t c memo united_states tax_court marco zarlengo and linda mcmahon-zarlengo petitioners v commissioner of internal revenue respondent merilyn h sandin-zarlengo petitioner v commissioner of internal revenue respondent docket nos filed date z and then spouse s sought to contribute a facade conservation_easement on their property to the national architectural trust trust z and s obtained an appraisal claiming the value of the conservation_easement to be dollar_figure as of date on or before date z s and the trust all signed a conservation deed of easement however the deed was not recorded until date z and s each claimed a charitable_contribution_deduction of dollar_figure for the conservation_easement on their separately filed tax returns because of applicable gross_income limitations on charitable_contribution deductions see sec_170 z and s were able to use only part of the deduction for and they carried the excess forward r issued a notice_of_deficiency to z for and a notice_of_deficiency to s for disallowing the charitable_contribution deductions held the conservation_easement was not protected in perpetuity until date held further z is not entitled to a deduction for the conservation_easement for held further s substantially complied with the substantiation requirements with respect to the conservation_easement notwithstanding the premature nature of the appraisal held further the fair_market_value of the conservation_easement is dollar_figure as of date s is entitled to a deduction of dollar_figure for held further z and s meet the reasonable_cause and good_faith exception to the accuracy-related_penalties for and respectively held further s is liable for gross_valuation_misstatement penalties for and frank agostino jairo g cano and jeremy m klausner for petitioners marc l caine and eliezer klein for respondent memorandum findings_of_fact and opinion vasquez judge the issues for decision in these consolidated cases are whether petitioners are entitled to noncash charitable_contribution deductions under sec_170 with respect to the donation of a facade conservation_easement conservation_easement to the national architectural trust trust and whether petitioners are liable for accuracy-related_penalties under sec_6662 or a findings_of_fact some of the facts have been stipulated and are so found the stipulations of facts and accompanying exhibits are incorporated herein by this reference at the time they filed the petitions petitioners resided in new york on date petitioners marco zarlengo and merilyn h sandin-zarlengo purchased a four-story townhouse townhouse pincite west 80th street on the upper west side of manhattan for dollar_figure the townhouse had been built in the 1890s and like many of the other townhouses in the neighborhood was in dire need of repair petitioners undertook a complete restoration of the townhouse using materials designed to preserve its historic character their neighbors soon followed suit unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure linda mcmahon-zarlengo is a party to this case by virtue of having filed a joint_return with marco zarlengo for all references hereafter to petitioners are to marco zarlengo and merilyn h sandin-zarlengo i the landmarks preservation commission the new york city landmarks preservation commission lpc took notice one of the functions of the lpc is to identify new potential historic districts and landmarks on date the lpc designated petitioners’ neighborhood as the riverside drive - west 80th-81st street historic_district riverside historic_district as a result of this designation the townhouse fell under the lpc’s jurisdiction the primary function of the lpc is to regulate historic districts and landmarks under its jurisdiction the lpc does this through two sets of regulations--the administrative code lpc code and the rules of the city of new york lpc rules the lpc code is for the most part static while the lpc rules change approximately every two years the normal standard of maintenance for a building under the lpc’s jurisdiction is good repair this means that significant architectural features of the building must be kept intact it does not mean that the building must be kept in pristine condition certain buildings are subject_to a heightened standard of maintenance known as sound first class condition an owner of a building will typically receive a special zoning permit in exchange for agreeing to restore and maintain a building in sound first class condition the townhouse is subject_to the good repair standard the lpc does not actively monitor buildings subject_to the good repair standard the lpc instead relies on the local community to report violations of the lpc rules directly to the lpc the lpc has three or four employees dedicated to enforcement the lpc has the authority to issue a stop work order to a building owner who is doing work without a permit and it may impose sanctions including fines for violations of the lpc rules the lpc does not have the right to enter a building subject_to the good repair standard in order to correct a violation but it may seek a court order compelling a building owner to make necessary repairs ii the trust on date petitioners divorced dr zarlengo moved out of the townhouse but he and ms sandin-zarlengo each retained an interest in the townhouse sometime after the divorce ms sandin-zarlengo learned about the trust from her neighbors the trust is a nonprofit organization whose mission is to preserve historic architecture in the united_states the trust advances its mission primarily through acquiring conservation easements on historic properties unlike the lpc the trust actively monitors all of the properties on which it owns an easement through annual inspections the trust evaluates proposed changes to easement-encumbered properties using the standards promulgated by the secretary of the interior see c f_r part and has a variety of potential legal options should the terms of one of its easements be violated ms sandin-zarlengo believed that donating a conservation_easement on the townhouse to the trust was a great way to support conservation on a national level she brought the idea to dr zarlengo’s attention he too was intrigued by the idea after meeting with a representative of the trust petitioners decided to move forward with the donation on date petitioners submitted to the trust a document titled facade conservation_easement application petitioners stated the estimated fair_market_value of the townhouse as dollar_figure million on the document on date the u s department of the interior national park service certified that the townhouse contributes to the significance of the riverside historic_district and is a ‘certified historic structure’ for a charitable_contribution for the trust also engages in educational outreach and gives grants to other nonprofit_organizations with similar missions conservation purposes in accordance with the tax treatment extension act of on date the trust sent petitioners a letter stating that the trust had received all necessary approvals to complete petitioners’ application to donate the conservation_easement the letter directed petitioners to obtain an appraisal of the conservation_easement the trust enclosed with the letter a list of qualified appraisers in petitioners’ area petitioners selected jerome haims of jerome haims realty inc to appraise the conservation_easement mr haims is a certified real_estate general appraiser in new york he determined the market_value of the townhouse to be dollar_figure million as of date he then applied an diminution to the market_value of the townhouse to arrive at a value of dollar_figure for the conservation_easement mr haims prepared an appraisal report dated date with an effective date of date appraisal report jean hao an employee of mr haims’ company performed a physical inspection of the townhouse and assisted mr haims in the preparation of the appraisal report the appraisal report includes a detailed description of the townhouse complete with photographs of its interior exterior and surroundings the appraisal report states that its intended use is to assist our client ms sandin-zarlengo in determining the federal tax benefits resulting from the creation of the subject’s townhouse’s historic preservation easement mr haims attached a copy of a conservation deed of easement sample deed to the appraisal report the sample deed was the standard deed that the trust used at the time it had a few blank lines for a donor’s personal information on or about date mr haims provided ms sandin-zarlengo with a copy of the appraisal report also on august mr haims sent the trust a copy of the appraisal report and a form_8283 noncash charitable_contributions appraisal_summary on part of the appraisal_summary information on donated property mr haims checked the box for real_estate in response to the inquiry check type of property he described the property as west 80th street and as a historic preservation easement he listed the appraised fair_market_value of the property as dollar_figure he signed part of the appraisal_summary declaration of appraiser under penalties of perjury and listed the date of his appraisal as date on date the trust sent petitioners a letter stating that it had received a copy of the appraisal report the trust enclosed with the letter a number of documents including a conservation deed of easement conservation deed the enclosed conservation deed was identical in all material respects to the sample deed that mr haims had attached to the appraisal report except for the fact that the blanks had been filled in with information pertaining to petitioners’ donation ie petitioners’ names the address of the townhouse the identification of the riverside historic_district etc the trust requested that petitioners execute and return the enclosed documents on or before date and provide a check to the trust for the remainder of their agreed-upon cash donation on date petitioners signed the conservation deed and had it notarized on date a duly authorized representative of the trust signed the conservation deed on behalf of the trust that same day the trust completed part of the appraisal_summary donee acknowledgment on date the trust mailed petitioners a letter thanking them for their cash donation and their donation of the conservation_easement the trust the letter specifically stated please note that your easement donation must be closed within sixty days of the date of your appraisal which is dated date therefore the executed documents listed above must be received by the trust on or before date the trust generally requires that easement donors make a cash contribution of approximately of the value of an easement the trust uses the cash contributions to fund its operating_expenses enclosed the completed appraisal_summary with the letter the letter stated - - in pertinent part enclosed is a copy of irs form_8283 executed by the appraiser and the trust this form is to be included