qwhuqdo cid 5hyhqxh cid 6huylfh ’hsduwphqw cid ri cid wkh cid 7uhdvxu index no number release date taxpayer dear dvklqjwrq cid cid ’ cid cid cid cid cid cid person to contact telephone number refer reply to cc intl b1 plr-118585-99 date date this responds to your letter dated date as supplemented by your letter dated date you request a ruling that premiums received by taxpayer on policies of insurance or reinsurance of united_states_risks are exempt from the insurance excise_tax imposed by sec_4371 of the internal_revenue_code_of_1986 the ruling contained in this letter is predicated upon facts and representations submitted by or on behalf of taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party this office has not verified any of the above material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of the audit process taxpayer an insurance_company which was created in is a resident of france and seeks to qualify for benefits under the united states-france income_tax convention on the basis of article a under this article a resident of a contracting state will be entitled to all the benefits of the convention if i such resident is engaged in the active_conduct_of_a_trade_or_business in the first-mentioned state other than the business of making or managing investments unless these activities are banking or insurance activities carried on by a bank or investment_company ii the income is connected with or incidental to the trade_or_business in the first-mentioned state and iii the trade_or_business is substantial in relation to the activity in the other state that generated the income article b of the united states-france income and capital_tax convention provides that a taxpayer’s trade_or_business will be deemed substantial in relation to the activity in the other state if for the taxpayer’s preceding_taxable_year each of the following ratios equals at least and the average of the ratios exceeds i the ratio of the value of assets used or held for use in the conduct of the trade_or_business of the resident in the first mentioned-state to the value of assets used or held for use in the conduct of the activity in the other state ii the ratio of the gross_income derived from the conduct of the trade_or_business of the resident in the first mentioned state to the gross_income derived from the conduct of the activity in the other state iii the ratio of payroll expense of the trade_or_business of the resident in the first mentioned state for services performed in that state to the payroll expense of the activity in the other state for services performed in that other state the taxpayer has submitted information under penalties of perjury which establishes it is engaged in the active_conduct_of_a_trade_or_business in france and that the income derived is connected with or incidental to the trade_or_business in france the taxpayer has also submitted information under penalties of perjury which establishes that ratio i equals that ratio ii equals and that ratio iii equals for an average of the three ratios of taxpayer has thus submitted information establishing that it satisfies the test in article b and thus the trade_or_business in france is substantial in relation to the activity in the united_states therefore taxpayer meets the limitation_on_benefits test in article a of the convention pursuant to paragraph a of the enclosed agreement taxpayer's liability for federal excise_tax as agreed upon including liability resulting from reinsurance of u s risks with persons not entitled to exemption under the convention or another convention will commence date the letter_of_credit required by paragraph a of the enclosed agreement in the amount of dollar_figure must be in effect within days of the date the agreement is finally signed for the commissioner any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance policies issued by you pursuant to sec_46_4371-1 of the excise_tax regulations may rely upon a copy of this letter and or a copy of the approved closing_agreement as authority that they may consider premiums_paid to you on and after date as exempt under the united states-france income_tax convention from the federal excise_tax this is a ruling and is directed only to the taxpayer named above sec_6110 of the internal_revenue_code provides that this ruling may not be used or cited as precedent by any other taxpayer furthermore this ruling does not address the issues of whether taxpayer is an insurance_company or whether premiums_paid to taxpayer are deductible under sec_162 of the internal_revenue_code sincerely ___________________ w edward williams senior technical reviewer branch associate chief_counsel international enclosures copy of approved closing_agreement copy for sec_6110 purposes cc closing_agreement on final_determination covering specific matters under sec_7121 of the internal_revenue_code french insurer or reinsurer or taxpayer tax identification_number and the commissioner of internal revenue make the following closing_agreement whereas under the business profits article article of the united_states - france income and capital_tax treaty signed date and brought into force date and effective for taxable years beginning on or after date the treaty exempts insurance or reinsurance premiums_paid to a resident of france from the federal excise_tax imposed by sec_4371 and sec_4371 et seq of the internal_revenue_code_of_1986 as amended the code only to the extent that the french insurer or reinsurer does not reinsure such risks with a person not entitled to exemption from such tax under the treaty or another whereas sec_3 and dollar_figure of revproc_92_39 1992_1_cb_860 provide that the person required to remit the tax should consider the policy exempt only if prior to filing the return for the taxable_period such person has knowledge that the french insurer or reinsurer has entered into a closing_agreement to be liable as a united_states taxpayer for federal excise_tax due under sec_4371 on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise_tax under the treaty or any other convention and on premiums_paid or accrued when the french insurer or reinsurer did not qualify under the treaty for exemption from the excise_tax imposed by sec_4371 et seq of the code whereas the french insurer or reinsurer represents that it is and will continue to be eligible for benefits under the treaty and whereas the french insurer or reinsurer wishes to have its policies of insurance or reinsurance considered exempt from tax under the treaty it is hereby determined and agreed that taxpayer shall for purposes of this closing_agreement be liable as a united_states taxpayer for the federal excise_tax due under sec_4371 et seq of the code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise_tax under the treaty or any other convention and from policies issued or outstanding when the taxpayer did not qualify under the treaty for exemption from the excise_tax imposed by sec_4371 et seq of the code a returns of federal excise_tax due under and pursuant to this closing_agreement and sec_4371 et seq of the code shall be made by taxpayer or by taxpayer's authorized representative on taxpayer's behalf by filing form_720 quarterly federal excise_tax return for each return_period covered by this closing_agreement b if taxpayer reinsurers in whole or in part a policy of insurance or reinsurance with any person s not entitled to exemption from the excise_tax under the treaty or any other convention or if taxpayer issues or has outstanding a policy or polices when the taxpayer did not qualify under the treaty for exemption from the excise_tax imposed by sec_4371 et seq of the code the tax reportable on the return form_720 shall be computed on the basis of the percentage of such policy reinsured or on the basis of the premium accrued or received during the time period when taxpayer did not qualify for exemption under the treaty for purposes of the preceding sentence taxpayer may consider a reinsurer to be entitled to exemption from the excise_tax under the treaty or another convention if the reinsurer is a party to a closing_agreement with the internal_revenue_service irs or the service under this treaty or another convention or the reinsurer provides evidence that it is a resident_of_the_united_states or of a country with which the united_states has in effect a convention that waives the excise_tax without an explicit anti-conduit clause c forms shall be filed with the director internal_revenue_service center philadelphia pennsylvania u s a d taxpayer or taxpayer’s authorized representative shall make the required federal tax deposits of the federal excise_tax in such manner and at such times as are prescribed by regulations and explained in the instructions for form_720 taxpayer agrees that for purposes of examination of the federal excise_tax liability pursuant to this closing_agreement and for purposes of verifying the taxpayer’s entitlement to benefits under the treaty taxpayer will maintain for a period of six years from the end of each taxable_period to which this closing_agreement applies accounts and records of items of insurance and reinsurance that will be made available upon written request by the irs at the place mutually agreed upon by the service and taxpayer taxpayer will also maintain for six years and make available for inspection records to establish eligibility for treaty benefits taxpayer will be allowed days or other period of time determined as reasonable by the assistant_commissioner international within which to make available its accounts and records if it is determined that there is an underpayment in respect of any excise_tax determined to be due pursuant to this closing_agreement and sec_4371 et seq of the code the irs shall issue a statement of notice_and_demand for the tax due plus any interest and applicable penalties notice of any underpayment shall be sent to the taxpayer at the name and address shown on the form_720 if a form_720 was filed for the period which an underpayment is determined by the irs or otherwise to the taxpayer’s registered address in france payment of all additional_amounts due shall be made in accordance with the terms specified in the statement of notice_and_demand collection of such amounts not paid per notice_and_demand shall be in accordance with paragraph hereof a as security for payment of tax taxpayer shall cause an irrevocable letter_of_credit to be issued by a united_states bank that is a member of the federal reserve system or by a united_states branch or agency of a foreign bank that is on the national association of insurance commissioners list of banks from which letters of credit may be accepted in favor of the irs in the amount of dollar_figure seventy five thousand united_states dollars or such amount as may from time to time be mutually agreed upon by taxpayer and the service such letter_of_credit must be in effect within days of the date that the closing_agreement is signed for the commissioner of internal revenue b such letter_of_credit may be drawn upon after and to the extent that i ii the service issues a statement of notice_and_demand for any_tax due shown on a