T.C. Memo. 2009-94



                 UNITED STATES TAX COURT



             NICK R. HUGHES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 6395-06.              Filed May 6, 2009.



     P granted a conservation easement to a qualified
conservation organization and claimed a $3,100,000
charitable contribution deduction on his 2000 Federal
income tax return. R determined a deficiency on the
basis that P overstated the amount of his charitable
contribution by $1,107,625.

     Held:   P is liable for the deficiency.



Joseph H. Thibodeau and Vincent M. Lane, for petitioner.

Sara J. Barkley and Tamara L. Kotzker, for respondent.
                                 - 2 -

               MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     On December 28, 2000, petitioner granted a

conservation easement to the Valley Land Conservancy, a Colorado

nonprofit corporation locally referred to, and doing business

under a filed trade name, as the Black Canyon Regional Land

Trust, Inc.1   He claimed a $3,100,000 charitable contribution

deduction on his 2000 Form 1040, U.S. Individual Income Tax

Return, for doing so.    In a February 7, 2006, notice of

deficiency respondent disallowed $1,107,625 of the deduction,

resulting together with some other small adjustments2 in the

determination of an alleged $437,153 Federal income tax

deficiency for petitioner’s 2000 tax year.    This case is before

the Court on a petition for redetermination of that deficiency.

The issue for decision is the amount of petitioner’s charitable

contribution for Federal income tax purposes.




     1
      See Colo. Rev. Stat. sec. 38-30.5-102 (2000); see also sec.
1.170A-14(a), Income Tax Regs. (“A qualified conservation
contribution is the contribution of a qualified real property
interest to a qualified organization exclusively for conservation
purposes.”).
     2
      Respondent also determined that petitioner had $3,503 of
unreported interest income, $401 of unreported dividend income,
and $10 of “other income”, and that a $118 itemized deduction
limitation adjustment to Schedule A, Itemized Deductions, was
necessary. Petitioner has conceded these issues.
                               - 3 -

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.   At the time he filed his petition,

petitioner resided in Colorado.

     Petitioner granted the conservation easement at issue over

two nearby properties:   A 1,950-acre property referred to by the

parties as the Bull Mountain parcel and a 463.35-acre property

referred to by the parties as the Sylvester parcel.    Both parcels

are in a mountainous region in Gunnison County, Colorado,

approximately 18 miles northeast of Panonia, Colorado.    The

properties’ elevation ranges from approximately 6,900 feet to

8,185 feet above sea level.

     Gunnison County is approximately 3,260 square miles in size,

making it about twice the size of Rhode Island.3    The U.S. census

for 2000 indicated a population of 13,956, which results in an

overall population density of 4.3 people per square mile.4      In

2000 approximately half of the county’s population was in the

city of Gunnison and the town of Crested Butte, which together




     3
      U.S. Census Bureau, United States Summary: 2000--
Population and Housing Unit Counts 29 (2004); see United States
v. Bailey, 

, 985 (7th Cir. 1996) (taking judicial
notice of census information with respect to life expectancy).
     4
      U.S. Census Bureau, Colorado:    2000--Population and Housing
Unit Counts 8 (2003).
                                - 4 -

constituted less than 4 square miles.5   The census also found

that the 673.51-square-mile area in which the Bull Mountain and

Sylvester parcels are located has a population of 488, resulting

in a population density of less than 1 person per square mile.6

The Federal Government owns much of the county’s land.

     The Bull Mountain and Sylvester parcels lie southwest of the

intersection of the two public roads that service their immediate

area:    State Highway 133 (north-south) and County Road 265 (east-

west).    County Road 265 dead-ends at its intersection with State

Highway 133.   The Sylvester parcel abuts County Road 265,

commonly known as Buzzard Divide, on its northern border.    The

Bull Mountain parcel is located south of the Sylvester parcel and

is separated from it by a 1/4-mile-wide strip of property owned

by an unrelated third party.    The Bull Mountain parcel does not

abut either of the two roads.

     Property in the area has historically been used for

agricultural purposes with some isolated residential use.    The

Bull Mountain and Sylvester parcels have historically been used

for cattle ranching and recreational purposes.




     5
        Id.
     6
        Id.
                                   - 5 -

I.     The Bull Mountain Parcel

       The Bull Mountain parcel features rolling, brush-covered

hills and two permanent streams.      A national forest borders the

parcel to the west, and views of the Ragged Mountains are

available to the north and east.      Petitioner purchased the parcel

from Million Agricultural Investment, Ltd. (Million), on October

6, 1999, for $1,535,000 or $787 per acre.

       When petitioner purchased the Bull Mountain parcel, it did

not have direct access to either State Highway 133 or County Road

265.       However, petitioner could use access easements that had

been acquired by previous owners of the parcel to travel to and

from both roads.

       To access State Highway 133, petitioner could use an

easement along a road through property owned by the Theodore R.

Eck Trust (Eck), petitioner’s neighbor to the east.       To access

County Road 265, petitioner could use two easements along the

Narrows Road, which runs north from the parcel through property

owned by Spadafora Ranches, Inc. (Spadafora), and continues

northeast through property owned by McIntyre Livestock Corp.

(McIntyre).       The easement over McIntyre’s property was limited to

agricultural use.7


       7
      The parties dispute whether the easement over Spadafora’s
property was also limited to agricultural use. To resolve the
issue, petitioner attempted to introduce at trial a document
dated Apr. 14, 1978, in which Spadafora granted McIntyre--which
                                                   (continued...)
                               - 6 -

II.   The Sylvester Parcel

      The Sylvester parcel is essentially an irregular, long,

brush-covered ridge, which, like the Bull Mountain parcel, has

views of the Ragged Mountains to the north and east.   Petitioner

purchased the Sylvester parcel from Gerald and Connie Rentz on

September 18, 2000, for $671,350 or $1,449 per acre.

      The Sylvester parcel had direct access to County Road 265

along its northern border.   In addition, petitioner could use

easements acquired by the previous owner to travel to and from


      7
      (...continued)
owned the Bull Mountain parcel at the time--and McIntyre’s
successors and assigns forever an unrestricted access easement
over Spadafora’s property. Respondent objected to the
admissibility of the document on the basis that petitioner did
not provide a copy to respondent at least 14 days before trial,
as required by the Court’s standing pretrial order. We reserved
judgment on the issue.

     Despite respondent’s objection, we will admit the document
into evidence. First, the Gunnison County Clerk and Recorder has
certified the document as a “true and exact copy” of a document
recorded in Gunnison County’s publicly available real estate
records. As such, we can take judicial notice of it. See Joseph
v. U.S. Civil Serv. Commn., 

, 1147 n.12 (D.C. Cir.
1977); see also Van Woudenberg v. Gibson, 

, 568 (10th
Cir. 2000), abrogated on other grounds by McGregor v. Gibson, 

 (10th Cir. 2001); see also sec. 7453; Fed. R. Evid. 201;
Rule 143(a). Unless otherwise indicated, all Rule references are
to the Tax Court Rules of Practice and Procedure. Second, on the
record before us we cannot conclude that respondent was
prejudiced by not receiving the document at least 14 days before
the trial. See Freije v. Commissioner, 

, 16 n.2
(2005).

