The Tax Court has reduced the value of a conservation easement granted by a partnership on land it owned and imposed a 30 percentage limitation on the resulting income tax charitable deduction.
Citation: Trout Ranch LLC et al. v. Commissioner; T.C. Memo. 2010-283; No. 14374-08
Full Text:
TROUT RANCH, LLC, MICHAEL D. WILSON, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
UNITED STATES TAX COURT
Filed December 27, 2010
Larry D. Harvey, for petitioner.
Sara Jo Barkley and Tamara L. Kotzker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN,
Judge: By notice of final partnership administrative adjustment (the notice), respondent reduced the amount of the
charitable
contribution that Trout Ranch, LLC (the partnership), claimed on its
2003 Form 1065, U.S. Return of Partnership Income, from $2,179,849 to
$485,000. Before trial, we granted respondent's motion to amend his
answer to reduce the charitable
contribution further to zero -- that is, to increase the proposed
adjustment from $1,694,849 to $2,179,849. By the notice, respondent also
determined that the amount of any resulting charitable
contribution deduction is limited to 30 percent of the taxpayer's
contribution base and not 50 percent of that base. In 2003, the
partnership granted a conservation easement on land it owned. Because
the value of that conservation easement determines the amount of the charitable contribution that the partnership may claim, we must determine that value.
Unless otherwise stated, section references are to the Internal
Revenue Code in effect for 2003, and all Rule references are to the Tax
Court Rules of Practice and Procedure. We round all measurements in
acres and all dollar amounts to the nearest whole number.
FINDINGS OF FACT
Introduction
Some facts have been stipulated and are so found. The
stipulation of facts and the supplemental stipulation of facts, with
accompanying exhibits, are incorporated herein by this reference.
When the petition was filed, the partnership's principal place of business was in Gunnison County, Colorado.
Background
The partnership was formed as a limited liability company in
October 2002 and elected to be taxed as a partnership for its taxable
(calendar) year 2003. In January 2003, the partnership purchased land
and certain appurtenant water rights in Gunnison County for $3,953,268.
To consolidate the west line of the property, the partnership entered
into land trades with neighboring landowners involving adjacent parcels.
After those trades, the partnership owned 457 acres of land, including 2
miles of the Gunnison River running north to south through the
property. In April 2003, in exchange for $9,700, the partnership
conveyed three permanent easements and a temporary easement to the
Colorado Department of Transportation (CDOT) encumbering 1 acre (the
CDOT easement). A week later, CDOT granted the partnership a State
Highway Access Permit over 4 acres (the CDOT access permit). Not
counting the land covered by the CDOT access permit, the partnership
controlled 453 acres, which we shall refer to as Gunnison Riverbanks
Ranch (sometimes, the property). Before 2003, the property had been used
for agriculture, recreation, and, during one period, the extraction of
gravel. In 2003, approximately 200 acres of the property consisted of
hay meadows and pastures.
The east line of the property adjoins several thousand acres
managed by the U.S. Department of the Interior, Bureau of Land
Management. To the north and west of the property are rural residential
tracts, most of which are between 2 and 10 acres. To the south of the
property are larger rural residential tracts, all of which are at least
35 acres.
The Gunnison County Land Use Resolution
Gunnison County has no zoning. The Gunnison County Land Use
Resolution (the land use resolution) governs land development and
subdivision in Gunnison County. Two development regulations are
important in this case: the Large Parcel Incentive Process (LPIP) and
the Major Impact Project Process (MIP). Both LPIP and MIP require a
developer to submit a plan for approval to the Gunnison County Planning
Commission (the commission). Under LPIP, if a developer preserves at
least 75 percent of the land for open space or another conservation
purpose, then the developer may subdivide the remaining land into three
lots for every 70 acres, rounded down to the nearest whole multiple of
35 acres.1 If the developer preserves at least 85 percent of
the land, however, then the developer is entitled to a bonus lot for
every 140 acres. In contrast, MIP does not explicitly limit the number
of lots into which a developer may subdivide land. Rather, the maximum
lot density depends on the physical capacity of the land and the impact
the proposed subdivision would have on the community. Under MIP, the
developer must preserve at least 50 percent of the land. As a matter of
right, a developer may subdivide land into 35-acre parcels.
In April 2003, the partnership filed a Land Use Change
Permit Application under LPIP proposing to preserve 85 percent of the
property to take advantage of the LPIP bonus-density lot provisions. The
partnership sought to create 21 residential lots, in addition to a lot
for a clubhouse, at Gunnison Riverbanks Ranch (the land use change
permit). The partnership also could have filed a Land Use Change Permit
Application under MIP for approval to create more than 22 lots.
Development of Gunnison Riverbanks Ranch
From the beginning, the partnership intended to develop
Gunnison Riverbanks Ranch into a residential subdivision with a minimum
of 20 lots and exclusive shared amenities, including a clubhouse, a
guest house, fishing, a riding arena and stable, ponds, a boathouse,
duck blinds, and an archery range. (We shall refer to such a development
as a shared ranch, in contrast to residential subdivisions without
shared amenities.) To the extent possible, the partnership intended to
preserve the pristine nature of the land and the river.
In May 2003, the commission formally discussed the land use
change permit with the partnership and visited the property. In July,
the commission held a public hearing concerning the land use change
permit.
The Conservation Easement
In December 2003, the partnership donated a conservation
easement to the Crested Butte Land Trust encumbering 384 acres at
Gunnison Riverbanks Ranch and certain appurtenant water rights (the
Trout Ranch CE or, simply, the conservation easement). On the same day,
the partnership entered into a Land Conservation Covenant with Gunnison
County encumbering an additional 4 acres of the property (the land
covenant). Neither the conservation easement nor the land covenant
encumbered land that the CDOT easement already encumbered. The remaining
unencumbered 66 acres were along the Gunnison River in three parcels.
The partnership reserved the right to subdivide those three parcels into
22 lots: 10 lots in the northern parcel, a historic ranch house (the
clubhouse) in the middle parcel, and 11 lots in the southern parcel. The
21 single-family residential lots each had 3 acres, with part of each
residential lot including land that the conservation easement
encumbered. The conservation easement allowed the construction of three
open horse shelters, three duck blinds, two corrals, three ponds with
docks, a tent platform, and a skeet trap wobble deck on land the
conservation easement encumbered.
Subsequent Events
In February 2004, the partnership submitted to the
commission its final plan for Gunnison Riverbanks Ranch. In April, the
commission approved the land use change permit and the partnership
entered into a development agreement with the Board of County
Commissioners of Gunnison County. In August, the partnership conveyed
the land encumbered by the conservation easement, the land covenant, and
the CDOT easement to Gunnison Riverbanks Ranch Association.
The partnership incurred $2,232,485 in expenses to develop Gunnison Riverbanks Ranch.
The Partnership's 2003 Tax Return
On its 2003 Form 1065, the partnership claimed a charitable
contribution of $2,179,849 for the contribution of the conservation
easement. In March 2008, respondent issued the notice to the
partnership. The notice disallowed $1,694,849 of the claimed charitable contribution; i.e., the notice allowed a charitable contribution of $485,000. The notice also determined that a deduction of the charitable
contribution was subject to the 30-percent limitation in section
170(b)(1)(B) and not the 50percent limitation in section 170(b)(1)(A).
The Court subsequently allowed respondent to amend his answer to
increase the proposed adjustment by $485,000, thereby disallowing the
entire charitable contribution.
To determine the amount of the charitable contribution made by the partnership, we must determine the value of the conservation easement.
