T.C. M em o . 2 0 1 8 -2 1 4

UNITED STATES TAX COURT

PINE M O UNTAIN PRESERVE, LLLP f.k
. a. CHELSEA PRESERVE, LLLP, EDDLEM AN PROPERTIES, LLC, TAX M ATTERS PARTNER, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 8 9 5 6-1 3. Fi l edDecem b er 2 7 , 2 01 8
.
Dav i dM . W o o l dri d g e, Ro n al dLev i t t , Greg o ry P. Rh o des , an d M i ch el l e A. Lev in , fo r p et i t i o n er. Edwi n B. Cl ev erd o n an dHo race Cru m p , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION
M ORRISON, J u d g e: Th i s cas e co n cern s ch ari tab l e-co n tri b u ti o n d edu ct i o n s fo r t h ree co n s erv at i o n eas em en t s . Th e eas em en ts were co n tri b u t edi n 2 0 0 5 , 2 0 0 6 ,-2
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[* 2 ] an d 2 0 0 7, res p ect iv el y . Ino u r Co u rt -rev i ewedOp i ni o n (rev i ewedOp i n i o n ) i s su edt o d ay i n th is cas e t h e Co u rt res o l v es al l i s s u es ex cep tth e v al u e o f t h e 2 0 0 7
eas em en t . Th e rev i ewedOp i n i o n h o l d s th atn o d edu ct i o n i s al l o wedfo r t h e 2 0 0 5
an d th e 2 0 06 eas em en ts b u tth ata d edu ct io n i s al l o wedfo r t h e 2 0 0 7 eas em en t(t o th e ex t en to f i t s v al u e). W e h o l dh ere t h atth e v al u e o f t h e 2 0 07 eas em en ti s $ 4 ,7 7 9 ,5 0 0
. FINDINGS OF FACT Th e fi n d i ng s o f fact are s etfo rt h i n the “ Fi n d i n g s o f Fact ” s ect i o n o f t h e
rev i ewedOp i n i on . OPINION In Tax Co u rtl i t ig at i o n , th e u s u al ru l e i s t h at the b u rd en o f p ro o f i s o n th e p et i t i o n er. Th is b u rd en i n cl u d es b o th th e b u rd en s o f p ro du ct io n an dp ers u as i o n . Co zzi v . Co m

m i s si o ner, 8 8 T.C. 4 3 5 , 4 4 3 -4 4 4 (1 9 8 7). Th e b u rd en o f p ro du ct i o n i s s at i s fi edi f t he p et i t i o n er co m es fo rwardwi th en o u g h ev i d en ce t o s up p o rta fact ual fi n d i n g . Es tat e o f Gi l fo rdv . Co m m is si o n er, 8 8 T.C. 3 8 , 5 1 (1 9 8 7 ). Th e b u rd eno f p ers u as i o n i s s at i s fi edi f t h e p et i t io n er s h ows th at , o n the b as i s o f t h e
ev i d en ce, t he fact i s m ore p ro b ab l e t h an n o t . M erk el v . Co m m is s i o n er, 1 0 9 T.C. 4 6 3 , 4 7 6 (1 9 9 7) (ci ti n g 2 M cCo rm i cko n Ev i d en ce, s ec. 3 3 9 , at4 3 9 (4 th ed
. 1 9 9 2 )), aff’ d , 1 9 2 F.3 d8 4 4 (9 th Ci r. 1 9 9 9). Th e p et i t i o n er i s Ed dl em an-3
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[* 3 ] Pro p ert ies , LLC (Ed d l em an Pro p ert i es ), th e t ax m at t ers p artn er o f Pi n e M o u nt ai n Pres erv e, LLLP. Al th o u g h as th e p et i t i on er Ed d l em an Pro p ert ies b ears th e b u rd en o f p ro o f, th e fi n d in g s o f fact wo u ldb e t h e s am e ev en i f res p o n d en t(t h e IRS) were t o b ear t h e b urd en o f p ro o f. I. Pri n ci p al p ro v i s i o n s o f l aw A d edu ct io n fo r ch ari t ab l e co n tri b u t i o n s i s al l o wedb y s ect i o n 1 7 0(a)(1 ), 1 wh i ch p ro v i des : Th ere s h al l b e al l o wedas a d edu ct i o n an y ch ari t ab l e co n tri b u ti o n (as d efi n edi n s ubs ect i o n (c)) p aym en to f wh ich i s m ad e wi th i n th e t ax ab l e y ear. A ch ari t ab l e co n tri b u ti o n s hal l b e al l owab l e as a d edu ct i o n o n l y

i f v eri fi edu n d er reg u l at i o n s p res cri b edb y th e Secret ary . A reg ul at i o n i m

p l em en t in g s ect i o n 1 7 0 (a)(1 ) p ro v i d es i n p ert i n en t p art : “ If a ch ari t ab le co n tri b u t i on i s m ad e i n p ro p ert y o th er t h an m on ey , th e am o u n to f t h e
co n tri b u t i o n i s th e fai r m ark etv al u e o f t h e p ro p ert y atthe t i m e o f t h e
co n tri b u t i o n ”. Sec. 1 .1 70 A -1 (c)(1 ), In co m e Tax Reg s . Fai r m ark etv al u e i s “ t h e p ri ce atwh i ch the p ro p ert y wo u l dch an g e h an d s b etween a wi l l i n g b u y er an da wi l l i ng s el l er, n ei th er b ei n g u n d er an y co m pu l s io n t o b u y

o r s el l an db o th h av i n g
reas on ab l e kn o wl ed g e o f rel ev an tfact s .” Id . s ub para. (2 ). Th e g en eral p ri n ci p l e

1 Al l referen ces t o s ect i o ns are t o s ect io n s o f t h e In tern al Rev en u e Co d e o f 1 9 8 6 , as am en d edan d i n effect fo r t h e t ax y ears ati s s ue, u n l es s o th erwi s e i n d i cat ed
.-4
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[* 4 ] th atth e am o u n to f t h e ch ari t ab l e d edu ct i o n i s th e fai r m ark etv al ue o f t h e d o n at ed p ro pert y

i s n o l es s tru e wh en th e d o n at i on i s o f a p art i al i n t eres ti n p ro p erty , i n cl u d i n g a s ect io n 1 70 (h )(2 )(C) i n teres t . Bro wn in g v . Co m m i s s i o n er, 1 0 9 T.C. 3 0 3 , 3 1 4 (1 9 9 7 ) (ci t i n g s ect i o n 1 .1 7 0 A -7 (c), In co m e Tax Reg s .). Sect i o n 1 .1 70 A-7 (c), In co m e Tax Reg s., p ro v i d es th at(ex cep tas p ro v i d edi n s ect io n 1 .1 70 A-1 4 , In co m e Tax Reg s .) th e am o u nto f t h e d edu ct i o n u n d er s ect i o n 1 7 0 i n th e cas e o f a p art i al i n teres ti n p ro p erty i s th e fai r m ark etv al u e o f t h e p art i al i n t eres tatth e t i m e o f t h e co n tri b u ti o n . Sect i o n 1 .1 70 A-1 4(h )(3 )(i ), In co m e Tax Reg s., s et s fo rt h the ru l es fo r v al u i n g a p erp etu al co n s erv at i o n res tri ct i on (i .e., a
s ect i on 1 7 0 (h )(2 )(C) i nt eres t ). Th i s reg u l at i o n p ro v i d es i n rel ev an t p art : [Sen t en ce 1 : ] Th e v al u e o f t h e co n tri b u t i o n u n d er s ect i o n 1 7 0 i n th e cas e o f a ch ari t ab l e co n tri b u t i o n o f a p erp etu al co n s erv at io n res tri ct i o n i s t h e fai r m ark et v al u e o f t h e p erp etu al co n s erv at i o n res tri ct i o n atth e t i m e o f t h e co n tri bu t i o n . See § 1 .1 7 0 A-7 (c). [Sen t en ce 2 : ] If t h ere i s a s ub s t an t i al reco rdo f s al es o f eas em en t s co m p arab l e t o t h e d o n at edeas em en t(s u ch as p urch as es p u rs uan tt o a g o v ern m en t al p ro g ram ), th e fai r m ark etv al u e o f th e d on at ed eas em en ti s b as ed o n th e s al es p ri ces o f s u ch co m p arab l e eas em en t s . [Sen t en ce 3 : ] If n o s ubs t an t i al reco rd o f m ark et -p l ace s al es i s av ai lab le t o u s e as a m ean i n g fu l o r v al i dco m p ari s o n , as a g en eral ru l e (b u t n otn eces s ari l y

i n al l cas es ) t h e fai r m ark etv al u e o f a p erp etu al co n s erv at io n res tri ct i o n i s equ al t o t h e d i fferen ce b etween th e fai r m ark etv al u e o f t h e p ro p ert y i ten cu m b ers b efo re t h e g ran ti n g o f t h e res tri ct i o n an dthe fai r m ark etv al u e o f t h e en cu m b ered p ro p ert y aft er th e g ran t in g o f t h e res tri ct i o n . [Sen t en ce 4 : ] Th e am o u n t o f t h e d edu ct i o n i n th e cas e o f a ch ari t ab l e co n tri b ut i o n o f a p erp etual co n s erv at io n res tri ct i o n co v eri n g a p o rt i o n o f t h e co n t i gu o us p ro p ert y-5
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o wn edb y a d o n o r an d t h e d o n o r’ s fam i l y * * * i s th e d i fferen ce b et ween the fai r m ark et v al u e o f t h e en t i re co nt i gu o u s p arcel o f p ro p ert y b efo re an daft er t h e g ran ti n g o f t h e res tri ct i on . [Sen t en ce 5 : ] If t h e g ran t i n g o f a p erp etu al co n s erv at i o n res tri ct i on aft er J anu ary 1 4 , 1 9 8 6 , h as th e effect o f i ncreas i ng th e v al u e o f an y o th er p ro p ert y o wn edb y th e d o n o r o r a rel at edp ers on , th e am o un to f th e d edu ct i o n fo r t h e co n serv at io n co n tri b ut i o n s h al l b e redu cedb y th e am ou n t o f th e i n creas e i n th e v al u e o f t h e o th er p ro p erty , wh et h er o r n o ts u ch p ro p ert y i s co n t i g u o u s . * * * Sec. 1 .1 7 0 A-1 4 (h )(3 )(i ), In co m e Tax Reg s. W e refer t o th i s t ex tas “ th e reg u l at i o n ”. Th e fo l lo w i n g ex am p l e i s g i v en t o i ll u s trat e t h e fo u rt h s en t en ce o f th e reg u l at i o n : Ex am

p l e (1 0 ). E o wn s 1 0 o n e-acre l ot s th atare cu rren t l y wo o ds an dp ark lan d . Th e fai r m ark etv al u e o f each o f E’ s l o t s i s $ 1 5 ,0 00 an d th e b as i s o f each l o ti s $ 3,0 0 0 . E g ran ts t o the co u n ty a p erp etu al eas em en tfo r co n s erv at i on p u rp o ses t o u s e an dm ai nt ai n ei g h t o f t h e acres as a p ub l i c p arkan dt o res tri ct an y fu tu re d ev el o p m en to n th o s e ei g h tacres . As a res ul to f t h e res tri ct i o ns , th e v al u e o f t he ei gh tacres is redu cedt o $ 1 , 0 00 an acre. Ho wev er, b y p erp etu al l y res tri ct in g d ev el o p m en to n th is p ort i o n o f t h e l an d , E h as en s u redth atth e t w o rem ai n i n g acres wi l l al way s b e b o rd eredb y p ark lan d , th u s i n creas i n g t h ei r fai r m ark etv al ue t o $ 22 ,5 0 0 each . If th e ei g h t acres rep res en t edal l o f E’ s l an d, the fai r m ark etv al u e o f t h e eas em en two u l d b e $ 1 1 2 ,0 0 0 , an am o u n t equ al t o th e fai r m ark et v al u e o f t he l an db efo re t h e g ran t i n g o f t h e eas em en t(8 × $ 1 5 , 0 0 0 = $ 1 2 0 ,0 0 0) m i n u s th e fai r m ark etv al u e o f t h e en cu m b eredl an d aft er th e g ran t in g o f t h e eas em en t(8 × $ 1 ,0 0 0 = $ 8,0 0 0 ). Ho wev er, b ecau s e t he eas em en t o n l y co v ereda p ort i on o f t h e t ax p ay er’ s co n t ig u o u s l an d , th e am o u n to f t h e d edu ct i o n u nd er s ect i on 1 7 0 i s redu cedt o $ 9 7,0 0 0 ($ 15 0 ,0 0 0

