Frank Agostino, Julie Pruitt Barry, Eduardo S. Chung, Eleanor E. Farwell, Michael Mattaliano, and Michael E. Mooney, for petitioners. Carina J. Campobasso, for respondent. HALPERN, Judge. Respondent determined deficiencies in, and penalties with respect to, petitioners' Federal income tax, as follows:
[1]
Penalties Year Deficiency Sec. 6662(a) Sec. 6662(h) 2003 $39,081 $1,097 $13,439 2004 36,340 - 14,536 The deficiencies respondent determined result from his disallowance of petitioners' deductions for contributions of a facade easement burdening their residence (the facade easement) and of cash to the National Architectural Trust (NAT). The penalties are accuracy-related penalties relating to those deductions. By amendment to answer, respondent asserted an increased deficiency for 2004 of $37,248 and an increased section 6662 penalty for that year of $14,726. Earlier in this case, respondent moved for summary judgment, which we granted in part, with respect to the facade easement contribution, and denied in part, with respect to the cash contribution and the penalties. See Kaufman v. Commissioner, 134 T.C. 182 (2010). Petitioners then moved for us to reconsider our grant of partial summary judgment. Several organizations receiving facade or other preservation easements and otherwise concerned with historic preservation asked permission to file briefs in support of petitioners' motion.[2] We took petitioners' motion under advisement, instructing the parties that we would proceed with a trial on the remaining issues in the case (the cash contribution and the penalties) and would address the motion following the trial. We instructed the parties to incorporate their arguments in support of, or in opposition to, the motion in their posttrial briefs. We denied the organizations' requests to file briefs but instructed them to work with petitioners to develop a coordinated position, which petitioners would set forth in their posttrial briefs. In their opening brief, petitioners assure us that it was prepared in accordance with our instruction. We therefore assume that petitioners' briefs incorporate petitioners and the organizations' joint position.[3] We shall first set forth our findings of fact, which are necessary to dispose of the cash contribution issue and the penalties (and which should provide a useful background for our discussion of our grant of partial summary judgment). We shall then set forth our reasons for sustaining our grant of partial summary judgment and denying petitioners' motion to reconsider it; finally, we shall dispose of the remaining issues. FINDINGS OF FACT Introduction Some facts are stipulated and are so found. The stipulation of facts and the second stipulation of facts, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed, petitioners resided in Massachusetts. Background Petitioners are husband and wife. Gordon Kaufman[4] is the Morris A. Adelman Professor of Management Emeritus of the Sloan School of Management at the Massachusetts Institute of Technology. Lorna Kaufman has a Ph.D. in developmental psychology from Boston College and is president of her own company. The Property In 1999, Lorna Kaufman purchased real property (the property) in Boston, Massachusetts. The property consists of a lot and a single-family residence (a rowhouse), which is petitioners' home. The property is in the South End historic preservation district. The October 13, 2003, Letter Lorna Kaufman received a letter dated October 13, 2003, from Mory Bahar (Mr. Bahar), an NAT area manager, thanking her for her inquiry about NAT's Federal historic preservation tax incentive program. Among other things, Mr. Bahar stated that the program allowed the owner of a nationally registered historic building to deduct between 10 and 15 percent of the value of the building on her Federal income tax return. He further stated that the program would require very little effort on her part because, as part of NAT's service, NAT "will be handling all the red tape and paperwork." The Application In late October or early November 2003, Lorna Kaufman submitted an application, the "Preservation Restriction Agreement Application" (the application), to NAT, on its own form, identifying the property as property to be considered for a preservation donation. On the application, she estimated the fair market value of the property as $1.8 million and identified Washington Mutual Bank FA (the bank) as holding a mortgage on the property. In pertinent part, the application states:
Deposit
A good faith deposit of $1,000 is required at the time of application. If for any reason the necessary approvals cannot be obtained, the deposit will be promptly refunded. The deposit should be made to * * * [NAT].
* * * * * * *
Donor Endowment
When the Trust accepts a donation it pledges to monitor and administer the donation in perpetuity. Since the Trust receives no government funding and has no other source of income, it requires that donors create an endowment that covers current operating costs and funds the Trust's long term Stewardship Endowment which is reserved for future monitoring and administration purposes.
The cash endowment contribution is set at 10% of the value of the donation tax deduction * * * . * * * If the donation can not [sic] be processed in the timeframe required to qualify for a 2003 deduction, a 10% reduction in the cash contribution will be provided to the donor once the process is completed in 2004.
