Charitable Deduction of $22 Million Reduced 99%

Published 2025-06-02

GiftLaw Note:

Charitable Deduction of $22 Million Reduced 99%

In Beaverdam Creek Holdings LLC et al. v. Commissioner; No. 12362-21; T.C. Memo. 2025-53, a charitable deduction of $21,972,000 was determined to be invalid and the deduction amount was reduced to $193,250. A 40% Section 6662(h) gross valuation misstatement was also applied.

In northeastern Georgia, there is a granite deposit that is approximately six miles wide, 35 miles long and over two miles deep. Several granite quarries operate in the area, making Georgia the leading state for production of granite.

The easement property is 85 acres in Oglethorpe County, Georgia. Three different entities operated a quarry on the property until February of 2012. At that time, the quarry was abandoned, and the property remained largely vacant.

In early 2017, property owner Strategic Seek One, LLC (SSO) contacted experts to discuss creating a conservation easement on the property. After determining an easement was feasible, Beaverdam Creek Holdings LLC (Beaverdam) was formed on June 29, 2017. Beaverdam acquired the easement property and transferred a 97% interest to SSO for $228,000.

Prior to the transfer of the easement, an appraisal was prepared by Martin Van Sant and Thomas Wingard of Van Sant & Wingard, LLC (VSW). The appraisal determined an operating quarry could create a present value of over $20 million under a discounted cash flow analysis.

Beaverdam Creek Investors, LLC (BCI) was formed in 2017. It sold units at $25,000 per unit. The offering claimed that an investment of $50,000 would produce a charitable contribution deduction of $207,245 and save taxes of $89,115. Based on the assumption that the investors would have a substantial net profit by investing and saving income tax, 183 units were sold. On December 27, 2017, the investors were offered one day to vote on the decision to create the conservation easement. On December 28, 2017, Beaverdam transferred a conservation easement to Foothills Land Conservancy (FLC).

Beaverdam filed IRS Form 1065, U.S. Return of Partnership Income and claimed a charitable deduction of $21,972,000. The deduction was supported by the VSW appraisal and claimed this amount was based on the "highest and best use of the subject property."

VSW stated that properties with "similar mineral resources as compared to the subject property have not been identified." Therefore, a discounted cash flow (DCF) analysis was proper. Based on the DCF analysis, the before value was $22,100,000 and the value of the charitable deduction was $21,972,000. The IRS denied the charitable deduction and assessed a 40% penalty under Section 6662(h) for a gross valuation misstatement.

At trial, BCI offered expert testimony from three experienced appraisers. They claimed under the DCF analysis that the valuation of the property would be from $20 to $33 million. However, one of the taxpayer experts stated "it was not feasible for other companies – both financially and from an industry expertise perspective – to enter the quarry market."

The IRS offered testimony from two qualified experts. In the opinion of the IRS experts, the VSW appraisal "analysis and assignment result is not credible and should not be relied upon." The IRS determined the before value was $215,000 based on seven sales of comparable properties, and the after value was $85,500. One of the IRS experts noted that the taxpayer valuation per acre was 112 times the average of the comparable properties.

The taxpayer claimed the IRS position was "arbitrary and capricious on its face." Therefore, the burden of proof should shift to the IRS. However, the Tax Court noted the taxpayer bears the burden of proof for charitable deductions.

The taxpayer claimed there was credible evidence that supported the charitable contribution deduction amount of approximately $22 million. However, the Tax Court noted there were abandoned quarries in the area and there was a low probability that the quarry on the property could be reopened.

The IRS contested the appraisal as not qualified because it had a serious overvaluation and did not follow the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines.

The Tax Court noted an appraisal may be valid even if not in strict compliance with USPAP. However, the failure to follow USPAP may affect the credibility of the appraisal. While the appraisal value was very high, the IRS did not prove that the VSW appraisal was unqualified. Therefore, the Tax Court determined there was a qualified appraiser and qualified appraisal. The primary question was the "amount of the deduction allowable."

Fair market value is determined based on the highest and best use. The taxpayer claimed that only a discounted cash flow method could be used for valuation. However, the IRS offered over ten comparable sales. The general principle is that "comparable sales constitute the best evidence of market value."

Based on the comparable sales, the valuation was determined to be approximately $300,000 prior to the easement grant. The Tax Court stated, "BC Investors’ position is absurd." While BC Investors attempted to explain the reasons for disregarding the IRS comparables, the Tax Court noted that the comparables are valid if the properties are similar, the sales are at arm’s-length and the sales have occurred within a reasonable time of the valuation date. Because the income method is not reliable and is based on a hypothetical business, the DCF value was disregarded. The Tax Court noted that the DCF claimed by BCI "is completely untethered from reality."

Therefore, the before value was $300,000. Because the parties stipulated that the after value was $106,750, the easement charitable deduction is $193,250.

The final determination was whether there was a gross valuation misstatement under Section 6662(h). Because valuation is "gross" if there is a deduction that is more than double the amount of the fair market value, the court determined a deduction of $21,972,000 was greater than the double-the-deduction amount of $386,500. Therefore, there was a gross valuation misstatement.

Editor's Note: The limited partners who invested $50,000 each lost 99% of the claimed charitable deduction and were assessed a 40% penalty. With the loss of the charitable deduction, the 40% penalty, legal fees and court costs, it is probable that each $50,000 investment declined to a very minimal level.

Beaverdam Creek Holdings LLC et al. v. Commissioner; No. 12362-21; T.C. Memo. 2025-53

BEAVERDAM CREEK HOLDINGS, LLC, BEAVERDAM CREEK INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

United States Tax Court

Filed June 2, 2025

Jeffrey A. Kaplan, Jr., Darianne De Leon, Charles E. Hodges II, Anthony J. DeRiso III, Samuel B. Reilly, Tyler C. Jackson, and Simon P. Hansen, for petitioner.

Catherine JM McCollum, Tess deLiefde, Eric R. Skinner, Stephanie A. Gatt, Ismael T. Salam, John W. Stevens, and Shannon C. Bambery, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: This case concerns the contribution of a conservation easement by Beaverdam Creek Holdings, LLC (Beaverdam), during 2017.1 Beaverdam obtained an appraisal valuing the easement at $21,972,000 and claimed a noncash charitable contribution deduction in the same amount. Respondent issued a Notice [*2] of Final Partnership Administrative Adjustment (FPAA)2 in which respondent disallowed the $21,972,000 deduction and determined that various alternative penalties applied. Beaverdam's tax matters partner timely petitioned our Court for review. We hold that Beaverdam attached a qualified appraisal to its 2017 return but that the value of the easement is only $193,250 and a section 6662(h) gross valuation misstatement penalty applies.

FINDINGS OF FACT

1. The Georgia Granite Industry

Northeastern Georgia contains a granite batholith that is about 35 miles long, 6 miles wide, and 2–3 miles deep. Neighboring Oglethorpe, Elbert, and Madison Counties all contain portions of the batholith. Granite-producing areas in these counties are collectively known as the Elberton granite area, named after the largest city in Elbert County. Elberton bills itself the “Granite Capital of the World.” The first commercial granite quarry in the Elberton granite area opened in 1889, and granite remains an important part of the local economy; in 2005 the Elberton Granite Association reported the granite industry in Elberton alone generated at least $175 million in revenue. During 2017 there were dozens of operational and abandoned granite quarries3 in the Elberton granite area.

Largely because of production in the Elberton granite area, Georgia leads the United States in production and use of granite dimension stone. Granite dimension stone is natural rock that is cut out of a quarry into multiton blocks. The blocks are hoisted out of a quarry by crane and then typically transported to finishing plants via flatbed tractor trailers or rail-borne containers. Some quarries sell their blocks to third-party plants, and some transfer the blocks to affiliated plants. Because of the location of rail lines and the Port of Savannah, granite and granite products from the Elberton granite area can be efficiently shipped throughout the United States.

[*3] Granite is categorized by grade. Die stock is the highest grade of granite and typically must be free of imperfections. After die stock, in descending order of quality, are quarry run, base/coping, and curbing grades. Like die stock, quarry run and base/coping grades are used in numerous products, but they may be relegated to less visible portions of the product because of imperfections. Curbing grade is primarily used for street paving, as its greater imperfections are far less relevant for such use.4

There are also different types of granite. A type of granite from the Elberton granite area called “Georgia Grey” is known for being uniform, durable, and having an attractive color. Georgia Grey granite above curbing grade is suitable for many uses, including fabricating memorials and cemetery headstones. Accordingly, the number of people dying each year, especially in the United States, affects demand for Georgia Grey granite. The list of uses for granite in general is extensive; it includes buildings, monuments, paving streets, furniture, decorative objects, bridges, countertops, retaining walls, and landscaping.

1. Overview and History of the Property at Issue

The real property at issue in this case (easement property) is 85 acres of mostly vacant land in Oglethorpe County, Georgia. The easement property is about ten miles southwest from Elberton.

Service Granite Co., Inc. (SGC), began operating a granite quarry on the easement property in the 1950s. SGC was owned by members of the Miller family, an affluent family in Elberton. SGC initially leased the easement property but eventually bought it in two transactions in 1981 and 1988. SGC quarried from the easement property, and sold, Georgia Grey granite. SGC had numerous customers for its granite, including Japanese customers and domestic monument manufacturers.

[*4] SGC operated the quarry on the easement property until May 2006, at which time Lexington Blue Granite, Inc. (Lexington Blue), leased the property and began to operate the quarry. Lexington Blue was a monument manufacturing company that had previously purchased granite from SGC. Lexington Blue was owned by Carolyn Miller (who also owned a portion of SGC) and Richard Griggs. In 2005 Regions Bank lent over $100,000 to Lexington Blue. Both Carolyn Miller and Mr. Griggs became ill around that time, and Lexington Blue began to experience financial difficulties. Lexington Blue ceased operating the quarry on the easement property in August 2008 and went out of business at an unclear time.

North Ridge Quarries, Inc. (North Ridge), leased the easement property from SGC and operated the quarry from August 2008 to February 2012. North Ridge was operated by David Giannoni, who had extensive experience in the granite industry, primarily in the monument business. North Ridge was initially successful in its operation of the quarry, but later (1) made a bad decision about what part of the quarry to extract granite from and (2) ran into issues regarding the quality of its crew. As a result, North Ridge's operation became unprofitable, and Mr. Giannoni decided to cease quarrying on the easement property and focus his attention on a different quarry that he had purchased.

Carolyn Miller personally guaranteed the Regions Bank loan to Lexington Blue but died before the loan was satisfied. The loan went into default, and the outstanding debt led to a lien against assets of Carolyn Miller's estate, which included her interest in SGC. Carolyn Miller's sister-in-law, Carmelita Miller (Lita Miller), served as the executrix of Carolyn Miller's estate. In this role, Lita Miller was often contacted by creditors about the outstanding Regions Bank loan debt. Furthermore, after the death of her husband and daughter, Lita Miller became the 100% owner of SGC, and creditors were still contacting her. Though she was not personally liable for the debt, this situation was understandably stressful for the elderly Lita Miller, and she engaged an attorney, Judge J. Jenkins, to assist her.

Lita Miller had little to no experience in the granite industry and did not lease nor seek to resume quarrying on the easement property after North Ridge ceased its operation in February 2012. As a result, the quarry on the easement property was abandoned and the land remained mostly vacant as of 2017. At all relevant times the easement property was zoned “Heavy Industry-Mineral Extraction” (HI-ME). The property had an electric power source on site and sufficient water sources to [*5] facilitate quarrying. Roads around and through the easement property would have allowed trucks to transport granite, and the property was about three miles from a rail line spur. A picture of the primary quarry pit (which is between two and three acres in area) on the easement property as it existed in December 2022 follows:

picture of the primary quarry pit (which is between two and three acres in area)

A smaller, but otherwise similar, quarry pit was located nearby

III. The Strategic Group Background

The Strategic Group was founded in 2007 and has invested in real estate across the country. The Strategic Group partners James Freeman and Ricky Novak started working on conservation easement projects through the Strategic Group around 2011. In 2016 or 2017 the Strategic Group partnered with Lee Ellis and Manny Kaloyannides to form Strategic Seek One, LLC (SSO), also for the purpose of investing in real estate. Messrs. Freeman and Novak were managers of SSO and primarily ran the high-level business operations, while Messrs. Ellis and Kaloyannides focused on “on the ground” relationships and doing the initial work on potential real estate deals. Mr. Ellis would find potential properties for SSO to invest in and contact property owners.

[*6] IV. Relevant Transactions and Easement Contribution

1. Transfer of Ownership of the Easement Property

Mr. Ellis identified the easement property as a potential SSO investment by reviewing aerial maps. Although the easement property was not listed for sale, Mr. Ellis visited Lita Miller in early 2017 to discuss SSO's potentially purchasing the property from SGC. Mr. Ellis learned that Lita Miller had inherited ownership of SGC and that the Regions Bank loan debt associated with SGC caused her stress.

Lita Miller again met with Mr. Ellis in early 2017, this time with Judge J. Jenkins present, regarding a potential sale of the easement property. Judge J. Jenkins had been involved in a sale of an abandoned granite quarry in the 1990s, and he has represented numerous people in the granite industry, including quarry owners. He was aware that SSO intended to grant an easement on the property and not restart the quarry. As he explained it, from the “first time we discussed it, it was explained to me that this was taking the property out of commercial use and putting it into a conservation program, where it would never be quarried again.” Because he did not practice tax law, Judge J. Jenkins consulted with tax specialists to learn about the proposed transactions discussed infra so he could properly advise Lita Miller.

Lita Miller knew several granite quarry operators but did not ask Judge J. Jenkins to solicit interest from them (or from people he knew) regarding purchasing the easement property. She reviewed Oglethorpe County tax records to see what value the county placed on the property, but she did not have the property appraised. Lita Miller's chief concern was receiving sufficient funds to pay off the Regions Bank loan debt. She met with Mr. Ellis again in April 2017, with Mr. Kaloyannides also in attendance.5 Messrs. Ellis and Kaloyannides proposed an effective purchase price for the easement property around $225,000, discussed further infra. Lita Miller tentatively agreed with the proposal and the parties proceeded toward finalizing an agreement.

Beaverdam was formed on June 29, 2017. Beaverdam's initial Operating Agreement was executed by SGC and SSO on August 2, [*7] 2017,6 with SSO named as Beaverdam's manager. SGC and SSO also executed a Membership Interest Purchase Agreement (MIPA) on August 2, 2017. The MIPA provided that SGC would contribute the easement property to Beaverdam in exchange for a 99% interest in Beaverdam, while SSO would contribute $10,000 to Beaverdam in exchange for a 1% interest in Beaverdam. The MIPA also provided that SSO would pay $228,000 to SGC on or before December 29, 2017, in exchange for a 97% interest in Beaverdam, “leaving [SGC] with a 2% membership interest in” Beaverdam.

Beaverdam acquired the easement property from SGC by limited warranty deed dated November 17, 2017. On December 27, 2017, SGC transferred a 97% interest in Beaverdam to SSO in exchange for $228,000 (the background of this transaction is discussed infra). Through this transaction and other negotiations/actions, Lita Miller was able to satisfy the Regions Bank loan debt.

SGC and SSO also executed an Option Agreement on October 1, 2017. The Option Agreement gave SSO the option to purchase the remaining 2% interest in Beaverdam that would be (and was) owned by SGC at the end of 2017 for $20,000. SSO agreed to pay SGC a $5,000 nonrefundable deposit on or before February 1, 2018, and the remaining $15,000 would be paid if SSO exercised the option. The option could not be exercised before January 1, 2021, and would lapse on January 31, 2022, if not exercised. SSO paid the $5,000 deposit to SGC on January 28, 2018, but never exercised the option. At the time of trial SGC still owned 2% of Beaverdam.

1. Preliminary Easement Appraisal

Martin Van Sant, SRA,7 was referred to Mr. Freeman in 2013 or 2014 through a mutual client. Mr. Van Sant and his partner, Thomas Wingard, MAI,8 owned an appraisal company, Van Sant & Wingard, LLC (VSW). Multiple Strategic Group-affiliated entities similar to Beaverdam hired VSW to complete appraisals before and during 2017.

