t c memo united_states tax_court george gorra and leila gorra petitioners v commissioner of internal revenue respondent docket no filed date frank agostino reuben muller and jairo cano for petitioners marc l caine and marissa j savit for respondent memorandum findings_of_fact and opinion kerrigan judge this case involves a noncash charitable_contribution_deduction respondent determined the following tax deficiencies and penalties brief amicus curiae was filed by miriam l fisher and theodore j wu as attorneys for trust for architectural easements respondent concedes the portion of the penalty under sec_6662 for tax continued year deficiency dollar_figure big_number penalties sec_6662 sec_6662 dollar_figure big_number dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar after concessions we must consider whether petitioners are entitled to a charitable_contribution_deduction under sec_170 for the donation of a facade easement and whether petitioners are liable for a gross_valuation_misstatement penalty pursuant to sec_6662 or in the alternative for an accuracy-related_penalty pursuant to sec_6662 findings_of_fact some of the facts have been stipulated and are so found petitioners resided in new york when they filed the petition continued year that relates to petitioners’ cash contribution the amount of the penalty under sec_6662 that is still in issue for is dollar_figure petitioner husband graduated from the university of pennsylvania wharton school of business where he received a bachelor of science degree in economics petitioner husband attended the new york university stern school of business graduate program for one year for approximately years petitioner husband has been involved with commercial real_estate transactions in manhattan petitioner husband has also maintained an interest in architecture from the victorian period for many years petitioner wife practiced as a tax attorney with mobil oil from to thereafter petitioner wife left her position as a tax attorney and worked full time raising petitioners’ children the property on date petitioners purchased a townhouse at block lot in the borough of manhattan with a street address on east 91st street new york new york property the property is in the carnegie hill historic_district of new york city the property is a single-family residence with four stories it i sec_15 feet wide and approximately big_number square feet the lot is approximately big_number square feet petitioners owned the property at all relevant times on date and at all times relevant there was no mortgage on the property the tax record shows square footage of big_number respondent’s expert contends the square footage is big_number in date a real_estate agency listed the property for sale at dollar_figure petitioners reduced the price to dollar_figure on date on date petitioners further reduced the price to dollar_figure the property was taken off the market in date on or about date the national park service certified that the property contributes to the significance of the carnegie hill historic_district and is a certified_historic_structure for a charitable_contribution for conservation purposes in accordance with the tax treatment extension act of pub_l_no sec b stat pincite the property is not classified as sound first-class condition the easement on date petitioners executed a conservation deed of easement deed with the trust for architectural easements trust which was known at the time as the national architectural trust nat among other things the deed grants the trust the right to enter and inspect petitioners’ property including granting access through the interior of the building on date petitioners also made a dollar_figure cash contribution to the we refer to the organization as the nat when discussing the organization before its name change and as the trust when discussing the organization after its name change trust on date a representative of the trust executed the deed on behalf of the trust at all times relevant the trust was a nonprofit organization_exempt_from_taxation pursuant to sec_501 for the purposes of this case the trust is a qualified_organization within the meaning of sec_170 the primary mission of the trust is to encourage participation in the voluntary historic preservation program funded by the federal government with the federal tax incentive program the trust also engages in additional preservation activities that relate to historic architecture the trust monitors the properties where it holds easements by sending employees to visit the properties the trust employs three people to monitor properties trust employees inspect visually the properties during these annual inspections trust employees also photograph the properties the trust uploads the resulting pictures and notes onto a server and compares the pictures to images from previous years to determine whether there are changes to the property if trust employees find a violation through their inspection process the deed gives the trust the right to institute legal proceedings to procure an for tax_year respondent allowed a cash charitable_contribution_deduction of dollar_figure for petitioners’ payment to the nat there is no indication in the record that the remaining dollar_figure is still in issue injunction against violations of the deed the deed also gives the trust the right to enter the property to correct any violations and then place a lien on the property for the cost of such repairs before springfield management services sms performed services for the trust sms did not perform services for the trust while the trust held an easement for the property the deed the terms of the deed in pertinent part include the following e grantor petitioners desires to grant to the grantee the nat and the grantee desires to accept an open space and architectural facade conservation deed of easement the easement on the property exclusively for conservation purposes f it is the intent of the parties that the facades of the improvements located on the property the building including the existing facades on the front sides and rear of the building and the measured height of the building collectively the protected facades are protected by this easement so that any change to the protected facades shall require prior express written approval by the grantee which may be withheld or conditioned in its sole discretion and shall be consistent with the historical character of the building exterior as required under applicable federal state and local laws ii the grantor does hereby grant and convey to the grantee to have and to hold an easement in gross in perpetuity in on and to the property the building and the protected facades being an open space and architectural facade conservation deed of easement on the property a without the express written consent of the grantee grantor will not undertake with respect to those parts of the protected facades any alteration construction or remodeling of existing exterior improvements on the protected facades or the placement thereon or any exterior extension of existing improvements on the property or the erection of any new or additional exterior improvements on the property or in the open space above or surrounding the existing improvements iii a the grantee shall have the following rights at reasonable times and upon reasonable notice the right to enter upon and inspect the protected facades and any improvements thereon in the event of a violation of the easement and grantor’s failure to cure such violation within fifty business days following grantor’s receipt of grantee’s written notice of such violation a the right to institute legal proceeding to enjoin such violation by temporary and or permanent injunction to require the restoration of the property or the improvements thereon including the protected facades and open space to their prior condition to be reimbursed by grantor for all related reasonable costs and attorney’s fees and to avail itself of all other legal and equitable remedies iv a this easement is binding not only upon grantor but also upon its successors heirs and assigns and all other successors in interest to the grantor and shall continue as a servitude running in perpetuity with the land this easement shall survive any termination of grantor’s or the grantee’s existence the rights of the grantee under this instrument shall run for the benefit of and may be exercised by its successors and assigns or by its designees duly authorized in a deed of easement b grantee covenants and agrees that it will not transfer assign or otherwise convey its rights under this easement except to another qualified_organization described in sec_170 of the internal_revenue_code_of_1986 and controlling treasury regulations and grantee further agrees that it will not transfer this easement unless the transferee first agrees to continue to carry out the conservation purposes for which this easement was created provided however that nothing herein contained shall be construed to limit the grantee’s right to give its consent eg to changes in a protected facades sic or to abandon some or all of its rights hereunder c in the event this easement is ever extinguished through a judicial decree 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 as estimated by a state licensed appraiser unless controlling state law provides that the grantor petitioners is entitled to the full proceeds in such situations without regard to the easement grantee agrees to use any proceeds so realized in a manner consistent with the conservation purposes of the original contribution new york city landmarks preservation commission the new york city landmarks preservation commission lpc is the new york city agency responsible for identifying and designating the city’s landmarks and buildings in the city’s historic districts the lpc regulates changes to designated buildings the lpc consists of commissioners and approximately full-time staff members including architects architectural historians and restoration specialists the lpc is responsible for the preservation of big_number structures and had a staff of four employees responsible for inspection during relevant times new york city landmarks law new york city adopted its landmarks preservation law landmarks law in in response to concerns about the destruction of buildings with significant historical architectural and cultural value 438_us_104 see n y city admin code sec the landmarks law was enacted in order to safeguard new york city’s historic aesthetic and cultural heritage help stabilize and improve property values in historic districts encourage civic pride in the beauty and accomplishments of the past protect and enhance the city’s attractions for tourists strengthen the city’s economy and promote the use of landmarks for the education pleasure and welfare of the people of new york city petitioners’ property is subject_to the landmarks law which requires property owners to keep designated properties in good repair and to obtain an lpc permit before starting work if the work will affect a landmark’s exterior or if the work requires a department of buildings permit violations of the landmarks law occur either when work is performed on a landmark without a permit or when work does not comply with a permit the landmarks law provides in pertinent part in making a determination with respect to an application_for a permit to construct reconstruct alter or demolish an improvement in an historic_district the commission shall consider a the effect of the proposed work in creating changing destroying or affecting the exterior architectural features of the improvement upon which such work is to be done and b the relationship