Filed: Apr. 05, 2011
Latest Update: Mar. 03, 2020
Summary: BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 25954–08. Filed April 5, 2011. In a conservation easement donation case, R moved to exclude P’s experts’ report as unreliable and irrelevant under Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993). Held: Standards of reliability and rel- evance apply in trials without a jury, including Tax Court trials, subject to the discretion of the tria
Summary: BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 25954–08. Filed April 5, 2011. In a conservation easement donation case, R moved to exclude P’s experts’ report as unreliable and irrelevant under Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993). Held: Standards of reliability and rel- evance apply in trials without a jury, including Tax Court trials, subject to the discretion of the trial..
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BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS
PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket No. 25954–08. Filed April 5, 2011.
In a conservation easement donation case, R moved to
exclude P’s experts’ report as unreliable and irrelevant under
Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc.,
509 U.S. 579 (1993). Held: Standards of reliability and rel-
evance apply in trials without a jury, including Tax Court
trials, subject to the discretion of the trial Judge to receive
evidence. Held, further, P’s experts failed to apply the correct
326
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(326) BOLTAR, L.L.C. v. COMMISSIONER 327
legal standard by failing to determine the value of the
donated easement by the before and after valuation method,
failed to value contiguous parcels owned by a partnership,
and assumed development that was not feasible on the subject
property. R’s motion to exclude P’s report and expert testi-
mony is granted. Held, further, the value determination in the
statutory notice is sustained.
James R. Walker, Justin D. Cumming, and Christopher D.
Freeman, for petitioner.
Steven I. Josephy and Miles B. Fuller, for respondent.
COHEN, Judge: In a notice of final partnership administra-
tive adjustment (FPAA) for 2003, respondent allowed only
$42,400 out of $3,245,000 claimed as a charitable contribu-
tion deduction on the partnership return of Boltar, L.L.C.
(Boltar). The deduction was claimed for the donation of a
conservation easement on a portion of real property owned by
Boltar and located in Lake County, Indiana.
Prior to trial, respondent filed a motion in limine to
exclude petitioner’s expert report and testimony as neither
reliable nor relevant under the Federal Rules of Evidence
and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579
(1993). The issues for decision are whether respondent’s
motion should be granted and, in any event, whether the
value of the easement for charitable contribution purposes is
greater than determined in the FPAA. Unless otherwise
indicated, all section references are to the Internal Revenue
Code, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. At
the time the petition was filed, Boltar’s principal place of
business was in Colorado. Boltar is a Delaware limited
liability company (LLC). Joseph Calabria, Jr., is Boltar’s tax
matters partner.
On December 31, 1996, Laura Lake Development Co., LLC
(Laura Lake), acquired two contiguous parcels of real estate
in Lake County, Indiana (the Northern Parcel and the
Southern Parcel), each consisting of approximately 10 acres.
Laura Lake paid approximately $10,000 per acre for the
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328 136 UNITED STATES TAX COURT REPORTS (326)
Northern and Southern Parcels. On October 1, 1999, Laura
Lake quitclaimed to Boltar the Northern and Southern Par-
cels. Boltar received the property from Laura Lake in pay-
ment of a note and to prevent foreclosure.
On November 8, 2002, Shirley Heinze Land Trust, Inc.
(Shirley Heinze), quitclaimed to Boltar a parcel of real prop-
erty located immediately east of the Southern Parcel and
consisting of approximately 10.3 acres (the Eastern Parcel).
The quitclaim deed was never recorded.
Beginning in 1955 and as of December 29, 2003, the
Southern Parcel was encumbered by a 50-foot-wide pipeline
utility easement. As of December 29, 2003, the Northern and
Southern Parcels were both encumbered by an access (golf
cart) easement in favor of the Gary Works Supervisors Club,
Inc., and golf course.
