Court Opinion

ID: 804708
Source: CourtListenerOpinion
Date Created: 2012-07-19 19:27:11+00
Date Added: 2024-06-11T18:00:13.350660
License: Public Domain

United States Court of Appeals
                        For the First Circuit

Nos. 11-2017, 11-2022

                  GORDON KAUFMAN; LORNA KAUFMAN,

            Petitioners, Appellants/Cross-Appellees,

                                 v.

       DOUGLAS SHULMAN, COMMISSIONER OF INTERNAL REVENUE,

              Respondent, Appellee/Cross-Appellant.

            APPEALS FROM THE UNITED STATES TAX COURT

                              Before
                       Lynch, Chief Judge,
                Boudin and Lipez, Circuit Judges.

     Catherine M.A. Carroll with whom Seth P. Waxman, Thomas R.
Dettore and Wilmer Cutler Pickering Hale and Dorr LLP were on brief
for petitioners, appellants/cross-appellees.
     Rebecca K. Troth, David R. Hill, Ryan C. Morris, Sidley Austin
LLP, Paul W. Edmondson, Elizabeth S. Merritt and Ross M. Bradford,
National Trust for Historic Preservation, on brief for the National
Trust for Historic Preservation, Amicus Curiae.
     Patrick J. Urda, Tax Division, Department of Justice, with
whom Tamara W. Ashford, Deputy Assistant Attorney General, and
Kenneth L. Greene, Tax Division, Department of Justice, were on
brief for respondent, appellee/cross-appellant.

                            July 19, 2012
           BOUDIN, Circuit Judge.     This case comprises appeals by

both sides--the Commissioner of Internal Revenue ("the IRS") and

the taxpayers Gordon and Lorna Kaufman--from a decision of the Tax

Court.   The subject is deductions on the couple's joint returns of

the asserted value of Lorna Kaufman's donation to the National

Architectural Trust of a façade easement restricting alterations on

her Boston house. A brief description of the background events and

proceedings follows, which is elaborated where necessary later in

this decision.

           In 1999, Lorna Kaufman bought for $1,050,000 a row house

in the South End of Boston, an area (not to be confused with South

Boston), which is subject to local restrictions aimed at historic

preservation.1   The row house, 19 Rutland Square, was designed by

physician Elbridge Dudley and built between 1859 and 1861; it

reflected popular mid-nineteenth-century architectural trends but

also featured a Venetian Gothic-style façade that distinguished it

from redbrick row houses elsewhere in the South End.

     1
      The South End Landmark District is one of nine neighborhoods
designated as a historic district by the Boston Landmarks
Commission pursuant to state law. See Eckstein v. Bos. Landmarks
Comm'n, 17 L.C.R. 401, 401, 2009 Mass. LCR LEXIS 75, at *2-3 (Mass.
Land Ct. June 26, 2009). Exterior alterations to buildings in the
South End neighborhood must be approved by a local district
commission. See S. End Landmark Dist., Standards and Criteria 1
(rev. Apr. 27, 1999); Landmarks Frequently Asked Questions, City of
Boston, http://www.cityofboston.gov/landmarks/FAQ (last visited
June 25, 2012).

                                -2-
           The Kaufmans renovated the house, which included the

restoration of original details of the façade. In 2003, the couple

learned about a tax incentive program for historic preservation,

promoted in this instance by an organization then known as the

National   Architectural     Trust,   since     renamed   the    Trust    for

Architectural   Easements.     A   Trust   representative       advised   the

Kaufmans that the Trust could help the couple qualify for a tax

deduction equal to 10 to 15 percent of the fair market value of

their home and that the Trust "as part of our service . . . will be

handling all the red tape and paperwork."

           A provision of the Internal Revenue Code, 26 U.S.C.

§ 170(h) (2006), creates an incentive for taxpayers to donate real

property   interests   to   nonprofit    organizations    and    government

entities for "conservation purposes."         Adopted in 1976 and amended

the following year, the statute allows taxpayers to claim a

deduction for donating a real property interest--including an

easement--"exclusively for conservation purposes."         Tax Reform Act

of 1976, Pub. L. No. 94-455, § 2124(e)(1)(C), 90 Stat. 1520, 1919

(1976); see also Tax Reduction and Simplification Act of 1977, Pub.

L. No. 95-30, § 309(a), 91 Stat. 126, 154 (amending statute); 26

U.S.C. § 170(h)(1)-(2) (current codification).            These purposes

include the preservation of "historically important" land areas or

structures. Pub. L. No. 94-455, § 2124(e)(1)(D), 90 Stat. at 1919;

see also 26 U.S.C. § 170(h)(4)(A)(iv) (current codification).             Cf.