I. Burden of Proof
In general, the taxpayer bears the burden of proof, although the
Commissioner bears the burden of proof with respect to any "increases in
deficiency". See Rule 142(a)(1). That general rule suggests that
respondent bears the burden of proving the partnership is entitled to
claim a
charitable contribution of less than $485,000 and that petitioner bears the burden of proving the partnership is entitled to claim a charitable
contribution of more than $485,000. Petitioner, however, raises the
issue of section 7491(a), which shifts the burden of proof to the
Commissioner in certain situations if the taxpayer introduces credible
evidence with respect to any factual issue relevant to ascertaining the
proper tax liability. Respondent objects that petitioner has failed both
to introduce credible evidence under section 7491(a)(1) and to satisfy
other preconditions for the application of that section. It is
unnecessary for us to address the parties' disagreements and to
determine whether the burden has shifted because the parties have
provided sufficient evidence for us to find that the value of the
conservation easement was $560,000. See Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005).
II. The Value of the Conservation Easement
A. Introduction
Section 170 allows a deduction for charitablecharitable
contribution of an interest in property that is less than the
taxpayer's entire interest in the property. One exception to that
general rule, however, is for a qualified conservation contribution. See
sec. 170(f)(3)(B)(iii). Respondent concedes that the donation of the
conservation easement was a qualified conservation contribution. The
only issue with respect to the donation is its value.
contributions. In general, section 170(f)(3) denies a deduction for a
B. Positions of the Parties
The parties defend their respective valuations (through
expert and other testimony), and each attacks the valuation offered by
his opponent. We briefly describe the analyses of the experts.
Michael R. Nash and Louis J. Garone, both experts in real estate
appraisal, concluded independently that the conservation easement was
worth nothing. They both determined the value of the conservation
easement using the so-called income approach to calculate and compare
the highest and best use of the property before and after the imposition
of the conservation easement. The income approach to valuing real
property involves discounting to present value the expected cashflows
from the property. E.g.,
Marine v. Commissioner, 92 T.C. 958, 983
(1989), affd. without published opinion 921 F.2d 280 (9th Cir. 1991).
The theory behind the approach is that an investor would be willing to
pay no more than the present value of a property's anticipated net
income.
Jonathan S. Lengel, an expert with respect to the valuation of
conservation easements, concluded that the conservation easement was
worth $2.2 million. His original report determined the value of the
conservation easement by calculating the value of the property before
the imposition of the conservation easement using sales of similar
properties and then estimating the percentage by which the conservation
easement likely decreased the value of the property. Mr. Lengel
calculated that percentage by dividing the sale prices of encumbered
property by the contemporaneous sale prices of similar unencumbered
property. To correct certain errors in his original report and to
provide two additional estimates of the value of the conservation
easement (using a so-called sales comparison analysis and the income
approach), Mr. Lengel later produced a supplemental report. His ultimate
conclusion remained the same.
2
C. The Proper Valuation Methodology
Section 1.170A-14(h)(3)(i), Income Tax Regs., states in pertinent 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. * * * 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 difference 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. * * *
Petitioner argues that, if the condition in the second sentence of that
provision is satisfied (i.e., if there is a substantial record of sales
of easements comparable to the donated easement), then the only proper
valuation methodology is to calculate the fair market value of the
donated easement using the sales prices of the comparable easements.
Petitioner argues that respondent's experts, who valued the conservation
easement using the method described in the third sentence of the
provision (the so-called before and after method), violated the
"unambiguous" language of the regulation. We need not address that legal
issue, however, because we find that the condition in the second
sentence of the provision was not in fact satisfied. That is, we find
that there was no substantial record of sales of easements comparable to
the donated easement. The use of the before and after method (by all
three experts) to value the conservation easement was thus proper and in
accordance with the regulation.
D. Mr. Lengel's Sales Comparison Analysis
Petitioner argues that, according to section
1.170A14(h)(3)(i), Income Tax Regs., the "only mandatory methodology"
for the valuation of a conservation easement is the methodology
described in the second sentence of that provision (the sales comparison
method). In the sales comparison analysis in his supplemental report,
Mr. Lengel relies on five sales of conservation easements in Gunnison
County. On brief, petitioner relies on only four of those sales,
disregarding a fifth sale that occurred after the partnership donated
the conservation easement.3 Nonetheless, none of the other
four conservation easements is comparable to the Trout Ranch CE. For
that reason, we find Mr. Lengel's sales comparison analysis to be of no
help in determining the value of the conservation easement. We discuss
the four conservation easements below.
1. The Niccoli Conservation Easement
In April 2001, as part of a bargain sale, Robert Niccoli conveyed
to Colorado Cattlemen's Agricultural Land Trust, a Colorado nonprofit
corporation, a conservation easement encumbering 146 acres of primarily
open ranchland. There are no water rights associated with the property,
and there was no creek or river frontage. The Niccoli property was about
4 miles southeast of Crested Butte, directly west of the Crested Butte
South subdivision, and about 12 miles north of Gunnison Riverbanks
Ranch. Both the Niccoli property and Gunnison Riverbanks Ranch abutted
Colorado State Highway 135. The Niccoli conservation easement (Niccoli
CE) precluded any development on the Niccoli property. That is, the
Niccoli property went from at least four 35-acre lots to none. In the
bargain sale, Mr. Niccoli received $695,296 from Great Outdoors Colorado
Trust Fund, a State agency that provides money to Colorado land trusts
and local governments to acquire conservation easements. The appraised
value of the Niccoli CE was $927,061.
2. The Guerrieri Conservation Easement
In November 2003, as part of a bargain sale (with the grantor
receiving land), Guerrieri Ranches, L.L.C., conveyed to Gunnison
Ranchland Conservation Legacy, a Colorado land trust and nonprofit
corporation, a conservation easement encumbering 320 acres of primarily
open ranchland. The Guerrieri conservation easement (Guerrieri CE),
however, did not cover the entire Guerrieri property, which was 952
acres. The Guerrieri CE encumbered the northern section of the irregular
Guerrieri property, which was connected to the greater Guerrieri
property only by a relatively narrow strip of land. The Guerrieri
property, irrigated and with creek frontage, is 11 miles north of
Gunnison Riverbanks Ranch. The Guerrieri CE precluded any development on
315 acres of 320 encumbered acres; the remaining 5 acres were reserved
for one single-family residence. That is, the Guerrieri property went
from at least twenty-three 35-acre lots to at least fourteen or fifteen
35-acre lots and one 5-acre lot. In the bargain sale, Guerrieri Ranches,
L.L.C., received land in Gunnison County worth $938,475 from Gunnison
Ranchland Conservation Legacy. The appraised value of the Guerrieri CE
was $1,248,750.
3. The Miller Conservation Easement
In November 2003, as part of a bargain sale (with the grantor
receiving land), Miller Land and Cattle conveyed to Gunnison Legacy
Fund, a Colorado land trust and nonprofit corporation, a conservation
easement encumbering 360 acres of primarily open ranchland. The Miller
property was irrigated. The Miller conservation easement (Miller CE)
precluded any development on 355 acres of the Miller property; the
remaining 5 acres were reserved for one single-family residence. That
is, according to the contemporaneous appraisal, the Miller property went
from nine 40-acre lots to one 5-acre lot. In the bargain sale, Miller
Land and Cattle received land in Gunnison County worth $711,000 from
Gunnison Legacy Fund. The appraised value of the Miller CE was $984,600.
4. The Trampe Conservation Easement
In December 2003, as part of a bargain sale, Trampe Ranches,
L.L.L.P., conveyed to Colorado Open Lands, a Colorado land trust and
nonprofit corporation, a conservation easement encumbering 978 acres of
primarily open ranchland. The Trampe property contains 1.5 miles of the
East River. The Trampe property was just north of Almont, about 3 miles
north of Gunnison Riverbanks Ranch. Both the Trampe property and
Gunnison Riverbanks Ranch abutted Colorado State Highway 135. The Trampe
conservation easement (Trampe CE) precluded any development on 973
acres of the Trampe property; Trampe Ranches, L.L.L.P., retained the
right to build one single-family residence on one of three 5-acre lots.
