126 T.C. No. 16



                UNITED STATES TAX COURT



    JAMES D. AND BEVERLY H. TURNER, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5165-04.                     Filed May 16, 2006.



     P, a real estate investor, purchased 29.3 acres of
unimproved land in a historical overlay district, 15.04
acres of which were located within a designated
floodplain. Property development was subject to county
regulations that were more stringent for property
within a historical overlay district. Among the
regulations were zoning and rezoning requirements, as
well as limitations on development of designated
floodplain areas. Thirty lots were permissible under
current zoning. County approval would be required for
denser zoning usage. P, claiming that he was entitled
to develop up to 62 residences on smaller lots,
executed a deed to Fairfax County purporting to limit
development of the property to 30 residences. On their
1999 Federal income tax return, Ps claimed a
contribution deduction for a qualified conservation
easement under sec. 170(h)(1), I.R.C.
                               - 2 -

          1. Held: P did not make a contribution of a
     qualified conservation easement under sec. 170(h)(1),
     I.R.C., because the attempted grant did not satisfy the
     conservation purposes required under sec. 170(h)(4)(A),
     I.R.C. Specifically, the deed did not preserve open
     space or a historically important land area or
     certified historical structure.
          2. Held, further, Ps are liable for a 20-percent
     penalty for negligence under sec. 6662, I.R.C.



     J. Carlton Howard, Jr., for petitioners.

     John M. Altman and Linda R. Averbeck, for respondent.




     GERBER, Chief Judge:   Respondent determined a $178,168

income tax deficiency and a $56,537 accuracy-related penalty

under section 66621 for petitioners’ 1999 taxable year.   After

concessions,2 the issues remaining for our consideration are:




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       The parties settled the portion of respondent’s income
adjustments or penalties relating to the determination of an
increase in the net gain from FAC Co., L.C., and a decrease in a
home mortgage interest deduction. The parties agree that the
$62,045 home mortgage interest deduction that petitioners
claimed, and which respondent determined was $38,670, should be
$56,872. The parties also agree that the portion of a $892,578
gain that petitioners reported on their return from FAC Co.,
L.C., an entity in which petitioners have a 60-percent interest,
and which respondent determined was $1,215,027, should be
$1,081,578. Finally, respondent concedes the portion of the
penalties attributable to the home mortgage interest deduction
and the net gain from FAC Co., L.C.
                                 - 3 -

(1) Whether petitioners made a contribution of a qualified

conservation easement under section 170(h)(1); (2) if qualified,

we must decide the value of the easement; and (3) in the absence

of a qualified contribution or, alternatively if the easement’s

value was substantially overstated, whether petitioners are

liable for the accuracy-related penalty under section 6662.

                           FINDINGS OF FACT3

     General Background

     At the time their petition was filed, petitioners resided in

Alexandria, Virginia.     Petitioner4 is an attorney whose practice

is concentrated on real estate transactions in the vicinity of

Alexandria, Virginia.     Part of petitioner’s business activity was

the conduct of real estate closings through a title insurance

company he owned.   Petitioner was also an investor in real

property.   At all relevant times, he was a 60-percent member and

general manager of FAC Co., L.C. (FAC), a limited liability

company formed for the purpose of acquiring, rezoning, and

developing real property.     During 1997 and 1998, petitioner,

individually or through FAC, embarked on a plan to acquire

several contiguous parcels of land located in Woodlawn Heights,



     3
      The parties’ stipulation of fact is incorporated herein by
this reference.
     4
      Petitioners are husband and wife and they filed a joint
return for the year in issue. References to petitioner alone are
to petitioner James D. Turner.
                               - 4 -

Fairfax County, Virginia.   The unimproved realty was situated in

a historical district in the general area of Mount Vernon, the

home of President George Washington, and adjacent to President

Washington’s Grist Mill (Grist Mill).

     Acquisition of the Land for Development

     Through several transactions, a 29.3-acre parcel was

conglomerated by petitioner and/or FAC.    One transaction involved

the Future Farmers of America (FFA), which owned five lots within

this historical district.   One of these lots approximated 5.9

acres and was the situs of the FFA’s office building.    Although

the 5.9 acres was zoned for residential (classified as R-2), FFA

had a special use exception for its commercial office building.

But for the special use, the property was zoned residential.      If

FFA sold the land and building, the special use would not

automatically pass to the new owner.    The remaining four lots

acquired by petitioner were adjacent to the Grist Mill.

     During his negotiations for the purchase of the FFA

property, petitioner’s written offer included his belief that the

highest and best use for the property was for either “commercial

or a combined commercial and residential (town homes)”.

Petitioner expressed the further belief that the highest and best

use would require rezoning for increased density, but that “the

realities of local politics will not allow the highest and best

use.”   The developer of the acquired property would face several
                                - 5 -

obstacles to development, including compliance with Fairfax

County’s ordinances and regulations concerning such land

development.

     On December 12, 1997, and March 27, 1998, FAC acquired the

lots from FFA for $2 million.   On August 7 and 10, 1998,

petitioner, through another entity, purchased, from sellers other

than FFA, three additional lots in the Woodlawn Heights

historical overlay district for $550,000 and then contributed

them to FAC.   On August 15, 1999, FAC sold the 5.9-acre parcel,

including the FFA building, for $1.6 million.   Prior to that

sale, Fairfax County Supervisor Gerald Hyland (Hyland) assisted

in the rezoning of the 5.9-acre site to a C-2 classification that

would permit continued the use of the commercial building on that

property.   As of the date of the trial in this case, petitioner

continued to own one of the acquired unimproved parcels (lot 10),

and the remaining parcels5 that were conglomerated into a 29.3-

acre parcel for development that became known as the Grist Mill

Woods subdivision (Grist Mill property).   Slightly more than half

of the property (15.04 acres) is situated in a designated 100-

year floodplain and not available for residential development.