On December 29, 2003, Boltar granted Shirley Heinze an
easement restricting the use of approximately 8 acres (the
subject easement) on the eastern side of the Southern Parcel
(the Eased Area). The easement prevented any use of the
property that would significantly impair or interfere with the
conservation values of the property. Approximately 2.82
acres on the Eased Area, 8.5 acres on the eastern portion of
the Northern Parcel, and all of the Eastern Parcel are for-
ested wetlands falling within the jurisdiction of the U.S.
Army Corps of Engineers (USACE).
The discharge of dredged or fill material in wetlands
within Federal jurisdiction is subject to a permitting process
through USACE. In Indiana, the State requires that a party
obtain a permit separate from USACE’s. A party must apply
for a permit through the Indiana Department of Environ-
mental Management (IDEM). The decisions to issue permits
from both USACE and IDEM involve a review of the public
interest factors and may vary depending on the location,
amount, and type of wetlands a permit applicant is seeking
to impact or remove. Generally, as a condition of obtaining
a permit, a permit application must mitigate for impacted
wetlands. Mitigation includes avoiding, minimizing, or com-
pensating for lost resources. Compensatory mitigation can be
accomplished through wetlands restoration, creation of new
wetlands somewhere else within the neighboring area, or
purchase of mitigation (development) credits from a wetlands
mitigation bank. In 2003, the Lake Station Wetland Mitiga-
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(326) BOLTAR, L.L.C. v. COMMISSIONER 329
tion Bank serviced northern Indiana, including the subject
parcels.
On December 29, 2003, the Northern and Southern Parcels
were under the jurisdiction of Lake County, Indiana, and
were zoned R–1, single-family residential, as described in the
Lake County zoning ordinances. The R–1 zone residential
use permitted by right was for one single-family home per
acre if the property was serviced by a septic system and two
per acre if serviced by a sewer system. As of December 29,
2003, Lake County did not provide water or sewer services
independent of the services provided by municipalities.
On December 29, 2003, the Eastern Parcel was under the
jurisdiction of the city of Hobart, Indiana, and was zoned as
a Planned Unit Development (PUD) as part of the Deep River
Pointe development. The proposed Deep River Pointe project
included a total of three phases. Phases I and II would first
be annexed into the city of Hobart and rezoned as a PUD, and
Phase III would be annexed and zoned at a later date. No
final plat was ever approved by the city of Hobart for Phase
II of the Deep River Pointe PUD. The property comprising
Phase III of the Deep River Pointe PUD was never annexed
into the city of Hobart and never zoned as a PUD. The city
of Hobart requires a public hearing as part of the annexation
process.
On its 2003 Form 1065, U.S. Return of Partnership
Income, Boltar claimed charitable contribution deductions of
$3,259,000, of which $3,245,000 related to the donation of the
subject easement. Boltar reported a fair market value of
$3,270,000 for the subject easement as of December 31, 2003.
The fair market value was reduced by $25,000 as a claimed
enhancement in value to adjacent parcels owned by Boltar as
a result of the donation of the subject easement.
Attached to Boltar’s Form 1065 was a Form 8283, Noncash
Charitable Contributions, signed by Gary K. DeClark, man-
aging director and principal of Integra Realty Resources in
Chicago, Illinois (Integra). Also attached to the return was
an appraisal report (the Integra appraisal) prepared by
DeClark and Nancy S. Myers (Myers), senior real estate
analyst for Integra, on March 7, 2004. A member of Boltar’s
management team had met DeClark in 1998, and DeClark’s
firm had evaluated other conservation easements for Laura
Lake and related projects. DeClark and Myers reviewed only
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330 136 UNITED STATES TAX COURT REPORTS (326)
a draft of the easement before preparing their appraisal; they
did not rely on the final version.
