T.C. Memo. 2012-169
UNITED STATES TAX COURT
FREDERICK M. WALL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17209-09. Filed June 18, 2012.
Frederick M. Wall, pro se.
Julie A. Jebe, for respondent.
MEMORANDUM OPINION
GALE, Judge: Respondent determined deficiencies in petitioner’s Federal
income tax for 2003 and 2004 of $39,525 and $34,141, respectively, and accuracy-
related penalties under section 6662(h) of $15,810 and $13,656, respectively.1
1
All section references are to the Internal Revenue Code of 1986, as in effect
for the years at issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. All dollar amounts are rounded to the nearest dollar.
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In 2003 petitioner contributed a preservation easement encumbering certain
elements of his personal residence to Landmarks Preservation Council of Illinois
(LPCI). With respect to the preservation easement contribution, petitioner claimed
a charitable contribution deduction for 2003 and a corresponding carryover
deduction for 2004. Respondent disallowed those deductions and determined the
deficiencies at issue and accuracy-related penalties of 40% for a gross valuation
misstatement under section 6662(h).
Pending before us is respondent’s motion for summary judgment under Rule
121. Therein he concedes that the accuracy-related penalties should not be
imposed if petitioner’s deductions are disallowed as a matter of law. Petitioner
was afforded an opportunity to respond but failed to do so. For the reasons set
forth below, we shall grant respondent’s motion.
Background
The facts set forth below are based upon examination of the pleadings and
the moving papers, declaration, and exhibits respondent submitted.2 Petitioner
resided in Illinois at the time he filed the petition.
2
Attached as exhibits to respondent’s declaration are various documents
related to a preservation easement agreement into which petitioner entered.
Petitioner has not disputed the authenticity, completeness, or relevance of these
documents.
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The property at issue is a single-family house in a historic district in
Evanston, Illinois. On December 10, 2003, petitioner and Cynthia M. Keiser3
entered into a preservation easement agreement with LPCI wherein they granted
LPCI an easement for the purpose of protecting certain architecturally significant
elements of the house (facade easement). At the time the agreement was entered
into, Bank of America and First Bank & Trust held mortgages on the property.
An appraisal in December 2003 valued petitioner’s contribution of the
facade easement at $400,000. The appraisers calculated the value of the
contribution by subtracting the market value of the property subject to the facade
easement from the value of the property unburdened by the easement.
Petitioner reported a $400,000 noncash charitable contribution on his 2003
Federal income tax return for his donation of the facade easement. He claimed a
charitable contribution deduction with respect to the facade easement of only
$129,448, presumably because of the limitation in section 170(b)(1)(C) (a notation
3
Cynthia M. Keiser is listed along with petitioner as the grantor of the
preservation easement. She is also listed (in addition to petitioner) on the Form
8283, Noncash Charitable Contributions, attached to his 2003 Federal income tax
return, under “Name(s) shown on your income tax return”, although the filing status
claimed on the 2003 return was single. Respondent has not argued that the
charitable contribution deduction at issue should be disallowed because some or all
of the value of the claimed qualified conservation easement is allocable to Ms.
Keiser. Consequently, we do not consider the matter further.
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on his return indicated “disallowed contributions” of $270,552). On his 2004
Federal income tax return petitioner reported a carryover charitable contribution of
$270,552 and claimed a charitable contribution deduction of $104,088.4
Respondent disallowed the deductions in a statutory notice of deficiency,
and petitioner timely petitioned this Court for redetermination.
Discussion
Summary judgment “is intended to expedite litigation and avoid and
unnecessary and expensive trials.” Fla. Peach Corp. v. Commissioner, 90 T.C.