between the results of such work and the exterior architectural features of other neighboring improvements in such district n y city admin code sec b the landmarks law further provides the commission is not authorized to regulate or limit the height and bulk of buildings or to regulate and determine the area of yards courts and other open spaces n y city admin code sec a the landmark law defines exterior architecture feature as t he architectural style design general arrangement and components of all of the outer surfaces of an improvement as distinguished from the interior surfaces enclosed by said exterior surfaces including but not limited to the kind color and texture of the building material and the type and style of all windows doors lights signs and other fixtures appurtenant to such improvement n y city admin code sec g the task of administering the law was given to the lpc penn cent transp co u s pincite see n y c charter ch sec the lpc is responsible for identifying and designating new york city’s landmarks and the buildings in the city’s historic districts including the carnegie hill district the lpc also regulates changes to designated buildings including petitioners’ property since date when the landmark protection bill became effective the lpc has had the power to seek civil fines for violations of its regulations and to seek criminal penalties fines and imprisonment and injunctive relief n y city admin code secs and the lpc does not monitor yearly each of the structures in its jurisdiction the lpc does not photograph each structure and does not compare the annual photograph of the previous year in order to track violations the lpc uses referrals from sources other than its staff the lpc receives approximately to big_number reports of violations each year in and the lpc retained four employees who were responsible for the enforcement and preservation of approximately big_number structures in new york city haims appraisal on date petitioners obtained an appraisal of their property for tax purposes from jerome haims realty inc the nat provided petitioners with eric haims’ name along with the name of one other appraiser and advised that mr haims is a preapproved appraiser of conservation easements petitioners paid jerome haims realty inc dollar_figure for mr haims’ appraisal services mr haims who is a qualified_appraiser as defined in sec_1 170a- c income_tax regs appraised the easement that petitioners donated to the nat mr haims prepared an appraisal report that included a description of petitioners’ property and estimated the fair_market_value of the easement donated to the nat the appraisal valued the donated property as of date the appraisal described petitioners’ property as big_number square feet of gross living area as per new york city records and feet of frontage on the north side of east 91st street by feet 8½ inches of depth containing big_number square feet of lot area the appraisal stated that although the property was listed for sale on the market at an asking price of dollar_figure on the basis of mr haims’ analysis the property’s market_value was actually dollar_figure the haims appraisal used the sales comparison approach and determined the market_value of the property before the donation of the easement the appraisal established the diminution of the value of the easement reflected as a percentage of the before market_value of the property mr haims conducted a market study using paired sales data of residential properties in new york the appraisal stated that on the basis of the data and analysis presented the value of the historic preservation easement was equal to of the property’s market_value or dollar_figure recording the deed after signing the easement deed on date petitioners entrusted the trust to record it on date the vice president of the trust executed the deed on behalf of the trust on date the trust delivered the deed to the new york city department of finance office of the register city register the trust also paid the city register dollar_figure for recording fees and taxes as discussed below although mr haims used the term market_value in his appraisal he determined the property’s fair_market_value the cover sheet for the recording forms that were presented to the city register however contained an error the property’s street number was incorrectly listed on the cover sheet because the address on the cover sheet did not match the address on the deed the city register requested that the trust resubmit the deed with the discrepancy resolved the trust resubmitted the deed in date to correct the discrepancy the deed was recorded by the city register on date inspection of the property by the trust on date the trust sent petitioners a letter informing them that the inspector noted no alteration had been made to their property and the inspection was done on date the letter reminded petitioners that the exterior of the property may not be altered legally without the prior approval of the trust on date petitioners notified the trust in writing that they wanted to replace the rear windows the trust approved the changes on date on date petitioners received a letter from the trust informing them that their property would be inspected in spring on date the trust sent petitioners a letter informing them that the inspector noticed that no alterations had been made since the last inspection and the property appeared to be in good repair on date the trust sent petitioners a letter stating that the property would be visited during spring on date the trust inspected the property on date the trust sent petitioners a letter which stated that the window replacement at the rear facade was consistent with the approved plan and that the trust had no objection the date letter also noted that petitioners had installed a retractable awning the trust reminded petitioners that making alterations without its written consent was a violation of the easement and that if there were any unauthorized alterations inconsistent with the historic character of the property petitioners would be required to restore the property to its prior condition the trust however determined that the awning was consistent with the historical character of the property_tax returns a certified_public_accountant prepared petitioners’ and federal_income_tax returns petitioners timely filed both tax returns petitioners filed a form_8283 noncash charitable_contributions with their federal_income_tax return and reported a noncash charitable_contribution of dollar_figure for the donation of the facade easement to the nat petitioners then deducted dollar_figure of their reported noncash charitable_contribution for petitioners deducted a noncash charitable_contribution carryforward of dollar_figure notice_of_deficiency on date respondent issued the notice_of_deficiency to petitioners for tax years and disallowing the noncash charitable_contribution deductions petitioners claimed on their and income_tax returns the notice_of_deficiency also determined that petitioners were liable for the gross_valuation_misstatement penalty under sec_6662 or in the alternative the accuracy-related_penalty under sec_6662 in response petitioners filed a petition opinion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that those determinations are incorrect rule a 290_us_111 tax deductions are a matter of legislative grace and a taxpayer has the burden of proving his or her entitlement to a deduction 503_us_79 292_us_435 sec_7491 provides an exception that shifts the burden_of_proof to the commissioner as to any factual issue relevant to a taxpayer’s liability for tax if the taxpayer introduces credible_evidence with respect to the issue sec_7491 and the taxpayer satisfies certain other conditions including substantiation of any item and cooperation with the government’s requests for witnesses and information sec_7491 see also rule a petitioners and respondent stipulated that petitioners met the specifications of sec_7491 with respect to cooperat ing with reasonable requests by the secretary for witnesses information documents meetings and interviews petitioners contend that because they also introduced credible_evidence establishing both compliance with the technical provisions of sec_170 and the value of the easement the burden should shift to respondent under sec_7491 credible_evidence is evidence that the court would find sufficient upon which to base a decision on the issue in favor of the taxpayer if no contrary evidence were submitted rendall v commissioner tcmemo_2006_174 aff’d 535_f3d_1221 10th cir see 116_tc_438 petitioners did not produce evidence that meets the definition of credible_evidence as used in sec_7491 we find that petitioners have not shown that they meet the specifications of sec_7491 to shift the burden_of_proof to respondent as to the remaining relevant factual issues the burden_of_proof remains with petitioners i noncash charitable_contributions a deduction is allowed for any charitable_contribution for which payment is made within the taxable_year if the contribution is verified under regulations prescribed by the secretary sec_170 generally a charitable_contribution_deduction is not allowed for a charitable gift of property consisting of less than the donor’s entire_interest in that property sec_170 sec_170 however provides an exception for a qualified_conservation_contribution sec_170 defines a qualified_conservation_contribution as follows sec_170 qualified_conservation_contribution -- in general -- for purposes of subsection f b iii the term qualified_conservation_contribution means a contribution-- a of a qualified_real_property_interest b to a qualified_organization c exclusively for conservation purposes all three requirements must be met for a donation to be a qualified_conservation_contribution simmons v commissioner tcmemo_2009_208 slip op pincite aff’d 646_f3d_6 d c cir the legislative_history underlying sec_170 indicates the policy behind the qualified_conservation_contribution exception and its restrictions the committee believes that the preservation of our country’s natural_resources and cultural heritage is important and the committee recognizes that conservation easements now play an important role in preservation efforts the committee also recognizes that it is not in the country’s best interest to restrict or prohibit the development of all land areas and existing structures therefore the committee believes that provisions allowing deductions for conservation easements should be directed at the preservation of unique or otherwise significant land areas or structures s rept no pincite 1980_2_cb_599 sec_170 further provides that no charitable_contribution_deduction shall be allowed under sec_170 for any contribution of property for which a deduction of more than dollar_figure is claimed unless the taxpayer obtains a qualified_appraisal of the property sec_170 c for contributions of property for which a deduction of more than dollar_figure is claimed the taxpayer must also attach the qualified_appraisal of the property to his or her federal tax_return sec_170 the parties agree that the trust was at all relevant times an organization exempt from federal taxation under sec_501 and a qualified_organization under sec_170 as defined by sec_170 the parties do not dispute that petitioners properly attached an appraisal qualified or not to their federal_income_tax return as specified by sec_170 therefore we must determine whether petitioners’ easement contribution was a qualified_real_property_interest as defined by sec_170 whether petitioners’ easement contribution was made exclusively for conservation purposes as defined by sec_170 and and whether the haims appraisal was a