That is, the Trampe property went from at least twenty-seven 35acre lots
to one 5-acre lot. In the bargain sale, Trampe Ranches, L.L.L.P.,
received $235,000 from Colorado Open Lands. The appraised value of the
Trampe CE was $1,735,500.
The most obvious problem with Mr. Lengel's comparable sales
analysis is that none of the four conservation easements above had an
effect on the donor's land comparable to the effect the Trout Ranch CE
had on Gunnison Riverbanks Ranch.
4 With the exception of the
Guerrieri CE, the conservation easements restricted development rights
to a much greater extent than the Trout Ranch CE. The Niccoli CE
restricted development from at least four residential lots to none (a
reduction of potential development of 100 percent); the Miller CE
restricted development from nine residential lots to one lot (a
reduction of potential development of 89 percent; the Trampe CE
restricted development from 27 residential lots to one lot (a reduction
of potential development of 96 percent). In essence, in all three cases
the conservation easements all but eliminated residential development.
In stark contrast, the Trout Ranch CE restricted development from at
least 40 residential lots to 22 lots (a reduction in potential
development of 45 percent). We are simply not convinced that the value
of a conservation easement that restricts development to at most one
residential lot sheds any light on the value of a conservation easement
that allows as many as 22 residential lots.
Although the Guerrieri CE and the Trout Ranch CE restricted
overall development to a similar degree, the details of the former are
too different from those of the latter for the Guerrieri CE to be of
much help in valuing the Trout Ranch CE. Regardless of the true value of
the Guerrieri CE, that conservation easement provides no help in
valuing the Trout Ranch CE because the restrictions of the two
conservation easements had significantly different effects. The
Guerrieri CE restricted all development across a block of 315 acres (the
single 5-acre residential lot being in the northeast corner of the 320
encumbered acres). The appraisal stated: "There are several successful
residential developments within the subject neighborhood along with
sales of 35-acre parcels for homes and large ranches for development and
exclusive use." The conservation easement prevented Guerrieri Ranches,
L.L.C., from developing 320 acres of "semi-secluded pristine valley,
with creek frontage, views, majestic mountains, wildlife, [and]
proximity to economic centers". At Gunnison Riverbanks Ranch, however,
the conservation easement restricted the land surrounding the most
valuable asset (the river) but was designed to allow the partnership to
develop the entire parcel into a 21lot shared ranch, with 21 residential
lots and a clubhouse along the river.
The two conservation easements thus had greatly different
effects on the surrounding land. Whereas the appraisal of the Guerrieri
CE stated that the conservation easement would provide "no specific
benefit" to the rest of the Guerrieri property, the Trout Ranch CE
provided a clear benefit to the unencumbered land along the river. We
simply do not consider the Guerrieri CE comparable to the Trout Ranch
CE. Moreover, even if the Guerrieri CE were comparable, the record of a
single comparable conservation easement would be insufficient to
constitute "a substantial record of sales of easements comparable to the
donated easement". See sec. 1.170A-14(h)(3)(i), Income Tax Regs.
E. The Before and After Analyses
All three experts agreed that the highest and best use of Gunnison
Riverbanks Ranch before and after the granting of the conservation
easement was as a residential subdivision, and they all used the income
approach to calculate the before and after values of the property. Given
the lack of comparable market sales, we agree that the income approach
is the most appropriate method to value the property. To calculate the
before and after values, the experts used the so-called subdivision
method; to find the present value of the hypothetical residential
subdivisions, they constructed discounted cashflow analyses by
estimating the number and prices of the lots, the costs of their
development and sale, and other parameters. We find none of the experts
completely convincing. We shall discuss their assumptions and their
arguments, and we shall then construct our own discounted cashflow
analyses to calculate the before and after values of the property.
For a couple of reasons, we start by calculating the present
value of the property after the imposition of the conservation easement.
First, the experts spent the most time and effort calculating the after
value of the property, and their competing analyses lead to their most
substantial disputes. Our analysis depends on resolving those disputes,
and we can more coherently address them in their original context.
Second, the presence of the conservation easement would have no effect
on several parameters we must estimate; that is, several parameters
should remain constant in the calculations of the before and after
values. In choosing those parameters, we want to consider the arguments
of all three experts. Mr. Nash, however, used only a single discounted
cashflow analysis to support his after value. (Mr. Nash used a sales
comparison approach and a cost approach to calculate his before value,
which was less than his after value.) That is, unlike the other experts,
he did not use multiple discounted cashflow analyses to compare
different developments. Nonetheless, his report is in evidence, and we
find some of his analysis of the after value helpful. By calculating the
after value first, we can evaluate his parameters in their original
context.
Because Messrs. Nash and Garone found that the imposition of the
conservation easement did not change the highest and best use of the
property, their respective analyses of the before value and the after
value are identical. Mr. Nash found the highest and best use to be a
development identical to Gunnison Riverbanks Ranch -- i.e., a 21-lot
shared ranch. He valued that development at $5.8 million. Mr. Garone
found the highest and best use to be a 22-lot residential subdivision.
He valued that development at $5.08 million. Mr. Lengel, like Mr. Nash,
found the highest and best use after the imposition of the conservation
easement to be a development identical to Gunnison Riverbanks Ranch --
i.e., a 21lot shared ranch. He, however, valued that development at $2.6
million.
All the discounted cashflow analyses we discuss had the
following basic structure. To calculate gross sales revenue, the experts
estimated the prices of the lots, their absorption rate (i.e., the
number of lots that would sell every year), and their appreciation rate.
To calculate expenses, the experts estimated capital expenses (i.e.,
the development costs, all expended in the first year), the sales
expenses (e.g., sales commissions and general and administrative costs),
and developer's profit (for convenience, a percentage). The experts
also estimated a discount rate (i.e., the interest rate used to
determine the present value of the future cashflows). With their
estimates, the experts then calculated the present value of the future
cashflows, and thus the present value of the proposed development. We
discuss their discounted cashflow analyses below, and then we construct
our own.
The discounted cashflow analysis Mr. Nash used to calculate the
value of the 21-lot shared ranch had the following parameters. Mr. Nash
estimated that the lots would sell for $630,000 (before appreciation)
over 6 years (at a rate of 0, 5, 4, 4, 4, 4). He estimated the lots
would appreciate at 4 percent (but for some reason starting only in the
second year). He estimated that capital expenses would be $1.51 million,
that sales expenses would be 9 percent of gross sales revenue (i.e.,
commissions of 8 percent and closing costs of 1 percent), and that
developer's profit would be 25 percent. (Mr. Nash did not explicitly
estimate project management expenses. We offer an explanation for that
apparent oversight in section II.E.2.d.(8) of this report.) For
"sensitivity testing", he used discount rates of 9, 10, and 11 percent,
and he ultimately settled on a discount rate between 9 and 10 percent.
The discounted cashflow analysis Mr. Garone used to calculate the
value of the 22-lot residential subdivision had the following
parameters. Mr. Garone estimated that the lots would sell for $550,000
(before appreciation) over 8 years (at a rate of 3, 3, 3, 3, 3, 3, 3,
1). He estimated the lots would appreciate at 8 percent. He estimated
that capital expenses would be approximately $805,000, that project
management expenses would be 10 percent of gross sales revenue, that
sales expenses would be 8.5 percent of gross sales revenue (i.e.,
commissions of 7 percent and closing costs of 1.5 percent), and that
developer's profit would be 15 percent. He used a discount rate of 15
percent.