in your income_tax submission for the year please keep it in a safe and readily available place so that you can provide it to the person who prepares your taxes once your recorded deed is returned to our office we will forward a copy to you for your records we very much enjoyed working with you and once again thank you for your generous gifts on date the new york city department of finance office of the city register recorded and filed the conservation deed iii sale of the townhouse on date petitioners entered into an agreement with leslie j garfield co inc real_estate leslie j garfield to list the townhouse for sale dr zarlengo was no longer living in the townhouse at the time but he continued to pay between dollar_figure and dollar_figure per month to maintain the townhouse his motivation in selling the townhouse was to eliminate this monthly expense and to provide for his and ms sandin-zarlengo’s retirement richard pretsfelder a broker with leslie j garfield was petitioners’ agent the appraisal_summary has four parts mr haims completed part sec_1 and and the trust completed part part taxpayer donor statement applies to items having a value of dollar_figure or less mr pretsfelder listed the townhouse for sale on date he drafted a setup of the townhouse which is a marketing tool that provides a brief summary of the property he mailed the setup to brokers homeowners and other interested parties the setup stated an asking price of dollar_figure million for the townhouse mr pretsfelder believed that the asking price was too high relative to other properties on the market but he did not lower it at any point because petitioners had set the asking price mr pretsfelder did not update the setup after the conservation_easement was donated because it was not something that he would normally flag in marketing materials the real_estate market in manhattan was trending upward in and it continued to do so through on date petitioners through mr pretsfelder sold the townhouse to gregory astrachan and jacqueline clements buyers for dollar_figure the sale price was negotiated between mr pretsfelder and the buyers’ broker at the time the sale price was negotiated the buyers had plans to significantly modify the townhouse but neither the buyers nor their broker had knowledge of the conservation_easement when the buyers learned of the conservation_easement they had conversations with the trust regarding their plans to modify the townhouse however they did not lower their offer because the conservation_easement did not affect their plans and they wanted to honor their agreement on date the lpc issued a certificate of appropriateness approving the buyers’ plans to modify the townhouse in addition to the lpc’s approval the buyers had to get the trust’s approval on date the buyers submitted a proposed modification request form to the trust along with the lpc’s certificate of appropriateness architectural drawings and photographs of the proposed modifications on date the trust mailed the buyers a letter responding to their proposed modification request the trust stated in the letter that it did not object to the proposed modifications to the front of the townhouse because on the basis of the trust’s assessment the modifications will not be inconsistent with the historic character of the townhouse and are consistent with the terms and purpose of the easement the trust further stated that it would object to the modifications to the rear of the townhouse if it had jurisdiction because these modifications would irreversibly change the footprint of the townhouse iv petitioners’ tax returns dr zarlengo and ms mcmahon-zarlengo timely filed a joint federal_income_tax return for on form_1040 u s individual_income_tax_return on the return they reported a noncash charitable_contribution_deduction of dollar_figure representing one-half of the fair_market_value of the conservation_easement as reported on the appraisal report they also reported a cash charitable_contribution_deduction of dollar_figure representing one-half of the cash petitioners had donated to the trust in dr zarlengo and ms mcmahon-zarlengo were able to use only part of the dollar_figure deduction for because of applicable gross_income limitations on charitable_contribution deductions see sec_170 and they carried the excess forward to other taxable years the only year at issue for dr zarlengo and ms mcmahon-zarlengo is ms sandin-zarlengo also reported a noncash charitable_contribution_deduction of dollar_figure and a cash charitable_contribution_deduction of dollar_figure representing her share on her federal_income_tax return she too was able to use only part of the dollar_figure deduction for and carried the excess forward however is not at issue for ms sandin-zarlengo as it is for dr zarlengo and ms mcmahon-zarlengo the years at issue for ms sandin- zarlengo are the years for which she claimed carryforward noncash charitable_contribution deductions flowing from the dollar_figure deduction she originally reported for leonard cirillo of the accounting firm cirillo francis cirillo certified public accountants llp prepared the joint return for dr zarlengo and ms mcmahon-zarlengo and the individual returns for ms sandin-zarlengo mr cirillo had been preparing tax returns for petitioners since and continued to do so after the years in issue he is a licensed certified_public_accountant c p a in new york he had approximately years of experience in accounting at the time he prepared the returns mr cirillo first heard of the conservation_easement deduction from dr zarlengo dr zarlengo had stopped by mr cirillo’s office to inquire whether such a deduction was legitimate this occurred before petitioners had met with a representative of the trust mr cirillo agreed to look into it he then read an article on conservation easements in the journal of accountancy written by a c p a and researched the relevant substantiation requirements mr cirillo called dr zarlengo on the phone and explained that the deduction was legitimate and that petitioners would need to obtain an appraisal and forms to attach to their tax returns it was only after hearing back from mr cirillo that dr zarlengo asked ms sandin-zarlengo to pursue the donation further mr cirillo believes that he consulted the master tax guide for the substantiation requirements dr zarlengo does not have a background in tax finance or accounting when it came time to file his tax_return each year he would collect any and all relevant documents in his possession place them in an envelope and give the envelope to mr cirillo in person likewise ms sandin-zarlengo does not have a background in tax finance or accounting dr zarlengo provided mr cirillo with some of the documents needed to prepare ms sandin-zarlengo’s return even after they were divorced and ms sandin-zarlengo provided additional documents and information to mr cirillo by fax email or telephone dr zarlengo provided mr cirillo with the appraisal report the appraisal_summary and the conservation deed on the basis of his earlier research and his review of these documents mr cirillo felt comfortable that petitioners had sufficiently substantiated the deductions furthermore nothing in these documents gave mr cirillo cause for concern as to the accuracy of mr haims’ appraised values mr cirillo signed dr zarlengo’s return and ms sandin- zarlengo’s returns under penalties of perjury believing the returns to be true and correct v notices of deficiency on date respondent mailed dr zarlengo and ms mcmahon-zarlengo a notice_of_deficiency for respondent determined a deficiency of dollar_figure which is attributable to his disallowance of both the deduction for the conservation_easement and the deduction for the cash donation to the trust respondent also determined a penalty of dollar_figure under sec_6662 with respect to the conservation_easement and alternatively a penalty under sec_6662 and a penalty of dollar_figure under sec_6662 with respect to the cash donation respondent has since conceded that dr zarlengo and ms mcmahon-zarlengo are entitled to the deduction for the cash donation and are not liable for the sec_6662 penalty with respect to the cash donation also on date respondent mailed ms sandin-zarlengo a notice_of_deficiency for and respondent determined a deficiency of dollar_figure for dollar_figure for and dollar_figure for all of which are attributable to his disallowance of carryforward charitable_contribution deductions stemming from the conservation_easement respondent determined penalties of dollar_figure for dollar_figure for and dollar_figure for under sec_6662 and alternatively penalties under sec_6662 dr zarlengo and ms mcmahon-zarlengo timely filed a petition in response to the notice_of_deficiency for ms sandin-zarlengo timely filed a petition in response to the notice_of_deficiency for we consolidated the cases we must now decide whether petitioners are entitled to any of the disputed deductions they claimed for their donation of the conservation_easement and whether they are liable for any of the disputed penalties respondent has determined i burden_of_proof opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and a taxpayer bears the burden of proving that the commissioner’s determinations are in error rule a 290_us_111 the burden_of_proof on factual issues that affect a taxpayer’s liability for tax generally may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue sec_7491 see also 116_tc_438 petitioners argue that the burden shifts to respondent under sec_7491 respondent disagrees and argues that petitioners have not satisfied the requirements of sec_7491 the party whose position is supported by the weight of the evidence will prevail regardless of which party bore the burden of persuasion see 394_f3d_1030 8th cir aff’g tcmemo_2003_212 consequently a shift in the burden of persuasion ‘is of practical consequence only in the rare event of an evidentiary tie ’ id quoting 366_f3d_608 8th cir aff’g t c memo we decide these cases on the weight of the evidence presented instead of on an allocation of the burden_of_proof and thus need not decide whether the burden_of_proof has shifted ii conservation easements in general a taxpayer is generally allowed a deduction for any charitable_contribution made during the taxable_year sec_170 a charitable_contribution includes a gift of property to a charitable_organization made with charitable intent and without the receipt or expectation of receipt of adequate_consideration see 490_us_680 477_us_105 see also sec_1_170a-1 and income_tax regs while a taxpayer is generally not allowed a charitable_contribution_deduction for a gift of property consisting of less than an entire_interest in that property an exception is made for a qualified_conservation_contribution see sec_170 b iii a qualified_conservation_contribution is a contribution of a qualified_real_property_interest to a qualified_organization which is made exclusively for conservation purposes sec_170 see also