T.C. Memo. 2016-1
UNITED STATES TAX COURT
DAVID R. GEMPERLE AND KATHRYN D. GEMPERLE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19599-12. Filed January 4, 2016.
In 2007, Ps granted to a qualified donee a facade easement on
their Chicago residence, which constituted a certified historic
structure in a historic district, so that the easement was eligible for
classification as a "qualified conservation contribution" within the
meaning of I.R.C. sec. 170(f)(3)(B)(iii) and (h)(1). Ps obtained an
appraisal from an appraiser included on a list of appraisers furnished
by the donee. The appraiser valued the easement at $108,000, which
amount Ps deducted on their 2007 and (as a carryover) 2008 returns.
Ps did not include a copy of the appraisal with their 2007 return.
R seeks to (1) deny Ps any deduction for their contribution of
the easement or, alternatively, to permit a deduction not to exceed
$35,000, and (2) impose 40% gross valuation misstatement penalties
under I.R.C. sec. 6662(h) or, alternatively, 20% penalties for
negligence under I.R.C. sec. 6662(a) and (b)(1).
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[*2] 1. Held: Ps' deductions are denied in full because of Ps' failure
to include a qualified appraisal with their 2007 return. See I.R.C. sec.
170(h)(4)(B)(iii)(I).
2. Held, further, because Ps failed to include a qualified
appraisal with their 2007 return as required by I.R.C. sec.
170(h)(4)(B)(iii)(I), they are liable for 20% penalties under I.R.C. sec.
6662(a) and (b)(1) for disregard of rules and regulations.
3. Held, further, in the alternative, because Ps' unsupported
$108,000 valuation is more than 200% of the maximum $35,000
valuation supported by the only expert appraisal in evidence, they are
liable for 40% gross valuation misstatement penalties under I.R.C.
sec. 6662(h).
David R. Gemperle and Kathryn D. Gemperle, pro sese.
Lauren N. May, Kathryn E. Kelly, and Anita A. Gill, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: Respondent has determined deficiencies in, and
alternative penalties with respect to, petitioners' Federal income tax, as follows:1
1
Unless otherwise stated, section references are to the Internal Revenue
Code in effect for the years in issue, and Rule references are to the Tax Court
Rules of Practice and Procedure. We round all dollar amounts to the nearest
dollar.
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[*3] Penalties
Year Deficiency Sec. 6662(a) Sec. 6662(h)
2007 $17,201 $3,440 $6,880
2008 9,724 1,945 3,890
The deficiencies are attributable to respondent's disallowance of a charitable
contribution deduction for 2007 and a corresponding carryover deduction for 2008
($69,186 for 2007 and $38,814 for 2008 for a total disallowance of $108,000) that
petitioners claimed on account of their 2007 donation of a facade easement (plus
cash, the deduction of which respondent does not challenge) to Landmarks
Preservation Council of Illinois (Landmarks). With respect to the underpayments
resulting from those disallowances, respondent determined accuracy-related
penalties of 40% for a gross valuation misstatement under section 6662(h). In the
alternative, he determined accuracy-related penalties of 20% under section 6662(a)
for negligence or disregard of rules and regulations, as defined in subsection (c).
He found no grounds for mitigation of the penalties under section 6664(c)(1) by
reason of petitioners' acting with reasonable cause and in good faith.2 The issues
for determination are whether petitioners are entitled to the foregoing charitable
2
The tax deficiencies are based upon respondent's revenue agent's
disallowance of petitioners' total deduction for their contribution of the facade
easement (i.e., they are based upon the agent's determination that the facade
easement had no value), and the alternatively imposed sec. 6662 penalties are 40%
and 20% of those deficiencies, respectively.
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[*4] contribution deductions and, if not, whether they are liable for either of the
section 6662 penalties.
FINDINGS OF FACT
The parties have stipulated certain facts and the authenticity of certain
documents. The facts stipulated are so found, and the documents stipulated are
accepted as authentic.
Petitioners resided in Chicago, Illinois, when they filed the petition.
Background
Since 1975, petitioners have owned and resided in a house built in 1898 in
the Lakewood/Balmoral neighborhood of Chicago (Lakewood house). In 1999,
the U.S. Department of the Interior, National Park Service (Park Service),
established the neighborhood as a historic district and also listed the Lakewood
house on the National Register of Historic Places. On or about December 17,
2007, the Park Service certified that the Lakewood house constituted "a 'certified
historic structure' for a charitable contribution for conservation purposes in
accordance with the Tax Treatment Extension Act of 1980."
