T.C. Memo. 2021-12

UNITED STATES TAX COURT

KEVIN A. SELLS, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6267-12, 6801-12, Filed January 28, 2021.

 6835-12, 6836-12,

 6837-12, 6838-12,

 19246-12, 13553-13.

David Mace Wooldridge, Ronald A. Levitt, and Gregory P. Rhodes, for

petitioners.

Christopher A. Pavilonis, Laura A. Price, A. Gary Begun, and Denise A.

Diloreto, for respondent.

1

 We consolidated seven cases for trial on the issues we analyze in this

opinion: Lori Brown-James, docket number 6801-12; Jay and Sondra Pumroy,

docket number 6835-12; Charles G. and Mary D. Williams, docket number 6836-

12; Freddy H. and Penny J. Welch, docket number 6837-12; Stephen and Lucile

M. Whatley, docket number 6838-12; Steve and Janine Moses, docket number

19246-12; and John T. and Tammy I. Davis, docket number 13553-13. 

Served 01/28/21
- 2 -

[*2] MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Eight enterprising taxpayers created a partnership to buy

property at a distress sale and then donate a conservation easement on it to a land

trust. They paid $1.4 million in August 2002 for the entire property, and valued

the easement at $5.4 million in December 2003 when they donated it. 

Why are these conservation-easement cases different from all other

conservation-easement cases? The Commissioner doesn’t think they are. He

argues that the partners misstated the easement’s value and that they should get no

deductions at all because one of the clauses in the deed of easement violated the

same regulation we construed and upheld in Oakbrook Land Holdings, LLC v.

Commissioner, 154 T.C. 180 (2020), and Oakbrook Land Holdings, LLC v.

Commissioner, T.C. Memo. 2020-54. He is right that Oakbrook compels us to

deny the entire conservation-easement deduction, but these cases still raise a few

other issues, which include some especially knotty ones about penalties.

FINDINGS OF FACT

I. The Land and Easement

Nestled in the foothills of the Appalachian Mountains near Anniston in

Calhoun County, Alabama, lies a 398.01-acre piece of land. It’s close to Interstate
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[*3] 20 and is comprised of 161.5 acres of flatland and 236.51 acres of

mountainous land.

2

 Steven and Janine Moses bought it in November 1999 for

about $2.4 million. They planned to build a house and hippotherapy center3 on the

land. 

But much of Moses’ wealth was in technology stocks, and when the tech

bubble burst in 2001, Mr. Moses suddenly became insolvent. The Moseses

decided to sell the land they had just bought. They tried to sell the entire parcel,

and when that didn’t work they divided the flat part of their parcel from the part

that was mountainous. They were able to sell the 161.5 acres of flatland for about

$1.4 million. This left the Moseses with the mountainous land and a large pile of

debt. It seemed at first that they could find no buyer for the land that remained. 

II. Burning Bush Farms, LLC

With Mr. Moses’ debt still a problem, he and his attorney came up with a

plan for him and seven of his friends. In August 2002 Burning Bush Farms, LLC

was formed with eight members--Kevin Sells, Charlie Williams, Steven Moses,

2

 The parties stipulated the total amount of land--398.01 acres. There is a

minor discrepancy throughout the record about how much mountainous land there

was--the taxpayers claim it was 236.51 acres and the Commissioner claims it was

232.96 acres. The stipulation supports the taxpayers on this minor point.

3

 Hippotherapy uses the care and riding of horses as therapy or rehabilitation

for those who suffer from physical or mental disorders. 
- 4 -

[*4] Freddy Welch, Jay Pumroy, John Davis, Lori Brown-James, and Stephen

Whatley4--each a 12.5% owner. The Moseses then sold the mountainous land to

Burning Bush for $1.4 million--the amount of Mr. Moses’ existing debt--and they

liken this to a distress sale.

Once Burning Bush took over, its members started to investigate how to put

a conservation easement on their property. They spoke with Mark Pentecost of

Chattoawah Open Land Trust, Inc. (COLT), whom Mr. Moses had worked with on

conservation programs in the past. COLT provided Mr. Moses with “A

Professional’s Guide to Conservation Easements.” In late 2003, Burning Bush

deeded a conservation easement on the acres that it owned to COLT. It seemed

that Burning Bush would be the way for the Moseses to cross from their debt

troubles to the promised land with bags filled, not with jewels of gold and

borrowed raiment, but with their more modern and valuable equivalent--very large

tax deductions for themselves and their partners.

Might this work? The key is paragraph 16 of the deed, which contains an

extinguishment-proceeds clause. It reads in full:

4

 Two others, George Silva and Phillip Ledbetter, were members of Burning

Bush by the beginning of 2003 but seem to have dropped out by the end of the

year. Their membership has no bearing on these cases. 
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[*5] Extinguishment. If circumstances arise in the future such as render

the purpose of this Deed impossible to accomplish, this Conservation

Easement can only be terminated or extinguished, whether in whole

or in part, by judicial proceedings in a court of competent jurisdiction

pursuant to Code of Alabama § 35-18-3(b). The amount of the

proceeds to which Grantee shall be entitled, after the satisfaction of

prior claims, from any sale, exchange, or involuntary conversion of

all or any portion of the Property contemporaneously with, or

subsequent to, such termination or extinguishment, shall be

determined, unless otherwise provided by Alabama law at the time, in

accordance with Paragraph 17 below. Grantee shall use all such

proceeds in a manner consistent with the conservation purposes of

this Deed.

OK so far. But then paragraph 17 adds:

Proceeds. This Conservation Easement constitutes a real property

interest immediately vested in Grantee, which, for the purposes of this

Paragraph 17, the parties stipulate to have a current fair market value

determined by multiplying the fair market value of the Property

unencumbered by the Conservation Easement (minus any increase in

value after the date of this Deed attributable to improvements) by the

ratio of the value of the Conservation Easement at the time of this

Deed to the value of the Property, without deduction for the value of

the Conservation Easement, at the time of this Deed, according to that

certain Property Appraisal Report, dated November 1, 2003 and

prepared by Tennille and Associates of Boone, North Carolina, for

Burning Bush Farm, LLC. The values at the time of this Deed shall

be those values used to calculate the deduction for federal income tax

purposes allowable by reason of this Deed, pursuant to Section 170(h)

of the Internal Revenue Code of 1954, as amended. For the purposes

of this Paragraph, the ratio of the value of the Conservation Easement

to the value of the Property unencumbered by the Conservation

Easement shall remain constant. [Emphasis added.]
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[*6] Burning Bush and its members relied on Katherine Ebbins, the executive

director of COLT and a licensed attorney, to ensure that the conservation easement

was properly put into place and complied with the regulations. 

III. Reporting

When the time came to file its return, Burning Bush did so on Form 1065,

U.S. Return of Partnership Income.5 Attached to its Form 1065 was Form 8283,

Noncash Charitable Contributions. On page 2 of this form Burning Bush reported

the donation of the conservation easement to COLT as a noncash charitable

contribution with a value of just under $5.4 million. This amount was based on an

appraisal of the property by David Roberts and Pattie Tennille--both senior

residential appraisers. The Commissioner agrees that this was a “qualified

appraisal,” and that Burning Bush attached the appraisal to its partnership return

as it needed to do. See sec. 1.170A-13(c)(2)(i), Income Tax Regs.

6

Burning Bush also reported on this return a second noncash charitable

contribution of “Timber” valued at $275,340. Burning Bush described the timber

5

 Partnerships don’t pay taxes, but file Forms 1065 as informational returns. 

A partnership’s income and deductions “flow through” to its partners. Sec. 701;

6611, Ltd. v. Commissioner, T.C. Memo. 2013-49, at *44.

6

 All section references are to the Internal Revenue Code and regulations in

effect for the years at issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure, unless we say otherwise. 
- 7 -

[*7] as “PULP, Chip N SAW, SAW Timber.” It attached a separate appraisal of

this donated timber. That appraisal describes the timber as “forest products

growing on [the] property.” The appraisal then lists the value of eight types of

“products.” 

