T.C. M em o . 2 0 2 1 -1 2

UNITED STATES TAX COURT
KEVIN A. SELLS, ET AL., 1 Pet it i on ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 6 2 6 7-1 2, 6 8 0 1 -1 2 , Fi l edJ an uary2 8 , 2 0 2 1
.

6 8 3 5 -1 2 , 6 8 3 6 -1 2 , 6 8 3 7 -1 2 , 6 8 3 8 -1 2 , 1 9 2 4 6 -1 2 , 1 3 5 5 3 -1 3
.

Dav i dM ace W o o l dri d g e, Ro n al d A. Lev i t t , an dGreg o ry P. Rh o d es , fo r p et i t i o n ers . Ch ri st o p h er A. Pav il on i s , Lau ra A. Pri ce, A. Gary Beg u n , an dDen i s e A. Di l o ret o , fo r res po n d en t .

1 W e co n s o l i d at eds ev en cas es fo r t ri al o n th e i ss u es we an al y ze i n t h i s o p i n i o n : Lo ri Bro wn -J am es , d o ck etn u m b er 6 8 0 1 -1 2 ; J ay

an dSo n dra Pu m

ro y , d o ck etn u m

b er 6 8 3 5 -1 2 ; Ch arl es G. an dM ary D. W i l l i am s , d o ck etn u m b er 6 8 3 6
- 1 2 ; Fred dy

H. an dPen n y

J . W el ch , d o ck etn u m

b er 6 8 3 7 -1 2 ; St ep h en an dLu ci l e M . Wh at l ey , d o ck etn u m

ber 6 8 3 8 -1 2 ; St ev e an dJ an i n e M o ses , d o ck etn u m b er 1 9 2 4 6 -1 2 ; an dJ o h n T. an d Tam m y I. Dav i s , d o ck etn u m

b er 1 3 5 5 3 -1 3. Served 01/28/21- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: Ei g h ten t erp ri si n g t ax p ay ers creat eda p art ners h i p t o b u y p ro p erty ata d i s tres s s al e an d t h en d o n at e a co n s erv at i on eas em en t o n i tt o a l an d tru s t . Th ey

p ai d$ 1
. 4 m il l i o n i n Au g u s t2 0 0 2 fo r t he en t i re p ro p ert y , an dv al u ed th e eas em en t at$ 5 .4 m i l l i o n i n Decem b er 2 0 0 3 wh en th ey

d o nat edi t . Wh y are t h es e co n s erv at i o n -eas em en tcas es d i fferen tfro m al l o th er
co n serv at i on -eas em en tcas es ? Th e Co m m i s s i o n er d o es n ’ tth i n kth ey are. He arg u es th atth e p art n ers m i s s t at edth e eas em en t ’ s v al u e an dth atth ey s h o u l dg etn o d educt i o n s atal l b ecau s e o n e o f t h e cl au s es i n th e d eedo f eas em en tv i o l at edth e
s am e reg u l at i o n we co ns tru edan dup h el di n Oak b ro o kLan dHo l d i n gs , LLC v
. Co m m i s s i o n er, 1 5 4 T.C. 1 8 0 (2 0 2 0), an dOak b ro o k Lan dHo l d i n g s, LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -5 4 . He i s ri gh tth atOak b ro o kco m

p el s u s t o d en y th e en t i re co n serv at io n-eas em en t d edu ct i o n , b u t th es e cas es s ti l l rai s e a few
o th er i ss u es , wh i ch i n cl u d e s o m e es p eci al l y kn o t ty o n es ab o u t p en al t i es . FINDINGS OF FACT I. Th e Lan dan dEas em en t Nes t l ed i n th e fo o th i ll s o f t h e Ap p al ach i an M o un t ai n s n ear An n i s t o n i n Cal h ou n Co un ty , Al ab am a, l i es a 3 98 .0 1 -acre p i ece o f l an d . It ’ s cl o s e t o In t ers t at e- 3
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[* 3 ] 2 0 an di s co m

p ri s edo f 1 6 1 .5 acres o f fl at l an dan d 2 3 6 .5 1 acres o f
m o un t ai n o us l an d
. 2 St ev en an d J an i n e M o s es b o ug h ti ti n No v em ber 1 99 9 fo r ab o ut$ 2 .4 m il l i o n . Th ey p l an n edt o b ui l da h o us e an dh i p p o th erap y cen t er 3 o n th e l an d
. Bu tm

u ch o f M o s es ’ weal th was i n t ech n o l o gy s t o ck s , an dwh en the t ech b ub b l e b u rs ti n 2 0 0 1 , M r. M o s es s u d d en l y b ecam e i n s o l v en t. Th e M o s es es d eci d ed to s el l th e l an dth ey hadju s tb o u g h t . Th ey tri ed t o s el l th e en ti re p arcel , an d wh en th at d i dn ’ t wo rkth ey d i v i d edthe fl atp arto f t h ei r p arcel fro m the p art th atwas m o un tai n o u s. Th ey were ab l e t o s el l th e 1 61 .5 acres o f fl at l an d fo r ab o u t $ 1 .4 m i l l i o n . Th i s l eftth e M o ses es wi th th e m o u n t ai n o u s l an dan da l arg e p i l e o f d eb t. Its eem edatfi rs tth atth ey co u l d fi n dn o b uy er fo r th e l an dth atrem ai n ed
. II. Bu rn i n g Bu s h Farm s , LLC W i th M r. M o s es ’ d eb ts t i l l a p ro b l em , h e an d h is at t orn ey cam e up wi th a p l an fo r h i m

an ds ev eno f h is fri en d s. In Au g u s t 2 0 0 2 Bu rn i n g Bu s h Farm s , LLC
was fo rm edwi th ei g ht m em b ers --Kev i n Sel l s , Ch arl i e W i l l i am s , St ev en M o s es ,

2 Th e p art ies s ti p u l at edth e t o t al am o u n to f l an d --3 9 8 .0 1 acres . Th ere i s a m i n o r d is crep an cy

th ro u g h ou tth e reco rdab o uth o w m u ch m o u n t ai n o u s l an dth ere was --th e t ax pay ers cl ai m i twas 2 3 6 .5 1 acres an dth e Co m m i s s i o n er cl ai m s i twas 2 3 2 .9 6 acres . Th e s t ip u l at io n s up p ort s th e t ax p ay ers o n th is m i n o r p o i nt .

3 Hi p p o th erap y

u s es th e care an dri di ng o f h o rs es as th erap y o r reh ab i l i t at i o n fo r t h o s e wh o s u ffer fro m p h y s i cal o r m en tal d i s o rd ers .- 4
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[* 4 ] Fred dy

W el ch , J ay

Pu m ro y , J oh n Dav i s , Lo ri Bro wn -J am es , an dSt ep h en Wh at l ey 4 --each a 1 2 .5 % o wn er. Th e M o s es es th en s o l dth e m o u n t ai n ou s l an dt o Bu rn i n g Bu s h fo r $ 1 .4 m i l l i o n --th e am o un to f M r. M o s es ’ ex i st i n g d eb t --an dth ey l i ken thi s t o a d i s tres s s al e. On ce Bu rn i n g Bu sh t o o ko v er, i t s m em bers s t art ed t o i n v es ti g at e h o w t o p u t
a co n serv at i on eas em en t o n th ei r p ro p ert y . Th ey s p o k e wi th M arkPen t eco s to f Ch at to awah Op en Lan d Tru s t, In c. (COLT), wh o m M r. M o ses h adwo rk edwi th o n
co n serv at i on p ro g ram s i n th e p as t . COLT p ro vi dedM r. M o ses wi th “ A Pro fes s i on al ’ s Gu i d e t o Co ns erv at i o n Eas em en t s . ” In l at e 2 0 0 3, Bu rn i ng Bu s h d eed eda co n s erv at io n eas em en to n the acres th ati to wn edt o COLT. Its eem ed th atBu rn i n g Bu sh wo u l db e t h e way fo r t h e M o ses es t o cro s s fro m thei r d eb t tro ub l es t o th e p ro m i s edl an dwi t h b ag s fi ll ed , n o t wi th jewel s o f g o l dan d b o rro wedrai m en t , b u twi th th ei r m o re m od ern an dv al u ab l e eq u i v al en t --v ery l arg e t ax d edu ct i o n s fo r t h em s el v es an dth ei r p art n ers . M i g htth i s wo rk ? Th e k ey i s p arag rap h 1 6 o f t he d eed , wh i ch co n t ai n s an
ex t i n g u i s h m en t -p ro ceed s cl au se. Itread s i n fu l l :

4 Two o th ers , Geo rg e Si l v a an d Ph i l l i p Ledb et ter, were m em b ers o f Bu rn i n g Bu s h b y th e b eg i n n i n g o f 2 00 3 b u ts eem t o h av e d ro p ped o u tb y

th e en do f t h e y ear. Th ei r m em

b ers h i p h as n o b eari n g o n th es e cas es .- 5
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[* 5 ] Ex t i ng u i s h m en t . If ci rcu m s t an ces ari se i n th e fu tu re s u ch as ren d er th e p u rp o s e o f t h i s Deedi m p o ss i bl e t o acco m

p l i sh , th i s Co n s erv at i o n Eas em en tcan o nl y

b e t erm i n at ed o r ex t in g u i s h ed , wh et h er i n wh o l e o r i n p art , b y

ju d i ci al p ro ceed i n g s i n a co u rto f co m p et en t juri s d i ct i o n p u rs uan tt o Co d e o f Al ab am a § 3 5 -1 8 -3 (b ). Th e am o u n to f t h e p ro ceed s t o wh i ch Gran t ee s h al l b e en t i tl ed , aft er t h e s at i s fact i o n o f p ri o r cl ai m s , fro m

an y s al e, ex ch an g e, o r i n v o lu n t ary co n v ers io n o f al l o r an y p o rt i o n o f t h e Pro pert y

co n t em p o ran eo u sl y wi th , o r s ub s equ en tt o , s u ch t erm i n at i o n o r ex t i n gu i s hm en t , s h al l b e d et erm i ned , u n l es s o th erwi se p ro v i d edb y Al ab am a l aw atth e t i m e, i n acco rd an ce wi th Parag rap h 1 7 b el ow. Gran tee s h al l u s e al l s uch p ro ceed s i n a m an n er co n s i s t en twi th t h e co n s erv at i o n p urp o s es o f th i s Deed
. OK s o far. Bu tth en p arag rap h 1 7 ad d s : Pro ceed s. Th i s Co n s erv at i o n Eas em en tco n s ti tut es a real p ro pert y i n t eres ti m

m ed i at el y v es t edi n Gran t ee, wh i ch , fo r t h e p u rp os es o f t h i s Parag rap h 1 7 , th e p art i es s ti p u l at e t o h av e a cu rren tfai r m ark etv al u e d et erm i nedb y

m ul ti p l y i n g th e fai r m ark et v al ue o f t he Pro p ert y u n en cu m b ered b y th e Co n s erv at i o n Eas em en t( mi n us a n y i n cr ea s e i n va l u e a f ter th e d a t e o f th is Deed

a t tr i b u ta bl e t o i m

p r o vemen t

s ) b y th e rat i o o f t h e v al u e o f t h e Co n s erv at i o n Eas em en tat the t im e o f t h i s Deedt o th e v al u e o f t h e Pro p ert y , wi th o u t d edu ct i o n fo r t h e v al u e o f th e Co n serv at i on Eas em en t , atth e t i m e o f t h i s Deed , acco rd i n g t o th at cert ai n Pro p ert y

Ap p rai sal Rep ort , d at edNo v em b er 1 , 2 00 3 an d p rep aredb y

Ten n il l e an dAs s oci at es o f Bo o n e, No rt h Caro l i n a, fo r Bu rn i n g Bu s h Farm , LLC. Th e v al u es atth e t i m e o f t h is Deeds h al l b e t h o s e v al u es u sed t o cal cu l at e t h e d educt i o n fo r fed eral i n co m e t ax p u rp o s es al lo wab l e b y

reas on o f t h i s Deed , p urs u an t t o Sect io n 1 7 0 (h ) o f t h e In t ern al Rev enu e Co d e o f 1 9 5 4 , as am en d ed . Fo r th e p urp o s es o f t h i s Parag rap h, the rat i o o f t h e v al u e o f t h e Co n s erv at i o n Eas em en t t o th e v al u e o f t h e Pro p ert y u n en cu m b eredb y th e Co n s erv at i o n Eas em en ts h al l rem ai n co n s tan t . [Em p h as i s ad d ed .]- 6
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[* 6 ] Bu rn i n g Bu s h an di t s m em b ers rel iedo n Kat h eri n e Eb b i n s , th e ex ecu t i v e d i rect o r o f COLT an da l i cen s edat t o rn ey , t o en s u re t h atthe co n s erv at i o n eas em en t
was p ro p erl y p u ti n t o p l ace an dco m p l i ed wi th the reg u l at i o n s . III. Rep o rt i n g Wh en th e t im e cam e t o fi l e i t s return , Bu rn in g Bu sh d i d s o o n Fo rm 1 0 6 5 , U.S. Retu rn o f Part ners h i p In co m e. 5 At t ach edt o i t s Fo rm 1 06 5 was Fo rm 8 2 8 3 , No n cas h Ch ari t ab l e Co n tri b u t i o n s . Onp ag e 2 o f t h i s fo rm Bu rn i n g Bu s h rep o rt ed th e d o nat i o n o f t h e co n s erv at i o n eas em en tt o COLT as a n o n cas h ch ari t ab le
co n tri b u t i o n wi th a v al u e o f ju s tu n d er $ 5.4 m i l l io n . Th i s am o un twas b as edo n an ap p rai s al o f t h e p ro p ert y

b y Dav i dRo b ert s an dPat t i e Ten n i l l e--b o th s en i o r
res i den t ial ap p rai sers . Th e Co m m i ss i on er ag rees thatth i s was a “ qual i fi ed ap p rai s al ,” an dth atBu rn i ng Bu s h at t ach edth e ap prai sal t o i ts p art n ers h i p retu rn
as i tn eed edt o d o . See s ec. 1 .1 7 0 A-1 3 (c)(2 )(i ), In co m e Tax Reg s . 6 Bu rn i n g Bu s h al s o rep o rt edo n thi s retu rn a s eco n dn o ncas h ch ari t ab l e
co n tri b u t i o n o f “ Ti m

ber” v al uedat$ 2 7 5 ,3 4 0
. Bu rn i n g Bu s h d es cri b ed th e t i m b er

5 Part n ers h i p s d on ’ tp ay

t ax es , b u t fi l e Fo rm s 1 0 6 5 as i n fo rm at i o nal retu rn s . A p art n ers h i p’ s i n co m e an d d edu ct i o n s “ fl o w th ro u g h ” t o i t s p artn ers . Sec. 7 0 1 ; 6 6 1 1 , Lt d . v . Co m

m i s s i o n er, T.C. M em o. 2 0 13 -4 9 , at* 4 4
. 6 Al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de an dreg u l at i o n s i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re, u n l es s we s ay o therwi s e.- 7
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[* 7 ] as “ PULP, Ch ip N SAW , SAW Ti m b er.” Itat t ach eda s ep arat e ap prai s al o f th i s d o n at edt i m

b er. Th atap p rai s al d es cri b es th e t i m b er as “ fo res tp ro du ct s g ro wi n g o n [t he] p ro p erty . ” Th e ap p rai s al th en l i st s the v al u e o f ei g h tty p es o f