At the time she submitted the application, Lorna Kaufman made the required $1,000 deposit.
The December 16, 2003 Letter Lorna Kaufman received a letter dated December 16, 2003, from James Kearns (Mr. Kearns), president of NAT. In pertinent part, the letter states:
We are pleased to inform you that we have completed our discussions with the Massachusetts Historical Commission and have reached agreement on a Preservation Restriction Agreement. * * *
In order to accept your donation in 2003, we ask that you agree to the following:
1. Deliver to the Trust by December 26, 2003:
a. An executed and notarized Preservation Restriction Agreement,
b. A signed copy of this letter, and
c. A check for a cash contribution to the Trust of $15,840, which is based on 8% of the estimated easement valuation of $198,000 * * * . Since the final cash contribution is 10% of the easement value, it is expected that an additional contribution amount will be due and the donor promises to send a check for that amount within ten days of receipt of the final appraisal report. In the event the appraised value of the easement deduction generates a contribution amount less than the above calculated estimate, the Trust will refund the excess within ten days of receipt of the final appraisal report.
2. Schedule an appraisal within fifteen days of receiving this letter and ensure its completion by February 28, 2004.
3. The Trust must review the new Preservation Restriction Agreement with your lending institution(s) in order to ensure subordination according to its conditions.
4. In the event that the subordination of your mortgage(s) or historic certification can not
[sic] be achieved, and/or your appraisal cannot be completed by February 28, 2004, you will join with the Trust in voiding the easement. In this circumstance, the Trust will reimburse you for any disbursements made in an effort to achieve an enforceable donation, including the cost of appraisal and your cash contribution to the Trust.
Once all the necessary steps have been completed, the Trust will provide you with an acknowledgment of your 2003 charitable contributions and the appropriate IRS form for you to submit with your tax return. The Trust will also arrange for the deed to be recorded * * *.
On December 29, 2003, Lorna Kaufman signed a copy of the letter under the notation "Concurrence" and returned it to NAT, along with a check for $15,840 dated December 27, 2003, drawn to NAT. The Agreement In December 2003, Lorna Kaufman entered into a preservation restriction agreement (the agreement) with NAT pursuant to which she granted to NAT the facade easement restricting the use of the property. The agreement recites its purpose:
It is the purpose of this Preservation Restriction Agreement to assure that the architectural, historic, cultural and open space features of the property will be retained and maintained forever substantially in their current condition for conservation and preservation purposes in the public interest, and to prevent any use or change of the Property that will significantly impair or interfere with the Property's conservation and preservation values or that would be detrimental to the preservation of the Property.
That purpose is achieved by Lorna Kaufman's grant and conveyance to NAT by way of the agreement of "an easement in gross, in perpetuity, in, on, and to the Property, Building and
the Facade, being a Preservation Agreement on the Property," with certain delineated rights.
[5] In pertinent part, section IV.C. of the agreement also provides:
In the event this Agreement is ever extinguished, whether through condemnation, judicial decree or otherwise, Grantor agrees on behalf of itself, its heirs, successors and assigns, that Grantee, or its successors and assigns, will be entitled to receive upon the subsequent sale, exchange or involuntary conversion of the Property, a portion of the proceeds from such sale, exchange or conversion equal to the same proportion that the value of the initial easement donation bore to the entire value of the property at the time of donation * * *, unless controlling state law provides that the Grantor is entitled to the full proceeds in such situations, without regard to the Agreement. Grantee agrees to use any proceeds so realized in a manner consistent with the preservation purposes of the original contribution.
The Lender Agreement At the time the agreement was entered into, the bank held a mortgage on the property. A representative of the bank executed a document styled "LENDER AGREEMENT" (lender agreement). The lender agreement was attached to and recorded with the agreement. The lender agreement references the property and, in pertinent part, provides:
[The bank] hereby joins in * * * [the agreement] for the * * * purpose of subordinating its rights in the
Property to the right of * * * [NAT] to enforce * * * [the agreement] in perpetuity under the following conditions and stipulations:
(a) The Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty, hazard or accident occurring to or about the Property and all proceeds of condemnation, and shall be entitled to same in preference to * * * [NAT] until the Mortgage is paid off and discharged, notwithstanding that the Mortgage is subordinate in priority to the Agreement[.]
