TAX COURT OPINION

Case: Gordon Kaufman & Lorna Kaufman
Docket Number: 15997-09
Judge: Halpern
Opinion Type: reported
Filed: 04/26/2010
Pages: 12

GORDON AND LORNA KAUFMAN, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 15997-09 . Filed April 26, 2010 . In 2003, Ps transferred a fa to .a . ..qualified organization . Wit facade easement . contribution, Ps contribution deduction in 2003 an carryover deduction in 2004 ; with contribution, Ps claimed a charit deduction in 2003 . R disallowed led to deficiencies . 'R also de'te related penalties under sec . 6662', I .R .C . cade easement and cash h respect to the claimed a charitable da correspondin g respect 'to the cash- able contributio n the deductions, which rmined accuracy- R has moved for summary judgment . Ps .object . 1 . Held : With respect to the facade easement contribution, Ps have .failed ;to raise any genuine issue of material fact regarding their compliance with sec . 1 .170A-14(g)(6)(ii),Income Tax Regs . Because the facade easement- contribution fails to satisfy the requirement in that provision, the"-interest in propert y conveyed by the facade easement was not protected'i n perpetuity . Thus, the facade easement contribution wa s SEED APR 2 6 2010 not a qualified conservation contribution under sec . 170(h), I .R .C ., see sec . 170 (h) .,(2) (C) , (5) (A) , I .R .C ., and P .s are not entitled to„any deduction therefor, see sec . 170(f)(3), I .R .C . 2 . Held , further , Ps have raised genuine issues of material fact with respect to, the cash contribution and the accuracy-related penalties under sec . 6662(a), I .R .C . Michael E . Mooney , . Julie Pruitt Barry , and Eleanor E . Farwell , for petitioners . Carina J . Campobasso , for respondent . OPINION :: HALPERN, Judge : Respondent has ; determined deficiencies in , and penalties with respect to, petitioners' Federal income tax , as follows :' Year Deficiency, Sec . 6662 (a) Sec . .6662 (h) - Penalties 2003 : ., $1, .097 . $13,439 2004 36,340 -- ~- 14,53 6 $39, 081 In 2003, petitioners contributed a facade easement and cas h to the National Architectural Trust '(NAT) . With respect to the facade easement contribution, petitioners claimed a charitable . contribution deduction in2003 and a-corresponding, carryove r 'Unless otherwise stated, section references .are to the,, Internal Revenue Code in effect for-'the years in(cid:127)issue, and Rul e (cid:127)references are,to the Tax Court Rules of Practice and Procedure . We round all amounts to the nearest dollar . deduction in 2 .004 ; with respect ..to-th e claimed a charitable contribution deduiction in 2.003-.- Responden t disallowed those deductions',' which led to'the'deficiencies . With ' respect to the' portions~(cid:127) of the ' underpayments . of'-tax in 2003 and 2004 attributable 'to thesfaca'deeasement contribution, responden t determined accuracy-related penalt=ies of .40 percent'-for a gros s valuation'misstatement-under section .6662(h) ; in . the alternative, he determined'-accuracy-related penalties of 20 percent2 fo r negligence substantial'underatatement of income a tax, , an d substantial valuati-on misstatement 'under section 6662,(a) . With respect to'the portion' of the underpayment of tax in 2003 attributable to the cash contribution, respondent determined a n accuracy-related'penalty of"20 percent for negligence and .substantial understatement of income°tax under s .ection,6662 ( Respondent has :.moved" for' summary judgment .(-the motion) . . Petitioners obj ectr (the :response) ., . At our request, petitioner s also filed'-'a supplement to the response (the, supplement) . We shall . grant' . the motion only- with respect to the . facade< .easemen t contribution "With respect,tothe cash contribution ' andth e penalties, -we shall deny'the' motion . 2That i's '!half the amounts under sec : 6662 (h,)==..in the table- above . Backgroun d At the time they filed the petition, petitioners . lived i n Massachusetts . The property here in .question is ,a single-famil y rowho.use located in a historic . preservation district. . in Boston . . In December 2003, , petitioners . entered into a preservatio n restriction agreement (the agreement)„ with NAT pursuant to whic h petitioners granted to NAT a facade easement restricting the use ., . of the property . NAT also required petitioners to make a. cash . 'contribution, calculated as a percentage .of the estimated valu e of the facade easement ,~to provide for "monitoring . and administration" of the facade easement . Later ;that month , petitioners contributed- ,$16,840 to NAT,3 and NAT accepted the agreement . .At the time of the contributions, Washington Mutua l Bank, FA (the bank), held a mortgage on the property . On. their 2003 Federal income tax return, petitioners claime d I a charitable contribution deduction of $220,800 for th e contribution of the facade easement . Because of the limitation s on charitable contribution deductions in section 170(b)(1)(C .) , petitioners claimed a charitable contribution deduction wit h respect to the facade easement of. only $103,377. .1 Petitioners also claimed a charitable contribution deduction of $16,870 fo r 3Previously, in .October 2003, as part of their preservation restriction agreement application, petitioners had made a $1,000 "good faith deposit" 5 .the cash . contribution ; notwithstandi n that,the cash contributio n was only $16 ;840 . n their ; :2004 :LFederal' income . tax, return, petitioners claime d a carryover charitable contribution deduction of $117, .423 relate d to the facade easement contribution : interrogatories ; depositions, admissio h S, and any othe r acceptable materials',, together with thi affidavits, . if any, sho w that there is no genuine issue as'to any material fact and that' a decision" :may be rendered' as a matter, of law .", Rule 1,2,1(b)7 . In, pertinent part, Rule°'121(d) provides : "When a motion for summar y judgment ismade and supported * * *, an adverse party may not : rest upon the mere allegations or denials of 'such party's pleading ., but'such party's .response * ,* *' must set forth specifi c facts showing that,-there : is=a genuine issue : for trial . " Respondent hasmoved for summary judgment, and'so we infer facts -,in -the manner most favorable to petitioners . . . See, e .g .. , Anonvmoust 'v . Commissioner, 134 T .C .: '(2010) .(slip . op . 3-4) (citing Dahlstromsy :". Commissioner ; 85T .C . 812, 821 (1985)) II . The- Facade Easement Contribution - makes during the taxable year .. .In general, section 170(f)(3) . denies any deduction for a contribution of an interest i n 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 interes t exclusively for conservation purposes .i4 The interest i n property conveyed by a facade easement must be protected in perpetuity for the contribution .of the .easement'to be a qualifie d ,,.;conservation contribution . Under section 170(h) (2,) (C) ., a qualified real property interest must be ."a restriction (granted in perpetuity) on the use which, may be made of the rea l property ." See also sec . 1 .170A-14(b)(2), Income Tax Regs . Under section 170(h)°(5)(A), "A contribution shall not be treated as exclusively for conservation purposes unless the conservatio n purpose is protected in perpetuity . + See also sec . .1 .170A-14(a) , Income Tax Regs . If the facade easement was not protected in perpetuity, then its contribution was not a qualified conservation contribution , and petitioners' are not entitled to-any . deduction therefor . '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) . Section 1 .170A-14(g)(6)(ii), Income Tax Regs ., requires that, at the-time of the gift, the donor must agree that the donation of .the-,perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that, at the time of the"°gift, is at' .-least equal to the proportionate value that'the perpetual conservatio n restriction bears to the value of the property as a whole . .Moreover , section 1 .170A-14( g)(6)(ii) , Income Tax Regs ., state s in pertinent . part : when a change in conditions give rise to the extinguishment of a perpetual conservation restriction * * *, 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 restrictio n Petitioners concede that the property had a mortgage an d that the bank retained a "prior claim" to . all proceeds o f condemnation and to all insurance proceeds as a result of an y casualty,'ha'zard, or accident occurring to or about the property . Moreover , petitioners do not dispute t hat' thee . bank was entitle d to those proceeds "in preference" to NAT until the mortgage was satisfied and discharged . The right of NAT to . its . proportionate share of future proceeds was thus not"guaranteed . Petitioner s argue that whether NAT would receive i s proportionate share o f any proceeds is a question of fact . In effect,- .petitioners argu e that . they have'satisfi e- d the requirement in section 1 .170A- - .8 - 14(g)( .6)(ii), Income Tax Regs ., .because NAT might be entitled to, its proportionate ; share of future proceeds . Yet that provision . states that the-donee organization . must be so entitled . See id :, The requirement .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 . The facade easement contribution, thus fails to satisfy the requirement in section 1 .170A-14(g)(6), Income Tax Regs ., and .s o fails to satisfy the enforceability in-perpetuity requirement under section : 170 (h) (2),,(C) . and .(5) (A) . The facade easement contribution thus fails as amatt .eraof law to comply with the enforceability in perpetuity requi rement s under section 1 -. 170A-1 .4(g), Income .Tax Regs . For that ., reason, we find that'the facade easement contribution, was not protected i n .perpetuity and so was-not a qualified conservation contributio n under. section 170(h)(1) .5 . We shall grant the motion with respect- to the facade easement-contribution . ' III . The-Cash Contributio n . Respondent argues that we .should disallow, the charitable, contribution deduction for the cash contribution for two reasons . First, respondent argues that the cash contribution was a ., 'We therefore need not address respondent's additional arguments that we should disallow'the charitable contribution deduction for the facade easement contribution . 9 - conditional gift and so violated section 1 .170A- 1(e), Income Tax Regs . Second , respondent argues that he cash'contribution was part of a quid pro quo and - so'violated the rule of'Hernandez v . Commissioner , 490 U . S . 680 ( 1989 ) . Pe itoriers , however , raise . genuine issues of material fact with respect , to both arguments ., First, section 1 . 