After learning of the availability of conservation easement charitable
contribution deductions at a 2002 or 2003 presentation by Landmarks, petitioners
considered and, in 2007, decided to pursue, with Landmarks the creation of a
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[*5] facade easement on the Lakewood house. Landmarks assisted petitioners in
the creation and contribution (to it) of the facade easement, including the
providing of forms (presumably a model for the easement contribution agreement
itself) and a list of potential appraisers. Petitioners chose from that list
Gwendolyn J. Fiorenzo to appraise the facade easement (Fiorenzo appraisal). Ms.
Fiorenzo prepared two appraisals of the proposed facade easement, both dated
December 21, 2007, the second of which corrected errors in the first and was
considered, by petitioners, to be the actual, final appraisal.3 The second appraisal
was stated to be as of November 28, 2007. Both appraisals valued the proposed
facade easement at $108,000, the total amount that petitioners deducted for their
contribution of the easement to Landmarks.
Ms. Fiorenzo's first appraisal arrived at the $108,000 figure (a 12%
reduction in her before-easement valuation of the Lakewood house) without
identifying the after-easement comparable properties, and it concluded that the
comparable properties' loss in value from the easement "typically ranged from 9%
to 18%."4 Her second appraisal did identify eight after-easement comparable
3
Petitioners provided the second appraisal to respondent on August 6, 2013.
4
Because, generally, no established market exists for determining the fair
market value of an easement, the "before and after" appraisal method is normally
(continued...)
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[*6] properties, found the loss-in-value range for them to be between 8% and 24%,
but, consistent with her first appraisal, found a 12% loss in value for the
Lakewood house.
Description of the Easement
On December 28, 2007, petitioners, in their capacities as trustees of trusts in
their respective names, each, as "grantor" of "an undivided 1/2 interest", and
Landmarks, as "grantee", entered into a "preservation easement" (agreement) with
respect to the Lakewood house, by which petitioners conveyed the easement
(facade easement) to Landmarks. The agreement recites that the obligations
imposed by the facade easement were deemed to run as a binding servitude with
the land and the agreement was to bind not only petitioners but also their
successors as owners of the property (without distinction, petitioners). Under the
terms of the agreement, petitioners agreed not to "demolish, remove or raze" the
Lakewood house "or any portion of the Protected Elements" (in general, the entire
4
(...continued)
used to determine the fair market value of restrictive easements with respect to
which charitable contribution deductions are claimed; i.e., the appraiser must
compute a "before" value of the property in its current condition unrestricted by
the easement and an "after" value of the property as encumbered by the easement,
the excess of the former over the latter constituting the fair market value of the
easement. See Hilborn v. Commissioner, 85 T.C. 677, 689-690 (1985); see also
sec. 1.170A-14(h)(3)(i), Income Tax Regs.
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[*7] exterior of the house, the roof and chimney, and a stone entrance arch), and
they further agreed that, "[w]ithout the prior written permission of * * *
[Landmarks]", they would not partially demolish or remove the Lakewood house
or alter the "Protected Elements, including * * * any alteration, partial removal,
construction, remodeling or physical or structural change, or change in surfacing",
nor would they expand or reduce the Lakewood House "either horizontally or
vertically", and they agreed generally to maintain the house and the protected
elements. In addition, petitioners made a cash contribution to Landmarks of
$10,800, which was 10% of the $108,000 charitable contribution deduction that
they anticipated from their contribution to Landmarks of the facade easement.
Petitioners' Returns
Petitioners timely made joint returns of income on Forms 1040, U.S.
Individual Income Tax Return, for their 2007 and 2008 taxable (calendar) years
(2007 and 2008 return, respectively). Those returns show that they were prepared
by a paid tax return preparer, Norton V. Binenfeld, certified public accountant
(C.P.A.). Petitioners attached to the 2007 return an incomplete Form 8283,
Noncash Charitable Contributions, claiming a deduction for the noncash charitable
contribution of the facade easement to Landmark. No appraisal is included with
the 2007 return. On or around October 22, 2010, petitioners submitted a corrected
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[*8] Form 8283 to respondent. Both Forms 8283 show that they are a version of
Form 8283 that was revised in December 2006. Both state: "An appraisal is
generally required for property listed in Section B (see instructions)." Section B
addresses donated property valued at over $5,000. Instructions for Form 8283,
also revised December 2006, state that, for contributions of easements made on
buildings in historic districts, the taxpayer must include with his return a
"qualified appraisal".
