to be taxed as a partnership for its

taxable (calendar) year 2003.   In January 2003, the partnership

purchased land and certain appurtenant water rights in Gunnison

County for $3,953,268.   To consolidate the west line of the

property, the partnership entered into land trades with

neighboring landowners involving adjacent parcels.   After those

trades, the partnership owned 457 acres of land, including 2

miles of the Gunnison River running north to south through the

property.    In April 2003, in exchange for $9,700, the partnership

conveyed three permanent easements and a temporary easement to

the Colorado Department of Transportation (CDOT) encumbering 1

acre (the CDOT easement).   A week later, CDOT granted the

partnership a State Highway Access Permit over 4 acres (the CDOT

access permit).   Not counting the land covered by the CDOT access

permit, the partnership controlled 453 acres, which we shall

refer to as Gunnison Riverbanks Ranch (sometimes, the property).

Before 2003, the property had been used for agriculture,

recreation, and, during one period, the extraction of gravel.    In

2003, approximately 200 acres of the property consisted of hay

meadows and pastures.

     The east line of the property adjoins several thousand acres

managed by the U.S. Department of the Interior, Bureau of Land
                               - 4 -

Management.   To the north and west of the property are rural

residential tracts, most of which are between 2 and 10 acres.     To

the south of the property are larger rural residential tracts,

all of which are at least 35 acres.

The Gunnison County Land Use Resolution

     Gunnison County has no zoning.    The Gunnison County Land Use

Resolution (the land use resolution) governs land development and

subdivision in Gunnison County.   Two development regulations are

important in this case:   the Large Parcel Incentive Process

(LPIP) and the Major Impact Project Process (MIP).   Both LPIP and

MIP require a developer to submit a plan for approval to the

Gunnison County Planning Commission (the commission).   Under

LPIP, if a developer preserves at least 75 percent of the land

for open space or another conservation purpose, then the

developer may subdivide the remaining land into three lots for

every 70 acres, rounded down to the nearest whole multiple of 35

acres.1   If the developer preserves at least 85 percent of the

land, however, then the developer is entitled to a bonus lot for

every 140 acres.   In contrast, MIP does not explicitly limit the

number of lots into which a developer may subdivide land.

Rather, the maximum lot density depends on the physical capacity

of the land and the impact the proposed subdivision would have on



     1
      E.g., using LPIP, a landowner with 140 acres may cluster
six homes on lots smaller than 35 acres.
                               - 5 -

the community.   Under MIP, the developer must preserve at least

50 percent of the land.   As a matter of right, a developer may

subdivide land into 35-acre parcels.

     In April 2003, the partnership filed a Land Use Change

Permit Application under LPIP proposing to preserve 85 percent of

the property to take advantage of the LPIP bonus-density lot

provisions.   The partnership sought to create 21 residential

lots, in addition to a lot for a clubhouse, at Gunnison

Riverbanks Ranch (the land use change permit).   The partnership

also could have filed a Land Use Change Permit Application under

MIP for approval to create more than 22 lots.

Development of Gunnison Riverbanks Ranch

     From the beginning, the partnership intended to develop

Gunnison Riverbanks Ranch into a residential subdivision with a

minimum of 20 lots and exclusive shared amenities, including a

clubhouse, a guest house, fishing, a riding arena and stable,

ponds, a boathouse, duck blinds, and an archery range.    (We shall

refer to such a development as a shared ranch, in contrast to

residential subdivisions without shared amenities.)   To the

extent possible, the partnership intended to preserve the

pristine nature of the land and the river.

     In May 2003, the commission formally discussed the land use

change permit with the partnership and visited the property.    In
                               - 6 -

July, the commission held a public hearing concerning the land

use change permit.

The Conservation Easement

     In December 2003, the partnership donated a conservation

easement to the Crested Butte Land Trust encumbering 384 acres at

Gunnison Riverbanks Ranch and certain appurtenant water rights

(the Trout Ranch CE or, simply, the conservation easement).     On

the same day, the partnership entered into a Land Conservation

Covenant with Gunnison County encumbering an additional 4 acres

of the property (the land covenant).   Neither the conservation

easement nor the land covenant encumbered land that the CDOT

easement already encumbered.   The remaining unencumbered 66 acres

were along the Gunnison River in three parcels.   The partnership

reserved the right to subdivide those three parcels into 22 lots:

10 lots in the northern parcel, a historic ranch house (the

clubhouse) in the middle parcel, and 11 lots in the southern

parcel.   The 21 single-family residential lots each had 3 acres,

with part of each residential lot including land that the

conservation easement encumbered.   The conservation easement

allowed the construction of three open horse shelters, three duck

blinds, two corrals, three ponds with docks, a tent platform, and

a skeet trap wobble deck on land the conservation easement

encumbered.
                                - 7 -

Subsequent Events

     In February 2004, the partnership submitted to the

commission its final plan for Gunnison Riverbanks Ranch.   In

April, the commission approved the land use change permit and the

partnership entered into a development agreement with the Board

of County Commissioners of Gunnison County.   In August, the

partnership conveyed the land encumbered by the conservation

easement, the land covenant, and the CDOT easement to Gunnison

Riverbanks Ranch Association.

     The partnership incurred $2,232,485 in expenses to develop

Gunnison Riverbanks Ranch.

The Partnership’s 2003 Tax Return

     On its 2003 Form 1065, the partnership claimed a charitable

contribution of $2,179,849 for the contribution of the

conservation easement.   In March 2008, respondent issued the

notice to the partnership.   The notice disallowed $1,694,849 of

the claimed charitable contribution; i.e., the notice allowed a

charitable contribution of $485,000.    The notice also determined

that a deduction of the charitable contribution was subject to

the 30-percent limitation in section 170(b)(1)(B) and not the 50-

percent limitation in section 170(b)(1)(A).   The Court

subsequently allowed respondent to amend his answer to increase

the proposed adjustment by $485,000, thereby disallowing the

entire charitable contribution.
                                - 8 -

                               OPINION

      To determine the amount of the charitable contribution made

by the partnership, we must determine the value of the

conservation easement.

I.   Burden of Proof

      In general, the taxpayer bears the burden of proof, although

the Commissioner bears the burden of proof with respect to any

“increases in deficiency”.   See Rule 142(a)(1).    That general

rule suggests that respondent bears the burden of proving the

partnership is entitled to claim a charitable contribution of

less than $485,000 and that petitioner bears the burden of

proving the partnership is entitled to claim a charitable

contribution of more than $485,000.      Petitioner, however, raises

the issue of section 7491(a), which shifts the burden of proof to

the Commissioner in certain situations if the taxpayer introduces

credible evidence with respect to any factual issue relevant to

ascertaining the proper tax liability.     Respondent objects that

petitioner has failed both to introduce credible evidence under

section 7491(a)(1) and to satisfy other preconditions for the

application of that section.   It is unnecessary for us to address

the parties’ disagreements and to determine whether the burden

has shifted because the parties have provided sufficient evidence

for us to find that the value of the conservation easement was
                                 - 9 -

$560,000.    See Estate of Bongard v. Commissioner, 124 T.C. 95,

111 (2005).

II.   The Value of the Conservation Easement

      A.   Introduction

      Section 170 allows a deduction for charitable contributions.

In general, section 170(f)(3) denies a deduction for a charitable

contribution of an interest in property that is less than the

taxpayer’s entire interest in the property.    One exception to

that general rule, however, is for a qualified conservation

contribution.    See sec. 170(f)(3)(B)(iii).   Respondent concedes

that the donation of the conservation easement was a qualified

conservation contribution.    The only issue with respect to the

donation is its value.

      B.   Positions of the Parties

      The parties defend their respective valuations (through

expert and other testimony), and each attacks the valuation

offered by his opponent.    We briefly describe the analyses of the

experts.

