T.C. Memo. 2013-254
UNITED STATES TAX COURT
GEORGE GORRA AND LEILA GORRA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15336-10. Filed November 12, 2013.
Frank Agostino, Reuben Muller, and Jairo Cano, for petitioners.*
Marc L. Caine and Marissa J. Savit, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: This case involves a noncash charitable contribution
deduction. Respondent determined the following tax deficiencies and penalties:1
*
Brief amicus curiae was filed by Miriam L. Fisher and Theodore J. Wu as
attorneys for Trust for Architectural Easements.
1
Respondent concedes the portion of the penalty under sec. 6662(a) for tax
(continued...)
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[*2] Penalties
Year Deficiency Sec. 6662(a) Sec. 6662(h)
2006 $79,252 $15,853 $26,743
2007 25,719 5,344 10,688
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. We round all monetary amounts to
the nearest dollar.
After concessions we must consider (1) whether petitioners are entitled to a
charitable contribution deduction under section 170 for the donation of a facade
easement and (2) whether petitioners are liable for a gross valuation misstatement
penalty pursuant to section 6662(h) or, in the alternative, for an accuracy-related
penalty pursuant to section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioners resided
in New York when they filed the petition.
1
(...continued)
year 2006 that relates to petitioners’ cash contribution. The amount of the penalty
under sec. 6662(a) that is still in issue for 2006 is $13,372.
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[*3] Petitioner husband graduated from the University of Pennsylvania Wharton
School of Business where he received a bachelor of science degree in economics.
Petitioner husband attended the New York University Stern School of Business
graduate program for one year. For approximately 30 years petitioner husband has
been involved with commercial real estate transactions in Manhattan. Petitioner
husband has also maintained an interest in architecture from the Victorian period
for many years. Petitioner wife practiced as a tax attorney with Mobil Oil from
1978 to 1981. Thereafter, petitioner wife left her position as a tax attorney and
worked full time raising petitioners’ children.
The Property
On May 17, 1993, petitioners purchased a townhouse at Block 1520, Lot 9
in the borough of Manhattan with a street address on East 91st Street, New York,
New York (property). The property is in the Carnegie Hill Historic District of
New York City. The property is a single-family residence with four stories; it is
15 feet wide and approximately 3,300 square feet.2 The lot is approximately 1,500
square feet. Petitioners owned the property at all relevant times. On December
18, 2006, and at all times relevant, there was no mortgage on the property.
2
The tax record shows square footage of 3,300. Respondent’s expert
contends the square footage is 3,240.
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[*4] In March 2006 a real estate agency listed the property for sale at
$5,800,000. Petitioners reduced the price to $5,575,000 on June 23, 2006. On
September 19, 2006, petitioners further reduced the price to $5,295,000. The
property was taken off the market in March 2007.
On or about January 11, 2007, the National Park Service certified that the
property contributes to the significance of the Carnegie Hill Historic District and
is a “certified historic structure” for a charitable contribution for conservation
purposes in accordance with the Tax Treatment Extension Act of 1980, Pub. L.
No. 96-541, sec. 6(b), 94 Stat. at 3207. The property is not classified as “sound,
first-class condition”.
The Easement
On December 18, 2006, petitioners executed a conservation deed of
easement (deed) with the Trust for Architectural Easements (Trust), which was
known at the time as the National Architectural Trust (NAT).3 Among other
things, the deed grants the Trust the right to enter and inspect petitioners’
property, including granting access through the interior of the building. On
December 20, 2006, petitioners also made a $45,000 cash contribution to the
3
We refer to the organization as “the NAT” when discussing the
organization before its name change and as “the Trust” when discussing the
organization after its name change.
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[*5] Trust.4 On December 26, 2006, a representative of the Trust executed the
deed on behalf of the Trust.
At all times relevant the Trust was a nonprofit organization exempt from
taxation pursuant to section 501(c)(3). For the purposes of this case the Trust is a
“qualified organization” within the meaning of section 170(h)(3).
The primary mission of the Trust is to encourage participation in the
voluntary historic preservation program funded by the Federal Government with
the Federal Tax Incentive Program. The Trust also engages in additional
preservation activities that relate to historic architecture. The Trust monitors the
properties where it holds easements by sending employees to visit the properties.
The Trust employs three people to monitor 550 properties. Trust employees
inspect visually the properties. During these annual inspections Trust employees
also photograph the properties. The Trust uploads the resulting pictures and notes
onto a server and compares the pictures to images from previous years to
determine whether there are changes to the property.
If Trust employees find a violation through their inspection process, the
deed gives the Trust the right to institute legal proceedings to procure an
4
For tax year 2006 respondent allowed a cash charitable contribution
deduction of $44,300 for petitioners’ payment to the NAT. There is no indication
in the record that the remaining $700 is still in issue.
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[*6] injunction against violations of the deed. The deed also gives the Trust the
right to enter the property to correct any violations and then place a lien on the
property for the cost of such repairs.
Before 2006 Springfield Management Services (SMS) performed services
for the Trust. SMS did not perform services for the Trust while the Trust held an
easement for the property.
The Deed
The terms of the deed, in pertinent part, include the following:
* * * * * * *
E. Grantor [petitioners] desires to grant to the Grantee [the
NAT], and the Grantee desires to accept an Open Space and
Architectural Facade Conservation Deed of Easement (the Easement)
on the Property, exclusively for conservation purposes.
F. It is the intent of the parties that the facades of the
improvements located on the Property (the “Building”), including the
existing facades on the front, sides and rear of the Building and the
measured height of the Building (collectively the “Protected
Facades”), are protected by this Easement so that any change to the
Protected Facades shall require prior express written approval by the
Grantee, which may be withheld or conditioned in its sole discretion,
and shall be consistent with the historical character of the Building
exterior, as required under applicable federal, state and local laws.
***
II
The Grantor does hereby grant and convey to the Grantee, TO HAVE
AND TO HOLD, an Easement in gross, in perpetuity, in, on, and to
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[*7] the Property, the Building and the Protected Facades, being an
Open Space and Architectural Facade Conservation Deed of
Easement on the Property * * *.
A. Without the express written consent of the Grantee, * * * Grantor
will not undertake * * * with respect to those parts of the Protected
Facades:
1. any alteration, construction or remodeling of existing
exterior improvements on the Protected Facades, or the placement
thereon * * * [or]
2. any exterior extension of existing improvements on the
Property, or the erection of any new or additional exterior
improvements on the property or in the open space above or
surrounding the existing improvements.
* * * * * * *
III
A. The Grantee * * * shall have * * * the following rights:
1. at reasonable times and upon reasonable notice, the right to
enter upon and inspect the Protected Facades and any improvements
thereon. * * *
2. in the event of a violation of the Easement and Grantor’s
failure to cure, * * * such violation within fifty (50) business days
following Grantor’s receipt of Grantee’s written notice of such
violation:
(a) the right to institute legal proceeding to enjoin such
violation by temporary, and/or permanent injunction, to require
the restoration of the Property or the improvements thereon,
including the Protected Facades, and open space, to their prior
condition; to be reimbursed by Grantor for all related
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[*8] reasonable costs and attorney’s fees; and to avail itself of
all other legal and equitable remedies.
* * * * * * *
IV
A. This Easement is binding not only upon Grantor but also upon its
successors, heirs and assigns and all other successors in interest to the
Grantor, and shall continue as a servitude running in perpetuity with
the land. This Easement shall survive any termination of Grantor’s or
the Grantee’s existence. The Rights of the Grantee under this
instrument shall run for the benefit of and may be exercised by its
successors and assigns, or by its designees duly authorized in a deed
of Easement.
B. Grantee covenants and agrees that it will not transfer, assign or
otherwise convey its rights under this Easement except to another
“qualified organization” described in Section 170(h)(3) of the Internal
Revenue Code of 1986 and controlling Treasury regulations, and
Grantee further agrees that it will not transfer this Easement unless
the transferee first agrees to continue to carry out the conservation
purposes for which this Easement was created, provided, however,
that nothing herein contained shall be construed to limit the Grantee’s
right to give its consent (e.g., to changes in a Protected Facades [sic])
or to abandon some or all of its rights hereunder.
C. In the event this Easement is ever extinguished through a judicial
decree, Grantor agrees on behalf of itself, its heirs, successors and
assigns, that Grantee, or its successors and assigns, will be entitled to
receive upon the subsequent sale, exchange or involuntary conversion
of the Property, a portion of the proceeds from such sale, exchange or
conversion equal to the same proportion that the value of the initial
Easement donation bore to the entire value of the property at the time
of donation as estimated by a state licensed appraiser, unless
controlling state law provides that the Grantor [petitioners] is entitled
to the full proceeds in such situations, without regard to the
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[*9] Easement. Grantee agrees to use any proceeds so realized in a
manner consistent with the conservation purposes of the original
contribution.
New York City Landmarks Preservation Commission
The New York City Landmarks Preservation Commission (LPC) is the New
York City agency responsible for identifying and designating the city’s landmarks
and buildings in the city’s historic districts. The LPC regulates changes to
designated buildings. The LPC consists of 11 Commissioners and approximately
50 full-time staff members, including architects, architectural historians, and
restoration specialists. The LPC is responsible for the preservation of 26,000
structures and had a staff of four employees responsible for inspection during
relevant times.