“p ro du ct s .” Bu rn i n g Bu s h i s su edSch edu l es K-1 , Part n er’ s Sh are o f In co m e, Cred i t s , Deduct io n s, et c., t o i t s ei gh t m em b ers . Si nce t he m em

b ers were eq u al p art n ers , each h ad a n o n cas h , fl o wth ro u g h ch ari t ab l e co n tri b ut i o n o f $ 7 0 8 ,7 9 2 --t h e m at h
wo rk s o u tt o $ 67 4 ,3 7 5 fo r t h e d o n at i o n o f th e co ns erv at i o n eas em en tt o COLT an d $ 3 4 ,4 1 7 fo r t h e d o n at i on o f the t i m b er. Th es e am o un t s were v ery l arg e co m

p ared t o each p artn er’ s ad j u s t edg ro s s i n co m e, wh i ch m ean tthateach o f t h em h ad t o carry fo rwards o m e o f th at d educt i o n t o l at er y ears . See s ec. 1 7 0 (b )(1 ). IV. Au d itan dTri al A. Au d it Th e Co m m is s i o n er n o t i cedth es e l arg e d educt i on s , array eds ev eral ch ari o ts
o f rev en u e ag en t s ag ai n s tth em , an ds h otfo rt h ag ai n s tth em a qu i v erfu l o f n o t i ces
o f d efi ci en cy --s en d i n g each m em b er h i s o r h er o wn . Each n o t i ce d en iedan y- 8
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[* 8 ] d educt i o n fo r t h e d o n at i on o f ei th er t h e co n s erv at i o n eas em en to r t h e t i m b er. 7 Al l b u t o n e o f t h e n o ti ces d en i edeach m em b er’ s d edu ct i o n s fo r fai l u re t o s at i s fy th e req u i rem en t s fo r qual i fi edco n s erv at i o n co n tri b u t i on s . 8 Th e Co m m is s i o n er al s o wan t s p en al t i es --fo r b o th th e co ns erv at i o n eas em en t
a n d th e t i m b er d o n at i o n --b u th ere t h e fact s b eco m e a b i tco nv o lu t ed . Th e p art i es
s t ip u l at edth atthe Co m

m is s i o n er h ada “ p en al ty -ap p ro v al fo rm ” o n l y fo r t h e M o s es es an dth e Pu m

ro y s . Bo th th es e p en al ty -ap pro v al fo rm s were ap pro v edb y a

“ Gro up M an ag er” an dd at edb efo re t h e M os es es o r th e Pu m ro y s recei v edth ei r
n o t i ces . Th e p en al ty -ap p ro v al fo rm fo r t h e M o ses es s h o ws ap p ro v al o f p en al t i es fo r s ub s t an t i al u n d ers t at em en tan dg ro ss m i s v al u at i o n , b u t d o es n ’ t ap pro v e a p en al ty fo r n eg l i g en ce o r s ub s t an t i al m is v al u at i o n . Th i s fo rm d o es n ’ ts p eci fi cal l y
m en t i o n ei th er t h e eas em en to r t h e t i m ber, b u ts t at es thatth e “ co n tri b u t i o n d educt i o n ap p ear[s ] o v ers t at edb y th e v al u at io n .” Th e rev en u e ag en twh o d raft edth e p en al ty -ap p ro v al fo rm fo r t he Pu m

ro y s cl earl y wan t edp en al t i es fo r n eg l i g en ce an d s ub s t an t i al u n d ers t at em en t , b u tal s o

7 In ad d i t io n t o t h e n o n cas h co n tri bu t i o n s , the n o t i ces o f d efi ci en cy al s o i d en t i fi edi s s u es p ecu l i ar t o s p eci fi c m em b ers thataren ’ t ad dres s edi n th i s o p i n i on . 8 Th e n o t e o f d efi ci en cy

fo r t h e M o s es es was a b i t d ifferen t --i tg en eral l y d en iedth e d edu ct i o n s fo r fai lu re t o qu al i fy u n d er s ect i o n 1 7 0 wi th o u ts p eci fy i n g fai l u re t o b e qu al i fi edco n serv at i o n co n tri b u t io n s .- 9
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[* 9 ] ch eck eda b o x o n a ro wth ats ay s th i s : “ Sect i o n 6 6 62 (h ) Sub st an t i al Val u at i o n M i s st at em en t .” On e can i m m ed i at el y s ee a p ro b lem --s ect i o n 6 6 6 2 (h ) d efi n es gr o s s m i s v al u at i o n ; i t ’ s s ect i on 6 6 6 2 (b )(3 ) t h atd efi n es s u b s ta n t i a l
m i s v al u at i o n . Th e rev en u e ag en tfi l l ed i n th e co m m en tb o x : Th e s ub s t an ti al ad

ju s t m en ti s a fl o w thro u g h ad j u s t m en t fro m

th e rel at edp art n ers h i p , Bu rn i n g Bu s h Farm LLC Part n ers h i p . Th e ad j u s t m en ti s du e t o an o vers t at edd o n at io n o f a ch ari tab l e co n tri b u ti o n (Eas em en t ) an dth e Sub s t an ti al M i s s t at em en tPen al ty i s ap p li cab l e. Th e al t ern at i v e p o s it i o n i s th atth e n eg l i g en ce an ds ubs t an t i al u n d ers t at em en tp en al ty

i s ap p l i cab l e. Becau s e th e v erb al d es cri p t i o n s ay s “ s ub s t an t i al v al u at i o n m i s s t at em en t ” an dth e
co m m en tb o x m en t io n s o n l y

“ sub s t an ti al m i s st at em en tp en al ty ,” we m i g h th av e b een in cl i n edt o fi n d th at th e rev en u e ag en twas s eek i n g ap p ro v al fo r a s ub s t an t i al
m i s v al u at i o n p en al ty . Th e Co m m i s s i o n er, h owev er, as sert edi n h i s rep l y b ri ef t h at

“ [t ] h e p en al ty

ap p ro v al fo rm

fo r J ay an dSo n dra Pu m

ro y co n t ai n s a s cri v en er’ s
erro r th ati den t i fi es the I.R.C. § 6 6 6 2 (h ) g ro s s v al uat i on m i s s t at em en t p en al ty as th e s ub s t an t i al v al u at i o n m is s t at em en tp en al ty . Al th o u gh th e wri t t en referen ce i s
s l ig h t ly am b i gu o u s , th e referen ce t o I.R.C. § 6 6 6 2 (h ) i s cl ear.” W e accep t h i s cl ari fi cat i o n o f thi s am

b i g u it y , an d fi n dth atfo r t he Pu m ro y s th e g ro ss m i s v al u at i o n , an dn o t th e s ub s t an t ial -m i s v al u at i o n , p en al ty was p u ti n p l ay

an d ap p ro v edb y

th i s fo rm .- 1 0 -

[* 1 0 ] On e t h en tu rn s t o th e n o ti ces o f d efi ci en cy . Here t h ere was a b i tm o re
u n i fo rm i ty . Th e Co m

m i s s i on er as s ert ed2 0 % accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2 (a) fo r n eg l i g en ce, s ub s t an t i al u n d ers t at em en t , o r s ub s tan t i al
m i s v al u at i o n i n t he n o t i ces o f d efi ci en cy ag ai n s t al l the m em

b ers ex cep tfo r Sel l s. No n e o f t h e n o t ices as sert eda g ro ss -m i s val u at i o n p en al ty u n d er s ect io n 6 66 2 (h ),
ev en ag ai n s tth e M o s es es an d Pu m ro y s d es p i t e p en al ty -ap p ro v al fo rm s th at ap p ro v eds ect i on 6 66 2 (h ) p en al t i es ag ai n s tth em . 9 (Fo r t h em , th i s m ean s thatthere
was an i n i t ial d et erm i n at i o n o f t h e p en al ty an d ap p ro v al b y an i m

m ed i at e
s up erv i s o r, th o u g h n o co m m u n i cat i o n o f t h i s t o th em . ) Al l ei g h t m em

b ers o f Bu rn i n g Bu s h fi l ed th ei r p et i t i o ns wh il e res i d en t s o f Al ab am a. 1 0 Th e Co m

m i s s i o n er am en d edh i s an s wers b efo re t ri al t o as serta g ro s s m i s v al u at i o n p en al ty

u n der s ect i o n 6 6 6 2 (h ) ag ai n st each o f t h e Bu rn i n g Bu s h
m em b ers ex cep tSel l s . 1 1 Al l th es e am en d edan s wers were s i g nedb y Ch ri s t o p h er Pav il o n i s wh o i s t he l eadat to rn ey i n th es e cas es ; an db efo re t h ey were fi l edth ey

9 A p en al ty

co m pu t at i o n wo rk s heet at tach edt o th e M o s es es ’ n o t i ce o f d efi ci en cy

s ay s a p o rt i on o f thei r u n d ers t at em en twas at tri b u t ab l e t o g ro s s m i s v al u at i o n , b u tth en d et erm i n es th atth e p o rt i o n was zero .

1 0 W e b el i ev e th atth i s m ean s an y ap p eal s wi l l g o t o th e El ev en th Ci rcu i t . See s ec. 7 4 8 2 (b )(1 )(A).

1 1 Th e Co m

m i s s i o n er s eek s s ect i o n 6 66 2 (h ) p en al t i es o n l y fo r t he co n serv at i on -eas em en td o n at i o n s , n otfo r t h e t i m b er d o nat i o n s .- 1 1 -

[* 1 1 ] were i n i t i al edb y

“ ag b ”, wh i ch refers t o A. Gary Beg u n , wh o was Pav i l o n i s ’ s i m m ed i at e s up erv i s o r. 1 2 B. Tri al W e t ri edth es e cas es i n Bi rm in g h am , Al ab am a. Attri al th e t ax p ay ers o ral l y
m o vedt o s h i ft th e b u rd en o f p ro o f, o n th e g ro un d thatth ey h adco op erat edwi th th e Co m m i s s i o n er’ s req u es t s . W e g ran t edth ei r m o ti o n aft er tri al , b u ti tm ak es n o d i fferen ce b ecau s e we can d eci d e t h e v ari ou s i ss u es i n thes e cas es o n a p rep o n d eran ce o f ev id en ce. Th e p art i es s et t l edm an y

i s s u es ; o ne t h ey

d i dn o ti s th e s ub

jecto f a s ep arat e
o p i n i o n th atwe al s o rel eas e t o d ay . See What l ey v . Co m m i s s i o n er, T.C. M em o . 2 0 2 1 -1 1 . W e are l eftt o d eci d e i n th i s o p i n i o n : ! wh et her t h e p art n ers are en t it l edt o d edu ct i o n s fo r Bu rn i n g Bu s h ’ s d on at i o n o f t h e co n s erv at io n eas em en tt o COLT,
! wh et her t h e p art n ers are en t it l edt o d edu ct i o n s fo r Bu rn i n g Bu s h ’ s d on at i o n o f t h e t i m

b er, an d
! wh et her an y

p en al t i es ap p l y .

1 2 Beg u n al s o i n it i al edal l th e Co m m i s s io n er’ s m o t i o n s t o am en dh i s an s wers ex cep tfo r o n e--t h e M os es es ’ . Inth atcas e, h owev er, h i s i n it i al s are o n th e p ro p os edam en d m en tth atth e Co m m i s s io n er at t ach edt o h i s m o t i o n t o am en d
.- 1 2 -

[* 1 2 ] OPINION I. No n cas h Ch ari t ab l e Co n tri b u t i o n s A. Back g ro u n d Sect io n 1 7 0 s et s th e ru les fo r t h e d edu ct i b i li ty o f ch ari t ab l e co n tri b ut i o n s,
an d th ere are reg u l at i o n s th at g o i n t o m uch g reat er d et ai l . See s ec. 1 .1 7 0 A-1 3 , In co m e Tax Reg s . Th o s e reg u l at i o n s d i s t in g u i s h b etween cas h an dn o n cas h
co n tri b u t i o n s, s ee, e.g ., i d
. p aras . (a) an d(b ), an dco n tri b u t i o ns o f d i fferen t
am ou n t s , s ee, e.g ., i d . p ara. (b )(3 ). On e t y p e o f n on cas h ch ari t ab l e co n tri bu t i o n i s th e d o n at i o n o f a p art i al i n t eres ti n real es t at e. Th e Co d e g en eral ly d i sal l ows a ch ari t ab l e-co nt ri bu t i o n d educt i o n fo r a g i fto f real p ro p ert y th at“ co n s i s t s o f l es s th an th e t ax p ay er’ s en t i re i n t eres ti n s u ch p ro p ert y .” Sec. 1 7 0 (f)(3 )(A). Th ere i s an ex cep t i o n fo r t h e d o n at io n o f co n s erv at i on eas em en ts . Sec. 1 7 0 (f)(3 )(B)(i ii ). A “ qu al i fi ed co n s erv at i o n co nt ri bu t i on ” i s “ a co n tri b u t i o n -- (A) o f a qu al i fi edreal p ro p ert y i n t eres t , (B) t o a qu al i fi edo rg an i zat io n , (C)
ex cl u s i v el y

fo r co n s erv at i o n p u rp o s es .” Sec. 1 70 (h )(1 ). A co n tri b u t i o n m u s t
s at i s fy each o f t hes e requ i rem en t s, b u to u r fo cu s h ere i s o n th e t h i rd req u i rem en t -- th atth e co nt ri b u t i o n b e “ ex cl u s i v el y fo r co n s erv at i o n p u rp o s es , ” s ec. 1 7 0 (h )(1 )(C), wh i ch th e Co d e d efi n es i n th e n eg at i v e: “ A co n tri b ut i o n s h al l n o tb e- 1 3 -

[* 1 3 ] treat edas ex cl u si v el y fo r co n s erv at i o n p urp o s es u n l es s t h e co n s erv at i o n p u rp os e i s p r ot ect ed

i n p er p et u i t y ,” s ec. 1 7 0 (h )(5 )(A) (em p h as i s ad d ed ). B. Th e Do n at i o n o f t h e Co n s erv at io n Eas em en t W e wi l l fo cu s fi rs to n t h e d o nat i o n o f t h e co ns erv at i o n eas em en t , wh i ch we
m u std en y n ow t h atth e Co urt has d eci d edOak b ro o k
. 1 3 InOak

b ro o k , we an al y zed
s ect i on 1 .1 7 0 A-1 4 (g )(6 ), In co m e Tax Reg s. See Oakb ro o k , T.C. M em o . at* 2 0 -* 2 8 . As we d i s cu s s edth ere, a co n s erv at i o n eas em en tm u stb e p ro t ect edi n p erp etu i ty . See s ec. 1 7 0 (h )(5 )(A); Oak bro o k, T.C. M em o . at * 1 0. Parto f t h i s p ro t ect i o n m

u s t b e t h e al l ocat io n o f p ro ceed s t o t h e d o nee i f th e eas em en ti s
co n demn edo r o th erwi s e ex t i n g u i s h ed . Sect i o n 1
. 1 7 0 A-1 4 (g )(6 )(i ) t el ls u s th atth e p ro ceed s t h atd o g o t o th e d o n ee m u s tb e u s ed i n a “ m an n er co n s is ten twi th th e
co n serv at i on p urp o s es o f t h e o ri g i n al co n tri b u t i o n.” Oakb ro o k , T.C. M em o . at* 1 9
. Sect i o n 1
. 1 7 0 A-1 4 (g )(6 )(i i ) t el l s u s thatth e am ou n tth atg et s t o th e d o n ee
m u stb e
a f ai r ma r ket va l u e th a t

is a t l ea st eq u a l t o th e p r o

p o rt i on a t e va l u e th atth e p erp etu al co ns erv at i o n res tri ct i o n atth e t i m e o f th e g ift , b ears t o th e v al u e o f t h e p ro p ert y as a wh ol e atth e t i m e * * * [an dth at ] o n a s ub s equ en ts al e * * * [t h e d o n ee] mu s t b e en t i t l ed t o a p or t i o n o

f th e

1 3 Becau s e Oakb ro o kwas p en d i n g , we g av e t he p art ies th e o p p o rtun i ty t o m ak e an y arg u m en t s o n th i s i s su e t h atth ey wi s h edt o p res erv e fo r ap peal . Bo th fi led sup p l em en tal b ri efs t o d o s o .- 1 4 -

[* 1 4 ] p r o ceed

s a t l ea s t eq u a l

t o th a t p r o p o r t i o na t e va l u e o

f th e p er p et ua l co n s er va t io n r es tr i ct i o n * * * . [Em p has i s ad d ed .]