The Integra appraisal determined that the ‘‘highest and
best use’’ of the subject property was residential development
and determined the easement value as the difference
between the ‘‘Foregone Development Opportunity of 174 Con-
dominiums on Finished Sites, Discounted to December 31,
2003’’ (Scenario B)—$3,340,000 less the ‘‘Value of Raw,
Vacant and Developable Land’’ (Scenario A)—$68,000. These
values incorporated estimated wetlands mitigation costs of
$28,000 ($10,000 per acre for the affected 2.8 acres) that
DeClark and Myers calculated. The Integra appraisal
asserted that the 174-unit condominium project, consisting of
29 buildings with 6 units each, was legally permissible, phys-
ically possible, financially feasible, and maximally productive
on the Eased Area. The Integra appraisal relied in this
regard on a site plan for a condominium project situated on
approximately 10 acres. The Integra appraisal erroneously
assumed that the Eased Area was under the jurisdiction of
the city of Hobart and zoned as part of the Deep River Pointe
PUD.
In the FPAA, the fair market value of the subject easement
as of December 29, 2003, was determined to be $42,400,
based on review by one of respondent’s valuation engineers.
The valuation engineer opined that the Integra appraisal
failed to determine the value of the Eased Area before and
after the grant of the easement. The valuation engineer con-
cluded that the highest and best use of the subject property
was for ‘‘development of single-family detached residential
homes, but not until the surrounding properties are devel-
oped’’, partly because the Eased Parcel was landlocked with
no direct access to a public road.
(No penalty was determined in the FPAA. Fifteen months
after the answer was filed, 6 months after one continuance
on respondent’s motion, and 21⁄2 months before the next
scheduled trial date, respondent moved to amend the answer
to assert a ‘‘pass-through penalty adjustment of $1,281,040’’.
Respondent sought to assert a gross valuation misstatement
penalty under section 6662(h) or, alternatively, the substan-
tial valuation misstatement penalty under section 6662(e).
Petitioner objected to the amendment, and the Court denied
the motion as untimely and prejudicial.)
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(326) BOLTAR, L.L.C. v. COMMISSIONER 331
OPINION
Valuation of Conservation Easement Donations
Section 170(a)(1) provides that ‘‘There shall be allowed as
a deduction any charitable contribution (as defined in sub-
section (c)) payment of which is made within the taxable
year. A charitable contribution shall be allowable as a deduc-
tion only if verified under regulations prescribed by the Sec-
retary.’’
Section 1.170A–1(c)(1), Income Tax Regs., provides in perti-
nent part: ‘‘If a charitable contribution is made in property
other than money, the amount of the contribution is the fair
market value of the property at the time of the contribution’’.
Fair market value, as defined by the regulations, ‘‘is the
price at which the property would change hands between a
willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowl-
edge of relevant facts.’’ Sec. 1.170A–1(c)(2), Income Tax Regs.
Section 1.170A–7(c), Income Tax Regs., provides that,
except as provided in section 1.170A–14, Income Tax Regs.,
the amount of the deduction under section 170 in the case of
a partial interest in property is the fair market value of the
partial interest at the time of the contribution.
Section 1.170A–14(h)(3)(i), Income Tax Regs., states in rel-
evant part:
The value of the contribution under section 170 in the case of a charitable
contribution of a perpetual conservation restriction is the fair market value
of the perpetual conservation restriction at the time of the contribution.
See § 1.170A–7(c). If there is a substantial record of sales of easements
comparable to the donated easement (such as purchases pursuant to a
governmental program), the fair market value of the donated easement is
based on the sales prices of such comparable easements. If no substantial
record of market-place sales is available to use as a meaningful or valid
comparison, as a general rule (but not necessarily in all cases) the fair
market value of a perpetual conservation restriction is equal to the dif-
ference between the fair market value of the property it encumbers before
the granting of the restriction and the fair market value of the encumbered
property after the granting of the restriction. * * *
See generally Hilborn v. Commissioner, 85 T.C. 677, 688–689
(1985).
The before and after methodology has been adopted and
applied in various contexts. See, e.g., Browning v. Commis-
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332 136 UNITED STATES TAX COURT REPORTS (326)
sioner, 109 T.C. 303, 311–316 (1997); Symington v. Commis-
sioner, 87 T.C. 892, 894–895 (1986); Stanley Works & Subs.
v. Commissioner, 87 T.C. 389 (1986); Scheidelman v.