The lender agreement was attached to the agreement, and the agreement was recorded in the Suffolk County, Massachusetts, registry of deeds on October 1, 2004. NAT's Assistance NAT assisted Lorna Kaufman in obtaining the bank's agreement to subordinate its mortgage to the facade easement by submitting the required documents to the bank and following up to ensure the bank's agreement. NAT provided Gordon Kaufman with a list of whom it considered to be qualified appraisers. It also negotiated the terms of the agreement with the Massachusetts Historical Commission and facilitated approval of the agreement by it, the City of Boston, and the National Park Service. Mr. Bahar answered basic inquiries by Gordon Kaufman about the deductibility of Lorna Kaufman's contribution. The Appraisal Timothy J. Hanlon prepared an appraisal of the property (the appraisal) as of January 20, 2004. He reported the value of the
property to be $1,840,000 before the grant of the facade easement. He concluded: "The property is considered to have a reduction in fair market value of 12% of the property's value prior to the easement donation, which equates to a loss of $220,800 (rounded)." The Discount Lorna Kaufman received a letter dated April 5, 2004, from Victoria C. McCormick (Ms. McCormick), NAT vice president of operations and finance, addressing, in part, her "cash donation". Addressing an expected delay in petitioners' being able to file their 2003 joint income tax return on account of the then as-yet-uncompleted contribution of the facade easement, Ms. McCormick stated:
[NAT] will discount your cash donation by 10% as calculated below.
Appraised easement value $220,800 _________ Cash contribution at 10% of appraised easement value 22,080 Discount of 10% 2,208 _________ Discounted cash contribution 19,872 Washington Mutual fees 300 _________ Total amount due 20,172 Amounts paid to date 16,840 _________ Net amount due $3,332
No amount is due at this time. Your final payment of $3,332 will be due only after * * * [National Park Service] certification has been achieved.
Park Service Certification On August 9, 2004, the U.S. Department of the Interior, National Park Service, classified the property as a "certified historic structure" for charitable contribution for conservation purposes. The Final Payment and Form 8283 Lorna Kaufman paid NAT $3,332 by check received by it on August 17, 2004. On that date, it sent her an IRS Form 8283, Noncash Charitable Contributions, documenting her contribution of the facade easement. Ms. McCormick testified that donors to NAT were informed "up-front" that it "would give them the [Form] 8283 after the cash contribution was received." Petitioners' Tax Returns Petitioners filed joint Federal income tax returns for 2003 and 2004. On their 2003 return, petitioners showed a charitable contribution of $220,800 for the contribution of the facade easement. Because of the limitations on charitable contribution deductions in section 170(b)(1)(C), petitioners claimed a charitable contribution deduction with respect to the facade easement of only $103,377. Petitioners also claimed a charitable contribution deduction of $16,870 for a cash contribution to NAT, notwithstanding that, during 2003, they paid NAT only $16,840. On their 2004 return, petitioners claimed a carryover charitable contribution deduction of $117,423 related to the 13 facade easement contribution. They also claimed a charitable contribution deduction of $3,332 on account of the $3,032 final installment of their "cash contribution" to NAT and $300 on account of the bank fee paid by NAT. OPINION I. Reconsideration of Grant of Partial Summary Judgment A. Introduction We granted partial summary judgment to respondent, sustaining his disallowance of any deduction for 2003 or 2004 for the contribution of the facade easement to NAT. We concluded that the contribution failed as a matter of law to comply with the enforceability-in-perpetuity requirements found in section 1.170A-14(g), Income Tax Regs. Kaufman v. Commissioner, 134 T.C. at 187. For that reason, we found that the facade easement contribution was not protected in perpetuity and so was not a qualified conservation contribution under section 170(h)(1). Id. Rule 161 affords us discretion to reconsider an opinion upon a showing of substantial error. Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998). Petitioners argue that we should reconsider, and reverse, our grant of partial summary judgment because the agreement complies with the regulations. In particular, petitioners argue:
[The agreement] sets out the exact terms of the agreement between the donor and donee that are required by Treas. Reg. § 1.170A-14(g)(6), and the Lender Agreement includes the provision required by Treas.
Reg. § 1.170A-14(g)(2). Separately, the Court should consider the application of Treas. Reg. § 1.170A-14(g)(3), which provides that a conservation interest will be regarded as "enforceable in perpetuity"—even if defeasible upon the happening of a future event—"if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible."