“ Pro p o rt i o n at e v al u e” d em an ds th e creat i o n o f a fract io n , th e n u m erat o r o f wh i ch i s th e fai r m ark etv al u e (FM V) o f t h e eas em en tan dth e d en o m i n at o r o f wh i ch i s th e FM V o f t he co nt ri b u t edp ro p ert y u nbu rd en edb y

th e eas em en t , b o th
o n th e d at e o f d o nat i o n . See Oakb ro o k , T.C. M em o . at* 2 0 . W e fo l l o wedth e Fi ft h Ci rcu i t ’ s l ead i n ho l d i n g t h atth i s s ect i o n o f t h e reg u l at i o n s req u i res th atth e d o n ee b e en t i t l edt o recei ve t h is fract i o n m u l t i p l iedb y

th e gr os s p ro ceed s o f an y
ex t i n g u i s h m en t . See i d
. at* 3 7 -* 3 8 (ci t in g PBBM Ro s e Hi l l , Lt d . v . Co m m i s s i o n er, 9 0 0 F.3 d1 9 3 , 2 0 7 -0 8 (5 th Ci r. 2 0 18 )). Th is m ak es th e d o n ee
en t i t l edt o a s h are o f p ro ceed s at t ri b u t ab l e t o fl u ctu at i o n s i n th e p ro p ert y ’ s v al u e o r t o the v al u e o f p o s t -d o n at io n i m p ro v em en t s . See i d
. at* 3 8 . An d i n Oak b ro o kv . Co m m i s s i o n er, 1 5 4 T.C. 1 8 0 , we h el dth atth i s reg u lat i on was v al i d . Oak bro o k ’ s d i v i s i on o p i n i o n b i n d s u s . See, e.g ., Sec. St at e Ban kv . Co m m is s i o n er, 1 1 1 T.C. 2 1 0 , 2 1 3 -1 4 (1 9 9 8), aff’ d , 2 1 4 F.3 d1 2 5 4 (1 0 th Ci r. 2 0 0 0). Bu rn i n g Bu s h ’ s d eedwo u l ds ub tract th e v al u e o f an y i m p ro v em en t s fro m
an y co n demn at i on award b efo re cal cu l at i n g wh atp ercen t ag e o f t h o s e p ro ceed s
wo u l dg o t o t h e d o nee. Th atm ean s th at thi s d eed , l i k e th e o n e i n Oak b ro o k , d o es n’ tco m

p l y wi th s ect i o n 1 .1 7 0 A-1 4 (g )(6 )(i i ), In co m e Tax Reg s . See- 1 5 -

[* 1 5 ] Oak

b ro o k , T.C. M em o . at* 4 0 -* 4 1 . Th at ’ s en ou g h t o d en y the p art n ers ’ ch ari t ab le-co n tri b u ti o n d edu ct i o n s i n fu l l
. Th e p art n ers m ak e two arg u m en t s thatwe d i dn ’ ts ee i n Oak b ro ok . Th e fi rs t i s p ro cedu ral --t h atth e Co m m i s s i o n er wai v edh i s ri g h t t o at t ack the co n s erv at i o n eas em en td edu ct i o n s wi th h i s p ro ceed s -cl au s e s p ear b ecau s e h e d i dn ’ t m ak e t h e arg u m en tu n t i l aft er t ri al . Th e p art n ers are co rrect th atth i s was a n ew arg um en tb y th e Co m m i s s i o n er aft er t ri al ; b u tb et ween tri al an do u r en try o f a fi n al d eci s i o n we
can co n s i d er n ew a rg u men t s , ev en i f we can ’ tco n s i d er n ew is s u es . Th e d i fferen ce i s thatn ew iss u es req u ire n ew o r d i fferen tfact fi n di n g , b utn ew a r gu men t s d o n ’ t . See, e.g
. , M et ro co rp , In c. v . Co m m i ss i on er, 1 1 6 T.C. 2 1 1 , 2 3 2 (2 0 0 1 ) (Ru we, J ., d i s s en t i n g); ParkPl ace, In c. v . Co m m i s s i o ner, 5 7 T.C. 7 6 7, 7 6 8 -6 9 (1 9 72 ); Barn et t e v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 2 -5 9 5 , 6 4 T.C.M . (CCH) 9 9 8 , 1 0 0 2 (1 9 9 2), s up p l em en t i n g T.C. M em o . 1 9 9 2 -3 7 1
. If “ s u ffi ci en tfact s are p res en t , b u t
* * * a fu rt h er ex p o s it i o n o n th e ap p l i cab l e l aw b y th e p art i es i s d es i rab l e, [we]
can cal l fo r fu rt her b ri efi n g .” Barn et t e, 6 4 T.C.M (CCH) at 1 0 0 2
. Th at ’ s wh atwe d id h ere. Th ere are a g reat m an y co n s erv at i o n -eas em en t
cas es b efo re o u r Co u rt , an dwe are t ry i ng t o b e as co n s i s t en tas p o s s ib l e i n h o w we
an al y ze t h em . Ev en wi tho u ts up p l em en t al b ri efi n g , th e qu es t i o n i s a l eg al o n e an d

“ a d efi ci en cy

as ses s m en tm ay

b e s u s t ai n edupo n an y

l eg al g ro u n ds up p ort i n g i t ,- 1 6 -

[* 1 6 ] ev enth o u g h th e Co m m i s s i o n er d i dn o trel y th ereo n wh en th e as s es s m en t
was m ad e.” Bl an s et tv . Un i t edSt at es , 2 83 F.2 d 4 7 4 , 4 7 8 (8 th Ci r. 1 9 60 ). Th e p art n ers ’ n ex targ um en ti s a s ub st an t i v e o n e--t h atth ere i s l an g uag e i n
s ect i on 1 .1 7 0 A-1 4 (g )(6 )(i i) t h atn u l l i fi es th e “p ro p o rt i o n at e v al u e” req u i rem en t . Th e l an g uag e th atth ey

p o i nt t o i s atth e en d : Acco rd i ng l y , wh en a ch an g e i n co n d i t i o n s g i v e ri s e t o th e ex t i n g u i s h m en to f a p erp etu al co n s erv at io n res tri ct i o n u n d er p arag rap h (g )(6 )(i ) * * * th e d o nee o rg an izat i o n , o n a s ub s equen ts al e, ex ch an g e, o r i n v o l u n taryco n v ers i o n o f th e s ub jectp ro p ert y , m

u s tb e en t i t l edt o a p o rt i o n o f t h e p ro ceed s atl eas tequ al t o t h at p ro p o rt i o nat e v al u e o f t h e p erp etu al co n s erv at i o n res tri ct i on , u nl es s s tat e l a w p r o vi d

es th at th e d o n o r is en ti t l ed

t o the f u l l p r o ceed s f r o m th e co nver

s i o n wi th o u t

r eg a rd t o th e t erm s o

f th e p r i o r p er p et ua l co n s er va t io n r es tr i ct i o n . Sec. 1 .1 7 0 A-1 4 (g )(6 )(i i ), In co m e Tax Reg s . (em p has i s ad d ed ). Th e p art n ers arg u e th atu n d er Al ab am a l aw t he o wn er o f a co n s erv at i o n eas em en ti s n ’ ten t i t l edt o p ro ceed s wh ere t h e l an di s “ t ak en fo r an dd ev o t edt o [a] p ub l i c p u rp o se.” Bu rm a Hi l l s Dev . Co . v . M arr, 2 2 9 So .2 d 7 7 6 , 7 8 2 (Al a. 1 9 6 9). Si n ce Al ab am a l aw p rev en ts th e eas em en th o l d er fro m b ei n g en t i t l edt o an y p ro ceed s , th e p ro p ort i o n at e-v al u e-wi th -n o -al l o wan ce-fo r-i m p ro v em en ts cl au s e o f t h e reg u l at i o n d o es n’ tap p l y . Th e p ro b lem fo r Bu rn i n g Bu s h an d i t s m em b ers h ere i s th atthe reg u l at i o n
s p eak s o f t he i nv o l u n t ary co n v ers io n o f a “ p erp etu al co n serv at i o n res tri ct i o n ,”- 1 7 -

[* 1 7 ] s ee 1 .1 7 0A-1 4 (g )(6 )(i i), In co m e Tax Reg s ., an dthe cas el aw fro m Al ab am a th atth e m em

b ers ci t e ari s es fro m

the m o re t rad i ti o n al eas em en t s ap p u rt en an tth at h o m eo wn ers i n a s ub d i v i si o n o ft en h av e wi th each o th er. See Oakb ro o k , T.C. M em o. at* 1 4 -* 16 (co n tras t i n g co n s erv at i o n eas em en t s wi th t rad i t io n al eas em en t s ap p urt en an t ). Cas el aw d o es i n d eed al i g n Al ab am a s t at e l aw wi th th e v i ew t h atthe
co n demn at i o n o f a p ro p ert y s ubjectt o an eas em en tres ul t s i n co n demn at i o n award s
o n l y t o t h e p ro p ert y

o wn er, n o t th e eas em en to wn er. Bu rm a Hi ll s , 2 2 9 So .2 d at7 7 9
. W e d o n o t , h o w ev er, t h i nkth atAl ab am a l aw o n th i s s ub ject i s wh at th e reg u l at i o n m ean s wh en i ts p eak s o f a s t at e l aw th at“p ro v id es thatth e d o n o r i s
en t i t l edt o th e fu l l p ro ceed s fro m th e co n v ers i o n wi th o u treg ardt o th e t erm s o f t h e p ri o r p erp etu al co n s erv at i o n res tri ct i o n .” Sec. 1 .1 7 0A-1 4 (g )(6 )(i i ), In co m e Tax Reg s. Here’ s wh y : Wh en , fo r ex am p l e, p ro p ert y

o wn ers i n a s ub d i v i si o n al l h av e
eas em en t s o n each o th er’ s p ro p ert i es i n th e fo rm o f res tri ct i o n s o n u s e o f th ei r p ro p erty t o “ res id en t i al p u rp o s es o n l y ,” t h ere i s am b i g u i ty ab o u twh et h er t hat
eas em en ti s a co n tract ri gh to r a p ro p ert y ri g ht . Wh en a l o cal g o v ern m en ti n Al ab am a co n d em

n s l an dt o co n s tru cta ro ado r b u i l da s ch o o l, i th as t o i n v o k e
em in en td o m ai n ag ai n s t“p ro p ert y o wn ers ” an dco m

p en s at e t h em . If al l th e h o m eo wn ers i n a s ub d i v i si o n were “ o wn ers ” o f t he co n d em n edp ro pert y , th ey

t o o- 1 8 -

[* 1 8 ] wo u l d n eedt o b e p l ead edi n an d recei v e co m pen s at i o n fo r wh at ev er t h e
v al u e o f t h ei r eas em en t was . If th ey weren ’ t , th e co n d em

n in g g o v ern m en two u l d
s u cceed on l y

t o t h e co n demn edp ro p ert y o wn er’ s ri gh t s--i n s teado f g et t i ng l an do n wh i ch t o b ui l da ro ad , the l o cal h i gh way d ep art m en two u ldg eto n l y l an d wh i ch i t
co u ldu s e “ fo r res i d en t i al p u rp o s es o n l y .” Th i s wo u l db e d eci d ed l y

u n sat i sfact o ry , an dAl ab am a reject edth at ch aract eri zat i o n i n Bu rm a Hi l l s . 2 2 9 So .2 dat7 81 -8 2 . Th e Al ab am a Sup rem e Co u rth el dth ere t hatthe h o ld er o f an eas em en t i n co n d em n edp ro pert y

was n o ta

“p ro p ert y o wn er,” b u tth e h o l d er o f an en fo rceab l e co n tract ri g h tag ai n s t th e p ro p erty o wn er. When co n d i t io n s ch an g e, al l th e eas em en t h o l d ers can b e freed o f th ei r m u tu al o b l i g at i o n t o each o t h er, wh i ch i s a b en efi tt o each o f t h em . Th i s i s wh atwe cal ledi n Oakb ro o k t h e “ i m p li ci tco m

p en s at i o n fo r t h e l o ss o f a s erv i tu d e” th atl i es i n ex t in g u i s h m en to f m u tu al eas em en t s . See Oakbro o k , T.C. M em o . at* 1 5
. Th e Al ab am a Sup rem e Co u rtex pres s edth e s am e i d ea m o re el oqu en t l y : It is a fam i l i ar ru l e t h at , wh en th e p h y s i cal co n d i t i o n s i n t h e v i ci n it y o f t h e l an d t hu s res tri ct edh av e s o ch an g edas t o ren der i t u n co n s ci o n ab l e t o en fo rce t h e res tri ct io n , equ it y wi l l refu s e t o en fo rce, an d t h e res tri ct io n as t o i t s en fo rceab i l i ty then fad es o uto f th e co nt racto f th e p art i es . Bu rm a Hi l ls , 2 2 9 So .2 d at7 8 0
.- 1 9 -

[* 1 9 ] As we ex p l ai n edi n Oak b ro o k, T.C. M em o . at * 1 6 -* 1 7 , m o s ts t at es en act ed
s t atu tes t o ch an g e t h i s p arto f co m m o n l aw as i tm i g h taffect co n serv at i on
eas em en t s . Al ab am a was am o n g th em , an ds ect i o n 3 5 -1 8 -1 o f i t s Co d e n o w d efi n es th e i n t eres t o f t h e d o n ee o f a co n s erv at i o n eas em en tas th e “ n o np o s s es s o ry i n t eres to f a h o l d er i n real p ro p ert y .” W e l o o k edfo r, b u tad m i t t ed l y d i dn ’ tfi n d , an Al ab am a cas e t h atd i s t in g u i s h es co n s erv at i on eas em en ts fro m o th er eas em en t s i n th i s way . Bu tev en wi th o u t a cas e, t he l an g u ag e o f t h e s t atu t e g et s u s th ere--we h o l dth atth e eas em en t th at Bu rn i n g Bu s h d o nat edwas n o t a co n tract ri g h t b u tan i n t eres ti n p ro p ert y wh o s e h o l d er m u stb e co m

p en s at edfo r i ts co n d em

n at i o n o r d es tru ct io n o r o th er co n vers i o n. W e al s o fo un datl eas to n e s t at e l aw t h at d oes s eem t o b e g ov ern edb y

th e l as tfew l i n es i n s ect i o n 1 .1 7 0A-1 4(g )(6 )(i i ). Cal i fo rn i a’ s Go v ern m en tCo d e
s t at es : If an y

l an d o r a p o rt i o n th ereo f as t o wh ich an y ci ty o r co u n ty

h as accep t edo r ap pro v edan o p en -s p ace eas em en t p urs u an tt o t h i s ch ap t er i s th ereaft er s o u gh tt o b e co n d em n edfo r p ub l i c u s e an dth e eas em en t was recei vedas a g i ftwi th o u tth e p aym en to f an y co m pen s at io n th erefo r, th e eas em en ts h al l t erm i n at e as o f t h e t i m e o f t he fi l i n g o f th e co m p lai n ti n co nd em

n at io n as t o th e l an do r p o rt i o n th ereo f s o u g h t t o b e t ak en fo r p ub l i c u s e, an d th e o wn er s h a ll b e en t i t l ed

t o s u ch co mp en s a ti o n f

o r the t a ki n g a s h e wo uld

h ave b een en t i t l ed t o h a d th e l a n d n o t

b een b u rd

en ed b y th e ea s emen t . Cal . Go v ’ tCo d e s ec. 5 1 09 5 (W es t2 0 0 3 ) (em p h as i s ad d ed ).- 2 0 -

[* 2 0 ] Th e reas o n fo r s u ch an ap p aren t l y o d dp ro v i s i o n i s th atth e Cal i fo rn i a l eg i s latu re was wo rri edth atl o cal g o v ern m en ts wo u l d v i ew p ro p ert y wi th
co n serv at i on eas em en t s as es p eci al l y ju i cy t arg et s fo r co n d em

n at i o n b ecau s e t h ey
co u ldb e h ad ch eap l y . See Nan cy A. M cLau gh l i n , “ In t ern al Rev en ue Co d e Sect i o n 1 7 0 (h ): Nat i o n al Perp etu it y St an d ard s fo r Fed eral ly