sec 170a-14 a income_tax regs respondent argues that petitioners are not entitled to a deduction for their contribution of the conservation_easement because the conservation_easement was not a qualified_real_property_interest nor was it made exclusively for conservation purposes a general rules on perpetuity sec_170 defines qualified_real_property_interest as any of the following interests_in_real_property a the entire_interest of the donor other than a qualified_mineral_interest b a remainder_interest and c a restriction granted in perpetuity on the use which may be made of the real_property sec_1_170a-14 income_tax regs provides the following with respect to sec_170 a perpetual conservation restriction is a qualified_real_property_interest a perpetual conservation restriction is a restriction granted in perpetuity on the use which may be made of real property--including an easement or other interest_in_real_property that under state law has attributes similar to an easement eg a restrictive covenant or equitable servitude respondent does not dispute that the trust is a qualified_organization like sec_170 sec_170 specifies that the conservation_purpose must be protected in perpetuity sec_170 provides that a contribution shall not be treated as exclusively for conservation purposes unless the conservation_purpose is protected in perpetuity although paragraphs c and both require perpetuity they are separate and distinct requirements sec_170 specifies that the donated interest_in_real_property must be subject_to a use restriction in perpetuity whereas sec_170 specifies that the conservation_purpose of a conservation_easement must be protected in perpetuity 140_tc_1 sec_1_170a-14 income_tax regs a restriction granted in perpetuity on the use of the property must be based upon legally enforceable restrictions such as by recording the deed that will prevent uses of the retained_interest in the property that are inconsistent with the conservation_purpose of the contribution see sec_1 170a- g income_tax regs b conservation easements in new york in a federal tax controversy state law controls the determination of a taxpayer’s interest in property while the tax consequences are determined under federal_law 472_us_713 137_tc_159 therefore new york law governs when petitioners’ donation of the conservation_easement is regarded as complete and federal tax law determines the tax consequences under new york law an instrument purporting to create convey modify or terminate a conservation_easement is not effective unless recorded n y envtl conserv law nyec law sec mckinney supp in rothman v commissioner tcmemo_2012_163 slip op pincite we stated that i nsofar as new york law does not regard an easement contribution as effective until the recordation date we conclude that the contribution date for an easement on real_property in new york is the recording date petitioners argue that rothman was wrongly decided they argue that the contribution date of the conservation_easement was date the date on which a duly authorized representative of the trust executed the conservation deed on behalf of the trust they contend that t he recordation requirement in nyec law sec only makes the easement effective against subsequent purchasers it has nothing to do with the creation or conveyance of the property interest we disagree petitioners rely on n y real prop law nyrp law sec_244 and sec_291 mckinney nyrp law sec_244 provides that a grant takes effect so as to vest the estate or interest intended to be conveyed only from its delivery nyrp law sec_291 provides that a conveyance of real_property within the state may be recorded in the office of the clerk of the county where such real_property is situated every such conveyance not so recorded is void as against any person who subsequently purchases or acquires by exchange or contracts to purchase or acquire by exchange the same real_property or any portion thereof in good_faith and for a valuable consideration and whose conveyance contract or assignment is first duly recorded emphasis added both of these sections provide the general rules in new york with respect to conveyances of real_property conservation easements however are subject_to special rules in nyec law art tit these special rules apply only to conservation easements see nyec law sec this title shall not affect any interests or rights in real_property which are not conservation easements and shall not affect the rights of owners to convey any interests_in_real_property which petitioners cite a number of cases on brief which discuss n y real prop law sec_244 and or mckinney including manhattan life ins co v cont’l ins cos n e 2d n y james v lewis n y s 2d app div and bucklev v chevron u s a inc n y s 2d sup ct these cases all deal with general conveyances of real_property and not conservation easements they could now create under existing law without reference to the terms of this title one of the special rules in the nyec law is that conservation easements must be recorded see nyec law sec a conservation_easement shall be duly recorded and indexed as such in the office of the recording officer for the county or counties where the land is situate in the manner prescribed by article nine of the real_property law this rule differs from the general_rule in nyrp law sec_291 which provides that conveyances of real_property may be recorded conservation easements are governed by the special rules of the nyec law rather than the general rules of the nyrp law where the two conflict see 285_us_204 specific terms prevail over the general in the same or another statute which otherwise might be controlling nyrp law sec_291 provides that if a conveyance of real_property is not recorded then the conveyance is not effective against a subsequent purchaser for value who records first petitioners argue that the same result applies to an unrecorded conservation_easement but petitioners are mistaken the nyec law is clear that a conservation_easement must be recorded a conservation_easement that is not recorded does not have any legal effect in the state of new york see nyec law sec an instrument for the purpose of creating conveying modifying or terminating a conservation_easement shall not be effective unless recorded in these cases the conservation deed was recorded on date by the new york city department of finance office of the city register we conclude that the conservation deed was not effective until that date however even assuming arguendo that we were to accept petitioners’ argument that the conservation deed was legally enforceable by the trust against petitioners on date and became effective against subsequent purchasers on date the conservation_easement still would not have satisfied the perpetuity requirements of sec_170 and a in mr pretsfelder listed the townhouse for sale on behalf of petitioners on date he had drafted a setup of the townhouse and was actively marketing the townhouse to potential buyers however he did not tell any of petitioners argue on brief that the trust mailed the conservation deed to the new york city department of finance office of the city register on date and that the conservation deed is deemed recorded as of that date however petitioners have not presented any credible_evidence that the trust mailed the conservation deed in the parties stipulated that t he conservation deed was recorded by the city of new york office of register on date and the record contains a copy of the recording and endorsement cover page showing a recordation date of date we find that the recordation date is date them about the conservation_easement if a buyer had purchased the townhouse and had recorded the deed of conveyance before date that buyer could have taken the townhouse free and clear of the conservation_easement see panther mountain water park inc v cnty of essex n y s 2d app div a bona_fide purchaser--one who purchases real_property in good_faith for valuable consideration without actual or record notice of another party’s adverse interests in the property and is the first to record the deed or conveyance--takes title free and clear of such adverse interests webster v ragona n y s 2d app div a good_faith purchaser for value is not bound by an easement which is not properly recorded prior to a purchase of the encumbered property the possibility that this could have occurred was not so remote as to be negligible see sec_1_170a-14 income_tax regs we hold that the requirements of sec_170 and a have not been met for because neither the use restriction nor the conservation_purpose of the conservation_easement was protected in perpetuity until date accordingly dr zarlengo and ms mcmahon-zarlengo are not entitled to a deduction for the conservation_easement for we do not have jurisdiction to redetermine ms sandin-zarlengo’s federal_income_tax liability for we do however have jurisdiction to redetermine her tax_liabilities for and we may consider her taxable_year as may be necessary for redetermining her tax_liability for see sec_6214 fitch v commissioner tcmemo_2012_358 at because of applicable gross_income limitations on charitable_contribution deductions see sec_170 ms sandin-zarlengo was able to use only dollar_figure of the dollar_figure deduction that she reported on her tax_return for the conservation_easement ms sandin-zarlengo claimed carryover deductions on her tax returns based on the unused portion of the deduction because she would not have been entitled to the deduction it follows that she is not entitled to the carryover deductions for see eg mountanos v commissioner tcmemo_2013_138 at holding that the taxpayer was not entitled to charitable_contribution carryover deductions for the donation of a conservation_easement because the taxpayer failed to prove the easement had any value naylor v commissioner tcmemo_2013_19 at without actual substantiation of the original losses which led to the claimed capital_loss carryovers we cannot allow petitioner’s capital_loss_carryover deductions we asked the parties to brief whether any of petitioners might be entitled to a deduction for the conservation_easement for any of the other years at issue in the event the court were to agree with respondent that the requirements of the statute have not been met for the parties agree as do we that the court lacks jurisdiction to determine whether dr zarlengo and ms mcmahon-zarlengo are entitled to a deduction for any other year because the only year before the court with respect to them is the situation is different with respect to ms sandin-zarlengo we have jurisdiction to redetermine her federal_income_tax liabilities for respondent acknowledges that the conservation_easement could be considered made in perpetuity under section h c a in because the conservation_easement was recorded in that year notwithstanding respondent argues that ms sandin- zarlengo is not entitled to a deduction for any other year because she failed to properly substantiate the conservation_easement ms