[*8] VSW emailed a proposal to Mr. Ellis in October 2017 regarding performing an appraisal for Beaverdam. VSW proposed “to estimate the fair market value of the [easement] property under the Federal Rule, utilizing the BEFORE and AFTER valuation methodology.” VSW stated that it would rely on information provided by David Buss and Richard Capps9 to complete the appraisal. The Strategic Group had previously worked with Drs. Buss and Capps. Beaverdam agreed to engage VSW in October 2017.

On December 5, 2017, VSW emailed Mr. Freeman preliminary appraisal results, including a fair market value for the easement property immediately before the conveyance of a conservation easement (before value of the easement property) of $20,900,000, a fair market value for the easement property immediately after the conveyance of a conservation easement (after value of the easement property) of $113,000, and an “Easement Value” of $20,787,000. The before value of the easement property was calculated using discounted cashflow (DCF) analyses for several grades of granite and adding together the resulting net present values (NPVs). Similar DCF analyses included in the final appraisal completed by VSW (VSW appraisal) are discussed infra.

1. Promotion of Beaverdam Creek Investors, LLC

On August 23, 2017, Beaverdam Creek Investors, LLC (BC Investors), was formed with a principal place of business in Georgia. BC Investors was created to invest in and manage Beaverdam, ostensibly to pursue one of two strategies: (1) an investment strategy involving holding the easement property for future appreciation and/or quarrying or (2) a conservation strategy involving the contribution of a conservation easement regarding the easement property. All relevant parties were aware in August 2017 that the conservation strategy was almost certain to be adopted.

BC Investors issued a private placement memorandum (PPM) dated December 7, 2017, offering 183 units in BC Investors to potential investors at $25,000 per unit. The PPM explained how the $4,575,000 in potential proceeds would be used. First, $560,000 would be used to cover unit offering expenses. Second, BC Investors would acquire a 97% interest in Beaverdam from SSO for $950,000. This was to occur “[i]mmediately” after SSO's purchase of that 97% interest from SGC for [*9] $228,000, “mean[ing] that SSO w[ould] realize an immediate $722,000 profit.” Third, BC Investors would make a capital contribution of $2,260,000 to Beaverdam. Fourth, $520,000 would be paid to the Strategic Group for past and future consulting services. Fifth, $135,000 would be used to cover/reimburse legal and other expenses. Finally, $150,000 would be allocated to BC Investors' operating reserve.

Using VSW's preliminary easement value of $20,787,000, BC Investors' prospectus described tax benefits for investors if the conservation strategy was implemented. The prospectus included an example demonstrating how a person investing $50,000 in BC Investors would obtain charitable contribution deductions “of approximately $207,245.” For a hypothetical investor with adjusted gross income of $550,000, taxable income of $500,000, and “a blended federal and state [tax] rate of 43%,” such deductions would reduce the investor's tax liability by $89,115. This tax reduction amounted to the recoupment of the amount invested plus a 78% return in less than a year.10

BC Investors sold all 183 units offered in its PPM. On December 27, 2017 (after SGC transferred a 97% interest in Beaverdam to SSO in exchange for $228,000), SSO transferred a 97% interest in Beaverdam to BC Investors for $950,000. The same day, Beaverdam amended and restated its initial Operating Agreement and admitted BC Investors as a member and the manager of Beaverdam (replacing SSO as manager). In December 2017 BC Investors contributed about $2.3 million to Beaverdam, and Beaverdam invested $1,100,436 in a real estate investment fund managed by Mr. Freeman, Mr. Novak, and Strategic Fund Manager, LLC (SFM). Messrs. Freeman and Novak were managers of SFM. During 2017 SFM also managed BC Investors.

1. Easement Contribution

On December 27, 2017 (once all investors were admitted into BC Investors as members and BC Investors had acquired the 97% interest in Beaverdam), SFM sent BC Investors' members a notice stating that SFM had determined that BC Investors should pursue the conservation strategy. The notice gave members the option either to affirm SFM's determination to pursue the conservation strategy or to reject SFM's determination and instead pursue the investment strategy. The notice stated that members had one day to return their votes. The notice was [*10] signed by Messrs. Freeman and Novak, as managers for SFM. Of BC Investors' members who voted, 57 voted to affirm SFM's determination to pursue the conservation strategy and 2 voted to pursue the investment strategy.

Beaverdam never attempted to hire an operator or employees, buy equipment, or otherwise move toward restarting the quarry on the easement property. Beaverdam had been coordinating a potential conservation easement contribution regarding the easement property with Foothills Land Conservancy (FLC) since September 2017, in anticipation that all necessary transactions would be completed and BC Investors' members would vote in favor of the conservation strategy before the end of 2017. As part of this strategy, Mr. Freeman signed a “Letter Agreement” for Beaverdam, whereby Beaverdam agreed to make a nonrefundable $12,500 payment to FLC and “to work in good faith to complete the [conservation easement], which will be executed, delivered, and recorded, to the extent [Beaverdam] elects to finalize and proceed with the [conservation easement].”11

By deed recorded December 28, 2017, Beaverdam conveyed an easement to FLC. Among other things, the easement deed provided that the easement property would be preserved “as a viewshed and open space for the scenic enjoyment of the general public” in perpetuity. The easement deed generally prohibited the construction of buildings and the use of the property for commercial or industrial purposes (with limited exceptions not relevant here). The easement explicitly prohibited “further mining of the Property.”

At the time of trial, a relative of Lita Miller, Carter Edge, was the CEO of SGC. Mr. Edge owned 50 acres of land adjacent to the easement property. With Beaverdam's permission, his family used the easement property to hunt, walk their dog, camp, ride horses, and kayak.

1. Beaverdam's 2017 Return and VSW Appraisal

Beaverdam filed a 2017 Form 1065, U.S. Return of Partnership Income, for the short period beginning December 28, 2017, and ending December 31, 2017 (2017 return). Beaverdam claimed a noncash charitable contribution deduction of $21,972,000 for its contribution of the easement. In accordance with their ownership interests in [*11] Beaverdam, 97% of the deduction was assigned to BC Investors, 2% was assigned to SGC, and 1% was assigned to SSO.

A Form 8283, Noncash Charitable Contributions, attached to Beaverdam's 2017 return reported an appraised fair market value for the easement of $21,972,000. A supplement to the Form 8283 stated the before value of the easement property was $22,100,000 and the after value of the easement property was $128,000. Also attached to Beaverdam's 2017 return was the VSW appraisal. Messrs. Van Sant and Wingard jointly prepared the VSW appraisal, and each signed it. Messrs. Van Sant and Wingard also each signed the Form 8283 attached to Beaverdam's 2017 return, acknowledging

that a false or fraudulent overstatement of the property value as described in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (aiding and abetting the understatement of tax liability). In addition, I understand that I may be subject to a penalty under section 6695A if I know, or reasonably should know, that my appraisal is to be used in connection with a return or claim for refund and a substantial or gross valuation misstatement results from my appraisal.

The VSW appraisal was dated March 1, 2018, and provided an “estimate, for Federal Income Tax purposes, [of] the fair market value of the subject property and conservation easement” as of December 28, 2017. The VSW appraisal represented that it adhered to the current edition of the Uniform Standards of Professional Appraiser Practice (USPAP) effective for 2018 and 2019, as well as USPAP Advisory Opinions. The VSW appraisal included various maps, photographs, and/or information of/about the easement property, the surrounding area, and certain other properties.

As stated in the VSW appraisal, VSW determined that “an owner operated mining operation for dimension stone, countertop and waste rock extraction . . . represents the highest and best use of the subject property.” To determine the before value of the easement property, VSW considered whether to use (1) the market, or comparable sales, approach, (2) the income approach, or (3) the cost approach. VSW determined that the cost approach was not appropriate because “no permanent improvements will be constructed during the operation of the proposed mining operations.” Regarding the comparable sales approach, VSW stated:

[*12] The Sales Comparison Approach is considered a lesser valid appraisal methodology for mineral valuation as mineral producing properties are typically unique and because sales are relatively uncommon, there are few reported. When sales are reported, they may include many different items than another quarry sale. One mineral property transaction as compared to another may differ as they may represent different markets, unique mineral attributes and unique site characteristics. . . . Sales of properties with similar mineral resources as compared to the subject property have not been identified and as a result, the Sales Comparison Approach is not considered to be a reliable indicator of value. . . .

VSW concluded that the income approach should be used because a DCF “analysis represents the maximally productive use of the subject property, as Beaverdam . . . has the financial ability and expertise necessary to mine and operate the proposed mining operations.” VSW relied on Mr. Ellis for the claim that Beaverdam had the expertise necessary to operate a quarry. Beaverdam actually had no such expertise and never contemplated operating a quarry.

As set forth in the VSW appraisal, VSW completed three DCF analyses: (1) a monument stone analysis showing an NPV of $15,700,000, (2) a countertop stone analysis showing an NPV of $5,500,000, and (3) a waste-rock aggregate analysis showing an NPV of $900,000. Adding these amounts together, VSW determined that “the fair market value of the fee simple estate of the [easement] property, comprising 85.486 acres, . . . before . . . the placement of a conservation easement on the entirety of the property” was $22,100,000.

In completing its DCF analyses, VSW relied on information from Drs. Buss and Capps regarding the potential development and operation of a quarry on the easement property. Dr. Buss conducted a “geologic investigation for the development of a granite dimension stone facility at the” easement property and created a report that was attached to the VSW appraisal. As part of his investigation, Dr. Buss's company drilled “5 boreholes . . . at the Tract: one (1) core hole [to a depth of 200 feet] and four (4) overburden12 holes into the bedrock,” then submitted “[t]he granite material recovered from [the] core hole . . . for physical testing and x-ray diffraction analysis . . . to establish the quality and [*13] composition of the granite.” Dr. Buss stated that the core hole material tests “indicate[d] a very dense, durable, and competent granite material.” In addition to drilling, Dr. Buss also made “[a]n additional 8 estimates of overburden thickness . . . using field mapping techniques and handheld GPS.” Dr. Buss concluded, in part, that “the removal of 107,528 [loose cubic yards] of overburden [would] expose 43.56 million cubic feet of granite resource” on five acres north of the existing primary quarry pit. Dr. Buss noted that the “testing results indicate that the granite resource is of superior quality and could be developed as a source of dimension stone and of construction aggregates.” Dr. Buss further noted that, “[t]o complete a detailed mine and operation design, further geologic investigation, materials testing, and engineering design studies may be required.” Dr. Buss's report was admitted as an expert report in this case.

Relying on information from Dr. Buss, Dr. Capps prepared a “Resource Valuation Report” regarding the easement property that was attached to the VSW appraisal. In short, Dr. Capps used a 25-year timeframe and completed three DCF analyses: (1) a monument stone analysis showing an NPV of $14,983,942, (2) a countertop stone analysis showing an NPV of $6,243,309, and (3) a waste rock analysis showing an NPV of $1,070,977. Dr. Capps concluded that there was “a combined total of US$22.3M total resource valuation” on the easement property before conveyance of the easement.13 Dr. Capps's report was admitted as an expert report in this case and will be discussed further infra.

Using the comparable sales approach, VSW determined the after value of the easement property was $128,000. Subtracting $128,000 from $22,100,000, VSW determined that the value of the easement was $21,972,000.

Neither Mr. Van Sant nor Mr. Wingard testified at trial, for health reasons. The VSW appraisal is not an expert report in this case.

1. Broad River Mining and Granite City Quarries

Two relevant quarry/mining projects/properties related to the Strategic Group are not covered by easements. We will briefly discuss each one. The parties introduced little documentary evidence regarding [*14] these projects that would have allowed us to describe the properties and their owners in greater depth.

1. Broad River Mining

In December 2017 the Strategic Group was seeking investors for BC Investors. A potential investor emailed Mr. Novak regarding the possibility that the conservation strategy would not be implemented. The potential investor asked: “Probably a bit obvious questions [sic] but, [h]as there ever been an instance where the vote went the other way?” Mr. Novak responded:

In one of our projects last year we had 3 large investors who were related take down the deal. After the full diligence came back, the mining opportunity was so good they actually changed their mind and decided to mine it. Obviously, it was a rather unique situation and occurred because only 3 related buyers were involved.

The project Mr. Novak referred to was known as Broad River Mining. As of the time of trial it was still not an operating mine/quarry.

1. Granite City Quarries

Mr. Giannoni, through North Ridge, operated a granite quarry on a property now known as Granite City Quarries for a period ending around 2016. SSO owned an interest in Hearthstone Holdings, LLC (Hearthstone Holdings), which obtained majority ownership of Granite City Quarries in 2018. Transactions in 2018 involving Granite City Quarries, Hearthstone Holdings, SSO, and the previous owner(s) of Granite City Quarries were structured similarly to transactions involving the easement property, Beaverdam, SSO, and SGC in 2017. However, outside investors were not brought in with respect to Granite City Quarries, as they were with respect to the easement property (through BC Investors). The previous owner of Granite City Quarries was paid about $300,000 as part of the transactions in 2018. Similarly to how SGC retained a 2% ownership interest in Beaverdam at the end of 2017, the previous owner of Granite City Quarries retained a small ownership interest in Hearthstone Holdings at the end of 2018.

In 2021 Hearthstone Holdings and/or SSO entered into a joint venture with David Dye (an expert witness for BC Investors, discussed [*15] infra) and his father14 to operate a granite quarry on Granite City Quarries.15 The previous owner of the property was bought out for an unestablished amount, and the Dyes and SSO/Hearthstone Holdings were each 50% partners in the joint venture. The Dyes had decades of experience operating granite quarries and were tasked with restarting and operating the quarry, with Mr. Dye serving as managing partner of the joint venture. In November 2021 Mr. Dye began work on restarting the quarry. This took about two months and cost between $400,000 and $500,000. The quarry restarted in January 2022, was cashflow positive by the end of March 2022, and had net income of $148,943 for 2022 and $417,539 for 2023. Granite City Quarries and the easement property had similarly sized quarry pits.

VII. IRS Examination, Petition, and Relevant Orders

The Internal Revenue Service (IRS) examined Beaverdam's 2017 return. On March 31, 2021, the Commissioner issued an FPAA to BC Investors in its capacity as the tax matters partner for Beaverdam. The Commissioner denied Beaverdam's claimed $21,972,000 noncash charitable contribution deduction in full and applied (1) a 40% accuracy-related penalty under section 6662(h); (2) in the alternative, a 20% reportable transaction understatement penalty under section 6662A; and (3) in the alternative, 20% accuracy-related penalties under section 6662(c), (d), and (e).16

[*16] BC Investors petitioned our Court for review. By Order dated September 22, 2023, we ruled that the IRS complied with the supervisory approval requirement of section 6751 with respect to the penalties at issue, granting respondent's Motion for Partial Summary Judgment on the issue. By Order dated March 1, 2024, we ruled that no section 6662A penalty applies, see Green Valley Invs., LLC v. Commissioner, 159 T.C. 80 (2022), granting BC Investors' Motion for Partial Summary Judgment on the issue. The parties stipulated that the after value of the easement property was $106,750.

VIII. Summary of Expert Witnesses

Various witnesses gave testimony relevant to the value of the easement. Among those witnesses were the following experts, most of whose reports will be discussed further throughout this Opinion.

1. BC Investors' Experts
2. Dr. Capps

BC Investors offered expert testimony from Dr. Capps, a geologist with a master's in geology, a Ph.D. in economic geology, and over 45 years of experience in industrial minerals exploration and development. He is also a member of the Society for Mining, Metallurgy, and Exploration (SME). Dr. Capps's expert report is the same one that was attached to the VSW appraisal (itself attached to Beaverdam's 2017 return). As stated supra, Dr. Capps conducted three DCF analyses and concluded that there was “a combined total of US$22.3M total resource valuation” on the easement property before conveyance of the easement. In its Opening Brief, BC Investors stated:

Due to the fact that the fair market value determined by [VSW] came from inputs and analysis from Dr. Capps, Petitioner no longer relies on Dr. Capps' opinion . . . of fair market value as expert testimony. Instead, Petitioner may rely on Dr. Capps' testimony, including certain information and inputs in his report to corroborate the opinions of [other expert witnesses for petitioner].

