                           T.C. Memo. 1999-210



                         UNITED STATES TAX COURT



  WILLIAM N. KELLAHAN, JR., AND ALICE H. KELLAHAN, Petitioners
          v. COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 22540-96.                Filed June 23, 1999.



       J. Richard Cox, for petitioners.

       James E. Gray, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       GALE, Judge:   Respondent determined the following

deficiencies, additions to tax, and accuracy-related penalties:

                                 Additions to Tax and Penalties
Year        Deficiency        Sec. 6651(a)(1)          Sec. 6662(h)
1990         $21,612              $6,244                 $8,601
1992          40,334               5,547                  5,038
                                - 2 -


Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, we must decide the following issues1:

(1) The value of real property, 4.75 acres on which is located a

manmade canal, that petitioners donated to the South Carolina

Public Service Authority as a charitable contribution.      We hold

that the value is no higher than the amount determined by

respondent, $5,950.    (2) Whether petitioners are liable for the

addition to tax pursuant to section 6651(a) for 1990.     We hold

that they are not. (3) Whether petitioners are liable for

accuracy-related penalties in increased amounts pursuant to

section 6662(h) for 1990 and 1992.      We hold that they are.

                          FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts and

attached exhibits.    At the time of filing the petition,

petitioners resided in Kingstree, South Carolina.

     The real property that is the subject of the dispute in this

case was acquired by G. H. Hardy in 1971 as part of a 15-acre



     1
        At trial, petitioners sought to amend their petition to
aver that certain income reported in 1992 had been reported
twice. This matter will be disposed of separately.
                               - 3 -


tract of land in Clarendon County, South Carolina, near Lake

Marion.   Mr. Hardy’s tract abutted land owned by H. F. Oliver.

Mr. Oliver had dug a canal on his land.   The canal was connected

to Lake Marion and thus provided access to the lake.   Mr. Oliver,

who was a land surveyor, had subdivided his property and sold

lots around his canal.   The canal on Mr. Oliver’s property

terminated at Mr. Hardy’s tract, and Mr. Oliver persuaded Mr.

Hardy to dig a canal and subdivide in similar fashion.    So Mr.

Hardy arranged to have a canal (the Canal) dug on his tract,

starting from the point where Mr. Oliver’s canal terminated, and

had Mr. Oliver survey and subdivide his tract into 28 lots

surrounding the Canal.   He commenced selling the lots in March

1975 and sold the last one in August 1985.

     The deeds conveying the 28 lots recited the various land

boundaries of each lot and further stated that each lot was bound

“by waters of Lake Marion [i.e., the Canal]”.   The property plat

showing the subdivision of Mr. Hardy’s tract, which was

referenced in the deeds conveying the lots as providing a “more

particular description” of the lots, indicated that the lots

terminated at the “high water mark” of the Canal.   The plat made

no reference to a low water mark or to any land between high and

low water mark.   When Mr. Hardy offered the lots for sale, it was

his understanding that the lots extended to the center of the

Canal rather than terminating at the water’s edge, and he
                               - 4 -


represented this to the potential buyers.    Mr. Hardy did not

specify the language used in the deeds and did not read the deeds

before signing them.

     The Clarendon County Assessor took the position, apparently

based on the language of the deeds, that Mr. Hardy still held

title to the land under the Canal waters.2   Consequently,

sometime after Mr. Hardy had sold all the lots, he received a

bill from the Clarendon County Tax Collector for property taxes

owed on the Canal.   Mr. Hardy did not pay the tax on the Canal,

because he did not believe he owned the Canal and because he did

not think it had any value.3   As a result of Mr. Hardy’s

delinquency in paying the taxes, the Canal was auctioned by the

Clarendon County Tax Collector.   Mr. Hardy subsequently had the

opportunity to reacquire title to the Canal if he paid the

delinquent taxes, plus a redemption fee (see below), within 12

months.   He did not do so for the same reasons he did not

initially pay the property taxes on the Canal:    He did not

believe he owned it, and he did not think it had any value.



