James D. and Beverly H. Turner v. Commissioner ( 2006 )

126 T.C. No. 16UNITED STATES TAX COURT
JAMES D. AND BEVERLY H. TURNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5165-04. Filed May 16, 2006.
P, a real estate investor, purchased 29.3 acres of
unimproved land in a historical overlay district, 15.04
acres of which were located within a designated
floodplain. Property development was subject to county
regulations that were more stringent for property
within a historical overlay district. Among the
regulations were zoning and rezoning requirements, as
well as limitations on development of designated
floodplain areas. Thirty lots were permissible under
current zoning. County approval would be required for
denser zoning usage. P, claiming that he was entitled
to develop up to 62 residences on smaller lots,
executed a deed to Fairfax County purporting to limit
development of the property to 30 residences. On their
1999 Federal income tax return, Ps claimed a
contribution deduction for a qualified conservation
easement under sec. 170(h)(1), I.R.C.
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1. Held: P did not make a contribution of a
qualified conservation easement under sec. 170(h)(1),
I.R.C., because the attempted grant did not satisfy the
conservation purposes required under sec. 170(h)(4)(A),
I.R.C. Specifically, the deed did not preserve open
space or a historically important land area or
certified historical structure.
2. Held, further, Ps are liable for a 20-percent
penalty for negligence under sec. 6662, I.R.C.
J. Carlton Howard, Jr., for petitioners.
John M. Altman and Linda R. Averbeck, for respondent.
GERBER, Chief Judge: Respondent determined a $178,168
income tax deficiency and a $56,537 accuracy-related penalty
under section 66621 for petitioners’ 1999 taxable year. After
concessions,2 the issues remaining for our consideration are:
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
The parties settled the portion of respondent’s income
adjustments or penalties relating to the determination of an
increase in the net gain from FAC Co., L.C., and a decrease in a
home mortgage interest deduction. The parties agree that the
$62,045 home mortgage interest deduction that petitioners
claimed, and which respondent determined was $38,670, should be
$56,872. The parties also agree that the portion of a $892,578
gain that petitioners reported on their return from FAC Co.,
L.C., an entity in which petitioners have a 60-percent interest,
and which respondent determined was $1,215,027, should be
$1,081,578. Finally, respondent concedes the portion of the
penalties attributable to the home mortgage interest deduction
and the net gain from FAC Co., L.C.
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(1) Whether petitioners made a contribution of a qualified
conservation easement under section 170(h)(1); (2) if qualified,
we must decide the value of the easement; and (3) in the absence
of a qualified contribution or, alternatively if the easement’s
value was substantially overstated, whether petitioners are
liable for the accuracy-related penalty under section 6662.
FINDINGS OF FACT3
General Background
At the time their petition was filed, petitioners resided in
Alexandria, Virginia. Petitioner4 is an attorney whose practice
is concentrated on real estate transactions in the vicinity of
Alexandria, Virginia. Part of petitioner’s business activity was
the conduct of real estate closings through a title insurance
company he owned. Petitioner was also an investor in real
property. At all relevant times, he was a 60-percent member and
general manager of FAC Co., L.C. (FAC), a limited liability
company formed for the purpose of acquiring, rezoning, and
developing real property. During 1997 and 1998, petitioner,
individually or through FAC, embarked on a plan to acquire
several contiguous parcels of land located in Woodlawn Heights,
3
The parties’ stipulation of fact is incorporated herein by
this reference.
4
Petitioners are husband and wife and they filed a joint
return for the year in issue. References to petitioner alone are
to petitioner James D. Turner.
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Fairfax County, Virginia. The unimproved realty was situated in
a historical district in the general area of Mount Vernon, the
home of President George Washington, and adjacent to President
Washington’s Grist Mill (Grist Mill).
Acquisition of the Land for Development
Through several transactions, a 29.3-acre parcel was
conglomerated by petitioner and/or FAC. One transaction involved
the Future Farmers of America (FFA), which owned five lots within
this historical district. One of these lots approximated 5.9
acres and was the situs of the FFA’s office building. Although
the 5.9 acres was zoned for residential (classified as R-2), FFA
had a special use exception for its commercial office building.
But for the special use, the property was zoned residential. If
FFA sold the land and building, the special use would not
automatically pass to the new owner. The remaining four lots
acquired by petitioner were adjacent to the Grist Mill.
During his negotiations for the purchase of the FFA
property, petitioner’s written offer included his belief that the
highest and best use for the property was for either “commercial
or a combined commercial and residential (town homes)”.
Petitioner expressed the further belief that the highest and best
use would require rezoning for increased density, but that “the
realities of local politics will not allow the highest and best
use.” The developer of the acquired property would face several
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obstacles to development, including compliance with Fairfax
County’s ordinances and regulations concerning such land
development.
On December 12, 1997, and March 27, 1998, FAC acquired the
lots from FFA for $2 million. On August 7 and 10, 1998,
petitioner, through another entity, purchased, from sellers other
than FFA, three additional lots in the Woodlawn Heights
historical overlay district for $550,000 and then contributed
them to FAC. On August 15, 1999, FAC sold the 5.9-acre parcel,
including the FFA building, for $1.6 million. Prior to that
sale, Fairfax County Supervisor Gerald Hyland (Hyland) assisted
in the rezoning of the 5.9-acre site to a C-2 classification that
would permit continued the use of the commercial building on that
property. As of the date of the trial in this case, petitioner
continued to own one of the acquired unimproved parcels (lot 10),
and the remaining parcels5 that were conglomerated into a 29.3-
acre parcel for development that became known as the Grist Mill
Woods subdivision (Grist Mill property). Slightly more than half
of the property (15.04 acres) is situated in a designated 100-
year floodplain and not available for residential development.