form_720 original amended or substitute for return that is not paid with such return or any proposed additional excise_tax liability sustained by the irs regional_director_of_appeals having jurisdiction over such matter if the time for filing a protest of such proposed liability has expired provided that the statement of notice_and_demand has been issued as provided in paragraph hereof c if after the conditions in paragraph b hereof have been met the tax interest and any applicable penalties are not paid in accordance with the terms of the statement of notice_and_demand collection of such amounts will be made by resorting to such letter_of_credit to the extent thereof before any levy or proceeding in court for collection is instituted against taxpayer d if such letter_of_credit is drawn upon it must be reinstated to dollar_figure or an amount as may have been agreed upon by the district_director and taxpayer within days after the date drawn upon a solely by reason of the execution by taxpayer and the commissioner of this closing_agreement any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance premiums pursuant to sec_46_4374-1 of the excise_tax regulations may consider premiums_paid to taxpayer after the effective date of this agreement as exempt under the treaty from the federal excise_tax b taxpayer agrees that the commissioner or his or her authorized delegate may disclose taxpayer’s name as an insurer or reinsurer that qualifies for exemption from the excise_tax under the treaty by publication or otherwise a this closing_agreement shall include as an attachment hereto a statement from the competent_authority of france as defined in article of the treaty certifying that taxpayer is a resident of france as defined in article of the treaty and a statement from the taxpayer that the taxpayer is not disqualified from receiving benefits under the treaty by reason of article of the treaty taxpayer shall submit such information in its statement as will establish its entitlement to benefits under the treaty b the statement from the competent_authority of france certifying that the taxpayer is a resident of france shall be effective for a period of three calendar years beginning with the year of receipt taxpayer agrees to renew the certificate of residency every three years and its own certification of eligibility for benefits under the treaty every year on or before the expiration date of the original certificate taxpayer agrees to provide an original and one copy of the re-certification along with a photocopy of this closing_agreement to internal_revenue_service constitution ave n w washington d c u s a attn cc intl taxpayer also agrees to notify the competent_authority of france and the irs of any change that results in its disqualification from receiving treaty benefits a this closing_agreement shall be effective as of date this agreement shall thereafter continue in effect unless terminated as provided in subparagraph b of this paragraph b this agreement may be terminated by either taxpayer or the commissioner by giving the other written notice of the notifying party’s intent to terminate the decision to terminate is solely at the discretion of the party giving such notice this agreement shall be terminated on the last day of the return_period immediately following the return_period within which the written notice of termination is given c taxpayer hereby agrees to file a return form_720 marked final return for the taxable_period within which this agreement terminates pursuant to paragraph b hereof and to furnish a duplicate of such final return to internal_revenue_service constitution ave n w washington d c u s a attn cc intl i d taxpayer agrees that the letter_of_credit issued pursuant to paragraph hereof shall remain in effect for a period of not less than days after the final return has been filed in accordance with subparagraph c hereof or until the examination of taxpayer’s returns is completed and any additional tax due has been paid whichever is later whereas the determinations set forth above are hereby agreed to by said taxpayer now this closing_agreement witnesseth that the said taxpayer and said commissioner of internal revenue hereby mutually agree that the determinations set forth shall be final and conclusive subject however to reopening in the event of fraud malfeasance or misrepresentation of material fact and provided that any change or modification of applicable statutes or tax conventions will render this agreement ineffective to the extent that is dependent upon such statutes or tax conventions in witness whereof the above parties have subscribed their names to these presents in triplicate signed this day of novembre by directeur financier commissioner of internal revenue by associate chief_counsel international dated thi sec_15th day of may by for assistant_commissioner lntemational dated this16th day of may


internal_revenue_service number release date index number ------------------------------------------ --------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number ------------------- refer reply to cc psi b03 plr-148944-09 date date legend legend company ------------------------------------------ ein ---------------- shareholder --------------------------- date ---------------------- date ---------------------- dear ------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of company by company’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated on date1 company represents that it was the intent of shareholder for company to be an s_corporation as of date2 however company's form_2553 election by a small_business_corporation was not timely filed company represents that both company and shareholder have reported their income consistent with company's intended status as an s_corporation company requests a ruling that it will be recognized as an s_corporation effective date2 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-148944-09 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective date2 within days following the date of this letter we will treat the election as timely made a copy of this letter should be attached to form_2553 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied as to whether company otherwise qualifies as a subchapter_s_corporation under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-148944-09 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


gordon and lorna kaufman petitioners v commissioner of internal revenue respondent docket no filed date in 134_tc_182 we granted r partial summary_judgment sustaining his disallow- ance of charitable_contribution deductions ps claimed on account of pw’s grant to n of a facade easement burdening their residence ps ask that we reconsider our grant of partial summary_judgment we must also address pw’s cash con- tributions to n and r’s determination of accuracy-related pen- alties held we did not err in kaufman v commissioner supra in concluding that the contribution of the facade easement failed as a matter of law to comply with the enforceability-in- perpetuity requirements under sec_1_170a-14 income_tax regs we therefore affirm our grant of partial summary_judgment to r on the grounds set forth in that report and shall deny ps’ motion to reconsider it held further pw’s cash payments to n were condi- tional at the end of and therefore not deductible for held further ps may deduct pw’s cash payments to n for held further ps are liable for an accuracy-related pen- alty only on account of their negligence in deducting the cash payments for frank agostino julie pruitt barry eduardo s chung eleanor e farwell michael mattaliano and michael e mooney for petitioners carina j campobasso for respondent halpern judge respondent determined deficiencies in and penalties with respect to petitioners’ federal_income_tax as follows penalties year deficiency sec_6662 sec_6662 dollar_figure big_number dollar_figure - - - dollar_figure big_number unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure we round all amounts to the nearest dollar verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner the deficiencies respondent determined result from his dis- allowance of petitioners’ deductions for contributions of a facade easement burdening their residence the facade ease- ment and of cash to the national architectural trust nat the penalties are accuracy-related_penalties relating to those deductions by amendment to answer respondent asserted an increased deficiency for of dollar_figure and an increased sec_6662 penalty for that year of dollar_figure earlier in this case respondent moved for summary judg- ment which we granted in part with respect to the facade easement contribution and denied in part with respect to the cash contribution and the penalties see 134_tc_182 petitioners then moved for us to reconsider our grant of partial summary_judgment several organizations receiving facade or other preservation easements and otherwise concerned with historic preserva- tion asked permission to file briefs in support of petitioners’ motion we took petitioners’ motion under advisement instructing the parties that we would proceed with a trial on the remaining issues in the case the cash contribution and the penalties and would address the motion following the trial we instructed the parties to incorporate their argu- ments in support of or in opposition to the motion in their posttrial briefs we denied the organizations’ requests to file briefs but instructed them to work with petitioners to develop a coordinated position which petitioners would set forth in their posttrial briefs in their opening brief peti- tioners assure us that it was prepared in accordance with our instruction we therefore assume that petitioners’ briefs incorporate petitioners and the organizations’ joint position we shall first set forth our findings_of_fact which are nec- essary to dispose_of the cash contribution issue and the pen- alties and which should provide a useful background for our discussion of our grant of partial summary_judgment we shall then set forth our reasons for sustaining our grant of partial summary_judgment and denying petitioners’ motion the organizations are trust for architectural easements formerly national architectural trust foundation for the preservation of historic georgetown national trust for historic preservation and capitol historic trust the trust for architectural easements notified us that it joined relevant portions of peti- tioners’ briefs verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports to reconsider it finally we shall dispose_of the remaining issues findings_of_fact introduction some facts are stipulated and are so found the stipulation of facts and the second stipulation of facts with accom- panying exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in massachusetts background petitioners are husband and wife gordon kaufman is the morris a adelman professor of management emeritus of the sloan school of management at the massachusetts institute of technology lorna kaufman has a ph d in developmental psychology from boston college and is president of her own company the