! $ 5 3 ,0 0 0), t h ati s , th e d i fferen ce b et ween the fai r m ark et v al u e o f t h e en t i re t ract o f l an d b efo re ($ 1 5 0 ,0 0 0 ) an daft er ((8 × $ 1 ,0 0 0 ) + (2 × $ 2 2 , 5 0 0 )) t h e g ran t i n g o f th e eas em en t . [* 5 ]-6
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[* 6 ] Id . s ub p ara. (4 ), Ex am pl e (1 0 ). II. Ed d l em an Pro p ert i es ’ l i t i g at i ng p o s i t i o n as t o th e v al u e Ed d l em an Pro p ert i es cal l edRaym o n d Veal as an ex pert wi tnes s . 2 He
o p i n edas t o th e v al ues o f t h e 2 0 0 5 , 2 00 6 , an d2 0 0 7 eas em en ts , u s i n g a s im i l ar ap p ro ach t o v al u e each eas em en t . Becau s e t he i s s u es reg ard i n g th e v al u at i o n o f t h e 2 0 07 eas em en t are s i m i l ar t o tho s e reg ard i ng th e 2 0 0 5 eas em en t , we d i s cu s s the v al u at i o n o f t h e 2 0 05
eas em en tas an ex em

pl ar. Ex trap o l at i n g the co n cl u s i o n s reg ard i n g th e 2 0 0 5
eas em en t , we arri ve at a v al u e fo r t h e 2 0 0 7 eas em en t . Wh en Pi n e M o u n t ai n co n t ri b ut edth e 2 0 0 5 eas em en t t o the No rt h Am eri can Lan d Tru s t(NALT), i to wn ed2 ,8 8 0 .9 6 acres . 3 Th e eas em en t co v ered5 5 9.4 8 o f th e 2 ,8 80 .9 6 acres . Veal v al u edthe 2 0 0 5 eas em en tu s in g th e b efo re-an d -aft er fo rm u l a i n th e t h i rds en ten ce o f t h e reg ul at i o n . He s ubt ract ed the v al u e o f th e 2 ,8 80 .9 6 acres aft er t h e eas em en tfro m the v al u e o f t h e 2 ,8 8 0 .9 6 acres b efo re t h e
eas em en t .

2 Bo th Veal an dres p o n d en t ’ s ex p ert , Gary M cGu rri n , are ex p eri en ced ap p rai s ers .

3 Th e real p ro pert y

Pi n e M o u n t ai n o wn edatan y g i v end at e i s referred t o as th e Pi n e M o u n t ai n p ro p erty .-7
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[* 7 ] In d et erm in i n g th e v al u e o f t h e 2 , 8 8 0 .9 6 acres b efo re t h e 2 0 0 5 eas em en t , Veal d i v id edth e 2 , 88 0 .9 6 acres i n t o fo u r g ro up s : (1 ) 5 5 9 .4 8 acres o f
co n serv at i on -eas em en tp ro p ert y , (2 ) 1 ,6 0 1 .2 3 acres o f l an d , co n t i g u ou s t o t h e
eas em en tarea, wh i ch h e d et erm i n edt o b e d ev el o p ab l e l an d , (3 ) 6 9 3 .7 acres o f l an d , co nt i g u ou s t o th e eas em en tarea, wh i ch h e d et erm i n edt o b e u n d ev el o p ab l e b ecau s e o f s t eep t errai n o r o th er g eo g rap h i c p ro bl em s , an d(4 ) 2 6 .5 5 acres o f l an d , co n ti g u o us t o th e eas em en t area, wh i ch h e d et erm i n edt o b e b es t s u it edfo r u s e as
co m m erci al l an d . To d et erm i n e t h e v al u e o f th e 5 59 .4 8 acres o f co n s erv at i o n eas em en tp ro p ert y , h e em p lo y edtwo m et h o d s : (1 ) t h e s al es -co m p ari so n m et h o d
an d (2 ) th e d i s co u n t ed -cas h -fl o w m et ho d . Veal ’ s d i s co u n t edcas h -fl o w an al y s i s
as s u m edth at , h adth e 5 5 9 .4 8 acres n o tb een res tri ct edb y th e eas em en t , the l an d
co u ldh av e b een d ev el o pedi nt o a res i d en t i al s ub d i v i s io n wi th 8 6 5 u n i t s . Us i n g
v ari o u s as s u m

p ti o n s ab o u t th e s al e p ri ce o f t h e u n i t s , th e co s to f d ev el op m en t , an d th e d i s co u n trat e, h e d et erm i n edth atth e l an do wn er co u l dh av e earn edcas h fl o ws
o f $ 5 5,9 0 0 ,0 0 0 fro m th e 5 5 9 .4 8 acres . Th e s al es -co m p ari so n m et h od , h e t es t i fi ed ,

“ d ev el o p s an i nd i cat io n o f v al u e b y res earch i n g , v eri fy i n g , an dan al y zi n g s al es o f
s i m i l ar p ro p ert i es .” Th e p ro pert i es th atVeal co m pared t o t h e co n s erv at i o n
eas em en tp ro p ert y

were l i k el y

t o b e d ev el o ped . Onth e b as i s o f s al es o f t h es e p ro p ert i es , h e co n cl u dedthatthe v al u e o f th e co ns erv at i o n-eas em en tp ro p erty-8
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[* 8 ] u n d er t h e s al es -co m

p ari so n m et h o dwas $ 5 5 ,9 5 0 ,0 0 0 . He u lt i m at el y o p i n ed th atth e v al u e o f t h e co n serv at io n -eas em en tp ro p ert y was $ 5 5 ,9 5 0,0 0 0 , th e v al u e th atco rres p o n d s t o th e s al es -co m p ari s o n -m eth o d v al u e. To v al u e t h e o th er t h ree g ro ups o f p ro p ert i es , h e u s edth e s al es -co m p ari s o n m et h odb u tn o tth e d is co u n t ed
cas h -fl ow m et h o d . Veal ’ s co n cl u s i o n as t o th e p re-eas em en tv al u e o f t h e 2 ,8 8 0 .9 6
acres co m p ri si n g t h e fo u r g ro up s was : Gro up Val u e p er acre To t al v al u e (1 ) 5 5 9 .4 8 acres o f co n s erv at io n eas em en tp ro p ert y $ 1 0 0,0 0 0 $ 5 5,9 5 0 ,0 0 0 (2 ) 1 ,6 0 1 .2 3 acres --d ev el o pab l e 2 0 ,0 0 0 3 2 ,0 0 0,0 00 (3 ) 6 9 3 .7 acres --u n d ev el o p ab le 1 ,0 0 0 6 9 0,0 00 (4 ) 2 6 .5 5 acres --co m

m erci al 1 9 0 ,0 0 0 5 ,0 4 0,0 00 To d et erm i n e t h e v al u e o f t h e 2 ,8 8 0 .9 6 t o t al acres aft er t h e 2 0 0 5 eas em en t , Veal fi rs t ad dres s edth e v al u e o f t h e 5 5 9 .4 8 acres b u rd en ed b y th e eas em en t . He d i v i d edth es e 5 5 9 .4 8 acres i n t o t wo areas : (1 ) t h e l an di ns i d e th e 1 0 b ui ld i n g areas
an d (2 ) th e l an do u t s i d e t h e 1 0 b u i l d i n g areas . In v al ui n g th e l an di n s id e t h e 1 0 b ui l di n g areas , Veal u s edtwo i n co n s i s t en t cal cu l at io n s . Inth e fi rs t, h e s t at edth ateach b u i l d i ng area (each o f wh ich h e d es cri b edi n h i s fi rs tcal cu l at io n as a “ 1 acres Bu i l d i n g Pad ”) was wo rth $ 7 0 ,0 0 0
. Veal d et erm i n edth at th e $ 7 0 ,0 0 0 v al u e o f each b u i l d i ng area was equ al t o (1 ) t h e p ri ce t hath e es t i m at edwo u ldb e recei v edfro m the s al e o f t h e b u i l d i n g area m i n u s-9
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[* 9 ] (2 ) al l owan ces fo r (a) d ev el o p m en tco st s, (b ) m ark et i n g co s t s , an d (c)
en trep ren eu ri al p ro fi t . He cal cu l at edth at th e t o t al v al u e o f t h e 1 0 b u i l d in g areas
was $ 70 0 ,0 0 0 , equ al t o $ 7 0 ,0 0 0 p er acre × 1 0 acres . Th e fi rs tcal cu lat i on co rrect l y
as s u m edth atthe t o tal area o f t h e 1 0 b u il di n g areas was 1 0 acres . W i th th e s eco n d cal cu l at io n , h o wev er, Veal as s u m edth atth e t o t al n u m b er o f acres o f th e 1 0 b u i l d i n g areas was 2 acres . He fu rt her as s u m edth at the v al u e o f th e 1 0 b u i l d i n g
areas was $ 7 0 0 ,0 0 0 , equ al t o $ 3 5 0 ,0 0 0 p er acre × 2 acres . Th e d i fferen ce b et ween th e t wo cal cu l at io n s i s i l l us trat edi n th e t ab le b el o w:

Val u e o f 1 0 b ui l d i n g areas aft er eas em en t : Veal ’ s cal cu l at i o n s