     In any event, the language in the document is vague and does
not totally resolve the issue. Moreover, as we will see,
petitioner’s access over Spadafora’s property is inconsequential
to our ultimate conclusion.
                                 - 7 -

County Road 265.   An easement over Spadafora’s property permitted

petitioner to travel west from the parcel to the Narrows Road and

then to travel north along the road to McIntyre’s property.

Another easement permitted him to continue northeast along the

Narrows Road through McIntyre’s property.   Neither of these

easements was restricted to any particular use.

     The Sylvester parcel’s access easements mostly overlapped

the Bull Mountain parcel’s easements with two exceptions:    (1)

The Sylvester parcel’s easement over Spadafora’s property did not

permit petitioner to travel south along the Narrows Road to the

Bull Mountain parcel and (2) the Bull Mountain parcel’s easement

over Spadafora’s property did not permit petitioner to travel

east to the Sylvester parcel.

III. The Conservation Easement

     In a December 28, 2000, “Deed of Conservation Easement In

Gross”, petitioner granted the Valley Land Conservancy the

development rights, “as defined by section 2031(5)(D) [sic]

* * * except as specifically reserved herein”,8 over the Bull

Mountain and Sylvester parcels.    As a result, petitioner and “his

successors and assigns forever” were prohibited from, among other

things, subdividing the parcels, constructing buildings or other


     8
      All section references are to the Internal Revenue Code of
1986, as amended an in effect for the tax year at issue. There
is no sec. 2031(5)(D) in the Internal Revenue Code, however. For
the purposes of this case we shall assume the intended reference
was to sec. 2031(c)(5)(D).
                               - 8 -

structures except for a single-family residential dwelling on

each parcel, and using the parcels for any commercial,

residential, or industrial uses not specifically permitted.    The

deed refers to the Bull Mountain and Sylvester parcels as “two

legally distinct and separately deeded properties”.

     In connection with preparing and filing his 2000 Federal

income tax return, petitioner engaged Appraisal Associates of

Colorado, Inc., and its coowner, Pamela M. Sant, to appraise the

conservation easement.   Ms. Sant is a Residential Member of the

Appraisal Institute and a Certified General Appraiser licensed by

the State of Colorado.   She prepared an appraisal report, dated

March 2, 2001, in which she determined that the combined value of

the Bull Mountain and Sylvester parcels was $4,100,000 before

petitioner granted the easement and $1 million after.    She

concluded that the amount of the charitable contribution was

therefore $3,100,000 and to that effect signed an IRS Form 8283,

Noncash Charitable Contributions, which petitioner attached to

his return.

     On February 7, 2006, respondent sent petitioner a notice of

deficiency.   Respondent disallowed $1,107,625 of the charitable

contribution deduction and determined that petitioner was liable

for a $437,153 Federal income tax deficiency.   On April 3, 2006,

petitioner filed a timely petition with the Court.    Among other

things, he argues that respondent has incorrectly determined that
                               - 9 -

he is not entitled to the full $3,100,000 deduction.    A trial was

held on November 1-2, 2007, in Denver, Colorado.

                              OPINION

I.   Applicable Law

      Under section 170(a), a taxpayer may claim a deduction for

any charitable contribution, including a qualified conservation

contribution, made within the taxable year.    Sec. 170(c),

(f)(3)(B)(iii), (h).   The parties agree that petitioner’s grant

of the conservation easement over the Bull Mountain and Sylvester

parcels was a qualified conservation contribution under section

170(h) and that he is entitled to a deduction under section

170(a).   The only issue before us is the amount of the charitable

contribution and thus the allowable deduction.

      Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving entitlement to any claimed exemptions

or deductions.   INDOPCO, Inc. v. Commissioner, 

, 84

(1992).   Moreover, the Commissioner’s determination of value is

normally presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect.    See Rule 142(a);

Welch v. Helvering, 

, 115 (1933); Schwab v.

Commissioner, T.C. Memo. 1994-232.

      Generally, the amount of a charitable contribution is the

fair market value of the contributed property at the time it is

contributed.   Sec. 1.170A-1(a), (c)(1), Income Tax Regs.     Fair
                                - 10 -

market value is the price at which property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or sell and both having a reasonable

knowledge of relevant facts.     Sec. 1.170A-1(c)(2), Income Tax

Regs.

     In determining the fair market value of property, we must

take into account not only the current use of the property but

also its highest and best use.     See Stanley Works v.

Commissioner, 

, 400 (1986); sec. 1.170A-14(h)(3)(i)

and (ii), Income Tax Regs.     A property’s highest and best use is

the highest and most profitable use for which it is adaptable and

needed or likely to be needed in the reasonably near future.

Olson v. United States, 

, 255 (1934).     The highest

and best use can be any realistic, objective potential use of the

property.     Symington v. Commissioner, 

, 896 (1986).

        The amount of a charitable contribution of a conservation

easement is generally the fair market value of the easement at

the time it is contributed.     Sec. 1.170A-14(h)(3)(i), Income Tax

Regs.     Ideally, the fair market value of a conservation easement

would be based on the sales prices of comparable easements.     Sec.

1.170A-14(h)(3), Income Tax Regs.     However, because conservation

easements are typically granted by deed or gift rather than sold,

comparable sales are rarely available.     Symington v.

Commissioner, supra at 895.     As an alternative, the so-called
                               - 11 -

before-and-after approach is often used instead.    Stanley Works

v. Commissioner, supra at 399.   Under the before-and-after

approach, the fair market value of a conservation easement equals

the difference between the fair market value of the easement-

encumbered property before it is encumbered by the easement and

after.   Sec. 1.170A-14(h)(3)(i) and (ii), Income Tax Regs.

     The general rule for determining the amount of a charitable

contribution is modified in some situations where appreciated

property is contributed.   Under section 170(e)(1)(A), the amount

of a charitable contribution of property is reduced by the amount

of gain which would not have been long-term capital gain had the

taxpayer sold the property at its fair market value at the time

of contribution.    Estate of Bullard v. Commissioner, 

,

268 n.4 (1986); sec. 1.170A-4(a)(1), Income Tax Regs.     Long-term

capital gain is generally “gain from the sale or exchange of a

capital asset held for more than 1 year”.   Sec. 1222(3).   In

effect, section 170(e)(1)(A) limits the contribution amount of

appreciated property which is not long-term-capital gain property

to the property’s basis at the time it was contributed.     See Lary

v. United States, 

, 1540 (11th Cir. 1986); Jones v.

Commissioner, 

, 150-151 (2007), affd. 

(10th Cir. 2009).

     It follows that when a taxpayer grants a conservation

easement over appreciated real property held for less than 1
                               - 12 -

year, the amount of the contribution must be determined with

regard to section 170(e)(1)(A).    See sec. 1.170A-4(b)(1), Income

Tax Regs.; see also Strasburg v. Commissioner, T.C. Memo. 2000-

94; Griffin v. Commissioner, T.C. Memo. 1989-130, affd. 

 (5th Cir. 1990).    Accordingly, the amount of the

contribution is limited to the conservation easement’s basis at

the time it is contributed.    See Strasburg v. Commissioner,

supra; Griffin v. Commissioner, supra.