Respondent answers that the agreement and the lender agreement must be read together, that it is insufficient for the agreements merely to parrot the regulations, and that, when read together, the agreements constitute a conveyance that fails to conform to the extinguishment provision found in section 1.170A-14(g)(6), Income Tax Regs. Respondent argues that the mortgage subordination requirements found in section 1.170A-14(g)(2), Income Tax Regs., are irrelevant, having been relied on neither by him in support of the motion for summary judgment nor by the Court in Kaufman v. Commissioner, 134
T.C. 182 (2010). Finally, respondent argues that the requirements of section 1.170A-14(g)(3), Income Tax Regs., addressing remote future events, should not be read into the requirements of section 1.170A-14(g)(6), Income Tax Regs. Before setting forth the pertinent details of section 170 and the regulations and discussing the parties' arguments, we shall provide some background information with respect to the difficulties in making a conservation restriction perpetual.
(eminent domain), the foreclosure of pre-existing liens, foreclosure for unpaid taxes, Marketable Title Acts, merger or abandonment, the doctrine of changed conditions, and release by the holder. Id. The Powell treatise states with respect to release: "Some statutes confirm the common-law principle that an easement or covenant may be released by the holder." Id. It gives as an example Mass. Gen. Laws., ch. 184, sec. 32 (after a public hearing). Id. n.6. It states with respect to condemnation: "Thus if a conservation easement restricts the development of real property that is needed for a school, hospital, or publicly aided housing, eminent domain may be exercised." Id. sec. 34A.07[2]. It notes that the method of valuation of the interest represented by the conservation restriction and whether and to whom compensation may be awarded are controversial issues, but it states that the better view, followed by most States, "is that the condemnation of an easement is the taking of an interest in property that requires compensation to the holder." Id. It states that a conservation easement may be terminated without the consent of the holder:
through the foreclosure of a pre-existing mortgage or mechanic's lien on property subsequently encumbered by the easement. Such a foreclosure, when consummated by a sale, will result in the termination of the easement.
The purchaser takes title free of the restrictions imposed subsequent to the attachment of the lien. * * *
Id. sec. 34A.07[3]. It recognizes that the doctrine of changed circumstances may apply to conservation restrictions: "An action for an injunction against the violation of a restrictive covenant will be defeated, if the owner * * * can show that conditions in the neighborhood have changed so substantially that the original purposes to be served by the restriction can no longer be achieved." Id. sec. 34A.07[6]; see also 2 Restatement, Property 3d (Servitudes), sec. 7.11 (2000). The Powell treatise states that a good case to be made for the inapplicability of the doctrine to conservation restrictions on policy grounds and references another commentator who suggests that, on the obsolescence of a conservation restriction, because of its public nature "the servient owner should either pay the easement holder the value of the easement or a court should attempt to reform the terms of the easement to preserve its purpose based on the doctrine of cy pres." 4-34A Powell, supra sec. 34A.07[6] (citing Note, "Conservation Easements and the Doctrine of Changed Conditions", 40 Hastings L.J. 1187, 1221 (1989)); see also 2 Restatement, supra sec. 7.11. C. Section 170 and the Pertinent Regulations Section 170 allows a deduction for any charitable contribution, subject to certain limitations, that the taxpayer makes during the taxable year. In general, section 170(f)(3)
real property—including, [sic] an easement or other interest in real property that under state law has attributes similar to an easement (e.g., a restrictive covenant or equitable servitude)." Id. Section 1.170A-14(g), Income Tax Regs., elaborates on the enforceability-in-perpetuity requirement. Paragraph (g)(1) requires generally that legally enforceable restrictions prevent use of the retained interest by the donor (and his successors in interest) inconsistent with the conservation purposes of the donation. Paragraph (g)(2) addresses mortgages and, in pertinent part, provides that "no deduction will be permitted * * * for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the * * * [donee] organization to enforce the conservation purposes of the gift in perpetuity." Paragraph (g)(3) is entitled "Remote future event" and addresses events that may defeat the property interest that has passed to the donee organization. It provides that a deduction will not be disallowed merely because on the date of the gift there is the possibility that the interest will be defeated so long as on that date the possibility of such defeat is so remote as to be negligible. Id.
