Court Opinion

ID: 9942724
Source: CourtListenerOpinion
Date Created: 2024-02-21 20:03:29.880943+00
Date Added: 2024-06-11T13:48:29.009382
License: Public Domain

United States Tax Court

                         T.C. Memo. 2024-25

      OCONEE LANDING PROPERTY, LLC, OCONEE LANDING
          INVESTORS, LLC, TAX MATTERS PARTNER,
                        Petitioner

                                  v.

             COMMISSIONER OF INTERNAL REVENUE,
                         Respondent

                              —————

Docket No. 11814-19.                           Filed February 21, 2024.

                              —————

Kip D. Nelson, Elizabeth K. Blickley, Vivian D. Hoard, Richard A.
Coughlin, and Brian C. Bernhardt, for petitioner.

Shannon E. Craft, Hilary E. March, Laurie A. Humphreys, Schehera-
zade R. Ferrand, James G. Hartford, and Benjamin H. Weaver, for re-
spondent.

                           Table of Contents

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 3

FINDINGS OF FACT ..........………………………………………………….4

I.    Introduction…... …………………………………………………………..4

II.   The Reynolds Family………………… ...………………………………..7

III. Reynolds Plantation……………………………… ......... ………………7

IV. The Parent Tract.……………………………… ............ ……………….9

V.    Development Proposals for the Parent Tract………… ......... ……..10

VI. Appraisals of the Parent Tract During 2011–2014… ......... ………12

VII. Unsuccessful Efforts to Sell the Parent Tract……… .......... ……. 14

                           Served 02/21/24
                                                   2

[*2]
VIII. Investigating a Conservation Easement…… ........................... ….17

IX. Completing Phase 1………………………… ........ …………………..20

X.     Formation of the Entities……………………… ............…………….21

XI. The Appraisals and PPMs………………………… ........... …………24

XII. Year-End 2015 Transactions……………………… ........ …………..27

XIII. Final Appraisals…………………….…………… ...........……………29

XIV. Tax Returns………………… ................................................ ………29

XV. IRS Examination………………… ............ …………………………...31

XVI. Trial....................................................................................... ……..31

         A.       Petitioner’s Experts…………………………………………..31
                  1.        Belinda Sward…………………………………………31
                  2.        Rick McAllister………………………………………..32
                  3.        George Galphin, Jr……………………………………32
                  4.        James Clanton…………………………………………33
         B.       Respondent’s Valuation Expert……………………………..34
OPINION……………………………………………………………………… 35
I.       Charitable Contribution Deduction………………………………..35
         A.       Donative Intent………………………………………………..37
         B.       “Qualified Appraiser” Requirement………………………..39

         C.       Application of Section 170(e)(1)……………………………..47

                  1.        General Rules………………………………………….47

                  2.        Tax Character of the Subject Property……………..49

                  3.        Basis Limitation Under Section 170(e)(1)………....56

II.      Valuation……………………………………………………………….57

         A.       Valuation Principles………………………………………….58
                                             3

[*3]    B.      Highest and Best Use…………………………………………59

        C.      “Before Value” of the Subject Property…………………….66

                1.       Sales Comparison Methodology…………………….66

                2.       Respondent’s Expert………………………………….67

                3.       Petitioner’s Experts…………………………………..72

        D.      Valuation of the Easement…………………………………..74

III. Penalties……………………………………… ............. ………………..74

         MEMORANDUM FINDINGS OF FACT AND OPINION

       LAUBER, Judge: This is a syndicated conservation easement
case. The Internal Revenue Service (IRS or respondent) disallowed a
charitable contribution deduction of $20.67 million claimed by Oconee
Landing Property, LLC (Oconee), on its partnership return for the tax
period ending December 31, 2015. 1 Oconee claimed this deduction for
donating a conservation easement over a tract of land in Greene County,
Georgia. The claimed deduction was premised on the assertion that the
tract was worth $59,718 per acre before the granting of the easement.

       We tried the case in Atlanta from November 14 through 22, 2022.
The questions we must decide are (1) whether the charitable contribu-
tion deduction should be disallowed in its entirety because Oconee
lacked the requisite charitable intent or because it failed to attach to its
return a “qualified appraisal” as required by section 170(f)(11)(D);
(2) whether any allowable deduction is limited to Oconee’s basis under
section 170(e)(1) because the property on which the easement was
granted was “ordinary income property” in Oconee’s hands; (3) whether
(in the alternative) any allowable deduction is limited to $4,972,002, the
fair market value (FMV) of the easement as determined by respondent;
and (4) whether Oconee is subject to a 40% penalty for a gross valuation

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure. We round
most amounts to the nearest dollar.
                                          4

[*4] misstatement under section 6662(h) or (in the alternative) to a 20%
penalty under other provisions of sections 6662 and 6662A.

        We hold that Oconee is entitled to a charitable contribution de-
duction of zero for 2015, for two independently sufficient reasons. First,
it failed to secure and attach to its return a “qualified appraisal” of the
contributed property. See § 170(f)(11)(D). Second, the property on which
the easement was granted was “ordinary income property” in Oconee’s
hands, so that any charitable contribution deduction would be limited to
its basis. See § 170(e)(1). Because Oconee failed to prove that its basis
exceeded zero, its contribution is limited to zero.

       With regard to penalties, we find that the FMV of the easement
was less than $5 million. Because the value claimed on Oconee’s return
exceeded the FMV of the easement by more than 400%, it is liable for
the 40% gross valuation misstatement penalty. See § 6662(a), (h). Fi-
nally, we hold that Oconee is liable for a 20% penalty on the portion of
the underpayment not attributable to the valuation misstatement.

                             FINDINGS OF FACT

       The following facts are derived from the pleadings, seven Stipu-
lations of Facts with attached Exhibits, and the testimony of fact and
expert witnesses admitted into evidence at trial. Oconee is a Georgia
limited liability company (LLC) classified as a TEFRA partnership 2 for
its short taxable period beginning December 24, 2015, and ending De-
cember 31, 2015. Petitioner Oconee Landing Investors, LLC (Oconee
Investors or petitioner), is its tax matters partner. Both entities had
their principal places of business in Georgia when the Petition was
timely filed.

I.     Introduction

       The land on which the easement was granted (Subject Property)
is in Greene County, Georgia, roughly 70 miles east/southeast of down-
town Atlanta and not far from the South Carolina border. It is a rela-
tively rural county with an estimated population of about 16,000 in
2015. In recent decades it has become a vacation and retirement

       2 Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, governed the tax treat-
ment and audit procedures for many partnerships, including Oconee.
                                    5

[*5] destination owing chiefly to Lake Oconee, which lies on the county’s
southwestern border.

       Lake Oconee was created in 1979 when Georgia Power Co., need-
ing a reservoir for a hydroelectric plant, completed the Wallace Dam on
the Oconee River. It is a large lake that extends its tentacles into innu-
merable creeks and valleys, yielding 374 miles of shoreline running
through Greene, Morgan, and Putnam Counties. Much of the develop-
ment since 1979 has focused on lakefront property and golf courses.

       The Subject Property, comprising roughly 355 acres, was part of
a 1,130-acre tract acquired in 2003 by James M. Reynolds III (Jamie)
and Reynolds Partners, L.P., controlled by Mercer Reynolds (Mercer).
Mercer and Jamie are third cousins; we will refer to them as the Reyn-
oldses. We will refer to that larger property, which has varied in size
over time, as the Parent Tract.

       The Parent Tract is situated to the south of Interstate Highway
20 (I–20), the primary travel route to Atlanta and its suburbs. The Par-
ent Tract is bounded on its eastern side by Georgia State Route 44 (High-
way 44 or SR 44), a 94-mile-long highway that runs northeast-to-south-
west through Greene County and neighboring counties. Carey Station
Road, the most important local thoroughfare, runs north-south through
the Parent Tract. The map below, dated April 2006, shows how the Par-
ent Tract (a portion of the “Proposed Project Area” shown on the map) is
situated vis-à-vis Lake Oconee and the roadways mentioned above:
                                    6

[*6]

       Members of the Reynolds family have been prominent landown-
ers and developers in Greene County for more than three generations.
They are admired for the good things they have brought to the county in
terms of development and increased prosperity. Many of the fact wit-
nesses who testified at trial are current or former employees or business
associates of the Reynoldses. In some cases the Court perceived that
these witnesses’ loyalty and gratitude to the Reynolds family affected
their testimony, and we have made certain credibility determinations
accordingly.

        The Reynoldses and their associates created dozens of distinct en-
tities to conduct their real estate activities—holding companies, invest-
ment companies, development companies, and construction companies.
Where important to the analysis, we will identify these entities individ-
ually. But to avoid undue complexity, we will sometimes refer to actions
                                   7

[*7] taken by entities that Mercer and Jamie controlled as being taken
simply by “the Reynoldses.”

II.    The Reynolds Family

      From 2003 through 2015 Mercer and Jamie were the individuals
with ultimate management authority over the Parent Tract, including
the Subject Property. Both were sophisticated real estate developers
with extensive knowledge about market conditions in Greene County.

       After receiving degrees in business administration Mercer
founded Reynolds, DeWitt & Co., an investment firm. Much of his ca-
reer has been devoted to real estate development. In that capacity he
gained familiarity with financial projections, discounted cashflow anal-
yses, and private placement memoranda (PPMs). Jamie graduated from
the University of Georgia with a business degree in 1974. He was the
co-founder and managing member of American Real Estate Investment
Co., which engaged in real property development and the acquisition
and sale of timber properties.

       In June 1993 Reynolds Partners, L.P. (Reynolds Partners), was
formed to acquire, develop, lease, and manage real property. It later
made other investments, including baseball franchises, fast-food restau-
rants, and private equity. From 2003 through 2015 Mercer served as its
general partner (through an intervening wholly owned entity) and held
a 5% partnership interest. The remaining 95% of Reynolds Partners
was divided among Mercer’s five children. At all relevant times Mercer
controlled Reynolds Partners.

III.   Reynolds Plantation

      Neither the Parent Tract nor the Subject Property has any access
to Lake Oconee. They are surrounded on three sides by real estate that
is more favorably situated. Beginning in the 1980s and operating
through a joint venture called Linger Longer Development Co. (Linger
Longer), Mercer and Jamie initiated the development of that more fa-
vorably situated acreage. The development was initially called Reynolds
Plantation (now Reynolds Lake Oconee).

      Built on timberland originally owned by Mercer’s grandfather,
Reynolds Plantation was a gated residential community with dozens of
miles of shoreline on Lake Oconee, five golf courses, and thousands of
homes, many on lakefront lots. The development eventually grew to in-
clude other residential communities (Great Waters and Reynolds
                                   8

[*8] Landing), a Ritz Carlton hotel, several marinas, a health club, and
40–50 miles of roadways. The map below, dated October 2007, shows
how the Parent Tract (located at the top of the map and referenced as
“Reynoldsboro”) is situated in relation to Reynolds Plantation:

       Reynolds Plantation, with more than 6,000 acres under its con-
trol, was in the business of developing and selling residential (and some
commercial) tracts. Homesites were developed incrementally, with 500
units (including new lots and existing homes) being sold in a typical
year. As of 2010 Reynolds Plantation held several thousand acres that
remained available for development.

      The Great Recession was unkind to real estate developers in the
Southeast United States, and the Reynoldses were no exception. By
2011 property sales at Reynolds Plantation had declined from 500 units
annually to near zero. Encumbered by too much debt, Reynolds Planta-
tion was forced into receivership. The Metropolitan Life Insurance Co.
(MetLife) purchased Reynolds Plantation out of receivership; MetLife
                                    9

[*9] thereby acquired not only the developed properties but also thou-
sands of acres of undeveloped land. After the acquisition, MetLife cau-
tiously resumed development of Reynolds Plantation, selling lots for
homesites as the market began a very slow recovery.

       The property that MetLife acquired out of receivership included
five parcels comprising 1,392 acres that are adjacent to the Parent Tract
and to the immediate west, south, and east of the Subject Property. One
of these parcels has been zoned Commercial Planned Unit Development
(CPUD), and the other four have been zoned Planned Unit Development
(PUD), since at least 2015. The five parcels all have lake frontage, front-
age along Highway 44, or both.

       No legal or physical impediments prevented MetLife from devel-
oping these five parcels. But MetLife initiated no development of these
parcels between 2012 and 2022, believing that other portions of Reyn-
olds Plantation, more distant from the Subject Property, held greater
development potential. All in all, MetLife had between 4,000 and 5,000
acres, including lakefront lots, available for residential development at
year-end 2015.

IV.   The Parent Tract

      In 2003 the Parent Tract consisted of 1,130 acres situated
north/northwest of Reynolds Plantation. The Parent Tract is bisected
by Carey Station Road; for that reason it was often called the “Carey
Station Tract.” In November 2003 Jamie and Reynolds Partners each
acquired a 50% interest in the Parent Tract. Because Reynolds Partners
was owned by Mercer’s family and controlled by him, he and Jamie were
ultimately responsible for all decisions regarding the Parent Tract.

       Mercer and Jamie commissioned maps and surveys of the Parent
Tract and considered various options for developing it. They eventually
settled on a conceptual mixed-use development plan for a community to
be called Reynoldsboro, consisting of one or more “town centers” sur-
rounded by homes. In 2006 they submitted a proposed development
plan to Greene County, identifying a mixture of high-density residential,
low-density residential, commercial, and recreational uses. The county
approved the plan and zoned the entire Parent Tract (including the Sub-
ject Property) as CPUD. This zoning category requires at least 25% res-
idential and 25% nonresidential usage. The Parent Tract (including the
Subject Property) retained CPUD zoning through 2015.
                                    10

[*10] In 2006 the Reynoldses initiated efforts to have a new interchange
constructed at the intersection of I–20 and Carey Station Road. The
proposed interchange would have been closer to Atlanta than the exist-
ing interchange at the intersection of I–20 and Highway 44 (situated ten
miles further east). Mercer believed that construction of the new inter-
change, by facilitating tourism and attracting home buyers from At-
lanta, would have enhanced the development potential of the Parent
Tract. Greene County strongly supported this concept, but the new in-
terchange was never built.

       By 2007 the Reynoldses had installed on portions of the Parent
Tract paved and unpaved roads, wastewater and potable water access
points, and utility access points. They continued their pattern, begun in
2003, of selling off small portions of the Parent Tract, generally with a
view to facilitating amenities that would be synergistic with their
hoped-for development. Between 2003 and 2014 the Reynoldses sold 11
parcels out of the Parent Tract, ranging from 0.43 acres to 25.71 acres,
to be used (among other things) for the construction of a fire station, a
church, a school (Lake Oconee Academy), a hospital (Good Samaritan),
and a skilled nursing/assisted living facility. These parcels, all of which
had good frontage on major roads, were sold at prices ranging from
$15,947 to $67,136 per acre.

       The Reynoldses also sold portions of the Parent Tract to other de-
velopers. In February 2007 they sold 17.6 acres, at $50,000 per acre, for
inclusion in a planned residential community to be developed by Del E.
Webb and Pulte Homes. The Del E. Webb development, which occupied
408 acres in toto, was adjacent to the Subject Property on its northwest
side. Unlike the Subject Property, it had access to Lake Oconee and
some lakefront lots. Construction of homes began in 2007–2008, but the
full buildout took 15 years. The Del E. Webb community sold 31 new
homes in 2015 and had numerous homesites available for sale at
year-end 2015.

V.    Development Proposals for the Parent Tract

      After Reynolds Plantation was lost to receivership in 2011, the
Parent Tract was the most significant piece of real estate the Reynoldses
continued to own in Greene County. During 2012–2015 their local de-
velopment activities were thus focused on it.

      During 2012–2013 Mike Kelly was the president of Reynolds De-
velopment Management Group, reporting to Mercer. He had specialized
                                   11

[*11] knowledge of the real estate market in the Lake Oconee area; his
responsibilities included pre-development work, rezoning, master plan-
ning, market studies, and feasibility analysis. He regularly prepared
spreadsheets and discounted cashflow (DCF) analyses to test the feasi-
bility of proposals for developing the Parent Tract.

       In February 2013 Mr. Kelly prepared for Mercer a DCF analysis
for the Parent Tract, which then comprised 1,038 acres. He projected
that between 2012 and 2020 (1) a highly desirable 4-acre “corner lot”
would sell for $250,000 per acre; (2) 61 acres suitable for commercial or
institutional development would sell at prices ranging from $35,000 to
$100,000 per acre; (3) 120 acres suitable for residential development
would sell at prices ranging from $22,500 to $33,500 per acre; and
(4) 100 acres suitable for recreation would sell for $25,000 per acre. In
year 10 he projected that the remaining real estate (roughly 753 acres)
could be sold at $12,500 per acre. He concluded that the net present
value of the entire Parent Tract ranged from $1.78 million to $4.27 mil-
lion, depending on various assumptions (including the discount rates
used).

       As Mr. Kelly’s projections showed, the 1,038 acres then constitut-
ing the Parent Tract had vastly different values depending on where
they were located. Lots with frontage on major roads, at intersections,
and near existing communities were plausible candidates for future de-
velopment. But 753 acres, constituting 73% of the Parent Tract, con-
sisted of “inland” property lacking these desirable features. As a result,
Mr. Kelly projected that these 753 acres would be worth only $12,500
per acre 10 years down the road. After offsetting commissions and other
projected costs, Mr. Kelly anticipated the receipt of approximately
$8 million in year 10. Using his median discount rate of 15%, the net
present value of these 753 acres would be less than $2,650 per acre.

       The Reynoldses began marketing the Parent Tract to potential
investors, hoping to find a joint venture partner who would provide cap-
ital to begin development of “master infrastructure,” including roads
and sewer facilities. Using the projections prepared by Mr. Kelly and
his colleague Scott Denbow, the Reynoldses created a marketing pack-
age for the Parent Tract. According to Mr. Denbow, this package “was
to be selectively distributed to really a small group of potential inves-
tors” who were serious and financially well qualified.

      In late 2012 Mercer and Mr. Kelly initiated negotiations with
Robert Holbrook of Phoenix Atlanta Capital (Phoenix Capital). In
                                    12

[*12] January 2013 Phoenix Capital sent the Reynoldses a letter of in-
tent that valued the Parent Tract (then consisting of 1,016 acres) at
$8.3 million, or about $8,170 per acre. The Reynoldses made a counter-
offer in March 2013, but they were unable to reach a deal with Phoenix
Capital.

       Later in 2013 the Reynoldses made an offer to TPA Group (TPA),
a highly regarded Atlanta developer, again seeking a joint venture part-
ner to develop the Parent Tract. On this occasion the Reynoldses valued
the Parent Tract at $7.9 million on the basis of a DCF analysis prepared
by Messrs. Kelly and Denbow. Mercer approved this valuation and used
it to market the Parent Tract to other potential investors during the
third quarter of 2013.

       TPA rejected the Reynoldses’ offer. Messrs. Kelly and Denbow
then revised their DCF analysis, arriving at a reduced value of $6.7 mil-
lion, or roughly $6,700 per acre, for the Parent Tract. According to Mr.
Denbow, $6.7 million “became the new asking price” for the Parent
Tract. In September 2013 the Reynoldses offered the Parent Tract to
TPA at this price, but TPA again rejected their offer.

VI.   Appraisals of the Parent Tract During 2011–2014

       During 2011–2014 PNC Bank (PNC) held a multimillion-dollar
loan secured by the Parent Tract. While this loan was outstanding, the
Reynoldses needed a release from PNC before they could sell any portion
of the property. Typically, the rationale for a release would be that sell-
ing part of the Parent Tract would make the remainder more marketa-
ble and valuable. If PNC granted a release and the parcel in question
was sold, the proceeds were applied to reduce the PNC loan balance.

       In April 2011 Coldwell Banker Richard Ellis Group, Inc. (CBRE),
a commercial real estate firm, prepared at PNC’s request an appraisal
of the Parent Tract (then consisting of 1,049 acres). That appraisal val-
ued the Parent Tract at $11 million, or roughly $10,500 per acre. This
was a “market value” appraisal based on sales of comparable vacant
land in Georgia, including agricultural properties.

      The CBRE appraisal noted that residential development in the
Lake Oconee area was “mostly oriented to vacation homes and this mar-
ket has come to [a] relative standstill,” with “[t]he weakened overall
economy ha[ving] contributed to depressed levels of consumer spend-
ing.” Because “[d]evelopment of new residential/mixed-use properties
ha[d] been severely restricted” by these conditions, CBRE concluded
                                    13

[*13] that the highest and best use (HBU) of the Parent Tract would be
“future mixed use development” to commence “when economic condi-
tions improve.”

        CBRE observed that any development of the Parent Tract would
have to compete with other proposed projects in the subject market,
which were “slated to resume when economic conditions improve.”
“These factors indicate[d] that it would be financially feasible to com-
plete a new mixed-use project when economic conditions improve,” but
only if “the site acquisition cost [for the Parent Tract] was low enough to
provide an adequate developer’s profit.”

      In June 2014 the Reynoldses sent a proposal to PNC requesting a
release enabling them to sell portions of the Parent Tract. The letter
expressed the Reynoldses’ understanding that PNC would secure an ap-
praisal and that this appraisal would be “delivered to Borrower upon
request.” CBRE likewise prepared this appraisal.