                                   -3-
26 U.S.C. § 170(f)(3)(B)(iii) (exempting "qualified conservation

contributions" from general denial of deduction for donations of

partial interests in property).

          The deduction for granting the easement is intended to

reflect the value of what the taxpayer has donated which, in the

absence of a "market" for such easements, can be measured by "the

difference between the fair market value of the entire contiguous

parcel   of   property   before   and   after   the   granting    of   the

restriction."   26 C.F.R. § 1.170A-14(h)(3)(I) (2004).           A central

condition of the deduction, reflecting a change made in the 1977

amendment to the statute, is that the lease, option or easement be

granted "in perpetuity."    Pub. L. No. 95-30, § 309(a), 91 Stat. at

154 (codified as amended at 26 U.S.C. § 170(h)(2)(C)).

          On or about October 31, 2003, Lorna Kaufman submitted an

application on the Trust's own form and made a $1,000 "good faith

deposit"; she further agreed, as specified by the Trust, to make a

"cash endowment contribution" to the Trust equal to 10 percent of

the value of the ultimate deduction for the easement.        This is at

least one means by which the Trust finances its work.       The deposit

was to be returned if the "the necessary approvals cannot be

obtained" and the cash endowment contribution reduced in part if

the easement donation could not be processed in time to qualify for

a 2003 deduction.

                                  -4-
          The Trust advised Lorna Kaufman that if her property was

under mortgage, she needed to obtain consent from the mortgagee to

subordinate    its   interest     in   the   property    to   the   easement.

Accordingly, the Kaufmans sent a letter to their mortgage lender,

Washington Mutual Bank, asking it to subordinate its rights to the

easement being granted to the Trust.              The letter stated that

restrictions   on    the   property     imposed   by    the   easement   were

"essentially the same restrictions as those imposed by current

local ordinances that govern this property."            If this were so, the

bank would lose little or nothing by consenting.

          On    December    22,    2003,     Lorna     Kaufman   executed   a

Preservation Restriction Agreement supplied by the Trust and, a few

days later, sent it back to the Trust together with a further

contribution that the Trust had solicited in the amount of $15,840

(over and above her earlier $1,000 good-faith deposit).                  This

further contribution, the Trust said, could be adjusted dependent

on the appraised value of the easement.2

          The Trust also offered the names of two recommended

appraisers, and the Kaufmans selected one of the two, Timothy

Hanlon, a certified appraiser who for the previous nineteen years

     2
      The Kaufmans' cash transfers to the Trust of $16,840 in 2003
and $3,032 in 2004 total 9 percent of the $220,800 value set by the
appraiser. Although the Trust normally asks for a cash endowment
equal to 10 percent of the value of the easement, the Trust applied
a 1 percentage point reduction due to the delay in obtaining the
requisite approvals.

                                       -5-
had   managed   his   own   residential   appraisal   company.   Hanlon

inspected the 19 Rutland Square property in January 2004 and

submitted his report on January 30, estimating that the fair market

value of the donated easement was $220,800.              Gordon Kaufman

expressed concern that the reduction in the value of the property

due to the easement might be "so large as to overwhelm the tax

savings that accrue from it," but a representative of the Trust

sought to reassure him that it was "very unlikely" that the

easement would affect the marketability of the property.

           Meanwhile, the Kaufmans successfully secured consent from

their lender, Washington Mutual, to an agreement "subordinating

[the bank's] rights in the [19 Rutland Square] Property to the

right of the Grantee [i.e., the Trust], its successors or assigns,

to enforce the conservation and historic preservation purposes of

[the Preservation Restriction] Agreement in perpetuity."            The

lender agreement included several stipulations, one of which would

become relevant in the subsequent litigation:

           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 Grantee
           until the Mortgage is paid off and discharged,
           notwithstanding    that   the    Mortgage   is
           subordinate in priority to the [Preservation
           Restriction] Agreement.

           On their joint return for 2003, the Kaufmans claimed (1)

a cash contribution of $16,870 to the Trust (the correct figure

                                   -6-
would have been $16,840, see note 2, above, but the Kaufmans

attribute the discrepancy to a "typographical error"), and (2) a

noncash contribution of $220,800 for the easement donation.                 They

sought    the    $16,870    cash-contribution    deduction    on    their   2003

returns and, in light of statutory limits on deductions in a single

year, 26 U.S.C. § 170(b)(1)(E), spread the deduction for the

noncash contribution across their 2003 and 2004 returns.                     The

Kaufmans claimed an additional $3,032 cash contribution to the

Trust in 2004.