The discounted cashflow analysis Mr. Lengel used to calculate the
value of the 21-lot shared ranch had the following parameters. Mr.
Lengel estimated that the lots would sell for $300,000 (before
appreciation) over 4 years (at a rate of 4, 8, 8, 1). He estimated the
lots would appreciate at 15 percent. He estimated that capital expenses
would be approximately $2.18 million, that project management expenses
would be $40,000 a year, that sales expenses would be 7 percent of gross
sales revenue (i.e., commissions of 6 percent and closing costs of 1
percent), and that developer's profit would be 12 percent. He used a
discount rate of 15 percent.
We agree with Messrs. Lengel and Nash that the highest and best use
of the property after the imposition of the conservation easement was a
21-lot shared ranch. The implicit assumption is that the clubhouse
would increase the value of the other lots by more than the value of an
additional lot and the cost of the clubhouse itself. That assumption
does not strike us as implausible, especially given that the partnership
in fact developed Gunnison Riverbanks Ranch as a 21-lot shared ranch.
Because Mr. Garone failed to explain exactly why he placed such a low
value on the clubhouse, we find that a 21-lot shared ranch was the
highest and best use after the imposition of the conservation easement.
(2) Lot Prices
(a) The Experts' Estimates
The experts broadly disagreed about lot prices. Indeed, the value
of the lots after the imposition of the conservation easement is their
essential dispute. Mr. Lengel assumed that all 21 lots would sell for
$300,000. Mr. Lengel relied on six lot sales at Hidden River Ranch to
support his lot price of $300,000. (We discuss the experts' data in the
next section.) Yet Mr. Lengel himself abandoned that estimate in his
rebuttal reports. In those reports, Mr. Lengel stated that "a reasonable
conclusion given the data available" was, using Mr. Nash's data,
$355,000 and, using Mr. Garone's data, $375,000. We are not surprised
that Mr. Lengel did not defend his estimate. In his analysis of the
property before the imposition of the conservation easement, Mr. Lengel
found that a 40-lot residential subdivision was the highest and best
use. Mr. Lengel assumed that 40 lots, distributed across roughly the
same 15 to 20 percent of the property as 21 lots, would also sell for
$300,000. Mr. Lengel apparently assumed either that the 40 lots would
not sell at a discount or that the 21 lots would not sell at a premium.
We find his assumption that lot prices would remain the same regardless
of the number of lots implausible. (His estimate of $300,000 per lot is
somewhat more reasonable, however, for a 40lot residential subdivision.
See sec. II.E.3.c.(1) of this report.) Notably, in the rebuttal reports,
Mr. Lengel accepted all the other assumptions that Messrs. Nash and
Garone made.
Mr. Nash assumed that all 21 lots would sell for $630,000. To
arrive at that figure, he used 13 lot sales from three different
developments in the area. Mr. Nash considered three sales from Eagle
Ridge Ranch, six sales from Hidden River Ranch, and four sales from
Gunnison Riverbanks Ranch.
Mr. Garone assumed that all the lots (22 in his analysis)
would sell for $550,000. To arrive at that figure, he scaled down the
lot price from his 12-lot residential subdivision (which assumed a
matter-of-right subdivision into 35-acre lots) by approximately 12
percent. We find that approach unsatisfactory. We shall simply use the
raw data from which he derived the lot price for his 12-lot residential
subdivision. Mr. Garone used nine lot sales from four different
developments in the area. He considered three sales from Danni Ranch,
three sales from Hidden River Ranch, one sale from Eagle Ridge Ranch,
and two sales from Horse River Ranch.
With respect to lot sales at Hidden River Ranch, the experts offer
slightly different accounts. We find the facts of those sales to be the
following. Hidden River Ranch comprised 260 acres approximately 4 miles
south of Crested Butte, which included half a mile of the East River.
Amenities included a barn, corrals, and 171 acres of open space
protected by a conservation easement. The remaining 89 acres had 17 lots
of approximately 5 acres each. Two lots sold in July 2003 for $431,000,
one lot sold in December 2003 for $300,000, and three lots sold in
April 2004 for $320,000, $325,000, and $335,000.
Mr. Nash compared Hidden River Ranch to Gunnison Riverbanks
Ranch, describing its location (close to Crested Butte) as "slightly
superior", the size of its lots (which he believed to be 35 acres) as
"slightly superior", and its aesthetic appeal and amenities (e.g.,
inferior tree cover and a shorter stretch of river with an inferior
fishery) as "significantly inferior". Overall, he judged Hidden River
Ranch to be "slightly inferior" to Gunnison Riverbanks Ranch. In his
supplemental report, Mr. Lengel presented an almost identical analysis,
calling Hidden River Ranch "slightly superior in size and location * * *
but along a substantially inferior river".5 Nonetheless,
given that only a single lot at Hidden River Ranch sold for as little as
$300,000, Mr. Lengel evidently concluded that Gunnison Riverbanks Ranch
was inferior to that development. Mr. Garone concluded that, because of
the inferior East River fishery, Hidden River Ranch lots would, after
otherwise adjusting their values to reflect differences with Hidden
River Ranch lots, be worth approximately $50,000 less than lots at
Gunnison Riverbanks Ranch.
Eagle Ridge Ranch comprised 4,900 acres approximately 7
miles northwest of Gunnison, which included 2 miles of the Ohio Creek.
Amenities included two mountain cabins, a barn, corrals and equestrian
facilities, and 4,375 acres of open space (including 2,000 acres of
"mountainous lands"). The remaining 525 acres had 15 lots of 35 acres
each. One lot sold in January 2005 for $845,000, one lot sold in
December 2005 for $985,000, and one lot sold in November 2006 for
$875,000.
In comparison to Gunnison Riverbanks Ranch, Mr. Nash
described the location of Eagle Ridge Ranch as under "less development
pressure" and so "slightly inferior", the size of its lots as "slightly
superior", and its aesthetic appeal and amenities (e.g., similar tree
cover, a river with an inferior fishery, and a much lower density) as
"slightly superior". Overall, he judged Eagle Ridge Ranch to be
"moderately superior" to Gunnison Riverbanks Ranch. Mr. Garone described
the Eagle Ridge Ranch amenities as "superior" and estimated that its
lots were worth 25 percent more than those at Gunnison Riverbanks Ranch.
Mr. Lengel did not discuss Eagle Ridge Ranch.
Mr. Garone did not provide much background on Danni Ranch or
Horse River Ranch. At Danni Ranch, one 35-acre lot sold in October 2000
for $375,000, one 39-acre lot sold in November 2004 for $385,000, and
one 35-acre lot sold in March 2005 for $450,000. The first lot, like the
lots at Hidden River Ranch, was on the "inferior" East River. The
second two lots did not have river frontage. At Horse River Ranch, one
35-acre lot sold in January 2004 for $575,000 and one 35-acre lot sold
in April 2004 for approximately $465,000. Both lots were on the Ohio
Creek, which Mr. Garone considered even less desirable than the East
River. Mr. Garone concluded that, because of the inferior Ohio Creek
fishery, Horse River Ranch lots were worth approximately $75,000 less
than Gunnison Riverbanks Ranch lots.
The following is a summary of lot sales at Gunnison Riverbanks Ranch after the donation of the conservation easement:
Date Lot No. Price
_____________________________________________________________________
December 2004 16 $625,000
December 2004 17 625,000
August 2006 21 500,000
November 2006 16 677,000
August 2007 3 640,000
November 2007 1 685,000
April 2008 7 800,000
The lot sold in August 2006 did not have river frontage.
