Judges: HALPERN
Attorneys: Frank Agostino , Julie Pruitt Barry , Eduardo S. Chung , Eleanor E. Farwell , Michael Mattaliano , and Michael E. Mooney , for petitioners. Carina J. Campobasso , for respondent.
Filed: Apr. 04, 2011
Latest Update: Dec. 05, 2020
Summary: GORDON AND LORNA KAUFMAN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 15997–09. Filed April 4, 2011. In Kaufman v. Commissioner, 134 T.C. 182 (2010), we granted R partial summary judgment, sustaining his disallow- ance of charitable contribution deductions Ps claimed on account of PW’s grant to N of a facade easement burdening their residence. Ps ask that we reconsider our grant of partial summary judgment. We must also address PW’s cash con- tributions to N and R’s de
Summary: GORDON AND LORNA KAUFMAN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 15997–09. Filed April 4, 2011. In Kaufman v. Commissioner, 134 T.C. 182 (2010), we granted R partial summary judgment, sustaining his disallow- ance of charitable contribution deductions Ps claimed on account of PW’s grant to N of a facade easement burdening their residence. Ps ask that we reconsider our grant of partial summary judgment. We must also address PW’s cash con- tributions to N and R’s det..
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GORDON AND LORNA KAUFMAN, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 15997–09. Filed April 4, 2011.
In Kaufman v. Commissioner, 134 T.C. 182 (2010), we
granted R partial summary judgment, sustaining his disallow-
ance of charitable contribution deductions Ps claimed on
account of PW’s grant to N of a facade easement burdening
their residence. Ps ask that we reconsider our grant of partial
summary judgment. We must also address PW’s cash con-
tributions to N and R’s determination of accuracy-related pen-
alties.
1. Held: We did not err in Kaufman v. Commissioner, supra,
in concluding that the contribution of the facade easement
failed as a matter of law to comply with the enforceability-in-
perpetuity requirements under sec. 1.170A–14(g)(6), Income
Tax Regs. We therefore affirm our grant of partial summary
judgment to R on the grounds set forth in that report and
shall deny Ps’ motion to reconsider it.
2. Held, further, PW’s 2003 cash payments to N were condi-
tional at the end of 2003 and therefore not deductible for
2003. Held, further, Ps may deduct PW’s cash payments to N
for 2004.
3. Held, further, Ps are liable for an accuracy-related pen-
alty only on account of their negligence in deducting the 2003
cash payments for 2003.
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
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.
294
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(294) KAUFMAN v. COMMISSIONER 295
The deficiencies respondent determined result from his dis-
allowance of petitioners’ deductions for contributions of a
facade easement burdening their residence (the facade ease-
ment) 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 judg-
ment, 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 preserva-
tion 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 argu-
ments 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, peti-
tioners 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 nec-
essary to dispose of the cash contribution issue and the pen-
alties (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
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 peti-
tioners’ briefs.
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296 136 UNITED STATES TAX COURT REPORTS (294)
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 accom-
panying 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 paper-
work.’’
4 Since both petitioners hold doctoral degrees, and both could thus be referred to as Dr. Kauf-
man, we shall avoid confusion by referring to them individually as Gordon Kaufman and Lorna
Kaufman, respectively.
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(294) KAUFMAN v. COMMISSIONER 297
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 esti-
mated 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 dona-
tion 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 perti-
nent 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 fol-
lowing:
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298 136 UNITED STATES TAX COURT REPORTS (294)
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 deduc-
tion generates a contribution amount less than the above calculated esti-
mate, 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 cer-
tification can not [sic] be achieved, and/or your appraisal cannot be com-
pleted 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
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(294) KAUFMAN v. COMMISSIONER 299
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 con-
demnation, 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 con-
tribution.
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 ref-
erences 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 subordi-
nate in priority to the Agreement[.]
5 The term ‘‘Preservation Agreement’’ in the quoted language probably should be read ‘‘Preser-
vation 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).
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300 136 UNITED STATES TAX COURT REPORTS (294)
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
assisted Lorna Kaufman in obtaining the bank’s agree-
NAT
ment 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 facili-
tated 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 prop-
erty’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 ease-
ment, 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
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(294) KAUFMAN v. COMMISSIONER 301
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 conserva-
tion 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 con-
tribution 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 chari-
table 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
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.
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302 136 UNITED STATES TAX COURT REPORTS (294)
OPINION
I. Reconsideration of Grant of Partial Summary Judgment
A. Introduction
We granted partial summary judgment to respondent, sus-
taining his disallowance of any deduction for 2003 or 2004
for the contribution of the facade easement to NAT. We con-
cluded 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. 187. For that reason, we found
that the facade easement contribution was not protected in
perpetuity and so was not a qualified conservation contribu-
tion under section 170(h)(1). Id. Rule 161 affords us discre-
tion 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 agree-
ment 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 neg-
ligible.’’