     2
       This position was later confirmed in August 1990 when, in
response to a request from the Clarendon County Tax Collector,
the Clarendon County Assessor issued a letter stating that, based
on a review of the deeds, “the property owners abutting the canal
own down to the water, but no further” and that “the developer
(G. H. Hardy) still owned the land under the water.”
     3
       Mr. Hardy recollected that the amount billed by the
Clarendon County Assessor was in the range of $2,000-3,000.
                                - 5 -


     Petitioner William N. Kellahan, Jr. (petitioner) had been

engaged in the purchase of properties at tax sales since the

early 1980’s, as a member of a partnership by the name of DAK,

which consisted of W. W. Dibble, Harry R. Askins, Jr., and

petitioner.   DAK generated income by purchasing properties at tax

sales and selling them back to the previous owners, thereby

collecting redemption fees.   If a property owner was delinquent

in paying property taxes, the county could seize the property and

sell it.   The property would be sold at auction to the highest

bidder, whose bid would include the delinquent taxes and

penalties.    The delinquent taxpayer would have 12 months in which

to reacquire or “redeem” the property, by paying the delinquent

taxes and penalties plus an additional fee equal to 8 percent of

the bid amount.   If property sold at auction was redeemed during

the redemption period, the purchaser at auction would receive a

refund of his bid price plus the 8-percent redemption fee; if

there was no redemption, the auction purchaser would acquire

title.

     DAK’s principal objective in engaging in the tax sale

purchases was to collect the 8-percent redemption fees, which

were distributed to the partners.   Approximately 80 to 85 percent

of the properties purchased by DAK were redeemed.   Properties

that were not redeemed would be distributed by DAK to the

individual partners, who would attempt to sell them at a gain.
                               - 6 -


     Unredeemed properties would be equally divided among Mr.

Dibble, Mr. Askins, and petitioner based on the properties’ bid

prices.   The specific properties were divided randomly, but in a

manner ensuring that each partner got the same total value of

properties, based on their bid prices.   The partner to whom an

unredeemed property was assigned would be deeded the property by

the relevant county after the redemption period had expired.

Often, after the properties had been deeded, it was the practice

of Mr. Dibble, Mr. Askins, and petitioner to exchange properties,

primarily for convenience (because, e.g., a property was closer

to a partner’s place of residence, or to equalize the value of

parcels being exchanged).   Properties exchanged between the

partners were valued based on the bid prices plus any additional

taxes paid during the period the property had been held.

     DAK purchased the Canal at a tax sale in October of 1986 for

a bid price of $100.   The Canal was not redeemed and was assigned

to petitioner.   In October 1988, the Canal was deeded4 from the

Clarendon County Tax Collector to Colonial Properties, Inc., a

corporation controlled by petitioners.   Colonial Properties

deeded the property to Mr. Askins in May 1989, for total

consideration of $159.   Mr. Askins subsequently exchanged the

property with Mr. Dibble, and it was deeded to Blue, Inc., a


     4
       This deed indicated that the taxes due for 1985, 1986, and
1987 totaled $51.39.
                                - 7 -


corporation owned by Mr. Dibble.    For purposes of the foregoing

transfer, Mr. Askins and Mr. Dibble treated the property as

having an exchange value of $160.    Finally, the Canal was deeded

from Blue, Inc., to petitioners on December 10, 1990, for

consideration of $10 and the exchange of other property.5   Four

days later, on December 14, 1990, petitioners contributed the

Canal to the South Carolina Public Service Authority (SCPSA).

Petitioners contributed the Canal because the Clarendon County

Tax Assessor had advised petitioner that the owners of the 28

lots surrounding the Canal were very upset that the Canal had

been sold and had suggested that petitioner either attempt to

work out some kind of agreement with the owners or give the

property to the SCPSA.    Petitioners decided to contribute the

property to the SCPSA so they would not have to deal with the

disgruntled owners.

