T.C. Mem o. 2 01 5- 63

UNITED STAT ES TAX COURT

SWF REAL ESTATE L LC, YELLO W FISH INVESTMENTS, INC. TAX

MATTERS PARTNER, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 11 19 0- 11
. Fi le d Ap ril 2, 2 01 5.

W il li am L.S. Rowe a ndTim ot hy L. Jac ob s, fo r pe ti ti on er. Asi f L. Rag in walaan d P au l T. Bu tl er, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
W ELLS, Ju dg e: Res po nd en t i ss ue d ano ti ce o f fi na l p artne rs hi p adm in is tra ti ve ad

jus tm en t (F PAA) da te d F eb ru ary 16 , 20 11 , to Yell owf is h In ve st m en ts , Inc . (pe ti ti on er), as tax m at te rs pa rtn er o f SWF Real Est at e, LLC (SWF), with res pe ctto SW F’s 20 05 tax y ear. Th e FPAA p ro po se d a n i nc reas e in-2
-

[* 2] or di na ry

in co m e an d aco rres po nd in g d ecre as e in cap it al co nt rib ut io ns of $1 ,67 7,4 13 , as wel l as a de crea se inno nc as h c ha rit ab le co nt rib ut io ns of $4 ,92 1,2 33 . On May

13 , 20 11 , pet it io ne r fi le d ati m el y pe ti ti on pu rs uantto
se ct io n 6 22 6 forread

jus tm en t o f res po nd en t’s d et erm in at io ns inth e FPAA. 1 Afte r co nc es si on s, the is su es th atwe m us t d eci de are (1 ) whe th er SWF
en ga ge d i n adi sg ui se d s al e und er s ect io n 7 07 ; (2) if we d eci de th atth ere was a 2 di sg ui se d s al e, whe th er the pro ceed s fr om th e d is gu is edsal e were i nc om e to SW F du rin g i ts 20 05 tax y ear; an d (3 ) whe th er SWF ov ers ta te d t he va lu e o f a
co ns erv at io n e as em en t o n S he rwo odFarm an d, the refo re, the am ou ntof the ch ari tabl e co nt rib ut io n d educ ti on all owe d p ur su an t t o s ect io n 1 70
. 3 FINDINGS OF FACT So m e o f th e fac ts an d c ert ai n e xh ib it s h av e b eenst ip ul at ed . The p art ie s’ st ip ul at edfact s ar e in co rp or at edinth is op in io n b y refe ren ce an d a re fo un d

Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de of 1 98 6, as am en de d (C od e) an d i n e ffec t fo r th e rel ev an t t im e, an d R ul e refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. W e ro un d a ll m on et ary am ou nt s t o t he ne ares t d ol la r. See i nf ra n ot es 3 an d 3 7. 2 The rem ai ni ng requi rem en ts setforth insec . 17 0 andth e reg ul at io ns 3 th ereu nd er fo r cl ai m in g ach ari tabl e co nt rib ut io n d educ ti onare n otindi sp ut e.-3
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[* 3] acco rd in gl y . Add it io na ll y , we tak e jud ic ia l n ot ic e o f Ro ut e 2 31 , LLC v. Co m m is si on er, T.C. Mem o. 2 01 4- 30 ap pe al fil ed(4t h C ir. Se pt . 16 , 20 14 ), fo r so m e fac ts rel at in g t o t he ge ne ral ba ck gr ou ndof t he Sta te tax cred it s re le va ntto th e in st an t ca se . 4 At the ti m e o f fi li ng th e p et it io n, SWF’s andpe ti ti on er’s p rin ci pa l p la ce o f bu si ne ss was i n Vi rg in ia
. I. Fo rm at io n a ndOper at io n o f SWF SWF is a Vi rg in iali m it edli ab il it y co m pa ny tha t was form edon May 4, 20 01 . Peti ti on er, wh o i s the tax m at te rs pa rtn er o f SWF, was in co rp or at edin20 00
as a Dela ware co rp or at io n a ndele ct edto be tax edas asubc hapt er S co rp or at io n effe ct iv e Sep te m

be r 30 , 20 00 . At al l t im es rel ev an t t o t hi s ca se , Jo hn L. Lewis IV
own ed10 0% o f th e sh ares of p et it io ne r. On M ay 21 , 20 01 , pet it io ne r pu rch as eda 67 4.6 5- acre co nt ig uo us tra ctof la ndinAlb em arl e Co un ty, Virg in ia , kn own as “ Sh erwo odFarm ” fo r $3 ,45 0,0 00
.
A cou rt m ay

tak e jud ic ia l n ot ic e o f ap pr op ria te ad jud ic at iv e fac ts at a ny 4 st ag e in a pr oc eed in g wh ethe r orno t the th e p art ie s re qu es t i t. See Fed . R. Evi d. 20 1( a), (c) ; s ee al so Uni te d S ta te s v . Harri s, 3 31 F.2d60 0, 6 01 (6th C ir. 1 96 4) (ex pl ai ni ng th ata co urt m ay tak e jud ic ia l n ot ic e su a sp on te ). In g en eral , a co urt m ay tak e n ot ic e o f fac ts th atare capabl e o f acc ur at e an d re ady de te rm in at io n b y res ort t o s ou rces who se accu racy cann otreas on ab ly be que st io ne d. Fe d. R. Ev id
. 20 1( b)
.-4
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[* 4] Duri ng 20 01 , pet it io ne r co nt rib ut edSh erwo odFarm to SW F inex ch an ge for 10 0% o f th e m em

be rs hi p i nt eres ts inSW F. Fro m th e ti m e o f th atco nt rib ut io n du rin g 2 00 1 u nt il Decem be r 20 05 , pet it io ne r own ed10 0% o f th e m em be rs hi p in te res ts inSW F an d d is reg ard edSW F as anen ti ty sep arat e fro m pe ti ti on er fo r Fed eral tax pu rp os es . Dur in g 2 00 5 a nd20 06 , SW F was st art in g i ts farm in g b us in es s an d c at tl e br eed in g o pe rat io n. SWF fil eda Sch edul e F, Pro fitor Lo ss Fro m Farm in g, fo r 20 06 , rep orti ng $4 3,2 88 ingro ss in co m e an d $ 40 8,2 68 inex pe ns es fro m it s farm in g a ct iv it y . SWF owns all of t he pro pe rty at Sh erwo odFarm , in cl ud in g M r. Lewis ’
res id en ce, the bu si ne ss es , th e tr act or s, an d t he farm equi pm en t. SWF repo rte d $6 ,88 9,4 00 inass et s o n i ts 20 05 tax return a nd$7 ,43 4,9 35 inass et s o n i ts 20 06 tax return. A. Sh erwo odFarm Sh erwo odFarm

is inAlb em arl e Co un ty, Virg in ia , alo ng th e n orth si de of Secr et arys Roa d (S R 7 08 ) an d t he westsi de of B le nh ei m Ro ad(SR 7 27 ), anarea 5 The m ai n a cces s t o S he rwo odFarm is onSecr et arys Roa d wi th sec on da ry 5 acce ss fro m

Ble nh ei m

Ro ad , bo th of wh ic h a re p av ed , andth ro ug h t wo- lane se co nd ary acce ss roa ds th ro ug h t he area . Both R ou te 62 7 andSR 7 95 , whi ch co nn ectto ot he r m ajorhi gh way s an d t o m ajorem pl oym en t, s erv ic es , andsh op pi ng

(co nt in ue d...)-5
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[* 5] 10 m il es so ut h o f Ch arl ot te sv il le an d In te rs tate 64 . She rwo odFarm is inth e
so ut he as t qua dr an t o f Alb em arl e Co un ty an d i n t he Ch arl ot te sv il le m etro po li ta n 6 st at is ti cal area , whi chdurin g 2 00 5 was a de si rab le pl ace f orres id en ti al an d
co m m erci al pu rp os es . Sh erwo odFarm

ha d v ari ab le to po gr ap hy, rang in g fr om op ento ge nt ly
ro ll in g wo od edlan d wi th ne gl ig ib le cri ti cal sl op es . A sm al l p orti on of S he rwo od Farm li es withi n a10 0- y ear f

lo odzo ne alo ng th e b an ks of M ur ph y ’s Creek , bu t
ex pe rts co ns id ereditto be ge ne ral ly excel le ntterrai n fo r de ve lo pm en t p ur po se s. Sh erwo odFarm

is inth e fo ot hi ll s o f th e Bl ue Rid ge Mo un ta in s an d o ffer s v ie ws of for es ts , pas tu res , andm ou nt ai ns fro m va rio us po in ts onit s p ro pe rty; so m e o f th e woo de d l an d h as li tt le vi ew am en it y , bu t ab ou t two- th ird s o f th e p ro pe rty is op enwith d is ta ntm ou nt ai n v ie ws, ro ll in g m ead ow v ie ws, an d p on d v ie ws.

(...co nt inue d) 5 fo un d i n C harlo tt es vi ll e, are e as il y acce ss ib le fro m

Sh erwo odFarm . She rwo od Farm als o h as ad equa te roa d fr on ta ge for de ve lo pm en t p ur

po se s, wi thov er 3 ,20 0 feetof f ro nt ag e o n S ecre ta ry s R oa d a ndov er 1 ,20 0 fe eton Ble nh ei m Ro ad
. Alb em arl e Co un ty is d iv id edin to fou r qu adran ts , i.e., n orth wes t, n orth eas t, 6 so ut he as t, an d s ou th wes t, b y Int ers ta te 64 , whi chis th e h or iz on ta l ax is th atrun s wes t t o e as t, an d U.S. 2 9, wh ic h i s the ve rti cal ax is th atrun s n orth to so ut h.-6
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[* 6] Sh erwo odFarm

ha d c on ta in edth e fo ll owi ng bu il di ng im pr ov em en ts : an
ex is ti ng pri m ary dwe ll in g b ui ltin19 50 an d re no va te d i n 1 97 9, a n um be r of ba rn s, sh ed s, anice ho us e, anol d s ch oo l, an d two o ldten an t h ou se s. Sh erwo odFarm

si ts inth e m id dl e o f a l arg e b lo ckof p ro te ct edlan ds ; itis 7
su rro un de d b y

lo w-d en si ty use s an d abu ts pro pe rty pro te ct edby a con se rv at io n eas em en t h el d b y

th e Vir gi ni a Out do or s Fo un da ti on . She rwo odFarm is lo cat ed
am on g o th er l arg er farm

an d e st at e p arce ls an d s m al le r res id en ti al tra ct s i n alo wde ns ity areakn own as “ Cart ers Bri dg e”. Oth er es ta te s i n t he Cart ers Bri dg e are a 8 in cl ud e th e Klu ge Est at e win ery an d v in ey ard s, Al be m arl e Hou se , Ble nh ei m , Ced ar Gro ve , Red la nd s, Lo wer Sh erwo od , Mil l Co tt ag e, Mo rv en , Murci el ag o Farm s, an d F eathe rid ge . Inad di ti on to in di rect ly owni ng Sh erwo odFarm , Mr. Lewis own eda 65 .9-a cre p ro pe rty nearSh erwo odFarm
.

Nut m eg Farm , Pla in Deal in g F arm , andLana rkFarm are l arg e farm s i n t he 7 imm ed ia te vi ci ni ty of Sh erwo odFarm th atare p ro te ct edby con se rv at io n eas em en ts . The so ut hwe stqu adran t o f Alb em arl e Co un ty is l ow d en si ty and 8 ag ric ul tu ral with anu m

be r of ve ry lar ge est at es ; i t i s m or e co m pa rab le to Cart ers Bri dg e th anth e n orth eas t qua dr an t. Kes wick , whi chis inth e n orth eas t qua dr an t, is lo w den si ty anda pr em ie r are a o f Alb em arl e Co un ty w it h l arg e es ta te s.-7
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[* 7] B. Dev el op m en t Po te nt ia l o f Sh erwo odFarm Sh erwo odFarm

was i n t he “ R-A Ru ral Areas ” zo ni ng di st ric t an d t he refo re was eli gi bl e fo r ru ral subd iv is io n, o ne of t he th ree ty pe s o f subd iv is io ns pe rm it te d fo r “ R-A Rural Areas ”. Rural subd iv is io n a ll owe d p ro pe rty to b e d iv id edsu ch th ateach lo t o r pa rcel wou ld(1) ha ve a m in im um of 2 50 feetof f

ro nt ag e o n an ex is ti ng publ ic roa d and(2) co nt ai n a t l eas t fi ve acre s o f la nd
. Mor eo ve r, 9 pu rs ua ntto th e “by rig ht ” d iv is io n m etho d, th e th en -cu rren t zo ni ng ord in an ce i n 1 0 Alb em arl e Co un ty pro vi de d t ha t ea chpa rcel of r eco rdco ul d b e d iv id edin to 1 1 ei th er d ev el op m en t ri gh t l ot s, i .e., 5 o r fewerlo ts be twee n 2 acre s an d 2 1 a cres in si ze p er p arce l, o r ex ces s l ot s, i .e., as m an y 21 -p lu s ac re l ot s as m ig htbe crea te d. 1 2
All rur al subd iv is io ns were t o b e se rv edby an in te rn al subd iv is io n s tre et 9 th atsat is fie d Vi rg in iaDepa rtment o f Tran sp ortati on (VDOT) st an da rd s. The re were two m etho ds of s ub di vi si on forpu rp os es of rur al subd iv is io n 1 0 pe rm it te d u nd er the Alb em arl e Co un ty zon in g o rd in an ce: “by rig ht ” d iv is io n a nd “ rural pre se rv at io n d ev el op m en t” . Und er the “by rig ht ” d iv is io n m etho d, la nd own ers di d n otne edto ob ta in sp eci al pe rm is si on or r eque stan y ex cep ti on s t o orwaiv ers fro m

th e requi rem en ts of t he Alb em arl e Co un ty zon in g o rd in an ce i n or de r to un de rta ke de ve lo pm en t. Un de r th e “ rural pre se rv at io n d ev el op m en t” m etho d, l an do wne rs are re qu ire d t o fi le anap pl ic at io n a ndsee k s pe ci al pe rm is si on an d app ro va l fr om

th e Alb em arl e Co un ty Plan ni ng Co m m is si on . The th en -cu rren t zo ni ng ord in an ce i n Al be m arl e Co un ty w as ad op te d o n 1 1 Decem be r 10 , 19 80
. The or et ic al ly, a 3 8- acre pa rcel of r eco rdco ul d b e subd iv id edin to fiv e 1 2 (co nt in ue d...)-8
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[* 8] On the ba si s o f it s l oc at io n i n t he “ R-A Ru ral Areas ” zo ni ng di st ric t an d
us in g t he “by rig ht ” d iv is io n m etho d, Sh erwo odFarm ha d t he or et ic al de ve lo pm en t rig ht s fo r 42 lo ts an d was su it ab le forlo w-d en si ty resi de nt ia l d ev el op m en t. Howev er, d ev el op m en t ri gh ts all oc at edby the Alb em arl e Co un ty Cod e rep res en te d o nl y

th e th eo ret ic al m ax im

um nu m be r of lo ts th atSh erwo odFarm
m ig htbe di vi de d i nt o; rig ht s m ig htno t h av e b eenus ab le if the lo t d idno t co nt ai n
anap pr op ria te bu il di ng si te th atm etot he r requi rem en ts of the zo ni ng ord in an ce. Inreal it y , th e actua l l ot s m ig htno t h av e b eende ve lo pe d o n a cco un t o f to po gr ap hy
orflo odpl ai ns , so il su it ab il ity forwell an d s ep ti c p ur

po se s, an d re qu ire d i nt ern al 1 3
subd iv is io n ro ad s b ui ltto Virg in iaDepa rtment o f Tran sp orta ti on st an da rd s. Mo reo ve r, al th ou gh up to fiv e si ng le -fam il y dwel li ng s co ul d h av e b eenest ab li sh ed
on each pa rcel of r eco rd , on ly one dwel li ng un itwas p erm it te d o n e ach of t he
ex ces s l ot s o f 21 -p lu s ac res .
(...co nt in ue d) 1 2 2- acre lo ts (10 acre s) an d o ne ad di ti on al 21 -p lu s- acre lo t; an84 -acr e p arce l o f reco rdco ul d b e subd iv id edin to fiv e 2 -acr e lo ts (10 acre s) an d t hr ee ad di ti on al 21 -p lu s- acre lo ts ; a 1 67 -acr e p arce l o f reco rdco ul d b e subd iv id edin to fiv e 2 -acr e lo ts an d s ev enad di ti on al 21 -p lu s- acre lo ts ; an d a22 0- acre pa rcel of r eco rdco ul d be subd iv id edin to fiv e 2 -acr e lo ts (10 acre s) an d t enad di ti on al 21 -p lu s- acre lo ts . A sp eci al ex cep ti on was n eces sa ry to bu il d o n c rit ic al sl op es , i.e., sl op es 1 3 gr eat er tha n 2 5% o r withi n 2 00 ho riz on ta l fe etof any 10 0- y ear f lo odpl ai n.-9
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[* 9] Dur in g Dec em

be r 20 05 , Rog er Ra y

pre pa reda rural subd iv is io n ana lysis
an d d ev el op m en t p la n fo r Sh erwo odFarm , foc us in g o n “ by rig ht ” d ev el op m en t as al lo wedby the Alb em arl e Co un ty zon in g andsubd iv is io n o rd in an ces . Mr. Ray’ s subd iv is io n a na lysis to okin to acco un t a v ari ety of f act or s, i nc lu di ng (i) th e si ze o f Sh erwo odFarm , (ii ) ro adacce ss , (ii i) t op og rap hy, inc lu di ng th e lo cat io n o f cri ti cal sl op es an d t he 10 0- y ear f lo odpl ai n, an d (i v) Alb em arl e Co un ty’ s zo ni ng an d
subd iv is io n o rd in an ces . The p art ie s ag ree t ha t M r. Ray is anex pe rt i n ru ral
subd iv is io ns who ha s d on e o ve r 80 0 s ub di vi si on an al y se s i n Al be m arl e Co un ty, Virg in ia . On th e b as is of h is subd iv is io n a na lysis an d the pro po se d d ev el op m en t pl an , Mr. Ray con cl ud edth at38 lo ts co ul d b e d ev el op edon Sh erwo odFarm an d th atde ve lo pm en t d idno t re qu ire an y waiv ers or e xc ep ti on s und er the ap pl ic ab le Alb em arl e Co un ty zon in g a ndsubd iv is io n o rd in an ces . C. The 20 05 Real Est at e Mark et Dur in g 2 00 5, al th ou gh po pu la ti on gre w aro un d the Ch arl ot te sv il le areaat
ne arl y do ub le th e rat e fo un d i n o th er are as of Vi rg in ia , Alb em arl e Co un ty’ s po pu la ti on gro wth was p art ia ll y res tra in edby zon in g m eas ur es de si gn edto li m it gr owt h i n the R-A Ru ral Areas . Com bi ne d wi th hi gh de m an d, thi s ci rcu m st an ce cau se d p ro pe rty val ue s i n Al be m arl e Co un ty to i nc reas e rap id ly. Duri ng 20 05 , th ere was pre ss ur e to de ve lo p l an d; m an y lar ge r farm s wer e b ei ng de ve lo pe d i nt o-1 0-

[* 10 ] subd iv is io ns . Duri ng Decem be r 20 05 , She rwo odFarm was i n aris in g
m ark et ; re al est at e p ric es inth e are a were h ig h a ndwere co nt in ui ng to in crea se . II. Virg in iaTax C red it s Inth e y ears lea di ng up to 20 05 , th e rural ch arac te r of Alb em arl e Co un ty
was ina st at e o f de cl in e due , inpa rt, t o t he en cro ach m en t o f si gn ifi can t de ve lo pm en t i n i ts rur al area s. Bo th th e Fed eral Gov ern m en t an d t he Co m m on weal th of Vi rg in iareco gn iz edth e im po rta nc e o f la ndco ns erv at io n a nd pr es erv at io n b y

pro vi di ng tax in cen ti ve s, an d Al be m arl e Co un ty ado pt edpro gr am s su chas the Acqu is it io n o f Co ns erv at io n Eas em en ts pro gr am to curta il de ve lo pm en t an d t o p ro m ot e co ns erv at io n o f th e Co un ty’ s ru ral area s. Dur in g 1 99 9, the Virg in iaGene ral Ass em bl y en act edth e Vir gi ni a Lan d Pres erv at io n Tax Cred itPro gr am to all ow qua li fy in g l an do wne rs to rece iv e ta x cred it s fo r us e o n t he ir S ta te in co m e ta x re tu rn s. Fo r th e 2 00 5 a nd20 06 tax y ears Virg in iapro vi de d a n i nc om e ta x c red itto en co ur ag e th e p res erv at io n a nd
su st ai nabi li ty of Virg in ia ’s un ique na tu ral res ou rces , wil dl ife habi ta ts , op en sp aces , andfor es te d re so ur ces (Virg in iatax cred it s) . The Vi rg in iatax cred it s wer e equa l t o 5 0% o f th e fai r m ark etva lu e o f an y lan d o r in te res t i n Vi rg in iath atwas do na te d t o apubl ic or p riv at e co ns erv at io n a ge nc y eli gi bl e to ho ldth e d on at ed la ndan d/ orin te res ts forco ns erv at io n o r pr es erv at io n p ur po se s. Anin te res t i n l an d-1 1-

[* 11 ] in cl ud eda co ns erv at io n e as em en t i f th e eas em en t co m pl ie d wi th sec ti on 17 0( h) ; was co nv ey edforcert ai n p ur po se s s uc h a s ag ric ul tu ral , for es ta l, an d o pe n sp ace p ur po se s; an d was anun co nd it io na l d on at io n i n p erp etui ty. Acco rd in gl y , a la nd own er wh o d on at eda qu al ifi edco ns erv at io n e as em en t co ul d c la im a cred itin
anam ou ntequa l t o 5 0% o f th e fai r m ark etva lu e o f th e co ns erv at io n e as em en t as lo ng as t he eas em en t’s fa ir m ark etva lu e was subs ta nt iate d b y a “ qu al ifi ed ap pr ai sa l” pre pa redby a “ qu al ifi edap pr ai se r”, as th os e te rm s ar e d efi ne d u nd er the ap pl ic ab le pro vi si on s o f th e Co de an d t he reg ul at io ns . Bo th in di vi du al s an d c or

po rat io ns co ul d u se th e Vir gi ni a ta x c red it s o n t he ir St at e in co m e ta x re turn s. Fo r a p as s- th ro ug h e nt ity , su chas apa rtn ers hi p, the Virg in iatax cred it s co ul d b e u se d b y th e p artne rs hi p o r by the pa rtn ers in pr op orti on to th ei r in te res t i n t he en ti ty or as setforth inth e p artne rs hi p o r ot he r op erat in g a gr eem en t. Ho wev er, the Virg in iatax cred it s co ul d n otbe cla im edby bo th th e en ti ty andth e m em be r, m an ag er, p artne r, sh areh ol de r, or be ne fic ia ry

for th e sa m e d on at io n. Any tax pa y er i ss ue d Vi rg in iatax cred it s fo r a t ax y ear a fte r 20 02 was al lo wedto cla im

up to $1 00 ,00 0 o f th e cre di t fo r th e ta xabl e y ear i n wh ic h t he cred itori gi na te d (i .e., th e ta xabl e y ear i n wh ic h t he qu al ifi eddo na ti on was m ad e)
an d a ny of th e fi ve su ccee di ng tax ab le y ears , fora to ta l o f $6 00 ,00 0 i n c red it s o ve r-1 2-

[* 12 ] th e en ti re p eri od . A tax pa y er h ol di ng un us edbu t o th erwi se all owabl e Virg in iatax cred it s was ab le to sel l o r ot he rwis e tr an sf er the un us edcred it s fo r us e by ano th er t ax pay er o n aVirg in iain co m e ta x re tu rn . Any Virg in iatax cred it s tra ns ferr edwere cl ai m edas acred iton th e tr an sf eree ’s tax return fo r th e ta xabl e y ear i n wh ic h the tra ns fer o f th e Vir gi ni a ta x c red it s o ccu rred . Over t im e, a m ark et fo rm edforth e sa le or t ran sf er o f Virg in iatax cred it s. The VDOT pres cri be d p ro cedur es forth e 2 00 5 and20 06 tax y ears with
res pe ctto th e rep orti ng of d on at io ns an d the all oc at io n o r tr an sf er o f Virg in iatax cred it s. Th e VDOT requ es te d e ach do na ti ng lan do wne r to reg is te r th e Vir gi ni a ta x cred it s an d t o v eri fy

a ta xp ay er’s ri gh t t o c la im Virg in iatax cred it s o n h is or h er Virg in iain co m e ta x re turnby sub m it ti ng a co m pl et edFo rm

LPC, Virg in iaLand Pres erv at io n Tax Cred itNot ifi cat io n, as well as c ert ai n d oc um en ta ti on , in cl ud in g a qu al ifi edap pr ai sa l o f th e d on at edpro pe rty, the reco rd edeas em en t, an d aco py of a Fo rm 82 83 , Non cas h C ha rit ab le Co nt rib ut io ns , exe cu te d b y th e d on ee. The Fo rm LPC was fil edto ass is t the VDOT w it h b ot h t he reg is tra ti on of t he do na ti on an d th e reg is tra ti on an d re co rd in g o f an y subs eque nttrans fers an d a ll oc at io ns of t he Virg in iatax cred it s. Whil e su chsubm is si onwas n otpre sc rib edby V irg in iast atut e orreg ul at io n, the VDOT requ ire d p ro cedur al ly tha t the Virg in iatax pa y er s ub m ita Fo rm LPC b efo re h e o r sh e co ul d u se any all oc at edor tran sf

erre d t ax cred it s o n a-1 3-

[* 13 ] Virg in iain co m e ta x re tu rn . Like wis e, whi le su cha subm is si on was n ot pr es cri be d b y

Virg in iast atut e o r reg ul at io n, the VDOT dire ct eddo no rs an d c red it ho ld ers to subm itth e Fo rm LPC an d s up po rti ng do cu m en ta ti onwithi n 9 0 d ay s o f th e o rig in at io n o r tr an sf

er o f th e Vir gi ni a ta x c red it s o r atlea st60 da y s b efo re fil in g t he Virg in iain co m e ta x re tu rncla im in g t he cred it s. Onc e th e VDOT recei ve d the Fo rm LPC an d s up po rti ng do cu m en ta ti on , it
wou ldrev ie w th e subm it te d d oc um en ts forco m pl ianc e wit h app li cab le rul es an d pr oc edur es . If th e Fo rm

LPC was in su ffi ci en t, the VDOT w ou ldaskth e ta xp ay er to m ak e th e n eces sa ry

co rrec ti on s o r supp ly the ne ces sary do cum en tati on . On th e ot he r ha nd , if the VDOT det erm in edth atth e Fo rm LPC co m

pl ie d wi th requi rem en ts , th e VDOT wou ldpro vi de a ta x c red itackno wled gm en t l et te r (cre di t ackno wled gm en t l et te r). The cred itackno wled gm en t l et te r in cl ud eda un ique cred ittra ns act io n n um

be r kn own as a n “ LP nu m be r” an d t he effe ct iv e y ear f orth e Virg in iatax cred it s. The cr ed itackno wled gm en t l et te r st at ed : “ A cop y of t hi s 1 4 le tt er m us t b e at ta ch edto y ou r [Vir gi ni a in co m e ta x] return t o c la im th e cre di t. Youwil l n eedth e as si gn edcred itnu m be r if y ouwis h t o t ran sf

er thi s cr ed itinth e fu tu re.” If atax pa y er wi sh edto cla im hi s o r he r Virg in iatax cred it s o n aVirg in ia
The LP nu m

be rs all owe d t he VDOT to ad m in is tra ti ve ly trackcred it s 1 4 ari si ng fro m

sp eci fic co ns erv at io n e as em en t d on at io ns .-1 4-

[* 14 ] in co m e ta x re tu rn , th e VDOT requ ire d tha t the tax pa y er p ro vi de a co py of th e cre di t ac kn owl ed gm en t l et te r. 1 5 Fo r pu rp os es of d et erm in in g t he effe ct iv e d at e o f Virg in iatax cred it s, VDOT dis ti ng ui sh es be twee n a n a ll oc at io n a nda tr an sf er. Inth e cas e o f an al lo cat io n o f Virg in iatax cred it s b y a pa ss th ro ug h e nt it y

to it s p art ic ip an ts , th e effe ct iv e d at e fo r th e al lo cat io n was de em edto be th e d at e th atth e d on at io n was reco rd ed . In the cas e o f a tran sf er o f Virg in iatax cred it s i n atra ns act io n i nv ol vi ng pa rti es th atwere n otpa rt o f a p as st hr ou gh en ti ty, th e eff ect iv e d at e fo r th e tr an sf

er was th e d at e th atth e co nt ractbe twee n t ho se pa rti es was e xe cu te d. Dur in g t he 20 06 leg is la ti ve ses si on Virg in iam ad e se ve ral ch an ge s t o the st atut ory pro vi si on s ap pl ic ab le to th e Vir gi ni a ta x c red it
. Thes e ch an ge s ap pl ie d 1 6
on ly to co nv ey an ces of p ro pe rty m ad e o n o r aft er J anua ry 1, 2 00 7. OnNov em

be r 30 , 20 07 , th e Vir gi ni a ta x c omm is si on er rel eas eda su m m ary of th e ch an ge s i n t he

If a t ax pa y er fi le d aVirg in iatax return c la im in g Vi rg in iatax cred it s 1 5 witho uta cred itackno wled gm en t l et te r, th e VDOT wou ldeithe r co nt actth e ta xp ay er, i f itsu sp ect edth atth e ta xp ay er co ul d ri gh tfu ll y cla im th e Vir gi ni a ta x cred it s, o r itwou ldco nt in ue to pro ces s the return b utdi sa ll ow the Virg in iatax cred it s. Fo r th e fac tu al fin di ng s s etforth inth is pa rag rap h, we t ak e jud ic ia l n ot ic e

1 6 of cert ai n fa ct s s etforth inRo ut e 2 31 , LLC v. Co m m is si on er, T.C. Mem o. 2 01 4- 30 , app eal fil ed(4t h C ir. Se pt . 16 , 20 14 ), reg ard in g t he leg is la ti ve ch an ge s t o a nd adm in is tra ti ve in te rp ret at io ns of t he Virg in iatax cred it s.-1 5-

[* 15 ] form

of arul in g. Th e ru li ng ex pl ai ne d t ha t the VDOT w ou ld“ no lo ng er si m pl y ackno wled g[ e] the Cred itas h as be endo ne inth e p as t” bu t wo ul d h av e to

“ actua ll y is su e th e Cre di t” forth e Vir gi ni a ta x c red itto be va li d. III. Co ns erv at io n Eas em en t o n S he rwo odFarm A. Don at io n o f th e Eas em en t Afte r he m ov edto Ch arl ot te sv il le du rin g J ul y 20 03 , Mr. Lewis readab ou t th e co ns erv at io n o f la ndinAlb em arl e Co un ty in l oc al m ag azi ne s an d adve rti se m en ts . Duri ng 20 05 , Mr. Lewis co nt act edMel to n M cGu ire of Co ns erv at io n S ol ut io ns LLC (Co ns erv at io n S ol ut io ns ) to pro vi de servi ces an d gu id an ce wi thres pe ctto a po te nt ia l co ns erv at io n e as em en t o n S he rwo odFarm . In a le tt er d at edJu ly 5, 20 05 , Mr. Mc Gui re, aft er re ta in in g a n app rai se r to pre pa re a va lu at io n o f Sh erwo odFarm , su gg es te d t ha t aneas em en t o n S he rwo odFarm
wou ldco ns ti tu te a ch ari tabl e g iftof app ro xi m at el y $6 .7 m il li onan d t ha t i t wo ul d al so pro du ce Vi rg in iatax cred it s o f ap pr ox im at el y $3 .2 m il li on . Mr. McGu ire advi se d M r. Lewis th athe ha d t wo o pt io ns with re sp ectto an y Virg in iatax cred it s th athe was u nabl e to us e: to sel l the m or t o a ll oc at e th em

us in g apa rtn ers hi p st ru ctur e. Mr. Mc Gui re al so su gg es te d t ha t an y un us edVirg in iatax cred it s co ul d be tra ns ferr edor a ll oc at edto Geor ge Bro wer ata rat e o f 53 cen ts pe r do ll ar o f Virg in iatax cred it s tran sf erre d o r al lo cat ed . Mr. Bro wer was a pr in ci pa l o f-1 6-

[* 16 ] Virg in iaCo ns erv at io n Tax Cred itFundLLLP (Virg in iaCo ns erv at io n) , al on g wi th Dani el Geck er, an d h adwork edwith d ev el op ers by pro vi di ng cap it al in
ex ch an ge fortax cred it s ea rn edth ro ug h the reh ab il it at io n o f hi st or ic pro pe rti es . Virg in iaCo ns erv at io n was a Virg in iali m it edli ab il it y li mit edpartn ers hi p wi th a bu si ne ss ad dr es s i n New Orl ean s, Lo ui si an a; it s b us in es s ac ti vi ti es in cl ud edth e acqui si ti on an d s ynd ic at io n o f Virg in iatax cred it s. Mr. Bro wer h adpre vi ou sl y 1 7 pa rtn eredwith M r. McGu ire forth e d on at io n o f a co ns erv at io n e as em en t o n M r. McGu ire ’s farm

forwhi chMr. Mc Gui re an d Vi rg in iaCo ns erv at io n h adeach
rece iv edanall oc at io n o f Virg in iatax cred it s. Dur in g No ve m

be r 20 05 , aft er co nv ers at io ns with b ot h M r. McGu ire an d M r. Bro wer, Mr. Lewi s an d p et it io ne r de ci de d t o m ov e fo rwardwith t he co ns erv at io n eas em en t o n S he rwo odFarm an d t he tra ns act io n b etweenSW F an d Vi rg in ia Co ns erv at io n i nv ol vi ng th e tr an sf er o f Virg in iatax cred it s (VTC t ran sa ct io n)
. Mr. Lewi s an d p et it io ne r en ga ge d M r. McGu ire an d C on se rv at io n S ol ut io ns to pr ov id e se rv ic es to un de rta ke th e VTC tr an sa ct io n. Be cau se th e rel ev an t p art ie s ha d m or e ex pe rie nc e wit h t he pa rtn ers hi p s tru ctur e an d M r. Lewis was c on cern ed ab ou t s el li ng th e Vir gi ni a ta x c red it s o n h is own , Mr. Lewis an d M r. McGu ire Acco rd in g t o Tra cey Shaw, Virg in iaCo ns erv at io n’s co un se l, Vi rg in iatax 1 7 cred it s wer e th e p rimary

reas onforVirg in iaCo ns erv at io n’s i nv es tm en ts in pa rtn ers hi ps th atdo na te co ns erv at io n e as em en ts .-1 7-