sandin-zarlengo argues that she complied or substantially complied with all the requirements for the deduction in and that we should redetermine her tax_liability for and accordingly we find that both the use restriction and the conservation_purpose of the conservation_easement were protected in perpetuity as of date we further find that ms sandin-zarlengo has satisfied the other requirements of sec_170 with respect to the conservation_easement for we determine next whether she has met the relevant substantiation requirements iii substantiation requirements a general rules a taxpayer is generally allowed a deduction for any charitable_contribution of property made during the taxable_year only if the contribution is verified under regulations prescribed by the secretary sec_170 the amount allowed as a deduction for a noncash contribution of property is the fair_market_value of the contributed_property measured as of the donation date see sec_1_170a-1 respondent argues on brief that the conservation_easement did not have a conservation_purpose within the meaning of sec_170 because it did not preserve the townhouse in any way that local law did not we disagree the townhouse is subject_to the good repair standard the lpc does not actively monitor properties subject_to this standard the lpc instead relies on the local community to report violations the trust on the other hand actively monitors properties on which it owns a conservation_easement through annual inspections we find this difference to be significant moreover the lpc and the trust do not follow the same preservation standards the lpc has its own set of regulations these regulations are found in the lpc code and the lpc rules the trust follows the standards promulgated by the secretary of the interior the lpc’s regulations and the secretary’s standards are similar but not identical john weiss deputy counsel for the lpc credibly testified that the lpc changes its rules approximately every two years we find that the conservation_easement provides the townhouse with an additional layer of protection over and above that provided by the lpc’s regulations accordingly we find that the conservation_easement preserves the townhouse within the meaning of sec_170 income_tax regs a deduction claimed for a noncash contribution of property valued at more than dollar_figure is generally denied unless the taxpayer obtains a qualified_appraisal of the donated property and attaches to the return for the taxable_year in which the contribution is made such information regarding the property and the appraisal as the secretary requires sec_170 c sec_170 and sec_1_170a-13 income_tax regs collectively require a taxpayer claiming a noncash charitable_contribution_deduction of more than dollar_figure to obtain a qualified_appraisal of the contributed_property attach to the return first claiming the deduction a fully completed appraisal_summary ie form and maintain records containing the information required in sec_1_170a-13 income_tax regs another relevant statutory provision is the deficit_reduction_act_of_1984 defra pub_l_no sec stat pincite through which congress directed the secretary to prescribe regulations requiring any individual closely_held_corporation or personal services corporation claiming a charitable_contribution_deduction for which the claimed value of the contributed_property is the requirements of sec_170 apply to petitioners’ donation of the conservation_easement to the trust because that contribution was completed after the effective date of that section ie after date see american_jobs_creation_act_of_2004 pub_l_no sec_883 sec_118 stat pincite more than dollar_figure to obtain a qualified_appraisal congress defined the term qualified_appraisal to mean an appraisal prepared by a qualified_appraiser that includes among other information a description of the property appraised the fair_market_value of the property on the contribution date and the specific basis for valuation a statement that the appraisal was prepared for income_tax purposes the qualifications of the appraiser and any additional information the secretary may prescribe by regulation id sec a stat pincite pursuant to his grant of authority under defra the secretary promulgated sec_1_170a-13 income_tax regs see t d 1988_1_cb_99 stating in the preamble that amendments to the regulations interpreting sec_170 were promulgated to conform existing regulations to defra sec regulations issued under sec_170 generally define a qualified_appraisal as an appraisal document prepared by a qualified_appraiser no earlier than days before the contribution date and no later than the extended due_date of the return first claiming the deduction sec_1_170a-13 income_tax regs additionally a qualified_appraisal must include the following information a a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was or will be contributed b in the case of tangible_property the physical condition of the property c the date or expected date of contribution to the donee d the terms of any agreement or understanding entered into or expected to be entered into by or on behalf of the donor or donee that relates to the use sale_or_other_disposition of the property contributed e the name address and the identifying number of the qualified_appraiser and if the qualified_appraiser is acting in his or her capacity as an employee of any person whether an individual corporation or partnerships sic the name address and taxpayer_identification_number of the person who employs or engages the qualified_appraiser f the qualifications of the qualified_appraiser who signs the appraisal including the appraiser’s background experience education and membership if any in professional appraisal associations g a statement that the appraisal was prepared for income_tax purposes h the date or dates on which the property was appraised i the appraised fair_market_value within the meaning of sec_1_170a-1 of the property on the date or expected date of contribution j the method of valuation used to determine the fair_market_value such as the income approach the market-data approach and the replacement-cost-less depreciation approach and k the specific basis for the valuation such as specific comparable sales transactions or statistical sampling including a justification for using sampling and an explanation of the sampling procedure employed sec_1_170a-13 income_tax regs b substantial compliance the provisions of sec_1_170a-13 income_tax regs are directory requiring substantial compliance rather than mandatory requiring strict compliance see 100_tc_32 at issue in bond was whether the taxpayers were entitled to a charitable_contribution_deduction for the contribution of two blimps to a charitable_organization the bond parties agreed upon the value of the contributed_property that a qualified_appraiser completed an appraisal and that the donee organization was qualified to receive the contribution the commissioner however asserted that the taxpayers were not entitled to the claimed deduction because they failed to obtain and attach to their return a separate written appraisal including the reporting information specified in sec_1_170a-13 income_tax regs in concluding that the requirements of sec_1_170a-13 income_tax regs were directory as opposed to mandatory we explained i t is apparent that the essence of sec_170 is to allow certain taxpayers a charitable deduction for contributions made to certain organizations it is equally apparent that the reporting requirements of sec_1_170a-13 income_tax regs are helpful to respondent in the processing and auditing of returns on which charitable deductions are claimed however the reporting requirements do not relate to the substance or essence of whether or not a charitable_contribution was actually made we conclude therefore that the reporting requirements are directory and not mandatory id pincite citations omitted we held that the taxpayers in bond had substantially complied with the requirements of sec_1_170a-13 income_tax regs noting that information missing from their return was promptly furnished to the commissioner’s revenue_agent at or near the beginning of the audit in 109_tc_258 aff’d without published opinion 166_f3d_332 4th cir the taxpayers had claimed a charitable_contribution_deduction for a donation of shares of stock that were not publicly traded the taxpayers however had not obtained qualified appraisals before filing their returns for the years at issue the commissioner disallowed a portion of the deduction because of the lack of a qualified_appraisal the taxpayers countered that they had substantially complied with the appraisal requirements and attempted to rely on bond we rejected the taxpayers’ argument because the taxpayers had not provided any of the information required by sec_170 and the regulations thereunder taken together bond and hewitt provide a standard by which we can consider whether petitioners provided sufficient information to permit respondent to evaluate their reported contributions as intended by congress smith v commissioner tcmemo_2007_368 slip op pincite aff’d 364_fedappx_317 9th cir c application of the law respondent argues that ms sandin-zarlengo has failed to comply with a number of the aforementioned substantiation requirements we address each of the disputed requirements in turn date of the appraisal report respondent argues that mr haims prepared the appraisal report more than days before the date of the contribution of the conservation_easement in violation of sec_1_170a-13 income_tax regs the appraisal report is dated date and has an effective date of date ie the date on which the conservation_easement is valued petitioners signed the conservation deed on date and a duly authorized representative of the trust signed the conservation deed on date thus both petitioners and the trust assented to the terms of the conservation deed within days of date however the conservation deed was not recorded until date as previously discussed we conclude that the date of the contribution is the date of recordation see supra pp therefore the appraisal report was untimely however the timeliness requirement of sec_1_170a-13 income_tax regs does not relate to the essence of sec_170 see bond v commissioner t c pincite see also 42_tc_308 ‘generally those directions which are not of the essence of the thing to be done but which are given with a view merely to the proper orderly and prompt conduct of the business and by the failure to obey no prejudice will occur to those whose rights are protected by the statute are not commonly considered mandatory ’ quoting sutherland statutory construction sec pincite 3d ed we have previously found that a taxpayer may substantially comply with the substantiation requirements notwithstanding the taxpayer’s premature appraisal see consol investors grp v commissioner tcmemo_2009_290 slip op pincite concluding that the premature nature by approximately three months of a partnership’s appraisal report