qualified_appraisal under sec_170 we must also determine the value of the easement contribution a qualified_real_property_interest for purposes of sec_170 the term qualified_real_property_interest includes a restriction granted in perpetuity on the use which may be made of the real_property a restriction granted in perpetuity on the use of the property must be based on legally enforceable restrictions that will prevent uses of the retained_interest in the property that are inconsistent with the conservation purposes of the contribution see sec_1_170a-14 income_tax regs we addressed the issue of what constitutes a qualified_real_property_interest in 140_tc_1 in belk the taxpayers donated a conservation_easement in the conservation_easement agreement they agreed not to develop land on a golf course the conservation_easement agreement however permitted the taxpayers to remove portions of the golf course from the conservation_easement and replace them with property currently not subject_to the conservation_easement we found that the use restriction was not granted in perpetuity because the conservation_easement agreement permitted the taxpayers to change what property was subject_to the conservation_easement id pincite we noted that the taxpayers did not agree never to develop the golf course id pincite we thus held that the taxpayers failed to donate an interest_in_real_property which was subject_to a use restriction granted in perpetuity id pincite we stated to conclude otherwise would permit petitioners a deduction for agreeing not to develop the golf course when the golf course can be developed by substituting the property subject_to the conservation_easement id unlike the conservation_easement agreement in belk petitioners’ deed clearly defines the property donated under the easement and restricts the easement to that property the deed includes an exhibit with the legal description of the land and the boundaries of petitioners’ property which is also a matter of public record the deed provides that the facades of the improvements located on the property the ‘building’ including the existing facades on the front sides and rear of the building and the measured height of the building collectively the ‘protected facades’ are protected by this easement to prevent any ambiguity and clearly define the easement rights the deed provides that w ritten descriptions and photographs of the protected facades shall control the boundaries of the property are clear and the easement clearly relates to the front sides rear and measured height of the building no substitution is allowed in addition the deed grants an easement in gross in perpetuity in on and to the property it further states this easement is binding not only upon grantor but also upon its successors heirs and assigns and all other successors in interest to the grantor and shall continue as a servitude running in perpetuity with the land the deed mandates specifically that the trust will not transfer assign or otherwise convey its rights under the easement unless it is to a qualified_organization under sec_170 and the transferee agrees to continue to carry out the conservation purposes for which the easement was created accordingly we hold that petitioners’ easement contribution was a qualified_real_property_interest b exclusively for conservation_purpose sec_1 valid conservation_purpose sec_170 provides in pertinent part that a valid conservation_purpose is the preservation of a historically important land area or a certified_historic_structure sec_170 defines the phrase certified_historic_structure as i any building structure or land which is listed in the national register or ii any building that is located in a registered_historic_district as defined in sec_47 and is certified by the secretary of the interior to the secretary_of_the_treasury as being of historic significance to the district for this purpose a structure means any structure whether or not it is depreciable accordingly easements on private residences may qualify sec_1_170a-14 income_tax regs the enactment of the pension_protection_act of ppa pub_l_no 120_stat_780 created additional requirements under sec_170 for any contribution of property in a registered_historic_district ppa sec a stat pincite sec_170 provides b special rules with respect to buildings in registered historic districts --in the case of any contribution of a qualified_real_property_interest which is a restriction with respect to the exterior of a building described in subparagraph c ii such contribution shall not be considered to be exclusively for conservation purposes unless-- i such interest-- i includes a restriction which preserves the entire exterior of the building including the front sides rear and height of the building and ii prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior with respect to sec_170 the general explanation of tax legislation enacted in the 109th congress prepared by the staff of the joint_committee on taxation states as follows a charitable deduction is allowable with respect to buildings as is the case under present law but the qualified_real_property_interest that relates to the exterior of the building must preserve the entire exterior of the building including the space above the building the sides the rear and the front of the building in addition such qualified_real_property_interest must provide that no portion of the exterior of the building may be changed in a manner inconsistent with the historical character of such exterior staff of j comm on taxation general explanation of tax legislation enacted in the 109th congress j comm print taxpayers who make a donation in excess of dollar_figure also must pay a dollar_figure fee to the internal_revenue_service irs sec_170 this provision however did not go into effect until after petitioners made their contribution see pension_protection_act of ppa pub_l_no sec e continued if restrictions to preserve a building or land area within a registered_historic_district permit future development on the site a deduction will be allowed only if the terms of the restrictions require that such development conform with appropriate local state or federal standards for construction or rehabilitation within the district sec_1_170a-14 income_tax regs in general a facade easement is a restriction the purpose of which is to preserve certain architectural historic and cultural features of the facade or front of a building the terms of a facade easement might permit the property owner to make alterations to the facade of the structure if the property owner obtains consent from the qualified_organization that holds the easement this court has held that a facade easement may constitute a qualifying conservation contribution see 85_tc_677 respondent contends that the conservation_purpose requirement of sec_170 is not met because the easement does not preserve the property beyond what is already required under local law by virtue of the property’s location in carnegie hill historic_district petitioners’ property is subject_to the landmarks law petitioners are thus required to keep the property in good repair and to continued stat pincite noting that the provision applies to contributions made days after date the date of the ppa’s enactment obtain an lpc permit before starting work if the work will affect the property’s exterior or if the work requires a department of buildings permit petitioners contend that their easement meets the conservation requirement and that the examination of local preservation law is part of the valuation process see hilborn v commissioner t c pincite petitioners argue that their easement is different from easements in prior cases before the court because their easement is more than a facade easement it is a full envelope easement they contend that their easement is more restrictive than existing local laws and reduces development potential petitioners provide examples of properties for which the lpc approved a rear addition petitioners’ property is a certified_historic_structure within the meaning of sec_170 because it is in a registered_historic_district and was certified as such by the secretary of the interior through the national park service in response to petitioners’ request on date the easement at issue preserves petitioners’ property as a certified_historic_structure we find that the easement was more restrictive than the landmarks law the landmarks law mandates that petitioners obtain approval from the lpc before making changes to their property while the deed imposes certain clearly defined restrictions and gives the trust unlimited discretionary authority to approve or deny changes to petitioners’ property the lpc passively monitors changes to historic buildings while the trust actively monitors changes to historic buildings the lpc relies heavily on complaints as part of its monitoring the trust performed annual inspections and kept records including photographs when the lpc reviews a building it looks at it from the perspective of the streetscape approval from the lpc to make improvements to a property is based on a comparison of the surrounding historical properties that means petitioners may be given authority from the lpc to make improvements to their property as long as their building remains consistent with the exterior architectural features of neighboring improvements the properties directly across the street from petitioners’ building are five or more stories high while petitioners’ property is only four stories above ground if petitioners applied for a permit to build an additional story there is a chance the lpc would allow petitioners to do so as long as the addition was consistent with the exterior architectural features of neighboring buildings the deed however requires that improvements to the property involving the existing front sides rear and height of the building need written approval from the trust there is a risk that the trust will deny an improvement at trial an employee of the trust testified that the approval process of the trust was different from that of the lpc and that the trust did not approve all projects that met the qualifications of the lpc the landmarks law states specifically that the lpc is not authorized to regulate or limit the height and bulk of buildings or to regulate and determine the area of yards courts or other open spaces n y city admin code sec a the trust with its unlimited discretion may deny petitioners’ request to make any changes to their home for any reason while the lpc must follow specific guidelines in its decisionmaking the trust has the ultimate say in granting petitioners the right to make changes to their property petitioners however have the option of appealing a denied permit request with the lpc and changing the lpc’s decision john weiss deputy counsel to the lpc testified that in order for the lpc to review a change application_for a covered property both the property owner and the easement holder must sign the change application if the easement holder refused to sign the change application then the lpc would not approve it here the easement holder was the trust therefore the lpc would require the trust’s approval before reviewing a change application_for petitioners’ property mr weiss also testified the lpc must obtain either the consent of the property owner or a court order to enter the premises of a covered property the trust however has the right to enter petitioners’ property without a court order the trust’s monitoring visits require an appointment because the trust needs access to the property’s backyard the trust thus places a larger burden on petitioners’ property rights than the landmarks law the court on several occasions