Paragraph (g)(6) is entitled "Extinguishment" and recognizes that, after the donee organization's receipt of an interest in property, an unexpected change in the conditions surrounding the property can make impossible or impractical the continued use of the property for conservation purposes. Subdivision (i) of paragraph (g)(6) provides that those purposes will nonetheless be treated as protected in perpetuity if the restrictions limiting use of the property for conservation purposes "are extinguished by judicial proceeding and all of the donee's proceeds * * * from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution." Subdivision (ii) of paragraph (g)(6) is entitled "Proceeds" and, in pertinent part, provides:
for a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift * * * bears to the value of the property as a whole at that time. * * * For purposes of this paragraph (g)(6)(ii), that proportionate value of the donee's property rights must remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction * * *.
entered into the agreement. The lender agreement provides that the bank has "prior claim" to all insurance proceeds as a result of any casualty, hazard, or accident occurring to or about the property and all proceeds of condemnation. The lender agreement also provides that the bank was entitled to those proceeds "in preference" to NAT until the mortgage was satisfied and discharged. In Kaufman v. Commissioner, 134 T.C. at 186, we found that NAT's right to its proportionate share of future proceeds was thus not guaranteed and, since we interpreted the extinguishment provision to lay down an unconditional requirement that the donee organization be entitled to its proportionate share of future proceeds, the agreement did not satisfy the terms of the provision. As a result, we in effect held that the agreement did not establish a perpetual conservation restriction, and the facade easement was not a qualified real property interest. Id. at 186-187. We found that Lorna Kaufman's contribution of the facade easement to NAT was not, therefore, a qualified conservation contribution within the meaning of section 170(h)(1).[7] Id. at 187.
"gives rise to a property right * * * immediately vested in the donee organization". Subdivision (i), addressing generally the disposition of sale proceeds following judicial extinguishment of conservation restriction, speaks specifically of "the donee's proceeds * * * from a subsequent sale or exchange of the property". (Emphasis added.) While subdivision (ii) specifies that the donee's vested property right must have a value proportional to the value of the encumbered property, it does not otherwise describe the property in which the donee must have a vested right. Nevertheless, considering the "property right" language in subdivision (ii) together with the term "donee's proceeds" in subdivision (i), we think it the intent of the drafters of section 1.170A-14(g)(6), Income Tax Regs., that the donee have a right to a share of the proceeds and not merely a contractual claim against the owner of the previously servient estate. Petitioners having in effect conceded that NAT enjoyed no such right to proceeds under the agreement or the lender agreement, we conclude that, notwithstanding that section IV.C. of the agreement tracks the language of subdivision (ii), the agreement, as qualified by the lender agreement, fails to satisfy the requirements of section 1.170A-14(g)(6), Income Tax Regs.
of improbability of the changed conditions that would justify judicial extinguishment of the restrictions. Nor is it a question of the probability that, in the case of judicial extinguishment following an unexpected change in conditions, the proceeds of a condemnation or other sale would be adequate to pay both the bank and NAT. As we said in Kaufman v. Commissioner, 134 T.C. at 186, the requirement in section 1.170A-14(g)(6)(ii), Income Tax Regs., that NAT be entitled to its proportionate share of the proceeds is not conditional: "Petitioners cannot avoid the strict requirement in section 1.170A-14(g)(6)(ii), Income Tax Regs., simply by showing that they would most likely be able to satisfy both their mortgage and their obligation to NAT." E. Conclusion Petitioners have failed to persuade us that we erred in Kaufman v. Commissioner, 134 T.C. 182 (2010), in concluding that the contribution of the facade easement failed as a matter of law to comply with the enforceability-in-perpetuity requirements under section 1.170A-14(g)(6), Income Tax Regs. We therefore affirm our grant of partial summary judgment to respondent on the grounds set forth in Kaufman. We shall deny petitioners' motion for reconsideration.
success of petitioners' charitable contribution deductions for the contribution of the facade easement to NAT. After she received the appraisal in January 2004, Lorna Kaufman had no right to a refund of $19,872 of cash payments made to NAT. 2. Quid Pro Quo a. Introduction Respondent questions Lorna Kaufman's charitable intent. He argues: "[T]he record shows that petitioners made the cash payments because they knew they had to in order for NAT to accept the donation of the facade easement and to sign their Form 8283, which allowed them to take a deduction worth over $75,000." Additionally, he argues:
NAT provided substantial services to petitioners in exchange for these cash payments. NAT accepted and processed the preservation restriction agreement application, provided a form preservation restriction agreement that it had developed and negotiated with Massachusetts Historical Commission, dealt with the local and federal authorities in obtaining the necessary approvals, and dealt with Lorna Kaufman's mortgage holder, Washington Mutual, procuring Washington Mutual's execution of the "Lender Agreement." * * * [NAT's representative] even gave * * * [Gordon] Kaufman tax advice.