New York City Landmarks Law
New York City adopted its Landmarks Preservation Law (Landmarks Law)
in 1965 in response to concerns about the destruction of buildings with significant
historical, architectural, and cultural value. Penn Cent. Transp. Co. v. City of New
York, 438 U.S. 104, 108-109 (1978); see N.Y. City Admin. Code sec. 25-303.
The Landmarks Law was enacted in order to safeguard New York City’s historic,
aesthetic, and cultural heritage; help stabilize and improve property values in
historic districts; encourage civic pride in the beauty and accomplishments of the
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[*10] past; protect and enhance the city’s attractions for tourists; strengthen the
city’s economy; and promote the use of landmarks for the education, pleasure, and
welfare of the people of New York City.
Petitioners’ property is subject to the Landmarks Law, which requires
property owners to keep designated properties in good repair and to obtain an LPC
permit before starting work if the work will affect a landmark’s exterior or if the
work requires a Department of Buildings permit. Violations of the Landmarks
Law occur either when work is performed on a landmark without a permit or when
work does not comply with a permit. The Landmarks Law provides, in pertinent
part:
In making * * * [a] determination with respect to * * * [an]
application for a permit to construct, reconstruct, alter or demolish an
improvement in an historic district, the commission shall consider (a)
the effect of the proposed work in creating, changing, destroying or
affecting the exterior architectural features of the improvement upon
which such work is to be done, and (b) the relationship between the
results of such work and the exterior architectural features of other,
neighboring improvements in such district.
N.Y. City Admin. Code sec. 25-307(b)(1). The Landmarks Law further provides:
“[The commission is not authorized] to regulate or limit the height and bulk of
buildings, [or] to regulate and determine the area of yards, courts and other open
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[*11] spaces”. N.Y. City Admin. Code sec. 25-304(a). The Landmark Law
defines “exterior architecture feature” as:
[t]he architectural style, design, general arrangement and components
of all of the outer surfaces of an improvement, as distinguished from
the interior surfaces enclosed by said exterior surfaces, including, but
not limited to, the kind, color and texture of the building material and
the type and style of all windows, doors, lights, signs and other
fixtures appurtenant to such improvement.
N.Y. City Admin. Code sec. 25-302(g).
The task of administering the law was given to the LPC. Penn Cent. Transp.
Co., 438 U.S. at 110; see N.Y.C. Charter ch. 74, sec. 3020. The LPC is
responsible for identifying and designating New York City’s landmarks and the
buildings in the city’s historic districts, including the Carnegie Hill District. The
LPC also regulates changes to designated buildings, including petitioners’
property. Since July 1998 when the Landmark Protection Bill became effective,
the LPC has had the power to seek civil fines for violations of its regulations and
to seek criminal penalties (fines and imprisonment) and injunctive relief. N.Y.
City Admin. Code secs. 25-317 and 25-317.1.
The LPC does not monitor yearly each of the structures in its jurisdiction.
The LPC does not photograph each structure and does not compare the annual
photograph of the previous year. In order to track violations, the LPC uses
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[*12] referrals from sources other than its staff. The LPC receives approximately
800 to 1,000 reports of violations each year. In 2006 and 2007 the LPC retained
four employees who were responsible for the enforcement and preservation of
approximately 26,000 structures in New York City.
Haims Appraisal
On December 18, 2006, petitioners obtained an appraisal of their property
for tax purposes from Jerome Haims Realty, Inc. The NAT provided petitioners
with Eric Haims’ name, along with the name of one other appraiser, and advised
that Mr. Haims is a preapproved appraiser of conservation easements. Petitioners
paid Jerome Haims Realty, Inc., $3,000 for Mr. Haims’ appraisal services.
Mr. Haims, who is a qualified appraiser as defined in section 1.170A-
13(c)(5), Income Tax Regs., appraised the easement that petitioners donated to the
NAT. Mr. Haims prepared an appraisal report that included a description of
petitioners’ property and estimated the fair market value of the easement donated
to the NAT. The appraisal valued the donated property as of December 11, 2006.
The appraisal described petitioners’ property as 3,300 square feet of gross
living area (as per New York City records), and 15 feet of frontage on the north
side of East 91st Street by 100 feet 8½ inches of depth, containing 1,515 square
feet of lot area. The appraisal stated that although the property was listed for sale
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[*13] on the market at an asking price of $5,295,000, on the basis of Mr. Haims’
analysis the property’s market value5 was actually $5,500,000.
The Haims appraisal used the sales comparison approach and determined
the market value of the property before the donation of the easement. The
appraisal established the diminution of the value of the easement reflected as a
percentage of the “before” market value of the property. Mr. Haims conducted a
market study using paired sales data of residential properties in New York. The
appraisal stated that on the basis of the data and analysis presented, the value of
the historic preservation easement was equal to 11% of the property’s market
value, or $605,000.
Recording the Deed
After signing the easement deed on December 18, 2006, petitioners
entrusted the Trust to record it. On December 26, 2006, the vice president of the
Trust executed the deed on behalf of the Trust. On December 28, 2006, the Trust
delivered the deed to the New York City Department of Finance, Office of the
Register (city register). The Trust also paid the city register $122 for recording
fees and taxes.
5
As discussed below, although Mr. Haims used the term “market value” in
his appraisal, he determined the property’s fair market value.
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[*14] The cover sheet for the recording forms that were presented to the city
register, however, contained an error: The property’s street number was
incorrectly listed on the cover sheet. Because the address on the cover sheet did
not match the address on the deed, the city register requested that the Trust
resubmit the deed with the discrepancy resolved. The Trust resubmitted the deed
in January 2007 to correct the discrepancy. The deed was recorded by the city
register on January 18, 2007.
Inspection of the Property by the Trust
On October 18, 2007, the Trust sent petitioners a letter informing them that
the inspector noted no alteration had been made to their property and the
inspection was done on May 11, 2007. The letter reminded petitioners that “the
exterior of the Property may not be altered legally without the prior approval of
the Trust”.
On November 22, 2007, petitioners notified the Trust in writing that they
wanted to replace the rear windows. The Trust approved the changes on
December 24, 2007.
On March 2, 2008, petitioners received a letter from the Trust informing
them that their property would be inspected in spring 2008. On August 7, 2008,
the Trust sent petitioners a letter informing them that the inspector noticed that no
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[*15] alterations had been made since the last inspection and the property
appeared to be in good repair.
On February 13, 2009, the Trust sent petitioners a letter stating that the
property would be visited during spring 2009. On May 20, 2009, the Trust
inspected the property. On November 17, 2009, the Trust sent petitioners a letter
which stated that the window replacement at the rear facade was consistent with
the approved plan and that the Trust had no objection.
The November 17, 2009, letter also noted that petitioners had installed a
retractable awning. The Trust reminded petitioners that making alterations
without its written consent was a violation of the easement and that if there were
any unauthorized alterations inconsistent with the historic character of the
property, petitioners would be required to restore the property to its prior
condition. The Trust, however, determined that the awning was consistent with
the historical character of the property.
Tax Returns
A certified public accountant prepared petitioners’ 2006 and 2007 Federal
income tax returns. Petitioners timely filed both tax returns.
Petitioners filed a Form 8283, Noncash Charitable Contributions, with their
2006 Federal income tax return and reported a noncash charitable contribution of
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[*16] $605,000 for the donation of the facade easement to the NAT. Petitioners
then deducted $238,778 of their 2006 reported noncash charitable contribution.
For 2007 petitioners deducted a noncash charitable contribution carryforward of
$68,456.
Notice of Deficiency
On April 8, 2010, respondent issued the notice of deficiency to petitioners
for tax years 2006 and 2007, disallowing the noncash charitable contribution
deductions petitioners claimed on their 2006 and 2007 income tax returns. The
notice of deficiency also determined that petitioners were liable for the gross
valuation misstatement penalty under section 6662(h) or, in the alternative, the
accuracy-related penalty under section 6662(a). In response, petitioners filed a
petition.
OPINION
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving, by a
preponderance of the evidence, that those determinations are incorrect. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Tax deductions are a
matter of legislative grace, and a taxpayer has the burden of proving his or her
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[*17] entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Section 7491(a)(1) provides an exception that shifts the burden of proof to
the Commissioner as to any factual issue relevant to a taxpayer’s liability for tax if
(1) the taxpayer introduces credible evidence with respect to the issue, sec.
7491(a)(1); and (2) the taxpayer satisfies certain other conditions, including
substantiation of any item and cooperation with the Government’s requests for
witnesses and information, sec. 7491(a)(2); see also Rule 142(a)(2). Petitioners
and respondent stipulated that petitioners met the specifications of section
7491(a)(2)(B) with respect to “cooperat[ing] with reasonable requests by the
Secretary for witnesses, information, documents, meetings, and interviews”.
Petitioners contend that because they also introduced credible evidence
establishing both compliance with the technical provisions of section 170 and the
value of the easement, the burden should shift to respondent under section
7491(a)(1). Credible evidence is evidence that the Court would find sufficient
upon which to base a decision on the issue in favor of the taxpayer if no contrary
evidence were submitted. Rendall v. Commissioner, T.C. Memo. 2006-174, aff’d,
535 F.3d 1221 (10th Cir. 2008); see Higbee v. Commissioner, 116 T.C. 438, 442-
443 (2001). Petitioners did not produce evidence that meets the definition of
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[*18] “credible evidence” as used in section 7491(a)(1). We find that petitioners
have not shown that they meet the specifications of section 7491(a) to shift the
burden of proof to respondent as to the remaining relevant factual issues. The
burden of proof remains with petitioners.