     At the time they contributed it, petitioners had not visited

the property and knew very little about it.    In fact, petitioners

did not visit the property until approximately 1 month prior to

the trial in this case.    However, petitioner received a letter

dated December 14, 1990 (the date of the contribution), from

Harby Moses, Jr., a licensed contractor doing business as Coastal




     5
       The record does not indicate what property was exchanged,
or its value.
                               - 8 -


Structures, which stated that the cost of digging a canal of the

approximate dimensions of the Canal would be $107,134.50.

     As of October 5, 1988, the tax-assessed value of the Canal

was $1,000.   According to a ratio study completed by the State of

South Carolina, in Clarendon County during 1990 the average ratio

of tax-assessed value to sales price for nonresidential,

nonagricultural property was 79.4 percent.

     On April 15, 1991, petitioners filed a Form 4868, Extension

of Time to File U.S. Individual Income tax Return, seeking an

automatic 4-month extension of time to file their 1990 Federal

income tax return.   The Form 4868, signed by petitioners’ tax

return preparer, required the taxpayer to estimate the amount of

tax owed and stated that “If we later find that your estimate was

not reasonable, the extension will be null and void.”    On the

Form 4868, petitioners estimated a total tax liability of $0 for

1990.   On August 15, 1991, petitioners filed a Form 2688,

Application for Additional Extension of Time to File U.S.

Individual Income Tax Return, seeking an additional extension of

time to file their 1990 return until October 15, 1991.

     Petitioners hired an appraiser to value the Canal.    The

appraiser’s report, dated August 15, 1991, valued the Canal at

$111,750.   The appraisal used the cost method of valuation, under

which the appraiser’s estimated cost of constructing the Canal,

$98,010, was included in the value of the property.
                                 - 9 -


     On their 1990 return, petitioners claimed a charitable

contribution deduction with respect to the Canal in the amount of

$71,108; they claimed the remainder--$40,642--on their 1992

Federal income tax return as a charitable contribution carryover

from 1990.   The Canal was described on the 1990 return as 4.7

acres of land and improvements, appraised at a fair market value

of $111,750.   Attached to the 1990 return was the letter from Mr.

Moses estimating a $107,134.50 cost for digging a canal on 4.75

acres of land.   In addition, petitioners reported adjusted gross

income of $237,025 for 1990, claimed itemized deductions of

$104,042 (including the charitable contribution deduction with

respect to the Canal of $71,108) and exemptions of $10,250, and

computed taxable income of $122,733.     They reported a tax

liability of $32,363 and previous withholdings of $29,676,

resulting in net tax due for 1990 of $2,687.

     In the notice of deficiency, respondent determined that the

value of the Canal was $5,950.    Included in the notice was the

appraiser’s report relied on by respondent in making the

determination and offered by respondent at trial.     In preparation

for trial in this case, petitioners hired a second appraiser, who

valued the Canal at $72,500, and petitioners now concede that the

Canal’s value was no greater than $72,500.
                                - 10 -


                                OPINION

I.   Value of the Canal

      A. Background

      Section 170(a)(1) provides:   “There shall be allowed as a

deduction any charitable contribution * * * payment of which is

made within the taxable year.    A charitable contribution shall be

allowable as a deduction only if verified under regulations

prescribed by the Secretary.”    Where the charitable contribution

consists of property other than cash, the value of the

contribution, with exceptions not relevant here, is the fair

market value of the donated property at the time of contribution.

See sec. 1.170A-1(c)(1), Income Tax Regs.; see also Hewitt v.

Commissioner, 109 T.C. 258, 261 (1997), affd. 166 F.3d 332 (4th

Cir. 1998).   The regulations define fair market value as “the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or sell and both having reasonable knowledge of relevant

facts.”   Sec. 1.170A-1(c)(2), Income Tax Regs.; see also Johnson

v. Commissioner, 85 T.C. 469, 476 (1985).    Valuation is a

question of fact.     See, e.g., Estate of Newhouse v. Commissioner,

94 T.C. 193, 217 (1990).    The parties agree that a deduction in

the instant case is permitted and that the only issue is the fair

market value of the contributed property.
                                - 11 -


     B. Expert Reports

     Both parties rely on expert appraisals of the Canal.