       CBRE’s appraisal, made as of June 29, 2014, valued the Parent
Tract (then consisting of 1,025 acres) at $8,075,000, or about $7,900 per
acre. This was a “fair market value” appraisal based on sales of compa-
rable vacant land, including agricultural properties. Referring to the
Parent Tract as “the subject,” CBRE’s appraisal stated as follows:

      The subject’s area is marketed heavily to 2nd home buyers
      and regional retirees. This market segment was hit very
      hard by the financial downturn of 2008 and has yet to re-
      cover significantly. We anticipate that buyers of land, spe-
      cifically large tracts of mixed-use and residential land
      (such as the subject) would be investors or developers well
      positioned to hold the property until the market recovers
      in the future to a level which warrants substantial addi-
      tions in terms of housing supply.

       CBRE concluded in its appraisal that “the highest and best use of
the subject . . . would be the development of a mixed use property, time
and circumstances warranting.” In CBRE’s view, the most likely buyer
of the Parent Tract would be an investor or a developer. CBRE described
a prospective investor as a “land speculator likely funded with mostly
cash or by private equity.” CBRE described a prospective developer as
one “who would most likely hold for future mixed use development when
the market recovers.”
                                   14

[*14] In early fall 2014 the Reynoldses (through intervening entities)
formed Carey Station LLC and contributed to it roughly 980 acres of the
Parent Tract. Carey Station LLC then sought a $3.25 million loan from
Farmers Bank, intending to use the proceeds to pay off the PNC loan.
The Farmers Bank loan, like the PNC loan, was to be secured by the
Parent Tract.

       Before extending credit, Farmers Bank hired Weibel & Associates
(Weibel) to appraise the Parent Tract. Weibel’s appraisal, prepared as
of August 24, 2014, covered 964 acres of the Parent Tract and valued
that acreage at $9.64 million, or roughly $10,000 per acre. This was a
“market value” appraisal based on sales of comparable vacant land, in-
cluding agricultural properties. Farmers Bank closed the $3.25 million
loan in October 2014, and the loan was paid in full on December 29,
2015, with proceeds derived from the conservation easement transac-
tions.

VII.   Unsuccessful Efforts to Sell the Parent Tract

       The Reynoldses actively marketed the Parent Tract during 2014
and early 2015. Seeking to enhance the prospects for a sale or joint ven-
ture, they commissioned a utility review and a master sewer plan from
an engineering firm. They also prepared a conceptual land use plan
showing proposed roadways, residential communities, and proposed
commercial development.

        During 2015 Rick McAllister, a landscape architect, created re-
vised versions of this conceptual land use plan, which ultimately showed
more than 3,000 residential units on the Parent Tract. This number of
residential units could not have been absorbed by Greene County in the
foreseeable future. Greene County issued only 203 new residential
housing permits in 2014 and only 224 new residential housing permits
in 2015. And besides the 3,000+ residential units shown on Mr. McAl-
lister’s plan for the Parent Tract, the existing communities near Lake
Oconee—including Del E. Webb and Reynolds Lake Oconee—had thou-
sands of acres available for residential development and were actively
marketing their homesites.

      The Reynoldses continued their negotiations with TPA into 2014.
In February of that year TPA countered with an offer of $2.8 million for
the entire Parent Tract, an offer the Reynoldses rejected. But while the
parties could not reach an agreement on the Parent Tract as a whole,
they did conclude a deal to develop part of it. In May 2014 the
                                    15

[*15] Reynoldses sold a 15.43-acre parcel to Carey Station Communi-
ties, a joint venture owned 50%/50% by entities controlled by TPA and
the Reynoldses. They planned to develop the parcel into a residential
subdivision called Traditions at Carey Station (Traditions). This subdi-
vision was to be targeted to middle-income, first-time home buyers.

       This 15.43-acre parcel, then consisting of raw land, was situated
along Carey Station Road in the middle of the Parent Tract, with no
access to Lake Oconee. This parcel was adjacent to, and shared its
southwest border with, the Subject Property. The map below shows how
the Subject Property (referenced as a star) is situated in relation to Tra-
ditions (referenced as 7) and other residential communities in Lake
Oconee, including Reynolds Lake Oconee (1), Reynolds Landing
(2), Great Waters (3), and Del. E. Webb (6):
                                   16

[*16] The Reynoldses sold the 15.43-acre parcel to the joint venture for
$277,740, or $18,000 per acre. TPA, a 50% owner of the joint venture,
was wholly unrelated to the Reynoldses or any entities owned by them.
The $18,000-per-acre price was an arm’s-length price that reflected the
FMV of this parcel.

       Traditions ultimately took the form of a horse-shoe-shaped resi-
dential subdivision that would accommodate 42 single-family homes.
The Reynolds/TPA joint venture managed the first two construction
phases, running from 2014 through 2021. They began selling homes in
2015; that year Traditions sold six homes ranging in value from
$244,000 to $338,000. In 2016 Traditions sold ten homes ranging in
value from $229,000 to $331,600. As of 2017 Traditions had 26 home-
sites left for sale within its original 15.43-acre parcel, and it was con-
templating expansion by acquiring additional acreage nearby.

       During 2014–2015 TPA was the only developer or investor that
expressed serious interest in any portion of the Parent Tract. In early
2015 the Reynoldses prepared on behalf of Carey Station LLC a docu-
ment captioned “authorization to show unlisted property.” This docu-
ment was intended to grant Ted Baker, a real estate broker, the right to
offer the entire Parent Tract (then consisting of 960 acres) for sale at
$7.7 million, or roughly $8,000 per acre. The $7.7 million offering price
was close to the price at which the Reynoldses had offered the Parent
Tract to TPA in late 2013.

        Mr. Baker erected a 40-square-foot sign on the Parent Tract, de-
scribing it as “Carey Station Mixed Use Development” and advertising
it for sale. This sign invited interested buyers to contact him by calling
his phone number or visiting his website, both of which were listed on
the sign.

       As far as the record reveals, Mr. Baker was contacted by only one
prospective buyer, represented by James Thwaite. On March 24, 2015,
Mr. Baker sent Mr. Thwaite a copy of the “authorization to show un-
listed property” and asked him to sign it. Mr. Baker explained that this
document, which authorized him to quote a sale price of no less than
$7.7 million, “gives us three months to enter into a Purchase and Sale
Agreement with your proposed buyer.” Mr. Thwaite signed the docu-
ment two days later.

       Mr. Thwaite and his brother showed the Parent Tract to the cli-
ent, going “up and down every available road” and trying to show the
                                   17

[*17] client “every acre they could get into.” The Reynoldses met with
the buyer but could not close a deal for any portion of the property, even
though the buyer allegedly “had $4.4 million to spend,” because of the
buyer’s need to complete a like-kind exchange.

VIII. Investigating a Conservation Easement

       In early 2015 Carey Station LLC lacked the capital to develop the
Parent Tract, and the Reynoldses were not optimistic about finding a
buyer or joint venture partner who would pay their $7.7 million asking
price. They accordingly began investigating the possibility of wringing
cash from the Parent Tract by granting a conservation easement over it.

       Seeking assistance with this investigation, the Reynoldses and
their agents initiated communications with Todd Ciavola of the Vola
Group, a local real estate company. On January 9, 2015, Mr. Baker—the
broker representing the Reynoldses—emailed Mr. Ciavola to request a
meeting, indicating that “Jamie [Reynolds] said we should get together
and discuss the new plan that you and he discussed.”

       One week later, on January 16, 2015, the Vola Group sent the
Reynoldses a letter thanking them for their “interest in engaging Vola
Group to help [them] maximize the value of [their] return on the Carey
Station Road Tract.” Attached to the letter was a proposed engagement
letter. The Vola Group was not formally retained until April 2015, when
Carey Station LLC executed a revised version of this letter. The revised
agreement stated that the Vola Group was being retained “to determine
the viability and sale proceeds of a monetized conservation easement.”

       The agreement provided that an easement transaction would be
consummated only if Carey Station LLC “decide[d] that the net proceeds
from conservation easement are acceptable.” Throughout the ensuing
discussions and negotiations, the Reynoldses consistently took the view
that the proceeds accruing to them would be “acceptable” only if such
proceeds exceeded $7 million. This approach was consistent with the
Reynoldses’ asking price for the Parent Tract during their 2013–2014
negotiations with TPA ($7.9 million, followed by $6.7 million) and in the
2015 listing agreement for the Parent Tract ($7.7 million).

       In February 2015, two months before being formally retained, Mr.
Ciavola contacted Strategic Capital Partners, LLC (SCP), whose princi-
pals were Ricky Novak and James Freeman. SCP was in the business
of arranging and helping to market syndicated conservation easement
transactions, performing functions commonly regarded as being
                                        18

[*18] performed by a “promoter.” 3 Mr. Ciavola emailed Mr. Novak on
February 10, 2015, explaining the background and scheduling a meet-
ing. In this email, Mr. Ciavola sketched out scenarios that estimated
values for the Parent Tract (as-is and developed out) ranging from
$4 million to $40 million.

       Mr. Ciavola met with Mr. Novak on February 12, 2015. During
this meeting Mr. Novak explained that SCP’s current underwriting
model presupposed that investors would typically be offered a $4.35 tax
deduction for every $1 invested. (Mr. Novak testified at trial that this
was the “going rate” in the market for syndicated conservation ease-
ments at that time.) In order for the Reynoldses to derive net proceeds
of $7 million, Mr. Novak indicated that the Parent Tract would need to
have an appraised value of around $60 million.

       On February 13, 2015—the very next day, and well before it was
formally engaged—SCP supplied Mr. Ciavola with a schedule captioned
“Estimated Sources and Uses of Funds.” This schedule employed a
standard template that SCP used for its conservation easement trans-
actions. It showed an “estimated charitable contribution deduction” of
$60 million and a tax-deduction-to-investment ratio of 4.35 to 1. As of
February 13, 2015, neither Mr. Novak nor anyone else at SCP had seen
an appraisal of the Parent Tract, any offer to buy or sell the Parent
Tract, or any opinion of its value (other than the figures suggested in
Mr. Ciavola’s email).

      The following day SCP forwarded to Mr. Ciavola a “corrected”
schedule, with some entries changed, but with the same bottom line: An
“estimated charitable contribution deduction” of $60 million and a
tax-deduction-to-investment ratio of 4.35 to 1. Three weeks later, on
March 4, SCP supplied a third iteration of this schedule, again with the
same bottom line: An “estimated charitable contribution deduction” of
$60 million and a tax-deduction-to-investment ratio of 4.35 to 1.

      In an email sent March 26, 2015, Mr. Ciavola informed Mercer
and Jamie that “Ricky [Novak] is confident of a range from
$40MM-$75MM, depending on the appraiser’s verbal,” and indicated
that “we are over $7MM.” In stating that “we are over $7MM,” Mr.

        3 “Promoter” is a loaded term in the syndicated conservation easement space

because of the penalty imposed on “promoters” by section 6700(a). In this Opinion we
use the term “promoter” in its ordinary sense, making no determination as to whether
SCP or Mr. Novak or Mr. Freeman was a “promoter” within the meaning of section
6700(a), a question that is not before us.
                                   19

[*19] Ciavola referred to the aggregate proceeds the Reynoldses could
expect to receive from the contemplated easement transaction. Those
proceeds would derive from selling LLC units to investors, management
fees, and satisfaction of the $2.6 million Farmers Bank loan that then
encumbered the Parent Tract. SCP knew that the Reynoldses might
decline to proceed with the easement transaction if they were not guar-
anteed their desired $7 million share of the “net proceeds.”

       At Mr. Ciavola’s suggestion, Carey Station LLC engaged Timothy
Pollock, a lawyer at Morris, Manning & Martin, LLP (Morris firm), to
perform legal services “in connection with a potential conservation ease-
ment.” Mr. Pollock was familiar with this subject: Over a 10-year period
he worked on 250 conservation easement transactions and invested in
several easement deals himself. In April 2015 the Reynoldses asked Mr.
Pollock to negotiate an agreement with SCP under which they would not
have to proceed with a conservation easement unless the investors, in
the aggregate, received a “[m]inimum Charitable Contribution Deduc-
tion [of] $60-75M.”

        On behalf of the Reynoldses, the Morris firm duly negotiated an
engagement agreement between SCP and Carey Station LLC. That
agreement, executed in May 2015, provided that SCP would offer ser-
vices in three phases. During Phase 1 SCP would determine the “mini-
mum equity capital” to be raised from investors and the “estimated net
proceeds” accruing to the Reynoldses. These amounts would be shown
in schedules displaying “Estimated Sources and Uses of Funds,” employ-
ing the same template SCP had used when making its initial projection
in February 2015. After reviewing these numbers the Reynoldses would
decide whether to move to Phase 2, which would include developing a
strategy for marketing the easement transaction and drafting a PPM to
solicit investors. Phase 3 would cover the period after the easement was
granted.

      On June 12, 2015, Mr. Novak emailed Thomas Wingard and Mar-
tin Van Sant, who had previously appraised conservation easements for
SCP clients, to inform them that Carey Station LLC had engaged SCP.
Mr. Novak indicated that he would meet with the Reynoldses to deter-
mine what acreage or development rights they might wish to hold out of
the easement. On July 9, 2015, Messrs. Wingard and Van Sant were
given a tour of the Parent Tract. Three days later they sent a letter to
the Morris firm proposing to appraise a conservation easement on the
Parent Tract. The Morris firm executed the engagement letter with
                                   20

[*20] them, in part because of a desire to “maintain attorney client priv-
ilege on the appraisal results.”

       In August 2015 Mercer notified his children that “[w]e are close
to a deal for selling our land to an outside investment group.” He indi-
cated that “the appraisal will be somewhere around $70 million which
will net Carey Station [LLC] $6.7 million after debt retirement.” He
noted that “we can carve out . . . property that we continue to own.” He
described all of this as “good news.”

IX.   Completing Phase 1

       SCP’s principal task during Phase 1 was to determine the equity
capital to be raised from investors (“Minimum Threshold Capital Raise”)
and the estimated net proceeds accruing to the Reynoldses after pay-
ment of the promoter’s fees and other transaction costs. Because inves-
tors were to be promised a charitable contribution tax deduction of at
least $4 for every $1 invested, the “Minimum Threshold Capital Raise”
was directly linked to the value placed on the Parent Tract, on which
the magnitude of the promised deduction hinged.

      On October 29, 2015, Mr. Ciavola emailed Messrs. Novak and
Freeman, stating that he was attaching “the additional information you
requested.” Included among the attachments was a document titled
“Market Summary,” suggesting a value of $65 million (or about $73,000
per acre) for 890 acres of the Parent Tract, after excluding unspecified
“carve-outs.” Later that day Messrs. Novak and Freeman forwarded
those documents to Messrs. Wingard and Van Sant, who were then
working on an appraisal of the Parent Tract.

       On November 16 SCP supplied Mr. Ciavola with another “Esti-
mated Sources and Uses of Funds” spreadsheet showing an estimated
charitable contribution deduction of $57.6 million for the easement on
the Parent Tract. SCP noted that the Reynoldses were considering with-
drawing (or “carving out”) certain parcels from the Parent Tract and re-
serving those parcels for future commercial development. If the Reyn-
oldses did this, SCP estimated that it would decrease the overall valua-
tion of the conservation easement by about $5 million. Mr. Ciavola for-
warded this schedule to the Reynoldses.

       The following day Mr. Ciavola arranged a conference call with the
Reynoldses and SCP’s principals. The purpose of this call was to “re-
view[] the conservation easement for the Carey Station parcel.” “Fol-
lowing this call,” he said, “we need to decide whether or not we move on
                                   21

[*21] to Phase II.” Mercer separately emailed Jamie, explaining that
the upcoming discussion would be “regarding the Carey Station ap-
praisal, which will be a close call as to whether we go forward on the
sale.”

      On November 18 Mr. Ciavola emailed the Reynoldses a new “Es-
timated Sources and Uses of Funds” spreadsheet, which he described as
having been “revised from last night’s discussion.” This schedule
showed an “estimated charitable contribution deduction” before
carve-outs of $60,608,700. If the carved-out parcels were removed from
the Parent Tract before the granting of the easement, the schedule
showed a net “estimated charitable contribution deduction” of
$52,873,765.

      At that point Messrs. Wingard and Van Sant had not yet supplied
an appraisal of the Parent Tract. Mr. Ciavola told SCP to “call the ap-
praiser” because the Reynoldses needed a “‘verbal’ value” in order to pro-
ceed with the transaction. Mr. Freeman responded: “We all have the
window and need to work within that window. The appraisers are pull-
ing the exact figures together . . . . The window you have is within the
ballpark of reality and from that you all need to decide whether or not
you are moving forward.”

      On November 24, 2015, Mr. Ciavola told Mr. Pollock that the
Reynoldses were “moving ahead with Phase II,” i.e., authorizing SCP to
market the conservation easement transaction to investors. The Reyn-
oldses made that decision before receiving a written opinion of value
from the appraisers.

X.    Formation of the Entities

       SCP recommended, and the Reynoldses agreed, that the Parent
Tract be divided into three separate parcels for purposes of marketing
the conservation easement deal. Pursuant to this plan, Carey Station
LLC would transfer parcels to three separate entities, referred to as
“Property Companies” or “PropCos.” Each PropCo would be owned by
an “Investment Company” or “InvestCo,” and units in the InvestCos
would be marketed to investors. Each PropCo would grant a conserva-
tion easement on its parcel. The investors would then receive, through
the InvestCo, pro rata shares of the tax deduction that the PropCo
claimed for the easement. Messrs. Wingard and Van Sant were accord-
ingly directed to prepare three appraisals rather than one.
                                          22

[*22] Before creating the three parcels on which easements were to be
granted, the Reynoldses decided to “carve out” 82.22 acres from the Par-
ent Tract and retain ownership of that acreage in Carey Station LLC.
Because these carved-out parcels were situated at important highway
intersections and/or adjacent to existing or proposed future develop-
ments, they were more valuable than much of the acreage left in the
Parent Tract. The 82.22 acres thus carved out consisted of six parcels,
as follows:

       ● a 16.72-acre parcel and a 32.23-acre parcel adjacent to Tradi-
       tions, on which that subdivision was expected to expand. This
       expansion contemplated the addition of 37 additional homesites
       immediately adjacent to the Subject Property;

       ● an 18.9-acre parcel intended for an expected future expansion
       of Lake Oconee Academy;

       ● a 3.8-acre parcel and a 5.0-acre parcel at the intersection of
       Highway 44 and Carey Station Road, near Good Samaritan Hos-
       pital; and

       ● a 5.57-acre parcel on Highway 44 across from an entrance to
       Reynolds Plantation.

       After the exclusion of these carved-out parcels, the Parent Tract
was reduced to 874 acres. SCP proposed, and the Reynoldses agreed,
that Carey Station LLC would contribute that acreage to three PropCos.
Oconee (the partnership in this case) would receive 355 acres (the Sub-
ject Property). The other two PropCos—Richland Creek Holdings, LLC
(Richland Creek), and Carey Station Property, LLC (CS Prop-
erty)—would receive 260 and 259 acres, respectively.

       The following map shows the configuration of the acreage contrib-
uted to the three PropCos. 4 “Site 1,” on the south-southwestern side of
the Parent Tract, represents the Subject Property. “Site 2,” in the center
of the Parent Tract, represents the 259-acre parcel contributed to CS
Property. “Site 3,” on the north-northeastern side of the Parent Tract,
represents the 260-acre parcel contributed to Richland Creek. Each Site
is shown as subdivided into a number of sub-parcels.

        4 On this map, the Parent Tract is rotated clockwise from true north, such that

the northernmost portion of the property appears at the top right.
                                  23

[*23]

        The three PropCos were formed on November 23, 2015. The three
InvestCos—including Oconee Investors, petitioner in this case—were
formed the next day. On December 9, 2015, each InvestCo executed an
operating agreement stating that it was established for the purpose of
soliciting funds from investors and using those funds to acquire from
Carey Station LLC class A units of the PropCo with which it was paired.