[* 17 ] de ci de d t o e ng ag e in th e VTC tr an sa ct io n t hr ou gh a partn ers hi p s tru ctur e in whi chVirg in iaCo ns erv at io n wo ul d c on tri bu te fun ds of 5 3 c en ts pe r do ll ar o f Virg in iatax cred it s an d re cei ve a no nv ot in g m in or it y in te res t i n S W F an d a n al lo cat io n o f Virg in iatax cred it s. Pre vi ou sl y , Mr. Mc Gui re h adst at edth atth e pa rtn ers hi p s tru ctur e wou lden su re tha t the m on ey pa idby V irg in iaCo ns erv at io n wou ldno t b e ta xabl e an d t ha t “ th e $ 0.5 3 p er d ol la r th at[itpa id ] * * * [wa s] th e equi va le ntof s el li ng th e [Vi rg in iatax cred it s] * * * fo r ov er $ 0.8 0 p er d ol la r.” Mr. Lewi s’s u nd ers ta nd in g o f th e tr an sa ct io n was th atth e am ou ntof Vi rg in ia Co ns erv at io n’s capi ta l co nt rib ut io n t o S W F was di rect ly bas edon th e am ou ntof Virg in iatax cred it s t o b e tr an sf erre d o r al lo cat edto Virg in iaCo ns erv at io n. Be fo re en te rin g i nt o t he VTC trans act io n, n ei th er Mr . Bro wer n orTracey Shaw, Vir gi ni a Co ns erv at io n’s co un se l, re vi ewedba la nc e sh eet s, p ro fitan d l os s s ta te m en ts , in co m e st at em en ts , bu si ne ss pl an s, o r va lu at io ns reg ard in g S W F’s bu si ne ss es ; i n fact , no ne of t he se do cu m en ts were p ro vi de d b y SW F to an y on e rep res en ti ng or affi li at edwith Vi rg in iaCo ns erv at io n. Mr. Mc Gui re en ga ge d c on su lt an ts an d a tt orne y s t o a ss is t i n t he VTC tra ns act io n, i nc lu di ng James Sk eenan d Kev enPat ch et t o f th e la w firm of S ke en Law, to ha nd le th e reg is tra ti on of t he Virg in iatax cred it s wi th th e VDOT andto-1 8-

[* 18 ] pro vi de SW F an d M r. Lewis bu si ne ss an d l eg al advi ce ab ou t the reg is tra ti on pr oc es s. On Dec em

be r 29 , 20 05 , SWF ex ecu te d ade edof c on se rv at io n e as em en t,
co nv ey in g aco ns erv at io n e as em en t o n S he rwo odFarm (eas em en t) t o t he Alb em arl e Co un ty Pub li c Rec reat io na l Fa ci li ti es Autho rit y (Alb em arl e Co un ty PRFA) , a go ve rn m en ta l b ody of Al be m arl e Co un ty in Vi rg in ia . Befo re the do na ti on of the eas em en t, Sh erwo odFarm was n otun de r an y

ex is ti ng co ns erv at io n e as em en t. OnDecem be r 30 , 20 05 , th e d eedco nv ey in g t he eas em en t
was reco rd edwith t he Cle rk ’s Offic e o f th e Ci rcu itCo urt fo r Alb em arl e Co un ty, Virg in ia
. B. Term s o f th e Eas em en t Purs uantto th e te rm s o f th e eas em en t, the ex is ti ng fou r pa rcel s o f Sh erwo od Farm were t o b e tr eat edas asi ng le pa rcel th atwas n otto be di vi de d o r subd iv id ed ; th e si ng le pa rcel co ul d b e so ldor c on ve y edon ly as a wh ol e, si ng le un itof 6 74 .65
acre s. Th e eas em en t d eedals o p ro vi de d t ha t n o m or e th anfiv e dwell in g uni ts be bu il t o n t he si te . Mor eo ve r, th e co ns tru ct io n, p la cem en t, o r m ai nt en an ce o f certa in st ru ctur es or i m

pr ov em en ts onSh erwo odFarm were n otpe rm itte d u nl es s the st ru ctur es or i m

pr ov em en ts were o n t he pro pe rty as o f th e d at e o f th e eas em en t-1 9-

[* 19 ] an d/ orwere au th or iz edby the Alb em arl e Co un ty PRFA. The ea se m en t 1 8 de edals o p ro hi bi te d any indus tri al or c omm erci al us es forSh erwo odFarm , with th e ex cep ti on of c ert ai n a gr ic ul tu ral , for es ta l, an d o th er m in orli st edus es . 1 9 The eas em en t was pe rp etua l, an d i ts res tri ct io ns ranwith t he lan d a ndwere bi nd in g upo n t he pa rti es , su cces so rs , ass ig ns , rep res en tati ve s, an d h ei rs . Co ns id eri ng th e m ark et , th e lo cat io n, an d t he ex is ti ng us e o f Sh erwo odFarm , th e hi gh es t an d b es t u se of S he rwo odFarm be fo re the reco rd in g o f th e eas em en t d eed
was for lo w-d en si ty resi de nt ia l d ev el op m en t i nt o e st at e type l ot s. Ho wev er, aft er th e eas em en t d eedwas re co rd ed , th e h ig he stan d b es t u se of S he rwo odFarm sh ift edto wardag ric ul tural , li m it edfor es ta l, o r rec reat io na l u se . Sp eci fic al ly, (1 ) m od ifi cat io n o f certa in ex is ti ng stru ctur es th atin crea se d 1 8 th e fo otpr in t o f th e st ru ctur e b y m or e th an5% re qu ire d app ro va l fr om th e Alb em arl e Co un ty PRFA; (2 ) m od ifi cat io n o f th e ex te rio r fac ad e, bu t n otth e in te rio r, of

th e h is to ric stru ctur es requi redap pr ov al fro m th e Alb em arl e Co un ty PRFA, u nl es s u nd ert ak enforem erg en cy rep ai rs ; (3 ) certa in co ns tru ct io n o f ne w st ru ctur es inth ree b ui ld in g e nv el op es was a ll owe d wi th ou t an y furth er co ns en t fro m Alb em arl e Co un try PRFA; (4 ) th e to ta l fo otpr in t o f al l s tru ctur es on th e pr op erty was t o b e le ss th an60 ,00 0 s qu are f eet ; an d (5 ) SWF was p erm it te d t o in st al l, re pl ace, m od ify, or d es tro y well s, ro ad s, an d u ti li ty lin es as r equi red , bu t ne w roa ds were n otto ex ceeda wid th of 1 2 fe et . The eas em en t d eedals o re qu ire d S W F to est ab li sh rip ari anbu fferarea s 1 9 withi n 1 00 feetfro m

th e b an k o f certa in id en ti fie d s tre am s, i nc lu di ng Mu rp hy’ s Cree k, an d n o n ew im

pr ov em en ts were p erm it te d wi th in th e b uf fer areas . Catt le an d/ orli ve st oc k wer e to be res tri ct edfro m th e b uf fer areas , exc ep t al on g e xi st in g pa stur e are a, by fenc in g t o b e in st al le d a ndm ai nt ai ne d b y SW F.-2 0-

[* 20 ] C. Valu at io n o f th e Eas em en t Inco nn ect io n wi thth e ch ari tabl e eas em en t, Co ns erv at io n S ol ut io ns en ga ge d St ep he n G. Will iam s o f W il li am s Ap pr ai se rs , Inc ., to pre pa re a qua li fie d app rai sa l of th e eas em en t. Mr . W il li am s’ app rai sa l was da te d Dec em be r 12 , 20 05 , andha d
aneffe ct iv e d at e o f Decem be r 2, 2 00 5. Us in g asubd iv is io n d ev el op m en t an al y si s, Mr. Will ia m s d et erm in edth atth e eas em en t h ada va lu e o f $7 ,39 8,3 33 , whi chhe de riv edfro m

subt ract in g the aft er-e as em en t v al ue of $ 4,0 47 ,90 0 fr om th e b efo reeas em en t v al ue of $ 11 ,44 6,2 33 . Mr. W il li am s al so co nc lu de d t ha t the eas em en t
wou ldres ul t i n $ 3,6 99 ,16 7 o f Virg in iatax cred it s tha t SWF co ul d u se or t ran sf er. IV. SWF’ s Trans act io n With Vi rg in iaCo ns erv at io n Dur in g Dec em

be r 20 05 , Mr. Sk eenan d M r. Pat ch et t, o n b eh al f of Co ns erv at io n S ol ut io ns an d S W F, be ga n n eg ot ia ti ng th e VTC tr an sa ct io n do cu m en ts with M r. Sh aw, who rep res en te d Vi rg in iaCo ns erv at io n. Th e tra ns act io n d oc um en ts in cl ud eda pa rtn ers hi p a gr eem en t fo r SWF (op erat in g ag reem en t), asubs cri pt io n a gr eem en t, an op ti on to pu rch as e ag reem en t (o pt io n ag reem en t), andanesc ro w agr eem en t. A. Ope rat in g Ag reem en t Befo re Dece m

be r 1, 2 00 5, SWF op erat edwitho uta writ te n o pe rat in g ag reem en t b ecau se pe ti ti on er was th e so le m em be r of SW F. Acco rd in g t o t he-2 1-

[* 21 ] op erat in g a gr eem en t fo r SWF dat edDecem be r 1, 2 00 5, Vi rg in ia Co ns erv at io n b ecame a m em be r of SW F dur in g Dec em

be r 20 05 ; the pa rti es ag reed th atVirg in iaCo ns erv at io n e ffec ti ve ly became a part ne r in SW F o n Dec em be r 1, 20 05
. The op erat in g a gr eem en t s ta te d t ha t SWF’s pu rp os e was th e “ lo ng -te rm ap pr eci at io n o f * * * [S he rwo odFarm ] an d, i n a dd it io n, the ch ari tabl e p ur po se to
as si stinth e p res erv at io n o f si gn ifi can t l an ds inVirg in ia ” an d t ha t SWF, as o f th e effe ct iv e d at e o f th e o pe rat in g a gr eem en t, an ti ci pa te d t he reco rd at io n o f de edof a
co ns erv at io n e as em en t o n S he rwo odFarm th atwou ldqu al ify for Vi rg in iatax cred it s. Th ro ug h t he va rio us dra fts of t he op erat in g a gr eem en t, SWF andVirg in ia Co ns erv at io n m ad e rev is io ns to en su re tha t the tra ns act io n was no t “ m is ta ke nl y * * * ch arac te riz edas asal e o f ta x c red it s” as t ha t was “ no t the in te nt io n o f th e pa rti es [to th e VTC tr an sa ct io n].” The op erat in g a gr eem en t s ta te d t ha t p et it io ne r’s pe rcen ta ge in te res t i n S W F
was 99 % an d Vi rg in iaCo ns erv at io n’s p erce nt ag e in te res t i n S W F was 1%, b utit di d n otcrea te sep arat e cl as se s o f m em be rs hi p i nt eres ts . The o pe rat in g a gr eem en t al lo cat edpa rtn ers hi p p ro fit s an d l os se s t o t he m em be rs inpro po rti on to th ei r res pe ct iv e p erce nt ag e in te res ts inSW F; pro fit s an d l os se s i nc lu de d g ai n o r lo ss res ul ti ng fro m

an y di sp os it io n o f pr op erty

own edby SWF, in cl ud in g re al an d-2 2-

[* 22 ] pe rs on al pro pe rty, any im pr ov em en ts th eret o, an d b oth t an gi bl e an d in ta ng ib le pro pe rty. Any netcas hf lo w, whi chin cl ud edgro ss cas h p ro ceed s fr om SWF’ s o pe rat io ns (in cl ud in g s al es , di sp os it io ns , andrefi na nc in gs of S W F’s pr op erty ) le ss res erv es forSW F’s ex pe ns es , deb t p aym en ts , cap it al im pr ov em en ts , rep la cem en ts , andco nt in ge nc ie s, was als o t o b e d is tri bu te d t o p et it io ne r an d Virg in iaCo ns erv at io n i n p ro po rti on to th ei r res pe ct iv e p erce nt ag e in te res ts in SWF. Add it io na ll y , pu rs ua ntto sec ti on 3.6 of t he op erat in g a gr eem en t, Vi rg in ia ta x c red it s o f $3 00 ,00 0 a nd$3 ,05 0,0 00 , were t o b e al lo cat edto pe ti ti on er an d t o Virg in iaCo ns erv at io n, re sp ect iv el y . SWF andMr. Lewi s re pr es en te d a ndwarran te d tha t the Virg in iatax cred it s wou ldbe earn edon or b efo re Dece m be r 31 , 20 05 . SWF al so ag reedto rep res en t
an d warran t tha t i t h adno t u se d a ndwou ldno t u se an y po rti on of t he Virg in iatax cred it s al lo cat edto Virg in iaCo ns erv at io n t o o ffs etor s at is fy it s St at e in co m e ta x li ab il it y inan y y ear a ndth atitha d n ottra ns ferr edan d wo ul d n ottra ns fer the Virg in iatax cred it s al lo cat edto Virg in iaCo ns erv at io n t o a ny oth er t ax pa y er be y on d t he $3 00 ,00 0 o f Virg in iatax cred it s al lo cat edto pe ti ti on er. Any add it io na l Virg in iatax cred it s ar is in g fr om th e d on at io n o f th e eas em en t wer e to be all oc at ed
am on g t he m em

be rs , or s ol d t o p ers on s o th er tha n m em be rs , as d et erm in edby the
m em be rs ho ld in g a t l eas t 6 6% o f th e p erce nt ag e in te res ts inSW F.-2 3-

[* 23 ] The op erat in g a gr eem en t n am edMr. Lewi s as th e “ Man ag er” o f SWF and
ve st edhi m

with the da y -to -d ay

m an ag em en t re sp on si bi li ti es . Sin ce the 2 0
ex ecu ti on of t he Oper at in g Ag reem en t, SWF has tre at edit se lf a s a p artne rs hi p be twee n p et it io ne r an d Vi rg in iaCo ns erv at io n fo r Fed eral tax pu rp os es . B. Subs cri pt io n Ag reem en t The pa rti es als o e xe cu te d asubs cri pt io n a gr eem en t, d at ed“ effe ct iv e Decem be r 15 , 20 05 ”, to ad d Vi rg in iaCo ns erv at io n a s a p artne r inSW F. The
subs cri pt io n a gr eem en t p ro vi de d t ha t Vi rg in iaCo ns erv at io n o ffer edto acqui re fro m SW F, an d S W F acc ep te d Vi rg in iaCo ns erv at io n’s o fferto acqui re fro m SW F, a 1 % pe rcen ta ge in te res t i n S W F in ex ch an ge fora cap it al co nt rib ut io n o f $1 ,61 6,5 00
. Acco rd in g t o t he subs cri pt io n a gr eem en t, Vi rg in iaCo ns erv at io n

2 1 acqui redth e 1 % pe rcen ta ge in te res t i n S W F “ fo r in ve stm en t p ur po se s o nl y

an d n ot

The ori gi na l o pe rat in g a gr eem en t i nc orrect ly ide nt ifi edMr. Lewi s, an d n ot 2 0 pe ti ti on er, as th e fo un di ng an d c on ti nu in g m em be r of SWF. As we d is cu ss be lo w, pe ti ti on er an d Vi rg in iaCo ns erv at io n e xe cu te d a n a m en dm en t t o t he op erat in g ag reem en t t o re fle ctth e co rrec t m em be rs of S W F. Att ach m en t 3 of t he op erat in g a gr eem en t i nd ic at edth atpe ti ti on er m ad e an 2 1 in it ia l capi ta l co nt rib ut io n o f $1 2,4 85 ,73 3 a ndth atVirg in iaCo ns erv at io n m ad e an in it ia l capi ta l co nt rib ut io n o f $1 ,80 2,0 00 . As we d is cu ss inm or e d et ai l b el ow, Virg in iaCo ns erv at io n’s capi ta l co nt rib ut io n i nc reas edfro m $1 ,61 6,5 00 to $1 ,80 2,0 00 as ares ul t o f ad di ti on al Virg in iatax cred it s tha t wer e al lo cat edto Virg in iaCo ns erv at io n b ecau se of t he hi gh er v al ue for th e eas em en t tha n o rig in al ly es ti m at ed
.-2 4-

[* 24 ] fordi st rib ut io n o r res al e to ot he rs .” The s ub sc rip ti on ag reem en t s tate s tha t in ad di ti on to th e ri gh ts to sh are i n t he pro fit s, l os se s, an d g ov ern an ce o f SWF as
se t fo rth inth e o pe rat in g a gr eem en t, Vi rg in iaCo ns erv at io n’s al le ge d c ap it al
co nt rib ut io n e nt it le d i t t o re cei ve anall oc at io n o f Virg in iatax cred it s o f $3 ,05 0,0 00 fro m

th e eas em en t o n S he rwo odFarm . Purs ua ntto th e subs cri pt io n ag reem en t, Vi rg in iaCo ns erv at io n was to tra ns fer $ 1,6 16 ,50 0 t o M r. Sk een , who
wou ldbe act in g a s an esc ro w age ntpu rs ua ntto th e te rm s o f th e es cro w agr eem en t. Sect io n s ix of t he subs cri pt io n a gr eem en t, en ti tl ed“ Cred itInd em ni ty”, gr an te d S W F th e o pt io n t o d efen d a ga in stcla im s as se rte d b y th e VDOT or the IRS ag ai ns t SWF or Vi rg in iaCo ns erv at io n wi th res pe ctto a di sa ll owa nc e o r reduc ti on of th e Vir gi ni a ta x c red it s. Th e subs cri pt io n a gr eem en t p ro vi de d tha t (1 ) if SW F el ect edto no t d efen d a ga in stsu cha cl ai m ass ert edby the VDOT or th e IRS , (2) up on a fi na l, n on ap pe al ab le de ci si onres ul ti ng ina di sa ll owa nc e o f th e Vir gi ni a ta x c red it s, o r (3 ) up on a reduc ti on inth e v al ue of t he Virg in iatax cred it s, the n SWF andMr. Lewi s wer e requi redto in de m ni fy Virg in iaCo ns erv at io n fo r th e di sa ll owe d o r reduc edVirg in iatax cred it s i n a n am ou ntequa l t o t he su m of ( i) 5 3
cen ts foreach do ll ar i n v al ue of Vi rg in iatax cred it s tha t was di sa ll owe d o r reduc ed , and(ii ) any

am ou nt s due to th e VDOT or the IRS i n fi ne s, i nt eres t, o r-2 5-

[* 25 ] pe na lt ie s an d re as on ab le co st s an d e xp en se s ar is in g o utof s uc h d is al lo wan ce
orreduc ti on . The subs cri pt io n a gr eem en t was ex ecu te d b y Mr. Lewi s, as m an ag er o f SWF andMr. Bro wer, as m an ag in g m em be r of Virg in iaCo ns erv at io n. Mr . Lewis al so si gn edth e subs cri pt io n a gr eem en t o n h is ownbe ha lf t o a ckno wled ge hi s ag reem en t t o b e p ers on al ly bou ndby the cred itin de m ni ty pro vi si on s. C. Escr ow Ag reem en t Inad di ti on to en te rin g i nt o t he op erat in g a gr eem en t an d the subs cri pt io n ag reem en t, SWF andVirg in iaCo ns erv at io n e nt eredin to anesc ro w agr eem en t with M r. Sk eendu rin g Dec em be r 20 05 . The es cro w agr eem en t n am edMr. Sk een as anesc ro w age nton be ha lf o f Virg in iaCo ns erv at io n a ndSW F fo r pu rp os es of th e VTC tr an sa ct io n. Purs uantto th e es cro w agr eem en t, i f ei th er (1 ) th e eas em en t d eedwas n ot
reco rd edinth e Cl erk ’s Offic e o f th e Ci rcu itCo urt o f Alb em arl e Co un ty on o r be fo re Dece m

be r 31 , 20 05 , or (2 ) Virg in iaCo ns erv at io n was no t ad mit te d a s a 1 % pa rtn er i n S W F o n o r be fo re Dece m be r 31 , 20 05 , th e fu nd s d ep os it edinth e es cro w acco un t wer e to be returne d t o Vi rg in iaCo ns erv at io n. Mo reo ve r, fund s tra ns ferr edby V irg in iaCo ns erv at io n t o M r. Sk eenforth e al le ge d c ap it al
co nt rib ut io n t o S W F were t o b e h el d i n e sc ro w andno t re le as edun ti l al l o f th e-2 6-

[* 26 ] fol lo win g e ve nt s h adoc cu rred : (1 ) SWF or Vir gi ni a Co ns erv at io n h ad pr ov id edto Mr. Sk een : (i ) th e cre di t tran sa ct io n n um be r with re sp ectto th e Virg in iatax cred it s i ss ue d b y th e VDOT; (i i) e vi de nc e o f th e rec or da ti onof t he
eas em en t d eedinth e Cl erk ’s Offic e o f th e Ci rcu itCo urt o f Alb em arl e Co un ty, Virg in ia ; an d (i ii ) a rep ort o f ti tl e is su edby Chi cag o Ti tl e (t og ethe r with re le va nt do cu m en ts ) with a n e ffec ti ve da te an d t im e aft er the da te an d t im e o f rec or da ti on of th e eas em en t d eed , is su edto Mr. Sk eenan d Vi rg in iaCo ns erv at io n’s co un se l;
an d (2 ) Mr. Sk eenha d: (i) p ro vi de d a ll of t he it em s re qu ire d abo ve to Virg in ia Co ns erv at io n’s co un se l; an d (i i) r ecei ve d wri tt enin stru ct io ns fro m Virg in ia Co ns erv at io n’s co un se l co nf irming th atth e requi rem en ts ab ov e h adbe ensat is fie d
an d autho riz in g t he rel eas e o f th e es cro wedfun ds to SW F. The esc ro w agr eem en t re qu ire d t he fun ds pro vi de d b y Virg in ia Co ns erv at io n t o b e h el d b y Mr. Sk een , intru st , inhi s n on -in te res t-b eari ng att orne y tru stacco un t, or, a lt ern at iv el y , to be he ldinanin te res t-b eari ng acco un t o r

2 2
acco un ts inMr. Sk een ’s nam e, pr ov id edth athe was i ns tru ct edinwrit in g t o d o s o

An at to rn ey

tru stacco un t i s h el d b y

anatt orne y

intru stforcli en ts or t hi rd 2 2 pa rti es an d g ov ern edby pro fes si on al an d e th ic al rul es .-2 7-

[* 27 ] by V irg in iaCo ns erv at io n. Mr . Ske enwas n otpe rm it te d t o t ran sf er o r in ve st th e es cro wedfun ds witho utMr. Sh aw’s writ te n autho riz at io n. 2 3 D. Opt io n Ag reem en t On Dec em

be r 27 , 20 05 , Virg in iaCo ns erv at io n a ndMr. Lewi s en te redin to th e o pt io n a gr eem en t. The o pt io n a gr eem en t g ran te d M r. Lewis anop ti onto 2 4 pu rch as e al l, b utno t l es s tha n a ll , of the m em be rs hi p i nt eres ts of Vi rg in ia Co ns erv at io n i n S W F. Pur su an t t o t he op ti on ag reem en t, the pu rch as e p ric e o f th e 1% p erce nt ag e in te res t i n S W F h el d b y Virg in iaCo ns erv at io n wo ul d b e ag reed up on by the pa rti es or, i f no t ag reedup on , th enitwou ldbe 1% o f th e n etfai r
m ark etva lu e o f SWF’ s as se ts at e xe rci se . The o pt io n u nd er the op ti on ag reem en t be cam e fu ll y

ex erci sabl e o nl y

by Mr. Lewis on or a t an y ti m e aft er J anua ry

1, 20 10 , bu t re m ai ns ex erci sabl e as of t hi s p ro ceed in g. Du rin g t he pro ces s o f 2 5
Unt il th e es cro wedfun ds were d is bu rs ed , Mr. Sk eenwas re qu ire d t o t ak e 2 3 al l re as on ab le m eas ur es to en su re the pro te ct io n o f th e es cro wedfun ds ; a f ai lu re t o co m pl y with t he term s o f th e es cro w agr eem en t wi th res pe ctto th e rel eas e o f th e fund s wo ul d h av e subjec te d M r. Sk eento li ab il it y or d is ci pl in e und er the Virg in ia ba r ru le s. Altho ug h M r. Bro wer, as m an ag in g m em be r of Virg in iaCo ns erv at io n, 2 4 si gn edth e o pt io n a gr eem en t, Mr . Lewis di d n otsi gnitbe cau se itco nt ai ne d n o co ve nant s, warr an ti es , or o bl ig at io ns on hi s p art . Virg in iaCo ns erv at io n a ndMr. Lewi s ag reedto anex erci sabl e d at e o f 2 5 Ja nu ary 1, 2 01 0, i n p artbe cau se itwas aco m pr om is e b etweena po te nt ia l t ax au di t

(co nt in ue d...)-2 8-

[* 28 ] ne go ti at in g t he va rio us do cu m en ts th atun de rli e th e VTC tr an sa ct io n, M r. McGu ire refe rredto th e o pt io n a gr eem en t as “ th e v eh ic le th atge ts * * * [M r. Bro wer] out o f th e d eal .” E. Co m

pl et io n o f th e VTC Tran sa ct io n Do cu m en ts Whe n t he fin al ap pr ai sa l was de li ve redonDecem be r 12 , 20 05 , th e v al ua ti on of th e eas em en t o n S he rwo odFarm was h ig he r th anex pe ct edan d, co ns eque nt ly, th e res ul ti ng Virg in iatax cred it s wer e h ig he r th anan ti ci pa te d. Th e p art ie s t o t he VTC tra ns act io n a gr eedth atVirg in iaCo ns erv at io n wo ul d re cei ve th e ad di ti on al Virg in iatax cred it s b utth atth ey wou ldno t b e ref

le ct edinth e tr an sa ct io n do cu m en ts . The p art ie s ag reedth atVirg in iaCo ns erv at io n wo ul d i nc reas e it s pa ym en t fr om

$1 ,61 6,5 00 to $1 ,80 2,0 00 , at a r at e o f 53 cen ts pe r do ll ar o f ad di ti on al Virg in iatax cred it s ex pe ct edto be all oc at edto Virg in iaCo ns erv at io n. Altho ug h t he ag reem en ts were s ta te d a s ef fect iv e an d wer e d at edat c ert ai n sp eci fie d p oi nt s dur in g Dec em be r 20 05 , Mr. Bro wer, o n b eh al f of Virg in ia Co ns erv at io n, an d M r. Lewis , onbe ha lf o f hi m se lf a ndpe ti ti on er, ex ecu te d a ll of th e rel ev an t tran sa ct io n d oc um en ts by D ecember 3 0, 2 00 5. Th e si gn atur e p ag es fo r th e o pe rat in g a gr eem en t, the subs cri pt io n a gr eem en t, an d t he esc ro w (...co nt in ue d) 2 5 ti m et ab le of s ix y ears an d ash orte r ti m et ab le
.-2 9-

[* 29 ] ag reem en t wer e ci rcu la te d a m on g t he pa rti es du rin g J anua ry 20 06 . The op erat in g a gr eem en t es tabl is he d i ni ti al cap it al co nt rib ut io ns by pet it io ne r of $1 2,4 85 ,73 3, d eem edm ad e o n M ay 4, 2 00 1, an d b y

Virg in iaCo ns erv at io n o f $1 ,80 2,0 00 , dee m edm ad e o n Dec em be r 1, 2 00 5. F. Tran sf

er o f Fu nd s On o r be fo re Dece m

be r 30 , 20 05 , pu rs ua ntto th e es cro w agr eem en t, Virg in iaCo ns erv at io n d ep os it ed$1 ,80 2,0 00 (in two in st al lm en ts of $ 1,7 02 ,00 0
an d $ 10 0,0 00 ) in Mr. Sk een ’s no n- in te res t-b eari ng att orne y tru stacco un t. The
es cro wedfun ds rem ai ne d i n M r. Sk een ’s no n- in te res t-b eari ng att orne y tru st
acco un t thr ou gh th e en d o f 20 05 an d i nt o J anua ry 20 06
. 2 6 On J anua ry

9, 2 00 6, M r. Pat ch et t co nt act edMr. Lewi s t o s ee wh ethe r he
wou ldli ke th e es cro wedfun ds m ov edin to anin te res t-b eari ng esc ro w acco un t. On Ja nu ary 10 , 20 06 , Mr. Sk eensen t an em ai l t o M r. Sh aw in fo rm in g h im th atSW F ha d re qu es te d t he esc ro wedfun ds be pl acedinanin te res t-b eari ng acco un t i n t he
na m e o f Mr. Sk een , as e sc ro w age nt , andask in g wh ethe r Virg in iaCo ns erv at io n wou ldall ow the tra ns fer. OnJan ua ry 18 , 20 06 , Mr. Sh aw se ntanem ai l t o M r.

The fun ds di d n otearnin te res t wh il e in th e at to rn ey tru stacco un t; an y 2 6 in te res t ea rn in gs m an da to ril y were p ai d t o “ IOLTA”, th e Vir gi ni a le ga l ai d fu nd
.-3 0-

[* 30 ] Sk eenauth or iz in g Mr. Sk eento in ve stth e es cro wedfun ds ina m on ey 2 7
m ark etor o th er n o- ris k i nv es tm en t an d, wh enth e es cro w was re le as ed , forMr. Sk eento rel eas e th e in te res t ea rn edon th e acc ou ntto SW F as pa rt o f Virg in ia Co ns erv at io n’s capi ta l co nt rib ut io n. OnJanua ry 25 , 20 06 , Mr. Sk eenop en edan in te res t-b eari ng m on ey

m ark etacco un t u nd er the na m e “ Ja m es E. Skee n” , as

“ Escr ow Ag en t fo r SWF Real Est at e, LLC” an d p ro vi de d t he ba nkwith S W F’s ta xp ay er i de nt ifi cat io n n um be r fo r th atacco un t; so m et im e sh ortl y th erea fte r, he de po si te d e sc ro w fun ds of $ 1,8 02 ,00 0 fr om th e n on -in te res t-b eari ng att orne y tru st
acco un t i nt o t he in te res t-b eari ng m on ey m ark etacco un t. As re qu ire d p ur su an t t o t he esc ro w agr eem en t, the eas em en t d eedwas reco rd edon Decem

be r 30 , 20 05 , andev id en ce o f th is reco rd at io n was pro vi de d t o Virg in iaCo ns erv at io n andMr. Sh aw sh ortl y aft er the reco rd at io n. Mr . Pat ch et t
se ntto Mr. Sh aw on Marc h 1 6, 2 00 6, a t it le rep ort, p rep aredan d d at edaft er the

In it ia ll y , Mr. Sh aw ex pr es se d c on cern th at , if the esc ro wedfun ds were 2 7 in ve st edan d t he va lu e d ecl in ed , Virg in iaCo ns erv at io n wo ul d b e o bl ig at edto co nt rib ut e th e fu ll $1 ,80 2,0 00 of e sc ro wedfun ds ; b as ic al ly, th atVirg in ia Co ns erv at io n b or e th e ri skof a ny decl in e in va lu e due to in ve st m en t i n a n i nt eres tbe ari ng acco un t. WhenMr. Sh aw as ke d M r. Geck er fo r hi s tho ug ht s re ga rd in g t he reque stto tra ns fer the esc ro wedfun ds to anin te res t-b eari ng acco un t, Mr . Geck er st at ed : “ Altho ug h I s ho ul d c are, I re al ly don ’t. W e h av e wha t we b arg ai ne d fo r -- itis un li ke ly tha t we wi ll ge t the m on ey ba ck . Unl es s you d is ag ree, l etth em in ve st an d k eep in te res t.” SWF ev en tu al ly agree d t o a ss um e th e ri skass oc ia te d wi th an y de cl in e in va lu e o f th e fu nd s wh il e th ey were h el d i n an i nt eres t-b eari ng acco un t.-3 1-

[* 31 ] eas em en t. On Ma rch 30 , 20 06 , Virg in iaCo ns erv at io n a ndSW F rec ei ve d 2 8 th e cre di t tran sa ct io n n um be r fro m th e VDOT; as of tha t m om en t, ea chof the
co nd it io ns setforth inth e es cro w agr eem en t fo r rel eas e o f th e es cro wedfun ds was sa ti sf ie d. Howev er, b efo re au th or iz in g t he rel eas e o f th e es cro w as re qu ire d b y th e es cro w agr eem en t, Mr . Sha w requi redth e ex ecu ti onof t he fir stam en dm en t t o t he op erat in g a gr eem en t (f

irs t am en dm en t) t o re fle ctpe ti ti on er, an d n otMr. Lewi s, as th e o th er m em

be r in SW F. The o rig in al op erat in g a gr eem en t m is ta ke nl y na m ed Mr. Lewi s, an d n otpe ti ti on er, as th e fo un di ng an d c on ti nu in g m em be r of SW F, bu t M r. Lewis di d n otat any tim e d ire ct ly hol d am em be rs hi p i nt eres t i n S W F. On Apr il 13 , 20 06 , Mr. Lewis si gn edth e fi rs t am en dm en t, thu s amend in g t he op erat in g a gr eem en t b y

na m in g p et it io ne r as th e fo un di ng an d c on ti nu in g m em be r of SW F in pl ace o f Mr. Lewi s an d t o c on firm Mr. Lewi s’ rol e as m an ag er. On Apr il 14 , 20 06 , Mr. Sh aw au th or iz edMr. Sk eento rel eas e to SW F th e es cro wed

SWF hadpre vi ou sl y

rece iv eda ti tl e rep ort fr om Ch ic ag o Ti tl e th atst at ed 2 8 th atth ere wer e n o e nc um br an ces th atm ig htaffe ctth e v al ue of the eas em en t, b ut th e ti tl e rep ort was pre pa redan d d at edbe fo re the reco rd in g o f th e eas em en t d eed
.-3 2-

[* 32 ] fun ds an d t o p ay

to SWF an y

in te res t an d o th er ea rn in gs on th e in ve st ed
es cro wedfun ds . In t ot al , Virg in iaCo ns erv at io n t ran sf erre d $ 1,8 02 ,00 0 t o S W F. 2 9 Afte r Mr. Sk eenrece iv edth e requi si te au th or iz at io n t o re le as e th e es cro wed fund s, the rem ai ni ng esc ro wedfun ds were p ai d t o S W F fo r it s o wn u se or t o o th er pa rti es as d ire ct edby SWF. On Ap ril 17 , 20 06 , Mr. Sk eenpa idth e rem ai ni ng $1 ,45 6,4 12 fro m

th e es cro w acco un t t o aba nkacco un t o wne d b y pe ti ti on er. 3 0 Ove r th e co ur se of s ix tra ns fers fro m Apri l 2 4 t o Au gu st17 , 20 06 , pet it io ne r tra ns ferr edfro m

it s b an k a cco un t t o S W F th e fo ll owi ng va ry in g a m ou nt s o f th e es cro wedfun ds : Date Am ou nt

Apr. 2 4, 2 00 6 $3 50 ,00 0 May 30 , 20 06 20 0,0 00 Ju ly 10, 2 00 6 50 0,0 00 Ju ly 25, 2 00 6 20 ,00 0 Aug . 1, 2 00 6 50 ,00 0 Aug . 17 , 20 06 32 0,0 00

Altho ug h Vi rg in iaCo ns erv at io n a gr eedto pa y to SW F a $ 50 0 n om in al 2 9 in it ia l co nt rib ut io n t o e nt er i nt o the VTC trans act io n, the re i s n o e vi de nc e th atth e $5 00 no m in al in it ia l co nt rib ut io n was ev er p ai d. Mr. Sk eenpa idco ns ul ti ng fees of $ 35 6,7 59 to Co ns erv at io n S ol ut io ns for 3 0 it s s erv ic es infurth eran ce o f th e eas em en t an d t he VTC trans act io n.-3 3-

[* 33 ] Into ta l, p et it io ne r tr an sf erre d t o S W F $ 1,4 40 ,00 0 o f th e es cro wedfun ds it
rece iv edfro m

Virg in iaCo ns erv at io n. V. App li cat io n F oran d Us e o f Virg in iaTax C red it s Dur in g t he en d o f Decem be r 20 05 , Mr. Sk eenan d S ke enLaw beg an pr ep ari ng th e Fo rm s LPC for th e VTC tr an sa ct io n. OnJan ua ry 19 , 20 06 , Mr. Pat ch et t s en t a F orm

82 83 reg ard in g t he do na ti on of t he eas em en t b y SW F to Sco tt Cl ark , th e se ni orpl anne r fo r th e Alb em arl e Co un ty PRFA. On Feb ru ary 13 , 20 06 , th e Alb em arl e Co un ty PRFA si gn edth e Fo rm 82 83 an d re tu rn editto Sk eenLaw’ s of fic e. SWF’ s Fo rm