Sub s id i zed Co n s erv at i o n Eas em en t s ,” 4 5 Real Pro p . , Tr. & Es t . L.J . 4 7 3 , 5 0 0 n .1 03 (2 0 1 0 ). W e can s afel y

rejectBu rn i n g Bu s h’ s s t at e-l aw arg u m en t . Th e g en eral ru l e
o f s ect i o n 1 .1 7 0 A-1 4 (g )(6 )(i i ) ap p l i es an dfo rces u s t o d i sal l o w th e d edu ct i o n fo r th e co n s erv at i on eas em en t . 1 4 Th atl eav es u s t o fi gu re o u tth e p art n ers ’ s eco n dn o ncas h ch ari t ab le
co n tri b u t i o n --th ei r d on at i o n o f t i m b er o n th e p ro pert y . C. Th e Do n at i o n o f Ti m b er 1
. Wh at ’ s at Is s u e? Th e Co m m is s i o n er ch al l en g edth e d edu ct i b i l it y o f Bu rn i n g Bu s h ’ s d o n at i o n
o f t i m b er i n h i s p o s t tri al b ri ef. Th e p art n ers arg u edi n th ei r p o s t tri al b ri ef t h atth i s

1 4 Ou r res u l t , i f n ot o u r m o re v erb o s e ex p l an at i o n , i s th e s am e as i n t wo o th er cas es fro m

Al ab am a t h atwe recen t l y d eci d ed . See Sm i th Lak e, LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -1 0 7 , at* 9 ; Hewi t tv . Co m m i ss i on er, T.C. M em o. 2 0 2 0 -8 9 , at* 2 2 -* 2 4
.- 2 1 -

[* 2 1 ] i s th e fi rs tth ey ’ re h eari n g o f t h e i s su e, an d th ey s ay th i s m ean s thati t ’ s n o t p ro p erl y b efo re u s. As a g en eral ru l e, we co n s i d er o n ly th e i s su es th atth e p art i es p l ead . See, e.g ., M ark ward t v . Co m

m i s s io ner, 6 4 T.C. 9 8 9 , 9 9 7 (1 97 5 ). Bo th t h e p art i es an d th e Co u rtn eedfai r n o t i ce o f wh at ’ s i n co n tro v ers y . See Ru l e 3 1(a). Th e Co m m i s s i o n er h as th ree d i s t in cto p p o rtu ni t ies i n th e l i fe o f a cas e t o i d en t ify wh at h e wan t s t o p u t in p l ay : th e n o t i ce o f d efi ci en cy , h i s an s wer, an d an y am en d ed
an s wer. Sel i g m an v . Co m m i s s i o n er, 8 4 T.C. 1 9 1 , 1 9 8 (1 9 8 5 ), aff’ d , 7 9 6 F.2 d1 1 6 (5 th Ci r. 1 9 8 8 ). W e’ re n o t s ti ck l ers , b u twe d o req u i re t h e Co m m is s i o n er t o p u t t ax p ay ers o n “ fai r n o t i ce.” See M ark ward t, 6 4 T.C. at9 97
. Here we d o fi nd each p artn er was p u t o n fai r n o t i ce t h at th e t im b er d o n at i o n
was ati s s u e. Th e Co m

m i s s i on er d en i edeach m em b er’ s t o t al n o n cas h ch ari t ab l e d educt i o n , an dwe th i n kan y reas o nab l e t ax p ay er wo ul d reco g n i ze t h at d i s al l o wi n g th e s u m o f t wo n u m

b ers m ean s th atb o th are d is al lo wed . Th e m em bers , i n th ei r p et i t i o n s , ch al l en g edth e d i sal l owan ce o f t hi s t ot al d o ll ar am o u n tev en th o u g h th ey d i dn ’ tm en t i o n th e d i s al lo wan ce o f t h e t i m b er-d on at i o n p o rt i o n wi th an y
s p eci fi ci ty . W e fi n dfro m th is th ey d i di n deed ch al l en g e i ts d i s al l o wan ce. An di n h i s p ret ri al m em o th e Co m m i s si o n er s p eci fi cal l y s tat edth atth e co n tri b u t i o n o f t i m b er was b ei n g ch al len g ed --al b ei tas a “ Co n s erv at i o n Eas em en tIs s u e[] .” Th i s i s- 2 2 -

[* 2 2 ] en ou g h fo r fai r n o t i ce. See Gei s el m anv . Un i t edSt at es , 9 6 1 F.2 d 1 , 4 -5 (1 s t Ci r. 1 9 92 ); Ab at t i v . Co m m i s s i o n er, 6 4 4 F.2 d 1 3 8 5 , 1 3 8 9 (9 th Ci r. 1 98 1 ), rev ’ g T.C. M em o . 1 97 8 -3 9 2
.

2
. Do n at i o n o f th e Ti m b er Al th ou g h we fi n dth atth e d o nat i o n o f Bu rn in g Bu s h ’ s t i m b er i s ati s s u e, we ag ree wi th th e m em

b ers thatth e Co m

m is s i o n er’ s an al y s i s o f i ti s qu i t e co n fu s i n g . He arg u es i n h i s p o s t tri al b ri efs th at th e t im b er d o n at io n v io l at es s ect i o n 1 7 0 (h )-- th e s ub s ect i o n th at ad dres s es co n tri b u t i o ns o f qu al ifi edco n s erv at i o n eas em en t s . He s p eci fi cal l y

arg u es th atth e t i m

b er d on at i o n d o es n ’ th av e a co n s erv at i o n p u rp os e s i n ce t h e cl earcu t t i n g o f l an dcan ’ tp o s s i b ly b e fo r a co n s erv at i o n p u rp o s e. As we s earch th ro u g h th e reco rd , we fi n dn ex t t o n o o ther m en t io n o f t h e t i m b er d o n at i o n fro m

ei th er p art y . Th e o n l y

ev id en ce t h atwe h av e (b es i d es th e d i s al lo wan ce o f t h e t im

b er d o n at i o n s i n th e n o ti ces o f d efi ci en cy ) i s t h e i n i t i al cl ai m i ng o f t h e d edu ct io n b y th e p art n ers o n thei r t ax retu rn s. Th o s e ret u rn s each h av e two s ep arat e Fo rm s 8 2 83 at t ach ed --o n e fo r t he d o n at i o n o f t h e co n s erv at i o n
eas em en tan do n e fo r t h e d o n at i o n o f “ Ti m ber”. An d at t ach edt o each fo rm were
s ep arat e ap p rai s al s --o n e o f t h e v al ue o f th e co n s erv at i o n eas em en tan do n e o f t h e
v al u e o f t h e t i m

ber. Th e ap p rai s al o f t h e t i m b er d o n at i o n d es cri b es the v al u e o f ei g h tt im ber p ro du ct s t h atwere “ g ro wi n g o n [t h e] p ro p erty ” b u tm ak es n o m en t i o n- 2 3 -

[* 2 3 ] o f a co ns erv at i on eas em en t . When we l o o katthe en t i re reco rd , we fi n di t
m o re l i k el y

th an n o tth atthe t i m

b er d o n at i o n was n o ta d o n at i o n o f a co n s erv at i on
eas em en tb u t rat h er ju s ta s ep arat e n o n cas h d o n at i o n . Sect i on 1 7 0 (h ) an di t s reg u l at i o n s th atg o vern th e d o n at i o n o f co n serv at i on eas em en t s ju s td o n ’ tap p l y . Bu tth at d o es n ’ t m ean th e p art n ers are o u to f t h e wo o d s ju s t y et . Acco rd i ng t o the ap p rai s al , Bu rn i n g Bu s h acq u i redth e l an d o n wh i ch i tp l aced th e eas em en t
o n th e v ery

s am e d at e t h ati trep o rt ed i th adacq ui redth e t im b er--Au g u st6 , 2 0 0 2
. An dBu rn i n g Bu s h co n tri b u t edb o th th e eas em en t an dth e t i m b er t o th e s am e d o n ee, COLT. Becau s e o f t h i s, we fi n d i t m o re l i k el y th ann o tth at th e t i m

b er d o n at ed b y

Bu rn i n g Bu s h i s th e s am e s t an d in g t i m b er o n wh i ch i th adp l aced a
co n serv at i on eas em en t . Th ati s a p ro b l em . Th e v al u e t h atBu rn i n g Bu sh p l aced o n t h e s t an d i n g t i m b er i s i t s v al ue as t im

b er p ro du ct s . On e can s ee t h i s o n th e Fo rm 8 2 8 3 --wh i ch d es cri b es th e d o nat i o n o f “ Pu l p , Ch i p N Saw, Saw Ti m b er”--p ro du ct s th atres u l t fro m t i m b er’ s h arv es t . An dth e at t ach edap p rai s al --wh i ch d es cri b edei g h t p ro duct s --wo u l dreq ui re t h e t i m b er’ s h arv es t .- 2 4 -

[* 2 4 ] Th e p ro b lem h ere i s t h atAl ab am a l aw 1 5 m ak es t i m b er t h ath as n’ tb een
s ev eredfro m

the l an dth e p ro p ert y o f t h e l an do wn er, an d as a g en eral ru l e n o t
ev en a l i fe t en an th as th e ri g h tt o cu tan ds el l i t . See Wh i t e v . W at t s, 8 12 So .2 d 3 2 8 , 3 3 1 (Al a. 2 0 0 1); W i l d er v . Sco t t , 8 9 So .2 d6 8 2 , 6 85 (Al a. 1 9 5 6 ). Th ere are
ex cep t i o n s t o th is g en eral ru le--i f t h e p ro p erty was a t ree farm , Wh i t e, 8 12 So .2 d at3 3 1 ; Ro bi n s o n v . Ro b i n s o n, 2 1 5 So .2 d 5 8 5 , 5 9 0 -9 1 (Al a. 1 9 6 7 ), o r t h e t i m b er
cu t t i n g was an i n ci d en tt o cl eari n g l an dfo r cu l t i v at i o n , W es tm o rel an d v
. Bi rm i n g h am

Tr. & Sav . Ban k , 1 0 8 So . 5 3 6 , 5 38 (Al a. 1 9 2 6 )--b utn o ne o f t hes e
co u ldco n cei v ab l y

ap p l y h ere. Th e cu t t i n g o f t i m

b er an d i t s co n vers i on i n t o l u m b er an do th er wo o d p ro duct s i s n o ta co ns erv at i o n p u rp o s e. See s ec. 1 7 0 (h )(4 )(A); s ec. 1 .1 7 0 A-1 4 (e), In co m e Tax Reg s . Th e d eedfo rb i d s i t . 1 6 Th atm ak es Bu rn i n g Bu s h ’ s d o n at i o n o f th e t i m b er ei th er a n o n d edu ct i bl e g i fto f a p art i al i n teres t i n real es t at e o ther t h an a
co n serv at i on eas em en t , o r a fu tu re i n t eres t i n t an g i b l e p ers o n al p ro p ert y . If i t ’ s th e fi rs t , th e Co d e s ay s i t ’ s n ev er d edu ct i b l e, s ee s ec. 1 70 (f)(3 )(A); i f i t ’ s t h e s eco n d,

1 5 St at e l aw d efi nes p ro p ert y i n t eres t s. See, e.g ., Cas e v . Un i t edSt at es , 6 3 3 F.2 d1 2 4 0 , 1 2 4 6 (6 th Ci r. 1 9 8 0 ); Oak b ro o k , T.C. M em o . at* 3 4
. 1 6 Th atm ak es th es e cas es d i fferen tfro m Bu t l er Lan dHo l d i n g s , LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -7 2 , 2 0 1 2 W L 9 1 3 6 9 5 , at* 4 2 -* 4 3 , b ecau s e t h ere th e d eed ex p l i ci t l y

al l owed th e h arv es t i n g o f t i m b er as p arto f an ap p ro v edp l an .- 2 5 -

[* 2 5 ] s ect i o n 1 7 0(a)(3 ) s ay s th ati t ’ s n o t d edu ct i b l e u n t i l th e t i m b er i s s ev ered fro m th e real p ro pert y . Ei th er way , th e m em b ers o f Bu rn i n g Bu s h d o n ’ tg et d educt i o n s fo r d on at i n g s tan d i n g t i m b er t o COLT fo r th ei r 2 0 0 3 t ax y ear. II. Pen al t i es Th atl eav es p en al t i es . Here ag ai n co n fu si o n rei g n s . Th e Co m m i s s i on er
wan ts p en al t i es fo r b ot h the co ns erv at i o n eas em en t a n d th e t i m b er d o nat i o n . An d
o n e wo u ldth i n k th e o u t co m e fo r each p art n er s h o u l db e t he s am e--aft er al l , atfi rs t g l an ce t h ey

s eem t o b e l in edup i n th e s am e ran kan d o n e m i g h t h av e ex p ect edth e Co m m i s s i o n er t o u n l eas h a l i g h tb arrag e t h at wo u l d eas i ly h i t th em al l . Bu tth e Co m m i s s i o n er m i sfi red , cau s i n g ch ao s an d co n fu s i o n ; an dwe are l eft t o as s es s th e d am ag e. W e wi l l fi rs tb ri efl y

d i s cu s s th e p en al t i es i n v o lv ed , an dth en wh et h er th e p art n ers can s h el ter fro m th em i n th e p ro cedu ral d efen s es thatwe h av e recen t l y
m ad e av ai l ab l e. On l y

th en d o we d eci d e an y

rem ai n i n g p en al ty

i ss u es o n t h ei r
m eri t s . Th ere are t w o g en era o f p en al t i es h ere. On e i s co m m o n l y cal ledth e

“ accu racyrel at ed ” o r “ s ect i o n 6 6 6 2 (a)” p en al ty . Th e Co d e l i s t s s ev eral s p eci es wi th i n th i s g en u s i n s ect i o n 6 6 6 2 (b ), an dth ree are i n v o l vedh ere: s ect io n 6 6 6 2 (b )(1 ), wh i ch p en al i zes u n d ers t at em en t s du e t o n eg l i g en ce o r i n t en t i o n al- 2 6 -

[* 2 6 ] d i s reg ardo f ru les an dreg u l at i o ns ; s ect i o n 6 6 62 (b )(2 ), wh i ch p en al i zes

“ s ub s t an t i al u n d ers t at em en t ” o f t h e t ax due; an ds ect i o n 6 6 62 (b )(3 ), wh i ch p en al i zes “ s ub s tan t i al ” v al u at i o n m i ss t at em en t s . Al l o f t h es e carrya 2 0% p en al t y , an d th e Co m

m i s s i o n er h as to h i twi th o n l y o ne o f t he t h ree t o wi n . Th en there i s a 4 0 % p en al t y . Sect io n 6 6 6 2 (h ) i m

p o s es th i s m eg ap en al ty

fo r “ g ro s s ” m i s s t at em en t s o f
v al u e o n a retu rn . 1 7 Itm ig h ts eem o d dth atu nl i k e, fo r ex am pl e, m an s l au g ht er an d
m u rd er, a “ s ub st an t i al ” m is v al u at io n i s n o ta l es s er-i n cl u d edo ffen s e o f “ g ro s s ”
m i s v al u at i o n . InOro p eza v . Co m m is s i o n er, 1 55 T.C. _

_ (s l i p o p . at 1 8 ) (Oct . 1 3, 2 0 2 0 ), we h el dp reci s el y

thats ect i on 6 6 6 2(i ) “ do es n oti m p o se a d i st i nctp en al t y ; i t
s i m p l y i ncreas es th e rat e i m

p os edfo r t h e p en al ty

d et erm i n edu n d er s ect i o n 6 6 6 2 (a) an d (b )(6 ).” W e al s o h el dthere t h at , wi th o u ts uperv i s o ry ap p ro val o f a