I. Noncash Charitable Contributions
A deduction is allowed for any charitable contribution for which payment is
made within the taxable year if the contribution is verified under regulations
prescribed by the Secretary. Sec. 170(a)(1). Generally, a charitable contribution
deduction is not allowed for a charitable gift of property consisting of less than the
donor’s entire interest in that property. Sec. 170(f)(3)(A). Section
170(f)(3)(B)(iii), however, provides an exception for a “qualified conservation
contribution”. Section 170(h)(1) defines a qualified conservation contribution as
follows:
SEC. 170(h). Qualified Conservation Contribution.--
(1) In general.-- For purposes of subsection (f)(3)(B)(iii),
the term “qualified conservation contribution” means a
contribution--
(A) of a qualified real property interest,
(B) to a qualified organization,
(C) exclusively for conservation purposes.
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[*19] All three requirements must be met for a donation to be a qualified
conservation contribution. Simmons v. Commissioner, T.C. Memo. 2009-208, slip
op. at 9, aff’d, 646 F.3d 6 (D.C. Cir. 2011). The legislative history underlying
section 170(h) indicates the policy behind the qualified conservation contribution
exception and its restrictions:
The committee believes that the preservation of our country’s natural
resources and cultural heritage is important, and the committee
recognizes that conservation easements now play an important role in
preservation efforts. The committee also recognizes that it is not in
the country’s best interest to restrict or prohibit the development of all
land areas and existing structures. Therefore, the committee believes
that provisions allowing deductions for conservation easements
should be directed at the preservation of unique or otherwise
significant land areas or structures. * * *
S. Rept. No. 96-1007, at 9 (1980), 1980-2 C.B. 599, 603.
Section 170(f)(11) further provides that no charitable contribution
deduction shall be allowed under section 170(a) for any contribution of property
for which a deduction of more than $5,000 is claimed unless the taxpayer obtains a
qualified appraisal of the property. Sec. 170(f)(11)(A), (C). For contributions of
property for which a deduction of more than $500,000 is claimed, the taxpayer
must also attach the qualified appraisal of the property to his or her Federal tax
return. Sec. 170(f)(11)(D).
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[*20] The parties agree that the Trust was at all relevant times an organization
exempt from Federal taxation under section 501(c)(3) and a qualified organization
under section 170(h)(1)(B), as defined by section 170(h)(3). The parties do not
dispute that petitioners properly attached an appraisal (qualified or not) to their
Federal income tax return as specified by section 170(f)(11)(D).
Therefore, we must determine (1) whether petitioners’ easement
contribution was a qualified real property interest, as defined by section 170(h)(2);
(2) whether petitioners’ easement contribution was made exclusively for
conservation purposes, as defined by section 170(h)(4) and (5); and (3) whether
the Haims appraisal was a qualified appraisal under section 170(f)(11)(C). We
must also determine the value of the easement contribution.
A. Qualified Real Property Interest
For purposes of section 170(h)(2)(C) the term “qualified real property
interest” includes “a restriction (granted in perpetuity) on the use which may be
made of the real property.” A restriction granted in perpetuity on the use of the
property must be based on legally enforceable restrictions that will prevent uses of
the retained interest in the property that are inconsistent with the conservation
purposes of the contribution. See sec. 1.170A-14(g)(1), Income Tax Regs.
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[*21] We addressed the issue of what constitutes a “qualified real property
interest” in Belk v. Commissioner, 140 T.C. 1, 7 (2013). In Belk the taxpayers
donated a conservation easement; in the conservation easement agreement they
agreed not to develop land on a golf course. The conservation easement
agreement, however, permitted the taxpayers to remove portions of the golf course
from the conservation easement and replace them with property currently not
subject to the conservation easement. We found that the use restriction was not
granted in perpetuity because the conservation easement agreement permitted the
taxpayers to change what property was subject to the conservation easement. Id.
at 10. We noted that the taxpayers did not agree never to develop the golf course.
Id. at 10-11. We thus held that the taxpayers failed to donate an interest in real
property which was subject to a use restriction granted in perpetuity. Id. at 11.
We stated: “To conclude otherwise would permit petitioners a deduction for
agreeing not to develop the golf course when the golf course can be developed by
substituting the property subject to the conservation easement.” Id.
Unlike the conservation easement agreement in Belk petitioners’ deed
clearly defines the property donated under the easement and restricts the easement
to that property. The deed includes an exhibit with the legal description of the
land and the boundaries of petitioners’ property, which is also a matter of public
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[*22] record. The deed provides that “the facades of the improvements located on
the Property (the ‘Building’), including the existing facades on the front, sides and
rear of the Building and the measured height of the Building (collectively the
‘Protected Facades’), are protected by this Easement.” To prevent any ambiguity
and clearly define the easement rights, the deed provides that “[w]ritten
descriptions and photographs of the Protected Facades * * * shall control.” The
boundaries of the property are clear, and the easement clearly relates to the front,
sides, rear, and measured height of the building; no substitution is allowed.
In addition, the deed grants “an Easement in gross, in perpetuity, in, on, and
to the Property”. It further states: “This Easement is binding not only upon
Grantor, but also upon its successors, heirs and assigns and all other successors in
interest to the Grantor, and shall continue as a servitude running in perpetuity with
the land.” The deed mandates specifically that the Trust will not transfer, assign,
or otherwise convey its rights under the easement unless it is to a qualified
organization under section 170(h)(3) and the transferee agrees to continue to carry
out the conservation purposes for which the easement was created.
Accordingly, we hold that petitioners’ easement contribution was a qualified
real property interest.
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[*23] B. Exclusively for Conservation Purposes
1. Valid Conservation Purpose
Section 170(h)(4)(A)(iv) provides, in pertinent part, that a valid
conservation purpose is the preservation of a historically important land area or a
certified historic structure.
Section 170(h)(4)(C) defines the phrase “certified historic structure” as (i)
any building, structure, or land, which is listed in the National Register, or (ii) any
building that is located in a registered historic district (as defined in section
47(c)(3)(B)) and is certified by the Secretary of the Interior to the Secretary of the
Treasury as being of historic significance to the district. For this purpose, a
structure means any structure, whether or not it is depreciable; accordingly,
easements on private residences may qualify. Sec. 1.170A-14(d)(5)(iii), Income
Tax Regs.
The enactment of the Pension Protection Act of 2006 (PPA), Pub. L. No.
109-280, 120 Stat. 780, created additional requirements under section
170(h)(4)(B) for any contribution of property in a registered historic district. PPA
sec. 1213(a)(1), 120 Stat. at 1075. Section 170(h)(4)(B) provides:
(B) Special rules with respect to buildings in registered historic
districts.--In the case of any contribution of a qualified real property
interest which is a restriction with respect to the exterior of a building
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[*24] described in subparagraph (C)(ii), such contribution shall not be
considered to be exclusively for conservation purposes unless--
(i) such interest--
(I) includes a restriction which preserves the entire
exterior of the building (including the front, sides, rear,
and height of the building), and
(II) prohibits any change in the exterior of the
building which is inconsistent with the historical
character of such exterior, * * *
With respect to section 170(h)(4)(B) the General Explanation of Tax Legislation
Enacted in the 109th Congress prepared by the Staff of the Joint Committee on
Taxation states as follows:
A charitable deduction is allowable with respect to buildings (as is
the case under present law) but the qualified real property interest that
relates to the exterior of the building must preserve the entire exterior
of the building including the space above the building, the sides, the
rear, and the front of the building. In addition, such qualified real
property interest must provide that no portion of the exterior of the
building may be changed in a manner inconsistent with the historical
character of such exterior.
Staff of J. Comm. on Taxation, General Explanation of Tax Legislation Enacted in
the 109th Congress 590 (J. Comm. Print 2007).6
6
Taxpayers who make a donation in excess of $10,000 also must pay a $500
fee to the Internal Revenue Service (IRS). Sec. 170(f)(13). This provision,
however, did not go into effect until after petitioners made their contribution. See
Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, sec. 1213(e)(3), 120
(continued...)
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[*25] If restrictions to preserve a building or land area within a registered historic
district permit future development on the site, a deduction will be allowed only if
the terms of the restrictions require that such development conform with
appropriate local, State, or Federal standards for construction or rehabilitation
within the district. Sec. 1.170A-14(d)(5)(i), Income Tax Regs. In general, a
facade easement is a restriction the purpose of which is to preserve certain
architectural, historic, and cultural features of the facade, or front, of a building.
The terms of a facade easement might permit the property owner to make
alterations to the facade of the structure if the property owner obtains consent from
the qualified organization that holds the easement. This Court has held that a
facade easement may constitute a qualifying conservation contribution. See
Hilborn v. Commissioner, 85 T.C. 677 (1985).
Respondent contends that the conservation purpose requirement of section
170(h)(4) is not met because the easement does not preserve the property beyond
what is already required under local law. By virtue of the property’s location in
Carnegie Hill Historic District, petitioners’ property is subject to the Landmarks
Law. Petitioners are thus required to keep the property in good repair and to
6
(...continued)
Stat. at 1076 (noting that the provision applies to contributions made 180 days
after August 17, 2006, the date of the PPA’s enactment).