5
The Grist Mill Woods subdivision therefore consisted of
parcels 15, 16, 17, 18 (exclusive of the 5.9 acres of parcel 18
that included the FFA building), 25, 26, and 27.
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The 29.3-acre Grist Mill property was once owned by
President Washington and is located within the Woodlawn Heights
historical overlay district. Historical overlay districts are
subjected to special requirements by the County. President
Washington, beginning in 1771, operated the Grist Mill for the
purpose of grinding flour and cornmeal for use at his Mount
Vernon residence and also for sale along the east coast of the
United States, Portugal, and the West Indies. Also located in
close proximity to the site was the Woodlawn Plantation that was
built in 1805 on land also owned by President Washington. The
Grist Mill, Woodlawn Plantation, and the Future Farmers of
America (FFA) realty were all located relatively near to Mount
Vernon, President Washington’s 500-acre residential estate. At
the time of trial, Mount Vernon was owned and maintained by the
Mount Vernon Ladies’ Association (MVLA), a private nonprofit
organization. Slightly more than half of the Grist Mill property
(15.04 acres) is situated within a designated 100-year
floodplain. At all relevant times, the Grist Mill property was
zoned R-2 (for residential use).
Development of the Project
The first prerequisite to the proposed development was the
need to conform to the general guidelines of Fairfax County. The
governance of Fairfax County is vested in its Board of
Supervisors (the Board), which, inter alia, establishes county
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government policy, passes resolutions and ordinances, and
approves land use plans. The Board consists of a chairman and
nine additional members called supervisors elected by the
citizens of nine Fairfax County districts. At all relevant
times, Hyland was the supervisor who had been elected by the
citizens of the Mount Vernon District. As of the time of trial,
Hyland had served as a supervisor for 18 years.
The Grist Mill property was located in Fairfax County which
had a comprehensive zoning plan defining the permitted uses for
county property. Two pertinent Fairfax County residential zoning
plans are R-2 zoning and planned development housing (PDH)
zoning. Under an R-2 zoning an owner would “by-right” be
permitted to build two single-family dwelling units per acre.
The term “by-right” denotes the property uses available to an
owner without requesting a new zoning designation. Greater
residential per acre density is permitted under a PDH zoning
classification if certain requirements are met, such as the
preservation of open space. An owner of property zoned R-2 who
wishes to build three units per acre would have to ensure that
the comprehensive plan permitted it and then apply to the Board
for a rezoning to a PDH or R-3 classification.
During the conglomeration and development of the 29.3-acre
parcel, petitioner and others made the representation that 60
dwellings or residences could have been built. In reality, only
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approximately 30 could be built under the existing county zoning
for the property. It was petitioner’s plan to grant a
conservation easement to the County that would limit the number
of building lots to 30. The claimed conservation easement and
the underlying supporting appraisal were based on the assumption
that 60 dwellings could be built and the potential for 30 was
being given up by the easement. Ultimately, the 29.3 acres were
sold without application for or change in the zoning. At the
time of the claimed conservation easement, there was only the
possibility that the number of buildings or dwellings could have
been increased from 30 to a larger number.
The rezoning process can be time consuming, costly, and
involves compliance with numerous regulations. For example, even
with Hyland’s assistance, it took 5 months to obtain a C-2 zoning
classification for the FFA property and building. In some
instances there may be a need to employ experts such as engineers
and surveyors. The rezoning process is initiated by the filing
of an application and may involve a public hearing before the
planning commission and/or the Board. The Board considers the
rezoning request and makes its decision based upon the planning
commission recommendations, staff reports, and public testimony
at hearings. The cost to pursue a rezoning application in
Fairfax County during the late 1990s could have been as much as
$20,000-$30,000.
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In their review of a rezoning request, the Board considers
whether: (1) The environmental sensitivity of the property and
the surrounding area would be adversely affected by an increased
number of dwelling units per acre; (2) the variation would be
consistent with the current use of the neighborhood and
surrounding properties; (3) the storm water runoff can be
effectively managed; and (4) the neighbors’ reaction would be
favorable. Organizations or citizen groups concerned about a
particular zoning change may attempt to stop or slow the rezoning
process. An applicant may be forced to negotiate differences
with adverse interests before proceeding with the application
process.
In addition, Fairfax County may seek some public benefit in
the rezoning process. Occasionally, the rezoning request is
coupled with a proffer. A “proffer” is a form of compensation to
the county for increased needs such as transportation or public
improvement that are necessitated by the rezoning.
The Fairfax County Office of Public Works must also review
development and construction plans to ensure that they meet
ordinance requirements and public facilities guidelines. One of
the concerns of the Office of Public Works is to ensure that the
design of developments provides for proper drainage of storm
water and certain other safety-related factors. Under certain
circumstances, detention ponds are required to ensure a
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development does not encroach on or overburden designated
floodplain areas. A developer’s obligation to comply with the
requirements of the Office of Public Works is called best
management practice requirements (BMP requirements).