            1.   Respondent’s Experts

      Michael R. Nash and Louis J. Garone, both experts in real

estate appraisal, concluded independently that the conservation

easement was worth nothing.    They both determined the value of

the conservation easement using the so-called income approach to

calculate and compare the highest and best use of the property
                              - 10 -

before and after the imposition of the conservation easement.

The income approach to valuing real property involves discounting

to present value the expected cashflows from the property.      E.g.,

Marine v. Commissioner, 92 T.C. 958, 983 (1989), affd. without

published opinion 921 F.2d 280 (9th Cir. 1991).    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 net

income.

          2.   Petitioner’s Expert

     Jonathan S. Lengel, an expert with respect to the valuation

of conservation easements, concluded that the conservation

easement was worth $2.2 million.     His original report determined

the value of the conservation easement by calculating the value

of the property before the imposition of the conservation

easement using sales of similar properties and then estimating

the percentage by which the conservation easement likely

decreased the value of the property.    Mr. Lengel calculated that

percentage by dividing the sale prices of encumbered property by

the contemporaneous sale prices of similar unencumbered property.

To correct certain errors in his original report and to provide

two additional estimates of the value of the conservation

easement (using a so-called sales comparison analysis and the
                               - 11 -

income approach), Mr. Lengel later produced a supplemental

report.   His ultimate conclusion remained the same.2

     C.   The Proper Valuation Methodology

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

pertinent part:

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

Petitioner argues that, if the condition in the second sentence

of that provision is satisfied (i.e., if there is a substantial

record of sales of easements comparable to the donated easement),

then the only proper valuation methodology is to calculate the

fair market value of the donated easement using the sales prices

of the comparable easements.   Petitioner argues that respondent’s

experts, who valued the conservation easement using the method

described in the third sentence of the provision (the so-called


     2
      On brief, petitioner does not rely on Mr. Lengel’s original
report. We shall not either.
                              - 12 -

before and after method), violated the “unambiguous” language of

the regulation.   We need not address that legal issue, however,

because we find that the condition in the second sentence of the

provision was not in fact satisfied.   That is, we find that there

was no substantial record of sales of easements comparable to the

donated easement.   The use of the before and after method (by all

three experts) to value the conservation easement was thus proper

and in accordance with the regulation.

     D.   Mr. Lengel’s Sales Comparison Analysis

     Petitioner argues that, according to section 1.170A-

14(h)(3)(i), Income Tax Regs., the “only mandatory methodology”

for the valuation of a conservation easement is the methodology

described in the second sentence of that provision (the sales

comparison method).   In the sales comparison analysis in his

supplemental report, Mr. Lengel relies on five sales of

conservation easements in Gunnison County.   On brief, petitioner

relies on only four of those sales, disregarding a fifth sale

that occurred after the partnership donated the conservation

easement.3   Nonetheless, none of the other four conservation

easements is comparable to the Trout Ranch CE.     For that reason,

we find Mr. Lengel’s sales comparison analysis to be of no help


     3
      That is consistent with petitioner’s argument that the
Court should not consider any evidence not available before the
donation of the conservation easement because such evidence
cannot be relevant to the value of the conservation easement. We
address that argument in sec. II.E.2.d.(2)(c) of this report.
                               - 13 -

in determining the value of the conservation easement.    We

discuss the four conservation easements below.

          1.   The Niccoli Conservation Easement

     In April 2001, as part of a bargain sale, Robert Niccoli

conveyed to Colorado Cattlemen’s Agricultural Land Trust, a

Colorado nonprofit corporation, a conservation easement

encumbering 146 acres of primarily open ranchland.    There are no

water rights associated with the property, and there was no creek

or river frontage.    The Niccoli property was about 4 miles

southeast of Crested Butte, directly west of the Crested Butte

South subdivision, and about 12 miles north of Gunnison

Riverbanks Ranch.    Both the Niccoli property and Gunnison

Riverbanks Ranch abutted Colorado State Highway 135.    The Niccoli

conservation easement (Niccoli CE) precluded any development on

the Niccoli property.    That is, the Niccoli property went from at

least four 35-acre lots to none.    In the bargain sale, Mr.

Niccoli received $695,296 from Great Outdoors Colorado Trust

Fund, a State agency that provides money to Colorado land trusts

and local governments to acquire conservation easements.      The

appraised value of the Niccoli CE was $927,061.

          2.   The Guerrieri Conservation Easement

     In November 2003, as part of a bargain sale (with the

grantor receiving land), Guerrieri Ranches, L.L.C., conveyed to

Gunnison Ranchland Conservation Legacy, a Colorado land trust and
                                - 14 -

nonprofit corporation, a conservation easement encumbering 320

acres of primarily open ranchland.       The Guerrieri conservation

easement (Guerrieri CE), however, did not cover the entire

Guerrieri property, which was 952 acres.       The Guerrieri CE

encumbered the northern section of the irregular Guerrieri

property, which was connected to the greater Guerrieri property

only by a relatively narrow strip of land.       The Guerrieri

property, irrigated and with creek frontage, is 11 miles north of

Gunnison Riverbanks Ranch.    The Guerrieri CE precluded any

development on 315 acres of 320 encumbered acres; the remaining 5

acres were reserved for one single-family residence.       That is,

the Guerrieri property went from at least twenty-three 35-acre

lots to at least fourteen or fifteen 35-acre lots and one 5-acre

lot.   In the bargain sale, Guerrieri Ranches, L.L.C., received

land in Gunnison County worth $938,475 from Gunnison Ranchland

Conservation Legacy.    The appraised value of the Guerrieri CE was

$1,248,750.

            3.   The Miller Conservation Easement

       In November 2003, as part of a bargain sale (with the

grantor receiving land), Miller Land and Cattle conveyed to

Gunnison Legacy Fund, a Colorado land trust and nonprofit

corporation, a conservation easement encumbering 360 acres of

primarily open ranchland.    The Miller property was irrigated.

The Miller conservation easement (Miller CE) precluded any
                               - 15 -

development on 355 acres of the Miller property; the remaining 5

acres were reserved for one single-family residence.     That is,

according to the contemporaneous appraisal, the Miller property

went from nine 40-acre lots to one 5-acre lot.     In the bargain

sale, Miller Land and Cattle received land in Gunnison County

worth $711,000 from Gunnison Legacy Fund.     The appraised value of

the Miller CE was $984,600.

          4.   The Trampe Conservation Easement

     In December 2003, as part of a bargain sale, Trampe Ranches,

L.L.L.P., conveyed to Colorado Open Lands, a Colorado land trust

and nonprofit corporation, a conservation easement encumbering

978 acres of primarily open ranchland.     The Trampe property

contains 1.5 miles of the East River.     The Trampe property was

just north of Almont, about 3 miles north of Gunnison Riverbanks

Ranch.   Both the Trampe property and Gunnison Riverbanks Ranch

abutted Colorado State Highway 135.     The Trampe conservation

easement (Trampe CE) precluded any development on 973 acres of

the Trampe property; Trampe Ranches, L.L.L.P., retained the right

to build one single-family residence on one of three 5-acre lots.

That is, the Trampe property went from at least twenty-seven 35-

acre lots to one 5-acre lot.   In the bargain sale, Trampe

Ranches, L.L.L.P., received $235,000 from Colorado Open Lands.