V al ue p er acre Nu m

b er o f acres To t al v al u e =

v al u e p er acre × n u m

b er o f acres Fi rs tcal cu l at i o n $ 7 0 , 0 0 0 1 0 $ 70 0 ,0 0 0 Seco n dcal cu l at i o n 3 5 0 , 0 0 0 2 7 0 0 ,0 0 0 Th e t wo cal cu lat i o n s arri v edatth e s am e v al u e, $ 7 0 0 ,0 0 0 , b u t i n v o lv ed i n co n s i s t en tn um

b ers o f acres an d v al u es p er acre. Veal i n t en d edt o cal cu lat e t h e $ 7 0 0 ,0 0 0 v al ue u si n g t h e fo rm u l a $ 7 0,0 00 × 1 0 acres , n o t th e fo rm u la $ 3 5 0 ,0 0 0 × 2 acres . Hi s i n t en d edcal cu l at io n co m p o rt s wi th t h e act u al acreag e, 1 0 . Th e
rev i ewedOp i n i on i s s u edt o day o b s erv es th at Veal u sedtwo i n co n s is t en t cal cu l at io n s i n v al u i n g th e l an di n s i d e t h e 1 0 b ui l d i n g areas . Th e rev i ewed Op i ni o n d o es n o ts t at e wh ateffect th is i n co ns i s t en cy s h o u ldh av e o n th e Co u rt ’ s fi nd i ng s o f fact . Th e i n co n s i st en cy i s a rel at i v el y

m i n or u n i n t en d ed erro r. Th e-1 0
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[* 1 0 ] IRS d o es n o targ u e t h ati ts h o u l dd etract fro m th e wei g h twe p l ace o n Veal ’ s
o p i n i o n . Th e i n co n s i s ten cy d o es n o taffect th e wei g h t we acco rdVeal ’ s o p i n i o n o f
v al u e. Veal al s o g av e h i s o p i n i o n o n th e v al ue o f t he l an den cu m b eredb y th e
eas em en to th er th an th e 1 0 b ui l d i n g areas . He v al u edthi s p ort i o n o f t h e l an dat $ 1 ,0 0 0 p er acre. He u s edthe s al es -co m p ari s o n m eth o d , wh i ch i n v o l v es fi n d i n g
s al es o f co m

p arab l e l an den cu m

b eredb y co n s erv at i o n eas em en t s . Inh i s cal cu l at io n s , Veal i n co rrect l y as s u m edth at th i s p o rt i o n o f t h e l an dwas 5 57 .4 8
acres --eq u al t o 5 5 9
. 4 8 acres m i n u s 2 acres . Th e l an du nd er t h e eas em en twas 5 5 9 .4 8 acres . Th e b u i l d i n g areas were 1 0 acres . Th erefo re t h e co rrect area o f t h e p o rt i on o f t h e l an d Veal v al u edwas 5 4 9 .4 8 acres , equ al t o 5 5 9 .4 8 acres m i n u s 1 0
acres . Veal o p i n edth atth e v al u e o f t h i s p o rt i o n o f t h e l an d was 5 5 7 .4 8 acres × $ 1 ,0 0 0 = $ 5 6 0 ,0 0 0 . HadVeal cal cu l at ed th e acreag e co rrect l y , i tap p ears th atth i s
v al u e wo u l d h av e b een $ 5 4 9 ,4 80 , wh i ch , ro u n d edt o t h e n eares tt en tho u s an d , as
was Veal ’ s cu s t o m , i s $ 5 5 0 ,0 0 0 . Th e effect o f t h e 8 -acre m i s cal cu l at io n i s i l lu s trat edb y

th e t ab l e b el o w:-1 1
- Aft er-eas em en tv al u e o f t h e l an db u rd en edb y eas em en t ex cep tfo r t he 1 0 b ui ld i n g areas V al ue p er acre Nu m

b er o f acres To t al v al u e =

v al u e p er acre × n u m

b er o f acres Veal ’ s cal cu l at i o n $ 1 ,0 0 0 5 5 7 .4 8 $ 5 6 0 ,0 0 0 Veal ’ s cal cu l at i o n i f th e n u m

b er o f acres i s co rrect ed 1 ,0 0 0 5 4 9 .4 8 5 50 ,0 0 0 Veal ’ s m i s cal cu l at i on o f the acreag e res u l t edi n an o v eres ti m at e o f t h e v al u e o f t h e acreag e. Becau s e Veal es t i m at edth atth e v al ue o f t he eas em en twas the d i fferen ce b et ween th e v al u e o f t h e Pi n e M o u n t ai n p ro p ert y b efo re an daft er t h e eas em en t (u s i n g th e b efo re-an d -aft er m et h o d ), th is m ean s h i s o v eres t i m at e o f th e v al u e o f th e p art i cu l ar p o rt i o n o f t h e l an daft er th e eas em en tres u l t edi n an u n deres t i m at e o f th e v al u e o f t h e 2 0 0 5 eas em en t . Thu s , h i s erro r was i n t h e IRS’ s fav o r. If t h e
erro r were co rrect ed , th e v al u e o f t h e 2 0 0 5 eas em en two u l d b e $ 10 ,0 0 0 m o re t h an th e v al u e u rg edb y

Ed d l em an Pro p ert i es . Un d er t h es e ci rcu m s t an ces , we d o n o t
co rrect Veal ’ s $ 1 0,0 0 0 erro r. Ed d l em an Pro p ert i es fai l edt o b ri n g th is erro r t o th e Co u rt ’ s at t en t i on , an dth e IRS h as n o tg i v eni t s v i ews as t o th e effect o f t h i s erro r. W e wi l l n o w d es cri b e h o w Veal d et erm i n edth e aft er-eas em en tv al u es o f t h e th ree co m p o n en t s o f t h e 2 ,8 8 0 .9 6 acres o th er t h an th e 5 5 9 .4 8 acres s ub jectt o the
eas em en t . [* 1 1 ]-1 2
-

[* 1 2 ] Veal o p i n edth atth e eas em en t o n t h e 5 5 9.4 8 acres h ad n o effect o n th e
v al u es o f t he o th er t h ree co m po n en t s o f t h e 2 ,8 8 0 .9 6 acres . Th erefo re, i n h i s v i ew, th e v al u es o f t h e o th er t hree co m p o n en t s were t h e s am e b efo re an daft er t h e
eas em en t . Here i s Veal ’ s ex p lan at i o n as t o wh y th e eas em en th adn o effect o n th e
o th er t hree co m

p o n en t s o f t h e l an d : Th e v al u e o f t h e o th er l an dco m p o n en t s are [s i c] n o tp os i t i v el y affect ed b y

th e eas em en ts i nce d ev el o p i n g th e eas em en tl an dwo u l d en h an ce t h e v al u e o f t h e o th er co m po n en t s b y

creat i n g a d ev el op m en t o f h i g h v al u e h o m es an do th er am en i t i es . Th ere i s n o t s u ffi ci en t d at a av ai lab le t o d et erm i n e t h e ex t en tt o wh i ch th e o th er p arcel s are n eg at i v el y

affect ed b y

fi l i n g th e eas em en t . Th erefo re I co n cl u d e t h at th e o ther p arcel s are n o taffect edb y fi l i n g th e eas em en t d o cu m en t . Veal ’ s co n cl us i on as t o t h e v al u e o f th e 2 00 5 eas em en t can b e s u m m ari zed
as fo l l ows :-1 3
-

Nu m eri cal s u m

m ary o f Veal ’ s v al u at i o n o f t he 2 0 0 5 eas em en t D es cri p t i o n o f l an d Acres Val u e b efo re eas em en t Val u e aft er

eas em en t Lan d sub j ectt o eas em en t --ex cl u d i n g b u i l di n g areas (act u al acreag e 5 4 7 .4 8) 55 7 .4 8 ( 1 ) $ 5 6 0 ,0 0 0 Lan d sub j ectt o eas em en t --b u i l d i ng areas o n ly

(act u al acreag e 1 0 acres ) 2 .0 0 ( 1 ) 7 0 0 ,0 0 0 To t al l an ds ubjectt o eas em en t 55 9 .4 8 $ 5 5 , 9 5 0 ,0 0 0 1 , 2 6 0 ,0 0 0 Dev el o p ab le l an do ut s id e eas em en t 1 ,6 0 1 .2 3 3 2 , 0 0 0 ,0 0 0 3 2 , 0 0 0 ,0 0 0 Un d ev el o p ab l e l an do u t s i d e eas em en t 69 3 .7 0 6 9 0 ,0 0 0 6 9 0 ,0 0 0 Co m m erci al l an do u t s i d e eas em en t 2 6 .5 5 5 , 0 4 0 ,0 0 0 5 , 0 4 0 ,0 0 0 To t al Pi n e M ou n t ai n p ro p ert y wh en 2 0 0 5 eas em en t was d on at ed , i n cl u d i n g l an ds ubjectt o eas em en t an dl an d o u ts i d e eas em en t 2 ,8 8 0 .9 6 9 3 , 6 8 0 ,0 0 0 3 8 , 9 9 0 ,0 0 0
1 No ts ep arat el y val u ed
. Th e v al u e o f t h e 2 0 0 5 eas em en t , acco rd i n g t o Veal , i s th e $ 9 3 ,6 80 ,0 0 0 p reeas em en tv al ue o f the l an dm i nu s th e $ 3 8 ,9 9 0,0 0 0 p o st -eas em en tv al ue o f t h e l an d , o r $ 5 4 , 6 9 0 ,0 0 0
. Veal ’ s ap p ro ach t o v al u i n g th e 2 00 7 eas em en twas s i m il ar t o h i s ap p ro ach t o v al u i n g th e 2 0 0 5 eas em en t. He co n cl u d edth atth e 2 00 7 eas em en twas wo rt h $ 9 ,1 1 0 ,0 0 0 . Ed d l em an Pro pert i es h as ad o p tedVeal ’ s v al uat i o n o f t h e 2 0 0 7 [* 1 3 ]-1 4
-

[* 1 4 ] eas em en tas i ts l i t i g at i n g p o s i t i o n i n th i s cas e. Th e v al u e i s g reat er th an th e
v al u e o ri g i n al l y

rep o rt edb y

Pi n e M o u n t ai n o n i t s p art n ers h i p retu rn . 4 III. Th e IRS’ s l i t i g at i n g p o s it i o n as t o th e v al u e Th e IRS cal l edM cGu rri n as an ex p ertwi tn es s t o v al ue t h e 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7 eas em en t s . M cGu rri n u sedth e s am e ap p ro ach t o v al u e each o f t h e
eas em en t s . W e d es cri be h i s ap p ro ach i n d et ai l wi th res pect t o th e 2 0 05 eas em en t . To v al ue t h e 2 0 05 eas em en t , M cGu rri n co n s id eredtwo v al u at i o n m et h o d s : th e s al es -co m

p ari s o n m et h o dan dth e b efo re-an d -aft er m et h o d . Inap p l y i n g th e
s al es -co m p ari s o n m et h o d , h e co n s i d eredth e s al e p ri ces o f eas em en ts o n ru ral l an d wi th l i tt l e d ev el op m en t po t en t ial . Rel y in g o n t h e s al e p ri ces o f t h es e o th er
eas em en t s , M cGu rri n co n cl u dedth atth e v al u e o f t h e 2 0 05 eas em en t was $ 2 ,0 0 0 p er acre. Becau s e t h e area o f t h e eas em en t was 5 5 9
. 4 8 acres , th i s m ean tthatth e

4 Th e v al ue rep o rt edb y

Pi n e M o u n t ai n o n i t s p art n ers h i p ret u rn was $ 4 ,1 0 0 ,0 0 0 fo r the 2 00 7 eas em en t . Attach edt o th e ret urn was an ap p rai s al b y Cl au de Cl arkIII t h ats t at edth atth e v al u e o f th e eas em en t was th e s am e as th e v al u e rep o rt ed fo r t h ateas em en t . Th e IRS h as s t i p ul at edth atth e Cl arkap p rai s al was a “ qual i fi edap prai s al ” as th att erm i s d efi n edb y s ec. 1 7 0 (f)(1 1 )(E)(i ). Th i s s t ip u l at i o n m ean s th at Pi n e M o u n tai n h as m etth e req u i rem en t , fo u n di n s ec. 1 7 0 (f)(1 1 )(A)(i ) an d (D), t h ata t ax p ay er m u stat t ach a qu al ifi edap p rai s al t o th e retu rn wh en cl ai m i n g a ch ari t ab l e-co n tri bu t i o n d educt i o n o f m o re t h an$ 5 0 0 ,0 0 0
. Nei th er Ed d l em anPro p ert i es n o r t h e IRS arg u es th atth e Co u rts h ou l drel y o n th e Cl arkap prai sal to v al u e t he 2 0 07 eas em en t. Cl arkwas n o tcal ledas an ex p ert wi tn es s (o r a fact wi tn es s , fo r t h atm at t er). Co n s equ en t l y , we d o n o tco n s i d er t h e Cl arkap prai sal in o u r v i ew o f t h e v al u e o f t h e eas em en t .-1 5
-