Because the Grist Mill property was located within a
“historical overlay district”, it was subject to more stringent
regulations than otherwise required by the basic zoning
regulations. The Board has established 13 such historical
overlay districts within Fairfax County. Fairfax County seeks to
conserve and improve these historical districts. Where new
structures are being developed within those districts, the county
attempts to ensure they comport with the district’s historical
character. To assist in the administration of these regulations,
the county created an Architectural Review Board (the ARB)
consisting of residents with expertise and interest in the
preservation of historical sites. Applications for rezoning and
special exceptions or permits within historical overlay districts
must be submitted for the ARB’s review. The ARB, in turn,
provides its recommendations to Fairfax County agencies for
further consideration and review.
At all relevant times, the Grist Mill property was zoned R-2
and was limited to a maximum development of 30 residences. Of
the 29.3 acres, 15.04 acres were in a floodplain and could not be
developed. Accordingly, under an R-2 zoning (two homes per
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acre), the Grist Mill property would have been limited to 30 home
lots. Additional residential units and/or lots could have been
developed under a PDH-3 zoning. Although PDH–3 zoning was
permitted under the comprehensive plan, it would have required
rezoning approval. A change to PDH-3 zoning would have required
the approval of the planning commission, the Mount Vernon
Council, the Planning and Zoning Committee, and the Board, and
would likely not have been approved without an accompanying
proffer. A successful rezoning application would likely have
taken at least 6 months and as much as a year for approval. Due
to the historical nature of the subject property, petitioner
might have faced additional requirements, including review by the
ARB.
County Supervisor Hyland was actively involved in the
development of the Grist Mill property as part of Fairfax
County’s revitalization efforts. He was keenly interested in
this development because of its potential impact on the
surrounding historical sites. For example, during February 1998,
petitioner received an offer from the U.S. Postal Service to
purchase lot 10 for $1.7 million. Petitioner was enthusiastic
about that offer and was inclined to accept it, but Hyland was
against the idea, and negotiations failed.
The Mount Vernon Ladies Association was interested in the
Grist Mill property development for several reasons. It was
concerned about increased future parking needs for the Grist
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Mill, and it was planning to renovate the Grist Mill during 1999.
If it was unable to acquire the Grist Mill property, MVLA was
concerned that an unrelated buyer might operate it in a manner
that would interfere with the historical nature of the Grist Mill
and other nearby related historical sites. MVLA was specifically
concerned about negative impact on the Grist Mill caused by
commercial development, and, to a somewhat lesser extent, by
possible residential development. After FFA decided to sell its
property, MVLA inquired about some of the FFA property, but the
negotiations were unsuccessful, and FAC later contracted to
purchase all five FFA lots.
Around this same time, petitioner made assurances to MVLA
that the proposed development plan would include consideration of
MVLA’s needs for the preservation and the possible expansion of
Mount Vernon and the Grist Mill. Although MVLA’s first
preference would have been to have no development on the property
adjacent to the Grist Mill, it realized that expectation was
unrealistic. Therefore, MVLA believed the Grist Mill would be
better off with the development of a lesser number of more
expensive homes, as opposed to a larger number of less expensive
homes. Another concern of MVLA was the maintenance of a
sufficient buffer between the Grist Mill and any adjacent
development in order to protect the historical view and
surroundings of the Grist Mill.
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In a letter dated February 3, 1999, MVLA expressed the
mistaken view that petitioner could develop the Grist Mill
property into at least 60 single-family homes and requested that
development be limited to 30 single-family homes. MVLA pointed
out that a more expansive development would further impinge upon
the historical nature of the Grist Mill. In addition, in a
letter dated March 3, 1999, petitioner advised MVLA that he would
be willing to donate lot 30 to MVLA for a buffer zone and parking
facility if his development proceeded as planned. MVLA, however,
had hoped for a larger buffer between petitioner’s development
and the Grist Mill than the amount it ultimately received.
Woodlawn Plantation wished to protect its historical view so
that a visitor’s view from the plantation resembled, as closely
as possible, the 18th century view. Until 1999, the view from
the plantation was limited to the Grist Mill, trees and water,
and a small portion of a nearby road. Woodlawn Plantation was
concerned about any impact on its view from the development of
the Grist Mill property.
Petitioner’s Sales Activity - Grist Mill Property
Beginning sometime in mid-1998, petitioner began to actively
pursue the sale of the 29.3-acre Grist Mill property. While
attempting to sell the property, petitioner was also attempting
to obtain the necessary local government approval for the Grist
Mill property development. In a letter dated October 26, 1998,
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petitioner requested a waiver of the Fairfax County On-site
Stormwater Detention Requirements. The county granted the
request on December 31, 1998, so long as petitioner provided
channel protection from storm sewer outfalls to Dogue Creek.
This was accomplished by a floodplain easement. The required
protection could not have been satisfied by means of a
conservation easement. Notwithstanding, petitioner indicated in
his development plans that he intended to use a conservation
easement to satisfy those BMP requirements.
During June 1998, petitioner began discussions for the sale
of the Grist Mill property to NVHomes. Petitioner provided
NVHomes with a sketch depicting a 62-lot and a 30-lot proposal
for development. During July 1998, NVHomes sent petitioner a
proposed purchase agreement for the Grist Mill property,
envisioning the purchase of approximately 60 fully developed
single-family lots. The parties’ negotiations collapsed because
NVHomes wanted fully developed lots and petitioner’s business
partner wished to sell the property more quickly than it would
take to make the desired improvements.