Dr. Capps considered numerous factors/inputs in completing his DCF analyses, including (1) market conditions, (2) the price of granite [*17] sold, (3) capital costs, (4) operating costs, (5) quantity of output over time, and (6) location. Many of these factors depended on Dr. Capps's forecasts and/or estimates, especially since there was no active quarry on the easement property. Dr. Capps also determined that a 9.5% discount rate should apply.

2. Tyler Peck

BC Investors offered expert testimony from Tyler Peck, a mining engineer at Burgex Mining Consultants, Inc. (Burgex). Mr. Peck is a member of SME and an expert in stone mining and valuation. He, with the assistance of other Burgex employees, prepared a “Market Study and Project Evaluation” report regarding Beaverdam. Using a DCF analysis and a 20-year timeframe, Mr. Peck concluded that “the [NPV] of the [easement] property . . . [was] $20,073,000.” Mr. Peck also concluded that “[a] study considering the modifying factors necessary to convert the measured resource to a reserve is highly recommended. Additional drilling, engineering, testing, infrastructure planning, and market research are also recommended to further reduce risk.”

Like Dr. Capps, Mr. Peck considered numerous factors/inputs in completing his DCF analysis. Many of these factors relied on Mr. Peck's forecasts and/or estimates, especially since there was no active quarry on the easement property. Mr. Peck determined that a 10% discount rate should apply.

3. Mr. Dye

BC Investors offered expert testimony from Mr. Dye regarding valuation, granite quarrying, production, operation, and distribution. Mr. Dye has worked in the granite industry for decades and has experience running quarry operations in the Elberton granite area. He used a 25-year timeframe and three DCF analyses with different discount rates (7.5%, 9%, and 11%), concluding that “Beaverdam could have expected to have generated between $23 to $33.5 million in [NPV] by operating a granite quarry on the” easement property.

Like Dr. Capps and Mr. Peck, Mr. Dye considered numerous factors/inputs in completing his DCF analyses. Many of these factors relied on Mr. Dye's forecasts and/or estimates, especially since there was no active quarry on the easement property.

In the section of his report discussing the Elberton granite area and the market for granite, Mr. Dye stated that in “1997 there were 45 [*18] granite quarries in operation within a 25-mile radius of Elberton.” Mr. Dye later argued that the market for Georgia Grey granite was supply constrained at the time of his report, stating that around 2000

a shift occurred in the regional quarry business that saw the monument manufacturers in/around the Elberton, Georgia area—most notably, Star Granite Co., Eagle Granite Co., Central Granite Co., and Hillcrest Granite Co.—begin to buy and operate their own granite quarries. Prior to this time, these same monument manufacturers historically had not been involved in the quarrying business, but instead simply bought and utilized blocks from the local quarries. Getting into the quarry business allowed for these monument manufacturers to gain control of the overall local production of granite, including Georgia Grey granite. Within a short period of time, the four companies listed above became the largest monument builders in the region. Recent sales prices of these companies reflect how profitable this approach was. Star Granite Company sold for over $40,000,000 in 2018,17 Eagle Granite Company sold for over $18,000,000 in 2023, Central Granite Company sold for over $8,000,000 in 2023, and Hillcrest Granite Company has turned down multiple offers to sell for values as high if not higher than these published prices.

In contrast to these larger monument companies, other smaller monument builders in the Elberton area— those who do not have the means to open and operate their own quarries—have resisted the urge to grow due to the supply of raw materials being controlled by the larger monument companies. All of these factors have driven down the amount of Georgia Grey that has been produced in the area: the larger monument companies quarried what they needed for their business purposes, and it was not feasible for other companies—both financially and from an industry expertise perspective—to enter the quarry market. An increased supply of Georgia Grey would permit these smaller companies expand [sic].

[*19] A footnote after the first quoted sentence reads:

Around this time, there were actually a greater number of active granite mines in operation. This shift by monument companies resulted in fewer quarries, as these larger companies that owned their own quarries sold themselves blocks at or below market value, while also acquiring several other of the independent quarries. In the short term, this reduced the price of granite blocks being produced at that time.

Contrary to the implication in Mr. Dye's statements, testimony established that the sale of Star Granite Co. did not include any quarry or quarry operation. Before its sale Star Granite Co. was controlled by a family that also controlled an affiliated business named Sterling Gray, which leased and operated a quarry. The sale of Star Granite Co. did not include Sterling Gray, though there was an agreement for Sterling Gray to continue supplying Star Granite Co. with granite after the sale. The terms of the supply agreement were not established. It is unclear whether the other sales of/offers regarding monument manufacturing companies mentioned by Mr. Dye included quarrying operations. Testimony suggested that Hillcrest Granite Co. was a separate business from a quarry business owned by the same family.

1. Respondent's Experts
2. Leslie Sellers

Respondent offered expert testimony from Leslie Sellers, MAI, a valuation consulting expert for nearly five decades and former president of the Appraisal Institute. Mr. Sellers determined that the easement should be valued by subtracting the after value of the easement property from its before value. As part of his analysis, Mr. Sellers determined that the highest and best use of the easement property before conveyance of the easement was “limited rural residential, limited small agricultural, and recreation.” Mr. Sellers considered whether the highest and best use of the easement property might have been to operate a quarry, but determined that such use was not financially feasible, stating:

Financial feasibility considers more than just the land when considering the additional assets required to reopen the quarry operation. It also considers other assets needed to form the business operation. The combination of [*20] assets is called a going concern. When the additional costs are considered, the use is not financially feasible. The subject property quarry was abandoned from February 2012 until the last sale in December 2017. The experience of the previous operator, Mr. David Giannoni, was unsuccessful. Reopening the existing quarry's business operations is not feasible based on these two factors.

Mr. Sellers testified at trial that a different quarry operator “might be able to do better than what [Mr.] Giannoni did. But the value of that is the business operation, and . . . the property cannot produce that business.”

In reaching his before value of the easement property, Mr. Sellers used the comparable sales approach. He found seven sales of comparable properties; one of these properties had no quarry, and six had active or abandoned quarries. The sale prices ranged from $114,716 to $500,000, with a price per acre range of $1,707 to $2,996. Considering the sale prices per acre for the seven comparables, Mr. Sellers found that “the presence or status of a quarry operation . . . [results in] no measurable differences in prices paid.” Mr. Sellers assigned “primary weight” to three of the comparables with “existing quarries on them at the time of sale and . . . similar[ity] in location, size, and topography to the subject property.” Mr. Sellers gave “secondary consideration” to the remaining four comparables and concluded that the before value of the easement property was $215,000.

Again using the comparable sales approach, Mr. Sellers determined that the after value of the easement property was $85,500. Mr. Sellers subtracted this amount from $215,000, concluding that the value of the easement was $129,500.

2. Raymond Krasinski

Respondent offered expert testimony from Raymond Krasinski, MAI, who was employed by the IRS as a lead appraiser. Mr. Krasinski previously worked as an appraiser for the U.S. Army Corps of Engineers and owned his own appraisal company. Mr. Krasinski performed an “Appraisal Review” of the VSW appraisal. Mr. Krasinski described numerous errors that he perceived in the VSW appraisal, concluding that the VSW appraisal “analysis and assignment result is not credible and should not be relied upon.” Mr. Krasinski also determined that the VSW appraisal “does not comply with generally accepted appraisal [*21] practice—the [USPAP].” Although he faulted the VSW appraisal for many things, Mr. Krasinski agreed at trial that the highest and best use of the easement property was to operate a quarry.18

Regarding the analysis in the VSW appraisal, Mr. Krasinski stated:

Despite the fact that the subject property is not unique in its market, the [VSW appraisal] fails to use the most widely applied approach to value (sales comparison) and ignores evidence of market value provided by numerous similar sales in the area. Instead, an income approach methodology that relies heavily on client-provided data and subjective inputs is used and results in a value conclusion that is more akin to an investment — feasibility value, and one that cannot be confirmed by any relevant market sales. Simply stated, [VSW's] conclusion is not a “market value” and is not supported by actions of buyers and sellers for similar properties in the area. The [VSW appraisal] fails to produce any compelling or appropriate market data that suggests why a willing buyer knowledgeable of relevant facts in the market would pay $22,100,000 ($259,000) per acre [sic] for the subject property, given the pricing and history of alternative purchases available.

Regarding “alternative purchases available,” Mr. Krasinski discussed “six recent sales of [nearby] properties with” inactive quarry pits. The sale prices ranged from $35,000 to $260,000. After adjusting for appreciation over time, Mr. Krasinski determined that the price per acre “range [was] $1,818 to $3,176 per acre. This is in stark contrast to the [*22] [VSW] estimate of ±$259,000 per acre, which is 112 times higher than the average of these similar properties.”

Mr. Krasinski also noted 12 other property sales in Oglethorpe County, each with an alleged “active [quarry] at the time of its sale.”19 The sale prices ranged from $64,000 to $600,000, with a price per acre range of $1,266 to $10,763. Mr. Krasinski determined that the 12 sales were “representative of the value reasonable buyers will pay for mineral asset land and are in sharp contrast to the [VSW] valuation model and conclusion.”

OPINION

1. Burden of Proof

Rule 142(a)(1) provides that “[t]he burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court.” Generally, the IRS's adjustments in an FPAA are presumed to be correct, and a party challenging an FPAA bears the burden of proving them wrong. See Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013).

If, in any court proceeding, the taxpayer puts forth credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer and meets certain other requirements,20 the burden of proof shifts to the Commissioner as to that issue. §7491(a). Credible evidence is the quality of evidence which, after critical analysis, a court would find sufficient on which to base a decision on the issue if no contrary evidence were submitted. Baker v. Commissioner, 122 T.C. 143, 168 (2004) (citing Higbee v. Commissioner, 116 T.C. 438, 442 (2001)).

During the trial, BC Investors filed a Motion to Shift the Burden of Proof (Motion) to respondent. BC Investors argued that the burden of proof should be shifted because either (1) respondent's FPAA was arbitrary and capricious or (2) petitioner satisfied the requirements of section 7491 with respect to all issues in this case. The Court directed the parties to address the Motion in their opening briefs and stated that [*23] we would attempt to issue an Order before answering briefs were due.

The parties filed their opening briefs on August 5, 2024. On August 14, 2024, we issued an Order granting in part and denying in part BC Investors' Motion (Order). In its Answering Brief, BC Investors asked us to reconsider our Order. For the reasons stated below, we reaffirm our Order.21

1. Argument One: An Arbitrary and Capricious FPAA

BC Investors argued that respondent should bear the burden of proof because his FPAA was arbitrary and capricious. BC Investors argued that the FPAA “fails to articulate the basis for [a] $0 valuation of [Beaverdam's] charitable contribution of the” easement.

Our Court has held that “the Commissioner's determination does not receive a presumption of correctness if the determination is shown to be arbitrary and capricious.” Parkway Gravel, Inc. v. Commissioner, T.C. Memo. 2024-59, at *8–9 (first citing Helvering v. Taylor, 293 U.S. 507, 514 (1935); and then citing Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959), remanding T.C. Memo. 1957-172). However, we will follow a court of appeals decision which is squarely on point where appeal from our decision lies to that court of appeals alone. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). Absent stipulation to the contrary, this case is appealable to the U.S. Court of Appeals for the Eleventh Circuit. The Eleventh Circuit differentiates between unreported income and deductions when determining whether the burden of proof should shift to the Commissioner. See Gatlin v. Commissioner, 754 F.2d 921, 923–24 (11th Cir. 1985), aff'g per curiam T.C. Memo. 1982-489; see also Amey & Monge, Inc. v. Commissioner, 808 F.2d 758, 761 (11th Cir. 1987), aff'g T.C. Memo. 1984-642. As stated by the Eleventh Circuit:

In determining which party bears the burden of proof, it is necessary to differentiate between unreported income cases and deduction cases. In unreported income [*24] cases, once it has been shown through evidence that the Commissioner's determination is arbitrary and erroneous, the ultimate burden of proof or persuasion shifts to the Commissioner. . . . The rationale behind this rule is that a taxpayer should not bear the burden of proving a negative (no unreported income) if the Commissioner can present no substantive evidence to support his deficiency claim.

This is a deduction case. At all times the taxpayer must come forward with evidence to support his entitlement to the deduction and the amount of that entitlement. When claiming a deduction, the taxpayer has admitted the full amount of income but seeks to pay less than the applicable tax on that income by utilizing available deductions. Because the taxpayer is privy to the facts that substantiate a deduction, he must bear the burden of proving his right to, and amount of, a claimed deduction. This stricter burden for deduction cases makes sense because unlike unreported income cases the taxpayer is not required to prove a negative.

Moreover, when a taxpayer challenges the government's disallowance of part or all of a deduction, the Commissioner's original notice of deficiency and the method of calculation of the deficiency at the administrative level is not evidence in the Tax Court. It has no relevancy with respect to the proceeding. The Tax Court undertakes a de novo review.

If the government takes a position against a taxpayer that is not substantially justified and the taxpayer prevails, it is possible that the taxpayer has a remedy for attorney fees under 26 U.S.C. §7430(a). The taxpayer's remedy is not one of burden shifting. . . .

Gatlin v. Commissioner, 754 F.2d at 923–24 (citations omitted). Citing Gatlin, we ruled in our Order that “even assuming respondent's FPAA was arbitrary and capricious, the burden of proof remains with” BC Investors.

In its Answering Brief BC Investors argued that we should reconsider our ruling because

[*25] the taxpayers in Gatlin based their burden-shifting request on evidence not introduced in this Court; that is, they asked the Court to go behind the notice of deficiency in order to shift the burden. Whatever its merit, that holding has no application here, where the FPAA was arbitrary and capricious on its face, without any need to go behind the FPAA.

(Citations omitted.) We disagree. In Gatlin v. Commissioner, 754 F.2d at 923–24, the Eleventh Circuit clearly used the fact that the taxpayers asked the Court to go behind the notice of deficiency as additional, not primary, support for its holding that taxpayers bear the burden of proof with respect to deductions “[a]t all times.” As we stated in Peco Foods, Inc. & Subs. v. Commissioner, T.C. Memo. 2012-18, 2012 Tax Ct. Memo LEXIS 17, at *11–12 n.5, aff'd, 522 F. App'x 840 (11th Cir. 2013), the Eleventh Circuit

differentiates between unreported income cases and deduction cases in determining when the burden of proof shifts to the Commissioner. Although the Commissioner bears the burden of proving unreported income once it has been shown his determination was arbitrary and erroneous, where, as here, the case involves incorrect reporting of deductions, the taxpayer bears the burden of proving his or her entitlement to the deductions claimed “At all times”. See [Gatlin v. Commissioner, 754 F.2d at 923]. Thus, even assuming the notice of deficiency was arbitrary and capricious, the burden remains with [the taxpayer] to prove its entitlement to the deductions claimed.

(Additional citations omitted.) Although it did not specifically address the burden of proof, the Eleventh Circuit unsurprisingly affirmed our decision. Peco Foods, Inc. & Subs. v. Commissioner, 522 F. App'x 840. Accordingly, we reaffirm that even if the FPAA was arbitrary and capricious, the burden of proof remains with BC Investors.

1. Argument Two: Section 7491 and Qualified Appraisal Issue

In our Order, we agreed with BC Investors that it had introduced “credible evidence sufficient to shift the burden of proof to respondent with respect to” the qualified appraisal issue. Respondent did not challenge that ruling in his Answering Brief. As discussed infra, we rule [*26] for BC Investors on the qualified appraisal issue on the preponderance of the evidence.

1. Argument Three: Section 7491 and Valuation Issue

BC Investors argued that it introduced credible evidence with respect to the valuation issue, including “the income valuations of Mr. Dye and Mr. Peck and the testimony of several witnesses from the Elberton area.” While other evidence and testimony may support certain inputs and relevant facts, the DCF analyses of Messrs. Dye and Peck are the only items of evidence that BC Investors relies upon for its position that Beaverdam is entitled to a $21,972,000 charitable contribution deduction.22

In our Order, we stated that “nothing in the evidence put forth by [BC Investors] credibly supports the $21,972,000 noncash deduction claimed,” noting that the DCF analyses BC Investors relied upon overstated the amount of income that would flow to Beaverdam if the quarry on the easement property was restarted. We ruled that BC Investors “failed to show that the easement ha[d] a value nearly 100 times what” SGC had effectively sold the easement property for less than six months before the easement donation. Although we ruled that evidence and expert reports introduced by BC Investors did “not credibly support a nearly $22 million easement valuation,” we stated that they “may support a higher valuation for the easement than that claimed by respondent.” We further stated that we would weigh BC Investors' evidence/reports, “along with evidence put forward by respondent, in determining the value of the easement at the time of its donation.”