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
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(294) KAUFMAN v. COMMISSIONER 303
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 per-
petual.
B. Perpetual Conservation Restrictions
Under common law doctrines, it is difficult for a real prop-
erty owner to split the Blackstonian bundle of rights consti-
tuting ownership of the property to give one not holding the
remaining rights perpetual control over the use that may be
made of the property. The principal difficulties are assign-
ability and duration, common law disfavoring the creation of
an assignable right of unlimited duration to control the use
of land. See 4–34A Powell, Real Property, sec. 34A.01 (M.
Wolf ed. 2010); Airey, ‘‘Conservation Easements in Private
Practice’’, 44 Real Prop. Tr. & Est. L.J. 745, 750–758 (2010).
Statutory authority, however, to create assignable restric-
tions of unlimited duration for conservation, preservation,
and similar purposes now can be found in the codes of every
State and the District of Columbia. See 4–34A Powell, supra
sec. 34A.01 n.1 (list). Indeed, the agreement both character-
izes the facade easement as ‘‘an easement in gross’’, a
common law interest, and references Mass. Gen. Laws ch.
184, secs. 31 and 32 (conservation and preservation restric-
tions).
Yet, as the Powell treatise makes clear, notwithstanding
State law statutory provisions facilitating the creation of per-
petual conservation restrictions, there are many means by
which conservation restrictions may be modified or termi-
nated. 4–34A Powell, supra sec. 34A.07[1]. Those include:
Condemnation (eminent domain), the foreclosure of pre-
existing liens, foreclosure for unpaid taxes, Marketable Title
Acts, merger or abandonment, the doctrine of changed condi-
tions, and release by the holder. Id.
The Powell treatise states with respect to release: ‘‘Some
statutes confirm the common-law principle that an easement
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304 136 UNITED STATES TAX COURT REPORTS (294)
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 con-
servation 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, fol-
lowed by most States, ‘‘is that the condemnation of an ease-
ment 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 ease-
ment. 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 Restate-
ment, Property 3d (Servitudes), sec. 7.11 (2000). The Powell
treatise states that a good case to be made for the inapplica-
bility 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 pre-
serve 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.
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(294) KAUFMAN v. COMMISSIONER 305
C. Section 170 and the Pertinent Regulations
Section 170 allows a deduction for any charitable contribu-
tion, subject to certain limitations, that the taxpayer makes
during the taxable year. In general, section 170(f)(3) denies
any deduction for a contribution of an interest in property
that is less than the taxpayer’s entire interest in the prop-
erty. One exception to that general rule, however, is for a
qualified conservation contribution. Sec. 170(f)(3)(B)(iii).
Under section 170(h)(1), a qualified conservation contribution
must be a contribution of a ‘‘qualified real property interest
* * * exclusively for conservation purposes.’’ 6 Under section
170(h)(2)(C), a qualified real property interest includes ‘‘a
restriction (granted in perpetuity) on the use which may be
made of the real property.’’ Under section 170(h)(5)(A), ‘‘A
contribution shall not be treated as exclusively for conserva-
tion purposes unless the conservation purpose is protected in
perpetuity.’’ See also sec. 1.170A–14(a), Income Tax Regs.
The regulations introduce the term ‘‘perpetual conservation
restriction’’. Section 1.170A–14(b)(2), Income Tax Regs.,
states: ‘‘A perpetual conservation restriction is a qualified
real property interest.’’ It defines such restriction as ‘‘a
restriction granted in perpetuity on the use which may be
made of 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 equi-
table 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 pre-
vent 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 con-
servation purposes of the gift in perpetuity.’’
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).
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306 136 UNITED STATES TAX COURT REPORTS (294)
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 recog-
nizes 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 pur-
poses will nonetheless be treated as protected in perpetuity
if the restrictions limiting use of the property for conserva-
tion 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 restric-
tion gives rise to a property right, immediately vested in the donee
organization, with a fair market value that is at least equal to the propor-
tionate 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 * * *.
D. Discussion
1. Introduction
The drafters of section 1.170A–14, Income Tax Regs.,
undoubtedly understood the difficulties (if not impossibility)
under State common or statutory law of making a conserva-
tion restriction perpetual. They required legally enforceable
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(294) KAUFMAN v. COMMISSIONER 307
restrictions preventing inconsistent use by the donor and his
successors in interest. See sec. 1.170A–14(g)(1), Income Tax
Regs. They defused the risk presented by potentially
defeasing events of remote and negligible possibility. See sec.