The appraised value of the Trampe CE was $1,735,500.
                              - 16 -

          5.   Discussion

     The most obvious problem with Mr. Lengel’s comparable sales

analysis is that none of the four conservation easements above

had an effect on the donor’s land comparable to the effect the

Trout Ranch CE had on Gunnison Riverbanks Ranch.4    With the

exception of the Guerrieri CE, the conservation easements

restricted development rights to a much greater extent than the

Trout Ranch CE.   The Niccoli CE restricted development from at

least four residential lots to none (a reduction of potential

development of 100 percent); the Miller CE restricted development

from nine residential lots to one lot (a reduction of potential

development of 89 percent; the Trampe CE restricted development

from 27 residential lots to one lot (a reduction of potential

development of 96 percent).   In essence, in all three cases the

conservation easements all but eliminated residential

development.   In stark contrast, the Trout Ranch CE restricted

development from at least 40 residential lots to 22 lots (a

reduction in potential development of 45 percent).    We are simply

not convinced that the value of a conservation easement that


     4
      There are other problems. For one, Mr. Lengel used the
appraised value of each conservation easement as its “sales
price”. Given that the sales described above were bargain sales,
in which the purchaser paid less than the appraised value, we
question the propriety of his implicit assumption that the
appraised values were indicative of what a purchaser would pay
absent the implicit gift by the seller. Nonetheless, we need not
find the true value of any of the four conservation easements
because we find that none was comparable to the Trout Ranch CE.
                              - 17 -

restricts development to at most one residential lot sheds any

light on the value of a conservation easement that allows as many

as 22 residential lots.

     Although the Guerrieri CE and the Trout Ranch CE restricted

overall development to a similar degree, the details of the

former are too different from those of the latter for the

Guerrieri CE to be of much help in valuing the Trout Ranch CE.

Regardless of the true value of the Guerrieri CE, that

conservation easement provides no help in valuing the Trout Ranch

CE because the restrictions of the two conservation easements had

significantly different effects.    The Guerrieri CE restricted all

development across a block of 315 acres (the single 5-acre

residential lot being in the northeast corner of the 320

encumbered acres).   The appraisal stated:   “There are several

successful residential developments within the subject

neighborhood along with sales of 35-acre parcels for homes and

large ranches for development and exclusive use.”    The

conservation easement prevented Guerrieri Ranches, L.L.C., from

developing 320 acres of “semi-secluded pristine valley, with

creek frontage, views, majestic mountains, wildlife, [and]

proximity to economic centers”.    At Gunnison Riverbanks Ranch,

however, the conservation easement restricted the land

surrounding the most valuable asset (the river) but was designed

to allow the partnership to develop the entire parcel into a 21-
                                 - 18 -

lot shared ranch, with 21 residential lots and a clubhouse along

the river.

     The two conservation easements thus had greatly different

effects on the surrounding land.     Whereas the appraisal of the

Guerrieri CE stated that the conservation easement would provide

“no specific benefit” to the rest of the Guerrieri property, the

Trout Ranch CE provided a clear benefit to the unencumbered land

along the river.     We simply do not consider the Guerrieri CE

comparable to the Trout Ranch CE.     Moreover, even if the

Guerrieri CE were comparable, the record of a single comparable

conservation easement would be insufficient to constitute “a

substantial record of sales of easements comparable to the

donated easement”.     See sec. 1.170A-14(h)(3)(i), Income Tax Regs.

     E.   The Before and After Analyses

             1.   Introduction

     All three experts agreed that the highest and best use of

Gunnison Riverbanks Ranch before and after the granting of the

conservation easement was as a residential subdivision, and they

all used the income approach to calculate the before and after

values of the property.     Given the lack of comparable market

sales, we agree that the income approach is the most appropriate

method to value the property.     To calculate the before and after

values, the experts used the so-called subdivision method; to

find the present value of the hypothetical residential
                                - 19 -

subdivisions, they constructed discounted cashflow analyses by

estimating the number and prices of the lots, the costs of their

development and sale, and other parameters.    We find none of the

experts completely convincing.    We shall discuss their

assumptions and their arguments, and we shall then construct our

own discounted cashflow analyses to calculate the before and

after values of the property.

     For a couple of reasons, we start by calculating the present

value of the property after the imposition of the conservation

easement.   First, the experts spent the most time and effort

calculating the after value of the property, and their competing

analyses lead to their most substantial disputes.    Our analysis

depends on resolving those disputes, and we can more coherently

address them in their original context.    Second, the presence of

the conservation easement would have no effect on several

parameters we must estimate; that is, several parameters should

remain constant in the calculations of the before and after

values.   In choosing those parameters, we want to consider the

arguments of all three experts.    Mr. Nash, however, used only a

single discounted cashflow analysis to support his after value.

(Mr. Nash used a sales comparison approach and a cost approach to

calculate his before value, which was less than his after value.)

That is, unlike the other experts, he did not use multiple

discounted cashflow analyses to compare different developments.
                                   - 20 -

Nonetheless, his report is in evidence, and we find some of his

analysis of the after value helpful.          By calculating the after

value first, we can evaluate his parameters in their original

context.

           2.    The After Value

     Because Messrs. Nash and Garone found that the imposition of

the conservation easement did not change the highest and best use

of the property, their respective analyses of the before value

and the after value are identical.          Mr. Nash found the highest

and best use to be a development identical to Gunnison Riverbanks

Ranch--i.e., a 21-lot shared ranch.          He valued that development

at $5.8 million.    Mr. Garone found the highest and best use to be

a 22-lot residential subdivision.       He valued that development at

$5.08 million.    Mr. Lengel, like Mr. Nash, found the highest and

best use after the imposition of the conservation easement to be

a development identical to Gunnison Riverbanks Ranch--i.e., a 21-

lot shared ranch.    He, however, valued that development at $2.6

million.

     All the discounted cashflow analyses we discuss had the

following basic structure.    To calculate gross sales revenue, the

experts estimated the prices of the lots, their absorption rate

(i.e., the number of lots that would sell every year), and their

appreciation rate.    To calculate expenses, the experts estimated

capital expenses (i.e., the development costs, all expended in
                               - 21 -

the first year), the sales expenses (e.g., sales commissions and

general and administrative costs), and developer’s profit (for

convenience, a percentage).    The experts also estimated a

discount rate (i.e., the interest rate used to determine the

present value of the future cashflows).    With their estimates,

the experts then calculated the present value of the future

cashflows, and thus the present value of the proposed

development.   We discuss their discounted cashflow analyses

below, and then we construct our own.

          a.    Mr. Nash

     The discounted cashflow analysis Mr. Nash used to calculate

the value of the 21-lot shared ranch had the following

parameters.    Mr. Nash estimated that the lots would sell for

$630,000 (before appreciation) over 6 years (at a rate of 0, 5,

4, 4, 4, 4).    He estimated the lots would appreciate at 4 percent

(but for some reason starting only in the second year).    He

estimated that capital expenses would be $1.51 million, that

sales expenses would be 9 percent of gross sales revenue (i.e.,

commissions of 8 percent and closing costs of 1 percent), and

that developer’s profit would be 25 percent.    (Mr. Nash did not

explicitly estimate project management expenses.    We offer an

explanation for that apparent oversight in section II.E.2.d.(8)

of this report.)    For “sensitivity testing”, he used discount
                                 - 22 -

rates of 9, 10, and 11 percent, and he ultimately settled on a

discount rate between 9 and 10 percent.

           b.    Mr. Garone

     The discounted cashflow analysis Mr. Garone used to

calculate the value of the 22-lot residential subdivision had the

following parameters.     Mr. Garone estimated that the lots would

sell for $550,000 (before appreciation) over 8 years (at a rate

of 3, 3, 3, 3, 3, 3, 3, 1).      He estimated the lots would

appreciate at 8 percent.      He estimated that capital expenses

would be approximately $805,000, that project management expenses

would be 10 percent of gross sales revenue, that sales expenses

would be 8.5 percent of gross sales revenue (i.e., commissions of

7 percent and closing costs of 1.5 percent), and that developer’s

profit would be 15 percent.      He used a discount rate of 15

percent.

           c.    Mr. Lengel

     The discounted cashflow analysis Mr. Lengel used to

calculate the value of the 21-lot shared ranch had the following

parameters.     Mr. Lengel estimated that the lots would sell for

$300,000 (before appreciation) over 4 years (at a rate of 4, 8,

8, 1).   He estimated the lots would appreciate at 15 percent.      He

estimated that capital expenses would be approximately $2.18

million, that project management expenses would be $40,000 a

year, that sales expenses would be 7 percent of gross sales
                                  - 23 -

revenue (i.e., commissions of 6 percent and closing costs of 1

percent), and that developer’s profit would be 12 percent.       He

used a discount rate of 15 percent.

          d.    Analysis

          (1)    Number of Lots

     We agree with Messrs. Lengel and Nash that the highest and

best use of the property after the imposition of the conservation

easement was a 21-lot shared ranch.        The implicit assumption is

that the clubhouse would increase the value of the other lots by

more than the value of an additional lot and the cost of the

clubhouse itself.   That assumption does not strike us as

implausible, especially given that the partnership in fact

developed Gunnison Riverbanks Ranch as a 21-lot shared ranch.