Respondent’s expert, Felecia Coleman (respondent’s expert),

considered the 4.75-acre Canal to be solely land under water.

She used a comparable sales approach to value the Canal, under

which she attempted to estimate the value of the Canal based on

the sales prices of similar properties.   Since she could find no

sales of manmade canals, respondent’s expert used ponds as the

best available comparables.   Also, because there were no sales of

ponds in the vicinity close to the time of the contribution of

the Canal, she estimated the value of the ponds of comparable

size in the area using their assessed values for local property

tax purposes.   On the basis of her experience in real estate, she

concluded that such assessed values were typically 80 percent of

fair market value, and respondent introduced statistics

supporting this ratio for nonresidential, nonagricultural real

property in Clarendon County.    Since the tax-assessed value for

similarly sized ponds in the area was $1,000 per acre,

respondent’s expert used a figure of $1,250 per acre as the

estimated fair market value of the ponds.   On the basis of that

figure, she estimated the Canal’s value at $5,937.50 (4.75 acres

times $1,250), which she rounded to $5,950.

     Petitioners’ expert, Theodore B. Gardner (petitioners’

expert), treated the 4.75-acre Canal as comprising three
                              - 12 -


components:   3.5 acres of land under water; a 1.25-acre strip of

land between the water’s edge at its normal levels and the high

water mark; and 12 piers built from adjacent lots out into the

water.   The 1.25-acre strip of land was usually above water but

was nonetheless part of the Canal parcel because the Canal

extended to the high water mark.   Petitioners’ expert testified

that the State maintained and operated a dam that, among other

things, controlled the water level of Lake Marion and, in

general, kept the water level below the high water mark.

     With respect to the 3.5 acres of land under water,

petitioners’ expert’s method of valuation was similar to

respondent’s:   He too sought comparable properties and settled on

ponds.   He examined sales of farms with ponds of 3 acres or more.

The first of these sales took place in March 1995, more than 4

years after the charitable contribution in the instant case.

Petitioners’ expert relied on buyers’ estimates of the per-acre

value of the ponds, and from this he estimated the value of the

land under water in the Canal to be $2,750 per acre.    He thus

valued the land under water at $9,625 (3.5 acres x $2,750).

     With respect to the piers, petitioners’ expert estimated

that there were 12 piers extending out into the Canal.    He valued

the piers at their estimated cost of $650 each, a figure he

obtained from tax assessor records.    He included a total value

for the piers in the amount of $7,800 (12 piers x $650).
                              - 13 -


      With respect to the 1.25-acre strip of land above water,

petitioners’ expert estimated the size of the strip based on a

visit to the Canal and examination of tax assessor maps.      He

valued the strip of land as follows:   He measured the total

waterfront footage of all lots on the Canal at 3,650 feet.      He

then summed the total sales prices of all the lots between March

1975 and December 10, 1990, which produced a figure of $368,900.

He then divided the latter by the former to establish an average

cost per waterfront foot of $101.07.   He then discounted this

number by 85 percent, producing a value of $15.16 per waterfront

foot, or $55,334 for the strip (3,650 feet x $15.16).

      The value of the Canal, therefore, under petitioners’

expert’s computations, was the sum of the value of the piers

($7,800), the value of the land under water ($9,625), and the

value of the strip of land above water ($55,334), for a total of

$72,759, which he rounded down to $72,500.

C.   Court’s Analysis

      Valuing this parcel of property was no doubt a challenge for

both experts in this case, given its highly unusual, if not

unique, characteristics.   Nonetheless, the Court’s review of both

experts’ theories reveals that they cannot hold water.

      We start with the use of ponds as comparables.   Although we

appreciate the dilemma faced by the experts, we do not accept the

premise that a pond is comparable to the Canal.   The owner of a
                                - 14 -


pond may restrict access.   Both petitioners’ and respondent’s

experts agreed that the owner of the Canal could not restrict

access by the public via Lake Marion.6   The experts’ position

appears correct.   See, e.g., Hughes v. Nelson, 399 S.E.2d 24

(S.C. Ct. App. 1990) (manmade canal opening into navigable water

is itself navigable and hence open to public access).