      The adjusted basis of a conservation easement is equal to

that portion of the adjusted basis of the entire property which

bears the same ratio to the adjusted basis of the entire property

as the fair market value of the contributed property bears to the

fair market value of the entire property.     Sec. 1.170A-

4(c)(1)(ii), Income Tax Regs.; see Strasburg v. Commissioner,

supra.   Put another way, the basis of a conservation easement is

equal to the adjusted basis of the entire property reduced by the

percentage decrease in the entire property’s fair market value as

a result of the conservation easement.

II.   Expert Witnesses

      Each party has offered the report and testimony of an expert

witness to establish the amount of petitioner’s charitable

contribution.    An expert’s opinions are admissible if they assist

the trier of fact to understand the evidence or to determine a

fact in issue.   Fed. R. Evid. 702.     We evaluate expert opinions
                                - 13 -

in light of each expert’s demonstrated qualifications and all

other evidence in the record.    See Parker v. Commissioner, 

, 561 (1986).   Where experts offer competing estimates of

fair market value, we determine how to weigh those estimates by,

inter alia, examining the factors they considered in reaching

their conclusions.   See Casey v. Commissioner, 

, 381

(1962).   We are not bound by an expert’s opinions and may accept

or reject an expert opinion in full or in part in the exercise of

sound judgment.   See Helvering v. Nat. Grocery Co., 

,

295 (1938); Parker v. Commissioner, supra at 561-562.    We may

also reach a determination of value based on our own examination

of the evidence in the record.     Silverman v. Commissioner, 

, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285.

     A.   Petitioner’s Expert

     Petitioner’s expert, Mark S. Weston, has a bachelor of arts

degree in English literature and a master of arts degree in

library and information science.    He is a certified general

appraiser in the State of Colorado and has been a member of the

Colorado Board of Real Estate Appraisers since 1999.    Since the

mid-1990s he has written several publications and given a number

of presentations on valuing conservation easements.    Mr. Weston

wrote two appraisal reports with respect to the conservation

easement over the Bull Mountain and Sylvester parcels:    An
                               - 14 -

original report, dated March 30, 2001, and a supplemental report,

dated September 28, 2007.

     In his reports Mr. Weston used the before-and-after approach

and concluded that the fair market value of the conservation

easement was $2,926,700.    He determined that the fair market

values of the Bull Mountain and Sylvester parcels, before

petitioner granted the easement, were $3,509,568 and $832,752

(both $1,800 per acre9), respectively.   Referring to section

170(e)(1)(A) and the fact that petitioner purchased the Sylvester

parcel less than 1 year before he granted the easement, Mr.

Weston used the Sylvester parcel’s adjusted basis, $671,350, in

his calculations instead of its fair market value.    In addition,

he rounded the Bull Mountain parcel’s fair market value to

$3,509,650, resulting in a total before figure for both parcels

of $4,181,000.   He then determined that this figure was reduced

by 70 percent when petitioner granted the easement.




     9
      In his original report--in the narrative section on p. 44--
Mr. Weston twice stated that the value of the Bull Mountain and
Sylvester parcels was “at the average rate of $1,900 per acre.”
However, he used $1,800 per acre in his subsequent numerical
calculations and also referred to the $1,800-per-acre figure in
his supplemental report. Because his report does not explicitly
explain how he calculated the average value per acre of the two
parcels, we cannot be certain which figure Mr. Weston intended.
While this discrepancy on such an important fact is not
comforting, we will assume that his references to $1,900 per acre
were typographical errors.
                                  - 15 -

     B.     Respondent’s Expert

     Respondent’s expert, Kerry L. Packard, has bachelor of

science and a master of engineering degrees.      He has been an

engineer revenue agent with the Internal Revenue Service since

1982.     In that role he has conducted field investigations and has

made value estimations with respect to real and personal property

and has prepared valuation, technical, and engineering reports.

He has experience valuing conservation easements and ranch land

and has completed several American Institute of Real Estate

Appraisal courses.

     In his report, dated September 28, 2007, he also used the

before-and-after approach and concluded that the fair market

value of the conservation easement was between $0 and $238,135.10

He further determined that the fair market values of the Bull

Mountain and Sylvester parcels before contribution of the

easement were $1,706,250 ($875 per acre) and $671,350 (rounded to

$1,449 per acre), respectively.      Mr. Packard referenced section

170(e)(1)(A), but because he found that the Sylvester parcel did

not appreciate after petitioner purchased it, he concluded that

it did not apply.     He rounded the fair market value of the Bull

Mountain parcel to $1,710,000, resulting in a total before figure

for both parcels of $2,381,350.      He then determined that this



     10
      Respondent has not asserted an increased deficiency in
light of Mr. Packard’s conclusions.
                               - 16 -

figure was reduced by 0 to 10 percent when petitioner contributed

the easement.

     C.   Expert Witness Issues

     The parties have raised two issues with respect to the

expert witnesses.    First, the probative value of both experts’

reports and testimony has been called into question.    Petitioner

asserts that Mr. Packard is biased,11 lacks appropriate

qualifications, made numerous mistakes, and did not prepare his

report in accordance with the Uniform Standards of Professional

Appraisal Practice (USPAP).    Petitioner also argues that we

should give Mr. Packard’s report less weight because respondent

did not assert an increased deficiency in light of Mr. Packard’s

conclusions.    Respondent counters that Mr. Weston is biased12 and

made numerous mistakes.    We have considered the parties arguments

and, as appropriate, have evaluated the experts’ reports and

testimony accordingly.13   We do not find that Mr. Packard’s


     11
      In his brief, petitioner states that Mr. Packard’s report
is “unable to claim even a pretense at objectivity or
independence” and “is merely the expression of the (decidedly
biased) opinion of a career IRS valuation engineer (lacking in
requisite credentials and professional accreditation).”
     12
      Respondent points to preliminary valuation notes in Mr.
Weston’s work file, which contain the handwritten notation “Nick
wants it Bigger!!” next to a valuation of the Bull Mountain
parcel at $2.4 million to $2.7 million.
     13
      See Brown v. Se. Pa. Transp. Auth. (In re Paoli R.R. Yard
PCB Litig.), 

, 744-745 (3d Cir. 1994) (“A judge
frequently should find an expert’s methodology helpful even when
                                                   (continued...)
                             - 17 -

report should be given less weight on the basis that respondent

did not assert an increased deficiency.   Petitioner did not

provide any support for this argument, and we have found none.

     Second, at trial respondent moved to strike from the record

Ms. Sant’s March 2, 2001, appraisal report and a December 12,

2003, engineer’s report by IRS Engineer Lloyd Philip Kinney.14

We had admitted those reports into evidence, in part, so that

petitioner could use them to cross-examine Mr. Packard.

Respondent asserts, however, that petitioner never mentioned the

reports during cross-examination.   We reserved judgment on the

issue in order to obtain a transcript of the cross-examination

but will now deny respondent’s motion.