has considered whether a conservation deed of easement was more or less restrictive than local law in order to determine whether a contribution was for conservation purposes in east llc v commissioner tcmemo_2011_84 the taxpayer contributed a conservation_easement deed for a townhouse in a historic_district in new york city to the nat the deed of easement prohibited the taxpayer from altering the townhouse’s facade without the written consent of the donee organization in particular the deed prohibited the taxpayer from erecting ‘any new or additional exterior improvements on the subject property or in the open space above or surrounding the townhouse’ without the express written consent of nat id slip op pincite we observed that the lpc would need to approve any alteration made to the taxpayer’s property we further observed that in making its determination to approve an alteration the lpc would consider whether an alteration would ‘change destroy or affect any exterior architectural feature’ of the subject property and in the case of an improvement ‘whether such construction would affect or not be in harmony with the external appearance of other neighboring improvements’ id pincite quoting n y city admin code sec a we found in east llc that the lpc’s determination would consider the external appearance of the townhouse’s facade and the ability of the taxpayer to alter the aesthetics of the subject property by building above it id consequently we found that the deed of easement in east llc was not more restrictive than the landmarks law holding i t is local law and the rules of the lpc that preserve the subject property and not the rights which nat possessed under the deed of easement id the deed in the instant case is more restrictive than the deed of easement in east llc for instance petitioners’ deed mentions specifically the rear of the building while the deed of easement in east llc did not this distinction constitutes a major difference in the rights already granted to the lpc under the landmarks law although both petitioners’ deed and the lpc restrict improvements relating to the exterior of the building it is unclear whether the lpc would limit changes to the rear of a property under the deed petitioners are expressly restricted from making alterations to the rear of the building without approval the lpc however is less restrictive it focuses on how change to a property would affect the neighborhood this is a significant difference we conclude that petitioners’ easement is more restrictive than local law in simmons v commissioner tcmemo_2009_208 the taxpayers granted facade easements via conservation_easement deeds for two historic properties in washington d c to l’enfant a historical preservation commission similar to the trust the conservation_easement deeds provided in effect that the taxpayers could not make any material changes to the respective facades in any way without l’enfant’s consent id slip op pincite the court found that the deeds were more restrictive than local law and allowed the taxpayers sec_170 deductions stating even if we were to accept respondent’s contention that the easements did not impose any restrictions on the taxpayer over and above those imposed by the district of columbia the easements still added an additional level of approval before any changes could be made to the properties the taxpayer is required to obtain l’enfant’s the lpc further requires approval for any significant modification of the existing bulk or envelope of a building n y city admin code sec x c this language is likewise less restrictive than the language in petitioners’ deed which prohibits any alterations significant or not to the rear of the building without approval consent to make any changes to the facades even if those changes are allowable under district of columbia preservation laws id pincite we thus concluded that the approval process alone was enough to differentiate rights granted under the deeds from those already in place under local law in scheidelman v commissioner tcmemo_2013_18 the taxpayer contributed an architectural conservation facade easement for a townhouse in new york city to the nat the court concluded that the taxpayer’s argument that the lpc did not enforce restrictions as effectively as the nat was speculation not supported by anything but anecdotes and contrary to evidence specifically related to the property id at we concluded that the easement did not materially diminish the value of the taxpayer’s property unlike the deed in scheidelman which provided a conservation_easement only for the facade petitioners’ deed concerns the front side rear and measured height of property as required by sec_170 following the enactment of the ppa in we note that the taxpayer in scheidelman completed her donation in and therefore the special requirements of sec_170 did not apply we also find petitioners’ arguments regarding the trust’s ability to enforce restrictions more effectively than the lpc to be convincing in dunlap v commissioner tcmemo_2012_126 taxpayers granted a facade easement on their loft building in new york city to the nat the taxpayers’ property had a special sound first-class condition designation with the lpc which caused it to be subject_to a higher standard of preservation than most other historic structures in new york city the court found that because the building had the sound first-class condition designation the facade easement was not more stringent than the lpc regulations and enforcement the nat had failed to provide any easement monitoring of the property donated in until the court also noted that the nat appeared to be more concerned with making money for sms a for-profit entity which employed many of the people who were held out to third parties as working for the nat and which was owned by the same two people who founded the nat than monitoring and enforcing the terms of the facade easements it held until when its obligations to sms ended we concluded that the value of the easement was zero unlike the easement in dunlap petitioners’ property does not have a sound first-class condition designation approximately buildings of the big_number structures in new york city that the lpc monitors have this designation a property with this designation is subject_to a higher standard of preservation we also find that the trust monitored and enforced the terms of the easement it held on petitioners’ property whereas it is unclear whether the lpc ever inspected the property we note that the taxpayers in dunlap completed their donation before the enactment of sec_170 and their donation concerned only the facade of their loft building we further note that although prior cases criticized the trust for its affiliation with sms we are not convinced that the trust engaged in the same practices at the time of petitioners’ donation finally in herman v commissioner tcmemo_2009_205 the taxpayer donated the unused development air rights via a conservation_easement deed in a historic property in new york new york to the nat we found that an easement restricting only air rights and the maximum height of the building was not restrictive enough to preserve the certified_historic_structure of the building although the deed in herman was not restrictive enough to preserve the certified_historic_structure of the building we note that petitioners’ deed is much more restrictive than the deed in herman unlike the deed in herman petitioners’ deed restricts them from making changes not only to the height of the building but also to the building’s front side and rear as well as the building’s surrounding property we further note that although the deed allows the trust to consent to changes to petitioners’ property the deed requires any rehabilitative work or new construction on the facades to comply with the requirements of all applicable federal state and local_government laws and regulations sec_1_170a-14 income_tax regs specifically allows a donation to satisfy the conservation purposes test even if future development is allowed as long as that future development is subject_to local state and federal laws and regulations see simmons v commissioner slip op pincite therefore the deed complies with sec_170 we conclude that petitioners’ easement has a conservation_purpose exclusively for conservation purposes a conservation_purpose in perpetuity like sec_170 sec_170 specifies that the conservation_purpose must be protected in perpetuity sec_170 provides that a contribution shall not be treated as exclusively for conservation purposes unless the conservation_purpose is protected in perpetuity although subsections h c and h both require perpetuity they are separate and distinct requirements sec_170 specifies that the interest_in_real_property donated by taxpayers must be subject_to a use restriction in perpetuity whereas sec_170 specifies that the conservation_purpose of the conservation easement must be protected in perpetuity belk v commissioner t c pincite sec_1_170a-14 income_tax regs we discussed sec_170 perpetuity in east llc quoting the legislative_history i t is intended that contributions of perpetual easements qualify for a sec_170 deduction only in situations where the conservation purposes of protecting or preserving the property will in practice be carried out thus it is intended that a contribution of a conservation_easement qualify for a deduction only if the holding of the easement is related to the purpose or function constituting the donee’s purpose for exemption organizations such as historic trusts and the donee is able to enforce its rights as holder of the easement and protect the conservation purposes which the contribution is intended to advance east llc v commissioner slip op pincite quoting h_r conf rept no pincite 1977_1_cb_519 we further discussed the legislative intent behind this perpetuity requirement quoting the senate report for the contribution to be protected in perpetuity t he contribution must involve legally enforceable restrictions on the interest in the property retained by the donor that would prevent uses of the retained_interest inconsistent with the conservation purposes by requiring that the conservation_purpose be protected in perpetuity the committee intends that the perpetual restrictions must be enforceable by the donee organization and successors in interest against all other parties_in_interest including successors in interest id pincite quoting s rept no pincite 1980_2_cb_599 in east llc v commissioner slip op pincite we found that the property at issue was not protected in perpetuity because the nat was not guaranteed a proportionate share of proceeds in the event of a casualty or condemnation before the mortgage held by first republic bank was satisfied in that case first republic bank retained a prior claim to all condemnation and insurance proceeds in preference to the donee until that mortgage was satisfied and discharged thus at any point before the mortgage was repaid the possibility existed for first republic bank to deprive the nat of value that should have otherwise been dedicated to the conservation_purpose id pincite the court ultimately found that the contribution of donated property failed to comply with the perpetuity requirements of sec_1_170a-14 income_tax regs in simmons we held that the easement was a valid conservation_easement we stated although the grants do allow l’enfant to consent to changes to the properties the grants require any rehabilitative work or new constructions on the facades to comply with the requirements of all applicable federal state and local_government laws and regulations simmons v commissioner slip op pincite respondent argues that there are facts to indicate