678, 681 (1988). Summary judgment may be granted where there is no genuine
issue of material fact and a decision may be rendered as a matter of law. Rule
121(a) and (b). The moving party bears the burden of proving that there is no
genuine issue of material fact, and factual inferences are viewed in a light most
favorable to the nonmoving party. Craig v. Commissioner, 119 T.C. 252, 260
(2002); Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The party opposing
summary judgment must set forth specific facts which show that a genuine question
of material fact exists and may not rely merely on allegations or denials in the
pleadings. Rule 121(d); Grant Creek Water Works, Ltd. v. Commissioner, 91 T.C.
4
Similar to the statement he made in his 2003 return, petitioner indicated
“disallowed contributions” of $166,464 on his 2004 return.
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322, 325 (1988). If the adverse party does not so respond, then a decision, if
appropriate, may be entered against him. Rule 121(d).
Section 170 allows a deduction for any charitable contribution, subject to
certain limitations, that a taxpayer makes during the taxable year. A charitable
contribution includes a gift of property to a charitable organization, made with
charitable intent and without the receipt or expectation of receipt of adequate
consideration. See Hernandez v. Commissioner, 490 U.S. 680, 690 (1989); sec.
1.170A-1(h)(1) and (2), Income Tax Regs. While a taxpayer is generally not
allowed a charitable contribution deduction for a gift of an interest in property that
is less than his entire interest in the property, an exception exists for qualified
conservation contributions. Sec. 170(f)(3)(A), (B)(iii).
A qualified conservation contribution is a contribution of (1) a qualified real
property interest, (2) to a qualified organization,5 (3) made exclusively for
conservation purposes. Sec. 170(h)(1)-(5). A restriction, granted in perpetuity, on
the use which may be made of real property is a qualified real property interest.6
5
Respondent concedes that LPCI was a qualified organization within the
meaning of sec. 170(h)(3).
6
The regulations designate an easement restricting the use which may be
made of real property as a “perpetual conservation restriction”, which constitutes a
“qualified real property interest”. See sec. 1.170A-14(b)(2), Income Tax Regs.
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Sec. 170(h)(2)(C); sec. 1.170A-14(b)(2), Income Tax Regs. The preservation of
the facade of a certified historic structure may, subject to certain conditions,
constitute a conservation purpose. See sec. 170(h)(4)(B); sec. 1.170A-14(d)(5),
Income Tax Regs. However, a contribution is not treated as exclusively for
conservation purposes unless such purposes are protected in perpetuity. Sec.
170(h)(5)(A). Section 1.170A-14(g), Income Tax Regs., interprets the protected in
perpetuity requirement by setting forth a number of rules designed to safeguard the
conservation purpose of a donation. See Kaufman v. Commissioner, 134 T.C. 182,
186-187 (2010), reconsideration denied, 136 T.C. 294 (2011); see also 1982 East,
LLC v. Commissioner, T.C. Memo. 2011-84.
Respondent argues that the conservation purpose of the facade easement
petitioner contributed to LPCI is not protected in perpetuity because the
contribution failed to satisfy section 1.170A-14(g)(6), Income Tax Regs.7 That
section addresses subsequent unexpected changes in the conditions surrounding
7
Respondent also argues that the conservation purpose is not protected in
perpetuity because LPCI can consent to changes to the facade that are inconsistent
with such purpose and because a subsequent assignee of LPCI is not required to
enforce the easement’s restrictions. Further, respondent contends that the deduction
should be disallowed because petitioner failed to satisfy the substantiation
requirements of sec. 1.170A-13(c)(2), Income Tax Regs. We find it unnecessary to
address these arguments because we conclude petitioner’s contribution failed to
satisfy sec. 1.170A-14(g)(6), Income Tax Regs., and its conservation purpose is
therefore not protected in perpetuity.