            In March 2007, evidently as part of a wide-ranging

investigation into perceived abuses of the easement program, the

IRS opened an investigation into the Kaufmans' claimed charitable

deductions.      On May 5, 2009, the IRS sent a "Notice of Deficiency"

to the Kaufmans relating to the 2003 and 2004 tax years.                In the

Notice,    the    Service    cited   three   grounds   for   disallowing     the

Kaufmans' noncash contribution claim:

            -the Kaufmans had failed to "establish[] that
            all of the requirements of I.R.C. section 170
            and all of the regulations thereunder have
            been satisfied";

            -the contribution "was            made     subject     to
            subsequent event(s)"; and

            -as an "alternative[]" ground, "it has not
            been established that the value of the
            contributed property interest was $220,800."

            The    IRS   also   disallowed    the    Kaufmans'   claimed    cash

contribution of $16,870 to the Trust for 2003 "because it was made

                                       -7-
subject   to   or    in    contemplation      of   subsequent    event(s)"   and

calculated that the Kaufmans owed an additional $39,081.25 for 2003

and an additional $36,340.00 for 2004.                 It also imposed large

penalties for underpayment.        The Kaufmans petitioned for review by

the Tax Court.      See 26 U.S.C. § 6213(a) (authorizing petition to

the Tax Court for redetermination of deficiency); id. § 7442 (Tax

Court jurisdiction).

            On an IRS motion for summary judgment, the Tax Court on

April 26, 2010, disallowed any deduction for the easement but found

"genuine issues of material fact" remained with regard to the cash

contribution deduction and the IRS's imposition of penalties.

Kaufman v. Comm'r (Kaufman I), 134 T.C. 182 (2010).                  In a second

decision after a trial on the reserved issues, the Tax Court on

April 4, 2011, reaffirmed its ruling on the easement, but held that

the   Kaufmans      were    entitled     to   deduct     their   $16,840     cash

contribution on their 2004 return (as opposed to their 2003 return)

and were subject only to a small penalty for negligence in taking

the deduction in the earlier year. Kaufman v. Comm'r (Kaufman II),

136 T.C. 294 (2011).

            Both sides have now appealed to this court. The Kaufmans

challenge   the     disallowance    of    the      deduction   for   the   façade

easement; the IRS attacks the disallowance of most of the penalties

it had imposed but does not question the Tax Court's allowance of

the cash contribution deduction on the 2004 return.               Here, the Tax

                                       -8-
Court     granted    partial       summary      judgment     to    the    IRS     "only

because . . . Lorna Kaufman's contribution of the facade easement

to [the Trust] failed as a matter of law to comply with [relevant

regulations],"       Kaufman II, 136 T.C. at 325-26, so our review on

this issue is de novo.

            Our     legal   analysis      begins    with    §     170,   the    statute

governing    deductions      for    charitable      contributions         and    gifts.

Section    170(a)    requires      that    deductions       conform      to    Treasury

regulations, and subsequent subsections impose an elaborate list of

conditions relating to deductions of different types.                           Section

170(h) provides in detail for conservation contributions, of which

the provisions most pertinent to this appeal require that "a

qualified      appraisal"       be        provided,        see     26     U.S.C.      §

170(h)(4)(B)(iii)(I);        cf.     §    170(f)(11)(E)(I)          (definition      of

"qualified appraisal"), and that a donated "restriction" on use be

"in perpetuity," see § 170(h)(2)(C), (h)(5)(A).

            The      regulations          establish        further       substantive

requirements that conservation contributions must satisfy in order

to be deductible (independent of the appraisal requirements that we

address separately hereafter).            Four provisions relevant here are:

            -Paragraph (g)(1), the "[e]nforceable in
            perpetuity" requirement, states that "any
            interest in the property retained by the donor
            . . . must be subject to legally enforceable
            restrictions . . . that will prevent uses of
            the retained interest inconsistent with the
            conservation purposes of the donation."     26
            C.F.R. § 1.170A-14(g)(1).

                                          -9-
          -Paragraph (g)(2), the mortgage subordination
          requirement, states that "no deduction will be
          permitted under this section for an interest
          in property which is subject to a mortgage
          unless the mortgagee subordinates its rights
          in the property to the right of the [donee]
          organization to enforce the conservation
          purposes of the gift in perpetuity."        26
          C.F.R. § 1.170A-14(g)(2).

          -Paragraph (g)(3), the "[r]emote future event"
          provision, adds a noteworthy qualification to
          the regulatory requirements:     "A deduction
          shall not be disallowed . . . merely because
          the interest which passes to, or is vested in,
          the donee organization may be defeated by the
          performance of some act or the happening of
          some event, if on the date of the gift it
          appears that the possibility that such act or
          event will occur is so remote as to be
          negligible." 26 C.F.R. § 1.170A-14(g)(3).

          -Paragraph    (g)(6),    the    extinguishment
          provision, requires that "when a change in
          conditions give rise to the extinguishment of
          a perpetual conservation restriction [by
          judicial proceeding], 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, unless
          state law provides that the donor is entitled
          to the full proceeds from the conversion." 26
          C.F.R. § 1.170A-14(g)(6)(ii).