LPC was si gn edby Mr. Lewis an d n ot ari zedon Feb ru ary 21 , 20 06 . On Feb ru ary 22 , 20 06 , Mr. Pat ch et t m ai le d S W F’s Fo rm LPC (LPC # 1) to th e VDOT; at ta ch edto LPC # 1 was a co py of th e fu ll ap pr ai sa l re po rti ng th atth e va lu e o f th e eas em en t was $7 ,39 8,3 33 , a co py of th e rec or de d e as em en t d eed , and a si gn edFo rm

82 83 . Sect io n 6 of LPC #1 in di cat edth atSW F was th e cu rren t ho ld er o f Virg in iatax cred it s an d t ha t $ 29 9,1 67 of t he Virg in iatax cred it s wo ul d be all oc at edto pe ti ti on er an d $ 3,4 00 ,00 0 t o Vi rg in iaCo ns erv at io n. OnFeb ru ary 22 , 20 06 , Mr. Pat ch et t m ai le d asec on d F orm LPC (LPC # 2) rel at in g t o t he tra ns fer of $2 99 ,16 7 o f Virg in iatax cred it s fr om pe ti ti on er, wh o was li st edas t he curren t ho ld er o f Virg in iatax cred it s, t o M r. Lewis . LPC #2 was a ls o s ig ne d b y Mr.-3 4-

[* 34 ] Lewis an d n ot ari zedon Feb ru ary 21 , 20 06 . The $ 29 9,1 67 of Vi rg in iatax cred it s al lo cat edto pe ti ti on er were tra ns ferr edor a ll oc at edto Mr. Lewi s o n o r be fo re Dece m

be r 31 , 20 05
. Ina le tt er d at edDecem

be r 30 , 20 05 , andad dr es se d t o C athy Early of the VDOT, Mr. Gecke r rep res en te d t ha t Vi rg in iaCo ns erv at io n a cqui red$3 ,40 0,0 00 in Virg in iatax cred it s fr om

SW F an d s ub se qu en tl y

tra ns ferr ed$2 ,72 0,0 00 of t ho se Virg in iatax cred it s t o C he st erfi el d C on se rv an cy , Inc . (Ch es te rfi el d Co ns erv an cy ), a no np ro fitorg an iz at io n c reat edby Mr. Gecke r an d o th er 3 1 in di vi du al s. Ch es te rfi el d C on se rv an cy was ali m it edpartn er i n Vi rg in ia Co ns erv at io n a ndin te nd edto ob ta in Virg in iatax cred it s fo r subs eque ntsal e to in di vi du al tax pay ers ; the rev enue fro m th e sa le s wo ul d a ll ow Ch es te rfi el d Co ns erv an cy

to furth er i ts ch ari tabl e co ns erv at io n p ur po se s. Acco rd in g t o a se arch of S ta te tax reco rd s b y Ms . Early, 35 in di vi du al in ve st or s p ur ch as edfro m Ch es te rfi el d C on se rv an cy Virg in iatax cred it s o f $2 ,42 0,0 00 th atori gi na te d fr om
Pet it io ne r ob

jects to th e cre di bi li ty of th is let te r an d c on te nd s tha t the re i s 3 1 no ev id en ce tha t M r. Geck er s en t the let te r to Ms . Early andth atot he r in fo rm at io n in th e le tt er i s i na ccu rat e. Howev er, Mr . Geck er s ig ne d t he let te r an d i de nt ifi ed th e le tt er as hi s o wn attri al , andth e le tt er was adm it te d a s ev id en ce. Alt ho ug h we do no t o pi ne on whet he r th e le tt er was actua ll y sen t t o M s. Earl y

or wh ethe r ot he r in fo rm at io n i n t he let te r is accu rat e, we be li ev e th atth e le tt er i s p ro ba ti ve as t o M r. Geck er’s u nd ers tand in g o f th e al lo cat io ns of Vi rg in iatax cred it s fr om Virg in ia Co ns erv at io n a fte r th e VTC tr an sa ct io n.-3 5-

[* 35 ] th e eas em en t o n S he rwo odFarm ; 3 2 o f th os e in di vi du al tax pa y ers cla im ed Virg in iatax cred it s o rig in at in g wi th th e eas em en t i n ato ta l am ou ntof $ 2,1 57 ,63 3
on th ei r 20 05 Sta te in co m e ta x re tu rn s. 3 2 The VDOT recei ve d LPC #1 on Marc h 1 , 20 06 . The VDOT sen t Vi rg in ia Co ns erv at io n acred itackno wled gm en t l et te r da te d M arch 30 , 20 06 , th at ackno wled ge d re cei ptof LPC #1 , li st edth e cre di t tran sa ct io n n um be r as LP 05 01 35 , an d p ro vi de d t ha t Vi rg in iaCo ns erv at io n c ou ldrece iv e Vir gi ni a ta x

3 3 cred it s, ef fect iv e ta x year 20 05 an d e xp iri ng tax y ear 2 01 0, o f $3 ,40 0,0 00 fora do na ti on of the eas em en t t o t he Alb em arl e PRF A. The cr ed itackno wled gm en t 3 4 le tt er al so st at edth atth e le tt er i ts el f di d n otco ns ti tu te ap pr ov al of t he am ou ntof Virg in iatax cred it s, tha t Vi rg in iatax cred it s m ig htbe di sa ll owe d i n wh ol e o r in
Pet it io ne r ob

jects to th e sp read sh eet s d oc um en ti ng Ms . Early’ s s earc h, 3 2 whi chwere at ta ch edto all eg edFo rm s LPC fil edby V irg in iaCo ns erv at io n a nd Ch es te rfi el d C on se rv an cy , as h ears ay . Alth ou gh we su st ai n p et it io ne r’s he ars ay ob jecti onas t o F orm s LPC th em se lv es be cau se Ms . Early was no t qua li fie d t o te st ify as t o t he tru th of t he m at te rs ass ert edth erei n, we co nc lu de th atth e h ears ay res tri ct io n d oe s n otex te ndto sp read sh eet s tha t wer e cre at edby Ms. Earl y an d t ha t do cu m en t the res ul ts of s earc he s s he co nduc te d. The fir sttwo di gi ts inth e LP nu m be r, “ 05 ”, in di cat e VDOT’ s 3 3 ackno wled gm en t tha t the Virg in iatax cred it s co ul d b e cl ai m eddu rin g t he 20 05 tax y ear. The fir sty ear i n wh ic h M r. Lewis an d Vi rg in iaCo ns erv at io n c ou ldcla im

3 4 Virg in iatax cred it s ar is in g o utof t he eas em en t was 20 05 , bec au se th atwas the y ear i n wh ic h the eas em en t d eedwas re co rd ed
.-3 6-

[* 36 ] pa rt upo n s ub se qu en t re vi ew an d aud itby the VDOT, an d t ha t the VDOT
m ad e n o warran ti es th atan y tax be ne fit s wo ul d b e av ai labl e to th e d on orof t he
eas em en t o r to any

tra ns fere e o f th e Vir gi ni a ta x c red it s. VI. Tax Returns of the Part ic ip an ts A. Fed eral Inc om e Tax Returns SWF tim el y

fil edit s Fo rm

10 65 , U.S. Retu rnof P artne rs hi p In co m e, in cl ud in g S ch edul es K-1, Partn er’s Sh are o f In co m e, Deduc ti on s, Cr ed it s, an d Oth er It em s fo r it s 2 00 5 t ax y ear. Onit s t ax y ear 2 00 5 F orm 10 65 , SWF rep orte d a ch ari tabl e co nt rib ut io n o f $7 ,39 8,3 33 fro m th e eas em en t an d i nd ic at edth atit
us eda cas h b as is m etho d o f acc ou nt in g. OnSch edul e L, Bal an ce Sh eetpe r Bo ok s, o f it s 2 00 5 F orm

10 65 , SWF rep orte d $ 1,8 02 ,00 0 o n l in e 1 for“ Cas h” at

“ Endof t ax y ear” . On th e Sch edul e M-2 , Anal y si s o f Part ne rs ’ Cap it al Acco un ts , on it s 2 00 5 F orm

10 65 , SWF rep orte d $ 1,8 02 ,00 0 o n t he li ne for“ Cap it al
co nt rib ut ed ” in “ Cas h” . On th e 2 00 5 S ch edul e K-1 forVirg in iaCo ns erv at io n, Bo x N, Partn er’s Cap it al Acco un t An al y si s, re po rts $1 ,80 2,0 00 ne xtto th e li ne en ti tl ed“ Cap it al co nt rib ut eddurin g t he y ear” . The Sc he du le K-1 fo r Virg in ia Co ns erv at io n re pr es en te d tha t Vi rg in iaCo ns erv at io n re cei ve d a1% i nt eres t i n t he in co m e, lo ss es , andcap it al of S W F fo r th e 2 00 5 t ax y ear, an d S WF al lo cat ed-3 7-

[* 37 ] $7 3,9 83 of t he ch ari tabl e d educ ti on ari si ng ou t o f th e eas em en t t o Vi rg in ia Co ns erv at io n p ur su an t t o i ts 1% p erce nt ag e in te res t. SWF als o t im el y

fil edwith t he IRS, p ur su an t t o e xt en si on s, i ts Fo rm 10 65 fo r it s 2 00 6 t ax y ear. On i ts Fo rm 10 65 forit s 2 00 6 t ax y ear, SWF in di cat edth at 3 5 itha d abe gi nn in g c as h b al an ce o f $1 ,80 2,0 00 on Jan ua ry 1, 2 00 6. B. Virg in iaInc om e Tax Returns SWF als o fi le d wi th th e VDOT its 20 05 an d 2 00 6 F orm s 5 02 , Virg in ia Pas st hr ou gh Ent it y

Return o f In co m e, to ge th er wi th Sch edul es VK-1 (F orm 50 2) , Owner ’s Sha re o f In co m e an d Vi rg in iaMo di fic at io ns an d C red it s, fo r eac h pu rp orte d p artne r of

SW F. On a Sc he du le VK-1 fi le d wi th it s Fo rm 50 2, SWF al lo cat ed$3 ,40 0,0 00 inVirg in iatax cred it s t o Vi rg in iaCo ns erv at io n. Mr. Lewi s re po rte d $ 29 9,1 66 inVirg in iatax cred it s o n S ch edul e CR, Cr ed it Co m pu ta ti on Sch edul e, li ne 10 0, o f hi s 2 00 5 Vi rg in iaFo rm 76 0C G, Res id en t In di vi du al Inc om e Tax Return, fo r hi s 2 00 5 t ax y ear. Mr . Lewis cla im ed$9 2,8 33 of th e Vir gi ni a ta x c red it s t o o ffs ettax es owedfor hi s 2 00 5 t ax y ear, $ 10 0,0 00 of th e Vir gi ni a ta x c red it s t o o ffs ettax es owedforhi s 2 00 6 t ax y ear, $ 10 0,0 00 of t he

SWF’ s 2 00 5 a nd20 06 Fo rm s 1 06 5 wer e p rep aredby Mr. Ske enan d 3 5 si gn edby Mr. Lewis
.-3 8-

[* 38 ] Virg in iatax cred it s t o o ffs ettax es owedforhi s 2 00 7 t ax y ear, an d $ 6,3 33 of th e Vir gi ni a ta x c red it s t o o ffs ettax es owedforhi s 2 00 8 t ax y ear. VII. Aud itan d 2 00 5 F PAA Res po nd en t i ss ue d an F PAA da te d F eb ru ary 16 , 20 11 , with re sp ectto SWF’ s 2 00 5 t ax y ear. Th e FPAA p ro po se d t he fol lo win g a dju st m en ts to th e pa rtn ers hi p i te m s re po rte d o n S W F’s 20 05 Fo rm 10 65 : (i ) anad

jus tm en t t o or di na ry in co m e o f $1 ,67 7,1 43 ba se d o n a n i nc reas e ingro ss rece ip ts or s al es , (ii )
anad jus tm en t o f $1 ,67 7,1 43 to pa rtn er capi ta l co nt rib ut io ns m ad e dur in g the y ear,
an d (i ii ) anad

jus tm en t o f $4 ,92 1,2 33 to ch ari tabl e co nt rib ut io ns . W it h re sp ectto th e ad jus tm en ts to ord in ary in co m e an d p artne r cap it al co nt rib ut io ns , res po nd en t de te rm in edth atSW F’s rece ip t o f pu rp orte d c ap it al co nt rib ut io ns of $ 1,6 77 ,14 3 fro m Virg in iaCo ns erv at io n i n e xc ha ng e fo r Virg in iatax cred it s was a di sg ui se d
sa le pu rs ua ntto sec ti on 70 7. Re sp on de ntde te rm in edth at$1 24 ,85 7, the ba la nc e of th e to ta l fu nd s o f $1 ,80 2,0 00 rece iv edfro m Virg in iaCo ns erv at io n, re pr es en te d a cap it al co nt rib ut io n i n e xc ha ng e fo r a 1 % pe rcen ta ge in te res t i n S WF. W it h
res pe ctto th e ad

jus tm en t t o c ha rit ab le co nt rib ut io ns , onth e b as is of ava lu at io n rep ort p rep aredforres po nd en t b y Sen io r App rai se r Ken ne th E. Bake r, MSR , res po nd en t d et erm in edth atitha s n otbe enest ab li sh edth atth e v al ue of t he
eas em en t was m or e th an$2 ,47 7,1 00
.-3 9-

[* 39 ] OPINION I. Mo ti on s i n Li m in e As a p rel im in ary m atte r, we ad dr es s re sp on de nt ’s m ot io ns inli min e to pr ecl ud e te st im on y

of R ex Lin vi ll e an d o f McC he sn ey Goo da ll III as ex pe rt witne ss es . At tr ia l, we al lo wedth e te st im on y of b ot h b utto okres po nd en t’s 3 6
m ot io n u nd er ad vi se m en t. We fin d t he tes ti m on y of b ot h M r. Lin vi ll e an d M r. Goo da ll to be un he lp fu l wi th res pe ctto th e ad jud ic at io n o f th e is su es be fo re u s. Acco rd in gl y , res po nd en t’s m ot io ns inli m in e wil l b e d en ie d a s m oo t. II. Bu rd enof P ro of Gen eral ly, th e Co m

m is si on er’s ad

jus tm en ts inanFPAA are p res um ed
co rrec t, an d t he party chal le ng in g t he FPAA be ars th e b ur de n o f pr ov in g t ho se ad jus tm en ts are erro ne ou s. Ru le 14 2( a)(1 ); Welc h v . Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) ; Cr es cen t Ho ld in gs , LLC v. Co m m is si on er, 1 41 T.C. 47 7, 4 85 (20 13 );
se e al so Rep ub li c Pl aza P ro ps . P’shi p v . Comm is si on er, 1 07 T.C. 94 , 10 4 (1 99 6) (“ Pet it io ne r be ars th e b ur de n o f pr ov in g t ha t re sp on de nt ’s det erm in at io ns inth e FPAA are erro ne ou s.”) ; Cl ov is I v. Co m m is si on er, 8 8 T.C. 9 80 , 98 2 (1 98 7)

Res po nd en t al so subm it te d am ot io n i n l im in e to pre cl ud e th e te st im on y of 3 6 Dav idNelm s re ga rd in g t he dra fti ng an d b as es of t he FPAA. At tr ia l p et it io ne r rel eas edMr. Nel m s wi th ou t ca ll in g o n h im to tes ti fy , andth eref

or e we d en ie d res po nd en t’s m ot io n a s m oo t.-4 0-

[* 40 ] (ho ld in g t ha t an FPAA is th e fu nc ti on al equi va le ntof ano ti ce o f de fic ie nc y ). The b ur de n o f pr oo f m ay sh iftto th e Co m

m is si on er wh enth e Co m m is si on er’s p os it io n i m

pl ic at es a “ ne w m at te r” n otinth e FPAA. See Rul e 14 2( a)(1 ); Gra ev v. Co m

m is si on er, 1 40 T.C. 37 7, 3 79 n.3 (20 13 ). Pet it io ne r co nt en ds th atres po nd en t ra is eda ne w m atte r whe n, i n h is an swe r, he to okth e po si ti onth atth e VTC tr an sa ct io n was en ti rel y a di sg ui se d s al e an d o n t hi s b as is in crea se d t he de fic ie nc y

fro m th e $ 1,6 77 ,14 3 s ho wn i n t he FPAA to $1 ,80 2,0 00
. Sp eci fic al ly, pe ti ti on er co nt en ds th atres po nd en t ab an do ne d (1 ) hi s p os it io n i n t he FPAA th atth e VTC tr an sa ct io n was pa rti al ly a dis gu is edsal e p ur su an t t o s ect io n 70 7( a)(2 )(B) , and(2) hi s p os it io n i n h is an swe r th atVirg in iaCo ns erv at io n was no t a p artne r in SW F. Res po nd en t ar gu es th athe di d n otrai se any ne w is su es inhi s
an swe r an d t ha t h e d idno t ab an do n h is po si ti on th atth e VTC tr an sa ct io n was a di sg ui se d s al e, bu t s im

pl y in crea se d t he de fic ie nc y

fro m th e am ou ntsh own on th e FPAA; res po nd en t ar gu es th atpe ti ti on er i s the refo re re qu ire d t o s ho w th at
res po nd en t’s as se ss m en t i s “ witho utrat io na l fo un da ti on ” o r “ arb it rary and
erro ne ou s” to sh iftth e b ur de n o f pr oo f. The bu rd enof p ro of

is rel ev an t o nl y

when th ere i s equa l ev id en ce o n b ot h si de s, i .e., wher e th e ev id en ce i s i n “ equi po is e”. See Dagr es v. Co m m is si on er, 1 36 T.C. 26 3, 2 79 (20 11 ). “ Ina cas e whe re the st an da rdof p ro of is pre po nd eran ce o f-4 1-

[* 41 ] th e ev id en ce an d the pre po nd eran ce o f th e ev id en ce fa vo rs on e p arty , we
m ay de ci de th e cas e o n t he weig htof t he ev id en ce an d n oton anall oc at io n o f th e bu rd enof p ro of

.” Knu ds env. Co m

mis si on er, 1 31 T.C. 18 5, 1 89 (20 08 ). W e d o no t b el ie ve th atth e b ur de n o f pr oo f affe ct s the res ol ut io n i n t hi s ca se , bec au se th e pr ep on de ran ce o f th e ev id en ce re so lv es th e is su es no m atte r whi chparty has th e bu rd en . See Grae v v . Comm is si on er, 1 40 T.C. at 3 93 n.8 ; Dag res v. Co m m is si on er, 1 36 T.C. at 2 79 . Con se qu en tl y , we nee d n otde te rm in e whe th er res po nd en t ra is eda ne w m at te r orwhet he r pe ti ti on er h as su cces sf ul ly shi fte d t he bu rd enof p ro of

. III. Is su e 1 . Whe th er the VTC Trans act io n Was a Di sg ui se d S al e Res po nd en t co nt en ds th atth e VTC tr an sa ct io n, wh ic h i nc lu de d Vi rg in ia Co ns erv at io n’s tran sf

er o f cas h t o S W F in ex ch an ge forVirg in iatax cred it s, was a di sg ui se d s al e p ur su an t t o s ect io n 7 07
. Pet it io ne r co nt en ds th atth e VTC 3 7

Inhi s an swe r, res po nd en t ra is edas an a lt ern at iv e g ro un d tha t (a ) Virg in ia 3 7 Co ns erv at io n, wh il e in form a pa rtn er i n S W F, was n ot , insubs tanc e, a p artne r in SWF, (b) the all eg edcap it al co nt rib ut io n o f Virg in iaCo ns erv at io n t o S W F an d rece ip t o f Virg in iatax cred it s i n re tu rnwere i n s ub st an ce a s al e o f th e Vir gi ni a ta x cred it s b y SW F to Virg in iaCo ns erv at io n, an d (c ) as a res ul t o f th e subs ta nt iv e sa le of th e Vir gi ni a ta x c red it s b y SWF to Virg in iaCo ns erv at io n, SWF sh ou ldha ve reco gn iz ed$1 ,80 2,0 00 inord in ary in co m e fo r ta x year 20 05 . Howev er, i n po st tri al bri efs res po nd en t co nc ed edth athe “ is no t ch al le ng in g t he va li di ty of th e pa rtn er-p artne rs hi p re la ti on sh ip be twee n S W F an d Vi rg in iaCo ns erv at io n.” Acco rd in gl y , we dee m

th is is su e to be co nc ed edan d d o n otdi sc us s i t fu rth er.-4 2-

[* 42 ] tra ns act io n was no t a d is gu is edsal e p ur su an t t o s ect io n 7 07 bu t ra th er a
co nt rib ut io n o f cas h b y

Virg in iaCo ns erv at io n t o S W F in ex ch an ge fora pa rtn ers hi p i nt eres t an d asubs eque ntall oc at io n o f Virg in iatax cred it s. A. App li cab le Sta tu te s an d R eg ul at io ns Part ne rs hi ps are co ns id eredpa ss th ro ug h e nt it ie s an d the refo re ar e n ot
subjec t t o F ed eral in co m e ta x a t the en ti ty lev el . Sec. 7 01 . Ins te ad , a pa rtn ers hi p’s in co m e o r lo ss flo ws thr ou ghto it s i nd iv idua l p artne rs . See s ecs . 70 1 a nd70 2. Whe n d et erm in in g F ed eral in co m e ta x l iabi li ty, eachpa rtn er m us t i nc lu de
se pa rat el y

hi s o r he r di st rib ut iv e sh are o f th e p artne rs hi p’s t ax ab le in co m e o r lo ss , am on g o th er thi ng s. Sec . 70 2( a)(8 ). As a g en eral rul e, a p artne r’s di strib ut iv e sh are o f in co m e, ga in , lo ss , deduc ti on , or c red itis de te rm in edby the pa rtn ers hi p ag reem en t. Sec . 70 4( a). Gen eral ly, a p artne r m ay

co nt rib ut e cap it al to a pa rtn ers hi p t ax free an d m ay rece iv e a t ax -fre e return o f pr ev io us ly tax edpro fit s thr ou gh di st rib ut io ns ex cep t t o th e ex te ntth e d is tri bu ti onex ceed s the pa rtn er’s ad jus te d b as is . See s ecs . 72 1, 7 31
. The se no nr eco gn it io n ru le s, h owe ve r, do no t ap pl y to a tr an sa ct io n b etweena pa rtn ers hi p a nda pa rtn er n otact in g i n h is or h er capa ci ty as a p artne r. Sec. 3 8 Pet it io ne r co nt en ds th atinth e FPAA an d a t tria l re sp on de ntco nc ed edth at 3 8 Virg in iaCo ns erv at io n was act in g i n i ts cap aci ty as a p artne r an d tha t SWF was a (co nt in ue d...)-4 3-

[* 43 ] 1.7 21 -1 (a), In co m e Tax Reg s.; see sec . 70 7( a)(1 ). In t ho se si tu at io ns th e tra ns act io n i s re cas t as if i t o ccurredbe twee n t he pa rtn ers hi p a ndon e who is no t a pa rtn er. Sec . 70 7( a)(1 ). Sect io n 7 07 “pr ev en ts us e o f th e p artne rs hi p p ro vi si on s to ren de r no nt ax ab le whatwou ldinsubs ta nc e h av e b eena ta xabl e ex ch an ge if i t ha d n otbe en‘ run t hr ou gh ’ th e p artne rs hi p.” Otey v. Co m m is si on er, 7 0 T.C. 3 12 , 31 7 (1 97 8) , aff’d, 6 34 F.2d10 46 (6t h C ir. 1 98 0)
. One su chno nr eco gn it io n t ran sa ct io n i s co m m on ly referre d t o a s a d is gu is ed
sa le an d i s g ov ern edby sect io n 7 07 (a)( 2) . A dis gu is edsal e o ccu rs when (1) a pa rtn er d ire ct ly or in di rect ly tran sf ers m on ey

or p ro pe rty to apa rtn ers hi p, (2 ) th ere is a rel at eddi rector i nd ire cttra ns fer o f m on ey or o th er p ro pe rty by

th e p artne rs hi p to su chpa rtn er, an d (3 ) th e tr an sf ers are p ro pe rly char act eri zedas asal e o r ex ch an ge of p ro pe rty whenvi ewedto ge th er. Sec . 70 7( a)(2 )(B) . In al l ca se s the (...co nt in ue d) 3 8 bo nafid e p artne rs hi p a ndth eref or e th atsec . 70 7 d oe s n otap pl y inth e cas e at ha nd . W e d is ag ree. Al th ou gh res po nd en t co nc ed edth athe “ is no t ch al le ng in g t he va li di ty of th e p artne r-p artne rs hi p re la ti on sh ip be twee n S W F an d Vi rg in ia Co ns erv at io n,” res po nd en t h as no t co nc ed edth atVirg in iaCo ns erv at io n was act in g i n i ts cap aci ty as pa rtn er. Mo reo ve r, res po nd en t co rrec tl y co nt en ds th atth e ex is te nc e o f a v al idpa rtn er-p artne rs hi p re la ti on sh ip do es no t p recl ud e th e ap pl ic at io n o f se c. 70 7 a ndth atth e p artne r m ay no t b e act in g i n h is cap aci ty as a pa rtn er dur in g apurp orte d t ran sf er o f pr op erty

to th e p artne rs hi p, o r vi ce v ers a. Sec. 1 .70 7- 3( a)(3 ), In co m e Tax Reg s.; see als o R ou te 23 1, LLC v . Comm is si on er, at*2 7. Acco rd in gl y , sec . 70 7 m ay ap pl y inth e in st an t ca se reg ard le ss of wh ethe r SWF is a b on a fi de pa rtn ers hi p a ndVirg in iaCo ns erv at io n i s a b on a fi de pa rtn er.-4 4-

[* 44 ] subs ta nc e o f th e tr an sa ct io n g ov ern s ra th er than i ts form . Sec. 1 .70 7- 1( a), In co m e Tax Reg s. Sect io n 1 .70 7- 3( b) (1 ), In co m e Tax Reg s., clarif ie s the th irdpro ng of 3 9
se ct io n 7 07 (a)( 2) (B) andpro vi de s g ui da nc e wit h re ga rdto whi chpa rtn ers hi p tra ns fers sh ou ldbe ch arac te riz edpro pe rly as s al es or e xc ha ng es of p ro pe rty. Purs ua ntto sec ti on 1.7 07 -3 (b )(1 ), In co m e Tax Reg s., a d is gu is edsal e h as oc cu rred
on ly if, onth e b as is of a ll of t he fact s an d c irc um st an ces , (1) th e tr an sf er o f m on ey orot he r co ns id erat io n wo ul d n otha ve be enm ad e b utforth e tr an sf er o f pr op erty
an d (2 ) incas es inwhi chth e tr an sf ers are n otm ad e si m

ul ta ne ou sl y , th e subs eque nttra ns fer i s n otde pe nd en t o n t he en tre pr en eu ria l ri sk s o f partn ers hi p
Sec. 1 .70 7- 3, In co m e Tax Reg s., ex pr es sl y ap pl ie s i n s itua ti on s i n wh ic h 3 9 th e p artne r tr an sf

ers pro pe rty to t he pa rtn ers hi p a ndth e p artne rs hi p tran sf ers m on ey or o th er co ns id erat io n t o the pa rtn er, i .e., th e o pp os it e o f th e VTC tra ns act io n. Se c. 1.7 07 -6 (a), In co m e Tax Reg s., h owe ve r, no te s tha t ru le s s im il ar to th os e in sec . 1.7 07 -3 , Inc om e Tax Reg s., ap pl y to si tu at io ns su chas t he VTC tra ns act io n, i n wh ic h t he pa rtn er tran sf ers m on ey

to th e p artne rs hi p andth e pa rtn ers hi p t ran sf

ers pro pe rty to t he pa rtn er. Itis th eref or e ap pr op ria te to ap pl y th e ru le s p ro vi de d i n s ec. 1 .70 7- 3, In co m e Tax Reg s., i n t he in st an t ca se . See al so Va. His to ric Tax C red itFund20 01 LP v. Co m mis si on er, 6 39 F.3d12 9, 1 39 (4t h Ci r. 20 11 ) (ap pl y in g the rul es insec . 1.7 07 -3 (b )(1 ), In co m e Tax Reg s., i n a si tu at io n d es cri be d i n s ec. 1 .70 7- 6( a), In co m e Tax Reg s., i n wh ic h apa rtn er tra ns ferr edm on ey

to th e p artne rs hi p i n e xc ha ng e fo r Virg in iareh ab il it at io n hi st or ic tax cred it s) , rev ’g an d re m an di ng T.C. Mem o. 2 00 9- 29 5. As th e in st an t cas e is ap pe al ab le , abs en t s ti pu la ti on to th e co ntrary, to the U.S. Cou rt o f App eal s fo r th e Fo urth Cir cu it , we fol lo w th e d eci si on of t he Co urt o f App eal s. Go ls env. Co m m is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1)
.-4 5-

[* 45 ] op erat io ns . Sect io n 1 .70 7- 3( b) (2 ), In co m e Tax Reg s., p ro vi de s the fo ll owi ng no ne xh au st iv e li stof 1 0 fa ct s an d c irc um st an ces th atm ay ten d t o p ro ve th e ex is te nc e o f a d is gu is edsal e p ur su an t t o s ect io n 1 .70 7- 3( b) (1 ), In co m e Tax Reg s.: (i) Thatth e ti m in g a ndam ou ntof asubs eque nttra ns fer are de te rm in ab le with re as on ab le cert ai nt y at t he ti m e o f anearl ie r tra ns fer; (ii ) Tha t the tra ns fero r ha s a l eg al ly enfo rceabl e ri gh t t o t he subs eque nttra ns fer; (ii i) Th atth e p artne r’s rig htto rece iv e th e tr an sf er o f m on ey

or ot he r co ns id erat io n i s s ecu redinan y m an ne r, ta ki ng in to acco un t the pe rio d dur in g wh ic h i t i s s ecu red ; (iv ) Tha t an y

pe rs on ha s m ad e o r is leg al ly obl ig at edto m ak e co nt rib ut io ns to th e p artne rs hi p i n o rd er t o p erm itth e p artne rs hi p t o m ak e th e tr an sf

er o f m on ey

or o th er co ns id erat io n; (v ) Tha t an y

pe rs on ha s l oa ne d o r ha s ag reedto lo anth e pa rtn ers hi p t he m on ey

or o th er co ns id erat io n re qu ire d t o e nabl e th e pa rtn ers hi p t o m ak e th e tr an sf er, t ak in g i nt o a cco un t wh ethe r an y su chlen di ng ob li ga ti on is subjec t t o c on ti ng en ci es rel at edto th e res ul ts of p artne rs hi p o pe rat io ns ; (v i) Th atth e p artne rs hi p h as in cu rredor i s o bl ig at edto in cu r de btto acqui re the m on ey or o th er co ns id erat io n n eces sa ry to pe rm it itto m ak e th e tr an sf

er, t ak in g i nt o a cco un t the li ke li ho odth atth e pa rtn ers hi p wi ll be ab le to in cu r th atde bt(co ns id eri ng su chfact or s as whe th er an y

pe rs on ha s ag reedto gu aran te e o r ot he rwis e as su m e pe rs on al li ab il ity

forth atde bt );-4 6-

[* 46 ] (v ii ) Tha t the pa rtn ers hi p h ol ds m on ey or o th er l iqui d a ss et s, be y on d t he reas on ab le ne ed s o f th e b us in es s, tha t ar e ex pe ct edto be av ai labl e to m ak e th e tr an sf er (t ak in g i nt o a cco un t the in co m e th at wil l b e earne d fr om

th os e as se ts ); (v ii i) Th atpa rtn ers hi p d is tri bu ti on s, al lo cat io n o r co nt ro l o f pa rtn ers hi p o pe rat io ns is de si gn edto effe ctanex ch an ge of t he bu rd en s an d b en efi ts of o wne rs hi p o f pr op erty ; (ix ) Tha t the tra ns fer o f m on ey or o th er co ns id erat io n b y th e pa rtn ers hi p t o t he pa rtn er i s d is pr op orti on at el y lar ge inrel at io ns hi p t o th e p artne r’s ge ne ral an d c on ti nu in g i nt eres t i n p artne rs hi p p ro fit s; an d (x ) Tha t the pa rtn er h as no ob li ga ti on to return o r rep ay th e m on ey or o th er co ns id erat io n t o t he pa rtn ers hi p, o r ha s s uc h a n ob li ga ti on bu t i t i s l ik el y

to be co m e due at s uc h adi st an t p oi ntinth e fu tu re tha t the pre se ntva lu e o f th atob li ga ti on is sm al l i n re la ti on to th e am ou ntof m on ey

or o th er co ns id erat io n t ran sf erre d b y th e pa rtn ers hi p t o t he pa rtn er. The weig htth atis affo rd edto each fact orde pe nd s o n the pa rti cu la r cas e. Id
. Mo reo ve r, tra ns fers m ad e b etweena pa rtn ers hi p a nda pa rtn er wi th in a two -y ear pe rio d a re “pr es um edto be a sa le of t he pro pe rty to t he pa rtn ers hi p unl es s the fact s
an d c irc um st an ces cle arl y est ab li sh th atth e tr an sf

ers do no t co ns ti tu te a sa le .” Sec. 1 .70 7- 3( c)(1 ), In co m e Tax Reg s. B. Cas el aw Altho ug h we h av e rev ie wedth e ap pl ic at io n o f se ct io n 7 07 to pu rp orte d
no nr eco gn it io n t ran sa ct io ns on m an y oc cas io ns , see , e.g., Supe rio r Trad in g, LLC-4 7-

[* 47 ] v. Co m

m is si on er, 1 37 T.C. 70 (20 11 ), aff’d, 7 28 F.3d67 6 (7 thCir . 20 13 ); Can al Co rp . v. Co m

m is si on er, 1 35 T.C. 19 9 (2 01 0) ; Gat eway Hot el Partne rs , LLC v. Co m m is si on er, T.C. Mem o. 2 01 4- 5, we h av e co ns id eredth e ap pl ic at io n o f
se ct io n 7 07 sp eci fic al ly to p ur po rte d t ran sf

ers of Vi rg in iaSta te tax cred it s i n t wo pr ev io us in st an ces . W e an al yze b ot h o f th os e cas es an d t he ir app li cab il it y inth e in st an t ca se . 1. Virg in iaHis to ric InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, T.C. Mem o. 20 09 -2 95 , 98 T.C.M. (CCH) 6 31 , 63 3 (2 00 9) , rev ’d an d re m an de d, 6 39 F.3d12 9 (4 th Cir . 20 11 ), th ree i nd iv idua ls crea te d aweb o f pa rtn ers hi ps (fund s) inord er t o pa ss Virg in iahi st or ic reh ab il it at io n t ax cred it s t o i nv es to rs . One fu nd , th e “ so ur ce pa rtn ers hi p” , partn eredwith h is to ric de ve lo pe rs an d b ecame a 0.0 1% l im it ed pa rtn er i n s el ect edhi st or ic pro pe rty dev el op m en t p artne rs hi ps to pro vi de cap it al to th os e p artne rs hi ps inex ch an ge forVirg in iahi st or ic reh ab il it at io n t ax cred it s. Id ., 98 T.C.M. (CCH) a t 6 34 -6 35 ; s ee al so 63 9 F .2dat 1 33 -1 34 . The fu nd s s ol ic it ed in ve st or s wh o wer e wil li ng to co nt rib ut e cap it al inex ch an ge forth e al lo cat io n o f Virg in iahi st or ic reh ab il it at io n t ax cred it s, p ro m is in g t ha t ea chin ve st orwou ld
rece iv e $ 1 i n Vi rg in iahi st or ic reh ab il it at io n t ax cred it s fo r ev ery 74 cen ts to 80
cen ts of c ap it al co nt rib ut ed . Va. Hist or ic Tax C red itFund20 01 LP v.-4 8-

[* 48 ] Co m

m is si on er, 9 8 T.C.M . (CCH) at63 3- 63 4. Th e fu nd s al so pro m is edth at each in ve st orwou ldrece iv e a v ery sm al l p artne rs hi p i nt eres t i n t he fun ds , al th ou gh th e fu nd s caut io ne d t ha t the in ve st or s s ho ul d n otex pe ctto rece iv e an y
m at eri al am ou nt s o f pa rtn ers hi p i nc om e o r lo ss . Id. at63 4, 6 38 ; s ee al so 63 9 F .2d at13 4. If t he pro m is edtax cred it s co ul d n otbe ob ta in ed , th e fu nd s ag reedto refu ndth e in ve st or ’s cap it al , netof e xp en se s. Va. His to ric Tax C red itFund20 01 LP v. Co m

m is si on er, 9 8 T.C.M . (CCH) at63 4. The Co m m is si on er d et erm in ed , in te r al ia , th atth e tr an sa ct io ns am on g t he in ve st or s, the fun ds , andth e d ev el op m en t p artne rs hi ps were d is gu is edsal es pu rs ua ntto sec ti on 70 7. Id . at 6 35 . Becau se th e tr an sa ct io ns were n ot si m ul ta ne ou s an d t he in ve st or s fa ceden tre pr en eu ria l ri sk s i n t he pa rtn ers hi ps , th is Co urt re jecte d t he Co m

m is si on er’s p os it io n a ndde ci de d t ha t the tra ns act io ns were no t d is gu is edsal es . Id. at64 1. Ho wev er, as no te d s up ra n ot e 3 9, the Co m m is si on er ap pe al edou r de ci si on to th e Co urt o f App eal s fo r th e Fo urth Ci rcu it , whi chrev ers edan d re m an de d o urde ci si on . Va. Hist or ic Tax C red itFund 20 01 LP v. Co m

m is si on er, 6 39 F.3dat 1 46 . The Co urt o f App eal s co ns id ered 4 0 Befo re re vi ewin g t he fact or s t o d et erm in e whe th er the tra ns act io ns sh ou ld 4 0 pr op erl y ch arac te riz edas s al es , th e Co urt o f App eal s re jecte d the tax pa y ers ’ arg um en ts th atno tra ns fer o f pr op erty ha d o ccu rredan d t ha t the cred it s wer e n ot tra ns ferr edbu t ra th er al lo cat edto th e in ve st or s. Va. His to ric Tax C red itFund (co nt in ue d...)-4 9-

[* 49 ] th e rel ev an t fa ct or s en um erat edinsec ti on 1.7 07 -3 (b )(2 ), In co m e Tax Reg s.,
an d h el d t ha t tho se fact or s s tro ng ly sug ge st edth atth e tr an sa ct io ns were s al es ,

“ [p ]arti cu la rly in l ig htof t he pre su m pt io n t ha t a s al e o ccurredun le ss cle arl y de m on st rat edot he rwis e.” Id . at 1 44 . The Co urt o f App eal s al so co nc lu de d t ha t, whi le th is Co urt was free to co nduc t i ts ownev al ua ti onof e nt rep ren eu ria l ri sk , ou r co nc lu si on s o n t he is su e were f la wedbe cau se th e o nl y

ris k t he in ve st or s fa cedwas th atof a n “ adva nc e p ur ch as er wh o p ay s fo r anit em with apro m is e o f la te r de li ve ry .” Id . at 1 45
.