       Carey Station Manager, LLC (CS Manager), was formed on De-
cember 9, 2015. It functioned as the manager of each InvestCo and was
controlled (through intervening entities) by the Reynoldses. The follow-
ing day Carey Station LLC executed an agreement with each PropCo,
promising to contribute to it, in exchange for a 99% interest in it, the
relevant portion of the Parent Tract as described above. CS Manager
would hold the other 1% of each PropCo in exchange for a separate cap-
ital contribution.
                                    24

[*24] XI.    The Appraisals and PPMs

       On December 3, 2015, Messrs. Wingard and Van Sant provided a
“Restricted Appraisal Report” for the Subject Property. On December
10 and 12 they provided restricted appraisal reports for the other two
parcels. They assumed that the HBU of each parcel before the granting
of the easement was for immediate mixed-use residential development.
The appraisals did not cite any sales of comparable land in Georgia, re-
lying on allegedly comparable property transactions in Florida and
North Carolina. Opining on the “before value” of each parcel, the “after
value” of each parcel (following granting of the easement), and the pur-
ported value of the easement (subtracting the latter from the former),
Messrs. Wingard and Van Sant came up with the following values for
the three conservation easements:

                               “Before”       “After”        Easement
   Parcel       Acreage
                                Value          Value          Value
  Subject
                 355         $21,200,000     $530,000       $20,670,000
  Property
  Richland       260          15,200,000      390,000        14,810,000
   Creek
     CS
                 259          15,300,000      390,000        14,910,000
  Property
   Total         874        $51,700,000    $1,310,000       $50,390,000

       As noted earlier, the Parent Tract originally consisted of 1,130
acres. Between 2003 and year-end 2015 the Reynoldses had carved off
256 of the most valuable acres for sale or for future development by
Carey Station LLC. The restricted appraisal reports valued the 874
acres remaining in the Parent Tract as having an average “before” value
of $59,153 per acre. The appraisal of the Subject Property, which com-
prised 355 acres, valued it as having a “before” value of $59,718 per acre.

       On December 9, 2015, petitioner, Oconee Investors, circulated a
PPM soliciting investors to purchase class A units in it. On December
10 and 11, the other two InvestCos circulated PPMs soliciting investors
to purchase class A units in them. The terms of the three PPMs were
substantially similar, and the terms of the PPM issued by petitioner are
illustrative.

      The PPM issued by petitioner offered to sell 95 class A units in
Oconee Investors at $49,000 per unit, for a total offering price of
$4,655,000. If the offering were fully subscribed, class A members would
acquire 98% of the voting and economic interests in Oconee
                                           25

[*25] Investors. 5 The class A members of Oconee Investors, in turn,
would acquire a 97% ownership interest in Oconee. 6 The PPM advised
that five additional class A units in Oconee Investors would be issued at
the closing to Bridge Capital, an entity owned by Messrs. Freeman and
Novak. Ignoring those five additional units for simplicity’s sake, the
investors who subscribed to the class A offering in Oconee Investors
would acquire, in economic terms, roughly a 95% interest in Oconee
(98% × 97% = 95.06%).

       At that point it was expected that Oconee would receive the
355-acre Subject Property, which would be its only meaningful asset,
and Oconee had no significant liabilities. 7 By paying $4,655,000, the
class A investors thus acquired, in economic terms, a 95% interest in the
355-acre Subject Property. Simplifying somewhat, the class A offering
valued the Subject Property as being worth at most $12,500 per acre
([$4,655,000 × 0.95 = $4,422,250] ÷ 355 = $12,457).

      Each PPM identified two possible business strategies for its
PropCo: a “conservation strategy” and an “investment strategy.” Inves-
tors were told that CS Manager (owned by the Reynoldses) would deter-
mine “whether to cause the respective PropCo to pursue the Investment
Strategy or the Conservation Strategy.” In making that decision, CS
Manager would “seek input from all Members and may solicit a vote of
the Members.” After CS Manager chose which strategy to pursue, it was
to provide written notice to investors, who would then have “the right
within one (1) calendar day of receipt of the notice to vote to reject such
proposal.” If an investor did not submit a timely vote, that investor
would be deemed to have accepted CS Manager’s chosen strategy.

      The PPM issued by petitioner, Oconee Investors, is again illustra-
tive. Petitioner’s “conservation strategy” was to grant a conservation
easement over the Subject Property and allocate the resulting tax de-
duction among the investor/members. The PPM attached an excerpt
from the Wingard/Van Sant “restricted appraisal.” Because that

        5 The remaining 2% of the voting and economic value of Oconee Investors was

to be held by class B unit holders, namely CS Manager (owned by the Reynoldses) and
an entity owned by Messrs. Freeman and Novak.
        6 The remaining 3% of Oconee was to be held by class B unit holders, namely

CS Manager and Carey Station LLC, both owned by the Reynoldses.
       7 Oconee’s only other asset at that point was a partnership receivable of

$34,000, and its sole liability was the obligation to pay an accrued appraisal fee of less
than $35,000.
                                   26

[*26] appraisal was restricted to use by the Reynoldses and their advi-
sors, petitioner was not authorized to include this excerpt in the PPM,
and Mr. Van Sant was allegedly unaware that this was being done.

       The “investment strategy” was to develop the Subject Property
into a mixed-use residential community, likely in conjunction with a
third-party developer. The PPM cautioned investors that “a hold period
of one to three years or longer may be required before development will
occur or a sale to a developer could be consummated at an acceptable
value.” The PPM included financial projections suggesting that it would
take six years to sell off the entirety of the Subject Property. It warned
that these projections, which supposed a 31.6% internal rate of return
annually, were “based on assumptions that may or may not occur and
should not be relied upon to indicate the actual results that will be ob-
tained.” One such assumption was that development of the Subject
Property would begin within one year after the closing—an assumption
in tension with the warning that a holding period of “three years or
longer may be required before development will occur.”

       Each PPM was 250 pages long, and SCP did not expect that in-
vestors would read it with great care. SCP accordingly prepared a
two-page “Offering Summary & Case Study” (Offering Summary) for
each InvestCo. This document focused exclusively on the tax benefits of
the “conservation strategy,” advising that pursuing this strategy would
net the investor a tax deduction of roughly $4 for every $1 invested. The
Offering Summary contained no meaningful discussion of the economic
benefits that would supposedly flow from the “investment strategy.”

       In conjunction with the Offering Summary, SCP prepared an Ex-
cel spreadsheet, denominated “Investor Benefit Analysis.” This spread-
sheet enabled a prospective investor to calculate the “benefit[s] from
[the] conservation tax mitigation strategy.” For example, the spread-
sheet shows that a $96,000 investment in petitioner would generate a
tax deduction of $383,567 with an alleged “cash value” of $172,605. In-
vestors could plug in their adjusted gross income (AGI), expected item-
ized deductions, and applicable Federal and state tax rates to calculate
their particular tax benefits.

       SCP had communicated with prospective investors about the pro-
posed transaction as early as October 2015. These earlier communica-
tions, usually by email, likewise focused exclusively on the tax benefits
of the transaction. Emails from Mr. Novak repeatedly touted a 4:1 tax
write-off and recommended the number of units investors should
                                   27

[*27] purchase on the basis of their expected AGI. Marketing material
received by one investor, captioned “The Potential Tax Benefits Associ-
ated with Conservation Easements,” described the 4:1 tax write-off as
meaning that “you save more money on taxes than you invested in the
partnership and hence made a gain.” This document asserted that SCP
“had successfully closed 62 conservation easement projects” and “had
never been audited by the IRS.” None of SCP’s marketing materials
addressed the supposed benefits of the “investment strategy.” None of
SCP’s marketing materials described (or even mentioned) the environ-
mental values allegedly protected by the “conservation strategy.”

XII.   Year-End 2015 Transactions

       On December 21, 2015, in accordance with Oconee’s operating
agreement, Carey Station LLC contributed the 355-acre Subject Prop-
erty to Oconee in exchange for 99% of the membership interests in
Oconee. On December 23, 2015, Oconee Investors acquired all of the
class A interests in Oconee (constituting 97% of the total interests) from
Carey Station LLC in exchange for $3.74 million. Of that total,
$2.44 million was paid to Carey Station LLC and $1.3 million was con-
tributed to Oconee.

       Oconee then amended its operating agreement to name Oconee
Investors its manager. The amended agreement integrated the terms
set out in the PPM and provided that Oconee Investors, in its capacity
as manager of Oconee, would review and analyze the “investment strat-
egy” and “conservation strategy” and determine which to pursue. That
same day Oconee Investors sold to investors, for $4,655,000, 95 of its 100
total outstanding class A units.

       Substantially identical steps were followed by the other two Prop-
Cos and InvestCos. The total amount raised from investors via the three
PPMs was $11,856,000. Of these proceeds, Carey Station LLC (owned
by the Reynoldses) received $5,137,500 from the sale to the InvestCos of
97% of its interests in the PropCos. The PropCos and the InvestCos
retained $3.75 million of the proceeds as capital contributions and oper-
ational reserves. Of the balance, $2,723,500 was paid to the promoters,
Mr. Ciavola, the Morris firm, the appraisers, and other participants as
fees for their services.

     On December 24, 2015, the Reynoldses, as Oconee’s ultimate
managers, notified the class A members of their determination that
Oconee should pursue the “conservation strategy.” Any investor who
                                          28

[*28] wished to pursue the “investment strategy” was required to “af-
firmatively reject” the Reynoldses’ determination by December 28, 2015.
Twenty-six members were entitled to vote to accept or reject the Reyn-
oldses’ decision. Of the 24 individual investors in Oconee Investors, 12
explicitly approved the Reynoldses’ determination to pursue the “con-
servation strategy.” The other 12 investors did not submit an “affirma-
tive rejection” and were thus deemed to have approved the “conservation
strategy.” 8

       All investors in the other two PropCos were likewise unanimous
in voting for (or being deemed to have voted for) the “conservation strat-
egy.” Mr. Pollock testified that no investor in a conservation easement
transaction in which he had invested had ever voted for the investment
option. There was no evidence that any investor in any syndicated con-
servation easement transaction, when offered a choice between a deduc-
tion for a conservation easement and pursuit of an investment/develop-
ment option, had ever voted for the investment/development option.

       The transaction at issue was persistently marketed to investors
as a “conservation tax mitigation strategy.” From beginning to end, it
was priced as a multiple of the promised tax deduction. Mr. Freeman
acknowledged that the $49,000 offering price for class A interests in pe-
titioner was derived directly from the four-to-one tax write-off promised
to investors. That offering price bore no relationship whatsoever to the
financial projections for the purported “investment strategy.” The Court
finds as a fact that the purported “investment strategy” was not a viable
business proposition, that it was never intended to be implemented, and
that it was included as “window dressing” in an effort to obscure the
character of the transaction as a tax shelter. 9

     On December 31, 2015, Oconee donated to the Georgia-Alabama
Land Trust (GALT) a conservation easement over the 355-acre Subject

        8 The other two members eligible to vote on whether to pursue the “conserva-

tion strategy” were CS Manager (owned by the Reynoldses) and an entity owned by
Messrs. Novak and Freeman. Both voted in the affirmative.
         9 Each easement transaction had a put/call provision under which individual

investors could be bought out five years after their investment. In November 2015 Mr.
Freeman told Mr. Ciavola that the total cost of buying out the individual investors in
all three transactions would be only about $435,000. The financial projections set forth
in the PPM for the “investment strategy” suggested that it would take six years to sell
off the entirety of the Subject Property, and those projections were wildly optimistic.
If the investors had regarded the “investment strategy” as a realistic option, they
would not have consented to be bought out for a pittance after only five years.
                                    29

[*29] Property. The deed of easement was recorded the same day. The
other two PropCos concurrently donated to GALT conservation ease-
ments over their 259-acre and 260-acre tracts.

XIII. Final Appraisals

       Messrs. Wingard and Van Sant received substantive comments
on their December 3, 2015, Restricted Appraisal Reports from the Pri-
vate Client Law Group (PCLG), which was engaged to provide “comfort
letters” to investors in the three InvestCos. Noting that these reports
included no sale transactions of comparable properties in Georgia,
PCLG “recommend[ed] that the appraisers use at least one comparable
in the state of Georgia (preferably more).”

       PCLG also believed it “important that the valuation account for
the fact that all [three] deals or ‘phases’ [i.e., the proposed residential
subdivisions on the three PropCos] would hypothetically be hitting the
market at the same time.” But the Restricted Appraisal Reports in-
cluded “no analysis as to how having all those properties . . . on the mar-
ket at the same time would affect the market valuation under each ap-
praisal.” “One would think,” PCLG noted, “that all that supply would
have an adverse impact on pricing. Therefore, please have the apprais-
ers discuss why that is not the case here.”

       The final appraisal reports, completed in April 2016, ignored
PCLG’s point that the supply/demand balance would be adversely af-
fected if residential subdivisions on all three PropCos were on the mar-
ket simultaneously. However, Messrs. Wingard and Van Sant did re-
place one of their comparable property sales, from Florida, with a sale
that had occurred in Georgia. Despite this change, the “before” value
they gave the Subject Property in their final appraisal was exactly the
same as it was in their December 2015 Restricted Appraisal, viz.,
$21.2 million. And the “before” values they gave the tracts held by the
other two PropCos were likewise unchanged from December 2015, de-
spite using different comparable property sales.

XIV. Tax Returns

       Oconee timely filed Form 1065, U.S. Return of Partnership In-
come, for its short taxable year beginning December 24 and ending De-
cember 31, 2015. On that return it claimed a charitable contribution
deduction of $20.67 million for the donation of the easement. In support
of this supposed value Oconee relied on the final appraisal completed in
April 2016 by Messrs. Wingard and Van Sant. Oconee allocated
                                    30

[*30] $20,049,900 of the deduction (97% of the total) to Oconee Inves-
tors. The remaining 3% of the deduction was allocated to class B unit
holders (CS Manager and Carey Station LLC, both owned by the Reyn-
oldses).

        Oconee included with its return a Form 8283, Noncash Charitable
Contributions. On this form Oconee asserted that its adjusted basis in
the Subject Property was $3,348,498. Petitioner produced at trial a doc-
ument captioned “2015 Conservation Easement Basis Calculation,”
showing how it computed this number. But that document assumes two
facts: (1) that Carey Station LLC had a basis of $9,104,937 in the Parent
Tract and (2) that Oconee acquired a carryover basis of $3,362,116 (37%
of the total) when Carey Station LLC contributed the 355-acre parcel to
it.

       The former number, $9,104,937, appears to have been derived
from Carey Station LLC’s Form 1065 for 2014. On Schedule L, Balance
Sheets per Books, Carey Station LLC reported “Land” with a cost of
$9,104,937 at year-end 2014. Petitioner has produced no evidence that
substantiates that “basis” number. Specifically, petitioner has produced
no evidence to establish the Reynoldses’ original cost for the Parent
Tract, acquired in 2003, or to establish the numerous adjustments to
basis required by the sale of various parcels that were carved out of the
Parent Tract after 2003.

        Oconee indicated on its Form 8283 that the Subject Property had
been acquired by “capital contribution.” In a five-page supplement to its
Form 8283, Oconee asserted that the Subject Property “was a ‘capital
asset’ . . . as defined by Code Section 1221(a)” in the hands of its succes-
sive owners, viz., Jamie Reynolds and Reynolds Partners, Carey Station
LLC, and Oconee. Because the Subject Property was supposedly
“long-term capital gain property” in Oconee’s hands, the members of
Oconee and Oconee Investors were assertedly “permitted to claim a de-
duction for federal income tax purposes in an amount equal to the fair
market value (as opposed to the tax basis)” of the donated easement.

       On its Form 1065 for its short taxable year beginning December
24 and ending December 31, 2015, Oconee Investors reported a charita-
ble contribution deduction of $20,093,550, consisting of its 97% share of
the deduction claimed for the easement and a cash contribution of
$43,650. These deductions were passed through to the class A and class
B investors. As promised in the PPM, each class A investor received a
deduction of approximately four times his or her investment. For
                                    31

[*31] example, an investor who was reported to have contributed capital
of $784,000 was allocated a charitable contribution deduction of
$3,143,823, i.e., 400.99% of his investment.

XV.   IRS Examination

       The IRS selected Oconee’s 2015 return for examination. On April
4, 2019, it issued an FPAA that disallowed $20.67 million of the claimed
contribution deduction (the portion attributable to the easement), deter-
mining that Oconee had not established that it made a contribution or
gift in 2015 and had otherwise failed to show that all requirements of
section 170 had been met. The FPAA alternatively determined that
Oconee had failed to establish “that the value of the contributed prop-
erty . . . was greater than $1,420,560.” The IRS determined a 40%
accuracy-related penalty under section 6662(e) and (h) (applicable in the
case of a “gross valuation misstatement”) and (in the alternative) a 20%
penalty under other provisions of section 6662.

      Petitioner timely petitioned for readjustment of partnership
items. In his Answer filed September 6, 2019, respondent asserted
(again in the alternative) a 20% penalty for a reportable transaction un-
derstatement under section 6662A(b). See § 6214(a). The parties agree
(and the record establishes) that the IRS secured timely supervisory ap-
proval to assert each of these penalties. See § 6751(b)(1).

XVI. Trial

      A.     Petitioner’s Experts

             1.     Belinda Sward

       Petitioner offered testimony from Belinda Sward, the founder of
Strategic Solutions Alliance, a real estate consulting firm that petitioner
engaged to provide a “market analysis” for the Subject Property. She
described her methodology as including “an interview process with the
local and regional real estate professions,” “confidential data and analy-
sis from previous work . . . in the market that involved Lake Oconee
communities,” and “consumer research conducted in 2021 [involving]
customers qualified and interested in buying a home at Lake Oconee” or
in a similar community. These consumers were asked questions “about
their lifestyle, opinions of these communities, types of housing recently
purchased,” and the sorts of amenities they were seeking when consid-
ering the purchase of a second or retirement home. The thrust of her
report was that the Lake Oconee area is a desirable destination, and this
                                   32

[*32] desirability helps account for the increase in housing sales and
prices for years through 2022.

       Ms. Sward’s expert report relied extensively on data and infor-
mation from 2016–2022 in an effort to support her conclusions about the
real estate market in 2015. The bulk of the consumer research was con-
ducted in 2021 and much of the sales and housing data also post-dated
2015. By Order served November 15, 2022, we granted in part respond-
ent’s Motion in Limine and excluded all portions of Ms. Sward’s report
that discussed or relied on post-2015 consumer research and post-2015
market data. The parties agreed on the strikethroughs to Ms. Sward’s
report required by our Order, and she testified at trial as to the balance
of her report. We found her testimony to have little relevance in ascer-
taining the FMV of the conservation easement.

             2.     Rick McAllister

       Petitioner offered expert testimony of Rick McAllister, the land-
scape architect who had prepared the 2015 conceptual land use plan
that Messrs. Van Sant and Wingard used in their appraisal. We recog-
nized Mr. McAllister as an expert in land use planning, while taking
into account his past relationship with the Reynoldses in assessing his
testimony. Mr. McAllister’s report consists of a land use plan for the
Subject Property prepared in 2022. Like his 2015 plan, which covered
the entire Parent Tract, his 2022 plan approached the maximum density
possible under local zoning rules.

       Mr. McAllister’s 2022 plan presupposes the development of 1,012
residential units on 162.1 acres of the Subject Property, including
single-family homes, multifamily units, senior housing, and cottages.
His plan envisions commercial development on 89 acres, including retail
outlets, a hotel, restaurants, an entertainment center, office space, and
a 165-unit continuing care facility. He assumed that the remaining 104
acres would be used as common open space. He did not opine on the
financial feasibility of his proposed development, nor did he address
whether there was sufficient market demand in 2015 for 1,012 new res-
idential units in that location.

             3.     George Galphin, Jr.

        Petitioner offered expert testimony from George Galphin, Jr., a
certified real property appraiser in Georgia. He has more than 30 years
of experience in appraisals, primarily in the north Georgia region, and
has prepared conservation easement appraisals periodically over the
                                   33

[*33] last decade. We recognized him as an expert in real estate valua-
tion, including conservation easements.

       Mr. Galphin opined that the HBU of the Subject Property was
immediate development as a mixed-use residential community. In
reaching that conclusion, he relied heavily on Ms. Sward’s “market anal-
ysis” and Mr. McAllister’s 2022 conceptual land use plan. He made the
extraordinary assumption that Mr. McAllister’s 2022 site plan “would
be approved by Greene County.”

       Mr. Galphin opined that the “before” value of the Subject Property
was $19.53 million, or $55,014 per acre. He reached this conclusion us-
ing the comparable sales method, choosing sales of five allegedly compa-
rable properties in Georgia. Before drafting his Report, he had been
informed of petitioner’s position that the “before” value of the Subject
Property was $21.2 million. He was not informed of the Reynoldses’
prior efforts to sell the entire Parent Tract at prices ranging from
$6.7 million to $8.3 million. He was not aware that the Parent Tract
(including the Subject Property) was held for sale in 2015.

             4.    James Clanton

       Petitioner offered expert testimony from James “Chris” Clanton,
the founder of MVC Consulting, Inc., a real estate consulting firm. Mr.
Clanton has more than 25 years of experience appraising real estate and
is a certified appraiser in Georgia. We recognized him as an expert in
real estate valuation.

       Like Mr. Galphin, Mr. Clanton opined that the HBU of the Sub-
ject Property was immediate development as a mixed-use residential
community. Like Mr. Galphin, he relied heavily on Ms. Sward’s “market
analysis” and Mr. McAllister’s 2022 land use plan in reaching that con-
clusion. But he provided “no assurances, expressed or implied, regard-
ing the accuracy of the information” in their reports.