Petitioners have in any event failed to offer facts or law to

refute it.   Nevertheless, while both experts conclude that the

Canal is open to public access, they fail to take this factor

into account in deciding that ponds are viable comparables to the

Canal for valuation purposes.    In our view, given that he cannot

control public access, the Canal owner’s property rights are

substantially attenuated in comparison to the owner of a pond.

Cf. State v. Head, 498 S.E.2d 389 (S.C. Ct. App. 1997)

(conviction for fishing without permission overturned; owner of

land under navigable water could not prevent public access).     For

this reason, we doubt that ponds and publicly accessible canals



     6
       Petitioners attempt, unsuccessfully in our view, to refute
this point on brief with the naked claim that “The record states
that the Canal was dug and then opened into the waters of Lake
Marion without Public Service Authority permission. In light of
that, the Public Service Authority or other interested party may
well have been authorized to place a barrier between the Canal
and Lake Marion.” Petitioners do not suggest who that “other
interested party” might be, or provide any support for their
contention. Nor do they explain how the Canal’s being subject to
barricading by the Public Service Authority might enhance its
value.
                                - 15 -


are comparable.   In any event, the failure of either expert to

address this issue renders their conclusions unreliable to the

extent they involve pond comparables.

     We believe there are additional substantial flaws in

petitioners’ expert’s report.    First, petitioners’ expert decided

to include an estimated value of $7,800 for several piers

constructed by the lot owners and extending from their lots into

the water of the Canal.   An obvious premise underlying this

position is that the Canal owner owned the piers.   Yet neither

the expert nor petitioners on brief offer any support for that

legal conclusion or, indeed, even discuss it.   In his report,

petitioners’ expert notes that he obtained the value he used for

the piers from the tax assessor’s office, which at least suggests

that for local property tax purposes the piers were not

considered to be part of the Canal parcel.7   There is certainly

support for the contrary conclusion; namely, that the piers were

the property of the lot owners.    See, e.g., Sea Cabin On the

Ocean IV Homeowners Association v. City of North Myrtle Beach,

828 F. Supp. 1241 (D.S.C. 1993) (pier held to be an appurtenance

to the real property located above the mean high water mark).      In

any event, on this record, petitioners have failed to show that


     7
       The tax-assessed value attributed to the Canal by the
Clarendon County Assessor in October 1988 was $1,000, whereas the
value placed on the 12 piers was approximately $650 each,
according to petitioners’ expert.
                                - 16 -


the value of the piers should be counted in determining a value

for the Canal.

     Second, petitioners’ expert’s method of valuing the strip of

land between the ordinary water level and the high water mark of

the Canal is flawed.   It appears that the figure used for the

total sales prices of all 28 lots, $368,900, included multiple

sales of the same lots.    This would skew the average.8   Further,

petitioners’ expert provided no convincing rationale for his

determination that the value of the strip of land could be

determined by taking 15 percent of the combined fair market

values of the 28 lots and allocating it to the amount of their

waterfront footage.    Thus, his use of the 85-percent discount

appears to be arbitrary.    We accordingly reject this portion of

his analysis.

     The most significant problem with the valuation of

petitioners and their expert is the proposition that the strip of

land between the water’s edge and high water mark of the Canal

had significant value at all.    Petitioners’ expert valued the

strip at $55,334.   However, petitioners’ expert conceded that the

strip, which he estimated varied in width from 7 to 15 feet, and



     8
       For instance, if each of the lots were sold twice, then
the total sales prices would have been with respect to twice the
waterfront footage, which would mean (other things being equal)
that each waterfront foot was half as valuable as petitioners’
expert calculates.
                              - 17 -


was by definition occasionally submerged, could not be used for

residential or agricultural purposes.   Petitioners’ expert also

conceded that the strip was only accessible to its owner by

water, and, further, that the only conceivable market for the

property would be the 28 adjacent lot owners.   Petitioners make

clear in their arguments on brief that their theory of valuation

is that the strip of land between the water’s edge and high water

mark was valuable because it afforded its owner the opportunity

to restrict the water access of the 28 adjacent lot owners.    Thus

it was a nuisance that the lot owners would pay to eliminate.

