Court Opinion

ID: 4338598
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:58:30.550563+00
Date Added: 2024-06-11T07:49:38.127738
License: Public Domain

BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS
                                             PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL
                                                           REVENUE, RESPONDENT
                                                        Docket No. 25954–08.                           Filed April 5, 2011.

                                                  In a conservation easement donation case, R moved to
                                               exclude P’s experts’ report as unreliable and irrelevant under
                                               Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc.,
                                               509 U.S. 579 (1993). Held: Standards of reliability and rel-
                                               evance apply in trials without a jury, including Tax Court
                                               trials, subject to the discretion of the trial Judge to receive
                                               evidence. Held, further, P’s experts failed to apply the correct

                                      326

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        327

                                               legal standard by failing to determine the value of the
                                               donated easement by the before and after valuation method,
                                               failed to value contiguous parcels owned by a partnership,
                                               and assumed development that was not feasible on the subject
                                               property. R’s motion to exclude P’s report and expert testi-
                                               mony is granted. Held, further, the value determination in the
                                               statutory notice is sustained.

                                        James R. Walker, Justin D. Cumming, and Christopher D.
                                      Freeman, for petitioner.
                                        Steven I. Josephy and Miles B. Fuller, for respondent.
                                         COHEN, Judge: In a notice of final partnership administra-
                                      tive adjustment (FPAA) for 2003, respondent allowed only
                                      $42,400 out of $3,245,000 claimed as a charitable contribu-
                                      tion deduction on the partnership return of Boltar, L.L.C.
                                      (Boltar). The deduction was claimed for the donation of a
                                      conservation easement on a portion of real property owned by
                                      Boltar and located in Lake County, Indiana.
                                         Prior to trial, respondent filed a motion in limine to
                                      exclude petitioner’s expert report and testimony as neither
                                      reliable nor relevant under the Federal Rules of Evidence
                                      and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579
                                      (1993). The issues for decision are whether respondent’s
                                      motion should be granted and, in any event, whether the
                                      value of the easement for charitable contribution purposes is
                                      greater than determined in the FPAA. Unless otherwise
                                      indicated, all section references are to the Internal Revenue
                                      Code, and all Rule references are to the Tax Court Rules of
                                      Practice and Procedure.

                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated, and the stipulated
                                      facts are incorporated in our findings by this reference. At
                                      the time the petition was filed, Boltar’s principal place of
                                      business was in Colorado. Boltar is a Delaware limited
                                      liability company (LLC). Joseph Calabria, Jr., is Boltar’s tax
                                      matters partner.
                                         On December 31, 1996, Laura Lake Development Co., LLC
                                      (Laura Lake), acquired two contiguous parcels of real estate
                                      in Lake County, Indiana (the Northern Parcel and the
                                      Southern Parcel), each consisting of approximately 10 acres.
                                      Laura Lake paid approximately $10,000 per acre for the

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                                      328                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      Northern and Southern Parcels. On October 1, 1999, Laura
                                      Lake quitclaimed to Boltar the Northern and Southern Par-
                                      cels. Boltar received the property from Laura Lake in pay-
                                      ment of a note and to prevent foreclosure.
                                        On November 8, 2002, Shirley Heinze Land Trust, Inc.
                                      (Shirley Heinze), quitclaimed to Boltar a parcel of real prop-
                                      erty located immediately east of the Southern Parcel and
                                      consisting of approximately 10.3 acres (the Eastern Parcel).
                                      The quitclaim deed was never recorded.
                                        Beginning in 1955 and as of December 29, 2003, the
                                      Southern Parcel was encumbered by a 50-foot-wide pipeline
                                      utility easement. As of December 29, 2003, the Northern and
                                      Southern Parcels were both encumbered by an access (golf
                                      cart) easement in favor of the Gary Works Supervisors Club,
                                      Inc., and golf course.
                                        On December 29, 2003, Boltar granted Shirley Heinze an
                                      easement restricting the use of approximately 8 acres (the
                                      subject easement) on the eastern side of the Southern Parcel
                                      (the Eased Area). The easement prevented any use of the
                                      property that would significantly impair or interfere with the
                                      conservation values of the property. Approximately 2.82
                                      acres on the Eased Area, 8.5 acres on the eastern portion of
                                      the Northern Parcel, and all of the Eastern Parcel are for-
                                      ested wetlands falling within the jurisdiction of the U.S.
                                      Army Corps of Engineers (USACE).
                                        The discharge of dredged or fill material in wetlands
                                      within Federal jurisdiction is subject to a permitting process
                                      through USACE. In Indiana, the State requires that a party
                                      obtain a permit separate from USACE’s. A party must apply
                                      for a permit through the Indiana Department of Environ-
                                      mental Management (IDEM). The decisions to issue permits
                                      from both USACE and IDEM involve a review of the public
                                      interest factors and may vary depending on the location,
                                      amount, and type of wetlands a permit applicant is seeking
                                      to impact or remove. Generally, as a condition of obtaining
                                      a permit, a permit application must mitigate for impacted
                                      wetlands. Mitigation includes avoiding, minimizing, or com-
                                      pensating for lost resources. Compensatory mitigation can be
                                      accomplished through wetlands restoration, creation of new
                                      wetlands somewhere else within the neighboring area, or
                                      purchase of mitigation (development) credits from a wetlands
                                      mitigation bank. In 2003, the Lake Station Wetland Mitiga-