     5
      The Grist Mill Woods subdivision therefore consisted of
parcels 15, 16, 17, 18 (exclusive of the 5.9 acres of parcel 18
that included the FFA building), 25, 26, and 27.
                               - 6 -

     The 29.3-acre Grist Mill property was once owned by

President Washington and is located within the Woodlawn Heights

historical overlay district.   Historical overlay districts are

subjected to special requirements by the County.   President

Washington, beginning in 1771, operated the Grist Mill for the

purpose of grinding flour and cornmeal for use at his Mount

Vernon residence and also for sale along the east coast of the

United States, Portugal, and the West Indies.   Also located in

close proximity to the site was the Woodlawn Plantation that was

built in 1805 on land also owned by President Washington.    The

Grist Mill, Woodlawn Plantation, and the Future Farmers of

America (FFA) realty were all located relatively near to Mount

Vernon, President Washington’s 500-acre residential estate.    At

the time of trial, Mount Vernon was owned and maintained by the

Mount Vernon Ladies’ Association (MVLA), a private nonprofit

organization.   Slightly more than half of the Grist Mill property

(15.04 acres) is situated within a designated 100-year

floodplain.   At all relevant times, the Grist Mill property was

zoned R-2 (for residential use).

     Development of the Project

     The first prerequisite to the proposed development was the

need to conform to the general guidelines of Fairfax County.    The

governance of Fairfax County is vested in its Board of

Supervisors (the Board), which, inter alia, establishes county
                               - 7 -

government policy, passes resolutions and ordinances, and

approves land use plans.   The Board consists of a chairman and

nine additional members called supervisors elected by the

citizens of nine Fairfax County districts.   At all relevant

times, Hyland was the supervisor who had been elected by the

citizens of the Mount Vernon District.   As of the time of trial,

Hyland had served as a supervisor for 18 years.

     The Grist Mill property was located in Fairfax County which

had a comprehensive zoning plan defining the permitted uses for

county property.   Two pertinent Fairfax County residential zoning

plans are R-2 zoning and planned development housing (PDH)

zoning.   Under an R-2 zoning an owner would “by-right” be

permitted to build two single-family dwelling units per acre.

The term “by-right” denotes the property uses available to an

owner without requesting a new zoning designation.   Greater

residential per acre density is permitted under a PDH zoning

classification if certain requirements are met, such as the

preservation of open space.   An owner of property zoned R-2 who

wishes to build three units per acre would have to ensure that

the comprehensive plan permitted it and then apply to the Board

for a rezoning to a PDH or R-3 classification.

     During the conglomeration and development of the 29.3-acre

parcel, petitioner and others made the representation that 60

dwellings or residences could have been built.    In reality, only
                               - 8 -

approximately 30 could be built under the existing county zoning

for the property.   It was petitioner’s plan to grant a

conservation easement to the County that would limit the number

of building lots to 30.   The claimed conservation easement and

the underlying supporting appraisal were based on the assumption

that 60 dwellings could be built and the potential for 30 was

being given up by the easement.   Ultimately, the 29.3 acres were

sold without application for or change in the zoning.     At the

time of the claimed conservation easement, there was only the

possibility that the number of buildings or dwellings could have

been increased from 30 to a larger number.

     The rezoning process can be time consuming, costly, and

involves compliance with numerous regulations.   For example, even

with Hyland’s assistance, it took 5 months to obtain a C-2 zoning

classification for the FFA property and building.   In some

instances there may be a need to employ experts such as engineers

and surveyors.   The rezoning process is initiated by the filing

of an application and may involve a public hearing before the

planning commission and/or the Board.   The Board considers the

rezoning request and makes its decision based upon the planning

commission recommendations, staff reports, and public testimony

at hearings.   The cost to pursue a rezoning application in

Fairfax County during the late 1990s could have been as much as

$20,000-$30,000.
                               - 9 -

     In their review of a rezoning request, the Board considers

whether:   (1) The environmental sensitivity of the property and

the surrounding area would be adversely affected by an increased

number of dwelling units per acre; (2) the variation would be

consistent with the current use of the neighborhood and

surrounding properties; (3) the storm water runoff can be

effectively managed; and (4) the neighbors’ reaction would be

favorable.   Organizations or citizen groups concerned about a

particular zoning change may attempt to stop or slow the rezoning

process.   An applicant may be forced to negotiate differences

with adverse interests before proceeding with the application

process.

     In addition, Fairfax County may seek some public benefit in

the rezoning process.   Occasionally, the rezoning request is

coupled with a proffer.   A “proffer” is a form of compensation to

the county for increased needs such as transportation or public

improvement that are necessitated by the rezoning.

     The Fairfax County Office of Public Works must also review

development and construction plans to ensure that they meet

ordinance requirements and public facilities guidelines.    One of

the concerns of the Office of Public Works is to ensure that the

design of developments provides for proper drainage of storm

water and certain other safety-related factors.   Under certain

circumstances, detention ponds are required to ensure a
                              - 10 -

development does not encroach on or overburden designated

floodplain areas.   A developer’s obligation to comply with the

requirements of the Office of Public Works is called best

management practice requirements (BMP requirements).

