Fairfax County On-site Stormwater Detention Requirements. The county granted the request on December 31, 1998, so long as petitioner provided channel protection from storm sewer outfalls to Dogue Creek. This was accomplished by a floodplain easement. The required protection could not have been satisfied by means of a conservation easement. Notwithstanding, petitioner indicated in his development plans that he intended to use a conservation easement to satisfy those BMP requirements. During June 1998, petitioner began discussions for the sale of the Grist Mill property to NVHomes. Petitioner provided NVHomes with a sketch depicting a 62-lot and a 30-lot proposal for development. During July 1998, NVHomes sent petitioner a proposed purchase agreement for the Grist Mill property, envisioning the purchase of approximately 60 fully developed single-family lots. The parties' negotiations collapsed because NVHomes wanted fully developed lots and petitioner's business partner wished to sell the property more quickly than it would take to make the desired improvements. During October 1998, Centex Homes offered to purchase 41.5 acres of petitioner's property for $2,700,000 conditional on a PDH-2 rezoning that yielded approximately 60 singlefamily detached lots, but not fewer than 50. Also during October 1998, Batal Builders, Inc., offered to purchase approximately 32.5 acres of petitioner's of petitioner's property for $2,700,000 subject to rezoning that would yield a minimum of 48 lots. In November 1998, the terms of Batal Builders, Inc.'s offer were modified to approximately 32 acres for $2,450,000 not subject to rezoning. Both purchasers were aware that the subject property might be subjected to a conservation easement. On February 9, 1999, petitioner entered into an agreement with Carl Bernstein, manager of Mount Vernon Development, LLC (MVD), for the sale of the Grist Mill property. The agreement provided for the sale of 29 lots (comprising 32 acres) for $2,800,000. The sale was subject to the possibility that petitioner would donate lot 30 to MVLA. The sale was also subject to a conservation easement or donation in fee simple of the outlots for recreational use, but the parties recognized that the donation of the outlots "shall not reasonably impair the value of the 30 lots contained within the subdivision of Grist Mill Woods." Despite these express plans for 30 lots, in a letter dated the next day, February 10, 1999, Hyland requested petitioner to consider limiting development of the Grist Mill property to 30 single-family homes. The letter implied that petitioner could have built 62 lots "by-right". The letter contained the statement that limiting the development to 30 residential units would preserve the historical nature of the Grist Mill and might provide tax benefits. The parties to this proceeding acknowledge that the reference to 62 building lots "byright" was incorrect and would have required rezoning. Although Hyland signed this letter, petitioner and his advisers had prepared it and requested Hyland to sign it. Hyland relied on petitioner for the truth or accuracy of the statements in the letter. At the time Hyland signed the letter, he was unaware that petitioner had plans to develop and sell 30 lots. Petitioner intended to use the letter to substantiate a tax deduction he planned to take for a conservation easement. Ultimately, the Grist Mill property was subdivided into 29 residential lots. Some of the 29 homes built on the Grist Mill property could be seen from the Woodlawn Plantation, especially during the winter and spring months when there is less foliage. The Grist Mill Woods subdivision plan was approved by the Fairfax County Plan Control Section with an R-2 zoning classification on March 23, 1999. In a letter dated October 14, 1999, MVLA agreed to the plan and asked the ARB to support petitioner's proposed development of a 30-residence subdivision. MVLA also stated its understanding that petitioner would donate lot 30 to MVLA for parking at the Grist Mill. MVLA's letter was based on the language recommended and supplied by petitioner. On October 14, 1999, the ARB reviewed petitioner's application for the Grist Mill Woods subdivision. The ARB understood that the development plan provided a sufficient buffer between the subdivision and the Grist Mill and that lot 30 would be donated to the Grist Mill. Although the ARB was concerned about the potential for tree loss, ultimately the plans were approved. The Conservation Easement and Income Tax Deduction On December 6, 1999, the same day FAC closed on its sale of the Grist Mill property to MVD, FAC executed a conservation easement deed, which was recorded on December 7, 1999. The deed contained a description of the historical sites adjacent to the Grist Mill property and indicated that MVLA and the Board wished FAC to limit construction of the property to 30 single-family residential lots. It contained the further statement that even though FAC could have built 62 lots based on a PDH subdivision, it voluntarily agreed to limit developing the Grist Mill property to 30 lots to better serve the historic and scenic nature of the Grist Mill. Despite the assertion that 62 lots could have been built, the Grist Mill property was zoned R-2, and no plan for PDH zoning had been approved or was pending before Fairfax County. Neither the Fairfax County Attorney's Office nor MVLA reviewed the deed, and the purported grantee of the conservation easement did not sign or acknowledge the deed. Petitioners claimed a $342,781 charitable contribution deduction on their 1999 Federal income tax return. The deduction, $1,248,000, was based on a 40-percent 7 share of the conservation easement to Fairfax County which had been valued at $3,120,000. The $3,120,000 value was based on the December 30, 1999, appraisal report prepared by Frank Petroff (Petroff) and was referenced on petitioners' Form 8283, Noncash Charitable Contributions, attached to their return. The appraisal was based, in part, on the February 10, 1999, letter signed by Hyland. In addition, the appraisal was based on the erroneous assumption that the entire Grist Mill property could have been fully developed, including the area consisting of the floodplain. On the "Donee Acknowledgment" part of Form 8283 "Fairfax County Board of Supervisors" was shown as the intended charitable donee, but the acknowledgment signature line was not executed and left blank. 