Respondent counters that, under South Carolina law, the lot

owners had an easement granting them access to the water, citing

McAllister v. Smiley, 389 S.E.2d 857 (S.C. 1990) (owner of lot

bounded by road had easement over road since it appeared in

original plat).   Thus, respondent argues, the lot owners would

pay nothing for water access or would certainly sue any owner of

the strip who sought to restrict their water access.    We believe

there is significant support for respondent’s position.   In

addition to the case cited by respondent, we note Epps v.

Freeman, 200 S.E.2d 235 (S.C. 1973), which held that where

waterfront property is subdivided such that a strip of land

exists between the lots and the water, the lot owners have a

right to water access if it was the “intention of the

subdividers” to give the lot owners access to the water and “the
                               - 18 -


plat amounted to a representation” that the lot owners would have

access to the water.    Id. at 242.   The record in this case

demonstrates that the subdivider’s intent was to give water

access, and the plat, or at least Mr. Hardy’s representation to

buyers, appears to indicate water access.    Further, the record in

this case amply documents that the 28 lot owners were “very

disgruntled” upon learning that the Canal had been sold at

auction for back taxes.

     We need not, and do not, decide whether under South Carolina

law the adjacent lot owners had easements with respect to the

Canal parcel.   It is sufficient for our purposes to conclude that

there was a significant risk that such was the case.     We believe

it obvious that whatever property rights were conveyed with

ownership of the Canal parcel were subject to significant

litigation hazards.    We conclude that it was a virtual certainty

that any attempt by the Canal’s owner to restrict the adjacent

lot owners’ water access would be met with a lawsuit.9

Petitioners’ expert conceded at trial that he took no account of

the possibility of litigation in arriving at his value estimate.

This fact alone might provide grounds for substantially

discounting his conclusions.    When we consider the failure to


     9
       Indeed, given the lot owners’ disquietude evidenced in the
record, we believe merely holding title to the Canal might result
in entanglement in a suit to quiet title brought by the lot
owners.
                               - 19 -


account for litigation hazards along with the shortcomings

previously discussed, we conclude that petitioners’ expert’s

conclusions should be disregarded.

     Having largely rejected10 both expert reports, we must

ascertain the value of the Canal based on the remaining evidence

in the record.   With respect to the multiple transfers of the

Canal between the DAK partners, respondent's expert conceded that

they were not at arm's length, and for that reason we believe

they should be disregarded.    Likewise, with respect to the tax

sale for $100, there is no evidence in the record that the

auction was publicized or otherwise reached a wide market.     We

therefore conclude that it was more akin to a "forced" sale and

should be disregarded.   Mr. Hardy abandoned the property rather

than pay the accumulated tax liability, which he recalled was

between $2,000 and $3,000.11   Mr. Hardy was highly knowledgeable

regarding the Canal, and we believe his actions have some

probative value with respect to its worth.   In addition, there is

no evidence that the value of the Canal changed significantly

between the time of Mr. Hardy's abandonment and the later




     10
       We accept respondent’s expert’s contention in her report
that the tax-assessed value of the subject property “cannot be
ignored as an indication of value”.
     11
       The deed resulting from the tax sale indicated that the
taxes due for 1985 through 1987 totaled only $51.39.
                                - 20 -


contribution by petitioners.    Cf. Estate of Spruill v.

Commissioner, 88 T.C. 1197, 1233 (1987).

     There remains the assessed value for local property tax

purposes of $1,000.   The tax-assessed value of property is, in

general, “‘not * * * necessarily a reliable criterion to be used

in estimating its fair market value’”, Frazee v. Commissioner, 98

T.C. 554, 563 (1992) (quoting Estate of Lippincott v.