     Because the Grist Mill property was located within a

“historical overlay district”, it was subject to more stringent

regulations than otherwise required by the basic zoning

regulations.   The Board has established 13 such historical

overlay districts within Fairfax County.    Fairfax County seeks to

conserve and improve these historical districts.    Where new

structures are being developed within those districts, the county

attempts to ensure they comport with the district’s historical

character.   To assist in the administration of these regulations,

the county created an Architectural Review Board (the ARB)

consisting of residents with expertise and interest in the

preservation of historical sites.   Applications for rezoning and

special exceptions or permits within historical overlay districts

must be submitted for the ARB’s review.    The ARB, in turn,

provides its recommendations to Fairfax County agencies for

further consideration and review.

     At all relevant times, the Grist Mill property was zoned R-2

and was limited to a maximum development of 30 residences.      Of

the 29.3 acres, 15.04 acres were in a floodplain and could not be

developed.   Accordingly, under an R-2 zoning (two homes per
                                - 11 -

acre), the Grist Mill property would have been limited to 30 home

lots.    Additional residential units and/or lots could have been

developed under a PDH-3 zoning.    Although PDH–3 zoning was

permitted under the comprehensive plan, it would have required

rezoning approval.    A change to PDH-3 zoning would have required

the approval of the planning commission, the Mount Vernon

Council, the Planning and Zoning Committee, and the Board, and

would likely not have been approved without an accompanying

proffer.    A successful rezoning application would likely have

taken at least 6 months and as much as a year for approval.      Due

to the historical nature of the subject property, petitioner

might have faced additional requirements, including review by the

ARB.

       County Supervisor Hyland was actively involved in the

development of the Grist Mill property as part of Fairfax

County’s revitalization efforts.    He was keenly interested in

this development because of its potential impact on the

surrounding historical sites.    For example, during February 1998,

petitioner received an offer from the U.S. Postal Service to

purchase lot 10 for $1.7 million.    Petitioner was enthusiastic

about that offer and was inclined to accept it, but Hyland was

against the idea, and negotiations failed.

       The Mount Vernon Ladies Association was interested in the

Grist Mill property development for several reasons.    It was

concerned about increased future parking needs for the Grist
                              - 12 -

Mill, and it was planning to renovate the Grist Mill during 1999.

If it was unable to acquire the Grist Mill property, MVLA was

concerned that an unrelated buyer might operate it in a manner

that would interfere with the historical nature of the Grist Mill

and other nearby related historical sites.    MVLA was specifically

concerned about negative impact on the Grist Mill caused by

commercial development, and, to a somewhat lesser extent, by

possible residential development.    After FFA decided to sell its

property, MVLA inquired about some of the FFA property, but the

negotiations were unsuccessful, and FAC later contracted to

purchase all five FFA lots.

     Around this same time, petitioner made assurances to MVLA

that the proposed development plan would include consideration of

MVLA’s needs for the preservation and the possible expansion of

Mount Vernon and the Grist Mill.    Although MVLA’s first

preference would have been to have no development on the property

adjacent to the Grist Mill, it realized that expectation was

unrealistic.   Therefore, MVLA believed the Grist Mill would be

better off with the development of a lesser number of more

expensive homes, as opposed to a larger number of less expensive

homes.   Another concern of MVLA was the maintenance of a

sufficient buffer between the Grist Mill and any adjacent

development in order to protect the historical view and

surroundings of the Grist Mill.
                              - 13 -

     In a letter dated February 3, 1999, MVLA expressed the

mistaken view that petitioner could develop the Grist Mill

property into at least 60 single-family homes and requested that

development be limited to 30 single-family homes.    MVLA pointed

out that a more expansive development would further impinge upon

the historical nature of the Grist Mill.    In addition, in a

letter dated March 3, 1999, petitioner advised MVLA that he would

be willing to donate lot 30 to MVLA for a buffer zone and parking

facility if his development proceeded as planned.    MVLA, however,

had hoped for a larger buffer between petitioner’s development

and the Grist Mill than the amount it ultimately received.

     Woodlawn Plantation wished to protect its historical view so

that a visitor’s view from the plantation resembled, as closely

as possible, the 18th century view.    Until 1999, the view from

the plantation was limited to the Grist Mill, trees and water,

and a small portion of a nearby road.    Woodlawn Plantation was

concerned about any impact on its view from the development of

the Grist Mill property.

     Petitioner’s Sales Activity - Grist Mill Property

     Beginning sometime in mid-1998, petitioner began to actively

pursue the sale of the 29.3-acre Grist Mill property.    While

attempting to sell the property, petitioner was also attempting

to obtain the necessary local government approval for the Grist

Mill property development.   In a letter dated October 26, 1998,
                              - 14 -

petitioner requested a waiver of the Fairfax County On-site

Stormwater Detention Requirements.     The county granted the

request on December 31, 1998, so long as petitioner provided

channel protection from storm sewer outfalls to Dogue Creek.

This was accomplished by a floodplain easement.     The required

protection could not have been satisfied by means of a

conservation easement.   Notwithstanding, petitioner indicated in

his development plans that he intended to use a conservation

easement to satisfy those BMP requirements.

     During June 1998, petitioner began discussions for the sale

of the Grist Mill property to NVHomes.     Petitioner provided

NVHomes with a sketch depicting a 62-lot and a 30-lot proposal

for development.   During July 1998, NVHomes sent petitioner a

proposed purchase agreement for the Grist Mill property,

envisioning the purchase of approximately 60 fully developed

single-family lots.   The parties’ negotiations collapsed because

NVHomes wanted fully developed lots and petitioner’s business

partner wished to sell the property more quickly than it would

take to make the desired improvements.