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        329

                                      tion Bank serviced northern Indiana, including the subject
                                      parcels.
                                         On December 29, 2003, the Northern and Southern Parcels
                                      were under the jurisdiction of Lake County, Indiana, and
                                      were zoned R–1, single-family residential, as described in the
                                      Lake County zoning ordinances. The R–1 zone residential
                                      use permitted by right was for one single-family home per
                                      acre if the property was serviced by a septic system and two
                                      per acre if serviced by a sewer system. As of December 29,
                                      2003, Lake County did not provide water or sewer services
                                      independent of the services provided by municipalities.
                                         On December 29, 2003, the Eastern Parcel was under the
                                      jurisdiction of the city of Hobart, Indiana, and was zoned as
                                      a Planned Unit Development (PUD) as part of the Deep River
                                      Pointe development. The proposed Deep River Pointe project
                                      included a total of three phases. Phases I and II would first
                                      be annexed into the city of Hobart and rezoned as a PUD, and
                                      Phase III would be annexed and zoned at a later date. No
                                      final plat was ever approved by the city of Hobart for Phase
                                      II of the Deep River Pointe PUD. The property comprising
                                      Phase III of the Deep River Pointe PUD was never annexed
                                      into the city of Hobart and never zoned as a PUD. The city
                                      of Hobart requires a public hearing as part of the annexation
                                      process.
                                         On its 2003 Form 1065, U.S. Return of Partnership
                                      Income, Boltar claimed charitable contribution deductions of
                                      $3,259,000, of which $3,245,000 related to the donation of the
                                      subject easement. Boltar reported a fair market value of
                                      $3,270,000 for the subject easement as of December 31, 2003.
                                      The fair market value was reduced by $25,000 as a claimed
                                      enhancement in value to adjacent parcels owned by Boltar as
                                      a result of the donation of the subject easement.
                                         Attached to Boltar’s Form 1065 was a Form 8283, Noncash
                                      Charitable Contributions, signed by Gary K. DeClark, man-
                                      aging director and principal of Integra Realty Resources in
                                      Chicago, Illinois (Integra). Also attached to the return was
                                      an appraisal report (the Integra appraisal) prepared by
                                      DeClark and Nancy S. Myers (Myers), senior real estate
                                      analyst for Integra, on March 7, 2004. A member of Boltar’s
                                      management team had met DeClark in 1998, and DeClark’s
                                      firm had evaluated other conservation easements for Laura
                                      Lake and related projects. DeClark and Myers reviewed only

