HALPERN, Judge.
Respondent determined deficiencies in, and penalties with respect to, petitioners' Federal income tax, as follows:
Penalties
Year Deficiency Sec. 6662(a) Sec. 6662(h)
2003 $39,081 $1,097 $13,439
2004 36,340 --- 14,536
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.
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
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.
Petitioners are husband and wife. Gordon Kaufman
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.
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."
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:
At the time she submitted the application, Lorna Kaufman made the required $1,000 deposit.
Lorna Kaufman received a letter dated December 16, 2003, from James Kearns (Mr. Kearns), president of NAT. In pertinent part, the letter states:
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.
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:
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.
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:
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.
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)."
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.
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.
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 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 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.
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:
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
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.
Under common law doctrines, it is difficult for a real property owner to split the Blackstonian bundle of rights constituting 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 assignability 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 restrictions 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 characterizes 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 restrictions).
Yet, as the Powell treatise makes clear, notwithstanding State law statutory provisions facilitating the creation of perpetual conservation restrictions, there are many means by which conservation restrictions may be modified or terminated. 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 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
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:
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.
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) denies any deduction for a contribution of an interest in property that is less than the taxpayer's entire interest in the property. 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."
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 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)(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:
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 conservation restriction perpetual. They required legally enforceable
The following are uncontested facts. The bank held a mortgage 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. 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).
Petitioners argue that the requirements of the extinguishment provision are met if, in the event a conservation restriction 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 reference section IV.C. of the agreement, set forth above, and argue that the agreement "explicitly sets forth this entitlement." 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 condemnation 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 proceeds, 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.
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.
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
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 mortgage 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 mortgage 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
Referring to the so-remote-as-to-be-negligible standard found in section 1.170A-14(g)(3), Income Tax Regs., petitioners argue that, in determining whether the enforceability-in-perpetuity requirement embodied in section 1.170A-14(g), Income Tax Regs., is met, "a court must consider * * * 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
As stated, respondent argues that the so-remote-as-to-be-negligible standard is irrelevant to the extinguishment provision. 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
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 foreclose 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.
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.
In determining the deficiency for 2003, respondent disallowed a charitable contribution deduction of $16,870 petitioners 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 petition 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 contributions to the Donee were made subject to a condition, petitioners 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 justified 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 deduction. First, those sums were paid in exchange for substantial
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 disallowing the deduction in 2003. See id.; Shea v. Commissioner, 112 T.C. 183, 191 (1999).
Respondent's original explanation of the conditional-payment 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 deduction for the contribution of the facade easement to NAT. Petitioners 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 deductible
Neither party disputes that the amount of the cash payment 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 Kaufman 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 petitioners' 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 burden. 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 neighborhood." 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 contribution is set at 10% of the value of the donation tax deduction". (Emphasis added.) We found credible the testimony of both NAT'S representatives and petitioners that that was not
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.
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:
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.
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
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.
While the parties have wrestled over the value of the facade easement, given our disposition of the facade easement contribution issue on legal grounds, that is not a question 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.
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:
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
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 accepting and processing her application, providing her with a form preservation restriction agreement, undertaking to obtain approvals from the necessary government authorities, securing the lender agreement 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 undertaken 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 contribution might not be made (or might be unwound if the delineated conditions were not satisfied). The evidence does not
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:
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
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.
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.
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 taxpayer acted in good faith with respect to such portion. The
Under section 7491(c), the Commissioner bears the burden of production with regard to penalties and must come forward 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 negligence, 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 easement 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."
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
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 easement] 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 testimony. "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 summary 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 adjudication 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 negligence. 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 abandonment of value as a basis for imposition of the accuracy-related penalty on account of a valuation misstatement with respect to the facade easement.
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.
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:
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
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.
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.
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.