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the donated property that make it impossible or impractical to continue using it for
conservation purposes. Section 1.170A-14(g)(6)(ii), Income Tax Regs., requires
the donor to agree, at the time of the gift, that the donation of the perpetual
conservation restriction gives rise to a property right, immediately vested in the
donee organization, with a fair market value that, at the time of the gift, is at least
equal to the proportionate value that the perpetual conservation restriction bears to
the value of the property as a whole.8 If subsequent changes result in judicial
extinguishment of the easement, the conservation purpose of the contribution is
nonetheless treated as protected in perpetuity if the donee organization is entitled to
a portion of the proceeds from a subsequent sale, exchange, or involuntary
conversion of the subject property, which is at least equal to the proportionate
value of the perpetual conservation restriction, and it uses those proceeds in a
manner consistent with the conservation purpose of the original contribution. Sec.
1.170A-14(g)(6)(i), Income Tax Regs.
8
The proportionate value of the donee organization’s property right remains
constant. Sec. 1.170A-14(g)(6)(ii), Income Tax Regs.
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Section 1.170A-14(g)(6), Income Tax Regs., is unconditional; if the donee
organization is not entitled to a proportionate share of such proceeds, then the
conservation purpose of the contribution is not protected in perpetuity. Kaufman
v. Commissioner, 136 T.C. at 309; Kaufman v. Commissioner, 134 T.C. at 186-
187. The taxpayers in Kaufman claimed a deduction for their contribution of a
facade easement to a nonprofit organization. Kaufman v. Commissioner, 134 T.C.
at 184. Consistent with the regulation, the easement agreement granted the
nonprofit organization a proportionate share of future proceeds. See Kaufman v.
Commissioner, 136 T.C. at 299. However, the property was subject to a mortgage,
and a “lender acknowledgment” recorded with the easement agreement granted the
mortgagee a “prior claim” to insurance and condemnation proceeds in preference
to the nonprofit organization. Id. at 299-300. We held that the conservation
contribution failed as a matter of law to comply with the enforceability in
perpetuity requirement because the nonprofit organization was not guaranteed its
proportionate share of the proceeds (i.e., after preferential payment to the
mortgagee there might not have been sufficient proceeds for the nonprofit
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organization).9 Kaufman v. Commissioner, 134 T.C. at 187. We reached the same
conclusion on similar facts in 1982 East.
Similar to the contributions in Kaufman and 1982 East, petitioner’s contribution
of the facade easement to LPCI does not satisfy the requirements of section
1.170A-14(g)(6), Income Tax Regs. Section 19 of the easement
agreement, captioned “Stipulated Value of Grantee’s Interest”, provides in
pertinent part:
[Petitioner] acknowledges that upon execution and recording of this
Preservation Easement, * * * [LPCI] shall be immediately vested with a real
property interest in the Premises and that such interest of * * * [LPCI] shall
have a stipulated fair market value, for purposes of allocating net proceeds in
an extinguishment pursuant to Section 21, equal to the ratio between the fair
market value of the Preservation Easement and the fair market value of the
Premises prior to considering the impact of the Preservation Easement
(hereinafter the “Preservation Easement Percentage”) as determined in the
Qualified Appraisal * * *
In relevant part, section 21of the agreement provides that in the event the easement
is extinguished by judicial decree:
9
We accepted the taxpayers’ claim that the easement agreement gave the
nonprofit organization a contractual right against the taxpayers and their successors
for its proportionate share of the proceeds but found such right insufficient to satisfy
sec. 1.170A-14(g)(6), Income Tax Regs. See Kaufman v. Commissioner, 136 T.C.
294, 309 (2011). We held that the taxpayers could not avoid the strict requirement
of the regulation by showing that they would most likely be able to satisfy both their
mortgage and their obligation to the nonprofit organization. See Kaufman v.
Commissioner, 134 T.C. 182, 186 (2010).
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(ii) [LPCI] shall be entitled to share in any net proceeds resulting from or
related to the extinguishment in an amount equal to the Preservation
Easement Percentage determined pursuant to Section 19 multiplied by
the net proceeds.
(iii) [LPCI] agrees to apply all of the portion of the net proceeds it receives to
the preservation and conservation of other buildings, structures, or sites
having historical, architectural, cultural, or aesthetic value and
significance to the people of the State of Illinois.