that the trust was willing to terminate the easement upon petitioners’ request after the easement donation a lawyer on behalf of petitioners reached out to the trust about removing the easement respondent further argues that petitioners’ easement is comparable to those in other cases in which the court found that easements were not granted in perpetuity petitioners argue that the easement was granted in perpetuity because it is binding on petitioners’ successors and heirs it continues as a servitude running in perpetuity with the land and it survives the termination of the trust’s existence petitioners further argue that the trust enforces the easement in perpetuity by annually monitoring the property to ensure the property is in compliance with the easement reviewing any requests for alterations and tracking changes in ownership of the property to communicate easement obligations to new owners at trial an employee of the trust testified that petitioners were told the easement would not be removed the terms of the deed grant the easement in perpetuity under sec_170 the deed grants an easement in gross in perpetuity in on and to the property the deed further states this easement is binding and shall continue as a servitude running in perpetuity with the land this language shows petitioners’ intent to satisfy sec_170 we find that the trust was not willing to terminate the easement under the terms of the deed the easement is granted in perpetuity and may not be terminated at any time the trust has no intention of releasing the deed petitioners requested to have the easement terminated because they were having a difficult time selling their property and the trust denied this request moreover the facts in the case at hand are distinguishable from those in east llc because petitioners do not have a mortgage on the property and upon sale exchange or involuntary_conversion the trust is entitled to its proportionate share of future proceeds absent controlling state law that provides otherwise in carpenter v commissioner tcmemo_2013_172 we concluded that a conservation_easement will not qualify as a qualified_conservation_contribution if the deed allows mutual agreement to extinguish the easement and extinguishment by judicial proceedings is mandatory sec_1_170a-14 income_tax regs provides that a conservation_easement can be extinguished if the restrictions 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 the deed in this case allows the easement to be extinguished by judicial decree and requires the donees to use proceeds in a manner consistent with the conservation purposes of the original contribution the deed does not include other language regarding extinguishment the deeds in carpenter included the following language if circumstances arise in the future such that render the purpose of this conservation_easement impossible to accomplish this conversation easement can be terminated or extinguished whether in whole or in part by judicial proceedings or by mutual written_agreement of both parties provided no other parties will be impacted and no laws or regulations are violated by such termination carpenter v commissioner at the deed in the instant case does not include the mutual agreement language and meets the requirements of sec_1 170a- g income_tax regs b recording the deed respondent contends that the deed was not recorded under applicable new york law until and therefore its conservation_purpose was not protected in perpetuity under sec_170 for n y real prop sec_317 mckinney stated every instrument entitled to be recorded must be recorded by the recording officer in the order and as of the time of its delivery to him therefor and is considered recorded from the time of such delivery the deed was delivered for recording on date and the required fee was paid the deed delivered on date is identical to the deed as recorded the only error was on the cover sheet to the recording forms which incorrectly listed the property’s address the department of finance provided a receipt for the delivery of the deed therefore the deed was deemed recorded on date see manhattan co v laimbeer n e n y in the matter of deeds and mortgages it is constantly spoken of that such papers are recorded when left at the clerk’s office for such purpose furthermore sec_1_170a-14 income_tax regs provides a deduction shall not be disallowed under sec_170 and this section merely because the interest which passes to or is vested in the donee organization may be defeated by the performance of some act or the happening of some event if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible we find the possibility that the deed would not be recorded because of a clerical_error in the cover sheet to be remote but cf solutto v commissioner tcmemo_1993_614 finding that the possibility of the donee organization to which the taxpayers granted facade easements of their units in a condominium building losing the easement was not so remote as to be negligible because the organization did not obtain subordination agreements to protect it from foreclosure even though the organization had lost up to of its accepted easements to foreclosure the easement restrictions were unenforceable until several years after the purported donation and the easement did not stand in priority to a particular security_interest aff’d without published opinion 67_f3d_314 11th cir accordingly we find that the easement was contributed exclusively for conservation purposes sec_1_170a-14 income_tax regs cross-references sec_1 170a- e income_tax regs which likewise provides 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 event in order that it might become effective no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible c qualified_appraisal to be a qualified_appraisal under sec_170 an appraisal of property must be treated as a qualified_appraisal under regulations or other guidance prescribed by the secretary and must be conducted by a qualified_appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the secretary definition of qualified_appraisal sec_1_170a-13 income_tax regs defines a qualified_appraisal as a document that among other things relates to an appraisal that is made not earlier than days before the date of contribution of the appraised property and not later than the due_date including extensions of the return on which a deduction is first claimed under sec_170 is prepared signed and dated by a qualified_appraiser includes a a description of the property appraised b the fair_market_value of such property on the date of contribution and the specific basis for the valuation c a statement that such appraisal was prepared for income_tax purposes d the qualifications of the qualified_appraiser and e the signature and taxpayer_identification_number of such appraiser and does not involve an appraisal fee that violates certain prescribed rules the parties stipulated that mr haims who performed the appraisal for petitioners is a qualified_appraiser as the term is defined in sec_1_170a-13 income_tax regs the regulation imposes substantive requirements on the content of an appraisal report 682_f3d_189 2d cir vacating and remanding tcmemo_2010_151 a qualified_appraisal provides the irs with sufficient information to evaluate the claimed deduction and deal more effectively with the prevalent use of overvaluation 109_tc_258 aff’d without published opinion 166_f3d_332 4th cir the parties agree that the haims report meets the reporting requirements of certain subdivisions in sec_1_170a-13 income_tax regs however respondent claims that the haims report fails to meet the reporting requirements of sec_1_170a-13 i j and k income_tax regs pursuant to sec_1_170a-13 income_tax regs an appraisal report must include the date or expected date of the contribution the haims sec_170 provides further restrictions for any contribution made the year after the enactment of the ppa see ppa sec a stat pincite6 because petitioners made their contribution in the year in which the ppa was enacted sec_170 does not apply in this case however the parties stipulated that the haims appraisal included a description of the building its address block and lot and photographs appraisal reports the date or expected date of contribution as date therefore petitioners’ filings gave respondent sufficient information to determine that the expected date of contribution was in date pursuant to sec_1_170a-13 income_tax regs an appraisal report should include the appraised fair_market_value of the donated property on the date or expected dated of contribution fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_1 c income_tax regs the haims appraisal report used the phrase market_value which it defined as follows the most probable price as of a specified date in cash or in terms equivalent to cash or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale with the buyer and seller each acting prudently knowledgeably and for self interest and assuming that neither is under undue duress although we have previously observed that the phrase market_value is not necessarily synonymous with fair_market_value depending on how the term is defined and used see crimi v commissioner tcmemo_2013_51 at the appraisal used a standard of market_value as opposed to fair_market_value there is no discernible difference between market_value as used by the haims appraisal and the definition of fair_market_value in the regulation we have noted that three elements are necessary for a definition to mirror fair_market_value the parties are reasonably aware of all facts relevant to the valued property the parties cannot be under any compulsion to buy or sell and the parties must be considered hypothetical rather than actual persons 120_tc_174 aff’d in part vacated in part and remanded sub nom j p morgan chase co v commissioner 458_f3d_564 7th cir the definition of market_value as used in the haims appraisal is consistent with these criteria and meets the requirements of sec_1 170a- c ii i income_tax regs see also 139_tc_371 crimi v commissioner tcmemo_2013_51 pursuant to sec_1_170a-13 income_tax regs an appraisal must include the method of valuation used to determine the fair_market_value the haims appraisal uses the before and after method the haims appraisal explained and identified the method used including how a paired sales analysis was used and a percentage reduction was applied to the before value the haims appraisal meets the requirements of sec_1_170a-13 income_tax regs see scheidelman v commissioner f 3d pincite pursuant to sec_1_170a-13 income_tax regs an appraisal must report the specific basis for valuation the haims appraisal explains that it used an an empirically driven market study using paired sales data residential properties in new york the haims appraisal also provides detail on how the properties were selected mr haims’ approach was very similar to the approach taken in simmons the simmons appraisals which were qualified appraisals adequately described the parcels of land owned by the taxpayer and the structures built thereon contained lengthy discussions of historic preservation easements in general and identified the method of valuations used and the basis for the valuation reached the simmons appraisals also contained statistics gathered by l’enfant that the appraiser took into account in preparing the appraisals thus respondent may deem mr haims’ ‘reasoned analysis’ unconvincing but it is incontestably there scheidelman v commissioner f 3d pincite the haims appraisal meets the requirements of sec_1_170a-13 income_tax regs generally accepted appraisal standards sec_170 as amended by the ppa specifies that the qualified_appraisal must be conducted by a qualified_appraiser in