     We note that petitioner asked Mr. Packard several questions

about the exhibits during cross-examination, including:   (1)


     13
      (...continued)
the judge thinks that the expert’s technique has flaws sufficient
to render the conclusions inaccurate.”); Whitehouse Hotel Ltd.
Partnership v. Commissioner, 

__, __ (2008) (slip op. at
24) (“This and other courts have found that an expert’s valuation
opinion that does not fully comport with USPAP is still
admissible although it may or may not be helpful.”); Laureys v.
Commissioner, 

, 129 (1989) (“In the context of
valuation cases, we have observed that experts may lose their
usefulness (and credibility) when they merely become advocates
for the position argued by a party.”); Parker v. Commissioner, 

, 561 (1986) (stating that the Court will consider an
expert’s qualifications when evaluating his or her expert
opinion).
     14
      Ms. Sant’s report, Exhibit 28-P, provided the basis for
petitioner’s 2000 Form 8283, and Mr. Kinney’s report, Exhibit 27-
P, apparently provided a part of the basis for respondent’s Feb.
7, 2006, notice of deficiency.
                                - 18 -

Whether the two reports were in the file that Mr. Packard was

provided when he began working on the case; (2) whether Mr.

Packard reviewed Ms. Sant’s report; (3) whether he reviewed Mr.

Kinney’s report in a supervisory capacity; and (4) whether and to

what extent he relied on Ms. Sant’s and Mr. Kinney’s reports.

Mr. Packard responded that (1) the reports were in the file he

received, (2) he reviewed Ms. Sant’s report, (3) he did not

review Mr. Kinney’s report in a supervisory capacity, and (4) he

did not rely on either report to any extent, noting that “Had I

agreed with the facts and the analyses that were developed in

those reports, they would have precluded the need for me to have

done one.”

III.    Analysis

       Respondent allowed $1,992,375 of the $3,100,000 charitable

contribution deduction that petitioner claimed for granting the

conservation easement over the Bull Mountain and Sylvester

parcels.     We must determine whether petitioner is entitled to a

larger deduction and, if so, how much larger.    To do so, we must

determine the amount of petitioner’s charitable contribution,

which is generally the fair market value of the conservation

easement.    See sec. 1.170A-14(a), (h)(3)(i) and (ii), Income Tax

Regs.

       Mr. Weston attempted to determine the fair market value of

the easement based on the sales prices of comparable conservation
                                  - 19 -

easements; however, he did not “[weigh] this data heavily in

[his] analysis due to dissimilarity of the encumbered parcels

compared with the subject property.”       See sec. 1.170A-14(h)(3),

Income Tax Regs.   We agree with Mr. Weston and find that this

data is insufficient to make a conclusion as to fair market

value.    Accordingly, we must rely on the before-and-after

approach, as both Mr. Weston and Mr. Packard have.      See id.; see

also Stanley Works v. Commissioner, 87 T.C. at 399.       To apply the

before-and-after approach, we must determine the fair market

values of the Bull Mountain and Sylvester parcels before

petitioner granted the conservation easement and after.      Sec.

1.170A-14(h)(3), Income Tax Regs.

     A.    Fair Market Value of the Bull Mountain Parcel Before
           Petitioner Granted the Conservation Easement

     1.    Mr. Weston’s Opinion

     Mr. Weston concluded that the Bull Mountain parcel’s highest

and best use before petitioner granted the conservation easement

was residential development in lots ranging in size from 35 to

350 acres.    He believed--apparently based on anecdotal real

estate agents’ comments--that there was significant demand for

residential property of that size in the area and noted several

selling points, including proximity to a national forest, scenic

views, relative seclusion, and abundant wildlife.      Moreover, he

believed that Gunnison County would have approved the change in

the property’s use from agricultural to residential.
                                   - 20 -

        He relied primarily on the sales comparison approach to

determine the fair market value of the Bull Mountain parcel.15

Under that approach the property being valued is compared with

similar properties sold in the same timeframe and geographic

area.        Schwab v. Commissioner, T.C. Memo. 1994-232.   The subject

property’s fair market value is determined by reference to the

sales prices of the comparable properties, adjusted upward to the

extent that the subject property is superior to the comparable

property in some fashion and downward to the extent it is

inferior in some fashion.       See Whitehouse Hotel Ltd. Partnership

v. Commissioner, 

__, __ (2008) (slip op. at 44-45); see

also Schwab v. Commissioner, supra (“This approach is based on

the principle that the prudent purchaser would pay no more for a

property than the cost of acquiring an existing property with the

same utility.”).




        15
      Mr. Weston also used the development technique to “test
the reasonableness of the direct sales comparison technique” but
stated that he had “a greater degree of confidence in the direct
comparison technique.” The development technique is appropriate
where the subject property being valued is “‘ripe’ for
development.” Estate of McCormick v. Commissioner, T.C. Memo.
1995-371. Under the development technique, the subject property
is treated as if it were subdivided, developed, and sold.
Expected proceeds from sales of the subdivided lots are reduced
by development costs and discounted over the period during which
the lots are expected to sell. See Branch v. Commissioner, T.C.
Memo. 1987-321. Using the development technique, Mr. Weston
determined that the fair market value of the Bull Mountain parcel
was $3,695,265.
                               - 21 -

     For purposes of the sales comparison approach, Mr. Weston’s

subject property was a 2,412.40-acre piece of land that included

both the Bull Mountain and Sylvester parcels.    He valued the

parcels as one, believing that they had been “assembled together”

when petitioner purchased them and that they “can be considered

contiguous by virtue of the easements that joined these two

parcels”.

     Mr. Weston considered sales of 12 comparable properties in

his analysis, relying heavily on 4 sales, including the October

6, 1999, sale of the Bull Mountain parcel to petitioner for

$1,535,000 or $787 per acre.   He made adjustments to the sales

prices of the comparable properties to--in his view--account for

market conditions, location, size, and access.    With respect to

the October 6, 1999, sale of the Bull Mountain parcel to

petitioner, Mr. Weston made two significant positive adjustments,

reflecting that the Bull Mountain parcel had appreciated by a

prodigious and at first blush implausible 128 percent in the

short 14 months between the date petitioner purchased the remote,

rural parcel and the date he granted the conservation easement.

Mr. Weston’s first and most important adjustment was based on his

belief that “The value of [the Bull Mountain parcel] * * * was

increased significantly by the assemblage with the [Sylvester

Parcel] * * * due to improved access.”   His second adjustment was
                              - 22 -

due to inflation and improved market conditions during the

intervening 14 months.

     In his supplemental report Mr. Weston suggested a third

reason why the fair market value of the Bull Mountain parcel was

higher than the October 6, 1999, sales price; namely, because

that sales price may have been below fair market value.   In that

regard he made the following observation:   “Reportedly, Million

had been compelled to take title to this portion of the Property

after a prior transaction fell through and was as a result highly

motivated to sell the Property, even at a discount, due to

financial distress.”16

     Ultimately, Mr. Weston determined that the fair market value

of the combined subject property was $1,800 per acre.   Applying

that price per acre to the 1,950 acres of the Bull Mountain

parcel, he concluded that its fair market value before petitioner

contributed the conservation easement was $3,509,568.

     2.   Mr. Packard’s Opinion

     Mr. Packard found that the highest and best use of the Bull

Mountain parcel before petitioner granted the conservation

easement was continued agricultural and recreational use.