1.170A–14(g)(3), Income Tax Regs. (sometimes, simply, the
so-remote-as-to-be-negligible standard). They did not, how-
ever, consider the risk of mortgage foreclosure per se to be
remote and negligible and required subordination to protect
from defeasance. See sec. 1.170A–14(g)(2), Income Tax Regs.
(sometimes, simply, the subordination requirement). They
understood that forever is a long time and provided what
appears to be a regulatory version of cy pres to deal with
unexpected changes that make the continued use of the prop-
erty for conservation purposes impossible or impractical. See
sec. 1.170A–14(g)(6), Income Tax Regs. (sometimes, simply,
the extinguishment provision). It is the extinguishment
provision that directly concerns us here.
The following are uncontested facts. The bank held a mort-
gage on the property at the time Lorna Kaufman and NAT
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. 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 con-
servation 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.
7 Our concern in Kaufman v. Commissioner,
134 T.C. 182 (2010), was with the allocation of
proceeds on a sale or, exchange, or involuntary conversion of property following judicial extin-
Continued
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308 136 UNITED STATES TAX COURT REPORTS (294)
2. Petitioners’ Arguments
a. The Agreement Contains the Necessary Language
Petitioners argue that the requirements of the extinguish-
ment provision are met if, in the event a conservation restric-
tion is extinguished by judicial action and the underlying
property is sold, the donee organization ‘‘has a contractual
entitlement against the donor and his successors for the
organization’s proportionate share of the sales proceeds as
defined in Treas. Reg. § 1.170A–14(g)(6)(ii).’’ Petitioners ref-
erence section IV.C. of the agreement, set forth above, and
argue that the agreement ‘‘explicitly sets forth this entitle-
ment.’’ They conclude: ‘‘This is precisely what the Regulation
requires, and all that it requires.’’
As to how NAT would fare if, for instance, the property
were taken by condemnation following the extinguishment of
the facade easement in a judicial proceeding, petitioners
state: ‘‘If the entire property is the subject of a condemnation
action, the mortgagee may have a priority right to condemna-
tion proceeds under a Lender Agreement comparable to that
involved in this case.’’ That, they argue, ‘‘does not absolve the
property owner [Lorna Kaufman] of * * * [her] obligation to
make good on the easement-holding organization’s [NAT’s]
entitlement to a pro-rata share of the proceeds realized from
the sale or involuntary conversion of the property’’. With
respect to the fact that the lender agreement stands the bank
in front of NAT in line for a share of the condemnation pro-
ceeds, they explain: ‘‘The Lender Agreement defines priority
to insurance and condemnation proceeds as between * * *
[the bank] and * * * [NAT]; it has no effect on the donor or
subsequent property owner.’’ NAT, they explain, can still look
to Lorna Kaufman or her successors in interest for
reimbursement.
guishment 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 sur-
rounding conditions frustrates the conservation purposes of the restriction. Such a rule is sug-
gested, 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).
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We shall accept petitioners’ claim that the agreement gives
NAT a contractual right against Lorna Kaufman and her
successors for its proportionate share of the proceeds from
the sale of the property following judicial extinguishment of
the facade easement. In the face of the bank’s priority under
the lender agreement, however, we believe that right to be
insufficient to satisfy the requirements of subdivisions (i) and
(ii) of section 1.170A–14(g)(6), Income Tax Regs. (sometimes,
simply, subdivision (i) or subdivision (ii)). Subdivision (ii)
requires that the donor, at the time of the gift, must agree
that the donation ‘‘gives rise to a property right * * * imme-
diately vested in the donee organization’’. Subdivision (i),
addressing generally the disposition of sale proceeds fol-
lowing judicial extinguishment of conservation restriction,
speaks specifically of ‘‘the donee’s proceeds * * * from a sub-
sequent sale or exchange of the property’’. (Emphasis added.)
While subdivision (ii) specifies that the donee’s vested prop-
erty 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. Never-
theless, considering the ‘‘property right’’ language in subdivi-
sion (ii) together with the term ‘‘donee’s proceeds’’ in subdivi-
sion (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.
b. Subordination
On brief, petitioners head one of their arguments: ‘‘The
Facade Easement Contribution Satisfies The Requirements
of Treas. Reg. § 1.170A–14(g)(2)’’. They appear to believe that
respondent is arguing that the agreement fails to establish
a perpetual conservation restriction ‘‘because * * * [the
bank] did not subordinate its rights to * * * [NAT’s] right to
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310 136 UNITED STATES TAX COURT REPORTS (294)
receive a proportionate share of condemnation or insurance
proceeds, and therefore the * * * [agreement] somehow fails
to comply with Treas. Reg. § 1.170A–14(g)(6).’’ Put another
way, they appear to believe that respondent has conflated
the subordination requirement found in section 1.170A–
14(g)(2), Income Tax Regs., with the extinguishment provi-
sion found in section 1.170A–14(g)(6), Income Tax Regs., so
that, in order for a donor to show that its donation satisfies
the extinguishment provision, any mortgagee must ‘‘subordi-
nate its interests so that a donee organization has a priority
interest in insurance or condemnation proceeds.’’ Respondent
disavows making that argument, stating that neither his
motion for summary judgment nor our Opinion, Kaufman v.