For reasons discussed in the remainder of this OPINION Part I.C, neither Mr. Peck's nor Mr. Dye's conclusion credibly supports the $21,972,000 charitable contribution deduction claimed by Beaverdam.

Mr. Peck's financial model produced unrealistic results. He forecast that (1) the price of granite would increase 2.5% per year, (2) Beaverdam would increase production of granite each year, and (3) Beaverdam's mining and processing costs (M&P costs)23 per cubic [*27] foot of granite quarried would decrease every year of operations “as economies of scale are achieved.”24 M&P costs were most of Mr. Peck's forecasted total expenses for Beaverdam. On the basis of his forecast of decreasing M&P costs per cubic foot produced, Mr. Peck calculated that total M&P costs would be $1,250,546 in year 4,25 rise by less than $3,000 each year, and reach $1,278,579 in year 20 (the final year of his analysis). During the same time, he determined that “Sellable Cubic Feet” of granite produced would increase from 144,000 cubic feet to 405,000 cubic feet and that the price per cubic foot of granite sold would increase by 48%. As a result, Mr. Peck determined that Beaverdam's total revenue would increase by 318% (from $2,233,040 to $9,323,328) from year 4 to year 20, during which time M&P costs would increase by 2% (from $1,250,546 to $1,278,579)26 and total expenses would increase by 37% (from $1,410,488 to $1,936,193). For year 20, Mr. Peck forecast revenue for Beaverdam of $9,323,328, total expenses of $1,936,193, and free cashflow of $7,387,135. This amounted to a free cashflow-to-sales ratio of 79%, which is unrealistic on its face and should have caused Mr. Peck to reevaluate his model. Ironically, Mr. Peck repeatedly testified that, overall, his report was “conservative.”

Mr. Peck assumed a productivity miracle would occur over 16 years that is not discussed in his report other than in general statements that “economies of scale [will be] achieved” and an “estimate[ ] that newer equipment and improved operating efficiencies will” reduce operating costs.27 Mr. Peck did not analyze how such enormous advances in productivity would affect the supply curve for the granite market, which could affect the market price for granite. Regardless, in the [*28] absence of supporting evidence, we are highly skeptical that the granite industry will experience leaps forward in technology over 16 years sufficient to enable the huge advances in productivity forecast by Mr. Peck.

There was also a specific issue with the revenue that Mr. Peck forecast in his report. Mr. Peck projected that Beaverdam would sell three grades of granite: high-grade, medium-grade, and curbing-grade. Mr. Peck stated that the market price of curbing-grade granite in 2017 was $12 per cubic foot. He wrote that he “estimated” this price “by decreasing the published . . . pricing” for higher grade granite. Mr. Peck then applied “a 10% discount . . . to ensure market share gains,” meaning his analysis used a price for curbing-grade granite of $10.80 per cubic foot. However, almost all other testimony in this case (including Mr. Dye's) supported a far lower price for curbing-grade granite. BC Investors even requested we make a finding of fact that “[i]n 2017, the average sales price for curbing granite was between $2.25–$4 per cubic foot.” Mr. Peck forecast that curbing-grade granite would make up 30% of Beaverdam's sales by volume. Because Mr. Peck's price per cubic foot for curbing grade granite was far too high, his forecasted total revenue for Beaverdam was significantly overstated. Mr. Peck could have easily avoided this issue by talking to someone knowledgeable about curbing-grade granite pricing instead of attempting to estimate it himself.

Rather than supporting Beaverdam's claimed $21,972,000 charitable contribution deduction, Mr. Peck's report is a prime example of the dangers of relying on DCF analyses to value speculative businesses (discussed further infra). The assumptions he made combined and compounded to produce a result that is preposterous.

Mr. Dye28 used DCF analyses and concluded that “the fair market value of [Beaverdam's potential] granite operation, depending on the discount rate applied, would have been between $23 to $33.5 million.” We found Mr. Dye's analysis to be lacking. Statements he made about the granite market and quarrying in the Elberton granite area were poorly explained and/or did not make sense, and his financial analysis was vague and not convincing. We will note some questionable statements Mr. Dye made before discussing the financial analysis.

[*29] In his report, Mr. Dye stated:

[S]maller monument builders in the Elberton area—those who do not have the means to open and operate their own quarries—have resisted the urge to grow due to the supply of raw materials being controlled by the larger monument companies.29 All of these factors have driven down the amount of Georgia Grey that has been produced in the area: the larger monument companies quarried what they needed for their business purposes, and it was not feasible for other companies—both financially and from an industry expertise perspective—to enter the quarry market. An increased supply of Georgia Grey would permit these smaller companies [to] expand.

Mr. Dye asserted that “from an industry expertise perspective” it is “not feasible” for smaller monument manufacturers to enter the quarry market, but it is feasible for Beaverdam to do so, even though Beaverdam lacked expertise in any part of the granite industry. Mr. Dye later claimed that “Beaverdam had the ability in 2017—vis a vis hiring experts like myself to run the quarry—to extract Georgia Grey at the Subject Property.” Mr. Dye did not explain why a smaller monument manufacturer could not similarly hire an expert to operate a quarry.

Neither did Mr. Dye adequately explain why smaller monument manufacturers lacked the financial wherewithal to enter the quarry market, and his overall market analysis did not make sense. He claimed that

Georgia Grey is the only domestic material in the United States that has a demand that has yet to be met. . . . The total production for all the remaining Georgia Grey quarries in/around Elberton in 2017 was less than 2,000,000 cubic feet, or 182,000 tons. Nevertheless, from 2017 through 2023, the industry could have easily supported, at a minimum, an additional million cub[ic feet] of Georgia Grey granite per year.

[*30] Mr. Dye also claimed that “the risk and initial capital investment in a dimensional stone quarry is significantly less than that of an aggregate stone mine. This is especially true when . . . the dimensional stone quarry to be opened sits on a site that has historically been used for that same purpose.” Mr. Dye determined that an “initial capital contribution” of only $300,000 would be required for Beaverdam to restart the quarry on the easement property, with that $300,000 being repaid to investors over the first three years of operation (in addition to profits).

Mr. Dye would have us believe that (1) there are untapped riches in abandoned quarries in the Elberton granite area that require comparatively low amounts of startup capital to quarry,30 (2) restarting a quarry is a comparatively low-risk investment, and (3) the people who live in/around the “Granite Capital of the World” and collectively have vast experience in the granite industry are somehow failing to monetize abandoned quarries and satisfy demand for granite. Essentially, Mr. Dye is asking us to trust his conclusions over the accumulated knowledge of the free market. We believe it is substantially more likely that Mr. Dye is mistaken.

For his financial analysis Mr. Dye created the following table:

Beaverdam Cash Flow: 11% Discount Rate

Mr. Dye produced two other similar tables with the only differences being lower discount rates used, resulting in higher present values in the right-most column. We will discuss figures in the table.

Mr. Dye estimated that Beaverdam would quarry granite from 1 ledge31 in the first year, 1.5 ledges in the second year, 2 ledges in the third year, 2.5 ledges in the fourth year, and 3 ledges in the fifth year and each year thereafter. Mr. Dye assumed that Beaverdam would quarry 123,930 cubic feet of granite per ledge in each year, concluding that Beaverdam would quarry 123,930 cubic feet of granite in the first year, 185,000 cubic feet in the second year, 247,860 cubic feet in the third year, 308,930 cubic feet in the fourth year, and 371,790 cubic feet in the fifth and each year thereafter.32 Mr. Dye did not project any period of startup work before the quarry began operating.33

[*32] Mr. Dye assumed that Beaverdam would sell granite at an average price of $10.50 per cubic foot in year 1. He did not provide a breakdown of projected granite sales by grade. Mr. Dye testified that “[t]he average price of granite, historically, has increased six percent per year,” and thus forecast a 6% increase in the price of granite each year for the first 12 years.34 Mr. Dye did not analyze whether the continued 6% rate of increase he projected was reasonable considering his forecast that Beaverdam would significantly contribute to supply in a market that “in/around Elberton in 2017 was [producing] less than 2,000,000 cubic feet” of granite per year.

Mr. Dye's financial analysis was particularly weak with respect to costs that he projected. Mr. Dye stated that, after forecasting revenue, the analysis

required to assess whether a dimensional stone operation will be profitable is to determine anticipated average costs per cubic foot. These costs are divided into separate categories: equipment, labor, administrative, consumables, and non-production expenditures. Anticipated costs for each category are [discussed] below.

Mr. Dye's explanations of various costs were very brief and generally poor.

Mr. Dye first stated that his “Anticipated Equipment Start Up Cost” over five years was $675,750. Mr. Dye forecast that quarrying equipment could be financed with bank loans with interest rates of 5.5%. The interest cost was included in the $675,750. Mr. Dye stated that the yearly “[c]ost per [cubic foot] based on 10,327.5 [cubic feet produced] per month” was $1.09. It was unclear how/whether this cost was adjusted to account for the increasing production over the first five years of quarry operation and/or the repayment of the loans.

Mr. Dye next turned to anticipated labor costs. After noting that “[m]ining Georgia Grey is labor intensive,” he stated: “I assume annual labor costs to equal $276,820 annually [per ledge] (or $23,068.33 per [*33] month)—or $2.23 per cubic foot per month.”35 However, Mr. Dye's forecasted labor expenses did not comport with actual labor expenses for Granite City Quarries. Mr. Dye stated in his report that Granite City Quarries “shares many similarities with the type of quarry that Beaverdam contemplated opening” and compared the profits of Granite City Quarries (for its first two years of operation in 2022 and 2023) to his projected profits for Beaverdam's first two years of quarry operations. Mr. Dye included one-page “Profit and Loss” statements for Granite City Quarries for both 2022 and 2023. The 2022 statement showed “Wages & Salaries” expenses of $800,441, plus “Taxes-Payroll” expenses of $67,774. The 2023 statement showed wage expenses of $772,287, plus payroll taxes expenses of $61,951. Separate lines on the 2023 statement showed additional wage and payroll tax expenses of $362,823 and $33,695, respectively. These separate expenses for 2023 were not explained.36 Regardless, labor costs were far higher at Granite City Quarries, a difference Mr. Dye failed to explain. Furthermore, Mr. Dye and his father operated Granite City Quarries as part of a 50/50 joint venture. Even though the Dyes managed the operation and were compensated (in part) with 50% of the profits, the far higher labor expenses at Granite City Quarries strongly suggest that Mr. Dye's projected labor costs for Beaverdam are much too low.

Mr. Dye next forecast administrative costs to be $79,769 per ledge, per year, or $0.64 per cubic foot produced.

Mr. Dye next forecast “annual consumables costs to equal $10,599 annually—or $1.03 per cubic foot per month.” These figures do not align; Mr. Dye apparently meant to project monthly consumables costs of $10,599 per ledge.

Finally, Mr. Dye forecast “Non-Production Expenditures” per ledge to be $66,000 per year. This category included parts, repairs, maintenance, and growth/replacement reserves. As shown in the table from his report, supra, Mr. Dye listed these expenses separately. [*34] Notably, Mr. Dye did not adjust these expenses for inflation, as he did other costs. In addition, he listed $198,000 of nonproduction expenses for year 4, which should have been $165,000.

In total (and correcting what we assume to be an error regarding consumables expenses) Mr. Dye set forth costs totaling $4.99 per cubic foot produced for year 1, plus nonproduction expenses of $66,000. Then, with no clear explanation, Mr. Dye listed total costs of $8 per cubic foot for year 1 (plus nonproduction expenses of $66,000).37 For year 2, Mr. Dye listed total costs of $7.50 per cubic foot (plus nonproduction expenses of $99,000). The leap in total costs in these years appears to be aimed at generating net income for the first two years of Beaverdam's projected operations similar to the net income Granite City Quarries earned in 2022 and 2023. Mr. Dye even stated that his “estimates . . . are in line with actual costs and profits that were achieved at other granite mines,” citing Granite City Quarries' profit and loss statements. However, Mr. Dye's projected net income for Beaverdam was actually significantly higher, as for years 1 through 3 of his Beaverdam projections he subtracted $100,000 each year from net income as a “Repayment of Initial Capital.” The financial information for Granite City Quarries attached to Mr. Dye's report reflects no such expense. This omission is unsurprising, as a return of capital is not an expense used to determine net income.

Mr. Dye attached only two pages of financial records from Granite City Quarries, and these contain sizable, unexplained discrepancies from many of his projected costs for Beaverdam. Mr. Dye failed to address the fact that Granite City Quarries was possibly operating in a higher margin environment in 2022 and 2023 than one should have forecast for Beaverdam as of the end of 2017, as the COVID-19 pandemic had caused numerous deaths in the United States leading to an increased demand for Georgia Grey granite. Mr. Dye also failed to explain why Beaverdam would be able to capture all profits from a quarry operation on the easement property, even though Mr. Dye and his father received 50% of the Granite City Quarries profits in return for managing the operation for Hearthstone/SSO. Mr. Dye's report is not consistent with facts regarding Granite City Quarries, even though he repeatedly stated how similar the quarry pits were.

[*35] The range of values Mr. Dye reached in his DCF analyses are at odds with the granite market that he described, and he failed to provide substantive explanations for such incongruities. It is not credible to conclude that Beaverdam, a company that lacked expertise in any part of the granite industry, would have been massively profitable with only small startup expenses but not thoroughly explain why more experienced granite market participants could/would not take advantage of similar opportunities. Furthermore, Mr. Dye's financial analysis was poorly explained and not convincing; our impression is that he created it with predetermined outcomes (purported net income figures resembling Granite City Quarries' net income for its first two years of operation, then overly optimistic projections thereafter) in mind. We do not find his conclusions credible.

In addition to the issues discussed supra, Messrs. Peck and Dye both valued Beaverdam as a hypothetical business, which BC Investors equated to the fair market value of the easement property before the conveyance of the easement. For reasons discussed further infra OPINION Part III.C.2.c, we find that speculative business valuations that made no attempt to reflect the fair market value of the easement property do not credibly support Beaverdam's claimed $21,972,000 charitable contribution deduction.38 See Treas. Reg. §1.170A-14(h)(3)(i) (providing that if no substantial record of easement sales is available, the “general rule” is that “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”); Treas. Reg. §1.170A-1(c)(2) (defining “fair market value” to be “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of [*36] relevant facts”). Like the taxpayer's experts in Savannah Shoals, LLC. v. Commissioner, T.C. Memo. 2024-35, at *45, Messrs. Peck and Dye did not “opine[ ] as to the fair market value of the unencumbered easement property.” Rather, Messrs. Peck and Dye “ignored the regulatory definition of fair market value,” see id., and instead determined the purported NPV of Beaverdam as a business. It is not credible to posit that a buyer would pay—for the easement property alone—the entire NPV of a hypothetical business on the property. See Ranch Springs, LLC v. Commissioner, No. 11794-21, 164 T.C., slip op. at 56–57 (Mar. 31, 2025)39 (“[Taxpayer's experts] both equated the value of the land with the going concern value of a limestone mining business conducted on the land. That equation defies economic logic and common sense.”); see also Van Zelst v. Commissioner, 100 F.3d 1259, 1263 (7th Cir. 1996) (reasoning that when a resource is plentiful and “financing and entrepreneurship are the scarce ingredients . . . [financing and entrepreneurship] will capture the economic return”), aff'g T.C. Memo. 1995-396.