2. Ro ut e 2 31 InRo ut e 2 31 , LLC v. Co m m is si on er, T.C. Mem o. 2 01 4- 30 , we enc ou nt ered fact s n earl y

id en ti cal to th os e in th e in st an t ca se . In Ro ut e 2 31 , th e Co m mis si on er is su edanFPAA to th e ta x m at te rs pa rtn er o f Ro ut e 2 31 LLC (Ro ut e 2 31 ), a pa rtn ers hi p t ha t o wne d m ul ti pl e p arce ls of l an d i n Vi rg in ia . Id. at*2 , *7 . The pa rtn ers hi p h aden te redin to a tr an sa ct io n wi th Virg in iaCo ns erv at io n i n wh ic h Virg in iaCo ns erv at io n c on tri bu te d $ 3,8 16 ,00 0 t o R ou te 23 1 i n e xc ha ng e fo r a 1 %
m em be rs hi p i nt eres t i n R ou te 23 1 a ndanall oc at io n o f $7 ,20 0,0 00 inVirg in iatax cred it s ar is in g o utof t he ch ari tabl e d on at io n o f co ns erv at io n e as em en ts an d afee (...co nt in ue d) 4 0 20 01 L.P. v. Co m

m is si on er, 6 39 F.3dat 1 40 -1 42
.-5 0-

[* 50 ] in te res t o n p arce ls of l an d o wne d b y Ro ut e 2 31 . Id. at*9 , *1 1, * 14 -* 15
. Ro ut e 2 31 an d Vi rg in iaCo ns erv at io n a gr eedto (1) a cap it al co nt rib ut io n o f 53
cen ts pe r $1 of Vi rg in iatax cred it s al lo cat edto Virg in iaCo ns erv at io n a nd(2) an in de m ni ty clau se wher eb y

Rou te 23 1 a ndth e p artne rs ot he r th anVirg in ia Co ns erv at io n (t he pre vi ou s p artne rs of t he pa rtn ers hi p) were joi nt ly andsev eral ly li ab le to in de m

ni fy Virg in iaCo ns erv at io n i f th e Vir gi ni a ta x c red it s wer e di sa ll owe d. Id . at * 12 , *1 5. Th e p rev io us pa rtn ers of t he pa rtn ers hi p a ls o h adth e op ti on to pu rch as e al l, b utno t l es s tha n a ll , of Vi rg in iaCo ns erv at io n’s
m em be rs hi p i nt eres t i n R ou te 23 1 o n o r an yti m e aft er J anua ry 1, 2 01 0. Id . at * 12
. The Co m m is si on er co nt en de d t ha t “ Ro ut e 2 31 so ldVirg in iatax cred it s t o Virg in iaCo ns erv at io n i n e xc ha ng e fo r cas h a ndth eref or e en ga ge d i n adi sg ui se d
sa le un de r se ct io n 7 07 ” an d t he refo re tha t the cap it al co nt rib ut io ns to th e pa rtn ers hi p c on st itut edord in ary in co m e. Id . at * 22 , *2 5. Aft er tria l, the Tax Co urt d eci de d t ha t the fact s b efo re the Co urt wer e squa rel y inpo in t wi th th os e in Va. His to ric an d, af

te r ap pl y in g Go ls env. Co m m is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1) (th e Gol se n ru le ), th atth e tr an sf er o f 4 1 Virg in iatax cred it s t o Vi rg in iaCo ns erv at io n i n e xc ha ng e fo r m on ey sh ou ld Gol se n v . Comm is si on er, 5 4 T.C. at75 7, es tabl is he d t he rul e th atth is 4 1 Co urt wi ll “ fo ll ow a C ou rt o f App eal s d eci si on whi chis squa rel y inpo in t wh ere ap pe al fro m

ou r de ci si on li es to th atCo urt o f App eal s”
.-5 1-

[* 51 ] pro pe rly hav e b eench arac te riz edas adi sg ui se d s al e p ur su an t t o s ect io n 7 07
. Ro ut e 2 31 , LLC v. Co m

m is si on er, at*3 5, * 38 , *4 1, * 45
. 3. App li cat io n o f Gol se n R ul e Res po nd en t’s co nt en ti on s i n t he in st an t ca se rel y , inpa rt, o n t he reas on in g
an d h ol di ng of t he Co urt o f App eal s fo r th e Fo urth Cir cu itinVa. His to ric . As
no te d abo ve , acco rd in g t o t he Gol se n ru le we fo ll ow a d eci si on of t he Co urt o f App eal s t o wh ic h a n app eal fro m ou r di sp os it io n o f a cas e li es so lo ng as tha t de ci si on is squa rel y

inpo in t an d fa il ur e to fol lo w th atde ci si on wou ldres ul t i n a n in ev it ab le rev ers al up on ap pe al . See Go ls env. Co m m is si on er, 5 4 T.C. at75 7; see al so Lard as v. Co m

m is si on er, 9 9 T.C. 4 90 , 49 4- 49 5 (1 99 2) . As th e in st an t ca se is ap pe al ab le to th e Co urt o f App eal s fo r th e Fo urth Cir cu it , we wil l fo ll ow the ho ld in gs of Va . His to ric if the fact s i n t he in st an t ca se are s qu arel y inpo in t wi th th os e in Va. His to ric
. Howev er, p et it io ne r co nt en ds th atth e fac ts inth e in st an t ca se are n ot squa rel y inpo in t wi th th os e in Va. His to ric . Peti ti on er s pe ci fic al ly argu es th at
m at eri al ly dis ti ng ui sh ab le fact s i nc lu de th e n atur e o f th e p artne rs hi ps in vo lv edan d th e types of b uyou t ri gh ts ari si ng aft er the tra ns act io ns inqu es ti on . In Ro ut e 2 31 , we co ns id eredwhet he r th e fac ts , whi chin vo lv eda tr an sa ct io n a ndpa rtn ers hi p ne arl y id en ti cal to th e VTC tr an sa ct io n, wer e squa rel y inpo in t wi th th os e in Va.-5 2-

[* 52 ] His to ric . Rou te 23 1, LLC v . Comm is si on er, at*3 5. Al th ou gh we no te d
so m e imm at eri al factua l d iff eren ces be twee n the cas es , in cl ud in g t he na ture o f th e St at e ta x c red it s i n i ss ue , th e rat io s o f cred it s al lo cat edto cap it al co nt rib ut ed , and th e p artne rs hi p s tru ctur es an d t he ir o pe rat in g s ta tu se s, we u lt im at el y de ci de d t ha t th e co nt ro ll in g fa ct s i n R ou te 23 1 wer e squa rel y inpo in t wi th th os e inVa. His to ric . Id., at*3 3- *3 5. As we ex pl ai ne d abo ve , th e VTC tr an sa ct io n i s n earl y id en ti cal to th e tr an sa ct io n i n R ou te 23 1. Acco rd in gl y , as we c on cl ud edinRo ut e 23 1, we s im il arl y

co nc lu de th atth e fac ts inth e in st an t ca se are s qu arel y inpo in t with t ho se inVa. His to ric , andwe ap pl y th e h ol di ng s o f Va. His to ric inth e in st an t
cas e p ur su an t t o t he Gol se n ru le
. C. Ana lysis of t he VTC Trans act io n a s a Di sg ui se d S al e W e n ow turn t o a na lyzin g wh ethe r th e VTC tr an sa ct io n c on st itut es a di sg ui se d s al e p ur su an t t o s ect io n 7 07 (a)( 2) (B) andsec ti on 1.7 07 -3 (b ), In co m e Tax Reg s. Ho wev er, b ecau se th e p art ie s ag ree t ha t al l o f th e rel ev an t tran sf ers of th e VTC tr an sa ct io n o ccu rredwithi n atwo -y ear p eri odbe twee n Dec em be r 20 05
an d Ap ril 20 06 , we pre su m e p ur su an t t o s ect io n 1 .70 7- 3( c)(1 ), In co m e Tax Reg s., th atth e VTC tr an sa ct io n was a sa le or e xc ha ng e unl es s the fact s an d ci rcu m st an ces cle arl y

est ab li sh th atth e tr an sf

ers do no t co ns ti tu te a di sg ui se d s al e.-5 3-

[* 53 ] 1. Tran sf er o f Mo ne y Purs uantto sec ti on 70 7( a)(2 )(B) , th ere c anbe a di sg ui se d s al e o nl y if the re is a di rector i nd ire cttra ns fer o f m on ey or o th er co ns id erat io n fr om a pa rtn er t o a pa rtn ers hi p, o r vi ce v ers a. See s ec. 1 .70 7- 3( a), In co m e Tax Reg s. Nei th er p arty di sp ut es th at , th ro ug h the co ur se of t he VTC trans act io n, Vi rg in iaCo ns erv at io n ul ti m at el y

tra ns ferr ed$1 ,80 2,0 00 to SW F. Acco rd in gl y , we con cl ud e th atth e fi rs t pr on g o f se ct io n 7 07 (a)( 2) (B) i s s at is fie d b ecau se Virg in iaCo ns erv at io n tra ns ferr edm on ey

to SW F. 2. Tran sf

er o f Pro pe rty Inad di ti on to a tr an sf

er o f m on ey

fro m th e p artne r to th e p artne rs hi p, the re canbe a di sg ui se d s al e o nl y if the re i s a r el at eddi rector i nd ire cttra ns fer o f pr op erty by the partn ers hi p t o t he partn er. See sec . 70 7( a)(2 )(B) ; s ec. 1 .70 7- 3( a), In co m e Tax Reg s. Re sp on de ntco nt en ds th atSW F’s tra ns fer o f Virg in iatax cred it s t o Vi rg in iaCo ns erv at io n was a tr an sf er o f pr op erty . Peti ti on er co nt en ds th at(1) th e Vir gi ni a ta x c red it s wer e n otpro pe rty for p ur po se s o f se ct io n 70 7( a)(2 )(B) ; an d (2 ) th e Vir gi ni a ta x c red it s wer e al lo cat ed , andno t tran sf erre d, to Virg in iaCo ns erv at io n. We di sa gr ee wi th bo th of p et it io ne r’s co nt en ti on s.-5 4-

[* 54 ] InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 40 , th e Co urt o f App eal s ad dr es se d t he is su e o f whe th er t ax cred it s co ns ti tu te pro pe rty fo r pu rp os es of s ect io n 7 07 an d n ot edth atth e is su e was a hybri d F ed eral an d S ta te la w qu es ti on . It co m

pa redth e ta x c red it s i n i ss ue inVa. His to ric to a “bu nd le of st ic ks ” whe re St at e la w det erm in ed“ whi chst ic ks are i n ape rs on ’s bu nd le ” an d Fed eral law d et erm in edwhet he r th e st ic ks qu al ify as p ro pe rty for p ur po se s o f a Fed eral st atut e. Id . (ci ti ng Uni te d S ta te s v . Craft , 53 5 U.S. 2 74 , 27 8- 27 9 (2 00 2) ). The Co urt o f App eal s the n a sk edwhet he r th e ta x c red it s embod ie d “ ‘som e o f th e
m os t es se nt ia l p ro pe rty rig ht s’”, in cl ud in g t he “ ‘righ t t o u se th e p ro pe rty, to
rece iv e in co m e p ro du cedby it, an d t o e xc lu de othe rs fro m it ’”. Id . at 1 41 (qu ot in g Craf t, 5 35 U.S. at 2 83 ). It al so co ns id ered“ ‘the bre ad th of the co nt ro l the tax pa y er co ul d e xe rci se ’” ov er the it em an d wh ethe r th e it em

was “ va lu ab le .” Id . (qu ot in g Dry e v . Uni te d S ta te s, 5 28 U.S. 49 , 60 -6 1 (1 99 9) ). The C ou rt o f App eal s de te rm in edth atth e ta x c red it s i n que st io n wer e p ro pe rty; th ey ha d p ecu ni ary va lu e be cau se th ey

were u se d t o “ in du ce i nv es to rs to co nt rib ut e m on ey ” an d t he fun ds
ex erci se d p ro pr ie ta ry

co nt ro l o ve r th e cre di ts be cau se th ey co ul d “ ex cl ud e o th ers-5 5-

[* 55 ] fro m

ut il iz in g t he cred it s an d wer e fre e to ke ep or p as s al on g t he cred it s t o pa rtn ers as the y

saw fi t.” Id. at14 1 (c it in g C raft , 53 5 U.S. at28 3)
.

4 2 InRo ut e 2 31 , we app li edth e Co urt o f App eal s fo r th e Fo urth Cir cu it ’s rat io na le inVa. His to ric to th e Vir gi ni a ta x c red it s an d d eci de d t ha t the y were pr op erty forpu rp os es of s ect io n 7 07 be cau se th ey “ were b ot h v al uabl e an d i m bu ed with e ss en ti al pro pe rty rig ht s.” R ou te 23 1, LLC v . Comm is si on er, at*3 7. In th e in st an t ca se , we als o app ly the Co urt o f App eal s’ rat io na le inVa. His to ric an d si mil arl y co nc lu de th atth e Vir gi ni a ta x c red it s wer e v al uabl e an d i m bu edwith
es se nt ia l p ro pe rty rig ht s b ecau se th ey in du cedVirg in iaCo ns erv at io n t o i nv es t i n SWF, andbo th SW F fi rs t an d t he n Vi rg in iaCo ns erv at io n h adth e ri gh t t o u se th e Virg in iatax cred it s o n t he ir S ta te tax returns , ben efi t fr om th e Vir gi ni a ta x c red it s th ro ug h areduc ti on of S ta te tax li ab il it y , andex erci se co nt ro l o ve r th e Vir gi ni a ta x cred it s t o s el l o r tr an sf

er the m inth e St at e ta x c red itm ark etpl ace. Acc or di ng ly, in th e in st an t ca se we co nc lu de th atVirg in iatax cred it s ar e p ro pe rty for p ur po se s o f
se ct io n 7 07 . See i d. at*3 7; see als o Tem pe l v . Comm is si on er, 1 36 T.C. 34 1, 3 54 The Co urt o f App eal s al so he ldth atth e St at e la w pro hi bi ti onag ai ns t the 4 2 di rectsal e o r pu rch as e o f th e ta x c red it s i n t ha t ca se was a“ no min al pro hi bi ti on ” th atco ul d b e o ve rco m e b y a th ird -p arty

tra ns fer v iaa partn ers hi p s tru ctur e. Va. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 41 -1 42 . In the in st an t ca se th ere i s n o p ro hi bi ti on ag ai ns t d ire ctsal es or p ur ch as es of e xc es s Virg in iatax cred it s, m ak in g t he m m or e eas il y

tra ns ferabl e th anth e ta x c red it s i n qu es ti on inVa. His to ric
.-5 6-

[* 56 ] (2 01 1) (fi nd in g t ha t Co lo rad o t ax cred it s cr eat ed“ co gn iz ab le pro pe rty rig ht s in th os e cre di ts forth e rec ip ie nt s o f th os e cre di ts ”), aff ’d sub n om . Esg ar Co rp . v. Co m m is si on er, 7 44 F.3d64 8 (1 0t h C ir. 2 01 4)
. The Co urt o f App eal s i n Va. Hi st or ic als o c on te m pl at edpe ti ti on er’s
co nt en ti on th attax cred it s ar e al lo cat ed , andno t tran sf erre d, t o apa rtn er. The Co urt o f App eal s co nc lu de d t ha t the arg um en t was “ taut ol og ic al ” an d t ha t the on ly way to de te rm in e whe th er a p artne rs hi p a nda pa rtn er were act in g i n t he ir cap aci ti es as s uc h dur in g the trans act io ns inqu es ti on s was to co ns id er al l o f th e fact s an d c irc um st an ces purs uantto sec ti on 70 7 andsec ti on 1.7 07 -3 , Inc om e Tax Reg s. Va. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 40 n.1 3. Acco rd in gl y , we fol lo w th e h ol di ng of t he Co urt o f App eal s i n Va. Hi st or ic
an d re ject p et it io ne r’s co nt en ti on . See al so Ro ut e 2 31 , LLC v. Co m m is si on er, at *3 7- *3 8. Co ns eque nt ly, we co nc lu de th atSW F’s trans fer o f Virg in iatax cred it s t o Virg in iaCo ns erv at io n dur in g the VTC trans act io n c on st itut eda tr an sf er o f pr op erty fro m a partn ers hi p t o apa rtn er p ur su an t t o s ect io n 7 07 (a)( 2) (B). 3. Pro pe r Ch arac te riz at io n a s a S al e o r Exc ha ng e To d eci de whet he r th e tr an sf ers be twee n S W F an d Vi rg in iaCo ns erv at io n are p ro pe rly char act eri zedas asal e o r ex ch an ge of p ro pe rty purs uantto sec ti on-5 7-

[* 57 ] 70 7( a)(2 )(B) (ii i), we m us t co ns id er (1 ) whe th er Vi rg in iaCo ns erv at io n
wou ldno t h av e tr an sf

erre d $ 1,8 02 ,00 0 t o S W F b utforth e co rres po nd in g t ran sf er of $3 ,40 0,0 00 of Vi rg in iatax cred it s fr om SW F to Virg in iaCo ns erv at io n; an d (i i) if we do no t co ns id er the trans fers si m ul ta ne ou s, wh ethe r SWF’ s tran sf er was no t de pe nd en t o n t he en tre pr en eu ria l ri sk s o f SWF’ s p artne rs hi p o pe rat io ns . See s ec. 1.7 07 -3 (b )(1 ), In co m e Tax Reg s.

a. The “ Bu t Fo r” Tes t W e fi rs t co ns id er wh ethe r Virg in iaCo ns erv at io n wo ul d n otha ve tra ns ferr ed $1 ,80 2,0 00 to SW F b utforth e co rres po nd in g t ran sf er o f $3 ,40 0,0 00 of Vi rg in ia ta x c red it s fr om

SW F to Virg in iaCo ns erv at io n. InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.2dat 1 34 , th e fu nd s p ro m is ed(1) to pro vi de each in ve st or$1 inSta te tax cred it s fo r ev ery 74
cen t t o 8 0 c en ts co nt rib ut edan d (2 ) to refu ndth e in ve st orif the cred it s co ul d n ot be ob ta in ed . The Co urt o f App eal s fo un d t ha t the re was “ no di sp ut e” tha t the “bu t fo r” t es t was sat is fie d. Id . at 1 45 . In Ro ut e 2 31 , LLC v. Co m m is si on er, at*3 5, *4 0, af te r ap pl y in g t he Gol se n ru le , we app li edth e Co urt o f App eal s’ ho ld in gs an d rat io na le with re ga rdto th e “bu t fo r” t es t. We foundth atth e p art ie s h ad

“ ex pr es sl y

li nk edth e am ou ntof Vi rg in ia[t]ax [c]redi ts th atVirg in iaCo ns erv at io n rece iv edto th e am ou ntof m on ey ittra ns ferr edto ” th e p artne rs hi p i n que st io n-5 8-

[* 58 ] be cau se (1) Virg in iaCo ns erv at io n h adpro m is edto m ak e a co nt rib ut io n t o th e p artne rs hi p e qu al to 53 cen ts foreach $1 of Vi rg in iaTax C red it s al lo cat edto it
an d was subs eque nt ly allo cat edth e li on ’s sh are- -9 7%- -o f Virg in iatax cred it s de sp it e h ol di ng on ly a 1% in te res t i n t he Ro ut e 2 31 pa rtn ers hi p, an d (2 ) th e pa rtn ers hi p a ndot he r pa rtn ers inth atcas e p ro m is edto in de m ni fy Virg in ia Co ns erv at io n fo r an y

Virg in iatax cred it s d is al lo wedan d g ua ran te edim pl ic it ly th atVirg in iaCo ns erv at io n wo ul d re cei ve all of t he cred it s i t ex pe ct edto rece iv e. Id . at * 39
. Inth e in st an t ca se , Virg in iaCo ns erv at io n s im il arl y pro m is edto co nt rib ut e
m on ey to SW F equa l t o 5 3 c en ts foreach $1 of Vi rg in iatax cred it s al lo cat edto it
. Lik e th e o th er p artne rs (ot he r th anVirg in iaCo ns erv at io n) inRo ut e 2 31 , pet it io ne r
an d M r. Lewis als o a gr eedto in de m ni fy Virg in iaCo ns erv at io n i f an y Virg in iatax cred it s wer e d is al lo wedinth e in st an t tran sa ct io n. Mo reo ve r, whe n t he do na ti on of th e eas em en t o n S he rwo odFarm res ul te d i n a dd it io na l Vi rg in iatax cred it s b ecau se of a hi gh er-t ha n- expe ct edva lu at io n, Vi rg in iaCo ns erv at io n was gra nt edth e ad di ti on al Virg in iatax cred it s ata rat e o f 53 cen ts of a dd it io na l capi ta l
co nt rib ut io n p er $ 1 o f ad di ti on al Virg in iatax cred it s. Vir gi ni a Co ns erv at io n was ul ti m at el y

all oc at ed92 %--the “ li on ’s sh are” --o f th e Vir gi ni a ta x c red it s d es pi te ho ld in g o nl y

1% o f m em

be rs hi p i nt eres ts inSW F. As we d idinRo ut e 2 31 , we-5 9-

[* 59 ] fin d t ha t the m at eri al fact s ar e squa rel y inpo in t wi th th os e in Virg in ia His to ric , andwe co nc lu de th atVirg in iaCo ns erv at io n wo ul d n otha ve trans ferr ed
m on ey to SW F b utforth e co rres po nd in g t ran sf er o f Virg in iatax cred it s t o Virg in iaCo ns erv at io n.

b. Pres en ce o f Ent rep ren eu ria l Ri sk s W e n ex t co ns id er wh ethe r SWF’ s tran sf er o f Virg in iatax cred it s was no t de pe nd en t o n t he en tre pr en eu ria l ri sk s o f SWF’ s p artne rs hi p o pe rat io ns . 4 3 InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 45 , th e Co urt o f App eal s h el d t ha t the in ve st or s d idno t fa ce an y tru e en tre pr en eu ria l ris k b ecau se , am on g o th er thi ng s, (1 ) th ere was a fi xe d ra te of r eturn o n i nv es tm en t in st eadof a ny sha re i n p artne rs hi p p ro fit s t ie d t o t he in ve st or ’s partn ers hi p in te res ts an d (2 ) th e in ve st or s wer e se cu redag ai ns t l os in g t he ir c on tri bu ti on s be cau se th e fu nd s p ro m is eda refu ndif the cred it s co ul d n otbe de li ve redor we re rev ok ed . The Co urt o f App eal s h el d t ha t the on ly riskinth atcas e was on e o f “ an y adva nc e p ur ch as er wh o p ay s fo r anit em with apro mis e o f la te r de li ve ry ” an d Res po nd en t co nt en ds th atth e tr an sf ers of m on ey

an d o f cre di ts inth e VTC 4 3 tra ns act io n wer e si m

ul ta ne ou s, s ug ge st in g t ha t i t i s b ey on d t he ap pl ic at io n o f se c. 1.7 07 -3 (b )(1 )(i i), In co m e Tax Reg s. Be cau se we co nc lu de th atth e tr an sf er o f Virg in iatax cred it s d idno t d ep en d o n a ny entrep ren eu ria l ri sk s o f SWF’ s op erat io ns , we do no t ad dr es s an d d o n otde ci de th e is su e o f whe th er the tra ns fers were s im ul ta ne ou s. See Ro ut e 2 31 , LLC v. Co m m is si on er, at*4 0; see als o Va. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 43 n.1 7, 1 45
.-6 0-

[* 60 ] di st in gu is he d t ha t ri skfro m th atof a n e nt rep ren eu r, who “pu ts m on ey in to a
ve ntur e wit h t he ho pe th atitm ig htgro w inam ou ntbu t wi th th e kno wled ge th atit
m ay well sh rin k.” Id. at14 5- 14 6 (c it in g C omm is si on er v . Tower, 3 27 U.S. 28 0, 28 7 (1 94 6) ). Inth e in st an t ca se , Virg in iaCo ns erv at io n was pro m is eda le ga ll y en fo rceabl e, fi xe d ra te of r eturn o f $1 of Vi rg in iatax cred it s fo r ev ery 53 cen ts
co nt rib ut edan d was sh ie ld edfro m su ffer in g a ny los s o f Virg in iatax cred it s th ro ug h a n i nd em

ni ty clau se th atrequi redSW F an d M r. Lewis to in de m ni fy Virg in iaCo ns erv at io n fo r an y of i ts Virg in iatax cred it s tha t wer e d is al lo wedor rev ok ed . In Ro ut e 2 31 , LLC v. Co m mis si on er, at*4 0- *4 1, we ap pl ie d t he rat io na le an d h ol di ng of t he Co urt o f App eal s i n Va. Hi st or ic ina ne arl y id en ti cal tra ns act io n a ndhe ldth atth os e two fact s wer e in di cat iv e o f a tran sf er o f cre di ts th atwas n otde pe nd en t o n e nt rep ren eu ria l ri sk s. Si mil arl y , we aga infin d the fact s in th e in st an t ca se to be squa rel y inpo in t wi th th os e in Va. His to ric an d app ly the ho ld in gs th erei n i n t he in st an t ca se pu rs ua ntto th e Gol se n ru le . Add it io na ll y , al th ou gh th ey

rep res en te d t ha t the y

“ ha d o bt ai ne d s uf

fic ie ntin fo rm at io n * * * to
ev al ua te th e m eri ts an d ri sk s o f anin ve st m en t” inSW F, th ere i s n o i nd ic at io n t ha t Mr. Sh aw, Mr. Bro wer, o r an y ot he r rep res en ta ti ve pa rty for Vi rg in iaCo ns erv at io n rev ie wedth e rel ev an t fi na nc ia l re co rd s p ert ai ni ng to SW F’s bu si ne ss ; Vi rg in ia-6 1-

[* 61 ] Co ns erv at io n was so le ly int eres te d i n t he VTC trans act io n i n i ss ue rathe r th anth e o ng oi ng SW F farm in g b us in es s. See als o R ou te 23 1, LLC v
. Co m m is si on er, at*4 0- *4 1 (“ [T]here i s n o i nd ic at io n i n t he reco rdth atVirg in ia Co ns erv at io n e ve n c on si de redRo ut e 2 31 ’s op erat io ns be fo re i t ag reedto
co nt rib ut e a s ub st an ti al am ou ntof m on ey [.]”). On th e b as is of t he for eg oi ng , we co nc lu de th atSW F’s tra ns fer o f Virg in iatax cred it s t o Vi rg in iaCo ns erv at io n was no t d ep en de ntup on th e en tre pr en eu ria l ri sk s o f SWF’ s b us in es s.

c. Co ns id erat io n o f Fac ts an d C irc um st an ces Afte r an al yzi ng whethe r th e VTC tr an sa ct io n p ro pe rly cou ldbe ch arac te riz edas asal e o r ex ch an ge pu rs ua ntto sec ti on 1.7 07 -3 (b )(1 ), In co m e Tax Reg s., we al so co ns id er the ap pl ic at io n o f th e fac ts an d c irc um st an ces li st edin
se ct io n 1 .70 7- 3( b) (2 ), In co m e Tax Reg s., t o the VTC trans act io n. Altho ug h t ha t 4 4
se ct io n l is ts 10 rel ev an t fa ct or s, we re vi ew on ly tho se whi chare re le va ntto th e VTC tra ns act io n. 4 5
InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 4 4 14 4, the Co urt o f App eal s s ta te d t ha t al th ou gh th e fac to rs li st edinsec . 1.7 07
- 3( b) (2 ), In co m e Tax Reg s., are si gn ifi can t t o t he de te rm in at io n o f “ en tre pr en eu ria l ris k” , th is Co urt i s fr ee t o c on du ctit s o wn ev al ua ti on of e nt rep ren eu ria l ri sk ou ts id e o f th os e fac to rs . Inth e in st an t ca se we qu es ti on th e rel ev an ce o f fo ur of the fact or s t o o ur 4 5 fact s. Sec . 1.7 07 -3 (b )(2 )(i v) an d (v ), In co m e Tax Reg s., requi res co ns id erat io n o f (co nt in ue d...)-6 2-

[* 62 ] The fir stfact orwe co ns id er i s wh ethe r th e ti m in g a ndam ou ntof t he tra ns fer of Virg in iatax cred it s wer e d et erm in ab le with re as on ab le cert ai nty at t he ti m e o f Virg in iaCo ns erv at io n’s tran sf er o f m on ey

to SW F. See s ec. 1 .70 7- 3( b) (2 )(i ), In co m e Tax Reg s. InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 63 9 F .3dat 1 43 , th e Co urt o f App eal s co nc lu de d t ha t thi s fa ct orap pl ie d b ecau se th e p artne rs hi p h adpro m is ed(1) a pr eci se nu m be r of cred it s i n e xc ha ng e fo r th e co nt rib ut io n a nd(2) de li ve ry of t he cred it s fo r us e dur in g asp eci fie d t ax y ear. In th e in st an t ca se SW F p ro m is ed$1 of Vi rg in iatax cred it s t o Vi rg in iaCo ns erv at io n fo r ev ery 53 cen ts co ntrib ut edby V irg in iaCo ns erv at io n t o S W F. Pet it io ne r (...co nt in ue d) 4 5 whe th er an y

pe rs on “ ha s m ad e o r is leg al ly obl ig at edto m ak e co nt rib ut io ns ” o r “ ha s l oa ne d o r ha s ag reedto lo an ” to SW F m on ey or o th er co ns id erat io n t ha t wou lden ab le SW F to tra ns fer Vi rg in iatax cred it s t o Vi rg in iaCo ns erv at io n. Si m il arl y , sec . 1.7 07 -3 (b )(2 )(v i), In co m e Tax Reg s., requi res co ns id erat io n o f whe th er SWF hadin cu rredor wa s re qu ire d t o i nc urde btto acqui re the m on ey or ot he r co ns id erat io n n eces sary to en ab le a tr an sf

er o f Virg in iatax cred it s t o Virg in iaCo ns erv at io n. Al th ou gh th e m em be rs of S WF ag reedto co nt rib ut e ad di ti on al cap it al up on th e rea so nabl e d em an ds of S W F’s bu si ne ss , th ere i s n o ev id en ce o f a s pe ci fic co nt rib ut io n, l oan, o r ag reem en t o r ob li ga ti onto len d o r co nt rib ut e an y

m on ey or o th er co ns id erat io n t o S W F fro m an y pe rs on to sp eci fic al ly enab le th e VTC tr an sa ct io n. Si m il arl y , th ere i s n o e vi de nc e th atSW F ha d i nc urredor wa s re qu ire d t o i nc urde btto en ab le th e tr an sf er o f Virg in iatax cred it s t o Vi rg in iaCo ns erv at io n. Mo reo ve r, be cau se SW F al read y own ed Sh erwo odFarm

an d t hu s co ul d re co rdth e eas em en t d eed , com pl et e adm in is tra ti ve pape rwo rk , andpro cu re the ne ces sa ry Virg in iatax cred it s, an y

su chco nt rib ut io n, lo an , or d eb t wo ul d h av e b eenun ne ces sa ry . Accor di ng ly, we co nc lu de th atsec . 1.7 07 -3 (b )(2 )(i v) , (v) , and(vi ), In co m e Tax Reg s., i s i rrel ev an t t o t he in st an t tra ns act io n.-6 3-