[* 1 5 ] v al u e o f t h e eas em en twas $ 1 ,1 1 9 , 0 00 . M cGu rri n co n si d eredthe s al es o f
o th er eas em en t s t o b e a b et t er i n d i cat i o n o f th e v al u e o f t h e 2 0 0 5 eas em en tth an th e b efo re-an d -aft er m et h o d. Seco n d , M cGu rri n co n s i d eredth e b efo re-an d-aft er m et ho d . Ind et erm i n i n g th e p re-eas em en tv al u e o f t h e ap p ro x i m at el y 2 ,9 0 0 acres o wn ed b y

Pi ne M o u n tai n atthe t im e i tg ran t ed th e 2 0 0 5 eas em en t , h e m ad e t h e as s u m p t i o n th atth e h i g h es t
an d b es tu s e o f t h at l an d was u n d ev el o p ed , o p en s p ace. Rel y in g o n t h e s al e p ri ces
o f u n dev el o pedl an dh e t h o u g h ts i m i l ar t o th e Pi ne M o u n t ai n p ro p ert y , h e o p i n ed th atth e u n en cu m

b eredv al u e o f t h e 2 ,9 00 acres was $ 5 ,2 0 0 p er acre, o r $ 1 5 ,0 8 0 ,0 0 0 . M cGu rri n d et erm i n edth e aft er-eas em en tv al u e o f th e ap pro x i m at el y 5 6 0 acres t o b e $ 2 ,0 0 0 p er acre, o r $ 1 ,1 2 0,0 0 0 . He u s eds al es o f co m p arab l e l an d
en cu m b eredb y co n s erv at i o n eas em en t s t o arri v e atth i s v al u e. Fo r th e rem ai n i n g 2 ,3 40 acres (i .e., 2 ,9 0 0 acres ! 5 6 0 acres ), M cGu rri n o p in edth atth e v al u e
rem ai n edu n ch an g edat$ 5 ,2 0 0 p er acre, o r $ 12 ,1 6 8 ,0 0 0 . Un d er t h e b efo re-an d
aft er m et h o d , as u s edb y

M cGu rri n, the v al u e o f t h e 2 0 0 5 eas em en twas $ 2 ,9 1 2 ,0 0 0 . Acco rd i n g t o M cGu rri n ’ s cal cu lat i o n s , th i s i s equal t o th e “ b efo re”
v al u e o f t h e 2 ,9 0 0 acres ($ 1 5 ,0 8 0 ,0 0 0 ) m i nu s th e “ aft er” v al u e o f t h e 2 ,3 4 0-1 6
-

[* 1 6 ] n o n eas edacres , $ 12 ,1 68 , 0 0 0. 5 Bu tb ecau s e M cGu rri n co n si d eredth e
co m p arab l e-s al es m et h o d t o be t h e b es ti n d icat i o n o f t h e v al u e o f t h e eas em en t , h e
u l t i m at el y

o p i n edth atth e v al u e o f t h e 2 0 0 5 eas em en twas $ 1 ,1 1 9 , 0 0 0, the v al u e o f th e eas em en t u n d er th e co m p arab le-s al es m et h o d. M cGu rri n ’ s ap p ro ach t o v al u i n g th e 2 00 7 eas em en twas the s am e as h i s ap p ro ach t o v al u i n g th e 2 00 5 eas em en t . Inap p l y i n g th e co m p arab l e-s al es m et h o d , M cGu rri n es t i m at edth atthe 2 00 7 eas em en t was wo rt h $ 2 , 0 00 p er acre. He
co n cl u d ed th at th e 2 0 0 7 eas em en t was wo rt h $ 4 4 9 ,0 0 0. IV. An al y s i s Each p art y

ch al l en g es th e rel iab i l i ty o f t he m etho d u s ed b y

th e o th er p art y ’ s
ex p ertan das s ert s t h atth e m et h o dd o es n otco m p o rt wi th the reg ul at i o n (i .e., th e reg u l at i o n th atg o v ern s th e v al u at i o n o f a p erp etu al co ns erv at i o n res tri ct i o n , s ect i on 1 .1 7 0 A-1 4 (h )(3 )(i ), In co m e Tax Reg s .). Bo th p art i es ’ ch al l en g es are
co rrect . Nei ther s id e’ s ex pert wi tn es s em p l o y eda m et h o d t h atfi ts wi th i n t h e p aram et ers o f th e reg u lat i o n . Letu s b eg i n wi th th e s eco n ds en t en ce o f t h e reg u l at i o n . See s up ra p . 4
. Th i s s en ten ce s t at es th at i f t h ere i s a s ub s t an t i al reco rdo f s al es o f eas em en t s

5 It s eem s th atth e v al u e o f t h e 2 0 0 5 eas em en ts h o u l dh av e b een cal cu l at edas $ 1 ,7 9 2 ,0 0 0 , equ al t o (2 ,9 0 0 acres × $ 5 ,2 0 0)

! (5 60 acres × $ 2 ,0 0 0 )

! (2 , 3 4 0 acres × $ 5,2 0 0 ).-1 7
-

[* 1 7 ] co m

parab l e t o th e d o nat edeas em en t , th en the v al u e o f t h e eas em en ts h o u l d b e b as edo n t h e s al e p ri ces o f t h e co m p arab l e eas em en ts . M cGu rri n i d en t ifi ed
s al es o f eas em en t s th ath e t h o u g h tco m p arab le t o th e eas em en t s d o nat edb y Pi n e M o u nt ai n . He u s edth es e s al e p ri ces t o v al ue t h e Pi n e M ou n t ai n eas em en t s . Thu s, th e m et h o dh e u s edi s t h e co m parab l e s al es m et h o dd is cu s s edi n the fi rs ts en t en ce
o f t h e reg u lat i o n . Ho wev er, Ed d l em an Pro p ert i es co n t en d s thatth e eas em en t s M cGu rri n u s edwere n otco m p arab l e t o th e Pi n e M o u n t ai n eas em en t s b ecau s e t h e l an du nd erl y i n g th e M cGu rri n eas em en ts h adl i t t l e d ev el o p m en t p o t en t i al
. Ed d lem an Pro p ert i es co n t en d s th ati twas reas o n ab l y p ro b ab l e th atth e l an ds ub ject t o the Pi n e M o u n t ai n eas em en ts wo u l dh av e b een d ev el o ped
. Th e res o l u t i on o f t h e qu es t i o n o f wh et h er i t was reas o n ab l y p ro b ab l e t h at th e l an dwo u l d b e d ev el o pedb ears o n an o th er co n tro v ers y b et ween th e p art i es i n v o l v i n g th e b efo re-an d -aft er m et h o d . As n o t edab o ve, Veal d et erm i n edth e

“ b efo re” v al u es o f t h e l an d u n d er t h e as s u m pt i on th at the l an dco u l db e d ev el o p ed
. Th i s res u l t edi n co rres p on d i n g l y h i g h “befo re” v al ues . Inv al u i n g p ro p ert y , i ti s
s t an d ardp ract i ce t o v al u e t h e p ro p ert y at i ts m os tv al u ab l e reas o n ab l y p ro bab l e
u s e. See Frazee v . Co m

m is s i o n er, 9 8 T.C. 5 5 4 , 5 63 (1 9 9 2 ). Th i s u s e i s kno wnas th e “ hi g h es tan db es t ” u s e. See i d . Thu s , Veal ’ s “b efo re” v al u es fo r t h e Pi n e M o u nt ai n p ro p ert y are p ro p er o n l y i f i twas reas o nab l y

p ro b ab l e t h atth e Pi n e-1 8
-

[* 1 8 ] M o u n tai n p ro p ert y

wo u l db e d ev el o p edwh en Pi n e M o u n t ai n co nt ri bu t edth e
eas em en t s t o NALT. Th e IRS co nt en d s thati t wo u l dh av e b een u nreas on ab l e t o as s u m e, wh en th e
eas em en t s were g ran t ed , th atth e Pi n e M o u n t ai n p ro p ert y wo u l db e d ev el o p ed
. Th e IRS o b s erv es thatwh en th e 2 0 05 eas em en twas g ran t ed , co u n ty zo n i n g reg u l at i o n s p ro h i bi tedth e d ev el o p m en to f t h e Pi n e M o u n t ai n p ro p ert y . Fu rt h erm o re, t he IRS co n t en d s , d ev el o p m en to f t h e Pi n e M ou n t ai n p ro p erty co u ld h av e o ccu rredo n ly

wi th th e p ro p ert y

i n th e h an d s o f Do u gl as Ed d l em an b ecau s e
o f h i s ex p eri en ce d ev el o p i n g real es t at e. Inv al u i n g th e 2 0 0 7 eas em en tu n d er t h e b efo re-an d -aft er m et h o d , th e l an ds h o u ldb e as s u m edt o b e i n th e h an d s o f h y p o th et i cal p ers o ns , n o tPi n e M o u n t ai n (wh o s e g en eral p art n er was Ed d lem an Pro p ert i es , an en t it y

o wn edb y

th e Ed d l em an s). Sec. 1 .1 7 0 A-1 (c)(2 ), In co m e Tax Reg s.; Ch ap m an Gl en Lt d . v . Co m m i s s i o n er, 1 4 0 T.C. 2 9 4 , 3 2 5 (2 0 1 3 ). Al th o u g h th e Pi n e M o u n t ai n p ro p erty was n o tzo n edfo r d ev el o pm en tb y th e t o wno f W es t o v er u n t i l Ap ri l 2 0 07 , Do u g l as Ed d lem an an d t h e m ay o r o f W es t o v er
co n vi n ci n g l y

t es t ifi edth atth ey

reas o n ab l y

as s u m edearl y

i n th e p ro ces s o f
n eg ot i at i ng th e an n ex at i o n o f t h e Pi n e M o un t ai n p ro p ert y thatth e p ro p ert y

wo u ld
ev en tu al l y

b e zo n edfo r d ev el o p m en t . Des p it e Do u g l as Ed d l em an ’ s s i gn i fi can t p ers o n al ro l e i n g et t i ng th e l an dzo n edfo r res i d en t i al d ev el o p m en t , a th i rdp art y-1 9
-

[* 1 9 ] co ul dal s o h av e acco m p l i s h edth i s . Th e Pi n e M o un t ai n p ro p ert y was b et ween th e ci ty

o f Ch el s ea an dth e t own o f W es t o v er. Th es e two m un i ci p al i t i es h ad an i ncen t i v e t o co m

pet e wi th each o th er fo r d ev el o pm en t. Ev en wi th o u t Do u g l as Ed d l em an ’ s p ers o n al i n fl u en ce, o n e o f t h es e m u n i ci p al i t i es wo ul dh av e b een co n v i n cedt o an n ex th e Pi n e M o u n t ai n p ro p ert y an d al l o w i tt o b e d ev el o p ed
. Th u s, i t was reas o n ab l y p ro b ab l e t h at the Pi ne M o u nt ai n p ro pert y wo u l d
ev en tu al l y

b e zo n edfo r d ev el o p m en t . See Frazee v . Co m m i s s i o n er, 9 8 T.C. at 5 6 3 -5 6 6 (wh en lan dwas d o n at edi n Oct o ber 1 9 8 5 , i t was zo nedfo r ag ri cu l tu ral
u s e; h o wev er, i twas reas o n ab l e an dp ro b ab l e th ati two ul dl at er b e rezo nedfo r i n du s tri al o r co m

m erci al u se; therefo re i twas p erm i s si bl e t o as s u m e th ati t s h i g h es tan db es tu s e was i n du s tri al o r co m m erci al ). Al th o u g h Do ug l as Ed d l em an al s o p l ay eda cru ci al ro l e i n as sem b li n g th e p ro p ert y

th atm ad e up th e Pi n e M o u nt ai n p ro p ert y , an d al tho u g h h e acco m pl i s h ed the p u rch as e o f t h ree p arcel s , p arcel s 1 , 3 , an d4 , th atp ro v id edacces s t o t h e h i g h way s fro m the res to f th e p ro p erty , an dal th o u g h wi th o u tth es e p arcel s th e Pi n e M o un t ai n p ro p ert y co u l dn o t b e m ad e i n t o a res i d en t i al d ev el o p m en t , b y th e t i m e Pi n e M o u nt ai n h adg ran t ed th e 2 0 05 eas em en t, i t h ad al read y p u rch as edth e t h ree p arcel s. Acces s t o th e h i g h way s h adb een ach i ev ed b y th i s p u rch as e. Th us , as we fi n d, i t was reas o n ab l y p ro b ab l e t h atth e Pi n e M o u n tai n p ro p ert y wo u l db e d ev el o p ed . Th e rev i ewed-2 0
-