property in lorna kaufman purchased real_property the property in boston massachusetts the property consists of a lot and a single-family residence a rowhouse which is petitioners’ home the property is in the south end historic preservation district the date letter lorna kaufman received a letter dated date from mory bahar mr bahar an nat area manager thanking her for her inquiry about nat’s federal historic preservation tax incentive program among other things mr bahar stated that the program allowed the owner of a nationally registered historic building to deduct between and percent of the value of the building on her federal_income_tax return he further stated that the program would require very little effort on her part because as part of nat’s service nat will be handling all the red tape and paper- work since both petitioners hold doctoral degrees and both could thus be referred to as dr kauf- man we shall avoid confusion by referring to them individually as gordon kaufman and lorna kaufman respectively verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner the application in late october or early date lorna kaufman preservation restriction submitted an application the agreement application the application to nat on its own form identifying the property as property to be considered for a preservation donation on the application she esti- mated the fair_market_value of the property as dollar_figure million and identified washington mutual bank fa the bank as holding a mortgage on the property in pertinent part the application states deposit a good_faith deposit of dollar_figure is required at the time of application if for any reason the necessary approvals cannot be obtained the deposit will be promptly refunded the deposit should be made to nat donor endowment when the trust accepts a donation it pledges to monitor and administer the donation in perpetuity since the trust receives no government funding and has no other source_of_income it requires that donors create an endowment that covers current operating costs and funds the trust’s long term stewardship endowment which is reserved for future monitoring and administration purposes the cash endowment contribution is set pincite of the value of the dona- tion tax deduction if the donation can not sic be processed in the timeframe required to qualify for a deduction a reduction in the cash contribution will be provided to the donor once the process is completed in at the time she submitted the application lorna kaufman made the required dollar_figure deposit the date letter lorna kaufman received a letter dated date from james kearns mr kearns president of nat in perti- nent part the letter states we are pleased to inform you that we have completed our discussions with the massachusetts historical commission and have reached agreement on a preservation restriction agreement in order to accept your donation in we ask that you agree to the fol- lowing verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports deliver to the trust by date a an executed and notarized preservation restriction agreement b a signed copy of this letter and c a check for a cash contribution to the trust of dollar_figure which is based on of the estimated easement valuation of dollar_figure since the final cash contribution is of the easement value it is expected that an additional_contribution amount will be due and the donor promises to send a check for that amount within ten days of receipt of the final appraisal report in the event the appraised value of the easement deduc- tion generates a contribution amount less than the above calculated esti- mate the trust will refund the excess within ten days of receipt of the final appraisal report schedule an appraisal within fifteen days of receiving this letter and ensure its completion by date the trust must review the new preservation restriction agreement with your lending institution s in order to ensure subordination according to its conditions in the event that the subordination of your mortgage s or historic cer- tification can not sic be achieved and or your appraisal cannot be com- pleted by date you will join with the trust in voiding the easement in this circumstance the trust will reimburse you for any disbursements made in an effort to achieve an enforceable donation including the cost of appraisal and your cash contribution to the trust once all the necessary steps have been completed the trust will provide you with an acknowledgment of your charitable_contributions and the appropriate irs form for you to submit with your tax_return the trust will also arrange for the deed to be recorded on date lorna kaufman signed a copy of the letter under the notation concurrence and returned it to nat along with a check for dollar_figure dated date drawn to nat the agreement in date lorna kaufman entered into a preservation restriction agreement the agreement with nat pursuant to which she granted to nat the facade easement restricting the use of the property the agreement recites its purpose it is the purpose of this preservation restriction agreement to assure that the architectural historic cultural and open space features of the property will be retained and maintained forever substantially in their current condition for conservation and preservation purposes in the public interest and to prevent any use or change_of the property that will significantly verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner impair or interfere with the property’s conservation and preservation values or that would be detrimental to the preservation of the property that purpose is achieved by lorna kaufman’s grant and conveyance to nat by way of the agreement of an easement in gross in perpetuity in on and to the property building and the facade being a preservation agreement on the property with certain delineated rights in pertinent part section iv c of the agreement also provides in the event this agreement is ever extinguished whether through con- demnation judicial decree or otherwise grantor agrees on behalf of itself its heirs successors and assigns that grantee or its successors and assigns will be entitled to receive upon the subsequent sale exchange or involuntary_conversion of the property a portion of the proceeds from such sale exchange or conversion equal to the same proportion that the value of the initial easement donation bore to the entire value of the property at the time of donation unless controlling state law provides that the grantor is entitled to the full proceeds in such situations without regard to the agreement grantee agrees to use any proceeds so realized in a manner consistent with the preservation purposes of the original con- tribution the lender agreement at the time the agreement was entered into the bank held a mortgage on the property a representative of the bank executed a document styled lender agreement lender agreement the lender agreement was attached to and recorded with the agreement the lender agreement ref- erences the property and in pertinent part provides the bank hereby joins in the agreement for the purpose of subordinating its rights in the property to the right of nat to enforce the agreement in perpetuity under the following conditions and stipulations a the mortgagee lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty hazard or accident occurring to or about the property and all proceeds of condemnation and shall be entitled to same in preference to nat until the mortgage is paid off and discharged notwithstanding that the mortgage is subordi- nate in priority to the agreement the term preservation agreement in the quoted language probably should be read preser- vation restriction since the agreement earlier recites lorna kaufman’s and nat’s reciprocal desires to grant and receive a preservation restriction as such term is defined in mass ann laws ch sec_31 and sec_32 lexisnexis supp conservation and preservation restrictions verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports the lender agreement was attached to the agreement and the agreement was recorded in the suffolk county massachusetts registry of deeds on date nat’s assistance nat assisted lorna kaufman in obtaining the bank’s agree- ment to subordinate its mortgage to the facade easement by submitting the required documents to the bank and following up to ensure the bank’s agreement nat provided gordon kaufman with a list of whom it considered to be qualified appraisers it also negotiated the terms of the agreement with the massachusetts historical commission and facili- tated approval of the agreement by it the city of boston and the national park service mr bahar answered basic inquiries by gordon kaufman about the deductibility of lorna kaufman’s contribution the appraisal timothy j hanlon prepared an appraisal of the property the appraisal as of date he reported the value of the property to be dollar_figure before the grant of the facade easement he concluded the property is considered to have a reduction in fair_market_value of of the prop- erty’s value prior to the easement donation which equates to a loss of dollar_figure rounded the discount lorna kaufman received a letter dated date from victoria c mccormick ms mccormick nat vice president of operations and finance addressing in part her cash donation addressing an expected delay in petitioners’ being able to file their joint income_tax return on account of the then as-yet-uncompleted contribution of the facade ease- ment ms mccormick stated nat will discount your cash donation by as calculated below appraised easement value dollar_figure cash contribution pincite of appraised easement value discount of discounted cash contribution washington mutual fees big_number big_number big_number verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner total amount due amounts paid to date big_number big_number net amount due big_number no amount is due at this time your final payment of dollar_figure will be due only after national park service certification has been achieved park service certification on date the u s department of the interior national park service classified the property as a certified_historic_structure for charitable_contribution for conserva- tion purposes the final payment and form_8283 lorna kaufman paid nat dollar_figure by check received by it on date on that date it sent her an irs form_8283 noncash charitable_contributions documenting her con- tribution of the facade easement ms mccormick testified that donors to nat were informed up-front that it would give them the form after the cash contribution was received petitioners’ tax returns petitioners filed joint federal_income_tax returns for and on their return petitioners showed a chari- table contribution of dollar_figure for the contribution of the facade easement because of the limitations on charitable_contribution deductions in sec_170 petitioners claimed a charitable_contribution_deduction with respect to the facade easement of only dollar_figure petitioners also claimed a charitable_contribution_deduction of dollar_figure for a cash contribution to nat notwithstanding that