Burning Bush issued Schedules K-1, Partner’s Share of Income, Credits,

Deductions, etc., to its eight members. Since the members were equal partners,

each had a noncash, flowthrough charitable contribution of $708,792--the math

works out to $674,375 for the donation of the conservation easement to COLT and

$34,417 for the donation of the timber.

These amounts were very large compared to each partner’s adjusted gross

income, which meant that each of them had to carry forward some of that

deduction to later years. See sec. 170(b)(1). 

IV. Audit and Trial

A. Audit

The Commissioner noticed these large deductions, arrayed several chariots

of revenue agents against them, and shot forth against them a quiverful of notices

of deficiency--sending each member his or her own. Each notice denied any
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[*8] deduction for the donation of either the conservation easement or the timber.7

All but one of the notices denied each member’s deductions for failure to satisfy

the requirements for qualified conservation contributions.

8

The Commissioner also wants penalties--for both the conservation easement

and the timber donation--but here the facts become a bit convoluted. The parties

stipulated that the Commissioner had a “penalty-approval form” only for the

Moseses and the Pumroys. Both these penalty-approval forms were approved by a

“Group Manager” and dated before the Moseses or the Pumroys received their

notices. The penalty-approval form for the Moseses shows approval of penalties

for substantial understatement and gross misvaluation, but doesn’t approve a

penalty for negligence or substantial misvaluation. This form doesn’t specifically

mention either the easement or the timber, but states that the “contribution

deduction appear[s] overstated by the valuation.” 

The revenue agent who drafted the penalty-approval form for the Pumroys

clearly wanted penalties for negligence and substantial understatement, but also

7

 In addition to the noncash contributions, the notices of deficiency also

identified issues peculiar to specific members that aren’t addressed in this opinion.

8

 The note of deficiency for the Moseses was a bit different--it generally

denied the deductions for failure to qualify under section 170 without specifying

failure to be qualified conservation contributions.
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[*9] checked a box on a row that says this: “Section 6662(h) Substantial

Valuation Misstatement.” One can immediately see a problem--section 6662(h)

defines gross misvaluation; it’s section 6662(b)(3) that defines substantial

misvaluation. The revenue agent filled in the comment box:

The substantial adjustment is a flow through adjustment from the

related partnership, Burning Bush Farm LLC Partnership. The adjustment is due to an overstated donation of a charitable contribution

(Easement) and the Substantial Misstatement Penalty is applicable.

The alternative position is that the negligence and substantial understatement penalty is applicable.

Because the verbal description says “substantial valuation misstatement” and the

comment box mentions only “substantial misstatement penalty,” we might have

been inclined to find that the revenue agent was seeking approval for a substantialmisvaluation penalty. The Commissioner, however, asserted in his reply brief that

“[t]he penalty approval form for Jay and Sondra Pumroy contains a scrivener’s

error that identifies the I.R.C. § 6662(h) gross valuation misstatement penalty as

the substantial valuation misstatement penalty. Although the written reference is

slightly ambiguous, the reference to I.R.C. § 6662(h) is clear.” We accept his

clarification of this ambiguity, and find that for the Pumroys the grossmisvaluation, and not the substantial-misvaluation, penalty was put in play and

approved by this form. 
- 10 -

[*10] One then turns to the notices of deficiency. Here there was a bit more

uniformity. The Commissioner asserted 20% accuracy-related penalties under

section 6662(a) for negligence, substantial understatement, or substantial

misvaluation in the notices of deficiency against all the members except for Sells. 

None of the notices asserted a gross-misvaluation penalty under section 6662(h),

even against the Moseses and Pumroys despite penalty-approval forms that

approved section 6662(h) penalties against them.

9

 (For them, this means that there

was an initial determination of the penalty and approval by an immediate

supervisor, though no communication of this to them.)

All eight members of Burning Bush filed their petitions while residents of

Alabama.10 The Commissioner amended his answers before trial to assert a grossmisvaluation penalty under section 6662(h) against each of the Burning Bush

members except Sells.

11

 All these amended answers were signed by Christopher

Pavilonis who is the lead attorney in these cases; and before they were filed they

9

 A penalty computation worksheet attached to the Moseses’ notice of

deficiency says a portion of their understatement was attributable to gross

misvaluation, but then determines that the portion was zero. 

10

 We believe that this means any appeals will go to the Eleventh Circuit. 

See sec. 7482(b)(1)(A).

11

 The Commissioner seeks section 6662(h) penalties only for the

conservation-easement donations, not for the timber donations.
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[*11] were initialed by “agb”, which refers to A. Gary Begun, who was Pavilonis’s

immediate supervisor.12

B. Trial

We tried these cases in Birmingham, Alabama. At trial the taxpayers orally

moved to shift the burden of proof, on the ground that they had cooperated with

the Commissioner’s requests. We granted their motion after trial, but it makes no

difference because we can decide the various issues in these cases on a

preponderance of evidence. 

The parties settled many issues; one they did not is the subject of a separate

opinion that we also release today. See Whatley v. Commissioner, T.C. Memo.

2021-11. We are left to decide in this opinion:

! whether the partners are entitled to deductions for Burning Bush’s

donation of the conservation easement to COLT,

! whether the partners are entitled to deductions for Burning Bush’s

donation of the timber, and

! whether any penalties apply.

12

 Begun also initialed all the Commissioner’s motions to amend his answers

except for one--the Moseses’. In that case, however, his initials are on the

proposed amendment that the Commissioner attached to his motion to amend. 
- 12 -

[*12] OPINION

I. Noncash Charitable Contributions

A. Background

Section 170 sets the rules for the deductibility of charitable contributions,

and there are regulations that go into much greater detail. See sec. 1.170A-13,

Income Tax Regs. Those regulations distinguish between cash and noncash

contributions, see, e.g., id. paras. (a) and (b), and contributions of different

amounts, see, e.g., id. para. (b)(3).

One type of noncash charitable contribution is the donation of a partial

interest in real estate. The Code generally disallows a charitable-contribution

deduction for a gift of real property that “consists of less than the taxpayer’s entire

interest in such property.” Sec. 170(f)(3)(A). 

There is an exception for the donation of conservation easements. Sec.

170(f)(3)(B)(iii). A “qualified conservation contribution” is “a contribution--

(A) of a qualified real property interest, (B) to a qualified organization, (C)

exclusively for conservation purposes.” Sec. 170(h)(1). A contribution must

satisfy each of these requirements, but our focus here is on the third requirement--

that the contribution be “exclusively for conservation purposes,” sec.

170(h)(1)(C), which the Code defines in the negative: “A contribution shall not be
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[*13] treated as exclusively for conservation purposes unless the conservation

purpose is protected in perpetuity,” sec. 170(h)(5)(A) (emphasis added). 

B. The Donation of the Conservation Easement

We will focus first on the donation of the conservation easement, which we

must deny now that the Court has decided Oakbrook.

13

 In Oakbrook, we analyzed

section 1.170A-14(g)(6), Income Tax Regs. See Oakbrook, T.C. Memo.

at *20-*28. As we discussed there, a conservation easement must be protected in

perpetuity. See sec. 170(h)(5)(A); Oakbrook, T.C. Memo. at *10. Part of this

protection must be the allocation of proceeds to the donee if the easement is

condemned or otherwise extinguished. Section 1.170A-14(g)(6)(i) tells us that the

proceeds that do go to the donee must be used in a “manner consistent with the

conservation purposes of the original contribution.” Oakbrook, T.C. Memo.

at *19. Section 1.170A-14(g)(6)(ii) tells us that the amount that gets to the donee

must be 

a fair market value that is at least equal to the proportionate value

that the perpetual conservation restriction at the time of the gift, bears

to the value of the property as a whole at the time * * * [and that] on a

subsequent sale * * * [the donee] must be entitled to a portion of the

13

 Because Oakbrook was pending, we gave the parties the opportunity to

make any arguments on this issue that they wished to preserve for appeal. Both

filed supplemental briefs to do so. 
- 14 -

[*14] proceeds at least equal to that proportionate value of the perpetual

conservation restriction * * * . [Emphasis added.]