1 7 Co n g res s rev i s eds o m e o f t h e Co d e’ s p en al ty p ro vi s i o n s i n 2 0 06 . See Pen si o n Pro tect i o n Acto f 2 0 06 , Pub . L. No . 1 0 9 -2 8 0, s ec. 1 2 1 9(a)(2 )(A), 1 2 0 St at . at 1 08 3 . Parto f t h i s rev i s i o n was a ch an g e i n th e d efi ni ti o n o f h ow far o ff a rep o rt edv al ue h adt o b e fro m i t s tru e v al u e t o b e p en al i zedas a “ g ro ss ” o r “ s ub s t an t i al ” m i ss t at em en t . Id . W e ap p l y th e o l dd efi n i t i o n s h ere b ecau s e Bu rn i n g Bu s h rep o rt edthi s d o n at i o n o n i t s 2 0 0 3 i n fo rm at io n retu rn , b efo re t h e am en d m en t ’ s effect i ve d at e. Wh en a p as s th ro u g h en t i ty rep ort s a co n t es t edv al u e o n i t s retu rn , we d eci d e wh eth er t hatv al u e was a “ s ub s t an t i al ” o r “ g ro s s ” m i s s t at em en t atth e en ti ty l ev el . Sec. 1 .6 6 6 2 -5 (h )(1 ), In co m e Tax Reg s.; s ee Pl at eau Ho l d i n g s , LLC v . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -9 3, at * 30 -* 3 1
.- 2 7 -

[* 2 7 ] p en al ty

u n d er s ect i o n 6 6 6 2 (b )(6 ), ap p ro v al o f a p en al ty u nd er s ect i o n 6 6 6 2 (i ) was p ro cedu ral ly i n ad equ at e. Id
. at_

_ (s l ip o p . at2 0 -2 1). In an o th er T.C. o p i ni o n , Pal m o l i v e Bl d g . In v ’ rs , LLC v . Co m m i s si o n er, 1 5 2 T.C. 7 5 , 7 9 n .3 , 8 3 -8 4 (2 0 1 9 ), we co n cl u d edth atth e s ub s t an t i al - an dg ro s s m i s v al u at i o n p en al t i es were d i s t i n ctwi th each req u i ri n g s up erv i s ory ap p ro v al . As we p l ai n ly

rei t erat ed i n Cam

p b el l v . Co m

m is s i o n er, T.C. M em o . 2 0 2 0-4 1 , at* 3 2,

“ th e s ect i o n 6 6 6 2 (a) an d(h ) p en al t i es are d i s t i n ct(d es p i te t h e t i t l e o f s ect i o n 6 6 6 2 referri n g t o a (s in gu l ar) p en al ty ), an d th e i n i ti a l d et ermi n a t i o n u n der

ea ch
s u b s ect i o n mu s t

b e s ep a r a t el

y a p p r o ved fo r p u rp o s es o f s ect i o n 6 7 5 1(b )(1 ).” (Em p h as i s ad d ed .) See al s o Ro g ers v . Co m m i s s io n er, T.C. M em o . 2 0 1 9 -6 1 , at* 2 0
. A. Th e Ch ai g h o u l Pro b l em Cl as si fy i n g p en al ti es b y g en u s an ds p eci es i s n o t p u rel y i nt el lect u al s p o rt , b ecau s e i ti s n o ten o u g h fo r t h e Co m m i s s i o ner t o as sertp en al t i es i n a n o t i ce o f d efi ci en cy

o r a p l ead i n g . He m

u s tal s o s ho w th ath e co m p l i ed wi th s ect io n 6 7 5 1 (b ) as we h av e co n s tru edi tfo r t h e l as t few y ears . Th ats ect i o n s t at es th atn o p en al ty i s al l o w edu n l es s the “ i n i t i al d et erm i nat i o n o f s uch as s es sm en ti s p ers o n al l y

ap p ro v ed(i n wri t in g) b y th e i m m ed i at e s up erv is o r o f t h e i n d iv idu al
m ak i n g s u ch d et erm i n at io n .” Sec. 6 7 5 1 (b )(1 ). W e h av e co n s tru edth i s t o m ean- 2 8 -

[* 2 8 ] th atwri t t en ap p ro v al was s ecu red atl eas tb y the t i m e t he Co m

m i s s io n er i s su edth e n o ti ce o f d efi ci en cy o r wh en h e fi l edth e an s wer o r am en dedan s wer i n wh i ch h e as s ert edth e p en al ty . Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0, 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2 ; s ee al s o Graev v . Co m m i s s i o n er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7), s up p lem en t i n g an do v erru l in g i n p art 1 4 7 T.C. 4 6 0 (2 01 6 ). Ap p ro v al o f o ne s p eci es o f p en al ty d o es n ’ tm ean ap p ro val o f an y o th er. In Pal m o li v e, we s tat edth atth o u g h th e t i t l e o f s ect i o n 6 6 6 2 refers t o a s i n g u l ar

“p en al ty , ” t h ats ect io n i n fact creat es s ev eral d i s ti n ctp en al t i es . Pal m o l i v e, 1 5 2 T.C. at8 7 . On e co n s equ en ce i s th atthe Co m m i s s i o n er m

u s ts h ow ap p ro v al o f each p en al ty

s ep arat el y

t o s h o wth ath e h as co m

pl i edwi th s ect i o n 6 7 5 1 (b )(1 ). Id .;
s ee al so M cCart h y

v . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -7 4 , at* 2 8-* 2 9; Cam p b el l , T.C. M em o . at * 3 2 -* 3 3. W e h av e al so s ai dth atth i s ap p ro val d o es n’ th av e t o t ak e an y p art i cu l ar fo rm . See Pal m o li v e, 1 5 2 T.C. at8 6
. Bu t h ere t h e Co m m i s s i o n er rel i edo n h i s ap t l y n am ed“ Ci v i l Pen al ty Ap p ro v al Fo rm .” Two o f t h e s ect i o n 6 6 6 2 (b ) p en al t i es --n eg l i g en ce an ds ub s t an t i al u n d ers t at em en t--h av e t h ei r o wnl i n es o n th i s fo rm . Th e fo rm

al s o h as a l i n e fo r t h e m o re g en eral l y d es cri b ed“ o th er accu racy rel at ed p en al t i es ” u nd er s ect i o n 6 66 2 (b ), wh i ch we wi ll as s um e i ncl u d es th e- 2 9 -

[* 2 9 ] “ s ub s t an t i al ” m i s v al u at i on p en al ty d efi n edi n s ect i o n 6 66 2 (b )(3 ). Th ere i s al s o a s ep arat e l i n e fo r a g ro s s -m i s v al u at i o n p en al ty u n d er s ect i on 6 6 6 2(h ). Th ere’ s n o p ro bl em

wi th an IRS em

p lo y ee’ s t i ck i ng m o re t h an o n e b o x o n th i s fo rm . An d in th e s p eci fi c i n s t an ce o f m is val u at i o n p en al ti es , we h av e h el d th atth ere’ s n o th i n g i m

p ro p er i n th e Co m

m i s s i o ner’ s as sert i n g a 2 0 % s ub st an t i al
m i s v al u at i o n p en al ty

an d i n th e a l t er n a t ive as s ert i n g a 4 0% g ro s s -m is v al u at i o n p en al ty . See Leg g v . Co m m is s i o n er, 1 45 T.C. 3 4 4, 3 4 9-5 1 (2 0 15 ). Wh ath ap p en edh ere? Th e p art i es s t i p u l at edth atth e IRS rev en u e ag en t co m p l et ed o nl y

tw o p en al ty -ap p ro val fo rm s, o n e each fo r t h e M os es es an dthe Pu m ro y s , b efo re h e s en t
o u tn o ti ces o f d efi ci en cy

t o al l th e Bu rn in g Bu sh p art n ers . Th e M o s es es ’ p en al t y ap p ro v al fo rm

m en ti o n s o n l y

a s ub s t an t i al -u n d ers tat em en tp en al ty an dg ro ss m i s v al u at i o n p en al ty . Th e rev en u e ag en twro t e: “ Th e co n tri b ut i o n d edu ct i o n ap p ears o v ers t at edb y

th e v al u at i o n .” Th e Pu m ro y s were t h e m o s tu n lu cky --o n th ei r p en al ty -ap p ro v al fo rm a s up erv i s o r ap p ro v ed b o th a n eg l i g en ce p en al ty an d a
s ub s t an t i al -u nd ers t at em en tp en al ty , as wel l as a g ro ss -m i s v al u at i o n p en al ty . An d th e s am e rev en u e ag en twas a b i t m o re d et ai l edi n th e co m m en t s s ect io n fo r t h e Pu m ro y s , wri t i n g: “ Th e ad

ju s t m en ti s du e t o an o v ers t at edd o n at i o n o f a ch ari t ab le co n tri b u t i on (Eas em en t ) an d th e Sub s t an ti al m i s st at em en tPen al ty i s- 3 0 -

[* 3 0 ] ap pl i cab le. Th e al t ern at iv e p o s it i o n i s thatth e n eg l ig en ce an ds ub st an t i al
u n d ers t at em en tp en al ty

i s ap pl i cab l e.” Th e Co m m is s i o n er th en s en to u tn o t i ces o f d efi ci en cy t o al l th e Bu rn i n g Bu s h p art n ers i n wh i ch th e Co m m is s i o n er as s ert edp en al t i es u n d er s ect i o n 6 6 6 2 (b )(1 ), (b )(2 ), an d(b )(3 ) fo r 7 o f t he 8 p art n ers . It ’ s eas i er t o s ee i n a t ab l e:
Tax p ay er Pen al t i es o n p en al ty

ap p ro v al fo rm Pen al t i es i n n o t ice o f d efi ci en cy Kev in Sel l s No fo rm No ne Ch arl i e W i l l i am s No fo rm 6 6 6 2 (b )(1 ), (2 ), & (3 ) St ev e M o ses Yes fo r 6 6 6 2 (b )(2 ) & (h ) Pen al ty as s ert ed u n d er 6 6 6 2 (b )(1 ), (2 ), & (3 ) o n l y fo r t ax y ears 2 00 5 an d2 0 0 7 Bu t ch W el ch No fo rm 6 6 5 1 (a) 1 8 an d6 6 6 2 (b )(1 ), (2 ), & (3 ) J ay Pu m ro y Yes , fo r s ec. 6 6 6 2 (b )(1 ),

(2 ), & (h ) 6 6 6 2 (b )(1 ), (2 ), & (3 ) J o h n Dav i s No fo rm 6 6 6 2 (b )(1 ), (2 ), & (3 )

1 8 Th e W el ch es co n t es t edth e s ect i on 6 6 5 1 (a) p en al ty fo r y ears 2 0 03 an d 2 0 0 4 i n t h ei r p et i t i o n . Th e Co m m i s s io n er d i dn o tco n ced e t h e i s s u e. Th e W el ch es , h o wev er, fai l edt o p ro v i d e an y ex p l an at i o n fo r wh y

th ey th o u g h tth es e p en al t i es are erro neo u s . Th ey d i dn ’ tt es ti fy

an dd i dn ’ t m en ti o n th es e p en al t i es i n th ei r p os t tri al b ri ef. Th ey therefo re l o s e th i s i ss u e. See Su n ds tran dCo rp . & Sub s . v . Co m m i s s i o n er, 9 6 T.C. 2 2 6, 3 4 7 -4 9 (1 9 9 1); Ho ck ad en& As s o cs ., In c. v . Co m m i s s i o n er, 8 4 T.C. 1 3, 1 6 n .3 (1 9 8 5 ), aff’ d , 8 0 0 F.2 d7 0 (6 th Ci r. 1 9 86 ).- 3 1 -

[* 31 ] Lo ri J am es No fo rm 6 6 6 2 (b )(1 ), (2 ), & (3 ) St ep h en Wh at l ey No fo rm 6 6 6 2 (b )(1 ), (2 ), & (3 ) Al l th e Bu rn i n g Bu s h p art n ers o th er t h an th e M o s es es an dth e Pu m ro y s th u s
em erg e u n scat h edb y

an y o f t h e p en al t ies as s ert ed --fo r ei th er t h e co ns erv at i o n
eas em en to r t h e t i m

b er d o n at i o n --i n th ei r res pect i v e n o ti ces o f d efi ci en cy . Th e M o s es es an dth e Pu m

ro y s , h o wev er, req u i re s o m e ex p l an at i o n . Th e M os es es n eedn o two rry ab o utan y

p en al t i es rel at edt o th e t i m b er d o n at i o n . Th e ap p ro v al fo rm m ak es n o m en t i o n o f t h e t im b er an d i t s tat es th e p ro p os edad

ju s t m en twas du e t o the “ v al u at i o n ” o f t h e co n tri b u t i o n . An dth e t i m b er’ s v al u e was n ev er ch al l en gedb y th e Co m m i s s i o n er. Th erefo re we fi n di t
m o re l i k el y

th an n o tth ere was n o wri tt en s up erv i s o ry ap p ro val fo r a p en al ty rel at ed t o the t im

b er d o n at i o n fo r t he M o s es es . Th e Pu m ro y s ’ s i tu at i o n i s d i fferen t . Th ere was n o s up erv is ory ap p ro v al fo r
an y s ub s tan t ial -m i s v al uat i o n p en al ty --n o s ect io n 6 6 6 2 (b )(3 ) p en al ty fo r t h e d o n at i o n o f ei th er th e co n s erv at i o n eas em en t o r t h e t im ber. Bu tfo r t h e res to f t h e
as s ert ed p en al t i es , th e Pu m ro y s o n ce ag ai n m i g h tfeel s in g l edo u t . Onth e p en al t y ap p ro v al fo rm

fo r t h e Pu m

ro y s , an d u n l i k e t h e o n e fo r t h e M o s es es , th e rev en u e ag en t d i dn ’ t l i m i th is i ni t i al d eci s i o n t o as s ertp en al t i es t o v al u at i o n, b u ti n s t ead t o o ki s s u e wi th th e d edu ct i o n as a wh o l e. Th o ug h h e wro t e t hatth e ad ju s t m en ti s- 3 2 -

[* 3 2 ] fo r t h e “ Eas em en t ”, an d we fo u n dthatth e at t em p t edt i m ber d o nat i on was
n o tth e d o n at io n o f an eas em en t , s ee s upra p p . 2 2 -2 5 , th e Co m m i s s i o n er
co n si s t en t l y

ch aract eri zedth e t i m

b er d o n at i o n as an “ eas em en t ” al l th e way fro m th e n o ti ce o f d efi ci en cy

th ro u g h tri al . Th i s l ead s u s t o fi n d i t m o re l i k el y th an n o t th atth ere was wri t t ens up erv i so ry ap p ro v al fo r b o th n eg l i gen ce an ds ub s tan t i al
u n d ers t at em en tp en al t ies fo r t h e Pu m ro y s ’ d o n at i o ns o f b ot h t h e co ns erv at i o n
eas em en t a n d

th e t i m b er. Fo r al l th e o th er t ax p ay ers an dty p es o f p en al ty

an dp art i cu lar d o n at i o n th ere
was n o s up erv i s ory

ap pro val i n wri t i n g b efo re t he Co m m i ss i o n er fo rm al l y
co m m u n icat edh i s p en al ty

d et erm i n at i o n s t o the p art n ers . See Ch ai , 8 5 1 F.3 d at2 2 1 ; s ee al s o Graev , 1 4 9 T.C. at4 9 3
. As th es e cas es m ad e t h ei r way t o wardtri al , th e Co m

m i ss i o ner’ s l awy er
n o t i cedth ath i s rev en u e ag en th ad wo n ap p ro v al t o as s erts ect i o n 6 6 6 2 (h ) g ro s s m i s v al u at i o n p en al t i es (at l eas tfo r s o m e o f t h e p art ners ), b u tn o o n e atth e IRS h ad actu al l y n o t i fi edan y o f t h e p art n ers i n th e n ot i ces o f d efi ci en cy o f h i s d et erm i n at i o n t o d o s o . Th e Co m m is s i o n er t h en am en d edh is an s wers i n t h es e
cas es t o fo rm al l y

co m m u n i cat e fo r t h e fi rs tt i m e t hath e s o u g h t s ect i o n 6 6 6 2 (h ) g ro s s -m i s v al u at io n p en al t i es ag ai ns teach Bu rn in g Bu s h m em b er ex cep t Sel l s fo r- 3 3 -