1. Argument Four: Section 7491 and Penalties

Section 7491(a) applies only to “factual issue[s] relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B.” Section 7491(a) does not apply to section 6662 penalties (found in subtitle F of the Code). Higbee, 116 T.C. at 447 n.6; see also El v. Commissioner, 144 T.C. 140, 146–49 (2015) (discussing penalties, additions to tax, and additional amounts as compared to taxes). Section 7491(c) applies to penalties, providing that, in general, “the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.” However, section 7491(c) does not apply to TEFRA partnership-level proceedings, such as this case. Dynamo Holdings Ltd. P'ship v. Commissioner, 150 T.C. 224, 234 (2018). Therefore, BC Investors bears not only the burden of proof regarding the section 6662 penalties, but also the burden of production.

[*37] II. Qualified Appraisal

Section 170(f)(11) disallows a deduction for certain noncash charitable contributions unless specified substantiation and documentation requirements are met. In the case of a contribution of property valued in excess of $500,000, the taxpayer must obtain and attach to his return “a qualified appraisal of such property.” §170(f)(11)(D). An appraisal is “qualified” if it is “conducted by a qualified appraiser in accordance with generally accepted appraisal standards” and meets requirements set forth in “regulations or other guidance prescribed by the Secretary.” §170(f)(11)(E)(i).

Respondent argued that (1) the VSW appraisal was not prepared in accordance with generally accepted appraisal standards (the USPAP) and (2) was not prepared by a qualified appraiser. We disagree.

We have recently explained that an appraiser's failure to strictly follow USPAP does not render the appraisal per se “nonqualified.” Rather, it is simply a factor to be considered in assessing its persuasiveness. See Ranch Springs, 164 T.C., slip op. at 31–33; Seabrook Prop., T.C. Memo. 2025-6, at *31–32; JL Mins., LLC v. Commissioner, T.C. Memo. 2024-93, at *36–37; Buckelew Farm, T.C. Memo. 2024-52, at *48–49. We reach the same conclusion here. Having carefully reviewed the VSW appraisal and respondent's claims, we rule that the VSW appraisal lacks full compliance under USPAP but is not so deficient that it fails to comply with generally accepted appraisal standards.

Respondent also argued that Messrs. Van Sant and Wingard failed to satisfy Treasury Regulation §1.170A-13(c)(5)(ii), which provides, in relevant part:

An individual is not a qualified appraiser with respect to a particular donation . . . if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property (e.g., the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property).

Although VSW substantially overvalued the easement, we are not convinced that Beaverdam's principals were aware of any facts that would cause them to expect that VSW would falsely overstate the value. [*38] Establishing such a disqualification would require a showing of deception or collusion. Kaufman v. Commissioner, T.C. Memo. 2014-52, at *70–71, aff'd, 784 F.3d 56 (1st Cir. 2015); see also Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, at *42–43. The trial produced little or no evidence of either. Indeed, respondent asserted in his Pretrial Memorandum that “a tacit agreement” regarding valuation may have existed between VSW and Messrs. Freeman and Novak, but respondent omitted such claims from his posttrial briefs.

Respondent pointed out that “Messrs. Freeman and Novak knew that the VSW Appraisal did not align with” transactions involving the easement property in 2017. However, we have stated that an

appraiser does not become disqualified simply because (1) the appraiser incompetently or carelessly overstated the value [of a property], and/or (2) the donor knew that the appraiser overstated the value, and/or (3) the donor knew facts about the property that caused the value to be overstated. Rather, this disqualification occurs when the donor knows facts that do or should cause him to expect the appraiser to falsely overstate the value. Mill Road 36 Henry, LLC, T.C. Memo. 2023-129, at *42. Such facts will be facts about the appraiser, and the resulting expectation is not just an incorrect overstated value but a “falsely” overstated value. Id.

Seabrook Prop., T.C. Memo. 2025-6, at *33. There was no showing that anyone associated with Beaverdam should have expected VSW to falsely overstate any value.

While we share respondent's concerns regarding the valuation issue in this case, discussed infra, the Code elsewhere imposes consequences for overstated value (e.g., disallowance of the overstated deduction) and for grossly overstated value (e.g., the 40% section 6662(h) penalty). The regulatory text we construe here is focused on something beyond that: a donor's knowledge of an appraiser's deception. We see no such knowledge here. We hold that VSW was a “qualified appraiser” under Treasury Regulation §1.170A-13(c)(5).

III. Amount of the Deduction

Having determined that Beaverdam is entitled to a noncash charitable contribution deduction, we now consider the amount of the deduction allowable.

[*39] A. General Principles

Generally, the amount of a charitable contribution deduction under section 170(a) for a donation of property other than money is the fair market value of the property at the time of the donation. Treas. Reg. §1.170A-1(c)(1); see also TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1369 (11th Cir. 2021). Treasury Regulation §1.170A-1(c)(2) defines “fair market value” to be “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” See also Anselmo v. Commissioner, 757 F.2d 1208, 1213 (11th Cir. 1985), aff'g 80 T.C. 872 (1983). “This definition, a fixture in the Treasury Regulations since 1972, is universally acknowledged by professional appraisers when valuing charitable contributions of property.” Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, at *27.

The fair market value of property on a given date is a question of fact to be resolved on the basis of the entire record. McGuire v. Commissioner, 44 T.C. 801, 806–07 (1965); Kaplan v. Commissioner, 43 T.C. 663, 665 (1965); see also TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369 (“A determination of fair market value is a mixed question of fact and law: the factual premises are subject to a clearly erroneous standard while the legal conclusions are subject to de novo review.” (quoting Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d 982, 994 (11th Cir. 2016), aff'g in part, rev'g and remanding in part T.C. Memo. 2014-79)). We evaluate the opinions of the parties' expert witnesses in the light of each expert's qualifications and the evidence in the record, and we may accept an “opinion in toto or accept aspects . . . that we find reliable.” Oconee Landing, T.C. Memo. 2024-25, at *58; see also Savannah Shoals, T.C. Memo. 2024-35, at *35. We also “may determine fair market value on the basis of our own examination of the evidence in the record.” Savannah Shoals, T.C. Memo. 2024-35, at *35; accord Buckelew Farm, T.C. Memo. 2024-52, at *51.

There is not a substantial record of sales of properties with easements comparable to the easement donated by Beaverdam. The parties therefore agree that the easement should be valued by subtracting the after value of the easement property from the before value of the easement property. See, e.g., TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369 (“If no substantial record of market-place sales is available to use as a meaningful or valid comparison,' the 'before-and-after' valuation method is used.” (quoting Treas. Reg. [*40] §1.170A-14(h)(3)(i))). In determining the before value of the easement property, we must take into account not only the actual use of the easement property before the conveyance of the easement in December 2017 but also its highest and best use. See id. at 1369–70; Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986); Treas. Reg. §1.170A-14(h)(3)(ii). Although this “concept 'is an element in the determination of fair market value, . . . it does not eliminate the requirement that a hypothetical willing buyer would purchase the subject property for the indicated value.'” Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60, at *47 (quoting Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 336 (2011)).

1. Highest and Best Use
2. Legal Principles

“To determine a property's highest and best reasonably probable use, the court focuses on '[t]he highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.'” Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d at 996 (quoting Symington v. Commissioner, 87 T.C. 892, 897 (1986)); accord Olson v. United States, 292 U.S. 246, 255 (1934). We have defined highest and best use “as '[t]he reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value.'” Oconee Landing, T.C. Memo. 2024-25, at *59 (quoting Whitehouse Hotel Ltd. P'ship v. Commissioner (Whitehouse III), 139 T.C. 304, 331 (2012), supplementing 131 T.C. 112 (2008), aff'd in part, vacated in part and remanded, 755 F.3d 236 (5th Cir. 2014)). “The highest and best use inquiry is one of objective probabilities.” Esgar Corp. v. Commissioner, 744 F.3d 648, 657 (10th Cir. 2014), aff'g T.C. Memo. 2012-35, 2012 Tax Ct. Memo LEXIS 32.

“While highest and best use can be any realistic, objective potential use of the property, it is presumed to be the use to which the land is currently being put absent proof to the contrary.” Esgar Corp., 2012 Tax Ct. Memo LEXIS 32, at *21–22. Where “an asserted highest and best use differs from current use, the use must be reasonably probable and have real market value.” Id. at *22 (citing United States v. 69.1 Acres of Land, 942 F.2d 290, 292 (4th Cir. 1991)). If different from the current use, a proposed highest and best use requires both “closeness in time” and “reasonable probability.” Hilborn v. Commissioner, 85 T.C. 677, 689 (1985); see also Savannah Shoals, T.C. Memo. 2024-35, at *37. [*41] “Where, as here, the parties proposed different uses, we consider '[i]f there is too high a chance that the property will not achieve the proposed use in the near future,' in which case 'the use is too risky to qualify.'” TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1369 (quoting Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d at 1000). “The principle can also be articulated in terms of willingness to pay. If a proposed use is too risky for 'a hypothetical willing buyer [to] consider [the use] in deciding how much to pay for the property,' then the use should not be deemed the highest and best available." Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d at 1000 n.14 (quoting Whitehouse Hotel Ltd. P'ship v. Commissioner, 615 F.3d 321, 335 (5th Cir. 2010), vacating 131 T.C. 112 (2008)).

2. Before the Easement

The parties dispute what the highest and best use of the easement property was before the conveyance of the easement in December 2017. Respondent argued that the highest and best use was “limited agricultural, rural residential, and recreation,” in line with Mr. Sellers's opinion. Although respondent agreed that operation of a quarry on the easement property was legally permissible and physically possible, respondent claimed operation of a quarry was not financially feasible. Respondent argued that operation of a quarry was a risky and costly endeavor and that there was no showing that Beaverdam was capable of opening and successfully operating a quarry. To support his position, respondent pointed to (1) Beaverdam's lack of quarrying experience, (2) an alleged “lack of highly skilled labor” in the area, (3) alleged high startup costs and extended startup times, (4) Mr. Giannoni's decision to stop quarrying the easement property, (5) the lack of interest in quarrying the easement property after the quarry was abandoned in 2012, and (6) the failure of the Broad River Mining project to begin operating eight years after investors elected to quarry the property. Respondent also argued that BC Investors' expert witnesses “were not appraisers, [and] were not qualified to perform an appraisal or equipped to conduct a highest and best use analysis.”

BC Investors argued that operating a quarry on the easement property was financially feasible, pointing to (1) the easement property's use as a granite quarry for decades; (2) granite reserves on the property; (3) market demand for granite; (4) Beaverdam's sufficient capitalization; (5) the location of the property in an area hospitable to the extraction and sale of granite; (6) the fact that the property was zoned HI-ME; (7) Mr. Krasinski's agreement that the highest and best use of the [*42] easement property was to operate a quarry; and (8) the fact that the quarry on Granite City Quarries was abandoned for years before Mr. Dye and his father restarted it and operated it profitably.

We agree with BC Investors that operation of a quarry on the easement property was financially feasible in December 2017. Although many of respondent's points are fair, the facts favor BC Investors' position. We are especially persuaded by the long history of quarrying that has taken place on the property, the property's lack of use for other purposes, and Mr. Krasinski's agreement with BC Investors' position. We also disagree with respondent that there is a “lack of highly skilled labor” in the area. We believe that Beaverdam could have attracted persons with sufficient experience to profitably operate a quarry on the easement property if Beaverdam offered adequate incentive (i.e., the joint venture between the Dyes and Hearthstone Holdings/SSO to operate Granite City Quarries). Indeed, that is what eventually occurred at Granite City Quarries.40 Although BC Investors' expert witnesses are not appraisers, we do not need an appraiser's guidance to see (and rule) that the highest and best use of the easement property in December 2017 was to operate a quarry.

We note here that it does not flow from our highest and best use ruling that we should determine the before value of the easement property using the income method. See Boltar, L.L.C., 136 T.C. at 336 (stating that the highest and best use concept “is an element in the determination of fair market value, but it does not eliminate the requirement that a hypothetical willing buyer would purchase the subject property for the indicated value”); see also Ranch Springs, 164 T.C., slip op. at 41–42. The income method is a speculative valuation method most often used to value the projected cashflows of a business. See JL Mins., T.C. Memo. 2024-93, at *63 (stating that the income “method [does] not valu[e] the property at all, but what a speculative business could do with the property”). In this case, the income method is not appropriate to value the easement property considering (1) no [*43] quarry business existed and all parties (including Judge J. Jenkins) were aware that there was never an intent for Beaverdam to operate a quarry; (2) Beaverdam lacked industry knowledge and was unable to operate a quarry business without a hypothetical business partner; (3) the experienced Mr. Giannoni had failed to successfully quarry the property, and it had been abandoned since 2012; (4) sufficient sales data exists to establish a valuation that is based on actual transactions; and (5) other reasons discussed infra.

3. After the Easement

We need not determine the highest and best use of the easement property after the conveyance of the easement because the parties stipulated that the after value of the easement property was $106,750.

1. Valuation of the Easement
2. Legal Principles

As discussed supra, we will determine the fair market value of the easement by subtracting the after value of the easement property from the before value of the easement property. Because the parties stipulated that the after value of the easement property was $106,750, our analysis pertains entirely to the before value of the easement property.

We typically draw on one or more of three common approaches to determine the fair market value of real property: (1) the market, or comparable sales, approach; (2) the income approach; and (3) the cost, or an asset-based, approach. See, e.g., Excelsior Aggregates, T.C. Memo. 2024-60, at *32 (citing Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff'd in part, vacated in part, and remanded on another issue sub nom. JPMorgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006)). Our decision on which approach (or approaches) to use is a question of law. See Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 325–26 (2013); see also Corning Place, T.C. Memo. 2024-72, at *31–32; Savannah Shoals, T.C. Memo. 2024-35, at *35–36. Regarding the various approaches, the Eleventh Circuit has stated:

In terms of proving market value, “[c]ourts have consistently recognized that, in general, comparable sales constitute the best evidence of market value.” [United States v. 320.0 Acres of Land, 605 F.2d 762, 798 (5th Cir. [*44]1979)41]; see also United States ex rel. and for the Use of the Tenn. Valley Auth. v. Easement & Right of Way over a Tract of Land in Madison Cty., Tenn. (“Right of Way in Madison County”), 405 F.2d 305, 308 (6th Cir. 1968) (“[E]vidence of sales of comparable property is persuasive evidence of market value, either as direct proof or in support of a witness's opinion.”). Ordinarily, “[t]he extent of comparability goes to the weight rather than to the admissibility of the evidence.” Right of Way in Madison County, 405 F.2d at 307.

United States v. Easements and Rights-of-Way Over a Total of 15.66 Acres of Land, 779 F. App'x 578, 581–82 (11th Cir. 2019).

The parties have presented evidence regarding SGC's effective sale of the easement property in 2017. Our Court has “repeatedly affirmed that actual arm's-length sales [of a subject property] occurring sufficiently close to the valuation date are the best evidence of value, and typically dispositive, over other valuation methods.” Buckelew Farm, T.C. Memo. 2024-52, at *56 (citing ES NPA Holding, LLC v. Commissioner, T.C. Memo. 2023-55, at *14); see also JL Mins., T.C. Memo. 2024-93, at *55. Both we and the Eleventh Circuit have “f[ou]nd the purchase [of a partnership interest] reflective of the price that the market would pay for the Subject Property, especially when the ownership interest was nearly 100% and the only asset held by the Partnership was the Subject Property.” Buckelew Farm, T.C. Memo. 2024-52, at *56; see also TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1368 (finding that the sale price for a 98.99% interest in a partnership, whose only meaningful asset was property on which an easement was granted shortly thereafter, was representative of the “before” value of the property); Oconee Landing, T.C. Memo. 2024-25, at *71–72.

2. Analysis

Respondent claimed that the before value of the easement property was $215,000, as determined by Mr. Sellers. BC Investors' position is that Beaverdam's claimed charitable contribution deduction should be increased because the before value of the easement property was “at least $23 million” “based on the low-end of Mr. Dye's range.” For [*45] the reasons stated infra, we do not agree with either party. Instead, our value for the easement property is based on our own examination of the record. See, e.g., Seabrook Prop., T.C. Memo. 2025-6, at *44.