Because Mr. Garone failed to explain exactly why he placed such a

low value on the clubhouse, we find that a 21-lot shared ranch

was the highest and best use after the imposition of the

conservation easement.

          (2)    Lot Prices

          (a)    The Experts’ Estimates

     The experts broadly disagreed about lot prices.       Indeed, the

value of the lots after the imposition of the conservation

easement is their essential dispute.       Mr. Lengel assumed that all

21 lots would sell for $300,000.      Mr. Lengel relied on six lot

sales at Hidden River Ranch to support his lot price of $300,000.
                               - 24 -

(We discuss the experts’ data in the next section.)     Yet Mr.

Lengel himself abandoned that estimate in his rebuttal reports.

In those reports, Mr. Lengel stated that “a reasonable conclusion

given the data available” was, using Mr. Nash’s data, $355,000

and, using Mr. Garone’s data, $375,000.     We are not surprised

that Mr. Lengel did not defend his estimate.     In his analysis of

the property before the imposition of the conservation easement,

Mr. Lengel found that a 40-lot residential subdivision was the

highest and best use.   Mr. Lengel assumed that 40 lots,

distributed across roughly the same 15 to 20 percent of the

property as 21 lots, would also sell for $300,000.     Mr. Lengel

apparently assumed either that the 40 lots would not sell at a

discount or that the 21 lots would not sell at a premium.     We

find his assumption that lot prices would remain the same

regardless of the number of lots implausible.     (His estimate of

$300,000 per lot is somewhat more reasonable, however, for a 40-

lot residential subdivision.   See sec. II.E.3.c.(1) of this

report.)   Notably, in the rebuttal reports, Mr. Lengel accepted

all the other assumptions that Messrs. Nash and Garone made.

     Mr. Nash assumed that all 21 lots would sell for $630,000.

To arrive at that figure, he used 13 lot sales from three

different developments in the area.     Mr. Nash considered three

sales from Eagle Ridge Ranch, six sales from Hidden River Ranch,

and four sales from Gunnison Riverbanks Ranch.
                                - 25 -

     Mr. Garone assumed that all the lots (22 in his analysis)

would sell for $550,000.     To arrive at that figure, he scaled

down the lot price from his 12-lot residential subdivision (which

assumed a matter-of-right subdivision into 35-acre lots) by

approximately 12 percent.     We find that approach unsatisfactory.

We shall simply use the raw data from which he derived the lot

price for his 12-lot residential subdivision.       Mr. Garone used

nine lot sales from four different developments in the area.         He

considered three sales from Danni Ranch, three sales from Hidden

River Ranch, one sale from Eagle Ridge Ranch, and two sales from

Horse River Ranch.

          (b)   The Experts’ Data

     With respect to lot sales at Hidden River Ranch, the experts

offer slightly different accounts.       We find the facts of those

sales to be the following.     Hidden River Ranch comprised 260

acres approximately 4 miles south of Crested Butte, which

included half a mile of the East River.       Amenities included a

barn, corrals, and 171 acres of open space protected by a

conservation easement.     The remaining 89 acres had 17 lots of

approximately 5 acres each.     Two lots sold in July 2003 for

$431,000, one lot sold in December 2003 for $300,000, and three

lots sold in April 2004 for $320,000, $325,000, and $335,000.

     Mr. Nash compared Hidden River Ranch to Gunnison Riverbanks

Ranch, describing its location (close to Crested Butte) as
                                - 26 -

“slightly superior”, the size of its lots (which he believed to

be 35 acres) as “slightly superior”, and its aesthetic appeal and

amenities (e.g., inferior tree cover and a shorter stretch of

river with an inferior fishery) as “significantly inferior”.

Overall, he judged Hidden River Ranch to be “slightly inferior”

to Gunnison Riverbanks Ranch.    In his supplemental report, Mr.

Lengel presented an almost identical analysis, calling Hidden

River Ranch “slightly superior in size and location * * * but

along a substantially inferior river”.5   Nonetheless, given that

only a single lot at Hidden River Ranch sold for as little as

$300,000, Mr. Lengel evidently concluded that Gunnison Riverbanks

Ranch was inferior to that development.    Mr. Garone concluded

that, because of the inferior East River fishery, Hidden River

Ranch lots would, after otherwise adjusting their values to

reflect differences with Hidden River Ranch lots, be worth

approximately $50,000 less than lots at Gunnison Riverbanks

Ranch.

     Eagle Ridge Ranch comprised 4,900 acres approximately 7

miles northwest of Gunnison, which included 2 miles of the Ohio

Creek.   Amenities included two mountain cabins, a barn, corrals

and equestrian facilities, and 4,375 acres of open space

(including 2,000 acres of “mountainous lands”).    The remaining


     5
      Messrs. Lengel and Nash apparently judged slight
superiority in size differently. Or else slight superiority in
size covers a vast range.
                                - 27 -

525 acres had 15 lots of 35 acres each.    One lot sold in January

2005 for $845,000, one lot sold in December 2005 for $985,000,

and one lot sold in November 2006 for $875,000.

     In comparison to Gunnison Riverbanks Ranch, Mr. Nash

described the location of Eagle Ridge Ranch as under “less

development pressure” and so “slightly inferior”, the size of its

lots as “slightly superior”, and its aesthetic appeal and

amenities (e.g., similar tree cover, a river with an inferior

fishery, and a much lower density) as “slightly superior”.

Overall, he judged Eagle Ridge Ranch to be “moderately superior”

to Gunnison Riverbanks Ranch.    Mr. Garone described the Eagle

Ridge Ranch amenities as “superior” and estimated that its lots

were worth 25 percent more than those at Gunnison Riverbanks

Ranch.   Mr. Lengel did not discuss Eagle Ridge Ranch.

     Mr. Garone did not provide much background on Danni Ranch or

Horse River Ranch.   At Danni Ranch, one 35-acre lot sold in

October 2000 for $375,000, one 39-acre lot sold in November 2004

for $385,000, and one 35-acre lot sold in March 2005 for

$450,000.   The first lot, like the lots at Hidden River Ranch,

was on the “inferior” East River.    The second two lots did not

have river frontage.   At Horse River Ranch, one 35-acre lot sold

in January 2004 for $575,000 and one 35-acre lot sold in April

2004 for approximately $465,000.    Both lots were on the Ohio

Creek, which Mr. Garone considered even less desirable than the
                               - 28 -

East River.   Mr. Garone concluded that, because of the inferior

Ohio Creek fishery, Horse River Ranch lots were worth

approximately $75,000 less than Gunnison Riverbanks Ranch lots.

     The following is a summary of lot sales at Gunnison

Riverbanks Ranch after the donation of the conservation easement:

    Date                       Lot No.                 Price

December 2004                    16                   $625,000
December 2004                    17                    625,000
August 2006                      21                    500,000
November 2006                    16                    677,000
August 2007                       3                    640,000
November 2007                     1                    685,000
April 2008                        7                    800,000

The lot sold in August 2006 did not have river frontage.