“Proportionate value” demands the creation of a fraction, the numerator of

which is the fair market value (FMV) of the easement and the denominator of

which is the FMV of the contributed property unburdened by the easement, both

on the date of donation. See Oakbrook, T.C. Memo. at *20. We followed the

Fifth Circuit’s lead in holding that this section of the regulations requires that the

donee be entitled to receive this fraction multiplied by the gross proceeds of any

extinguishment. See id. at *37-*38 (citing PBBM Rose Hill, Ltd. v.

Commissioner, 900 F.3d 193, 207-08 (5th Cir. 2018)). This makes the donee

entitled to a share of proceeds attributable to fluctuations in the property’s value or

to the value of post-donation improvements. See id. at *38. And in Oakbrook v.

Commissioner, 154 T.C. 180, we held that this regulation was valid. Oakbrook’s

division opinion binds us. See, e.g., Sec. State Bank v. Commissioner, 111 T.C.

210, 213-14 (1998), aff’d, 214 F.3d 1254 (10th Cir. 2000).

Burning Bush’s deed would subtract the value of any improvements from

any condemnation award before calculating what percentage of those proceeds

would go to the donee. That means that this deed, like the one in Oakbrook,

doesn’t comply with section 1.170A-14(g)(6)(ii), Income Tax Regs. See
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[*15] Oakbrook, T.C. Memo. at *40-*41. That’s enough to deny the partners’

charitable-contribution deductions in full. 

The partners make two arguments that we didn’t see in Oakbrook. The first

is procedural--that the Commissioner waived his right to attack the conservationeasement deductions with his proceeds-clause spear because he didn’t make the

argument until after trial. The partners are correct that this was a new argument by

the Commissioner after trial; but between trial and our entry of a final decision we

can consider new arguments, even if we can’t consider new issues. The difference

is that new issues require new or different factfinding, but new arguments don’t. 

See, e.g., Metrocorp, Inc. v. Commissioner, 116 T.C. 211, 232 (2001) (Ruwe, J.,

dissenting); Park Place, Inc. v. Commissioner, 57 T.C. 767, 768-69 (1972);

Barnette v. Commissioner, T.C. Memo. 1992-595, 64 T.C.M. (CCH) 998, 1002

(1992), supplementing T.C. Memo. 1992-371. If “sufficient facts are present, but

* * * a further exposition on the applicable law by the parties is desirable, [we]

can call for further briefing.” Barnette, 64 T.C.M (CCH) at 1002. 

That’s what we did here. There are a great many conservation-easement

cases before our Court, and we are trying to be as consistent as possible in how we

analyze them. Even without supplemental briefing, the question is a legal one and

“a deficiency assessment may be sustained upon any legal ground supporting it,
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[*16] even though the Commissioner did not rely thereon when the assessment

was made.” Blansett v. United States, 283 F.2d 474, 478 (8th Cir. 1960). 

The partners’ next argument is a substantive one--that there is language in

section 1.170A-14(g)(6)(ii) that nullifies the “proportionate value” requirement.

The language that they point to is at the end:

Accordingly, when a change in conditions give rise to the

extinguishment of a perpetual conservation restriction under

paragraph (g)(6)(i) * * * the donee organization, on a subsequent sale,

exchange, or involuntary conversion of the subject property, must be

entitled to a portion of the proceeds at least equal to that

proportionate value of the perpetual conservation restriction, unless

state law provides that the donor is entitled to the full proceeds from

the conversion without regard to the terms of the prior perpetual

conservation restriction.

Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. (emphasis added). The partners argue

that under Alabama law the owner of a conservation easement isn’t entitled to

proceeds where the land is “taken for and devoted to [a] public purpose.” Burma

Hills Dev. Co. v. Marr, 229 So.2d 776, 782 (Ala. 1969). Since Alabama law

prevents the easement holder from being entitled to any proceeds, the

proportionate-value-with-no-allowance-for-improvements clause of the regulation

doesn’t apply. 

The problem for Burning Bush and its members here is that the regulation

speaks of the involuntary conversion of a “perpetual conservation restriction,”
- 17 -

[*17] see 1.170A-14(g)(6)(ii), Income Tax Regs., and the caselaw from Alabama

that the members cite arises from the more traditional easements appurtenant that

homeowners in a subdivision often have with each other. See Oakbrook, T.C.

Memo. at *14-*16 (contrasting conservation easements with traditional easements

appurtenant). Caselaw does indeed align Alabama state law with the view that the

condemnation of a property subject to an easement results in condemnation awards

only to the property owner, not the easement owner. Burma Hills, 229 So.2d

at 779.

We do not, however, think that Alabama law on this subject is what the

regulation means when it speaks of a state law that “provides that the donor is

entitled to the full proceeds from the conversion without regard to the terms of the

prior perpetual conservation restriction.” Sec. 1.170A-14(g)(6)(ii), Income Tax

Regs. Here’s why: When, for example, property owners in a subdivision all have

easements on each other’s properties in the form of restrictions on use of their

property to “residential purposes only,” there is ambiguity about whether that

easement is a contract right or a property right. When a local government in

Alabama condemns land to construct a road or build a school, it has to invoke

eminent domain against “property owners” and compensate them. If all the

homeowners in a subdivision were “owners” of the condemned property, they too
- 18 -

[*18] would need to be pleaded in and receive compensation for whatever the

value of their easement was. If they weren’t, the condemning government would

succeed only to the condemned property owner’s rights--instead of getting land on

which to build a road, the local highway department would get only land which it

could use “for residential purposes only.” 

This would be decidedly unsatisfactory, and Alabama rejected that

characterization in Burma Hills. 229 So.2d at 781-82. The Alabama Supreme

Court held there that the holder of an easement in condemned property was not a

“property owner,” but the holder of an enforceable contract right against the

property owner. When conditions change, all the easement holders can be freed of

their mutual obligation to each other, which is a benefit to each of them. This is

what we called in Oakbrook the “implicit compensation for the loss of a servitude”

that lies in extinguishment of mutual easements. See Oakbrook, T.C. Memo.

at *15. The Alabama Supreme Court expressed the same idea more eloquently:

It is a familiar rule that, when the physical conditions in the vicinity

of the land thus restricted have so changed as to render it

unconscionable to enforce the restriction, equity will refuse to

enforce, and the restriction as to its enforceability then fades out of

the contract of the parties.

Burma Hills, 229 So.2d at 780. 
- 19 -

[*19] As we explained in Oakbrook, T.C. Memo. at *16-*17, most states enacted

statutes to change this part of common law as it might affect conservation

easements. Alabama was among them, and section 35-18-1 of its Code now

defines the interest of the donee of a conservation easement as the “nonpossessory

interest of a holder in real property.” We looked for, but admittedly didn’t find, an

Alabama case that distinguishes conservation easements from other easements in

this way. But even without a case, the language of the statute gets us there--we

hold that the easement that Burning Bush donated was not a contract right but an

interest in property whose holder must be compensated for its condemnation or

destruction or other conversion.

We also found at least one state law that does seem to be governed by the

last few lines in section 1.170A-14(g)(6)(ii). California’s Government Code

states: 

If any land or a portion thereof as to which any city or county has

accepted or approved an open-space easement pursuant to this chapter

is thereafter sought to be condemned for public use and the easement

was received as a gift without the payment of any compensation

therefor, the easement shall terminate as of the time of the filing of

the complaint in condemnation as to the land or portion thereof

sought to be taken for public use, and the owner shall be entitled to

such compensation for the taking as he would have been entitled to

had the land not been burdened by the easement.