during they paid nat only dollar_figure on their return petitioners claimed a carryover charitable_contribution_deduction of dollar_figure related to the facade easement contribution they also claimed a charitable_contribution_deduction of dollar_figure on account of the dollar_figure final installment of their cash contribution to nat and dollar_figure on account of the bank fee paid_by nat verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports i reconsideration of grant of partial summary_judgment opinion a introduction we granted partial summary_judgment to respondent sus- taining his disallowance of any deduction for or for the contribution of the facade easement to nat we con- cluded that the contribution failed as a matter of law to comply with the enforceability-in-perpetuity requirements found in sec_1_170a-14 income_tax regs kaufman v commissioner t c pincite for that reason we found that the facade easement contribution was not protected in perpetuity and so was not a qualified conservation contribu- tion under sec_170 id rule affords us discre- tion to reconsider an opinion upon a showing of substantial error 110_tc_440 petitioners argue that we should reconsider and reverse our grant of partial summary_judgment because the agree- ment complies with the regulations in particular petitioners argue the agreement sets out the exact terms of the agreement between the donor and donee that are required by sec_1_170a-14 and the lender agreement includes the provision required by sec_1_170a-14 separately the court should consider the application of sec_1_170a-14 which provides that a conservation interest will be regarded as enforceable in perpetuity -even if defeasible upon the happening of a future event- if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be neg- ligible respondent answers that the agreement and the lender agreement must be read together that it is insufficient for the agreements merely to parrot the regulations and that when read together the agreements constitute a conveyance that fails to conform to the extinguishment provision found in sec_1_170a-14 income_tax regs respondent argues that the mortgage subordination requirements found in sec_1_170a-14 income_tax regs are irrelevant having been relied on neither by him in support of the motion for summary_judgment nor by the court in 134_tc_182 finally respondent verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner argues that the requirements of sec_1_170a-14 income_tax regs addressing remote future events should not be read into the requirements of sec_1_170a-14 income_tax regs before setting forth the pertinent details of sec_170 and the regulations and discussing the parties’ arguments we shall provide some background information with respect to the difficulties in making a conservation restriction per- petual b perpetual conservation restrictions under common_law doctrines it is difficult for a real prop- erty owner to split the blackstonian bundle of rights consti- tuting ownership of the property to give one not holding the remaining rights perpetual control_over the use that may be made of the property the principal difficulties are assign- ability and duration common_law disfavoring the creation of an assignable right of unlimited duration to control the use of land see 4-34a powell real_property sec_34adollar_figure m wolf ed airey conservation easements in private practice real prop tr est l j statutory authority however to create assignable restric- tions of unlimited duration for conservation preservation and similar purposes now can be found in the codes of every state and the district of columbia see 4-34a powell supra sec_34adollar_figure n list indeed the agreement both character- izes the facade easement as an easement in gross a common_law interest and references mass gen laws ch sec_31 and sec_32 conservation and preservation restric- tions yet as the powell treatise makes clear notwithstanding state law statutory provisions facilitating the creation of per- petual conservation restrictions there are many means by which conservation restrictions may be modified or termi- nated 4-34a powell supra sec_34a those include condemnation eminent_domain the foreclosure of pre- existing liens foreclosure for unpaid taxes marketable title acts merger or abandonment the doctrine_of changed condi- tions and release by the holder id the powell treatise states with respect to release some statutes confirm the common-law principle that an easement verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports or covenant may be released by the holder id it gives as an example mass gen laws ch sec_32 after a public hearing id n it states with respect to condemnation thus if a con- servation easement restricts the development of real_property that is needed for a school hospital or publicly aided housing eminent_domain may be exercised id sec_34a it notes that the method of valuation of the interest represented by the conservation restriction and whether and to whom compensation may be awarded are controversial issues but it states that the better view fol- lowed by most states is that the condemnation of an ease- ment is the taking of an interest in property that requires compensation to the holder id it states that a conservation_easement may be terminated without the consent of the holder through the foreclosure of a pre-existing mortgage or mechanic’s lien on property subsequently encumbered by the easement such a foreclosure when consummated by a sale will result in the termination of the ease- ment the purchaser takes title free of the restrictions imposed subsequent to the attachment of the lien id sec_34a it recognizes that the doctrine_of changed circumstances may apply to conservation restrictions an action for an injunction against the violation of a restrictive covenant will be defeated if the owner can show that conditions in the neighborhood have changed so substantially that the original purposes to be served by the restriction can no longer be achieved id sec_34a see also restate- ment property 3d servitudes sec dollar_figure the powell treatise states that a good case to be made for the inapplica- bility of the doctrine to conservation restrictions on policy grounds and references another commentator who suggests that on the obsolescence of a conservation restriction because of its public nature the servient owner should either pay the easement holder the value of the easement or a court should attempt to reform the terms of the easement to pre- serve its purpose based on the doctrine_of cy pres 4-34a powell supra sec_34a citing note conservation easements and the doctrine_of changed conditions hastings l j see also restatement supra sec verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner c sec_170 and the pertinent regulations sec_170 allows a deduction for any charitable contribu- tion subject_to certain limitations that the taxpayer makes during the taxable_year in general sec_170 denies any deduction for a contribution of an interest in property that is less than the taxpayer’s entire_interest in the prop- erty one exception to that general_rule however is for a qualified_conservation_contribution sec_170 under sec_170 a qualified_conservation_contribution must be a contribution of a qualified_real_property_interest exclusively for conservation purposes under sec_170 a qualified_real_property_interest includes a restriction granted in perpetuity on the use which may be made of the real_property under sec_170 a contribution shall not be treated as exclusively for conserva- tion purposes unless the conservation_purpose is protected in perpetuity see also sec_1_170a-14 income_tax regs the regulations introduce the term perpetual conservation restriction sec_1_170a-14 income_tax regs states a perpetual conservation restriction is a qualified_real_property_interest it defines such restriction as a restriction granted in perpetuity on the use which may be made of real property-including sic an easement or other interest_in_real_property that under state law has attributes similar to an easement eg a restrictive covenant or equi- table servitude id sec_1_170a-14 income_tax regs elaborates on the enforceability-in-perpetuity requirement paragraph g requires generally that legally enforceable restrictions pre- vent use of the retained_interest by the donor and his successors in interest inconsistent with the conservation purposes of the donation paragraph g addresses mortgages and in pertinent part provides that no deduction will be permitted for an interest in property which is subject_to a mortgage unless the mortgagee subordinates its rights in the property to the right of the donee organization to enforce the con- servation purposes of the gift in perpetuity the other requirement is that the contribution be to a qualified_organization see sec_170 respondent concedes that at the time of the contributions nat was a qualified_organization under sec_170 verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports paragraph g is entitled remote future event and addresses events that may defeat the property interest that has passed to the donee organization it provides that a deduction will not be disallowed merely because on the date of the gift there is the possibility that the interest will be defeated so long as on that date the possibility of such defeat is so remote as to be negligible id paragraph g is entitled extinguishment and recog- nizes that after the donee organization’s receipt of an interest in property an unexpected change in the conditions surrounding the property can make impossible or impractical the continued use of the property for conservation purposes subdivision i of paragraph g provides that those pur- poses will nonetheless be treated as protected in perpetuity if the restrictions limiting use of the property for conserva- tion purposes are extinguished by judicial proceeding and all of the donee’s proceeds from a subsequent sale_or_exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution subdivision ii of paragraph g is entitled proceeds and in pertinent part provides for a deduction to be allowed under this section at the time of the gift the donor must agree that the donation of the perpetual conservation restric- tion gives rise to a property right immediately vested in the donee organization with a fair_market_value that is at least equal to the propor- tionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time for purposes of this paragraph g ii that proportionate value of the donee’s property rights must remain constant accordingly when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph g i of this section the donee organization on a subsequent sale exchange or involuntary_conversion of the subject property must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction d discussion introduction the drafters of sec_1_170a-14 income_tax regs undoubtedly understood the difficulties if not impossibility under state common or statutory law of making a conserva- tion restriction perpetual they required legally enforceable verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner restrictions preventing inconsistent use by the donor and his successors in interest see sec_1_170a-14 income_tax regs they defused the risk presented by potentially defeasing events of remote and negligible possibility see sec_1_170a-14 income_tax regs sometimes simply the so-remote-as-to-be-negligible standard they did not how- ever consider the risk of mortgage foreclosure per se to be remote and negligible and required subordination to protect from defeasance see sec_1_170a-14 income_tax regs sometimes simply the subordination requirement they understood that forever is a long time and provided what appears to be a regulatory version of cy pres to deal with unexpected changes that make the continued use of the prop- erty for conservation purposes impossible or impractical see sec_1_170a-14 income_tax regs sometimes simply the extinguishment provision it is the extinguishment provision that directly concerns us here the following are uncontested facts the bank held a mort- gage on the property at the time lorna kaufman and nat entered into the agreement the lender agreement provides that the bank has prior claim to all insurance proceeds as a result of any casualty hazard or accident occurring to or about the property and all proceeds of condemnation the lender agreement also provides that the bank was entitled to those proceeds in preference to nat until the mortgage was satisfied and discharged in kaufman v commissioner t c pincite we found that nat’s right to its proportionate share of future proceeds was thus not guaranteed and since we interpreted the extinguishment provision to lay down an unconditional requirement that the donee organization be entitled to its proportionate share of future proceeds the agreement did not satisfy the terms of the provision as a result we in effect held that the agreement did not establish a perpetual con- servation restriction and the facade easement was not a qualified_real_property_interest id pincite we found that lorna kaufman’s contribution of the facade easement to nat was not therefore a qualified_conservation_contribution within the meaning of sec_170 id pincite our concern in 134_tc_182 was with the allocation of proceeds on a sale_or_exchange or involuntary_conversion of property following judicial extin- continued verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports petitioners’ arguments a the agreement contains the necessary language petitioners argue that the requirements of the extinguish- ment provision are met if in the event a conservation restric- tion is extinguished by judicial action and the underlying property is sold the donee organization has a contractual entitlement against the donor and his successors for the organization’s proportionate share of the sales proceeds as defined in sec_1_170a-14 petitioners ref- erence section iv c of the agreement set forth above and argue that the agreement explicitly sets forth this entitle- ment they conclude this is precisely what the regulation requires and all that it requires as to how nat would fare if for instance the property were taken by condemnation following the extinguishment of the facade easement in a judicial proceeding petitioners state if the entire property is the subject of a condemnation action the mortgagee may have a priority right to condemna- tion proceeds under a lender agreement comparable to that involved in this case that they argue does not absolve the property owner lorna kaufman of her obligation to make good on the easement-holding organization’s nat’s entitlement to a pro-rata share of the proceeds realized from the sale or involuntary_conversion of the property with respect to the fact that the lender agreement stands the bank in front of nat in line for a share of the condemnation pro- ceeds they explain the lender agreement defines priority to insurance and condemnation proceeds as between the bank and nat it has no effect on the donor or subsequent property owner nat they explain can still look to lorna kaufman or her successors for reimbursement interest in guishment of a conservation restriction burdening the property we did not then nor do we now rule on whether the language establishing the restriction must incorporate provisions requiring judicial extinguishment and compensation in all cases in which an unexpected change in sur- rounding conditions frustrates the conservation purposes of the restriction such a rule is sug- gested however by the last sentence in sec_1_170a-14 income_tax regs transfers by donee although the reference therein to paragraph b probably should be to paragraph b and the cross-reference to sec_1_170a-14 probably should be to sec_1 170a- g ii see sec_1_170a-13 proposed income_tax regs fed reg date apparently the secretary failed to update the cross-references in the final regulations verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner we shall accept petitioners’ claim that the agreement gives nat a contractual right against lorna kaufman and her successors for its proportionate share of the proceeds from the sale of the property following judicial extinguishment of the facade easement in the face of the bank’s priority under the lender agreement however we believe that right to be insufficient to satisfy the requirements of subdivisions i and ii of sec_1_170a-14 income_tax regs sometimes simply subdivision i or subdivision ii subdivision ii requires that the donor at the time of the gift must agree that the donation gives rise to a property right imme- diately vested in the donee organization subdivision i addressing generally the disposition of sale proceeds fol- lowing judicial extinguishment of conservation restriction speaks specifically of the donee’s proceeds from a sub- sequent sale_or_exchange of the property emphasis added while subdivision ii specifies that the donee’s vested prop- erty right must have a value proportional to the value of the encumbered property it does not otherwise describe the property in which the donee must have a vested right never- theless considering the property right language in subdivi- sion ii together with the term donee’s proceeds in subdivi- sion i we think it the intent of the drafters of sec_1_170a-14 income_tax regs that the donee have a right to a share of the proceeds and not merely a contractual claim against the owner of the previously servient estate petitioners having in effect conceded that nat enjoyed no such right to proceeds under the agreement or the lender agreement we conclude that notwithstanding that section iv c of the agreement tracks the language of subdivision ii the agreement as qualified by the lender agreement fails to satisfy the requirements of sec_1_170a-14 income_tax regs b subordination on brief petitioners head one of their arguments the facade easement contribution satisfies the requirements of sec_1_170a-14 they appear to believe that respondent is arguing that the agreement fails to establish a perpetual conservation restriction because the bank did not subordinate its rights to nat’s right to verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports receive a proportionate share of condemnation or insurance proceeds and therefore the agreement somehow fails to comply with sec_1_170a-14 put another way they appear to believe that respondent has conflated the subordination requirement found in sec_1 170a- g income_tax regs with the extinguishment provi- sion found in sec_1_170a-14 income_tax regs so that in order for a donor to show that its donation satisfies the extinguishment provision any mortgagee must subordi- nate its interests so that a donee organization has a priority interest in insurance or condemnation proceeds respondent disavows making that argument stating that neither his motion for summary_judgment nor our opinion 134_tc_182 even references sec_1_170a-14 income_tax regs he believes that he argued and we decided that the facade easement contribu- tion failed to satisfy the extinguishment provision without regard to whether the bank had subordinated its rights in the property to nat’s rights therein so as to satisfy the subordination requirement he is correct satisfying the subordination requirement immunizes against the effect of the general_rule described supra section i b of this report that an easement is lost by the foreclosure of a mortgage or trust deed burdening the servient tenement when such mortgage or trust deed was executed prior to the creation of the easement annotation foreclosure of mort- gage or trust deed as affecting easement claimed in over or under property a l r 2d supp see also eg camp clearwater inc v plock a 2d n j super ct ch div the foreclosure of a mort- gage vests in the purchaser at the foreclosure sale a legal right to the property free of easements and encumbrances imposed upon it subsequent to the mortgage provided that the holders of such easement rights or encumbrances are made parties to the foreclosure affd a 2d n j super ct app div we did not base our grant of partial summary_judgment for respondent on any consideration of the consequences of foreclosure of the bank’s mortgage we based our grant solely on the fact conceded by petitioners that because following a judicial extinguishment of the facade easement nat might not receive its proportional share of any future proceeds the verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner agreement failed to satisfy the requirements of sec_1_170a-14 income_tax regs and so failed to satisfy the enforceability-in-perpetuity requirements under sec_1_170a-14 income_tax regs and sec_170 and a we think it unnecessary to our result and reach no conclusion as to whether the bank subordinated its rights in the property to the right of nat to enforce the facade ease- ment so as to satisfy the requirements of sec_1 170a- g income_tax regs c sec_1_170a-14 income_tax regs in embodied requirement referring to the so-remote-as-to-be-negligible standard found in sec_1_170a-14 income_tax regs peti- tioners argue that in determining whether the enforce- ability-in-perpetuity sec_1_170a-14 income_tax regs is met a court must con- sider the remoteness of any future event that is alleged to defeat the interest passing to charity they then hypothesize a very low probability of occurrence for a set of events that would deprive nat of its proportional share of the proceeds determined under sec_1_170a-14 income_tax regs following judicial extinguishment of the facade easement and a subsequent sale of the property they conclude that the possibility of such deprivation is so remote as to be negligible and thus to be disregarded under the so- remote-as-to-be-negligible standard in determining whether the facade easement is enforceable in perpetuity as stated respondent argues that the so-remote-as-to-be- negligible standard is irrelevant to the extinguishment provi- sion respondent believes the extinguishment provision establishes a strict standalone requirement enacted to ensure that the conservation purposes of an extinguished easement be carried out by the donee as nearly as possible he considers the extinguishment provision to establish a rule similar to the rule_of