Exclusion of the Fiorenzo Appraisal From Evidence
At the commencement of the trial, the Court addressed respondent's motion
in limine to bar petitioners from asserting that the Fiorenzo appraisal (Exhibits 4-J
and 13-J attached to the stipulation of facts) qualifies as evidence of the value of
their facade easement. In his motion, respondent noted that petitioners had failed
to list Ms. Fiorenzo as a witness, and he argued that he "would be prejudiced if the
Fiorenzo appraisal was admitted as evidence * * * [of value] due to his inability to
cross examine * * * [her] concerning the facts, analysis and conclusions
purportedly set forth in * * * [the two exhibits]." Petitioners, in fact, did fail to
produce Ms. Fiorenzo as a witness. As a result, we granted respondent's motion
and excluded the Fiorenzo appraisal as evidence of the value of the facade
easement.
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[*9] Petitioners' Witnesses at Trial
Petitioners did call three witnesses, in addition to themselves. None of them
qualified as (nor did petitioners claim that they were) experts in appraising real
estate. Therefore, their proffered written submissions failed to constitute expert
reports, and, for that reason, we granted respondent's motions in limine to exclude
those submissions from evidence. We did permit petitioners, however, to elicit
testimony from all three as fact witnesses. None of the three purported to or did,
in fact, establish a value for petitioners' facade easement.
The first witness, Thom Greene, an architect, testified that the zoning laws
for the Lakewood/Balmoral district would not prohibit petitioners from expanding
the Lakewood house by, for example, attaching an addition to the house. The
second, Pamela Ball, a realtor, testified that houses, like the Lakewood house, on
50-foot lots are highly valued because they can be expanded. The third, Maureen
Murnane, also a realtor, testified that respondent's expert appraiser improperly
referred to one of the houses located, like the Lakewood house, on Lakewood
Avenue as a comparable property in valuing the Lakewood house before
petitioners' contribution of the facade easement.
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[*10] Respondent's Witnesses at Trial
Respondent introduced into evidence two expert reports, and the authors of
those reports testified in support thereof. The first expert, Howard Kanter,
criticized the Fiorenzo appraisal, primarily on the ground that it fails to satisfy
various requirements of the Uniform Standards of Professional Appraisal. The
second expert, Brian Flynn, testified that the facade easement had a value in the
range of zero to $35,000.
OPINION
I. Petitioners' Entitlement to a Deduction for the Facade Easement
A. Applicable Law
Section 170(a)(1) generally allows a deduction for any charitable
contribution, subject to certain limitations, that the taxpayer makes during the
taxable year. Pursuant to section 170(f)(11)(A) and (C), no deduction is allowed
under subsection (a) for a contribution of property for which a deduction of more
than $5,000 is claimed unless the taxpayer (individual, partnership, or corporation)
obtains a "qualified appraisal" of such property. Section 170(f)(11)(E)(i) defines a
qualified appraisal as an appraisal that complies with pertinent regulations and
other Internal Revenue Service (IRS) guidance and that is conducted by a
"qualified appraiser" in accordance with generally accepted appraisal standards. A
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[*11] "qualified appraiser" is generally defined as an individual who "has earned
an appraisal designation from a recognized professional appraiser organization or
has otherwise met minimum education and experience requirements set forth in
* * * [IRS] regulations", "regularly performs appraisals for * * * compensation",
and meets "such other requirements as may be prescribed by * * * [IRS]
regulations or other guidance." Sec. 170(f)(11)(E)(ii). We set forth in the margin
the elements of a qualified appraisal.5
5
Sec. 1.170A-13(c)(3)(ii), Income Tax Regs., enumerates 11 items that a
qualified appraisal must include:
(A) A description of the property in sufficient detail for a
person who is not generally familiar with the type of property to
ascertain that the property that was appraised is the property that was
(or will be) contributed;
(B) In the case of tangible property, the physical condition of
the property;
(C) The date (or expected date) of contribution to the donee;
(D) The terms of any agreement or understanding entered into
(or expected to be entered into) by or on behalf of the donor or donee
that relates to the use, sale, or other disposition of the property
contributed * * * ;
(E) The name, address, and * * * the identifying number of the
qualified appraiser; * * *
(F) The qualifications of the qualified appraiser who signs the
(continued...)