Most importantly, NAT gave * * * [Gordon] Kaufman the names of NAT-approved appraisers * * *. * * *
In his reply brief, respondent mitigates his first argument: "Respondent * * * agrees with the general proposition that the expected receipt of a tax deduction is not a benefit that
invalidates the deduction." Nevertheless, he continues to argue that petitioners are entitled to no deduction for the cash payments because Lorna Kaufman was "required" to make them. b. Required Cash Donation Petitioners answer respondent's first argument (a cash donation was required) as follows: "[NAT] solicits cash donations to enable it to pay its operating expenses, and to build its stewardship fund so that it can monitor eased properties and enforce its rights under facade conservation easements in perpetuity." They add that, "[a]part from donors' cash contributions, * * * [NAT] had no meaningful source of [operating] funds". They deny that NAT's acceptance of the facade easement and its issuance to petitioners of a Form 8283 were conditioned on its receipt of a cash contribution. They claim that many donee organizations benefiting from preservation restrictions require accompanying cash contributions. They point to the parties' stipulation
[10] that the National Park Service currently advises visitors to its Web site:
[11]
Many easement holding organizations require the easement donor to make an additional donation of funds
to help administer the easement. These funds are often held in an endowment that generates an annual income to pay for easement administration costs such as staff time and travel expenses, or needed legal services.
Of course, we agree with respondent: "Only unrequited payments to qualified recipients are deductible. Hernandez v. Commissioner,
490 U.S. 680, 690 (1989)." Neither party, however, has provided us with any authority governing the deductibility of a payment to a charitable organization when the organization's acceptance of a contribution of property is conditioned on the donor's cash donation sufficient to maintain the property and contribute to operating costs.
[12] The practice may be common, and no doubt provides funds to serve the charitable purposes of the donee. In the situation described by the National Park Service, it is difficult to see how the cash donation benefits the donor other than in making possible the contribution of the associated
constitute a charitable contribution if the contributor expects a substantial benefit in return." Id. (citing United States v. Am. Bar Endowment,
477 U.S. 105, 116 (1986)). We elaborated:
"If a transaction is structured in the form of a quid pro quo, where it is understood that the taxpayer's money will not pass to the charitable organization unless the taxpayer receives a specific benefit in return, and where the taxpayer cannot receive the benefit unless he pays the required price, then the transaction does not qualify for the deduction under section 170."
Id. (quoting Graham v. Commissioner,
822 F.2d 844, 849 (9th Cir. 1987), affd. sub nom. Hernandez v. Commissioner,
490 U.S. 680 (1989)). The burden was on the taxpayers in Scheidelman to prove that they made no quid pro quo payment to NAT for something of substantial value or, if they did, that their payment exceeded the value of what they received. Because they failed to provide evidence necessary to carry their burden, we denied them any deduction for their cash payment to NAT. Id. The shoe is on the other foot here, since, as discussed supra section II.A. of this report, respondent's quid-pro-quo ground constitutes new matter, requiring different evidence, for which respondent bears the burden of proof pursuant to Rule 142(a)(1). For respondent to succeed with his fee-for-services argument, the evidence must show a quid pro quo; i.e., that, reciprocally, Lorna Kaufman made a payment and NAT provided services of substantial value. Respondent argues that the evidence shows that Lorna Kaufman's payments reciprocated NAT's
of a cash contribution if a facade contribution were made but cognizant of the risk that a facade contribution might not be made (or might be unwound if the delineated conditions were not satisfied). The evidence does not convince us that Lorna Kaufman's payments reciprocated NAT's undertakings. Finally, we assume that respondent's position is that NAT's undertakings were of monetary value to Lorna Kaufman (saving her time and expense), yet the record is devoid of evidence of the value (much less the substantial value) of those undertakings. Respondent has failed to make the necessary showing of a quid pro quo. We shall not disallow petitioners a deduction for the cash payments as a fee-for-services quid pro quo, as argued by respondent. 3. Failure To Substantiate Section 170(f)(8)(A) provides that a taxpayer may not deduct any contribution of $250 or more unless she substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of section 170(f)(8)(B). The donee's written acknowledgment must state the amount of cash and describe other property contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the donee organization. Sec. 170(f)(8)(B).