- 26 -
[*26] obtain an LPC permit before starting work if the work will affect the
property’s exterior or if the work requires a Department of Buildings permit.
Petitioners contend that their easement meets the conservation requirement
and that the examination of local preservation law is part of the valuation process.
See Hilborn v. Commissioner, 85 T.C. at 689. Petitioners argue that their
easement is different from easements in prior cases before the Court because their
easement is more than a facade easement; it is a full envelope easement. They
contend that their easement is more restrictive than existing local laws and reduces
development potential. Petitioners provide examples of properties for which the
LPC approved a rear addition.
Petitioners’ property is a certified historic structure within the meaning of
section 170(h)(4)(A)(iv) because it is in a registered historic district and was
certified as such by the Secretary of the Interior through the National Park Service
in response to petitioners’ request on January 11, 2007.
The easement at issue preserves petitioners’ property as a certified historic
structure. We find that the easement was more restrictive than the Landmarks
Law.
The Landmarks Law mandates that petitioners obtain approval from the
LPC before making changes to their property, while the deed imposes certain
- 27 -
[*27] clearly defined restrictions and gives the Trust unlimited discretionary
authority to approve or deny changes to petitioners’ property. The LPC passively
monitors changes to historic buildings, while the Trust actively monitors changes
to historic buildings. The LPC relies heavily on complaints as part of its
monitoring. The Trust performed annual inspections and kept records including
photographs. When the LPC reviews a building, it looks at it from the perspective
of the streetscape.
Approval from the LPC to make improvements to a property is based on a
comparison of the surrounding historical properties. That means petitioners may
be given authority from the LPC to make improvements to their property as long
as their building remains consistent with the exterior architectural features of
neighboring improvements.
The properties directly across the street from petitioners’ building are five
or more stories high while petitioners’ property is only four stories above ground.
If petitioners applied for a permit to build an additional story, there is a chance the
LPC would allow petitioners to do so as long as the addition was consistent with
the exterior architectural features of neighboring buildings. The deed, however,
requires that improvements to the property involving the existing front, sides, rear,
and height of the building need written approval from the Trust. There is a risk
- 28 -
[*28] that the Trust will deny an improvement. At trial an employee of the Trust
testified that the approval process of the Trust was different from that of the LPC
and that the Trust did not approve all projects that met the qualifications of the
LPC.
The Landmarks Law states specifically that the LPC is not authorized to
regulate or limit the height and bulk of buildings or to regulate and determine the
area of yards, courts, or other open spaces. N.Y. City Admin. Code sec. 25-
304(a). The Trust, with its unlimited discretion, may deny petitioners’ request to
make any changes to their home for any reason, while the LPC must follow
specific guidelines in its decisionmaking. The Trust has the ultimate say in
granting petitioners the right to make changes to their property. Petitioners,
however, have the option of appealing a denied permit request with the LPC and
changing the LPC’s decision.
John Weiss, deputy counsel to the LPC, testified that in order for the LPC to
review a change application for a covered property, both the property owner and
the easement holder must sign the change application. If the easement holder
refused to sign the change application, then the LPC would not approve it. Here,
the easement holder was the Trust. Therefore, the LPC would require the Trust’s
approval before reviewing a change application for petitioners’ property.
- 29 -
[*29] Mr. Weiss also testified the LPC must obtain either the consent of the
property owner or a court order to enter the premises of a covered property. The
Trust, however, has the right to enter petitioners’ property without a court order.
The Trust’s monitoring visits require an appointment because the Trust needs
access to the property’s backyard. The Trust thus places a larger burden on
petitioners’ property rights than the Landmarks Law.
The Court on several occasions has considered whether a conservation deed
of easement was more or less restrictive than local law in order to determine
whether a contribution was for conservation purposes.
In 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84, the taxpayer
contributed a conservation easement deed for a townhouse in a historic district in
New York City to the NAT. The deed of easement prohibited the taxpayer from
altering the townhouse’s facade without the written consent of the donee
organization. In particular the deed prohibited the taxpayer from erecting “‘any
new or additional exterior improvements on the [subject] property or in the open
space above or surrounding the * * * townhouse’ without the express written
consent of NAT.” Id., slip op. at 8. We observed that the LPC would need to
approve any alteration made to the taxpayer’s property. We further observed that
in making its determination to approve an alteration, the LPC would consider
- 30 -
[*30] whether an alteration would “‘change, destroy or affect any exterior
architectural feature’ of the subject property and, in the case of an improvement,
‘whether such construction would affect or not be in harmony with the external
appearance of other, neighboring improvements’.” Id. at 26 (quoting N.Y. City
Admin. Code sec. 25-306(a)(1)).
We found in 1982 East, LLC that the LPC’s determination would consider
the external appearance of the townhouse’s facade and the ability of the taxpayer
to alter the aesthetics of the subject property by building above it. Id.
Consequently we found that the deed of easement in 1982 East, LLC was not more
restrictive than the Landmarks Law, holding: “[I]t is local law and the rules of the
LPC that preserve the subject property and not the rights which NAT possessed
under the deed of easement.” Id.
The deed in the instant case is more restrictive than the deed of easement in
1982 East, LLC. For instance petitioners’ deed mentions specifically the rear of
the building, while the deed of easement in 1982 East, LLC did not. This
distinction constitutes a major difference in the rights already granted to the LPC
under the Landmarks Law. Although both petitioners’ deed and the LPC restrict
improvements relating to the exterior of the building, it is unclear whether the LPC
would limit changes to the rear of a property. Under the deed petitioners are
- 31 -
[*31] expressly restricted from making alterations to the rear of the building
without approval. The LPC, however, is less restrictive: It focuses on how
change to a property would affect the neighborhood.7 This is a significant
difference. We conclude that petitioners’ easement is more restrictive than local
law.
In Simmons v. Commissioner, T.C. Memo. 2009-208, the taxpayers granted
facade easements via conservation easement deeds for two historic properties in
Washington, D.C., to L’Enfant, a historical preservation commission similar to the
Trust. The conservation easement deeds provided in effect that the taxpayers
“could not make any material changes to the respective facades in any way without
L’Enfant’s consent.” Id., slip op. at 4. The Court found that the deeds were more
restrictive than local law and allowed the taxpayers section 170 deductions,
stating:
Even if we were to accept respondent’s contention that the easements
did not impose any restrictions on * * * [the taxpayer] over and above
those imposed by the District of Columbia, the easements still added
an additional level of approval before any changes could be made to
the properties. * * * [The taxpayer] is required to obtain L’Enfant’s
7
The LPC further requires approval for “any significant modification of the
existing bulk or envelope of a building”. N.Y. City Admin. Code sec. 25-
302(x)(1)(c). This language is likewise less restrictive than the language in
petitioners’ deed, which prohibits any alterations (significant or not) to the rear of
the building without approval.
- 32 -
[*32] consent to make any changes to the facades, even if those
changes are allowable under District of Columbia preservation laws.
Id. at 26. We thus concluded that the approval process alone was enough to
differentiate rights granted under the deeds from those already in place under local
law.
In Scheidelman v. Commissioner, T.C. Memo. 2013-18, the taxpayer
contributed an architectural conservation facade easement for a townhouse in New
York City to the NAT. The Court concluded that the taxpayer’s argument that the
LPC did not enforce restrictions as effectively as the NAT was “speculation * * *
not supported by anything but anecdotes, and * * * contrary to evidence
specifically related to the * * * property.” Id. at *19. We concluded that the
easement did not materially diminish the value of the taxpayer’s property.
Unlike the deed in Scheidelman, which provided a conservation easement
only for the facade, petitioners’ deed concerns the front, side, rear, and measured
height of property, as required by section 170(h)(4)(B) following the enactment of
the PPA in 2006. We note that the taxpayer in Scheidelman completed her
donation in 2004 and therefore the special requirements of section 170(h)(4)(B)
did not apply. We also find petitioners’ arguments regarding the Trust’s ability to
enforce restrictions more effectively than the LPC to be convincing.
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[*33] In Dunlap v. Commissioner, T.C. Memo. 2012-126, taxpayers granted a
facade easement on their loft building in New York City to the NAT. The
taxpayers’ property had a special “sound, first-class condition” designation with
the LPC which caused it to be subject to a higher standard of preservation than
most other historic structures in New York City. The Court found that because the
building had the sound, first-class condition designation, the facade easement was
not more stringent than the LPC regulations and enforcement. The NAT had
failed to provide any easement monitoring of the property, donated in 2003, until
2006. The Court also noted that the NAT appeared to be more concerned with
making money for SMS (a for-profit entity which employed many of the people
who were held out to third parties as working for the NAT and which was owned
by the same two people who founded the NAT) than monitoring and enforcing the
terms of the facade easements it held, until 2006 when its obligations to SMS
ended. We concluded that the value of the easement was zero.
Unlike the easement in Dunlap, petitioners’ property does not have a sound,
first-class condition designation. Approximately 150 buildings of the 29,000
structures in New York City that the LPC monitors have this designation. A
property with this designation is subject to a higher standard of preservation. We
also find that the Trust monitored and enforced the terms of the easement it held
- 34 -
[*34] on petitioners’ property, whereas it is unclear whether the LPC ever
inspected the property. We note that the taxpayers in Dunlap completed their
donation before the enactment of section 170(h)(4)(B) and their donation
concerned only the facade of their loft building. We further note that although
prior cases criticized the Trust for its affiliation with SMS, we are not convinced
that the Trust engaged in the same practices at the time of petitioners’ donation.