Commissioner, T.C. Memo. 2010–151; Thayer v. Commis-
sioner, T.C. Memo. 1977–370; S. Rept. 96–1007, at 14–15
(1980), 1980–2 C.B. 599, 606; Rev. Rul. 76–376, 1976–2 C.B.
53; Rev. Rul. 73–339, 1973–2 C.B. 68. Although there may be
cases in which the before and after methodology is neither
feasible nor appropriate, petitioner has not provided any
persuasive reason for not applying it in this case. Only peti-
tioner’s experts purport to provide a rationale for their
peculiar methodology, which we reject for the reasons dis-
cussed below.
Expert Reports
In accordance with the Court’s standing pretrial order and
Rule 143(g), the parties exchanged and submitted expert
reports. Petitioner’s expert report consisted of the Integra
appraisal and a transmittal letter to petitioner dated March
7, 2004, and a letter to petitioner’s counsel dated April 15,
2010. In the letter dated April 15, 2010, DeClark and Myers
addressed the views of the Internal Revenue Service valu-
ation engineer but did not make any adjustments in their
value opinion, maintaining that the amount determined in
their 2004 appraisal was ‘‘supportable and appropriate.’’
Responding to the suggestion that they failed to determine
the before and after easement values, they asserted:
While it is obvious that the impressment of the easement severely impacts
the realizable highest and best use of the eight-acre parcel, this impact is
part and parcel of the deduction of the ‘‘as if raw’’ (Scenario A) value esti-
mate from the estimate of the ‘‘foregone development opportunity’’ (Sce-
nario B). Meanwhile, neither Scenario A nor Scenario B is described as an
‘‘as encumbered’’ (with the conservation easement) value estimate because
that estimate is the result of the deduction process (A from B), rather than
a freestanding value available to be measured in the marketplace with
comparable sales. So, essentially, neither of the two scenarios represents
encumbered land and, unencumbered, the appropriate highest and best
use in both the ‘‘before’’ and ‘‘after’’ is, in fact, residential development.
* * *
Respondent submitted the expert reports of Nick Tillema
and Steven Albert. Tillema testified at trial. Respondent’s
experts opined that the value of the subject easement was
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(326) BOLTAR, L.L.C. v. COMMISSIONER 333
$31,280, the difference between a before-easement value of
$100,600 and an after-easement value of $69,320. Respond-
ent’s experts determined that the highest and best use of the
Eased Area was single-family residential before and after
the easement, and they reached their results primarily on
the basis of comparable sales. They determined that the
unencumbered value of the Eased Area was $6,000 per acre
and that the encumbered value was $2,000 per acre, which
they applied to acreage including the contiguous parcels
owned by Boltar.
Respondent’s Motion in Limine
Prior to trial, respondent filed a motion in limine, asserting
that the Integra report was neither reliable nor relevant
because:
(1) The Integra Report does not provide both a before and after value
of the subject property despite the assertion that Mr. DeClark and Ms.
Meyers [sic] completed a before and after valuation;
(2) The Integra Report does not value all of the contiguous parcels owned
by petitioner and encumbered by the conservation easement at issue in
this case as required by the applicable Treasury Regulation; and
(3) The 174 condominium unit development evaluated as part of ‘‘Sce-
nario B’’ in the Integra Report was not a physically possible use on the
eight acre subject property analyzed in the Integra Report.
At trial, the Court deferred ruling on respondent’s motion
in limine because of the importance of the issues raised and
the substantial effect on the case of eliminating petitioner’s
primary evidence. The Integra report was marked and the
related testimony of petitioner’s experts was heard solely as
an offer of proof. Whether the report and testimony will be
received in evidence and considered in determining fair
market value of the easement depends on application of prin-
ciples expressed in Daubert v. Merrell Dow Pharm., Inc., 509
U.S. at 591, as related to rules 702 and 703 of the Federal
Rules of Evidence.