In Addis v. Commissioner, 118 T.C. 528, 537 (2002) (citing sections 1.170A-1(h)(4)(ii) and 1.170A-13(f)(7), Income Tax Regs.), affd. 374 F.3d 881 (9th Cir. 2004), we stated:
Section 170(f)(8) disallows a charitable contribution deduction in circumstances such as these, where the donee organization's contemporaneous written acknowledgment is erroneous and is not a good faith estimate of the value of goods or services it provided, and where the taxpayer unquestioningly and self-servingly uses that erroneous statement to claim a charitable contribution larger than the one to which he or she would be entitled under section 170. * * *
NAT sent Lorna Kaufman letters acknowledging her contributions of both the facade easement and the cash payments. In those letters it certified that she had received no goods or services in return for her gifts. Respondent catalogs most of the items we described supra section II.B.2. of this report (e.g., NAT negotiated with government agencies to obtain the necessary approvals). He then claims that petitioners should be denied a charitable contribution deduction for Lorna Kaufman's cash payments to NAT because (1) NAT's acknowledgment letters "were erroneous and did not contain a good faith estimate of the value of the goods or services NAT provided" and (2) "petitioners 'unquestioningly and self-servingly' relied on these letters, which they knew to be inaccurate, to claim deductions for the cash payments". Respondent's argument here is limited by his pleading to the $3,032 payment Lorna Kaufman made to NAT in 2004. It also
suffers from respondent's failure to prove the monetary value, if any, of what Lorna Kaufman may have received from NAT. Moreover, respondent has failed to prove that Lorna Kaufman knew the items had value (if, indeed, they did) and, therefore, knew that the letters were inaccurate (if, indeed, they were). We shall not disallow a deduction for the 2004 $3,032 cash payment on the ground of a failure to substantiate. C. Conclusion Petitioners are entitled to a charitable contribution deduction for 2004 of $19,872 for cash payments Lorna Kaufman made to NAT in 2003 and 2004. III. Penalty A. Introduction Section 6662 imposes an accuracy-related penalty if any part of an underpayment of tax required to be shown on a return is due to, among other things, negligence or disregard of rules or regulations (without distinction, negligence), a substantial understatement of income tax, or a substantial valuation misstatement. Sec. 6662(a) and (b)(1), (2), and (3). The penalty is 20 percent of the portion of the underpayment of tax to which the section applies. Sec. 6662(a). In the case of a gross valuation misstatement, 20 percent is increased to 40 percent. Sec. 6662(h)(1).
faith as a defense. We sustain an accuracy-related penalty with respect to the resultant underpayment. C. Substantial Understatement of Income Tax Section 6662(d)(1)(A) defines "substantial understatement of income tax" as an amount exceeding the greater of 10 percent of the tax required to be shown on the return or $5,000. Respondent asserts that substantial understatements of income tax exist for 2003 and 2004. Each of the understatements of income tax, after disallowance of the charitable contribution deductions attributable to the easements, is greater than $5,000 and greater than 10 percent of the amount of tax required to be shown on the return. Respondent has met his burden of production for 2003 and 2004. In opposition to respondent's claims of underpayments of tax due to section 6662(b)(2) substantial understatements of income tax, petitioners raise a section 6664(c)(1) reasonable cause and good faith defense. Respondent answers in part:
[F]or the same reasons petitioners are liable for the negligence prong of the penalty under
I.R.C. § 6662(b)(2), they cannot escape the penalty under the reasonable cause exception: They * * * [knew] that the easement likely had no value and yet nonetheless claimed a charitable deduction for it. They did not act in good faith.
Consistent with our refusal supra section III.B. of this report to consider misvaluation as a basis for negligence, we refuse to consider it a reason for the underpayment in income tax
that respondent has shown. We granted respondent partial summary judgment because, and only because, Lorna Kaufman's contribution of the facade easement to NAT failed as a matter of law to comply with the enforceability-in-perpetuity requirements under section 1.170A-14(g)(6), Income Tax Regs. We think it consistent with the underlying premises for summary adjudication that we consider only that ground as giving rise to petitioners' underpayments of tax for 2003 and 2004.
[14] As respondent concedes, see supra section III.B. of this report, that ground presents an issue of first impression. Consistent with our analysis in Rolfs v. Commissioner, supra at 495-496, we find that there was reasonable cause for the portions of petitioners' 2003 and 2004 underpayments due to that ground and that they acted in good faith with respect to those portions. D. Conclusion We sustain an accuracy-related penalty only on the basis of petitioners' negligence with respect to the underpayment of their 2003 tax that is attributable to Lorna Kaufman's cash payments to NAT in 2003.