Finally, in Herman v. Commissioner, T.C. Memo. 2009-205, the taxpayer
donated the unused development air rights via a conservation easement deed in a
historic property in New York, New York, to the NAT. We found that an
easement restricting only air rights and the maximum height of the building was
not restrictive enough to preserve the certified historic structure of the building.
Although the deed in Herman was not restrictive enough to preserve the
certified historic structure of the building, we note that petitioners’ deed is much
more restrictive than the deed in Herman. Unlike the deed in Herman, petitioners’
deed restricts them from making changes not only to the height of the building but
also to the building’s front, side, and rear, as well as the building’s surrounding
property.
We further note that although the deed allows the Trust to consent to
changes to petitioners’ property, the deed requires any rehabilitative work or new
- 35 -
[*35] construction on the facades to comply with the requirements of all
applicable Federal, State, and local Government laws and regulations. Section
1.170A-14(d)(5), Income Tax Regs., specifically allows a donation to satisfy the
conservation purposes test even if future development is allowed, as long as that
future development is subject to local, State, and Federal laws and regulations.
See Simmons v. Commissioner, slip op. at 11. Therefore, the deed complies with
section 170(h)(4)(B). We conclude that petitioners’ easement has a conservation
purpose.
2. Exclusively for Conservation Purposes
a. Conservation Purpose in Perpetuity
Like section 170(h)(2)(C), section 170(h)(5) specifies that the conservation
purpose must be protected in perpetuity. Section 170(h)(5)(A) provides that “[a]
contribution shall not be treated as exclusively for conservation purposes unless
the conservation purpose is protected in perpetuity.” Although subsections
(h)(2)(C) and (h)(5) both require perpetuity, they are separate and distinct
requirements. Section 170(h)(2)(C) specifies that the interest in real property
donated by taxpayers must be subject to a use restriction in perpetuity, whereas
section 170(h)(5) specifies that the conservation purpose of the conservation
- 36 -
[*36] easement must be protected in perpetuity. Belk v. Commissioner, 140 T.C.
at 12; sec. 1.170A-14(a), Income Tax Regs.
We discussed section 170(h)(5) perpetuity in 1982 East, LLC, quoting the
legislative history:
“[I]t is * * * intended that contributions of perpetual easements * * *
qualify for * * * [a section 170] deduction only in situations where
the conservation purposes of protecting or preserving the property
will in practice be carried out. Thus, it is intended that a contribution
of a conservation easement * * * qualify for a deduction only if the
holding of the easement * * * is related to the purpose or function
constituting the donee’s purpose for exemption (organizations such as
* * * historic trusts * * * ) and the donee is able to enforce its rights
as holder of the easement * * * and protect the conservation purposes
which the contribution is intended to advance.” * * *
1982 East, LLC v. Commissioner, slip op. at 17-18 (quoting H.R. Conf. Rept. No.
95-263, at 30-31 (1977), 1977-1 C.B. 519, 523).
We further discussed the legislative intent behind this perpetuity
requirement, quoting the Senate report:
“[For the contribution to be protected in perpetuity] [t]he contribution
must involve legally enforceable restrictions on the interest in the
property retained by the donor that would prevent uses of the retained
interest inconsistent with the conservation purposes. * * * By
requiring that the conservation purpose be protected in perpetuity, the
committee intends that the perpetual restrictions must be enforceable
by the donee organization (and successors in interest) against all other
parties in interest (including successors in interest).” * * *
- 37 -
[*37] Id. at 18-19 (quoting S. Rept. No. 96-1007, at 13-14 (1980), 1980-2 C.B.
599, 605-606).
In 1982 East, LLC v. Commissioner, slip op. at 21, we found that the
property at issue was not protected in perpetuity because the NAT was not
guaranteed a proportionate share of proceeds in the event of a casualty or
condemnation before the mortgage held by First Republic Bank was satisfied. In
that case First Republic Bank retained a prior claim to all condemnation and
insurance proceeds in preference to the donee until that mortgage was satisfied
and discharged. Thus, at any point before the mortgage was repaid, the possibility
existed for First Republic Bank to deprive the NAT of value that should have
otherwise been dedicated to the conservation purpose. Id. at 23. The Court
ultimately found that the contribution of donated property failed to comply with
the perpetuity requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.
In Simmons we held that the easement was a valid conservation easement.
We stated: “Although the grants do allow L’Enfant to consent to changes to the
properties, the grants require any rehabilitative work or new constructions on the
facades to comply with the requirements of all applicable Federal, State, and local
government laws and regulations.” Simmons v. Commissioner, slip op. at 11.
- 38 -
[*38] Respondent argues that there are facts to indicate that the Trust was willing
to terminate the easement upon petitioners’ request after the easement donation. A
lawyer on behalf of petitioners reached out to the Trust about removing the
easement. Respondent further argues that petitioners’ easement is comparable to
those in other cases in which the Court found that easements were not granted in
perpetuity.
Petitioners argue that the easement was granted in perpetuity because it is
binding on petitioners’ successors and heirs, it continues as a servitude running in
perpetuity with the land, and it survives the termination of the Trust’s existence.
Petitioners further argue that the Trust enforces the easement in perpetuity by (1)
annually monitoring the property to ensure the property is in compliance with the
easement, (2) reviewing any requests for alterations, and (3) tracking changes in
ownership of the property to communicate easement obligations to new owners.
At trial an employee of the Trust testified that petitioners were told the easement
would not be removed.
The terms of the deed grant the easement in perpetuity under section
170(h)(5). The deed grants “an Easement in gross, in perpetuity, in, on, and to the
Property”. The deed further states: “This Easement is binding * * * and shall
- 39 -
[*39] continue as a servitude running in perpetuity with the land.” This language
shows petitioners’ intent to satisfy section 170(h)(5).
We find that the Trust was not willing to terminate the easement. Under the
terms of the deed the easement is granted in perpetuity and may not be terminated
at any time. The Trust has no intention of releasing the deed. Petitioners
requested to have the easement terminated because they were having a difficult
time selling their property, and the Trust denied this request.
Moreover, the facts in the case at hand are distinguishable from those in
1982 East, LLC because petitioners do not have a mortgage on the property, and
upon sale, exchange, or involuntary conversion the Trust is entitled to its
proportionate share of future proceeds, absent controlling State law that provides
otherwise.
In Carpenter v. Commissioner, T.C. Memo. 2013-172, we concluded that a
conservation easement will not qualify as a qualified conservation contribution if
the deed allows mutual agreement to extinguish the easement and extinguishment
by judicial proceedings is mandatory. Section 1.170A-14(g)(6), Income Tax
Regs., provides that a conservation easement can be extinguished if “the
restrictions are extinguished by judicial proceeding and all of the donee’s proceeds
* * * from a subsequent sale or exchange of the property are used by the donee
- 40 -
[*40] organization in a manner consistent with the conservation purposes of the
original contribution.”
The deed in this case allows the easement to be extinguished by judicial
decree and requires the donees to use proceeds in a manner consistent with the
conservation purposes of the original contribution. The deed does not include
other language regarding extinguishment. The deeds in Carpenter included the
following language:
If circumstances arise in the future such that render the purpose of
this Conservation Easement impossible to accomplish, this
Conversation Easement can be terminated or extinguished, whether in
whole or in part, by judicial proceedings, or by mutual written
agreement of both parties, provided no other parties will be impacted
and no laws or regulations are violated by such termination.
Carpenter v. Commissioner, at *4. The deed in the instant case does not include
the mutual agreement language and meets the requirements of section 1.170A-
14(g)(6), Income Tax Regs.
b. Recording the Deed
Respondent contends that the deed was not recorded under applicable New
York law until 2007 and therefore its conservation purpose was not protected in
perpetuity under section 170(h)(5)(A) for 2006.
- 41 -
[*41] N.Y. Real. Prop. sec. 317 (McKinney 2006) stated: “Every instrument,
entitled to be recorded, must be recorded by the recording officer in the order and
as of the time of its delivery to him therefor, and is considered recorded from the
time of such delivery.”
The deed was delivered for recording on December 28, 2006, and the
required fee was paid. The deed delivered on December 28, 2006, is identical to
the deed as recorded; the only error was on the cover sheet to the recording forms,
which incorrectly listed the property’s address. The Department of Finance
provided a receipt for the delivery of the deed. Therefore, the deed was deemed
recorded on December 28, 2006. See Manhattan Co. v. Laimbeer, 15 N.E. 712
(N.Y. 1888) (“In the matter of deeds and mortgages it is constantly spoken of that
such papers are recorded when left at the clerk’s office for such purpose[.]”).
Furthermore, section 1.170A-14(g)(3), Income Tax Regs., provides: “A
deduction shall not be disallowed under section 170(f)(3)(B)(iii) and this section
merely because the interest which passes to, or is vested in, the donee organization
may be defeated by the performance of some act or the happening of some event,
if on the date of the gift it appears that the possibility that such act or event will
- 42 -
[*42] occur is so remote as to be negligible.”8 We find the possibility that the
deed would not be recorded because of a clerical error in the cover sheet to be
remote. But cf. Solutto v. Commissioner, T.C. Memo. 1993-614 (finding that the
possibility of the donee organization, to which the taxpayers granted facade
easements of their units in a condominium building, losing the easement was not
so remote as to be negligible because the organization did not obtain
subordination agreements to protect it from foreclosure, even though the
organization had lost up to 45% of its accepted easements to foreclosure, the
easement restrictions were unenforceable until several years after the purported
donation, and the easement did not stand in priority to a particular security
interest), aff’d without published opinion, 67 F.3d 314 (11th Cir. 1995).