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                                      330                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      a draft of the easement before preparing their appraisal; they
                                      did not rely on the final version.
                                         The Integra appraisal determined that the ‘‘highest and
                                      best use’’ of the subject property was residential development
                                      and determined the easement value as the difference
                                      between the ‘‘Foregone Development Opportunity of 174 Con-
                                      dominiums on Finished Sites, Discounted to December 31,
                                      2003’’ (Scenario B)—$3,340,000 less the ‘‘Value of Raw,
                                      Vacant and Developable Land’’ (Scenario A)—$68,000. These
                                      values incorporated estimated wetlands mitigation costs of
                                      $28,000 ($10,000 per acre for the affected 2.8 acres) that
                                      DeClark and Myers calculated. The Integra appraisal
                                      asserted that the 174-unit condominium project, consisting of
                                      29 buildings with 6 units each, was legally permissible, phys-
                                      ically possible, financially feasible, and maximally productive
                                      on the Eased Area. The Integra appraisal relied in this
                                      regard on a site plan for a condominium project situated on
                                      approximately 10 acres. The Integra appraisal erroneously
                                      assumed that the Eased Area was under the jurisdiction of
                                      the city of Hobart and zoned as part of the Deep River Pointe
                                      PUD.
                                         In the FPAA, the fair market value of the subject easement
                                      as of December 29, 2003, was determined to be $42,400,
                                      based on review by one of respondent’s valuation engineers.
                                      The valuation engineer opined that the Integra appraisal
                                      failed to determine the value of the Eased Area before and
                                      after the grant of the easement. The valuation engineer con-
                                      cluded that the highest and best use of the subject property
                                      was for ‘‘development of single-family detached residential
                                      homes, but not until the surrounding properties are devel-
                                      oped’’, partly because the Eased Parcel was landlocked with
                                      no direct access to a public road.
                                         (No penalty was determined in the FPAA. Fifteen months
                                      after the answer was filed, 6 months after one continuance
                                      on respondent’s motion, and 21⁄2 months before the next
                                      scheduled trial date, respondent moved to amend the answer
                                      to assert a ‘‘pass-through penalty adjustment of $1,281,040’’.
                                      Respondent sought to assert a gross valuation misstatement
                                      penalty under section 6662(h) or, alternatively, the substan-
                                      tial valuation misstatement penalty under section 6662(e).
                                      Petitioner objected to the amendment, and the Court denied
                                      the motion as untimely and prejudicial.)

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        331

                                                                                  OPINION

                                      Valuation of Conservation Easement Donations
                                         Section 170(a)(1) provides that ‘‘There shall be allowed as
                                      a deduction any charitable contribution (as defined in sub-
                                      section (c)) payment of which is made within the taxable
                                      year. A charitable contribution shall be allowable as a deduc-
                                      tion only if verified under regulations prescribed by the Sec-
                                      retary.’’
                                         Section 1.170A–1(c)(1), Income Tax Regs., provides in perti-
                                      nent part: ‘‘If a charitable contribution is made in property
                                      other than money, the amount of the contribution is the fair
                                      market value of the property at the time of the contribution’’.
                                      Fair market value, as defined by the regulations, ‘‘is the
                                      price at which the property would change hands between a
                                      willing buyer and a willing seller, neither being under any
                                      compulsion to buy or sell and both having reasonable knowl-
                                      edge of relevant facts.’’ Sec. 1.170A–1(c)(2), Income Tax Regs.
                                         Section 1.170A–7(c), Income Tax Regs., provides that,
                                      except as provided in section 1.170A–14, Income Tax Regs.,
                                      the amount of the deduction under section 170 in the case of
                                      a partial interest in property is the fair market value of the
                                      partial interest at the time of the contribution.
                                         Section 1.170A–14(h)(3)(i), Income Tax Regs., states in rel-
                                      evant part:
                                      The value of the contribution under section 170 in the case of a charitable
                                      contribution of a perpetual conservation restriction is the fair market value
                                      of the perpetual conservation restriction at the time of the contribution.
                                      See § 1.170A–7(c). If there is a substantial record of sales of easements
                                      comparable to the donated easement (such as purchases pursuant to a
                                      governmental program), the fair market value of the donated easement is
                                      based on the sales prices of such comparable easements. If no substantial
                                      record of market-place sales is available to use as a meaningful or valid
                                      comparison, as a general rule (but not necessarily in all cases) the fair
                                      market value of a perpetual conservation restriction is equal to the dif-
                                      ference between the fair market value of the property it encumbers before
                                      the granting of the restriction and the fair market value of the encumbered
                                      property after the granting of the restriction. * * *

                                      See generally Hilborn v. Commissioner, 85 T.C. 677, 688–689
                                      (1985).
                                        The before and after methodology has been adopted and
                                      applied in various contexts. See, e.g., Browning v. Commis-