6 The deduction was reduced by $905,219 due to an adjusted gross income limitation. 7 We note that petitioners claimed a deduction based upon a 40-percent share of FAC, although documentary evidence reflected that petitioner was a 60-percent member of FAC. Due to the outcome in this case, the difference between the ownership percentage and claimed contribution deduction percentage need not be reconciled or considered further. OPINION Petitioners claimed a deduction for a contribution of a qualified conservation easement under section 170(h)(1). Respondent determined that petitioners were not entitled to the contribution deduction. If we decide that there was a qualified conservation easement, then we must decide its value in order to arrive at the amount of the deduction to which petitioners are entitled. Respondent contends that petitioners have failed to show that their donation satisfies the statutory definition and requirements for a conservation easement deduction. In that regard, respondent contends that there were defects in the conservation easement deed and petitioners' Form 8283 (attached to their return) and no acceptance of the deed or an easement by Fairfax County (the donee named by petitioners). Alternatively, if the Court decides that there was a valid donation, respondent contends that the Grist Mill property was developed according to its highest and best use, and there was, therefore, nothing remaining to contribute as a conservation easement. Petitioners contend that they have either complied or substantially complied with the reporting requirements for a conservation easement deduction. They also contend that the Grist Mill property had the potential for additional development and that such potential was forgone to preserve the historic nature of the surrounding properties. If we decide that there was no contribution of a qualified conservation easement, we must then decide whether petitioners are subject to an accuracy-related penalty under section 6662. The grounds underlying respondent's determination for the penalty are, alternatively, that petitioners did not make a qualified contribution or, if a contribution was made, its value was substantially lower than the amount reported on their return. A. The Burden of Proof Generally, the burden of proving or showing error in the Commissioner's determination is upon the taxpayer. See Rule 142(a). The burden of proof may shift to the Commissioner in certain situations. See sec. 7491(a). Petitioners concede that they bear the burden of showing their entitlement to a conservation easement deduction. Conversely, respondent concedes that he bears the burden of production with respect to the section 6662 penalty. See sec. 7491(c). B. The Conservation Easement 1. Background Section 170(a)(1) allows a deduction for a charitable contribution made during the taxable year. Generally, section 170(f)(3) does not permit a deduction for a charitable gift of property consisting of less than the donor's entire interest in that property. An exception applies in the case of a "qualified conservation contribution." See sec. 170(f)(3)(B)(iii). A contribution of real property may constitute a qualified conservation contribution if: (1) The real property is a "qualified real property interest"; (2) the donee is a "qualified organization"; and (3) the contribution is "exclusively for conservation purposes." Sec. 170(h)(1); see also sec. 1.170A-14(a), Income Tax Regs. To be a qualified conservation contribution, all three requirements must be met. A "qualified real property interest" must consist of the donor's entire interest in real property (other than a qualified mineral interest) or consist of a remainder interest, or of a restriction granted in perpetuity concerning way(s) the real property may be used. Sec. 170(h)(2). A restriction granted in perpetuity on the use of the property must be based upon legally enforceable restrictions (such as by recording the deed) that will prevent uses of the retained interest in the property that are inconsistent with the conservation purpose of the contribution. See sec. 1.170A-14(g)(1), Income Tax Regs. A qualified organization is defined in section 170(h)(3) and a contribution is made "exclusively for conservation purposes" if it meets the tests of section 170(h)(4) and (5). This requirement has two parts. First, a contribution is for a conservation purpose if it: (1) Preserves land for the general public's outdoor recreation or education; (2) protects a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem (the natural habitat requirement); (3) preserves open space either for the scenic enjoyment of the general public or pursuant to a Federal, State, or local governmental conservation policy and yields a significant public benefit (the open space requirement); or (4) preserves a historically |