Tax Court Values Partnership's Gift of Conservation Easement
Summary
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.
1. Respondent's 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.
2. Petitioner's Expert
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
- 5. Discussion
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
- 1. Introduction
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.
- 2. The After Value
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.
- a. Mr. Nash
- b. Mr. Garone
- c. Mr. Lengel
- d. Analysis
(1) Number of Lots
- (2) Lot Prices
(a) The Experts' Estimates
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.
- (b) The Experts' Data
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
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). * * *
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.
- (d) Analysis of the Data
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.
- (3) Absorption
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).
- (4) Appreciation
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.
- (5) Capital Expenses
- (6) Project Management Expenses
- (7) Sales Expenses
- (8) Developer's Profit
- (9) Discount Rate
- e. Conclusion
- 3. The Before Value
- a. Mr. Lengel
Mr. Lengel also stated that a conservation easement protecting the river corridor could be sold in the first year for $1.5 million.
- b. Mr. Garone
- c. Analysis
We shall use the following estimates to calculate the present value of a 40-lot residential subdivision.
- (1) Lot Prices
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.
- (2) Absorption
- (3) Capital Expenses
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.
- (4) Discount Rate
- (5) River Corridor Conservation Easement
- d. Conclusion
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).
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) * * *
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
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