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[*12] Section 170(f)(3) generally denies a deduction for charitable contributions
of partial interests in property. One exception to that general rule is for a
"qualified conservation contribution." Sec. 170(f)(3)(B)(iii). Pursuant to section
170(h)(1) a qualified conservation contribution means a contribution of a
"qualified real property interest" to a "qualified organization"6 made "exclusively
for conservation purposes." A qualified real property interest includes "a
5
(...continued)
appraisal, including the appraiser's background, experience,
education, and membership, if any, in professional appraisal
associations;
(G) A statement that the appraisal was prepared for income tax
purposes;
(H) The date (or dates) on which the property was appraised;
(I) The appraised fair market value (within the meaning of §
1.170A-1(c)(2)) of the property on the date (or expected date) of
contribution;
(J) The method of valuation used to determine the fair market
value, such as the income approach, the market-data approach, and
the replacement-cost-less-depreciation approach; and
(K) The specific basis for the valuation, such as specific
comparable sales transactions or statistical sampling, including a
justification for using sampling and an explanation of the sampling
procedure employed.
6
Respondent agrees that Landmarks is a qualified organization.
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[*13] restriction (granted in perpetuity) on the use which may be made of the real
property." Sec. 170(h)(2)(C). Under section 170(h)(5)(A), "A contribution shall
not be treated as exclusively for conservation purposes unless the conservation
purpose is protected in perpetuity." In the case of a certified historic structure, i.e.,
a building in a registered historic district (which would include the Lakewood
house), "any contribution of a qualified real property interest which is a restriction
with respect to the exterior of a building", is not considered to be made
exclusively for conservation purposes unless the contributed interest (i.e., the
restriction) "preserves the entire exterior of the building" and prohibits any change
thereof "which is inconsistent with the historical character of such exterior". See
sec. 170(h)(4)(B)(i)(I) and (II). In addition, the donor and the donee must certify,
under penalty of perjury, that the donee is a qualified organization with "the
resources to manage and enforce the restriction and a commitment to do so", and
the taxpayer donor must include with the return for the contribution year a
qualified appraisal, photographs of the entire building exterior, and a description
of the restrictions on development of the building. See sec. 170(h)(4)(B)(ii) and
(iii).
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[*14] B. Analysis
1. Introduction
Respondent sets forth several grounds for his position that petitioners are
not entitled to any deduction for their contribution to Landmarks of the facade
easement, including: (1) the absence of a qualified appraisal as required by
section 170(f)(11)(A) and (C); (2) the fact that the facade easement or restriction
was neither granted in perpetuity as required by section 170(h)(2)(C) nor protected
in perpetuity as required by section 170(h)(5)(A); (3) petitioners' failure to include
a copy of a qualified appraisal or photographs of the Lakewood house with the
2007 return as required by section 170(h)(4)(B)(iii); (4) petitioners' failure to
include a completed appraisal summary with the 2007 return as required by
section 1.170A-13(c)(2)(i)(B) and (4), Income Tax Regs.; and (5) petitioners'
failure to prove that the contribution decreased the value of the Lakewood house
by $108,000. Because we find that petitioners failed to include a copy of a
qualified appraisal with the 2007 return as required by section 170(h)(4)(B)(iii)(I),
we will sustain respondent's adjustments to the 2007 and 2008 returns denying
them any charitable contribution deduction on account of their contribution of the
facade easement to Landmarks, and we need not address respondent's alternative
grounds for denying the deductions.
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[*15] 2. Petitioners' Failure To Satisfy the Appraisal-Inclusion
Requirement
Section 170(h)(4)(B)(iii)(I) provides that a taxpayer donor who contributes
a use restriction (such as the facade easement) encumbering a certified historic
structure in a registered historic district (such as the Lakewood house) must
include with his tax return for the year of the contribution a qualified appraisal.