      Mr. Clanton opined that the “before” value of the Subject Property
was $16.7 million, or $47,042 per acre. He reached this conclusion using
the comparable sales method, choosing sales of four allegedly compara-
ble properties. Only one of these transactions involved real estate in
Georgia; the other three involved real estate in Florida, North Carolina,
and South Carolina. He also considered two “additional land sales” in
Florida and South Carolina.
                                   34

[*34] Before drafting his report, Mr. Clanton had been informed of pe-
titioner’s position that the “before” value of the Subject Property was
$21.2 million. He was given copies of the Wingard/Van Sant final ap-
praisal report, the 2011 appraisal prepared for PNC, and the 2014 ap-
praisal prepared for Farmers Bank. Mr. Clanton was not informed of
the Reynoldses’ prior efforts to sell the entire Parent Tract at prices
ranging from $6.7 million to $8.3 million. He was not aware that the
Parent Tract (including the Subject Property) was held for sale in 2015.

      B.     Respondent’s Valuation Expert

       Respondent offered expert testimony from Robert Driggers. Mr.
Driggers has more than 35 years of experience appraising real estate in
Georgia, including appraisals of residential developments. Certified as
an appraiser by the State of Georgia and a licensed broker, Mr. Driggers
holds MAI and CCIM designations and has completed the Appraisal In-
stitute’s course on valuing conservation easements. The Court recog-
nized him as an expert in real estate appraisal.

       Before preparing his report, Mr. Driggers was informed neither
of petitioner’s nor of respondent’s position as to the value of the ease-
ment. He was not supplied a copy of the Wingard/Van Sant appraisal,
nor was he informed of prior appraisals relating to the Parent Tract.

       Mr. Driggers noted that, when the easement was granted in late
2015, “[t]he country and Greene County were still in recovery mode from
the Great Recession.” He concluded that immediate residential devel-
opment of the Subject Property, as proposed by petitioner and its ex-
perts, was unlikely given its physical characteristics and the existing
market conditions. He determined that the HBU of the property was a
“speculative hold for future mixed-use development.” “Based on devel-
opment patterns and real estate activity existing for the area,” he con-
cluded, “a hold of some seven to ten years is probable with regard to
widespread development of the property, though some smaller portions
may be saleable sooner.”

       Mr. Driggers calculated a value of $4,972,002 for the easement,
representing the difference between a “before” value of $5,327,145
(roughly $15,000 per acre) and an “after” value of $355,143. In reaching
these conclusions he relied chiefly on the comparable sales method, sup-
plemented by his review of market data and interviews with buyers and
sellers of properties in the area.
                                         35

[*35] Mr. Driggers selected sales of seven comparable properties, all in
Georgia. Six of these transactions involved property within 40 miles of
the Subject Property (three being located in or near Greensboro). The
sales occurred between February 2012 and November 2015 and involved
tracts ranging in size from 194.4 acres to 856.6 acres. These tracts had
a mix of zoning designations and planned uses. 10

                                    OPINION

      The IRS’s determinations in a notice of deficiency or an FPAA are
generally presumed correct, though the taxpayer can rebut this pre-
sumption. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);
Republic Plaza Props. P’ship v. Commissioner, 107 T.C. 94, 104 (1996).
Deductions are a matter of legislative grace, and taxpayers generally
bear the burden of proving their entitlement to the deductions claimed.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

        Section 7491 provides that the burden of proof on a factual issue
may shift to the Commissioner if the taxpayer satisfies specified condi-
tions. Among these conditions are that the taxpayer must have “intro-
duce[d] credible evidence with respect to [that] factual issue,”
§ 7491(a)(1), and must have “complied with the requirements under this
title to substantiate any item,” § 7491(a)(2)(A). Petitioner has not satis-
fied these conditions with respect to any factual issue that has salience
in deciding Oconee’s entitlement to the disputed charitable contribution
deduction. The burden of proof thus remains on petitioner.

I.     Charitable Contribution Deduction

       Section 170(a)(1) allows a deduction for any charitable contribu-
tion made within the taxable year. If the taxpayer makes a gift of prop-
erty other than money, the amount of the contribution is generally equal
to the FMV of the property at the time of the gift. See Treas. Reg.
§ 1.170A-1(c)(1). Deductions generally are not allowed for gifts of prop-
erty consisting of less than the donor’s entire interest in that property,

         10 Mr. Driggers also performed, as a backup to his comparable sales analysis,

a DCF analysis. For that purpose, he assumed that the Subject Property could be
developed as a mixed-use community, with lots being sold gradually over a
7- to 10-year period. After considering market data and information obtained from
interviews with local land speculators, he employed a 14% discount rate for the 7-year
sell-off analysis and a 15% discount rate for the 10-year sell-off analysis. This ap-
proach generated a “before” value for the Subject Property of $6,307,954 (or $17,762
per acre) under the former scenario and $5,428,962 (or $15,286 per acre) under the
latter.
                                    36

[*36] but there is an exception for (among other things) a “qualified con-
servation contribution.” See § 170(f)(3)(A), (B)(iii). This exception ap-
plies where (1) the taxpayer makes a contribution of a “qualified real
property interest,” (2) the donee is a “qualified organization,” and (3) the
donation is “exclusively for conservation purposes.” § 170(h)(1). Re-
spondent does not dispute that the conservation easement in this case
satisfies the latter requirements, apart from questioning the donation’s
status as a charitable contribution.

        Where the claimed value of contributed property (other than pub-
licly traded securities) exceeds $5,000, no deduction is allowed unless
the taxpayer obtains a “qualified appraisal” of such property. See
§ 170(f)(11)(C). A qualified appraisal is “an appraisal of such property
which . . . is conducted by a qualified appraiser in accordance with gen-
erally accepted appraisal standards and any regulations or other guid-
ance prescribed” by the Secretary. See § 170(f)(11)(E)(i)(II). Where (as
here) a contribution of property is valued in excess of $500,000, the tax-
payer must both obtain and attach to its return “a qualified appraisal of
such property.” § 170(f)(11)(D). Failure to comply with these require-
ments generally precludes a deduction. See § 170(f)(11)(A)(i) (providing
that “no deduction shall be allowed” unless specified substantiation re-
quirements are met).

       Section 170(e)(1) provides that “[t]he amount of any charitable
contribution of property” shall be reduced by (among other things) “the
amount of gain which would not have been long-term capital gain” if the
property had been sold instead of being contributed. Property subject to
this provision, generally called “ordinary income property,” includes in-
ventory property, i.e., property held for sale to customers in the ordinary
course of business. As a rule, the deduction allowable for a gift of “ordi-
nary income property” is limited to the taxpayer’s basis in such property.

       Respondent contends that Oconee’s charitable contribution de-
duction should be denied in its entirety on three distinct and independ-
ent grounds: (1) Oconee lacked the donative intent requisite to a “chari-
table contribution” within the meaning of section 170(a)(1); (2) the ap-
praisal attached to Oconee’s return was not a “qualified appraisal” be-
cause the authors, Messrs. Wingard and Van Sant, were not “qualified
appraisers”; and (3) the Subject Property was “ordinary income prop-
erty” in Oconee’s hands, thereby limiting any charitable contribution de-
duction to its basis, which Oconee allegedly failed to prove was greater
than zero. We consider these arguments in turn.
                                    37

[*37] A.     Donative Intent

        “The sine qua non of a charitable contribution is a transfer of
money or property without adequate consideration.” United States v.
Am. Bar Endowment, 477 U.S. 105, 118 (1986). If a transaction with a
charity “is structured as a quid pro quo exchange”—i.e., if the taxpayer
receives property or services equal in value to what he conveyed—there
is no “contribution or gift” within the meaning of the statute. Hernandez
v. Commissioner, 490 U.S. 680, 701–02 (1989).

        In assessing whether a transaction constitutes a “quid pro quo
exchange,” we give most weight to the external features of the transac-
tion, avoiding imprecise inquiries into taxpayers’ subjective motivations.
See id. at 690–91; Christiansen v. Commissioner, 843 F.2d 418, 420 (10th
Cir. 1988). “If it is understood that the property will not pass to the
charitable recipient unless the taxpayer receives a specific benefit, and
if the taxpayer cannot garner that benefit unless he makes the required
‘contribution,’ the transfer does not qualify the taxpayer for a deduction
under section 170.” Costello v. Commissioner, T.C. Memo. 2015-87, 109
T.C.M. (CCH) 1441, 1448; see Christiansen v. Commissioner, 843 F.2d
at 420–21; Graham v. Commissioner, 822 F.2d 844, 849 (9th Cir. 1987),
aff’g 83 T.C. 575 (1984), aff’d sub nom. Hernandez v. Commissioner, 490
U.S. 680. However, if the benefit received is merely incidental to a char-
itable purpose, then a deduction is allowable. See McGrady v. Commis-
sioner, T.C. Memo. 2016-233, 112 T.C.M. (CCH) 688, 694 (citing McLen-
nan v. United States, 24 Cl. Ct. 102, 107 (1991), aff’d, 994 F.2d 839 (Fed.
Cir. 1993)).

       Respondent urges that Oconee is not entitled to a charitable con-
tribution deduction because “the primary purpose of the transaction was
to derive an economic benefit in the form of tax savings . . . that would
exceed each investor’s contribution.” “The external features of the trans-
action,” respondent says, “overwhelmingly show that the Partnership
donated the conservation easement with the sole intent of generating
substantial income tax benefits for its partners.” In respondent’s view,
the Reynoldses and their agents were engaged in a profit-seeking busi-
ness transaction: Oconee never intended to make, and allegedly did not
make, “a transfer to a charitable entity exceeding the fair market value
of [the] expected consideration,” viz., the tax benefits accruing to the
partners in Oconee Investors. In short, because “the overstated tax de-
duction was the only purpose for the donation,” respondent contends
that Oconee lacked the donative intent requisite to a charitable contri-
bution.
                                          38

[*38] Without disputing respondent’s characterization of the intentions
of the Reynoldses and their agents, we find that these facts, without
more, do not suffice to disallow a deduction under section 170(a)(1).
Oconee executed a valid deed of easement that conveyed property to
GALT, a charitable organization recognized by the IRS as tax exempt
under section 501(c)(3). The property thus conveyed had value: Re-
spondent agrees that the easement accomplished valid conservation
purposes, and his expert placed upon the easement a value close to $5
million.

       The “quid pro quo” cases do not help respondent. In each such
case of which we are aware, the “quid” received by the putative donor
was supplied by a party to the transaction—typically by the donee, oc-
casionally by another participant in a multiparty transaction. See, e.g.,
Hernandez v. Commissioner, 819 F.2d 1212, 1217 (1st Cir. 1987) (reli-
gious “auditing” services provided by donee), aff’d, 490 U.S. 680; Stubbs
v. United States, 428 F.2d 885, 887–88 (9th Cir. 1970) (assistance in ob-
taining favorable zoning provided by donee); Allen v. Commissioner, 92
T.C. 1, 10–11 (1989) (low-interest loan provided by donee), aff’d, 925
F.2d 348 (9th Cir. 1991); Murphy v. Commissioner, 54 T.C. 249, 253
(1970) (adoption services provided by third party); DeJong v. Commis-
sioner, 36 T.C. 896, 899–900 (1961) (education services provided by do-
nee), aff’d, 309 F.2d 373 (9th Cir. 1962). Respondent does not contend
(and there is no evidence) that GALT provided any “quid pro quo”—in
the form of goods, services, or other consideration—to Oconee in ex-
change for its gift. The “quid pro quos” alleged by respondent are the
tax deductions inuring to the investors. But those benefits were pro-
vided, not by GALT, but by the U.S. Treasury. Respondent has cited,
and we have discovered, no case in which the tax benefits associated
with a charitable contribution deduction have been deemed a “quid pro
quo” that negates the donor’s charitable intent. 11

        11 Recognizing that a tax deduction would not normally be regarded as a “quid

pro quo,” respondent urges a special rule in a case where a taxpayer has substantially
overvalued the contributed property. But we do not see how the size of the deduction
a taxpayer claims on his tax return has probative value in determining whether he
had donative intent for a gift he made the previous year. As we explain infra p. 74,
Congress has enacted severe penalties for gross overvaluation of charitable contribu-
tion property. It is not our province to create, as an additional sanction for overvalua-
tion, the complete disallowance of any deduction.
                                    39

[*39] B.     “Qualified Appraiser” Requirement

       Section 170(f)(11) disallows a deduction for certain noncash char-
itable contributions unless specified substantiation and documentation
requirements are met. In the case of a contribution of property valued
in excess of $500,000, the taxpayer must obtain and attach to his return
“a qualified appraisal of such property.” § 170(f)(11)(D). An appraisal
is “qualified” if it is “conducted by a qualified appraiser in accordance
with generally accepted appraisal standards” and meets requirements
set forth in “regulations or other guidance prescribed by the Secretary.”
§ 170(f)(11)(E)(i). In the case of a partnership or S corporation, the qual-
ified appraisal requirements “shall be applied at the entity level.”
§ 170(f)(11)(G). Accordingly, we must determine whether Oconee met
these requirements for its contribution of the conservation easement.

        To be a “qualified appraiser,” an individual must have “earned an
appraisal designation from a recognized professional appraiser organi-
zation or ha[ve] otherwise met minimum education and experience re-
quirements set forth in the regulations prescribed by the Secretary.”
§ 170(f)(11)(E)(ii)(I). The individual must “regularly perform[] apprais-
als for which [he] receives compensation” and must meet “such other
requirements as may be prescribed by the Secretary.”
§ 170(f)(11)(E)(ii)(II) and (III). The appraiser also must “demonstrate[]
verifiable education and experience in valuing the type of property sub-
ject to the appraisal.” § 170(f)(11)(E)(iii)(I).

        Respondent agrees that Messrs. Wingard and Van Sant met these
general requirements at the time they prepared the final appraisal in
April 2016. However, respondent contends that Messrs. Wingard and
Van Sant were not qualified appraisers by virtue of the “Exception” set
forth in Treasury Regulation § 1.170A-13(c)(5)(ii). It provides that an
individual is not a qualified appraiser with respect to a particular dona-
tion “if the donor had knowledge of facts that would cause a reasonable
person to expect the appraiser falsely to overstate the value of the do-
nated property.” This will be true, for example, if “the donor and the
appraiser make an agreement concerning the amount at which the prop-
erty will be valued and the donor knows that such amount exceeds the
fair market value of the property.” Ibid.

       The “knowledge” requirement in Treasury Regulation § 1.170A-
13(c)(5)(ii) implicates the donor’s actual and/or constructive knowledge.
See Dunlap v. Commissioner, T.C. Memo. 2012-126, 103 T.C.M. (CCH)
1689, 1708 (considering whether the information the donor knew or
                                  40

[*40] should have known would cause a reasonable person to believe
that the appraiser would falsely overstate the value of an easement). In
gauging a partnership’s “knowledge” for this purpose, we look to the
knowledge of the person(s) with ultimate authority to manage the part-
nership. See, e.g., CNT Invs., LLC v. Commissioner, 144 T.C. 161, 222
(2015) (examining the knowledge possessed by the general partner in
order to assess “good faith”); Superior Trading, LLC v. Commissioner,
137 T.C. 70, 91–92 (2011) (stating that partnership-level defenses take
“into account the state of mind of the general partner”), supplemented
by T.C. Memo. 2012-110, aff’d, 728 F.3d 676 (7th Cir. 2013). The Reyn-
oldses (through intervening entities) were the ultimate managers of
Oconee and Oconee Investors. Thus, in determining what facts were
“known” by Oconee, we must determine what facts were known—actu-
ally or constructively—by the Reynoldses.

       During 2013–2015 the Reynoldses persistently marketed the Par-
ent Tract to prospective buyers. In 2013 they offered the Parent Tract
to TPA for $7.9 million, but TPA rejected that offer. The Reynoldses
then commissioned a new DCF analysis valuing the Parent Tract at $6.7
million; according to Mr. Denbow, $6.7 million “became the new asking
price.” In September 2013 the Reynoldses offered the Parent Tract to
TPA at $6.7 million, but TPA again declined. During 2015 the Reyn-
oldses authorized Mr. Baker to sell the entire Parent Tract at $7.7 mil-
lion. Only one prospective buyer expressed interest, and no deal was
consummated.

       On the basis of these facts, we conclude that the Reynoldses knew
that the Parent Tract in 2015 was worth considerably less than $10 mil-
lion. They may have believed that the property had considerable intrin-
sic value and might ultimately be developed into the Reynoldsboro of
their dreams. But they were shrewd, experienced, and highly sophisti-
cated real estate developers. Whatever the property’s future potential,
they knew that, as of late 2015, the current market value of the Parent
Tract was considerably less than $10 million.

       The Reynoldses regarded the conservation easement transaction
as a substitute for sale of the Parent Tract. Because they could not get
their asking price through a sale transaction, they were determined to
get proceeds of at least $7 million through the easement transaction.
The agreement they executed with the Vola Group explicitly stated that
an easement transaction would be consummated only if Carey Station
LLC (the Reynoldses’ entity) “decide[d] that the net proceeds from con-
servation easement are acceptable.”           Throughout the ensuing
                                        41

[*41] negotiations, the Reynoldses consistently took the position that
the proceeds accruing to them would be “acceptable” only if such pro-
ceeds exceeded $7 million.

       In February 2015, at his initial meeting with Mr. Ciavola, Mr.
Novak made clear that, in order for the Reynoldses to derive proceeds of
$7 million, the Parent Tract would need to have an appraised value of
around $60 million. The next day Mr. Novak supplied an “Estimated
Sources and Uses of Funds” schedule showing an “estimated charitable
contribution deduction” of $60 million. During the next six weeks SCP
provided two similar schedules, both presupposing a charitable contri-
bution deduction of $60 million.

       On March 26, 2015, Mr. Ciavola relayed this information to the
Reynoldses: “Ricky [Novak] is confident of a range from $40MM-75MM,
depending on the appraiser’s verbal,” and indicated that “we are over
$7MM.” Mr. Novak expressed confidence in an appraisal of that magni-
tude even though no appraiser had yet been retained. Mr. Ciavola’s con-
firmation that “we are over $7MM,” combined with the $60 million char-
itable contribution shown on SCP’s schedules, made it obvious to the
Reynoldses that the Parent Tract would need to be appraised in the
neighborhood of $60 million. But the Reynoldses knew that the FMV of
the Parent Tract was less than $10 million.

       The Reynoldses then sought to lock in an appraised value in the
$60 million range. In April 2015 they asked Mr. Pollock to negotiate an
arrangement with SCP under which they would not have to proceed with
a conservation easement unless the investors, in the aggregate, received
a “[m]inimum Charitable Contribution Deduction [of] $60-75M.” 12 In
August 2015 Mercer notified his children that “[w]e are close to a deal
for selling our land to an outside investment group,” stating that “the
appraisal will be somewhere around $70 million.” An appraised value
for the Parent Tract in the neighborhood of $60 million was thus baked
into the transaction from the outset. Otherwise, the transaction would
not occur.

        12 That document, executed in May 2015, provided that SCP and the Reyn-

oldses would come to a “[m]utual agreement” during Phase 1 on “the estimated net
proceeds” accruing to the Reynoldses and the “minimum equity capital” to be raised
from investors. We find that the “mutual agreement” was for the Reynoldses to derive
net proceeds of at least $7 million. This agreement required an aggregate charitable
contribution deduction in the neighborhood of $60 million, which was discussed and
agreed upon before any appraiser had been retained.
                                   42

[*42] Messrs. Wingard and Van Sant were retained to appraise the Par-
ent Tract in July 2015. In October 2015 Mr. Ciavola emailed Messrs.
Novak and Freeman, stating that he was attaching “the additional in-
formation you requested.” Included among the attachments was a doc-
ument titled “Market Summary,” suggesting a value of $65 million for
890 acres of the Parent Tract, after excluding unspecified “carve-outs.”
Later that day Messrs. Novak and Freeman forwarded these documents
to Messrs. Wingard and Van Sant. These documents made clear to the
appraisers—if they did not know it already—the magnitude of appraised
value that SCP needed in order for the deal to close.

       On November 16 SCP supplied Mr. Ciavola with a new spread-
sheet showing an estimated charitable contribution deduction of
$57.6 million for an easement on the Parent Tract. SCP noted that the
Reynoldses were considering carving out certain parcels and reserving
them for future development. If the Reynoldses did this, SCP estimated
that it would decrease the overall valuation of the easement by approx-
imately $5 million. Mr. Ciavola forwarded this schedule to the Reyn-
oldses.

       The following day Mr. Ciavola arranged a conference call with the
Reynoldses and SCP’s principals to discuss the “carve-out” problem. On
November 18 Mr. Ciavola emailed the Reynoldses a new spreadsheet
that he described as having been “revised from last night’s discussion.”
This schedule showed an estimated charitable contribution deduction,
before carve-outs, of $60,608,700. Significantly, that figure was within
1% of the $60 million projection Mr. Novak had supplied at his initial
meeting with Mr. Ciavola in February 2015. The Reynoldses did, in fact,
carve out from the Parent Tract and retain for future development six
parcels comprising 82.22 acres. If the carved-out parcels were removed
from the Parent Tract before the granting of the easement, the schedule
showed a net “estimated charitable contribution deduction” of
$52,873,765.