Commissioner, 134 T.C. 182 (2010), even references section
1.170A–14(g)(2), Income Tax Regs. He believes that he
argued, and we decided, that the facade easement contribu-
tion failed to satisfy the extinguishment provision without
regard to whether the bank had subordinated its rights in
the property to NAT’s rights therein, so as to satisfy the
subordination requirement. He is correct.
Satisfying the subordination requirement immunizes
against the effect of the general rule, described supra section
I.B. of this report, that an easement is lost by the foreclosure
of a mortgage or trust deed burdening the servient tenement,
when such mortgage or trust deed was executed prior to the
creation of the easement. Annotation, ‘‘Foreclosure of mort-
gage or trust deed as affecting easement claimed in, over, or
under property’’, 46 A.L.R. 2d 1197 (1956 & Supp.); see also,
e.g., Camp Clearwater, Inc. v. Plock, 146 A.2d 527, 536–537
(N.J. Super. Ct. Ch. Div. 1958) (‘‘The foreclosure of a mort-
gage vests in the purchaser at the foreclosure sale a legal
right to the property free of easements and encumbrances
imposed upon it subsequent to the mortgage provided that
the holders of such easement rights or encumbrances are
made parties to the foreclosure.’’), affd. 157 A.2d 15 (N.J.
Super. Ct. App. Div. 1959).
We did not base our grant of partial summary judgment
for respondent on any consideration of the consequences of
foreclosure of the bank’s mortgage. We based our grant solely
on the fact, conceded by petitioners, that, because, following
a judicial extinguishment of the facade easement, NAT might
not receive its proportional share of any future proceeds, the
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(294) KAUFMAN v. COMMISSIONER 311
agreement failed to satisfy the requirements of section
1.170A–14(g)(6), Income Tax Regs., and so failed to satisfy
the enforceability-in-perpetuity requirements under section
1.170A–14(g), Income Tax Regs., and section 170(h)(2)(C) and
(5)(A). We think it unnecessary to our result, and reach no
conclusion, as to whether the bank subordinated its rights in
the property to the right of NAT to enforce the facade ease-
ment so as to satisfy the requirements of section 1.170A–
14(g)(2), Income Tax Regs.
c. Section 1.170A–14(g)(3), Income Tax Regs.
Referring to the so-remote-as-to-be-negligible standard
found in section 1.170A–14(g)(3), Income Tax Regs., peti-
tioners argue that, in determining whether the enforce-
ability-in-perpetuity requirement embodied in section
1.170A–14(g), Income Tax Regs., is met, ‘‘a court must con-
sider * * * the remoteness of any future event that is
alleged to defeat the interest passing to charity.’’ They then
hypothesize ‘‘a very low probability of occurrence’’ for a set
of events 8 that would deprive NAT of its proportional share
of the proceeds (determined under section 1.170A–14(g)(6)(ii),
Income Tax Regs.) following judicial extinguishment of the
facade easement and a subsequent sale of the property. They
conclude that the possibility of such deprivation is ‘‘so remote
as to be negligible’’ and, thus, to be disregarded under the so-
remote-as-to-be-negligible standard in determining whether
the facade easement is enforceable in perpetuity.
As stated, respondent argues that the so-remote-as-to-be-
negligible standard is irrelevant to the extinguishment provi-
sion. Respondent believes the extinguishment provision
establishes ‘‘a strict, standalone requirement enacted to
ensure that the conservation purposes of an extinguished
easement be carried out by the donee as nearly as possible.’’
He considers the extinguishment provision to establish a rule
‘‘similar to the rule of cy pres’’. He also argues: ‘‘It assumes
an event, extinguishment of the easement, that is virtually
by definition, remote. Therefore, it would be illogical to read
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.
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312 136 UNITED STATES TAX COURT REPORTS (294)
* * * [the so-remote-as-to-be-negligible standard] into * * *
[the extinguishment provision].’’