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                                      332                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      sioner, 109 T.C. 303, 311–316 (1997); Symington v. Commis-
                                      sioner, 87 T.C. 892, 894–895 (1986); Stanley Works & Subs.
                                      v. Commissioner, 87 T.C. 389 (1986); Scheidelman v.
                                      Commissioner, T.C. Memo. 2010–151; Thayer v. Commis-
                                      sioner, T.C. Memo. 1977–370; S. Rept. 96–1007, at 14–15
                                      (1980), 1980–2 C.B. 599, 606; Rev. Rul. 76–376, 1976–2 C.B.
                                      53; Rev. Rul. 73–339, 1973–2 C.B. 68. Although there may be
                                      cases in which the before and after methodology is neither
                                      feasible nor appropriate, petitioner has not provided any
                                      persuasive reason for not applying it in this case. Only peti-
                                      tioner’s experts purport to provide a rationale for their
                                      peculiar methodology, which we reject for the reasons dis-
                                      cussed below.
                                      Expert Reports
                                        In accordance with the Court’s standing pretrial order and
                                      Rule 143(g), the parties exchanged and submitted expert
                                      reports. Petitioner’s expert report consisted of the Integra
                                      appraisal and a transmittal letter to petitioner dated March
                                      7, 2004, and a letter to petitioner’s counsel dated April 15,
                                      2010. In the letter dated April 15, 2010, DeClark and Myers
                                      addressed the views of the Internal Revenue Service valu-
                                      ation engineer but did not make any adjustments in their
                                      value opinion, maintaining that the amount determined in
                                      their 2004 appraisal was ‘‘supportable and appropriate.’’
                                      Responding to the suggestion that they failed to determine
                                      the before and after easement values, they asserted:
                                      While it is obvious that the impressment of the easement severely impacts
                                      the realizable highest and best use of the eight-acre parcel, this impact is
                                      part and parcel of the deduction of the ‘‘as if raw’’ (Scenario A) value esti-
                                      mate from the estimate of the ‘‘foregone development opportunity’’ (Sce-
                                      nario B). Meanwhile, neither Scenario A nor Scenario B is described as an
                                      ‘‘as encumbered’’ (with the conservation easement) value estimate because
                                      that estimate is the result of the deduction process (A from B), rather than
                                      a freestanding value available to be measured in the marketplace with
                                      comparable sales. So, essentially, neither of the two scenarios represents
                                      encumbered land and, unencumbered, the appropriate highest and best
                                      use in both the ‘‘before’’ and ‘‘after’’ is, in fact, residential development.
                                      * * *

                                        Respondent submitted the expert reports of Nick Tillema
                                      and Steven Albert. Tillema testified at trial. Respondent’s
                                      experts opined that the value of the subject easement was

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        333

                                      $31,280, the difference between a before-easement value of
                                      $100,600 and an after-easement value of $69,320. Respond-
                                      ent’s experts determined that the highest and best use of the
                                      Eased Area was single-family residential before and after
                                      the easement, and they reached their results primarily on
                                      the basis of comparable sales. They determined that the
                                      unencumbered value of the Eased Area was $6,000 per acre
                                      and that the encumbered value was $2,000 per acre, which
                                      they applied to acreage including the contiguous parcels
                                      owned by Boltar.
                                      Respondent’s Motion in Limine
                                        Prior to trial, respondent filed a motion in limine, asserting
                                      that the Integra report was neither reliable nor relevant
                                      because:
                                        (1) The Integra Report does not provide both a before and after value
                                      of the subject property despite the assertion that Mr. DeClark and Ms.
                                      Meyers [sic] completed a before and after valuation;
                                        (2) The Integra Report does not value all of the contiguous parcels owned
                                      by petitioner and encumbered by the conservation easement at issue in
                                      this case as required by the applicable Treasury Regulation; and
                                        (3) The 174 condominium unit development evaluated as part of ‘‘Sce-
                                      nario B’’ in the Integra Report was not a physically possible use on the
                                      eight acre subject property analyzed in the Integra Report.

                                        At trial, the Court deferred ruling on respondent’s motion
                                      in limine because of the importance of the issues raised and
                                      the substantial effect on the case of eliminating petitioner’s
                                      primary evidence. The Integra report was marked and the
                                      related testimony of petitioner’s experts was heard solely as
                                      an offer of proof. Whether the report and testimony will be
                                      received in evidence and considered in determining fair
                                      market value of the easement depends on application of prin-
                                      ciples expressed in Daubert v. Merrell Dow Pharm., Inc., 509
                                      U.S. at 591, as related to rules 702 and 703 of the Federal
                                      Rules of Evidence.
                                        In the reply brief, respondent aptly summarizes the defi-
                                      ciencies of the Integra experts’ analysis as:
                                      failure: to properly apply the before and after methodology, to value all of
                                      petitioner’s contiguous landholdings, to take into consideration zoning
                                      restraints and density limitations and to take into consideration the pre-
                                      existing conservation easements. As a result, the Integra Experts saw
                                      nothing wrong with a hypothetical development project that could not fit

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                                      334                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      on the land they purportedly valued, was not economically feasible to con-
                                      struct and would not be legally permissible to be built in the foreseeable
                                      future.