1. Summary of Respondent's Arguments

Respondent argued that we should employ the comparable sales method to determine the before value of the easement property and that, even if we agree with BC Investors that the highest and best use of the easement property before conveyance of the easement was to operate a quarry, the before value was still $215,000. Pointing to sales data in Messrs. Sellers's and Krasinski's reports, respondent claimed that “neither the presence nor operational status of a quarry on a comparable [property] made any measurable difference in the sales price.” See Savannah Shoals, T.C. Memo. 2024-35, at *45 (ruling that even if the highest and best use of the property at issue was as an aggregate quarry, “the presence of known aggregate deposits has a minimal effect on the price of the land in the region”). Respondent also pointed to SGC's sale of a 97% interest in Beaverdam for $228,000 in 2017 (when Beaverdam owned only the easement property and $10,000) in support of his position. Finally, respondent argued that there were numerous issues with the DCF analyses prepared by BC Investors' experts, including that they valued “a hypothetical quarry business and not the” easement property itself.

1. Summary of BC Investors' Arguments

BC Investors' argument is based on several related points. First, BC Investors argued (as we have ruled) that the highest and best use of the easement property was to operate a quarry.

Second, BC Investors argued that “the Income Approach must be used to value mineral properties as potential income producing assets.” BC Investors claimed that “[t]he income method is the sole valuation method that can determine the fair market value of what Beaverdam Holdings sacrificed: the valuable granite that could be extracted and sold.”

Third, BC Investors argued that the comparable sales method is inapplicable because no sales of comparable properties exist. BC Investors claimed that respondent's experts failed to establish that any alleged comparable properties sold had (1) a highest and best use as a granite quarry or (2) features similar to those of the easement property. [*46] Quoting Willamette Industries, Inc. v. Commissioner, T.C. Memo. 1987-479, 1987 Tax Ct. Memo LEXIS 475, at *36 (aff'd, 149 F.3d 1057 (9th Cir. 1998)) (a case involving the valuation of timber, not land), BC Investors argued that “[f]or natural resource properties, the proffered comparable 'must be of like species, quality, quantity, etc., to be considered a valid comparable sale.'” BC Investors also devoted 18 pages of its Opening Brief to a section titled “Different Sellers Also Have Different Bargaining Positions and Can Therefore Command Different Prices; Therefore, Only Transactions Involving Sellers with Similar Bargaining Positions to Beaverdam Holdings May be Considered Comparable.” In short, BC Investors argued that (1) respondent failed to establish that sellers of other properties in the region were similarly situated to Beaverdam and (2) SGC's sale of a 97% interest in Beaverdam for $228,000 was not representative of the fair market value of the easement property because Lita Miller/SGC was a distressed seller, did not have all relevant facts, and did not have the ability to use the easement property as a granite quarry.

Fourth, BC Investors argued that the inputs its experts used in their DCF analyses were supported and that their conclusions were accurate.

1. Addressing Each Party's Position

Respondent argued in favor of Mr. Sellers's valuation, pointing to property sales in the Elberton granite area, including many with abandoned and active granite quarries. While this data is helpful, it would have been stronger had respondent's experts more closely examined the quarry/granite attributes on the properties sold. As we stated in Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19 (1979):

The “comparable sales” method functions by: (1) Locating [properties] as physically similar (comparable) as possible to the subject [property] which (2) have been sold on the open market in noncollusive, nonforced sales for cash or cash equivalent, within (3) a reasonable time of the date for which a value of the subject property is desired. Once these [properties] are located, those features of the [property] being valued which are most pertinent to its value are compared to those same features on the comparable [properties]. Since no two sales and no two [properties] can be identical, the value of those features of the comparable [*47] [properties] which are relevant to the value of the subject [property] are adjusted until they are of a condition or quality equivalent to those of the subject [property].

In this case, the granite quarries on the easement property are features pertinent to its value, and the best comparable sales data would have included more information regarding quarry/granite features of other properties.

In addition to comparable sales data, respondent's position is also generally supported by SGC's sale of a 97% interest in Beaverdam to SSO. The MIPA signed August 2, 2017, provided that SGC would contribute the easement property to Beaverdam in exchange for a 99% interest in Beaverdam, while SSO would contribute $10,000 to Beaverdam in exchange for a 1% interest in Beaverdam. The MIPA also provided that SSO would pay $228,000 to SGC on or before December 29, 2017, in exchange for a 97% interest in Beaverdam. Considering the contributions of the easement property and the $10,000 agreed to by SGC and SSO, SGC's agreement to sell 97% of Beaverdam for $228,000 works out to an effective easement property sale price of $225,052.42 We and the Eleventh Circuit have previously found such sales to be relevant in determining the fair market value of a property.43 See, e.g., Buckelew Farm, T.C. Memo. 2024-52, at *56; see also TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1368; Oconee Landing, T.C. Memo. 2024-25, at *71–72.

While we do not completely agree with respondent's position, it is not unreasonable. On the other hand, BC Investors' position is absurd. See Brooks v. Commissioner, 109 F.4th 205, 222 (4th Cir. 2024) (“[R]emarkable was [the taxpayers'] attempt to claim a $5.1 million deduction for a limited easement estate on property that they had purchased in fee simple for $652,000 only a year earlier. Such a claim simply does not pass any reasonable smell test, much less the tax law's [*48] requirements.”), aff'g T.C. Memo. 2022-122. We will proceed to address BC Investors' arguments.

First, we have discussed supra why the valuation conclusions of Messrs. Dye and Peck are not credible. Their expert reports were not convincing.

Second, nothing mandates that the income approach be used to value mineral properties such as the easement property.44 Indeed, Mr. Peck specifically stated in his report that the comparable sales method may be used to value mineral properties at all stages of exploration, development, and production. Even if the income approach might have also been used to help determine the fair market value of the easement property, BC Investors' experts did not use it in such a manner. As discussed further infra, they (1) valued Beaverdam as a business (which BC Investors equated to the fair market value of the easement property) and (2) did not examine sales of similar properties as a check on the results they reached. See USPAP, Advisory Opinion 33, at 162–63 [*49] (2018–19 ed.) (stating that (1) DCF analyses are “vulnerable to misuse or misapplication,” (2) DCF analyses are “often applied in developing value opinions in concert with one or more other approaches,” and (3) “[t]he results of [a] DCF analysis should be tested and checked for errors and reasonableness”). Mr. Peck's failure to check his DCF analysis results against quarry property sales was particularly egregious considering his testimony that quarry properties sold for prices “way lower than” the NPVs of quarry businesses.

Third, BC Investors has pointed to no property sales data that comes close to substantiating that $23 million was a reasonable fair market value for the easement property. The record contains facts regarding sales of many quarry properties (with active or abandoned granite quarries) and quarry businesses in the Elberton granite area. All those sales were for less than $3 million. We will discuss other quarry property/business sales in this OPINION Part III.C.2.c and also infra OPINION Part III.C.2.d.i.

BC Investors singled out (1) the sale of Star Granite Co. for $41.2 million during 2018; and (2) the fact that one witness made a $10 million offer to buy a quarry business named Blue Sky Quarries at an unestablished time. We will briefly discuss the sale and the offer.

As discussed supra, Star Granite Co. was a monument manufacturing business that was affiliated with Sterling Gray, which leased and operated a quarry. The sale of Star Granite Co. did not include Sterling Gray, though there was an agreement for Sterling Gray to continue supplying Star Granite Co. with granite after the sale. Considering the limited facts established, we find this sale does not support BC Investors' position. The sale was of a monument manufacturing business, not a quarry property/business. Although there was an agreement for Sterling Gray to continue supplying Star Granite Co. with granite, the terms of the agreement were not established. BC Investors has not shown that the $41.2 million sale price (or any specific portion of it) is representative of what a quarry business might sell for, much less what the fair market value of a quarry property might be.

Blue Sky Quarries was a division of a company named Imex International. The president of Blue Sky Quarries, Randy Rice, testified that he “had a discussion with my boss where I[ ] offered ten million for [Blue Sky Quarries] at one time.” The offer was not for a quarry property alone but included the quarry operation and equipment. The offer was [*50] considered but later rejected because of various factors, including transaction costs and potential effects on operations during the sale process. In 2017 Blue Sky Quarries quarried around 750,000 cubic feet of granite and generated around $4 million in profits. We fail to see how a $10 million offer for an operational quarry business generating sizable profits supports BC Investors' position that the easement property had a fair market value of over $20 million. If anything, the offer for Blue Sky Quarries suggests that purchasers will pay only a few years' worth of earnings for an operational quarry business, a conclusion supported by other evidence discussed infra.

BC Investors gave numerous reasons for low sale prices of quarry properties, including lack of capitalization, the death or retirement of a quarry operator, and operating difficulties such as surface pressure. BC Investors also discussed one instance in which Mr. Dye and his father purchased a quarry property in 2011 (that they had leased for the prior five years) for $500,000 because, as Mr. Dye vaguely testified, the owning family “got into trouble.” BC Investors claimed that such reasons caused quarry property sellers to be in weak bargaining positions, and that resulting property sales are not comparable sales that indicate the fair market value of the easement property. BC Investors argued that

[i]f Respondent cannot show that the sellers in any “comparable” transactions had similar bargaining positions (opportunity costs) to the hypothetical seller in this case, then it cannot be shown that the prices reached in any of those sales transactions would remotely resemble what Beaverdam . . . would have received in a similar setting (and therefore would not be probative as to the value of the deduction to which Beaverdam . . . is entitled).45

BC Investors further stated that “[t]he number of potential explanations behind . . . sales in the record is indeterminable.”

[*51] We reject BC Investors' argument. We have stated that “[a]n appraiser using the comparable sales method identifies property sales that meet three criteria: (1) the properties themselves are similar to the subject property; (2) the sales are arm's-length transactions;46 and (3) the sales have occurred within a reasonable time of the valuation date.” Chandler, 142 T.C. at 285; see also United States v. 0.161 Acres of Land, 837 F.2d 1036, 1040 (11th Cir. 1988) (“Comparable sales are 'sales from a willing seller to a willing buyer of similar property in the vicinity at or about the same time as the taking.'” (quoting 320.0 Acres of Land, 605 F.2d at 798)). A requirement that a party fully analyze the bargaining positions of sellers and buyers when using the comparable sales method would, in many or most instances, be impossible to meet.47 Such a requirement would introduce a large amount of subjectivity into a comparable sales analysis and destroy exactly what makes that valuation method useful: A group of actual sales of comparable properties is generally indicative of the fair market value of a subject property. BC Investors would prefer to ignore real-world sales data because of “indeterminable” explanations for sale prices (hence BC Investors' reliance on the speculative income method). We decline to ignore such sales data. Furthermore, we found BC Investors' claims in support of its argument to lack credibility in the aggregate; does BC Investors really expect us to believe that every quarry property/business sale in the Elberton granite area was for a price far below fair market value because of an imbalance in bargaining power? We found this claim to be ill supported and incredibly unlikely. Rather, the fact that BC Investors cannot point to a single sale that supports its valuation position shows this argument for what it is: an attempt to disregard reality.

BC Investors also argued that it was not established whether other properties sold had similar granite reserves, granite quality, [*52] location, etc. that would qualify them as comparable. However, the comparable sales method does not rely on raw sales data and property attributes alone. Rather, an

appraiser must adjust the sale prices of the comparables to account for differences between the properties (e.g., parcel size, location, and physical features) and the terms of the sales (e.g., proximity to valuation date and conditions of sale). Wolfsen Land & Cattle Co., 72 T.C. at 19. The reliability of a comparable sales analysis depends on the comparability of the properties selected as comparables and the reasonableness of the adjustments made to the prices to establish comparability. Id. at 19–20.

Savannah Shoals, T.C. Memo. 2024-35, at *36; see also Excelsior Aggregates, T.C. Memo. 2024-60, at *33. BC Investors made no effort to adjust any actual sales that might support its position. Instead, BC Investors chose to rely on the speculative income method. Considering the record, we find that this was less because BC Investors truly believed the income method was more reliable, and more because other sales in the area demonstrate that BC Investors' position is not even close to accurate. The market shows that that fair market value of the easement property was much lower than $23 million. No reasonable person would have paid $23 million for the easement property in December 2017, as other quarry properties (and businesses) routinely sold for far less.48

Fourth, BC Investors argued that a DCF analysis should be used to value the granite that Beaverdam “sacrificed” and that this value was the fair market value of the easement property. However, BC Investors' use of the income method does not represent a reliable indicator of the fair market value of the easement property.

The income method values a property by computing the present value of projected future cashflow from the property. Chapman Glen Ltd., 140 T.C. at 327; see also JL Mins., T.C. Memo. 2024-93, at *60. “The theory behind an income approach is that an investor would be willing to pay no more than the present value of a property's anticipated future net income.” Savannah Shoals, T.C. Memo. 2024-35, at *36 (citing Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283, aff'd, [*53] 493 F. App'x 944 (10th Cir. 2012)). “The income capitalization method is most reliable when used to determine the value of an existing business with a track record of income, expenses, profits, and growth rates. A historical track record provides real-world inputs that supply a plausible basis for projecting future revenue.” Excelsior Aggregates, T.C. Memo. 2024-60, at *43–44 (citing Whitehouse III, 139 T.C. at 325 (noting that the income approach “has been judged an unsatisfactory valuation method for property that does not have a track record of earnings”)); see also JL Mins., T.C. Memo. 2024-93, at *61. We have further stated that “the DCF approach [is] even more tenuous” where the entities that would conduct a putative mining business “were shell companies— passthrough [entities] owned by investors seeking tax deductions” that “had no employees, management, or mining experience.” Excelsior Aggregates, T.C. Memo. 2024-60, at *46.

While the easement property was quarried by experienced companies in the past, relevant income and expenses for those past quarrying operations were not established. Beaverdam, of course, had no track record of quarrying results from any property. There is thus no available track record of results regarding the easement property or Beaverdam that would support the DCF analyses that BC Investors relies upon. If anything, the limited historical information available suggests those DCF analyses are overly optimistic, as the easement property quarry was abandoned in 2012 and not restarted. Furthermore, Beaverdam and BC Investors were organized to generate tax deductions for investors; no relevant entities had either the ability or the intention to operate a quarry.49

In a recent conservation easement case, we held that use of DCF analyses was erroneous because such use equated the value of land with the NPV of a hypothetical business conducted on the land. Ranch Springs, 164 T.C., slip op. at 56–57 (noting that taxpayer's experts “both equated the value of the land with the going concern value of a limestone mining business conducted on the land. That equation defies economic logic and common sense.”). We have also stated that the DCF “method [does] not valu[e] the property at all, but what a speculative business could do with the property. But a discounted cashflow method geared to what a business could earn is of limited utility in determining what a [*54] property is worth.” JL Mins., T.C. Memo. 2024-93, at *63. These statements apply with respect to BC Investors' reliance on DCF analyses.

The fact that Mr. Giannoni (who had extensive experience in the granite industry) failed to profitably quarry the easement property shows how important quarry operations are. Simply owning a quarry property in no way guarantees profits. Yet, BC Investors imagined a successful business, procured experts to value it, and then assigned the entirety of that valuation to the easement property. The result reached does not reflect the fair market value of the easement property. Mr. Peck recognized as much, testifying that

typically, the sales price of mineral properties don't really reflect the value of the rock that's on there just because most of the people that are buying these properties are doing it for investments. And so it wouldn't make sense to buy the property for $20 million when you can make $20 million over 20 years. That doesn't make sense from an investment perspective. And so usually the sales prices are way lower than what the value is just because they're investments.

(Emphasis added.) Similarly, we have stated that “no rational businessperson would pay the [NPV] of a business simply to buy [a] property, as is implicit in [the taxpayer's] position equating the two values.” JL Mins., T.C. Memo. 2024-93, at *62; see also Ranch Springs, 164 T.C., slip op. at 60 (explaining that no rational mine operator would “pay the entire NPV of [a] prospective mining business merely to acquire the land”); Savannah Shoals, T.C. Memo. 2024-35, at *45 (stating that an operator would not pay a mineral production NPV “for the land as there would be no means for a profit”).

BC Investors often made statements such as “the value of Beaverdam Holdings' sacrifice exceeds the raw-land value” and claimed that the primary issue was “[w]hether the fair market value of the conservation easement . . . should primarily be based on . . . the right to quarry . . . granite over the course of decades . . . [or] on the value of parcels of raw land.”50 However, the Eleventh Circuit has stated that

[*55] under I.R.C. §170, the correct measure of an easement's value is the “fair market value of the perpetual conservation restriction at the time of the contribution.” 26 C.F.R. §1.170A-14(h)(3)(i). The calculation requires reviewing comparable sales of similar easements or, if no substantial record of such sales exists, gauging the difference between the fair market value of the property pre- and post-encumbrance. Id.