     During October 1998, Centex Homes offered to purchase 41.5

acres of petitioner’s property for $2,700,000 conditional on a

PDH-2 rezoning that yielded approximately 60 single-family

detached lots, but not fewer than 50.     Also during October 1998,

Batal Builders, Inc., offered to purchase approximately 32.5
                               - 15 -

acres of petitioner’s property for $2,700,000 subject to rezoning

that would yield a minimum of 48 lots.    In November 1998, the

terms of Batal Builders, Inc.’s offer was modified to

approximately 32 acres for $2,450,000 not subject to rezoning.

Both purchasers were aware that the subject property might be

subjected to a conservation easement.

     On February 9, 1999, petitioner entered into an agreement

with Carl Bernstein, manager of Mount Vernon Development, LLC

(MVD), for the sale of the Grist Mill property.    The agreement

provided for the sale of 29 lots (comprising 32 acres) for

$2,800,000.    The sale was subject to the possibility that

petitioner would donate lot 30 to the MVLA.    The sale was also

subject to a conservation easement or donation in fee simple of

the outlots for recreational use, but the parties recognized that

the donation of the outlots “shall not reasonably impair the

value of the 30 lots contained within the subdivision of Grist

Mill Woods.”

     Despite these express plans for 30 lots, in a letter dated

the next day, February 10, 1999, Hyland requested petitioner

consider limiting development of the Grist Mill property to 30

single-family homes.    The letter inferred that petitioner could

have built 62 lots “by-right”.    The letter contained the

statement that limiting the development to 30 residential units

would preserve the historical nature of the Grist Mill and might
                               - 16 -

provide tax benefits.    The parties to this proceeding acknowledge

that the reference to 62 building lots “by-right” was incorrect

and would have required rezoning.   Although Hyland signed this

letter, petitioner and his advisers had prepared it and requested

Hyland to sign it.   Hyland relied on petitioner for the truth or

accuracy of the statements in the letter.   At the time Hyland

signed the letter, he was unaware that petitioner had plans to

develop and sell 30 lots.    Petitioner intended to use the letter

to substantiate a tax deduction he planned to take for a

conservation easement.

     Ultimately, the Grist Mill property was subdivided into 29

residential lots.    Some of the 29 homes built on the Grist Mill

property could be seen from the Woodlawn Plantation, especially

during the winter and spring months when there is less foliage.

     The Grist Mill Woods subdivision plan was approved by the

Fairfax County Plan Control Section with an R-2 zoning

classification on March 23, 1999.   In a letter dated October 14,

1999, MVLA agreed to the plan and asked the ARB to support

petitioner’s proposed development of a 30-residence subdivision.

MVLA also stated its understanding that petitioner would donate

lot 30 to MVLA for parking at the Grist Mill.   MVLA’s letter was

based on the language recommended and supplied by petitioner.
                                - 17 -

     On October 14, 1999, the ARB reviewed petitioner’s

application for the Grist Mill Woods subdivision.    The ARB

understood that the development plan provided a sufficient buffer

between the subdivision and the Grist Mill and that lot 30 would

be donated to the Grist Mill.    Although the ARB was concerned

about the potential for tree loss, ultimately the plans were

approved.

     The Conservation Easement and Income Tax Deduction

     On December 6, 1999, the same day FAC closed on its sale of

the Grist Mill property to MVD, FAC executed a conservation

easement deed, which was recorded on December 7, 1999.    The deed

contained a description of the historical sites adjacent to the

Grist Mill property and indicated that MVLA and the Board wished

FAC to limit construction of the property to 30 single-family

residential lots.   It contained the further statement that even

though FAC could have built 62 lots based on a PDH subdivision,

it voluntarily agreed to limit developing the Grist Mill property

to 30 lots to better serve the historic and scenic nature of the

Grist Mill.   Despite the assertion that 62 lots could have been

built, the Grist Mill property was zoned R-2 and no plan for PDH

zoning had been approved or was pending before Fairfax County.

Neither the Fairfax County Attorney’s Office nor MVLA reviewed

the deed, and the purported grantee of the conservation easement

did not sign or acknowledge the deed.
                              - 18 -

     Petitioners claimed a $342,781 charitable contribution

deduction6 on their 1999 Federal income tax return.   The

deduction, $1,248,000, was based on a 40-percent7 share of the

conservation easement to Fairfax County which had been valued at

$3,120,000.   The $3,120,000 value was based on the December 30,

1999, appraisal report prepared by Frank Petroff (Petroff) and

was referenced on petitioners’ Form 8283, Noncash Charitable

Contributions, attached to their return.   The appraisal was

based, in part, on the February 10, 1999, letter signed by

Hyland.   In addition, the appraisal was based on the erroneous

assumption that the entire Grist Mill property could have been

fully developed, including the area consisting of the floodplain.

On the “Donee Acknowledgment” part of Form 8283 “Fairfax County

Board of Supervisors” was shown as the intended charitable donee,

but the acknowledgment signature line was not executed and left

blank.

                              OPINION

     Petitioners claimed a deduction for a contribution of a

qualified conservation easement under section 170(h)(1).


     6
      The deduction was reduced by $905,219 due to an adjusted
gross income limitation.
     7
      We note that petitioners claimed a deduction based upon a
40-percent share of FAC, although documentary evidence reflected
that petitioner was a 60-percent member of FAC. Due to the
outcome in this case, the difference between the ownership
percentage and claimed contribution deduction percentage need not
be reconciled or considered further.
                              - 19 -

Respondent determined that petitioners were not entitled to the

contribution deduction.   If we decide that there was a qualified

conservation easement, then we must decide its value in order to

arrive at the amount of the deduction to which petitioners are

entitled.   Respondent contends that petitioners have failed to

show that their donation satisfies the statutory definition and

requirements for a conservation easement deduction.    In that

regard, respondent contends that there were defects in the

conservation easement deed and petitioners’ Form 8283 (attached

to their return) and no acceptance of the deed or an easement by

Fairfax County (the donee named by petitioners).    Alternatively,

if the Court decides that there was a valid donation, respondent

contends that the Grist Mill property was developed according to

its highest and best use, and there was, therefore, nothing

remaining to contribute as a conservation easement.