In the reply brief, respondent aptly summarizes the defi-
ciencies of the Integra experts’ analysis as:
failure: to properly apply the before and after methodology, to value all of
petitioner’s contiguous landholdings, to take into consideration zoning
restraints and density limitations and to take into consideration the pre-
existing conservation easements. As a result, the Integra Experts saw
nothing wrong with a hypothetical development project that could not fit
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334 136 UNITED STATES TAX COURT REPORTS (326)
on the land they purportedly valued, was not economically feasible to con-
struct and would not be legally permissible to be built in the foreseeable
future.
Respondent asserts that petitioner has departed from the
legal standard to be applied in determining the highest and
best use of property and instead determined a value ‘‘based
on whatever use generates the largest profit, apparently
without regard to whether such use is needed or likely to be
needed in the reasonably foreseeable future.’’
Petitioner argues that a Daubert analysis is not applicable
in this case because there is no jury; that respondent pre-
viously accepted the methodology used in the Integra expert
report and stipulated that the version attached to the part-
nership return was a qualified appraisal; that Rule 143(g)
mandates receipt of the report in evidence; and that the mat-
ters complained of by respondent do not affect admissibility
of the report.
Rule 702 of the Federal Rules of Evidence provides:
If scientific, technical, or other specialized knowledge will assist the trier
of fact to understand the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience, training, or edu-
cation, may testify thereto in the form of an opinion or otherwise, if (1)
the testimony is based upon sufficient facts or data, (2) the testimony is
the product of reliable principles and methods, and (3) the witness has
applied the principles and methods reliably to the facts of the case.
The Supreme Court in Daubert stressed the trial court’s
‘‘gatekeeper’’ function in excluding evidence that is not reli-
able. In Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148
(1999), the Supreme Court applied the same standard to
expert testimony that was not ‘‘scientific’’. Although special
considerations apply to jury trials, the Daubert analysis is
not limited to jury trials. See Atty. Gen. of Okla. v. Tyson
Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009); Seaboard
Lumber Co. v. United States, 308 F.3d 1283, 1302 (Fed. Cir.
2002) (standards of relevance and reliability must be met in
bench trials). In any event, rule 702 of the Federal Rules of
Evidence applies to bench trials as well as to jury trials and
specifically sets forth applicable standards of reliability.
We have long recognized that receipt of unreliable evidence
is an imposition on the opposing party and on the trial
process. See Laureys v. Commissioner, 92 T.C. 101, 127
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(326) BOLTAR, L.L.C. v. COMMISSIONER 335
(1989). We have also frequently stated that an expert loses
usefulness to the Court and loses credibility when giving
testimony tainted by overzealous advocacy. Id. at 129 (citing
Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74
T.C. 441, 452 (1980), and Messing v. Commissioner,
48 T.C.
502, 512 (1967)); see Neonatology Associates, P.A. v. Commis-
sioner, 115 T.C. 43, 86–87 (2000), affd.
299 F.3d 221 (3d Cir.
2002); Wagner Constr., Inc. v. Commissioner, T.C. Memo.
2001–160; Jacobson v. Commissioner, T.C. Memo. 1989–606.
Expert opinions that disregard relevant facts affecting valu-
ation or exaggerate value to incredible levels are rejected.
See Estate of Newhouse v. Commissioner, 94 T.C. 193, 244
(1990); Estate of Hall v. Commissioner, 92 T.C. 312, 338
(1989); Chiu v. Commissioner, 84 T.C. 722, 734–735 (1985);
Estate of O’Keeffe v. Commissioner, T.C. Memo. 1992–210;
Garrison v. Commissioner, T.C. Memo. 1986–261 (concluding
that the taxpayers were ‘‘far too aggressive in their claimed
value of * * * [the donated] property and in seeking to profit
from their ‘good works’ at the expense of Uncle Sam’’); Estate
of Gallo v. Commissioner, T.C. Memo. 1985–363.