We described supra section I.B. of this report some of the
means by which conservation restrictions may be modified or
terminated, and we voiced our belief supra section I.D.1. of
this report that the drafters of section 1.170A–14(g), Income
Tax Regs., sought to mitigate or otherwise address the threat
to the enforceability-in-perpetuity requirement presented by
some of those possibilities. Satisfying the so-remote-as-to-be-
negligible standard immunizes against the risk that acts or
events of such low probability will defeat the donee’s interest
in the servient property. Section 1.170A–14(g)(3), Income Tax
Regs., is silent with respect to the right of the donee to any
recompense on account of the actual occurrence of the risk,
and it appears that the drafters’ intent was simply to fore-
close any argument that a charitable contribution deduction
is unavailable because the donee’s interest could be defeated
by remote, improbable events. That point is nicely illustrated
by Stotler v. Commissioner, T.C. Memo. 1987–275, a case
petitioners cite for the proposition that the enforceability-in-
perpetuity requirement is per se satisfied if the possibility of
a defeasing event is so remote as to be negligible. 9 The case
stands for no such thing, addressing neither section 1.170A–
14(g), Income Tax Regs., in general, nor paragraph (g)(6)
thereof in particular, since the contribution in the case
occurred before the effective date of that regulation. To deter-
mine whether the contribution in that case satisfied the
enforceability-in-perpetuity requirement as it existed before
promulgation of section 1.170A–14(g), Income Tax Regs., we
had to determine whether the possibility of condemnation of
the servient property was so remote as to be negligible, as
required by section 1.170A–1(e), Income Tax Regs. We found
in the affirmative, notwithstanding that, if the particular
property in question were condemned, the underlying ease-
ment would terminate, and the donor would be entitled to all
of any condemnation proceeds, as if the property had not
been burdened by the easement.
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.
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It perhaps belabors the obvious to point out that the risk
addressed by the extinguishment provision—an ‘‘unexpected’’
change in conditions surrounding the property—likely
describes a class of events the range of whose probabilities
includes, if it is not coincident with, the range of proba-
bilities of events that are so remote as to be negligible. One
does not satisfy the extinguishment provision, however,
merely by establishing that the possibility of a change in
conditions triggering judicial extinguishment is unexpected,
for, unlike the risk addressed by the so-remote-as-to-be-neg-
ligible standard, to satisfy the extinguishment provision, sec-
tion 1.170A–14(g)(6), Income Tax Regs., provides that the
donee must ab initio have an absolute right to compensation
from the postextinguishment proceeds for the restrictions
judicially extinguished. It is Lorna Kaufman’s failure to
accord NAT an absolute right to a fixed share of the
postextinguishment proceeds that causes her gift to fail the
extinguishment provision. It is not a question as to the
degree 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 condi-
tions, the proceeds of a condemnation or other sale would be
adequate to pay both the bank and NAT. As we said in Kauf-
man v. Commissioner, 134 T.C. 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 con-
cluding that the contribution of the facade easement failed as
a matter of law to comply with the enforceability-in-per-
petuity 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 Kauf-
man. We shall deny petitioners’ motion for reconsideration.
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314 136 UNITED STATES TAX COURT REPORTS (294)
II. Cash Contribution
A. Introduction
In determining the deficiency for 2003, respondent dis-
allowed a charitable contribution deduction of $16,870 peti-
tioners claimed for a cash contribution to NAT. Respondent
explained that he disallowed the deduction ‘‘because it was
made subject to or in contemplation of subsequent event(s).’’
In determining the deficiency for 2004, respondent did not
disallow any charitable contribution deduction on account of
a cash contribution to NAT. Lorna Kaufman paid $3,332 to
NAT in 2004. The parties have both amended their pleadings
relating to Lorna Kaufman’s payments to NAT.
In May 2010, before trial, petitioners amended their peti-
tion in the belief that respondent’s disallowance of the cash
contribution deduction for 2003 was based on the ground
that Lorna Kaufman’s obligation to make the contribution
was conditional on her receipt of a qualified appraisal (the
conditional-payment ground). Petitioners added the following
to their prayer for relief: ‘‘[I]f petitioners [sic] cash contribu-
tions to the Donee were made subject to a condition, peti-
tioners are entitled to [a] deduction of $16,840 in the 2004
tax year.’’
In June 2010, after trial, we allowed respondent to amend
the answer to, among other things, assert both an increased
deficiency and an accuracy-related penalty for 2004. He justi-
fied that amendment on the ground that he had only recently
become aware that Lorna Kaufman paid $3,332 to NAT in
2004 and that petitioners claimed a charitable contribution
deduction therefor on their 2004 return. By the amendment
to answer, he first argued that $300 of the $3,332 Lorna
Kaufman paid to NAT in 2004 is not deductible because it
reimbursed NAT for a fee it paid to the bank on her behalf.
Petitioners apparently concede that the $300 payment is not
deductible, a concession we accept, and we shall not further
discuss that payment.