(c) The Use of Postvaluation Data
Before we discuss the data presented above, we must address
petitioner's argument that we may not consider evidence of lot sales
after the date of valuation (i.e., the date the partnership donated the
conservation easement). Petitioner argues that "the plain language of
the regulation" makes events occurring after the date of valuation
"irrelevant". In support, he quotes section 1.170A-14(h)(3)(i), Income
Tax Regs.: "The value of * * * a perpetual conservation restriction is *
* * [its] fair market value * * * at the time of the contribution."
That statement, however, does not limit the evidence one may consider in
determining that value; the regulation does not support petitioner.
In Estate of Gilford v. Commissioner, 88 T.C. 38, 52-54 (1987), on which petitioner relies, we stated:
The rule that has developed, and which we accept, is that subsequent
events are not considered in fixing fair market value, except to the
extent that they were reasonably foreseeable at the date of valuation.
See, e.g., Ithaca Trust Co. v. United States, 279 U.S. 151 (1929) * * *
* * * * * * *
* * * the rule against admission of subsequent events is a rule of
relevance. Rule 401, Federal Rules of Evidence, applicable in this Court
pursuant to Rule 143, Tax Court Rules of Practice and Procedure, and
section 7453, defines relevant evidence as "evidence having any tendency
to make the existence of any fact that is of consequence to the
determination of the action more or less probable than it would be
without the evidence." (Emphasis added.) See Armco, Inc. v. Commissioner, 87 T.C. 865 (1986). * * *
Estate of Gilford does not support petitioner. We find that the
evidence of lot sales within a reasonable period after the date of
valuation (especially those at Gunnison Riverbanks Ranch itself) tends
to make a given estimate of the lot prices more or less likely; that is,
such evidence is relevant.
6
Petitioner argues that, even if such evidence is relevant, we
should give it no weight, because between June 2004 and June 2006
"Gunnison County real property appreciated overall" by 53 percent.
Moreover, petitioner argues that, in those 2 years, vacant land in
Gunnison County appreciated by 87 percent. Respondent objects that
Gunnison County comprises many different economic areas, including the
towns of Gunnison and Crested Butte and the area surrounding the
latter's ski resorts. Respondent argues that the Gunnison economic area,
which included Gunnison Riverbanks Ranch, experienced only, in the
words of a senior appraiser for the Gunnison County Assessor's Office,
"a minor upward adjustment." According to that senior appraiser, the
sale of the Crested Butte mountain caused "an increase in market volume
and market prices" in Crested Butte and the area surrounding the ski
resorts. (Although that sale did not occur until March 2004, the
purchasers of the Crested Butte Ski Resort signed a letter of intent in
October 2003.) Petitioner does not suggest that any lot sales (with the
notable exception of lot sales at Gunnison Riverbanks Ranch) support the
proposition that prices of real estate in and around the town of
Gunnison appreciated at more than a reasonable rate. We find no evidence
that the lots at Gunnison Riverbanks Ranch appreciated at more than a
reasonable rate after the date of valuation. Nonetheless, we shall give
the most weight to lot sales within a year of the date of valuation
(i.e., sales in 2003 and 2004) and less weight to lot sales outside that
range.
We are not convinced that the prices of the 35-acre lots at Danni
Ranch, Horse River Ranch, and Eagle Ridge Ranch tell us much about the
lot prices at Gunnison Riverbanks Ranch. Danni Ranch and Horse River
Ranch are complete unknowns. We are reluctant to draw any conclusion
from the lot sales at those two developments. Eagle Ridge Ranch was
almost completely different from Gunnison Riverbanks Ranch: Eagle Ridge
Ranch had fewer and much larger lots, in a more secluded area, with
superior amenities. We are certain (and the experts all agreed) that
those lots were worth far more than lots at Gunnison Riverbanks Ranch,
but exactly how much more is not clear.
We shall rely on the sales at Hidden River Ranch and Gunnison
Riverbanks Ranch. We find that lots at Hidden River Ranch were much less
desirable than lots at Gunnison Riverbanks Ranch. Mr. Nash called the
East River "significantly inferior", and even Mr. Lengel called it
"substantially inferior". Given that both parties stress the beauty of
the Gunnison River and the quality of its fishery, we find the
difference between the two rivers to be important. The sales data
suggest that Hidden River Ranch had two tiers of lots: those worth
around $430,000 and those worth around $320,000. (The experts offered no
explanation for the significant difference in prices.)
We also find the two lot sales at Gunnison Riverbanks Ranch
in December 2004 to be important. Nonetheless, we are wary of relying
too much on the sale prices of $625,000, which is the sale price 1 year
after the December 2003 donation of the Trout Ranch CE. Mr. Garone
suggested adding at least $50,000 to the prices of lots at Hidden River
Ranch to estimate the prices of lots at Gunnison Riverbanks Ranch. We
shall add $60,000 to the top-tier lots at Hidden River Ranch to estimate
the price of the average lot at Gunnison Riverbanks Ranch. That strikes
us as a reasonable (indeed, a generous) compromise: Our estimate
suggests that appreciation over 1 year was almost 30 percent. Although
petitioner failed to present any evidence of such appreciation, we must
reconcile the sales data before us. We shall thus use $490,000 as the
price of lots.
The experts again broadly disagreed. Mr. Lengel estimated a rapid
absorption rate. He stated that, in 3 years, Hidden River Ranch had sold
six lots with river frontage. He argued that, given the limited supply
of similar lots and the anticipated competition for lots at Gunnison
Riverbanks Ranch, the absorption rate there would be much higher. Mr.
Garone stated that developments with lots between $400,000 and $550,000
had absorption rates of about three lots a year. Mr. Nash also
considered lot sales at Hidden River Ranch, but he did not limit himself
to lots with river frontage. He stated that Hidden River Ranch had sold
14 lots in 3 years, but that, given the higher lot prices at Gunnison
Riverbanks Ranch, he estimated slightly slower absorption.
7
We agree with the analyses of Messrs. Lengel and Nash. Whereas
Mr. Garone failed to justify his sluggish absorption rate, they provided
data in support of their estimates. Yet we agree with Mr. Garone that
Mr. Lengel's absorption rate -- with eight sales in each of the first 2
years -- seems "slightly aggressive". We find that Mr. Lengel's
arguments do not justify his own estimates but do support those of Mr.
Nash. We shall adopt the absorption rate of four to five lots a year
that Mr. Nash proposed. We assume, as did all the experts, that the
first sales are in 2004 (the year after the year of the contribution of
the Trout Ranch CE).
With respect to appreciation, Mr. Lengel stated that "The rate of
increase in selling prices is difficult to * * * [predict]." He
suggested that, at the time of the donation of the conservation
easement, because demand had been low for the few years before, one
might have expected demand to increase in the future. He reasoned that,
with only a "small supply of vacant river front lots between one and ten
acres in the neighborhood" and "no known new developments * * *
planned", rising demand "should lead to escalating values." He noted
that, historically, similar properties generally appreciated between 5
and 20 percent a year. Mr. Lengel concluded that the lots would
appreciate at 15 percent a year for the first 4 years and would stop
appreciating thereafter. Looking to the "sluggish economy and historical
performance in the area" at the time of the donation of the
conservation easement, Mr. Garone estimated appreciation of 8 percent a
year. Relying solely on the sale and resale of lot 16 at Gunnison
Riverbanks Ranch, Mr. Nash estimated appreciation of 4 percent.
Bearing in mind Mr. Lengel's initial caveat ("The rate of
increase in selling prices is difficult to portend"), we find the
assumption that appreciation would not be uniform unwarranted. There is
no evidence that the property would either not appreciate in the first
year or abruptly stop appreciating after 4 years. Although Mr. Lengel's
analysis does not justify appreciation of 15 percent, we do find that
his reasons justify appreciation of more than 8 percent. We shall use
flat appreciation of 10 percent a year.