           (c)   The Use of Postvaluation Data

     Before we discuss the data presented above, we must address

petitioner’s argument that we may not consider evidence of lot

sales after the date of valuation (i.e., the date the partnership

donated the conservation easement).      Petitioner argues that “the

plain language of the regulation” makes events occurring after

the date of valuation “irrelevant”.      In support, he quotes

section 1.170A-14(h)(3)(i), Income Tax Regs.:      “The value of

* * * a perpetual conservation restriction is * * * [its] fair

market value * * * at the time of the contribution.”      That

statement, however, does not limit the evidence one may consider

in determining that value; the regulation does not support

petitioner.
                             - 29 -

     In Estate of Gilford v. Commissioner, 88 T.C. 38, 52-54

(1987), on which petitioner relies, we stated:

     The rule that has developed, and which we accept, is
     that subsequent events are not considered in fixing
     fair market value, except to the extent that they were
     reasonably foreseeable at the date of valuation. See,
     e.g., Ithaca Trust Co. v. United States, 279 U.S. 151
     (1929) * * *

         *      *       *       *       *        *      *

          * * * the rule against admission of subsequent
     events is a rule of relevance. Rule 401, Federal Rules
     of Evidence, applicable in this Court pursuant to Rule
     143, Tax Court Rules of Practice and Procedure, and
     section 7453, defines relevant evidence as “evidence
     having any tendency to make the existence of any fact
     that is of consequence to the determination of the
     action more or less probable than it would be without
     the evidence.” (Emphasis added.) See Armco, Inc. v.
     Commissioner, 87 T.C. 865 (1986). * * *

Estate of Gilford does not support petitioner.   We find that the

evidence of lot sales within a reasonable period after the date

of valuation (especially those at Gunnison Riverbanks Ranch

itself) tends to make a given estimate of the lot prices more or

less likely; that is, such evidence is relevant.6

     Petitioner argues that, even if such evidence is relevant,

we should give it no weight, because between June 2004 and June

2006 “Gunnison County real property appreciated overall” by 53


     6
      Indeed, in the case of valuation for stocks and bonds for
estate and gift tax purposes, where the standard is also fair
market value, and there may be no sales on the appropriate
valuation date, the regulations specifically contemplate the use
of sales data within a reasonable period both before and after
the valuation date to determine value on that date. Sec.
20.2031-2(b), Estate Tax Regs.; sec. 25.2512-2(b), Gift Tax Regs.
                               - 30 -

percent.   Moreover, petitioner argues that, in those 2 years,

vacant land in Gunnison County appreciated by 87 percent.

Respondent objects that Gunnison County comprises many different

economic areas, including the towns of Gunnison and Crested Butte

and the area surrounding the latter’s ski resorts.    Respondent

argues that the Gunnison economic area, which included Gunnison

Riverbanks Ranch, experienced only, in the words of a senior

appraiser for the Gunnison County Assessor’s Office, “a minor

upward adjustment.”   According to that senior appraiser, the sale

of the Crested Butte mountain caused “an increase in market

volume and market prices” in Crested Butte and the area

surrounding the ski resorts.   (Although that sale did not occur

until March 2004, the purchasers of the Crested Butte Ski Resort

signed a letter of intent in October 2003.)   Petitioner does not

suggest that any lot sales (with the notable exception of lot

sales at Gunnison Riverbanks Ranch) support the proposition that

prices of real estate in and around the town of Gunnison

appreciated at more than a reasonable rate.   We find no evidence

that the lots at Gunnison Riverbanks Ranch appreciated at more

than a reasonable rate after the date of valuation.    Nonetheless,

we shall give the most weight to lot sales within a year of the

date of valuation (i.e., sales in 2003 and 2004) and less weight

to lot sales outside that range.
                               - 31 -

          (d)   Analysis of the Data

     We are not convinced that the prices of the 35-acre lots at

Danni Ranch, Horse River Ranch, and Eagle Ridge Ranch tell us

much about the lot prices at Gunnison Riverbanks Ranch.    Danni

Ranch and Horse River Ranch are complete unknowns.   We are

reluctant to draw any conclusion from the lot sales at those two

developments.   Eagle Ridge Ranch was almost completely different

from Gunnison Riverbanks Ranch:   Eagle Ridge Ranch had fewer and

much larger lots, in a more secluded area, with superior

amenities.   We are certain (and the experts all agreed) that

those lots were worth far more than lots at Gunnison Riverbanks

Ranch, but exactly how much more is not clear.

     We shall rely on the sales at Hidden River Ranch and

Gunnison Riverbanks Ranch.   We find that lots at Hidden River

Ranch were much less desirable than lots at Gunnison Riverbanks

Ranch.   Mr. Nash called the East River “significantly inferior”,

and even Mr. Lengel called it “substantially inferior”.    Given

that both parties stress the beauty of the Gunnison River and the

quality of its fishery, we find the difference between the two

rivers to be important.   The sales data suggest that Hidden River

Ranch had two tiers of lots:   those worth around $430,000 and

those worth around $320,000.   (The experts offered no explanation

for the significant difference in prices.)
                               - 32 -

     We also find the two lot sales at Gunnison Riverbanks Ranch

in December 2004 to be important.    Nonetheless, we are wary of

relying too much on the sale prices of $625,000, which is the

sale price 1 year after the December 2003 donation of the Trout

Ranch CE.    Mr. Garone suggested adding at least $50,000 to the

prices of lots at Hidden River Ranch to estimate the prices of

lots at Gunnison Riverbanks Ranch.      We shall add $60,000 to the

top-tier lots at Hidden River Ranch to estimate the price of the

average lot at Gunnison Riverbanks Ranch.     That strikes us as a

reasonable (indeed, a generous) compromise:     Our estimate

suggests that appreciation over 1 year was almost 30 percent.

Although petitioner failed to present any evidence of such

appreciation, we must reconcile the sales data before us.      We

shall thus use $490,000 as the price of lots.

            (3)   Absorption

     The experts again broadly disagreed.     Mr. Lengel estimated a

rapid absorption rate.    He stated that, in 3 years, Hidden River

Ranch had sold six lots with river frontage.     He argued that,

given the limited supply of similar lots and the anticipated

competition for lots at Gunnison Riverbanks Ranch, the absorption

rate there would be much higher.    Mr. Garone stated that

developments with lots between $400,000 and $550,000 had

absorption rates of about three lots a year.     Mr. Nash also

considered lot sales at Hidden River Ranch, but he did not limit
                                 - 33 -

himself to lots with river frontage.      He stated that Hidden River

Ranch had sold 14 lots in 3 years, but that, given the higher lot

prices at Gunnison Riverbanks Ranch, he estimated slightly slower

absorption.7

     We agree with the analyses of Messrs. Lengel and Nash.

Whereas Mr. Garone failed to justify his sluggish absorption

rate, they provided data in support of their estimates.     Yet we

agree with Mr. Garone that Mr. Lengel’s absorption rate--with

eight sales in each of the first 2 years--seems “slightly

aggressive”.    We find that Mr. Lengel’s arguments do not justify

his own estimates but do support those of Mr. Nash.     We shall

adopt the absorption rate of four to five lots a year that Mr.

Nash proposed.    We assume, as did all the experts, that the first

sales are in 2004 (the year after the year of the contribution of

the Trout Ranch CE).