Accordingly, we find that the easement was contributed exclusively for
conservation purposes.
8
Sec. 1.170A-14(g)(3), Income Tax Regs., cross-references sec. 1.170A-
1(e), Income Tax Regs., which likewise provides: “If as of the date of a gift a
transfer for charitable purposes is dependent upon the performance of some act or
the happening of a precedent event in order that it might become effective, no
deduction is allowable unless the possibility that the charitable transfer will not
become effective is so remote as to be negligible.”
- 43 -
[*43] C. Qualified Appraisal
To be a qualified appraisal under section 170(f)(11)(E), an appraisal of
property (1) must be treated as a qualified appraisal under regulations or other
guidance prescribed by the Secretary and (2) must be conducted by a qualified
appraiser in accordance with generally accepted appraisal standards and any
regulations or other guidance prescribed by the Secretary.
1. Definition of Qualified Appraisal
Section 1.170A-13(c)(3), Income Tax Regs., defines a qualified appraisal as
a document that, among other things: (1) relates to an appraisal that is made not
earlier than 60 days before the date of contribution of the appraised property and
not later than the due date (including extensions) of the return on which a
deduction is first claimed under section 170; (2) is prepared, signed, and dated by
a qualified appraiser; (3) includes (a) a description of the property appraised, (b)
the fair market value of such property on the date of contribution and the specific
basis for the valuation, (c) a statement that such appraisal was prepared for income
tax purposes, (d) the qualifications of the qualified appraiser, and (e) the signature
and taxpayer identification number of such appraiser; and (4) does not involve an
appraisal fee that violates certain prescribed rules. The parties stipulated that Mr.
- 44 -
[*44] Haims, who performed the appraisal for petitioners, is a “qualified
appraiser” as the term is defined in section 1.170A-13(c)(5), Income Tax Regs.
The regulation imposes substantive requirements on the content of an
appraisal report. Scheidelman v. Commissioner, 682 F.3d 189, 198 (2d Cir. 2012),
vacating and remanding T.C. Memo. 2010-151. A qualified appraisal provides the
IRS with sufficient information to evaluate the claimed deduction and deal more
effectively with the prevalent use of overvaluation. Hewitt v. Commissioner, 109
T.C. 258, 265 (1997), aff’d without published opinion, 166 F.3d 332 (4th Cir.
1998).9
The parties agree that the Haims report meets the reporting requirements of
certain subdivisions in section 1.170A-13(c)(3)(ii), Income Tax Regs.; however,
respondent claims that the Haims report fails to meet the reporting requirements of
section 1.170A-13(c)(3)(ii)(C), (I), (J), and (K), Income Tax Regs.
Pursuant to section 1.170A-13(c)(3)(ii)(C), Income Tax Regs., an appraisal
report must include the date or expected date of the contribution. The Haims
9
Sec. 170(h)(4)(B)(iii) provides further restrictions for any contribution
made the year after the enactment of the PPA. See PPA sec. 1213(a)(1), 120 Stat.
at 1075-1076. Because petitioners made their contribution in 2006, the year in
which the PPA was enacted, sec. 170(h)(4)(B)(iii) does not apply in this case.
However, the parties stipulated that the Haims appraisal included a description of
the building, its address, block, and lot, and photographs.
- 45 -
[*45] appraisal reports the date or expected date of contribution as December 11,
2006. Therefore, petitioners’ filings gave respondent sufficient information to
determine that the expected date of contribution was in December 2006.
Pursuant to section 1.170A-13(c)(3)(ii)(I), Income Tax Regs., an appraisal
report should include the appraised fair market value of the donated property on
the date or expected dated of contribution. Fair market value is “the price at which
the property would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable
knowledge of relevant facts.” Sec. 1.170-1(c)(2), Income Tax Regs.
The Haims appraisal report used the phrase “market value”, which it defined
as follows: “The most probable price, as of a specified date, in cash, or in terms
equivalent to cash, or in other precisely revealed terms, for which the specified
property rights should sell after reasonable exposure in a competitive market under
all conditions requisite to a fair sale, with the buyer and seller each acting
prudently, knowledgeably and for self interest, and assuming that neither is under
undue duress”.
Although we have previously observed that the phrase “market value” is not
necessarily synonymous with “fair market value” depending on how the term is
defined and used, see Crimi v. Commissioner, T.C. Memo. 2013-51, at *15 (“The
- 46 -
[*46] * * * appraisal used a standard of market value as opposed to fair market
value[.]”), there is no discernible difference between market value as used by the
Haims appraisal and the definition of fair market value in the regulation. We have
noted that three elements are necessary for a definition to mirror fair market value:
(1) the parties are reasonably aware of all facts relevant to the valued property, (2)
the parties cannot be under any compulsion to buy or sell, and (3) the parties must
be considered hypothetical rather than actual persons. Bank One Corp v.
Commissioner, 120 T.C. 174, 308-310 (2003), aff’d in part, vacated in part and
remanded sub nom. J.P. Morgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th
Cir. 2006). The definition of market value as used in the Haims appraisal is
consistent with these criteria and meets the requirements of section 1.170A-
13(c)(3)(ii)(I), Income Tax Regs. See also Irby v. Commissioner, 139 T.C. 371
(2012); Crimi v. Commissioner, T.C. Memo. 2013-51.
Pursuant to section 1.170A-13(c)(3)(ii)(J), Income Tax Regs., an appraisal
must include the method of valuation used to determine the fair market value. The
Haims appraisal uses the “before and after” method. The Haims appraisal
explained and identified the method used, including how a paired sales analysis
was used and a percentage reduction was applied to the before value. The Haims
- 47 -
[*47] appraisal meets the requirements of section 1.170A-13(c)(3)(ii)(J), Income
Tax Regs. See Scheidelman v. Commissioner, 682 F.3d at 196.
Pursuant to section 1.170A-13(c)(3)(ii)(K), Income Tax Regs., an appraisal
must report the specific basis for valuation. The Haims appraisal explains that it
used an “an empirically driven market study using paired sales data residential
properties in New York”. The Haims appraisal also provides detail on how the
properties were selected.
Mr. Haims’ approach was very similar to the approach taken in Simmons.
The Simmons appraisals, which were qualified appraisals, adequately described
the parcels of land owned by the taxpayer and the structures built thereon,
contained lengthy discussions of historic preservation easements in general, and
identified the method of valuations used and the basis for the valuation reached.
The Simmons appraisals also contained statistics gathered by L’Enfant that the
appraiser took into account in preparing the appraisals. Thus, respondent “may
deem * * * [Mr. Haims’] ‘reasoned analysis’ unconvincing, but it is incontestably
there.” Scheidelman v. Commissioner, 682 F.3d at 198. The Haims appraisal
meets the requirements of section 1.170A-13(c)(3)(ii)(K), Income Tax Regs.
- 48 -
[*48] 2. Generally Accepted Appraisal Standards
Section 170(f)(11)(E) as amended by the PPA specifies that the qualified
appraisal must be conducted by a qualified appraiser in accordance with generally
accepted appraisal standards. The Department of the Treasury provided guidance
in the form of Notice 2006-96, 2006-2 C.B. 902. According to that Notice an
appraisal will meet the specifications of section 170(f)(11)(E) if, for example, “the
appraisal is consistent with the substance and principles of the Uniform Standards
of Professional Appraisal Practice (‘USPAP’)”. Id. sec. 3.02(2), 2006-2 C.B. at
902.
Respondent contends that there were serious defects in the Haims appraisal
and that it was inconsistent with USPAP. Respondent contends that Mr. Haims
used Department of Finance records when he should have used Department of
Building Records. In addition, respondent contends that the after-value analysis
Mr. Haims used is not consistent with USPAP. Petitioners contend that Mr.
Haims did use Department of Building records.
Appraising is not an exact science and has a subjective nature. The Haims
appraisal meets the specifications of section 170(f)(11)(E).
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[*49] Accordingly, we find that the Haims appraisal was a qualified appraisal for
purposes of section 170(f)(11). Petitioners are entitled to a charitable contribution
deduction under section 170(a)(1).
D. Valuation
No established market exists for determining the fair market value of an
easement. Simmons v. Commissioner, slip op. at 18; see also Hilborn v.
Commissioner, 85 T.C. at 688. We have used the “before and after” approach on
numerous occasions to determine the fair market values of restrictive easements
with respect to which charitable contribution deductions are claimed. See, e.g.,
Hilborn v. Commissioner, 85 T.C. at 689; Simmons v. Commissioner, T.C. Memo.
2009-208; Griffin v. Commissioner, T.C. Memo. 1989-130, aff’d, 911 F.2d 1124
(5th Cir. 1990).
Under this approach the fair market value of the restriction is equal to the
difference (if any) between the fair market value of the encumbered property
before the restriction is granted and its fair market value after the restriction is
granted. Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Where the grant of a
conservation restriction has no material effect on the value of the property, or
serves to enhance, rather than reduce, the value of the property, no deduction is
allowed. Sec. 1.170A-14(h)(3)(ii), Income Tax Regs.