(iv) Net proceeds shall include, without limitation, insurance proceeds,
condemnation proceeds or awards, proceeds from a sale in lieu of
condemnation, and proceeds from the sale, financing or exchange by * * *
[petitioner] of any portion of the Premises after the extinguishment,
but shall specifically exclude any preferential claim of a Mortgagee under
Section 22. [Emphasis added.]
Section 22 of the agreement, captioned “Subordination of Mortgages”, provides in
pertinent part:
[Petitioner] and * * * [LPCI] agree that all mortgages and rights in the
Premises of all mortgagees and holders of other liens and encumbrances
(collectively “lienholders”) are subject and subordinate at all times to the
rights of * * * [LPCI] to enforce the purposes of this Preservation
Easement. * * * [Petitioner] represents and warrants that it [sic] has
provided a copy of this instrument to all lienholders as of the date
hereof, and the agreement of each lienholder to subordinate its mortgage
to this Preservation Easement is attached hereto. The following
provisions apply to all Mortgagees (as hereinafter defined) now existing
or hereafter holding a mortgage on the Premises:
* * * * * * *
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(c) If a mortgage grants to a Mortgagee the right to receive the proceeds
of condemnation proceedings arising from any exercise of the power of
eminent domain as to all or any part of the Premises or the right to receive
insurance proceeds as a result of any casualty, hazard, or accident occurring
to or about the Premises, the Mortgagee shall have a prior claim to the
insurance and condemnation proceeds and shall be entitled to same in
preference to * * * [LPCI] until the mortgage is paid off and discharged,
notwithstanding that the mortgage is subordinate in priority to this
Preservation Easement. [Emphasis added.]
* * * * * * *
(h) For purposes of this instrument, the term “Mortgagee” shall
include only the holder of a bona fide indebtedness secured by a
mortgage or trust deed, provided that such holder is an institutional
lender or other third party unrelated to * * * [petitioner].
Bank of America and First Bank & Trust held mortgages on the property at the
time the easement agreement was entered into and were thus “Mortgagees” under the
agreement. The terms of each mortgage assigned insurance and condemnation
proceeds to the lender. As required by the easement agreement, representatives of
the banks executed documents styled “LENDER ACKNOWLEDGMENT-
PRESERVATION EASEMENT” which purported to subordinate the banks’
mortgage rights to LPCI’s rights under the easement agreement. However, the
lender acknowledgments contain clauses that are essentially identical to section 22,
paragraph (c) of the easement agreement, which grant the banks a “prior claim” to
insurance and condemnation proceeds “in preference to” LPCI.
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Under the easement agreement Bank of America and First Bank & Trust have
preferential claims to all future insurance and condemnation proceeds up to the
amounts of the outstanding balances of their respective mortgages at the time. As a
result, LPCI does not have a guaranteed right to its proportionate share of such
proceeds as required by section 1.170A-14(g)(6), Income Tax Regs. See Kaufman
v. Commissioner, 134 T.C. at 186. The effect of the easement agreement in this case
is indistinguishable from the effect of similar agreements in Kaufman and 1982 East,
and our opinions in those cases are squarely on point. Petitioner’s facade easement
contribution fails as a matter of law to comply with the enforceability in perpetuity
requirements of section 170A-14(g)(6), Income Tax Regs., and therefore is not
exclusively for conservation purposes. See sec. 170(h)(5)(A). For that reason, it is
not a qualified conservation contribution under section 170(h)(1), and petitioner is
not allowed a deduction therefor.
We conclude that no genuine issues of material fact exist and that
respondent is entitled to judgment as a matter of law with respect to the facade
easement contribution. In his memorandum of law in support of summary
judgment respondent concedes the accuracy-related penalties are not appropriate if
petitioner’s deduction is disallowed as a matter of law. Accordingly, we shall
grant respondent’s motion for summary judgment.
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To reflect the foregoing,
An appropriate order and
decision will be entered.