To calculate capital expenses, all three experts started with the
actual expenses the partnership incurred developing the property
(approximately $2.23 million) and subtracted certain expenses and
related interest. Mr. Lengel subtracted one expense (a finder's fee for
petitioner), which left him with development costs of approximately
$2.18 million. Mr. Nash subtracted six additional expenses (related to
the conservation easement, the land swaps, the ranch house, and the
barn), which left him with development costs of approximately $1.40
million. Mr. Garone subtracted several more expenses (e.g., related to
the digging of "Lakes and Ditches" -- the ponds, we presume), which left
him with development costs of approximately $805,000. Because we have
already rejected Mr. Garone's 22-lot residential subdivision, we shall
not consider his proposed development costs for that plan. Mr. Garone,
however, also estimated costs for a syndicated plan, intended to reflect
a shared ranch similar to the actual Gunnison Riverbanks Ranch. For
that estimate, he subtracted far fewer costs (i.e., not those related to
the clubhouse), which left him with development costs of approximately
$1.77 million. Messrs. Nash and Garone, however, failed to explain why
they excluded certain costs. (Mr. Nash characterized the costs he
excluded as "abnormal costs * * * not typical for most subdivision
developments" yet failed to acknowledge that those costs may have
increased the value of property). Given respondent's insistence that the
partnership developed the land according to its highest and best use,
we find his experts' reasons for excluding some of its costs lacking. We
shall use Mr. Lengel's estimate of capital expenses of approximately
$2.18 million.
(6) Project Management Expenses
Mr. Lengel allocated $40,000 a year for "marketing and
advertising". Mr. Garone, however, stated that project management
expenses would also include "project oversight" costs and "miscellaneous
administrative costs". We find that Mr. Lengel underestimated project
management expenses. We shall adopt Mr. Garone's estimate of project
management expenses (10 percent of gross sales revenue).
Mr. Lengel stated that "real estate agents charge 5 percent to 10
percent commissions on vacant land sales." He then stated that, because
potential buyers of real estate in Gunnison County come from a "wide
geographical range", "marketing costs * * * extend out of the immediate
area." Mr. Lengel concluded that real estate agents would charge a
commission of 6 percent -- that is, a low commission -- to cover those
marketing costs. Mr. Garone proposed a commission of 7 percent, and,
given that Mr. Lengel's own analysis supports such a figure, we shall
adopt it. Mr. Garone, however, did not suggest any reason that closing
costs would exceed 1 percent, so we shall assume closing costs of 1
percent, as Messrs. Nash and Lengel do. We find the figure Mr. Nash used
for commissions to be slightly high and without much support. Moreover,
a survey attached as an appendix to Mr. Lengel's supplemental report
(the Winter 2002/2003 Real Estate Investment Survey for the Rocky
Mountain Region) concluded that, according to 25 real estate brokers,
developers, lenders, real estate appraisers, and consulting firms, total
sales expenses of 8 percent were reasonable for sales of vacant land
worth up to $1 million. We shall use sales expenses of 8 percent of
gross sales revenue.
Mr. Lengel stated that "Developers typically require or anticipate
profits ranging from 15 percent (usually for short term development
projects with a minimum of well identified risk factors) to 50 percent
or more for longer term, more hazardous projects." Mr. Lengel stated
that one Colorado developer "typically anticipates at least a 20 percent
profit for 'subdivision' development." He then claimed that "Interviews
with developers in resort areas of Colorado revealed only that they
anticipate a 15 to 40 percent profit". Mr. Lengel then inexplicably
concluded that the developer would require a profit of only 12 percent.
Given that 12 percent was not even within his own range, and because Mr.
Lengel provided no reason the range was inappropriate, we cannot accept
that figure. Mr. Garone suggested 15 percent. Mr. Nash suggested 25
percent. We recall that Mr. Nash did not incorporate project management
expenses into his analysis. We believe that he rolled those costs into
his estimate of developer's profit. We have found project management
expenses to be 10 percent of gross sales revenue. See sec. II.E.2.d.(6)
of this report. We shall assume a developer's profit of 15 percent.
8
Mr. Lengel stated that "An appropriate discount rate reflects
competitive rates of return on similar investments." He referred to a
survey (the Winter 2002/2003 Real Estate Investment Survey for the Rocky
Mountain Region) attached to his supplemental report as an appendix in
which 25 real estate brokers, developers, lenders, real estate
appraisers, and consulting firms opined as to the discount rates they
anticipated and used for residential land development. Their figures
ranged from 10 to 15 percent. Mr. Lengel concluded that 15 percent was
appropriate. Mr. Garone cited two different surveys, with discount rates
ranging from 10 to 30 percent. He stated that, at the time of the
donation, the anticipated selling period was long (9 years), the "demand
for finished housing" was low, and the area had a sufficient supply of
residential lots. For those reasons, he considered the project to be
"relatively higher risk". Nonetheless, he chose a discount rate of 15
percent. Mr. Nash chose a discount rate of approximately 10 percent, but
he failed to offer much support. Messrs. Lengel and Garone agreed, and
we find their evidence and their reasons convincing. We shall adopt
their discount rate of 15 percent.
We conclude that the 21-lot shared ranch had, at the time of the
donation of the conservation easement, a present value of approximately
$3.89 million. See the appendix for our discounted cashflow analysis.
Mr. Lengel found the highest and best use of the property before
the imposition of the conservation easement to be a 40-lot residential
subdivision. He valued a 40-lot residential subdivision at $5.6 million.
Mr. Garone valued a 40-lot residential subdivision at $3.22 million. We
discuss their discounted cashflow analyses, and then we construct our
own.
The discounted cashflow analysis Mr. Lengel used to calculate the
value of the 40-lot residential subdivision had the following
parameters. Mr. Lengel estimated that the lots would sell for $300,000
over 9 years (at a rate of 0, 8, 8, 6, 5, 4, 3, 3, 3). He estimated the
lots would appreciate at 15 percent for 4 years and then stop
appreciating. He estimated that capital expenses would be $2.55 million,
that project management expenses would be $40,000 a year, that sales
expenses would be 7 percent of gross sales revenue (i.e., commissions of
6 percent and closing costs of 1 percent), and that developer's profit
would be 12 percent. He used a discount rate of 15 percent.
Mr. Lengel also stated that a conservation easement protecting
the river corridor could be sold in the first year for $1.5 million.
The discounted cashflow analysis Mr. Garone used to calculate the
value of the 40-lot residential subdivision had the following
parameters. Mr. Garone, like Mr. Lengel, estimated that all the lots
would sell in 9 years. Mr. Garone, however, estimated three different
prices for three different kinds of lots; he estimated that 18 "buffer"
lots would sell for $200,000 each (at a rate of 0, 3, 3, 2, 2, 2, 2, 2,
2), that 12 "west river" lots would sell for $300,000 each (at a rate of
0, 2, 1, 2, 1, 2, 1, 2, 1), and that 10 "east river" lots would sell
for $400,000 each (at a rate of 0, 1, 2, 1, 2, 1, 2, 1, 0). He estimated
the lots would appreciate at 8 percent a year. He estimated that
capital expenses would be approximately $1.27 million, that project
management expenses would be 10 percent of gross sales revenue, that
sales expenses would be 8.5 percent of gross sales revenue (i.e.,
commissions of 7 percent and closing costs of 1.5 percent), and that
developer's profit would be 15 percent. He used a discount rate of 20
percent.