cy pres he also argues it assumes an event extinguishment of the easement that is virtually by definition remote therefore it would be illogical to read condemnation of the property judicial extinguishment of the easement existence of the subordination agreement at that time insufficiency of the condemnation proceeds to cover the bank’s prior claim to proceeds and judgment-proof status of the property owner attaching a 10-percent probability to the occurrence of each of those events they calculate a joint probability of percent verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports the so-remote-as-to-be-negligible standard into the extinguishment provision we described supra section i b of this report some of the means by which conservation restrictions may be modified or terminated and we voiced our belief supra section i d of this report that the drafters of sec_1_170a-14 income_tax regs sought to mitigate or otherwise address the threat to the enforceability-in-perpetuity requirement presented by some of those possibilities satisfying the so-remote-as-to-be- negligible standard immunizes against the risk that acts or events of such low probability will defeat the donee’s interest in the servient property sec_1_170a-14 income_tax regs is silent with respect to the right of the donee to any recompense on account of the actual occurrence of the risk and it appears that the drafters’ intent was simply to fore- close any argument that a charitable_contribution_deduction is unavailable because the donee’s interest could be defeated by remote improbable events that point is nicely illustrated by stotler v commissioner tcmemo_1987_275 a case petitioners cite for the proposition that the enforceability-in- perpetuity requirement is per se satisfied if the possibility of a defeasing event is so remote as to be negligible the case stands for no such thing addressing neither sec_1 170a- g income_tax regs in general nor paragraph g thereof in particular since the contribution in the case occurred before the effective date of that regulation to deter- mine whether the contribution in that case satisfied the enforceability-in-perpetuity requirement as it existed before promulgation of sec_1_170a-14 income_tax regs we had to determine whether the possibility of condemnation of the servient property was so remote as to be negligible as required by sec_1_170a-1 income_tax regs we found in the affirmative notwithstanding that if the particular property in question were condemned the underlying ease- ment would terminate and the donor would be entitled to all of any condemnation proceeds as if the property had not been burdened by the easement satullo v commissioner tcmemo_1993_614 affd without published opinion 67_f3d_314 11th cir applying sec_1_170a-14 income_tax regs might be taken as support for the proposition but petitioners do not cite the case for that point and our discussion of the point was speculative since the taxpayers in the case did not set forth facts showing that the possibility of foreclosure of the easement was so remote as to be negligible verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner it perhaps belabors the obvious to point out that the risk addressed by the extinguishment provision-an unexpected change in conditions surrounding the property-likely describes a class of events the range of whose probabilities includes if it is not coincident with the range of proba- bilities of events that are so remote as to be negligible one does not satisfy the extinguishment provision however merely by establishing that the possibility of a change in conditions triggering judicial extinguishment is unexpected for unlike the risk addressed by the so-remote-as-to-be-neg- ligible standard to satisfy the extinguishment provision sec_1_170a-14 income_tax regs provides that the donee must ab initio have an absolute right to compensation from the postextinguishment proceeds for the restrictions judicially extinguished it is lorna kaufman’s failure to accord nat an absolute right to a fixed share of the postextinguishment proceeds that causes her gift to fail the extinguishment provision it is not a question as to the degree of improbability of the changed conditions that would justify judicial extinguishment of the restrictions nor is it a question of the probability that in the case of judicial extinguishment following an unexpected change in condi- tions the proceeds of a condemnation or other sale would be adequate to pay both the bank and nat as we said in kauf- man v commissioner t c pincite the requirement in sec_1_170a-14 income_tax regs that nat be entitled to its proportionate share of the proceeds is not conditional petitioners cannot avoid the strict requirement in sec_1_170a-14 income_tax regs simply by showing that they would most likely be able to satisfy both their mortgage and their obligation to nat e conclusion petitioners have failed to persuade us that we erred in 134_tc_182 in con- cluding that the contribution of the facade easement failed as a matter of law to comply with the enforceability-in-per- petuity requirements under sec_1_170a-14 income_tax regs we therefore affirm our grant of partial summary_judgment to respondent on the grounds set forth in kauf- man we shall deny petitioners’ motion for reconsideration verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports ii cash contribution a introduction in determining the deficiency for respondent dis- allowed a charitable_contribution_deduction of dollar_figure peti- tioners claimed for a cash contribution to nat respondent explained that he disallowed the deduction because it was made subject_to or in contemplation of subsequent event s in determining the deficiency for respondent did not disallow any charitable_contribution_deduction on account of a cash contribution to nat lorna kaufman paid dollar_figure to nat in the parties have both amended their pleadings relating to lorna kaufman’s payments to nat in date before trial petitioners amended their peti- tion in the belief that respondent’s disallowance of the cash contribution deduction for was based on the ground that lorna kaufman’s obligation to make the contribution was conditional on her receipt of a qualified_appraisal the conditional-payment ground petitioners added the following to their prayer for relief i f petitioners sic cash contribu- tions to the donee were made subject_to a condition peti- tioners are entitled to a deduction of dollar_figure in the tax_year in date after trial we allowed respondent to amend the answer to among other things assert both an increased deficiency and an accuracy-related_penalty for he justi- fied that amendment on the ground that he had only recently become aware that lorna kaufman paid dollar_figure to nat in and that petitioners claimed a charitable_contribution_deduction therefor on their return by the amendment to answer he first argued that dollar_figure of the dollar_figure lorna kaufman paid to nat in is not deductible because it reimbursed nat for a fee it paid to the bank on her behalf petitioners apparently concede that the dollar_figure payment is not deductible a concession we accept and we shall not further discuss that payment as to both the remaining dollar_figure lorna kaufman paid to nat in and the dollar_figure she had paid it in respondent by the amendment to answer sets forth two grounds for disallowing any charitable_contribution deduc- tion first those sums were paid in exchange for substantial verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner services provided by nat to petitioners to facilitate peti- tioners’ deduction of a large unjustified noncash contribution of a facade easement that both petitioners and nat knew had no value the quid pro quo ground second the total of the payments dollar_figure was based on the value of the facade easement and or the value of the resulting tax deduction petitioners claimed either or both of which could turn out to be zero ie the conditional-payment ground with respect only to the dollar_figure paid to nat in respondent adds a third ground petitioners relied on a contempora- neous written acknowledgment that they knew was inac- curate in claiming the erroneous charitable deduction of dollar_figure respondent bears the burden_of_proof with respect to the increased deficiency and penalty for resulting from his disallowance of a deduction for the dollar_figure paid_by lorna kaufman to nat in see rule a he also bears the burden_of_proof with respect to the quid-pro-quo ground for disallowing petitioners a deduction for lorna kaufman’s payment of dollar_figure to nat in and now because of the amended petition claimed alternatively to be deductible for either or he bears that burden because the quid- pro-quo ground constitutes new_matter requiring petitioners to present different evidence from that necessary to rebut his original ground the conditional-payment ground for dis- allowing the deduction in see id 112_tc_183 b discussion conditional payment respondent’s original explanation of the conditional-pay- ment ground supplemented by an argument in the amended petition is that the dollar_figure lorna kaufman paid to nat in and the dollar_figure she paid to it in in total dollar_figure were conditional payments subject_to refund if either the appraisal reported the value of the facade easement to be zero or we disallow petitioners’ charitable_contribution deduc- tion for the contribution of the facade easement to nat peti- tioners answer respondent’s first alternative as follows while there may be an argument that the dollar_figure cash donation made in became ‘final’ and deduct- verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports ible in this does not support a complete disallowance but simply moves the deduction into petitioners answer respondent’s second alternative the wit- nesses from nat and petitioners were in uniform agreement that it was not their understanding that petitioners might be entitled to a refund of the cash donation should their tax deduction for the facade easement contribution be disallowed neither party disputes that the amount of the cash pay- ment contemplated from lorna kaufman was a function of the appraised value of the facade easement which was not determined until respondent argues that at the end of it was possible that the appraisal would show the facade easement to be valueless thus entitling lorna kauf- man to a refund of the dollar_figure she paid in that year respondent further argues that possibility was not so remote as to be negligible thereby depriving petitioners of a deduction for the cash payment see sec_1_170a-1 income_tax regs as stated petitioners concede there may be an argument that the dollar_figure payment became final and if deductible is deductible for we assume that peti- tioners’ concession is based on their receiving the appraisal in and their conclusion that before receipt of the appraisal in there was the possibility that nat would refund some or all of the dollar_figure lorna kaufman had paid it in petitioners bear the burden of proving that at the end of the possibility of a zero appraisal value