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[*50] The “before” value of the property generally reflects the highest and best
use of the property in its condition just before the donation of the easement.
Hilborn v. Commissioner, 85 T.C. at 689. The highest and best use of the property
in its “before” condition takes into account the manner by which the property
likely would have been developed absent the easement. Simmons v.
Commissioner, slip op. at 19. The evaluation of that likelihood also takes into
account the effect of existing zoning or historic preservation laws that already
restrict the property’s development regardless of the existence of the restrictive
easement. Id.
Both petitioners and respondent submitted expert reports regarding the
value of petitioners’ easement. Respondent’s expert was Richard Marchitelli,
executive managing director of Cushman & Wakefield. Mr. Marchitelli has
appraised facade easements in New York City, including townhouses. He is a
member of the Appraisal Institute. Petitioners’ expert was Gary Miller, president
of Nico Valuation Services, Ltd. He is a member of the Appraisal Institute.
Mr. Miller has valued more than $1 billion of real estate.
Both experts agree that the “before” value of petitioners’ townhouse was
$5,200,000. They have different reasoning for reaching the fair market value, and
they differ on the “after” value of the property. Respondent’s expert believes that
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[*51] the “after” value of the property was $5,300,000 and that the easement had
no influence on the fair market value of the property. Petitioners’ expert believes
that the “after” value is $4,735,000, resulting in an easement value of $465,000.
1. Marchitelli Report and Testimony
The Marchitelli report used the “before and after” method to determine the
value of the easement. The report compares sales of townhouses in the Upper East
Side of Manhattan that were not encumbered by easements to sales of townhouses
in the Upper East Side that were encumbered by easements. The findings in the
report indicate that wider, larger townhouses tend to sell for a higher price per
square foot than smaller, narrower townhouses.
The report discussed seven sales involving Upper East Side landmark
townhouses encumbered by facade easements. The sales took place between June
2005 and September 2007, but all the easements were donated before the PPA was
enacted in 2006. The report includes copies of the deeds for the seven properties.
The deeds for these easements state: “The term ‘facade’ as herein consists of all
exterior surfaces of the improvements on the Property, including all walls, roofs,
and chimneys”. Several of these deeds include language which limits the deed to
exteriors that are visible on the opposite side of the street. Mr. Marchitelli
testified that there are different types of easements and not all easements cover
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[*52] side walls or rear walls. He believes that the data does not support a
different value for different types of easements.
The seven sales without easements had prices ranging from $1,380 to
$2,949 per square foot. Only one townhouse was smaller than petitioners’
property. The average price of townhouses without easements was $2,159 per
square foot.
The seven townhouses with easements had prices ranging from $1,616 to
$2,692 per square foot. The townhouses in five of these seven sales were larger
than petitioners’ townhouse. The average price of those with easements was
$2,195 per square foot. Mr. Marchitelli testified that wider townhouses are more
desirable. None of these townhouses was in the same district as petitioners’
property. Four of these townhouses were sold after the date of petitioners’
easement. Mr. Marchitelli testified that there were no comparable properties at the
time in the same district as petitioners’ townhouse. He further testified that he
determines the size of a townhouse using the tax maps rather than the square
footage of the living area of the townhouse because he believes the square footage
of the living area overstates the size of the home.
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[*53] 2. Miller Report and Testimony
The Miller report uses the sales comparison approach to the “before and
after” method by looking at the sales of similar property in surrounding
neighborhoods. The size used for comparisons ranged from 3,072 to 3,721 square
feet. To determine the value of the facade easement, the report analyzed the
market to determine whether the encumbrance of properties by conservation
easements has any resultant effect on value. The report describes petitioners’
easement as an “envelope easement” that preserved the existing front, rear, top,
and any exposed sides of the building from unauthorized alterations. The report
notes that petitioners’ townhouse is small for the market.
The Miller report addresses floor area ratio (FAR), which is the total floor
area in a zoning lot divided by the lot area of that zoning lot. Properties in New
York, New York, are subject to zoning restrictions based on FAR. If two or more
buildings are in the same zoning lot, the FAR is the sum of their floor areas
divided by the lot area. The Miller report concludes that petitioners could be
allowed to develop an additional 2,744 square feet on the basis of the unused
development right in place. The report explains that it is likely that petitioners’
unused development right would be used in the form of a 15-foot extension on the
rear and one or two additional levels above the fourth story. Mr. Miller testified
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[*54] that he would not expect a purchaser to build a four-story rear addition,
which would be an 83% increase in bulk. The report contends that this expansion
would be subject to strict guidelines.
In order to value the easement, the report looked at nine paired sales--four
with respect to a property referred to as easement No. 1 and five with respect to
another property referred to as easement No. 2. Sales of properties with easements
were compared to sales of comparable properties that did not have easements.
Adjustments were made, and the remaining difference in price shows the impact of
the easement. The deeds for both of the properties with easements described each
of the easements as a “Scenic, Open, Space and Architectural Facade Conservation
Easement on the Property exclusively for conservation purposes”. A ratio was
used to compare the price the easement property should have sold for according to
sales of comparable unencumbered properties and the actual sale price of the
encumbered property. The sale price per square foot was the primary unit of
comparison. The two properties with easements that were used in the paired sales
analysis were much larger than petitioners’ townhouse. These properties have
square footage of 12,401 and 7,006. The ratios reflecting a discount ranged from
-8% to -35% for the first property, which was 12,401 square feet. The range of
ratios for the property with 7,006 square feet was -2% to -15%.
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[*55] The Miller report concluded that petitioners’ easement demonstrates a
diminution in value of 9% of its encumbered value. This would reduce the value
of the property to $1,435 per square foot from $1,575 per square foot. During his
testimony Mr. Miller stated that “there’s no scientific way to break down the
parts” referring to the 9% diminution in value. He believes that his report explains
how he reached the diminution in value of 9%. He testified that keeping a
residence in “good repair” is more expensive if you have an easement because you
are required by the easement to keep it maintained and preserved.
3. Analysis
Respondent contends that petitioners’ easement has no value. Respondent
compares it to the easements in Dunlap v. Commissioner, T.C. Memo. 2012-126,
and Scheidelman v. Commissioner, T.C. Memo. 2013-18. As discussed above, in
Dunlap the taxpayers donated a facade easement regarding a property in New
York, New York, to the NAT that restricted the ability to alter, construct or
remodel the facade without the NAT’s express written consent. The donation took
place in 2003. We concluded that the value of the facade easement was zero
because the it did not result in increased restrictions on that property above those
required and enforced by the LPC on the date of the donation. In Scheidelman we
held that the taxpayers’ facade easement was valued at zero because, among other
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[*56] things, the property was already restricted by the LPC. The facade easement
was donated in 2004. Respondent argues that petitioners’ easement also mirrors
the existing restrictions already in local law.
Mr. Marchitelli had several concerns with the Miller report. He believes
that people buy a house to live in, and he testified that townhouses historically
have not been renovated to increase their size. He believes that the Miller report
overemphasized the value of development rights and that the market does not
attach significance to the development rights.
Mr. Marchitelli raised the issue that the Miller report does not compare the
easement properties discussed in the report with petitioners’ townhouse. He
believes that comparisons are being made to two separate properties with
easements and that the report does not compare these properties to petitioners’
townhouse. He believes that this analysis makes the report “convoluted”.
Petitioners contend that it is appropriate to make adjustments to comparable
sale figures when using the compared sales approach. See Friedberg v.
Commissioner, T.C. Memo. 2011-238, slip op. at 23. They further contend that if
a buyer in the Carnegie Hill neighborhood had the choice of buying two identical
properties at the same price but for the easement, the buyer would choose the
property without the easement.
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[*57] Mr. Miller testified that he did not compare petitioners’ property to the
comparison sale properties because petitioners’ property was substantially lower
in value. Mr. Miller criticized the Marchitelli report for not making adjustments
for the condition of property, such as an elevator and servant’s quarters.
Ordinarily, any encumbrance on real property, however slight, would tend
to have some negative effect on the property’s fair market value. Evans v.
Commissioner, T.C. Memo. 2010-207, slip op. at 15. We do not find respondent’s
expert report credible insofar as it maintained that an easement would have
absolutely no effect on the fair market value of a valuable piece of real estate.
Simmons v. Commissioner, slip op. at 26. In White House Hotel Ltd. P’ship v.
Commissioner, 615 F.3d 321, 327 (5th Cir. 2010), vacating and remanding 131
T.C. 112 (2008), the Court of Appeals for the Fifth Circuit noted: “[R]ather
extraordinarily, * * * [the Commissioner’s expert] assigned the easement a value
of zero”.
The paired sales analysis involves a comparison of the fair market value of a
property with and without an easement. The fair market value of the property with
the easement is divided by the fair market value of the property without the
easement to derive a diminution percentage attributable to the conservation
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[*58] easement involved. Strasburg v. Commissioner, T.C. Memo. 2000-94, slip
op. at 12 n.8. We have approved this method, which we refer to as the “percentage
diminution approach”. See, e.g., Butler v. Commissioner, T.C. Memo. 2012-72,
slip op. at 75.
Since both respondent and petitioners’ experts agree that the “before” value
is $5,200,000, we will use that as the “before” value. We conclude that neither
petitioners nor respondent was persuasive about the value of the easement.