We shall use those estimates from our analysis of the after value
of the property that are not related to the number of lots in the
development. We shall assume that the lots appreciate at 10 percent,
that project management expenses are 10 percent of gross sales revenue,
that sales expenses are 8 percent of gross sales revenue (i.e.,
commissions of 7 percent and closing costs of 1 percent), and that
developer's profit is 15 percent.
We shall use the following estimates to calculate the present value of a 40-lot residential subdivision.
In contrast to their sharp dispute over lot prices in the 21-lot
shared ranch, Messrs. Garone and Lengel hardly disagreed about lot
prices in the 40-lot subdivision. They did, however, disagree about the
optimal placement of the lots. Mr. Lengel assumed that all 40 lots could
be placed along the river "on approximately 15 to 20 percent of the
subject property with the remainder of the site being unencumbered open
space for the use and enjoyment of the lot owners." That is, he assumed
each lot would be between 1.25 and 2 acres. (Mr. Garone assumed each lot
would be 5 acres.) We recall that a developer, to subdivide the
property into any more than 22 lots, would have needed to apply under
MIP and not LPIP. Under MIP, however, a developer would have needed to
preserve only 50 percent of the land. Mr. Lengel failed to explain why a
developer would have restricted itself to between 15 to 20 percent of
the land when as much as 50 percent of the land was available. Mr.
Lengel provided no evidence that such a dense configuration on the river
was even possible, and Mr. Garone doubted the riverfront could
accommodate the necessary wells and septic systems. We find Mr. Lengel's
configuration unnecessarily restrictive and so find his estimate of
$300,000 for all 40 lots unreliable.
We find Mr. Garone's analysis more convincing because we find
his proposed configuration more likely; that is, 22 lots along the river
(the actual configuration at Gunnison Riverbanks Ranch) plus 18 lots
not on the river. Nonetheless, Mr. Garone did not explain why east river
lots would sell at a premium to west river lots, and the other experts
made no such distinction. Indeed, Mr. Garone himself made no such
distinction in his analysis of a 22-lot subdivision. We shall assume
that buffer lots would sell for $200,000 and that river lots would sell
for $350,000. Our conclusion, however, hardly conflicts with that of Mr.
Lengel: The undiscounted value of Mr. Lengel's gross sales revenue ($12
million)9 and the undiscounted value of our gross sales revenue ($11.3 million)10 differ by only $700,000.
Because both experts do so, we shall assume that all the lots are
sold in 9 years. The absorption rates of the two experts are broadly
similar, but again we find that Mr. Lengel's assumptions are slightly
aggressive. Mr. Garone's absorption rate is quite close to the
absorption rate Mr. Nash reported for Hidden River Ranch (14 lots in 3
years), which included lots both with and without river frontage. We
find Hidden River Ranch to be similar to, but (given the inferior East
River) less desirable than, the 40-lot subdivision here. Thus, Mr.
Garone's slightly faster absorption rate seems reasonable. We shall
adopt Mr. Garone's estimates.
To calculate capital expenses, Mr. Lengel started with the actual
expenses the partnership incurred developing the property (approximately
$2.23 million) and subtracted two expenses (a finder's fee for
petitioner and costs related to the conservation easement), which left
him with development costs of approximately $2.13 million. After adding
approximately $420,000 to account for the increased expenses related to
the additional lots, he concluded capital expenses would be $2.55
million. Mr. Garone had a much lower estimate for capital expenses:
approximately $1.27 million. That figure comes from a supplement to his
report that provides a detailed comparison of capital expenses for five
different development plans, all derived from the partnership's actual
expenses. (In his discounted cashflow analysis, for some reason, Mr.
Garone separately calculated "Estimated Project Costs", which he found
to be approximately $1.24 million. We prefer his more detailed
supplement.)
In the supplement, Mr. Garone started with the actual expenses
the partnership incurred, increased some expenses to reflect the greater
cost of developing more lots, and subtracted other expenses that, in
his opinion, were "not appropriate for the development model". At trial,
Mr. Garone explained why the excluded expenses would not have been
necessary, and we found some of his testimony convincing. For example,
Mr. Garone excluded all the expenses related to the renovation of the
clubhouse. Yet Mr. Garone failed to explain his reasons for excluding
other costs. Although we find that Mr. Lengel failed to justify both his
use of nearly all the partnership's expenses and his additional
$420,000 upward adjustment, we also find that Mr. Garone failed to
justify his exclusion of many expenses beyond those related to the
clubhouse. We shall start with Mr. Garone's estimate of capital expenses
and add back certain expenses (those not related to the clubhouse and
not excluded by Mr. Lengel). We thereby calculate capital expenses to be
approximately $1.87 million.
Mr. Garone used a discount rate of 20 percent to account for the
risk associated with developing 40 lots. Yet he also used a discount
rate of 20 percent for his 60-lot residential subdivision. That is, Mr.
Garone argued that developing 60 lots involved no more risk than
developing 40 lots, but developing 40 lots involved substantially more
risk than developing 22 lots. We are not convinced. We shall again use a
discount rate of 15 percent.
(5) River Corridor Conservation Easement
In his supplemental report, Mr. Lengel asserted that the
partnership could have sold a conservation easement protecting the river
corridor for $1.5 million. Nonetheless, in an addendum to that report,
he stated that, contrary to his previous understanding, no government
entity had made any offer to purchase such a conservation easement. We
find that petitioner failed to show that a developer would have been
likely to sell such a conservation easement for such a large sum.
We conclude that the 40-lot residential subdivision had, at the
time of the donation of the conservation easement, a present value of
approximately $4.45 million. See the appendix for our discounted
cashflow analysis.
F. The Value of the Conservation Easement
We find that Gunnison Riverbanks Ranch was worth $4.45
million (as a 40-lot residential subdivision) before the imposition of
the conservation easement and was worth $3.89 million (as a 21-lot
shared ranch) after the imposition of the conservation easement. The
value of the conservation easement is the difference: $560,000 (and we
so find).
III. The Percentage Limitation Rules of Section 170(b)(1)
By the notice, respondent determined that any
charitablecharitable
contribution to * * * [certain organizations is] allowed to the extent
that the aggregate of such contributions does not exceed 50 percent of
the taxpayer's contribution base for the taxable year." The general rule
of section 170(b)(1)(B) is that charitable
contribution deduction is subject to the limitations in section
170(b)(1)(B) and not those in section 170(b)(1)(A). The general rule of
section 170(b)(1)(A) is that "Any contributions other than those to which section 170(b)(1)(A) applies are
allowed to the extent that the aggregate of such contributions does not exceed the lesser of --
(i) 30 percent of the taxpayer's contribution base for the taxable year, or
(ii) the excess of 50 percent of the taxpayer's contribution base for the taxable year over the amount of charitable contributions allowable under subparagraph (A) * * *
Petitioner did not in the petition assign error to respondent's
determination with respect to the percentage limitation. That is enough
for us to deem the issue conceded. See Rule 241(d)(1)(C). Moreover, he
did not raise the issue at trial or in his opening brief. In his reply
brief, however, petitioner argues that we do not have jurisdiction to
decide the issue because the issue turns on questions of fact specific
to the partners. That is, petitioner argues that the issue is not a
partnership item, see sec. 6231(a)(3), but a nonpartnership item, see
sec. 6231(a)(4). We disagree. To decide whether the charitable
contribution here falls under subparagraph (A) or (B) of section
170(b)(1), all we must decide is to what kind of organization the
partnership donated the conservation easement. See sec. 170(b)(1)(A) and
(B). That question is best answered at the partnership level and so is a
partnership item. See sec. 6231(a)(3). Petitioner has presented no
evidence or argument with respect to that question. We find against him.