Cal. Gov’t Code sec. 51095 (West 2003) (emphasis added).
- 20 -

[*20] The reason for such an apparently odd provision is that the California

legislature was worried that local governments would view property with

conservation easements as especially juicy targets for condemnation because they

could be had cheaply. See Nancy A. McLaughlin, “Internal Revenue Code

Section 170(h): National Perpetuity Standards for Federally Subsidized

Conservation Easements,” 45 Real Prop., Tr. & Est. L.J. 473, 500 n.103 (2010).

We can safely reject Burning Bush’s state-law argument. The general rule

of section 1.170A-14(g)(6)(ii) applies and forces us to disallow the deduction for

the conservation easement.

14

That leaves us to figure out the partners’ second noncash charitable

contribution--their donation of timber on the property. 

C. The Donation of Timber

1. What’s at Issue?

The Commissioner challenged the deductibility of Burning Bush’s donation

of timber in his posttrial brief. The partners argued in their posttrial brief that this

14

 Our result, if not our more verbose explanation, is the same as in two

other cases from Alabama that we recently decided. See Smith Lake, LLC v.

Commissioner, T.C. Memo. 2020-107, at *9; Hewitt v. Commissioner, T.C.

Memo. 2020-89, at *22-*24.
- 21 -

[*21] is the first they’re hearing of the issue, and they say this means that it’s not

properly before us.

As a general rule, we consider only the issues that the parties plead. See,

e.g., Markwardt v. Commissioner, 64 T.C. 989, 997 (1975). Both the parties and

the Court need fair notice of what’s in controversy. See Rule 31(a). The

Commissioner has three distinct opportunities in the life of a case to identify what

he wants to put in play: the notice of deficiency, his answer, and any amended

answer. Seligman v. Commissioner, 84 T.C. 191, 198 (1985), aff’d, 796 F.2d 116

(5th Cir. 1988). We’re not sticklers, but we do require the Commissioner to put

taxpayers on “fair notice.” See Markwardt, 64 T.C. at 997. 

Here we do find each partner was put on fair notice that the timber donation

was at issue. The Commissioner denied each member’s total noncash charitable

deduction, and we think any reasonable taxpayer would recognize that disallowing

the sum of two numbers means that both are disallowed. The members, in their

petitions, challenged the disallowance of this total dollar amount even though they

didn’t mention the disallowance of the timber-donation portion with any

specificity. We find from this they did indeed challenge its disallowance. And in

his pretrial memo the Commissioner specifically stated that the contribution of

timber was being challenged--albeit as a “Conservation Easement Issue[].” This is
- 22 -

[*22] enough for fair notice. See Geiselman v. United States, 961 F.2d 1, 4-5 (1st

Cir. 1992); Abatti v. Commissioner, 644 F.2d 1385, 1389 (9th Cir. 1981), rev’g

T.C. Memo. 1978-392. 

2. Donation of the Timber

Although we find that the donation of Burning Bush’s timber is at issue, we

agree with the members that the Commissioner’s analysis of it is quite confusing. 

He argues in his posttrial briefs that the timber donation violates section 170(h)--

the subsection that addresses contributions of qualified conservation easements. 

He specifically argues that the timber donation doesn’t have a conservation

purpose since the clearcutting of land can’t possibly be for a conservation purpose.

As we search through the record, we find next to no other mention of the

timber donation from either party. The only evidence that we have (besides the

disallowance of the timber donations in the notices of deficiency) is the initial

claiming of the deduction by the partners on their tax returns. Those returns each

have two separate Forms 8283 attached--one for the donation of the conservation

easement and one for the donation of “Timber”. And attached to each form were

separate appraisals--one of the value of the conservation easement and one of the

value of the timber. The appraisal of the timber donation describes the value of

eight timber products that were “growing on [the] property” but makes no mention
- 23 -

[*23] of a conservation easement. When we look at the entire record, we find it

more likely than not that the timber donation was not a donation of a conservation

easement but rather just a separate noncash donation. Section 170(h) and its

regulations that govern the donation of conservation easements just don’t apply. 

But that doesn’t mean the partners are out of the woods just yet. According

to the appraisal, Burning Bush acquired the land on which it placed the easement

on the very same date that it reported it had acquired the timber--August 6, 2002.

And Burning Bush contributed both the easement and the timber to the same

donee, COLT. Because of this, we find it more likely than not that the timber

donated by Burning Bush is the same standing timber on which it had placed a

conservation easement.

That is a problem. The value that Burning Bush placed on the standing

timber is its value as timber products. One can see this on the Form 8283--which

describes the donation of “Pulp, Chip N Saw, Saw Timber”--products that result

from timber’s harvest. And the attached appraisal--which described eight

products--would require the timber’s harvest. 
- 24 -

[*24] The problem here is that Alabama law15 makes timber that hasn’t been

severed from the land the property of the land owner, and as a general rule not

even a life tenant has the right to cut and sell it. See White v. Watts, 812 So.2d

328, 331 (Ala. 2001); Wilder v. Scott, 89 So.2d 682, 685 (Ala. 1956). There are

exceptions to this general rule--if the property was a tree farm, White, 812 So.2d

at 331; Robinson v. Robinson, 215 So.2d 585, 590-91 (Ala. 1967), or the timber

cutting was an incident to clearing land for cultivation, Westmoreland v.

Birmingham Tr. & Sav. Bank, 108 So. 536, 538 (Ala. 1926)--but none of these

could conceivably apply here.

The cutting of timber and its conversion into lumber and other wood

products is not a conservation purpose. See sec. 170(h)(4)(A); sec. 1.170A-14(e),

Income Tax Regs. The deed forbids it.

16

 That makes Burning Bush’s donation of

the timber either a nondeductible gift of a partial interest in real estate other than a

conservation easement, or a future interest in tangible personal property. If it’s the

first, the Code says it’s never deductible, see sec. 170(f)(3)(A); if it’s the second,

15

 State law defines property interests. See, e.g., Case v. United States, 633

F.2d 1240, 1246 (6th Cir. 1980); Oakbrook, T.C. Memo. at *34. 

16

 That makes these cases different from Butler Land Holdings, LLC v.

Commissioner, T.C. Memo. 2012-72, 2012 WL 913695, at *42-*43, because there

the deed explicitly allowed the harvesting of timber as part of an approved plan. 
- 25 -

[*25] section 170(a)(3) says that it’s not deductible until the timber is severed

from the real property. Either way, the members of Burning Bush don’t get

deductions for donating standing timber to COLT for their 2003 tax year.

II. Penalties

That leaves penalties. Here again confusion reigns. The Commissioner

wants penalties for both the conservation easement and the timber donation. And

one would think the outcome for each partner should be the same--after all, at first

glance they seem to be lined up in the same rank and one might have expected the

Commissioner to unleash a light barrage that would easily hit them all. But the

Commissioner misfired, causing chaos and confusion; and we are left to assess the

damage. 

We will first briefly discuss the penalties involved, and then whether the

partners can shelter from them in the procedural defenses that we have recently

made available. Only then do we decide any remaining penalty issues on their

merits.

There are two genera of penalties here. One is commonly called the

“accuracy related” or “section 6662(a)” penalty. The Code lists several species

within this genus in section 6662(b), and three are involved here: section

6662(b)(1), which penalizes understatements due to negligence or intentional
- 26 -

[*26] disregard of rules and regulations; section 6662(b)(2), which penalizes

“substantial understatement” of the tax due; and section 6662(b)(3), which

penalizes “substantial” valuation misstatements. All of these carry a 20% penalty,

and the Commissioner has to hit with only one of the three to win. 

Then there is a 40% penalty. 

Section 6662(h) imposes this megapenalty for “gross” misstatements of

value on a return.