was insubstantial adequate description respondent argues that the appraisal report fails to describe property that was appraised within the meaning of sec_1_170a-13 income_tax regs we disagree the appraisal report describes the property appraised as a historic preservation easement the appraisal report includes a detailed description of the townhouse complete with photographs of its interior exterior and surroundings moreover part of the appraisal_summary describes the property appraised as west 80th street and as a historic preservation easement we find that ms sandin-zarlengo has complied or substantially complied with sec_1_170a-13 income_tax regs date of the contribution respondent argues that the appraisal report fails to state the date or expected date of the contribution as required by sec_1_170a-13 income_tax regs this is true however on part of the appraisal_summary the trust acknowledged that it had received the conservation_easement on date thus respondent was put on notice that the date or expected date of the contribution was to be date notwithstanding our holding that the contribution was not actually effective until date in simmons v commissioner tcmemo_2009_208 slip op pincite aff’d 646_f3d_6 d c cir we found that the taxpayer complied with sec_1_170a-13 income_tax regs where the date of the contribution was provided on forms attached to the taxpayer’s tax_return we find that ms sandin-zarlengo has complied or substantially complied with sec_1_170a-13 income_tax regs terms of agreement or understanding respondent argues that the appraisal report fails to provide the terms of any agreement or understanding entered into as required by sec_1_170a-13 income_tax regs we disagree mr haims attached a copy of the sample deed to the appraisal report the sample deed was identical in all material respects to the conservation deed except for the fact that it had a few blank lines for the donor’s personal information such as the donor’s name address historic_district etc petitioners’ personal information was provided elsewhere in the appraisal report we find that ms sandin-zarlengo has complied or substantially complied with sec_1_170a-13 income_tax regs appraisal report prepared for income_tax purposes respondent argues that the appraisal report does not contain a statement that it was prepared for income_tax purposes as required by sec_1_170a-13 income_tax regs the appraisal report states that its intended use is to assist our client ms sandin-zarlengo in determining the federal tax benefits resulting from the creation of the subject’s townhouse’s historic preservation easement we find that this statement complies or substantially complies with the requirements of sec_1_170a-13 income_tax regs fair_market_value of the conservation_easement respondent argues that the appraisal report fails to appraise the fair_market_value of the conservation_easement as required by sec_1_170a-13 income_tax regs mr haims determined the market_value of the townhouse to be dollar_figure million as of date he then applied an diminution to the market_value of the townhouse to arrive at a value of dollar_figure for the conservation_easement mr haims defines the term market_value in the appraisal report as the most probable price as of a specified date in cash or in terms equivalent to cash or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale with the buyer and seller each acting prudently knowledgeably and for self interest and assuming that neither is under undue duress sec_1_170a-1 income_tax regs defines fair_market_value as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts this definition is similar to mr haims’ definition of market_value though not identical on part of the appraisal_summary mr haims states the conservation easement’s appraised fair_market_value to be dollar_figure the exact same value as stated in his appraisal report for the conservation easement’s market_value furthermore the parties have stipulated that according tò the haims appraisal the facade easement had a fair_market_value of dollar_figure at the time of contribution by all accounts it appears that mr haims used the terms market_value and fair_market_value synonymously we find that ms sandin-zarlengo has complied or substantially complied with sec_1_170a-13 income_tax regs qualified_appraiser respondent argues that ms sandin-zarlengo has failed to satisfy sec_1_170a-13 income_tax regs that regulation requires that an appraisal be prepared signed and dated by a qualified_appraiser within the meaning of paragraph c of this section the parties have stipulated that petitioners retained mr haims to appraise the conservation_easement the appraisal report was prepared by mr haims and mr haims is a qualified_appraiser mr haims prepared signed and dated the appraisal report sec_1_170a-13 income_tax regs provides more than one appraiser may appraise the donated property if more than one appraiser appraises the property the donor does not have to use each appraiser’s appraisal for purposes of substantiating the charitable_contribution_deduction pursuant to this paragraph c if the donor uses the appraisal of more than one appraiser or if two or more appraisers contribute to a single appraisal each appraiser shall comply with the requirements of this paragraph c including signing the qualified_appraisal and appraisal_summary as required by paragraphs c i b and c i c of this section respectively respondent argues that the appraisal report does not state whether ms hao is a qualified_appraiser within the meaning of sec_1_170a-13 income_tax regs and that she did not testify at trial ms hao is an employee of mr haims’ company she performed a physical inspection of the townhouse and assisted mr haims in the preparation of the appraisal report there is no indication in the record that any of the figures in the appraisal report were her own we do not believe that her assistance has caused ms sandin-zarlengo to violate sec_1_170a-13 income_tax regs d conclusion regarding substantiation requirements ms sandin-zarlengo has complied or substantially complied with all of the disputed substantiation requirements under sec_1_170a-13 income_tax regs she has not complied or substantially complied with the timeliness requirement under sec_1_170a-13 income_tax regs in that the appraisal report was premature however as previously discussed this requirement does not relate to the essence of sec_170 we conclude that ms sandin-zarlengo has satisfied the requirements to substantiate the conservation_easement iv valuation of the conservation_easement a general principles we now arrive at the question of valuation--how much is the conservation_easement actually worth the regulations provide that the value of a conservation_easement is the fair_market_value of the conservation_easement at the time of the contribution see sec_1_170a-14 income_tax regs if a substantial record of sales of conservation easements comparable to the donated conservation_easement exists then the fair_market_value of the donated conservation_easement is based on the sale prices of the comparable easements see id however there is no substantial record of sales of conservation easements similar to the conservation_easement that petitioners donated in such a case the regulations provide that the fair_market_value of a conservation_easement as a general_rule is equal to the difference between the fair_market_value of the encumbered property before the conservation_easement is granted and the fair_market_value of the encumbered property after the conservation_easement is granted see id this approach is known as the before and after approach it has been used by this court on numerous occasions see eg 85_tc_677 gorra v commissioner tcmemo_2013_254 at simmons v commissioner tcmemo_2009_208 slip op pincite b the expert witnesses the parties each called an expert witness to help us determine the fair_market_value of the conservation_easement see fed r evid crimi v commissioner tcmemo_2013_51 at an expert witness may be allowed to testify in a proceeding before this court when his or her scientific technical or other specialized knowledge might help us to understand the evidence or decide a fact in issue we evaluate expert opinions in the light of all the evidence in the record and we may accept or reject an expert’s testimony in whole or in part according to our independent evaluation of the evidence in the record see 304_us_282 268_f3d_497 7th cir aff’g tcmemo_1999_182 110_tc_530 petitioners offered expert testimony of eric haims eric haims is the senior vice president of jerome haims realty inc he is a certified real_estate general appraiser in new york he appraised the conservation_easement using the before and after approach as of date and as of date respondent offered expert testimony of timothy barnes mr barnes is a senior managing director at cushman wakefield he is also a certified real_estate general appraiser in new york he appraised the conservation_easement using the before and after approach as of date only c the before value sec_1 eric haims’ before values eric haims used the sales comparison approach to determine the before values of the conservation_easement as of date and as of date the sales comparison approach is based on the principle of substitution the theory being that the value of a property sold in a competitive market is based on the cost of acquiring a comparable substitute property under this approach eric haims researched properties in manhattan that were comparable to the townhouse and that had sold on the market in or he eric haims is jerome haims’ son to avoid confusion we will refer to eric haims by his full name selected three properties on the upper west side that in his view were comparable to the townhouse he then adjusted the sale prices of these properties to account for differences between the properties and the townhouse in date of sale location frontage presence of an elevator condition presence of a garage number of baths gross living area and number of fireplaces he arrived at before values of dollar_figure million and dollar_figure million as of date and date respectively mr barnes’ before value like eric haims mr barnes used the sales comparison approach to determine the before value of the conservation_easement he selected five properties on the upper west side that in his view were comparable to the townhouse he then adjusted the sale prices of the properties to account for differences between the properties and the townhouse in market conditions location size condition floors and frontage he arrived at a before value of the townhouse of dollar_figure million as of date he did not compute a value for the townhouse as of date these five properties were all different from the properties that eric haims had selected for use in his sales comparison approach analysis of before values on brief each of the parties criticizes the adjustments of the other parties’ expert respondent argues that eric haims abused