      At that point Messrs. Wingard and Van Sant had not yet supplied
an appraisal of the Parent Tract. Mr. Ciavola told SCP to “call the ap-
praiser” because the Reynoldses needed a “‘verbal’ value” in order to pro-
ceed with the transaction. Mr. Freeman responded: “We all have the
window and need to work within that window. The appraisers are pull-
ing the exact figures together . . . . The window you have is within the
ballpark of reality.”
                                   43

[*43] In speaking of “the window we all have,” we find that Mr. Free-
man was referring to the revised easement numbers discussed during
the meeting with the Reynoldses on the evening of November 17—i.e.,
an estimated charitable contribution deduction of $60.6 million, reduced
to $52.8 million after carving 82.22 acres out of the Parent Tract. In
stating that this window “is within the ballpark of reality,” we find that
Mr. Freeman was assuring the Reynoldses that the appraisal would
come in fairly close to the latter number. That assurance was enough
for the Reynoldses: On November 24, Mr. Ciavola told Mr. Pollock that
the Reynoldses were “moving ahead with Phase II,” i.e., authorizing SCP
to market the conservation easement deal to investors.

       On the basis of these facts, we find that the Reynoldses, acting
through their intermediaries, had reached a meeting of the minds with
Messrs. Wingard and Van Sant that the Parent Tract would be ap-
praised at roughly $60 million (before carve-outs) and fairly close to
$52.8 million (after carve-outs). And sure enough it was: On December
3, 2015, Messrs. Wingard and Van Sant provided a “Restricted Ap-
praisal Report” valuing the 874 acres then remaining in the Parent
Tract as having a “before value” of $51.7 million and an “easement
value” of $50.4 million. That “easement value” was within 5% of the
$52.8 million “estimated charitable contribution deduction” Mr. Free-
man had projected two weeks previously. Because the Reynoldses knew
that the Parent Tract was not worth $51.7 million, but rather was worth
less than $10 million, they “had knowledge of facts that would cause a
reasonable person to expect the appraiser falsely to overstate the value
of the donated property.” Treas. Reg. § 1.170A-13(c)(5)(ii).

        Petitioner argues that the Reynoldses could not have had
“knowledge of facts that would cause a reasonable person to expect the
appraiser[s] falsely to overstate the value” because there was “no com-
munication” between them and Messrs. Wingard and Van Sant. Mercer
testified at trial that he put what might be called a “Chinese Wall” in
place to ensure that he and Jamie never communicated with the ap-
praisers directly. Petitioner likewise asserts that no advance agreement
could have existed because “respondent was unable to elicit any testi-
mony from any witness that anyone instructed the appraisers as to
value.” “To the contrary,” petitioner says, “the evidence was that all
parties were awaiting value determinations by the appraisers before
other numbers could be finalized.”

      We are not persuaded. The “Chinese Wall” supposedly separating
the Reynoldses from the appraisers was both transparent and porous.
                                   44

[*44] We assume arguendo that the Reynoldses never communicated di-
rectly with Messrs. Wingard and Van Sant. But there was a daisy chain
of intermediaries (i.e., Mr. Ciavola and SCP’s principals) who ensured
that all critical information was passed back and forth across the chain.

       As a result of incessant communications among the Reynoldses,
their agents, and the appraisers, a meeting of the minds was reached
that the Parent Tract would be appraised (before carve-outs) very close
to the $60 million figure that Mr. Novak had given the Reynoldses in
February 2015. Contrary to petitioner’s view, testimony that someone
“instructed the appraisers as to value” was not required. An agreement
can arise by virtue of acquiescence in a shared goal as well as by re-
sponse to an explicit instruction. See Ahern v. Cent. Pac. Freight Lines,
846 F.2d 47, 49 (9th Cir. 1988) (holding that the terms of an agreement
“can be implied from the circumstances, and conduct inconsistent with
a refusal of the terms raises a presumption of assent upon which others
may rely” (quoting Wong v. Bailey, 752 F.2d 619, 621 (11th Cir. 1985))).
An agreement can be confirmed by a wink and a nod as well as by a
signature page. See United States v. Hernandez, 921 F.2d 1569, 1575
(11th Cir. 1991) (holding that an agreement to conspire may “be proved
by circumstantial as well as direct evidence” (quoting United States v.
Burton, 871 F.2d 1566, 1571 (11th Cir. 1989))).

       In support of its position petitioner relies on Kaufman v. Commis-
sioner, T.C. Memo. 2014-52, 107 T.C.M. (CCH) 1262, supplementing 134
T.C. 182 (2010) and 136 T.C. 294 (2011), aff’d, 784 F.3d 56 (1st Cir.
2015). Addressing the regulation before us, the Tax Court interpreted
the phrase “falsely to overstate” as “intended to convey a sense of collu-
sion and deception as to the value of the property.” Id., 107 T.C.M.
(CCH) at 1278. That interpretation, we explained, was supported by the
regulation’s illustrative example (cited above), which hypothesizes that
“the donor and the appraiser make an agreement” that the property will
be appraised at an inflated value. Treas. Reg. § 1.170A-13(c)(5)(ii).
Finding no such agreement or collusion on the facts of Kaufman, the
Court concluded that the regulation did not operate to render the ap-
praisers in that case nonqualified. See Kaufman, 107 T.C.M. (CCH)
at 1278.

       Petitioner seeks to analogize Kaufman to this case, asserting that
“there could be no ‘collusion’ if there was no communication” between
the Reynoldses and the appraisers. We have already rejected that ar-
gument: Communication can occur directly or can be accomplished in-
directly through agents and intermediaries. “Collusion” simply means
                                           45

[*45] a “secret agreement or cooperation,” especially for an improper
purpose. See Collusion, Webster’s Collegiate Dictionary (9th ed. 1984).
We have found that there was a meeting of the minds between the Reyn-
oldses and the appraisers—i.e., a “secret agreement”—that the Parent
Tract would be appraised (before carve-outs) in the neighborhood of $60
million. And this agreement was made for an improper purpose, i.e., to
secure grossly inflated tax deductions for the Reynoldses, the promoters,
and the investors.

       In sum, the Reynoldses at year-end 2015 knew the Parent Tract
was worth less than $10 million, having recently offered it for sale (un-
successfully) at prices between $6.7 million and $7.9 million. Yet
through their intermediaries they reached a meeting of the minds with
Messrs. Wingard and Van Sant that the Parent Tract would be ap-
praised (before carve-outs) in the neighborhood of $60 million. The facts
here fit squarely within the example set forth in the regulation, where
“the donor and the appraiser make an agreement concerning the amount
at which the property will be valued and the donor knows that such
amount exceeds the fair market value of the property.” Treas. Reg.
§ 1.170A-13(c)(5)(ii). Because the Reynoldses “had knowledge of facts
that would cause a reasonable person to expect the appraiser falsely to
overstate the value of the donated property,” ibid., Messrs. Wingard and
Van Sant were not “qualified appraisers” with respect to this particular
donation. Their final appraisal, which was attached to Oconee’s return,
was thus not a “qualified appraisal” as required by section
170(f)(11)(E)(i). 13

      In certain cases, failure to secure a “qualified appraisal” may be
excused. Section 170(f)(11)(A)(ii)(II) provides that a charitable contri-
bution deduction will not be disallowed “if it is shown that the failure to
[secure a qualified appraisal] is due to reasonable cause and not to will-
ful neglect.” See Belair Woods, LLC v. Commissioner, T.C. Memo.
2018-159, 116 T.C.M. (CCH) 325, 330. We have construed section

        13 Petitioner contends that, even if “there were some technical defect,” Oconee

should still be entitled to its charitable contribution deduction because it “substantially
complied” with the requirements of section 170 and the regulations thereunder. Cf.
Bond v. Commissioner, 100 T.C. 32, 42 (1993). We disagree. As we have previously
held, obtaining an appraisal from a nonqualified appraiser does not constitute sub-
stantial compliance. See Alli v. Commissioner, T.C. Memo. 2014-15, 107 T.C.M. (CCH)
1082, 1095 (citing D’Arcangelo v. Commissioner, T.C. Memo. 1994-572, 68 T.C.M.
(CCH) 1223, 1230). The Reynoldses cannot be deemed to have “substantially complied”
with the regulations when they achieved an advance agreement with the appraisers
that the Parent Tract would be overvalued.
                                    46

[*46] 170(f)(11)(A)(ii)(II) similarly to other Code sections that provide
for “reasonable cause” defenses. See Presley v. Commissioner, T.C.
Memo. 2018-171, 116 T.C.M. (CCH) 387, 402, aff’d, 790 F. App’x 914
(10th Cir. 2019); Crimi v. Commissioner, T.C. Memo. 2013-51, 105
T.C.M. (CCH) 1330, 1353. Reasonable cause requires that a taxpayer
“have exercised ordinary business care and prudence.” Crimi, 105
T.C.M. (CCH) at 1353 (citing United States v. Boyle, 469 U.S. 241
(1985)). If a taxpayer alleges reliance on professional advice, he must
show that he “actually relied in good faith on the professional’s advice.”
Id.; see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98–99
(2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

        Petitioner contends that the Reynoldses had “reasonable cause”
for failure to secure a qualified appraisal because they “relied on an ac-
countant and the ongoing tax advice of a law firm at the time of the
appraisal.” But the record establishes that the Reynoldses, acting
through their agents, reached an advance agreement with Messrs. Van
Sant and Wingard that the Subject Property would be significantly over-
valued. There is no evidence that any lawyer or accountant opined that
the Parent Tract was actually worth $60 million. Even if they had, the
Reynoldses could not reasonably have relied on that advice because they
knew that the Parent Tract at year-end 2015 was worth less than $10
million. See Treas. Reg. § 1.6664-4(c)(1)(ii) (stating that, for reliance on
professional advice to constitute reasonable cause, “the advice must not
be based upon a representation or assumption which the taxpayer
knows, or has reason to know, is unlikely to be true”); see also Exelon
Corp. v. Commissioner, 906 F.3d 513, 529 (7th Cir. 2018), aff’g 147 T.C.
230 (2016); Blum v. Commissioner, 737 F.3d 1303, 1318 (10th Cir. 2013),
aff’g T.C. Memo. 2012-16.

      In short, the reason the appraisal is “nonqualified” is not some
minor defect or technical flaw, a matter about which a taxpayer might
sensibly trust professional advice. The appraisal is nonqualified be-
cause the Reynoldses “had knowledge of facts that would cause a rea-
sonable person to expect the appraiser falsely to overstate the value of
the donated property.” Treas. Reg. § 1.170A-13(c)(5)(ii). A person who
achieves an advance agreement with an appraiser that property will be
overvalued—knowing that it is being overvalued—cannot establish good
                                          47

[*47] faith reliance on professional advice that the appraisal is accepta-
ble. 14

       C.      Application of Section 170(e)(1)

               1.      General Rules

        Section 170(e)(1)(A) provides that a deduction otherwise allowa-
ble for a contribution of property shall be reduced by “the amount of gain
which would not have been long-term capital gain . . . if the property
contributed had been sold by the taxpayer at its fair market value (de-
termined at the time of such contribution).” Inventory held primarily
for sale to customers in the regular course of a trade or business is “or-
dinary income property.” No portion of the gain from the sale of such
property can be long-term capital gain. See § 1221(a)(1).

       For these reasons, the deduction for a contribution of “ordinary
income property” is typically limited to the donor’s cost or adjusted basis
in the property. See Jones v. Commissioner, 560 F.3d 1196, 1199 (10th
Cir. 2009), aff’g 129 T.C. 146 (2007); Strasburg v. Commissioner, T.C.
Memo. 2000-94, 79 T.C.M. (CCH) 1697, 1704 (“The allowable charitable
contribution deduction for ordinary income property is limited to the ba-
sis of the property donated.”). Thus, if a taxpayer has a zero basis in
“ordinary income property,” section 170(e)(1)(A) “require[s] that the de-
duction for donating that property be reduced by the property’s entire
value—leaving the taxpayer with no deduction at all.” Jones v. Com-
missioner, 560 F.3d at 1199; see Lary v. United States, 787 F.2d 1538,
1540–41 (11th Cir. 1986); Conner v. Commissioner, T.C. Memo. 2018-6,
115 T.C.M. (CCH) 1013, 1023, aff’d, 770 F. App’x 1016 (11th Cir. 2019).

       Property contributed to a partnership generally retains the same
character it had in the hands of the contributing partner. Section 724(b)
provides that, if property is contributed by a partner to a partnership,
and if the property “was an inventory item in the hands of such partner
immediately before such contribution,” then “any gain or loss recognized

        14 In its opening post-trial brief petitioner asserted that the regulations gov-

erning qualified appraisals and qualified appraisers “did not go through a proper
notice-and-comment process and are, therefore, invalid.” That assertion occupied a
single sentence; petitioner supplied no argument in support of that assertion, stating
that “the Court need not reach that issue in this case.” And in its post-trial Answering
Brief petitioner did not mention any challenge to the validity of Treasury Regulation
§ 1.170A-13(c)(5)(ii), or any other provision of the regulations, based on the Adminis-
trative Procedure Act (APA). Under these circumstances, petitioner has not properly
presented or preserved an APA challenge to any regulation discussed in this Opinion.
                                         48

[*48] by the partnership on the disposition of such property during the
5-year period beginning on the date of such contribution shall be treated
as ordinary income or ordinary loss.” Section 724(b) was enacted to pre-
vent a partner from converting “ordinary income property” into capital
gain property simply by contributing it to a partnership. See Jones v.
Commissioner, 560 F.3d at 1199; Strasburg, 79 T.C.M. (CCH) at 1704.

       Section 751(d) defines “inventory items” for section 724(b) pur-
poses to include “property of the partnership of the kind described in
section 1221(a)(1).” See § 724(d)(2) (incorporating the definition of “in-
ventory item” provided in section 751(d)). Section 1221(a)(1) sets forth
an exclusion from the term “capital asset,” providing that a capital asset
does not include “stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory . . . or property
held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business.” Thus, if the contributing partner holds
property primarily for sale to customers in the ordinary course of its
trade or business, the property is an “inventory item” in its hands and
in the hands of the partnership to which it contributes the property.

       Whether a taxpayer holds property primarily for sale to custom-
ers in the ordinary course of its business, rather than as an investment,
presents a question of fact. Pritchett v. Commissioner, 63 T.C. 149, 162
(1974). The U.S. Court of Appeals for the Eleventh Circuit has explained
that this factual question involves three subsidiary inquiries:
(1) whether the taxpayer was engaged in a trade or business;
(2) whether the taxpayer held the property primarily for sale in that
business; and (3) whether the sales thus contemplated were “ordinary”
in the course of that business. Sanders v. United States, 740 F.2d 886,
888–89 (11th Cir. 1984) (citing Suburban Realty Co. v. United States,
615 F.2d 171, 178 (5th Cir. 1980)). 15 Absent stipulation to the contrary
this case is appealable to the Eleventh Circuit, and we thus follow its
precedent. See § 7482(b)(1)(E); Golsen v. Commissioner, 54 T.C. 742,
756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).

       The Eleventh Circuit has identified several factors that may be
relevant in this inquiry: (1) the nature and purpose of the property’s ac-
quisition and the duration of the taxpayer’s ownership; (2) the extent of
the taxpayer’s efforts to sell the property; (3) the number, extent,

       15 Decisions from the U.S. Court of Appeals for the Fifth Circuit issued before

October 1, 1981, are binding precedent in the Eleventh Circuit. See Bonner v. City of
Pritchard, 661 F.2d 1206, 1209 (11th Cir. 1981).
                                    49

[*49] continuity, and substantiality of the sales; (4) the extent of subdi-
viding, developing, and advertising to increase sales; (5) the use of a
business office for sale of the property; (6) the degree of supervision ex-
ercised by the taxpayer over any broker hired to sell the property; and
(7) the time and effort the taxpayer habitually devoted to the sales ac-
tivity. Boree v. Commissioner, 837 F.3d 1093, 1100 (11th Cir. 2016) (cit-
ing United States v. Winthrop, 417 F.2d 905, 909–10 (5th Cir. 1969)),
aff’g in part, rev’g in part T.C. Memo. 2014-85; see Sanders, 740 F.2d
at 889 (applying the Winthrop factors). No single factor or combination
of factors is controlling, and “great weight” may be given to other rele-
vant factors where appropriate. See Boree v. Commissioner, 837 F.3d
at 1105. Each case must be decided on its particular facts. Biedenharn
Realty Co. v. United States, 526 F.2d 409, 415 (5th Cir. 1976) (citing
Thompson v. Commissioner, 322 F.2d 122, 127 (5th Cir. 1963), aff’g in
part, rev’g in part 38 T.C. 153 (1962)).

             2.     Tax Character of the Subject Property

       The Reynoldses were real estate developers. In 2003 Jamie and
Reynolds Partners (controlled by Mercer)) each acquired a 50% interest
in the Parent Tract. At all times between 2003 and 2014 they held the
Parent Tract (including the Subject Property) for sale to customers in
the ordinary course of their real estate business.

       The Reynoldses commissioned maps and surveys of the Parent
Tract and considered various options for developing it. They eventually
settled on a conceptual mixed-use development plan for a community to
be called Reynoldsboro, consisting of one or more “town centers” sur-
rounded by homes. In 2006 they submitted a proposed development
plan to Greene County, identifying a mixture of high-density residential,
low-density residential, commercial, and recreational uses. The county
approved the plan and zoned the entire Parent Tract (including the Sub-
ject Property) as CPUD. By 2007 the Reynoldses had installed on por-
tions of the Parent Tract paved and unpaved roads, wastewater and po-
table water access points, and utility access points.

        Between 2007 and 2014 the Reynoldses persistently marketed the
Parent Tract, using a marketing package created by Messrs. Kelly and
Denbow. Their goal was to find a joint venture partner that would pro-
vide capital to assist them in bringing Reynoldsboro to life. In late 2012
Mercer initiated negotiations with Phoenix Capital which resulted in an
offer and a counteroffer but no deal. In 2013 the Reynoldses made an
offer to TPA, again seeking a joint venture partner to develop the Parent
                                          50

[*50] Tract. Those negotiations resulted in two offers and a counterof-
fer, but again no deal.

       While seeking a joint venture partner for the entire Parent Tract,
the Reynoldses sold portions of it to various buyers, generally with a
view to facilitating amenities that would be synergistic with their
hoped-for development. Between 2003 and 2012 they sold six parcels
out of the Parent Tract, totaling 95.53 acres, to be used (among other
things) for the construction of a fire station, a church, a school, a skilled
nursing/assisted living facility, and a residential community to be devel-
oped by Del E. Webb. The Reynoldses derived proceeds of $2,671,300
from three of these sales; the record does not enable us to determine the
sale prices for the other three parcels.

       Between February and June 2014, the Reynoldses sold another
four parcels out of the Parent Tract, totaling 60.6 acres. One of these
sales, to Carey Station Communities (15.43 acres), was for the construc-
tion of the Traditions residential community, which was jointly devel-
oped and operated by the Reynoldses and TPA. The Reynoldses derived
aggregate proceeds of $1,012,415 from these sales. They reported the
profit from all of the 2014 sales as ordinary income on their Federal in-
come tax returns. 16

       On the basis of these facts, we find that Jamie Reynolds and
Reynolds Partners (controlled by Mercer Reynolds) held their respective
50% interests in the Parent Tract for sale to customers in the ordinary
course of their real estate development business. Several factors listed
as relevant by the Eleventh Circuit—plus an additional factor, to which
we give great weight—point inescapably to that conclusion:

   •   The Reynoldses acquired the Parent Tract for development, held
       the Tract for 11 years, and completed plans to develop it as a
       mixed-use residential community. They submitted a develop-
       ment plan to Greene County for approval and received the CPUD
       zoning they requested. See Boree v. Commissioner, 837 F.3d at
       1100 (deeming relevant “the nature and purpose of the

        16 The 2014 returns on which these sales were reported were filed by Jamie

Reynolds and Reynolds Partners, which Mercer controlled. Petitioner did not submit
into evidence any tax returns filed by the Reynoldses or their affiliated entities for
years before 2014. In the absence of such evidence, we assume that the profits realized
from earlier sales of parcels carved from the Parent Tract, which occurred between
2003 and 2012, were likewise reported as ordinary income on the relevant Federal
income tax returns.
                                           51

[*51] acquisition of the property and the duration of the ownership”
      (quoting Winthrop, 417 F.2d at 910)).

    •   The Reynoldses persistently marketed the entire Parent Tract on
        the basis of DCF analyses prepared by their staff. From late 2012
        through early 2014 they engaged in lengthy negotiations with
        Phoenix Capital and TPA seeking a joint venture partner to de-
        velop the Parent Tract. Despite several rounds of offers and coun-
        teroffers, no deal was reached. As Mr. Denbow testified, $6.7 mil-
        lion “became the new asking price” after TPA rejected the Reyn-
        oldses’ first offer. See ibid. (deeming relevant “the extent and na-
        ture of the taxpayer’s efforts to sell the property” (quoting Win-
        throp, 417 F.2d at 910)).