[* 63 ] co nt en ds th atth e rat io do es no t re su ltina reas on ab ly certa inam ou ntof cred it s b ecau se th e und erl y in g v al ua ti on of t he eas em en t was un cert ai n. Ho wev er, whe n the sec on d v al ua ti onof t he eas em en t cr eat edm or e Vir gi ni a ta x c red it s tha n or ig in al ly exp ect ed , Virg in iaCo ns erv at io n was gi ve n t he fir stop po rtu ni ty to ob ta in th e ad di ti on al Virg in iatax cred it s wi th anad di ti on al co nt rib ut io n a t the
sa m e rat io , in di cat in g t ha t the am ou ntof Vi rg in iatax cred it s at ta in edwas d ire ct ly cal cu la te d fr om

th e am ou ntof m on ey

th atVirg in iaCo ns erv at io n c on tri bu te d. At tri al Mr. Lewi s t es ti fie d t ha t h is un de rs ta nd in g o f th e tr an sa ct io n was th atth e
am ou ntof Vi rg in iaCo ns erv at io n’s capi ta l co nt rib ut io n t o S WF was ba se d d ire ct ly
on th e am ou ntof Vi rg in iatax cred it s t o b e tr an sf erre d o r al lo cat edto Virg in ia Co ns erv at io n. Onth e b as is of t he for eg oi ng , we fin d t ha t Vi rg in iaCo ns erv at io n co ul d p reci se ly det erm in e th e num be r of Virg in iatax cred it s i t co ul d e xp ectto
rece iv e o n t he ba si s o f th e am ou ntof m on ey itco nt rib ut edto SW F. Mo reo ve r, in th e o pe rat in g a gr eem en t, SWF agr eedto reco rdth e eas em en t o n o r be fo re Decem be r 31 , 20 05 , so th atVirg in iaCo ns erv at io n c ou ldus e th e res ul ti ng Virg in ia ta x c red it s o n i ts 20 05 in co m e ta x re tu rn . Acco rd in gl y , we con cl ud e th at 4 6 Pet it io ne r co nt en ds th atth e av ai labi li ty of th e Vir gi ni a ta x c red it s was 4 6 un cert ai n unt il VDOT certi fie d t he earn edcred it s an d a ct iv el y is su edth em . W e di sa gr ee. As we p rev io us ly exp la in edinRo ut e 2 31 , LLC v. Co m m is si on er, at *4 6- *4 7, an d e xp la in ingre at er d et ai l b el ow, ce rti fic at io n was no t re qu ire d t o u se (co nt in ue d...)-6 4-

[* 64 ] Virg in iaCo ns erv at io n kne w with re as on ab le cert ai nt y th atth e Vir gi ni a ta x cred it s wo ul d b e av ai labl e fo r us e o n Vi rg in iaCo ns erv at io n’s 2 00 5 t ax returns . Co ns eque nt ly, we co nc lu de th atth is fact or weig hs infav orof treat in g t he VTC tra ns act io n a s a d is gu is edsal e. See al so Ro ut e 2 31 , LLC v. Co m mis si on er, at *4 1- *4 2. The sec on d fa ct orwe co ns id er i s wh ethe r Virg in iaCo ns erv at io n h ada le ga ll y en fo rceabl e ri gh t t o t he lat er tran sf er o f Virg in iatax cred it s. See sec . 1.7 07 -3 (b )(2 )(i i), In co m e Tax Reg s. InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 43 , th e Co urt o f App eal s co nc lu de d t ha t thi s fa ct or in di cat eda di sg ui se d s al e b ecau se th e subs cri pt io n a gr eem en ts ex pl ic it ly pro m is ed de li ve ry of t ax cred it s i n e xc ha ng e fo r cap it al co nt rib ut io ns an d t he in ve st or s co ul d ha ve purs ue d b reac h o f co nt ractcla im s i f th os e cre di ts were n otde li ve red
. Acco rd in g t o t he op erat in g a gr eem en t, Vi rg in iaCo ns erv at io n was pro m is ed $3 ,05 0,0 00 of Vi rg in iatax cred it s, a fi gu re tha t was lat er i nc reas edbe cau se of t he pr es en ce o f ad di ti on al Virg in iatax cred it s. Mo reo ve r, th e subs cri pt io n a gr eem en t st at edth atVirg in iaCo ns erv at io n’s capi ta l co nt rib ut io n wo ul d e nt it le itto rece iv e (...co nt in ue d) 4 6 th e Vir gi ni a ta x c red it s ar is in g fr om co nv ey an ces m ad e b efo re 2 00 7. A ta xp ay er earn edan d was ab le to us e a Vir gi ni a ta x c red iton ce “ he or s he sat is fie d t he st atut ory requi rem en ts ” fo r th e cre di ts ; the VDOT “m erel y ackno wled ge d a nd reg is te redth e cre di ts to crea te anacco un ti ng tra ckreco rd .” Id . at * 46
.-6 5-

[* 65 ] fro m

SW F anall oc at io n o f $3 ,05 0,0 00 of Vi rg in iatax cred it s fo r it s
co nt rib ut io n o f $1 ,61 6,5 00 . If SW F, Mr. Lewi s, an d p et it io ne r ha d fa il edto ful fil l th e te rm s o f th os e ag reem en ts , Virg in iaCo ns erv at io n c ou ldha ve pu rs ue d b reac h of co nt ractcla im s. Acco rd in gl y , we con cl ud e th atVirg in iaCo ns erv at io n h ada le ga ll y en fo rceabl e ri gh t t o t he lat er tran sf er o f Virg in iatax cred it s. Co ns eque nt ly,
we co nc lu de th atth is fact or weig hs infav orof f

in di ng a di sg ui se d s al e. The th irdfact orwe co ns id er i s wh ethe r Virg in iaCo ns erv at io n’s ri gh t t o rece iv e th e Vir gi ni a ta x c red it s was sec ur edinan y m an ne r. See s ec. 1 .70 7- 3( b) (2 )(i ii ), In co m e Tax Reg s. InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3d . at 1 43 , th e Co urt o f App eal s d efi ne d “ se cu red ” b ro ad ly
an d c on cl ud edth atth e ri gh t t o re cei ve tax cred it s was sec ur edbe cau se th e pa rtn ers hi ps pro m is edth atth e in ve st or s’ cap it al an d c on tri bu ti on s wo ul d b e refu nd edif the su ffi ci en t cr ed it s co ul d n otbe ob ta in ed , were rev ok ed , or wer e n ot de li ve red . See al so Ro ut e 2 31 , LLC v. Co m m is si on er, * 43 . In the in st an t ca se , th e in de m ni ty clau se inth e subs cri pt io n a gr eem en t g ua ran te edth atMr. Lewi s an d SWF woul d i nd em

ni fy Virg in iaCo ns erv at io n i f an y of t he Virg in iatax cred it s tha t itexpe ct edto rece iv e p ur su an t t o t he VTC trans act io n wer e d is al lo wedor r educ ed
. Mo reo ve r, SWF was requi redto reco rdth e eas em en t d eedby D ecember 3 1, 2 00 5, to en su re tha t Vi rg in iaCo ns erv at io n wo ul d o bt ai n Vi rg in iatax cred it s t o b e u se d-6 6-

[* 66 ] on it s 2 00 5 t ax returns . Accor di ng ly, we co nc lu de th atVirg in ia Co ns erv at io n’s ri gh t t o re cei ve th e Vir gi ni a ta x c red it s was sec ur ed : Eit he r Virg in iaCo ns erv at io n wo ul d re cei ve Virg in iatax cred it s fo r it s 2 00 5 t ax y ear o r it
wou ldrece iv e a ref

un d o f it s p aym en t t o S W F. Co ns eque nt ly, we co nc lu de th at th is fact orweig hs infav orof f in di ng a di sg ui se d s al e. The fou rth fact orwe co ns id er i s wh ethe r SWF hel d Vi rg in iatax cred it s, be y on d t he reas on ab le ne ed s o f SWF’ s b us in es s, tha t wer e ex pe ct edto be
av ai labl e to m ak e th e tr an sf er t o Vi rg in iaCo ns erv at io n. Se e se c. 1.7 07
- 3( b) (2 )(v ii ), In co m e Tax Reg s.; see als o s ec. 1 .70 7- 6( a), In co m e Tax Reg s. Bo th th e Co urt o f App eal s i n Va. Hi st or ic an d t hi s C ou rt i n R ou te 23 1 c on cl ud edth at th is fact orwas i rrel ev an t t o t he ir r es pe ct iv e fac ts , andwe als o que st io n i ts rel ev an ce t o t he in st an t ca se . See Va. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 44 n.1 9 (f in di ng th atth is fact orwas “ no t o f pa rti cu la r rel ev an ce t o t he way

th e in st an t tran sa ct io ns were s tru ctur ed ”); Ro ut e 2 31 ,LLC v. Co m m is si on er, at*2 9- *3 0 n .5 (f in di ng th atth is fact or

was i rrel ev an t b ecau se th e pa rtn ers hi p i n que st io n “ was no t en ga ge d i n abu si ne ss at t he ti m e o f th e tra ns fers ”). Howe ve r, we no te th atSW F ag reedto rep res en t an d warran t tha t i t ha d n otus edan d wo ul d n otus e an y po rti on of t he Virg in iatax cred it s al lo cat edto Virg in iaCo ns erv at io n t o o ffs etor s at is fy it s St at e in co m e ta x l iabi li ty for an y y ear-6 7-

[* 67 ] an d tha t i t h adno t tran sf erre d a ndwou ldno t tran sf er the Virg in iatax cred it s al lo cat edto Virg in iaCo ns erv at io n t o a ny oth er t ax pa y er b ey on d t he $3 00 ,00 0 o f Virg in iatax cred it s al lo cat edto pe ti ti on er. Mo reo ve r, whe n the sec on d v al ua ti on of th e eas em en t cr eat edm or e Vir gi ni a ta x c red it s tha n o rig in al ly exp ect ed , SWF he ldth e ad di ti on al Virg in iatax cred it s, b ey on d wh atwas re as on ab ly neces sa ry for SWF’ s b us in es s, fo r po te nt ia l tran sf er t o Vi rg in iaCo ns erv at io n, ra th er tha n fo r us e by SWF o r tr an sf

er o r sa le to an ot he r pa rty. Con se qu en tl y , we con cl ud e th atth is fact or weig hs , alb ei t l es s s o t han t he ot he r fac to rs , infav orof f in di ng a di sg ui se d
sa le
. The fif

th fact orwe co ns id er i s wh ethe r SWF’ s tran sf er o f Virg in iatax cred it s t o Vi rg in iaCo ns erv at io n was di sp ro po rti on at el y lar ge inrel at io ns hi p t o Virg in iaCo ns erv at io n’s g en eral an d c on ti nu in g i nt eres t i n S W F’s pr of it s. See
se c. 1.7 07 -3 (b )(2 )(i x) , Inc om e Tax Reg s. InVa. His to ric Tax C red itFund20 01 LP v. Co m

m is si on er, 6 39 F.3dat 1 44 , th e Co urt o f App eal s co nc lu de d tha t thi s fact or in di cat eda di sg ui se d s al e b ecau se eachin ve st or ’s 0.0 1% p artne rs hi p in te res t, fro m

whi chth e in ve st or s wer e to ldto ex pe ctno m at eri al am ou ntof pa rtn ers hi p p ro fit , hadno co rrel at io n t o t he am ou ntof t ax cred it s tran sf erre d t o th atin ve st or ; i ns te ad , th e tr an sf er o f ta x c red it s was ti edto th e am ou ntof m on ey th atth e in ve st orco nt rib ut edto th e fu nd . In Ro ut e 2 31 , LLC v. Co m m is si on er, at-6 8-

[* 68 ] *4 4, we h el d tha t thi s fa ct orin di cat eda di sg ui se d s al e b ecau se Virg in ia Co ns erv at io n h el d a1% i nt eres t i n p artne rs hi p p ro fit s an d l os se s an d d is tri bu ti on of ne t ca sh flo w bu t re cei ve d 9 7% o f th e av ai labl e Vir gi ni a ta x c red it s. Inth e in st an t ca se , Virg in iaCo ns erv at io n h el d a1% i nt eres t inpa rtn ers hi p p ro fit s an d 4 7 lo ss es an d n etcas hf

lo w, bu t was ul ti m at el y

all oc at ed92 % of the Virg in iatax cred it s av ai labl e to SWF. The a m ou ntof Vi rg in iatax cred it s tha t Vi rg in ia Co ns erv at io n re cei ve d i n t he in st an t ca se was p ro po rti on at e to th e am ou ntof
m on ey itco nt rib ut edto SW F, an d n otto it s p artne rs hi p i nt eres t i n S W F. See Va. His to ric Tax C red itFund20 01 LP v. Co m mis si on er, 6 39 F.3dat 1 44 ; Ro ut e 23 1, LLC v . Comm is si on er, at*4 4. We con cl ud e th atSW F’s trans fer o f Virg in ia ta x c red it s t o Vi rg in iaCo ns erv at io n was di sp ro po rti on at el y lar ge inrel at io ns hi p t o Virg in iaCo ns erv at io n’s g en eral an d c on ti nu in g i nt eres t i n S W F’s pr of it s. Co ns eque nt ly, we ho ldth atth is fact orweig hs infav orof f in di ng a di sg ui se d s al e. The si xt h, an d fi na l, fa ct orwe co ns id er i s wh ethe r Virg in iaCo ns erv at io n ha s an ob li ga ti on to return the Virg in iatax cred it s t o S W F. See s ec. 1 .70 7- W e n ot e th atth e p art ie s o rig in al ly int en de d t he in te res t t o b e n on vo ti ng 4 7 an d t ha t, p ur su an t t o t he op ti on ag reem en t, Mr . Lewis ha d t he op ti on to pu rch as e al l o f Virg in iaCo ns erv at io n’s i nt eres ts inSW F o n o r aft er J anua ry 1, 2 01 0. Th e op ti on ag reem en t was ev enrefe rredto as “ th e v eh ic le th atge ts * * * [M r. Bro wer] ou t o f th e d eal .” Acco rd in gl y , eve n t ho ug h Vi rg in iaCo ns erv at io n o bt ai ne d a1% in te res t i n S W F, we co nc lu de th atth e p art ie s en de av or edto li mitth e p ot en ti al co nt ro l an d l on ge vi ty of th atin te res t.-6 9-

[* 69 ] 3(b )(2 )(x ), In co m e Tax Reg s. InVa. His to ric Tax C red itFund20 01 LP v. Co m m is si on er, 6 39 F.3dat 1 44 , th e Co urt o f App eal s co nc lu de d t ha t thi s fa ct or in di cat eda di sg ui se d s al e b ecau se th e in ve st or s h adno furth er o bl ig at io ns to th e pa rtn ers hi p a nd“ were fr ee t o u se th e cre di ts forth ei r own be ne fit .” See al so Ro ut e 2 31 , LLC v. Co m

m is si on er, at*4 4- *4 5. In th e in st an t ca se , aft er re cei vi ng th e Vir gi ni a ta x c red it s, Vi rg in iaCo ns erv at io n was free to us e o r tr an sf er the cred it s as itde si red ; i t h adno furth er o bl ig at io ns to SW F wit h re gardto th e Virg in iatax cred it s. Co ns eque nt ly, we co nc lu de th atth is fact orweig hs infav orof fin di ng a di sg ui se d s al e. Upo n c on si de rat io n o f th e fo reg oi ng fact or s an d i n t he li gh t o f th e h ol di ng s of th e Co urt o f App eal s i n Va. Hi st or ic , we con cl ud e th atth e VTC tr an sa ct io n i s pr op erl y ch arac te riz edas asal e o r ex ch an ge pu rs ua ntto sec ti on 1.7 07 -3 (b ), In co m e Tax Reg s. D. Co nc lu si on Afte r rev ie win g t he fact s o f th e in st an t ca se an d i n t he li gh t o f th e h ol di ng s of th e Co urt o f App eal s i n Va. Hi st or ic , we con cl ud e th atth e VTC tr an sa ct io n in cl ud eda tr an sf

er o f m on ey

fro m Virg in iaCo ns erv at io n t o S W F an d arel at ed tra ns fer o f Virg in iatax cred it s fr om SW F to Virg in iaCo ns erv at io n t ha t, wh en vi ewedto ge th er, are pro pe rly char act eri zedas asal e o r ex ch an ge of p ro pe rty-7 0-

[* 70 ] pu rs ua ntto sec ti on 70 7( a)(2 )(B) . Add it io na ll y , as the reco rdest ab li sh es th at th e VTC tr an sa ct io n c on st itut es a sa le , ou r co nc lu si onis co ns is te ntwith t he pr es um pt io n t ha t ap pl ie s u nd er s ect io n 1 .70 7- 3( c)(1 ), In co m e Tax Reg s. Co ns eque nt ly, we ho ldth atSW F en ga ge d i n adi sg ui se d s al e p ur su an t t o s ect io n 70 7( a) wh eniten ga ge d i n t he VTC trans act io n wi thVirg in iaCo ns erv at io n. IV. Is su e 2 . Whe th er Pro ceed s Fr om th e Dis gu is edSal e Are In co m e to SW F fo r Its 20 05 Tax Year Bec au se we ha ve co nc lu de d abo ve th atth e VTC tr an sa ct io n was a di sg ui se d
sa le pu rs ua ntto sec ti on 70 7, we m us t d eci de whet he r th e in co m e fro m th e di sg ui se d s al e was rep ortabl e wit h re sp ectto th e 2 00 5 t ax y ear. Re sp on de nt
co nt en ds th atpro ceed s o f th e d is gu is edsal e were r ep ortabl e as in co m e to SWF with re sp ectto it s 2 00 5 t ax y ear, wh ic h was th e y ear wh enth e sa le oc cu rred
. Pet it io ne r co nt en ds th atin co m e fro m th e d is gu is edsal e was no t re po rtabl e fo r th e 20 05 tax y ear b ecau se (1) an y di sg ui se d s al e co ul d n otbe co m pl et edun ti l 2 00 6, whe n (i ) th e Vir gi ni a ta x c red it s wer e reg is te redby V DOT and(ii ) th e co nd it io ns of th e es cro w agr eem en t wer e m et , and(2) SW F d idno t ac tu al ly or co ns tru ct iv el y rece iv e an y

of Vi rg in iaCo ns erv at io n’s $ 1,8 02 ,00 0 p aym en t dur in g 2 00 5.-7 1-

[* 71 ] A. Tim in g o f th e Dis gu is edSal e A di sg ui se d s al e is co ns id eredto tak e p la ce o n the da te th at , un de r ge ne ral pr in ci pl es of F ed eral tax law, the pa rtn ers hi p i s co ns id eredth e o wne r of th e pr op erty . Sec. 1 .70 7- 3( a)(2 ), In co m e Tax Reg s.; see als o Un it edSta te s v . Irv in e, 51 1 U.S. 2 24 , 23 8- 23 9 (1 99 4) . If th e tr an sf er o f m on ey

or o th er co ns id erat io n fro m th e p artne rs hi p t o t he partn er o ccu rs aft er the tra ns fer o f pr op erty to th e pa rtn ers hi p, the partn er an d p artne rs hi p are treat edas i f, on th e d at e o f th e sa le , th e pa rtn ers hi p t ran sf

erre d t o t he pa rtn er an ob li ga ti on to tra ns fer t o t he pa rtn er m on ey orot he r co ns id erat io n. Se c. 1.7 07 -3 (a)( 2) , Inc om e Tax Reg s. Si m il ar ru le s ap pl y whe n p ro pe rty is t ran sf

erre d fr om

th e p artne rs hi p t o t he pa rtn er, an d the pa rtn er subs eque nt ly tran sf

ers m on ey

to th e p artne rs hi p. Se e Ro ut e 2 31 , LLC v. Co m m is si on er, at*4 9; sec . 1.7 07 -6 (a), In co m e Tax Reg s. Inth e in st an t ca se , a di sg ui se d s al e is co ns id eredto have tak enpl ace wh enVirg in iaCo ns erv at io n i s co ns id eredto ha ve be co m e th e o wne r of th e Vir gi ni a ta x c red it s. St at e la w det erm in es an d g ov ern s the na tu re o f pr op erty rig ht s wh il e Fed eral la w det erm in es th e ap pr op ria te Fed eral tax tre atm en t o f th os e ri gh ts . See Kei th v. Co m m is si on er, 1 15 T.C. 60 5, 6 11 (20 00 ). “ The term ‘ sa le ’ is gi ve n i ts ord in ary
m ean in g fo r Fed eral in co m e ta x p ur po se s an d i s g en eral ly defi ne d a s a tran sf er o f pr op erty form on ey

or apro m is e to pay .” Grod t & McKay Realt y , Inc . v.-7 2-

[* 72 ] Co m

m is si on er, 7 7 T.C. 1 22 1, 1 23 7 (1 98 1) (ci ti ng Co m m is si on er v . Bro wn, 38 0 U.S. 5 63 , 57 0- 57 1 (1 96 5) ). A sal e o ccu rs forFed eral in co m e ta x p ur po se s whe n the re h as be ena tr an sf er o f th e b en efi ts an d b ur de ns of o wne rs hi p; th is is a qu es ti on of f

actth atm us t b e as cert ai ne d fr om

th e in te nt io n o f th e p art ie s as ev id en cedby a writt enag reem en t re adinth e li gh t o f th e at te nd in g fa ct s an d ci rcu m st an ces . Id. Thi s C ou rt h as co ns id eredth e fo ll owi ng fact or s i n c on si de rin g wh ethe r a tra ns fer o f th e b en efi ts an d b ur de ns of o wne rs hi p h as oc cu rred : (1 ) whe th er l eg al ti tl e p as se d; (2) ho w th e p art ie s treat edth e tr an sa ct io n; (3) whet he r anequi ty in te res t i n t he pro pe rty was acqui red ; (4 ) whe th er the co ntractcrea te d apre se nt ob li ga ti on on th e se ll er t o e xe cu te an d d el iv er a d eedan d apre se ntob li ga ti on on th e p ur ch as er t o m ak e p aym en ts ; (5 ) whe th er the rig htof p os se ss io n was ve st edin th e p ur ch as ers ; (6 ) whi chpa rty pai d t he pro pe rty tax ; (7 ) whi chpa rty bo re the ris k of lo ss or d am ag e to th e p ro pe rty; an d (8 ) whi chpa rty recei ve d t he pro fit s fr om th e op erat io n a ndsal e th e p ro pe rty. Call owa y v. Co m m is si on er, 1 35 T.C. 26 , 33 -3 4 (2 01 0) , aff’d, 6 91 F.3d13 15 (11 th Cir . 20 12 ); Gro dt& McKa y Real ty, In c. v. Co m m is si on er, 7 7 T.C. at12 37 -1 23 8; see als o S m it h v . Comm is si on er, 8 20 F.2d 12 20 , 19 87 W L 37 62 7, at*3 -* 5 (4 th Cir . 19 87 ) (aff irming th is Co urt’s u se of t he Gro dt& McKa y

Real ty facto rs to de ci de whet he r th e b en efi ts an d b ur de ns of-7 3-

[* 73 ] own ers hi p h adbe entra ns ferr ed ), aff’g wi th ou t p ub li sh edop in io n T.C. Mem o. 1 98 5- 56 7; Uni te d S tate s v . Hedg eLen de r, LLC, 10 7 A.F.T.R.2 d (R IA) 20 11 -2 62 5 (E.D. Va. 20 11 ) (ap pl y in g t he Grodt & McKay Realt y fact or s t o d eci de whe th er a tran sf

er o f pr op erty

co ns ti tu te d asal e). Acco rd in gl y , we con si de r se ve n of th es e fac to rs rel ev an t to an al yze wh enth e b en efi ts an d b ur de ns of o wne rs hi p 4 8 of th e Vir gi ni a ta x c red it s wer e tr an sf erre d fr om

SW F to Virg in iaCo ns erv at io n. The fir stfact orwe co ns id er i s wh enleg al ti tl e to th e Vir gi ni a ta x c red it s pa ss edfro m

SW F to Virg in iaCo ns erv at io n. In Ro ut e 2 31 , LLC v. Co m m is si on er, at*4 7- *4 8, * 51 , we hel d tha t Vi rg in ialaw i n 2 00 5 re qu ire d atax pa y er t o h ol d a ta x c red itbe fo re tran sf

erri ng it ; the refo re, a t ax pa y er was co ns id eredto ho ldleg al ti tl e to a ta x c red itbe fo re a s ub se qu en t tran sf er. Va. Co de Ann . sec . 58 .1-5 13 (C) (West 2 00 5) . Peti ti on er co nt en ds th atth e tr an sf er o f Virg in iatax cred it s co ul d n ot
oc cu r un ti l 2 00 6 a fte r th e VDOT regi st eredth e cre di ts . W e d is ag ree. Du rin g 20 05 , a tax pa y er was no t re qu ire d t o app ly to the VDOT in o rd er t o re cei ve a Virg in iatax cred it . See i d. s ec. 5 8.1 -5 12 . Duri ng 20 05 , Va. Cod e Ann . sec . 58 .1-5 12 pro vi de d t ha t a t ax pa y er co ul d re cei ve a Virg in iaTax C red itforlan d pr es erv at io n i f (1 ) th e ta xp ay er m ad e a qua li fie d d on at io n o f la ndor a n i nt eres t i n W e n ot e th atth e si xt h fa ct or , whi chask s u s t o c on si de r whi chpa rty pai d 4 8 th e p ro pe rty tax , is irr el ev an t t o t he in st an t ca se be cau se th ere a re n o p ro pe rty ta xe s due on th e Vir gi ni a ta x c red it s-7 4-

[* 74 ] lan d; (2) a qu al ifi edap pr ai sa l p rep aredby a qu al ifi edap pr ai se r subs ta nt ia te d th e fai r m ark etva lu e o f th e d on at io n; (3) th e qua li fie d app rai sa l was si gn edby the qu al ifi edap pr ai se r, who ha d t o b e li cen se d i n Vi rg in ia , anda co py of th e ap pr ai sa l
was subm it te d t o t he VDOT; (4) th e qua li fie d d on at io n was m ad e to th e Co m m on weal th of Vi rg in ia , an i ns tru m en ta li ty the reo f, ora qu al ifi edch ari tabl e or ga ni zat io n; an d (5 ) th e p res erv at io n o r si m il ar u se an d p ur po se of s uc h p ro pe rty
was ass ur edinpe rp etui ty. See al so Ro ut e 2 31 , LLC v. Co m m is si on er, at*4 6. Acco rd in gl y , forco nv ey an ces durin g 2 00 5 a ta xp ay er ea rn edan d h el d aVirg in ia 4 9 Tax Cred itwhen th e ta xp ay er s at is fie d the st atut ory requi rem en ts forth e cre di ts ; th e VDOT m erel y

ackno wled ge d a ndreg is te redth e cre di ts to crea te anacco un ti ng tra ckreco rd . Id. The pa rti es do no t d is pu te th atSW F’s eas em en t o n S he rwo od Farm m etth e requi rem en ts of Va . Cod e Ann . sec . 58 .1-5 12 as p res cri be d dur in g 20 05 . On Dece m

be r 30 , 20 05 , th e eas em en t d eedwas re co rd edwith t he Cle rk ’s Offi ce o f th e Ci rcu itCo urt fo r Alb em arl e Co un ty. At tha t m om en t SWF he ldth e In20 06 , ho wev er, Vir gi ni a ch an ge d t he st atut ory requi rem en ts ap pl ic ab le 4 9 to th e Vir gi ni a ta x c red it s fo r co nv ey an ces m ad e o n o r aft er J anua ry 1, 2 00 7. Am on g o th er thi ng s, Vi rg in iaex pr es sl y requi reda ta xp ay er t o “ ap pl y for a cred it aft er co m pl et in g t he do na ti onby sub m it ti ng a fo rm or f orm s p res cri be d b y

* * * [th e VDOT] ” b efo re h e o r sh e wou ldbe is su edVirg in iatax cred it s fo r do na ti on s m ad e o n o r aft er J anua ry

1, 2 00 7. Va. Co de Ann . sec . 58 .1- 5 12 (D)(1 ) (West 20 07 ). Thu s, the VDOT beg anto act iv el y is su e th e cre di ts on ly w it h re sp ectto co nv ey an ces m ad e dur in g 2 00 7. Se e Ro ut e 2 31 , LLC v. Co m m is si on er, at *4 6- *4 7.-7 5-

[* 75 ] Virg in iatax cred it s o rig in at in g fr om th e eas em en t o n S he rwo odFarm
. 5 0 SWF the n t ran sf

erre d s om e o f th os e Vir gi ni a ta x c red it s t o Vi rg in iaCo ns erv at io n,
an d Vi rg in iaCo ns erv at io n s ub se qu en tl y trans ferr edth em

to Ch es te rfi el d Co ns erv an cy

forad di ti on al tra ns fers to in di vi du al tax pa y ers to be us edon th ei r 20 05 tax returns . Thes e tr an sf ers co ul d n otha ve oc cu rredun le ss SW F an d t he n Virg in iaCo ns erv at io n h adacqui redan d h el d the Virg in iatax cred it s dur in g 2 00 5. See R ou te 23 1, LLC v . Comm is si on er, at*4 8. Acco rd in gl y , we con cl ud e th at le ga l t it le to th e Vir gi ni a ta x c red it s p as se d fr om SW F to Virg in iaCo ns erv at io n du rin g 2 00 5. The sec on d fa ct orwe co ns id er i s h ow SWF an d Vi rg in iaCo ns erv at io n tre at edth e VTC tr an sa ct io n. In Ro ut e 2 31 , we con si de redth e te rm s an d e ffec ti ve da te s o f th e tr an sa ct io na l ag reem en ts an d t he pa rti es ’ ta x re turn s as in di cat or s o f th e p art ie s’ in te ntas t o t he ti min g o f th e tr an sa ct io n. Id . at * 51 -* 52 . In the in st an t
cas e, eac h o f th e rel ev an t tran sa ct io na l d oc um en ts was e ffec ti ve onor b efo re Decem be r 31 , 20 05 . Bot h the esc ro w agr eem en t an d t he op erat in g a gr eem en t
co nt ai ne d t erm s tha t i nd ic at eda m utua l u nd ers tand in g t ha t SWF was t o re co rdth e eas em en t, ad m itVirg in iaCo ns erv at io n a s a p artne r, an d e arnth e Vir gi ni a ta x
W e al so no te th atth e cre di t ac kn owl ed gm en t l et te r fro m th e VDOT, dat ed 5 0 Mar ch30 , 20 06 , rep orte d 2 00 5 a s the effec ti ve y ear f orth e Vir gi ni a Tax Cred it
.-7 6-

[* 76 ] cred it s o n o r be fo re Dece m be r 31 , 20 05 . Mo reo ve r, on it s Fo rm 10 65 forit s 20 05 tax y ear, SWF rep orte d re cei vi ng du rin g 2 00 5 apu rp orte d c ap it al
co nt rib ut io n fr om

Virg in iaCo ns erv at io n o f $1 ,80 2,0 00 fora 1% i nt eres t i n the in co m e, lo ss es , andcap it al of S W F. On LPC # 1, as well as o n aSch edul e VK-1 fil edwith i ts Fo rm

50 2 fo r it s 2 00 5 t ax y ear, SWF rep orte d a n a ll oc at io n o f $3 ,40 0,0 00 inVirg in iatax cred it s t o Vi rg in iaCo ns erv at io n. Onth e b as is of the fo reg oi ng , we con cl ud e th atSW F an d Vi rg in iaCo ns erv at io n t reat edth e VTC tra ns act io n a s h av in g o ccu rreddu rin g 2 00 5. The th irdfact orwe co ns id er i s wh enVirg in iaCo ns erv at io n a cqui redan equi ty int eres t i n t he Virg in iatax cred it s. InRo ut e 2 31 we he ldth atanequi ty in te res t was acqui redwhen Virg in iaCo ns erv at io n, the acqui rer o f ta x c red it s i n th atcas e, was ab le to pa ss or k eep th e cre di ts witho utres tri ct io n a ndco ul d
ex cl ud e o th ers fro m

us in g t he tax cred it s. Inth e in st an t ca se Virg in ia Co ns erv at io n was ab le to us e o r tr an sf er the Virg in iatax cred it s dur in g t he 20 05 ta x year an d a ctua ll y

tra ns ferr edth em

to Ch es te rfi el d C on se rv an cy for subs eque nt tra ns fers to in di vi du al s fo r us e o n t he ir 2 00 5 t ax returns . Unt il Virg in ia Co ns erv at io n’s tran sf

er o f th e Vir gi ni a ta x c red it s t o C he st erfi el d C on se rv an cy , whi chals o o ccu rreddu rin g 2 00 5, i t h adex cl us iv e co nt ro l t o e it he r us e o r tr an sf er-7 7-

[* 77 ] th e Vir gi ni a ta x c red it s. Onth e b as is of t he for eg oi ng , we fin d t ha t Vi rg in ia Co ns erv at io n a cqui redanequi ty int eres t i n t he Virg in iatax cred it s dur in g 2 00 5. The fou rth fact orwe co ns id er i s wh ethe r SWF hada pr es en t o bl ig at io n t o ex ecu te an d d el iv er a d eedan d Vi rg in iaCo ns erv at io n h ada pr es en t o bl ig at io n t o
m ak e p aym en ts . Becau se th e tr an sa ct io n i n t he in st an t ca se was s tru ctur edas a pa rtn ers hi p a ll oc at io n, the re was no de edto be ex ecu te d a ndde li ve redto in di cat e a tr an sf er o f Virg in iatax cred it s. In st ead , SWF was ob li ga te d t o e ns ur e th atth e eas em en t d eedwas re co rd edan d t he Virg in iatax cred it s wer e earne d o n o r be fo re Decem be r 31 , 20 05 , to adm itVirg in iaCo ns erv at io n a s a p artne r on or b efo re Decem be r 31 , 20 05 , andto m ak e a p artne rs hi p a ll oc at io n o f Virg in iatax cred it s t o Virg in iaCo ns erv at io n e ffec ti ve forth e 2 00 5 t ax y ear. In ex ch an ge , pu rs uantto th e es cro w agr eem en t an d s ub sc rip ti on ag reem en t, Vi rg in iaCo ns erv at io n was requi redto tra ns fer fu nd s t o M r. Sk een ’s att orne y tru stacco un t; th os e fu nd s wo ul d
on ly be returne d t o Vi rg in iaCo ns erv at io n i f SWF didno t re co rdth e eas em en t de edor a dm itVirg in iaCo ns erv at io n a s a p artne r on or b efo re Dece m be r 31 , 20 05
. On the ba si s o f th e fo reg oi ng , we fin d t ha t, as of De cem be r 31 , 20 05 , SWF h ada pr es en t o bl ig at io n t o t ran sf er Vi rg in iatax cred it s t o Vi rg in iaCo ns erv at io n a ndth at Virg in iaCo ns erv at io n h ada pr es en t o bl ig at io n t o t ran sf er m on ey to anesc ro w acco un t fo r ul ti m at e d is tri bu ti on to SW F.-7 8-