                                      Respondent asserts that petitioner has departed from the
                                      legal standard to be applied in determining the highest and
                                      best use of property and instead determined a value ‘‘based
                                      on whatever use generates the largest profit, apparently
                                      without regard to whether such use is needed or likely to be
                                      needed in the reasonably foreseeable future.’’
                                         Petitioner argues that a Daubert analysis is not applicable
                                      in this case because there is no jury; that respondent pre-
                                      viously accepted the methodology used in the Integra expert
                                      report and stipulated that the version attached to the part-
                                      nership return was a qualified appraisal; that Rule 143(g)
                                      mandates receipt of the report in evidence; and that the mat-
                                      ters complained of by respondent do not affect admissibility
                                      of the report.
                                         Rule 702 of the Federal Rules of Evidence provides:
                                         If scientific, technical, or other specialized knowledge will assist the trier
                                      of fact to understand the evidence or to determine a fact in issue, a witness
                                      qualified as an expert by knowledge, skill, experience, training, or edu-
                                      cation, may testify thereto in the form of an opinion or otherwise, if (1)
                                      the testimony is based upon sufficient facts or data, (2) the testimony is
                                      the product of reliable principles and methods, and (3) the witness has
                                      applied the principles and methods reliably to the facts of the case.

                                      The Supreme Court in Daubert stressed the trial court’s
                                      ‘‘gatekeeper’’ function in excluding evidence that is not reli-
                                      able. In Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148
                                      (1999), the Supreme Court applied the same standard to
                                      expert testimony that was not ‘‘scientific’’. Although special
                                      considerations apply to jury trials, the Daubert analysis is
                                      not limited to jury trials. See Atty. Gen. of Okla. v. Tyson
                                      Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009); Seaboard
                                      Lumber Co. v. United States, 308 F.3d 1283, 1302 (Fed. Cir.
                                      2002) (standards of relevance and reliability must be met in
                                      bench trials). In any event, rule 702 of the Federal Rules of
                                      Evidence applies to bench trials as well as to jury trials and
                                      specifically sets forth applicable standards of reliability.
                                         We have long recognized that receipt of unreliable evidence
                                      is an imposition on the opposing party and on the trial
                                      process. See Laureys v. Commissioner, 92 T.C. 101, 127

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                                      (1989). We have also frequently stated that an expert loses
                                      usefulness to the Court and loses credibility when giving
                                      testimony tainted by overzealous advocacy. Id. at 129 (citing
                                      Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74
                                      T.C. 441, 452 (1980), and Messing v. Commissioner, 48 T.C.
                                      502, 512 (1967)); see Neonatology Associates, P.A. v. Commis-
                                      sioner, 115 T.C. 43, 86–87 (2000), affd. 299 F.3d 221 (3d Cir.
                                      2002); Wagner Constr., Inc. v. Commissioner, T.C. Memo.
                                      2001–160; Jacobson v. Commissioner, T.C. Memo. 1989–606.
                                      Expert opinions that disregard relevant facts affecting valu-
                                      ation or exaggerate value to incredible levels are rejected.
                                      See Estate of Newhouse v. Commissioner, 94 T.C. 193, 244
                                      (1990); Estate of Hall v. Commissioner, 92 T.C. 312, 338
                                      (1989); Chiu v. Commissioner, 84 T.C. 722, 734–735 (1985);
                                      Estate of O’Keeffe v. Commissioner, T.C. Memo. 1992–210;
                                      Garrison v. Commissioner, T.C. Memo. 1986–261 (concluding
                                      that the taxpayers were ‘‘far too aggressive in their claimed
                                      value of * * * [the donated] property and in seeking to profit
                                      from their ‘good works’ at the expense of Uncle Sam’’); Estate
                                      of Gallo v. Commissioner, T.C. Memo. 1985–363.
                                         In most cases, as in this one, there is no dispute about the
                                      qualifications of the appraisers. The problem is created by
                                      their willingness to use their re´sume´s and their skills to
                                      advocate the position of the party who employs them without
                                      regard to objective and relevant facts, contrary to their
                                      professional obligations. See Estate of Halas v. Commis-
                                      sioner, 94 T.C. 570, 577–578 (1990).
                                         As the above cases illustrate, the same rules apply regard-
                                      less of which party offers the unreliable evidence. Justice is
                                      frequently portrayed as blindfolded to symbolize impartiality,
                                      but we need not blindly admit absurd expert opinions. For
                                      these reasons, excluding unreliable and irrelevant evidence,
                                      rather than receiving it ‘‘for what it is worth’’ and then
                                      rejecting it or giving it no weight, serves several purposes.
                                         The Court’s gatekeeper function in a bench trial serves to
                                      increase the efficiency of trials and the objectivity of judg-
                                      ments. After decades of warnings regarding the standards to
                                      be applied, we may fairly reject the burden on the parties
                                      and on the Court created by unreasonable, unreliable, and
                                      irrelevant expert testimony. In addition, the cottage industry
                                      of experts who function primarily in the market for tax bene-
                                      fits should be discouraged. Each case, of course, will involve