[* 2 0 ] Op i n i o n i ss u edt o d ay n o t es th atVeal t es ti fi ederro n eo us l y th atW es t o v er
an n ex edth e Pi n e M o u n t ai n p ro p ert y s h o rt l y aft er t h e 2 0 0 5 eas em en t was g ran t ed ; th e an n ex at i o n d i dn o to ccu r u nt i l M arch 2 0 07 . Th e rev i ewedOp i n i o n d o es n o t
s t at e wh ateffect th i s erro r s h o ul dh av e o n the Co u rt ’ s fi n d i n g s o f fact . Des p i t e th i s erro r, th e p rep o n d eran ce o f ev id en ce d em o n s trat es th ati twas reas o n ab l y p ro b ab l e t h atth e Pi n e M o u n tai n p ro p ert y wo u l db e d ev el o p ed . Th i s co n cl u s i o n i s
n o taffect edb y

the fact th atreal -es t at e p ri ces p eak edi n the y ear 2 0 0 6 an dth at , o n
acco u n t of t h e s ub s equ en tfal l i n real -es t at e p ri ces , the Pi n e M o u nt ai n p ro p ert y
was n ev er act u al l y

d ev el o ped . Th e ques t i o n o f wh et her t h ere was a reas on ab l e p ro b ab i l i ty

the p ro p ert y

wo u ldb e d ev el o p edi s res o l v ed acco rd i ng t o th e ci rcu m s t an ces ex i s t i n g as o f t h e d at es o f v al u at i on , wh i ch are t h e d at es th e
eas em en t s were d o nat ed . See Es t at e o f Newh o us e v . Co m m i ss i o n er, 9 4 T.C. 1 9 3 , 2 1 8 (1 99 0 ) (p ro p ert y

i s v al u edacco rd i n g t o th e fact s an dci rcu m s t an ces ex i s t i n g
o n th e v al u at io n d at e). Pi ne M o u n t ai n k ep tb u y in g l an d du ri n g each o f t h e t h ree y ears i n wh i ch th e eas em en t s were d o n at ed . Th e l as t o f t h e 1 0 p arcel s o f t h e Pi n e M o u nt ai n p ro p ert y was b o u g h t i n th e y ear 2 0 0 7. Th e co n t i n u al b u y i n g o f p ro p ert y
s h o wedth at th e Ed d l em an s s t i ll th o u g h tth atth e Pi n e M o u n t ai n p ro p ert y wo u l d b e d ev el o p ed
. Two s al es o f p art n ers h i p i n t eres t s s u g g es t edth ato u t s id e i n v es t o rs al s o th o u g h tth atth e Pi n e M o u n t ai n p ro p ert y wo u l d b e d ev el o p ed . Th e b as i c fact s-2 1
-

[* 2 1 ] affect i ng th e p ro s pect s o f d ev el o p i n g th e Pi n e M o u n t ai n p ro p ert y --th e
acces s fro m

th e p ro p ert y

t o h i g h way s , th e l ik el i h o o d th ato n e o f t h e m u n ici p al i t i es
wo u l dap p ro v e a real -es t at e s ub d i vi s io n , an dth e ch an g in g s t at e o f t h e real -es t at e
m ark et --are fact s th atwo u l db e kn o wnt o th i rdp art i es o r co u ldeas i l y b e l earn ed b y th i rdp art i es . Th es e co n s i d erat i o n s l ead u s t o b el i ev e t h atwh en th e 2 0 0 7
eas em en twas g ran ted , the Pi n e M o u n t ai n p ro p ert y co u ldb e s o l dt o a t hi rd -p art y b u y er an dth e b u y er wo u l dh av e p ai da rel at i v el y h i g h p ri ce t h atco rres p o n d edt o th e d ev el o p m en t p o t en t i al o f t h e p ro p ert y . Becau se t h e Pi n e M o u n t ai n p ro p ert y h ad d ev el o p m en tp o ten t i al , th e eas em en ts ex am i n ed b y M cGu rri n were n o t
co m p arab l e t o t h e Pi n e M o u n t ai n eas em en t s . Th erefo re, t h e s eco n ds en t en ce o f th e reg u l at i o n d oes n o tco m p el th e u s e o f t h e co m

p arab l e s al es m et h odas
em pl o y edb y M cGu rri n. Th i s b ri ng u s t o t h e t h i rds en t en ce o f th e reg u lat i o n . See s up ra p . 4 . Th e th i rd s en t en ce s tat es th ati f n o s ub s t an t i al reco rdo f m ark et -p l ace s al es i s av ai l ab l e, th en as a g en eral ru l e, t h e v al u e o f t h e eas em en ts h o u l db e d et erm i ned u s i ng th e b efo re-an d -aft er m et h o d . See Hi l b o rn v . Co m m is s i o n er, 8 5 T.C. 6 7 7 , 6 8 8 -6 9 0 (1 9 8 5). Becau s e, as ex p l ai n edab o v e, th e s al e p ri ces o f eas em en t s u s edb y M cGu rri n were n o to f eas em en t s co m p arab l e t o th e Pi ne M o u n t ai n eas em en t s , i t
m i g h ts eem

thatthe t h i rds en ten ce req u i res th e u s e o f t h e b efo re-an d-aft er m et h o d
.-2 2
-

[* 2 2 ] Veal u s edth e b efo re-an d-aft er m et ho d . Th erefo re, Veal ’ s m et h o dm i g h t
s eem t o co m p o rtwi th th e t hi rds en t en ce o f t h e reg ul at i o n . Th i s wo u l d i g n o re, h o wev er, t h e reg u l at i o n ’ s u s e o f t h e t erm “ g en eral ru le”. On l y

as a “ g en eral ru l e”, th e reg u l at i o n s ay s , s h ou l dth e b efo re-an d -aft er m et h odb e u s ed . Inthi s cas e, a d ep artu re fro m

th e g en eral ru l e i s ju s t i fi ed . Th e b efo re-an d-aft er m et h odas
em pl o y edb y Veal g i ves an o v eres t i m at e o f th e v al u e o f t h e 2 0 0 7 eas em en t . M cGu rri n ’ s s u rv ey o f t h e s al e p ri ces o f o th er eas em en t s , wh i l e n o ti t s el f cap ab l e
o f res ol v i n g th e v al u e o f t h e Pi n e M o u n t ai n eas em en t s (b ecau s e t h e eas em en t s
res tri ctru ral l an d wi th l i m i t ed d ev el op m en tp o ten t ial ), p ro v i d es a ch ecko n Veal ’ s
es t i m at es o f v al u e. M cGu rri n d em o n s trat ed th atth e b u y ers o f co n s erv at io n
eas em en t s (p ri m ari l y co n serv at i o n o rg an i zat i o n s an d g o v ern m en t al en t i t i es ) b o u g h tco n s erv at i o n eas em en ts i n ru ral areas fo r ap p ro x i m at el y $ 2 ,0 00 p er acre. Veal , b y co n tras t , o p i n edth atth e v al u e o f t h e 2 0 0 5 eas em en twas n earl y $ 9 8 ,0 0 0 p er acre. Th i s i s ab o u t5 0 t im es th e ru ral p ri ce. Iti s s om ewh atd i ffi cu l tt o
u n d ers t an dwh y b u y ers o f co n s erv at i o n eas em en t s (p ri m ari ly co n s erv at i o n
o rg an i zat i o n s an dg o v ern m en tal en t it i es ) wo u l d p ay 5 0 t i m es th e ru ral p ri ce fo r an
eas em en to n d ev el o p ab l e l an d. A p art i al ex p l an at io n i s th atan eas em en t o n d ev el o p ab le l an di s m ore v al u ab l e t han o n e o n u n dev el o p ab le l an d . Pro tect i n g l an dth atco u ldo therwi s e b e p arto f a res i d en t i al d ev el o p m en tm i g h t b e t ho u g h t t o-2 3
-

[* 2 3 ] m ak e a g reat er co n tri bu t i o n t o th e en v i ro n m en tthan p ro t ect i n g ru ral l an d
. Ad d i t i o n al l y , s u ch an eas em en tm i g h th av e g reat er s cen i c v al u e. Th u s , th e Pi n e M o u nt ai n eas em en ts ’ l o cat io n i n a p o t en t i al res i d en t i al d ev el o p m en tl i k el y ju s t ifi es a co n s erv at i o n o rg an i zat i o n ’ s o r a g o v ern m en t al en t it y ’ s p ay i n g a p rem i u m fo r t h e eas em en t . Ho wev er, a fi ft y -fo l dp rem i u m i s m o re t h anwo u l db e p ai db y a b u y er wi th co ns trai n edres o u rces , s u ch as a co n serv at i on o rg an i zat i o n , th ats eek s t o m ax i m i ze t h e effect i v en es s o f i t s d ol l ars . W e are t h u s l eftwi th th e i m p res s i o n thatVeal o v eres t i m at edth e v al u e o f t h e 2 0 0 7 eas em en tan d p o s i ttwo
reas on s Veal ’ s m et h o dl ed to an o v eres t i m at e. Fi rs t , Veal ’ s “ aft er” v al u e (t h e
v al u e o f t h e Pi n e M o u nt ai n p ro p ert y aft er t h e g ran t i n g o f t h e eas em en t ) d i dn o t t ak e i n t o acco u n tth e b en efi ci al effect th atth e eas em en th ado n th e s urro u n d i n g l an d . Th is p o i n ti s d i s cu s sedi n fu rt h er d et ai l i n th e n ex tp arag rap h . Seco n d , th e h i g h d ev el o p m en tp o t en t i al o f t h e Pi n e M o un t ai n p ro p ert y m ay m ak e t h e eas em en t
o n th e p ro p ert y

d i ffi cu l t t o v al u e u s i n g th e b efo re-an d -aft er m et h od . On e can th i n ko f t h e b efo re-an d -aft er m et h o dfo r v al ui n g an eas em en tas an al o g o u s t o the
co s tm et h o do f v al u i n g a b u i l d in g . Th e co stm et h o di s fo u n dedo n t h e as s u m p t i o n th atn o o n e wi ll b u y

a co m p l et edb u i l d i n g fo r a p ri ce g reat er t h an i two u l dco s tt o-2 4
-