          (4)     Appreciation

     With respect to appreciation, Mr. Lengel stated that “The

rate of increase in selling prices is difficult to * * *

[predict].”     He suggested that, at the time of the donation of

the conservation easement, because demand had been low for the

few years before, one might have expected demand to increase in



     7
      We presume the experts did not consider the actual
absorption of lots at Gunnison Riverbanks Ranch because many of
the partners, who each received at least one lot, were interested
in building homes for themselves, not in selling to others.
                                - 34 -

the future.   He reasoned that, with only a “small supply of

vacant river front lots between one and ten acres in the

neighborhood” and “no known new developments * * * planned”,

rising demand “should lead to escalating values.”     He noted that,

historically, similar properties generally appreciated between 5

and 20 percent a year.   Mr. Lengel concluded that the lots would

appreciate at 15 percent a year for the first 4 years and would

stop appreciating thereafter.    Looking to the “sluggish economy

and historical performance in the area” at the time of the

donation of the conservation easement, Mr. Garone estimated

appreciation of 8 percent a year.    Relying solely on the sale and

resale of lot 16 at Gunnison Riverbanks Ranch, Mr. Nash estimated

appreciation of 4 percent.

     Bearing in mind Mr. Lengel’s initial caveat (“The rate of

increase in selling prices is difficult to portend”), we find the

assumption that appreciation would not be uniform unwarranted.

There is no evidence that the property would either not

appreciate in the first year or abruptly stop appreciating after

4 years.   Although Mr. Lengel’s analysis does not justify

appreciation of 15 percent, we do find that his reasons justify

appreciation of more than 8 percent.     We shall use flat

appreciation of 10 percent a year.
                               - 35 -

          (5)    Capital Expenses

     To calculate capital expenses, all three experts started

with the actual expenses the partnership incurred developing the

property (approximately $2.23 million) and subtracted certain

expenses and related interest.      Mr. Lengel subtracted one expense

(a finder’s fee for petitioner), which left him with development

costs of approximately $2.18 million.     Mr. Nash subtracted six

additional expenses (related to the conservation easement, the

land swaps, the ranch house, and the barn), which left him with

development costs of approximately $1.40 million.     Mr. Garone

subtracted several more expenses (e.g., related to the digging of

“Lakes and Ditches”--the ponds, we presume), which left him with

development costs of approximately $805,000.     Because we have

already rejected Mr. Garone’s 22-lot residential subdivision, we

shall not consider his proposed development costs for that plan.

Mr. Garone, however, also estimated costs for a syndicated plan,

intended to reflect a shared ranch similar to the actual Gunnison

Riverbanks Ranch.   For that estimate, he subtracted far fewer

costs (i.e., not those related to the clubhouse), which left him

with development costs of approximately $1.77 million.     Messrs.

Nash and Garone, however, failed to explain why they excluded

certain costs.   (Mr. Nash characterized the costs he excluded as

“abnormal costs * * * not typical for most subdivision

developments” yet failed to acknowledge that those costs may have
                                 - 36 -

increased the value of property).     Given respondent’s insistence

that the partnership developed the land according to its highest

and best use, we find his experts’ reasons for excluding some of

its costs lacking.   We shall use Mr. Lengel’s estimate of capital

expenses of approximately $2.18 million.

          (6)   Project Management Expenses

     Mr. Lengel allocated $40,000 a year for “marketing and

advertising”.   Mr. Garone, however, stated that project

management expenses would also include “project oversight” costs

and “miscellaneous administrative costs”.        We find that Mr.

Lengel underestimated project management expenses.        We shall

adopt Mr. Garone’s estimate of project management expenses (10

percent of gross sales revenue).

          (7)   Sales Expenses

     Mr. Lengel stated that “real estate agents charge 5 percent

to 10 percent commissions on vacant land sales.”        He then stated

that, because potential buyers of real estate in Gunnison County

come from a “wide geographical range”, “marketing costs * * *

extend out of the immediate area.”        Mr. Lengel concluded that

real estate agents would charge a commission of 6 percent--that

is, a low commission--to cover those marketing costs.        Mr. Garone

proposed a commission of 7 percent, and, given that Mr. Lengel’s

own analysis supports such a figure, we shall adopt it.        Mr.

Garone, however, did not suggest any reason that closing costs
                               - 37 -

would exceed 1 percent, so we shall assume closing costs of 1

percent, as Messrs. Nash and Lengel do.   We find the figure Mr.

Nash used for commissions to be slightly high and without much

support.   Moreover, a survey attached as an appendix to Mr.

Lengel’s supplemental report (the Winter 2002/2003 Real Estate

Investment Survey for the Rocky Mountain Region) concluded that,

according to 25 real estate brokers, developers, lenders, real

estate appraisers, and consulting firms, total sales expenses of

8 percent were reasonable for sales of vacant land worth up to $1

million.   We shall use sales expenses of 8 percent of gross sales

revenue.

           (8)   Developer’s Profit

     Mr. Lengel stated that “Developers typically require or

anticipate profits ranging from 15 percent (usually for short

term development projects with a minimum of well identified risk

factors) to 50 percent or more for longer term, more hazardous

projects.”   Mr. Lengel stated that one Colorado developer

“typically anticipates at least a 20 percent profit for

‘subdivision’ development.”   He then claimed that “Interviews

with developers in resort areas of Colorado revealed only that

they anticipate a 15 to 40 percent profit”.   Mr. Lengel then

inexplicably concluded that the developer would require a profit

of only 12 percent.   Given that 12 percent was not even within

his own range, and because Mr. Lengel provided no reason the
                                  - 38 -

range was inappropriate, we cannot accept that figure.       Mr.

Garone suggested 15 percent.       Mr. Nash suggested 25 percent.    We

recall that Mr. Nash did not incorporate project management

expenses into his analysis.       We believe that he rolled those

costs into his estimate of developer’s profit.       We have found

project management expenses to be 10 percent of gross sales

revenue.   See sec. II.E.2.d.(6) of this report.      We shall assume

a developer’s profit of 15 percent.8

           (9)    Discount Rate

     Mr. Lengel stated that “An appropriate discount rate

reflects competitive rates of return on similar investments.”         He

referred to a survey (the Winter 2002/2003 Real Estate Investment

Survey for the Rocky Mountain Region) attached to his

supplemental report as an appendix in which 25 real estate

brokers, developers, lenders, real estate appraisers, and

consulting firms opined as to the discount rates they anticipated

and used for residential land development.       Their figures ranged

from 10 to 15 percent.     Mr. Lengel concluded that 15 percent was

appropriate.     Mr. Garone cited two different surveys, with

discount rates ranging from 10 to 30 percent.       He stated that, at

the time of the donation, the anticipated selling period was long


     8
      Both Messrs. Garone and Nash applied their profit
percentages to projected gross sales revenue (both in determining
their after and their before values) rather than to projected net
revenue from sales, as did Mr. Lengel. We shall follow the lead
of Messrs. Garone and Nash.
                                - 39 -

(9 years), the “demand for finished housing” was low, and the

area had a sufficient supply of residential lots.     For those

reasons, he considered the project to be “relatively higher

risk”.   Nonetheless, he chose a discount rate of 15 percent.      Mr.

Nash chose a discount rate of approximately 10 percent, but he

failed to offer much support.      Messrs. Lengel and Garone agreed,

and we find their evidence and their reasons convincing.      We

shall adopt their discount rate of 15 percent.

           e.   Conclusion

     We conclude that the 21-lot shared ranch had, at the time of

the donation of the conservation easement, a present value of

approximately $3.89 million.     See the appendix for our discounted

cashflow analysis.

           3.   The Before Value

     Mr. Lengel found the highest and best use of the property

before the imposition of the conservation easement to be a 40-lot

residential subdivision.     He valued a 40-lot residential

subdivision at $5.6 million.     Mr. Garone valued a 40-lot

residential subdivision at $3.22 million.     We discuss their

discounted cashflow analyses, and then we construct our own.

           a.   Mr. Lengel

     The discounted cashflow analysis Mr. Lengel used to

calculate the value of the 40-lot residential subdivision had the

following parameters.   Mr. Lengel estimated that the lots would
                               - 40 -

sell for $300,000 over 9 years (at a rate of 0, 8, 8, 6, 5, 4, 3,

3, 3).   He estimated the lots would appreciate at 15 percent for

4 years and then stop appreciating.     He estimated that capital

expenses would be $2.55 million, that project management expenses

would be $40,000 a year, that sales expenses would be 7 percent

of gross sales revenue (i.e., commissions of 6 percent and

closing costs of 1 percent), and that developer’s profit would be

12 percent.    He used a discount rate of 15 percent.