     Petitioners contend that they have either complied or

substantially complied with the reporting requirements for a

conservation easement deduction.   They also contend that the

Grist Mill property had the potential for additional development

and that such potential was foregone to preserve the historic

nature of the surrounding properties.    If we decide that there

was no contribution of a qualified conservation easement, we must

then decide whether petitioners are subject to an accuracy-

related penalty under section 6662.    The grounds underlying
                                 - 20 -

respondent’s determination for the penalty are, alternatively,

that petitioners did not make a qualified contribution or, if a

contribution was made, its value was substantially lower than the

amount reported on their return.

A.   The Burden of Proof

      Generally, the burden of proving or showing error in

respondent’s determination is upon the taxpayer.      See Rule

142(a).    The burden of proof may shift to respondent in certain

situations.    See sec. 7491(a).    Petitioners concede that they

bear the burden of showing their entitlement to a conservation

easement deduction.    Conversely, respondent concedes that he

bears the burden of production with respect to the section 6662

penalty.    See sec. 7491(c).

B.   The Conservation Easement

     1.   Background

      Section 170(a)(1) allows a deduction for a charitable

contribution made during the taxable year.      Generally, section

170(f)(3) does not permit a deduction for a charitable gift of

property consisting of less than the donor’s entire interest in

that property.    An exception applies in the case of a “qualified

conservation contribution.”     See sec. 170(f)(3)(B)(iii).     A

contribution of real property may constitute a qualified

conservation contribution if:      (1) The real property is a

“qualified real property interest”; (2) the donee is a “qualified
                               - 21 -

organization”; and (3) the contribution is “exclusively for

conservation purposes.”   Sec. 170(h)(1); see also sec. 1.170A-

14(a), Income Tax Regs.   To be a qualified conservation

contribution, all three requirements must be met.

     A “qualified real property interest” must consist of the

donor’s entire interest in real property (other than a qualified

mineral interest) or consist of a remainder interest, or of a

restriction granted in perpetuity concerning way(s) the real

property may be used.   Sec. 170(h)(2).   A restriction granted in

perpetuity on the use of the property must be based upon legally

enforceable restrictions (such as by recording the deed) that

will prevent uses of the retained interest in the property that

are inconsistent with the conservation purpose of the

contribution.   See sec. 1.170A-14(g)(1), Income Tax Regs.

     A qualified organization is defined in section 170(h)(3) and

a contribution is made “exclusively for conservation purposes” if

it meets the tests of section 170(h)(4) and (5).    This

requirement has two parts.    First, a contribution is for a

conservation purpose if it:    (1) Preserves land for the general

public’s outdoor recreation or education; (2) protects a

relatively natural habitat of fish, wildlife, or plants, or

similar ecosystem (the natural habitat requirement); (3)

preserves open space either for the scenic enjoyment of the

general public or pursuant to a Federal, State, or local
                               - 22 -

governmental conservation policy and yields a significant public

benefit (the open space requirement); or (4) preserves a

historically important land area or a certified historic

structure (the historic preservation requirement).    Sec.

170(h)(4)(A); see also sec. 1.170A-14(d)(1), Income Tax Regs.

Secondly, the “exclusively for conservation purposes requirement”

may be met only if the conservation purpose is protected in

perpetuity.   Sec. 170(h)(5)(A).

    2.   Discussion

         a.   Generally

     Respondent agrees that the intended donee, Fairfax County,

is a qualified organization under section 170(h)(3).     The parties

continue to dispute whether there was a qualified real property

interest and whether the contribution is exclusively for

conservation purposes.    If petitioners are unsuccessful in

showing either that they contributed a qualified interest or that

a qualified interest was contributed exclusively for conservation

purposes, they will not be entitled to the claimed deduction.    If

petitioners satisfy both of those two requirements, then we shall

decide the value of the conservation easement.

     With respect to the third requirement,8 petitioners contend

only that they met the open space and historic preservation



     8
      Whether the contribution is made exclusively for
conservation purposes.
                                   - 23 -

requirements.        We accordingly begin our discussion of the third

requirement by considering those two aspects.9

          b.   Satisfaction of the Third Requirement

     In Glass v. Commissioner, 

, 278-284 (2005),

which also involved the contribution of a conservation easement,

this Court considered the requirement that a contribution be made

exclusively for conservation purposes.          The discussion in that

case, however, was directed to whether the taxpayer satisfied the

natural habitat requirement.       That discussion, accordingly, did

not focus on the requirements we consider here.10         Accordingly,

we proceed to consider and analyze the two elements in dispute in

this case.

               (1)     Open Space Requirement

     Petitioners allege that they satisfy the open space

requirement of section 170(h).        Satisfaction of this requirement

requires both the preservation of open space and the inurement of

a significant public benefit.       Sec. 170(h)(4)(A)(iii).     The




     9
      Because we ultimately hold that petitioners have not
satisfied the third requirement, there is no need to consider the
first requirement or the easement’s value.
     10
      In addition, because we hold that petitioners do not
satisfy either the open space or the historic preservation
requirement, we need not consider whether the contribution was
“exclusively” for conservation purposes, as we did in Glass v.
Commissioner, 

, 278-284 (2005).
                              - 24 -

legislative history underlying this statute contains the

following relevant examples of uses that may satisfy the open

space requirement:

     the preservation of * * * [land] as a public garden * *
     * (1) the preservation of farmland pursuant to a State
     program for flood prevention and control; (2) the
     preservation of a unique natural land formation for the
     enjoyment of the general public; (3) the preservation
     of woodland along a Federal highway pursuant to a
     government program to preserve the appearance of the
     area so as to maintain the scenic view from the
     highway; and (4) the preservation of a stretch of
     undeveloped oceanfront property located between a
     public highway and the ocean so as to maintain the
     scenic ocean view from the highway. [S. Rept. 96-1007,
     at 12 (1980), 1980-2 C.B. 599, 605.]