[* 2 4 ] th e co n s tru ct th e b u i l d in g. 6 Thu s , th e co s to f a b u i l d in g can b e an i nd i cat o r
o f i t s m ark etp ri ce. Ho wev er, i n s o m e i n st an ces , th e co s to f th e b ui l d i n g d o es n o t d i rect l y tran s l at e t o m ark etv al ue. Fo r ex am p l e, s up p o s e t h ats o m eo n e co n s tru ct s a l u x u ry h o u s e (wi th h i g h -qu al i ty m at eri al s an dfi x tures , et c.) ata co s to f $ 1 m i l l i o n i n a m od es tn ei g h b o rh o o d wh ere t h e o th er h o us es s el l fo r $ 30 ,0 0 0
. A b uy er m i g h t p ay m o re m o n ey

fo r th e l ux u ry

h ou s e, b u ti s u n l ik el y

t o p ay th e fu l l $ 1 m i l l i o n th at th e h o us e co s tt o b u i l d
. 7 Wh en v al u in g an eas em en t , th e “ co s t ” o f an eas em en tcan b e t h o ug h to f as th e am o u n tb y wh i ch th e eas em en t d i m i n i s h es the v al u e o f th e
u n d erl y i n g l an d . Un der cert ai n ci rcu m s t an ces th i s d i fferen ce i n v al u e can b e u s ed t o i nd i rect l y v al ue t h e eas em en t , ju s tas th e co s to f a b u i ld i n g m ay b e u s edt o i n d i rect l y v al u e a b ui l d i n g . Ho wev er, t h e d i m i n u ti o n i n v al u e m ay n o tal way s b e a g o o di nd i cat o r o f t h e v al u e o f t h e eas em en t , ju stas th e co s to f a b u i l d i ng m ay n o t al way s b e a g o o d i n d icat o r o f i t s v al u e. Here, n o b uy er wo ul db e wi l l i n g t o p ay th e fu l l “ co s t ” o f th e Pi n e M o u n t ai n 2 0 07 eas em en tas m eas u red b y th e b efo rean d -aft er m et h o d . Becau se Veal ’ s b efo re-an d -aft er m et h o d o v eres t i m at es th e
v al u e o f t h e eas em en to n t h e Pi n e M o u n t ai n p ro p ert y fo r th e reas o n s i d en t i fi ed , th e

6 As Veal tes t ifi ed : “ Th e co s tap pro ach as s u m es th atth e i n fo rm edp u rch as er wo u l dp ay

n o m o re t h anth e co s to f p ro du ci n g a s ub s t i tu t e p ro pert y wi th th e s am e u t i l i ty .”

7 Fo r s i m p l i ci ty , th i s ex am

p l e i g n ores l an dv al ues .-2 5
-

[* 2 5 ] “ g en eral ru le” o f the t h irds en t en ce o f t h e reg u l at i o n d o es n o treq u i re t h e accep t an ce o f Veal ’ s b efo re-an d -aft er m et h od
. No w co n s i d er t h e fo u rt h s en t en ce o f t he reg u l at i o n. See s up ra p p . 4 -5 . Th i s
s en t en ce g i v es th e ru le t h ati f t h e res tri ct io n i n qu es t i o n co v ers o nl y “ a p o rt i o n o f th e co n t i g u o u s p ro pert y

o wn edb y th e d o n o r”, t h en th e v al u e o f t h e res tri ct i o n i s

“ th e d i fferen ce b et ween th e fai r m ark etv al u e o f t h e en t i re co n ti g u o u s p arcel o f p ro p erty b efo re an daft er t h e g ran ti n g o f t h e res tri ct i on .” Each o f t h e eas em en t s d o n at ed b y

Pi n e M ou n t ai n co v ers o nl y a p o rt io n o f th e co n t i g u o u s p ro p ert y o wn ed b y Pi n e M o u n tai n atth e g ran to f each eas em en t . Th erefo re, Ed d lem an Pro p ert i es arg u es , th e fo u rt h s en t en ce o f t h e reg u l at i o n req u i res th e u s e o f t h e b efo re-an d
aft er m et h o d . Th e fo u rt h s en t en ce i s d es i gn edt o fo rce t h e ap p rai s er t o acco u n tfo r th e b en efi ci al effect s o f t h e eas em en to n the co n t i g u o us p ro p erty th ati s n ot
res tri ct edb y

th e eas em en t . See s ec. 1 .1 7 0 A-1 4 (h )(4 ), Ex am p l e (1 0 ), In co m e Tax Reg s. (“ [B] y

p erp etu al l y

res tri ct i n g d ev el op m en t o n th i s p o rt i o n o f t h e l an d , E h as
en s u red th atth e t w o rem ai n i n g acres wi l l al way s b e b o rd eredb y p ark l an d , th u s i n creas i ng th ei r fai r m ark etv al u e t o $ 2 2 ,5 0 0 each .”). Veal as s u m edth atth e
eas em en t s co n tri b u tedb y Pi n e M o u nt ai n t o NALT d i dn o taffect th e v al u e o f t h e p o rt i on s o f t h e Pi ne M ou n t ai n p ro p ert y u n res tri ct edb y

the p art i cu l ar eas em en t . Ho wev er, th e eas em en th adp o s i t i v e ex t ern al effect s o n th e u nres tri ct edp ro p ert y-2 6
-

[* 2 6 ] th atwas co n t i g u o us wi th th e res tri ct edp ro p ert y . Th e t h ree eas em en t s ru n al o n g m o u n t ai n ri d ges an dp ro t ect th o s e ri d g el i n es fro m co n s tru ct i o n . Th e
eas em en t s en h an ce t he v al u e o f th e o th er Pi n e M o u n t ai n p ro p erty b y p res erv i n g
s cen i c v i ews o f t h e ri d g el in es . Th e p ro t ect i o n s affo rd edb y th e eas em en t s p ro v i d e
o th er b en efi ts as wel l. Th e ri d g el i n es p ro t ect edb y the eas em en t s co u l d b e u s ed fo r recreat i o nal p urp o s es , s u ch as h i k i n g . On e o f Ed d lem anPro pert i es ’ wi tn es s es , an ex pert i n real -es t at e d ev el op m en t , co n fi rm edi n h er t es t i m on y th atth e p ro t ect ed ri dg el i n es wo u l daffo rdrecreat i o n al b en efi t s . Veal ’ s o p i n i on ab o utth e v al u e o f t h e 2 0 0 7 eas em en t th us d o es n o tacco u n t fo r b en efi ci al effect s o f t h e eas em en to n th e u n en cu m bered p o rt i o n s o f t he Pi n e M o u nt ai n p ro p ert y . 8 Th i s fai l u re i s i n co ns i s t en t wi th the fo u rt h s en ten ce o f t h e

8 Veal co n cl ud edth atth e eas em en t s actu al l y d i m i n i s hedth e v al ue o f t h e u n en cu m b ered l an db ecau s e th e eas em en t s p rev en tedPi n e M o u nt ai n fro m d ev el o p in g th e m o u n t ai n t o p p ro p ert i es , d ev el o p m en twh i ch h e as su m edwo u l d h av e h ada fav o rab l e effect o n th e l o wer-al t i tu d e h om e l ot s o n u n en cu m b eredl an d
. Veal ’ s o p i n i on d i dn o tacco u ntfo r t h i s effect b ecau s e h e t h o u g h t the effect was t o o d i ffi cu l tt o qu an t i fy . Veal ’ s fai l ure t o qu an t i fy th e am o u n tb y

wh i ch h e th o u g h tth e eas em en t s d i m i n is h edth e v al u e o f t h e o th er l an d m ay m ean th ati ti s u n n eces saryt o co n s i d er wh et h er Veal i s co rrect th atth e eas em en t s d i m i n i sh edth e v al u e o f t h e o ther l an d
. Th e as s u m p t i o n , n o tb ei n g qu an t i fi edb y Veal , p o s s i b l y d i dn o t affect Veal ’ s v al u at io n . To th e ex t en ti tm at t ers , we are n o tco n v i n cedth at th e d ev el o p m en t o f m o u n tai n t o p p ro p ert i es wo u l d h av e h ada fav o rab l e effect o n th e l o wer-al t i tu d e h o m e l o t s . Do u g l as Ed d l em an wro te i n a m em o ran du m t o Veal th at , o n th e b as i s o f h i s ex p eri en ce wi th d ev el o pi n g m o u n t ai n real es t at e, h e b el i ev edth e s al e o f h i gh -p ri cedh o u s es atth e t o p o f a m o u n t ai n s erv es t o i n creas e (co n ti n u ed ...)-2 7
-

[* 2 7 ] reg u l at i o n . 9 Th erefo re, t h e fo u rt h s en t en ce o f t h e reg u l at io n d o es n o treq u i re
u s t o accep tVeal ’ s o p i n io n ab ou tth e v al u e o f t h e 2 0 0 7 eas em en t . Th e IRS arg u es th atVeal ’ s m et h o dco n trad ict s th e fi ft h s en t en ce o f t h e reg u l at i o n . See s up ra p . 5 . Th e fi ft h s en t en ce o f t h e reg u l at io n s t at es th ati f t h e
res tri ct i o n h as th e effect o f i n creas i ng th e v al u e o f u n res tri ct edp ro pert y o wn edb y th e d o no r, wh et her co n t i g uo u s o r n o n co n t i g u o us , th e am ou n to f t he d educt i o n
m u stb e redu cedb y

th e i n creas e i n v al u e. Becau s e Veal ’ s m et h o dd o es n o t

8 (...co n t in u ed ) th e v al u e o f t h e h o u s es atth e b o t t o m . Th e m em o ran du m was th e s o u rce o f Veal ’ s as s u m pt i o n . Veal u n cri ti cal l y accep t edDo u gl as Ed d l em an ’ s o p in i o n , fo r wh i ch Do u g l as Ed d l em an p ro v id edn o s p eci fi c d at a o r ex am pl es . As an ex p erti n v al u at i o n , Veal co u l dh av e fo rm edh i s o wn o p i ni o n o n th e v al i d i ty o f t h i s th eo ry . He al s o co u l dh av e s up pl iedco rro b o rat i o n fo r t h e t h eo ry . Inth e en d , th e t h eo ry was n otco rro b o rat edb y

th e ev i d en ce i n th i s cas e. W e are n o tp ers u ad edi ti s co rrect .

9 Ed d l em an Pro p ert ies no t es thatth e IRS’ s ex p ertwi tn es s , M cGu rri n , d i dn o t o p i n e t h atth e eas em en two u l d en han ce t he v al u e o f t h e s u rro u n di ng l an d
. Th erefo re, Ed d l em an Pro p ert i es i m p l i es , th e IRS h as n o cau s e fo r co n t en d i n g th at th e eas em en t wo u l den h an ce t he v al u e o f t h e s urro u n di n g l an d . Ho wev er, M cGu rri n h el da d i fferen tv i ew o f t h e d ev el o pm en tp o ten t i al o f t he Pi n e M o u n t ai n p ro p erty . He th o u g h ti two u l d n o tb e d ev el o p edan dwo u l drem ai n ru ral . Un d er s u ch anas s u m

p t i on , th e eas em en two u l dh av e a rel at i v el y i n s ig n i fi can teffect o n co n ti g u o us l an d . Ano wn er o f t i m b erl an d v al ues th e s cen i c v iews fro m th e t i m b erl an dl es s th an th e o wn er o f a res i d en t i al l o tv al u es th e s cen i c v i ews fro m a res i den t ial l o t . Thu s , M cGu rri n ’ s fai l u re t o o p i n e t hatth e eas em en t s en h an cedth e v al u e o f t h e s u rro un d i n g l an d i s i n s i g n i fi can t . Hi s fai l u re d o es n o t s way o ur v i ew th atth e eas em en t s en h an cedth e v al ue o f t he s u rro u n d in g l an dan dth atVeal o v eres t i m at edth e v al u e o f th e 2 0 0 7 eas em en tb y i g n o ri n g the en h an cem en t s .-2 8
-