the adjustment process in order to artificially inflate the ‘before’ value of the property -- under the percentage ‘theory’ the higher the ‘before’ value the higher the easement’s value petitioners argue that mr barnes made some excessive adjustments and failed to make other necessary adjustments the result being that his before value was too low we find many of the parties’ criticisms to be well founded each expert made adjustments designed to support his side’s litigating positions experts lose their usefulness and credibility when they merely become advocates for the position argued by a party 92_tc_101 petitioners’ expert computed unreasonably high before values while respondent’s expert computed an unreasonably low before value we believe that the true value of the townhouse lies somewhere in between an expert qualified to testify in a judicial proceeding owes a duty to the court that transcends the duty to his or her client insofar as the expert must present his or her opinion as well as the facts data and analysis on which he or she relied neutrally and candidly 94_tc_570 see also estate of mitchell v commissioner tcmemo_2002_98 slip op pincite wagner constr inc v commissioner tcmemo_2001_160 slip op pincite we are not bound by values computed by either side’s expert witness see 538_f2d_927 2nd cir aff’g tcmemo_1974_285 we may reach our own determination of value on the basis of our analysis of the evidence in the record id mr pretsfelder credibly testified that he thought petitioners’ dollar_figure million asking price for the townhouse was too high relative to other properties on the market and that the townhouse would have sold in the four’s he further testified that four and a half did not sound unreasonable we find mr pretsfelder to be a credible and unbiased witness he specializes in townhouse sales and was very familiar with petitioners’ townhouse we find that dollar_figure million is the best evidence of the before value of the townhouse as of date d the after value sec_1 eric haims’ after values eric haims conducted an empirical market study based on a paired sales analysis of residential properties in new york city to determine the after values of the conservation_easement as its name implies this technique calls for comparing the sale prices of properties that are matched in pairs in theory the while mr pretsfelder was petitioners’ broker he was actually called to testify as a witness for respondent properties in each pair would be identical except for the fact that one of the properties would be encumbered by an easement the premise is that when two properties are identical in all respects except that one of the properties is encumbered by an easement the value of the easement can be measured as the difference between the sale prices of the two properties in practice however it is all but impossible to find identical pairs of unencumbered and easement- encumbered properties therefore similar properties are generally paired and adjustments are made to the sale price of one of the properties in each pair to account for differences between the properties eric haims matched pairs of comparable unencumbered and easement- encumbered properties together he then adjusted one of the properties in each pair for differences in location gross living area presence of an elevator parking and frontage he arrived at median and mean diminutions of value of and respectively to the easement- encumbered properties as a result of the additional burdens imposed by the conservation easements on the properties eric haims selected as the diminution of value to apply to the townhouse as a result of the conservation_easement he arrived at after values for the townhouse of dollar_figure million and dollar_figure million as of date and date respectively he subtracted the after values from the before values to arrive at fair market values of dollar_figure and dollar_figure for the conservation_easement as of date and date respectively mr barnes’ after value mr barnes did not attempt to compute the after value of the townhouse using any methodology he states in his expert report that the value of the townhouse might in theory be diminished by the grant of the conservation_easement as a result of one or more factors he then lists various factors that might cause the granting of a conservation_easement to reduce the value of a property including its placing a greater burden on the property owner he concludes however that he is not persuaded that the conservation_easement places a greater burden on the owner creates an additional layer of regulation or in an addendum to his expert report mr barnes lists six properties in manhattan that had been sold on the market before being encumbered by an easement and had been resold after being encumbered by an easement he notes that there was substantial appreciation in the value of the properties between the sales and resales the resales occurred roughly four to eight years after the original sales the increases in the resale prices are likely due to a number of factors including appreciation in the real_estate market mr barnes did not attempt to isolate the effect of the easements on the resale prices we find his analysis to be devoid of any value for purposes of valuing the conservation_easement will result in additional costs we disagree we find that the conservation_easement did impose additional burdens see supra note mr barnes also states in his expert report that he inquired among a number of brokers and valuation professionals in the local market whether the presence of a facade easement affected either the marketability of or the ability to finance a townhouse and that t he uniform response was that the easements had no effect on buyer interest marketing time or the ability to secure mortgage capital mr barnes does not list the brokers and valuation professionals with whom he purportedly consulted nor the questions that he purportedly asked them mr barnes concludes that the after value of the townhouse was dollar_figure million as of we do not find it particularly significant that the buyers did not reduce their offer on the townhouse after they became aware of the conservation_easement mr pretsfelder and the buyers’ broker had carried on extensive negotiations up until that point they had reached an agreement on a purchase_price of dollar_figure for the townhouse which was more than dollar_figure below petitioners’ dollar_figure million asking price mr astrachan one of the buyers credibly testified that he wanted to honor this agreement returning to the negotiating table could very well have jeopardized the agreement and it is certainly plausible that the buyers did not want to risk the prospects of striking a new agreement furthermore the conservation_easement resulted in additional compliance costs to the buyers who had to obtain the permission of the trust before carrying out their pre-purchase plans to modify the townhouse the conservation_easement did not significantly affect these plans but it might have a larger impact on any future plans the buyers may have and or plans of any future purchasers of the townhouse date the same as his before value and that the conservation_easement thus had no value analysis of after values mr barnes’ conclusory analysis demonstrates his preconceived notion that conservation easements have no value we reject his analysis as unsupported and unreliable ordinarily any encumbrance on real_property however slight would tend to have some negative effect on a property’s fair_market_value gorra v commissioner at evans v commissioner tcmemo_2010_207 slip op pincite moreover mr pretsfelder credibly testified that if two properties are identical in all respects except for the fact that one of the two properties is burdened by a conservation_easement the property without the easement will have a greater value eric haims’ paired sales analysis while conceptually sound is marred by flaws in its execution eric haims did not adjust the values of the properties in his analysis for several important characteristics including date of sale and condition he admitted at trial that if one of the properties was in slightly better or worse while in scheidelman v commissioner tcmemo_2013_18 at aff’d ___ f 3d ___ 2d cir date we found mr barnes’ judgments to be more reliable than those of the taxpayer’s expert we find mr barnes’ expert report to be broad and conclusory in these cases and accord it little value see 92_tc_101 condition the percentage diminution may be a little bit different the explanation he gave as to why he did not adjust the values of the properties for differences in condition is that his research and analysis didn’t produce enough information to make condition adjustments to the pairs furthermore many of eric haims’ adjustments seem to be rather arbitrary when questioned by respondent’s counsel as to why he adjusted the value of one particular property in his analysis by dollar_figure per square foot when the property including the land on which it was situated sold for dollar_figure per square foot his response was that his adjustment doesn’t seem to correlate well we do not adopt the after values of eric haims either we find on the basis of our analysis of the evidence in the record that is a reasonable diminution to the value of the townhouse as a result of the additional burdens imposed by the conservation_easement see scheidelman v commissioner ___ f 3d ___ ___ 2d cir date ‘valuation is necessarily an approximation ’ and ‘ i t is not necessary that the value arrived at by the trial_court be a figure as to which there is specific testimony if it is within the range of figures that may properly be deduced from the evidence ’ quoting silverman v commissioner f 2d pincite aff’g tcmemo_2013_18 see also gorra v commissioner at finding to be a reasonable diminution in value simmons v commissioner slip op pincite finding to be a reasonable diminution in value applying a diminution to the townhouse’s dollar_figure million before value we find that the fair_market_value of the conservation_easement is dollar_figure as of date accordingly ms sandin-zarlengo is entitled to a deduction of dollar_figure for for her contribution of her interest in the conservation_easement we leave it to the parties to compute under rule the amount of this deduction that ms sandin-zarlengo may use for and the excess if any that she may carry forward to and v penalties a introduction sec_6662 and b and imposes an accuracy-related_penalty if any part of an underpayment_of_tax required to be shown on a return is attributable to among other things negligence or disregard of rules or regulations a substantial_understatement_of_income_tax or a substantial_valuation_misstatement the penalty is of the portion of the underpayment_of_tax to which the section applies sec_6662 in the case of a gross_valuation_misstatement is increased to sec_6662 only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is subject_to