[* 78 ] The fif

th fact orwe co ns id er i s wh ethe r th e ri gh t o f po ss es si on of t he Virg in iatax cred it s was ve st edinVirg in iaCo ns erv at io n. As we di sc us se d abo ve , Virg in iaCo ns erv at io n was ab le to us e o r tr an sf er the Virg in iatax cred it s dur in g th e 2 00 5 t ax y ear a ndactua ll y tra ns ferr edth em

to Ch es te rfi el d C on se rv an cy for
subs eque nttra ns fers to in di vi du al s fo r us e o n t he ir 2 00 5 t ax returns . Thes e tra ns fers co ul d n otha ve oc cu rredun le ss SWF an d t he n Vi rg in iaCo ns erv at io n h ad acqui redan d p os se ss edth e Vir gi ni a ta x c red it s dur in g 2 00 5. Se e Ro ut e 2 31 , LLC v. Co m m is si on er, at*4 8, * 53 . On th e b as is of t he for eg oi ng , we fin d t ha t the rig ht of po ss es si on ov er the Virg in iatax cred it s was ve st edwith Vi rg in iaCo ns erv at io n du rin g 2 00 5. The si xt h fa ct orwe co ns id er i s wh ethe r SWF or Vir gi ni a Co ns erv at io n b or e th e ri skof l os s o r da m ag e to th e Vir gi ni a ta x c red it s. Be cau se th e Vir gi ni a ta x cred it s ar e in ta ng ib le pro pe rty, we con si de r whi chpa rty to the VTC trans act io n bo re an y lo ss fro m

a de crea se ineco no m ic va lu e. See C al lo way v. Co m m is si on er, 13 5 T.C. at36 ; Ro ut e 2 31 , LLC v. Co m m is si on er, at*5 3. In th e in st an t ca se , al th ou gh Virg in iaCo ns erv at io n h el d t he Virg in iatax cred it s o nl y fora br ie f ti m e, itwou ldha ve bo rn e th e ri skof ade cl in e in th e v al ue of t he Virg in iatax cred it s o n th e o pe n m ark etdu rin g t ha t p eri od . Howev er, Vir gi ni a Co ns erv at io n was als o sh ie ld edfro m

so m e ri skof l os s thr ou gh anin de m ni ty clau se th atrequi redSW F-7 9-

[* 79 ] an d M r. Lewis to in de m ni fy Virg in iaCo ns erv at io n fo r any of i ts Virg in ia ta x c red it s tha t wer e d is al lo wedor r ev ok edby the VDOT or th e IRS . In Ro ut e 23 1, LLC v . Comm is si on er, at*5 3- *5 4, co nf ro nt edwith a n i de nt ic al setof f act s, we fo un d t ha t b oth p art ie s b or e th e ri skof l os s an d, the refo re, tha t thi s fa ct orwas ne ut ral . Accor di ng ly, we si m il arl y co nc lu de th atbo th Virg in iaCo ns erv at io n a nd SWF bo re the ris k o f lo ss with re sp ectto th e Vir gi ni a ta x c red it s. Co ns eque nt ly,
we co nc lu de th atth is fact or is ne ut ral
. The sev en th an d fi na l fa ct orwe co ns id er i s wh ethe r SWF or Vir gi ni a Co ns erv at io n wo ul d h av e rec ei ve d a ny pro fit s fr om th e o pe rat io n andsal e o f th e Virg in iatax cred it s. As we di sc us se d abo ve , Virg in iaCo ns erv at io n was ab le to
us e th e Vir gi ni a ta x c red it s t o d ecre as e it s o wn 2 00 5 t ax li ab il ity or t ran sf er the Virg in iatax cred it s fo r pr of itdurin g 2 00 5; infact , Virg in iaCo ns erv at io n a ctua ll y tra ns ferr edth e Vir gi ni a ta x c red it s t o C he st erfi el d C on se rv an cy forsubs eque nt tra ns fers to in di vi du al s fo r us e o n t he ir 2 00 5 t ax returns . Accor di ng ly, we fi nd th at , du rin g the 20 05 tax y ear, Vi rg in iaCo ns erv at io n wo ul d h av e rec ei ve d a ny pr of it s fr om th e o pe rat io n a ndsal e o f th e Vir gi ni a ta x c red it s. Upo n c on si de rat io n o f th e fo reg oi ng fact or s, we co nc lu de th at , forFed eral ta x p ur po se s, Vi rg in iaCo ns erv at io n s ho ul d b e tr eat edas t he own er o f th e Vir gi ni a ta x c red it s o n o r be fo re Dece m be r 31 , 20 05 . See i d. at*5 4. Co ns eque nt ly, we-8 0-

[* 80 ] co nc lu de th atth e d is gu is edsal e o f Virg in iatax cred it s fr om SW F to Virg in iaCo ns erv at io n t oo k p la ce o n o r be fo re Dece m be r 31 , 20 05
. B. Rec og ni ti onof I nc om e Fro m th e Dis gu is edSal e Sect io n 6 1( a) p ro vi de s g en eral ly tha t g ro ss in co m e m ean s al l i nc om e fro m wha te ve r so ur ce d eri ve d. Se ct io n 6 1( a)(3 ) pr ov id es th atgro ss in co m e in cl ud es ga in s d eri ve d fr om

de al in gs inpro pe rty. See als o s ec. 1 .61 -6 , Inc om e Tax Reg s. Sect io n 1 00 1( a) p ro vi de s tha t the ga in s fr om th e sa le or o th er d is po si ti on of pr op erty sh al l b e th e ex ces s o f th e am ou ntreal iz edov er the ad jus te d b as is . Unl es s ot he rwis e p ro vi de d, the en ti re am ou ntof t he ga in or l os s o n t he sal e o f th e pr op erty is reco gn iz ed . Sec. 1 00 1( c). Gen eral ly, a ta xp ay er i s re qu ire d t o i nc lu de ga in s, p ro fit s, an d i nc om e in gr os s i nc om e fo r th e ta xabl e y ear i n wh ic h h e o r sh e actua ll y or c on st ru ct iv el y rece iv edth em

un le ss th ey

are o th erwi se in cl ud ib le fora di ffer en t year in
acco rd an ce wi th th e ta xp ay er’s m etho d o f acc ou nt in g. Se c. 45 1( a); sec . 1.4 51
- 1( a), In co m e Tax Reg s. SWF is a cas h m etho d t ax pay er an d, the refo re, i nc om e is ta xabl e to itup on rece ip t. Un de r th e cas h re cei pt s m etho d o f acc ou nt in g, an
am ou ntof i nc om e is in cl ud ib le ingro ss in co m e o nl y when itis actua ll y

or co ns tru ct iv el y

rece iv ed . Sec. 1 .45 1- 1( a), In co m e Tax Reg s. “ Co ns tru ct iv e rece ip t” is de fin edinsec ti on 1.4 51 -2 (a), In co m e Tax Reg s., as fol lo ws:-8 1-

[* 81 ] (a) Gen eral rul e.--In co m e al th ou gh no t ac tu al ly redu cedto a ta xp ay er’s p os se ss io n i s co ns tru ct iv el y rece iv edby him

inth e ta xabl e y ear dur in g wh ic h i t i s cr ed it edto hi s ac co un t, s etap artforhi m , or ot he rwis e m ad e av ai labl e so th athe m ay dra w up on itat a ny tim e, or so th athe co ul d h av e drawnup on itdu rin g t he tax ab le y ear i f no ti ce of in te nt io n t o wi th dr aw ha d b eengi ve n. Ho wev er, i nc om e is no t co ns tru ct iv el y

rece iv edif the tax pa y er’s co nt ro l o f it s re cei ptis subjec t t o s ub st an ti al li m it at io ns or r es tri ct io ns . * * * Pet it io ne r co nt en ds th atth ere was no actua l o r co ns tru ct iv e rec ei ptof t he $1 ,80 2,0 00 incas h b y

SWF dur in g 2 00 5. Sp eci fic al ly, pe ti ti on er co nt en ds th at Virg in iaCo ns erv at io n p ai d t he $1 ,80 2,0 00 in to anesc ro w acco un t dur in g Decem be r 20 05 an d tha t SWF’s rig htto rece iv e th e fu nd s fr om esc ro w were li mit edby the fol lo win g c on di ti on s p rece de nt : (1 ) rec ei ptof acred ittra ns act io n nu m be r with re sp ectto th e Vir gi ni a ta x c red it s o rig in at in g fr om th e eas em en t; (2)
ev id en ce o f rec or da ti on of t he eas em en t d eedwith t he Cle rk ’s Offic e o f th e Ci rcu it Co urt o f Alb em arl e Co un ty; (3) a rep ort o f ti tl e is su edby Chi cag o Ti tl e; an d (4 ) writ te n autho riz at io n fr om Virg in iaCo ns erv at io n’s co un se l t o re le as e th e fu nd s. Pet it io ne r co nt en ds th atth os e co nd it io ns pre ced en t wer e “ subs ta nt ia l l im it at io ns or res tri ct io ns ” an d t ha t b ecau se all fou r were n otco m pl et edbe fo re Ap ril 20 06 , any in co m e fro m

th e d is gu is edsal e o f Virg in iatax cred it s s ho ul d n otbe reco gn iz edfor th e 2 00 5 t ax y ear. Al th ou gh pe ti ti on er i s co rrec t tha t the cred ittra ns act io n n um be r
an d t he ti tl e rep ort wer e n otrece iv edbe fo re Ma rch 20 06 an d t ha t M r. Sh aw di d-8 2-

[* 82 ] no t au th or iz e d is bu rs em en t o f th e es cro w fun ds inwrit in g u nt il Apri l 2 00 6, we di sa gr ee wi th pe ti ti on er’s co nt en ti on th atth es e co nd it io ns pre cl ud e rec og ni ti on of in co m e fo r 20 05 . In Ro ut e 2 31 , we rev ie weda factua l s itua ti on si mil ar t o t he
on e b efo re u s, i nc lu di ng th e tr an sf er o f fu nd s p ur su an t t o an e sc ro w agr eem en t with n earl y

id en ti cal term s. We hel d t ha t re qu ire m en ts to “pr ov id e to Virg in ia Co ns erv at io n t he cred ittra ns act io n n um be r, th e ev id en ce o f rec or da ti on of t he de edof g ift , th e n ew own er’s p ol ic y , anddi sb ur se m en t au th or iz at io n fr om Virg in iaCo ns erv at io n’s co un se l * * * were m in is te ria l an d n otco nd it io ns pr eced en t.” Ro ut e 2 31 , LLC v. Co m m is si on er, at*5 6 n .7. In st ead , we foc us edon co nd it io ns inth e es cro w agr eem en t tha t co nt ro ll edwhet he r th e es cro w fun ds
wou ldbe returne d t o Vi rg in iaCo ns erv at io n t o d et erm in e whe n i nc om e sh ou ldbe
reco gn iz ed . Id. at*5 6. In th e in st an t ca se , th e es cro w agr eem en t p ro vi de d t ha t Mr. Sk eenwou ldreturn t he esc ro w fun ds to Virg in iaCo ns erv at io n o nl y if (1 ) th e de edof the eas em en t was no t re co rd edinth e Cl erk ’s Offic e o f th e Ci rcu itCo urt o f Alb em arl e Co un ty on o r be fo re Dece m be r 31 , 20 05 , or (2 ) Virg in iaCo ns erv at io n was no t ad mit te d a s a 1 % partn er i n S W F o n o r be fo re Dece m be r 31 , 20 05 . The pa rti es do no t d is pu te th atbo th of t he se act s o ccu rredon or b efo re Dece m be r 31 , 20 05 . At th atpo in t, re ga rd le ss of wh enor wh ethe r (1 ) Virg in iaCo ns erv at io n rece iv edth e cre di t tran sa ct io n n um be r, ev id en ce o f rec or da ti on of the eas em en t,-8 3-

[* 83 ] an d t it le rep ort an d (2 ) Mr. Sh aw au th or iz eddi sb ur se m en t, Vi rg in ia Co ns erv at io n c ou ldno lo ng er re tri ev e th e fund s fr om th e es cro w acco un t an d SWF’ s ri gh t t o t he esc ro wedfun ds ha d v es te d. See i d. at*5 6. Acco rd in gl y , we 5 1
co nc lu de th atth e rem ai ni ng tas ks , i.e., Vir gi ni a Co ns erv at io n’s re cei ptof t he cred ittra ns act io n n um

be r, ev id en ce o f eas em en t, an d t it le rep ort, an d M r. Sh aw’s
au th or iz at io n, wer e m erel y m in is te ria l i n n atur e an d d idno t co ns ti tu te co nd it io ns pr eced en t t o S W F’s rig htto th e es cro wedfun ds . Con se qu en tl y , th es e co nd it io ns are n ot“ subs ta nt ia l l im it at io ns or r es tri ct io ns ” p ur su an t t o s ect io n 1 .45 1- 2( a), In co m e Tax Reg s. See Turn er v . Comm is si on er, T.C. Mem o. 1 96 4- 16 1, af f’d, 34 3 F.2 d 1 50 (4t h C ir. 1 96 5)
. Howev er, the co ns tru ct iv e rec ei ptdo ctrin e is in ap pl ic ab le to th e fac ts be fo re us forreas on s o th er tha n p et it io ne r’s co nt en ti on . The co ns tru ct iv e rec ei ptdo ctrin e requi res a ta xp ay er wh o i s o n t he cas h m etho d o f acc ou nt in g t o re co gn iz e in co m e whe n the tax pa y er h as anun qu al ifi ed , ves te d ri gh t t o re cei ve imm ed ia te pa ym en t of in co m e. See R os s v . Comm is si on er, 1 69 F.2d48 3, 4 90 (1s t Ci r.19 48 ), rev ’g
an d re m an di ng on an ot he r is su e a Me m or an du m Opi ni on of t hi s C ou rt; Mart in v. Co m m is si on er, 9 6 T.C. 8 14 , 82 3, (1 99 1) ; Am en d v . Comm is si on er, 1 3 T.C. 1 78 , Dur in g J anuary

20 06 , Mr. Geck er adm it te d t ha t Vi rg in iaCo ns erv at io n h ad 5 1 rece iv edwhatitha d b arg ai ne d fo r an d t ha t “ it[was ] un li ke ly tha t [t he y wou ld ] ge t th e m on ey

ba ck .”-8 4-

[* 84 ] 18 5 (1 94 9) . The co ns tru ct iv e rec ei ptdo ctrin e p rev en ts a cred it orfro m

“ ‘del ib erat el y

tu rn [in g] hi s b ackup on th e in co m e an d t hu s s el ect [in g] th e y ear f or whi chhe wil l re po rt i t.’” Gale v . Comm is si on er, T.C. Mem o. 2 00 2- 54 , 83 5 2 T.C.M. (CC H) 12 70 , 12 78 (20 02 ) (quo ti ng Ham il to n Nat ’l Ban k v
. Co m m is si on er, 2 9 B .T.A. 63, 6 7 (1 93 3) ). W e h av e p rev io us ly hel d tha t the re i s no ne edto co ns id er the co ns tru ct iv e rec ei ptdo ctrin e if a ta xp ay er d oe s n otde la y a pa ym en t due to hi m . See i d., 8 3 T.C.M . (CCH) at12 78 . SWF d idno t d el ay th e es cro wedfun ds fro m

be in g d is tri bu te d t o i t. Acco rd in gl y , we con cl ud e th atth ere is no ne edto co ns id er the ap pl ic at io n o f th e co ns tru ct iv e rec ei ptdo ctrin e to th e fact s b efo re u s.

The pro babl e p ur

po se forde ve lo pm en t o f th e d oc tri ne of 5 2 co ns tru ct iv e rec ei ptwas s ta te d a s fo ll ows inRo ss v. Co m m is si on er, 16 9 F .2d48 3, 4 91 (1s t Ci r. 19 48 ):

“ The do ctrin e o f co ns tru ct iv e rec ei ptwas, n o d oubt , con cei ve d by the Treas ury

inord er t o p rev en t a t ax pa y er fro m ch oo si ng th e y ear in whi chto return i nc om e m erel y by cho os in g t he y ear i n wh ic h t o reduc e itto po ss es si on . There by the Treas ury m ay subjec t i nc om e to ta xa ti on when th e o nl y

th in g p rev en ti ng it s re du ct io n t o P os se ss io n i s th e v ol it io n o f th e ta xp ay er.” * * * Hornu ng v. Co m

mis si on er, 4 7 T.C. 4 28 , 43 4 (1 96 7) (al te rat io n i n o rig in al ).-8 5-

[* 85 ] In st ead , we con si de r whe th er the eco no m ic be ne fitth eo ry ap pl ie s t o t he fact s b efo re u s. Un li ke th e d oc tri ne of c on st ru ct iv e rec ei pt , th e eco no mic be ne fit 5 3 th eo ry st at es th ata ta xp ay er m

us t re co gn iz e in co m e fo r th e ta xabl e y ear i n wh ic h
an y eco no m ic or f

in an ci al be ne fitis co nf

erre d. Zo rc v . Comm is si on er, T.C. Mem o. 1 99 0- 62 0, 6 0 T.C.M . (CCH) 1 39 9, 1 40 1 (1 99 0) (ci ti ng Anas ta si o v . Co m m is si on er, 6 7 T.C. 8 14 (19 77 ), aff’d wi th ou t p ub li sh edop in io n, 5 73 F.2d 12 87 (2dCir . 19 77 ), an d S pr ou ll v. Co m m is si on er, 1 6 T.C. 2 44 (19 51 ), aff’d, 1 94 F.2 d 5 41 (6t h C ir. 1 95 2) ); s ee al so Jac uz zi v. Co m m is si on er, 6 1 T.C. 2 62 , 26 8 (1 97 3) . Purs ua ntto th e eco no m ic be ne fitth eo ry , an i nd iv idua l o n t he cas h
rece ip ts an d d is bu rs em en ts m etho d o f acc ou nt in g i s cu rren tl y tax ab le on th e eco no m ic an d fi na nc ia l b en efi t d eri ve d fr om th e ab so lu te rig htto in co m e inth e fo rm of afun d wh ic h h as be enirr ev oc ab ly set a si de forhi m intru stan d i s b ey on d th e rea chof t he pay or ’s deb to rs . Pul si fie r v. C omm is si on er, 6 4 T.C. 2 45 , 24 6 (1 97 5) (ci ti ng Sp ro ul l v . Comm is si on er, 1 6 T.C. 2 44 ). In p rev io us cas es de ci de d
un de r th e eco no mic be ne fitth eo ry , we hav e fo cu se d o n wh ethe r a cas h m etho d ta xp ay er h ad“ a v es te d, ra th er tha n c on ti ng en t, ri gh t t o fu tu re p os se ss io n o f a W e h av e p rev io us ly ackn owl ed ge d tha t, al th ou gh th e co ns tru ct iv e-re cei pt 5 3 do ctrin e “ si gn ifi can tl y

di ffer s fr om

th e th eo ry

of e co no m ic be ne fit* * * [,] th e de ci de d c as es ha ve no t al way s b eenm od el s o f cl ari ty in re sp ectof t he di st in ct io n.” Ana st as io v. Co m

m is si on er, 6 7 T.C. 8 14 , 81 7 (1 97 7) (fn . ref. o m it te d) , aff’d witho utpubl is he d o pi ni on , 57 3 F .2d12 87 (2dCir . 19 77 ).-8 6-

[* 86 ] pa rti cu la r fu nd .” Biz zackBro s. Co ns tr. C or p. v . Commis si on er, T.C. Mem o. 19 80 -4 57 , 41 T.C.M. (CCH) 1 73 , 17 8 (1 98 0) (co m pa rin g S ti le s v . Comm is si on er, 69 T.C. 55 8 (1 97 8) , Jac uz zi v. Co m mis si on er, 6 1 T.C. 2 62 , Spr ou ll v. Co m m is si on er, 1 6 T.C. 2 44 , andGol ds m it h v . Uni te d S ta te s, 5 86 F.2d81 0 (1 97 8) ). Gene ral ly, subs ta nt ia l re st ric ti on s o r co nd it io ns im po se d o n the rel eas e o f
es cro wedfun ds pre cl ud e ap pl ic at io n o f th e eco no mic be ne fitth eo ry ; i n c on tra st , if a fi xe d s um

of m on ey

is irr ev oc ab ly set a si de fora ta xp ay er’s s ol e b en efi t an d o nl y
m in is te ria l dut ie s, n otsubs ta nt ia l re st ric ti on s o r co nd it io ns , rem ai n unt il th e fu nd s are r el eas ed , th enth e eco no m ic be ne fitth eo ry ap pl ie s. Ku eh ne r v. C omm is si on er, 21 4 F .2d43 7, 4 40 (1s t Ci r. 19 54 ), aff’g 2 0 T.C. 8 75 (19 53 ). Co m pa re St il es v. Co m m is si on er, 6 9 T.C. 5 58 , andBiz zackBro s. Co ns tr. C or p. v . Comm is si on er, 41 T.C.M. (CCH) a t 1 76 -1 78 , with S pr ou ll v. Co m m is si on er, 1 6 T.C. at24 7 (em ph as iz in g t ha t the irr ev oc ab le pa ym en t i nt o tru stserve d “ to di st in gu is h t hi s cas e fro m th os e inwhi chth e ex actam ou ntof c om pe ns at io n i s s ub

ject t o s om e fu tu re co nt in ge nc y

or s ub ject t o t he po ss ib il ity

of r eturn” ). As we d is cu ss ed ab ov e, SWF’ s ri gh t t o the esc ro wedfun ds was v es te d o n o r be fo re Dece m be r 31 , 20 05 , aft er i t (1 ) rec or de d t he eas em en t d eedinth e Cl erk ’s Offic e an d (2 ) adm it te d Virg in iaCo ns erv at io n a s a p artne r, be cau se Virg in iaCo ns erv at io n c ou ldno lo ng er retrie ve th e fu nd s fr om

th e es cro w acco un t. We reit erat e th atth e rem ai ni ng tas ks ,-8 7-

[* 87 ] in cl ud in g (1 ) Virg in iaCo ns erv at io n’s re cei ptof t he cred ittra ns act io n
nu m be r, ev id en ce o f rec or da ti onof t he eas em en t d eed , andti tl e rep ort an d (2 ) Mr. Sh aw’s writ te n aut ho riz at io n t o re le as e th e es cro wedfun ds , were m erel y
m in is te ria l an d d idno t co ns ti tu te co nd it io ns pre ced en t t o S W F’s rig htto th e es cro wedfun ds . See Ro ut e 2 31 , LLC v. Co m m is si on er, at*5 6 n .7. Acco rd in gl y , we fi ndth aton or b efo re Dece m be r 31 , 20 05 , SW F’s pr oc eed s fr om th e VTC tra ns act io n wer e irrev oc ab ly set a si de forSW F’s so le be ne fitan d o nl y m in is te ria l ta sk s re m ai ne d b efo re d is tri bu ti on . Con se qu en tl y , pu rs ua ntto th e eco no mic be ne fitth eo ry , we con cl ud e th atSW F m ay be tax edforit s 2 00 5 t ax y ear f orth e eco no m ic be ne fitof t he esc ro wedfun ds
. Add it io na ll y , we no te th atSW F adm it te d t ha t the tra ns fer o f fu nd s fr om Virg in iaCo ns erv at io n o ccu rreddu rin g 2 00 5 u nd er the cas h m etho d o f acc ou nt in g. On i ts 20 05 Fo rm

10 65 , SWF rep orte d tha t i t re cei ve d $ 1,8 02 ,00 0 i n c as h fr om Virg in iaCo ns erv at io n. Onth e 2 00 5 S ch edul e K-1 for Virg in iaCo ns erv at io n, SWF als o re po rte d c ap it al co nt rib ut eddu rin g 2 00 5 o f $1 ,80 2,0 00 . Peti ti on er al so adm it s tha t “ [i]n 2 00 5, Vi rg in iaCo ns erv at io n c on tri bu te d $ 1,8 02 ,00 0 i n c as h t o SWF in e xc ha ng e fo r a p artne rs hi p i nt eres t i n S W F.” W e h av e h el d re pe at ed ly th atst at em en ts m ad e in a ta x re tu rnsi gn edby a tax pa y er ar e b in di ng an d t reat edas adm is si on s. Me nd es v. Co m mis si on er, 1 21 T.C. 30 8, 3 12 (20 03 ) (ci ti ng W ari ng v.-8 8-

[* 88 ] Co m

m is si on er, 4 12 F.2d80 0, 8 01 (3dCir . 19 69 ), aff’g T.C. Me m o. 19 68 -1 26 , Lare v . Comm is si on er, 6 2 T.C. 7 39 , 75 0 (1 97 4) , aff’d wit ho ut publ is he d o pi ni on , 52 1 F .2d13 99 (3dCir . 19 75 ), an d Kal tri ed er v . Comm is si on er, 28 T.C. 12 1, 1 25 -1 26 (19 57 ), aff’d, 2 55 F.2d83 3 (3 d C ir. 1 95 8) ). A tax pa y er

“ can no t * * * di sa vo w * * * [h is or h er t ax ] returns witho utco ge ntpro of th atth ey are i nc orrect .” Cri gl er v . Comm is si on er, T.C. Mem o. 2 00 3- 93 , 85 T.C.M. (CCH) 10 91 (20 03 ), aff’d p er curia m , 85 Fed . App x. 3 28 (4th C ir. 2 00 4) . Peti ti on er d oe s no t ar gu e th atth e st at em en ts onSW F’s 20 05 Fo rm 10 65 are i nc orrect . 5 4 Acco rd in gl y , we con cl ud e th atSWF adm it te d tha t the tra ns fer o f fund s p ur su an t t o th e d is gu is edsal e, whi chitch arac te riz ederro ne ou sl y as acap it al co nt rib ut io n, oc cu rreddu rin g 2 00 5.

W it ho utsu gg es ti ng th atSW F’s st at em en ts on it s 2 00 5 F orm 10 65 are 5 4 in co rrec t, p et it io ne r co nt en ds th at“ res po nd en t em br aces SW F’s cap it al co nt rib ut io n re po rti ng when he th in ks itsupp orts hi s ar gu m en t b utdi sr eg ard s i t whe n i t d oe sn ’t.” Peti ti on er s ug ge st s tha t re sp on de ntcan no t re ly on S W F’s ta x returns forso m e rep res en ta ti on s b utdi sp ut e itforot he r rep res en ta ti on s. We di sa gr ee. The is su e o f th e ch arac te riz at io n o f th e VTC tr an sa ct io n- -i.e ., whethe r it sh ou ldbe tre at edforFed eral in co m e ta x p ur po se s as a di sg ui se d s al e o r a cap it al co nt rib ut io n- -is sep arat e fro m th e is su e o f whe n t o re co gn iz e an y in co m e fro m

th e VTC tra ns act io n- -i.e ., whethe r th e fu nd s tran sf erre d b y Virg in iaCo ns erv at io n t o SWF purs ua ntto th e VTC tr an sa ct io n s ho ul d b e in cl ud edforth e 2 00 5 o r 20 06 tax y ear. Acco rd in gl y , we con cl ud e th atres po nd en t i s n otpre cl ud edfro m rel y in g o n so m e, bu t n otall , of the rep res en ta ti on s o n S W F’s an d p et it io ne r’s ta x re tu rn s whe re the ir r es pe ct iv e rep res en ta ti on s ar e n otin co ns is te nt .-8 9-

[* 89 ] C. Co nc lu si on Upo n due co ns id erat io n o f th e fo reg oi ng , we con cl ud e th at(1) th e VTC tra ns act io n was a di sg ui se d s al e th atoc cu rreddu rin g 2 00 5 a nd(2) SW F h ad
eco no m ic be ne fitof o wne rs hi p, h adtax ab le rece ip t, an d a dm it te d re co gn it io n fo r Fed eral in co m e ta x p ur

po se s o f th e es cro wedfun ds du rin g 2 00 5. Co ns eque nt ly, th e p ro ceed s o f th e d is gu is edsal e are rep ortabl e as in co m e to SW F fo r it s 2 00 5 t ax y ear. V. Is su e 3 . Whe th er Pe ti ti on er Ov ers ta te d t he Valu e o f th e Eas em en t On i ts tax y ear 2 00 5 F orm 10 65 , SW F rep orte d ach ari tabl e co nt rib ut io n o f $7 ,39 8,3 33 fro m

th e d on at io n o f th e eas em en t t o t he Alb em arl e Co un ty PRFA. Res po nd en t co nt en ds th atSW F o ve rs ta te d t he va lu e o f th e eas em en t o n S he rwo od Farm an d t he refo re o ve rs ta te d the am ou ntof t he de du ct io n a ll owe d p ur su an t t o se ct io n 1 70
. A. Gen eral Lega l Ba ck gr ou nd A tax pa y er i s en ti tl edto de du ct , pu rs ua ntto sec ti on 17 0( a), a qua li fie d
co ns erv at io n c on tri bu ti onm ad e wit hi n atax ab le y ear. Sec. 1 70 (c), (f )(3 )(B) (ii i), 5 5 Gen eral ly, ta xp ay ers are n oten ti tl edto de du ctgi fts of p ro pe rty tha t co ns is t 5 5 of les s than t he tax pay ers ’ en ti re i nt eres t i n t ha t p ro pe rty. Sec. 17 0( f)(3 ). An ex cep ti on to th is ge ne ral rul e is th attax pay ers are p erm it te d t o d educ t the va lu e o f a co nt rib ut io n o f a p art ia l i nt eres t i n p ro pe rty tha t co ns ti tu te s a “ qu al ifi ed (co nt in ue d...)-9 0-

[* 90 ] (h ). Gene ral ly, th e am ou ntof ach ari tabl e co ntrib ut io n i s the fai r m ark et
va lu e o f th e co nt rib ut edpro pe rty at th e ti m e itis co nt rib ut ed . Sec. 1 .17 0A- 1( a), (c)( 1) , Inc om e Tax Reg s. Fai r m ark etva lu e is th e p ric e atwhi chpro pe rty woul d ch an ge ha nd s b etweena wil li ng bu y er an d awil li ng sel le r, ne it he r be in g u nd er an y co m pu ls io n t o b uy or s el l an d b ot h h av in g areas on ab le kn owl ed ge of r el ev an t fact s. Id . par a. (c)( 2)
. Inde ci di ng th e fai r m ark etva lu e o f pr op erty , we m us t t ak e in to acco un t n ot
on ly the curren t u se of t he pro pe rty bu t al so it s h ig he stan d b es t u se . See St an le y W orks & Subs . v. Co m

m is si on er, 8 7 T.C. 3 89 , 40 0 (1 98 6) ; s ec. 1 .17 0A14 (h )(3 )(i ) an d (i i), In co m e Tax Reg s. A pr op erty ’s hi gh es t an d b es t u se is th e hi gh es t an d m os t p ro fit ab le us e fo r whi chitis ad ap tabl e an d n eed edor l ik el y to be
ne ed edinth e rea so nabl y

ne ar fu tu re. Ols onv. Un it edSta te s, 2 92 U.S. 24 6, 2 55 (...co nt in ue d) 5 5 co ns erv at io n c on tri bu ti on ” as de fin edinsec . 17 0( h) (1 ). Sec. 1 70 (f)(3 )(B) (ii i). Fo r a co nt rib ut io n t o c on st itut e a qua li fie d c on se rv at io n c on tri bu ti on , th e ta xp ay er m us t s ho w th atth e co nt rib ut io n i s (1 ) of a “ qu al ifi edreal pro pe rty int eres t” , (2) to a “ qu al ifi edorg an iz at io n” , and(3) “ ex cl us iv el y for co ns erv at io n p ur

po se s.” Se c. 17 0( h) (1 ). Forth e d on at io n t o b e d educ ti bl e, th e co ns erv at io n p ur po se m us t b e pr ot ect edinpe rp etui ty. Sec. 1 70 (h )(5 ); s ec. 1 .17 0A- 14 (a), In co m e Tax Reg s. In th e in st an t ca se , res po nd en t d oe s n otch al le ng e th e v al id it y of t he eas em en t o r whe th er SWF is en ti tl edto a ch ari tabl e co nt rib ut io n d educ ti onpu rs ua ntto sec . 17 0 fo r th e co nt rib ut io n o f th e eas em en t t o t he Alb em arl e Co un ty PRFA. Res po nd en t ch al le ng es on ly pet it io ne r’s va lu at io n o f th e eas em en t an d, the refo re, th e am ou ntof t he ch ari tabl e co nt rib ut io n d educ ti on all owe d p ur su an t t o s ec. 1 70
.-9 1-

[* 91 ] (1 93 4) . The h ig he stan d b es t u se canbe an y real is ti c, ob

jecti ve po te nt ia l u se of th e p ro pe rty. Sy

m in gt on v. Co m

m is si on er, 8 7 T.C. 8 92 , 89 6 (1 98 6) . If di ffer en t fr om

th e cu rren t u se , a pr op os edhi gh es t an d b es t u se requi res “ cl os en es s in ti m e” an d “ reas on ab le pro babi li ty”. H il bo rnv. Co m m is si on er, 8 5 T.C. 6 77 , 68 9 (1 98 5) . Und er ci rcu m st an ces wher e th ere i s a s ub st an ti al reco rdof s al es of
eas em en ts co m

pa rab le to a do na te d e as em en t, the fai r m ark etva lu e o f th e d on at ed
eas em en t i s b as edonth e sa le pri ces of t ho se co m pa rab le eas em en ts . Sec. 1.1 70 A-1 4( h) (3 )(i ), In co m e Tax Reg s. Where, a s i n t he in st an t ca se , th ere i s n o es tabl is he d m ark etfor

si m il ar co ns erv at io n e as em en ts an d n o re co rdex is ts of s al es of su cheas em en ts , th e reg ul at io ns pro vi de an ot he r m etho d t o d et erm in e fai r
m ark etva lu e: If n o s ub st an ti al reco rdof m ark et -p la ce s al es is av ai labl e to us e as a m ean in gf ul or v al idco m

pa ris on , as age ne ral rul e (b utno t n eces sa ril y in all cas es ) th e fai r m ark etva lu e o f a p erp etua l co ns erv at io n res tri ct io n i s equa l t o t he di ffer en ce b etweenth e fai r m ark etva lu e o f th e p ro pe rty it en cu m

be rs be fo re the grant in g o f th e res tri ct io n a nd th e fai r m ark etva lu e o f th e en cu m be redpro pe rty afterth e g ran ti ng of th e res tri ct io n. * * * Id . W e h av e u se d a“be fo re an d a fte r” m etho do lo gy in e va lu at in g c on se rv at io n eas em en ts . See, e.g ., Hilb orn v . Comm is si on er, 8 5 T.C. 6 77 ; Bu tl er v . Co m m is si on er, T.C. Mem o. 2 01 2- 72 ; Si m m on s v . Comm is si on er, T.C. Mem o. 20 09 -2 08 , aff’d, 6 46 F.3d6 (D.C. Ci r. 20 11 ); Ki vaDun es Co ns erv at io n, L.L.C. v.-9 2-

[* 92 ] Co m

m is si on er, T.C. Mem o. 2 00 9- 14 5; Griff in v. Co m m is si on er, T.C. Mem o. 1 98 9- 13 0, af

f’d, 91 1 F .2d11 24 (5t h C ir. 1 99 0) . The p art ie s i n t he in st an t
cas e ag ree t ha t the be fo re an d a fte r m etho do lo gy is the ap pr op ria te va lu at io n
m etho d t o d et erm in e th e fai r m ark etva lu e o f th e eas em en t. Add it io na ll y , whenus in g t he be fo re an d a fte r va lu at io n app ro ach , any en ha nc em en t i n t he va lu e o f a d on or ’s othe r pr op erty res ul ti ng fro m

th e eas em en t
co nt rib ut io n, o r of

pro pe rty owne d b y

cert ai n re late d p ers on s, re du ces th e v al ue of th e co nt rib ut io n d educ ti on . Sec. 1 .17 0A- 14 (h )(3 )(i ), In co m e Tax Reg s. Valu at io n i s n ota pr eci se sci en ce, an d t he fai r m ark etva lu e o f pr op erty on a gi ve n d at e is a qu es ti on of f actto be res ol ve d o n the ba si s o f th e en ti re re co rd
. See, e.g ., Kapl anv. Co m

mis si on er, 4 3 T.C. 6 63 , 66 5 (1 96 5) ; Arb in i v
. Co m m is si on er, T.C. Mem o. 2 00 1- 14 1. In th e in st an t ca se , each pa rty has off ered th e rep ort an d t es ti m on y

of a n e xp ertwitne ss to est ab li sh th e v al ue of t he eas em en t fo r pu rp os es of a rri vi ng at the pro pe r am ou ntof t he ch ari tabl e co nt rib ut io n de du ct io n. Anex pe rt’s o pi ni on is adm is si bl e if itass is ts th e tr ie r of

factto
un de rs ta ndth e ev id en ce o r to de te rm in e a fac t i n i ss ue . Fed . R. Evi d. 7 02 . W e ev al ua te ex pe rt o pi ni on s i n t he li gh t o f th e ex pe rt’s d em on st rat edqu al ifi cat io ns
an d a ll ot he r ev id en ce i n t he reco rd . See Parke r v. C omm is si on er, 8 6 T.C. 5 47 , 56 1 (1 98 6) . Whe re ex pe rts off er co m pe ti ng est im at es of f

ai r m ark etva lu e, we-9 3-

[* 93 ] de ci de ho w to weig h t ho se est im at es by, in te r al ia , exa m in in g the fact or s th ey co ns id eredinreac hi ng th ei r co nc lu si on s. See Cas ey v. Co m m is si on er, 3 8 T.C. 35 7, 3 81 (19 62 ). W e are no t b ou ndby the op in io n o f an y ex pe rt wi tn es s, an d
we m ay acce ptor r ejectex pe rt t es ti m on y inth e ex erci se of o urso un d ju dg m en t. Helv eri ng v. Nat ’l Groce ry Co ., 30 4 U.S. 2 82 (19 38 ); Es ta te of Ne who us e v . Co m m is si on er, 9 4 T.C. 1 93 , 21 7 (1 99 0) . W e m ay als o re acha de ci si on as t o t he
va lu e o f pr op erty

th atis ba se d o n o urownex am in at io n o f th e ev id en ce i n t he
reco rd . Sil ve rm anv. Co m mis si on er, 5 38 F.2d92 7, 9 33 (2dCir . 19 76 ), aff’g T.C. Mem o. 1 97 4- 28 5. Gen eral ly, de du ct io ns are a m at te r of leg is lati ve gra ce an d atax pa y er b ears th e b ur de n o f pr ov in g e nt it le m en t t o a ny clai m edde du ct io ns . INDOPCO, Inc . v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). Mo reo ve r, th e Co m m is si on er’s de te rm in at io n o f va lu e is no rm al ly pres um edco rrec t, an d t he tax pa y er b ears th e bu rd enof p ro vi ng th atth e d et erm in at io n i s i nc orrect . See Ru le 14 2( a); W el chv. Helv eri ng , 29 0 U.S. at11 5; Sch wab v. Co m m is si on er, T.C. Mem o. 1 99 4- 23 2. Howev er, as we st at edab ov e, th e al lo cat io n o f th e b ur de n o f pr oo f is imm at eri al in th e in st an t ca se be cau se we de ci de th is factua l i ss ue on th e p rep on de ran ce o f th e ev id en ce. See Knu ds env. Co m m is si on er, 1 31 T.C. at 1 89 ; Es ta te of B on ga rdv. Co m m is si on er, 1 24 T.C. 95 , 11 1 (2 00 5)
.-9 4-