That provision was added to the Internal Revenue Code by the Pension Protection
Act of 2006, Pub. L. No. 109-280, sec. 1213(a)(1) [sic (a)], 120 Stat. at 1075.
While it appears on the face of section 170(h)(4)(B) that the failure to include the
necessary appraisal with the return for the contribution year is fatal to the
deduction (negating the exclusivity of the contribution for conservation purposes),
that result is confirmed in the Staff of the Joint Committee on Taxation's Technical
Explanation of H.R. 4, the "Pension Protection Act of 2006", as passed by the
House on July 28, 2006, and as considered by the Senate on August 3, 2006 (JCX-
38-06) 291-292 (J. Comm. Print 2006). The Joint Committee Staff explains the
appraisal-inclusion requirement as follows:
For any contribution relating to a registered historic district
made after the date of enactment of the provision [Aug. 17, 2006],
taxpayers must include with the return for the taxable year of the
contribution a qualified appraisal of the qualified real property
interest (irrespective of the claimed value of such interest) and attach
the appraisal with the taxpayer’s return * * * . Failure to obtain and
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[*16] attach an appraisal * * * results in disallowance of the
deduction. * * *
Id. at 295 (emphasis added) (fn. ref. omitted); see also Staff of J. Comm. on
Taxation, Description of the Chairman's Modification to the Provisions of the
"Tax Relief Act of 2005" (JCX-77-05) 65 (J. Comm. Print 2005) (prior unenacted
legislation; similar).
The parties have stipulated a copy of the 2007 return, and nothing
resembling a qualified appraisal is included with it. Indeed, petitioners concede
on brief: "We admit that the full [Fiorenzo] appraisal was not included with the
[2007] return". For lack of a qualified appraisal included with the 2007 return, we
will sustain respondent's adjustments disallowing for 2007 and 2008 petitioners'
charitable contribution deductions claimed on account of their contribution of the
facade easement to Landmark.
II. Application of the Accuracy-Related Penalty
A. Introduction
Respondent seeks to impose a 40% accuracy-related penalty for each of the
years in issue under section 6662(h) or, in the alternative, a 20% penalty under
section 6662(a) and either subsection (b)(1) or (2). Under section 7491(c), the
Commissioner bears the burden of production with regard to penalties and must
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[*17] come forward with sufficient evidence indicating that it is proper to impose
penalties. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). However, once the
Commissioner has met the burden of production, the burden of proof remains with
the taxpayer, including the burden of proving that the penalties are inappropriate
because of reasonable cause. Id. at 446-447. Only one accuracy-related penalty
may be applied with respect to any given portion of an underpayment, even if that
portion is subject to the penalty on more than one of the grounds set out in section
6662(b). Sec. 1.6662-2(c), Income Tax Regs.
B. Application of Section 6662(a) Penalty
Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the portion of
the underpayment of tax attributable to negligence or disregard of rules or
regulations. Section 6662(c) provides in pertinent part that, for purposes of
section 6662, "disregard" "includes any careless, reckless, or intentional
disregard." Section 1.6662-3(b)(2), Income Tax Regs., provides in pertinent part
that the term "rules or regulations" includes, among other things, "the provisions
of the Internal Revenue Code".
We have sustained respondent's adjustments disallowing petitioners any
charitable contribution deduction for the contribution of the facade easement to
Landmarks on the ground that they failed to comply with the requirement of
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[*18] section 170(h)(4)(B)(iii)(I) that they include a qualified appraisal with the
return for 2007, the taxable year of the contribution. That requirement is stated
not only in the Internal Revenue Code but also in the instructions for the Form
8283 that accompanied the 2007 return. The form itself warned petitioners that an
appraisal is generally required for donated property over $5,000 and directed them
to the Form 8283 instructions. We cannot help but conclude that petitioners did
not exercise reasonable diligence to determine the correctness of their return
positions in claiming a charitable contribution deduction in the face of the warning
on the Form 8283 that an appraisal is generally required for donations of property
over $5,000. See sec. 1.6662-3(b)(2), Income Tax Regs. Petitioners were at least
careless, if not reckless, in ignoring the warning that an appraisal was required.
They disregarded the appraisal-inclusion requirement of section
170(h)(4)(B)(iii)(I) and are thus liable for accuracy-related penalties on account of
such disregard unless they can show adequate disclosure of their position or
reasonable cause for the resulting underpayments and that they acted in good faith.