As to both the remaining $3,032 Lorna Kaufman paid to
NAT in 2004 and the $16,840 she had paid it in 2003,
respondent by the amendment to answer sets forth two
grounds for disallowing any charitable contribution deduc-
tion. First, those sums were paid in exchange for substantial
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(294) KAUFMAN v. COMMISSIONER 315
services provided by NAT to petitioners ‘‘to facilitate peti-
tioners’ deduction of a large, unjustified noncash contribution
of a facade easement that both petitioners and NAT knew had
no value’’ (the quid pro quo ground). Second, the total of the
payments, $19,872, ‘‘was based on the value of the facade
easement and/or the value of the [resulting] tax deduction’’
petitioners claimed, either, or both, of which could turn out
to be zero (i.e., the conditional-payment ground). With
respect only to the $3,032 paid to NAT in 2004, respondent
adds a third ground: ‘‘Petitioners relied on a contempora-
neous written acknowledgment that they knew was inac-
curate in claiming the erroneous charitable deduction of
$3,032.’’
Respondent bears the burden of proof with respect to the
increased deficiency and penalty for 2004 resulting from his
disallowance of a deduction for the $3,032 paid by Lorna
Kaufman to NAT in 2004. See Rule 142(a)(1). He also bears
the burden of proof with respect to the quid-pro-quo ground
for disallowing petitioners a deduction for Lorna Kaufman’s
payment of $16,840 to NAT in 2003 (and now, because of the
amended petition, claimed, alternatively, to be deductible for
either 2003 or 2004). He bears that burden because the quid-
pro-quo ground constitutes new matter, requiring petitioners
to present different evidence from that necessary to rebut his
original ground (the conditional-payment ground) for dis-
allowing the deduction in 2003. See id.; Shea v. Commis-
sioner, 112 T.C. 183, 191 (1999).
B. Discussion
1. Conditional Payment
Respondent’s original explanation of the conditional-pay-
ment ground, supplemented by an argument in the amended
petition, is that the $16,840 Lorna Kaufman paid to NAT in
2003 and the $3,032 she paid to it in 2004 (in total, $19,872)
were conditional payments (subject to refund) if either the
appraisal reported the value of the facade easement to be
zero or we disallow petitioners’ charitable contribution deduc-
tion for the contribution of the facade easement to NAT. Peti-
tioners answer respondent’s first alternative as follows:
‘‘While there may be an argument that the * * * [$16,840]
cash donation * * * made in 2003, became ‘final’ and deduct-
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316 136 UNITED STATES TAX COURT REPORTS (294)
ible in 2004, this does not support a complete disallowance,
but simply moves the deduction into 2004.’’ Petitioners
answer respondent’s second alternative: ‘‘The * * * wit-
nesses [from NAT] and Petitioners were in uniform agreement
that * * * [it] was not their understanding’’ that ‘‘Petitioners
might be entitled to a refund of the cash donation should
their tax deduction for the facade easement contribution be
disallowed.’’
Neither party disputes that the amount of the cash pay-
ment contemplated from Lorna Kaufman was a function of
the appraised value of the facade easement, which was not
determined until 2004. Respondent argues that, at the end of
2003, it was possible that the appraisal would show the
facade easement to be valueless, thus entitling Lorna Kauf-
man to a refund of the $16,840 she paid in that year.
Respondent further argues that possibility was not so remote
as to be negligible, thereby depriving petitioners of a 2003
deduction for the cash payment. See sec. 1.170A–1(e), Income
Tax Regs. As stated, petitioners concede there ‘‘may be’’ an
argument that the $16,840 payment became final and, if
deductible, is deductible for 2004. We assume that peti-
tioners’ concession is based on their receiving the appraisal
in 2004 and their conclusion that, before receipt of the
appraisal in 2004, there was the possibility that NAT would
refund some or all of the $16,840 Lorna Kaufman had paid
it in 2003. Petitioners bear the burden of proving that, at the
end of 2003, the possibility of a zero appraisal value was not
so remote as to be negligible. They have not carried that bur-
den. Indeed, there is in evidence an email from Mr. Bahar
(NAT’s area manager) to Gordon Kaufman, dated February 6,
2004, assuring him that properties in a historic neighborhood
(like the property) ‘‘are not at a market value disadvantage
when compared to the other properties in the same neighbor-
hood.’’ We sustain respondent’s disallowance of a deduction
for $16,840 paid by Lorna Kaufman to NAT in 2003.