[* 94 ] B. Part ie s’ Exp ert s an d B as es forValu at io n Res po nd en t o ffer edanex pe rt r ep ort draft edby K arenD. Pape (Pap e rep ort). Ms . Pap e h as work edwith Al be m arl e Co un ty real es ta te si nc e 1 97 9 a ndha s va lu edov er 1 00 co ns erv at io n e as em en ts , m an y of wh ic h wer e in Alb em arl e Co un ty. Ms . Pap e ap pr ai se d s ev eral pro pe rti es th atpe ti ti on er’s ex pe rt u se d a s co m pa rab le pro pe rti es inhi s v al ua ti on . Pet it io ne r of

fere d a n e xp ertrep ort draft edby Brian Jo ne s (J on es rep ort). Mr. J on es ha s ap pr ai se d m or e th an70 eas em en ts inAlb em arl e Co un ty sin ce 2 00 1
an d h as ap pr ai se d o ve r 60 0 e as em en t thr ou gh ou t Vi rg in iadu rin g h is care er. Res po nd en t co nt en ds th atMr. J on es was h eav il y in flu en cedby Mr. W il li am s’ ap pr ai sa l, wh ic h was co m pl et eddu rin g Dec em

be r 20 05 , bef

or e b eg in ni ng hi s o wn va lu at io n a ndth eref

or e th atMr. J on es ’ in de pe nd en ce m ay have be enco m

pr om is ed
an d t ha t the Jo ne s re po rt wa s n otcred ib le . Res po nd en t’s co nt en ti on is ba se d o n on ly two fa ct s: (1) Mr. J on es was g iv enMr. Will ia m s’ app rai sa l b efo re co m pi li ng th e Jo ne s re po rt a nd(2) th ere was a di ffer en ce o f le ss th an1% b etweenth e two ap pr ai sa ls as t o t he ul ti m at e v al ue of t he eas em en t. We dis ag ree wi th res po nd en t. Res po nd en t m is take nl y

pre su m es im

pr op rie ty w it ho utpro vi ng it , i.e., th atMr. Jo ne s m us t h av e b eenim

pr op erl y in flu en cedby Mr. W il li am s’ app rai sa l b ecau se he ha d a cces s t o i t an d b ecau se th ei r ul ti m at e res ul ts were s im il ar. As p et it io ne r-9 5-

[* 95 ] po in ts ou t, Mr . Jo ne s u se d d iff eren t v al ua ti onm etho ds an d d iff eren t
co m pa rab le pro pe rti es , app li eddi ffer en t am ou nt s o f ad jus tm en ts , andde te rm in ed di ffer en t v al ue s fo r Sh erwo odFarm be fo re an d a fte r th e eas em en t. Mo reo ve r, Mr. Jo ne s cr ed ib ly test ifi edth athe refe rredto Mr. Will ia m s’ app rai sa l o nl y forit s de sc rip ti on of S he rwo odFarm as o f Decem

be r 20 05 . Accor di ng ly, we co nc lu de th atMr. J on es was n otim pr op erl y in flu en cedby Mr. W il li am s’ app rai sa l. The Pap e rep ort an d the Jo ne s re po rt ( co ll ect iv el y , rep orts ) ag reedonm an y as pe ct s o f th e b as es forva lu in g the eas em en t. The rep orts rel ie d o n R og er Ray ’s de ve lo pm en t p la n fo r Sh erwo odFarm , whi chde te rm in edth at38 sep arat e lo ts
co ul d b e d ev el op edat the si te . Bot h re po rts de te rm in edth atth e h ig he stan d b es t
us e fo r Sh erwo odFarm

be fo re the eas em en t was for res id en ti al ho us in g de ve lo pm en t i nt o e st at e type l ot s. Bo th rep orts als o d et erm in edth atth e eas em en t
on Sh erwo odFarm

was v ery res tri ct iv e b ecau se itpre cl ud edth e d iv is io n o f ov er 67 4.6 5 a cres of l an d o r th e d ev el op m en t o f m or e th an5 dwell in gs on th e si te , li mit edm od ifi cat io n o r co ns tru ct io n o f so m e o f th e ex is ti ng stru ctur es an d im pr ov em en ts , andpro hi bi te d m os t i ndus tri al or c omm erci al us es for Sh erwo od Farm ; the refo re, b ot h re po rts de te rm in edth atth e h ig he stan d b es t u se for Sh erwo odFarm

aft er the eas em en t was forag ric ul tural or r ecre at io na l u se .-9 6-

[* 96 ] Mo reo ve r, bo th ex pe rts us edpri m ari ly the co m pa rab le sal es m etho d t o de te rm in e th e v al ue s o f Sh erwo odFarm be fo re an d a fte r th e eas em en t. An 5 6 ap pr ai se r m ay

us e th e co m

pa rab le sal es m etho d, o r an ot he r acc ep te d m etho d, t o es ti m at e th e b efo re an d a fte r va lu es of t he pro pe rty. H il bo rnv. Co m m is si on er, 8 5 T.C. at 6 89 . An ap pr ai se r us in g t he co m parab le sal es m etho d, al so kn own as t he
m ark et -d at a ap pr oa chor t he sal es co m paris on ap pr oa ch , fin ds sal es of p ro pe rti es th atm eetth ree c rit eri a: (1) th e p ro pe rti es th em se lv es are s im il ar t o t he subjec t pr op erty ; (2 ) th e sa le s ar e arm ’s-le ng th tra ns act io ns ; an d (3 ) th e sa le s h av e oc cu rredwithi n areas on ab le ti m e o f th e v al ua ti on da te . W ol fs enLand& Cat tl e Co . v. Co m

m is si on er, 7 2 T.C. 1 , 19 (19 79 ). Becaus e n o two s al es an d n o t wo pr op ert ie s ar e ev er i de nt ic al , th e ap pr ai se r th enco ns id ers asp ect s o f th e sa le s o f
co m pa rab le pro pe rti es su chas t im e, si ze, o r ot he r si gn ifi can t fe atur es an d m ak es ap pr op ria te ad

jus tm en ts foreach to ap pr ox im at e th e qua li ti es of t he subjec t
Bo th rep orts us edad di ti on al va lu at io n m etho ds to ve rif y th e co nc lu si on s 5 6 reac he d fr om

th e co m pa rab le sal es m etho d. Ms . Pap e u se d t he de ve lo pm en t ap pr oa chto tes t the reas on ab le ne ss of h er v al ua ti on of S he rwo odFarm be fo re the eas em en t an d t he m at ch edpa ir a na lysis to tes t the reas on ab le ne ss of h er v al ua ti on of Sh erwo odFarm

aft er the eas em en t. Mr . Jo ne s al so us edth e d ev el op m en t ap pr oa chto tes t the reas on ab le ne ss of h is va lu at io n o f Sh erwo odFarm be fo re the eas em en t. Bo thparti es co nt en d t ha t the alt ern at iv e m etho ds of v al ua ti on were l es s rel iabl e an d/ orles s re as on ab le th anth e co m parab le sal es m etho d. We agre e an d, th eref or e, we do no t d is cu ss furth er the rep orts ’ co nc lu si on s u nd er the alt ern at iv e m etho ds
.-9 7-

[* 97 ] pro pe rty. E st at e o f Sp ru il l v . Commis si on er, 8 8 T.C. 1 19 7, 1 22 9 n .24 (1 98 7) ; Wol fs enLand& Cat tl e Co . v. Co m m is si on er, 7 2 T.C. at19 . Alth ou gh th e co m pa rab le sal es m etho d, l ik e al l v al ua ti on tec hn ique s, i s fa r fro m anex act
sc ie nc e, se e Wolfs enLand& Cat tl e Co . v. Co m m is si on er, 7 2 T.C. at19 , we hav e fo un d the co m

pa rab le sal es ap pr oa chto be th e m os t re li ab le in di cat orof v al ue whe n the re i s s uf

fic ie ntda taab ou t s al es of p ro pe rti es si m il ar t o the subjec t pr op erty , see , e.g., Est at e o f Sp ru il l v . Comm is si on er, 8 8 T.C. at12 29 n.2 4; Est at e of Rab e v . Comm is si on er, T.C. Mem o. 1 97 5- 26 , aff’d wit ho utpubl is he d o pi ni on , 56 6 F .2d11 83 (9th C ir. 1 97 7)
. Des pi te th e si mil ar b as es forva lu at io n, re sp on de ntco nt en ds th atth e Jo ne s rep ort i s n otcred ib le be cau se itfai ls to co m pl y with t he requi rem en ts of t he Uni fo rm Sta nd ard s o f Pro fes si on al App rai sa l Pr act ic e (USPAP)
. Spe ci fic al ly, 5 7
res po nd en t co nt en ds th atpe ti ti on er fa il edto li stth e p ro pe r hypo th et ic al co nd it io ns Uni fo rm Sta nd ard s o f Pro fes si on al App rai sa l Pr act ic e (USPAP) are 5 7 pr om ul ga te d b y

th e App rai sa l St an da rd s B oa rdof t he App rai sa l Fo un da ti on , a no np ro fitorg an iz at io n c om pr is in g o th er n onpr of

itorg an iz at io ns th atrep res en t ap pr ai se rs an d u se rs of app rai sa l s erv ic es . Whi te ho us e Hot el Ltd . P'sh ip v. Co m m is si on er, 1 31 T.C. 11 2, 1 26 n.4 (20 08 ) (ci ti ng The Ap pr ai sa l Fo un da ti on , Freque nt ly A sk edQues ti on s: ht tp ://www.ap pr ai sa lfo un da ti on .org /s _app rai sa l/ do c.as p? CID=9 & DID=1 72 (la stvi si te d Oct . 25 , 20 08 )), rev ’d onot he r gr ou nd s, 6 15 F.3d32 1 (5 thCir . 20 10 ). USPAP is wid el y reco gn iz edan d a ccep te d as co nt ai ni ng st an da rd s ap pl ic ab le to th e ap pr ai sa l p ro fes si on . Id. at12 7. Adh eren ce t o t ho se st an dard s i s ev id en ce tha t the ap pr ai se r is ap pl y in g m etho ds th atare g en eral ly accep te d wi th in th e ap pr ai sa l p ro fes si on . Id.-9 8-

[* 98 ] of a n app rai sa l co m pl et edaft er an eas em en t i s p la cedon pro pe rty andth at pe ti ti on er fa il edto li stsev eral de ta il s re qu ire d fo r se lf- co nt ai ne d app rai sa l re po rts . W e d is ag ree. We hav e p rev io us ly hel d t ha t “ [f]ul l co m pl ia nc e wit h p ro fes si on al st an da rd s [e .g., USPAP] is no t the so le m eas ur e o f anex pe rt' s re li ab il it y ” an d t ha t

“ a n on co m

pl ia ntva lu at io n re po rt i s n otpe r se un rel iabl e.” Whit eh ou se Hot el Ltd
. P’sh ip v. Co m

m is si on er, 1 31 T.C. 11 2, 1 27 (20 08 ), rev ’d on ot he r gr ou nd s, 6 15 F.3 d 3 21 (5t h C ir. 2 01 0) ; s ee al so Sch wart z v . Comm is si on er, 3 48 Fed . App x. 8 06 , 80 9 (3 d C ir. 2 00 9) , aff’g T.C. Mem o. 2 00 8- 11 7. Inth e in st an t ca se , we dec li ne to
acce ptth e m eri ts of r es po nd en t’s co nt en ti on s b ecau se , as p et it io ne r no te s, res po nd en t h as no t d em on st rat edho w th e al le ge d t ech ni cal erro rs ren de r th e Jo ne s rep ort u nr el iabl e o r th atth e al le ge d t ech ni cal erro rs are re fle ct iv e o f m or e si gn ifi can t s ub st an ti ve erro rs . Accor di ng ly, we de cl in e to fin d t ha t the Jo ne s rep ort i s u nr el iabl e so le ly for an y all eg edfai lu res to co m

pl y with USP AP requi rem en ts . Ins te ad , we in de pe nd en tl y rev ie w bo th rep orts to ev al ua te th e rel iabi li ty of eac h a ndde te rm in e th e p ro pe r va lu at io n o f th e eas em en t.-9 9-

[* 99 ] C. The Pap e Rep ort

1. The Pap e Rep ort’s Val ua ti on of S he rwo odFarm Befo re the Ease m en t The Pap e rep ort re vi ewedsal es of t he fol lo win g fi ve pro pe rti es to asc ert ai n th e v al ue of S he rwo odFarm be fo re the eas em en t: Min t M ead ow, Ra gg ed Mo un ta in , Mo nt al to , Cat te rto n, an d S ut he rla nd . The Pape rep ort l is te d e ig ht 5 8 ad jus tm en t fa ct or s fo r de te rm in in g t he be fo re-e as em en t v al ue s: con di ti on of s al e, si gn ifi can t b ui ld in gs , m ark etco nd it io ns , to po gr ap hy, loc at io n, s iz e, vi ews , and ot he r im pr ov em en ts . Ms . Pap e ad

jus te d t he pro pe rty val ue foreach sal e th atoc cu rredov er s ix
m on th s b efo re the da te of t he va lu at io n, i .e., Min t M ead ow, Ra gg edMo un ta in , and Mo nt al to , by 10 % pe r annu m on acco un t o f im

pr ov edm ark etco nd it io ns . Ms. Pap e ad jus te d d own wardth e v al ue s o f Rag ge d M ou nt ai n a ndSu th erl an d fo r bu il di ng s o r ot he r im

pr ov em en ts ; al th ou gh Mo nt al to als o h adbu il di ng s, n o ad jus tm en ts were m ad e. Ms . Pap e d et erm in edth atRag ge d M ou nt ai n a nd Mo nt al to ha d s ig ni fic an t s lo pe is su es an d wer e in feri orto Sh erwo odFarm , and ad jus te d e ach of t ho se va lu es up ward . Ms. Pape als o d et erm in edth atMi nt Mea do w, Rag ge d M ou nt ai n, an d M on ta lt o wer e in area s s up eri orto Sh erwo od Pet it io ne r refe rs to th e Mo nt al to pro pe rty as “ Bro wn’s Mo un ta in ”. To 5 8 av oi d c on fu si on an d fo r co nv en ie nc e, we refe r to iton ly as “ Mo nt al to ”.-1 00
-

[* 10 0] Farm

an d t he refo re ad

jus te d t he ir v al ue s d own ward20 %, 15 %, and25 %,
res pe ct iv el y . Min t M ead ow, Mo nt al to , andCat te rto n wer e al so de em edto be
sm al le r pa rcel s tha t wer e m or e v al uabl e, so th ei r va lu es were ad jus te d d own ward
on acco un t o f si ze. Ms . Pap e ad jus te d d own wardth e v al ue s o f Mi ntMea do w, Rag ge d M ou nt ai n, M on ta lt o, an d C at te rto n fo r th ei r vi ews , whi chsh e d eem edto be supe rio r to th os e p res en t atSh erwo odFarm . Becau se Ms . Pap e b el ie ve d t ha t th ere wer e n on m ark etm ot iv at io ns th atin flu en cedth e sa le of t he Mo nt al to pr op erty , sh e m ad e anad di ti on al 20 % do wnwar d a dju st m en t t o i ts va lu e fo r th e un ique sal e co nd it io n. Inth e ag gr eg at e, Ms . Pap e d et erm in edth e fo ll owi ng va lu es foreach of h er be fo re-e as em en t co m

pa rab le pro pe rti es :

M i n t M e a d o w R a g g e d

M o u n t a i n M o n t a l t o C a t t e r t o n S u t h e r l a n d
T o t a l s a l e p r i c e $ 4 , 1 0 0 , 0 0 0 $ 8 , 0 0 0 , 0 0 0 $ 1 5 , 0 0 0 , 0 0 0 $ 4 , 1 0 0 , 0 0 0 $ 6 , 4 0 0 , 0 0 0 P r i c e p e r a c r e $ 1 8 , 8 6 5 $ 1 5 , 5 4 9 $ 4 5 , 5 8 7 $ 1 6 , 4 0 0 $ 1 3 , 9 4 9 D o w n w a r d a d j u s t m e n t s L o c a t i o n , s i z e , v i e w s I m p r o v e m e n t ,

l o c a t i o n , v i e w s S a l e c o n d i t i o n ,

l o c a t i o n , s i z e , v i e w S i z e , v i e w s I m p r o v e m e n t s U p w a r d a d j u s t m e n t s M a r k e t M a r k e t , t o p o g r a p h y M a r k e t ,

t o p o g r a p h y N o n e N o n e A d j u s t e d p r i c e p e r a c r e $ 1 4 , 7 1 5 $ 1 3 , 5 7 9 $ 1 9 , 1 4 6 $ 1 3 , 1 2 0 $ 1 3 , 4 0 4 Afte r rev ie win g t he ad

jus te d p ric es pe r acre , Ms . Pap e d is co un te d t he Mo nt al to
va lu at io n a lt og ethe r be cau se itwas “ anou tl ie r as itwas ave ry un ique pro pe rty-1 01
-

[* 10 1] with asi ng ul arl y

di st in gu is he d l oc at io n, an in cred ib le vi ew[,] anda
ne ig hb or in g p ro pe rty owne r with agre atm ot iv at io n.” Ms . Pap e th enus edth e rem ai ni ng va lu es to de te rm in e a $ 13 ,50 0 p er ac re v al ue to be ap pl ie d t o the 67 4.6 5
acre s o f Sh erwo odFarm . The Pape rep ort co nc lu de d t ha t the va lu e o f Sh erwo od Farm be fo re the eas em en t was $9 ,10 0,0 00
. 5 9 2. The Pap e Rep ort’s Val ua ti on of S he rwo odFarm Afte r th e Ease m en t The Pap e rep ort re vi ewedsal es of t he fol lo win g fo urpro pe rti es to asc ert ai n th e v al ue of S he rwo odFarm aft er the eas em en t: PlankRo ad , Decca Lan e, Lon e OakFarm , andBal lard s M il l. Each of t he pro pe rti es was s ub ject t o a n e as em en t o r ot he r li m it at io n o n d ev el op m en t p ot en ti al . The Pape rep ort l is te d s ev en ad jus tm en t fa ct or s fo r de te rm in in g t he aft er-e as em en t v al ue s: m ark etco nd it io ns , to po gr ap hy, loc at io n, s iz e, de ve lo pm en t p ot en ti al , im pr ov em en ts , andflo ra. 6 0 Si m il ar t o h er ad

jus tm en ts forth e b efo re-e as em en t co m pa rab le sal es , Ms
. Pap e ad jus te d t he pro pe rty val ue foreach sal e th atoc cu rredov er s ix m on th s be fo re the da te of t he va lu at io n, i .e., Pla nkRo ad , Lon e OakFarm , andBal la rd s

As ro un de d i n t he Pap e rep ort. 5 9 Acco rd in g t o t he Pap e rep ort, i t s eem s tha t M s. Pape co ns id ered , bu t d id 6 0 no t i m pl em en t, ad

jus tm en ts on acco un t o f vi ews fro m th e p ro pe rti es to th e v al ue s of th e fo uraft er-e as em en t co m pa rab le sal es .-1 02
-

[* 10 2] Mi ll , by 10 % pe r an nu m on acco un t o f im

pr ov edm ark etco nd it io ns . In the
ex pl an at io n s ect io n, the Pap e rep ort cl ai m s t o m ak e a 2 0% a dju st m en t upwa rdto th e v al ue of Lo ne Oak F arm forto po gr ap hy becaus e o f subs ta nt ia l wet la nd s o n t he pr op erty ; h owe ve r, th e cal cu la ti on sec ti on in cl ud eda 30 % ad jus tm en t upwa rdfor to po gr ap hy onth atpro pe rty. Ms. Pap e d et erm in edth atDeccaLane an d B al la rd s Mi ll were i n a reas supe rio r to Sh erwo odFarm an d t he refo re ad

jus te d the ir v al ue s do wnwar d b y

10 % an d 2 0%, re sp ect iv el y . In co nt ras t, s he ad jus te d upwa rdby 25 % th e v al ue of Lo ne Oak F arm be cau se sh e d et erm in editto be ina lo cat io n in feri orto th atof S he rwo odFarm . The Pape rep ort ad jus te d t he va lu e o f eac h o f th e fo urpro pe rti es on acco un t o f si ze; th e v al ue s o f Pl an k R oa d, Dec ca Lan e, an d Bal la rd s M il l wer e ad

jus te d d own wardbe cau se th ey were s m al le r tr act s o f la nd
an d t he va lu e o f Lon e OakFarm was a dju st edup wardsi gn ifi can tl y as i t was a la rg er tractof l an d. Ms . Pap e al so ad jus te d d own wardth e v al ue of Lo ne Oak Farm by 10% fo r it s b ui ld in g i m pr ov em en ts an d b y

an ot he r 10 % be cau se it s eas em en t al lo weddi vi si onof p arce ls ab ou t 1 00 acre s i n s iz e. Ms . Pap e de te rm in edth atDeccaLane an d B al la rd s M il l wer e p rimaril y woo de d p ro pe rti es th atha d i nf

eri orflo ra an d, the refo re, s he ad jus te d t he va lu e o f eac h upwa rdby 10 %.-1 03
-

[* 10 3] In t he ag gr eg at e, Ms . Pap e d et erm in edth e fo ll owi ng va lu es forhe r aft ereas em en t co m

parab le pro pe rti es :

P l a n k R o a d D e c c a L a n e L o n e O a k F a r m B a l l a r d s M i l l
T o t a l s a l e p r i c e $ 1 , 9 0 0 , 0 0 0 $ 1 , 1 7 5 , 0 0 0 $ 4 , 0 0 0 , 0 0 0 $ 1 , 7 9 2 , 7 0 0 P r i c e p e r a c r e $ 6 , 2 3 4 $ 9 , 7 7 9 $ 3 , 0 2 6 $ 9 , 1 4 1 D o w n w a r d a d j u s t m e n t s S i z e L o c a t i o n , s i z e D e v e l o p m e n t p o t e n t i a l , i m p r o v e m e n t s L o c a t i o n , s i z e U p w a r d a d j u s t m e n t s M a r k e t F l o r a M a r k e t , t o p o g r a p h y , l o c a t i o n , s i z e M a r k e t , f l o r a A d j
. P r i c e P e r a c r e $ 6 , 7 3 3 $ 7 , 8 2 3 $ 6 , 3 4 4 $ 7 , 8 2 7 Ms . Pap e u se d t he fou r va lu es to de te rm in e a $ 7,5 00 pe r acr e v al ue to be ap pl ie d to th e 6 74 .65 acre s o f Sh erwo odFarm . The Pape rep ort co nc lu de d t ha t the va lu e of Sh erwo odFarm

aft er the eas em en t, af

te r ro un di ng , was $ 5,0 60 ,00 0. Th e Pap e rep ort s ub tra ct edth is am ou ntfro m th e $ 9,1 00 ,00 0 b efo re-e as em en t v al ue of Sh erwo odFarm

an d c on cl ud edth atth e v al ue of t he eas em en t was $4 ,04 0,0 00
. D. The Jo ne s R ep ort 1. The Jo ne s R ep ort’s Val ua ti onof S he rwo odFarm Befo re the Ease m en t The Jo ne s re po rt r ev ie wedsal es of t he fol lo win g s ix pro pe rti es to asc ert ai n th e v al ue of S he rwo odFarm be fo re the eas em en t: Ble nh ei m Ro ad , Klu ge-1 04
-

[* 10 4] Est at e, Airs li e Farm , Cas tl e Hil l, Ch ap el Sp rin gs , andBund or an . The

6 1 Jo ne s re po rt c on si de redth e fo ll owi ng ad jus tm en t fa ct or s fo r de te rm in in g t he be fo re-e as em en t v al ue s: con di ti on of s al e, m ark etco nd it io n, l oc at io n, s iz e, an d flo odpl ai n. Rathe r th anm ak e ad jus tm en ts forbu il di ng s an d/ orim pr ov em en ts , 6 2 th e Jo ne s re po rt d et erm in edsal e p ric es ne t o f an y im pr ov em en ts ex is ti ng on th e la nd
. Mr. J on es ad

jus te d t he pro pe rty val ue foreach sal e th atoc cu rredov er s ix
m on th s b efo re the da te of t he va lu at io n, i .e., Klu ge Est at e, Cas tl e Hil l, an d C hape l Sp rin gs , by 12 % pe r an nu m on acco un t o f im

pr ov edm ark etco nd it io ns . Alth ou gh th e Bl en he im

Ro adpro pe rty was s ol d dur in g Dec em be r 20 06 , m or e th ansi x
m on th s fr om

th e d at e o f Mr. J on es ’ va lu at io n, M r. Jo ne s d et erm in edno ad jus tm en t
was ne ces sa ry

be cau se of o ffs et ti ng flu ctua ti on s i n t he m ark et . Mr. Jo ne s 6 3
Res po nd en t re fers to th e Klu ge Est at e p ro pe rty as “ Cart er’s”. To av oi d 6 1 co nf us io n a ndfor

co nv en ie nc e, we refe r to iton ly as “ Klu ge Est at e”. Mr. J on es als o c on si de redad jus tm en ts for

fin an ci ng an d fo r 6 2 fro nt ag e/ acce ss bu t d et erm in edth atno ad jus tm en ts were n eces sa ry foreit he r of th os e two fact or s. Res po nd en t co nt en ds th atMr. J on es erre d b y fai li ng to ad

jus t the va lu e o f 6 3 Bl en he im Ro adto acco un t fo r m ark etco nd it io ns an d t ha t Bl en he im Ro adwas n ot a p ro pe r co m

pa rab le . Peti ti on er co nt en ds th atMr. J on es accurat el y de te rm in ed th atth ere wer e o ffs et ti ng flu ctua ti on s i n t he m ark etan d t he refo re n o a dju st m en ts were n eces sa ry

on acco un t o f m ark etco nd it io n. We agre e wit h p et it io ne r an d, (co nt in ue d...)-1 05
-

[* 10 5] ad jus te d d own wardth e Air sl ie Farm an d C as tl e Hil l v al ue s b y $2 ,60 0 e ach fo r supe rio r lo cat io n. Mr . Jo ne s d et erm in edth atBle nh ei m Ro ad , Klu ge Est at e,
an d Ai rs li e Farm

were s im il ar i n s iz e to Sh erwo odFarm an d t he ir v al ue s n eed ed
no ad jus tm en ts ; i n c on tra st , Mr. Jo ne s d et erm in edth atCas tl e Hil l, Ch ap el Sp rin gs , an d B un do ranwere l arg er p ro pe rti es an d a dju st edeach pro pe rty’ s v al ue up ward by $5 ,20 0 p er ac re. Bl en he im Ro ad ’s val ue was a ls o a dju st edup wardby $3,0 00 pe r acr e to acco un t fo r a fl oo d p la in on ap pr ox im at el y 27 % of t he Ble nh ei m

Ro ad pr op erty . Klu ge Est at e’s va lu e was ad jus te d upwa rd5% t o a cco un t fo r a b ou gh tou t co ntractsi tu at io n. Bu nd or an ’s val ue was a dju st eddo wnwar d 1 0% fo r a s al e co nd it io n. 6 4 (...co nt in ue d) 6 3 be cau se itis “ ap pr op ria te to co ns id er s al es of p ro pe rt[ y ] oc curri ng subs eque ntto th e v al ua ti on da te if the pro pe rti es in vo lv edare i nd eedco m pa rab le to th e subjec t pr op ert ie s” , see Est at e o f Tho m ps on v. Co m

m is si on er, 8 9 T.C. 6 19 , 62 8- 62 9 n .7 (1 98 7) , rev ’d on ot he r gr ou nd s, 8 64 F.2d11 28 (4t h C ir. 1 98 9) , we con cl ud e th at Bl en he im Ro adwas an a ccep tabl e co m pa rab le pro pe rty. Res po nd en t co nt en ds th atth e Bu nd or anco m pa rab le pro pe rty sal e was 6 4 un rel iabl e b ecau se Mr. J on es ad jus te d t he pro pe rty’ s v al ue fora co nd it io n o f sa le th athe di d n otex pl ai n. We di sa gr ee. As p et it io ne r co nt en ds , Mr. Jo ne s ex pl ai ne d bo th inth e Jo ne s re po rt a ndat t ria l tha t the co nd it io n o f sa le ad jus tm en t was m ad e to acco un t fo r im

pr ov em en ts to a li fe es ta te th atdi d n otad d v al ue . Accor di ng ly, we co nc lu de th atBund or anwas arel iabl e co m pa rab le pro pe rty. More ov er, we no te th atres po nd en t’s co nt en ti on , if we ac cep te d i t, wo ul d h av e th e eff ectof in crea si ng th e v al ue of t he Bund or anco m pa rab le pro pe rty and , th eref or e, in crea si ng th e b efo re-e as em en t v al ue of S he rwo odFarm an d t he va lu e o f th e

(co nt in ue d...)-1 06
-

[* 10 6] Inth e ag gr eg at e, Mr. J on es de te rm in edth e fo ll owi ng va lu es foreach of h is be fo re-e as em en t co m

pa rab le pro pe rti es :
B l e n h e i m R o a d K l u g e E s t a t e A i r s l i e F a r m C a s t l e H i l l C h a p e l S p r i n g s B u n d o r a n
T o t a l s a l e p r i c e $ 3 , 5 0 0 , 0 0 0 $ 8 , 0 0 0 , 0 0 0 $ 1 0 , 0 0 0 , 0 0 0 $ 2 1 , 0 0 0 , 0 0 0 $ 1 7 , 5 0 0 , 0 0 0 $ 3 0 , 3 0 0 , 0 0 0 1 P r i c e p e r a c r e $ 1 1 , 7 8 8 $ 1 3 , 6 9 1 $ 1 9 , 6 0 9 $ 1 3 , 2 7 1 $ 1 0 , 7 8 4 $ 1 2 , 8 0 6 D o w n w a r d a d j u s t m e n t s N o n e N o n e L o c a t i o n L o c a t i o n N o n e S a l e c o n d i t i o n U p w a r d a d j u s t m e n t s F l o o d P l a i n S a l e c o n d i t i o n , m a r k e t N o n e M a r k e t , s i z e M a r k e t , s i z e S i z e A d j u s t e d p r i c e p e r a c r e $ 1 4 , 7 8 8 $ 1 6 , 9 6 3 $ 1 7 , 0 0 9 $ 1 6 , 6 6 8 $ 1 6 , 9 5 5 $ 1 6 , 7 2 6 T o t a l s a l e p r i c e i s c a l c u l a t e d n e t o f i m p r o v e m e n t s o n t h e p r o p e r t y . 1 Mr. J on es de te rm in edth atth e “ si x s al es ran ge d i n v al ue fro m $1 4,7 88 to $1 7,0 09 pe r acr e wit h a n a ve rag e $ 16 ,51 8, a m eanof $ 15 ,89 9 p er ac re wi th a st an da rd de vi at io n o f $3 70 pe r acr e.” Mr. J on es th ende te rm in eda $1 5,5 00 pe r acr e v al ue to be ap pl ie d t o t he 67 4.6 5 a cres of S he rwo odFarm . The J on es rep ort co nc lu de d th atth e v al ue of S he rwo odFarm be fo re the eas em en t was $1 0,4 60 ,00 0. 6 5

(...co nt in ue d) 6 4 eas em en t i ts el f. As ro un de d i n t he Jo ne s re po rt. 6 5-1 07
-

[* 10 7] 2. The Jo ne s R ep ort’s Val ua ti onof S he rwo odFarm Afte r th e Ease m en t The Jo ne s re po rt r ev ie wedsal es of t he fol lo win g fi ve pro pe rti es to asc ert ai n th e v al ue of S he rwo odFarm aft er the eas em en t: Green m on t Fa rm , Rou te 61 2, Mo nr ov iaRo ad , Lon e OakFarm , andEastBel m on t. Fo urof t he pro pe rti es were subjec t t o an e as em en t o r ot he r li m it at io n o n d ev el op m en t p ot en ti al . Mr. Jo ne s co ns id eredsi x a dju stm en t fa ct or s fo r de te rm in in g t he aft er ea se m en t v al ue s: fin an ci ng , m ark etco nd it io ns , lo cat io n/ acce ss , fro nt ag e, si ze/ acre s, an d de ve lo pm en t p ot en ti al . Sim il ar t o t he co m pa rab le pro pe rti es forth e b efo reeas em en t v al ue , th e Jo ne s re po rt d et erm in edsal e p ric es ne t o f an y im pr ov em en ts
ex is ti ng on th e la nd
. Si m il ar t o h is ad

jus tm en ts forth e b efo re-e as em en t co m pa rab le pro pe rti es , Mr. J on es ad

jus te d t he va lu es of t hr ee o f th e fo ur pro pe rti es who se sal es oc cu rred
ov er s ix m on th s b efo re the da te of t he va lu at io n, i .e., Rou te 61 2, Lo ne Oak F arm , an d Eas t Be lm on t, b y

12 % pe r an nu m

on acco un t o f im

pr ov edm ark etco nd it io ns . 6 6

Res po nd en t co nt en ds th atMr. J on es erre d b y no t ad jus ti ng th e v al ue of 6 6 Green m on t Fa rm , whi chwas s ol d dur in g J un e 2 00 6, o n a cco un t o f m ark et co nd it io ns . Howev er, as pe ti ti on er n ot es , bo th parti es ad jus te d v al ue s fo r m ark et co nd it io ns on ly whe n t he sal e o ccu rredov er s ix m on th s fr om th e d at e o f th e eas em en t. Acco rd in gl y , bec au se th e sa le of Gre en m on t Fa rm oc cu rredwithi n s ix m on th s o f th e d at e o f th e eas em en t, we co nc lu de th atno ad jus tm en t was ne ces sa ry fo r m ark etco nd it io ns .-1 08
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[* 10 8] The J on es rep ort ad jus te d d own wardth e v al ue s o f Ro ut e 6 12 an d Eas t Bel m on t o n a cco un t o f supe rio r lo cat io n a ndad jus te d upwa rdth e v al ue of Lo ne OakFarm on acco un t o f in feri orlo cat io n. Mr . Jo ne s m ad e ad jus tm en ts forfou r of th e fi ve pro pe rti es on acco un t o f si ze; th e v al ue s o f Green m on t Fa rm an d R ou te 61 2 wer e ad

jus te d d own wardbe cau se of t he ir s m al le r si zes an d t he va lu es of Lo ne OakFarm an d Eas t Be lm on t wer e ad jus te d upwa rdbe cau se of t he ir l arg er s iz es . Mr. J on es als o a dju st edth e v al ue of Gre en m on t Fa rm do wnwar d b y