Generally, the examples provided in the legislative history

concern the preservation of the natural state of land.

Petitioners’ argument addresses this requirement from their

viewpoint that the limiting of the Grist Mill property

development to 30 lots rather than 62 lots enables it to have “a

distinctly open quality.”   Respondent counters that even if the

deed effectively limited development to 30 lots, there were no

restrictions placed on open space within the buildable area.

Further, there could be no building on the remaining acreage

because it was designated floodplain.   Accordingly, we agree with

respondent’s argument.

     Petitioners do not contend, nor was it feasible, that

residential units could have been built on the floodplain portion

of the property.   Therefore, a conservation easement, if any,
                              - 25 -

could only have been carved from the somewhat less than 15

developable acres (outside of the 15.04 acre floodplain area).

Assuming arguendo that the deed limited petitioner’s development

of the Grist Mill property to 30 lots, that limitation, by

itself, does not provide additional land that would have been

available if the same developable acreage had been divided into

62 lots (such as by use of PDH zoning permitting more housing

units per lot).   Nothing in the deed limits the size of the homes

(either in square footage to protect the amount of buildable land

that each can cover, or in height to protect the view from any

nearby historical area), or any other development that could have

taken place on or adjacent to the Grist Mill property.    Moreover,

nothing in the deed limits the landowner’s ability to seek

rezoning to denser development classifications.    Accordingly,

neither petitioner nor the builder was prohibited from building

homes twice the size of those planned for development.

     Finally, petitioner’s contention that the development did

not infringe on any view is without merit.    The deed contained no

specific provisions to protect the views from the Grist Mill and

the Woodlawn Plantation or any other location.    The view from

those properties were not any more protected if 30 instead of 62

residential units were to be built.    The natural state was not

protected by the development of 30 rather than 62 units.
                                 - 26 -

Accordingly, petitioners have not satisfied the open space

requirement of section 170(h).

               (2)   Historic Preservation

     We now consider whether petitioners satisfied the third

requirement by showing that their contribution comes within the

historic preservation requirement of section 170(h).      The

historic preservation requirement may be met by showing the

preservation of a “historically important land area” or

“certified historic structure”.     The legislative history

underlying this aspect of the statute describes a “historically

important land area” as one that is important in its own right or

in relation to “historic structures”:

     The term “historically important land area” is intended
     to include independently significant land areas (for
     example, a civil war battlefield) and historic sites
     and related land areas, the physical or environmental
     features of which contribute to the historic or
     cultural importance and continuing integrity of
     certified historic structures such as Mount Vernon, or
     historic districts, such as Waterford, Virginia, or
     Harper’s Ferry, West Virginia. * * * [S. Rept. 96-
     1007, supra at 12, 1980-2 C.B. at 605; emphasis added.]

See also sec. 1.170A-14(d)(5), Income Tax Regs.

     Petitioners argue that limiting the development of the Grist

Mill property promoted the preservation of the historic Grist

Mill.     On this point, petitioners reference the open

floodplain,11 the “quiet and peaceful atmosphere” of limited


     11
          Petitioners’ arguments with respect to giving up the right
                                                       (continued...)
                               - 27 -

development, and the requests of Hyland and the MVLA to limit

development.    Respondent does not dispute that the Grist Mill

property was an “historically important land area”.    Respondent

contends that there was no “historic structure” on the Grist Mill

property that petitioners could have preserved.    In addition,

respondent contends that the conservation easement did not

preserve the Grist Mill property’s “historically important land

area” or its natural state.    Respondent also references the loss

of trees on the development portion of the Grist Mill property as

demonstrating that, in fact, there was a loss of historical

importance after the Grist Mill property’s development.

Conversely, petitioners strongly deny that they contributed to

any loss of historical importance by the removal of trees during

the development of the Grist Mill property.

     The parties’ disagreement about tree loss or removal is

irrelevant.    If the trees contributed to the historical

importance of the Grist Mill property, the measure should be

based on the potential use of the property before and after the

contribution of a conservation easement.    Even if no trees were

removed by petitioner, such restraint was not mandated by the

terms of conservation easement, which failed to reference

preservation of trees or the view, but merely referenced a


     11
      (...continued)
to develop and/or to preserve the floodplain ring hollow as no
homes could have been built on that land.
                                - 28 -

development limit of 30 lots.    Accordingly, petitioner’s action

or inaction with respect to the trees is irrelevant in

considering whether the purported conservation easement satisfies

the requirements of section 170(h).

     The attempted easement did not satisfy the historic

preservation requirement of section 170(h) because it did not

preserve a historic structure or historically important land

area.   First, there was no historical structure on the Grist Mill

property to preserve, and the easement’s limitation on

development on land near the Grist Mill or Woodlawn Plantation

does not preserve the historical structures on those properties.

That remains so despite any ancillary benefit of limited

development because petitioners did not own or control those

historical structures.   The legislative history is explicit that

land surrounding a historical structure, like Mount Vernon, makes

that land historically important, but proximity alone does not

provide a basis to support a claim of protection of a historical

structure.   Petitioner has not shown how his proposed limitation

in the conservation easement preserved any historical structure.