     16
      Mr. Weston suggested this third adjustment in his Sept.
28, 2007, supplemental report. While discussing generally
“Conditions of Sale (Motivation of the Parties)” in his original
Mar. 30, 2001, appraisal report, he explicitly chose not to make
any adjustment for financial distress for any of the comparable
sales included in his original report.
                              - 23 -

Although he believed that residential development in lots of 35

acres or more was legally permissible, physically possible, and

financially feasible, he did not think it was the “maximally

productive use” of the property because of the limited demand for

residential lots in the area, as reflected by “limited demand for

developable lands” in the area.

     Mr. Packard relied on the sales comparison approach to

determine the fair market value of the Bull Mountain parcel.     He

used the Bull Mountain parcel itself as the subject property and

compared it with nine comparable properties, making adjustments

for access, size, water rights, tree cover, and market

conditions.   He placed great reliance on the October 6, 1999,

sale of the Bull Mountain parcel to petitioner and one other

sale.   His only adjustment to the October 6, 1999, sales price of

the Bull Mountain parcel was a positive adjustment because

“properties were generally increasing in value” during the 14

months between the sale and petitioner’s grant of the easement.

     Mr. Packard ultimately determined that the fair market value

of the Bull Mountain parcel before petitioner granted the

conservation easement was $875 per acre or $1,710,000 after

rounding.   This value reflects that the Bull Mountain parcel

appreciated in value by 11 percent.
                               - 24 -

     3.   Discussion

     To determine the fair market value of the Bull Mountain

parcel, both experts used the sales comparison approach, relying

heavily on the October 6, 1999, sale of the parcel to petitioner.

We think that this was the appropriate approach to take.     After

all, the best evidence of fair market value is a recent sale of

the property at issue.    See Wortmann v. Commissioner, T.C. Memo.

2005-227 (“we find that the most persuasive evidence of the

subject property’s value as of the contribution date is the

actual sale of the subject property 17 months before the

contribution”).   For the purposes of our analysis, we will focus

on the October 6, 1999, sale.17

     There are three major issues that divide the experts.

First, they do not agree whether there was demand for residential

property in the area.    Second, they do not agree that the Bull

Mountain parcel’s access was improved after petitioner purchased

the Sylvester parcel.    Third, they do not agree that petitioner

purchased the Bull Mountain parcel at a discount due to the

seller’s financial distress.    Each of these issues has a

significant effect on the fair market value of the Bull Mountain

parcel, and we will address each separately.



     17
      Because we will not consider other comparable properties
in our analysis, we need not address the parties’ disputes over
other adjustments, such as adjustments due to location, size, and
water rights.
                               - 25 -

     i.   Demand for Residential Property

     The demand for residential property in the Bull Mountain

parcel’s neighborhood is an important consideration because it

affects the parcel’s highest and best use and because high demand

for residential property would suggest a higher fair market

value.

     Although Mr. Weston acknowledged, in his March 30, 2001,

report, that “To date there has not been a significant amount of

development in this part of Gunnison County”, he indicated that

“The northwestern portion of Gunnison County is beginning to see

an increase in demand for vacant land suitable for development”

and that “property values are appreciating rapidly at the present

time.”    Despite his statement that “This growth is not explosive,

however”, he projected that demand was so high that if the Bull

Mountain parcel were subdivided into 39 parcels of 35 acres or

more, the subdivided parcels could have been sold within 5 years.

Citing local realtors, he concluded that there was “strong demand

for residential sites of this size and character in the current

market” and that “The lack of sales activity involving smaller

parcels in this area is due entirely to a lack of supply.”18


     18
      In her report, Ms. Sant also concluded that demand for
residential property in the area was high: “Prices are
increasing and demand is moderate to strong. The difficulty in
this area is the lack of available smaller acreage parcels.
* * * The subject due to its location and physical
characteristics is well suited and desirable for residential use
                                                   (continued...)
                              - 26 -

     Mr. Packard found to the contrary, noting simply that “If

demand for residential parcels was strong, it is reasonable to

expect that a developer would have shown interest in [the Bull

Mountain parcel].”   He stated that “There is little, or no,

residential development activity in the market area of the

subject property” and “While there are isolated small-acreage

land purchases that have occurred for the purpose of building a

home, there has been no planned development of large parcels.”

     Based on the evidence before us we find that there was

little to no demand for residential property of the type

suggested by Mr. Weston at the time petitioner granted the

conservation easement.   In addition, we do not see a trend of

increasing demand at that time, either.    Mr. Weston’s assertions

otherwise lack evidentiary support.

     The experts did acknowledge that the property to the Bull

Mountain parcel’s east--property owned by Eck and adjacent to

State Highway 133--was divided into twelve 35-acre residential

parcels and sold from 2002 through 2006.   That evidence and the

prolonged 4-year absorption rate does not persuade us that there

was significant demand for that type of property, even with



     18
      (...continued)
and is a convenient drive time from Carbondale.”    We note,
however, that reaching Carbondale requires one to   traverse
McClure Pass, the summit of which is 8,755 feet.    This is not
high by Colorado standards but would be a problem   or cause a
delay on snowy days.
                              - 27 -

relatively good access, in 2000.   First, the Eck sales occurred

after the valuation date in this case, and we are therefore

limited in our consideration of them.19   Second, even if we could

consider those sales, they reflect much lower demand than Mr.

Weston has suggested.   Specifically, although Mr. Weston

indicated that thirty-nine 35-acre-or-more residential parcels

could be sold within 5 years, it apparently took Eck 4 years to

sell just twelve 35-acre parcels with better access and a

comparable nearby location.

     Mr. Weston has also noted the existence of smaller lots,

including some of less than 1 acre, to the north of the Bull

Mountain parcel.   Although those lots may exist, there is no

evidence that they had been sold or even offered for sale at the

time petitioner granted the conservation easement.   Accordingly,

they do not support Mr. Weston’s claims regarding demand.

     Because we conclude that there was limited demand for

residential property in the Bull Mountain parcel’s neighborhood

around the time petitioner granted the easement, we also conclude

that the highest and best use of the Bull Mountain parcel before




     19
      See Estate of Spruill v. Commissioner, 

, 1228
(1987) (“It is well settled that, in examining all the relevant
facts and circumstances, events occurring subsequent to the
valuation date are not considered in determining fair market
value, except to the extent that such events were reasonably
foreseeable on the valuation date”.).
                              - 28 -

petitioner granted the easement was continued agricultural and

recreational use.20

     ii.   Access to the Bull Mountain Parcel

     Both experts agree that the Bull Mountain parcel did not

have ideal access to public roads when petitioner purchased it on

October 6, 1999.   The road to Highway 133 was long and rough, and

the Bull Mountain parcel’s easement over McIntyre’s property to

access County Road 265, which was a gravel road not always plowed

in the winter,21 was limited to agricultural purposes.   Mr.

Weston asserts, however, that when petitioner purchased the

Sylvester parcel, the agricultural restriction over McIntyre’s

property was lifted.   In his words:   “there was created a much

better and unrestricted access route that led from County Road

265 all the way down into the larger Bull Mountain Ranch tract.”