17

 It might seem odd that unlike, for example, manslaughter and

murder, a “substantial” misvaluation is not a lesser-included offense of “gross”

misvaluation. In Oropeza v. Commissioner, 155 T.C. __ (slip op. at 18) (Oct. 13,

2020), we held precisely that section 6662(i) “does not impose a distinct penalty; it

simply increases the rate imposed for the penalty determined under section

6662(a) and (b)(6).” We also held there that, without supervisory approval of a

17

 Congress revised some of the Code’s penalty provisions in 2006. See

Pension Protection Act of 2006, Pub. L. No. 109-280, sec. 1219(a)(2)(A), 120

Stat. at 1083. Part of this revision was a change in the definition of how far off a

reported value had to be from its true value to be penalized as a “gross” or

“substantial” misstatement. Id. We apply the old definitions here because

Burning Bush reported this donation on its 2003 information return, before the

amendment’s effective date. When a passthrough entity reports a contested value

on its return, we decide whether that value was a “substantial” or “gross”

misstatement at the entity level. Sec. 1.6662-5(h)(1), Income Tax Regs.; see

Plateau Holdings, LLC v. Commissioner, T.C. Memo. 2020-93, at *30-*31. 
- 27 -

[*27] penalty under section 6662(b)(6), approval of a penalty under section

6662(i) was procedurally inadequate. Id. at __ (slip op. at 20-21).

In another T.C. opinion, Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152

T.C. 75, 79 n.3, 83-84 (2019), we concluded that the substantial- and grossmisvaluation penalties were distinct with each requiring supervisory approval. As

we plainly reiterated in Campbell v. Commissioner, T.C. Memo. 2020-41, at *32,

“the section 6662(a) and (h) penalties are distinct (despite the title of section 6662

referring to a (singular) penalty), and the initial determination under each

subsection must be separately approved for purposes of section 6751(b)(1).” 

(Emphasis added.) See also Rogers v. Commissioner, T.C. Memo. 2019-61,

at *20.

A. The Chaighoul Problem

Classifying penalties by genus and species is not purely intellectual sport,

because it is not enough for the Commissioner to assert penalties in a notice of

deficiency or a pleading. He must also show that he complied with section

6751(b) as we have construed it for the last few years. That section states that no

penalty is allowed unless the “initial determination of such assessment is

personally approved (in writing) by the immediate supervisor of the individual

making such determination.” Sec. 6751(b)(1). We have construed this to mean
- 28 -

[*28] that written approval was secured at least by the time the Commissioner

issued the notice of deficiency or when he filed the answer or amended answer in

which he asserted the penalty. Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir.

2017), aff’g in part, rev’g in part T.C. Memo. 2015-42; see also Graev v.

Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part

147 T.C. 460 (2016). 

Approval of one species of penalty doesn’t mean approval of any other. In

Palmolive, we stated that though the title of section 6662 refers to a singular

“penalty,” that section in fact creates several distinct penalties. Palmolive, 152

T.C. at 87. One consequence is that the Commissioner must show approval of

each penalty separately to show that he has complied with section 6751(b)(1). Id.;

see also McCarthy v. Commissioner, T.C. Memo. 2020-74, at *28-*29; Campbell,

T.C. Memo. at *32-*33.

We have also said that this approval doesn’t have to take any particular

form. See Palmolive, 152 T.C. at 86. But here the Commissioner relied on his

aptly named “Civil Penalty Approval Form.” Two of the section 6662(b)

penalties--negligence and substantial understatement--have their own lines on this

form. The form also has a line for the more generally described “other accuracy

related penalties” under section 6662(b), which we will assume includes the
- 29 -

[*29] “substantial” misvaluation penalty defined in section 6662(b)(3). There is

also a separate line for a gross-misvaluation penalty under section 6662(h). 

There’s no problem with an IRS employee’s ticking more than one box on

this form. And in the specific instance of misvaluation penalties, we have held

that there’s nothing improper in the Commissioner’s asserting a 20% substantial

misvaluation penalty and in the alternative asserting a 40% gross-misvaluation

penalty. See Legg v. Commissioner, 145 T.C. 344, 349-51 (2015). 

What happened here?

The parties stipulated that the IRS revenue agent completed only two

penalty-approval forms, one each for the Moseses and the Pumroys, before he sent

out notices of deficiency to all the Burning Bush partners. The Moseses’ penaltyapproval form mentions only a substantial-understatement penalty and grossmisvaluation penalty. The revenue agent wrote: “The contribution deduction

appears overstated by the valuation.” The Pumroys were the most unlucky--on

their penalty-approval form a supervisor approved both a negligence penalty and a

substantial-understatement penalty, as well as a gross-misvaluation penalty. And

the same revenue agent was a bit more detailed in the comments section for the

Pumroys, writing: “The adjustment is due to an overstated donation of a

charitable contribution (Easement) and the Substantial misstatement Penalty is
- 30 -

[*30] applicable. The alternative position is that the negligence and substantial

understatement penalty is applicable.”

The Commissioner then sent out notices of deficiency to all the Burning

Bush partners in which the Commissioner asserted penalties under section

6662(b)(1), (b)(2), and (b)(3) for 7 of the 8 partners. It’s easier to see in a table:

Taxpayer Penalties on penalty

approval form

Penalties in notice of

deficiency

Kevin Sells No form None

Charlie Williams No form 6662(b)(1), (2), & (3)

Steve Moses Yes for 6662(b)(2) & (h) Penalty asserted under

6662(b)(1), (2), & (3) only

for tax years 2005 and 2007

Butch Welch No form 6651(a)18 and 6662(b)(1),

(2), & (3) 

Jay Pumroy Yes, for sec. 6662(b)(1),

(2), & (h)

6662(b)(1), (2), & (3)

John Davis No form 6662(b)(1), (2), & (3)

18

 The Welches contested the section 6651(a) penalty for years 2003 and

2004 in their petition. The Commissioner did not concede the issue. The

Welches, however, failed to provide any explanation for why they thought these

penalties are erroneous. They didn’t testify and didn’t mention these penalties in

their posttrial brief. They therefore lose this issue. See Sundstrand Corp. & Subs.

v. Commissioner, 96 T.C. 226, 347-49 (1991); Hockaden & Assocs., Inc. v.

Commissioner, 84 T.C. 13, 16 n.3 (1985), aff’d, 800 F.2d 70 (6th Cir. 1986). 
- 31 -

[*31] Lori James No form 6662(b)(1), (2), & (3)

Stephen Whatley No form 6662(b)(1), (2), & (3)

All the Burning Bush partners other than the Moseses and the Pumroys thus

emerge unscathed by any of the penalties asserted--for either the conservation

easement or the timber donation--in their respective notices of deficiency. The

Moseses and the Pumroys, however, require some explanation. 

The Moseses need not worry about any penalties related to the timber

donation. The approval form makes no mention of the timber and it states the

proposed adjustment was due to the “valuation” of the contribution. And the

timber’s value was never challenged by the Commissioner. Therefore we find it

more likely than not there was no written supervisory approval for a penalty

related to the timber donation for the Moseses. 

The Pumroys’ situation is different. There was no supervisory approval for

any substantial-misvaluation penalty--no section 6662(b)(3) penalty for the

donation of either the conservation easement or the timber. But for the rest of the

asserted penalties, the Pumroys once again might feel singled out. On the penaltyapproval form for the Pumroys, and unlike the one for the Moseses, the revenue

agent didn’t limit his initial decision to assert penalties to valuation, but instead

took issue with the deduction as a whole. Though he wrote that the adjustment is
- 32 -

[*32] for the “Easement”, and we found that the attempted timber donation was

not the donation of an easement, see supra pp. 22-25, the Commissioner

consistently characterized the timber donation as an “easement” all the way from

the notice of deficiency through trial. This leads us to find it more likely than not

that there was written supervisory approval for both negligence and substantialunderstatement penalties for the Pumroys’ donations of both the conservation

easement and the timber. 