     Mr. Lengel also stated that a conservation easement

protecting the river corridor could be sold in the first year for

$1.5 million.

          b.    Mr. Garone

     The discounted cashflow analysis Mr. Garone used to

calculate the value of the 40-lot residential subdivision had the

following parameters.    Mr. Garone, like Mr. Lengel, estimated

that all the lots would sell in 9 years.     Mr. Garone, however,

estimated three different prices for three different kinds of

lots; he estimated that 18 “buffer” lots would sell for $200,000

each (at a rate of 0, 3, 3, 2, 2, 2, 2, 2, 2), that 12 “west

river” lots would sell for $300,000 each (at a rate of 0, 2, 1,

2, 1, 2, 1, 2, 1), and that 10 “east river” lots would sell for

$400,000 each (at a rate of 0, 1, 2, 1, 2, 1, 2, 1, 0).     He

estimated the lots would appreciate at 8 percent a year.     He

estimated that capital expenses would be approximately $1.27
                               - 41 -

million, that project management expenses would be 10 percent of

gross sales revenue, that sales expenses would be 8.5 percent of

gross sales revenue (i.e., commissions of 7 percent and closing

costs of 1.5 percent), and that developer’s profit would be 15

percent.   He used a discount rate of 20 percent.

           c.    Analysis

     We shall use those estimates from our analysis of the after

value of the property that are not related to the number of lots

in the development.    We shall assume that the lots appreciate at

10 percent, that project management expenses are 10 percent of

gross sales revenue, that sales expenses are 8 percent of gross

sales revenue (i.e., commissions of 7 percent and closing costs

of 1 percent), and that developer’s profit is 15 percent.

     We shall use the following estimates to calculate the

present value of a 40-lot residential subdivision.

           (1)    Lot Prices

     In contrast to their sharp dispute over lot prices in the

21-lot shared ranch, Messrs. Garone and Lengel hardly disagreed

about lot prices in the 40-lot subdivision.   They did, however,

disagree about the optimal placement of the lots.    Mr. Lengel

assumed that all 40 lots could be placed along the river “on

approximately 15 to 20 percent of the subject property with the

remainder of the site being unencumbered open space for the use

and enjoyment of the lot owners.”   That is, he assumed each lot
                               - 42 -

would be between 1.25 and 2 acres.      (Mr. Garone assumed each lot

would be 5 acres.)   We recall that a developer, to subdivide the

property into any more than 22 lots, would have needed to apply

under MIP and not LPIP.   Under MIP, however, a developer would

have needed to preserve only 50 percent of the land.     Mr. Lengel

failed to explain why a developer would have restricted itself to

between 15 to 20 percent of the land when as much as 50 percent

of the land was available.    Mr. Lengel provided no evidence that

such a dense configuration on the river was even possible, and

Mr. Garone doubted the riverfront could accommodate the necessary

wells and septic systems.    We find Mr. Lengel’s configuration

unnecessarily restrictive and so find his estimate of $300,000

for all 40 lots unreliable.

     We find Mr. Garone’s analysis more convincing because we

find his proposed configuration more likely; that is, 22 lots

along the river (the actual configuration at Gunnison Riverbanks

Ranch) plus 18 lots not on the river.     Nonetheless, Mr. Garone

did not explain why east river lots would sell at a premium to

west river lots, and the other experts made no such distinction.

Indeed, Mr. Garone himself made no such distinction in his

analysis of a 22-lot subdivision.    We shall assume that buffer

lots would sell for $200,000 and that river lots would sell for

$350,000.   Our conclusion, however, hardly conflicts with that of

Mr. Lengel:   The undiscounted value of Mr. Lengel’s gross sales
                                - 43 -

revenue ($12 million)9 and the undiscounted value of our gross

sales revenue ($11.3 million)10 differ by only $700,000.

          (2)    Absorption

     Because both experts do so, we shall assume that all the

lots are sold in 9 years.     The absorption rates of the two

experts are broadly similar, but again we find that Mr. Lengel’s

assumptions are slightly aggressive.      Mr. Garone’s absorption

rate is quite close to the absorption rate Mr. Nash reported for

Hidden River Ranch (14 lots in 3 years), which included lots both

with and without river frontage.     We find Hidden River Ranch to

be similar to, but (given the inferior East River) less desirable

than, the 40-lot subdivision here.       Thus, Mr. Garone’s slightly

faster absorption rate seems reasonable.      We shall adopt Mr.

Garone’s estimates.

          (3)    Capital Expenses

     To calculate capital expenses, Mr. Lengel started with the

actual expenses the partnership incurred developing the property

(approximately $2.23 million) and subtracted two expenses (a

finder’s fee for petitioner and costs related to the conservation

easement), which left him with development costs of approximately

$2.13 million.    After adding approximately $420,000 to account



     9
      $12 million = $300,000 per lot x 40 lots.
     10
      $11.3 million = ($200,000 per lot x 18 lots) + ($350,000
per lot x 22 lots).
                               - 44 -

for the increased expenses related to the additional lots, he

concluded capital expenses would be $2.55 million.    Mr. Garone

had a much lower estimate for capital expenses: approximately

$1.27 million.   That figure comes from a supplement to his report

that provides a detailed comparison of capital expenses for five

different development plans, all derived from the partnership’s

actual expenses.   (In his discounted cashflow analysis, for some

reason, Mr. Garone separately calculated “Estimated Project

Costs”, which he found to be approximately $1.24 million.      We

prefer his more detailed supplement.)

     In the supplement, Mr. Garone started with the actual

expenses the partnership incurred, increased some expenses to

reflect the greater cost of developing more lots, and subtracted

other expenses that, in his opinion, were “not appropriate for

the development model”.   At trial, Mr. Garone explained why the

excluded expenses would not have been necessary, and we found

some of his testimony convincing.    For example, Mr. Garone

excluded all the expenses related to the renovation of the

clubhouse.   Yet Mr. Garone failed to explain his reasons for

excluding other costs.    Although we find that Mr. Lengel failed

to justify both his use of nearly all the partnership’s expenses

and his additional $420,000 upward adjustment, we also find that

Mr. Garone failed to justify his exclusion of many expenses

beyond those related to the clubhouse.    We shall start with Mr.
                                  - 45 -

Garone’s estimate of capital expenses and add back certain

expenses (those not related to the clubhouse and not excluded by

Mr. Lengel).     We thereby calculate capital expenses to be

approximately $1.87 million.

           (4)    Discount Rate

     Mr. Garone used a discount rate of 20 percent to account for

the risk associated with developing 40 lots.      Yet he also used a

discount rate of 20 percent for his 60-lot residential

subdivision.     That is, Mr. Garone argued that developing 60 lots

involved no more risk than developing 40 lots, but developing 40

lots involved substantially more risk than developing 22 lots.

We are not convinced.     We shall again use a discount rate of 15

percent.

           (5)    River Corridor Conservation Easement

     In his supplemental report, Mr. Lengel asserted that the

partnership could have sold a conservation easement protecting

the river corridor for $1.5 million.       Nonetheless, in an addendum

to that report, he stated that, contrary to his previous

understanding, no government entity had made any offer to

purchase such a conservation easement.      We find that petitioner

failed to show that a developer would have been likely to sell

such a conservation easement for such a large sum.
                                - 46 -

            d.   Conclusion

       We conclude that the 40-lot residential subdivision had, at

the time of the donation of the conservation easement, a present

value of approximately $4.45 million.     See the appendix for our

discounted cashflow analysis.