[* 3 3 ] th e d o n at i o n o f t h e co n s erv at i o n eas em en t . 1 9 Each am en d edan s wer was
s i gn edb y b o th th e l ead at t o rn ey

i n th es e cas es an dh i s as s o ci at e area co u n s el . See Ro th v . Co m

m is s i o n er, T.C. M em o . 2 0 1 7 -2 4 8, at* 1 0 -* 1 1 (s t at i n g th atan an s wer th atas sert s p en al t i es , s i g n ed b y b o th co u n s el an dthe area co u n s el , s at i s fi es s ect i o n 6 7 5 1 (b )). Si n ce t h e l eadat t o rn ey ’ s i m m ed i at e s up erv i so r g av e h i s wri t t en ap p ro v al , an d th i s was th e fi rs tt i m e t h e Co m m i s s i on er fo rm al ly

co m m u n i cat edt o th e t ax p ay ers th at h e wan t edp en al t i es fro m th em u n d er s ect i o n 6 6 6 2 (h ), i tm i g h t l o o kas th o u g h h e d i ds at i s fy s ect i o n 6 7 5 1(b ) fo r t h e g ro s s -m i s v al u at i o n p en al t i es fo r al l Bu rn i n g Bu sh m em b ers ex cep tSel l s . In Oro p eza, h o wev er, we reas o n edthats up erv i s ory ap p ro v al o f a p en al ty
u n d er s ect i o n 6 6 6 2 (i ) was n eces s ary , b u tn o ts u ffi ci en twi th o u t ap p ro v al o f a p en al ty u n d er s ect i o n 6 6 6 2 (b )(6 )--t hatth e 4 0 % p en al ty was an en ha n cemen t , n o ta p en al ty en t i re u n t o i t sel f. Si m i l ar l o g i c m i gh twel l l eadu s t o h o ldi n t h e fu tu re th ats up erv i s o ry

ap pro val o f a 4 0 % g ro s s -m i s v al u at i on p en al ty u n d er s ect i o n 6 6 6 2 (h ) i s l i k ewi s e i nad equ at e wi th ou t ap p ro v al o f a s ubs t an t i al -m i s v al u at i o n p en al ty u n d er s ect i o n 6 6 6 2 (b )(3 ). Th ere was n o n e h ere. Bu t we’ l l res erv e t h at qu es ti o n fo r a l at er cas e wh ere t h e p art ies arg u e i t .

1 9 Th e am en d ed an s wers as s ertg ro s s -m i s v al u at i on p en al t i es fo r t h e d o n at i o n o f t h e co n s erv at io n eas em en tv al u edat$ 5 .4 m i l li o n --wh i ch ex cl ud es an y g ro s s m i s v al u at i o n m i ss t at em en tp en al t i es fo r t h e t im b er d o n at i o n .- 3 4 -

[* 3 4 ] If Graev were a g o al i e, i th as p u to n a Haš ek -l ev el p erfo rm an ce i n th es e
cas es . Th e res ul t i n g s ho t s o n g o al an ds av es are al l eas i er t o s ee i n t ab u l ar fo rm :

Tax p ay er Pen al ty AtIs su e Kev i n Sel l s Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) Ch arl i e W il l i am s Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) St ev e M o s es Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) 2 0 Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) Bu t ch W el ch Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) J ay Pu m ro y Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) J oh n Dav i s Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h )

2 0 Th i s d o es n o tap p l y

t o th e t i m

b er d o n at i o n . See s up ra p p . 2 2 -2 5.- 3 5 -

[* 35 ] Lo ri J am es Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) St ep h en Wh at l ey Sect i o n 6 6 6 2 (b )(1 ) Sect i o n 6 6 6 2 (b )(2 ) Sect i o n 6 6 6 2 (b )(3 ) Sect i o n 6 6 6 2 (h ) B. Sect io n 6 6 6 2 (b )(1 ) an d(2 ) Pen al t ies Th atl eav es u s t o d eci d e o n l y th e m eri t s o f t h e p en al ty d et erm i n at i o ns th at
m an ag edt o t ri ck l e th ro u g h s ect i o n 6 7 5 1 ’ s p ro cedural p ro t ect i o n . Th e o nl y
accu racy -rel at edp en al ti es th at g o tth ro u g h were: a s ect i o n 6 6 62 (b )(2 ) p en al ty fo r th e co n s erv at i on eas em en td on at i o n d educt edb y th e M o s es es , an db ot h s ect i o n 6 6 6 2 (b )(1 ) an d(2 ) p en al t i es fo r b o th th e co ns erv at i o n eas em en t a n d t im b er d o n at i o n s d edu ct edb y th e Pu m ro y s . 1
. Bu rd en o f Pro du ct io n Th e Co m m is s i o n er h as th e b u rd en o f p ro duct i o n wi th res p ectt o p en al t i es . Sec. 7 4 91 (c). To m eet h i s b u rd en th e Co m m is s i o n er m

u s tp ro du ce ev i d en ce reg ard i n g th e ap p ro p ri at en es s o f i m p o s i ng a p en al ty . Hi g b ee v . Co m m i s s io n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1 ). Fo r p en al t i es rel at edt o th e d o n at i o n o f t h e
co n serv at i on eas em en t , th i s b u rd en i s u n qu es t i o n ab l y m etb y ev i d en ce o f i t s p ro p er v al u e.- 3 6 -

[* 3 6 ] Fo r b o th p en al t i es rel at edt o th e Bu rn i n g Bu s h ’ s t i m b er d o n at i o n , th e Co m m i s s i o n er al s o s at i s fi edth e b u rd en o f p ro du ct io n as t o th e Pu m ro y s . He fi rs t
as s ert s th e Pu m

ro y s were n eg l i g en tan d d i s reg ard edth e ru l es o r reg u lat i o n s wi t h th i s d edu ct i o n . See s ec. 6 6 62 (c). Tak in g a d o n at i o n b as edo n t h e v al u e o f t i m b er p ro duct s --wh i ch wo u l dreq u ire t h e ch o p p i ng d o wno f t h e t i m b er--o n l an dth atju s t h ad a co n s erv at i o n eas em en t p l aced o n i t s eem s o n i t s face “ t o o g o o dt o b e t ru e.” Sec. 1 .6 6 6 2 -3 (b )(1 )(i i ), In co m e Tax Reg s. Th e Co m m i s s io ner m eet s h i s b u rd en o f p ro duct i o n fo r a s ect i o n 6 6 6 2(b )(1 ) p en al ty . As fo r a p o t en t i al s ub s tan t i al
u n d ers t at em en tp en al ty

u n d er s ect i o n 6 66 2 (b )(2 ), th e ques t i o n i s wh et h er t h e m at h
s h o ws th atd i s al l o wan ce o f t he t i m b er d o n at io n wo u l d l ead t o a s ub s t an t i al
u n d ers t at em en tb y

th e Pu m ro y s . W e’ l l l eav e th at fo r t h e co m p u t at i o n s tag e. See M i l eh am

v . Co m m i ss i o n er, T.C. M em o . 2 01 7 -1 6 8 , at* 4 6 -* 4 7
. 2
. Sect io n 6 6 6 4 (c) Wh atthes e p en al t i es h av e i n co m m o n i s th e av ai l ab il i ty

o f a reas o nab l ecau s e-an d -g o o d -fai th d efen se. Sec. 6 6 6 4 (c); s ec. 1 .6 6 6 4-4 (a), In co m e Tax Reg s . Th e d et erm i n at i o n o f wh et h er a t ax p ay er act edwi th reas o nab l e cau s e an di n g o o d fai th is o n e we m ak e o n a cas e-b y -cas e b as i s . Sec. 1 .6 6 6 4-4 (b )(1 ), In co m e Tax Reg s. On e ci rcu m s t an ce t h ati n d i cat es reas o n ab l e cau se an d g oo d fai th i s an h o n es tm i s u n d ers tan d i n g o f fact o r l aw t h ati s reas o n ab l e i n l i g h t o f al l o f th e fact s- 3 7 -

[* 3 7 ] an d ci rcu m st an ces . Id
. Rel i an ce o n cert ai n fact s can co n st i tu t e g o odfai t h i f,

“ u n d er al l th e ci rcu m s t an ces , s u ch rel i an ce was reas o n ab le an d t h e t ax p ay er act ed i n g o o d fai th .” Id
. W e d en i edth e d edu ct i on s fo r t h e d o nat i on o f t h e co n s erv at i o n eas em en t h ere b ecau s e t h e p ro ceed s cl au s e i n th e d eedv i o l at edth e reg ul at io n . Bu t we t h i n k Bu rn i n g Bu s h ’ s p o s i t i o n was reas on ab l e: AnIRS p ri v at e l et ter ru l i n g (PLR)
s u g g es t edth at a cl au s e l i k e t h e o n e i n th e d eedh ere wo u l ds at i s fy th e reg u l at i o n . See Pri v . Ltr. Ru l. 2 00 83 6 0 1 4 (Sep t . 5 , 2 0 0 8) (s t at i n g t h atd ecreas i ng th e d o n ee’ s p ro ceed s b y

th e g ran t o r’ s p erm i s s i b l e i m p ro v em en ts d o es n o tv i o l at e th e reg u l at i o n ). A PLR fro m 2 0 0 8 i s n o t , o f co u rs e, s o m et h in g th atan y o f t h e Bu rn i n g Bu s h p art n ers co ul d h av e s ub ject i v el y rel i edo n i n p rep ari n g th ei r return s fo r m u ch earl ier t ax y ears , b ut we d o fi n dth ati t p ro v i d es an o b ject i v e i n d i cat i o n o f t h e- 3 8 -

[* 3 8 ] reas o n ab l en es s o f t h e p o s i t i o n th ey t o o k
. 2 1 See s ecs . 1 .6 6 6 2-3 (b )(3 ), 1 .6 66 2 -4 (d )(3 )(i i i ), In co m e Tax Reg s . W e fo u n di n Oak b ro o kth atth e u s e o f t h i s
co m m o npl ace l an gu ag e i n th e d eed , th o ug h u l t i m at el y fat al t o the d edu ct io n , was
s u ffi ci en tt o s h o w reas o n ab le cau s e fo r t h ei r erro r. See Oakb ro o k, T.C. M em o . at* 4 3
. An d b o th Pu m

ro y an d M o s es , l i k e al l th e Bu rn i n g Bu s h p artn ers , l o o k edt o Eb b in s , th e ex ecu t iv e d i rect o r o f COLT, t o en s u re t h at th ei r co ns erv at i o n eas em en t
co m p l iedwi th t h e reg u l at io n s . Th e l an g u ag e u s ed i n t h e d eed was wi d es p read th ro u g h ou tth e So u th eas t . See i d . at* 7 n .2 . W e t herefo re fi n d th atth ei r erro r was
reas on ab l e u n d er t h es e ci rcu m s t an ces --n o t ju s tb ecau s e o f t h e PLR, b u tb ecau s e COLT h ad a g o o d d eal o f ex p eri en ce i n th i s co m pl i cat edn o o k o f t ax l aw an dwas
n o ta p ro m o t er o r o th erwi s e t ai n t edi n p ro v i d i n g ad vi ce i n h o wt o g etthe d o n at i o n

2 1 Th e Ei g h th Ci rcu i trecen t l y h el d i n W el l s Farg o & Co
. v . Un i t edSt at es , 9 5 7 F.3 d8 4 0, 8 5 2 (8 th Ci r. 2 0 20 ), thata t ax p ay er m u s ts h o w i tactu al l y

rel i edo n a PLR t o es t ab l i s h i th ada reas o n ab l e b a s is fo r i t s p o s i t i on . W e d o n ’ tn eedt o fi n d th atth e reas o n ab l e b a s is s t an d ard --a rel at i v el y h i g h s t an d ardfo r t ax rep o rt i n g , s ee s ec. 1 .6 6 6 2-3 (b )(3 ), In co m e Tax Reg s . --was m et . W e m u s td eci d e i n s t ead wh et h er Bu rn i n g Bu sh ’ s m em bers h ere h adreas o n ab le ca us e fo r t h ei r erro r. Th i s i s a l ower t h res h o l d fo r a t ax pay er t o p as s o v er. See i d . (“ [T] he reas o nab l e cau s e an d g o o dfai th ex cep ti o n * * * m ay p ro v i d e rel i ef fro m the p en al ty o f n eg li g en ce * * * even i

f a r et u rn p o si t i on d

o es n o t s a tis f y the r ea s o n a b l e b a s is s ta n d a rd .” (Em p h as i s ad d ed .)). A PLR i s o f s o m e h el p t o a t ax p ay er t ry i n g t o s h o w th ath i s p o s i t i on was reas o n ab le, t ho u g h i trem ai n s o nl y o n e fact o r i n t h e al l -fact s -an d
ci rcu m s t an ces t es twe ap p l y . See s ec. 1
. 6 6 6 4 -4 (b ), In co m e Tax Reg s .- 3 9 -

[* 3 9 ] d o n e p ro p erl y . Bas edo n th ei r cred i b l e t es t i m o n y , we al s o fi n dth atb o th M o s es an dPu m

ro y t o o kth i s p o s i ti o n en t i rel y i n g o o dfai th . W e t herefo re fi n dth e M o s es es d o n ot o we p en al ti es u n d er s ect i o n 6 6 6 2 (b )(2 ). W e al s o fi n d t h e Pu m ro y s aren ’ t l i ab l e fo r t h e s ect i o n 6 6 6 2 (b )(1 ) o r (2 ) p en al ty fo r t h e d o n at i o n o f th e co n s erv at i on eas em en t . Bu td o es th i s d efen s e al s o wo rkfo r t h e Pu m ro y s’ t i m b er d o n at i o n? W e th i n kn o t . Wh eth er t h e Pu m ro y s h adreas o n ab l e cau s e an dg o o d fai th i s a d eci s i o n
m ad e o n a cas e-b y -cas e b as i s aft er co ns i d erat io n o f al l p ert i n en t fact s an d ci rcu m s t an ces . See s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . W e m u s tt ak e i n t o
acco u n t th e Pu m

ro y s ’ ex p eri en ce an dedu cat i o n wh end et erm in i ng wh et her t h ere
was reas o n ab l e cau s e o r g o odfai th fo r th ei r p o s i t i o n . See i d. Pu m ro y i s an at t o rn ey wh o se p ract i ce fo cu s es o n real es t at e. He i s a wel l edu cat edp ers o n wh o h as an ab o ve-av erag e kn o wl ed g e o f real es t at e. W e t h erefo re fi n d i tm o re l i k el y th an n otth atcl ai m in g a d edu ct i o n fo r th e t i m b er d on at i o n was u n reas o n ab l e. Pu m ro y s h ou l dh av e b een aware t h ati f Bu rn i n g Bu s h d on at ed a co ns erv at i o n
eas em en tth en i tco u l dn’ ts i m u l t an eo u s l y

d o n at e t im

b er wh o s e v al u e was b as edo n ch o pp i n g trees d o wni n v io l at i o n o f t h e co n s erv at io n d eed . Oni t s face p ai ri n g th es e d edu ct i o n s was u n reas o n ab l e an dt oo g o o d t o b e t ru e. Pu m ro y n ev er t es t i fi edth ath e recei vedad v i ce rel at edt o th i s t i m b er d o n at i o n , an d ev en i f h e h ad ,- 4 0 -