IV. Conclusion
The conservation easement was worth $560,000, and so the
partnership made a contribution in that amount. The percentage
limitations in section 170(b)(1)(B) apply.
An appropriate decision will be entered.
FOOTNOTES
1 E.g., using LPIP, a landowner with 140 acres may cluster six homes on lots smaller than 35 acres.
2 On brief, petitioner does not rely on Mr. Lengel's original report. We shall not either.
3 That is consistent with petitioner's argument
that the Court should not consider any evidence not available before the
donation of the conservation easement because such evidence cannot be
relevant to the value of the conservation easement. We address that
argument in sec. II.E.2.d.(2)(c) of this report.
4 There are other problems. For one, Mr. Lengel
used the appraised value of each conservation easement as its "sales
price". Given that the sales described above were bargain sales, in
which the purchaser paid less than the appraised value, we question the
propriety of his implicit assumption that the appraised values were
indicative of what a purchaser would pay absent the implicit gift by the
seller. Nonetheless, we need not find the true value of any of the four
conservation easements because we find that none was comparable to the
Trout Ranch CE.
5 Messrs. Lengel and Nash apparently judged
slight superiority in size differently. Or else slight superiority in
size covers a vast range.
6 Indeed, in the case of valuation for stocks and
bonds for estate and gift tax purposes, where the standard is also fair
market value, and there may be no sales on the appropriate valuation
date, the regulations specifically contemplate the use of sales data
within a reasonable period both before and after the valuation
date to determine value on that date. Sec. 20.2031-2(b), Estate Tax
Regs.; sec. 25.2512-2(b), Gift Tax Regs.
7 We presume the experts did not consider the
actual absorption of lots at Gunnison Riverbanks Ranch because many of
the partners, who each received at least one lot, were interested in
building homes for themselves, not in selling to others.
8 Both Messrs. Garone and Nash applied their
profit percentages to projected gross sales revenue (both in determining
their after and their before values) rather than to projected net
revenue from sales, as did Mr. Lengel. We shall follow the lead of
Messrs. Garone and Nash.
9 $12 million = $300,000 per lot x 40 lots.
10 $11.3 million = ($200,000 per lot x 18 lots) + ($350,000 per lot x 22 lots).
END OF FOOTNOTES
APPENDIX Trout Ranch Discounted Cashflow Analysis -- 40 Lots ______________________________________________________________________________ Assumptions Lot Prices ______________________________________________________________________________ Discount rate 15% Buffer $200,000 Commissions 7% West river 350,000 Closing costs 1% East river 350,000 Sales expenses 8% Developer's profit 15% Capital expenses Project management 10% (1,870,000) Appreciation 10% ______________________________________________________________________________ Absorption Rate ______________________________________________________________________________ Year Buffer West East TOTALS 1 0 0 0 0 2 3 2 1 6 3 3 1 2 6 4 2 2 1 5 5 2 1 2 5 6 2 2 1 5 7 2 1 2 5 8 2 2 1 5 9 2 1 0 3 Totals 18 12 10 40 ______________________________________________________________________________ Year Sales 1 2 3 4 5 ______________________________________________________________________________ -- Buffer 0 3 3 2 2 Lot price $200,000 $200,000 $242,000 $266,200 $292,820 Revenue 0 660,000 726,000 532,400 585,640 -- West river 0 2 1 2 1 Lot price 350,000 385,000 423,500 465,850 512,435 Revenue 0 770,000 423,500 931,700 512,435 -- East river 0 1 2 1 2 Lot price 350,000 385,000 423,500 465,850 512,435 Revenue 0 385,000 847,000 465,850 1,024,870 Gross sales revenue 0 1,815,000 1,996,500 1,929,950 2,122,945 Sales expenses 0 (145,200) (159,720) (154,396) (169,836) Capital expenses (1,870,000) 0 0 0 0 Project management 0 (181,500) (199,650) (192,995) (212,295) Developer's profit 0 (272,250) (299,475) (289,493) 318,442) Net sales revenue (1,870,000) 1,216,050 1,337,655 1,293,067 1,422,373 Present value (1,870,000) 1,057,435 1,011,459 850,212 813,246 [table continued] Year Sales 6 7 8 9 TOTALS ______________________________________________________________________________ -- Buffer 2 2 2 2 18 Lot price $322,102 $354,312 $389,743 $428,718 Revenue 644,204 708,624 779,487 857,436 $5,493,791 -- West river 2 1 2 1 12 Lot price 563,679 620,046 682,051 750,256 Revenue 1,127,357 620,046 1,364,102 750,256 6,499,396 -- East river 1 2 1 0 10 Lot price 563,679 620,046 682,051 750,256 Revenue 563,679 1,240,093 682,051 0 5,208,542 Gross sales revenue 2,335,240 2,568,763 2,825,640 1,607,692 17,201,729 Sales expenses (186,819) (205,501) (226,051) (128,615) (1,376,138) Capital expenses 0 0 0 0 (1,870,000) Project management (233,524) (256,876) (282,564) (160,769) (1,720,173) Developer's profit (350,286) (385,315) (423,846) (241,154) (2,580,259) Net sales revenue 1,564,611 1,721,072 1,893,179 1,077,154 9,655,159 Present value 777,888 744,067 711,716 352,123 4,448,147 Trout Ranch Discounted Cashflow Analysis -- 21 Lots ______________________________________________________________________________ Assumptions Lot Prices ______________________________________________________________________________ Discount rate 15% West river $490,000 Commissions 7% East river 490,000 Closing costs 1% Sales expenses 8% Capital expenses Developer's profit 15% (2,180,000) Project management 10% Appreciation 10% ______________________________________________________________________________ Absorption Rate ______________________________________________________________________________ Year West East TOTALS 1 0 0 0 2 3 2 5 3 2 2 4 4 2 2 4 5 2 2 4 6 2 2 4 7 0 0 0 8 0 0 0 9 0 0 0 Totals 11 10 21 ______________________________________________________________________________ Year Sales 1 2 3 4 5 ______________________________________________________________________________ -- West river 0 3 2 2 2 Lot price $490,000 $539,000 $592,900 $652,190 $717,409 Revenue 0 1,617,000 1,185,800 1,304,380 1,434,818 -- East river 0 2 2 2 2 Lot price 490,000 539,000 592,900 652,190 717,409 Revenue 0 1,078,000 1,185,800 1,304,380 1,434,818 Gross sales revenue 0 2,695,000 2,371,600 2,608,760 2,869,636 Sales expenses 0 (215,600) (189,728) (208,701) (229,571) Capital expenses (2,180,000) 0 0 0 0 Project management 0 (269,500) (237,160) (260,876) (286,964) Developer's profit 0 (404,250) (355,740) (391,314) (430,445) Net sales revenue (2,180,000) 1,805,650 1,588,972 1,747,869 1,922,656 Present value (2,180,000) 1,570,130 1,201,491 1,149,252 1,099,285 [table continued] Year Sales 6 7 8 9 TOTALS ______________________________________________________________________________ -- West river 2 0 0 0 11 Lot price $789,150 $ 868,065 $954,871 $1,050,359 Revenue 1,578,300 0 0 0 $7,120,298 -- East river 2 0 0 0 10 Lot price 789,150 868,065 954,871 1,050,359 Revenue 1,578,300 0 0 0 6,581,298 Gross sales revenue 3,156,600 0 0 0 13,701,596 Sales expenses (252,528) 0 0 0 (1,096,128) Capital expenses 0 0 0 0 (2,180,000) Project management (315,660) 0 0 0 (1,370,160) Developer's profit (473,490) 0 0 0 (2,055,239) Net sales revenue 2,114,922 0 0 0 7,000,069 Present value 1,051,490 0 0 0 3,891,648