For all the other taxpayers and types of penalty and particular donation there

was no supervisory approval in writing before the Commissioner formally

communicated his penalty determinations to the partners. See Chai, 851 F.3d

at 221; see also Graev, 149 T.C. at 493. 

As these cases made their way toward trial, the Commissioner’s lawyer

noticed that his revenue agent had won approval to assert section 6662(h) grossmisvaluation penalties (at least for some of the partners), but no one at the IRS had

actually notified any of the partners in the notices of deficiency of his

determination to do so. The Commissioner then amended his answers in these

cases to formally communicate for the first time that he sought section 6662(h)

gross-misvaluation penalties against each Burning Bush member except Sells for
- 33 -

[*33] the donation of the conservation easement.

19

 Each amended answer was

signed by both the lead attorney in these cases and his associate area counsel. See

Roth v. Commissioner, T.C. Memo. 2017-248, at *10-*11 (stating that an answer

that asserts penalties, signed by both counsel and the area counsel, satisfies section

6751(b)). Since the lead attorney’s immediate supervisor gave his written

approval, and this was the first time the Commissioner formally communicated to

the taxpayers that he wanted penalties from them under section 6662(h), it might

look as though he did satisfy section 6751(b) for the gross-misvaluation penalties

for all Burning Bush members except Sells. 

In Oropeza, however, we reasoned that supervisory approval of a penalty

under section 6662(i) was necessary, but not sufficient without approval of a

penalty under section 6662(b)(6)--that the 40% penalty was an enhancement, not a

penalty entire unto itself. Similar logic might well lead us to hold in the future

that supervisory approval of a 40% gross-misvaluation penalty under section

6662(h) is likewise inadequate without approval of a substantial-misvaluation

penalty under section 6662(b)(3). There was none here. But we’ll reserve that

question for a later case where the parties argue it.

19

 The amended answers assert gross-misvaluation penalties for the donation

of the conservation easement valued at $5.4 million--which excludes any grossmisvaluation misstatement penalties for the timber donation.
- 34 -

[*34] If Graev were a goalie, it has put on a Hašek-level performance in these

cases. The resulting shots on goal and saves are all easier to see in tabular form:

Taxpayer Penalty At Issue

Kevin Sells Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

Charlie Williams Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

Steve Moses Section 6662(b)(1)

Section 6662(b)(2)

20

Section 6662(b)(3)

Section 6662(h)

Butch Welch Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

Jay Pumroy Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

John Davis Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

20

 This does not apply to the timber donation. See supra pp. 22-25. 
- 35 -

[*35] Lori James Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

Stephen Whatley Section 6662(b)(1)

Section 6662(b)(2)

Section 6662(b)(3)

Section 6662(h)

B. Section 6662(b)(1) and (2) Penalties

That leaves us to decide only the merits of the penalty determinations that

managed to trickle through section 6751’s procedural protection. The only

accuracy-related penalties that got through were: a section 6662(b)(2) penalty for

the conservation easement donation deducted by the Moseses, and both section

6662(b)(1) and (2) penalties for both the conservation easement and timber

donations deducted by the Pumroys. 

1. Burden of Production

The Commissioner has the burden of production with respect to penalties. 

Sec. 7491(c). To meet his burden the Commissioner must produce evidence

regarding the appropriateness of imposing a penalty. Higbee v. Commissioner,

116 T.C. 438, 446 (2001). For penalties related to the donation of the

conservation easement, this burden is unquestionably met by evidence of its

proper value. 
- 36 -

[*36] For both penalties related to the Burning Bush’s timber donation, the

Commissioner also satisfied the burden of production as to the Pumroys. He first

asserts the Pumroys were negligent and disregarded the rules or regulations with

this deduction. See sec. 6662(c). Taking a donation based on the value of timber

products--which would require the chopping down of the timber--on land that just

had a conservation easement placed on it seems on its face “too good to be true.” 

Sec. 1.6662-3(b)(1)(ii), Income Tax Regs. The Commissioner meets his burden of

production for a section 6662(b)(1) penalty. As for a potential substantialunderstatement penalty under section 6662(b)(2), the question is whether the math

shows that disallowance of the timber donation would lead to a substantial

understatement by the Pumroys. We’ll leave that for the computation stage. 

See Mileham v. Commissioner, T.C. Memo. 2017-168, at *46-*47.

2. Section 6664(c)

What these penalties have in common is the availability of a reasonablecause-and-good-faith defense. Sec. 6664(c); sec. 1.6664-4(a), Income Tax Regs. 

The determination of whether a taxpayer acted with reasonable cause and in good

faith is one we make on a case-by-case basis. Sec. 1.6664-4(b)(1), Income Tax

Regs. One circumstance that indicates reasonable cause and good faith is an

honest misunderstanding of fact or law that is reasonable in light of all of the facts
- 37 -

[*37] and circumstances. Id. Reliance on certain facts can constitute good faith if,

“under all the circumstances, such reliance was reasonable and the taxpayer acted

in good faith.” Id. 

We denied the deductions for the donation of the conservation easement

here because the proceeds clause in the deed violated the regulation. But we think

Burning Bush’s position was reasonable: An IRS private letter ruling (PLR)

suggested that a clause like the one in the deed here would satisfy the regulation. 

See Priv. Ltr. Rul. 200836014 (Sept. 5, 2008) (stating that decreasing the donee’s

proceeds by the grantor’s permissible improvements does not violate the

regulation). A PLR from 2008 is not, of course, something that any of the Burning

Bush partners could have subjectively relied on in preparing their returns for much

earlier tax years, but we do find that it provides an objective indication of the 
- 38 -

[*38] reasonableness of the position they took.

21

 See secs. 1.6662-3(b)(3),

1.6662-4(d)(3)(iii), Income Tax Regs. We found in Oakbrook that the use of this

commonplace language in the deed, though ultimately fatal to the deduction, was

sufficient to show reasonable cause for their error. See Oakbrook, T.C. Memo.

at *43.

And both Pumroy and Moses, like all the Burning Bush partners, looked to

Ebbins, the executive director of COLT, to ensure that their conservation easement

complied with the regulations. The language used in the deed was widespread

throughout the Southeast. See id. at *7 n.2. We therefore find that their error was

reasonable under these circumstances--not just because of the PLR, but because

COLT had a good deal of experience in this complicated nook of tax law and was

not a promoter or otherwise tainted in providing advice in how to get the donation

21

 The Eighth Circuit recently held in Wells Fargo & Co. v. United States,

957 F.3d 840, 852 (8th Cir. 2020), that a taxpayer must show it actually relied on a

PLR to establish it had a reasonable basis for its position. We don’t need to find

that the reasonable basis standard--a relatively high standard for tax reporting,

see sec. 1.6662-3(b)(3), Income Tax Regs.--was met. We must decide instead

whether Burning Bush’s members here had reasonable cause for their error. This

is a lower threshold for a taxpayer to pass over. See id. (“[T]he reasonable cause

and good faith exception * * * may provide relief from the penalty of negligence

* * * even if a return position does not satisfy the reasonable basis standard.” 

(Emphasis added.)). A PLR is of some help to a taxpayer trying to show that his

position was reasonable, though it remains only one factor in the all-facts-andcircumstances test we apply. See sec. 1.6664-4(b), Income Tax Regs. 
- 39 -

[*39] done properly. Based on their credible testimony, we also find that both

Moses and Pumroy took this position entirely in good faith. We therefore find the

Moseses do not owe penalties under section 6662(b)(2). We also find the

Pumroys aren’t liable for the section 6662(b)(1) or (2) penalty for the donation of

the conservation easement.