IV. Conclusion We shall issue an order denying petitioners' motion for reconsideration of our grant of partial summary judgment. Otherwise, An appropriate order will be issued, and decision will be entered under Rule 155. [1] Unless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. We round all amounts to the nearest dollar. [2] The organizations are: Trust for Architectural Easements (formerly National Architectural Trust), Foundation for the Preservation of Historic Georgetown, National Trust for Historic Preservation, and Capitol Historic Trust. [3] The Trust for Architectural Easements notified us that it joined relevant portions of petitioners' briefs. [4] Since both petitioners hold doctoral degrees, and both could thus be referred to as Dr. Kaufman, we shall avoid confusion by referring to them individually as Gordon Kaufman and Lorna Kaufman, respectively. [5] The term "Preservation Agreement" in the quoted language probably should be read "Preservation Restriction", since the agreement earlier recites Lorna Kaufman's and NAT's reciprocal desires to grant and receive a "Preservation Restriction * * * as such term is defined in * * * [Mass. Ann. Laws ch. 184, secs. 31 and 32 (LexisNexis 1996 & Supp. 2010)]" (conservation and preservation restrictions). [6] The other requirement is that the contribution be to a "qualified organization". See sec. 170(h)(1)(B). Respondent concedes that, at the time of the contributions, NAT was a qualified organization under sec. 170(h)(3). [7] Our concern in Kaufman v. Commissioner, 134 T.C. 182 (2010), was with the allocation of proceeds on a sale, exchange, or involuntary conversion of property following judicial extinguishment of a conservation restriction burdening the property. We did not then, nor do we now, rule on whether the language establishing the restriction must incorporate provisions requiring judicial extinguishment (and compensation) in all cases in which an unexpected change in surrounding conditions frustrates the conservation purposes of the restriction. Such a rule is suggested, however, by the last sentence in sec. 1.170A-14(c)(2), Income Tax Regs. ("Transfers by donee"), although the reference therein to "paragraph (b)(3)" probably should be to "paragraph (b)(2)" and the cross-reference to sec. 1.170A-14(g)(5)(ii) probably should be to sec. 1.170A-14(g)(6)(ii). See sec. 1.170A-13, Proposed Income Tax Regs., 48 Fed. Reg. 22941 (May 23, 1983) (apparently the Secretary failed to update the cross-references in the final regulations). [8] "Condemnation of the property, judicial extinguishment of the easement, existence of the subordination agreement at that time, insufficiency of the condemnation proceeds to cover the bank's prior claim to proceeds, and judgment-proof status of the property owner". Attaching a 10-percent probability to the occurrence of each of those events, they calculate a joint probability of 0.001 percent. [9] Satullo v. Commissioner, T.C. Memo. 1993-614, affd. without published opinion 67 F.3d 314 (11th Cir. 1995), applying sec. 1.170A-14(g), Income Tax Regs., might be taken as support for the proposition, but petitioners do not cite the case for that point, and our discussion of the point was speculative, since the taxpayers in the case did not set forth facts showing that the possibility of foreclosure of the easement was so remote as to be negligible. [10] Respondent objects to the stipulation as irrelevant; we disagree and overrule the objection. [11] http://www.nps.gov/hps/tps/tax/download/easements_2010.pdf (last visited, Feb. 2, 2011), at which can be found a pamphlet, "Easements to Protect Historic Properties: A Useful Historic Preservation Tool with Potential Tax Benefits". Language similar to the quoted language is at 8. [12] In McMillan v. Commissioner, 31 T.C. 1143 (1959), we disallowed a charitable contribution deduction for $75 paid by adoptive parents to a charitable organization operating an adoption program as a prerequisite to placing a child in their home preliminary to an adoption. The payment was regarded by the organization as a fee for service to cover part of the cost of operating an adoption program. We concluded that whatever charitable aspects there may have been to the payment lose significance when compared to the personal benefits that would result to the taxpayers from the completed adoption. McMillan is distinguishable because, as discussed in the text, the personal benefits Lorna Kaufman received were the accomplishment of the contribution and entitlement to charitable contribution deductions on account of both the facade easement and cash contributions. [13] Apparently on the basis of his abandonment of valuation misstatement as grounds for an accuracy-related penalty if we sustain our order granting him partial summary judgment (which we do), respondent makes no argument that petitioners are precluded by sec. 6664(c)(2) from arguing for application of the sec. 6664(c)(1) reasonable cause exception. [14] Putting aside the disallowance of the cash contribution for 2003, which we dealt with supra sec. III.B. of this report.