These requirements are in addition to the recordkeeping and return

regulations of 26 C.F.R. § 1.170A-13, discussed in more detail

below.

          Paragraph (g)(6).      The Tax Court, in denying the

Kaufmans a deduction for the façade easement, relied entirely on

the last of these requirements.      Although the extinguishment

                              -10-
provision was unexplained when first promulgated, 51 Fed. Reg.

1496, 1505 (Jan. 14, 1986), paragraph (g)(6) appears designed in

case of extinguishment both (1) to prevent taxpayers from reaping

a windfall if the property is destroyed or condemned and they get

the proceeds from insurance or condemnation3 and (2) to assure that

the donee organization can use its proportionate share of the

proceeds to advance the cause of historic preservation elsewhere.

             The   Tax   Court's   position,   briefly   stated,     was   that

although the Kaufmans in the Preservation Restriction Agreement

governing 19 Rutland Square granted the Trust an entitlement to a

proportionate share of post-extinguishment proceeds, thus seemingly

complying with the regulation, the lender agreement executed by

Washington Mutual undercut this commitment--and so defeated the

deduction--by stipulating that "[t]he Mortgagee/Lender and its

assignees shall have a prior claim to all insurance proceeds . . .

and all proceeds of condemnation, and shall be entitled to same in

preference    to     Grantee   until    the   Mortgage   is   paid   off   and

discharged."       See Kaufman II, 136 T.C. at 299, 313; Kaufman I, 134

T.C. at 185-87.

             Certainly the IRS has good reason to assure that the

Kaufmans could not recapture the value of what they gave up by

     3
      As the Kaufmans note, paragraph (g)(6) only applies when the
easement is "extinguished by judicial proceeding,"      26 C.F.R.
§ 1.170A-14(g)(6)(I).    Accordingly, paragraph (g)(6) does not
necessarily entitle the donee organization to a share of casualty
insurance proceeds if the easement remains in place.

                                       -11-
granting the easement in order to get the deduction; but the

Kaufmans had no power to make the mortgage-holding bank give up its

own protection against fire or condemnation and, more striking, no

power to defeat tax liens that the city might use to reach the same

insurance proceeds--tax liens being superior to most prior claims,

1 Powell on Real Property § 10B.06[6] (Michael Allan Wolf ed.,

Matthew Bender & Co. 2012), including in Massachusetts the claims

of the mortgage holder.4

               The IRS reads the word "entitled" in the extinguishment

regulation to mean "gets the first bite" as against the rest of the

world, a view the Tax Court accepted in reading "entitled" to mean

"ha[s] an absolute right."             Kaufman II, 136 T.C. at 313.        But a

grant       that   is   absolute   against     the   owner-donor   is    also   an

entitlement, Black's Law Dictionary (7th ed. 1999) ("entitle"

defined      as    "[t]o   grant   a   legal   right   to");   Collins   English

Dictionary (10th ed. 2009) ("to give (a person) the right to do or

have something"), and almost the same as an absolute one where

        4
      Mass. Gen. Laws ch. 60, § 37 (2010); Carpenter v. Suffolk
Franklin Sav. Bank, 346 N.E.2d 892, 899-900 (Mass. 1976); see also
United States v. A Certain Parcel of Land with Buildings Thereon
Known as Hotel Buckminster, in City of Boston, 59 F. Supp. 65, 68
(D. Mass. 1944) ("Under Massachusetts law, real estate taxes are
liens paramount to any mortgage on the real estate."). Such super-
priority for tax liens is widespread. Alexander, Tax Liens, Tax
Sales, and Due Process, 75 Ind. L.J. 747, 770-71 nn. 129-30 (2000).
Likewise, proceeds from condemnation go to satisfy a municipal tax
lien "before any payment of damages for such taking is made to any
other party." Mass. Gen. Laws ch. 79, § 44A; cf. id. ch. 80A, § 15
(applying provisions of chapter 79 to takings by judicial
proceeding).

                                        -12-
third-party claims (here, the bank's or the city's) are contingent

and unlikely.

          Equally important, given the ubiquity of super-priority

for tax liens, the IRS's reading of its regulation would appear to

doom practically all donations of easements, which is surely

contrary to the purpose of Congress.            We normally defer to an

agency's reasonable reading of its own regulations, e.g., United

States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001),

but cannot find reasonable an impromptu reading that is not

compelled and would defeat the purpose of the statute, as we think

is the case here.        Cf. Grunbeck v. Dime Sav. Bank of N.Y., FSB, 74

F.3d 331, 336 (1st Cir. 1996).