     We also note that petitioners are not in a position to claim

that the Grist Mill property is independently significant, like a

Civil War battlefield, as there is no evidence that anything on

the property was historically unique.    The Grist Mill property is

thus a historically important land area only because of its
                              - 29 -

proximity to the Grist Mill and the Woodlawn Plantation.   Its

physical feature “which [contributed] to the historic or cultural

importance” of the surrounding historical properties was its

natural state because that natural state provided the separation

of the modern world from the 18th century that MVLA and the

Woodlawn Plantation were attempting to preserve.

     The mere possibility or conjecture of a quieter and more

peaceful atmosphere that might have been engendered by limited

development did not preserve this historic characteristic.     To be

sure, there was a more peaceful environment before any

development occurred.   The requests by Hyland, MVLA, or any other

influential groups to limit development simply indicate their

desire for a development that would limit the quantity or amount

of interference with the historic nature of the community.12     The

influence exerted by these groups only serves to illustrate some

of the difficulties that petitioner would encounter in the

development of the Grist Mill property.   MVLA received a smaller

buffer than it had hoped for and no more than would have been

mandated by petitioner’s inability to build on the defined

floodplain.   Therefore, petitioners fail to qualify on the basis

that they had preserved a historically important land area.




     12
      The “requests” by Hyland and MLVA are also entitled to
less probative value because of petitioner’s role in drafting
those letters.
                              - 30 -

          c.   Conclusion

     The Senate report on the enactment of the legislation

pertaining to conservation easements contains the following

explanation:

     [T]he committee believes that provisions allowing
     deductions for conservation easements should be
     directed at the preservation of unique or otherwise
     significant land areas or structures * * * the
     committee bill would restrict the qualifying
     contributions where there is no assurance that the
     public benefit, if any, furthered by the contribution
     would be substantial enough to justify the allowance of
     a deduction. * * * [S. Rept. 96-1007, supra at 9-10,
     1980-2 C.B. at 603.]

With respect to the Grist Mill property, the record does not

support a finding that any public benefit would be furthered by

petitioners’ claimed13 conservation easement.   We need not decide

whether petitioner’s choice not to pursue a rezoning for more

intense development was due to:   The realization that the

rezoning would not get approved, his business partner’s desire to

quickly sell the property, or a desire to benefit the community.

Here there has been no preservation of open space.   Nor have

petitioners preserved anything that is historically unique about

the Grist Mill property or the surrounding historical areas.

Petitioner simply developed the Grist Mill property to its

maximum yield within the property’s zoning classification.



     13
      In effect, petitioner was attempting to self-impose a
limitation that was already imposed by the zoning classification
and requirements of Fairfax County.
                              - 31 -

Petitioners have therefore satisfied neither the open space

requirement nor the historic preservation subdivision

requirements of the third requirement for qualification as a

deductible conservation easement.   Accordingly, petitioners are

not entitled to a deduction for a qualified conservation easement

under section 170(h) because the attempted grant did not satisfy

the conservation purposes required under section 170(h)(4)(A).

C.   Penalty

      Respondent determined that petitioners were liable for a 20-

percent accuracy-related penalty under section 6662(a) due to (1)

negligence or disregard of rules or regulations, (2) a

substantial understatement of income tax, or (3) a substantial

valuation overstatement, and, to the extent that a portion of the

underpayment was attributable to a gross valuation misstatement,

an increased penalty of 40 percent under section 6662(h).

Respondent has conceded, for the purposes of this case, that if

we find that petitioners have not made a qualified conservation

contribution under section 170(h) that the gross valuation

misstatement penalty does not apply, and that only the negligence

or substantial understatement penalty applies.   Because we have

found that petitioners have not made a qualified conservation

contribution, we consider only whether petitioners are liable for

either the negligence or substantial understatement penalty.
                              - 32 -

     Section 6662(a) provides that if any portion of an

underpayment is due to negligence, then a taxpayer will be liable

for a penalty equal to 20 percent of the underpayment that is

attributable to negligence.   “Negligence” is defined as “the lack

of due care or failure to do what a reasonable and ordinarily

prudent person would do” under the circumstances.    Niedringhaus

v. Commissioner, 

, 221 (1992).   “Negligence” includes

a failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.    Id.; sec. 1.6662-

3(b)(1), Income Tax Regs.   Respondent concedes that he has the

burden of production with respect to the penalty.   In that

regard, respondent “must come forward with sufficient evidence

indicating that it is appropriate to impose” the accuracy-related

penalty.   Higbee v. Commissioner, 

, 446 (2001).

     Conversely, petitioners’ contend that they are not liable

for the section 6662 penalty because they satisfied all of the

reporting requirements for a contribution deduction with the

perfunctory exception that the donee did not sign the

acknowledgment on the Form 8283.   Petitioners also contend that

there was no person in Fairfax County who was authorized to sign

the Form 8283.   However, petitioners’ failure to obtain a

signature is not the sole basis for respondent’s determined

penalty.   As a basis to support the determined penalty,

respondent places heavy reliance upon the invalid premise in
                               - 33 -

Hyland’s February 10, 1999, letter that 62 lots could have been

developed.    Respondent argues that Petroff (the appraiser), in

arriving at his property valuation, relied on the false premise

in the February 10 letter that petitioner could have built 62

lots “by-right”.    More significantly, however, respondent argues

that    Petroff’s assumption was that petitioner could have built

the additional 32 lots in the floodplain.