       F.   The Value of the Conservation Easement

       We find that Gunnison Riverbanks Ranch was worth $4.45

million (as a 40-lot residential subdivision) before the

imposition of the conservation easement and was worth $3.89

million (as a 21-lot shared ranch) after the imposition of the

conservation easement.     The value of the conservation easement is

the difference:     $560,000 (and we so find).

III.    The Percentage Limitation Rules of Section 170(b)(1)

       By the notice, respondent determined that any charitable

contribution deduction is subject to the limitations in section

170(b)(1)(B) and not those in section 170(b)(1)(A).    The general

rule of section 170(b)(1)(A) is that “Any charitable contribution

to * * * [certain organizations is] allowed to the extent that

the aggregate of such contributions does not exceed 50 percent of

the taxpayer’s contribution base for the taxable year.”    The

general rule of section 170(b)(1)(B) is that charitable

contributions other than those to which section 170(b)(1)(A)

applies are

       allowed to the extent that the aggregate of such
       contributions does not exceed the lesser of--
                              - 47 -

               (i) 30 percent of the taxpayer’s contribution
          base for the taxable year, or

               (ii) the excess of 50 percent of the
          taxpayer’s contribution base for the taxable year
          over the amount of charitable contributions
          allowable under subparagraph (A) * * *

     Petitioner did not in the petition assign error to

respondent’s determination with respect to the percentage

limitation.   That is enough for us to deem the issue conceded.

See Rule 241(d)(1)(C).   Moreover, he did not raise the issue at

trial or in his opening brief.   In his reply brief, however,

petitioner argues that we do not have jurisdiction to decide the

issue because the issue turns on questions of fact specific to

the partners.   That is, petitioner argues that the issue is not a

partnership item, see sec. 6231(a)(3), but a nonpartnership item,

see sec. 6231(a)(4).   We disagree.    To decide whether the

charitable contribution here falls under subparagraph (A) or (B)

of section 170(b)(1), all we must decide is to what kind of

organization the partnership donated the conservation easement.

See sec. 170(b)(1)(A) and (B).   That question is best answered at

the partnership level and so is a partnership item.     See sec.

6231(a)(3).   Petitioner has presented no evidence or argument

with respect to that question.   We find against him.
                              - 48 -

IV.   Conclusion

      The conservation easement was worth $560,000, and so the

partnership made a contribution in that amount.   The percentage

limitations in section 170(b)(1)(B) apply.


                                         An appropriate decision

                                    will be entered.
                                                                              - 49 -
                                                                              APPENDIX


                                                          Trout Ranch Discounted Cashflow Analysis--40 Lots


Assumptions                                                   Lot Prices                                                          Absorption Rate

Discount rate                  15%                   Buffer              $200,000                       Year         Buffer            West           East        TOTALS
Commissions                        7%                West river            350,000                       1             0                 0              0            0
Closing costs                      1%                East river            350,000                       2             3                 2              1            6
Sales expenses                     8%                                                                    3             3                 1              2            6
Developer’s profit             15%                   Capital expenses                                    4             2                 2              1            5
Project management             10%                                      (1,870,000)                      5             2                 1              2            5
Appreciation                   10%                                                                       6             2                 2              1            5
                                                                                                         7             2                 1              2            5
                                                                                                         8             2                 2              1            5
                                                                                                         9             2                 1              0            3
                                                                                      Totals                          18                12             10           40



Year Sales                     1                2                 3             4              5               6              7               8              9    TOTALS
--Buffer                       0                3                 3             2              2               2              2               2              2           18
Lot price              $200,000         $200,000       $242,000         $266,200       $292,820      $322,102      $354,312          $389,743       $428,718
Revenue                        0         660,000        726,000          532,400         585,640      644,204       708,624           779,487        857,436     $5,493,791
--West river                   0                2                 1             2              1               2              1               2              1           12
Lot price               350,000          385,000        423,500          465,850         512,435      563,679       620,046           682,051        750,256
Revenue                        0         770,000        423,500          931,700         512,435     1,127,357      620,046          1,364,102       750,256      6,499,396
--East river                   0                1                 2             1              2               1              2               1              0           10
Lot price               350,000          385,000        423,500          465,850         512,435      563,679       620,046           682,051        750,256
Revenue                        0         385,000        847,000          465,850       1,024,870      563,679      1,240,093          682,051                0    5,208,542
Gross sales revenue            0        1,815,000     1,996,500         1,929,950      2,122,945     2,335,240     2,568,763         2,825,640      1,607,692    17,201,729
Sales expenses                 0         (145,200)     (159,720)         (154,396)      (169,836)     (186,819)     (205,501)         (226,051)      (128,615)   (1,376,138)
Capital expenses      (1,870,000)               0                 0             0              0               0              0               0              0   (1,870,000)
Project management             0         (181,500)     (199,650)         (192,995)      (212,295)     (233,524)     (256,876)         (282,564)      (160,769)   (1,720,173)
Developer’s profit             0         (272,250)     (299,475)         (289,493)      (318,442)     (350,286)     (385,315)         (423,846)      (241,154)   (2,580,259)
Net sales revenue     (1,870,000)       1,216,050    1,337,655          1,293,067      1,422,373     1,564,611     1,721,072         1,893,179      1,077,154     9,655,159
Present value         (1,870,000)       1,057,435    1,011,459           850,212         813,246      777,888       744,067           711,716        352,123      4,448,147
                                                                                  - 50 -

                                                            Trout Ranch Discounted Cashflow Analysis--21 Lots


Assumptions                                                       Lot Prices                                                     Absorption Rate

Discount rate                  15%                   West river            $490,000                       Year        West          East            Totals
Commissions                        7%                East river                490,000                     1            0             0                0
Closing costs                      1%                                                                      2            3             2                5
Sales expenses                     8%                                                                      3            2             2                4
Developer’s profit             15%                   Capital expenses                                      4            2             2                4
Project management             10%                                        (2,180,000)                      5            2             2                4
Appreciation                   10%                                                                         6            2             2                4
                                                                                                           7            0             0                0
                                                                                                           8            0             0                0
                                                                                                           9            0             0                0
                                                                                         Totals                        11            10               21



Year Sales                     1                2                 3                 4             5              6           7            8                  9       Totals
--West river                   0                3                 2                 2             2              2           0            0                  0           11
Lot price              $490,000         $539,000       $592,900           $652,190        $717,409     $789,150      $868,065    $954,871      $1,050,359
Revenue                        0        1,617,000     1,185,800          1,304,380        1,434,818    1,578,300             0            0                  0   $7,120,298
--East river                   0                2                 2                 2             2              2           0            0                  0           10
Lot price               490,000          539,000        592,900            652,190         717,409       789,150      868,065     954,871          1,050,359
Revenue                        0        1,078,000     1,185,800          1,304,380        1,434,818    1,578,300             0            0                  0    6,581,298
Gross sales revenue            0        2,695,000     2,371,600          2,608,760        2,869,636    3,156,600             0            0                  0   13,701,596
Sales expenses                 0         (215,600)     (189,728)          (208,701)        (229,571)    (252,528)            0            0                  0   (1,096,128)
Capital expenses      (2,180,000)               0                 0                 0             0              0           0            0                  0   (2,180,000)
Project management             0         (269,500)     (237,160)          (260,876)        (286,964)    (315,660)            0            0                  0   (1,370,160)
Developer’s profit             0         (404,250)     (355,740)          (391,314)        (430,445)    (473,490)            0            0                  0   (2,055,239)
Net sales revenue     (2,180,000)       1,805,650     1,588,972          1,747,869        1,922,656    2,114,922             0            0                  0    7,000,069
Present value         (2,180,000)       1,570,130     1,201,491          1,149,252        1,099,285    1,051,490             0            0                  0    3,891,648