    •   The Reynoldses sold ten parcels out of the Parent Tract, generally
        with a view to enhancing prospects for development of the entire
        Tract. These sales were substantial, involving 156.13 acres and
        generating sale proceeds in excess of $3.6 million. The “frequency
        and substantiality” of sales is the “most important” factor in de-
        termining the tax character of property. Boree v. Commissioner,
        837 F.3d at 1100 (quoting Biedenharn Realty, 526 F.2d at 416);
        see Suburban Realty, 615 F.2d at 178 (“[T]he presence of frequent
        sales ordinarily belies the contention that property is being held
        ‘for investment’ rather than ‘for sale.’”). 17

    •   The Reynoldses did initial infrastructure work on the Parent
        Tract, adding paved and unpaved roads, wastewater and potable
        water access points, and utility access points. They commissioned
        a master sewer plan from an engineering firm and a conceptual
        land use plan showing proposed roadways, residential communi-
        ties, and proposed commercial development. They created a mar-
        keting package for the Parent Tract that was “selectively distrib-
        uted” to potential joint-venture partners. Such development and
        marketing activities indicate that the taxpayer is engaged in a
        real estate business and holds land for sale rather than for invest-
        ment. See Boree v. Commissioner, 837 F.3d at 1100 (deeming

         17 Petitioner argues that the ten parcels sold—constituting roughly 15% of the

Parent Tract—represented an “insubstantial” portion of the whole. Eleventh Circuit
precedent does not support that assertion. See Major Realty Corp. & Subs v. Commis-
sioner, 749 F.2d 1483, 1488 (11th Cir. 1985) (ruling that sale of parcels amounting to
16% of a larger tract indicates that the tract was held for sale), aff’g in part, rev’g in
part T.C. Memo. 1981-361. In any event, the failure to sell more acreage was not for
lack of trying, as explained in the text.
                                         52

[*52] relevant “the extent of subdividing, developing, and advertising
      to increase sales” (quoting Winthrop, 417 F.2d at 910)); see Sub-
      urban Realty, 615 F.2d at 178–79.

   •   The Reynoldses conducted their sales activity directly and
       through office staff employed by their affiliated real estate enti-
       ties. See Boree v. Commissioner, 837 F.3d at 1100 (deeming rele-
       vant “the use of a business office for the sale of the property”
       (quoting Winthrop, 417 F.2d at 910)).

   •   Finally, when Jamie and Reynolds Partners sold portions of the
       Parent Tract, they reported those sales on their Federal income
       tax returns as generating ordinary income, not long-term capital
       gain. Statements on tax returns may generally be treated as ad-
       missions by the taxpayer. See Mendes v. Commissioner, 121 T.C.
       308, 312 (2003). We place great weight on this reporting, which
       shows that the Reynoldses (and their entities) regarded the Par-
       ent Tract as being held for sale to customers in the ordinary
       course of their real estate business. See Boree v. Commissioner,
       837 F.3d at 1105 (“[T]he [taxpayers] deducted expenses related to
       the property . . . , a practice inconsistent with capital gains treat-
       ment . . . .”); Glade Creek Partners, LLC v. Commissioner (Glade
       Creek Partners II), T.C. Memo. 2023-82, at *14 (“In the light of
       section 724(b) and its purpose, we place great weight on [the tax-
       payer’s] reporting of the easement property as inventory.”).

       In fall 2014 the Reynoldses formed Carey Station LLC, which is
treated as a partnership for Federal income tax purposes. They contrib-
uted to Carey Station LLC roughly 980 acres of the Parent Tract, includ-
ing the Subject Property. Because that acreage was an “inventory item”
in the Reynoldses’ hands, section 724(b) dictates that it remained an
“inventory item” in the hands of Carey Station LLC.

       During 2015 Carey Station LLC continued to hold the 980 acres
(including the Subject Property) as “ordinary income property.” In De-
cember 2014 it carved a 15.63-acre parcel out of the Parent Tract and
sold it to Good Samaritan Hospital for $1,049,262. As required by sec-
tion 724(b), Carey Station LLC reported its profit from that sale as or-
dinary income on the Form 1065 it originally filed for 2014. 18

        18 In June 2016 Mr. Ciavola sent Mr. Pollock an email outlining several “open

items,” including a “2014 amended return classifying property as held for investment
                                          53

[*53] In early 2015 Mr. Baker, a real estate broker, was authorized to
offer for sale, with an asking price of $7.7 million, the 980 acres held by
Carey Station LLC. He advertised the property for sale and asked in-
terested buyers to call him. He was contacted by a prospective buyer,
who was given a thorough tour of the Parent Tract and introduced to the
Reynoldses to discuss a possible purchase of the property.

       On the basis of these facts, we find that the 980 acres held by
Carey Station LLC (including the Subject Property) was “ordinary in-
come property” in its hands. On December 21, 2015, Carey Station LLC
contributed the Subject Property to Oconee, which is treated as a part-
nership for Federal income tax purposes. Under section 724(b), the Sub-
ject Property was thus “ordinary income property” in Oconee’s hands.
Cf. Jones v. Commissioner, 560 F.3d at 1199; Mill Road 36 Henry, LLC
v. Commissioner, T.C. Memo. 2023-129, at *51–54 (applying section
724(b) in the context of a syndicated conservation easement transac-
tion); Glade Creek Partners II, T.C. Memo. 2023-82, at *8, *15 (same);
Strasburg, 79 T.C.M. (CCH) at 1704.

       Petitioner advances two main arguments against this conclusion.
First, it asserts that the Parent Tract from 2003 to 2014 was “invest-
ment property” in the hands of Jamie Reynolds and Reynolds Partners,
and that the 980 acres they contributed to Carey Station LLC retained
this “investment” character. According to petitioner, Jamie and Reyn-
olds Partners were not in the “development business” but relied on affil-
iated entities (such as Linger Longer) to do the hands-on development
and construction work. Alternatively, they contend that the Parent
Tract was converted to “investment property” after 2011, when Reynolds
Plantation went into receivership. That is supposedly so because the
Reynoldses, owing to the financial crisis and lack of funding, allegedly
abandoned at that point their intent to develop the Parent Tract.

     We are not persuaded. The record leaves no doubt that Jamie
Reynolds and Reynolds Partners were engaged in the real estate

and not dealer inventory.” On April 4, 2016, Carey Station LLC had submitted to the
IRS an amended Form 1065 for 2014 reporting that its income from the sale of 15.63
acres to Good Samaritan Hospital was not ordinary income, as originally reported, but
rather was long-term capital gain. We find that the reporting of this transaction on
the amended return was erroneous and self-serving—being designed to backstop the
inflated charitable contribution deductions about to be claimed by the PropCos—and
we give it no weight. As discussed in the text, we find that Carey Station LLC at all
times held the Parent Tract (including the Subject Property) for sale to customers, not
for investment.
                                           54

[*54] development business. The Reynoldses and their associates cre-
ated dozens of distinct entities to conduct their real estate activities—
holding companies, investment companies, development companies, and
construction companies. In determining the tax character of the Parent
Tract, it is immaterial which of these entities ultimately performed the
development and construction work. The critical question is whether
the owners of the Parent Tract held that land for sale to customers in
the ordinary course of their real estate business. Jamie Reynolds and
Reynolds Partners were the owners of the Parent Tract, and the facts
establish that they held this land for sale to customers from 2003 on-
wards. 19

       Nor are we persuaded by petitioner’s assertion that the Reyn-
oldses converted the Parent Tract to “investment property” in 2011. The
Reynoldses, at that point, may have had insufficient capital to develop
the entirety of the Parent Tract on their own. That is why they focused
their marketing activities during 2012–2014 on a search for a joint ven-
ture partner. Their concept was that they would provide the land, the
new partner would provide much of the capital, and the development
activities would be undertaken jointly. This is precisely the pattern they
followed in May 2014, when they sold a 15.43-acre piece of the Parent
Tract to Carey Station Communities. That joint venture was owned
50%/50% by entities controlled by the Reynoldses and TPA. The Reyn-
oldses and TPA together developed that property as Traditions, a resi-
dential subdivision targeted to first-time home buyers.

      Finally, assuming arguendo that the Subject Property was “ordi-
nary income property” in Oconee’s hands, petitioner urges that a differ-
ent conclusion applies to the easement. The easement, petitioner em-
phasizes, was the subject of the charitable contribution, and it was not
“held for sale to customers.” Indeed, petitioner urges that section
170(e)(1) cannot possibly apply to the contribution of a conservation

         19 In August 2016 the Morris firm prepared, and Mr. Pollock signed, an opinion

letter discussing the easement transaction. That opinion relied on factual representa-
tions set forth in a “closing certificate” prepared by the Reynoldses or their agents. The
closing certificate included the representation that “[t]he Property Owner [Oconee]
does not hold any portion of the [Subject] Property for sale to customers in the ordinary
course of business.” This representation was incorrect insofar as it suggested that the
Subject Property was not ordinary income property in Oconee’s hands. Because this
representation was incorrect, the opinion can offer no support for petitioner’s position
regarding the application of section 170(e)(1).
                                          55

[*55] easement: Because an easement does not constitute physical
property, it is not the type of asset normally includible in “inventory.”

       This argument has little appeal to common sense. An easement
is a real property interest corresponding to a subset of the property
rights possessed by Oconee, the fee simple owner. By way of analogy,
suppose that a car dealership has an automobile in inventory and do-
nates the engine to a charity. The engine, like the car, is surely “ordi-
nary income property”; how could it have been transformed into invest-
ment property? Because the easement was carved from realty that was
“ordinary income property” in Oconee’s hands, the easement has the
same tax character.

       And there is no support for petitioner’s argument that section
170(e)(1) does not apply when the property donated is an easement. We
have repeatedly held that conservation easement contributions are sub-
ject to reduction under section 170(e)(1) where the property on which
the easement is granted is ordinary income property. See Mill Road 36
Henry, LLC, T.C. Memo. 2023-129, at *51–54; Glade Creek Partners II,
T.C. Memo. 2023-82, at *8–9 (stating the Court “must determine the
character of the easement property” in the donor’s hands because its
characterization carries over under section 724(b) and any “easement
deduction would be limited to [the donor’s] adjusted basis” if the ease-
ment property was inventory); Hughes v. Commissioner, T.C. Memo.
2009-94; Strasburg, 79 T.C.M. (CCH) 1697; Griffin v. Commissioner,
T.C. Memo. 1989-130, aff’d, 911 F.2d 1124 (5th Cir. 1990). 20

       In sum, we find that the Parent Tract (including the Subject Prop-
erty) was at all times “ordinary income property” in the hands of Jamie
Reynolds, Reynolds Partners, and Carey Station LLC. When Carey Sta-
tion LLC contributed the Subject Property to Oconee, section 724(b) dic-
tated that the Subject Property retained its character as “ordinary in-
come property” in Oconee’s hands. Thus, any charitable contribution

         20 The Reynoldses and their agents were fully aware of the risk that section

170(e)(1) might apply here. The draft and final opinions prepared by the Morris firm
devoted four pages to this topic. And Oconee referenced the application of sections
170(e)(1) and 724(b) in a five-page supplement to the Form 8283 that accompanied its
tax return. It there asserted that the Subject Property “was a ‘capital asset’ . . . as
defined by Code Section 1221(a)” in the hands of Jamie Reynolds, Reynolds Partners,
Carey Station LLC, and Oconee, and that, because the Subject Property was suppos-
edly “long-term capital gain property,” Oconee was “permitted to claim a deduction for
federal income tax purposes in an amount equal to the fair market value (as opposed
to the tax basis).”
                                   56

[*56] deduction attributable to Oconee’s grant of a conservation ease-
ment is limited by section 170(e)(1)(A) to Oconee’s basis in the Subject
Property at the time of the donation. See Jones v. Commissioner, 560
F.3d at 1199; Strasburg, 79 T.C.M. (CCH) at 1704 (“The allowable char-
itable contribution deduction for ordinary income property is limited to
the basis of the property donated.”).

             3.     Basis Limitation Under Section 170(e)(1)

       Petitioner asserts that Carey Station LLC had an adjusted basis
of $9,104,937 in the Parent Tract, which allegedly consisted of 963.27
acres at year-end 2014. From these figures petitioner derives a “tax ba-
sis per acre” of $9,452. The Subject Property consisted of 355.522 acres.
Multiplying that acreage by $9,452 and making a $72,240 adjustment
for “Capitalized Property Expenses in 2015,” petitioner calculates that
Oconee had a tax basis of $3,362,116 in the Subject Property.

       Petitioner has supplied no evidence to establish the starting point
for this calculation. The $9,104,937 figure is evidently derived from the
Form 1065 that Carey Station LLC filed for 2014. On Schedule L it
reported “land” with an alleged cost of $9,104,937. But there is no evi-
dence substantiating how this number was derived. An entry on a tax
return simply states the taxpayer’s position as to an item; it does not
constitute evidence. See Wilkinson v. Commissioner, 71 T.C. 633, 639
(1979); Roberts v. Commissioner, 62 T.C. 834, 837 (1974); Lenihan v.
Commissioner, T.C. Memo. 2006-259, 92 T.C.M. (CCH) 463, 466 (holding
that the cost basis reported by a taxpayer on his Federal tax return was
merely a statement of his position, not evidence that his figure was cor-
rect).

      Proper substantiation of Oconee’s adjusted basis in the Subject
Property would require a multistep calculation. Petitioner has failed at
every step:

   •   Petitioner has supplied no evidence to show the Reynoldses’ ac-
       quisition cost for the Parent Tract, consisting of 1,130 acres when
       purchased in 2003.

   •   Petitioner has supplied no evidence to establish the downward
       adjustments to basis required by the Reynoldses’ sale of 156.13
       acres from the Parent Tract—in 10 distinct transactions between
       2003 and 2014—for aggregate consideration exceeding $3.65 mil-
       lion.
                                      57

[*57] •      Petitioner has supplied no evidence to establish the downward
             adjustment to basis required by Carey Station LLC’s sale of
             15.63 acres to Good Samaritan Hospital in December 2014, for
             total consideration of $1,049,262.

      •   Petitioner has supplied no evidence to show any applicable up-
          ward adjustments to basis on account of improvements made to
          the Parent Tract.

      •   Petitioner has supplied no evidence to show the downward adjust-
          ment to basis required by the Reynoldses’ carving out 82.22 acres
          from the Parent Tract in November 2015 before Carey Station
          LLC contributed the remaining acreage to the PropCos.

      •   Petitioner has not established that all acreage remaining in the
          Parent Tract was 100% fungible, such that a “tax basis per acre”
          computation could reasonably be used to calculate Oconee’s ad-
          justed basis in the Subject Property.

       In sum, any charitable contribution deduction to which Oconee
would be entitled would be limited to its adjusted basis in the Subject
Property. Petitioner has failed to carry its burden of proving that
Oconee’s basis in the Subject Property exceeded zero. It has thus failed
to prove its entitlement to a charitable contribution deduction in excess
of zero. See Lary, 787 F.2d at 1540 (holding that taxpayers were entitled
to no charitable contribution deduction under section 170(e)(1)(A) when
they failed to prove that the donated property was long-term capital gain
property and failed to substantiate their basis); Better Beverages, Inc. v.
United States, 619 F.2d 424, 428 n.4 (5th Cir. 1980) (“Where the tax-
payer fails to carry this burden to prove a cost basis in the item in ques-
tion, the basis utilized by IRS . . . must be accepted even where, as here,
the IRS has accorded the item a zero basis.” (citing Coloman v. Commis-
sioner, 540 F.2d 427, 429–31 (9th Cir. 1976), aff’g T.C. Memo. 1974-78)).

II.       Valuation

       We have held that Oconee for 2015 is entitled to a charitable con-
tribution deduction of zero. But the proper valuation of the easement is
relevant in determining the penalties to which it may be subject. On its
2015 return, Oconee valued the easement at $20.67 million. It based
that valuation on the assertion that the “before value” of the Subject
Property was $21.2 million, or $59,718 per acre. We now consider the
reasonableness of that valuation.
                                    58

[*58] A.     Valuation Principles

       The allowable deduction for a charitable contribution of property
is generally the FMV of the property on the date it is contributed. Treas.
Reg. § 1.170A-1(a), (c)(1). The regulations define FMV as “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 knowledge of relevant facts.” Id. para. (c)(2). Valua-
tion is not a precise science, and the value of property on a given date is
a question of fact to be resolved on the basis of the entire record. See
Kaplan v. Commissioner, 43 T.C. 663, 665 (1965).

       To support their respective positions on the value of the ease-
ment, the parties retained experts who testified at trial. We assess an
expert’s opinion in the light of his or her qualifications and the evidence
in the record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986).
When experts offer competing opinions, we weigh them by examining
the factors the experts considered in reaching their conclusions. See Ca-
sey v. Commissioner, 38 T.C. 357, 381 (1962).

       We are not bound by an expert opinion that we find contrary to
our judgment. Parker, 86 T.C. at 561. We may accept an expert’s opin-
ion in toto or accept aspects of his or her testimony that we find reliable.
See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Boltar,
L.L.C. v. Commissioner, 136 T.C. 326, 333–40 (2011) (rejecting expert
opinion that disregards relevant facts). And we may determine FMV
from our own examination of the record evidence. See Silverman v. Com-
missioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.

       The parties agree that the easement should be valued by calcu-
lating the difference between the FMV of the Subject Property before
and after Oconee granted the easement—commonly referred to as the
“before and after” method. In deciding the “before value,” we must take
into account not only the actual use of the Subject Property at year-end
2015, but also its HBU. See Stanley Works & Subs. v. Commissioner, 87
T.C. 389, 400 (1986); Treas. Reg. § 1.170A-14(h)(3)(i) and (ii). A prop-
erty’s HBU is the most profitable use for which it is adaptable and
needed, or likely to be needed in the reasonably near future. Olson v.
United States, 292 U.S. 246, 255 (1934); Symington v. Commissioner, 87
T.C. 892, 897 (1986). If different from the current use, a proposed HBU
thus requires both “closeness in time” and “reasonable probability.” Hil-
born v. Commissioner, 85 T.C. 677, 689 (1985).
                                    59

[*59] B.     Highest and Best Use

       We have defined HBU as “[t]he reasonably probable and legal use
of vacant land or an improved property that is physically possible, ap-
propriately supported, and financially feasible and that results in the
highest value.” Whitehouse Hotel Ltd. P’ship v. Commissioner, 139 T.C.
304, 331 (2012) (quoting Appraisal Institute, The Appraisal of Real Es-
tate 277 (13th ed. 2008)), supplementing 131 T.C. 112 (2008), aff’d in
part, vacated in part and remanded, 755 F.3d 236 (5th Cir. 2014). Peti-
tioner’s experts, following the lead of Messrs. Wingard and Van Sandt,
determined that the HBU of the Subject Property was “immediate de-
velopment as a mixed-use residential community.” The specific HBU
they posited was a 1,012-unit residential subdivision on 162.1 acres of
the Subject Property, as laid out in Mr. McAllister’s 2022 land use plan.
By contrast, respondent’s expert, Mr. Driggers, concluded that a devel-
oper could not plausibly begin a development of this size immediately,
but would need to hold the 355-acre tract “for seven to ten years” before
full-scale development would become financially feasible. Mr. Driggers
accordingly determined that the HBU of the Subject Property was a
“speculative hold for future mixed-use development.” On this threshold
point we agree with respondent.

       In reaching his HBU conclusion, Mr. Driggers relied on the phys-
ical characteristics of the Subject Property and existing market condi-
tions. He determined that the real estate market in Greene County, as
of December 2015, was “still in recovery mode from the Great Reces-
sion.” In the near term, it could not absorb a new subdivision with the
number of units and high price points envisioned by petitioner’s experts.
During 2015 one-third of all residential real estate sales in the Lake
Oconee area involved property with lake frontage, access to golf courses,
or both. Mr. McAllister’s proposed 1,012-unit development offered nei-
ther.

       Mr. Driggers reasonably concluded that the supply of real estate
available for residential development in Greene County vastly exceeded
the demand. He analyzed the supply by focusing chiefly on the existing
residential communities near Lake Oconee—including Traditions, Del
E. Webb, and Reynolds Lake Oconee (formerly Reynolds Plantation, now
owned by MetLife). The developers of all three communities were so-
phisticated and well capitalized, and collectively they controlled 1,527
acres of developable land immediately adjacent to the Subject Property.
                                          60

[*60] Mr. Driggers estimated that at least 1,600 additional homesites
could be constructed on this acreage alone. 21

       Greene County issued only 203 new residential housing permits
in 2014 and only 224 in 2015. Assuming that permits would continue to
be issued at this pace (or slightly faster), Mr. Driggers estimated that it
would take at least seven years to absorb the homesites that the existing
communities already had available, without even considering the addi-
tional supply of 1,012 units that petitioner’s experts envisioned for the
Subject Property. Mr. Driggers reasonably viewed a seven-year absorp-
tion period as the best-case scenario. This is consistent with his conclu-
sion that the HBU of the Subject Property was a speculative hold for
future development. 22

      Mr. Driggers’ HBU determination, and the reasoning he adduced
to support it, mirror the conclusions that CBRE reached in its 2011 and
2014 appraisals of the Parent Tract. CBRE prepared these appraisals
for PNC Bank, which held a mortgage loan on the property. Both ap-
praisals emphasized that the Lake Oconee real estate market had been
severely damaged by the Great Recession. They concluded that low de-
mand, coupled with the high supply of vacant land, made near-term de-
velopment of the Parent Tract unlikely.