was not so remote as to be negligible they have not carried that bur- den indeed there is in evidence an email from mr bahar nat’s area manager to gordon kaufman dated date assuring him that properties in a historic neighborhood like the property are not at a market_value disadvantage when compared to the other properties in the same neighbor- hood we sustain respondent’s disallowance of a deduction for dollar_figure paid_by lorna kaufman to nat in respondent’s alternative argument that the cash payments were conditional because refundable if we disallow any deduction for the facade easement contribution is based on the clause in the application that the cash endowment con- tribution is set pincite of the value of the donation tax deduc- tion emphasis added we found credible the testimony of both nat’s representatives and petitioners that that was not verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner the intent of the clause we also found credible gordon kaufman’s testimony that petitioners did not expect to receive any money back we find that the cash contributions were not conditional on the success of petitioners’ charitable_contribution deductions for the contribution of the facade easement to nat after she received the appraisal in date lorna kaufman had no right to a refund of dollar_figure of cash pay- ments made to nat quid pro quo a introduction respondent questions lorna kaufman’s charitable intent he argues t he record shows that petitioners made the cash payments because they knew they had to in order for nat to accept the donation of the facade easement and to sign their form_8283 which allowed them to take a deduc- tion worth over dollar_figure additionally he argues nat provided substantial services to petitioners in exchange for these cash payments nat accepted and processed the preservation restriction agreement application provided a form preservation restriction agreement that it had developed and negotiated with massachusetts historical commission dealt with the local and federal authorities in obtaining the necessary approvals and dealt with lorna kaufman’s mortgage holder washington mutual procuring washington mutual’s execution of the lender agreement nat’s representative even gave gordon kaufman tax_advice most importantly nat gave gordon kaufman the names of nat-approved appraisers in his reply brief respondent mitigates his first argument respondent agrees with the general proposition that the expected receipt of a tax deduction is not a benefit that invalidates the deduction nevertheless he continues to argue that petitioners are entitled to no deduction for the cash payments because lorna kaufman was required to make them b required cash donation petitioners answer respondent’s first argument a cash donation was required as follows nat solicits cash dona- tions to enable it to pay its operating_expenses and to build verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports its stewardship fund so that it can monitor eased properties and enforce its rights under facade conservation easements in perpetuity they add that a part from donors’ cash con- tributions nat had no meaningful source of oper- ating funds they deny that nat’s acceptance of the facade easement and its issuance to petitioners of a form_8283 were conditioned on its receipt of a cash contribution they claim that many donee organizations benefiting from preservation restrictions require accompanying cash contributions they point to the parties’ stipulation that the national park service currently advises visitors to its web site many easement holding organizations require the easement donor to make an additional donation of funds to help administer the easement these funds are often held in an endowment that generates an annual income to pay for easement administration costs such as staff time and travel_expenses or needed legal services of course we agree with respondent only unrequited payments to qualified recipients are deductible 490_us_680 neither party how- ever has provided us with any authority governing the deductibility of a payment to a charitable_organization when the organization’s acceptance of a contribution of property is conditioned on the donor’s cash donation sufficient to main- tain the property and contribute to operating costs the practice may be common and no doubt provides funds to serve the charitable purposes of the donee in the situation described by the national park service it is difficult to see how the cash donation benefits the donor other than in making possible the contribution of the associated property respondent objects to the stipulation as irrelevant we disagree and overrule the objection http www nps gov hps tps tax download easements-2010 pdf last visited date at which can be found a pamphlet easements to protect historic properties a useful historic preservation tool with potential tax benefits language similar to the quoted language is pincite in 31_tc_1143 we disallowed a charitable_contribution_deduction for dollar_figure paid_by adoptive parents to a charitable_organization operating an adoption program as a prerequisite to placing a child in their home preliminary to an adoption the pay- ment was regarded by the organization as a fee for service to cover part of the cost of operating an adoption program we concluded that whatever charitable aspects there may have been to the payment lose significance when compared to the personal benefits that would result to the taxpayers from the completed adoption mcmillan is distinguishable because as discussed in the text the personal benefits lorna kaufman received were the accomplishment of the contribution and entitlement to charitable_contribution deductions on account of both the facade easement and cash contributions verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner and giving rise to an added charitable_contribution_deduction an acceptable benefit while the parties have wrestled over the value of the facade easement given our disposition of the facade ease- ment contribution issue on legal grounds that is not a ques- tion of fact we must decide moreover respondent does not claim that the cash payments were in consideration for nat’s facilitation of a sham transfer seeing no benefit to lorna kaufman other than facilitation of her contribution of the facade easement which we discuss in the next paragraph and an increased charitable_contribution_deduction we shall not deny petitioners’ deduction of the cash payments on the ground that the application required a donor endowment to accompany the contribution of facade easement c fee for services as to respondent’s second argument a fee for services petitioners principally respond that nat’s actions were taken primarily to benefit it and any benefit to petitioners was ancillary recently in scheidelman v commissioner tcmemo_2010_151 we addressed a similar claim by the commissioner that a cash payment made to nat ancillary to a facade easement contribution to it was a quid pro quo for nat’s assistance in obtaining a tax deduction we stated the familiar rule a payment of money or transfer of property generally cannot constitute a charitable_contribution if the contributor expects a substantial benefit in return id citing 477_us_105 we elaborated if a transaction is structured in the form of a quid pro quo where it is understood that the taxpayer’s money will not pass to the charitable_organization unless the taxpayer receives a specific benefit in return and where the taxpayer cannot receive the benefit unless he pays the required price then the transaction does not qualify for the deduction under sec_170 id quoting 822_f2d_844 9th cir affd sub nom 490_us_680 the burden was on the taxpayers in scheidelman to prove that they made no quid pro quo pay- ment to nat for something of substantial value or if they did that their payment exceeded the value of what they verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports received because they failed to provide evidence necessary to carry their burden we denied them any deduction for their cash payment to nat id the shoe is on the other foot here since as discussed supra section ii a of this report respondent’s quid-pro-quo ground constitutes new_matter requiring different evidence for which respondent bears the burden_of_proof pursuant to rule a for respondent to succeed with his fee-for- services argument the evidence must show a quid pro quo ie that reciprocally lorna kaufman made a payment and nat provided services of substantial value respondent argues that the evidence shows that lorna kaufman’s pay- ments reciprocated nat’s accepting and processing her application providing her with a form preservation restric- tion agreement undertaking to obtain approvals from the necessary government authorities securing the lender agree- ment from the bank giving gordon kaufman basic tax_advice and providing him with a list of approved appraisers the evidence however is ambiguous as to whether lorna kaufman’s payments reciprocated nat’s undertakings we do have in evidence nat’s date introductory letter to lorna kaufman representing that her contribution to nat would require very little effort by her because nat would handle all of the red tape and paperwork we also have in evidence mr kearns’ nat’s president’s date letter to her asking her to sign the agreement and send nat a check for dollar_figure by that date however nat had under- taken and completed many of the tasks of concern to respondent although it had received only a dollar_figure deposit from her moreover mr kearns also states in that letter that if by date the bank did not subordinate she failed to receive historic certification of the property or an appraisal could not be obtained nat would join with her in voiding the agreement reimburse her costs and refund her cash contribution certainly nat was accommodating to lorna kaufman but it was in its interest as much as hers to complete the contribution of the facade easement we assume moreover that nat undertook the delineated tasks in anticipation of a cash contribution if a facade contribution were made but cognizant of the risk that a facade contribu- tion might not be made or might be unwound if the delin- eated conditions were not satisfied the evidence does not verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner convince us that lorna kaufman’s payments reciprocated nat’s undertakings finally we assume that respondent’s position is that nat’s undertakings were of monetary value to lorna kaufman saving her time and expense yet the record is devoid of evidence of the value much less the substantial value of those undertakings respondent has failed to make the necessary showing of a quid pro quo we shall not disallow petitioners a deduction for the cash pay- ments as a fee-for-services quid pro quo as argued by respondent failure to substantiate sec_170 provides that a taxpayer may not deduct any contribution of dollar_figure or more unless she substan- tiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organiza- tion that meets the requirements of sec_170 the donee’s written acknowledgment must state