During October 1998, Centex Homes offered to purchase 41.5
acres of petitioner’s property for $2,700,000 conditional on a
PDH-2 rezoning that yielded approximately 60 single-family
detached lots, but not fewer than 50. Also during October 1998,
Batal Builders, Inc., offered to purchase approximately 32.5
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acres of petitioner’s property for $2,700,000 subject to rezoning
that would yield a minimum of 48 lots. In November 1998, the
terms of Batal Builders, Inc.’s offer was modified to
approximately 32 acres for $2,450,000 not subject to rezoning.
Both purchasers were aware that the subject property might be
subjected to a conservation easement.
On February 9, 1999, petitioner entered into an agreement
with Carl Bernstein, manager of Mount Vernon Development, LLC
(MVD), for the sale of the Grist Mill property. The agreement
provided for the sale of 29 lots (comprising 32 acres) for
$2,800,000. The sale was subject to the possibility that
petitioner would donate lot 30 to the MVLA. The sale was also
subject to a conservation easement or donation in fee simple of
the outlots for recreational use, but the parties recognized that
the donation of the outlots “shall not reasonably impair the
value of the 30 lots contained within the subdivision of Grist
Mill Woods.”
Despite these express plans for 30 lots, in a letter dated
the next day, February 10, 1999, Hyland requested petitioner
consider limiting development of the Grist Mill property to 30
single-family homes. The letter inferred that petitioner could
have built 62 lots “by-right”. The letter contained the
statement that limiting the development to 30 residential units
would preserve the historical nature of the Grist Mill and might
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provide tax benefits. The parties to this proceeding acknowledge
that the reference to 62 building lots “by-right” was incorrect
and would have required rezoning. Although Hyland signed this
letter, petitioner and his advisers had prepared it and requested
Hyland to sign it. Hyland relied on petitioner for the truth or
accuracy of the statements in the letter. At the time Hyland
signed the letter, he was unaware that petitioner had plans to
develop and sell 30 lots. Petitioner intended to use the letter
to substantiate a tax deduction he planned to take for a
conservation easement.
Ultimately, the Grist Mill property was subdivided into 29
residential lots. Some of the 29 homes built on the Grist Mill
property could be seen from the Woodlawn Plantation, especially
during the winter and spring months when there is less foliage.
The Grist Mill Woods subdivision plan was approved by the
Fairfax County Plan Control Section with an R-2 zoning
classification on March 23, 1999. In a letter dated October 14,
1999, MVLA agreed to the plan and asked the ARB to support
petitioner’s proposed development of a 30-residence subdivision.
MVLA also stated its understanding that petitioner would donate
lot 30 to MVLA for parking at the Grist Mill. MVLA’s letter was
based on the language recommended and supplied by petitioner.
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On October 14, 1999, the ARB reviewed petitioner’s
application for the Grist Mill Woods subdivision. The ARB
understood that the development plan provided a sufficient buffer
between the subdivision and the Grist Mill and that lot 30 would
be donated to the Grist Mill. Although the ARB was concerned
about the potential for tree loss, ultimately the plans were
approved.
The Conservation Easement and Income Tax Deduction
On December 6, 1999, the same day FAC closed on its sale of
the Grist Mill property to MVD, FAC executed a conservation
easement deed, which was recorded on December 7, 1999. The deed
contained a description of the historical sites adjacent to the
Grist Mill property and indicated that MVLA and the Board wished
FAC to limit construction of the property to 30 single-family
residential lots. It contained the further statement that even
though FAC could have built 62 lots based on a PDH subdivision,
it voluntarily agreed to limit developing the Grist Mill property
to 30 lots to better serve the historic and scenic nature of the
Grist Mill. Despite the assertion that 62 lots could have been
built, the Grist Mill property was zoned R-2 and no plan for PDH
zoning had been approved or was pending before Fairfax County.
Neither the Fairfax County Attorney’s Office nor MVLA reviewed
the deed, and the purported grantee of the conservation easement
did not sign or acknowledge the deed.
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Petitioners claimed a $342,781 charitable contribution
deduction6 on their 1999 Federal income tax return. The
deduction, $1,248,000, was based on a 40-percent7 share of the
conservation easement to Fairfax County which had been valued at
$3,120,000. The $3,120,000 value was based on the December 30,
1999, appraisal report prepared by Frank Petroff (Petroff) and
was referenced on petitioners’ Form 8283, Noncash Charitable
Contributions, attached to their return. The appraisal was
based, in part, on the February 10, 1999, letter signed by
Hyland. In addition, the appraisal was based on the erroneous
assumption that the entire Grist Mill property could have been
fully developed, including the area consisting of the floodplain.
On the “Donee Acknowledgment” part of Form 8283 “Fairfax County
Board of Supervisors” was shown as the intended charitable donee,
but the acknowledgment signature line was not executed and left
blank.
OPINION
Petitioners claimed a deduction for a contribution of a
qualified conservation easement under section 170(h)(1).
6
The deduction was reduced by $905,219 due to an adjusted
gross income limitation.
7
We note that petitioners claimed a deduction based upon a
40-percent share of FAC, although documentary evidence reflected
that petitioner was a 60-percent member of FAC. Due to the
outcome in this case, the difference between the ownership
percentage and claimed contribution deduction percentage need not
be reconciled or considered further.
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Respondent determined that petitioners were not entitled to the
contribution deduction. If we decide that there was a qualified
conservation easement, then we must decide its value in order to
arrive at the amount of the deduction to which petitioners are
entitled. Respondent contends that petitioners have failed to
show that their donation satisfies the statutory definition and
requirements for a conservation easement deduction. In that
regard, respondent contends that there were defects in the
conservation easement deed and petitioners’ Form 8283 (attached
to their return) and no acceptance of the deed or an easement by
Fairfax County (the donee named by petitioners). Alternatively,
if the Court decides that there was a valid donation, respondent
contends that the Grist Mill property was developed according to
its highest and best use, and there was, therefore, nothing
remaining to contribute as a conservation easement.