[* 2 8 ] co m

po rtwi th th e fo u rth s en t en ce o f t h e reg u l at i o n , i t i s u n n eces s ary t o
co n si d er wh eth er h is m et h o d i s al s o o uto f co n fo rm i ty wi th th e fi ft h s en t en ce. 1 0 In s u m m ary b o th Ed d lem an Pro p ert i es an dth e IRS fav o r v al u at i on o p i n i o n s th atare b as edo n m et h o ds th atd o n o tm eetth e req u i rem en t s o f t h e reg u l at i o n . No w co ns i d er t h e l eg al s i gn i fi can ce o f t h i s . Ina cas e o f u n i l at eral n o n co m p l i an ce, wh ere o n e p art y ’ s p ro ferred m et h o dco m p l i es wi th th e reg u l at io n b utth e o th er’ s d o es no t , i tm i gh tb e ap pro pri at e, o r ev en m an dat o ry , fo r a co u rtt o ad o ptth e
o p i n i o n o f t h e ex p ertwh o se m et h o d co m p l i es wi th th e reg u l at i o n . Inth i s cas e, h o wev er, n ei th er ex p ert ’ s m et h o d s co m p l i es . No th i ng i n the reg u l at i on co u n s el s
o n e ex p ert ’ s m et h o d o v er t he o th er i n th is cas e o f b il at eral n o nco m p l ian ce. Sect i o n 1 7 0 (a)(1 ) p ro v i d es th ata ch ari t ab le-co nt ri bu t i o n d educt i o n i s al l o wab l e
o n l y “ i f v eri fi edu n der reg u l at io n s p res cri b edb y the Secret ary .” Th e reg u l at i o n g o v ern i n g th e v al u at i o n o f p erp etu al co ns erv at i o n res tri ct i o n s , s ect io n 1
. 1 7 0 A1 4 (h )(3 )(i ), In co m e Tax Reg s ., g o v ern s b o th th e t ax p ay ers (s eek i n g d educt i o n s )
an d th e IRS (d i s al l o wi n g d edu ct i o n s ) al i k e. Th e reg u l at i o n i s therefo re n o t a

“ v eri fi cat i o n ” reg u l at i on wi th in th e m ean i n g o f s ect i o n 1 7 0 (a)(1 ).

1 0 C. Ti m o th y

Li n d s tro m , i n “ A Gu i de t o th e Tax As p ect s o f Co n s erv at i o n Eas em en tCo n tri b u t i o ns ”, 7 Wy o . L. Rev . 4 4 1 , 5 0 4 (2 00 7 ), arg u es th atthe fi ft h s en t en ce d o es n o tap p l y wh en th e u n res tri ct edp ro p erty i s co n ti g u ou s wi th th e res tri ct edp ro p erty , as i ti s h ere.-2 9
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[* 2 9 ] Becau s e t he reg u lat i o n d o es n o treq u i re u s t o accep to n e ex pert ’ s co n cl u s io n
o v er t h e o ther’ s , thi s cas e i s l i k e an y o ther cas e i n wh i ch ex p ert s o ffer co m p et i n g
es t i m at es o f fai r m ark etv al u e. Th e Co u rtd eci d es wh atwei g h t t o g iv e t h o se
es t i m at es b y , am o n g o th er t hi n g s , ex am i n i n g th e fact ors th ey co n s i d eredi n reach i n g th ei r co ncl u s io n s . See Cas ey v . Co m m i s s io n er, 3 8 T.C. 3 5 7, 3 8 1 (1 9 6 2 ). Th e Co u rti s n o t b o u n d b y th e o p i n i on o f an y

ex p ertwi tn es s , an di t m ay accep to r rejectex p ertt es t i m o ny

i n th e ex erci s e o f i t s s o u ndju dg m en t . Es t at e o f Newh o u s e
v . Co m m i s s i o n er, 9 4 T.C. at2 1 7 ; Ch iuv . Co m m i s s i o n er, 8 4 T.C. 7 2 2 , 7 3 4 (1 9 8 5 ) (t he Co u rti s n otreq u i red t o ad o p t th e o p i n io n o f anex p ertth ati s co n traryt o i t s
o wnju d g m en t). Th e Co u rt m ay s el ect iv el y

u s e a p o rt i on o f t h e o p i n i o n o f an
ex p ert . Park er v . Co m

m i s s i o ner, 8 6 T.C. 5 4 7 , 5 6 2 (1 9 8 6). Th e Co u rtm ay al s o reach a d eci s i o n as t o th e v al ue o f p ro p ert y th ati s b as edo n i t s o wn ex am i n at i o n o f th e ev i d en ce i n th e reco rd . Si l v erm an v . Co m m i s s io n er, 5 3 8 F.2 d9 2 7 , 9 3 3 (2 d Ci r. 1 9 76 ), aff’ g T.C. M em o. 1 9 7 4 -2 8 5
. To d et erm i n e t h e v al u e o f t h e 2 0 0 7 eas em en t , we ad o p tth e fo l lo wi n g ap p ro ach : Th e v al ue o f t he eas em en ts h o u l db e es t i m at edb y g i v in g equal wei g h t t o the v al u es as s i g n edb y Veal an dM cGu rri n . To ex p lai n wh y thi s ap p ro ach i s
reas on ab l e u n d er t h e ci rcu m s t an ces , we wi l l d i s cu s s three g en eral t o p i cs : (1 ) h o w b o th ex p ert s ’ o p i n i on s h av e as p ect s th atare u sefu l t o t h e d et erm i n at i o n o f t h e-3 0
-

[* 3 0 ] eas em en t ’ s v al ue, (2 ) t he n atu re o f t h e erro rs m ad e b y each ex p ert , an d (3 ) h o w wei g h t i n g t h e t wo ex p ert s ’ o p i n i o n s t en d s t o co rrect th e erro rs i n t h ei r
res p ect i ve ap p ro ach es . 1 . As p ect s o f b o th ex p ert s ’ o pi n io n s th atare u s efu l t o th e Co u rti n v al u i n g th e 2 0 07 eas em en t. Bo th ex p ert s ’ o p i n i o n s h av e as p ect s th atare h el pfu l t o t h e Co u rti n d et erm i n i n g th e v al u e o f t h e 2 00 7 eas em en t . Veal co rrect l y as s u m edth at th e Pi n e M o u n t ai n p ro p erty wo u l d b e d ev el o p ed . M cGu rri n p ro p erl y d et erm i n ed th e v al u e o f t h e eas em en tb y referen ce t o th e p ri ces p ai d fo r o th er co n s erv at i o n
eas em en t s . Th e p ri ces p ai dfo r o th er co n serv at i on eas em en ts are h el p fu l i n
v al u i n g th e 2 00 7 eas em en tal th o u gh th ey can n o t ex cl u si v el y d et erm i n e t h e v al u e b ecau s e th e p ri ces M cGu rri n u s edco rres po n dt o p ri ces o f eas em en t s i n ru ral areas . 2 . Th e n atu re o f the erro rs m ad e b y each ex pert . Des p i t e u sefu l as p ect s , each ex p ert ’ s o p i ni on res t edo n erro rs . Veal o v eres ti m at ed th e v al u e o f t h e 2 0 0 7
eas em en tb y

i g n o ri n g th e b en efi ci al effect s th e eas em en t h ado n t h e u n res tri ct ed Pi n e M o un t ai n p ro pert y . Veal al s o o v eres t i m at edth e v al u e o f t h e eas em en t b ecau s e th e d i m i n u t i o n of t h e u n d erl y i n g l an d ’ s v al u e i s an i m perfect p ro x y

fo r t h e
m ark etv al u e o f t h i s p art i cu l ar eas em en tth atres tri ct s th e u s e o f h i g h l y v al u ab l e-3 1
-

[* 3 1 ] d ev el o p ab l e l an d
. 1 1 M cGu rri n as s u m ed i nco rrect l y th atth e Pi n e M o un t ai n p ro p erty wo u l dn o tb e d ev el o p ed . Th i s as s u m p t i o n res ul t edi n M cGu rri n ’ s
u n d eres ti m at i n g the v al u e o f t h e 2 0 0 7 eas em en tb ecau s e h e v al u edthe eas em en t
o n th e b as i s o f act u al s al e p ri ces o f eas em en t s o n ru ral u n d ev el o p ab l e l an d
. 3 . Wh y wei g h t i ng th e t wo ex p ert s ’ o p i n i on s equ al l y t en d s t o co rrectth e
erro rs i n th ei r res p ect i v e ap p ro ach es . W e wi l l n ow ex p l ai n wh y Veal ’ s erro rs h av e
an effect o n v al ue o p p os i te t o M cGu rri n ’ s , h o w th e effect s are o f ro u gh l y th e s am e
m ag n i tu d e, an d h o w equ al l y wei g h t i n g th e v al u e as s i gn edb y each ex p erth as th e effect o f co rrect i n g th ei r erro rs . Bo th o f Veal ’ s erro rs res u lt ed i n an o v eres t i m at e
o f t h e v al u e o f t he 2 0 0 7 eas em en t . Ig n o ri n g the b en efi ci al effect s o f t h e eas em en t
res u l ted i n an u n d eres t i m at e o f th e “ aft er” v al u e o f t h e Pi ne M o u n t ai n p ro p ert y aft er t h e d o n at i o n o f t h e eas em en t . Becau s e t h e v al u e o f aneas em en t u n d er th e

1 1 Th e IRS al so at t ack s Veal ’ s v al u at io n s o f t h e Pi ne M o u n t ai n p ro p erty b efo re t h e eas em en t s b ecau s e h e d i dn o tco n s id er t h e rel at i v el y l o w actu al p ri ces Pi n e M o un t ai n p ai dfo r t h e p ro p ert y . W e are n o t p ers uad edth at Veal ’ s m et h o d was fl awedfo r thi s reas on . Veal o p i n edthatth e v al u e o f th e Pi n e M o u n t ai n p ro p erty was m u ch h i g h er t h an i t s p u rch as e p ri ce b ecau se h e t ho u g h t th atwh en th e eas em en t s were g ran t ed , i twas reas o nab l y p ro b ab l e t h atth e l an dco u l db e d ev el o p ed
. W e ag ree wi th t hi s as su m p t i o n . Th e p u rch as e p ri ce o f t h e Pi n e M o u nt ai n p ro p ert y d i dn o trefl ectth e v al u e o f t h e l an das a co m m erci al an d res i den t ial s ub d i v i s i o n . Th i s i s b ecau s e t h e l an dwas as sem b l edp arcel b y

p arcel
. Th e l o w p ri ce fo r each p arcel d i dn o trefl ect , fo r ex am pl e, t hatth e fu l ly

as s em b l ed p ro p erty wo u l dh av e acces s t o th e h i g h way s y s tem . Th i s acces s was n eces s ary fo r th e fu l ly as s em b l edp ro p ert y

t o b e d ev el o p edi n t o a s ub d i v i s io n .-3 2
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[* 3 2 ] b efo re-an d-aft er m eth o di s th e v al ue o f t he p ro p ert y b efo re t h e eas em en t
m i n u s th e v al u e o f t h e p ro p ert y aft er t h e eas em en t, an u n d eres t i m at e o f t h e “ aft er”
v al u e res u l t s i n an o v eres ti m at e o f t h e v al u e. Si m i l arl y , Veal ’ s u s e o f t h e b efo rean d -aft er m et h o di n th e co n t ex to f an eas em en t o n h i g h l y v al u ab l e d ev el o pab l e p ro p erty res u l t edi n an o v eres t i m at e o f t he v al u e o f t h e eas em en tb ecau se t h e h i g h