Pine Mt. Pres. LLLP v. Commissioner, 978 F.3d 1200, 1211 (11th Cir. 2020), aff'g in part, rev'g in part, vacating and remanding 151 T.C. 247 (2018). In this case there is not a substantial record of sales of comparable easements, meaning that the difference between the fair market value of the easement property before and after conveyance of the easement is determinative. To value the easement property, the fair market value of the fee simple interest (which includes the entire bundle of property rights) is used. See Treas. Reg. §1.170A-1(c)(2) (defining “fair market value” to be “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts”); see also Ga. Kaolin Co. v. United States, 214 F.2d 284, 285–86 (5th Cir. 1954) (where “the best and most valuable purpose for which the land[ ] could be used . . . was the mining of kaolin,” determining “the market value of the land . . . taken as a whole and with due consideration of all the components that tend to make its market value,” thus accounting for “the existence of valuable mineral deposits”); [*56] JL Mins., T.C. Memo. 2024-93, at *62–63 (discussing property rights and the market).

Summing up the prior four points, because the valuation BC Investors argues for is completely untethered from reality, it produced no sales data that remotely supports its DCF analyses. BC Investors asks us to trust speculative, unconvincing business valuation projections over the accumulated knowledge of the market in the “Granite Capital of the World.” It is not difficult to see that BC Investors' position should be rejected.

Fifth, BC Investors argued that Beaverdam “could readily have proposed employment to one of the area's many experienced industry experts, including Mr. Dye, Mr. Dye's family, or any of” numerous trial witnesses. However, in the case of Granite City Quarries (which represents the most similar property and set of facts) a joint venture between the Dyes and Hearthstone Holdings/SSO was established in which the Dyes received 50% of the Granite City Quarries profits. Testimony generally showed that joint ventures/partnerships are common in the area/industry. In addition, the easement property has been leased (and abandoned) in the recent past. Even if the DCF analyses that BC Investors relies upon did not overstate projected quarrying profits, it is highly speculative to project that Beaverdam, which lacked quarrying experience, would capture all such profits. See Ga. Kaolin Co., 214 F.2d at 286 (affirming trial court's rejection of a valuation that was “largely based on . . . speculati[on]”). We believe it is more likely that Beaverdam would have needed to partner with, or lease the easement property to, an experienced quarry operator for a quarry operation to succeed. This would have reduced Beaverdam's profits and, accordingly, the value that BC Investors assigned to Beaverdam's donation of the easement.

1. Our View

BC Investors erroneously equated the (overstated) value of a hypothetical business to the fair market value of the easement property. Respondent advocated use of the comparable sales method, but his experts could have included more information regarding quarry/granite features in their comparable sales data. Considering the evidence, we value the easement property on the basis of our own examination of the record. See, e.g., Seabrook Prop., T.C. Memo. 2025-6, at *44. We rely on the comparable sales method and SGC's effective sale of the easement [*57] property for $225,052 during 2017, as support for our conclusion that the before value of the easement property was $300,000.

1. Comparable Sales Method Elements

Certain comparable sales data submitted does not contain much information regarding quarry/granite features on properties sold. However, at least one property discussed in this Opinion, Granite City Quarries, is broadly comparable to the easement property in terms of quarry/granite features. BC Investors noted that “Granite City Quarries is almost the same size—with regard to perimeter and depth—as the” larger of the two easement property quarry pits. Mr. Dye's testimony confirmed the similarities. For example, he was asked: “How did your estimates, with regard to [the easement property], what you thought you could do at [the easement property], how did those compare with what you thought you could do at Granite City?” He responded “[v]ery similar.” Mr. Dye also stated in his expert report that “[t]he Granite City quarry shares many similarities with the type of quarry that Beaverdam contemplated opening.” In addition, Mr. Giannoni/North Ridge was the last quarry operator before Hearthstone's acquisition of Granite City Quarries, and the quarry was abandoned for around five years before the Dyes (in a joint venture with Hearthstone/SSO) restarted it. Such facts mirror what occurred with respect to the easement property before its effective sale in 2017.

The previous owner of Granite City Quarries effectively sold the property for around $300,000 during 2018 as part of transactions involving Hearthstone and SSO.51 The previous owner still had a small ownership interest in Hearthstone Holdings but was later bought out for an amount that was not established. Considering the similarities between Granite City Quarries and the easement property and the sale dates only a year apart, the Granite City Quarries sale price around $300,000 is strong evidence regarding the before value of the easement property.

[*58] Other sales data supports a fair market value for the easement property around $300,000. Mr. Krasinski presented the following table in his expert report showing 12 sales of properties with (allegedly) active granite quarries:

Sale Transactions of Actively Working Dimension Stone Quarries

The quarries on the North Peter Point Road property and the property at 74 Allgood Road were actually abandoned at the time of sale and later restarted. Mr. Krasinski stated that “[s]everal of these sales included equipment and personal property that has not been segregated in the analysis,” meaning sale prices for some properties alone likely would have been lower.

Mr. Krasinski also noted and described six sales of properties in the Elberton granite area with abandoned quarries. The chart below (from Mr. Krasinski's report) summarizes sales data regarding the properties:

Non-Active Dimension Stone Mine Site Sales

Five of the six properties were zoned HI-ME, all had one or more abandoned quarry pits, and three were adjacent to properties with active quarries.

In his report, Mr. Sellers described the sales of seven properties that he found to be comparable to the easement property. Of those seven sales, one property had no quarry and six had active or abandoned quarries. Of the six properties with quarries, three were included in Mr. Krasinski's list of 12 sales of properties with (allegedly) active granite quarries.52 Testimony about two of the three properties on both lists was also presented, and we will briefly describe all three properties:

The 114-acre property on Allgood Road is Briarpatch Quarry. Briarpatch Quarry had been abandoned for about ten years when Larry Cook purchased it for $268,887 in October 2016. Mr. Cook did not restart Briarpatch Quarry until 2018, at which time it produced good quality granite. In 2023 the operation on Briarpatch Quarry generated revenue of around $650,000.

The 73-acre property on North Peter Point Road is the Giannoni Tract. Mr. Sellers noted that “[t]he property had an existing quarry at the time of sale that had been abandoned since about 2000 and was full of water. It was reopened after being purchased by the buyer,” Mr. Giannoni, for $125,000.

The 200-acre property on Veribest Road is Echols Mill Quarry. This is the property mentioned supra that Mr. Dye and his father purchased in 2011 (after leasing and operating it for the prior five [*60]years) for $500,000. The operation was profitable soon after operations began in 2006. The quarry was only slightly smaller than the abandoned quarry on the easement property.

Various witnesses testified about other quarry property/business sales. We will briefly summarize these sales/properties:

Mr. Dye became the Director of Operations for Savannah Valley Quarries around 2018. Savannah Valley Quarries was created to consolidate ownership of several active, independently owned quarries in the Elberton granite area. Mr. Dye helped to negotiate Savannah Valley Quarries' purchase of four quarries in 2018 or 2019, all for $1.5–2.5 million. These four quarries were Echols Mill Quarry, Harper's Quarry, Harmony Blue Quarry, and Tristar Quarry. The four properties were each between 80 and 140 acres, though the quarries themselves were each smaller than the abandoned quarry on the easement property. Some of the four purchases included equipment. Savannah Valley Quarries later formed a partnership with three other quarries; Savannah Valley Quarries owned 70% of the partnership and the previous owner(s) of the three quarries owned a total of 30%. In 2021 the seven quarries combined produced about 1.2 million cubic feet of granite and had total revenue around $9 million.

Harper's Quarry was a quarry business purchased by Savannah Valley Quarries for $1.5 million in 2018 or 2019. Before that purchase Mark Harper owned a small percentage of the business, and his parents owned the rest. Mr. Harper's parents were in their 80s, and his father had had a heart attack which prompted the sale of Harper's Quarry (Mr. Harper did not want to take over the business, even though he worked for Harper's Quarry at the time). In 2017 Harper's Quarry produced about 120,000 cubic feet of granite and had a yearly profit of about $700,000. The sale to Savannah Valley Quarries included equipment that Mr. Harper estimated would cost about $900,000 to buy at the time of trial.53 Mr. Harper worked for Savannah Valley Quarries after the sale.

In 2020 partners Michael Baston, Bill Hood, and Brad Ruff purchased Willis Dimensional Stone, a combined operational quarry and fabricating plant business, from a man who was [*61] preparing to retire. The purchase price of about $1.8 million included about 110 acres of land, all equipment, and the fabricating plant. The partners put up a total of $200,000 in cash and secured the remainder of the purchase price through a bank loan and financing from the seller. The partners recouped the purchase price in less than four years.

Arnold Jaudon purchased a seven-acre quarry for about $700,000 in the 1990s. As Mr. Jaudon testified, he “ma[d]e an extremely good living” quarrying the property for an unclear period. Very few facts about the property were established. Considering the lack of facts and the time of purchase, we assign little weight to this sale.

The numerous sales described supra demonstrate that the before value of the easement property was close to the effective sale prices of Granite City Quarries in 2018 and the easement property itself in 2017. See further discussion infra OPINION Part III.C.2.d.iii.

1. SGC's Effective Sale of the Easement Property in 2017

As discussed supra, SGC effectively sold the easement property for $225,052 when it sold 97% of Beaverdam to SSO for $228,000 in 2017. Both we and the Eleventh Circuit have “f[ou]nd the purchase [of a partnership interest] reflective of the price that the market would pay for the Subject Property, especially when the ownership interest was nearly 100% and the only asset held by the Partnership was the Subject Property.” Buckelew Farm, T.C. Memo. 2024-52, at *56; see also TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th at 1368; Oconee Landing, T.C. Memo. 2024-25, at *71–72. However, the specific facts of this case indicate there are reasons to doubt that the effective price of $225,052 was perfectly reflective of the fair market value of the easement property in 2017. Lita Miller, as the owner and CEO of SGC, was elderly, with little to no experience in the granite industry, and likely had no interest in, nor the capability to, restart(ing) the quarry on the easement property. She was chiefly concerned with paying off the Regions Bank loan, which she accomplished. Lita Miller did not have the easement property appraised before signing the MIPA, nor did she solicit interest from quarry operators. However, she did review Oglethorpe County tax records to get an idea of the value the county placed on the property and engaged Judge J. Jenkins to assist her.

[*62] Considering the facts, we find SGC's effective sale of the easement property in 2017 to be representative of only a ballpark before value of the easement property. While there is a good chance that SGC could have received a higher price had it put the easement property on the market and/or solicited interest from quarry operators, Lita Miller was content not to do so because the effective sale allowed her to achieve her goal of satisfying the Regions Bank loan.54 However, BC Investors' position that SGC effectively sold the easement property for around 1% of its fair market value is incorrect. Lita Miller and Judge J. Jenkins are not fools. They see what BC Investors is unable or unwilling to: No reasonable person would have paid anything close to $20 million for the easement property in 2017. Not without reason, Lita Miller accepted the effective sale price of $225,052, which is comparatively close to the sale price of Granite City Quarries in 2018 and reasonable compared to sales of other properties in the area with abandoned granite quarries.

iii. Valuation Conclusion

Considering all the evidence regarding valuation, we assign the most weight to (1) the sale of Granite City Quarries for about $300,000 during 2018; (2) SGC's effective sale of the easement property for $225,052 in 2017 and other facts regarding the sale; (3) other sales data (including whether the purchase was of land or a business); (4) testimony and evidence showing that there were reserves of quality granite on the easement property; (5) the fact that the easement property had been quarried for decades before 2012; and (6) the fact that the quarry on the easement property had been abandoned for five years before 2017.

The sales data shows that quarry properties tend to sell for $600,000 or less. For properties with known acreage, the per-acre sale price ranges from $1,266 to $10,763. Unsurprisingly, properties with active quarries tend to sell for more than properties with abandoned quarries, in both absolute and per-acre terms.

While the acreage of Granite City Quarries was not established, assigning a similar $300,000 value to the easement property would result in a per-acre value around $3,550. This per-acre value is above [*63] the average per-acre price for sold properties with abandoned quarries, and only slightly below the average per-acre price for sold properties with active quarries. Furthermore, a $300,000 total value is above the average absolute price for sold properties with abandoned quarries, and only slightly below the average absolute price for sold properties with active quarries. Considering the generally favorable facts established regarding the quarry and granite features of the easement property, this is a reasonable result. This result also comports with SGC's effective sale of the easement property during 2017, which we have found representative of “a ballpark before value of the easement property.” Accordingly, we rule that the before value of the easement property was $300,000.

The parties stipulated that the after value of the easement property was $106,750. Subtracting $106,750 from $300,000, we rule that the fair market value of the easement was $193,250. Accordingly, we hold that the amount of Beaverdam's allowable 2017 noncash charitable contribution deduction is $193,250.

1. Penalty

The Code imposes a penalty for “the portion of any underpayment [of tax] which is attributable to . . . [a]ny substantial valuation misstatement.” §6662(a), (b)(3). A misstatement is “substantial” if the value of the property claimed on a return is 150% or more of the correct amount. §6662(e)(1)(A). The penalty is increased to 40% in the case of a gross valuation misstatement. §6662(h). A misstatement is “gross” if the value of property claimed on the return exceeds 200% of the correct amount. §6662(h)(2)(A)(i).

Beaverdam claimed a $21,972,000 noncash charitable contribution deduction for its donation of the easement. We have determined that the correct value of the easement was only $193,250. Double that amount is $386,500, which is less than $21,972,000. The valuation misstatement was therefore “gross.”

Generally, an accuracy-related penalty is not imposed if the taxpayer demonstrates “reasonable cause” and shows that it “acted in good faith with respect to [the underpayment].” §6664(c)(1). This defense may be available where a taxpayer makes a “substantial” valuation overstatement with respect to charitable contribution property. See §6664(c)(3). However, this defense is not available where the overstatement is “gross.” See §6664(c)(3); see also Chandler, [*64] 142 T.C. at 293 (“The [Pension Protection Act of 2006, Pub. L. No. 109-280, 109 Stat. 780] . . . eliminated the reasonable cause exception for gross valuation misstatements of charitable contribution property.”). Accordingly, the 40% penalty applies.

1. Conclusion

The amount of Beaverdam's allowable 2017 noncash charitable contribution deduction is $193,250 and a 40% gross valuation misstatement penalty applies. We have considered all arguments made by the parties, and to the extent not mentioned or addressed, they are irrelevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

FOOTNOTES

1. Unless otherwise indicated, references to an easement are to the conservation easement at issue in this case, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. We round monetary amounts to the nearest dollar and acreage to the nearest acre.

2. Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§401–407, 96 Stat. 324, 648–71, governed the tax treatment and audit procedures for many partnerships, including Beaverdam. Beaverdam's principal place of business was in Georgia.

3. We will use the terms “inactive” and “abandoned” interchangeably in this Opinion.

4. Some witnesses in this case referred to other grades/subgrades of granite. For example, one of petitioner's expert witnesses, Richard Capps, defined “[g]rade” as the “[q]uality of dimension stone for resale dependent on use. Die grade is the highest and followed by base, coping, quarry run, foundation, and curb.” Dr. Capps listed the grades in an incorrect order and added a “foundation” grade. In Dr. Capps's financial analysis, he used only three grades of granite: (1) “monument-grade,” (2) “counter-top grade,” and (3) “waste-rock aggregate.” The grades Dr. Capps used in his financial analysis were not clearly explained.

The parties and witnesses often did not do a good job clarifying what grades of granite were being discussed at/in various times/documents. We have attempted to avoid discussion of granite grades wherever possible because of the lack of clarity.

5. Judge J. Jenkins did not attend this meeting but was informed of it shortly after it occurred.

6. For each agreement discussed in this Opinion that was executed in August 2017 or October 2017, Lita Miller signed as chief executive officer (CEO) of SGC and Mr. Freeman signed as a manager of SSO.