Petitioners contend that they have either complied or
substantially complied with the reporting requirements for a
conservation easement deduction. They also contend that the
Grist Mill property had the potential for additional development
and that such potential was foregone to preserve the historic
nature of the surrounding properties. If we decide that there
was no contribution of a qualified conservation easement, we must
then decide whether petitioners are subject to an accuracy-
related penalty under section 6662. The grounds underlying
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respondent’s determination for the penalty are, alternatively,
that petitioners did not make a qualified contribution or, if a
contribution was made, its value was substantially lower than the
amount reported on their return.
A. The Burden of Proof
Generally, the burden of proving or showing error in
respondent’s determination is upon the taxpayer. See Rule
142(a). The burden of proof may shift to respondent in certain
situations. See sec. 7491(a). Petitioners concede that they
bear the burden of showing their entitlement to a conservation
easement deduction. Conversely, respondent concedes that he
bears the burden of production with respect to the section 6662
penalty. See sec. 7491(c).
B. The Conservation Easement
1. Background
Section 170(a)(1) allows a deduction for a charitable
contribution made during the taxable year. Generally, section
170(f)(3) does not permit a deduction for a charitable gift of
property consisting of less than the donor’s entire interest in
that property. An exception applies in the case of a “qualified
conservation contribution.” See sec. 170(f)(3)(B)(iii). A
contribution of real property may constitute a qualified
conservation contribution if: (1) The real property is a
“qualified real property interest”; (2) the donee is a “qualified
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organization”; and (3) the contribution is “exclusively for
conservation purposes.” Sec. 170(h)(1); see also sec. 1.170A-
14(a), Income Tax Regs. To be a qualified conservation
contribution, all three requirements must be met.
A “qualified real property interest” must consist of the
donor’s entire interest in real property (other than a qualified
mineral interest) or consist of a remainder interest, or of a
restriction granted in perpetuity concerning way(s) the real
property may be used. Sec. 170(h)(2). A restriction granted in
perpetuity on the use of the property must be based upon legally
enforceable restrictions (such as by recording the deed) that
will prevent uses of the retained interest in the property that
are inconsistent with the conservation purpose of the
contribution. See sec. 1.170A-14(g)(1), Income Tax Regs.
A qualified organization is defined in section 170(h)(3) and
a contribution is made “exclusively for conservation purposes” if
it meets the tests of section 170(h)(4) and (5). This
requirement has two parts. First, a contribution is for a
conservation purpose if it: (1) Preserves land for the general
public’s outdoor recreation or education; (2) protects a
relatively natural habitat of fish, wildlife, or plants, or
similar ecosystem (the natural habitat requirement); (3)
preserves open space either for the scenic enjoyment of the
general public or pursuant to a Federal, State, or local
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governmental conservation policy and yields a significant public
benefit (the open space requirement); or (4) preserves a
historically important land area or a certified historic
structure (the historic preservation requirement). Sec.
170(h)(4)(A); see also sec. 1.170A-14(d)(1), Income Tax Regs.
Secondly, the “exclusively for conservation purposes requirement”
may be met only if the conservation purpose is protected in
perpetuity. Sec. 170(h)(5)(A).
2. Discussion
a. Generally
Respondent agrees that the intended donee, Fairfax County,
is a qualified organization under section 170(h)(3). The parties
continue to dispute whether there was a qualified real property
interest and whether the contribution is exclusively for
conservation purposes. If petitioners are unsuccessful in
showing either that they contributed a qualified interest or that
a qualified interest was contributed exclusively for conservation
purposes, they will not be entitled to the claimed deduction. If
petitioners satisfy both of those two requirements, then we shall
decide the value of the conservation easement.
With respect to the third requirement,8 petitioners contend
only that they met the open space and historic preservation
8
Whether the contribution is made exclusively for
conservation purposes.
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requirements. We accordingly begin our discussion of the third
requirement by considering those two aspects.9
b. Satisfaction of the Third Requirement
In Glass v. Commissioner, 124 T.C. 258, 278-284 (2005),
which also involved the contribution of a conservation easement,
this Court considered the requirement that a contribution be made
exclusively for conservation purposes. The discussion in that
case, however, was directed to whether the taxpayer satisfied the
natural habitat requirement. That discussion, accordingly, did
not focus on the requirements we consider here.10 Accordingly,
we proceed to consider and analyze the two elements in dispute in
this case.
(1) Open Space Requirement
Petitioners allege that they satisfy the open space
requirement of section 170(h). Satisfaction of this requirement
requires both the preservation of open space and the inurement of
a significant public benefit. Sec. 170(h)(4)(A)(iii). The
9
Because we ultimately hold that petitioners have not
satisfied the third requirement, there is no need to consider the
first requirement or the easement’s value.
10
In addition, because we hold that petitioners do not
satisfy either the open space or the historic preservation
requirement, we need not consider whether the contribution was
“exclusively” for conservation purposes, as we did in Glass v.
Commissioner, 124 T.C. 258, 278-284 (2005).