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                                      336                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      exercise of the discretion of the trial Judge to admit or
                                      exclude evidence. In this case, in the view of the trial Judge,
                                      the expert report is so far beyond the realm of usefulness
                                      that admission is inappropriate and exclusion serves salutary
                                      purposes.
                                         In the context of this case, the task of the appraisers was
                                      to determine the fair market value of the 8-acre parcel and
                                      the contiguous parcels owned by Boltar before and after the
                                      easement was granted. Fair market value is consistently
                                      defined as the price that a willing buyer would pay a willing
                                      seller, both persons having reasonable knowledge of all rel-
                                      evant facts and neither person being under any compulsion
                                      to buy or to sell. United States v. Cartwright, 411 U.S. 546,
                                      551 (1973); sec. 1.170A–1(c)(2), Income Tax Regs. The con-
                                      cept of ‘‘highest and best use’’ is an element in the deter-
                                      mination of fair market value, but it does not eliminate the
                                      requirement that a hypothetical willing buyer would pur-
                                      chase the subject property for the indicated value. As we said
                                      in Stanley Works & Subs. v. Commissioner, 87 T.C. at 402
                                      (citing United States v. 320.0 Acres of Land, 605 F.2d 762,
                                      781 (5th Cir. 1979)): ‘‘If a hypothetical buyer would not
                                      reasonably have taken into account * * * [a] potential use in
                                      agreeing to purchase the property, such potential use should
                                      not be considered in valuing the property.’’
                                         Petitioner quotes this Court’s cases Symington v. Commis-
                                      sioner, 87 T.C. 892 (1986), Stanley Works & Subs. v. Commis-
                                      sioner, supra, and Hughes v. Commissioner, T.C. Memo.
                                      2009–94, to emphasize the necessity of considering highest
                                      and best use by determining ‘‘realistic’’ or ‘‘objective potential
                                      uses’’, to which the subject property is ‘‘adaptable’’ and which
                                      are ‘‘reasonable and probable’’ uses. We conclude, however,
                                      that the Integra appraisal’s valuations fail to apply realistic
                                      or objective assumptions.
                                         In the Integra report, the experts opine that residential
                                      use of the property is the highest and best use. They value
                                      the property at $3,340,000 on the assumption that a 174-unit
                                      condominium project would be built on the property. Using
                                      that scenario, the report concludes that the conservation
                                      easement that would preclude the assumed development is to
                                      be valued at $3,270,000. As an alternative scenario, the
                                      report considers the value of the parcel as ‘‘raw land’’, con-
                                      cluding that to be $68,000. But the report does not determine