          In reaching our conclusion, we do not rely on the general

provision of paragraph (g)(3) that aims to prevent deductions from

being lost by improbable events, 26 C.F.R. § 1.170A-14(g)(3),

because, as the Tax Court noted, "[o]ne does not satisfy the

extinguishment provision . . . merely by establishing that the

possibility     of   a    change   in   conditions   triggering   judicial

extinguishment is unexpected."          Kaufman II, 136 T.C. at 313.   Nor

do we rest our conclusion on the Kaufmans' expressio unius reading

of paragraph (g)(2), for "expressio unius is an aid to construction

                                     -13-
and not an inflexible rule," Hewlett-Packard Co. v. Berg, 61 F.3d

101, 106 (1st Cir. 1995).5

          Paragraph (g)(1).      A provision in the agreement between

the Kaufmans and the Trust states that "nothing herein contained

shall be construed to limit the [Trust's] right to give its consent

(e.g., to changes in the Façade) or to abandon some or all of its

rights hereunder."     According to the IRS, this provision is a

"blank check" to the Trust "to consent to any type of change,

irrespective of its compatibility with the donation's conservation

purpose," and so "[t]he easement fails to include restrictions that

'will' prevent uses inconsistent with the conservation purpose as

required by [paragraph (g)(1)]."

          The   D.C.   Circuit   considered   and   rejected   this   same

argument in Commissioner v. Simmons, 646 F.3d 6, 10 (D.C. Cir.

2011):

          The    clauses    permitting    consent and
          abandonment, upon which the Commissioner so
          heavily relies, have no discrete effect upon

     5
      The Kaufmans argue that because paragraph (g)(2) deals
expressly with subordination and only requires that "the mortgagee
subordinate[] its rights in the property to the right of the
qualified organization to enforce the conservation purposes of the
gift," it is per se improper for the IRS to argue that some other
right of the bank--here, to insurance and condemnation proceeds--
should have been subordinated. But the Kaufmans' argument could be
turned against them by reading "conservation purposes" broadly to
include the donee organization's right to post-extinguishment
proceeds (which, by regulation, must be used to advance
"conservation purposes," cf. 26 C.F.R. § 1.170A-14(g)(6)(I)). As
the IRS disclaimed this broad reading of paragraph (g)(2), we need
not pursue this issue.

                                  -14-
           the perpetuity of the easements:     Any donee
           might fail to enforce a conservation easement,
           with or without a clause stating it may
           consent to a change or abandon its rights, and
           a tax-exempt organization would do so at its
           peril. . . . [T]his type of clause is needed
           to allow a charitable organization that holds
           a conservation easement to accommodate such
           change as may become necessary to make a
           building   livable   or   usable  for   future
           generations while still ensuring the change is
           consistent with the conservation purpose of
           the easement.

Id. (internal quotation marks omitted).

           The IRS insists that paragraph (g)(1) is a "reasonable

interpretation"   of   the   perpetuity   language   of   26     U.S.C.

§ 170(h)(5), and is therefore entitled to deference.           See Mayo

Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704,

711-13 (2012).    Yet the question here is not whether paragraph

(g)(1) is reasonable, but whether the IRS's interpretation of that

regulation is reasonable. The language of paragraph (g)(1) nowhere

suggests the stringent outcome that the IRS seeks to ascribe to it

and the   consequences of the reading would be to deprive the donee

organization of flexibility to deal with remote contingencies.

           In addition, the concern posited by the IRS is within its

power to control: the IRS's own regulations require that tax-exempt

organizations such as the Trust be operated "exclusively" for

charitable purposes, 26 C.F.R. § 1.501(c)(3)-1, a requirement that

the IRS can enforce against the Trust.     See, e.g., Alexander v.

"Americans United" Inc., 416 U.S. 752 (1974); Music Square Church

                                -15-
v. United States, 218 F.3d 1367 (Fed. Cir. 2000).           We agree with

Simmons that such deductions "cannot be disallowed based upon the

remote possibility [that the donee organization] will abandon the

easements."    646 F.3d at 10.

           Recordkeeping and Reporting Requirements.           As a further

alternative ground, the IRS argues that the Kaufmans failed to

comply with certain recordkeeping and reporting requirements that

are imposed by statute, 26 U.S.C. § 170(f)(11), and elaborated in

an   accompanying   regulation,    26   C.F.R.   §   1.170A-13.    Clauses

(c)(3)(ii)(J)-(K) of that regulation require taxpayers who claim

easement contribution deductions to obtain a "qualified appraisal"

report that explains "[t]he method of valuation used to determine

the fair market value" of the contribution and "[t]he specific

basis for the valuation."       See also Deficit Reduction Act of 1984,

Pub. L. No. 369, § 155(a)(1)-(2), 98 Stat. 494, 691 (instructing

Treasury      Department   to     promulgate     regulations      regarding

appraisals).