$3 ,00 0 p er acre be cau se he de te rm in edth atth e eas em en t o n Gre en m on t Farm was l es s res tri ct iv e th anth e eas em en t o n S he rwo odFarm . Alth ou gh Mr. J on es co ns id ered po te nt ia l ad

jus tm en ts forfin an ci ng an d fr on ta ge , no ad jus tm en ts were m ad e fo r
an y of t he fiv e p ro pe rti es on acco un t o f ei th er o f th es e co ns id erat io ns . Inth e ag gr eg at e, Mr. J on es de te rm in edth e fo ll owi ng va lu es foreach of h is aft er-e as em en t co m

pa rab le pro pe rti es :-1 09
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[* 10 9] G r e e n m o n t F a r m R o u t e 6 1 2 M o n r o v i a R o a d L o n e O a k

F a r m E a s t B e l m o n t
T o t a l s a l e p r i c e $ 2 , 3 0 0 , 0 0 0 $ 3 , 0 0 0 , 0 0 0 $ 3 , 0 0 0 , 0 0 0 $ 3 , 5 0 0 , 0 0 0 $ 1 1 , 3 0 0 , 0 0 0 1 P r i c e p e r a c r e $ 8 , 3 3 7 $ 1 0 , 6 3 9 $ 4 , 3 7 1 $ 2 , 5 3 1 $ 8 , 9 6 4 D o w n w a r d a d j u s t m e n t s S i z e ,

d e v e l o p m e n t p o t e n t i a l L o c a t i o n , s i z e N o n e N o n e L o c a t i o n U p w a r d a d j u s t m e n t s N o n e M a r k e t N o n e M a r k e t , l o c a t i o n , s i z e M a r k e t , s i z e A d j u s t e d p r i c e p e r a c r e $ 4 , 5 3 7 $ 4 , 6 3 4 $ 4 , 3 7 1 $ 4 , 5 3 6 $ 4 , 6 0 2 T o t a l S a l e P r i c e i s c a l c u l a t e d n e t o f i m p r o v e m e n t s o n t h e p r o p e r t y . 1 Mr. J on es de te rm in edth atth e “ av erag e o f al l fi ve sal es was $ 4,5 36 , whi le th e
m ed ia n was $4 ,53 7 wi th a st an da rdde vi at io n o f $6 78 pe r acr e.” Mr. J on es th en de te rm in eda $4 ,50 0 p er ac re v al ue to be ap pl ie d t o t he 67 4.6 5 a cres of S he rwo od Farm . The J on es rep ort co nc lu de d t ha t the va lu e o f Sh erwo odFarm aft er the
eas em en t was $3 ,04 0,0 00 aft er ro un di ng . 3. The Jo ne s R ep ort’s En ha nc em en t Ad jus tm en t The Jo ne s re po rt a ls o d et erm in edth atMr. Lewi s o wne d a n a dd it io na l 6 5.9
- acre pro pe rty nearSh erwo odFarm th atwas n otco ve redby the eas em en t. Purs ua ntto sec ti on 1.1 70 A-1 4( h) (3 )(i ), In co m e Tax Reg s., Mr . Jo ne s d et erm in ed th atanad jus tm en t was ne ces sa ry

to th e v al ue of t he eas em en t t o a cco un t fo r th e po te nt ia l v al ue en ha nc em en t t o M r. Lewis ’ ne arb y pro pe rty. U si ng th e co m pa ris on an al y si s, M r. Jo ne s d et erm in edth atanad jus tm en t o f ap pr ox im at el y-1 10
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[* 11 0] $7 0,0 00 was app ro pr iate to acco un t fo r th e en ha nc em en t i n v al ue to Mr. Lewis ’s nea rb y

pro pe rty. T he refo re, the Jo ne s re po rt c on cl ud edth atth e v al ue of th e eas em en t was $7 ,35 0,0 00 , i.e., th e $ 10 ,46 0,0 00 be fo re-Eas em en t v al ue les s the ag gr eg at e o f (1 ) th e $ 3,0 40 ,00 0 a fte r-ea se m en t v al ue an d (2 ) th e $ 70 ,00 0
en ha nc em en t ad

jus tm en t. E. Ana lysis of t he Rep orts As we s ta te d abo ve , th e rep orts ag reedon m an y asp ect s o f th e b as es for
va lu in g t he eas em en t. Bo threp orts rel ie d o n R og er Ra y ’s dev el op m en t p la n fo r Sh erwo odFarm , agr eedonth e h ig he stan d b es t u se s fo r Sh erwo odFarm bo th be fo re an d a fte r th e eas em en t, co nc lu de d tha t the eas em en t o n S he rwo odFarm
was ve ry res tri ct iv e, an d u se d p rimaril y th e co m parab le sal es m etho d. Ho wev er, th e rep orts di ffer edina nu m be r of way s. 1. Marke t Co nd it io ns The rep orts ap pl ie d d iff

eren t ra te s o f ad

jus tm en t t o a cco un t fo r th e m ark et
co nd it io ns at t he ti m e o f th e eas em en t. The Pap e rep ort ad jus te d c om

pa rab le pr op erty sal es pri ces by 10% p er an nu m to acco un t fo r ch an ge s i n m ark et
co nd it io ns , bu t d idno t p ro vi de an y supp ort fo r th e 1 0% ra te . The J on es rep ort ad jus te d c om

pa rab le pro pe rty sal es pri ces by 12% p er an nu m to acco un t fo r ch an ge s i n m ark etco nd it io ns ; M r. Jo ne s b as edth is rat e o n apri ce i nd ex rel eas ed-1 11
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[* 11 1] by the Offic e o f Fed eral Hou si ng Ent erp ris e Ove rs ig htst at in g t ha t h om e pr ic es in crea se d n earl y

13 % fro m

th e en d o f 20 04 to th e en d o f 20 05 . Mor eo ve r, th e 1 2% p er an nu m

rat e co m po rts with c red ib le tes ti m on y fro m Mr. J on es an d M r. Lewis reg ard in g t he ris in g re al est at e m ark etinan d a ro un d Al be m arl e Co un ty du rin g t he en d o f 20 05 . Becau se of g reatde m an d a ndpre ss ur e to de ve lo p l arg e farm lan ds in to subd iv is io ns , real est at e p ric es inAlb em arl e Co un ty w ere h ig h a nd in crea si ng rap id ly. Acco rd in gl y , we con cl ud e th atth e Jo ne s re po rt u se d am or e accu rat e rat e o f ad

jus tm en t fo r m ark etco nd it io ns an d t he refo re m or e acc ur at el y ad jus te d t he va lu es of c om

pa rab le pro pe rti es th anth e Pap e rep ort t o a cco un t fo r im pr ov in g m ark etco nd it io ns .

2. Featur es of t he Co m parab le Pro pe rti es The rep orts us eddi ffer en t co m pa rab le pro pe rti es to de te rm in e th e v al ue s o f Sh erwo odFarm

be fo re an d a fte r th e eas em en t. Mr . Jo ne s u se d 1 1 c om parab le pr op ert ie s: 6 fo r hi s b efo re-e as em en t v al ua ti on an d 5 forhi s af te r-ea se m en t
va lu at io n. Be cau se sh e u lt im at el y de te rm in edth aton e o f he r pr op ert ie s was an

“ ou tl ie r”, Ms . Pap e u se d o nl y fou r co m pa rab le pro pe rti es forhe r be fo re-Eas em en t
va lu at io n a ndan ot he r fo urpro pe rti es forhe r aft er-e as em en t v al ua ti on . The Jo ne s re po rt i nc lu de d b efo re-e as em en t an d a fte r-ea se m en t co m pa rab le pr op ert ie s tha t wer e cl os er t o S he rwo odFarm th anth os e u se d i n t he Pap e rep ort.-1 12
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[* 11 2] Fo r be fo re-e as em en t co m pa rab le s M r. Jo ne s u se d t wo p ro pe rti es , i.e., Bl en he im Ro adan d Kl ug e Est at e, in th e imm ed ia te vi ci ni ty of Sh erwo odFarm whi le Ms . Pap e u lt im at el y di sc ou nt edth e p ro pe rty, i.e., Mo nt al to , th atwas c lo se st to Sh erwo odFarm . For a fte r-ea se m en t co m parab le s, o th er tha n Lo ne Oak F arm , whi chbo th ex pe rts us ed , Mr. Jo ne s u se d t hr ee p ro pe rti es , i.e., Green m on t Fa rm , Ro ut e 6 12 , andEastBle m on t, tha t wer e cl os er t o S he rwo odFarm th anan y of t he
co m pa rab le pro pe rti es Ms . Pap e u se d. Mr. J on es als o fo un d c om pa rab le pro pe rti es th atform eda ran ge of pr op ert ie s s m al le r an d l arg er tha n S he rwo odFarm . For h is be fo re-e as em en t
co m pa rab le pro pe rti es , th ree wer e smalle r th anSh erwo odFarm an d t hr ee were la rg er; forhi s af

te r-ea se m en t co m

pa rab le pro pe rti es , two were s m al le r th an Sh erwo odFarm , on e was of ane arl y id en ti cal si ze, an d t wo wer e larg er. On t he ot he r ha nd , all fou r of

th e b efo re-e as em en t p ro pe rti es th atMs . Pap e u lt im at el y us edwere s m al le r th anSh erwo odFarm , andth ree o utof the fou r aft er-e as em en t pr op ert ie s wer e smalle r th anSh erwo odFarm ; the on ly one lar ge r th anSh erwo od Farm was Lo ne Oak F arm , whi chMr. J on es als o u se d a s a c om pa rab le pro pe rty. Each rep ort al so us edbe fo re-e as em en t co m pa rab le pro pe rti es th atdi ffer ed with re sp ectto to po gr ap hy. The Jo ne s re po rt g en eral ly use d b efo re-e as em en t
co m pa rab le pro pe rti es with g en tl e ro ll in g t op og rap hy, ope n fa rm lan d, an d-1 13
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[* 11 3] ne gl ig ib le sl op es th atm at ch edth e to po gr ap hy of Sh erwo odFarm . Of th e si x b efo re-e as em en t co m

pa rab le pro pe rti es us edby the Jo ne s re po rt, o nl y on e, i.e., Bl en he im Ro ad , hadto po gr ap hy adjus tm en ts on acco un t o f si gn ifi can t ar eas of flo odpl ai ns . On the ot he r ha nd , m an y of M s. Pape ’s bef

or e-ea se m en t 6 7
co m pa rab le pro pe rti es ha d t op og rap hy iss ue s. Of the fiv e p ro pe rti es ori gi na ll y co ns id eredby the Pap e rep ort, two, i .e., Rag ge d M ou nt ai n a ndMo nt al to , had to po gr ap hy iss ue s tha t wer e si gn ifi can t en ou gh forMs . Pap e to ad jus t the va lu e o f th e p ro pe rty and , as p et it io ne r co nt en ds , ano th er two, i .e., Cat te rto n a nd Su th erl an d, m ay

ha ve als o h adsi gn ifi can t fl oo dp la in an d s lo pe is su es th atMs
. Pap e fai le d t o c on si de r. The Jo ne s re po rt a ls o u se d agre at er num be r of co m pa rab le pro pe rti es th at
were s ol d wi th in a y ear o f th e d at e o f th e eas em en t. Fi ve ou t o f th e si x b efo reeas em en t co m

parab le pro pe rti es an d fo urou t o f th e fi ve aft er-e as em en t
co m pa rab le pro pe rti es inth e Jo ne s re po rt we re s ol d wi th in a y ear o f th e eas em en t. Inco nt ras t, o nl y

two ou t o f th e fo urbe fo re-e as em en t co m pa rab le pro pe rti es an d Res po nd en t co nt en ds th atMr. J on es fai le d t o app ro pr ia te ly adjus t fo r th e 6 7 effe ctof t he flo odpl ai n o n t he va lu e o f th e Lon e OakFarm . Peti ti on er co nt en ds th atinAlb em arl e Co un ty top og rap hy iss ue s ar e le ss si gn ifi can t fo r Lon e Oak Farm an d o th er af

te r-ea se m en t p ro pe rti es , wher e th e h ig he stan d b es t u se of t he la ndis ag ric ul tu ral , th anwith b efo re-e as em en t p ro pe rti es , wher e th e h ig he stan d be stus e is res id en ti al ho us in g d ev el op m en t, b ecau se th ey li m itth e num

be r of us ab le lo ts to be de ve lo pe d. We agre e with p et it io ne r.-1 14
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[* 11 4] on e o utof t he fou r aft er-e as em en t co m pa rab le pro pe rti es ul ti m at el y us ed by the Pap e rep ort wer e so ldwithi n ay ear o f th e eas em en t. The sal e o f Mo nt al to , th e b efo re-e as em en t co m pa rab le pro pe rty tha t M s. Pape ul ti m at el y di sc ou nt edas
anou tl ie r, al so di d n otoc cur withi n ay ear o f th e eas em en t. Afte r rev ie win g e ach of the rep orts , we fin d t ha t M r. Jo ne s s el ect ed
co m pa rab le pro pe rti es with l oc at io n, s iz e, to po gr ap hy, andti m in g fe atur es th at were g en eral ly m or e co m parab le to th os e o f Sh erwo odFarm an d t he eas em en t. Acco rd in gl y , we con cl ud e th atth e Jo ne s re po rt c ho se be tt er co m pa rab le pr op ert ie s tha n t he Pap e rep ort.

3. Adju st m en ts to th e Co m parab le Pro pe rti es The rep orts als o d iff

eredinth e types of a dju st m en ts an d t he m etho d o f ad jus ti ng th e v al ue s o f th e co m pa rab le pro pe rti es . The Pap e rep ort i nc lu de d anu m be r of erro rs th atcau se us to qu es ti on it s ov eral l re li ab il ity . For e xa m pl e, th e rep ort i nc orrect ly stat edth atLon e OakFarm , on e o f th e aft er-e as em en t co m pa rab le pro pe rti es , was ap pr ox im at el y 1,3 92 acre s
an d t he n c al cu la te d t he pri ce p er ac re u si ng 1,3 22 acre s. Lo ne Oak F arm was, i n fact , app ro xi m at el y

1,3 82 acre s. As a se co ndex am pl e, Ms . Pap e in co rrec tl y cl ai m edinth e Pap e rep ort tha t Pl an k R oa d, o ne of h er af te r-ea se m en t co m

pa rab le pr op ert ie s, co ul d n otbe furth er d iv id ed . Howev er, aft er ex am in in g t he pro pe rty-1 15
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[* 11 5] it se lf, M s. Pape di sc ov eredth atPla nkRo adha d i n fa ctbe ensubd iv id ed in to 21 -acr e lo ts . Non ethe le ss , Ms . Pap e u se d P la nkRo ad , whi chha d b een subd iv id edan d d ev el op ed , as apro pe rty com pa rab le to Sh erwo odFarm aft er the
eas em en t, wh ic h c ou ldno t b e d ev el op edto th e sa m e d eg ree. A th irdex am pl e is Ms . Pap e’s 10 % up wardad jus tm en t t o t he va lu e o f Bal la rd s M il l o n a cco un t o f in feri orflo ra; Ms . Pap e adm it te d a t tria l tha t s he “ ab so lu te ly didm ak e a m is ta ke
on th at ”. Ms . Pap e al so co m m it te d t wo erro rs with re sp ectto th e Cat te rto n pr op erty . She fai le d t o c on si de r th e im pl ic at io ns of a15 0- acre tra ctth atwas p art of th e p ro pe rty whensh e was co m pu ti ng an d a dju st in g h er v al ua ti on of C at te rto n. Add it io na ll y , sh e in ap pr op ria te ly reli edonph ot og rap hs pro vi de d b y a real est at e ag en t t o a dju stth e v al ue of t he pro pe rty by 10 % forvi ews th atsh e d et erm in ed
were s up eri orto th os e p res en t o n S he rwo odFarm ev enth ou gh sh e d idno t o bs erv e
an y su chvi ews du rin g h er o wn v is itto th e Cat te rto n p ro pe rty. In co nt ras t, we d id
no t n ot e an y

si gn ifi can t m at eri al erro rs du rin g o urrev ie w of the Jo ne s re po rt. Add it io na ll y , Ms . Pap e fai le d t o e va lu at e o th er s ig ni fic an t co ns id erat io ns al to ge th er. Fo r ex am

pl e, sh e fai le d t o fu ll y

in ve st ig at e th e m ot iv at io ns of t he pa rti es be hi ndth e sa le Bal la rd s M il l, wh ic h was on e o f he r aft er-e as em en t
co m pa rab le pro pe rti es . At tri al sh e adm it te d t ha t (1 ) th e Bal la rd s M il l s al e h adno t be enpubl ic ly lis te d, (2 ) th e acqui rer o f Bal la rd s M il l o wne d a n a djo in in g p ro pe rty-1 16
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[* 11 6] an d m ay

ha ve be enwil li ng to pa y a pr em iu m

to ass em bl e a l arg er tractof la nd , and(3) sh e fai le d t o c on si de r th es e fac ts when co m pu ti ng th e v al ue to ass ig n to th e Bal la rd s M il l p ro pe rty. T he Pap e rep ort al so co nc lu de d t ha t the eas em en t di d n otcau se an y

en ha nc em en t o f co nt ig uo us pro pe rti es . In co ntras t, the Jo ne s rep ort n ot edne ig hb or in g p ro pe rti es own edby Mr. Lewis an d a dju st eddo wnwar d th e u lt im at e v al ue of t he eas em en t as a res ul t o f en ha nc em en ts to th os e ne ig hb or in g p ro pe rti es . Becau se of t he se gl ari ng om is si on s, we l ackco nf id en ce i n Ms . Pap e’s ad

jus tm en ts to he r co m

pa rab le pro pe rty val ue s. Whe n M s. Pape ad

jus te d t he va lu es of h er co m pa rab le pro pe rti es to acco un t fo r fea tu re v ari at io ns fro m Sh erwo odFarm s, tho se ad jus tm en ts were i nc on si st en t in ap pl ic at io n o r de gr ee. With res pe ctto lo cat io n a dju st m en ts , Ms . Pap e ad jus te d do wnwar d t he va lu e o f th e Decc a Lan e p ro pe rty, whic h was inon e o f th e m os t pr es ti gi ou s l oc at io ns inAlb em arl e Co un ty, by on ly 10% e ve n t ho ug h s he ad jus te d th e v al ue s o f Mi ntMea do w andRag ge d M ou nt ai n b y 20 % an d 1 5%, re sp ect iv el y . Ms . Pap e ex pl ai ne d t hi s i nc on si st en cy by stat in g t ha t the lo cat io n a dju st m en t was le ss si gn ifi can t wh enev al ua ti ng aft er-e as em en t p ro pe rti es be cau se of t he li m it ed de ve lo pm en t p ot en ti al . Howev er, Ms . Pap e’s la rg es t ad jus tm en t, i .e., 50 % up ward , was m ad e to anaft er-e as em en t co m pa rab le pro pe rty, L on e OakFarm , be cau se sh e d et erm in edth e p ro pe rty’ s l otsi ze t o b e in feri orto th atof S he rwo od-1 17
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[* 11 7] Farm . W it h re sp ectto to po gr ap hy adjus tm en ts , Ms . Pap e ad jus te d t he
va lu e o f Lon e OakFarm

up wardby 30% ev enth ou ghon ly 16% o f th e p ro pe rty 6 8
was co ve redby w et la nd s an d the rem ai ni ng 84 % was av ai labl e fo r farm in g, the
m ai n u se of t he res tri ct edpro pe rty. In co nt ras t, s he ad jus te d t he va lu e o f Rag ge d Mo un ta inup wardby onl y 10 % ev enth ou gh33 %-5 0% o f th e p ro pe rty was
co ve redby crit ic al sl op es th atli m it edde ve lo pm en t an d m ad e n o a dju st m en t t o t he
va lu e o f Su th erl an d d es pi te si gn ifi can t fl oo dp la in s o n i ts pro pe rty. Ms. Pap e’s la ckof p ro pe r ad

jus tm en ts is ev enles s ex pl ic ab le when we co ns id er tha t b ot h Rag ge d M ou nt ai n a ndSu th erl an d wer e b efo re-e as em en t co m pa rab le pro pe rti es who se de ve lo pm en t p ot en ti al an d u lt im at e v al ue s wo ul d b e m or e d im in is he d b y to po gr ap hy iss ue s than wo ul d t ho se of Lo ne Oak F arm , whi chwas p rimaril y farm in g l an d. With res pe ctto vi ews ad jus tm en ts , Ms . Pap e adm it te d a t tria l tha t sh e m is ta ke nl y

fai le d t o a dju stth e v al ue of B al la rd s M il l fo r havi ng th e “be st [v ie w sh e’s] * * * see n” ev enth ou gh sh e ad jus te d t he va lu es of f

ou r ot he r pr op ert ie s o n a cco un t o f vi ews . Res po nd en t co nt en ds th atMr. J on es als o m ad e in co ns is te ntad jus tm en ts in th e Jo ne s re po rt wi th res pe ctto th e si zes of s om e o f hi s co m pa rab le pro pe rti es . In Altho ug h M s. Pape cla im edinth e d es cri pt io n o f th e ad jus tm en ts to ad

jus t 6 8 th e v al ue up wardby 20%, h er t ab le of c al cu lati on s i nd ic at es th atsh e u lt im at el y ad jus te d t he va lu e upwa rdby 30%.-1 18
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[* 11 8] pa rti cu la r, res po nd en t co nt en ds th atMr. J on es fai le d t o a dju stth e v al ue of Bl en he im Ro addo wnwar d e ve n t ho ug h h e ad jus te d t he va lu e o f Ro ut e 6 12 an d Green m on t Fa rm

do wnwar d a ndth e th ree p ro pe rti es are ro ug hl y si m il ar i n s iz e. W e d is ag ree. As pe ti ti on er co nt en ds , Mr. Jo ne s p ro pe rly det erm in edth atfor pu rp os es of t he be fo re-e as em en t v al ua ti on an al y si s B le nh ei m Ro adwou ldbe in cl ud edinth e sa m e si ze ca te go ry as S he rwo odFarm

be cau se bo th ha d s im il ar de ve lo pm en t p ot en ti al . Howev er, fo r pu rp os es of t he aft er-e as em en t an al y si s, a si ze ad jus tm en t was ne ces sa ry

be cau se th ere was a si gn ifi can t d iff eren ce b etween th e m ark et ab il it y

of S he rwo odFarm , whi chwas a67 4.6 5- acre tra ctof l an d t ha t
co ul d b e u se d o nl y

for farm in g, an d the m

uc h s m al le r Ro ut e 6 12 an d Gre en m on t Farm pro pe rti es , whi chco ul d p os si bl y be so ldto est at e h om e-b uyers. Acco rd in gl y , we fin d n o i nc on si st en cy inMr. J on es ’ ad

jus tm en ts . Afte r rev ie win g b ot h re po rts , we con cl ud e th atth e Pap e rep ort co nt ai ne d
nu m ero us erro rs , om is si on s, an d i nc on si st en ci es , whi le th e Jo ne s re po rt g en eral ly
av oi de d t he m .

4. Effectof I m

pr ov em en ts Res po nd en t’s m ai n c on te nt io n i s tha t the Jo ne s re po rt l ack s re li ab il it y be cau se itus edm

ul ti pl e co m

pa rab le pro pe rti es with s ig ni fic an t b ui ld in gs an d ot he r im pr ov em en ts . In p art ic ul ar, res po nd en t co nt en ds th at(1) be fo re-e as em en t-1 19
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[* 11 9] co m

pa rab le pro pe rti es with b ui ld in gs an d i m pr ov em en ts do no t h av e th e
sa m e h ig he stan d b es t u se as t ho se with p red om in an tl y un ob st ru ct edlan d a nd(2) Mr. J on es un de rv al ue d the im pr ov em en ts to hi s b efo re-e as em en t co m pa rab le pr op ert ie s an d o ve rv al ue d t he im pr ov em en ts on hi s af

te r-ea se m en t co m

pa rab le pr op ert ie s t o a rti fic ia ll y

in crea se th e v al ue of t he eas em en t. We dis ag ree. As a p rel im in ary co ns id erat io n, we n ot e th atwhi le res po nd en t i s co rrec t tha t
m an y of M r. Jo ne s’ com

pa rab le pro pe rti es ha d i m pr ov em en ts , She rwo odFarm al so ha d b ui ld in gs an d i m pr ov em en ts , in cl ud in g apri m ary dwe ll in g t ha t was
ren ov at edin19 79 , barns , sh ed s, an ice ho us e, anol d s ch oo l, an d t wo o ldten an t ho us es . Mor eo ve r, fo ur

ou t o f th e n in e co m

pa rab le pro pe rti es ori gi na ll y us edby
res po nd en t’s ex pe rt, M s. Pape , in cl ud edim pr ov em en ts an d b ui ld in gs . Acco rd in gl y , bec au se Sh erwo odFarm ha d b ui ld in gs an d i m

pr ov em en ts an d
res po nd en t’s o wn ex pe rt u se d c om pa rab le pro pe rti es with i m pr ov em en ts , we qu es ti on th e m eri ts of r es po nd en t’s co nt en ti on th atco m parab le pro pe rti es th atare free of any im

pr ov em en ts or b ui ld in gs are m or e rel iabl e th anth os e h av in g im pr ov em en ts . Mo reo ve r, attri al Mr. J on es cred ib ly test ifi edth atm os t d ev el op ers wou ld
rem ov e m os t b ui ld in gs an d o th er i m pr ov em en ts be cau se th ey va lu e v acan t l an d fo r de ve lo pm en t. The refo re, h e as si gn edva lu e to im pr ov em en ts on th e b efo re--1 20
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[* 12 0] eas em en t co m

pa rab le pro pe rti es on ly if a de ve lo pe r m ig htfin d the m of u se
orva lu e to th e p ro po se d d ev el op m en t. Res po nd en t’s ex pe rt, M s. Pape , con firm ed Mr. J on es ’ te st im on y

by stat in g tha t i m

pr ov em en ts on th e la ndare s om et im es raze d o r de m ol is he d a ndth atinth os e cas es no va lu e sh ou ldbe ass ig ne d t o t he im pr ov em en ts . Accor di ng ly, we fi ndth atMr. J on es pro pe rly us edbe fo reeas em en t co m

parab le pro pe rti es with i m pr ov em en ts an d a ccu rat el y ad jus te d t he
va lu es of t ho se pro pe rti es to acco un t fo r th e im pr ov em en ts . Res po nd en t’s co nt en ti on th atMr. J on es un de rv al ue d t he im pr ov em en ts to hi s b efo re-e as em en t co m pa rab le pro pe rti es an d o ve rv al ue d t he im pr ov em en ts on hi s af te r-ea se m en t co m

pa rab le pro pe rti es is ba se d o n aco m pa ris on of v al ue s as si gn edby Mr. Jo ne s t o t ho se ass es se d b y th e co un ty. Howev er, “ [w]e do no t
co ns id er tha t the am ou ntforwhi ch* * * p ro pe rty was as se ss edforpu rp os es of lo cal tax at io n * * * [to be ] ne ces sa ril y a rel iabl e cri te rio n t o b e u se d i n e st im at in g it s fa ir m ark etva lu e.” Fra zee v . Comm is si on er, 9 8 T.C. 5 54 , 56 3 (1 99 2) (qu ot in g Lip pi nc ot t v . Comm is si on er, 2 7 B .T.A. 735 , 74 0 (1 93 3) , rev ’d, 72 F.2d78 8 (3 d Ci r. 19 34 )). InEst at e o f Ben ne tt , we con fro nt edth e is su e o f us in g a ss es sm en ts fro m co un ti es inVirg in iaas i nd ic at or s o f fai r m ark etva lu e an d s ta te d:

“ Whi le we reco gn iz e th atass es se d v al ue s m ay be ‘ co ns id ered ’ as an in di cat orof f

ai r m ark etva lu e, as se ss edva lu es are re le va nton ly whe n th e rel at io ns hi p b etweenass es se d v al ue an d fa ir m ark etva lu e is-1 21
-

[* 12 1] de m on st rat ed . Sect io n 2 5.2 51 2- 1, Gi ft Tax Reg s. Mo reo ve r, ev enif s uc h re la ti on sh ip is de m on st rat ed , ass es se d v al ue s g en eral ly are u se d ‘ba si cal ly as a co rro bo rat io n o f fai r m ark etva lu e d et erm in ed by a m or e rel iabl e m etho d.’” Est at e o f Ben ne ttv. Co m m is si on er, T.C. Mem o. 1 98 9- 68 1, 5 8 T.C.M . (CCH) 10 56 , 10 65 (qu ot in g N. Tru stCo . v. Co m m is si on er, 8 7 T.C. 3 49 , 38 2 (1 98 6) , aff’d
on an ot he r is su e sub n om . Cit iz en s B an k & Trus t Co . v. Co m mis si on er, 8 39 F.2d 12 49 (7t h C ir. 1 98 8) ) (ci ti ng Em m etv. Co m

mis si on er, 1 1 T.C. 9 0, 9 5 (1 94 8) , and Est at e o f Fri ed ers v. Co m m is si on er, T.C. Mem o. 1 98 0- 18 4, af f’d, 68 7 F .2d22 4 (7 th Cir . 19 82 )), aff

’d witho utpubl is he d o pi ni on , 93 5 F .2d12 85 (4t h C ir. 1 99 1)
. Altho ug h we n ot edth at“ Virg in ialaw p ro vi de s tha t as se ss edva lu e is in te nd edto rep res en t 1 00 pe rcen t o f fai r m ark etva lu e”, we d et erm in edth at“ [t]he weig htof th e ev id en ce * * * su gg es t[e d] th atth e * * * Co un ty ass es sm en ts , tak enin is ol at io n, wer e NOT reli ab le in di cat or s o f th e fai r m ark etva lu e o f in di vi du al pa rcel s o f pr op erty .” Id ., 58 T.C.M. (CCH) a t 1 06 5. Inth e in st an t ca se , th e co m pa rab le pro pe rti es us edby bot h M s. Pape an d M r. Jo ne s wer e co ns is te nt ly
so ldforam ou nt s i n e xc es s o f th e v al ue s as se ss edby the co un ty. Acco rd in gl y , we co nc lu de th atth e co un ty ass es sm en ts of t he im pr ov em en ts on th e co m

pa rab le pr op ert ie s u se d i n t he rep orts are n otrel iabl e in di cat or s o f th ei r fai r m ark etva lu e. Res po nd en t’s co nt en ti on is furth er u nd erm in edby a com paris on of e ach ex pe rt’s-1 22
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[* 12 2] tre atm en t o f Lon e OakFarm , whi chwas the on e aft er-e as em en t
co m pa rab le pro pe rty tha t b ot h M r. Jo ne s an d M s. Pape us ed . Ms. Pape ’s val ue for th e im pr ov em en ts on th e la ndwas $ 10 0,0 00 gre at er tha n t he va lu e at tri bu te d b y Mr. J on es , di sc red it in g re sp on de nt ’s con te nt io n t ha t M r. Jo ne s o ve rv al ue d t he im pr ov em en ts . Accor di ng ly, we co nc lu de th atres po nd en t’s co nt en ti on th atMr. Jo ne s und erv al ue d the im pr ov em en ts to hi s b efo re-e as em en t co m pa rab le pr op ert ie s an d o ve rv al ue d t he im pr ov em en ts on hi s af

te r-ea se m en t co m

pa rab le
sa le pro pe rti es to be m eri tl es s. F. Co nc lu si on The Jo ne s re po rt p ro pe rly acco un te d fo r th e res tri ct iv e n atur e o f th e eas em en t an d t he m ark etco nd it io ns at the ti m e o f th e eas em en t; us edm or e nu m ero us an d m or e acc ur at e co m pa rab le pro pe rti es th anth e Pap e rep ort; an d
av oi de d o th er erro rs an d i nc on si st en ci es when ad jus ti ng th e v al ue s o f th os e co m pa rab le pro pe rti es . W

hi le we fin d t he Pap e rep ort, t o b e b ur de ne d b y m ul ti pl e erro rs an d i nc on si st en ci es , we fin d n o re as on to qu es ti on th e cre di bi li ty of Mr. Jo ne s o r th e rel iabi li ty of th e Jo ne s re po rt. Acc or di ng ly, we co nc lu de th atth e Jo ne s re po rt p ro vi de d a n a ccu rat e v al ua ti on of t he eas em en t o n S he rwo odFarm
an d, the refo re, tha t the va lu e o f th e eas em en t fo r pu rp os es of ach ari tabl e co nt rib ut io n d educ ti on is $7 ,35 0,0 00
.-1 23
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[* 12 3] On i ts 20 05 Fo rm

10 65 , SW F rep orte d ach ari tabl e co nt rib ut io n o f $7 ,39 8,3 33 forit s d on at io n o f th e eas em en t t o Al be m arl e Co un ty PRFA, onth e ba si s o f a v al ua ti on pre pa redby Mr. W il li am s. Mr . W il li am s d idno t t es ti fy at tri al , andpe ti ti on er re li es on ly on t he Jo ne s re po rt f orth e p ro pe r va lu at io n o f th e eas em en t. Co ns eque nt ly, we co nc lu de th atSW F o ve rs ta te d i ts ch ari tabl e co nt rib ut io n d educ ti on forit s 2 00 5 t ax y ear b y $4 8,3 33
. VI. Co nc lu si on Insu m m ary, we ho ldth at(1) SW F en ga ge d i n adi sg ui se d s al e und er se ct io n 7 07 , (2) th e p ro ceed s fr om th e d is gu is edsal e were i nc om e to SW F fo r it s 20 05 tax y ear, an d (3 ) SWF ov ers ta te d the va lu e o f th e eas em en t o n S he rwo od Farm by $48 ,33 3 a ndth eref

or e o ve rs ta te d i ts ch ari tabl e co nt rib ut io n d educ ti on pu rs ua ntto sec ti on 17 0 fo r it s 2 00 5 t ax y ear b y th e sa m e am ou nt . Con se qu en tl y , we su st ai n t he FPAA’s pro po se d i nc reas e in ord in ary in co m e an d aco rres po nd in g de crea se incap it al co nt rib ut io ns of $ 1,6 77 ,41 3, bu t we re ad jus t the FPAA’s 6 9 pr op os edde crea se inno nc as h c ha rit ab le co nt rib ut io ns to $4 8,3 33
.

As s ta te d s up ra n ot e 3 7, we d eem co nc ed edres po nd en t’s ar gu m en t tha t 6 9 SWF sho ul d h av e rec og ni zed$1 ,80 2,0 00 in st eadof t he $1 ,67 7,4 13 rep orte d i n t he FPAA.-1 24
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[* 12 4] In r each in g t he se ho ld in gs , we hav e co ns id eredall arg um en ts m ad e, an d, t o th e ex te ntno t m en ti on ed , we con cl ud e th atth ey are m oo t, i rrel ev an t, o r witho ut
m eri t. To re fle ctth e fo reg oi ng , An ap pr op ria te ord er wi ll be is su ed , andde ci si onwil l b e en te red
un de r Ru le 15 5.