Based predominantly on this belief and the synergy created by the

assemblage of the two parcels, he determined that the Bull




     20
      Because the highest and best use of the parcel was not
residential development, the development technique for valuing it
is not appropriate. As a result, we will disregard Mr. Weston’s
development technique analysis as well as the experts’ and
parties’ disputes over how that technique was applied. But had
we considered it and factored in realistic development costs and
access problems together with a realistic absorption rate, it
would not have materially affected our valuation of the
conservation easement.
     21
      Gunnison County Public Works Department, Gunnison County,
Colorado County/Plowed Roads Numerical List 2 (last viewed 2009).
                               - 29 -

Mountain parcel more than doubled in value after petitioner

purchased the Sylvester parcel.

     Mr. Weston, who is not an attorney, never fully explained

how the agricultural restriction was lifted; and when asked

during cross-examination, he acknowledged that he was “probably

* * * not qualified to have that opinion.”   Apparently, he

believed that petitioner could cross McIntyre’s property using

the Sylvester parcel’s unrestricted easement even if petitioner

was traveling to and from the Bull Mountain parcel.

     There is no discernable legal support for Mr. Weston’s

position.   Under Colorado law “an easement holder may not use

[an] easement to benefit property other than the dominant

estate.”    Lazy Dog Ranch v. Telluray Ranch Corp., 

,

1238 (Colo. 1998) (citing 1 Restatement, Property 3d (Servitude),

sec. 4.11); WRWC, LLC v. City of Arvada, 

, 1005

(Colo. Ct. App. 2004).   In Lazy Dog Ranch, the Colorado Supreme

Court cited the Restatement, which states that “unless otherwise

provided, an appurtenant easement cannot be used to serve

property other than the dominant estate.   The rationale is that

use to serve other property is not within the intended purpose of
                                 - 30 -

the servitude.”22     1 Restatement, Property 3d (Servitude), sec.

4.11, cmt. b. (2000).

     Here, the unrestricted easement over McIntyre’s property is

appurtenant to the Sylvester parcel.      In that regard, the benefit

of the easement passed from the parcel’s previous owners to

petitioner when he bought the parcel.     In addition, the Sylvester

parcel is the dominant estate with respect to the easement

because it is the property that is benefited by it.     Accordingly,

Colorado law would prohibit petitioner from using the Sylvester

parcel’s unrestricted easement to benefit property other than the

Sylvester parcel.     Lazy Dog Ranch v. Telluray Ranch Corp., supra

at 1238; 1 Restatement, supra sec. 4.11.      This is true even

though petitioner owned both the Bull Mountain and Sylvester

parcels.     1 Restatement, supra sec. 4.11.23


     22
      The Colorado Supreme Court defined some of the key terms
as follows:

     An easement is said to be “appurtenant” to property
     when the benefit or burden of the easement “runs with”
     an interest in property. Owners of the property are
     entitled to the benefit, or subject to the burden, of
     the easement due to their relation to the property.
     Thus, when their property interest terminates, so does
     their connection to the easement. * * * The property
     burdened by the easement is customarily known as the
     “servient estate,” while the property benefited by the
     easement is called the “dominant estate.” * * *

Lazy Dog Ranch v. Telluray Ranch Corp., 

, 1234
(Colo. 1998).
     23
          As an example, if a hotel owner purchases a lot in an
                                                       (continued...)
                                - 31 -

     What this means is that the Bull Mountain parcel’s access

over McIntyre’s land was still limited to agricultural purposes

even after petitioner purchased the Sylvester parcel.

Consequently, for this and other reasons, Mr. Weston’s large

positive adjustment to the Bull Mountain parcel’s fair market

value due to improved access is unwarranted.24

     A second consequence of our access analysis is that Mr.

Weston was wrong to have valued the Bull Mountain and Sylvester

parcels as a single property.    Presumably Mr. Weston believed

that once petitioner owned both parcels, he could string the

parcels’ easements together to provide access between them, thus

assembling the parcels or rendering them contiguous.25   As


     23
      (...continued)
adjacent subdivision and that lot holds an easement appurtenant
allowing it rights to use a community beach and recreational
facilities, the hotel owner is not entitled to use the beach or
the facilities for the benefit of its hotel operation.
1 Restatement, Property 3d (Servitude), sec. 4.11, ill. 1 (2000).
In an even more extreme example, if an individual purchases two
adjoining parcels of land, one of which includes the benefit of
an appurtenant easement over another parcel, and builds a house
which straddles the borders of those two parcels, the individual
is not entitled to use the easement for access to the part of the
house built on the other parcel of land. Id. ill. 2.
     24
      In any event, even if access to the Bull Mountain parcel
was no longer limited to agricultural use, given our
determination that the parcel’s highest and best use was
agricultural and recreational, any positive adjustment to its
fair market value would have been much smaller than Mr. Weston’s
adjustment.
     25
      Mr. Weston also cited “the concept of unity of use” to
explain why the Bull Mountain and Sylvester parcels could be
                                                   (continued...)
                             - 32 -

explained above, this was not permissible.   See Lazy Dog Ranch v.

Telluray Ranch Corp., supra at 1238.

     The Bull Mountain and Sylvester parcels are two separate

properties, separated from each other by a quarter mile.   In

fact, the parties stipulated that the parcels are not contiguous,

and even the conservation easement documents that petitioner

signed refer to the parcels as “two legally distinct and

separately deeded properties.”   For the reasons above, the Bull

Mountain and Sylvester parcels should have been valued

separately.26


     25
       (...continued)
considered a single property despite the fact that they are not
contiguous. We note that in condemnation cases “Three factors
are particularly helpful in ascertaining whether property taken
is part of a single, larger tract: physical contiguity, unity of
ownership, and unity of use.” United States v. 8.41 Acres of
Land, 

, 393 (5th Cir. 1982). We are not persuaded
that unity of use is a relevant concept in the case before us.
Moreover, other than some possible savings in marketing costs, we
do not perceive that development costs would be markedly reduced
given the need for separate roads and utilities for the disparate
parcels. We therefore reject Mr. Weston’s analysis on this
point.
     26
      There is yet another reason why the Bull Mountain and
Sylvester parcels should have been valued separately. By valuing
the two parcels together and allocating the combined price per
acre to the Bull Mountain parcel, Mr. Weston factored the
attributes of the Sylvester parcel into his determination of the
Bull Mountain parcel’s fair market value. This may have
distorted his ultimate determination of the fair market value of
the Bull Mountain parcel. This is particularly problematic here
because the Sylvester parcel was treated separately under sec.
170(e)(1)(A), leaving only the question of the Bull Mountain
parcel’s value.

                                                    (continued...)
                               - 33 -

     iii.    Evidence of a Discounted Sales Price in 1999

     Mr. Weston suggested in his supplemental report that the

Bull Mountain parcel’s $1,535,000 sales price may have been a

discounted price due to the financial distress of its seller,

Million.    There is insufficient evidence to support that

suggestion.

     At trial Mr. Weston admitted that he did not speak with

Million’s managing partner, Aaron Million, about any financial

distress that Million may have been experiencing.    Mr. Weston

appears to have based his suggestion on the fact that the Bull

Mountain parcel “had been listed for sale at a higher asking

price for years” and that the price was lowered in the year

before petitioner purchased it.