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        337

                                      the highest and best use of the property after the easement
                                      is granted, as the Integra experts acknowledge in the April
                                      2010 letter to petitioner’s counsel submitted as part of their
                                      report for trial. The appraisers did not consider potential
                                      residential use of the property and thus did not value the
                                      property at its highest and best use after the easement was
                                      granted. From other evidence presented at trial, including
                                      the existing zoning, it appears that single-family residential
                                      use was feasible after the easement was granted and could
                                      have been developed with the preexisting easements. The
                                      Integra experts made no attempt to determine the highest
                                      and best use of the property after the easement was granted
                                      by considering the potential for single-family residential
                                      development.
                                        In addition, as respondent argues, the Integra report does
                                      not consider the effect on contiguous property owned by
                                      Boltar. Petitioner argues that the effect on the contiguous
                                      property is considered in a separate exhibit, a three-page
                                      letter written to petitioner in 2004 by the authors of the
                                      report. Apparently the letter was the source of the $25,000
                                      reduction in fair market value of the subject easement for
                                      which petitioner claimed a charitable contribution deduction
                                      on the return. It does not consider each of the contiguous
                                      parcels owned by Boltar, because the writers were unaware
                                      of the extent of Boltar’s ownership. That letter, moreover, is
                                      not a part of the report submitted in accordance with Rule
                                      143(g) and the Court’s standing pretrial order. Consideration
                                      of the letter during trial would prejudice respondent in pre-
                                      paring rebuttal and would undermine the purpose of pretrial
                                      exchange of expert reports. In any event, it is not based on
                                      sufficient facts or data, as required by rule 702 of the Federal
                                      Rules of Evidence, and does not state the facts or data and
                                      detailed reasons for the conclusions, as required by Rule
                                      143(g). Thus it would not be admissible as expert testimony
                                      or as an expert report if submitted as such before trial and
                                      before respondent’s motion in limine was filed. Cf. Jacobsen
                                      v. Deseret Book Co., 287 F.3d 936, 952–954 (10th Cir. 2002)
                                      (holding that incomplete expert reports that do not comply
                                      with rule requiring pretrial disclosure should be stricken and
                                      can only be cured if sufficient time remains before trial).
                                        In support of the argument that the 174-unit condominium
                                      project assumed by the Integra report could not be physically

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                                      338                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      placed on the subject property, respondent points out that
                                      the site plan for the proposal assumes 10 acres, whereas the
                                      subject property was only 8 acres, and the Integra experts
                                      ignored the effect of a preexisting 50-foot-wide utility ease-
                                      ment for a gas pipeline across the property. As a result,
                                      respondent argues, at least 4 of the 29 hypothetical
                                      buildings, each containing 6 units, could not be constructed.
                                      Petitioner’s only response is a bald and unpersuasive asser-
                                      tion that the project ‘‘will fit, it just won’t fit as drawn’’ on
                                      the site plan.
                                         The Integra report assumed erroneously that the Eased
                                      Parcel was within the city of Hobart and zoned PUD, which
                                      it was not. Thus the Integra report failed to evaluate the
                                      prospects for annexation and rezoning to allow development
                                      of the condominium project. Petitioner asserts that the likeli-
                                      hood of annexation and rezoning may be seen from the
                                      record, but the evidence supporting that assertion consists
                                      solely in the opinion of Boltar’s management representative
                                      and is not persuasive in view of the prerequisites for annex-
                                      ation and rezoning. In any event, the omission of appropriate
                                      analysis from the Integra report, due to erroneous factual
                                      premises, is fatal.
                                         Petitioner does not refute respondent’s specific objections
                                      to the Integra report. Petitioner contends that the Integra
                                      report provides the only evidence of the ‘‘subdivision
                                      approach’’ that should be considered in valuing the subject
                                      property. Petitioner’s response to respondent’s objections to
                                      the Integra report and to the testimony of DeClark and
                                      Myers is to suggest that adjustments could be made because
                                      the effects of the factual errors are ‘‘minimal’’ and in part
                                      based on misinformation received from someone in the
                                      Hobart city office. We could do our own analysis and have
                                      done so where the experts provide enough useful and reliable
                                      data for applying the appropriate methodology to the objec-
                                      tive evidence. See, e.g., Trout Ranch, LLC v. Commissioner,
                                      T.C. Memo. 2010–283. Petitioner’s experts, however, did not
                                      suggest any adjustments or corrections to their calculations
                                      but persisted in their position that the original appraisal was
                                      correct, even when admitting factual errors. (By contrast,
                                      respondent’s experts conducted research in areas that were
                                      not within their specific expertise, acknowledged weaknesses,
                                      and corrected errors during their analysis.) Neither peti-