the amount of cash and describe other_property contributed indicate whether the donee organization provided any goods or serv- ices in consideration for the contribution and provide a description and good_faith estimate of the value of any goods or services provided by the donee organization sec_170 in 118_tc_528 citing sec_1_170a-1 and sec_1_170a-13 income_tax regs affd 374_f3d_881 9th cir we stated sec_170 disallows a charitable_contribution_deduction in cir- cumstances such as these where the donee organization’s contempora- neous written acknowledgment is erroneous and is not a good_faith esti- mate of the value of goods or services it provided and where the taxpayer unquestioningly and self-servingly uses that erroneous statement to claim a charitable_contribution larger than the one to which he or she would be entitled under sec_170 nat sent lorna kaufman letters acknowledging her con- tributions of both the facade easement and the cash pay- ments in those letters it certified that she had received no goods or services in return for her gifts respondent catalogs most of the items we described supra section ii b of this report eg nat negotiated with government agencies to obtain the necessary approvals he then claims that peti- verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports tioners should be denied a charitable_contribution_deduction for lorna kaufman’s cash payments to nat because nat’s acknowledgment letters were erroneous and did not contain a good_faith estimate of the value of the goods or services nat provided and petitioners ‘unquestioningly and self- servingly’ relied on these letters which they knew to be inac- curate to claim deductions for the cash payments respondent’s argument here is limited by his pleading to the dollar_figure payment lorna kaufman made to nat in it also suffers from respondent’s failure to prove the monetary value if any of what lorna kaufman may have received from nat moreover respondent has failed to prove that lorna kaufman knew the items had value if indeed they did and therefore knew that the letters were inaccurate if indeed they were we shall not disallow a deduction for the dollar_figure cash payment on the ground of a failure to substantiate c conclusion petitioners are entitled to a charitable_contribution deduc- tion for of dollar_figure for cash payments lorna kaufman made to nat in and iii penalty a introduction sec_6662 imposes an accuracy-related_penalty if any part of an underpayment_of_tax required to be shown on a return is due to among other things negligence or disregard of rules or regulations without distinction negligence a substantial_understatement_of_income_tax or a substantial_valuation_misstatement sec_6662 and b and the penalty is percent of the portion of the underpayment_of_tax to which the section applies sec_6662 in the case of a gross_valuation_misstatement percent is increased to percent sec_6662 sec_6664 provides a reasonable_cause exception to the accuracy-related_penalty generally under sec_6664 no penalty is imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the tax- payer acted in good_faith with respect to such portion the verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner reasonable_cause exception does not apply however in the case of a substantial or gross_valuation_overstatement with respect to property for which a charitable_contribution deduc- tion was claimed under sec_170 unless the claimed value of the property was based on a qualified_appraisal by a qualified_appraiser and the taxpayer made a good_faith investigation of the value of the contributed_property sec_6664 and under sec_7491 the commissioner bears the burden of production with regard to penalties and must come for- ward with sufficient evidence indicating that it is proper to impose penalties 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause id pincite initially respondent determined that on account of his disallowance of their deduction for the contribution of the facade easement to nat petitioners underpaid the tax required to be shown on their return and were liable for the accuracy-related_penalty on the grounds of either neg- ligence a substantial_understatement_of_income_tax a substantial_valuation_misstatement or a gross_valuation_misstatement on brief however respondent concedes that if we do not reach the issue of valuation of the facade ease- ment contribution because we sustain our grant of summary_judgment for respondent so that the deduction is denied as a matter of law no accuracy-related_penalty on the grounds of either a substantial or gross_valuation_misstatement will apply respondent adds however the negligence and substantial_understatement of tax penalties will still be applicable although not imposed cumulatively b negligence_penalty petitioners argue and respondent agrees that because it presents an issue of first impression no negligence_penalty is warranted on account of our disallowing petitioners a deduction for the contribution of the facade easement if the apparently on the basis of his abandonment of valuation misstatement as grounds for an accuracy-related_penalty if we sustain our order granting him partial summary_judgment which we do respondent makes no argument that petitioners are precluded by sec_6664 from arguing for application of the sec_6664 reasonable_cause exception verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports disallowance is on the ground that the contribution failed as a matter of law to comply with the enforceability-in-per- petuity requirements under sec_1_170a-14 income_tax regs see eg 135_tc_471 considering among other things uncertain state of the law in sustaining sec_6664 reasonable_cause and good_faith defense nevertheless respondent argues for petitioners’ negligence in claiming a deduction for the contribution of the facade easement on the basis of respondent’s claim that petitioners knew that the contribution of the facade ease- ment would not diminish the value of their property what petitioners knew is a factual question hotly contested by the parties the question involves not only the subjective issue of their states of mind but the objective issue of how much if any conveyance of the facade easement reduced the value of the property an issue the parties address with expert testi- mony summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 it may be granted only if there is no genuine issue as to any material fact see rule b we granted respondent partial sum- mary judgment disallowing petitioners’ deductions for lorna kaufman’s contribution of the facade easement to nat on the basis that the contribution failed as a matter of law to comply with the enforceability-in-perpetuity requirements under sec_1_170a-14 income_tax regs we had no need to consider the value of the facade easement and think it consistent with the underlying premises for summary adju- dication that we not now be required to invest the time and effort necessary to resolve the difficult factual questions of intent and value presented by respondent’s claim of neg- ligence see eg trout ranch llc v commissioner tcmemo_2010_283 illustrating the laborious undertaking that determining the value of a conservation restriction may present to the trier of fact moreover whatever argument respondent might make that we should now in the penalty phase of the case focus on value as a basis for negligence is negated by his abandon- ment of value as a basis for imposition of the accuracy- related penalty on account of a valuation misstatement with respect to the facade easement verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila kaufman v commissioner we shall for the reasons stated reject respondent’s argu- ment that petitioners negligently overstated the charitable_contribution deductions they claimed on account of the facade easement contribution because respondent has made no other argument for petitioners’ negligence in connection with those deductions we find that in connection with those deductions they were not negligent with respect to our disallowance of a deduction for the cash contribution petitioners virtually concede that a deduction was in error petitioners were negligent in claiming that deduction and have not established reasonable_cause and good_faith as a defense we sustain an accuracy- related penalty with respect to the resultant underpayment c substantial_understatement_of_income_tax sec_6662 defines substantial_understatement_of_income_tax as an amount exceeding the greater of per- cent of the tax required to be shown on the return or dollar_figure respondent asserts that substantial understatements of income_tax exist for and each of the understate- ments of income_tax after disallowance of the charitable con- tribution deductions attributable to the easements is greater than dollar_figure and greater than percent of the amount of tax required to be shown on the return respondent has met his burden of production for and in opposition to respondent’s claims of underpayments of tax due to sec_6662 substantial understatements of income_tax petitioners raise a sec_6664 reasonable_cause and good_faith defense respondent answers in part f or the same reasons petitioners are liable for the negligence prong of the penalty under sec_6662 they cannot escape the penalty under the reasonable_cause exception they knew that the ease- ment likely had no value and yet nonetheless claimed a charitable deduc- tion for it they did not act in good_faith consistent with our refusal supra section iii b of this report to consider misvaluation as a basis for negligence we refuse to consider it a reason for the underpayment in income_tax that respondent has shown we granted respondent partial summary_judgment because and only because lorna kaufman’s contribution of the facade ease- ment to nat failed as a matter of law to comply with the verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila united_states tax_court reports requirements under enforceability-in-perpetuity sec_1_170a-14 income_tax regs we think it consistent with the underlying premises for summary adjudication that we consider only that ground as giving rise to petitioners’ underpayments of tax for and as respondent concedes see supra section iii b of this report that ground presents an issue of first impression consistent with our analysis in rolfs v commissioner supra pincite we find that there was reasonable_cause for the portions of petitioners’ and underpayments due to that ground and that they acted in good_faith with respect to those portions d conclusion we sustain an accuracy-related_penalty only on the basis of petitioners’ negligence with respect to the underpayment of their tax that is attributable to lorna kaufman’s cash payments to nat in iv conclusion we shall issue an order denying petitioners’ motion for reconsideration of our grant of partial summary_judgment otherwise an appropriate order will be issued and decision will be entered under rule f putting aside the disallowance of the cash contribution for which we dealt with supra sec iii b of this report verdate 0ct date jkt po frm fmt sfmt v files kaufman sheila