7. “SRA” stands for Senior Residential Appraiser, a designation conferred by the Appraisal Institute.

8. The MAI designation is conferred upon members of the Appraisal Institute.

9. Drs. Buss and Capps worked through their companies, aquaFUSION, Inc., and Capps Geoscience, LLC, respectively. For simplicity, we will refer only to Drs. Buss and Capps.

10. Though there may have been reductions in section 164 state and local tax deductions and other effects, this 78% return was otherwise tax free because it represented a reduction in tax rather than a taxable gain.

11. The “Letter Agreement” incorrectly stated that Beaverdam would make the election whether to donate the easement and that Mr. Freeman was Beaverdam's manager.

12. Overburden is generally worthless soil above a resource deposit.

13. While VSW relied on information in Dr. Capps's report, it did not adopt all inputs used in his DCF analyses. As a result, VSW reached results slightly different from Dr. Capps's.

14. References to “Mr. Dye” throughout this Opinion are to David Dye. David Dye's father will be referred to as “Mr. Dye's father” or similar.

15. Throughout this Opinion we will refer to both the property and the quarry business (Granite City Quarries, LLC) as Granite City Quarries.

16. Only one section 6662 accuracy-related penalty may be imposed with respect to any given portion of an underpayment. Treas. Reg. §1.6662-2(c). However, this Court has jurisdiction to determine partnership items and the applicability of any penalty that relates to an adjustment to a partnership item. §§6221, 6226; United States v. Woods, 571 U.S. 31, 39–42 (2013). While there is thus no limitation on our authority to determine the applicability of more than one accuracy-related penalty at the partnership level, Oconee Landing Prop., LLC v. Commissioner, T.C. Memo. 2024-73, at *3–4, supplementing T.C. Memo. 2024-25, we need not do so in this case because we find a 40% gross valuation misstatement penalty under section 6662(h) applies to the entirety of the adjustment sustained in this Opinion. There is no reasonable cause exception for gross valuation misstatements for charitable contribution property. See §6664(c); Chandler v. Commissioner, 142 T.C. 279, 293 (2014). Accordingly, we have not considered alternative 20% accuracy-related penalties in cases where a 40% penalty under section 6662(h) applies to the entirety of the sustained adjustment. See, e.g., Seabrook Prop., LLC v. Commissioner, T.C. Memo. 2025-6, at *77 n.60; Buckelew Farm, LLC v. Commissioner, T.C. Memo. 2024-52, at *61 n.27. We will not address the alternative 20% accuracy-related penalties further.

17. The sale price was $41.2 million.

18. Respondent disputed this, arguing on brief that Mr. Krasinski merely “assumed that even if the highest and best use of the Subject Property was a granite quarry, as suggested by the VSW Appraisal, the value reached in the VSW Appraisal is not credible.” However, Mr. Krasinski was asked on cross-examination: “What is the highest and best use? Did you agree with the highest and best use of these property rights as defined by the [VSW appraisal]?” Mr. Krasinski responded “Yes.” Mr. Krasinski was then asked two other times on cross-examination whether he “agreed with” the highest and best use of the easement property being operation as a quarry. Both times Mr. Krasinski responded “Yes.” Respondent now attempts to shade those responses in his favor, but his counsel failed to ask Mr. Krasinski about them on redirect examination. We found Mr. Krasinski to be a credible witness, and we accept his responses at face value; he agreed that the highest and best use of the easement property was to operate a quarry.

19. As will be discussed infra, the quarries on two of these properties were actually inactive at the time of the sales.

20. The other requirements set forth in section 7491(a)(2) are not in dispute and will not be discussed.

21. Even if we granted BC Investors' Motion, it would not determine the outcome of this case. As with most issues decided by our Court, we do not perceive an evidentiary tie with respect to any issue and are able to decide this case on the preponderance of the evidence. See, e.g., Bordelon v. Commissioner, T.C. Memo. 2020-26, at *11. However, we will fully explain our Order regarding the burden of proof for the benefit of similarly situated taxpayers.

22. As noted supra, BC Investors stated in its Opening Brief that it is “no longer rel[ying] on Dr. Capps' opinion . . . of fair market value as expert testimony.”

23. As stated by Mr. Peck, M&P “costs are the expenses that contribute most to final production costs. [For Beaverdam], these costs will include labor, hauling operation, fuel, water, maintenance, power, site waste storage/removal, equipment leasing, and other contingencies.”

24. Meanwhile, Dr. Capps chose to hold both Beaverdam's price per unit and production cost per unit constant.

25. Mr. Peck determined that it would take two years of startup work before the quarry began operating, and that there would be a steep drop in M&P costs per cubic foot in year 3. Year 4 is the most reasonable year to begin our critique of Mr. Peck's forecasted M&P costs.

26. This small increase in M&P costs was in nominal dollars; Mr. Peck estimated 2% inflation per year for operating costs and therefore forecast that M&P costs would decrease by 25% in real terms.

27. Mr. Peck testified that the number of employees would increase as production did. However, this assertion was not stated in his report, which did not provide a full model showing how he forecast operating costs. Considering the unbelievable results he reached, it was incumbent upon Mr. Peck to include a full model supporting his results. It seems impossible that the number of employees (along with consumables and other operating necessities) could have increased as production did, considering Mr. Peck's forecast that M&P costs would decrease by 25% in real terms over 16 years while the volume of granite produced would nearly triple.

28. Although we are critical of Mr. Dye's report, we admire his quarrying work. His work ethic, like that of many other witnesses who worked in the granite industry, is truly impressive.

29. These larger monument companies were Star Granite Co., Eagle Granite Co., Central Granite Co., and Hillcrest Granite Co. As discussed supra, Mr. Dye asserted that these companies had “beg[u]n to buy and operate their own granite quarries” and “gain[ed] control of the overall local production of granite, including Georgia Grey granite.”

30. Beaverdam already owned the easement property on the effective date of Mr. Dye's DCF analyses. Thus, Beaverdam's remaining startup costs would be lower than those for a person or entity that had yet to purchase a property on which a quarry could be operated. However, SGC effectively sold the easement property for less than $230,000 in 2017, a fact which Mr. Dye failed to discuss. This is a drop in the bucket compared to potential profits forecast by Mr. Dye. Mr. Dye failed to address how much it would cost another person/entity to purchase a quarry property that could produce a similar amount of granite and/or whether a bank would finance a portion of that purchase. Mr. Dye also failed to analyze whether a potential quarry operator could lease a quarry property, which would likely require a lower amount of initial capital.

31. Granite is often extracted in a manner that creates “ledges” for groups of workers to stand on while they extract additional blocks of granite.

32. In his tables Mr. Dye listed 185,000 instead of 185,895 for the second year and 308,930 instead of 309,825 for the fourth year. Mr. Dye's analysis contained numerous small errors, which did not give us confidence in his work generally.

33. This assumption is at odds with forecasts by Mr. Peck and Dr. Capps, as well as common sense. It took SSO/Hearthstone about three years after they obtained ownership of Granite City Quarries before they entered a partnership with the Dyes to operate the quarry. It then took the Dyes about two months to restart the quarry. Mr. Dye was aware of these facts but ignored them in his report.

34. Oddly, Mr. Dye then forecast that the price of granite would remain flat from year 13 to year 25, which was not explained. Our impression is that Mr. Dye realized his projected net profits were getting too large and he needed a way to reel them in. Mr. Dye's forecasted net profit margin drops from 64% in year 13 to 49% in year 25.

35. Mr. Dye also forecast that an office manager would be employed for $35,000 per year, though he included that expense in administrative costs, discussed infra.

36. We have considered whether the separate labor expenses for 2023 might pertain to construction of “a curbing/processing facility” near Granite City Quarries that Mr. Dye discussed in his report. However, this facility was operated as a separate business (Granite City Fabrication, LLC) from Granite City Quarries. Considering the profit and loss statements for Granite City Quarries for 2022 and 2023, we believe the most likely explanation for the separate payroll expense lines in 2023 is that an accounting change occurred in 2023.

37. Mr. Dye stated “that Beaverdam will incur higher costs per cubic foot in initial years of operation.” However, his discussion of individual costs was clearly based on the initial years of operation.

38. Mr. Dye made no effort to value the easement property. Mr. Peck briefly touched on property valuation, stating that the comparable sales “approach is not recommended in the case of Beaverdam . . . as most aggregate quarrying operations are generally offered for private (closed-door) sales and not enough data is available to generate comparable scenarios.” There is no indication that Mr. Peck verified the asserted lack of data; Mr. Peck did not address any other quarry property/business sales, nor did he address the effective sale of the easement property itself in 2017. Mr. Peck knew there was a disconnect between the fair market value of the easement property and a business valuation; he testified on redirect examination that “it wouldn't make sense to buy the [easement] property for $20 million when you can make $20 million over 20 years. That doesn't make sense from an investment perspective. And so usually the sales prices [for properties] are way lower than what the value is just because they're investments.”

39. On April 22, 2025, BC Investors filed a supplement to its Opening Brief alleging that Ranch Springs was incorrectly decided and is otherwise not applicable to Beaverdam's case. We disagree. We have set forth the facts in the present case in detail and they differ in some respects from Ranch Springs, but Ranch Springs is authority for many points in this case as we have noted herein.

40. Although the Broad River Mining project was not yet operating at the time of trial, the parties established very few facts regarding it. It is unclear how similar the property is to the easement property or what is causing delays in commencing operations. Mr. Novak testified that the COVID-19 pandemic “shut everything down for a couple of years” and that the need to have a rail line extended was also causing delays. We did not find this unsupported testimony to be a credible explanation for such a lengthy delay, though respondent failed to establish facts that might have favored his position. On the basis of facts established in this case, Granite City Quarries is a much better comparable.

41. Decisions from the U.S. Court of Appeals for the Fifth Circuit issued before October 1, 1981, are binding precedent in the Eleventh Circuit. See Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981).

42. This amount is based on the following calculations: (1) 97% of Beaverdam's $10,000 in cash was worth $9,700; (2) subtracting $9,700 from the $228,000 total equals $218,300, which is the effective sale price of 97% of the easement property; and (3) dividing $218,300 by 97% equals $225,052, which is the effective sale price of 100% of the easement property.

43. SSO sold the same 97% interest in Beaverdam to BC Investors for $950,000 during 2017. Though this sale was between related entities, it also generally supports a fair market value for the easement property far below the before value of the easement property claimed by BC Investors. However, we view the SGC effective sale price of $225,052 as a better indicator of the before value of the easement property and will not discuss the sale by SSO to BC Investors further.

44. Citing Terrene Investments, Ltd. v. Commissioner (Terrene), T.C. Memo. 2007-218, 2007 Tax Ct. Memo LEXIS 220, BC Investors argued that “[w]hen a court is tasked with valuing income producing property for which there is inadequate comparable sales data, as here, the general approach instead is to apply the income (DCF) method.” In Terrene, we first looked to comparable sales, finding there were none and thus “turn[ing] to the DCF method.” Id., 2007 Tax Ct. Memo LEXIS 220, at *15. Even then, we used a royalty-based income capitalization method to value the subject sand and gravel property at $1.3 million, which was only 4.3 times the value that the Commissioner argued for. Id. at *10, *36. However, in this case (1) BC Investors' DCF analyses greatly overstated profits, assumed that the inexperienced Beaverdam would capture 100% of projected profits, and were otherwise not credible and (2) sales data (including an effective sale of the easement property in 2017) supports a much lower value for the easement property. In this case there is no good reason or basis to determine the before value of the easement property using the income method.

Another case BC Investors cited, Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394 (1989), aff'd, 926 F.2d 1169 (Fed. Cir. 1991), is also distinguishable. In Whitney Benefits, 18 Cl. Ct. at 396, one plaintiff owned “coal underlying 1,327 surface acres” of land in Wyoming and another plaintiff had secured the right to mine the coal, investing significant money in preparations to do so. The coal was effectively taken by defendant, and plaintiffs filed suit seeking the value of the coal taken. Id. at 396–98. The Court of Federal Claims first looked to the comparable sales method, but found the only sale identified by defendant was not of a comparable property because (1) it was sold out of necessity or compulsion and (2) the property sold was dissimilar to the subject coal. Id. at 408. Accordingly, the court used a DCF analysis to determine the value of the coal taken, finding that plaintiffs' DCF analysis was “reliable.” Id. However, BC Investors' DCF analyses were not reliable, and sales data support a much lower value for the easement property.

45. BC Investors often worked Beaverdam's (allegedly superior) bargaining position into arguments related to this point. For example, BC Investors claimed that “in lieu of selling the [easement] Property, a realistic alternative use to Beaverdam . . . would have been to operate it as a granite quarry” and “earn[ ], in net present value terms, at least $23 million.” However, the “willing buyer/willing seller” test seeks to determine the price on which a hypothetical buyer and a hypothetical seller would agree. Treas. Reg. §1.170A-1(c)(2); see also Cave Buttes, L.L.C. v. Commissioner, 147 T.C. 338, 357 (2016). The mindset of the specific property owner on the valuation date is irrelevant to this inquiry. Ranch Springs, 164 T.C., slip op. at 54.

46. An arm's-length transaction is “[a] transaction between two unrelated and unaffiliated parties,” or alternatively, “[a] transaction between two parties, however closely related they may be, conducted as if the parties were strangers, so that no conflict of interest arises.” Transaction, Black's Law Dictionary (12th ed. 2024); see also Estate of Bongard v. Commissioner, 124 T.C. 95, 122–23 (2005). In an arm's-length transaction, the parties are “presumed to have roughly equal bargaining power.” Arm's-length, Black's Law Dictionary (12th ed. 2024) (emphasis added).

47. Of course, the opposing party can establish facts regarding buyers and sellers demonstrating that individual sales in a comparable sales analysis should be given less or no weight. Indeed, as discussed infra, BC Investors has shown that SGC's effective sale of the easement property during 2017 is only somewhat representative of the before value of the easement property.

48. We will discuss other quarry property/business transactions infra OPINION Part III.C.2.d.iii.

49. Although SGC owned a portion of Beaverdam and had a history of quarrying the easement property, SGC was owned by Lita Miller during 2017. Lita Miller had little to no experience in the granite business, and there is no indication that SGC's past quarrying experience was relevant.

50. Arguments BC Investors made regarding “raw land” and fee simple values evoke the taxpayer's position in JL Minerals, T.C. Memo. 2024-93. In that case, the taxpayer argued that a DCF analysis showed the value of the mineral property at issue was $17 million. We discussed the property market and stated that no one would pay $17 million for the property when a similar mineral property could be purchased for under $200,000. Id. at *62. We further stated:

This example points to the oddity produced by using the income approach here. JL Minerals is claiming a deduction for donating one stick in its bundle of property rights. But according to JL Minerals's income approach, this one stick has a much greater value than what the evidence shows a market participant would pay for the fee simple property, which includes all the sticks in the bundle.

Something is plainly off. We believe the reason for the counterintuitive result is that the discounted cashflow method is not valuing the property at all, but what a speculative business could do with the property.

Id. at *62–63.

51. Although this effective sale took place the year after the effective sale of the easement property, the Eleventh Circuit and our Court both allow subsequent property sales to be considered when ruling on valuation. 0.161 Acres of Land, 837 F.2d at 1044 (“The general rule is that evidence of 'similar sales in the vicinity made at or about the same time' is to be the basis for the valuation and evidence of all such sales should generally be admissible . . . including subsequent sales.” (quoting 320.0 Acres of Land, 605 F.2d at 799)); Champions Retreat Golf Founders, LLC v. Commissioner, T.C. Memo. 2022-106, at *38–40, supplementing T.C. Memo. 2018-146.

52. The other three properties with quarries identified by Mr. Sellers were included on Mr. Krasinski's list of properties with abandoned quarries, and we will not describe them further.

53. It was not clear whether Mr. Harper was estimating the price for the used equipment sold or new equipment.

54. Certain other factors, such as control and marketability discounts, might result in a lower price paid for an interest in an LLC (here, SGC's interest in Beaverdam) than would be paid for a direct interest in the assets held by the LLC (here, the easement property). Neither party presented arguments regarding control and marketability discounts, however, and so they have forfeited those arguments.