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        339

                                      tioner nor the Integra experts suggested any quantitative
                                      adjustment in response to their admitted errors or the prob-
                                      lems addressed in respondent’s motion in limine. They
                                      simply persist in asserting an unreasonable position. We are
                                      not inclined to guess at how their valuation should be
                                      reduced by reason of their erroneous factual assumptions.
                                      Their report as a whole is too speculative and unreliable to
                                      be useful.
                                         In their discussion of the valuation issue, fully developed
                                      pending ruling on the motion in limine, the parties dispute
                                      other factors about the reasonableness of the Integra report’s
                                      projections of profits to be earned from development of the
                                      property, including existing demand for residential units,
                                      miscalculation of revenue to be expected from sale of units,
                                      poor experience of other developers with respect to the Deep
                                      River Pointe project, density considerations, comparable
                                      sales, and other matters that might relate more to the
                                      weight to be given to the experts’ opinions if admitted into
                                      evidence. Although the Integra experts determined that sales
                                      of comparable land nearby were occurring at approximately
                                      $12,000 an acre, their conclusion would assign a value of
                                      approximately $400,000 per acre to the subject property.
                                      Additional factual errors made by the Integra report authors
                                      undermine the reliability of their conclusions and dem-
                                      onstrate the lack of sanity in their result. If the report and
                                      their testimony were admitted into evidence, we would
                                      decide that their opinions were not credible. The assertion
                                      that the Eased Parcel had a fair market value exceeding $3.3
                                      million on December 29, 2003, before donation of the ease-
                                      ment, i.e., that it would attract a hypothetical purchaser and
                                      exchange hands at that price, defies reason and common
                                      sense. That conclusion is certainly inconsistent with the
                                      objective evidence in this case.
                                         We reject petitioner’s other arguments for admitting the
                                      Integra report. Neither the Commissioner’s alleged accept-
                                      ance of similar appraisals in other audit situations nor the
                                      procedural aspects of Rule 143(g) compel us to receive unreli-
                                      able and irrelevant evidence in this case. What may or may
                                      not have occurred in another audit would be relevant only if
                                      a penalty were in issue, which it is not in this case because
                                      respondent’s motion for leave to amend was untimely. An
                                      appraisal may be ‘‘qualified’’ for one purpose but lacking in

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                                      340                136 UNITED STATES TAX COURT REPORTS                                         (326)

                                      evidentiary weight for another. See Evans v. Commissioner,
                                      T.C. Memo. 2010–207. This issue is to be decided under the
                                      Federal Rules of Evidence and controlling caselaw. See Rule
                                      143(a).
                                        For the reasons stated above, we conclude that the Integra
                                      report is not admissible under rule 702 of the Federal Rules
                                      of Evidence, because it is not the product of reliable methods
                                      and the authors have not applied reliable principles and
                                      methods reliably to the facts of the case. Because it assumes
                                      scenarios that are unrealistic in view of the facts of the case,
                                      it is not relevant. Respondent’s motion in limine will be
                                      granted. Respondent’s rebuttal witnesses and petitioner’s
                                      objections to respondent’s rebuttal reports and testimony are
                                      thus moot and need not be addressed.
                                      Valuation of the Easement
                                        After the Integra report and testimony is excluded, the
                                      record contains factual evidence of value and the report and
                                      testimony of respondent’s valuation expert. Petitioner has
                                      the burden of proving the value of the easement for chari-
                                      table contribution deduction purposes. See Rule 142(a); New
                                      Colonial Ice Co. v. Helvering, 292 U.S. 435, 440–441 (1934).
                                      Because petitioner did not present credible evidence of value,
                                      the burden of proof did not shift to respondent under section
                                      7491(a). Although respondent’s experts determined a value
                                      less than that set forth in the statutory notice, respondent
                                      has not asked for an increased deficiency.
                                        We are persuaded by the evidence in the record that the
                                      highest and best use of the Eased Parcel before and after the
                                      easement grant was single-family residential development.
                                      Even petitioner’s rebuttal expert, who testified ‘‘with respect
                                      to real estate market analysis and feasibility in northwest
                                      Indiana’’, described demand for single-family residences and
                                      provided little, if any, support to the assumptions about con-
                                      dominium developments relied on by petitioner. There is no
                                      credible evidence that higher density development of the
                                      Eased Parcel was a use to which the property was adaptable,
                                      given the preexisting easements and existing zoning. The evi-
                                      dence regarding the experience of Boltar and others in the
                                      area and decreasing population negates the feasibility of and
                                      demand for the type of development asserted by petitioner.

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                                      (326)                    BOLTAR, L.L.C. v. COMMISSIONER                                        341

                                      There is no evidence that justifies a value higher than the
                                      amount determined in the statutory notice. It is not, there-
                                      fore, necessary to address in detail petitioner’s challenges to
                                      respondent’s experts, because disregarding or adjusting their
                                      valuations would not change the result.
                                        We have considered the other arguments of the parties.
                                      They do not affect our analysis or the result. For the reasons
                                      discussed above,
                                                                     An appropriate order will be issued, and
                                                                   decision will be entered for respondent.

                                                                               f

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