Commissioner, 27 B.T.A. 735, 740 (1933)).    This is particularly

true when there is nothing in the record indicating that the tax-

assessed value was intended to represent fair market value.    See

Frazee v. Commissioner, supra.    However, in this case the record

contains evidence that the tax-assessed value of property in this

locality was approximately 80 percent of fair market value.    The

ratio study conducted by the State of South Carolina found that

in 1990 the average ratio of tax-assessed value to sales price

for nonresidential, nonagricultural property in Clarendon County

was 79.4 percent.   Respondent’s expert also opined that the tax-

assessed value of property in South Carolina was approximately 80

percent of fair market value.    Moreover, in appropriate

circumstances tax-assessed values can be useful as a guideline or

as corroboration of other evidence of fair market value.    See

Fannon v. Commissioner, T.C. Memo. 1986-572, modified and

remanded without published opinion 842 F.2d 1290 (4th Cir.
                               - 21 -


1988).12   In the circumstances of this case, we believe the tax-

assessed value is entitled to some weight in valuing the Canal.

     Mr. Hardy's abandonment and the tax-assessed value

considered cumulatively both suggest that the value of the Canal

is much closer to respondent's estimate of $5,950 than to

petitioners' estimate of $72,500.   Moreover, a closer look at

petitioners' theory of a "nuisance" value also provides support

for respondent's position.   Petitioners theorize that the Canal

had value because the 28 adjacent lot owners would "pay

something" to eliminate a potential obstacle to their water

access.    As noted earlier, the respective property rights of the

adjacent lot owners and the Canal owner were not clear and would

likely require litigation to determine.   The parties to such a

potential dispute might well pay to avoid it.   Under petitioner's

theory of value, the 28 lot owners would collectively pay

$72,500, or almost $2,600 each, to be rid of the nuisance.    The

average purchase price of the lots was approximately $10,370.13

We do not believe, given the speculative nature of the Canal

owner's rights to restrict their water access, that the lot



     12
       As we pointed out in Fannon v. Commissioner, T.C. Memo.
1989-136, the Court of Appeals for the Fourth Circuit also relied
on assessed values in reaching its result.
     13
       This price is based on the sales data provided in
petitioners’ expert’s report, using only the most recent sale for
lots that had been sold more than once.
                               - 22 -


owners would be likely to pay anywhere near this amount, which

represents approximately 25 percent of the average purchase price

of the lots.    Under respondent's value, the lot owners would

collectively pay $5,950, or a little more than $200 each.    This,

we believe, represents a more realistic estimate of the nuisance

value of the Canal owner's speculative property rights.

     The Canal parcel only came into existence as a result of

inadvertence.    Any owner of the Canal could not restrict public

access to the Canal waters from Lake Marion.    As to a Canal

owner's right to restrict the adjacent lot owners' water access

from their lots, the record amply demonstrates that any such

nuisance value was speculative and subject to a significant

litigation hazard.    The Canal's first owner abandoned it, and

petitioners gave it away, rather than confront the litigation

almost certainly entailed in any effort to realize value from the

property rights conferred by Canal ownership.    Based on our

review of all the evidence with respect to the Canal, we conclude

that respondent's determination of a value of $5,950 is better

supported than petitioners’ and that petitioners have failed to

prove that the value was any greater than the amount conceded by

respondent.    Accordingly, we sustain respondent's determination

of value.
                                 - 23 -


II.   Addition to Tax

      In the notice of deficiency, respondent determined that

petitioners were liable for additions to tax under section

6651(a) for failure to file tax returns for both 1990 and 1992.

Respondent now concedes that petitioners are not liable for the

addition to tax for 1992.     Respondent agrees that the requests

for extension for filing the 1990 return were timely filed and

that petitioners’ 1990 return was filed within the time as

provided in the requests for extension.       However, respondent

argues that the Form 4868, requesting an automatic extension of

time to file, was invalid.     We disagree.

      In order for a Form 4868 to be valid, the taxpayer must use

available evidence of tax liability, and must attempt to locate

evidence, to make a proper estimate.14    See Crocker v.

Commissioner, 92 T.C. 899 (1989).     The mere fact that the

estimate is incorrect does not make the Form 4868 invalid.       See

id. at 906-907.   However, “if a taxpayer, in his Form 4868

request for automatic extension, estimated his tax liability to

be zero, even though he had, at the time he submitted the

request, ample evidence discrediting the estimate, the Form 4868

would be invalid.”      Id. at 908.