In most cases, as in this one, there is no dispute about the
qualifications of the appraisers. The problem is created by
their willingness to use their re´sume´s and their skills to
advocate the position of the party who employs them without
regard to objective and relevant facts, contrary to their
professional obligations. See Estate of Halas v. Commis-
sioner, 94 T.C. 570, 577–578 (1990).
As the above cases illustrate, the same rules apply regard-
less of which party offers the unreliable evidence. Justice is
frequently portrayed as blindfolded to symbolize impartiality,
but we need not blindly admit absurd expert opinions. For
these reasons, excluding unreliable and irrelevant evidence,
rather than receiving it ‘‘for what it is worth’’ and then
rejecting it or giving it no weight, serves several purposes.
The Court’s gatekeeper function in a bench trial serves to
increase the efficiency of trials and the objectivity of judg-
ments. After decades of warnings regarding the standards to
be applied, we may fairly reject the burden on the parties
and on the Court created by unreasonable, unreliable, and
irrelevant expert testimony. In addition, the cottage industry
of experts who function primarily in the market for tax bene-
fits should be discouraged. Each case, of course, will involve
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336 136 UNITED STATES TAX COURT REPORTS (326)
exercise of the discretion of the trial Judge to admit or
exclude evidence. In this case, in the view of the trial Judge,
the expert report is so far beyond the realm of usefulness
that admission is inappropriate and exclusion serves salutary
purposes.
In the context of this case, the task of the appraisers was
to determine the fair market value of the 8-acre parcel and
the contiguous parcels owned by Boltar before and after the
easement was granted. Fair market value is consistently
defined as the price that a willing buyer would pay a willing
seller, both persons having reasonable knowledge of all rel-
evant facts and neither person being under any compulsion
to buy or to sell. United States v. Cartwright, 411 U.S. 546,
551 (1973); sec. 1.170A–1(c)(2), Income Tax Regs. The con-
cept of ‘‘highest and best use’’ is an element in the deter-
mination of fair market value, but it does not eliminate the
requirement that a hypothetical willing buyer would pur-
chase the subject property for the indicated value. As we said
in Stanley Works & Subs. v. Commissioner, 87 T.C. 402
(citing United States v. 320.0 Acres of Land,
605 F.2d 762,
781 (5th Cir. 1979)): ‘‘If a hypothetical buyer would not
reasonably have taken into account * * * [a] potential use in
agreeing to purchase the property, such potential use should
not be considered in valuing the property.’’
Petitioner quotes this Court’s cases Symington v. Commis-
sioner, 87 T.C. 892 (1986), Stanley Works & Subs. v. Commis-
sioner, supra, and Hughes v. Commissioner, T.C. Memo.
2009–94, to emphasize the necessity of considering highest
and best use by determining ‘‘realistic’’ or ‘‘objective potential
uses’’, to which the subject property is ‘‘adaptable’’ and which
are ‘‘reasonable and probable’’ uses. We conclude, however,
that the Integra appraisal’s valuations fail to apply realistic
or objective assumptions.
In the Integra report, the experts opine that residential
use of the property is the highest and best use. They value
the property at $3,340,000 on the assumption that a 174-unit
condominium project would be built on the property. Using
that scenario, the report concludes that the conservation
easement that would preclude the assumed development is to
be valued at $3,270,000. As an alternative scenario, the
report considers the value of the parcel as ‘‘raw land’’, con-
cluding that to be $68,000. But the report does not determine
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(326) BOLTAR, L.L.C. v. COMMISSIONER 337
the highest and best use of the property after the easement
is granted, as the Integra experts acknowledge in the April
2010 letter to petitioner’s counsel submitted as part of their
report for trial. The appraisers did not consider potential
residential use of the property and thus did not value the
property at its highest and best use after the easement was
granted. From other evidence presented at trial, including
the existing zoning, it appears that single-family residential
use was feasible after the easement was granted and could
have been developed with the preexisting easements. The
Integra experts made no attempt to determine the highest
and best use of the property after the easement was granted
by considering the potential for single-family residential
development.