     In his testimony before the Court, Mr. Million acknowledged

that the Bull Mountain parcel had been on the market for years

and that its sales price had been lowered.    He noted that the



     26
      (...continued)
     A simple, albeit extreme, example can illustrate this point.
Assume that Goldacre is a 10-acre property with vast gold
deposits and a fair market value of $1,000 ($100 per acre) and
that Blackacre is a 10-acre property with no redeeming qualities
and a fair market value of $100 ($10 per acre). Valued together
Goldacre and Blackacre are still very valuable, with a fair
market value of around $1,100 ($55 per acre), because of
Goldacre’s gold deposits. If the fair market value of Blackacre
alone is determined by allocating the joint value of $55 per acre
to Blackacre, then the fair market value of Blackacre would be
$550. That result factors Goldacre’s gold deposits into
Blackacre’s fair market value, resulting in a large distortion
from its actual fair market value of $100.
                              - 34 -

parcel had been on the market on a for-sale-by-owner basis for

some time before he listed it with a real estate agent.    It was

listed for 6 to 8 months, and at least three offers for parts of

the parcel were received, before petitioner purchased it.    Mr.

Million also testified that he had moved to Fort Collins,

Colorado, 2 years before the sale of the Bull Mountain parcel to

petitioner.   He testified, however, that he was not under

“duress” or “financial compulsion” when petitioner purchased the

parcel.

     Mr. Lario, the real estate agent who worked with Mr. Million

to sell the parcel, testified that Million’s motivation to sell

the property may have increased after Mr. Million moved out of

the area.   However, he also stated that he had no reason to think

that the sales price of the parcel to petitioner did not reflect

its fair market value.

     On this evidence we cannot conclude that Million sold the

Bull Mountain parcel to petitioner at a discount or that any

positive adjustment is warranted with respect to the sales

comparison approach.   The fact that the Bull Mountain parcel was

on the market for several years and that its asking price was

lowered is just as likely an indication that demand for the

parcel was limited as it is some reflection of financial

distress.
                              - 35 -

     4.   Conclusion as to the Fair Market Value of the Bull
          Mountain Parcel Before Petitioner Granted the
          Conservation Easement

     We have determined that the October 6, 1999, sales price

should serve as the basis for determining the fair market value

of the Bull Mountain parcel before petitioner granted the

conservation easement.   We have further determined that that

sales price should not be adjusted upward, as Mr. Weston

asserted, because of improved access or because the parcel was

sold to petitioner at a discount.   We agree with both experts,

however, that a positive adjustment should be made because

properties in the Bull Mountain parcel’s neighborhood were

generally increasing in value between the time petitioner

purchased the parcel and when he granted the conservation

easement.   Mr. Weston assumed a “very conservative appreciation

rate of 5% per year” while Mr. Packard’s ultimate conclusion

reflects 11-percent appreciation.   Based on the evidence of

record we find that an 11-percent positive adjustment is generous

but reasonable.   We therefore find that the fair market value of

the Bull Mountain parcel before petitioner granted the

conservation easement was $1,710,000.

     B.   The Fair Market Value of the Sylvester Parcel Before
          Petitioner Contributed the Conservation Easement

     The experts disagree on the fair market value of the

Sylvester parcel before petitioner granted the conservation

easement.   Mr. Weston determined that it had appreciated in value
                                - 36 -

to $832,752 from its $671,350 sales price 2 months earlier.

Nevertheless, because of the restrictions imposed by section

170(e)(1)(A), he used $671,350 in his easement valuation.    Mr.

Packard determined that the parcel had not appreciated in value

and was still worth $671,350.    We agree with Mr. Packard that

$671,350 reflects the parcel’s fair market value before

petitioner granted the easement.    As explained below, however,

even if this parcel had marginally appreciated 1 or 2 percent

based on an 11-percent-per-year appreciation rate, our ultimate

conclusion as to the amount of petitioner’s charitable

contribution with respect to the Sylvester parcel would be

unchanged because of section 170(e)(1)(A).

     Because the Sylvester parcel did not appreciate in value

between the date petitioner purchased the parcel and the date he

granted the conservation easement, section 170(e)(1)(A) does not

apply.   The amount of petitioner’s contribution with respect to

the Sylvester parcel is therefore the fair market value of the

conservation easement, which is in turn equal to the difference

between the fair market value of the parcel before petitioner

granted the easement ($671,350) and its fair market value

afterwards.   See sec. 1.170A-14, Income Tax Regs.   Put another

way, the amount of the contribution is the fair market value

before petitioner granted the easement reduced by the percentage

diminution in the parcel’s fair market value caused by the
                                  - 37 -

easement.    See, e.g., Griffin v. Commissioner, T.C. Memo. 1989-

130 (“Our evaluation of the totality of the evidence supports a

value for the easement of 20 percent of the $350,000 ‘before’

value of the property, or $70,000.”).

     Accordingly, the amount of petitioner’s charitable

contribution with respect to the Sylvester parcel is exactly the

same regardless of whether the parcel appreciated in value or

not.27    Either way, the operative number is $671,350, which we

will reduce by the percentage diminution in the Sylvester

parcel’s fair market value.

     C.    The Fair Market Values of the Bull Mountain and
           Sylvester Parcels After Petitioner Granted the
           Conservation Easement

     1.    Mr. Weston’s Opinion

     Mr. Weston determined that the fair market value of the Bull

Mountain and Sylvester parcels was diminished by 70 percent

because of the conservation easement.      In reaching this

conclusion he considered the diminution in value caused by

conservation easements over six similar properties.      He

determined that the diminution in value of those properties

ranged from 48 to 70-80 percent.      In comparing the Bull Mountain

and Sylvester parcels with those other properties, a critical



     27
      If the Sylvester parcel had depreciated, we would have
used the depreciated value in our calculation. See sec. 1.170A-
14, Income Tax Regs. However, there is no evidence, and neither
expert suggests, that the parcel depreciated.
                              - 38 -

factor was the extent to which the easement restricted the use of

the property.   He believed that the highest and best use of the

Bull Mountain and Sylvester parcels before petitioner granted the

easement was residential development and that the parcels were

limited to agricultural and recreational use after the easement.

He therefore concluded that “Due to the restrictive nature of the

subject conservation easement we are more confident at the higher

end of the range of diminution.”   He provided the following

explanation in his September 28, 2007, supplemental report:

     If the [Bull Mountain and Sylvester parcels] * * * had
     been divided into 35-acre parcels, 68 separately
     conveyable homesites could have been created, and if it
     had been divided into 50-acre parcels (consistent with
     our highest and best use conclusion), 48 separately
     conveyable homesites could have been created. In any
     event, density has been reduced by 95% to 97%. The
     Easement, based on our analysis, caused a significant
     diminution in the fair market value of the Bull
     Mountain Ranch.

     Mr. Weston supported his conclusion using the sales

comparison approach and comparing the parcels after petitioner

contributed the easement directly with other properties

encumbered by conservation easements.   The comparison resulted

“in a range in value for the entire 2,412.40-acre subject

property of between $964,960-$1,688,680, bracketing our

conclusion of value developed by the percentage diminution

technique.”
                               - 39 -

     2.   Mr. Packard’s Opinion

     Mr. Packard determined that the conservation easement

diminished the fair market values of the Bull Mountain and

Sylvester parcels by 0 to 10 percent.    Like Mr. Weston, he

considered the diminution in value caused by conservation

easements over comparable properties.    Also like Mr. Weston, he

paid particular attention to the restrictiveness of the easements

and whether they changed the highest and best use of the

properties.   In his words:   “The goal in analyzing an easement

encumbered property sale is to estimate the loss in value

attributable to the change in highest and best use resulting from

the conservation easement and reflected by the easement

encumbered sale price.”   He indicated that when using that method

“The need to adjust for location differences is eliminated,

because the diminution in value is expressed as a percentage.”