       21 Petitioner contends that Mr. Driggers, in determining the HBU, “ignored

evidence that development in the area had already started and was continuing”—an
apparent reference to Traditions. But Mr. Driggers clearly considered in his analysis
the ongoing development of Traditions—which was proceeding at a very modest
pace—and the other existing communities. The Del E. Webb community sold 31 new
homes in 2015. Traditions sold its first 6 homes in 2015, sold another 10 homes in
2016, and had 26 homesites available for sale as of January 2017. This is not what
one would call a tidal wave of development.
        22 Petitioner relies on a 2006 “Market Analysis,” prepared by a Reynolds-affil-

iated entity, that was submitted to Greene County in connection with the proposed
Reynoldsboro subdivision. That analysis projected that mixed-use development was
imminent and that absorption of all homesites would occur over ten years (i.e., by
2016). Needless to say, that did not come close to happening. Petitioner seems to infer
that Greene County, by granting CPUD zoning as requested by the Reynoldses, agreed
with their projections about the imminence and profitability of full-scale development.
There is no logical basis for that inference: The zoning approval simply indicated that
the proposed development complied with the county’s ordinance and was legally per-
missible. In any event, that report was prepared in 2006, setting forth the Reynoldses’
optimistic view of the housing market at its 2006 peak, before the Great Recession
caused real estate prices to crash. The 2006 report has no relevance in assessing the
relevant supply/demand factors at year-end 2015.
                                          61

[*61] The 2011 CBRE appraisal explained that “[t]he determination of
financial feasibility is dependent primarily on the relationship of supply
and demand.” It noted that four established residential communities
already existed near the Parent Tract, each with large amounts of de-
velopable land. All four had available homesites with lakefront access
and/or golf courses. The Parent Tract, which lacked these favorable at-
tributes, would have to contend with these established communities in
a market that CBRE called “competitive.” Indeed, CBRE was aware of
several development projects that “were slated to resume when eco-
nomic conditions improve.” All in all, CBRE concluded that “it would be
financially feasible to complete a new mixed-use project when economic
conditions improve,” but only if the price of the Parent Tract “was low
enough to provide an adequate developer’s profit.”

       CBRE reached essentially the same conclusions about the local
real estate market in 2014. Its June 2014 appraisal of the Parent Tract
determined that the Lake Oconee market, which mainly targeted “2nd
home buyers and regional retirees,” had been “hit very hard by the fi-
nancial downturn of 2008 and has yet to recover significantly.” It found
that development “has been slow to recover” because of “the low level of
sales that has taken place for the existing [housing] stock.” CBRE con-
cluded that potential buyers of land, “specifically large tracts of
mixed-use and residential land” like the Parent Tract, would likely be
“investors or developers well positioned to hold the property until the
market recovers in the future to a level which warrants substantial ad-
ditions in terms of housing supply.” 23

       The record supports CBRE’s and Mr. Driggers’ conclusion that
immediate development of the Subject Property was not financially fea-
sible. When MetLife acquired Reynolds Lake Oconee (formerly Reyn-
olds Plantation) out of receivership, the property it acquired included
five parcels comprising 1,392 acres adjacent to the Parent Tract and to
the immediate west, south, and east of the Subject Property. As candi-
dates for residential development, these parcels were at least as

         23 Petitioner discounts the two CBRE appraisals because they were prepared

for a bank that was chiefly interested in whether the Parent Tract would provide suf-
ficient collateral in the event of default. We do not find the reason PNC commissioned
the appraisals to be critical. We find these appraisals relevant chiefly for CBRE’s can-
did evaluation of the Lake Oconee real estate market in 2011–2014 and its conclusion
that the HBU of the Parent Tract would be “future mixed-use development” to com-
mence “when economic conditions improve.” Unlike some experts hired to provide trial
testimony, CBRE had no ax to grind, but was simply providing straightforward anal-
ysis to a bank.
                                          62

[*62] plausible as (if not more plausible than) the Subject Property: All
five were zoned CPUD or PUD, and all five had lake frontage, frontage
along Highway 44, or both. But MetLife determined that other portions
of Reynolds Lake Oconee—more distant from the Subject Property—
held greater development potential given the current market. And the
current market was not strong: Reynolds Lake Oconee (including Reyn-
olds Landing and Great Waters) sold fewer than 200 units between 2012
and 2015, whereas before the Great Recession it typically sold more than
500 units annually.

       MetLife was not the only entrepreneur with available land. The
Del E. Webb community, which occupied 408 acres northwest of the Sub-
ject Property, had 104 acres available for development in 2015. It sold
31 new homes in 2015 and had numerous homesites remaining for sale.
Traditions, which sold 16 homes during 2015–2016, had 26 remaining
homesites available for sale in 2017. And it was expected to expand:
Before easements were granted on the Subject Property and the other
two parcels, the Reynoldses carved out of the Parent Tract a 16.72-acre
parcel and a 32.23-acre parcel adjacent to Traditions to accommodate its
future expansion. Ironically, perhaps, any future development of the
Subject Property would thus encounter serious competition from the
Reynoldses themselves. 24

       In short, at year-end 2015 the Subject Property (comprising 355
acres) was surrounded on three sides by more than 2,000 acres of unde-
veloped land. Much of this acreage already had CPUD zoning and had
desirable features the Subject Property lacked. Most of this acreage was
owned by sophisticated, well-capitalized investors who had established
reputations as developers of existing communities in the area. Yet all
of these developers were taking a decidedly “go slow” approach to devel-
opment. Given that Greene County had issued only 203 new residential

        24 Apart from the acreage owned by existing communities and developers, the

two other parcels carved from the Parent Tract—Richland Creek and CS
Property—encompassed 519 acres of CPUD-zoned land that was also available for res-
idential development. Petitioner urges that we ignore this additional acreage because
conservation easements were granted on those parcels. But the three conservation
easements were all granted on the same day—December 31, 2015. In determining the
“before value” of the Subject Property, we assume that the other two parcels were not
yet encumbered by easements. We accordingly consider the parcels owned by Richland
Creek (250 acres) and CS Property (259 acres) in calculating the total acreage of unde-
veloped CPUD-zoned land adjacent to the Subject Property.
                                   63

[*63] housing permits in 2014 and only 224 in 2015, that “go slow” ap-
proach was surely rational in economic terms.

        Petitioner contends that the vast supply of neighboring undevel-
oped land is irrelevant because the Subject Property would supposedly
be developed in a way that filled “a gap in the market that needed to be
filled.” Petitioner surmises that the 2,000 acres surrounding the Subject
Property would likely be developed either into “gated communities,”
with high price points, or into simple cottages, with very low price
points. Mr. McAllister’s 1,012-unit development, petitioner says, would
shoot for the middle, having as its target demographic “ordinary people”
working in the neighborhood, aiming to “supply housing and commercial
needs for a more modest market.”

       We find no factual or logical support for this argument. Petitioner
adduced no plausible evidence that there was enough current demand
among “ordinary people” in the neighborhood to fill a 1,012-unit devel-
opment. To the contrary, the evidence established that demand for
homes in the Lake Oconee area came chiefly from retirees and
second-home buyers, typically residing in Atlanta, its suburbs, or other
regional population centers. The recommended price points for resi-
dences in Mr. McAllister’s proposed development, moreover, ranged
from $300,000 to $1.75 million. We are not sure that “ordinary people”
in the neighborhood would find these prices compelling.

       In any event—and contrary to petitioner’s premise—the existing
communities in the area had numerous homes and homesites available
in this same price range. Traditions, which likewise targeted first-time,
middle-class homebuyers, sold homes ranging in price from $244,000 to
$338,000 in 2015. Homes in Reynolds Landing ranged in price from
$370,000 to $550,000, and homes in Great Waters ranged in price from
$163,300 to $432,390. Reynolds Lake Oconee—the premier “gated com-
munity” in the area—had some homes priced as high as $3 million but
offered others for as little as $200,000.

       In short, contrary to petitioner’s contention, there was nothing
unique about the price points for Mr. McAllister’s proposed residences
that would immunize them from competition posed by the existing Lake
Oconee communities. Surrounded on three sides by more than 2,000
acres of undeveloped land, the Subject Property at year-end 2015 was
not a plausible candidate for full-scale development. The record firmly
supports Mr. Driggers’ conclusion that the HBU of the Subject Property
was not immediate development as a 1,012-unit residential complex, but
                                   64

[*64] rather a “speculative hold for future mixed-use development” once
the market could absorb such growth.

       In opining to the contrary, Mr. Galphin surmised that immediate
development of the Subject Property would be financially feasible be-
cause there was an “increasing demand for residential and resulting
commercial development,” as concluded in Ms. Sward’s “market analy-
sis.” Mr. Clanton similarly concluded that immediate full-scale devel-
opment would be financially feasible, making the extraordinary assump-
tion that Ms. Sward’s report was “true and accurate.” Both experts
made the extraordinary assumption that Mr. McAllister’s 2022 concep-
tual land use was legally permissible and would be approved.

       Mr. McAllister’s report posits the development of 1,012 residen-
tial units on 162.1 acres of the Subject Property—a residential density
of 6.24 units per acre, twice as dense as Traditions and Del E. Webb, the
two densest developments in the area. He offered no opinion concerning
the financial feasibility of this conceptual land use plan. And Messrs.
Galphin and Clanton did not undertake an in-depth analysis of the Lake
Oconee market as it actually existed at year-end 2015. Rather, they
based their HBU determination on Ms. Sward’s “market analysis,”
which asserted that development of a mixed-use subdivision at year-end
2015 would have been “successful” because of what she claimed was
“strong support for additional housing” in the area. She posited that 962
units could easily be sold within seven years, describing that sales pace
as “very conservative” given Mr. McAllister’s “high-quality development
concept” and “moderate initial pricing floor.”

       Ms. Sward’s “market analysis” left us completely unconvinced.
Although she opined that the residences shown in Mr. McAllister’s con-
ceptual plan would sell out in seven years, she offered no credible mar-
ket data to support that opinion. Her report fails to address the actual
facts on the ground in Greene County at year-end 2015. She ignores the
facts that (1) MetLife and Del E. Webb held 1,500 acres available for
development next door to the Subject Property; (2) Traditions had acre-
age available for development adjacent to the Subject Property and was
expected to expand; (3) much of these developers’ acreage had desirable
features the Subject Property lacked; (4) MetLife declined to develop its
acreage adjoining the Subject Property because it regarded other por-
tions of Reynolds Lake Oconee as more marketable; (5) Reynolds Lake
Oconee, the premier development in the area, was able to sell (on aver-
age) only 50 residential units annually during 2012–2015; and
(6) Greene County during 2014–2015 had issued (on average) only 214
                                   65

[*65] new residential housing permits annually.      Ms. Sward’s math
simply does not work.

        Rather than adduce contemporaneous market evidence to support
her conclusions, Ms. Sward relied heavily on consumer surveys, socio-
logical data, and housing statistics that post-dated 2015. She described
her methodology as including “an interview process with the local and
regional real estate professions,” “confidential data and analysis from
previous work . . . in the market that involved Lake Oconee communi-
ties,” and “consumer research conducted in 2021 [involving] customers
qualified and interested in buying a home at Lake Oconee” or in a simi-
lar community. These consumers were asked questions “about their life-
style, opinions of these communities, types of housing recently pur-
chased,” and the sorts of amenities they were seeking when considering
the purchase of a second or retirement home. The thrust of her report
was that the Lake Oconee area is a desirable destination—with an un-
met demand for “village-style communities”—and this desirability helps
account for the increase in housing sales and prices for years through
2022.

        Ms. Sward’s expert report relied extensively on data and infor-
mation from 2016–2022 to support her conclusions about the real estate
market in 2015. The bulk of the consumer research was conducted in
2021, and much of the sales and housing data also postdated 2015. Alt-
hough we ordered numerous problematic passages stricken from her re-
port, we find that her retrospective approach to valuation biased all of
her conclusions and renders the entirety of her “market analysis” unre-
liable.

       At the end of 2015, the immediate development of a 1,012-unit
residential community on the Subject Property was an extremely im-
probable scenario. At best, it would have depended “upon events or com-
binations of occurrences which, while within the realm of possibility,
[have not been] fairly shown to be reasonably probable.” See Esgar Corp.
v. Commissioner, T.C. Memo. 2012-35, 103 T.C.M. (CCH) 1185, 1190
(quoting Olson, 292 U.S. at 257), aff’d, 744 F.3d 648 (10th Cir. 2014).
We will not consider a “potential use” in valuing property if a hypothet-
ical buyer, on the valuation date, would not reasonably have considered
that potential use. Boone Operations Co. v. Commissioner, T.C. Memo.
2013-101, 105 T.C.M. (CCH) 1610, 1616 (citing Boltar, 136 T.C. at 336).

     A hypothetical buyer at year-end 2015 would not have considered
immediate full-scale development of the Subject Property financially
                                          66

[*66] feasible. As CBRE explained in its June 2014 appraisal, the most
likely “hypothetical buyer” would be a developer or investor “well posi-
tioned to hold the property until the market recovers in the future to a
level which warrants substantial additions in terms of housing supply.”
The Reynoldses were real estate developers. The evidence at trial con-
vinced us that, if immediate development of the Subject Property (or
other portion of the Parent Tract) were a realistic option, the Reynoldses
would have pursued that option, either themselves or in partnership
with one of the developers with whom they had negotiated. However,
they understood that immediate development was not financially feasi-
ble. That is why they opted for a conservation easement transaction as
an alternative mechanism for wringing cash out of their investment. We
accordingly agree with Mr. Driggers that, at year-end 2015, the HBU of
the Subject Property was a speculative hold for future mixed-use devel-
opment. 25

       C.      “Before Value” of the Subject Property

               1.      Sales Comparison Methodology

      We typically consider one or more of three approaches to deter-
mine the FMV of real property: (1) the market approach, (2) the income
approach, and (3) an asset-based approach. See Bank One Corp. v. Com-
missioner, 120 T.C. 174, 306 (2003), aff’d in part, vacated in part, and
remanded sub nom. J.P. Morgan Chase & Co. v. Commissioner, 458 F.3d
564 (7th Cir. 2006). Determining which method to apply presents a
question of law. See Chapman Glen Ltd. v. Commissioner, 140 T.C. 294,
325–26 (2013).

       The market approach—often called the “comparable sales”
method—is commonly used to value residential property. It determines
FMV by considering the sale prices realized for similar properties sold
in arm’s-length transactions around the same time. See Estate of Spruill
v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987); Wolfsen Land & Cattle
Co. v. Commissioner, 72 T.C. 1, 19 (1979). Because no two properties
are ever identical, the appraiser must make adjustments to account for

        25 Petitioner repeatedly insists that Greene County would have approved Mr.

McAllister’s 2022 mixed-use development plan. We assume arguendo that it would
have done so. But while the county was naturally supportive of economic development,
its approval would not indicate the financial feasibility of any particular development
proposal or the timeline under which development would occur. The record establishes
that there was no demand for large-scale mixed-use development in Greene County as
of December 31, 2015.
                                         67

[*67] differences between the properties (e.g., parcel size and location)
and the terms of the comparable sales (e.g., proximity to valuation date
and conditions of sale). See, e.g., Wolfsen Land & Cattle Co., 72 T.C.
at 19. The solidity of an appraiser’s valuation “depends to a great extent
upon the comparables selected and the reasonableness of the adjust-
ments made.” Id. at 19–20.

       “In the case of vacant, unimproved property . . . the comparable
sales approach is ‘generally the most reliable method of valuation . . . .’”
Estate of Spruill, 88 T.C. at 1229 n.24 (quoting Estate of Rabe v. Com-
missioner, T.C. Memo. 1975-26, aff’d, 566 F.2d 1183 (9th Cir. 1977) (un-
published table decision)). Both parties’ experts used the comparable
sales method to determine the “before value” of the Subject Property.
Because the 355-acre tract was vacant and largely unimproved at
year-end 2015, and because its HBU was a “speculative hold” for future
development, we agree that this approach provides the most reliable tool
for determining the “before value.” 26

               2.      Respondent’s Expert

       Given his HBU determination for the Subject Property, Mr. Drig-
gers searched for sales of similarly configured tracts that investors
would reasonably view as potential candidates for eventual (but not im-
mediate) mixed-use development, market conditions permitting. He se-
lected sales of seven comparable properties, all in Georgia. Six of these
transactions involved properties within 40 miles of the Subject Property
(three being located near Greensboro). The sales occurred between Feb-
ruary 2012 and November 2015 and involved tracts ranging from 194.4

          26 In certain situations the “subdivision method”—an application of the DCF

income method—may be an appropriate valuation tool. See., e.g., Crimi, 105 T.C.M.
(CCH) at 1345–46; Glick v. Commissioner, T.C. Memo. 1997-65, 73 T.C.M. (CCH) 1925,
1929–30. The subdivision method values undeveloped land by treating the property
as if it were subdivided and developed, estimating the costs of development and future
sale proceeds, and then discounting the expected net cashflows to present value. See
Glick, 73 T.C.M. (CCH) at 1929. Because the HBU of the Subject Property is a specu-
lative hold for future development, the subdivision method would not generate reliable
results here, given the numerous and highly uncertain assumptions necessarily en-
tailed in implementing it. We thus give no weight to Mr. Driggers’ backup DCF anal-
ysis. See supra note 10.
                                          68

[*68] acres to 856.6 acres. These tracts had a mix of zoning designations
and included agricultural properties. 27

      Of the seven transactions Mr. Driggers selected, we find the most
persuasive to be the three sales that occurred in Greene County, all in-
volving parcels slightly smaller than the 355-acre Subject Property:

    •   Comparable #3 was a 288-acre tract near Greensboro that sold for
        $8,091 per acre in October 2013. The property is located across
        from the Del E. Webb community and has waterfront acreage on
        Lake Oconee. It was zoned partially for agricultural use and par-
        tially for residential use, with 220 feet of lake and road frontage.
        After being on the market for three years, it was purchased by a
        developer who planned to develop it into a residential subdivision
        to be called “The Farm at Lake Oconee.”

    •   Comparable #6 was a 248.9-acre tract in Greene County that sold
        for $14,507 per acre in November 2012. Zoned mainly for agricul-
        tural use, it had 4,570 feet of frontage along the Oconee River that
        would be attractive for residential development. A bank acquired
        the property by foreclosure in December 2011 and sold it to a de-
        veloper in November 2012.

    •   Comparable #7 was a 194.4-acre tract in Greene County that sold
        for $10,286 per acre in February 2012. This tract, located roughly
        10 miles from the Subject Property, had about 9,500 feet of front-
        age on Lake Oconee. The purchaser was a developer who subdi-
        vided the parcel into homesites for a community to be called
        “Oconee Landing.” A small number of waterfront lots initially
        sold in the $200,000 range, while lots lacking lake frontage sold

        27 Petitioner contends that agricultural properties should not be used as com-

parables when considering a prospective mixed-use residential development. We dis-
agree: Because the HBU of the Subject Property is a speculative hold for potential
future development, well-situated agricultural properties are perfectly plausible can-
didates. CBRE and Weibel both used agricultural properties as comparables when
preparing their appraisals of the Parent Tract in 2011 and 2014, and this seems per-
fectly sensible: Numerous suburban and exurban developments have been built on
land formerly used for agricultural purposes. We also reject petitioner’s assertion that
Mr. Driggers selected comparables “in the middle of nowhere.” Six of his comparables
were within 40 miles of the Subject Property, and the three in or near Greensboro all
had desirable waterfront acreage on Lake Oconee. The comparables he chose outside
Greene County had plausible development potential, being located (1) in suburban At-
lanta, (2) near I–20 or another busy Atlanta highway, (3) near state or national parks,
or (4) near existing residential subdivisions.
                                           69

[*69] for roughly $35,000. The first homes were built in 2013, and con-
      struction was ongoing at year-end 2015. 28

       For all seven transactions, Mr. Driggers adjusted the actual sale
prices upward. He made these adjustments to account for differences
(for example) in parcel size, “conditions of sale,” and access to major
roadways. He adjusted all 2012–2014 sale prices upward to account for
improvement in the general economy after 2012. 29

       Mr. Driggers adjusted the prices for Comparables #5 and #6 up-
ward by 5% to account for the fact that a bank was the seller, noting
that lenders post-foreclosure often tend to be “more than typically moti-
vated sellers.” After interviews with brokers involved in those two
transactions, he concluded that a modest upward adjustment was rea-
sonable, noting that the properties were sold reasonably quickly after
being placed on the market. 30

       For the seven transactions, Mr. Driggers calculated an average
sale price of $8,488 per acre, which he increased to $12,550 per acre after
making upward adjustments as described above. But he believed that
emphasis should be given to the three transactions from Greene County,
recognizing that “market participants presented with th[ese] data might

        28 For Comparable #7 petitioner says that Mr. Driggers should have placed

more weight on the developer’s subsequent sales of the subdivided lots, which fetched
an average price of $33,586 per acre. We disagree—quarter-acre lots sold by a devel-
oper at retail are not comparable to the 355-acre Subject Property.
        29  Petitioner criticizes Mr. Driggers’ treatment of sale transactions from
2012–2013 as “comparable.” But as Mr. Driggers explained, few tracts comparable in
size to the Subject Property were sold during 2014–2015, and he made appropriate
upward adjustments to his 2012–2013 prices. Petitioner’s expert Mr. Galphin admit-
ted at trial that it was “very difficult” to find sales of similar land; indeed, he treated
two 2012 transactions as “comparable” even though they occurred in suburban Atlanta
as opposed to Greene County. Mr. Galphin’s only “comparable sale” from Greene
County occurred in February 2007, eight years before the valuation date.
        30 Petitioner faults Mr. Driggers for using bank sales as comparables, urging

that any “distress sale, a forced sale, or one negotiated with unusual terms provided
by the seller” should be discarded. See Rev. Proc. 79-24, 1979-1 C.B. 565, 565. That
revenue procedure does not treat sales by banks as “distress sales.” Rather, it says
that an appraiser should evaluate all “trends affecting the neighborhoods” and
determine—from the purchaser, the seller, or the real estate broker involved in the
sale—“whether there was any compulsion exercised by either party to the sale or if
there were any motives affecting the purchase price.” Id. at 565–66. Mr. Driggers
spoke with the transaction participants, determined that the sales were not “dis-
tressed,” and concluded that a modest upward adjustment of 5% was sufficient to ac-
count for the fact that the seller was a bank.
                                    70

[*70] well conclude that Greene County land” had above-average desir-
ability. As he noted, “three of [his] highest value indications after ad-
justments [were] from Greene County, and these [were] also among the
least adjusted comparables.” The average adjusted sale price for the
three Greene County comparable properties, all of which were slightly
smaller than the Subject Property, was $15,845. On the basis of these
facts and all the sales data, Mr. Driggers determined a “before value” of
$15,000 per acre for the Subject Property at year-end 2015, generating
a total value of $5,327,145 for the 355.143-acre parcel.

