126 T.C. 299 (T.C. 2006), 5165-04, Turner v. Commissioner of Internal Revenue

Docket Nº:5165-04
Citation:126 T.C. 299, 126 T.C. No. 16
Opinion Judge:GERBER, Chief Judge:
Attorney:J. Carlton Howard, Jr., for petitioners. John M. Altman and Linda R. Averbeck, for respondent.
Judge Panel:Gerber, Joel
Case Date:May 16, 2006
Court:United States Tax Court

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126 T.C. 299 (T.C. 2006)

126 T.C. No. 16




No. 5165-04

United States Tax Court

May 16, 2006

As Amended, May 18, 2006.


P, a real estate investor, purchased 29.3 acres of unimproved land in a historical overlay district, 15.04 acres of which were located within a designated floodplain. Property development was subject to county regulations that were more stringent for property within a historical overlay district. Among the regulations were zoning and rezoning requirements, as well as limitations on development of designated floodplain areas. Thirty lots were permissible under current zoning. County approval would be required for denser zoning usage. P, claiming that he was entitled to develop up to 62 residences on smaller lots, executed a deed to Fairfax County purporting to limit development of the property to 30 residences. On their 1999 Federal income tax return, Ps claimed a contribution deduction for a qualified conservation easement under sec. 170(h)(1), I.R.C.

1. Held: P did not make a contribution of a qualified conservation easement under sec. 170(h)(1), I.R.C., because the attempted grant did not satisfy the conservation purposes required under sec. 170(h)(4)(A), I.R.C. Specifically, the deed did not preserve open space or a historically important land area or certified historical structure.

2. Held, further, Ps are liable for a 20-percent penalty for negligence under sec. 6662, I.R.C.

J. Carlton Howard, Jr., for petitioners.

John M. Altman and Linda R. Averbeck, for respondent.

Gerber, Joel


GERBER, Chief Judge:

Respondent determined a $ 178,168 income tax deficiency and a $ 56,537 accuracy-related penalty

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under section 6662 [1] for petitioners' 1999 taxable year. After concessions, [2] the issues remaining for our consideration are: (1) Whether petitioners made a contribution of a qualified conservation easement under section 170(h)(1); (2) if qualified, we must decide the value of the easement; and (3) in the absence of a qualified contribution or, alternatively if the easement's value was substantially overstated, whether petitioners are liable for the accuracy-related penalty under section 6662.


General Background

At the time their petition was filed, petitioners resided in Alexandria, Virginia. Petitioner [4] is an attorney whose practice is concentrated on real estate transactions in the vicinity of Alexandria, Virginia. Part of petitioner's business activity was the conduct of real estate closings through a title insurance company he owned. Petitioner was also an investor in real property. At all relevant times, he was a 60-percent member and general manager of FAC Co., L.C. (FAC), a limited liability company formed for the purpose of acquiring, rezoning, and developing real property. During 1997 and 1998, petitioner, individually or through FAC, embarked on a plan to acquire several contiguous parcels of land located in Woodlawn Heights, Fairfax County, Virginia. The unimproved realty was situated in a historical district in the general area of Mount Vernon, the home of President George Washington, and adjacent to President Washington's Grist Mill (Grist Mill).

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Acquisition of the Land for Development

Through several transactions, a 29.3-acre parcel was conglomerated by petitioner and/or FAC. One transaction involved the Future Farmers of America (FFA), which owned five lots within this historical district. One of these lots approximated 5.9 acres and was the situs of the FFA's office building. Although the 5.9 acres was zoned for residential (classified as R-2), FFA had a special use exception for its commercial office building. But for the special use, the property was zoned residential. If FFA sold the land and building, the special use would not automatically pass to the new owner. The remaining four lots acquired by petitioner were adjacent to the Grist Mill.

During his negotiations for the purchase of the FFA property, petitioner's written offer included his belief that the highest and best use for the property was for either " commercial or a combined commercial and residential (town homes)" . Petitioner expressed the further belief that the highest and best use would require rezoning for increased density, but that " the realities of local politics will not allow the highest and best use." The developer of the acquired property would face several obstacles to development, including compliance with Fairfax County's ordinances and regulations concerning such land development.