           The regulation also requires taxpayers to attach an

"appraisal summary" to their returns that includes, inter alia:

           -"[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
           contributed,"    26    C.F.R.      §    1.170A-
           13(c)(4)(ii)(B);

                                    -16-
            -"[t]he manner of acquisition . . . and the
            date of acquisition of the property by the
            donor," id. § 1.170A-13(c)(4)(ii)(D);

            - "[t]he cost or other basis of the property
            adjusted as provided [elsewhere in the Code],"
            id. § 1.170A-13(c)(4)(ii)(E); and

            - "[t]he appraised fair market value of the
            property on the date of contribution," id. §
            1.170A-13(c)(4)(ii)(J).

            The IRS claims that the method of valuation used by the

Kaufmans' appraiser lacked "analytical mooring" and produced an

indefensibly inflated valuation; indeed, the IRS concluded that the

Kaufmans'    contribution   claim    constituted   a   "gross   valuation

misstatement[]," that is, a claim more than 200 percent of the

actual value.    See 26 U.S.C. § 6662(h). This is not a frivolous

contention.     But the IRS's argument is largely an attempt to

convert an inherently factual issue into a set of violations of the

procedural requirements of section 1.170A-13 in disregard of their

language and purpose.

            The procedural regulations requiring an appraisal report

and summary are designed to provide information "sufficient to

permit [the IRS] to evaluate the [taxpayer]'s reported contribution

and monitor and address concerns about overvaluation."           Consol.

Investors Grp. v. Comm'r, 98 T.C.M. (CCH) 601, 2009 Tax Ct. Memo

LEXIS 294, at *67, 2009 WL 4840246, at *23 (T.C. 2009). But whether

the valuation was overstated, grossly or otherwise, is a factual

question different from whether the formal procedural requirements

                                    -17-
were met, either strictly or under the      "substantial compliance"

doctrine which may forgive minor discrepancies.6

             True, the IRS has identified elements of the Kaufmans'

appraisal summary (submitted on Form 8283) that are in technical

noncompliance with Treasury regulations. As the IRS rightly points

out, "the Form 8283 did not include the date and manner of

acquisition of the property purportedly contributed or the cost or

other basis of the property."      Yet as the Kaufmans explain, they

"did not 'acquire' the preservation easement, but created that

property interest at the moment they conveyed it to the Trust," and

"thus had no 'manner and date of acquisition' and no 'cost or other

basis' to report."

             Arguably, the Kaufmans should have written "None" or "Not

Applicable" in the spaces on the Form 8283 reserved for date of

acquisition, method of acquisition, and cost/adjusted basis.      But

we can hardly agree with the IRS that "[t]hese defects," in no way

prejudicial to it in this instance, "doom the appraisal summary."

Accord Scheidelman v. Comm'r, Nos. 10-3587 & 10-5316, 2012 U.S.

App. LEXIS 12272, at *15-23, 2012 WL 2161155, at *5-7 (2d Cir. June

15, 2012).

     6
      The substantial compliance doctrine allows taxpayers to
overcome technical noncompliance if they make "a showing that the
requirement is either unimportant or unclearly or confusingly
stated." Prussner v. United States, 896 F.2d 218, 224-25 (7th Cir.
1990) (Posner, J.); see also Volvo Trucks of N. Am., Inc. v. United
States, 367 F.3d 204, 210 (4th Cir. 2004); Shotgun Delivery, Inc.
v. United States, 269 F.3d 969, 973 (9th Cir. 2001).

                                  -18-
          One aspect of the IRS position warrants separate mention.

The regulations say that an appraiser is not "qualified" if "the

donor had knowledge of facts that would cause a reasonable person

to expect the appraiser falsely to overstate the value of the

donated property."    26 C.F.R. 1.170A-13(c)(5)(ii).     This argument

is closely related to the question of whether the easement was

overvalued and, as explained in the next section, the context and

proper inferences as to the appraisal require further fact-finding

by the Tax Court, so it is not a basis for affirmance of the

summary judgment.

          For   the   foregoing   reasons,   the   original   Tax   Court

rationale for disallowing the easement deduction as a matter of law

fails, as do the alternative grounds for outright affirmance

tendered by the IRS.     Accordingly, the grant of partial summary

judgment for the IRS must be vacated.7       Moreover, since the Tax

Court's decision not to impose penalties with respect to the

Kaufmans' noncash contribution claim depended on the same rationale

on which it based its grant of partial summary judgment, Kaufman

II, 136 T.C. at 325-26 (namely, paragraph (g)(6)), the Tax Court's

     7
      At trial, the Tax Court sustained the IRS's disallowance of
a $16,840 deduction for Lorna Kaufman's 2003 cash contribution to
the Trust, Kaufman II, 136 T.C. at 316, and sustained an accuracy-
related penalty (of approximately $1,097) resulting from the 2003
cash contribution deduction, id. at 325. As the Kaufmans do not
contest the disallowance of the 2003 cash contribution deduction or
the accompanying penalty, our decision to vacate the grant of
partial summary judgment does not disturb the Tax Court's
conclusions regarding those matters.