the penalty on more than one of the grounds set out in sec_6662 sec_1_6662-2 income_tax regs respondent argues that petitioners are liable for a gross_valuation_misstatement penalty or in the alternative a penalty for negligence a substantial_understatement_of_income_tax or a substantial_valuation_misstatement respondent bears the burden of production on the applicability of the accuracy-related_penalty in that he must come forward with sufficient evidence indicating that it is proper to impose the penalty see sec_7491 see also higbee v commissioner t c pincite b valuation_misstatement_penalty in general we consider first the valuation_misstatement_penalty before the enactment of the pension_protection_act of ppa pub_l_no 120_stat_780 a substantial_valuation_misstatement existed if the value of any property reported on a tax_return was percent or more of the amount determined to be the correct amount of such valuation sec_6662 if the valuation misstatement was or more of the correct amount a gross_valuation_misstatement existed and the penalty increased to see sec_6662 h a i taxpayers could avoid these penalties under certain circumstances if they made a valuation misstatement in good_faith and with reasonable_cause see sec_6664 the ppa lowered the threshold from to for a substantial_valuation_misstatement and from to for a gross_valuation_misstatement the ppa also eliminated the reasonable_cause exception for gross_valuation_misstatements of charitable_deduction_property see sec_6664 these ppa changes apply to returns filed after date ppa sec e stat pincite pre-ppa returns dr zarlengo’s joint_return and ms sandin-zarlengo’s return were filed before date therefore the ppa does not apply to those returns we need not decide whether respondent has met his burden of production as to the substantial or gross_valuation_misstatement penalties or any of the other accuracy-related_penalties for and because we find that dr zarlengo this provision was moved to sec_6664 in the health care and education reconciliation act of pub_l_no sec c stat pincite for charitable_contributions of property other than facade easements the changes are effective for returns filed after date and ms sandin-zarlengo meet the reasonable_cause and good_faith exception for those years sec_6664 provides an exception to the imposition of a sec_6662 accuracy-related_penalty with respect to any portion of an underpayment if a taxpayer establishes that there was reasonable_cause for such portion and the taxpayer acted in good_faith with respect to such portion in the case of an underpayment attributable to a substantial or gross_valuation_misstatement with respect to charitable_deduction_property the taxpayer must also establish that the claimed value of the property was based on a qualified_appraisal made by a qualified_appraiser and the taxpayer made a good_faith investigation of the value of the contributed_property sec_6664 see also sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs reliance upon the advice of a tax professional may establish reasonable_cause and good_faith for the purpose of avoiding liability for the sec_6662 penalty see 469_us_241 whether reasonable_cause exists when a taxpayer has relied on a tax professional to prepare a return must be determined on the basis of all of the facts and circumstances see 115_tc_43 aff’d 299_f3d_221 3d cir the taxpayer claiming reliance on a tax professional must prove by a preponderance of evidence that he or she satisfies each prong of the following test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment id pincite petitioners are not financially sophisticated taxpayers neither dr zarlengo nor ms sandin-zarlengo has a background in tax finance or accounting when ms sandin-zarlengo brought the idea of donating a conservation_easement on the townhouse to dr zarlengo’s attention he consulted with mr cirillo his longtime accountant about its legitimacy mr cirllio a licensed c p a in new york had approximately years of experience in accounting at the time he was initially unfamiliar with conservation easements but he read an article on the subject in the journal of accountancy and researched the relevant substantiation requirements before getting back to dr zarlengo we find that mr cirillo was a competent accountant with sufficient expertise to justify reliance mr cirillo explained to dr zarlengo that the deduction was in fact legitimate and that petitioners would need to obtain an appraisal and forms to attach to their tax returns mr cirillo later prepared dr zarlengo’s joint tax_return for and ms sandin-zarlengo’s tax_return for dr zarlengo provided him with all of the necessary information relevant to the charitable_contribution deductions at issue including the appraisal report the appraisal_summary and the conservation deed nothing in these documents gave mr cirillo cause for concern as to the accuracy of the appraised value of the conservation_easement we find that petitioners relied on mr cirillo’s advice we further find that petitioners acted in good_faith the term good_faith appears in both sec_6664 and b although the term has no precise definition it means among other things honesty in belief black’s law dictionary 9th ed petitioners honestly believed that the conservation_easement was a completed_gift in on date they received a letter from the trust stating that the enclosed appraisal_summary was to be included in your income_tax submission for the year mr cirillo also informed dr zarlengo that he could claim part of the deduction for the conservation_easement in and carry the excess forward the amount of the deduction that dr zarlengo and ms sandin-zarlengo each claimed on their returns was exactly half of mr haims’ appraised value representing their interests in the conservation_easement the parties have stipulated that mr haims is a qualified_appraiser and we have already found that his appraisal report was a qualified_appraisal see supra pp petitioners made a good_faith investigation into the value of the conservation_easement by obtaining mr haims’ appraisal and mr cirillo’s advice we find that dr zarlengo and ms sandin-zarlengo have met the reasonable_cause and good_faith defense for and respectively accordingly they are not liable for accuracy-related_penalties with respect to the conservation_easement for those years post-ppa returns ms sandin-zarlengo’s and returns were filed after date therefore the reasonable_cause and good_faith rules as amended by the ppa apply to those returns in chandler v commissioner t c ___ ___ slip op pincite date the taxpayers argued that applying the amended reasonable_cause and good_faith rules to their tax_return which was filed after date would amount to a retroactive application of the ppa because a portion of the underpayment appearing on their return resulted from the carryover of a charitable_contribution_deduction which originated on their return id we rejected their argument and held that the plain language of the ppa makes the amended reasonable_cause and good_faith rules applicable for all returns filed after date id at ___ slip op pincite in chandler we had no need to consider whether the pre-ppa thresholds or the post-ppa thresholds applied to the taxpayers’ return because the taxpayers had failed to prove that the conservation_easement they donated had any value and thus under both thresholds the taxpayers’ valuation misstatement would have been a gross_valuation_misstatement id at ___ slip op pincite likewise in these cases we need not decide that question as to ms sandin-zarlengo’s and returns because respondent has met his burden of production as to the gross_valuation_misstatement penalties with respect to ms sandin-zarlengo for and regardless of whether the or threshold applies ms under sec_1_6662-5 income_tax regs the penalty for a substantial or gross_valuation_misstatement applies to any portion of an underpayment for a year to which a deduction is carried that is attributable to a substantial or gross_valuation_misstatement for the year in which the carryback or carryover of the deduction arises ms sandin-zarlengo first claimed a deduction for the conservation_easement on her return based on a dollar_figure valuation we found that the actual value of the conservation_easement was dollar_figure as of date see supra p because the conservation_easement was not yet effective under new york law in and because the housing market in new york city was trending upward at the time it is clear that the conservation_easement did not reduce the value of the townhouse by more than dollar_figure in thus the valuation misstatement on ms sandin-zarlengo’s return meets or exceeds the threshold irrespective of whether the conservation_easement was worth zero dollar_figure or some amount in between dollar_figure continued sandin-zarlengo may not raise a reasonable_cause and good_faith defense for or because the ppa makes the gross_valuation_misstatement penalty a strict_liability penalty with respect to charitable_deduction_property see sec_6664 and vi conclusion dr zarlengo is not entitled to a charitable_contribution_deduction for the conservation_easement for ms sandin-zarlengo is not entitled to the carryover deductions for that she claimed with respect to the conservation_easement she is however entitled to a deduction of dollar_figure for and she may carry forward any unused portion dr zarlengo is not liable for a penalty for and ms sandin-zarlengo is not liable for a penalty for ms sandin- zarlengo is liable for gross_valuation_misstatement penalties for and with respect to any underpayments for those years which are attributable to her misvaluation of the conservation_easement provided that the applicable dollar limitation set forth in sec_6662 is satisfied continued dollar_figure see also sec_1_6662-5 income_tax regs the value or adjusted_basis claimed on a return of any property with a correct value or adjusted_basis of zero is considered to be percent or more of the correct amount we have considered all the arguments of the parties and to the extent we have not addressed them we find them to be irrelevant moot or meritless to reflect the foregoing decisions will be entered under rule