But does this defense also work for the Pumroys’ timber donation? We

think not. Whether the Pumroys had reasonable cause and good faith is a decision

made on a case-by-case basis after consideration of all pertinent facts and

circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. We must take into

account the Pumroys’ experience and education when determining whether there

was reasonable cause or good faith for their position. See id. Pumroy is an

attorney whose practice focuses on real estate. He is a well educated person who

has an above-average knowledge of real estate. We therefore find it more likely

than not that claiming a deduction for the timber donation was unreasonable. 

Pumroy should have been aware that if Burning Bush donated a conservation

easement then it couldn’t simultaneously donate timber whose value was based on

chopping trees down in violation of the conservation deed. On its face pairing

these deductions was unreasonable and too good to be true. Pumroy never

testified that he received advice related to this timber donation, and even if he had,
- 40 -

[*40] we would still find this position unreasonable. We therefore find that the

reasonable-cause-and-good-faith defense doesn’t protect the Pumroys from

penalties for their timber donation. The Pumroys’ timber donation deduction was

negligent, and they are liable for an accuracy-related penalty under section

6662(b)(1). If the math works out, the Pumroys would in the alternative be liable

for the penalty under section 6662(b)(2).

C. Section 6662(h)

1. Whether Section 6662(h) Applies

Section 6662(h) increases the penalty under section 6662(a) to 40% to the

extent an underpayment is attributable to a “gross valuation misstatement.” But

here we denied the entire deduction because the extinguishment-proceeds clause

in the deed did not track the regulation. This made us ponder--if an underpayment

is attributable to one reason, can a penalty be applied for a completely separate

reason? 

As it turns out, the answer is yes. We start as always with the text of the

Code--section 6662(h)(1) requires that the underpayment be “attributable to” a

gross valuation misstatement. So on first glance it might appear that no section

6662(h) penalty should apply since the underpayment was attributable to failure to

donate a conservation easement in perpetuity--not because a portion of the
- 41 -

[*41] deduction reflected a gross misvaluation.

22

 The law has shifted here, and we

now know that an overvaluation penalty can apply even if an underpayment is

caused by a reason distinct from overvaluation. RERI Holdings I, LLC v.

Commissioner, 149 T.C. 1, 21-24 (2017), aff’d, 924 F.3d 1261 (D.C. Cir. 2019);

see also PBBM-Rose Hill, 900 F.3d at 214-15.

These penalties are in play.

2. The Proper Value

Although we already know the amount of the deductions the partners are

going to get--zero--we must still figure out the actual value of the donation so that

we can decide whether they grossly misvalued it.23

Under section 170, an easement’s value is the FMV of the perpetual

conservation restriction at the time of its contribution. Sec. 1.170A-14(h)(3)(i),

22

 This is what we held in Todd v. Commissioner, 89 T.C. 912, 913-15, 920-

21 (1987), aff’d, 862 F.2d 540 (5th Cir. 1988), overruled by AHG Invests., LLC v.

Commissioner, 140 T.C. 73, 83 (2013). (The Fifth Circuit has also overruled its

own opinion in Todd. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193,

214-15 (5th Cir. 2018).)

23

 The Pension Protection Act eliminated the reasonable-cause-and-goodfaith defense for gross-misvaluation penalties for years after Burning Bush

donated its easement. See Pension Protection Act of 2006, sec. 1219(a)(3), 120

Stat. at 1084. Even before its elimination, the reasonable-cause-and-good-faith

defense for misvaluation penalties differed from the reasonable-cause-and-good

faith defense for negligence and substantial-understatement penalties. See sec.

6664(c)(2). 
- 42 -

[*42] Income Tax Regs.; see also sec. 1.170A-1(c)(1), Income Tax Regs.; sec.

1.170A-7(c), Income Tax Regs. FMV is the price at which the property would

change hands “between a willing buyer and a willing seller.” Sec. 1.170A-1(c)(2),

Income Tax Regs. To determine the FMV, the regulations require us to first try to

use the sales of easements comparable to the donated easement--if there is a

substantial record of such sales. Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Both

parties agree there is no substantial record of sales of comparable conservation

easements. If there is no substantial record of comparable easement sales, an

easement’s FMV is “the difference between the [FMV] of the property it

encumbers before the granting of the restriction and the [FMV] of the encumbered

property”--also known as the before-and-after test. Id. We must consider the

property’s highest and best use before and after the easement’s creation. See sec.

1.170A-14(h)(3)(ii); Hilborn v. Commissioner, 85 T.C. 677, 689-90 (1985). 

This means we must:

! first determine the highest and best use of the property at issue before

the donation;

! determine the FMV of the property based on that use;

! determine the highest and best use of the property after the donation;

! determine the FMV of the property based on that use; and
- 43 -

[*43] ! compare the before and after values to determine the FMV of the

conservation easement. 

The following chart summarizes each party’s position:

Party Best use

before

Best use

after

FMV

before

FMV after FMV of

easement

Petitioners 

(on return) 

214 singlefamily

homes

Hold for

speculation $5,845,000 $450,000 $5,395,000

Petitioners

(at trial)

218

residential

lots

Hold for

speculation 3,250,000 235,000 3,015,000

Comm’r Hold for

speculation

Hold for

speculation 1,280,000 350,000

 

930,000

a. Before Best Use

The central point in this valuation dispute is the property’s best use before

the easement. The partners argue that the best use was to develop the property

into a 218-lot residential subdivision. The Commissioner argues that residential

development would’ve been a money loser, which means that the best use of the

land was to hold it for speculation. The parties used both the income approach--

specifically the discounted cashflow (DCF) method--and the sales-comparison

approach. We will first address the parties’ DCF analyses. 

A DCF analysis projects a property’s future cashflow and then discounts it

back to present value. See, e.g., Heck v. Commissioner, T.C. Memo. 2002-34. 
- 44 -

[*44] Burning Bush’s expert called for the development of a 218-lot subdivision.

His plan has some severe problems. Several of the lots--specifically lots 1, 193,

194, 201, 203, 205, 206, 207, 208--would be located in a flood plain, and building

on them it would violate county regulations.24 See Calhoun County Subdivision

Regs. secs. 5-2-1, 5-6(7), 5-7 (Jan. 20, 1999). Other lots near the proposed cul-desacs named Aaron Way, Miriam Pass, and Levi Lane--specifically lots 13A, 117,

118, 119, 129, 130, 156, 157, 160, 184, and 185--would be partly located in a

proposed water feature with the even more excellent name of Lake Meribah.

25

 The

plan would also build town homes--on lots 60-89 and 93-114--located on plots

that under county and state regulations are too small (roughly 7,500 square feet)

for a septic system. Calhoun County Subdivision Regs. sec. 5-6(2) (Jan. 20,

24

 The parties agreed that Calhoun County’s regulations applied at the time

of donation. They did argue about whether the city of Oxford could annex the

property if it were developed as a subdivision, and thus seemed to disagree

whether county or city regulations would apply to the property. We heard credible

testimony that a developer would likely try to get the property annexed, but no

witness said that annexation is automatic. All three experts assumed that Calhoun

County regulations would apply, and on balance we find it more likely than not

that this property should not be valued as if it were already within Oxford. 

25

 All of which are far removed from Jethro Pass, which returns to the

country surrounding the hypothetical subdivision in its own way. See Exodus

18:27. Though some of these plots are only partly underwater, county regulations

don’t allow lots to be more than 25% under water, Calhoun County Subdivision

Regs. sec. 5-6(8) (Jan. 20, 1999), a limitation that, by looking at Burning Bush’s

expert’s report, would affect at least some of them.
- 45 -

[*45] 1999); Ala. Admin. Code r. 420-3-1-.14(1) (Jan. 21, 2000) (requiring

minimum lot size for one septic system be 15,000 square feet). This is important

because the imagined subdivision is so remote that it would require septic systems.

We also find that Burning Bush’s expert used construction costs in his

analysis that he failed to substantiate and are much too low. He projected total

construction costs of $3,051,000 or $180 per linear foot. He based this on the

costs of an unrelated subdivision in North Georgia and his general expertise. His

position suffered on cross-examination when he was unable to give a dollar-bydollar breakdown or even a general budget. This lack of any sort of concrete

detail leads us to find this part of his opinion unreliable. 