[* 4 0 ] we wo u l ds t i ll fi ndth is p o s i t i o n u nreas o n ab l e. W e t herefo re fi ndth atth e
reas on ab l e-cau s e-an d -g o o d -fai th d efen s e d o es n ’ tp ro tectth e Pu m ro y s fro m p en al t i es fo r t h ei r t i m

b er d on at i o n . Th e Pu m

ro y s ’ t i m b er d o n at i o n d edu ct i o n was
n eg li g en t , an d t h ey

are l i ab l e fo r an accu racy -rel at edp en al ty u nd er s ect i o n 6 6 6 2 (b )(1 ). If t h e m at h wo rk s o u t , th e Pu m ro y s wo u l di n th e al t ern at i v e b e l i ab l e fo r t h e p en al ty

u n d er s ect i o n 6 6 6 2 (b )(2 ). C. Sect io n 6 6 6 2 (h ) 1
. Wh et h er Sect i o n 6 6 6 2(h ) Ap p l i es Sect io n 6 6 6 2 (h ) i n creas es th e p en al ty u n d er s ect i o n 6 6 6 2 (a) t o 4 0 % t o th e
ex t en tan u n d erp aym en t i s at tri b u t ab l e t o a “ g ro ss v al u at i o n m i s s t at em en t .” Bu t h ere we d en i edth e en t i re d edu ct i o n b ecau s e t h e ex ti n g u is h m en t -p ro ceed s cl au s e i n the d eedd i dn o ttrack th e reg u l at i o n . Th i s m ad e u s p o nd er--i f an u n d erp aym en t i s at tri bu t ab l e t o o n e reas o n , can a p en al ty b e ap p l i edfo r a co m

p l et el y s ep arat e
reas on ? As i ttu rn s o u t , th e an s w er i s y es . W e s t artas al way s wi th th e t ex to f t h e Co d e--s ect io n 6 6 62 (h )(1 ) req u i res th atth e u n d erp aym en tb e “ at tri b ut ab l e t o ” a g ro s s v al u at i o n m i s s t at em en t . So o n fi rs tg l an ce i tm i g h tap p ear t hatn o s ect i o n 6 6 6 2 (h ) p en al ty

s h o ul d ap p ly

s i n ce t h e u n d erp aym en twas at tri b u t ab l e t o fai l u re t o d o n at e a co n s erv at i on eas em en ti n p erp etu it y --n o tb ecau s e a p o rt i o n o f t h e- 4 1 -

[* 4 1 ] d edu ct i o n refl ect ed a g ro s s m i s v al u at i o n . 2 2 Th e l aw h as s h i ft edh ere, an dwe
n o w kn o w th atan o v erv al u at i o n p en al ty can ap p ly

ev en i f an u n d erp aym en ti s
cau s ed b y a reas o n d i s t i n ct fro m

o v erv al u at i o n . RERI Ho ld i n g s I, LLC v
. Co m m i s s i o n er, 1 4 9 T.C. 1 , 2 1-2 4 (2 0 1 7 ), aff’ d, 9 2 4 F.3 d 1 2 6 1 (D.C. Ci r. 2 0 1 9 );
s ee al so PBBM -Ro s e Hi l l , 9 0 0 F.3 dat2 1 4 -1 5
. Th es e p en al t i es are i n p lay
. 2
. Th e Pro p er Val u e Al th ou g h we al read y kn o w th e am o u n to f th e d edu ct i o n s th e p artn ers are g o i n g t o g et --zero --we m u s ts t il l fi g u re o utth e act u al v al u e o f t h e d o n at i o n s o th at
we can d eci d e wh et h er t hey g ro s s l y m i s v al u ed i t. 2 3 Un d er s ect i o n 1 70 , an eas em en t ’ s v al u e i s th e FM V o f th e p erp etu al
co n serv at i on res tri ct i o n atth e t i m e o f i t s co n tri bu t io n . Sec. 1
. 1 7 0 A-1 4 (h )(3 )(i ),

2 2 Th i s i s wh atwe h el di n To d d v . Co m m i s s io n er, 8 9 T.C. 9 1 2, 9 1 3 -1 5 , 9 2 0
- 2 1 (1 98 7 ), aff’ d , 8 6 2 F.2 d5 4 0 (5 th Ci r. 1 9 8 8 ), o v erru l ed b y AHG In v es t s ., LLC v
. Co m m i s s i o n er, 1 4 0 T.C. 7 3 , 8 3 (2 0 1 3 ). (Th e Fi ft h Ci rcu i th as al s o o v erru l edi t s o wno p i n i o n i n To d d
. See PBBM -Ro s e Hi l l , Lt d . v . Co m m i s s i on er, 9 0 0 F.3 d1 9 3 , 2 1 4 -1 5 (5 th Ci r. 2 0 18 ).)

2 3 Th e Pen s i on Pro t ect i o n Actel i m i n at ed the reas o nab le-cau s e-an d -g o o d
fai th defen s e fo r g ro s s -m i s v al u at io n p en al t i es fo r y ears aft er Bu rn in g Bu s h d o n at ed i t s eas em en t . See Pen s i o n Pro t ect i on Acto f 2 0 0 6 , s ec. 1 2 1 9 (a)(3 ), 1 2 0 St at . at 1 08 4 . Ev en b efo re i t s el i m i n at io n , th e reas o n ab l e-cau se-an d -g o od -fai th d efen s e fo r m i sv al u at i o n p en al t i es d i fferedfro m the reas o n ab l e-cau s e-an d -g o o d fai th defen s e fo r n eg li g en ce an ds ub s t an ti al -u n d ers t at em en tp en al t i es . See s ec. 6 6 6 4 (c)(2 ).- 4 2 -

[* 4 2 ] In co m e Tax Reg s . ; s ee al s o s ec. 1 .1 7 0 A-1 (c)(1 ), In co m e Tax Reg s .; s ec. 1 .1 70 A-7 (c), In co m e Tax Reg s. FM V i s th e p ri ce atwh ich th e p ro p erty wo u l d ch an ge h an d s “b et ween a wi ll i ng b u y er an da wi l l i n g s el l er.” Sec. 1 .1 7 0 A -1 (c)(2 ), In co m e Tax Reg s . To d et erm i ne t h e FM V, th e reg u l at io n s req u i re u s t o fi rs ttry t o
u s e t h e s al es o f eas em en t s co m p arab l e t o th e d o n at edeas em en t--i f t h ere i s a
s ub s t an t i al reco rdo f s u ch s al es . Sec. 1 .1 7 0 A-1 4 (h )(3 )(i ), In co m e Tax Reg s . Bo t h p art i es ag ree t here i s n o s ub s t an t i al reco rd o f s al es o f co m p arab l e co n s erv at i o n
eas em en t s . If th ere i s n o sub st an t i al reco rdo f co m p arab l e eas em en ts al es , an
eas em en t ’ s FM V i s “ th e d i fferen ce b et ween th e [FM V ] o f t h e p ro p ert y i t
en cu m b ers b efo re t h e g ran t i n g o f t h e res tri ct i o n an d t h e [FM V] o f t h e en cu m b ered p ro p erty ”--al s o kn o wnas th e b efo re-an d -aft er t es t . Id . W e m u s tco ns i d er th e p ro p erty ’ s h i g h es tan db es t u s e b efo re an daft er t he eas em en t ’ s creat i o n . See s ec. 1 .1 70 A-1 4 (h )(3 )(i i ); Hi l b o rn v . Co m m i s s io ner, 8 5 T.C. 6 7 7, 6 8 9 -9 0 (1 9 8 5 ). Th i s m ean s we m

us t : ! fi rs t det erm i n e t h e h i g h es t an db es tu s e o f t h e p ro p ert y ati s s ue b efo re th e d o n at i o n ; ! d et erm i ne t h e FM V o f t h e p ro p erty b as edo n th atu s e; ! d et erm i ne t h e h i g hes tan db es tu s e o f th e p ro p ert y aft er t h e d o n at i o n ; ! d et erm i ne t h e FM V o f t h e p ro p erty b as edo n th atu s e; an d- 4 3 -

[* 4 3 ] ! co m

p are t h e b efo re an daft er v al u es t o d et erm i n e t h e FM V o f th e co n s erv at io n eas em en t . Th e fo l l o w i n g ch arts u m

m ari zes each p art y ’ s p os i t i o n: Part y Bes t u s e

b efo re Bes tu s e

aft er FM V

b efo re FM V aft er FM V o f eas em en t Pet i t i o n ers (o n ret u rn ) 2 14 s i n g lefam i l y h om es Ho l dfo r

s p ecu l at i o n $ 5 ,8 4 5 , 0 0 0 $ 4 5 0 , 0 0 0 $ 5 , 3 9 5 ,0 0 0 Pet i t i o n ers (attri al ) 2 18

res i d en ti al l o t s Ho l dfo r

s p ecu l at i o n 3 ,2 5 0 , 0 0 0 2 3 5 , 0 0 0 3 , 0 1 5 ,0 0 0 Co m m ’ r Ho l dfo r s p ecu l at i o n Ho l dfo r

s p ecu l at i o n 1 ,2 8 0 , 0 0 0 3 5 0 , 0 0 0 9 3 0 ,0 0 0
a. Befo re Bes tUs e Th e cen tral p o in ti n t h i s v al u at i o n d is p u te i s th e p ro pert y ’ s b es tu s e b efo re th e eas em en t . Th e p art n ers arg u e t h atthe b es tu s e was t o d ev el o p the p ro pert y i n t o a 2 1 8 -l o tres i d en t i al s ub d iv i s i o n . Th e Co m m i s s io n er arg u es th atres i d en t i al d ev el o p m en two u l d ’ v e b een a m o n ey l o s er, wh ich m ean s th atth e b es tu s e o f t h e l an dwas t o h o l d i tfo r s p ecu lat i o n . Th e p art i es u s edb o th th e i n co m e ap p ro ach
-- s p eci fi cal l y

the d is co u nt edcas hfl o w (DCF) m et h od --an dth e s al es -co m pari s o n ap p ro ach . W e wi l l fi rs tad dres s th e p art ies ’ DCF an al y s es . A DCF an al y s i s p ro

ject s a p ro p ert y ’ s fu tu re cas hfl o w an dthen d i s co u n t s i t b ack to p res en tv al u e. See, e.g ., Heckv . Co m m i s s i o n er, T.C. M em o . 2 0 0 2 -3 4
.- 4 4 -

[* 4 4 ] Bu rn i n g Bu s h’ s ex pert cal l edfo r t h e d ev el o p m en to f a 2 1 8 -l ots ub d i v i s i o n . Hi s p lan h as s o m e s ev ere p ro b l em s. Sev eral o f th e l o t s --s p eci fi cal ly l o ts 1 , 1 9 3 , 1 9 4 , 2 0 1 , 2 0 3 , 2 0 5 , 2 0 6, 2 0 7 , 2 0 8 --wo u ldb e l o cat edi n a fl o o d p l ai n , an db u i l d i n g
o n th em i two u l d v i o lat e co u n ty

reg u l at i o n s. 2 4 See Cal h o u n Co u n ty Subd i v i s i o n Reg s. s ecs . 5 -2 -1 , 5 -6 (7 ), 5 -7 (J an . 2 0 , 1 9 9 9 ). Oth er l o t s n ear t h e p ro p os edcu l -d es acs n am edAaro n W ay , M i ri am Pas s , an d Lev i Lan e--s p eci fi cal l y l o t s 1 3 A , 1 1 7 , 1 1 8 , 1 1 9 , 1 2 9 , 1 3 0 , 1 5 6, 1 5 7 , 1 6 0 , 1 8 4 , an d1 8 5 --wo ul db e p art l y l o cat edi n a p ro p os edwat er feat u re wi th th e ev en m o re ex cel l en tn am e o f Lak e M eri b ah
. 2 5 Th e p l an wo u l dal so b ui l dt o wnh o m es --o n l o t s 6 0 -8 9 an d 9 3 -1 1 4--l ocat edo n p l o t s th atu n d er co u n ty

an ds t at e reg u l at i on s are t o o s m al l (ro u gh l y 7 ,5 0 0 s qu are feet ) fo r a s ep t i c s y s t em . Cal h o u n Co u n ty Sub d i v i si o n Reg s . s ec. 5 -6 (2 ) (J an . 2 0,

2 4 Th e p art i es ag reedth atCal h o u n Co u n ty ’ s reg u l at i o n s ap p l i edatth e t i m e o f d o nat i o n . Th ey

d i d arg u e ab o u twh et h er t h e ci ty o f Ox fo rdco u ldan n ex th e p ro p erty i f i twere d ev el op edas a s ub d i v is io n , an d t h u s s eem edt o d i s ag ree wh et h er co u nt y

o r ci ty reg u l at i o n s wo u l dap p l y

t o the p ro pert y . W e h eard cred i b l e t es t i m o ny th ata d ev el op er wo u l dl i k el y try t o g etth e p ro p erty

an n ex ed , b u tn o wi tn es s s ai dth atan n ex at i o n i s au t o m at i c. Al l th ree ex p ert s as s u m edth atCal h o u n Co u n ty reg u l at i on s wo u l dap p l y , an d o n b al an ce we fi n di tm o re l i k el y th an n o t th atth is p ro p ert y

s h o u l dn o t b e v al u edas i f i twere al read y wi thi n Ox fo rd
. 2 5 Al l o f wh i ch are far rem o v edfro m J et h ro Pas s , wh i ch retu rn s t o the co u nt ry s u rro u n d i n g th e h y

p ot het i cal s ub d i v i s io n i n i t s o wn way . See Ex o du s 1 8 : 2 7 . Th o u g h s o m e o f t h es e p l o t s are o nl y p art l y u nd erwat er, co un ty

reg u l at i o n s d o n ’ tal l ow l o ts t o b e m o re t h an 2 5 % u n d er wat er, Cal h o un Co u n ty Sub d i v i s i o n Reg s. s ec. 5 -6 (8 ) (J an . 2 0 , 1 9 9 9 ), a l i m i t at i o n th at , b y l o o k i ng atBu rn i ng Bu s h ’ s ex p ert ’ s rep o rt , wo ul daffect atl eas ts o m e o f t h em .- 4 5 -

[* 4 5 ] 1 9 9 9 ); Al a. Ad m i n . Co d e r. 4 2 0 -3 -1 -.1 4 (1 ) (J an . 2 1 , 2 00 0 ) (req u i ri n g
m i n i m u m l o ts i ze fo r o n e s ep t i c s y st em b e 1 5 ,0 0 0 s qu are feet ). Th is i s i m po rt an t b ecau s e th e i m ag in eds ub di v i s io n i s s o rem o t e t h ati t wo u l dreq u i re s ep t i c s y s t em s . W e al s o fi n d t h atBu rn i ng Bu s h ’ s ex p ertu s ed co n s tru ct i o n co s ts i n h i s
an al y s i s t h at h e fai ledt o s ubs t an t i at e an dare m u ch t o o l o w . He p ro

ject edt o t al
co n st ru ct i o n co s t s o f $ 3 ,0 5 1,0 0 0 o r $ 1 8 0 p er l in ear fo o t . He b as edthi s o n th e
co s t s o f an u n rel at eds ub d i v i s i on i n No rt h Geo rg i a an dh i s g en eral ex p ert i s e. Hi s p o s i t i on s u ffered o n cro ss -ex am i n at io n wh en h e was u n ab l e t o g i v e a d o l l ar-b y d o l l ar b reak do wn o r ev en a g en eral b u d g et . Th i s l acko f an y s orto f co n cret e d et ai l l ead s u s t o fi ndth is p art o f h i s o p i n io n u nrel i ab le. Th e Co m m is s i o n er’ s ex p ertan al y s is was n o tm u ch b et t er o n th i s p oi n t . Th o ug h th atex p ert ’ s p l an i t s el f i s m o re s o u n d --1 6 6 b u i l dab l e l o t s i n th ree p h as es -- we fi n dth ath i s co s t s were g ro s s l y o ver s t at ed
. Th e p ro b l em was h i s s o urce--t h e Al ab am a Dep art m en t o f Tran s p o rt at i o n (DOT). As we l earn ed fro m cred i b l e t es t i m o ny attri al , co m

p ari n g DOT co s t s t o co s t s o f b u i ld i n g a s ub d iv i s i o n i s n o tat al l reas o nab le. DOT requ i res m at eri al s wh o s e co s t s are m u ch h i g h er t han th o s e
u s ed in res id en t ial co n s tru ct i on , an dDOT h as b u i ld i n g s p eci fi cat i o n s th ata n o rm al
s ub d iv i s i o n wo u l d n o t req u i re. W e fi n d th atth e res u lti s a g ro s s o v eres t i m at e o f th e co s tas so ci at edwi th a p ot en t i al s ub di v i s i o n o n Bu rn i ng Bu s h ’ s l an d
.- 4 6 -