accordance with generally accepted appraisal standards the department of the treasury provided guidance in the form of notice_2006_96 2006_2_cb_902 according to that notice an appraisal will meet the specifications of sec_170 if for example the appraisal is consistent with the substance and principles of the uniform standards of professional appraisal practice ‘uspap’ id sec_3 c b pincite respondent contends that there were serious defects in the haims appraisal and that it was inconsistent with uspap respondent contends that mr haims used department of finance records when he should have used department of building records in addition respondent contends that the after-value analysis mr haims used is not consistent with uspap petitioners contend that mr haims did use department of building records appraising is not an exact science and has a subjective nature the haims appraisal meets the specifications of sec_170 accordingly we find that the haims appraisal was a qualified_appraisal for purposes of sec_170 petitioners are entitled to a charitable_contribution_deduction under sec_170 d valuation no established market exists for determining the fair_market_value of an easement simmons v commissioner slip op pincite see also hilborn v commissioner t c pincite we have used the before and after approach on numerous occasions to determine the fair market values of restrictive easements with respect to which charitable_contribution deductions are claimed see eg hilborn v commissioner t c pincite simmons v commissioner tcmemo_2009_208 griffin v commissioner tcmemo_1989_130 aff’d 911_f2d_1124 5th cir under this approach the fair_market_value of the restriction is equal to the difference if any between the fair_market_value of the encumbered property before the restriction is granted and its fair_market_value after the restriction is granted sec_1_170a-14 income_tax regs where the grant of a conservation restriction has no material effect on the value of the property or serves to enhance rather than reduce the value of the property no deduction is allowed sec_1_170a-14 income_tax regs the before value of the property generally reflects the highest_and_best_use of the property in its condition just before the donation of the easement hilborn v commissioner t c pincite the highest_and_best_use of the property in its before condition takes into account the manner by which the property likely would have been developed absent the easement simmons v commissioner slip op pincite the evaluation of that likelihood also takes into account the effect of existing zoning or historic preservation laws that already restrict the property’s development regardless of the existence of the restrictive easement id both petitioners and respondent submitted expert reports regarding the value of petitioners’ easement respondent’s expert was richard marchitelli executive managing director of cushman wakefield mr marchitelli has appraised facade easements in new york city including townhouses he is a member of the appraisal institute petitioners’ expert was gary miller president of nico valuation services ltd he is a member of the appraisal institute mr miller has valued more than dollar_figure billion of real_estate both experts agree that the before value of petitioners’ townhouse was dollar_figure they have different reasoning for reaching the fair_market_value and they differ on the after value of the property respondent’s expert believes that the after value of the property was dollar_figure and that the easement had no influence on the fair_market_value of the property petitioners’ expert believes that the after value is dollar_figure resulting in an easement value of dollar_figure marchitelli report and testimony the marchitelli report used the before and after method to determine the value of the easement the report compares sales of townhouses in the upper east side of manhattan that were not encumbered by easements to sales of townhouses in the upper east side that were encumbered by easements the findings in the report indicate that wider larger townhouses tend to sell for a higher price per square foot than smaller narrower townhouses the report discussed seven sales involving upper east side landmark townhouses encumbered by facade easements the sales took place between date and date but all the easements were donated before the ppa was enacted in the report includes copies of the deeds for the seven properties the deeds for these easements state the term ‘facade’ as herein consists of all exterior surfaces of the improvements on the property including all walls roofs and chimneys several of these deeds include language which limits the deed to exteriors that are visible on the opposite side of the street mr marchitelli testified that there are different types of easements and not all easements cover side walls or rear walls he believes that the data does not support a different value for different types of easements the seven sales without easements had prices ranging from dollar_figure to dollar_figure per square foot only one townhouse was smaller than petitioners’ property the average price of townhouses without easements was dollar_figure per square foot the seven townhouses with easements had prices ranging from dollar_figure to dollar_figure per square foot the townhouses in five of these seven sales were larger than petitioners’ townhouse the average price of those with easements was dollar_figure per square foot mr marchitelli testified that wider townhouses are more desirable none of these townhouses was in the same district as petitioners’ property four of these townhouses were sold after the date of petitioners’ easement mr marchitelli testified that there were no comparable properties at the time in the same district as petitioners’ townhouse he further testified that he determines the size of a townhouse using the tax maps rather than the square footage of the living area of the townhouse because he believes the square footage of the living area overstates the size of the home miller report and testimony the miller report uses the sales comparison approach to the before and after method by looking at the sales of similar_property in surrounding neighborhoods the size used for comparisons ranged from big_number to big_number square feet to determine the value of the facade easement the report analyzed the market to determine whether the encumbrance of properties by conservation easements has any resultant effect on value the report describes petitioners’ easement as an envelope easement that preserved the existing front rear top and any exposed sides of the building from unauthorized alterations the report notes that petitioners’ townhouse is small for the market the miller report addresses floor area ratio far which is the total floor area in a zoning lot divided by the lot area of that zoning lot properties in new york new york are subject_to zoning restrictions based on far if two or more buildings are in the same zoning lot the far is the sum of their floor areas divided by the lot area the miller report concludes that petitioners could be allowed to develop an additional big_number square feet on the basis of the unused development_right in place the report explains that it is likely that petitioners’ unused development_right would be used in the form of a 15-foot extension on the rear and one or two additional levels above the fourth story mr miller testified that he would not expect a purchaser to build a four-story rear addition which would be an increase in bulk the report contends that this expansion would be subject_to strict guidelines in order to value the easement the report looked at nine paired sales--four with respect to a property referred to as easement no and five with respect to another property referred to as easement no sales of properties with easements were compared to sales of comparable properties that did not have easements adjustments were made and the remaining difference in price shows the impact of the easement the deeds for both of the properties with easements described each of the easements as a scenic open space and architectural facade conservation_easement on the property exclusively for conservation purposes a ratio was used to compare the price the easement property should have sold for according to sales of comparable unencumbered properties and the actual sale price of the encumbered property the sale price per square foot was the primary unit of comparison the two properties with easements that were used in the paired sales analysis were much larger than petitioners’ townhouse these properties have square footage of big_number and big_number the ratios reflecting a discount ranged from -8 to -35 for the first property which was big_number square feet the range of ratios for the property with big_number square feet was -2 to -15 the miller report concluded that petitioners’ easement demonstrates a diminution in value of of its encumbered value this would reduce the value of the property to dollar_figure per square foot from dollar_figure per square foot during his testimony mr miller stated that there’s no scientific way to break down the parts referring to the diminution in value he believes that his report explains how he reached the diminution in value of he testified that keeping a residence in good repair is more expensive if you have an easement because you are required by the easement to keep it maintained and preserved analysis respondent contends that petitioners’ easement has no value respondent compares it to the easements in dunlap v commissioner tcmemo_2012_126 and scheidelman v commissioner tcmemo_2013_18 as discussed above in dunlap the taxpayers donated a facade easement regarding a property in new york new york to the nat that restricted the ability to alter construct or remodel the facade without the nat’s express written consent the donation took place in we concluded that the value of the facade easement was zero because the it did not result in increased restrictions on that property above those required and enforced by the lpc on the date of the donation in scheidelman we held that the taxpayers’ facade easement was valued at zero because among other things the property was already restricted by the lpc the facade easement was donated in respondent argues that petitioners’ easement also mirrors the existing restrictions already in local law mr marchitelli had several concerns with the miller report he believes that people buy a house to live in and he testified that townhouses historically have not been renovated to increase their size he believes that the miller report overemphasized the value of development rights and that the market does not attach significance to the development rights mr marchitelli raised the issue that the miller report does not compare the easement properties discussed in the report with petitioners’ townhouse he believes that comparisons are being made to two separate properties with easements and that the report does not compare these properties to petitioners’ townhouse he believes that this analysis makes the report convoluted petitioners contend that it is appropriate to make adjustments to comparable sale figures when using the compared sales approach see friedberg v commissioner tcmemo_2011_238 slip op pincite they further contend that if a buyer in the carnegie hill neighborhood had the choice of buying two identical properties at the same price but for the easement the buyer would choose the property without the easement mr miller testified that he did not compare petitioners’ property to the comparison sale properties because petitioners’ property was substantially lower in value mr