We do not agree with respondent that the easement had no value. To
determine the value of the easement, we should consider whether the easement is
more restrictive than the restrictions provided by local law. See Hilborn v.
Commissioner, 85 T.C. 677. As discussed above, petitioners’ easement is more
restrictive than local law. Respondent’s reliance on Dunlap and Scheidelman is
misplaced. Moreover, we have previously allowed charitable contribution
deductions even if the property was subject to local conservation law before the
granting of the easement. Simmons v. Commissioner, slip op. 25 (noting that local
preservation laws do not necessarily prevent charitable contributions); see Griffin
v. Commissioner, T.C. Memo. 1989-130; Nicoladis v. Commissioner, T.C. Memo.
1988-163.
- 59 -
[*59] Petitioners also did not meet their burden of proving that the value of the
easement is $465,000. We do not rely on easement sale No. 1 in the Miller report
because the property with the easement is 12,401 square feet. We realize that
appraisers have to rely on sales that are available at the time of the appraisal and
that adjustments can be made; however, the property used for easement sale No. 1
is substantially larger than petitioners’ property, and a reasonable comparison
cannot be made. The property used for easement No. 1 is 26.5 feet wide, and
petitioners’ townhouse is only 15 feet wide. The testimony of both Mr. Miller and
Mr. Marchitelli indicates that a wider townhouse has more value than a narrow
townhouse. Twenty adjustments were made in this comparison. When numerous
adjustments have to be made, there is a likelihood that the outcome is less reliable
than in a comparison where fewer adjustments have to be made.
The easement sale No. 2 property is still larger than petitioners’ property,
but unlike the easement sale No. 1 property, it is not substantially larger. The
property used for easement No. 2 is 7,006 square feet and 20 feet wide. This is
still larger and wider than petitioners’ property, but it provides a more reasonable
comparison than easement sale No. 1. Mr. Miller made adjustments to the four
comparable sales, and the diminution in value ranged from 2% to 13%.
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[*60] The 9% diminution in value used by Mr. Miller is too high. We agree with
petitioners that there is value for an envelope easement. There is a reasonable
chance that the property may not be able to be developed or modified, especially
in the rear of the property. Even though all the paired sales in the Miller report are
based on wider properties than petitioners’ townhouse, we conclude a more
reasonable diminution would be 2%.
The property in the comparable sale analysis for easement sale No. 2 with
the 2% diminution in value is the property closer is in size to petitioners’ property.
This comparable property is 4,500 square feet and 20 feet wide. The price per
square foot is $1,956. According to the Miller report the “before” value of
petitioners’ property is $1,561 per square foot. Mr. Miller made adjustments in
using this sale, including adjustments for size, physical characteristics, and
condition. Both the comparable property and the easement No. 2 property are five
feet wider than petitioners’ property.
We note that the easement No. 2 property in the Miller report does not
explicitly include the rear of the property. The easement No. 2 property, however,
is larger and wider than petitioners property, and those differences balance out the
easement No. 2 property does not include the rear of the property. We are not
required to accept the Miller valuation in its entirety. See Symington v.
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[*61] Commissioner, 87 T.C. 892, 902 (1986); Buffalo Tool & Die Mfg. Co. v.
Commissioner, 74 T.C. 441, 452 (1980).
We have considered the expert reports and testimony and conclude that
there should be only a 2% reduction in value. This decrease stems from
heightened financial burdens of an eased facade, enforcement actions of the Trust,
and the scope of the easement. See Simmons v. Commissioner, slip op. at 25. The
value of petitioners’ easement is $104,000.
II. Penalties
Respondent contends that petitioners are liable for penalties under section
6662(h) or, in the alternative, under section 6662(a).
A. Section 6662(h)
PPA sec. 1219(a), 120 Stat. at 1083, made several changes to section
6662(h). Section 6662(h) provides a 40% penalty for gross valuation
misstatements. Gross valuation misstatements occurs when the value of any
property reported on an income tax return is 200% or more of the amount
determined to be the correct amount, among other things. See sec. 6662(h)(2).
Before the enactment of the PPA the threshold for gross valuation misstatement
was 400% or more of the amount determined to be the correct amount. PPA sec.
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[*62] 1219(a), 120 Stat. at 1083. The PPA also eliminated the reasonable cause
exception for gross valuation misstatements. Id.
Petitioners valued the easement at $605,000. The amounts they reported on
their 2006 and 2007 Federal income tax returns reflected this value. We conclude
that the easement has a value of $104,000. Thus, petitioners’ valuation of
$605,000 is greater than 200% of the amount determined to be the correct value.
Petitioners are liable for a gross valuation misstatement. Therefore, a 40% penalty
is imposed on the portion of the underpayment attributable to the gross valuation
misstatement. The reasonable cause exception does not apply in the case of gross
valuation misstatements with respect to charitable donations. See sec. 6664(c)(3).
A penalty pursuant to section 6662(h) applies to any portion of an
underpayment for the year to which a deduction is carried that is attributable to a
gross valuation misstatement for the year in which the carryover of the deduction
arises. See sec. 1.6662-5(c), Income Tax Regs. Petitioners therefore are liable for
this penalty for both tax years 2006 and 2007.
Petitioners contend that the section 6662(h) penalty should not be assessed
because it is an excessive fine under the Eighth Amendment to the United States
Constitution. The Eighth Amendment provides: “Excessive bail shall not be
required, nor excessive fines imposed, nor cruel and unusual punishments
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[*63] inflicted.” U.S. Const. amend. VIII. The touchstone of the inquiry is the
“principle of proportionality: The amount of the forfeiture must bear some
relationship to the gravity of the offense that it is designed to punish.” United
States v. Bajakajian, 524 U.S. 321, 334 (1998).
The purpose of civil tax penalties is to encourage voluntary compliance. Cf.
United States v. Boyle, 469 U.S. 241, 245 (1985) (“Congress’ purpose in the
prescribed civil penalty [section 6651(a)(1)] was to ensure timely filing of tax
returns to the end that tax liability will be ascertained and paid promptly.”).
Indeed, the Commissioner’s policy statement explains that “[p]enalties are used to
enhance voluntary compliance[.] * * * Penalties provide the Service with an
important tool * * * because they enhance voluntary compliance by taxpayers.”
Internal Revenue Manual pt. 1.2.20.1.1 (June 29, 2004).
In Helvering v. Mitchell, 303 U.S. 391 (1938), the Supreme Court analyzed
whether a civil fraud penalty under the Revenue Act of 1928 was punishment or
purely remedial in character. The Court found the penalty to be remedial, stating:
“The remedial character of sanctions imposing additions to a tax has been made
clear by this Court in passing upon similar legislation. They are provided
primarily as a safeguard for the protection of the revenue and to reimburse the
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[*64] government for the heavy expense of investigation and the loss resulting
from the taxpayer’s fraud.” Id. at 401.
In Little v. Commissioner, 106 F.3d 1445 (9th Cir. 1997), aff’g T.C. Memo.
1993-281, the Court of Appeals for the Ninth Circuit held that the IRS’ imposition
of negligence and substantial understatement penalties under section 6662 did not
violate the Excessive Fines Clause because they are remedial and do not constitute
“punishment”. The Court of Appeals held that the penalties at issue are “purely
revenue raising because they serve only to deter noncompliance with the tax laws
by imposing a financial risk on those who fail to do so”, and that the taxpayer
failed to establish that the penalties in question were penal sanctions unrelated to
the Government’s interest in raising revenue. Id. at 1454-1455.
We have similarly found contentions that civil tax penalties violate the
Excessive Fines Clause to be without merit. See, e.g., Acker v. Commissioner, 26
T.C. 107, 114 (1956); Ryan v. Commissioner, T.C. Memo. 1998-62; Louis v.
Commissioner, T.C. Memo. 1996-257, aff’d, 170 F.3d 1232 (9th Cir. 1999).
Section 6662(h) does not violate the Excessive Fines Clause. As the Court
of Appeals for the Fourth Circuit stated: “Even assuming arguendo that the
Excessive Fines Clause is implicated in this case, there is no basis for concluding
that the * * * [civil tax penalty] is excessive. If the * * * [civil tax penalty] is
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[*65] always calculated as * * * [a percentage] of the tax deficiency regardless of
the means by which the income is accrued, the sanction could not be excessive as
to one person, but not excessive as to another.” Thomas v. Commissioner, 62 F.3d
97, 103 (4th Cir. 1995), aff’g T.C. Memo. 1994-128. Section 6662(h) is
calculated as a percentage of an underpayment, so it bears a relationship to the
gravity of the offense that it is designed to remedy.
Moreover, perceived overvaluation of noncash charitable contributions
prompted Congress to amend the tax laws several times. Consistent with this
perception the PPA lowered the threshold for imposing penalties related to
deductions for charitable contribution property. Such congressional actions
demonstrate the remedial nature of the penalty and Congress’ intent to regulate the
difficult realm of valuing charitable contribution property.
B. Section 6662(a)
Respondent argues in the alternative that petitioners are liable for a section
6662(a) and (b)(1) and (2) accuracy-related penalty due to negligence or disregard
of rules or regulations or a substantial understatement of income tax. This issue
does not need to be addressed since petitioners are liable for a section 6662(h)
penalty.
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[*66] Any contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.