[* 4 6 ] Th atex p ertal so h ads o m e m at h p ro bl em s . He reco g n i zedo ne m ath erro r i n h i s rep o rtth e d ay

b efo re t ri al thatch an g ed h i s v al u at io n b y m o re t h an $ 1 .3
m i l l io n . Th en , aft er s ki ll fu l cro s s -ex am i n at i o n g o t h i m t o as s ert th ath e was

“ co n fi den t ” aft er fi n d i n g t h atm i s t ak e, i ttu rn ed o u tth ath e h adu n d ers t at ed
rev en u e b y

$ 7 00 ,0 0 0 b ecau s e o f an o th er b as i c m at h erro r. An dthatwas n ’ tth e
o n l y o n e. Su ch erro rs h arm

cred i b i l i ty . See Bo l t ar, LLC v . Co m m i s s io n er, 1 3 6 T.C. 3 2 6 , 3 3 8 -3 9 (2 0 1 1 ); Es tat e o f Bel l v . Co m m i s s i o n er, T.C. M em o . 1 9 8 7 -5 7 6 , 5 4 T.C.M . (CCH) 1 1 2 3 , 1 1 2 5-2 6 (1 9 8 7 ) (fi n di n g an ex p ertrep o rtri d d l ed wi th
m at h erro rs was n o t cred i b l e). W e d i s reg ardb o th ex p ert s ’ DCF an al y s es . Th atl eav es u s wi th a s al es -co m p ari s on ap p ro ach , wh i ch we fav o r an yway wh en we d eci d e v al u at i o n cas es , s ee Pi t t s b u rg h Term i n al Co rp . v . Co m m i ss i o n er, 6 0 T.C. 8 0 , 8 9 -9 0 (1 9 7 3 ), aff’ d , 5 0 0 F.2 d 1 4 0 0 (3 d Ci r. 1 9 7 4 ), es p eci al l y wh en th e al t ern at i v e i s a DCF an al y s i s o f an as s etwi th n o h i s t o ry o f earn i ng s , s ee Du n can In du s., In c. v . Co m

m i s s io n er, 7 3 T.C. 2 6 6 , 2 8 0 n .1 3 (1 9 79 ). A s al es -co m pari s o n
an al y s i s g en eral ly

wo rk s b y i d en t i fy i n g co m

parab l e m ark et tran s act i o ns an d ad ju s t i n g t h ei r v al u e fo r d ifferen ces o f m ark etco n d it i o n s , s i ze, l o cat i o n , p h y s i cal feat ures , an do th er fact o rs . W o rt m an n v . Co m m i s s io n er, T.C. M em o . 2 0 0 5 -2 2 7 , 9 0 T.C.M . (CCH) 3 3 6 , 3 4 0 -4 1 (2 0 05 ). Bo th ex p ert s h ere an al y zedco m p arab l e- 4 7 -

[* 4 7 ] s al es t o fi g u re o utth e “ b efo re v al u e” o f t h e p ro p ert y . Th ey were far ap art -- Bu rn i n g Bu s h ’ s ex p ertcal cu l at eda v al u e o f $ 3 ,0 7 5 ,0 0 0 ; the Co m m i s s i on er’ s cal cu l at edo ne o f $ 1 ,2 8 0 ,0 0 0 . Th ei r d i fferen ce d eri v es fro m l o o k i ng atv ery d i fferen t ty

p es o f l an d --t h e Co m

m is s i o n er’ s ex p ertu s edtran s act i on s fo r l an dh el d fo r s p ecu l at i v e i nv es t m en t , wh i l e Bu rn i n g Bu s h ’ s ex p ertu s edtran s act io n s fo r l an d b o u g h tfo r d ev el o p m en t . W e fi n dth e k ey

d i fferen ce b etween th e ch o i ce o f co m p arab l es t o b e t h e
ex p ert s ’ d i fferi n g v i ews o f wh atthe h i g h es tan db es t u se o f t he p ro p ert y was b efo re Bu rn i n g Bu s h en cu m b eredi twi th an eas em en t. W e fi n dthata d en s e
res i den t ial d ev el o p m en t o f t he s o rtb o th ex p ert s u s edi n thei r DCF an al y s es was
n o tfi n an ci al l y

feas i b l e. Bu t th e al t ern at i v e t o th i s i s n o tn eces s ari l y t o h o l d t h e l an dfo r s p ecu l at i o n . Th e Co m m i s s i o n er’ s ex pert n o t ed i n h i s rep ortth atthe real
es t at e m ark eti n t h e area was g o o datth e en do f 2 0 0 3 , an dh e co n cl u d ed“ th atth e h i g h es tan db es tu s e an al y s i s m u s tco n s id er fu tu re s i n g l e-fam i l y res i d en t i al d ev el o p m en to f t h e p ro p ert y . ” He reas o n ab ly co n cl u d edth ati f a d en s e res i d en t i al d ev el o p m en td i dn ’ tm ak e s en s e eco n o m ical l y , “ th ere ap p ears t o h av e b een a n i ch e
m ark etfo r upp er en dh o m es wi th v i ews b u t wi th ou t a g o l f co u rs e.” Bu rn i n g Bu s h ’ s ex p ertm ad e a s i m i lar o b s erv at i o n i n h i s rep o rt . An dh e rep o rt edth ata n ew ro adthatwas i m m i n en t l y t o b e b u i l t as o f l at e 2 0 03 wo u l d- 4 8 -

[* 4 8 ] i n creas e acces s s o u th o f I-2 0 n ear t he p ro p ert y . W e fi ndth at Bu rn i n g Bu s h ’ s ex p ertwas m ore reas on ab l e i n co n cl u d i n g th atres id en t i al d ev el o p m en t
was th e h i g h es tan d b es t“b efo re” u s e, ev en i f o n l y l es s d en s e res i den t i al d ev el o p m en t . Th at l ead s u s t o co n cl ud e t h ath i s ch o i ce o f “ b efo re” co m p arab l es -- s al es o f raw l an ds u i tab l e fo r res i d en t ial d ev el o p m en t --i s m o re reas on ab le t h an the Co m m i s s i o n er’ s ex p ert ’ s ch o i ce o f l an dh el d o n l y fo r s p ecu l at i o n . Bu rn i n g Bu s h ’ s ex p erts el ect edfi v e d i fferen tp l o t s o f l an dth at , i n h is v i ew,
are co m parab l e t o Bu rn i n g Bu s h ’ s p ro p ert y :

Sal e Pri ce p er acre 1 $ 2 5 ,2 2 6 2 12 ,1 7 7 3 11 ,0 0 0 4 11 ,0 8 6 5 10 ,5 0 0 He t h enad

ju s t edth es e v al u es fo r t hei r s up eri o r an di nferi o r ch aract eri s t i cs , co m p aredt o Bu rn i n g Bu s h ’ s p ro p ert y . As ad ju s t ed :- 4 9 -

[* 4 9 ] Sal e Pri ce p er acre

1 $ 2 0 ,0 0 0 2 12 ,7 0 0 3 13 ,4 0 0 4 12 ,6 0 0 5 11 ,5 0 0 Bas edo n thes e v al u es , h e co ncl u d edth atBu rn i n g Bu sh ’ s p ro pert y was wo rt h $ 1 3 ,0 0 0 / acre. As Bu rn i n g Bu sh ’ s p ro p erty was 2 3 6 .5 1 acres , h e d et erm in edth e
ro u n dedv al ue was $ 3,0 7 5 ,0 0 0
. W e ag ree t h ats o m e ad

j u s t m en t s are n eed edt o ad dres s b o th the s up eri o r an d i n feri o r ch aract eri s t i cs o f t h es e p ro p ert i es . W e fi n d , h o wev er, th atBu rn in g Bu s h ’ s ad ju s t m en t s are ex ces s i v e. W e ag ree t hatth e t o p o g rap h y o f t h es e co m

p arab l es i s i n feri o r t o Bu rn i n g Bu s h ’ s p ro p ert y --m o s t o f t h em are fl at t er an dl ackth e v i ews th atBu rn i n g Bu sh ’ s p ro pert y h as . Bu t th e co m

parab l e p ro p ert i es are al s o s up eri o r t o the Bu rn i n g Bu s h p ro p erty i n s o m e way s . Sal e 2 was b y th e g o v ern m en t , p o t en t i al ly i nfl at i ng th e p ri ce, an dal s o h adg o o d acces s an dex p o s u re. Sal e 3 h ad fo res eeab l y

g reat acces s b eg in n i n g i n 2 00 4 an di s s m al l er i n s i ze. Sal e 4 h ad
s up eri o r ex p o s ure. Sal e 5 was p u rch as edb y a l o cal i ty , p o s si bl y

i nfl at i ng th e p ri ce,
an d h adg o o dacces s an dex p o s u re.- 5 0 -

[* 5 0 ] W e al s o fi n d t h attwo o f t h e co m parab l es n eeda b i tm o re ad ju s t m en t . Th e p ri ce p er acre fo r Sal es 2 an d3 ex cl u d es a fl o o d p lai n fro m th e t o t al acreag e. Th i s dri v es up th e p ri ce p er acre. 2 6 Th i s wo u l d b e o kay , ex cep t th atBu rn i ng Bu s h ap p li edth e av erag e p ri ce p er acre t o t h e en t i re Bu rn i n g Bu sh p ro p ert y --i n cl u d i n g th e p arto f t h atp ro p ert y

thatwas i n a fl o o dp l ai n. W e wi l l ad ju stSal es 2 an d3 b ack to th ei r t o t al acreag e, wh i ch l o wers th e av erag e p ri ce p er acre fo r t ho s e p ro p ert i es : Sal e Pri ce p er acre To t al Ad ju s t m en t 1 $2 5 ,0 0 0 -0
- 2 1 1 ,2 6 6 ($ 7 3 4 ) 3 9 ,0 9 5 (1 ,9 0 5 ) 4 1 1 ,0 0 0 -0
- 5 1 0 ,5 0 0 -0
- Sal e 1 ap p ears t o b e an o u t l ier, b u ti t s d es cri p t i o n ex p lai n s wh y --t he t ract
was v as t ly

s up eri o r i n qu al it y . Ith as g o o dacces s an dex p o s u re, l o cat edo n l y th ree
m i l es fro m

I-2 0 . Iti s s m al l er, i s a h ig h er d en s i ty d ev el o p m en t , an d h as
co m m erci al fro n t ag e. Al l o f t h es e s up eri o r qu al i t i es as wel l as th e s ub s t an t i al l y

2 6 Fo r ex am

p l e, i f 1 0 0 acres s o l dfo r $ 1 0 0, the av erag e p ri ce p er acre i s $ 1. Bu t i f 3 0 acres were i n a fl o o d p l ai n , th e p ri ce p er acre o f u s ab le l an dwo u l db e $ 1 .4 2
.- 5 1 -

[* 5 1 ] h i g h er p ri ce p er acre t h an th e o th er co m p arab l e l an ds al es , i n d i cat e t h atth e Sal e 1 p ro p ert y

i s n ’ tco m

p arab l e t o th e Bu rn i n g Bu s h p ro p ert y --we wi l l d i s reg ard i t . Aft er we d i s m is s Sal e 1 , th e av erag e p ri ce p er acre co m es o u t t o b e $ 1 0 ,4 6 5
. Fo r t h e reas o n s we’ v e s tat ed , we d o fi n dth at th ere s h o u l db e a s li g h tup ward ad ju s t m en tfo r Bu rn i n g Bu s h ’ s s up eri o r ch aract eri s t i cs , an dfi n d t h ata reas o n ab l e p ri ce p er acre i s $ 1 1 , 0 0 0
. Th i s m ak es Bu rn i ng Bu s h ’ s p ro p ert y ’ s b efo re v al u e $ 2 ,6 01 ,6 1 0
. 2 7

b
. “ Aft er” Bes t Us e Th e p art i es ag ree t h atth e b es tu s e fo r t h e Bu rn i ng Bu s h p ro p ert y aft er t h e d o n at i o n i s s p ecu l at i on o r recreat i o n . Bu rn i ng Bu s h ’ s ex p ertv al u edth e l an di n th i s u s e at$ 23 5 ,0 0 0 . Th e Co m m i s s i o n er’ s ex p ertv al u edth e l an d at$ 3 5 0 , 0 0 0 . Al l
o f t h e Co m

m is s i o n er’ s co m

p arab l e p ro p ert i es were i n Al ab am a, an dm o s t o f t h em
were m ou n t ai no us . Bu rn i n g Bu s h ’ s ex p erto n t h e o th er h an d u s edp ro p ert i es l o cat edal l o v er t h e So ut h eas t , wi th o n l y o n e o f h is co m

p arab l es i n Al ab am a. On e
o f h i s co m

p arab l es was s o l d t wo y ears aft er th e y ear o f t h e eas em en t; o n e was s o l d b ack in 1 9 98 ; an o th er o n e was m o re t h an 4 t i m es th e s i ze o f t h e Bu rn i n g Bu s h p ro p erty wh i l e y etan o ther was m o re t h an 1 3 t i m es l arg er. W e fi n d t h e Co m m i s s i o n er’ s ex p ertb ot h rel i ab l e an dm ore reas o n ab l e.

2 7 $ 1 1 ,0 00 x 2 3 6 .5 1 = $ 2 ,6 0 1 ,6 1 0
.- 5 2 -

[* 5 2 ] c. Co n s erv at i o n Eas em en tVal u e an dPen al ty Th e fo l l o w i n g t ab l e s u m

m ari zes o u r b efo re an daft er v al u es : Befo re b es tu se v al u e $ 2 ,6 00 ,0 0 0 Aft er b es tu s e v al u e 3 50 ,0 0 0 W i th th es e v al ues n o w d et erm in ed , we can cal cu l at e t h atth e co n s erv at i o n
eas em en td o n at edh adan FM V o f $ 2 ,2 5 0 , 0 0 0
. 2 8 Bu t$ 5 ,3 9 5 ,0 0 0 i s n ’ t4 0 0% o f $ 2 ,2 5 0 ,0 0 0 , s o n o g ro s s -m i sv al u at io n p en al t y ap p li es . Th e p art n ers d i drep o rta v al u e fo r th e eas em en tth ati s m o re t h an 2 0 0 %
o f t h e co rrect v al u e, b ut a p en al ty i s b arred b y

s ect io n 6 7 5 1 (b ). See s up ra p p . 2 7 -3 5
. Wh atthi s al l m ean s i s th atBu rn in g Bu s h ’ s p art n ers wo n ’ t g etth ei r d educt i o n s , b u tp ro cedu ral m i s t ak es , a reas o nab l e-cau s e d efen s e, an dan i n i t i al d educt i o n th at was n’ tt o o h i g h m ean th at --atl eas t fo r th e al l b u t a t i n y s l i v er o f a p en al ty ag ai n s tth e Pu m

ro y s--“ [t ] h e d ep ths h av e co v eredth em ; th ey s an ki n t o th e b o t t o m as a s to n e.” Ex o du s 1 5 : 5
. Deci s i o n s wi l l b e en t eredu n der Ru l e 1 5 5
.

2 8 $ 2 ,6 0 0,0 0 0

! $ 3 5 0 ,0 0 0 = $ 2 ,2 50 ,0 0 0
.