     In his report Mr. Packard included a chart that he referred

to as “the matrix”.   The matrix incorporated information from 35

easement-encumbered properties and illustrated generally that the

amount of diminution caused by an easement is related to the

degree to which the easement changes a property’s highest and

best use.   According to Mr. Packard, the matrix showed that the

diminution in value “for those properties that did not experience

a change in highest and best use * * * is quite small and was

often found to be 0%”.
                                - 40 -

     In addition, Mr. Packard selected seven specific properties

from the matrix to compare with the Bull Mountain and Sylvester

parcels.    Because Mr. Packard believed that the highest and best

use of the parcels before and after petitioner contributed the

easement was agricultural and recreational use, he chose

comparable properties that did not show any change in highest and

best use.     After analyzing the comparables, he determined that

the fair market values of the parcels were diminished by 0 to 10

percent because of the easement.

     Finally, Mr. Packard noted that there were no comparable

arm’s-length sales of easement-encumbered properties in Gunnison

County but that a similar sale involving subdivision covenants

resulted in no diminution in value.

     3.    Analysis

     There are fundamental problems with both experts’

opinions.28    Mr. Weston’s conclusion of 70-percent diminution is

premised on his belief that the highest and best use of the Bull

Mountain and Sylvester parcels before petitioner granted the

easement was residential development.     We found above that the

highest and best use of the Bull Mountain parcel was actually

continued agricultural and recreational use, and for the same


     28
      In light of the fundamental problems and because of the
conclusions discussed below, we need not dwell further on the
more specific problems raised by the experts with respect to the
methods and comparable properties used in their respective
analyses.
                               - 41 -

reason we find that the highest and best use of the Sylvester

parcel is also continued agricultural and recreational use.

Therefore, the development restrictions imposed by the easement

had much less effect on the parcels’ use than Mr. Weston has

suggested and would not warrant a 70-percent diminution in

value.29

     Moreover, given our conclusions as to the fair market values

of the Bull Mountain and Sylvester parcels ($1,710,000 and

$671,350, respectively), even with 70-percent diminution in value

the amount of petitioner’s charitable contribution would not

exceed the $1,992,375 deduction that respondent has already

allowed.

     With respect to Mr. Packard, we disagree with his conclusion

that the conservation easement may have had no, or only a

nominal, impact on the fair market values of the Bull Mountain

and Sylvester parcels.30   See Schwab v. Commissioner, T.C. Memo.

1994-232 (“We find it hard to imagine a prospective purchaser of

a 1,558-acre parcel of land who would not have considered the


     29
      We note as well that Mr. Weston’s report lacks critical
information about the comparable properties he considered; namely
the highest and best use of the properties before they were
encumbered by conservation easements. Without this information
it is impossible to tell how much effect the easements had on the
properties’ fair market values.
     30
      We also disagree with Mr. Packard’s use of the matrix.
Because it included general information that did not have a
specific connection to the Bull Mountain and Sylvester parcels,
we afforded it little weight in our analysis.
                                - 42 -

restrictions of the open-space easement in determining the

price.”).   Further, he failed to consider two important factors.

     First, for tax years beginning on or after January 1, 2000,

the State of Colorado allows a State income tax credit for

taxpayers who grant a qualified conservation easement on real

property located in Colorado.    Colo. Rev. Stat. sec. 39-22-522(2)

(2000).   At the time petitioner granted the conservation

easement, the maximum credit allowed was $100,000 per donation.

Id. sec. 39-22-522(4)(a).    Any unused portion of the credit could

generally be carried forward for a maximum of 20 years.      Id. sec.

39-22-522(5)(a).    In addition, subject to certain limitations,

the taxpayer could transfer all or a portion of the credit to

another taxpayer.     Id. sec. 39-22-522(7).   Generally, the credit

a taxpayer could use was limited to the net tax liability

reported during the tax year; however, if State revenue exceeded

certain thresholds, a taxpayer could “elect to have the amount of

the credit not used as an offset against income taxes in said

income tax year refunded to the taxpayer.”      Id. sec. 39-22-

522(5)(b)(I).

     Mr. Packard disregarded the value of the Colorado State

income tax credits.    By granting the conservation easement over

the Bull Mountain and Sylvester parcels, petitioner precluded any

future purchasers from granting a conservation easement and thus

from receiving the benefit of the tax credits.     This should have
                               - 43 -

been at least considered in determining the parcels’ diminution

in fair market value.   At trial Mr. Packard tried to explain his

lack of attention to the State credits by noting that the market

was generally not yet sophisticated enough to recognize the

potential value of the credits or factor them into fair market

value.   We reject his explanation, which was based on the state

of the market at that time.    For purposes of determining fair

market value, we must consider a hypothetical sale between a

willing buyer and a willing seller both having a reasonable

knowledge of relevant facts.    See Arbor Towers Associates, Ltd.

v. Commissioner, T.C. Memo. 1999-213; sec. 1.170A-1(c)(2), Income

Tax Regs.

     Second, Mr. Packard has seemingly neglected the possibility

that circumstances may change in the future.    For example,

although there was little demand for residential property at the

time petitioner granted the easement, residential development may

be a realistic possibility in the future.    In that event, the

conservation easement would nevertheless prevent petitioner or

his successors in interest from taking advantage of potentially

lucrative development opportunities.    Mr. Packard should have at

least considered this possibility in his report and, if
                              - 44 -

appropriate, reflected it in the diminution in value of the Bull

Mountain and Sylvester parcels’ fair market values.31

      In sum, Mr. Weston’s determination of 70-percent diminution

is too high and Mr. Packard’s determination of 0- to 10-percent

diminution is too low.   The correct percentage lies somewhere in

between; however, because of our conclusions with respect to the

fair market values of the Bull Mountain and Sylvester parcels, no

diminution in that range will lead to a larger deduction than

respondent has already allowed.

IV.   Conclusion

      Based on a thorough review of the evidence in this case, we

concluded that the fair market values of the Bull Mountain and

Sylvester parcels before petitioner granted the conservation

easement were $1,710,000 and $671,350, respectively.    When

petitioner granted the conservation easement, the fair market

values of the parcels diminished, entitling him to a deduction.

They did not diminish so much, however, that petitioner is


      31
      Mr. Packard tried to explain that these two factors are of
minimal importance “in the real world”, but we are not persuaded.

     To the extent future demand for residential development
could have been anticipated, any increase in fair market value
due to such demand would have had to have been discounted under
time value of money principles. There is no evidence that there
will be significant demand for residential development in the
area surrounding the Bull Mountain and Sylvester parcels in the
near to intermediate future. Accordingly, in light of the
necessary discount for the time value of money, the possibility
of future residential development does not affect our conclusion
as to the value of the conservation easement.
                              - 45 -

entitled to a deduction larger than that which respondent has

already allowed.   Accordingly, we sustain the deficiency

determined by respondent.

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.   To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.