       We find no flaws in Mr. Driggers’ approach, and we find his bot-
tom line to be firmly supported, not only by the comparable property
transactions he selected, but also by the historical record relating to val-
uation of the Parent Tract. Petitioner does not contend that the Subject
Property had any unique features that made it especially valuable, and
the trial established that much of the acreage in the Parent Tract was
essentially fungible. Thus, prior valuations of the Parent Tract shed
some light on the proper valuation of the Subject Property.

       The record includes three prior appraisals of the Parent Tract, all
made by professional appraisers in a commercial (as opposed to a litiga-
tion) context. In 2011 CBRE appraised the Parent Tract (then compris-
ing 1,049 acres) at $11 million, or roughly $10,500 per acre. In June
2014 CBRE appraised the Parent Tract (then comprising 1,025 acres) at
$8,075,000, or about $7,900 per acre. In August 2014 Weibel appraised
a 964-acre portion of the Parent Tract at $9.64 million, or roughly
$10,000 per acre. All of these were “fair market value” appraisals valu-
ing the Parent Tract using sales of comparable vacant land, including
agricultural properties.

       In late 2012 the Reynoldses initiated negotiations with Phoenix
Capital, which sent them a letter of intent in January 2013 valuing the
Parent Tract (then consisting of 1,016 acres) at $8.3 million, or about
$8,170 per acre. The Reynoldses made a counteroffer in March 2013,
but they were unable to reach a deal with Phoenix Capital. Later in
2013 the Reynoldses made an offer to TPA, valuing the Parent Tract
(then consisting of 1,000 acres) at $7.9 million, or about $7,900 per acre.
After TPA rejected that offer, Messrs. Kelly and Denbow revised their
DCF analysis, arriving at a reduced value of $6.7 million, or about
$6,700 per acre. According to Mr. Denbow, $6.7 million “became the new
asking price” for the Parent Tract. In September 2013 the Reynoldses
                                          71

[*71] offered the Parent Tract to TPA at $6,700 per acre, but TPA again
rejected their offer. 31

       Although TPA was not interested in the entire Parent Tract at
the prices the Reynoldses were asking, the parties did reach a deal in
May 2014 on a 15.43-acre parcel, which they jointly developed as Tradi-
tions. The Reynoldses sold that parcel to the joint venture for $277,740,
or $18,000 per acre. Because TPA was unrelated to the Reynoldses, this
was an arm’s-length price that reflected the FMV of this parcel.

       Situated along Carey Station Road, the Traditions parcel was
more valuable than most acreage in the Parent Tract. As Mr. Kelly’s
2013 projection showed, 73% of the Parent Tract consisted of “inland”
property that he determined to have a net present value of less than
$2,650 per acre. It is also well established that smaller parcels (other
things being equal) generally sell for higher per-acre prices than larger
parcels. See Estate of Giovacchini v. Commissioner, T.C. Memo.
2013-27, 105 T.C.M. (CCH) 1179, 1201; Estate of Kolczynski v. Commis-
sioner, T.C. Memo. 2005-217, 90 T.C.M. (CCH) 290, 294 (noting pre-
mium paid for smaller parcels). Taking those factors into account, the
$18,000 per-acre price to which TPA agreed in May 2014 is consistent
with the $15,000 per-acre value that Mr. Driggers determined for the
entire Subject Property.

       The consummation of the easement transaction in December
2015 supplies a final piece of historical evidence as to the “before value”
of the Subject Property. On December 23, 2015, Oconee Investors ac-
quired all of the class A interests in Oconee (constituting 97% of the total
interests) from Carey Station LLC in exchange for $3.74 million. On
that day, Oconee’s only assets were the Subject Property and a receiva-
ble of $34,000, and its sole liability was an obligation to pay $35,000.
Ownership of Oconee was “thus a proxy for ownership” of the Subject
Property. See Plateau Holdings, LLC v. Commissioner, T.C. Memo.

        31 Petitioner contends that evidence regarding the Reynoldses’ offering prices

for the Parent Tract is irrelevant, noting that “a mere offer, unaccepted, to buy or sell
is inadmissible to establish market value,” quoting United States v. Smith, 355 F.2d
807, 811 (5th Cir. 1966). We are not using the offering prices to establish the FMV of
the Subject Property, but merely as a “sanity check” on the FMV determination Mr.
Driggers reached using comparable sales. The Reynoldses’ offers to sell the Parent
Tract for $7,150 and $6,050 per acre supply some evidence of what they thought the
property was worth. The fact that Mr. Driggers determined a per-acre value of
$15,000—more than double the price the Reynoldses were prepared to accept—pro-
vides some comfort that his value conclusion was reasonable.
                                         72

[*72] 2020-93, 119 T.C.M. (CCH) 1619, 1626. Grossing up Oconee In-
vestors’ ownership percentage to 100%, the Subject Property was thus
valued at roughly $3,885,670, or $10,950 per acre. See TOT Prop. Hold-
ings, LLC v. Commissioner, 1 F.4th 1354, 1368 (11th Cir. 2021) (finding
that the sale price for a 98.99% interest in a partnership, whose only
meaningful asset was property on which an easement was granted
shortly thereafter, was representative of the “before” value of the prop-
erty). Petitioner cannot plausibly dispute the arm’s-length character of
this transaction. 32

       In sum, the historical evidence—of which there is a great
deal—consistently supports Mr. Driggers’ determination that the Sub-
ject Property at year-end 2015 was worth (at most) $15,000 per acre.
Correctly positing the HBU of the Subject Property as a speculative hold
for future mixed-use development, he determined a “before value” of
$5,327,145 for the entire 355.143-acre tract. We find that his valuation
was conservative, i.e., generous to petitioner.

               3.      Petitioner’s Experts

       Messrs. Galphin and Clanton assumed the wrong HBU for the
Subject Property. Having assumed an incorrect HBU, they necessarily
selected their comparable property sales from the wrong universe of
transactions. See Glade Creek Partners, LLC v. Commissioner, T.C.
Memo. 2020-148, 120 T.C.M. (CCH) 285, 294 (noting that an expert’s
valuation “is of little relevance” where the expert adopted a different
HBU from the Court’s), aff’d in part, vacated in part and remanded per
curiam, No. 21-11251, 2022 WL 3582113 (11th Cir. Aug. 22, 2022)).
Even on their own terms, the comparables petitioner’s experts selected
are highly questionable. For both reasons, we give no weight to their
determinations of the “before value.”

     Only one of Mr. Galphin’s “comparable sales” involved land in
Greene County. That sale, which occurred in February 2007, involved a

        32 Petitioner asserts that the Reynoldses at year-end 2015 “were distressed

sellers who were incapable of engaging in a fair market value transaction.” In so con-
tending petitioner cites the foreclosure on Reynolds Plantation and the outstanding
mortgage loan on the Parent Tract. But the foreclosure had occurred four years previ-
ously, and the mortgage loan ($3.25 million at December 2014) represented a relatively
small fraction of the Parent Tract’s value. The Reynoldses were actively engaged in a
profitable real estate business during 2014–2015, as shown by their joint venture with
TPA to develop Traditions. Petitioner adduced no plausible evidence to support its
assertion that the Reynoldses were “distressed sellers” at year-end 2015.
                                           73

[*73] 17.62-acre tract that the Reynoldses (then the owners of Reynolds
Plantation) sold for incorporation into the Del E. Webb residential sub-
division. That transaction was not comparable for several reasons.

       First and most obviously, that sale occurred in February 2007,
almost nine years before the valuation date for the Subject Property.
The market conditions at that time—near the top of the real estate boom
that preceded the Great Recession—differed entirely from the market
conditions prevailing in late 2015. Secondly, at 17.62 acres, the tract
was much smaller than the Subject Property (355 acres), and smaller
parcels typically sell at higher per-acre prices. See Estate of Giovacchini,
105 T.C.M. (CCH) at 1201; Estate of Kolczynski, 90 T.C.M. (CCH) at 294
(noting premium paid for smaller parcels). Finally, the 17.62-acre par-
cel was sold to a developer that had committed to constructing a large
residential community. No similar developer was active in the Greene
County real estate market in late 2015. None of Mr. Galphin’s adjust-
ments—which failed to include any adjustment for market condi-
tions—was capable of accounting for these differences.

      Mr. Galphin’s other four “comparable sales” involved land in the
metropolitan Atlanta statistical area. Each was within 30–40 miles of
downtown Atlanta and was relatively close to a major highway intersec-
tion. Each tract was thus a plausible candidate for immediate develop-
ment. The Subject Property, by contrast, was 70 miles from downtown
Atlanta and was not a plausible candidate for a major residential devel-
opment anytime soon. 33

       Mr. Clanton selected only one “comparable sale” of real estate in
Georgia. That sale, involving a 113-acre tract in Dawson County, oc-
curred in March 2016. This transaction has diminished comparability
for several reasons: (1) the parcel was less than one-third the size of the
Subject Property, (2) the parcel was located three counties distant from
Greene County to the northwest, and (3) the sale occurred three months
after the valuation date. The other three “comparables” Mr. Clanton
selected were anything but comparable. All involved property outside
Georgia. Two had lake frontage, and two were sold to developers who

         33 The four tracts in suburban Atlanta, ranging from 113 to 183 acres, were

also significantly smaller than the Subject Property. As noted in the text, smaller
tracts generally sell for higher prices per acre than larger tracts. See Akers v. Com-
missioner, 799 F.2d 243, 246 (6th Cir. 1986) (agreeing that, the closer in size a property
is, the more comparable it is), aff’g T.C. Memo. 1984-490.
                                     74

[*74] were already constructing (or about to construct) residential sub-
divisions in the area.

       Finally, the proof of the pudding is in the eating. Mr. Galphin
opined that the Subject Property was worth $19.53 million, or $55,014
per acre. Mr. Clanton opined that the Subject Property was worth $16.7
million, or $47,042 per acre. These valuations are outlandish when com-
pared to the actual historical record. In an arm’s-length sale to Oconee
Investors in December 2015, Carey Station LLC (owned by the Reyn-
oldses) valued the Subject Property at roughly $3,885,670, or $10,950
per acre. And in an arm’s-length sale to the Traditions joint venture in
May 2014, the Reynoldses valued a 15.43-acre parcel of the Parent Tract
at $277,740, or $18,000 per acre. The Subject Property was 24 times
larger than the Traditions parcel. Since smaller parcels generally sell
for higher per-acre prices than larger parcels, the $18,000-per-acre price
for the Traditions parcel shows that the “before values” posited by peti-
tioner’s experts are not even in the ballpark.

       D.    Valuation of the Easement

       The parties agree that the easement should be valued by calcu-
lating the difference between the FMV of the Subject Property before
and after Oconee granted the easement. We have found that the “before
value” of the Subject Property was $5,327,145, as determined by Mr.
Driggers. The “after value” determined by Mr. Driggers, $355,143, is
lower than (and thus more advantageous to petitioner than) the “after
values” determined by petitioner’s experts. We will thus deem respond-
ent to have conceded that the “after value” of the Subject Property was
$355,143. The value of the conservation easement was thus $4,972,002
($5,327,145 – $355,143 = $4,972,002).

III.   Penalties

       The Code imposes a penalty for “the portion of any underpayment
[of tax] which is attributable to . . . [a]ny substantial valuation misstate-
ment.” § 6662(a), (b)(3). A misstatement is “substantial” if the value of
the property claimed on a return is 150% or more of the correct amount.
§ 6662(e)(1)(A). The penalty is increased to 40% in the case of a “gross
valuation misstatement.” § 6662(h). A misstatement is “gross” if the
value of property claimed on the return exceeds 200% of the correct
amount. § 6662(h)(2)(A)(i).

      The value Oconee claimed for the easement on its return was
$20.67 million. We have determined that the correct value of the
                                          75

[*75] easement at year-end 2015 was no greater than $4,972,002. The
claimed value exceeded the correct value by 416%. The valuation mis-
statement was thus “gross.”

       Generally, an accuracy-related penalty is not imposed if the tax-
payer demonstrates “reasonable cause” and shows that he “acted in good
faith with respect to [the underpayment].” § 6664(c)(1). This defense
may be available where a taxpayer makes a “substantial” valuation
overstatement with respect to charitable contribution property. See
§ 6664(c)(3) (second sentence). But this defense is not available where
the overstatement is “gross.” See § 6664(c)(3) (first sentence). The 40%
penalty thus applies to the portion of Oconee’s underpayment attribut-
able to claiming a value for the easement in excess of $4,972,002.

       Respondent alternatively seeks a 20% penalty for (among other
things) a substantial understatement of income tax. See § 6662(a),
(b)(2). This penalty would apply to what might be called the “lower
tranche” of the underpayment, i.e., the portion of the underpayment that
was not attributable to a valuation misstatement. See Plateau Hold-
ings, LLC v. Commissioner (Plateau Holdings II), T.C. Memo. 2021-133,
122 T.C.M. (CCH) 343, 343. The 20% penalty would apply, in other
words, to the portion of the underpayment resulting from our conclusion
that Oconee is not entitled to a charitable contribution deduction of
$4,972,002, corresponding to the correct value of the easement. The dis-
allowance of a charitable contribution deduction in that lesser amount
stems from our determinations that petitioner failed to secure a “quali-
fied appraisal” and that section 170(e)(1) limits its deduction to zero be-
cause it failed to prove a basis in excess of zero.

       The determination of an “underpayment” within the meaning of
section 6662(a) cannot be made at the partnership level because part-
nerships do not pay tax. Plateau Holdings II, 122 T.C.M. (CCH) at 343.
However, we can determine at the partnership level the applicability of
the penalty for substantial understatement of income tax. See Dynamo
Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 233 (2018); Plateau
Holdings II, 122 T.C.M. (CCH) at 343. 34

         34 Only one accuracy-related penalty may be applied with respect to any given

portion of an underpayment, even if that portion is penalizable on more than one of
the grounds set forth in section 6662(b). Sampson v. Commissioner, T.C. Memo.
2013-212, 106 T.C.M. (CCH) 276, 278 (citing New Phoenix Sunrise Corp. v. Commis-
sioner, 132 T.C. 161, 187 (2009), aff’d, 408 F. App’x 908 (6th Cir. 2010)). Consequently,
                                           76

[*76] The “reasonable cause” defense may be asserted against the 20%
accuracy-related penalty. But we conclude that Oconee has not estab-
lished “reasonable cause.” We have already determined that the Reyn-
oldses, who controlled Oconee, lacked reasonable cause for failure to se-
cure a qualified appraisal. See supra pp. 45–46. That is because they
“had knowledge of facts that would cause a reasonable person to expect
the appraiser falsely to overstate the value of the donated property.” See
Treas. Reg. § 1.170A-13(c)(5)(ii).

       We hold that Oconee likewise lacked reasonable cause in connec-
tion with the disallowance of a deduction under section 170(e)(1). Be-
tween February and June 2014, the Reynoldses sold four parcels out of
the Parent Tract and derived proceeds of $1,012,415 from these sales.
They reported the profit from all four sales as ordinary income on their
Federal income tax returns. In December 2014 Carey Station LLC,
owned by the Reynoldses, carved a 15.63-acre parcel out of the Parent
Tract and sold it for $1,049,262. Carey Station LLC likewise reported
its profit from that sale as ordinary income on the Form 1065 it origi-
nally filed for 2014. The Reynoldses thus knew that the Parent Tract
(including the Subject Property) was treated for tax purposes as prop-
erty held for sale to customers in the ordinary course of their real estate
business.

       Because the Subject Property was “ordinary income property,” the
Reynoldses and their agents were fully aware of the risk that section
170(e)(1) might apply here. Indeed, Mr. Pollock’s draft and final opin-
ions devoted four pages to this topic. But while Mr. Pollock described
how section 170(e)(1) works, he carefully avoided providing an actual
opinion on this point. Instead, he relied on the representation prepared
by the Reynoldses or their agents that “[t]he Property Owner [Oconee]
does not hold any portion of the [Subject] Property for sale to customers
in the ordinary course of business.” This representation was incorrect
insofar as it suggested that the Subject Property was not “ordinary in-
come property” in Oconee’s hands. Because this representation was in-
correct, the opinion cannot support petitioner’s position regarding the
application of section 170(e)(1). See Neonatology Assocs., 115 T.C. at 99

we will not determine whether Oconee is liable for the 20% negligence penalty under
section 6662(b)(1). “Once a partnership-level proceeding is final, the liability of the
partners, if any, may be determined in a partner-level proceeding, which may involve
a computational adjustment or a notice of deficiency.” Dynamo, 150 T.C. at 233 (citing
§ 6230(a)). We note that the disposition of this partnership-level proceeding does not
preclude a partner’s possible liability for negligence or his ability to raise a defense to
penalties in that partner-level proceeding. See id. (citing Treas. Reg. § 301.6221-1).
                                         77

[*77] (holding that a taxpayer asserting good faith reliance on profes-
sional advice must prove that “the taxpayer provided necessary and ac-
curate information to the adviser”).

       Finally, we conclude that Oconee lacked “reasonable cause” for
taking the position that its basis in the Subject Property exceeded zero.
Jamie Reynolds and Reynolds Partners (controlled by Mercer Reynolds)
acquired the Parent Tract in 2003. They supplied no evidence at trial to
establish their acquisition cost for the Parent Tract—a fact we found
surprising, given that a real estate business should be able to establish
what it paid for land it owns. As we explain supra pp. 56–57, proper
substantiation of Oconee’s basis in the Subject Property would require
a multistep computation including numerous downward and some up-
ward adjustments; petitioner did not even attempt such a calculation.
If petitioner had evidence to establish that there was enough basis left
in the Parent Tract at year-end 2015 to give Oconee a transferred basis
in excess of zero, we would have expected petitioner to present that evi-
dence at trial. Because petitioner failed to do this, we infer that it either
had no evidence or chose not to present the evidence because it was un-
helpful.

       In sum, petitioner offered no plausible evidence to show that
Oconee had reason to believe it was entitled to a charitable contribution
deduction in excess of zero or that it “exercised ordinary business care
and prudence” in taking that position. See Crimi, 105 T.C.M. (CCH) at
1353 (citing Boyle, 469 U.S. 241). Petitioner has thus failed to meet its
burden of establishing a “reasonable cause” defense to the 20%
accuracy-related penalty. See Rule 142(a); Davis v. Commissioner, 81
T.C. 806, 820 (1983), aff’d, 767 F.2d 931 (9th Cir. 1985) (unpublished
table decision); Fischer v. Commissioner, 50 T.C. 164, 177 (1968). 35

        35 The Commissioner asserted in the alternative a reportable transaction un-

derstatement penalty under section 6662A. However, in Green Valley Investors, LLC
v. Commissioner, 159 T.C. 80, 103 (2022), we that held the imposition of this penalty
on conservation easement transactions was improper because IRS Notice 2017-10 was
issued without the notice and comment required by the Administrative Procedure Act.
See 5 U.S.C. § 553.
                                 78

[*78] We have considered all of the parties’ contentions and arguments
that are not discussed herein, and we find them unnecessary to reach,
without merit, or irrelevant.

     To reflect the foregoing,

     Decision will be entered under Rule 155.