miller criticized the marchitelli report for not making adjustments for the condition of property such as an elevator and servant’s quarters ordinarily any encumbrance on real_property however slight would tend to have some negative effect on the property’s fair_market_value evans v commissioner tcmemo_2010_207 slip op pincite we do not find respondent’s expert report credible insofar as it maintained that an easement would have absolutely no effect on the fair_market_value of a valuable piece of real_estate simmons v commissioner slip op pincite in 615_f3d_321 5th cir vacating and remanding 131_tc_112 the court_of_appeals for the fifth circuit noted r ather extraordinarily the commissioner’s expert assigned the easement a value of zero the paired sales analysis involves a comparison of the fair_market_value of a property with and without an easement the fair_market_value of the property with the easement is divided by the fair_market_value of the property without the easement to derive a diminution percentage attributable to the conservation easement involved strasburg v commissioner tcmemo_2000_94 slip op pincite n we have approved this method which we refer to as the percentage diminution approach see eg butler v commissioner tcmemo_2012_72 slip op pincite since both respondent and petitioners’ experts agree that the before value is dollar_figure we will use that as the before value we conclude that neither petitioners nor respondent was persuasive about the value of the easement we do not agree with respondent that the easement had no value to determine the value of the easement we should consider whether the easement is more restrictive than the restrictions provided by local law see 85_tc_677 as discussed above petitioners’ easement is more restrictive than local law respondent’s reliance on dunlap and scheidelman is misplaced moreover we have previously allowed charitable_contribution deductions even if the property was subject_to local conservation law before the granting of the easement simmons v commissioner slip op noting that local preservation laws do not necessarily prevent charitable_contributions see griffin v commissioner tcmemo_1989_130 nicoladis v commissioner tcmemo_1988_163 petitioners also did not meet their burden of proving that the value of the easement is dollar_figure we do not rely on easement sale no in the miller report because the property with the easement is big_number square feet we realize that appraisers have to rely on sales that are available at the time of the appraisal and that adjustments can be made however the property used for easement sale no is substantially larger than petitioners’ property and a reasonable comparison cannot be made the property used for easement no i sec_26 feet wide and petitioners’ townhouse is only feet wide the testimony of both mr miller and mr marchitelli indicates that a wider townhouse has more value than a narrow townhouse twenty adjustments were made in this comparison when numerous adjustments have to be made there is a likelihood that the outcome is less reliable than in a comparison where fewer adjustments have to be made the easement sale no property is still larger than petitioners’ property but unlike the easement sale no property it is not substantially larger the property used for easement no is big_number square feet and feet wide this is still larger and wider than petitioners’ property but it provides a more reasonable comparison than easement sale no mr miller made adjustments to the four comparable sales and the diminution in value ranged from to the diminution in value used by mr miller is too high we agree with petitioners that there is value for an envelope easement there is a reasonable chance that the property may not be able to be developed or modified especially in the rear of the property even though all the paired sales in the miller report are based on wider properties than petitioners’ townhouse we conclude a more reasonable diminution would be the property in the comparable sale analysis for easement sale no with the diminution in value is the property closer is in size to petitioners’ property this comparable_property is big_number square feet and feet wide the price per square foot is dollar_figure according to the miller report the before value of petitioners’ property is dollar_figure per square foot mr miller made adjustments in using this sale including adjustments for size physical characteristics and condition both the comparable_property and the easement no property are five feet wider than petitioners’ property we note that the easement no property in the miller report does not explicitly include the rear of the property the easement no property however is larger and wider than petitioners property and those differences balance out the easement no property does not include the rear of the property we are not required to accept the miller valuation in its entirety see 87_tc_892 74_tc_441 we have considered the expert reports and testimony and conclude that there should be only a reduction in value this decrease stems from heightened financial burdens of an eased facade enforcement actions of the trust and the scope of the easement see simmons v commissioner slip op pincite the value of petitioners’ easement is dollar_figure ii penalties respondent contends that petitioners are liable for penalties under sec_6662 or in the alternative under sec_6662 a sec_6662 ppa sec a stat pincite made several changes to sec_6662 sec_6662 provides a penalty for gross_valuation_misstatements gross_valuation_misstatements occurs when the value of any property reported on an income_tax return is or more of the amount determined to be the correct amount among other things see sec_6662 before the enactment of the ppa the threshold for gross_valuation_misstatement was or more of the amount determined to be the correct amount ppa sec a stat pincite the ppa also eliminated the reasonable_cause exception for gross_valuation_misstatements id petitioners valued the easement at dollar_figure the amounts they reported on their and federal_income_tax returns reflected this value we conclude that the easement has a value of dollar_figure thus petitioners’ valuation of dollar_figure is greater than of the amount determined to be the correct value petitioners are liable for a gross_valuation_misstatement therefore a penalty is imposed on the portion of the underpayment attributable to the gross_valuation_misstatement the reasonable_cause exception does not apply in the case of gross_valuation_misstatements with respect to charitable donations see sec_6664 a penalty pursuant to sec_6662 applies to any portion of an underpayment for the year to which a deduction is carried that is attributable to a gross_valuation_misstatement for the year in which the carryover of the deduction arises see sec_1_6662-5 income_tax regs petitioners therefore are liable for this penalty for both tax years and petitioners contend that the sec_6662 penalty should not be assessed because it is an excessive fine under the eighth amendment to the united_states constitution the eighth amendment provides excessive bail shall not be required nor excessive fines imposed nor cruel and unusual punishments inflicted u s const amend viii the touchstone of the inquiry is the principle of proportionality the amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish 524_us_321 the purpose of civil_tax_penalties is to encourage voluntary compliance cf 469_us_241 congress’ purpose in the prescribed civil penalty sec_6651 was to ensure timely filing of tax returns to the end that tax_liability will be ascertained and paid promptly indeed the commissioner’s policy statement explains that p enalties are used to enhance voluntary compliance penalties provide the service with an important tool because they enhance voluntary compliance by taxpayers internal_revenue_manual pt date in 303_us_391 the supreme court analyzed whether a civil_fraud penalty under the revenue act of was punishment or purely remedial in character the court found the penalty to be remedial stating the remedial character of sanctions imposing additions to a tax has been made clear by this court in passing upon similar legislation they are provided primarily as a safeguard for the protection of the revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud id pincite in 106_f3d_1445 9th cir aff’g tcmemo_1993_281 the court_of_appeals for the ninth circuit held that the irs’ imposition of negligence and substantial_understatement penalties under sec_6662 did not violate the excessive fines clause because they are remedial and do not constitute punishment the court_of_appeals held that the penalties at issue are purely revenue raising because they serve only to deter noncompliance with the tax laws by imposing a financial risk on those who fail to do so and that the taxpayer failed to establish that the penalties in question were penal sanctions unrelated to the government’s interest in raising revenue id pincite5 we have similarly found contentions that civil_tax_penalties violate the excessive fines clause to be without merit see eg 26_tc_107 ryan v commissioner tcmemo_1998_62 louis v commissioner tcmemo_1996_257 aff’d 170_f3d_1232 9th cir sec_6662 does not violate the excessive fines clause as the court_of_appeals for the fourth circuit stated even assuming arguendo that the excessive fines clause is implicated in this case there is no basis for concluding that the civil_tax_penalty is excessive if the civil_tax_penalty is always calculated as a percentage of the tax_deficiency regardless of the means by which the income is accrued the sanction could not be excessive as to one person but not excessive as to another 62_f3d_97 4th cir aff’g tcmemo_1994_128 sec_6662 is calculated as a percentage of an underpayment so it bears a relationship to the gravity of the offense that it is designed to remedy moreover perceived overvaluation of noncash charitable_contributions prompted congress to amend the tax laws several times consistent with this perception the ppa lowered the threshold for imposing penalties related to deductions for charitable_contribution property such congressional actions demonstrate the remedial nature of the penalty and congress’ intent to regulate the difficult realm of valuing charitable_contribution property b sec_6662 respondent argues in the alternative that petitioners are liable for a sec_6662 and b and accuracy-related_penalty due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax this issue does not need to be addressed since petitioners are liable for a sec_6662 penalty any contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-116301-00 date date x sub y venture venture venture venture venture venture property property property property property property dollar_figurex1 dollar_figurex2 dollar_figurex3 dollar_figurex4 dollar_figurex5 dollar_figurex6 dollar_figurey1 dollar_figurey2 dollar_figurey3 dollar_figurey4 dollar_figurey5 dollar_figurey6 x d1 d2 d3 dear this letter responds to a letter dated date and subsequent correspondence written by your authorized representative on behalf of x requesting a ruling concerning sec_1362 of the internal_revenue_code according to the information submitted x was incorporated on d1 sub is a wholly owned subsidiary of x that was incorporated on d2 x and sub and are c corporations that file a consolidated_income_tax_return x has accumulated_earnings_and_profits x proposes to elect to be treated as an s_corporation and to treat sub as a qualified_subchapter_s_subsidiary qsub sub and y an unrelated entity are partners in limited_partnerships venture sec_1 through sub is a limited_partner in each venture and