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legislative history underlying this statute contains the
following relevant examples of uses that may satisfy the open
space requirement:
the preservation of * * * [land] as a public garden * *
* (1) the preservation of farmland pursuant to a State
program for flood prevention and control; (2) the
preservation of a unique natural land formation for the
enjoyment of the general public; (3) the preservation
of woodland along a Federal highway pursuant to a
government program to preserve the appearance of the
area so as to maintain the scenic view from the
highway; and (4) the preservation of a stretch of
undeveloped oceanfront property located between a
public highway and the ocean so as to maintain the
scenic ocean view from the highway. [S. Rept. 96-1007,
at 12 (1980), 1980-2 C.B. 599, 605.]
Generally, the examples provided in the legislative history
concern the preservation of the natural state of land.
Petitioners’ argument addresses this requirement from their
viewpoint that the limiting of the Grist Mill property
development to 30 lots rather than 62 lots enables it to have “a
distinctly open quality.” Respondent counters that even if the
deed effectively limited development to 30 lots, there were no
restrictions placed on open space within the buildable area.
Further, there could be no building on the remaining acreage
because it was designated floodplain. Accordingly, we agree with
respondent’s argument.
Petitioners do not contend, nor was it feasible, that
residential units could have been built on the floodplain portion
of the property. Therefore, a conservation easement, if any,
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could only have been carved from the somewhat less than 15
developable acres (outside of the 15.04 acre floodplain area).
Assuming arguendo that the deed limited petitioner’s development
of the Grist Mill property to 30 lots, that limitation, by
itself, does not provide additional land that would have been
available if the same developable acreage had been divided into
62 lots (such as by use of PDH zoning permitting more housing
units per lot). Nothing in the deed limits the size of the homes
(either in square footage to protect the amount of buildable land
that each can cover, or in height to protect the view from any
nearby historical area), or any other development that could have
taken place on or adjacent to the Grist Mill property. Moreover,
nothing in the deed limits the landowner’s ability to seek
rezoning to denser development classifications. Accordingly,
neither petitioner nor the builder was prohibited from building
homes twice the size of those planned for development.
Finally, petitioner’s contention that the development did
not infringe on any view is without merit. The deed contained no
specific provisions to protect the views from the Grist Mill and
the Woodlawn Plantation or any other location. The view from
those properties were not any more protected if 30 instead of 62
residential units were to be built. The natural state was not
protected by the development of 30 rather than 62 units.
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Accordingly, petitioners have not satisfied the open space
requirement of section 170(h).
(2) Historic Preservation
We now consider whether petitioners satisfied the third
requirement by showing that their contribution comes within the
historic preservation requirement of section 170(h). The
historic preservation requirement may be met by showing the
preservation of a “historically important land area” or
“certified historic structure”. The legislative history
underlying this aspect of the statute describes a “historically
important land area” as one that is important in its own right or
in relation to “historic structures”:
The term “historically important land area” is intended
to include independently significant land areas (for
example, a civil war battlefield) and historic sites
and related land areas, the physical or environmental
features of which contribute to the historic or
cultural importance and continuing integrity of
certified historic structures such as Mount Vernon, or
historic districts, such as Waterford, Virginia, or
Harper’s Ferry, West Virginia. * * * [S. Rept. 96-
1007, supra at 12, 1980-2 C.B. at 605; emphasis added.]
See also sec. 1.170A-14(d)(5), Income Tax Regs.
Petitioners argue that limiting the development of the Grist
Mill property promoted the preservation of the historic Grist
Mill. On this point, petitioners reference the open
floodplain,11 the “quiet and peaceful atmosphere” of limited
11
Petitioners’ arguments with respect to giving up the right
(continued...)
- 27 -
development, and the requests of Hyland and the MVLA to limit
development. Respondent does not dispute that the Grist Mill
property was an “historically important land area”. Respondent
contends that there was no “historic structure” on the Grist Mill
property that petitioners could have preserved. In addition,
respondent contends that the conservation easement did not
preserve the Grist Mill property’s “historically important land
area” or its natural state. Respondent also references the loss
of trees on the development portion of the Grist Mill property as
demonstrating that, in fact, there was a loss of historical
importance after the Grist Mill property’s development.
Conversely, petitioners strongly deny that they contributed to
any loss of historical importance by the removal of trees during
the development of the Grist Mill property.
The parties’ disagreement about tree loss or removal is
irrelevant. If the trees contributed to the historical
importance of the Grist Mill property, the measure should be
based on the potential use of the property before and after the
contribution of a conservation easement. Even if no trees were
removed by petitioner, such restraint was not mandated by the
terms of conservation easement, which failed to reference
preservation of trees or the view, but merely referenced a
11
(...continued)
to develop and/or to preserve the floodplain ring hollow as no
homes could have been built on that land.
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development limit of 30 lots. Accordingly, petitioner’s action
or inaction with respect to the trees is irrelevant in
considering whether the purported conservation easement satisfies
the requirements of section 170(h).
The attempted easement did not satisfy the historic
preservation requirement of section 170(h) because it did not
preserve a historic structure or historically important land
area. First, there was no historical structure on the Grist Mill
property to preserve, and the easement’s limitation on
development on land near the Grist Mill or Woodlawn Plantation
does not preserve the historical structures on those properties.
That remains so despite any ancillary benefit of limited
development because petitioners did not own or control those
historical structures. The legislative history is explicit that
land surrounding a historical structure, like Mount Vernon, makes
that land historically important, but proximity alone does not
provide a basis to support a claim of protection of a historical
structure. Petitioner has not shown how his proposed limitation
in the conservation easement preserved any historical structure.