On December 12, 1997, and March 27, 1998, FAC acquired the lots from FFA for $ 2 million. On August 7 and 10, 1998, petitioner, through another entity, purchased, from sellers other than FFA, three additional lots in the Woodlawn Heights historical overlay district for $ 550,000 and then contributed them to FAC. On August 15, 1999, FAC sold the 5.9-acre parcel, including the FFA building, for $ 1.6 million. Prior to that sale, Fairfax County Supervisor Gerald Hyland (Hyland) assisted in the rezoning of the 5.9-acre site to a C-2 classification that would permit continued the use of the commercial building on that property. As of the date of the trial in this case, petitioner continued to own one of the acquired unimproved parcels (lot 10), and the remaining parcels [5] that were conglomerated into a 29.3acre parcel for development that became known as the Grist Mill Woods

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subdivision (Grist Mill property). Slightly more than half of the property (15.04 acres) is situated in a designated 100year floodplain and not available for residential development.

The 29.3-acre Grist Mill property was once owned by President Washington and is located within the Woodlawn Heights historical overlay district. Historical overlay districts are subjected to special requirements by the County. President Washington, beginning in 1771, operated the Grist Mill for the purpose of grinding flour and cornmeal for use at his Mount Vernon residence and also for sale along the east coast of the United States, Portugal, and the West Indies. Also located in close proximity to the site was the Woodlawn Plantation that was built in 1805 on land also owned by President Washington. The Grist Mill, Woodlawn Plantation, and the Future Farmers of America (FFA) realty were all located relatively near to Mount Vernon, President Washington's 500-acre residential estate. At the time of trial, Mount Vernon was owned and maintained by the Mount Vernon Ladies' Association (MVLA), a private nonprofit organization. Slightly more than half of the Grist Mill property (15.04 acres) is situated within a designated 100-year floodplain. At all relevant times, the Grist Mill property was zoned R-2 (for residential use).

Development of the Project

The first prerequisite to the proposed development was the need to conform to the general guidelines of Fairfax County. The governance of Fairfax County is vested in its Board of Supervisors (the Board), which, inter alia, establishes county government policy, passes resolutions and ordinances, and approves land use plans. The Board consists of a chairman and nine additional members called supervisors elected by the citizens of nine Fairfax County districts. At all relevant times, Hyland was the supervisor who had been elected by the citizens of the Mount Vernon District. As of the time of trial, Hyland had served as a supervisor for 18 years.

The Grist Mill property was located in Fairfax County which had a comprehensive zoning plan defining the permitted uses for county property. Two pertinent Fairfax County residential zoning plans are R-2 zoning and planned development housing (PDH) zoning. Under an R-2 zoning an

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owner would " by-right" be permitted to build two single- family dwelling units per acre. The term " by-right" denotes the property uses available to an owner without requesting a new zoning designation. Greater residential per acre density is permitted under a PDH zoning classification if certain requirements are met, such as the preservation of open space. An owner of property zoned R-2 who wishes to build three units per acre would have to ensure that the comprehensive plan permitted it and then apply to the Board for a rezoning to a PDH or R-3 classification.

During the conglomeration and development of the 29.3-acre parcel, petitioner and others made the representation that 60 dwellings or residences could have been built. In reality, only approximately 30 could be built under the existing county zoning for the property. It was petitioner's plan to grant a conservation easement to the County that would limit the number of building lots to 30. The claimed conservation easement and the underlying supporting appraisal were based on the assumption that 60 dwellings could be built and the potential for 30 was being given up by the easement. Ultimately, the 29.3 acres were sold without application for or change in the zoning. At the time of the claimed conservation easement, there was only the possibility that the number of buildings or dwellings could have been increased from 30 to a larger number.

The rezoning process can be time consuming, costly, and involves compliance with numerous regulations. For example, even with Hyland's assistance, it took 5 months to obtain a C-2 zoning classification for the FFA property and building. In some instances there may be a need to employ experts such as engineers and surveyors. The rezoning process is initiated by the filing of an application and may involve a public hearing before the planning commission and/or the Board. The Board...

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