      14
       The Form 4868 itself warns of this limitation. It
states: “If we later find that your estimate was not reasonable,
the extension will be null and void.”
                               - 24 -


       In this case, petitioners did not have “ample evidence

discrediting the estimate” of zero tax liability and in fact had

some evidence supporting it.    Petitioner received a letter from a

licensed contractor prior to filing the Form 4868, which stated

that the cost of constructing a canal similar to the Canal would

be $107,134.50.    Given that a copy of this letter was ultimately

attached to their tax return as filed, we believe petitioners

estimated the value of their contribution of the Canal using

replacement cost.    Petitioners thus made an effort to locate

evidence which, although incorrectly used, was sufficient for

purposes of their Form 4868 estimate, particularly in light of

the fact that valuing this property involved complicated legal

issues and posed a genuine challenge for both experts who

testified in this case.    Accordingly, petitioners are not liable

for the addition to tax under section 6651(a) for 1990.

III.    Accuracy-Related Penalties

       In the notice of deficiency, respondent determined that

petitioners were liable for accuracy-related penalties under

section 6662(h) for both 1990 and 1992.    Section 6662(h) applies

when there is a substantial valuation overstatement in which the

value of any property claimed on a tax return is 400 percent or

more of the value determined to be correct.    See sec.

6662(h)(2)(A), (e)(1).    However, no penalty is imposed unless the

portion of the underpayment attributable to substantial valuation
                                - 25 -


overstatement exceeds $5,000.    See sec. 6662(e)(2).   If section

6662(h) applies, the accuracy-related penalty under section

6662(a) is applied using a 40-percent, rather than a 20-percent,

rate.   See sec. 6662(h)(1).   In this case, the value of the Canal

claimed on petitioners’ tax return, $111,750, is 400 percent or

more of the value determined to be correct, $5,950.     Further, the

portion of the underpayment attributable to substantial valuation

overstatement exceeds $5,000.    Thus, section 6662(h) applies.

However, petitioners might be relieved of the penalty under

section 6662(h) if section 6664(c), the reasonable cause

exception, applies.

     Section 6664(c) provides in relevant part as follows:

          (1) In general.--No penalty shall be imposed
     under this part with respect to any portion of an
     underpayment if it is shown that there was a reasonable
     cause for such portion and that the taxpayer acted in
     good faith with respect to such portion.

          (2) Special rule for certain valuation
     overstatements.--In the case of any underpayment
     attributable to a substantial or gross valuation
     overstatement under chapter 1 with respect to
     charitable deduction property, paragraph (1) shall not
     apply unless--

                (A) the claimed value of the property was
           based on a qualified appraisal made by a qualified
           appraiser, and

                (B) in addition to obtaining such appraisal,
           the taxpayer made a good faith investigation of
           the value of the contributed property.
                              - 26 -


By adding subparagraph (B) to section 6664(c)(2), Congress

obviously intended that the taxpayer take some further steps

beyond merely obtaining an appraisal from a qualified appraiser.

We believe that petitioners’ actions in this case fall short of

what subparagraph (B) requires.   Petitioner had experience in

real estate, given his activity in purchasing property at tax

sales and reselling it, and successfully ran his own engineering

and survey business.   Thus he is chargeable with some

sophistication in real estate matters.      Taking into account

petitioner’s experience, and the fact that he did not even visit

the property until approximately 1 month before trial, we

conclude that he failed to make a “good faith investigation” of

the value of the contributed property within the meaning of

section 6664(c)(2)(B) before claiming the value on the tax

return.   See Sergeant v. Commissioner, T.C. Memo. 1998-265.

Therefore, petitioners have failed to satisfy section

6664(c)(2)(B), and the reasonable cause exception does not apply.

Accordingly, petitioners are liable for the accuracy-related

penalty under section 6662(h) for 1990 and 1992 as determined by

respondent.
                                       An appropriate order will be

                                  issued.