We also note that petitioners are not in a position to claim
that the Grist Mill property is independently significant, like a
Civil War battlefield, as there is no evidence that anything on
the property was historically unique. The Grist Mill property is
thus a historically important land area only because of its
- 29 -
proximity to the Grist Mill and the Woodlawn Plantation. Its
physical feature “which [contributed] to the historic or cultural
importance” of the surrounding historical properties was its
natural state because that natural state provided the separation
of the modern world from the 18th century that MVLA and the
Woodlawn Plantation were attempting to preserve.
The mere possibility or conjecture of a quieter and more
peaceful atmosphere that might have been engendered by limited
development did not preserve this historic characteristic. To be
sure, there was a more peaceful environment before any
development occurred. The requests by Hyland, MVLA, or any other
influential groups to limit development simply indicate their
desire for a development that would limit the quantity or amount
of interference with the historic nature of the community.12 The
influence exerted by these groups only serves to illustrate some
of the difficulties that petitioner would encounter in the
development of the Grist Mill property. MVLA received a smaller
buffer than it had hoped for and no more than would have been
mandated by petitioner’s inability to build on the defined
floodplain. Therefore, petitioners fail to qualify on the basis
that they had preserved a historically important land area.
12
The “requests” by Hyland and MLVA are also entitled to
less probative value because of petitioner’s role in drafting
those letters.
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c. Conclusion
The Senate report on the enactment of the legislation
pertaining to conservation easements contains the following
explanation:
[T]he committee believes that provisions allowing
deductions for conservation easements should be
directed at the preservation of unique or otherwise
significant land areas or structures * * * the
committee bill would restrict the qualifying
contributions where there is no assurance that the
public benefit, if any, furthered by the contribution
would be substantial enough to justify the allowance of
a deduction. * * * [S. Rept. 96-1007, supra at 9-10,
1980-2 C.B. at 603.]
With respect to the Grist Mill property, the record does not
support a finding that any public benefit would be furthered by
petitioners’ claimed13 conservation easement. We need not decide
whether petitioner’s choice not to pursue a rezoning for more
intense development was due to: The realization that the
rezoning would not get approved, his business partner’s desire to
quickly sell the property, or a desire to benefit the community.
Here there has been no preservation of open space. Nor have
petitioners preserved anything that is historically unique about
the Grist Mill property or the surrounding historical areas.
Petitioner simply developed the Grist Mill property to its
maximum yield within the property’s zoning classification.
13
In effect, petitioner was attempting to self-impose a
limitation that was already imposed by the zoning classification
and requirements of Fairfax County.
- 31 -
Petitioners have therefore satisfied neither the open space
requirement nor the historic preservation subdivision
requirements of the third requirement for qualification as a
deductible conservation easement. Accordingly, petitioners are
not entitled to a deduction for a qualified conservation easement
under section 170(h) because the attempted grant did not satisfy
the conservation purposes required under section 170(h)(4)(A).
C. Penalty
Respondent determined that petitioners were liable for a 20-
percent accuracy-related penalty under section 6662(a) due to (1)
negligence or disregard of rules or regulations, (2) a
substantial understatement of income tax, or (3) a substantial
valuation overstatement, and, to the extent that a portion of the
underpayment was attributable to a gross valuation misstatement,
an increased penalty of 40 percent under section 6662(h).
Respondent has conceded, for the purposes of this case, that if
we find that petitioners have not made a qualified conservation
contribution under section 170(h) that the gross valuation
misstatement penalty does not apply, and that only the negligence
or substantial understatement penalty applies. Because we have
found that petitioners have not made a qualified conservation
contribution, we consider only whether petitioners are liable for
either the negligence or substantial understatement penalty.
- 32 -
Section 6662(a) provides that if any portion of an
underpayment is due to negligence, then a taxpayer will be liable
for a penalty equal to 20 percent of the underpayment that is
attributable to negligence. “Negligence” is defined as “the lack
of due care or failure to do what a reasonable and ordinarily
prudent person would do” under the circumstances. Niedringhaus
v. Commissioner, 99 T.C. 202, 221 (1992). “Negligence” includes
a failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code. Id.; sec. 1.6662-
3(b)(1), Income Tax Regs. Respondent concedes that he has the
burden of production with respect to the penalty. In that
regard, respondent “must come forward with sufficient evidence
indicating that it is appropriate to impose” the accuracy-related
penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Conversely, petitioners’ contend that they are not liable
for the section 6662 penalty because they satisfied all of the
reporting requirements for a contribution deduction with the
perfunctory exception that the donee did not sign the
acknowledgment on the Form 8283. Petitioners also contend that
there was no person in Fairfax County who was authorized to sign
the Form 8283. However, petitioners’ failure to obtain a
signature is not the sole basis for respondent’s determined
penalty. As a basis to support the determined penalty,
respondent places heavy reliance upon the invalid premise in
- 33 -
Hyland’s February 10, 1999, letter that 62 lots could have been
developed. Respondent argues that Petroff (the appraiser), in
arriving at his property valuation, relied on the false premise
in the February 10 letter that petitioner could have built 62
lots “by-right”. More significantly, however, respondent argues
that Petroff’s assumption was that petitioner could have built
the additional 32 lots in the floodplain.