In addition, as respondent argues, the Integra report does
not consider the effect on contiguous property owned by
Boltar. Petitioner argues that the effect on the contiguous
property is considered in a separate exhibit, a three-page
letter written to petitioner in 2004 by the authors of the
report. Apparently the letter was the source of the $25,000
reduction in fair market value of the subject easement for
which petitioner claimed a charitable contribution deduction
on the return. It does not consider each of the contiguous
parcels owned by Boltar, because the writers were unaware
of the extent of Boltar’s ownership. That letter, moreover, is
not a part of the report submitted in accordance with Rule
143(g) and the Court’s standing pretrial order. Consideration
of the letter during trial would prejudice respondent in pre-
paring rebuttal and would undermine the purpose of pretrial
exchange of expert reports. In any event, it is not based on
sufficient facts or data, as required by rule 702 of the Federal
Rules of Evidence, and does not state the facts or data and
detailed reasons for the conclusions, as required by Rule
143(g). Thus it would not be admissible as expert testimony
or as an expert report if submitted as such before trial and
before respondent’s motion in limine was filed. Cf. Jacobsen
v. Deseret Book Co., 287 F.3d 936, 952–954 (10th Cir. 2002)
(holding that incomplete expert reports that do not comply
with rule requiring pretrial disclosure should be stricken and
can only be cured if sufficient time remains before trial).
In support of the argument that the 174-unit condominium
project assumed by the Integra report could not be physically
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338 136 UNITED STATES TAX COURT REPORTS (326)
placed on the subject property, respondent points out that
the site plan for the proposal assumes 10 acres, whereas the
subject property was only 8 acres, and the Integra experts
ignored the effect of a preexisting 50-foot-wide utility ease-
ment for a gas pipeline across the property. As a result,
respondent argues, at least 4 of the 29 hypothetical
buildings, each containing 6 units, could not be constructed.
Petitioner’s only response is a bald and unpersuasive asser-
tion that the project ‘‘will fit, it just won’t fit as drawn’’ on
the site plan.
The Integra report assumed erroneously that the Eased
Parcel was within the city of Hobart and zoned PUD, which
it was not. Thus the Integra report failed to evaluate the
prospects for annexation and rezoning to allow development
of the condominium project. Petitioner asserts that the likeli-
hood of annexation and rezoning may be seen from the
record, but the evidence supporting that assertion consists
solely in the opinion of Boltar’s management representative
and is not persuasive in view of the prerequisites for annex-
ation and rezoning. In any event, the omission of appropriate
analysis from the Integra report, due to erroneous factual
premises, is fatal.
Petitioner does not refute respondent’s specific objections
to the Integra report. Petitioner contends that the Integra
report provides the only evidence of the ‘‘subdivision
approach’’ that should be considered in valuing the subject
property. Petitioner’s response to respondent’s objections to
the Integra report and to the testimony of DeClark and
Myers is to suggest that adjustments could be made because
the effects of the factual errors are ‘‘minimal’’ and in part
based on misinformation received from someone in the
Hobart city office. We could do our own analysis and have
done so where the experts provide enough useful and reliable
data for applying the appropriate methodology to the objec-
tive evidence. See, e.g., Trout Ranch, LLC v. Commissioner,
T.C. Memo. 2010–283. Petitioner’s experts, however, did not
suggest any adjustments or corrections to their calculations
but persisted in their position that the original appraisal was
correct, even when admitting factual errors. (By contrast,
respondent’s experts conducted research in areas that were
not within their specific expertise, acknowledged weaknesses,
and corrected errors during their analysis.) Neither peti-
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(326) BOLTAR, L.L.C. v. COMMISSIONER 339
tioner nor the Integra experts suggested any quantitative
adjustment in response to their admitted errors or the prob-
lems addressed in respondent’s motion in limine. They
simply persist in asserting an unreasonable position. We are
not inclined to guess at how their valuation should be
reduced by reason of their erroneous factual assumptions.
Their report as a whole is too speculative and unreliable to
be useful.