The Commissioner’s expert analysis was not much better on this point. 

Though that expert’s plan itself is more sound--166 buildable lots in three phases--

we find that his costs were grossly overstated. The problem was his source--the

Alabama Department of Transportation (DOT). As we learned from credible

testimony at trial, comparing DOT costs to costs of building a subdivision is not at

all reasonable. DOT requires materials whose costs are much higher than those

used in residential construction, and DOT has building specifications that a normal

subdivision would not require. We find that the result is a gross overestimate of

the cost associated with a potential subdivision on Burning Bush’s land. 
- 46 -

[*46] That expert also had some math problems. He recognized one math error in

his report the day before trial that changed his valuation by more than $1.3

million. Then, after skillful cross-examination got him to assert that he was

“confident” after finding that mistake, it turned out that he had understated

revenue by $700,000 because of another basic math error. And that wasn’t the

only one. Such errors harm credibility. See Boltar, LLC v. Commissioner, 136

T.C. 326, 338-39 (2011); Estate of Bell v. Commissioner, T.C. Memo. 1987-576,

54 T.C.M. (CCH) 1123, 1125-26 (1987) (finding an expert report riddled with

math errors was not credible). 

We disregard both experts’ DCF analyses. 

That leaves us with a sales-comparison approach, which we favor anyway

when we decide valuation cases, see Pittsburgh Terminal Corp. v. Commissioner,

60 T.C. 80, 89-90 (1973), aff’d, 500 F.2d 1400 (3d Cir. 1974), especially when the

alternative is a DCF analysis of an asset with no history of earnings, see Duncan

Indus., Inc. v. Commissioner, 73 T.C. 266, 280 n.13 (1979). A sales-comparison

analysis generally works by identifying comparable market transactions and

adjusting their value for differences of market conditions, size, location, physical

features, and other factors. Wortmann v. Commissioner, T.C. Memo. 2005-227,

90 T.C.M. (CCH) 336, 340-41 (2005). Both experts here analyzed comparable
- 47 -

[*47] sales to figure out the “before value” of the property. They were far apart--

Burning Bush’s expert calculated a value of $3,075,000; the Commissioner’s

calculated one of $1,280,000. Their difference derives from looking at very

different types of land--the Commissioner’s expert used transactions for land held

for speculative investment, while Burning Bush’s expert used transactions for land

bought for development. 

We find the key difference between the choice of comparables to be the

experts’ differing views of what the highest and best use of the property was

before Burning Bush encumbered it with an easement. We find that a dense

residential development of the sort both experts used in their DCF analyses was

not financially feasible. But the alternative to this is not necessarily to hold the

land for speculation. The Commissioner’s expert noted in his report that the realestate market in the area was good at the end of 2003, and he concluded “that the

highest and best use analysis must consider future single-family residential

development of the property.” He reasonably concluded that if a dense residential

development didn’t make sense economically, “there appears to have been a niche

market for upper end homes with views but without a golf course.”

Burning Bush’s expert made a similar observation in his report. And he

reported that a new road that was imminently to be built as of late 2003 would
- 48 -

[*48] increase access south of I-20 near the property. We find that Burning

Bush’s expert was more reasonable in concluding that residential development

was the highest and best “before” use, even if only less dense residential

development. That leads us to conclude that his choice of “before” comparables--

sales of raw land suitable for residential development--is more reasonable than the

Commissioner’s expert’s choice of land held only for speculation.

Burning Bush’s expert selected five different plots of land that, in his view,

are comparable to Burning Bush’s property:

Sale Price per acre

1 $25,226 

2 12,177

3 11,000

4 11,086

5 10,500

He then adjusted these values for their superior and inferior characteristics,

compared to Burning Bush’s property. As adjusted:
- 49 -

[*49]

Sale Price per acre

1 $20,000 

2 12,700

3 13,400

4 12,600

5 11,500

Based on these values, he concluded that Burning Bush’s property was worth

$13,000/acre. As Burning Bush’s property was 236.51 acres, he determined the

rounded value was $3,075,000.

We agree that some adjustments are needed to address both the superior and

inferior characteristics of these properties. We find, however, that Burning Bush’s

adjustments are excessive. We agree that the topography of these comparables is

inferior to Burning Bush’s property--most of them are flatter and lack the views

that Burning Bush’s property has. But the comparable properties are also superior

to the Burning Bush property in some ways. Sale 2 was by the government,

potentially inflating the price, and also had good access and exposure. Sale 3 had

foreseeably great access beginning in 2004 and is smaller in size. Sale 4 had

superior exposure. Sale 5 was purchased by a locality, possibly inflating the price,

and had good access and exposure.
- 50 -

[*50] We also find that two of the comparables need a bit more adjustment. 

The price per acre for Sales 2 and 3 excludes a flood plain from the total acreage. 

This drives up the price per acre.26 This would be okay, except that Burning Bush

applied the average price per acre to the entire Burning Bush property--including

the part of that property that was in a flood plain. We will adjust Sales 2 and 3

back to their total acreage, which lowers the average price per acre for those

properties:

Sale Price per acre Total Adjustment

1 $25,000 -0-

2 11,266 ($734) 

3 9,095 (1,905) 

4 11,000 -0-

5 10,500 -0-

Sale 1 appears to be an outlier, but its description explains why--the tract

was vastly superior in quality. It has good access and exposure, located only three

miles from I-20. It is smaller, is a higher density development, and has

commercial frontage. All of these superior qualities as well as the substantially

26

 For example, if 100 acres sold for $100, the average price per acre is $1. 

But if 30 acres were in a flood plain, the price per acre of usable land would be

$1.42.
- 51 -

[*51] higher price per acre than the other comparable land sales, indicate that the

Sale 1 property isn’t comparable to the Burning Bush property--we will disregard

it. After we dismiss Sale 1, the average price per acre comes out to be $10,465. 

For the reasons we’ve stated, we do find that there should be a slight upward

adjustment for Burning Bush’s superior characteristics, and find that a reasonable

price per acre is $11,000.

This makes Burning Bush’s property’s before value $2,601,610.

27

b. “After” Best Use

The parties agree that the best use for the Burning Bush property after the

donation is speculation or recreation. Burning Bush’s expert valued the land in

this use at $235,000. The Commissioner’s expert valued the land at $350,000. All

of the Commissioner’s comparable properties were in Alabama, and most of them

were mountainous. Burning Bush’s expert on the other hand used properties

located all over the Southeast, with only one of his comparables in Alabama. One

of his comparables was sold two years after the year of the easement; one was sold

back in 1998; another one was more than 4 times the size of the Burning Bush

property while yet another was more than 13 times larger. We find the

Commissioner’s expert both reliable and more reasonable. 

27

 $11,000 x 236.51 = $2,601,610.
- 52 -

[*52] c. Conservation Easement Value and Penalty

The following table summarizes our before and after values:

Before best use value $2,600,000 

After best use value 350,000 

With these values now determined, we can calculate that the conservation

easement donated had an FMV of $2,250,000.

28

But $5,395,000 isn’t 400% of $2,250,000, so no gross-misvaluation penalty

applies. The partners did report a value for the easement that is more than 200%

of the correct value, but a penalty is barred by section 6751(b). See supra

pp. 27-35. 

What this all means is that Burning Bush’s partners won’t get their

deductions, but procedural mistakes, a reasonable-cause defense, and an initial

deduction that wasn’t too high mean that--at least for the all but a tiny sliver of a

penalty against the Pumroys--“[t]he depths have covered them; they sank into the

bottom as a stone.” Exodus 15:5.

Decisions will be entered under

Rule 155.

28

 $2,600,000 ! $350,000 = $2,250,000.