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no indication in his report that the 62-lot sketch was based on a
rezoning of the buildable area. Thus, the sketch in the
addendum, by itself, was not sufficient to provide the correct
circumstances to Petroff. More importantly, the report and
addendum did not inform respondent of these matters or intention.
Petroff’s appraisal is filled with a sufficient number of
instances showing that he relied on the incorrect or false
assumption that the entire 29 plus acres could be developed in
the absence of the easement and that the conservation easement
had been placed on the unbuildable 15 plus acres of floodplain.
Petitioner, who was familiar with and heavily involved in the
development of the Grist Mill property, knew that the floodplain
could not be developed and that any conservation easement would
have to be placed on the buildable land. A casual review of
Petroff’s report would have alerted petitioner to the fact that
the valuation was based on erroneous assumptions. Petitioners
cannot therefore rely on this report as reasonable cause for
taking the position they did on their income tax return. See
sec. 1.6664-4(c)(2), Income Tax Regs. In addition, petitioners
cannot rely on the expert reports prepared in anticipation of
trial to show reasonable cause because these reports are not
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