Respondent’s alternative argument that the cash payments
were conditional because refundable if we disallow any
deduction for the facade easement contribution is based on
the clause in the application that the ‘‘cash endowment con-
tribution is set at 10% of the value of the donation tax deduc-
tion’’. (Emphasis added.) We found credible the testimony of
both NAT’s representatives and petitioners that that was not
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(294) KAUFMAN v. COMMISSIONER 317
the intent of the clause. We also found credible Gordon
Kaufman’s testimony that petitioners did not expect to
receive any money back. We find that the cash contributions
were not conditional on the 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 pay-
ments 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 deduc-
tion 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 dona-
tions to enable it to pay its operating expenses, and to build
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318 136 UNITED STATES TAX COURT REPORTS (294)
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 con-
tributions, * * * [NAT] had no meaningful source of [oper-
ating] 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, how-
ever, 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 main-
tain 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 property
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 pay-
ment 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.
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(294) KAUFMAN v. COMMISSIONER 319
and giving rise to an added charitable contribution deduction
(an acceptable benefit).
While the parties have wrestled over the value of the
facade easement, given our disposition of the facade ease-
ment contribution issue on legal grounds, that is not a ques-
tion of fact we must decide. Moreover, respondent does not
claim that the cash payments were in consideration for NAT’s
facilitation of a sham transfer. Seeing no benefit to Lorna
Kaufman other than facilitation of her contribution of the
facade easement (which we discuss in the next paragraph)
and an increased charitable contribution deduction, we shall
not deny petitioners’ deduction of the cash payments on the
ground that the application required a ‘‘donor endowment’’ to
accompany the contribution of facade easement.
c. Fee for Services
As to respondent’s second argument (a fee for services),
petitioners principally respond that NAT’s actions were taken
primarily to benefit it, and any benefit to petitioners was
ancillary. Recently, in Scheidelman v. Commissioner, T.C.
Memo. 2010–151, we addressed a similar claim by the
Commissioner that a cash payment made to NAT ancillary to
a facade easement contribution to it was a quid pro quo for
NAT’s assistance in obtaining a tax deduction. We stated the
familiar rule: ‘‘A payment of money or transfer of property
generally cannot 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 pay-
ment to NAT for something of substantial value or, if they
did, that their payment exceeded the value of what they
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320 136 UNITED STATES TAX COURT REPORTS (294)
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 pay-
ments reciprocated NAT’s accepting and processing her
application, providing her with a form preservation restric-
tion agreement, undertaking to obtain approvals from the
necessary government authorities, securing the lender agree-
ment from the bank, giving Gordon Kaufman basic tax
advice, and providing him with a list of approved appraisers.
The evidence, however, is ambiguous as to whether Lorna
Kaufman’s payments reciprocated NAT’s undertakings. We do
have in evidence NAT’s October 13, 2003, introductory letter
to Lorna Kaufman, representing that her contribution to NAT
would require very little effort by her because NAT would
handle all of the red tape and paperwork. We also have in
evidence Mr. Kearns’ (NAT’s president’s) December 16, 2003,
letter to her, asking her to sign the agreement and send NAT
a check for $15,840. By that date, however, NAT had under-
taken and completed many of the tasks of concern to
respondent although it had received only a $1,000 deposit
from her. Moreover, Mr. Kearns also states in that letter
that, if, by February 28, 2004, the bank did not subordinate,
she failed to receive historic certification of the property, or
an appraisal could not be obtained, NAT would join with her
in voiding the agreement, reimburse her costs, and refund
her cash contribution. Certainly, NAT was accommodating to
Lorna Kaufman, but it was in its interest as much as hers
to complete the contribution of the facade easement. We
assume moreover that NAT undertook the delineated tasks in
anticipation of a cash contribution if a facade contribution
were made but cognizant of the risk that a facade contribu-
tion might not be made (or might be unwound if the delin-
eated conditions were not satisfied). The evidence does not
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(294) KAUFMAN v. COMMISSIONER 321
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 pay-
ments 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 substan-
tiates the contribution with a contemporaneous written
acknowledgment of the contribution by the donee organiza-
tion 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 serv-
ices 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 cir-
cumstances such as these, where the donee organization’s contempora-
neous written acknowledgment is erroneous and is not a good faith esti-
mate 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 con-
tributions of both the facade easement and the cash pay-
ments. 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 peti-
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322 136 UNITED STATES TAX COURT REPORTS (294)
tioners 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 inac-
curate, 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 deduc-
tion 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).
Section 6664(c) provides a reasonable cause exception to
the accuracy-related penalty. Generally, under section
6664(c)(1), no penalty is imposed under section 6662 with
respect to any portion of an underpayment if it is shown that
there was reasonable cause for such portion and that the tax-
payer acted in good faith with respect to such portion. The
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(294) KAUFMAN v. COMMISSIONER 323
reasonable cause exception does not apply, however, in the
case of a substantial or gross valuation overstatement with
respect to property for which a charitable contribution deduc-
tion was claimed under section 170 unless the claimed value
of the property was based on a ‘‘qualified appraisal’’ by a
‘‘qualified appraiser’’ and the taxpayer made a good faith
investigation of the value of the contributed property. Sec.