       Petitioners represented to respondent, through Petroff’s

appraisal report, that the entire Grist Mill property could be

developed and that the conservation easement had been placed on

the floodplain, which, in fact, petitioner knew was unavailable

for development.    The evidence shows, without doubt, that the

property was zoned R-2 and limited to 30 units, and approximately

one-half of the Grist Mill property was floodplain on which no

development was permitted.    Most importantly, petitioner knew at

the time of filing the return that the assumption that the

existing R-2 zoning allowed the development of 62 lots on the

Grist Mill property was false.    Petitioners have shown a lack of

care and due regard in claiming a deduction based on assumptions

known to be false or erroneous.

       The accuracy-related penalty may be avoided by showing that

(1) there was reasonable cause for the underpayment, and (2) the

taxpayer acted in good faith with respect to such underpayment.

Sec. 6664(c)(1).    Whether a taxpayer acted with reasonable cause
                              - 34 -

and in good faith is made on a case-by-case basis based on the

facts and circumstances.   Reliance on an appraisal of the value

of property does not necessarily demonstrate reasonable cause and

good faith, depending on the assumptions made in the appraisal.

Sec. 1.6664-4(b)(1), Income Tax Regs.   For example, the appraisal

may not be based on an assumption that the taxpayer knows, or has

reason to know, is unlikely to be true.   Sec. 1.6664-4(c)(1)(ii),

(2), Income Tax Regs.

     Respondent argues that petitioner knew the statement in the

letter was incorrect when supplying the letter to the appraiser.

Respondent therefore argues that petitioner did not in good faith

rely on Petroff’s appraisal of the Grist Mill property.

Petitioners’ counter respondent’s argument by contending that the

conservation easement deed contains no references to a donation

of floodplain property, but instead a limitation to build on 30

lots or less, and that petitioners have not attempted to take a

donation based on an assertion that homes could have been built

in the floodplain.

     We agree that the issue of whether petitioner could have

built 62 lots “by-right” is of less concern if the valuation was

conducted on the theory that the property could have been

rezoned.   However, despite petitioners’ contentions, by

submitting Petroff’s appraisal, petitioners indicated to

respondent that they could have built on the floodplain.
                                - 35 -

Irrespective of their position at trial, we must consider the

reasonableness of petitioners’ position based upon their position

at the time the return was filed.    Petroff’s appraisal report

does contain the premise that the floodplain could have been

developed in the absence of the easement, and it was this report

that petitioners relied upon and presented to respondent to

support their contribution.

     Although the report does not contain the express statement

that the entire 29 plus acres could have been developed in the

absence of the easement or that the conservation easement was

placed on the floodplain, it can be readily inferred from

Petroff’s report that he assumed these to be facts.     Petroff’s

report contains the statement that the “by-right” subdivision

plan allowed 62 lots to be built on the total 29.2722 acres, a

development that we can infer Petroff believed was permitted

under the R-2 classification.    The report also contains the

statement that the conservation easement was “donated on a

15.0418 acre portion of the 29.2722 acre” Grist Mill property,

which is the same acreage as the existing floodplain.     The report

further notes that this constitutes 51.4 percent of the Grist

Mill property, representing 32 lots.     It also refers to the

entire 29.2722 acres of the Grist Mill property before the

easement, the 15.0418 acres of the conservation easement, and

then the “Area of Remainder after Conservation Easement” of
                               - 36 -

14.2304 acres, insinuating that only 14.2304 acres of buildable

land are available because of the placement of the conservation

easement.    However, petitioner acknowledges that the conservation

easement did not restrict any more buildable land in total than

what was available before the purported easement.     Finally, the

report assumes the same 2.11-unit-per-acre yield for both 62 and

30 lots before and after the donation of the conservation

easement.

     Petitioners argue that the deed attached to both Petroff’s

report and the Form 8283 does not make any reference to 62 lots

that could be developed “by-right”.     While that is correct,

neither does the deed state where the easement is located.

Accordingly, Petroff would have assumed that 62 lots could have

been built on the entire 29.2722 acres absent the easement, and

that the floodplain (on which there could be no development) was

where the conservation easement was placed.

     The only part of Petroff’s report that could possibly

support petitioners’ position that the valuation of the 62 lots

was based on rezoning was Petroff’s reference to the valuation’s

being based on the 62-lot sketch in the addendum to his

appraisal.   This is the same 62-lot rezoning sketch of the

buildable area upon which petitioners’ trial experts based their

opinions of the value of the Grist Mill property.     However, a 30-

lot sketch was not provided in Petroff’s appraisal, and there is
                              - 37 -

no indication in his report that the 62-lot sketch was based on a

rezoning of the buildable area.   Thus, the sketch in the

addendum, by itself, was not sufficient to provide the correct

circumstances to Petroff.   More importantly, the report and

addendum did not inform respondent of these matters or intention.

     Petroff’s appraisal is filled with a sufficient number of

instances showing that he relied on the incorrect or false

assumption that the entire 29 plus acres could be developed in

the absence of the easement and that the conservation easement

had been placed on the unbuildable 15 plus acres of floodplain.

Petitioner, who was familiar with and heavily involved in the

development of the Grist Mill property, knew that the floodplain

could not be developed and that any conservation easement would

have to be placed on the buildable land.   A casual review of

Petroff’s report would have alerted petitioner to the fact that

the valuation was based on erroneous assumptions.   Petitioners

cannot therefore rely on this report as reasonable cause for

taking the position they did on their income tax return.    See

sec. 1.6664-4(c)(2), Income Tax Regs.   In addition, petitioners

cannot rely on the expert reports prepared in anticipation of

trial to show reasonable cause because these reports are not
                              - 38 -

evidence of petitioners’ position at the time of the filing of

their return.   Accordingly, the section 6662 negligence penalty

is sustained.


                                    Decision will be entered

                               under Rule 155.