                                  -19-
decision not to impose further penalties on the Kaufmans must be

vacated as well.

           Overstatement of Value.        Given our rejection of the Tax

Court's readings and the IRS's alternatives, a remand is necessary.

As the IRS noted in its brief, "If this Court disagrees with the

Tax Court's decision, and does not believe that the decision is

justified under the alternative grounds discussed, the case should

be remanded so that the Tax Court can consider, in the first

instance, the grounds left unaddressed, including the proper value

of the easement."     At oral argument, counsel for the Kaufmans

agreed that it would be appropriate for us to remand the case to

the Tax Court to determine the substantive question of value in the

first instance.

           Section 170(h) does not allow taxpayers to obtain six-

figure deductions for gifts of lesser or no value.          "The value of

the contribution under section 170 in the case of a charitable

contribution of a perpetual conservation restriction is the fair

market value of the perpetual conservation restriction at the time

of the contribution."          26 C.F.R. § 1.170A-14(h)(3) (emphasis

added).    Whether the deduction claimed by the Kaufmans exceeded

fair market value was not decided by the Tax Court.

            In its Notice of Deficiency, the IRS stated that the

Kaufmans   had   failed   to   "establish[]    that   the   value   of   the

[easement] was $220,800 as claimed in the 2003 return."             The IRS

                                   -20-
did not waive this objection by moving for summary judgment to

disallow the easement deduction on other grounds as a matter of

law; a summary judgment motion properly includes only such grounds

as may be susceptible to disposition without a trial.   See, e.g.,

Sánchez-Rodríguez v. AT&T Mobility P.R., Inc., 673 F.3d 1, 10-11

(1st Cir. 2012).   And, because the value of the gift is a factual

issue not decided by the Tax Court, the IRS could not offer the

objection here as an alternative ground to sustain the judgment.

          But although the Kaufmans claimed that the value of the

easement donation was $220,800, the IRS has repeatedly pointed to

evidence that the true value of the donation was close to zero.   If

so, then the Kaufmans would be liable for penalties under 26 U.S.C.

§ 6662 for substantial understatement of income tax and for

substantial or gross valuation misstatements, unless they could

show "reasonable cause." The IRS has also argued that the Kaufmans

knew or should have known that the value of the easement was

minimal, failed adequately to investigate, and so fail to establish

a "reasonable cause" defense to misstatement penalties for noncash

contribution claims.   See id. § 6664(c)(3)(B).

          When the Kaufmans donated the easement, their home was

already subject to South End Landmark District rules that severely

restrict the alterations that property owners can make to the

exteriors of historic buildings in the neighborhood.    These rules

provide that "[a]ll proposed changes or alterations" to "all

                               -21-
elements of [the] facade, . . . the front yard . . . and the

portions of roofs that are visible from public streets" will be

"subject to review" by the local landmark district commission.        S.

End Landmark Dist., Standards and Criteria 2 (rev. Apr. 27, 1999).

            Under the Standards and Criteria, property owners of

South End buildings have an obligation to retain and repair the

original    steps,   stairs,   railings,     balustrades,      balconies,

entryways, transoms, sidelights, exterior walls, windows, roofs,

and front-yard fences (along with certain "other features"); and,

when the damaged elements are beyond repair, property owners may

only replace them with elements that look like the originals.        Id.

at 2-6.    Given these pre-existing legal obligations the Tax Court

might well find on remand that the Kaufmans' easement was worth

little or nothing.

            The Kaufmans' own appraiser, recommended to them by the

Trust, acknowledged in his report that "there is much overlap in

the restrictions imposed by the [easement] and the pre-existing

restrictions imposed on the property, particularly by the Landmark

Commission."   This may be a substantial understatement.        Although

the   appraiser   listed   several   ways   in   which   the   easement's

restrictions differed from the landmark district commission's,

whether the differences have any economic significance could be

disputed.

                                 -22-
          For instance, the appraiser noted that the easement

agreement would last "in perpetuity" while local ordinances might

lapse; but no specific reason was given for expecting this to

happen (other than a vague suggestion of "changes in political,

economic and aesthetic needs and tastes in a community").    He also

said that the Kaufmans would be "subject to the inconvenience of

periodic inspections" by the Trust; yet any such inconvenience

would be limited by the fact that the agreement explicitly does not

give the Trust the right to inspect the inside of the house.