170A - 1,(e), Income Tax Regs . , states : If as of the date of a gift a transfer for charitable purposes is dependent upon the performance of some act or the happening : of a precedent .e~lent in order that it might become effective, no deduction is allowabl e unless the possibility that the .charitable'transfer will not become effective is so remote as to be negligible . In neither the response nor the supplement do . petitioner s dispute that the cash contribution was a conditional gift ; tha t is, petitioners seem to concede that the agreement required NAT to refund the cash contribution if'the appraisal found the facade easement to have no value . Petitioners, however, rely on the exception'(quoted above ) in section 1 .170A- 1(e), Income Tax .Reg s . They argue that the possibility that the charitable transfer . would not become effective--that is, the possibility that the appraisal would find . the facade easement to have no value-- as "so remote as to be negligible ." See id . Moreover , according to petitioners, that inquiry is inherently factual . We agree . Second, under Hernandez v . . Commissioner , su ra , a transfe r is not a charitable contribution if itlis part of a quid pro quo . 10 Respondent argues that the cash contribution was payment for a service . Respondent seems to argue that, in return for the cash contribution, NAT accepted the facade easement contribution so- that petitioners could claim a charitable contribution deduction . . Even if NAT required . petitioners to make the cash contribution, however, we are not convinced that that is sufficient to--deny a charitable contribution deduction under Hernandez . 6 Because petitioners raise genuine issues of material fac t regarding the cash contribution, we shall deny the motion with respect to the cash contribution . IV . Accuracy-Related Penaltie s Respondent concedes that "if the facade easemen t contribution is disallowed as a matter of law * the gros s misstatement valuation (and the substantial valuation .. misstatement) penalties would not apply ." We accept his concession . For both the facade, easement contribution 'and the cash contribution, we .must decide only-whether to sustain the accuracy-related penalties of,20 percent for negligence and substantial understatement .of income-tax under section 6662(a) . ,'Respondent does not explicitly allege . fraud or collusion . That is . he does not state (although he .implies) that the cash contribution was a payment to NAT for its compliance in helping petitioners claim a deduction for the'facade easement-- a deduction that, . respondent implies,,both NAT and petitioners knew was illegitimate because the facade easement itself was worthless . Nonetheless, even if respondent did so argue, petitioners have alleged'enough facts to raise a genuine issue as to fraud or collusion . 11 - Because' petitioners raise genuine issues of material fac t regarding the"-applicability of the reasonable 'cause defense t o the penalt-ies,'we must deny the motio n with respect to,those-.. penalties .' Section 6664(c)(1)t provides . that the accuracy-reaated penalty shall not be imposed with respect toany portion of an underpayment if :thetaxpayer shows that there was- .reasonabl e cause for that portion and the taxpayer acted in good faith with- respect to that portion . Further .'',r The,-determination of whether-a taxpayer acted wit h reasonable cause and in good fait, is made * * * case by-case,* * *, taking into,-account all pertinent-facts : and circumstances . *_* * Reliance on * * * professiona l advice-* * * constitutes reasonable cause and-goodfaith if,, under all the circumstaces , such reliance was-reasonable and-the'taxpayer acted i n good faith . . Sec . 1 .6664-4(b)(1), Income Tax Regs . 1 .6664-4 ( c Income Tax Regs . ("Reliance on opinio n Respondent argues that petitioners may not, .as amatter o f law, rely on the reasonable cause exception ..' In so'concluding , respondent relies on . communications b e l weenMr . Kaufman and a representative of NAT that suggest Mr . Kaufman had reason t o believe the facade . easement in fact had no value . Petitioner s 'Respondent also argues .that petitioners may not, as a matter of law, rely on the substantial authority exception under sec . 6662(d) .(2) (B) (i) . Because we find that petitioners' hav e raised a'genuine issue of .material fact as to the applicabilit y of the reasonable cause defense, we need not address th e substantial authority exception . 12 - assert that the . significance of those communications must be= determined in . the :light of all the relevant facts and circumstances, and we agree . Petitioners argue that-they relie d on the advice of their accountant . Petitioners argue that at trial (1) their accountant would testify to show that they had . reasonable cause for claiming .a charitable contribution ., deduction for their contributions to NAT of the facade easement and .the cash and (2) they themselves would testify as to their understanding of the value of the . facade easement and their good faith belief that their contribution' was a qualified conservatio n contribution under section 170(h)(1) .' . . Because petitioners raise genuine issues of material fact regarding the applicability of the reasonable cause exception to the accuracy-related penalties, we shall deny the motion with respect to those, penalties . V . Conclusio n For the reasons stated, we shall grant the motion wit h respect to the facade easement contribution . With respect to th e cash contribution and the penalties,,, we shall deny the motion . An appropriate order wil l be issued .