Petitioners represented to respondent, through Petroff’s
appraisal report, that the entire Grist Mill property could be
developed and that the conservation easement had been placed on
the floodplain, which, in fact, petitioner knew was unavailable
for development. The evidence shows, without doubt, that the
property was zoned R-2 and limited to 30 units, and approximately
one-half of the Grist Mill property was floodplain on which no
development was permitted. Most importantly, petitioner knew at
the time of filing the return that the assumption that the
existing R-2 zoning allowed the development of 62 lots on the
Grist Mill property was false. Petitioners have shown a lack of
care and due regard in claiming a deduction based on assumptions
known to be false or erroneous.
The accuracy-related penalty may be avoided by showing that
(1) there was reasonable cause for the underpayment, and (2) the
taxpayer acted in good faith with respect to such underpayment.
Sec. 6664(c)(1). Whether a taxpayer acted with reasonable cause
- 34 -
and in good faith is made on a case-by-case basis based on the
facts and circumstances. Reliance on an appraisal of the value
of property does not necessarily demonstrate reasonable cause and
good faith, depending on the assumptions made in the appraisal.
Sec. 1.6664-4(b)(1), Income Tax Regs. For example, the appraisal
may not be based on an assumption that the taxpayer knows, or has
reason to know, is unlikely to be true. Sec. 1.6664-4(c)(1)(ii),
(2), Income Tax Regs.
Respondent argues that petitioner knew the statement in the
letter was incorrect when supplying the letter to the appraiser.
Respondent therefore argues that petitioner did not in good faith
rely on Petroff’s appraisal of the Grist Mill property.
Petitioners’ counter respondent’s argument by contending that the
conservation easement deed contains no references to a donation
of floodplain property, but instead a limitation to build on 30
lots or less, and that petitioners have not attempted to take a
donation based on an assertion that homes could have been built
in the floodplain.
We agree that the issue of whether petitioner could have
built 62 lots “by-right” is of less concern if the valuation was
conducted on the theory that the property could have been
rezoned. However, despite petitioners’ contentions, by
submitting Petroff’s appraisal, petitioners indicated to
respondent that they could have built on the floodplain.
- 35 -
Irrespective of their position at trial, we must consider the
reasonableness of petitioners’ position based upon their position
at the time the return was filed. Petroff’s appraisal report
does contain the premise that the floodplain could have been
developed in the absence of the easement, and it was this report
that petitioners relied upon and presented to respondent to
support their contribution.
Although the report does not contain the express statement
that the entire 29 plus acres could have been developed in the
absence of the easement or that the conservation easement was
placed on the floodplain, it can be readily inferred from
Petroff’s report that he assumed these to be facts. Petroff’s
report contains the statement that the “by-right” subdivision
plan allowed 62 lots to be built on the total 29.2722 acres, a
development that we can infer Petroff believed was permitted
under the R-2 classification. The report also contains the
statement that the conservation easement was “donated on a
15.0418 acre portion of the 29.2722 acre” Grist Mill property,
which is the same acreage as the existing floodplain. The report
further notes that this constitutes 51.4 percent of the Grist
Mill property, representing 32 lots. It also refers to the
entire 29.2722 acres of the Grist Mill property before the
easement, the 15.0418 acres of the conservation easement, and
then the “Area of Remainder after Conservation Easement” of
- 36 -
14.2304 acres, insinuating that only 14.2304 acres of buildable
land are available because of the placement of the conservation
easement. However, petitioner acknowledges that the conservation
easement did not restrict any more buildable land in total than
what was available before the purported easement. Finally, the
report assumes the same 2.11-unit-per-acre yield for both 62 and
30 lots before and after the donation of the conservation
easement.
Petitioners argue that the deed attached to both Petroff’s
report and the Form 8283 does not make any reference to 62 lots
that could be developed “by-right”. While that is correct,
neither does the deed state where the easement is located.
Accordingly, Petroff would have assumed that 62 lots could have
been built on the entire 29.2722 acres absent the easement, and
that the floodplain (on which there could be no development) was
where the conservation easement was placed.
The only part of Petroff’s report that could possibly
support petitioners’ position that the valuation of the 62 lots
was based on rezoning was Petroff’s reference to the valuation’s
being based on the 62-lot sketch in the addendum to his
appraisal. This is the same 62-lot rezoning sketch of the
buildable area upon which petitioners’ trial experts based their
opinions of the value of the Grist Mill property. However, a 30-
lot sketch was not provided in Petroff’s appraisal, and there is
- 37 -
no indication in his report that the 62-lot sketch was based on a
rezoning of the buildable area. Thus, the sketch in the
addendum, by itself, was not sufficient to provide the correct
circumstances to Petroff. More importantly, the report and
addendum did not inform respondent of these matters or intention.
Petroff’s appraisal is filled with a sufficient number of
instances showing that he relied on the incorrect or false
assumption that the entire 29 plus acres could be developed in
the absence of the easement and that the conservation easement
had been placed on the unbuildable 15 plus acres of floodplain.
Petitioner, who was familiar with and heavily involved in the
development of the Grist Mill property, knew that the floodplain
could not be developed and that any conservation easement would
have to be placed on the buildable land. A casual review of
Petroff’s report would have alerted petitioner to the fact that
the valuation was based on erroneous assumptions. Petitioners
cannot therefore rely on this report as reasonable cause for
taking the position they did on their income tax return. See
sec. 1.6664-4(c)(2), Income Tax Regs. In addition, petitioners
cannot rely on the expert reports prepared in anticipation of
trial to show reasonable cause because these reports are not
- 38 -
evidence of petitioners’ position at the time of the filing of
their return. Accordingly, the section 6662 negligence penalty
is sustained.
Decision will be entered
under Rule 155.