“ co s t ” o f creat in g the eas em en t(i .e., th e redu ct i o n i n v al u e o f t h e u n derl y i n g l an d
cau s ed b y res tri ct in g the l an d ) d o es n o tn eces s ari l y tran sl at e i n t o m ark etv al u e. Co n v ers el y , th e erro r m ad e b y M cGu rri n res u l t edi n an u nd eres t i m at e o f t he
eas em en t ’ s v al u e. M cGu rri n as s u m edthatth e Pi n e M o u n t ai n p ro pert y wo ul dn o t b e d ev el op ed . Th erefo re, h e co m p aredth e 2 0 0 7 eas em en tt o eas em en t s o n ru ral l an dth atwo u ld n o tb e d ev el o p ed . Hadh e co m p ared th e 2 0 0 7 eas em en tt o
eas em en t s o n d ev el o pab l e l an d , h e p res u m ab l y wo u l dh av e g i v ena h i gh er v al u e t o th e eas em en t . Thu s, th e erro rs i n Veal ’ s ap pro ach h av e t h e o p p o si te effect o n
v al u e fro m

th e erro r i n M cGu rri n ’ s ap p ro ach . Veal o v eres t im at edth e 2 0 07
eas em en t ’ s v al u e. M cGu rri n u n d eres ti m at ed i t. Al th o ug h th e erro rs i n the
ex p ert s ’ ap p ro ach es h av e o p po s i t e effect s o n v al u e, t he effect s are s im il ar i n p ro p ort i o n b ecau s e t h e m ag n i tud e o f al l th ree erro rs i s p ro p o rt i on al t o th e p ro b ab i l i ty

thatth e Pi n e M o u n t ai n p ro pert y wo ul db e d ev el o ped . To u n d ers t an d th i s p ro p o s i t i o n , s upp o s e t h atth e Pi n e M o u n t ai n p ro p ert y was u nd ev el o p ab l e, i .e.,-3 3
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[* 3 3 ] th atth ere was a l o w p ro b ab i l i ty thati t wo u l db e d ev el o p ed . Inth i s
u n d ev el op ab l e p ro p ert y

s cen ari o , Veal ’ s m et h o d o f v al u i n g th e 2 0 0 7 eas em en t
wo u l dretu rn a fai rl y

l o w v al u e fo r t h e eas em en t . Veal u sedth e b efo re-an d -aft er
m et h o d, u n d er wh i ch th e v al ue o f an eas em en t i s co ns i d ered t o b e eq u al t o th e p reeas em en tv al ue o f the l an dm i nu s th e p o s t -eas em en t v al u e o f t h e l an d
. Thu s , Veal ’ s m et h o dwo u l dh av e p l aced a l o w “b efo re” v al u e o n u n d ev el o p ab l e l an dan d
a co rres p o n d i n g l y

l o w v al u e o n the eas em en to n s u ch l an d . Th e fi rs t erro r we
as cri be t o t h e Veal o p i n i o n--t h ath e fai l edt o acco u n tfo r t h e v al u e-en h an ci n g effect o f t h e 2 0 0 7 eas em en to n th e s u rro u n d in g Pi n e M o u n tai n p ro p ert y --wo u l d h av e a m i n i m al effect i f t h e Pi n e M o u n t ai n p ro p ert y were u n d ev el o p ab l e. Th ati s b ecau s e a co n serv at i o n eas em en tco n fers l o w b en efi t s o n the s u rro u nd i n g l an d wh en th ats u rro u nd in g l an di s n o td ev el op ab le. A co n s erv at io n eas em en td o es n o t
s i gn i fi can t l y

en h an ce t h e v al u e o f s u rro u n d i n g l an dth ati s u s edfo r t i m b er o r h u n t i n g , es p eci al l y

co m p aredt o t h e v al u e en h an cem en t co nferred o n a res i d en t i al
s ub d iv i s i o n . Th e s eco n derro r we as cri be t o Veal --t h at h is b efo re-an d -aft er
m et h o d ex ag g erat es th e v al u e o f an eas em en twh en th e u n d erl y i n g l an di s
ex ceed in g l y

v al u ab l e an d wh en th ere i s a co m p et in g s up p ly

o f ch eap er ru ral
eas em en t s --al s o wo u l dh av e m i n i m al effect i n th e s itu at i o n i n wh i ch th e
u n d erl y i n g l an di s u n d ev el o p ab l e. Th u s , Veal ’ s m etho d o f v al ui n g t h e Pi n e-3 4
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[* 3 4 ] M o u n tai n p ro p ert y

wo u l db e a fai rl y

rel i ab l e way

o f es ti m at i n g the v al u e o f th e 2 0 07 eas em en t i n a h y p o th et i cal s i tu at i on i n wh i ch th e Pi n e M o u n t ai n p ro p ert y i s u n d ev el o p ab l e. A s i m i lar co n cl us i on can al s o b e eas i l y m ad e wi th res p ectt o M cGu rri n ’ s m eth o di n th ats i tu at i o n . If th e Pi n e M ou n t ai n p ro p ert y i s
u n d ev el op ab l e, t h en M cGu rri n ’ s m et h o d , wh i ch rel i es o n t h e s al e p ri ces o f ru ral
u n d ev el op ab l e p ro p ert y , wo u l db e a fai rl y rel i ab l e m et h o d o f v al ui n g the Pi n e M o u nt ai n p ro p ert y . No wco n s i d er wh ath ap p en s i f t h e p ro b ab i l i ty o f d ev el o p i n g th e Pi n e M o u n t ai n p ro p erty i s h i g h er. W i th a h i gh er p ro b ab i l i ty , th e v al u e o f t he l an di s h i g h er. Veal ’ s m et h o dwo u l dth en p ro du ce a h i g h er v al u e fo r t h e 2 0 0 7
eas em en tb ecau s e, u n d er t h e b efo re-an d -aft er m et ho d , an eas em en to n h i g h -v al ue l an di s wo rt h m ore t h an an eas em en t o n l o w-v al u e l an d . Parto f t h e eas em en t ’ s
v al u e t h atwo u l dres u l tu s i n g Veal ’ s m et h odwo u l db e an ex ag g erat i o n du e t o th e two erro rs we as cri b e t o Veal : (1 ) h is fai l u re t o acco u n tfo r t he en h an cem en t effect wo u l dm ean th ath is “ aft er” v al u e i s t o o l o w, wh i ch m ak es h i s eas em en t
v al u e t o o h i g h, an d(2 ) h i s fai l ure t o acco u n t fo r th e d own w ardp ri ce p res s u re p l aced o n t h e m ark etfo r co n s erv at i o n eas em en t s b y th e av ai l ab i l i ty

o f ch eap er
ru ral eas em en t s al s o m ean s th ath i s eas em en tv al u e i s t o o h i g h . To m o re fu l l y d em o n s trat e t h atth e effect s o f b o th erro rs th atwe as cri b e t o Veal are p ro p o rt i o n al t o the p ro b ab i l i ty

th e l an d wi l l b e d ev el o p ed , we wi l l s t artwi th Veal ’ s fi rs terro r---3 5
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[* 3 5 ] h i s fai l ure t o p ro perl y acco u n t fo r t he en h an cem en teffect o f t h e 2 0 0 7
eas em en to n th e n o n eas em en tp ro p ert y . Th e g reat er th e p ro bab i l i ty th atth e Pi n e M o u nt ai n p ro p ert y wi l l b e d ev el o p ed , th e g reat er t he effect o f t he erro r. Beau t i fu l
m o un t ai n v i ews en h an ce t h e v al u e o f res i d en t i al p ro p ert y --i .e., p ro p ert y o n wh ich h o m es wi l l s i t . Su ch v i ews are l es s i m p o rt an tt o th e v al ue o f u n d ev el o p ed p ro p erty --i .e., h u n t i n g l an d s an dt i m b erl an d s . No wco n s i d er Veal ’ s s eco n derro r: He u s edth e b efo re-an d -aft er m et h o d ex cl u s i v el y t o v al u e t h e 2 0 0 7 eas em en tev en th o u g h ch eap er eas em en t s o n ru ral l an dwo u l d(p art i al l y ) co m p et e wi th th e Pi n e M o u nt ai n eas em en t. Th e g reat er t h e p ro bab i l i ty th e Pi n e M o u n t ai n p ro p ert y wi l l b e d ev el op ed , the g reat er th e redu ct i o n i n th e v al u e o f t h e Pi n e M ou n tai n p ro p ert y th atwi l l res u l tfro m

th e i m po s i t i o n o f t he eas em en t . An dth e g reat er t h e redu ct i o n i n v al u e, t h e g reat er d i s crep an cy th ere wi l l b e b et ween th e es t i m at edv al u e o f t h e Pi n e M o un t ai n eas em en tu s i ng th e b efo re-an d -aft er ap p ro ach an dth e v al u e o f
ru ral eas em en t s . No w co n s i d er h o w th e v al u e u n d er M cGu rri n ’ s m et h o dwo u l d ch an ge as th e p ro bab i l i ty o f d ev el o p i n g th e l an d i s h y p o th et i cal l y

i n creas ed
. M cGu rri n ex cl u si v el y

u sed th e v al u e o f ru ral eas em en t s t o v al ue t h e 2 0 0 7
eas em en t . Th e g reat er t he p ro b ab i l i ty o f d ev el o p m en to f th e Pi n e M o u n t ai n p ro p erty , th e m o re v al u ab l e t h e eas em en to n p ort i on s o f t h e Pi n e M ou n tai n p ro p erty are co m p aredt o ru ral eas em en t s . Thu s , the g reat er th e p ro bab i l i ty o f-3 6
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[* 3 6 ] d ev el o p m en t , th e g reat er M cGu rri n ’ s u n d eres t i m at e o f th e v al ue. In
co n cl u s i o n , th e m ag n i tu de o f Veal ’ s o v eres t i m at e o f t h e Pi ne M o u n t ai n 2 0 0 7
eas em en t ’ s v al u e co rrel at es wi th th e p ro b ab i l i ty o f d ev el o p i n g t h e Pi n e M o u n t ai n p ro p erty ; an dth e m ag n itu de o f M cGu rri n ’ s u n d eres ti m at e o f t h e Pi n e M o un t ai n 2 0 0 7 eas em en t ’ s v al ue al so co rrel at es wi th t h i s p ro b ab i l i ty . Th atm ean s t h atas th e p ro b ab i l i ty

o f d ev el o p i n g th e Pi n e M o u n t ai n p ro pert y i n creas es , each ex p ert ’ s
erro r i n creas es i n p ro p o rt i o n t o th e o th er ex p ert ’ s erro r. Th e m ere fact thatth e
m ag n i tu d e o f t h e t wo ex pert s ’ erro rs v ary p ro p ort i on al l y

d o es n o tm ean th atth e
m ag n i tu d es are eq u al . Ho wev er, o n o u r rev iew o f t h e en t i re reco rd , we are
co n vi n ced th at th e erro rs are ro u g h l y equ al i n m ag n i tud e. Onth e b as is o f th e reco rd , we b el iev e t h at the am o u n tb y wh i ch Veal
o v eres t i m at edth e v al u e o f th e 2 0 0 7 eas em en ti s co m parab l e i n m ag n i tud e t o th e
am ou n tb y wh i ch M cGu rri n u n d eres t i m at edi t . Thus , co m b i n i n g Veal ’ s ap p ro ach
an d M cGu rri n ’ s ap p ro ach t en d s t o co rrect th ei r res p ect i v e erro rs . It i s ap p ro p ri at e t o co m b i ne t h ei r res p ect i v e es ti m at es o f v al u e fo r t h e eas em en t b y g i v i n g each
es t i m at e equ al wei g h t. Us i n g an equ al l y

wei g h t edav erag e, we co n cl u d e t h atth e v al u e o f t h e 2 0 0 7
eas em en ti s $ 4 , 7 7 9 , 5 0 0 , equal t o 5 0 % o f Veal ’ s $ 9 , 1 1 0 ,0 0 0 v al u e p l u s 5 0 % o f M cGu rri n ’ s $ 4 4 9 ,0 0 0 v al u e.