Preservation Restriction Agreement 3 (Dec. 22, 2003).   Whether any

of the offered distinctions justify any deduction is a matter for

the remand.

          The Kaufmans themselves were surprised at the size of the

valuation, albeit out of concern that it implied--as it must if the

Kaufmans were conveying anything of value--a substantial reduction

in the resale value of their home.    In an effort to reassure them,

a Trust representative told the Kaufmans that experience showed

that such easements did not reduce resale value, and this could

easily be the IRS's opening argument in a valuation trial.      The

Trust representative explained in pertinent part that

          [i]n areas that are regulated by local
          historic preservation ordinances and bodies
          such   as   Boston   historic  neighborhoods
          (including yours) . . . , properties with an
          easement   are   not  at   a  market   value

                               -23-
          disadvantage when compared to the         other
          properties in the same neighborhood.8

          As indicated by the large cash contributions required of

donors, the Trust had a substantial economic incentive for itself

in facilitating such conservation easements; and to this end and

because of the 10 percent target for donations, it also had a stake

in assuring a high valuation.      Similarly, the appraiser, who

admitted receiving fees for a succession of such appraisals for

Trust easements, assuredly had an interest in remaining on the list

of those recommended by the Trust to potential donors.

          The burden in the Tax Court initially rests on the

taxpayer to justify his or her deduction.    See Tax Ct. R. Prac. &

P. 142(a)(1); see also INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84

(1992).   The burdens and presumptions relating to penalties are

more complicated, compare, e.g., 26 U.S.C. § 7491(c), with Higbee

v. Comm'r, 116 T.C. 438, 446-47 (2001), and there is no reason to

pursue the subject of the Kaufmans' fault before determining first

whether their deduction was legitimate.     Judging from the amici,

the present appeals have the hallmarks of a test case to settle

     8
      The Kaufmans have objected to the admission of this e-mail
into evidence on grounds of hearsay, relevance, and noncompliance
with the expert witness requirements of Rule 143(g) of the Tax
Court Rules of Practice and Procedure.           While the Trust
representative's testimony may not be admissible for the purpose of
proving the value of the easement (or lack thereof), it may well be
relevant to the question of whether the Kaufmans acted in "good
faith," and at trial the Tax Court admitted the e-mail into
evidence for that purpose.

                               -24-
larger issues between the industry and the IRS; and on remand the

Kaufmans and the IRS could well work out a settlement without a

trial.

             Doubtless it is the desire to avoid such trials, as well

as the difficulty of detecting and investigating suspicious cases

one by one, that explains the IRS's aggressive legal positions in

this   case.     And,   despite   our    rejection    of    those   particular

positions, we do not question the IRS's concern, transcending this

case, that individuals and organizations have been abusing the

conservation statute "to improperly shield income or assets from

taxation."     IRS News Release IR-2005-19 (Feb. 28, 2005), see also

IRS News Release IR-2006-25 (Feb. 7, 2006) (repeating language from

2005 news release).

             However, to reject overly aggressive IRS interpretations

of existing regulations is hardly to disarm the IRS.                     Without

stifling Congress' aim to encourage legitimate easements, one can

imagine IRS regulations that require appraisers to be functionally

independent of donee organizations, curtail dubious deductions in

historic districts where local regulations already protect against

alterations,     and    require   more     specific        market-sale     based

information to support any deduction.        Forward looking regulations

also serve to give fair warning to taxpayers.

             If taxpayers still do not get the message, the penalties

regime is formidable, see, e.g., 26 U.S.C. § 6662(h)(1) (40 percent

                                   -25-
penalty   for   gross   valuation   misstatements);   and,   for   willful

abusers, there are criminal penalties, e.g., 26 U.S.C. § 7201

(prison term up to five years). The Justice Department has already

secured a permanent injunction against the Trust to prohibit some

of the practices alluded to in this case.9        The IRS is properly

zealous to protect the revenues and over the long run it has the

tools to do so.

           The judgment of the Tax Court is vacated except with

regard to the deductibility of the taxpayers' cash contributions

and the accuracy-related penalty associated with their 2003 cash

contribution claim, and the matter remanded to that court for

further proceedings consistent with this decision. Each side shall

bear its own costs on this appeal.

           It is so ordered.

     9
      See Stipulated Order of Permanent Injunction, United States
v. McClain, No. 11-1087 (D.D.C. July 15, 2011), which inter alia
prevents the Trust from claiming that the IRS has recognized a
"safe harbor" for easement valuations in the 10-15 percent range
and    from "[p]articipating in the appraisal process for a
conservation easement in any regard, including but not limited to
recommending . . . any appraiser . . . or list of appraisers"
beyond furnishing a list of all appraisers who have been certified
to appraise conservation easements by a professional organization.

                                    -26-