In their discussion of the valuation issue, fully developed
pending ruling on the motion in limine, the parties dispute
other factors about the reasonableness of the Integra report’s
projections of profits to be earned from development of the
property, including existing demand for residential units,
miscalculation of revenue to be expected from sale of units,
poor experience of other developers with respect to the Deep
River Pointe project, density considerations, comparable
sales, and other matters that might relate more to the
weight to be given to the experts’ opinions if admitted into
evidence. Although the Integra experts determined that sales
of comparable land nearby were occurring at approximately
$12,000 an acre, their conclusion would assign a value of
approximately $400,000 per acre to the subject property.
Additional factual errors made by the Integra report authors
undermine the reliability of their conclusions and dem-
onstrate the lack of sanity in their result. If the report and
their testimony were admitted into evidence, we would
decide that their opinions were not credible. The assertion
that the Eased Parcel had a fair market value exceeding $3.3
million on December 29, 2003, before donation of the ease-
ment, i.e., that it would attract a hypothetical purchaser and
exchange hands at that price, defies reason and common
sense. That conclusion is certainly inconsistent with the
objective evidence in this case.
We reject petitioner’s other arguments for admitting the
Integra report. Neither the Commissioner’s alleged accept-
ance of similar appraisals in other audit situations nor the
procedural aspects of Rule 143(g) compel us to receive unreli-
able and irrelevant evidence in this case. What may or may
not have occurred in another audit would be relevant only if
a penalty were in issue, which it is not in this case because
respondent’s motion for leave to amend was untimely. An
appraisal may be ‘‘qualified’’ for one purpose but lacking in
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340 136 UNITED STATES TAX COURT REPORTS (326)
evidentiary weight for another. See Evans v. Commissioner,
T.C. Memo. 2010–207. This issue is to be decided under the
Federal Rules of Evidence and controlling caselaw. See Rule
143(a).
For the reasons stated above, we conclude that the Integra
report is not admissible under rule 702 of the Federal Rules
of Evidence, because it is not the product of reliable methods
and the authors have not applied reliable principles and
methods reliably to the facts of the case. Because it assumes
scenarios that are unrealistic in view of the facts of the case,
it is not relevant. Respondent’s motion in limine will be
granted. Respondent’s rebuttal witnesses and petitioner’s
objections to respondent’s rebuttal reports and testimony are
thus moot and need not be addressed.
Valuation of the Easement
After the Integra report and testimony is excluded, the
record contains factual evidence of value and the report and
testimony of respondent’s valuation expert. Petitioner has
the burden of proving the value of the easement for chari-
table contribution deduction purposes. See Rule 142(a); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440–441 (1934).
Because petitioner did not present credible evidence of value,
the burden of proof did not shift to respondent under section
7491(a). Although respondent’s experts determined a value
less than that set forth in the statutory notice, respondent
has not asked for an increased deficiency.
We are persuaded by the evidence in the record that the
highest and best use of the Eased Parcel before and after the
easement grant was single-family residential development.
Even petitioner’s rebuttal expert, who testified ‘‘with respect
to real estate market analysis and feasibility in northwest
Indiana’’, described demand for single-family residences and
provided little, if any, support to the assumptions about con-
dominium developments relied on by petitioner. There is no
credible evidence that higher density development of the
Eased Parcel was a use to which the property was adaptable,
given the preexisting easements and existing zoning. The evi-
dence regarding the experience of Boltar and others in the
area and decreasing population negates the feasibility of and
demand for the type of development asserted by petitioner.
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(326) BOLTAR, L.L.C. v. COMMISSIONER 341
There is no evidence that justifies a value higher than the
amount determined in the statutory notice. It is not, there-
fore, necessary to address in detail petitioner’s challenges to
respondent’s experts, because disregarding or adjusting their
valuations would not change the result.
We have considered the other arguments of the parties.
They do not affect our analysis or the result. For the reasons
discussed above,
An appropriate order will be issued, and
decision will be entered for respondent.
f
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