t c summary opinion united_states tax_court richard garcia petitioner v commissioner of internal revenue respondent docket no 16497-10s filed date richard garcia pro_se priscilla a parrett for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined an dollar_figure deficiency in petitioner’s federal_income_tax and imposed a dollar_figure sec_6651 addition_to_tax and a dollar_figure sec_6662 accuracy-related_penalty after concessions we consider whether petitioner is entitled to trade_or_business expense deductions claimed on a schedule c profit or loss from business in excess of the amounts now allowed by respondent whether the gross_receipts reported on that schedule c are overstated and whether petitioner is liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in california 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the year at issue rule references are to the tax_court rules_of_practice and procedure 2this issue raised for the first time by petitioner at trial was tried by consent of the parties see rule b during petitioner worked as a truck driver for garcia ready mix inc he was paid dollar_figure for doing so and this amount is shown on a form misc miscellaneous income that the company issued to petitioner also during petitioner was the sole_proprietor of rick’s roofing through which he offered residential roof installation and repair services petitioner did not maintain separate books of account for the business nor did he maintain a bank account in the name of the business sometimes petitioner’s customers paid cash and sometimes they paid_by check petitioner maintained several personal bank accounts during but he did not deposit all business receipts into one or the other of those accounts more often than not checks received from customers were cashed at a local restaurant some business_expenses paid_or_incurred in the operation of rick’s roofing were paid_by checks drawn on petitioner’s personal checking account some business_expenses were paid_by charges to personal credit card accounts and some were paid in cash sometimes petitioner provided a potential customer with a written cost estimate of a prospective roof installation or repair on a form entitled proposal sometimes the estimate was given to the customer on a form entitled invoice if the estimate was acceptable to the customer and the work was performed sometimes the written estimate in effect functioned as an invoice sometimes petitioner noted amounts paid for the job on the copy of the proposal or invoice forms sometimes he did not sometimes the amount_paid for a certain job varied from the amount estimated one of rick’s roofing’s customers reported dollar_figure paid to petitioner during on a form 1099-misc petitioner maintained in a box copies of the various proposal forms invoice forms and other slips of paper generated in the operation of rick’s roofing during the box of documents was provided to the paid income_tax_return_preparer who prepared petitioner’s federal_income_tax return petitioner’s untimely federal_income_tax return was filed on date original return the schedule c for rick’s roofing included with the original return shows dollar_figure of gross_receipts expense deductions that total dollar_figure and a net_loss of dollar_figure materials expenses totaling dollar_figure are included in the deductions claimed on the schedule c the amount reported as gross_receipts includes among other income the amount reported on the form 1099-misc that garcia ready mix inc issued to petitioner the net_loss from rick’s roofing is taken into account in the negative dollar_figure reported as petitioner’s adjusted_gross_income on the original return the deficiency determined in the notice takes into account the disallowances of many of the deductions claimed on the schedule c for rick’s roofing and the effects upon petitioner’s federal_income_tax liability of the increase to his net_earnings_from_self-employment caused by those disallowances see sec_164 sec_1401 sec_1402 petitioner submitted two amended returns after respondent selected the original return for examination both amended returns were prepared by the same income_tax_return_preparer who prepared the original return and both amended returns show changes to items reported on the schedule c for rick’s roofing included with the original return neither amended_return was processed by respondent the first amended_return dated date includes two schedules c one for rick’s roofing and another on which the compensation that petitioner received from garcia ready mix inc is reported as relevant here the schedule c for rick’s roofing shows corrected gross_receipts of dollar_figure and a corrected deduction for materials expenses of dollar_figure the second amended_return undated but mailed on date includes a schedule c for rick’s roofing this schedule c shows corrected gross_receipts of dollar_figure and a corrected deduction for materials expenses of dollar_figure as with the schedule c included with the original return the amount shown for gross_receipts on the schedule c included with the second amended_return apparently includes the compensation that petitioner received from garcia ready mix inc the services that petitioner provided to garcia ready mix inc are unrelated to the business of rick’s roofing discussion i rick’s roofing deductions as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 sec_1_6001-1 income_tax regs 3petitioner does not claim that the provisions of sec_7491 are applicable and we proceed as though they are not the parties have reached agreement with respect to all deductions attributable to rick’s roofing with the exception of the deduction claimed for materials expense according to petitioner he is entitled to the materials expense deduction that is dollar_figure as claimed on the schedule c included with the original return because the expense relates to the trade_or_business of rick’s roofing see sec_162 according to respondent petitioner is entitled to a deduction of dollar_figure for materials expenses respondent’s amount follows a review of numerous receipts for various materials submitted to respondent’s counsel before trial the amount takes into account all receipts for materials that reasonably could be connected to a roofing business even though petitioner did not necessarily associate a particular receipt with a particular job receipts showing sales to a purchaser other than petitioner receipts showing purchases charged to a credit card account other than petitioner’s and receipts showing purchases for items petitioner acknowledged to be personal are not taken into account in respondent’s analysis of an allowable deduction for materials expenses at trial petitioner maintained his entitlement to a deduction for materials expenses in the amount claimed on his original return even though amounts shown on the amended returns for that deduction were substantially less under the circumstances and in the absence of any bookkeeping system then in place for rick’s roofing we have little confidence that petitioner could accurately compute the amount of the deduction for materials expenses to which he might be entitled after careful review of the evidence submitted we have far more confidence in the allowable deduction respondent proposed petitioner has failed to establish that he is entitled to a deduction for materials expenses in excess of that amount ii gross_receipts for rick’s roofing according to petitioner the amount reported as gross_receipts on the schedule c attached to the original return includes amounts shown not only on invoices but on proposals as well according to petitioner both types of documents were included in the box that he provided to his return preparer and according to petitioner she mistakenly totaled the amounts in the computation of gross_receipts shown on the schedule c included with the original return petitioner explained that he did not become aware of the mistake until after the notice was issued and the submissions of the amended returns were his attempts to correct it we have little confidence that the proper amount of gross_receipts for rick’s roofing can now be computed petitioner’s records certainly do not allow for an accurate computation the amounts shown on the three schedules c included in the record at least one that inappropriately includes the income shown on the form 1099-misc from garcia ready mix inc are not consistent much less certain and petitioner’s failure to deposit all business receipts into one of his bank accounts hardly supports his claim that gross_receipts shown on the schedule c included with the original return are overstated furthermore evidence suggesting an overstatement of gross_receipts attributable to one customer is offset by inferences of unreported receipts raised from the combination of his failure to keep any books of account for the business and his practice of cashing customer checks at a local restaurant rather than depositing the checks into one of his bank accounts a taxpayer claiming that income reported on a federal_income_tax return has been overstated has the burden to prove that claim see bell v commissioner tcmemo_2011_296 this petitioner has failed to do iii accuracy-related_penalty sec_6662 imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 and b 4following the parties’ lead we ignore the federal_income_tax implications of incorrectly reporting the income from the form 1099-misc from garcia ready mix inc on the schedule c for rick’s roofing and negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement includes an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent bears the burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 on his original return petitioner claimed deductions for expenses that he is unable to substantiate see sec_1 b income_tax regs furthermore the underpayment_of_tax required to be shown on that return is a substantial_understatement_of_income_tax because the understatement exceeds dollar_figure see sec_6662 d respondent’s burden of production under sec_7491 has been satisfied sec_6664 provides an exception to the imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause 5in this case the deficiency underpayment_of_tax and understatement_of_tax are all computed in the same manner see sec_6211 sec_6662 sec_6664 for and the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs it is petitioner’s burden to establish that he acted in good_faith and that there was reasonable_cause for the underpayment see higbee v commissioner t c pincite see also rule a 290_us_111 under certain circumstances a taxpayer’s reliance upon professional advice may establish the taxpayer’s reasonable_cause and good_faith with respect to an underpayment_of_tax if the taxpayer establishes that the professional was provided with complete and accurate information an incorrect return was a result of the preparer’s mistakes and the taxpayer demonstrates good-faith reliance on a competent professional see 112_tc_317 aff’d without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir see also 115_tc_43 aff’d 299_f3d_221 3d cir although petitioner’s return was prepared by a paid income_tax_return_preparer petitioner has failed to establish that he provided his return preparer with complete and accurate information with respect to the deductions claimed on the schedule c included with the original return accordingly and otherwise petitioner failed to establish that he acted in good_faith with respect to any portion of the underpayment_of_tax and that any portion of the underpayment is due to reasonable_cause petitioner is liable for the sec_6662 accuracy-related_penalty and respondent’s imposition of that penalty is sustained to reflect the foregoing decision will be entered under rule