through wholly-owned llcs sub owns an x general_partnership interest in each venture because no election will be made for any of the wholly-owned llcs each llc will be disregarded as an entity separate from its owner under sec_301_7701-3 each venture owns and operates a single commercial real_estate property propertie sec_1 through in the fiscal_year ending d3 venture accrued approximately dollar_figurex1 in rents and incurred approximately dollar_figurey1 in relevant expenses with respect to property venture accrued approximately dollar_figurex2 in rents and incurred approximately dollar_figurey2 in relevant expenses with respect to property venture accrued approximately dollar_figurex3 in rents and incurred approximately dollar_figurey3 in relevant expenses with respect to property venture accrued approximately dollar_figurex4 in rents and incurred approximately dollar_figurey4 in relevant expenses with respect to property venture accrued approximately dollar_figurex5 in rents and incurred approximately dollar_figurey5 in relevant expenses with respect to property venture accrued approximately dollar_figurex6 in rents and incurred approximately dollar_figurey6 in relevant expenses with respect to property the ventures provide various services to its tenants services provided by venture sec_1 and to its various tenants include but are not limited to maintenance and repair of parking lots parking structures and easements repair maintenance and decoration of common areas snow removal from common areas provision of all electric light bulbs tubes and ballasts for building standard fixtures janitorial services window washing repair service for any building equipment or machinery installation of tenant improvements services provided by venture to its various tenants include but are not limited to providing managers engineers porters and matrons providing repairs and general nightly maintenance of offices elevators public corridors lobbies restrooms and stairwells dusting vacuuming and trash removal venture contracts with an independent hotel management company which provides extensive services to property on behalf of venture except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation sec_1361 provides that except as provided in regulations i a corporation which is a qsub shall not be treated as a separate corporation and ii all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1_1361-4 states that the separate existence of a qsub is ignored for federal tax purposes thus a corporation which is a qsub shall not be treated as a separate corporation and all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and items of income deduction and credit of the s_corporation sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in this section sec_301_7701-3 provides that unless the entity elects otherwise a domestic eligible_entity is disregarded as an entity separate from its owner if it has a single owner llc will be a disregarded_entity of sub which in turn will be ignored for federal tax purposes after x makes the qsub election for sub thus x will hold for federal tax purposes direct general_partnership interests in venture sec_1 through based solely on the information submitted and the representations made if x makes a valid election to be an s_corporation and a valid qsub election for sub the rents that x receives through venture sec_1 through will not be passive_investment_income as described in sec_1362 except as specifically set forth above we express no opinion as to the federal tax consequences of the transaction described above under any other provision of the code further we express no opinion on whether x is a small_business_corporation eligible to be an s_corporation nor whether sub is eligible to be a qualified_subchapter_s_subsidiary under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours jeanne m sullivan acting senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index no washington dc person to contact telephone number refer reply to i i g ebeo br1 - plr-118087-98 jan employer plan custodial_account agreement custodian city x i dear this is in reply to your letter dated date and subsequent correspondence on behaif of the above employer requesting a ruling on the federal tax consequences of employer's deferred_compensation plan the plan and related custodial_account under sec_457 of the internal_revenue_code employer city x is an eligible_employer within the meaning of sec_457 of the code the plan is intended to be an eligible_deferred_compensation_plan to which sec_457 applies employer previously received a private_letter_ruling with respect to the plan on date the plan was subsequently amended and employer requests a ruling stating that the plan is in compliance with sec_457 as amended by the small_business job protection act of under the plan an employee participant may elect to defer compensation received for services to the employer until retirement death or separation_from_service with employer or until the occurrence of an unforeseeable_emergency the election to defer compensation must be made prior to the month for which the compensation is earned the plan provides for a catch-up computation for amounts deferred for one or more of the participant's last three taxable years ending before he attains normal i99igi tub retirement age under the plan the amounts that may be deferred under the annual maximum limitation and the catch-up provision are within the limitations set out in sec_457 of the code a participant or his beneficiary may elect the manner in which his deferred amounts will be distributed these include substantially equivalent monthly quarterly semi-annual or annual installments partial lump-sum payment the rest to be paid in substantially equivalent monthly quarterly semi-annual or annual installments or a lump sum cash payment the election must be made prior to the month any such amounts become payable to the participant or the beneficiary if the participant or his beneficiary fails to make a timely election concerning distribution of the deferred amounts benefits shall be paid at the time and in the manner prescribed by the plan the manner and time of benefit payout must meet the distribution_requirements of sec_457 and sec_401 of the code deferrals under the plan will be held in a custodial_account pursuant to the written custodial_account agreement between city x and custodian a bank amounts deferred under the plan will be transferred to the custodian or its agent as promptly as possible but in no event later than two business days after the applicable payroll date and will be invested promptly in accordance with the investment directions of the participant but in no event later than two business days following receipt of the amounts by the custodian or its agent the custodial_account agreement provides that it shall be impossible prior to t further provides that the assets of the custodial_account will never the satisfaction of all liabilities with respect to plan participants and their beneficiaries for any part of the funds of the custodial_account to be used for or diverted to purposes other than for the exclusive benefit of the participants or their beneficiaries as provided for in the plan inure to the benefit of the employer and will be held for the exclusive purposes of providing benefits to the participants and their beneficiaries and defraying reasonable expenses of administering the plan and the custodial_account no amount payable at any time under the plan will be subject in any manner to alienation by anticipation sale transfer assignment bankruptcy pledge attachment charge or encumbrance of any kind the plan provides that no payments to an alternate_payee pursuant to a domestic_relations_order may be made prior to the earliest date as of which payments to the participant could commence under the plan upon the receipt of a plan certifted domestic_relations_order a portion of the participant's account as determined under the plan certified domestic relation order shall be segregated in an account maintained on behalf of the alternate_payee sec_457 of the code provides rules for the deferral of compensation by an individual participant in an eligible_deferred_compensation_plan as defined in sec_457 sec_457 of the code provides that in the case of a participant in an eligible_deferred_compensation_plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid or otherwise made available to the participant or beneficiary sec_457 prescribes that an eligible_deferred_compensation_plan must meet the distribution_requirements of sec_457 sec_457 provides that for a sec_457 plan to be an eligible_plan the plan must have distribution_requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age ii when the participant is separated from service with the employer or iii when the participant is faced with an unforeseeable_emergency as determined under treasury regulations however sec_401 c i generally allows plans to postpone the required_beginning_date until april of the calendar_year following the later of the calendar_year in which the employee retires or in which he attains age sec_1_457-2 of the income_tax regulations defines an unforeseeable_emergency as a severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant or of a dependent loss of a participant's property due to casualty or other similar extraordinary an unforeseeable circumstances arising as a result of events beyond the control of the participant sec_457 provides that a plan maintained by an eligible governmental employer shalt not be treated as an eligible deferred_compensation pian unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries sec_457 provides that for purposes of sec_457 custodial accounts described in sec_401 shail be treated as trusts caf a basic requirement prescribed by sec_457 is that an eligible sec_457 plan must meet the sec_457 distribution_requirements described above in order to retain its tax-deferred eligible status a sec_457 plan would violate these provisions of sec_457 and regulations thereunder if the participant or anyone else received a distribution earlier than the earliest date established in sec_457 the plan provides that all distributions will be made in accordance with sec_457 sec_401 and the regulations thereunder based upon the provisions of the plan and the custodial_account agreement summarized above we conclude as follows the plan is an eligible_deferred_compensation_plan as defined in sec_457 of the internal_revenue_code_of_1986 amounts of compensation deferred under the plan including any income attributable to the deferred_compensation will be includible in gross_income for the taxable_year or years in which amounts are paid or otherwise made available to the participant or a participant's beneficiary in accordance with the terms of the plan the custodial_account established under the plan will be treated as a_trust for purposes of sec_457 no opinion is expressed concerning the timing of the inclusion in income of amounts deferred under any deferred_compensation plan other than the plan described above n addition this ruling applies only to deferrals made after the date this ruling is issued this ruling is directed only to the employer and its employees sec_6110 of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked if the adopted temporary or final regulations are inconsistent with any csf conclusion in the ruling see section dollar_figure of revproc_98_1 r b however when the criteria in section dollar_figure of revproc_98_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances gq sincerely yours ail robert d patchgll acting chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosure copy for sec_6110 purposes