6664(c)(2) and (3).
Under section 7491(c), the Commissioner bears the burden
of production with regard to penalties and must come for-
ward with sufficient evidence indicating that it is proper to
impose penalties. Higbee v. Commissioner, 116 T.C. 438, 446
(2001). However, once the Commissioner has met the burden
of production, the burden of proof remains with the taxpayer,
including the burden of proving that the penalties are
inappropriate because of reasonable cause. Id. at 446–447.
Initially, respondent determined that, on account of his
disallowance of their deduction for the contribution of the
facade easement to NAT, petitioners underpaid the tax
required to be shown on their 2003 return and were liable for
the accuracy-related penalty on the grounds of either neg-
ligence, a substantial understatement of income tax, a
substantial valuation misstatement, or a gross valuation
misstatement. On brief, however, respondent concedes that,
if we do not reach the issue of valuation of the facade ease-
ment contribution because we sustain our grant of summary
judgment for respondent (so that the deduction is denied as
a matter of law), no accuracy-related penalty on the grounds
of either a substantial or gross valuation misstatement will
apply. Respondent adds: ‘‘However, the 20% negligence and
substantial understatement of tax penalties will still be
applicable, although not imposed cumulatively.’’ 13
B. Negligence Penalty
Petitioners argue, and respondent agrees, that, because it
presents an issue of first impression, no negligence penalty
is warranted on account of our disallowing petitioners a
deduction for the contribution of the facade easement if the
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.
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324 136 UNITED STATES TAX COURT REPORTS (294)
disallowance is on the ground that the contribution failed as
a matter of law to comply with the enforceability-in-per-
petuity requirements under section 1.170A–14(g)(6), Income
Tax Regs. See, e.g., Rolfs v. Commissioner, 135 T.C. 471, 496
(2010) (considering, among other things, ‘‘uncertain state of
the law’’ in sustaining section 6664(c)(1) ‘‘reasonable cause’’
and ‘‘good faith’’ defense).
Nevertheless, respondent argues for petitioners’ negligence
in claiming a deduction for the contribution of the facade
easement on the basis of respondent’s claim that petitioners
‘‘knew * * * that * * * [the contribution of the facade ease-
ment] would not diminish the value of their property.’’ What
petitioners knew is a factual question hotly contested by the
parties. The question involves not only the subjective issue of
their states of mind but the objective issue of how much, if
any, conveyance of the facade easement reduced the value of
the property, an issue the parties address with expert testi-
mony. ‘‘Summary judgment is intended to expedite litigation
and avoid unnecessary and expensive trials.’’ Fla. Peach
Corp. v. Commissioner, 90 T.C. 678, 681 (1988). It may be
granted only if there is no genuine issue as to any material
fact. See Rule 121(b). We granted respondent partial sum-
mary judgment, disallowing petitioners’ deductions for Lorna
Kaufman’s contribution of the facade easement to NAT, on the
basis that the contribution 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 had no
need to consider the value of the facade easement and think
it consistent with the underlying premises for summary adju-
dication that we not now be required to invest the time and
effort necessary to resolve the difficult factual questions of
intent and value presented by respondent’s claim of neg-
ligence. See, e.g., Trout Ranch, LLC v. Commissioner, T.C.
Memo. 2010–283 (illustrating the laborious undertaking that
determining the value of a conservation restriction may
present to the trier of fact).
Moreover, whatever argument respondent might make that
we should now, in the penalty phase of the case, focus on
value as a basis for negligence is negated by his abandon-
ment of value as a basis for imposition of the accuracy-
related penalty on account of a valuation misstatement with
respect to the facade easement.
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(294) KAUFMAN v. COMMISSIONER 325
We shall, for the reasons stated, reject respondent’s argu-
ment that petitioners negligently overstated the charitable
contribution deductions they claimed on account of the facade
easement contribution. Because respondent has made no
other argument for petitioners’ negligence in connection with
those deductions, we find that, in connection with those
deductions, they were not negligent.
With respect to our disallowance of a deduction for the
2003 cash contribution, petitioners virtually concede that a
2003 deduction was in error. Petitioners were negligent in
claiming that deduction and have not established reasonable
cause and good 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 per-
cent 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 understate-
ments of income tax, after disallowance of the charitable con-
tribution 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 ease-
ment likely had no value and yet nonetheless claimed a charitable deduc-
tion 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 ease-
ment to NAT failed as a matter of law to comply with the
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326 136 UNITED STATES TAX COURT REPORTS (294)
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.
f
14 Putting aside the disallowance of the cash contribution for 2003, which we dealt with supra
sec. III.B. of this report.
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