See sec. 6664(c)(1); sec. 1.6662-3(a), Income Tax Regs. Petitioners have made no
such showing and, thus, do not escape the section 6662(b)(1) penalties.
Because the resulting 2007 and 2008 underpayments of tax are fully
attributable to petitioners' disregard of section 170(h)(4)(B)(iii)(I), they are liable
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[*19] for 20% accuracy-related penalties on the whole of those underpayments
pursuant to section 6662(a) and (b)(1). We need not consider their liability under
section 6662(a) and (b)(2), concerning any substantial understatement of income
tax, for similar penalties. We will, however, consider their potential alternative
liability for 40% penalties under section 6662(a) and (b)(3) on account of a
valuation misstatement.
C. Application of Section 6662(h) Penalty
1. Analysis
Section 6662(a) and (b)(3) imposes a penalty equal to 20% of the portion of
the underpayment of tax attributable to a substantial valuation misstatement. A
valuation misstatement of 200% or more of the correct amount is a gross valuation
misstatement, and the 20% penalty increases to 40%. Sec. 6662(h)(1) and
(2)(A)(i). The taxpayer may not rely on a reasonable cause, good-faith defense
against imposition of the section 6662(h) penalty with respect to gross valuation
misstatements of charitable contribution properties. See sec. 6664(c)(2);
Chandler v. Commissioner, 142 T.C. 279, 293 (2014). No penalty, however, is
imposed unless the portion of the underpayment attributable to the valuation
misstatement exceeds $5,000. Sec. 6662(e)(2).
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[*20] As discussed supra, because petitioners failed to make their alleged
qualified appraiser, Ms. Fiorenzo, available for cross-examination, we determined
that her written appraisals constituted inadmissable hearsay evidence, and we
refused to admit them as evidence of the value of petitioners' facade easement.7
As a result, petitioners have failed to furnish admissible evidence that their facade
easement had any determinable value.8 Respondent submitted expert testimony by
Mr. Flynn that the easement's "influence on value [of the Lakewood house] would
7
We see no reason to reverse that evidentiary ruling. Pursuant to Rule
143(g)(1), an expert witness is required to prepare a written report for submission
to the Court, which, pursuant to Rule 143(g)(2), is "received in evidence as the
direct testimony of the expert witness". Because the written report constitutes the
expert witness' direct testimony, it is necessary that the expert witness be available
for cross-examination regarding the truth or accuracy of the assertions in the
written report. Otherwise, the written report constitutes excludable hearsay
evidence. "The essential requirement of the hearsay rule * * * is that statements
offered testimonially must be subjected to the test of cross-examination." 5
Wigmore on Evidence, sec. 1365, at 28 (Chadbourn rev. 1974). "The premise that
the opportunity of cross-examination is an essential safeguard has become the
principal justification for the general exclusion of hearsay statements." 1
McCormick on Evidence, sec. 19, at 152 (7th ed. 2013). Moreover, even though
the loss of a nonparty witness' direct testimony may impose a severe hardship on
the party relying on that testimony, which, under certain circumstances, might
justify a court's exercise of its discretion to admit such testimony, see id., that
circumstance does not arise in this case, where Ms. Fiorenzo's failure to testify
arose out of petitioners' voluntary decision not to make her available, see Estate of
Tanenblatt v. Commissioner, T.C. Memo. 2013-263, at *9-*12.
8
As discussed supra, none of petitioners' three fact witnesses established a
value for the easement.
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[*21] be in the range of no measurable impact to a de minimis impact or as
expressed in dollar figures: $0 to $35,000." Mr. Flynn "concluded at the high end
of the range" on the basis of his interpretation of section 1.170A-14(h)(3)(i),
Income Tax Regs., which addresses the valuation of conservation restrictions.
On brief, petitioners criticize Mr. Flynn's "before" valuation of $780,000 for
the Lakewood house, which is $85,000 less than their proffered "before" valuation
of $865,000. Because they accept Mr. Flynn's "after" valuation of $745,000, they
determine a $120,000 value for their facade easement, which is $12,000 more than
their deduction based upon the Fiorenzo appraisal. Petitioners' criticism of Mr.
Flynn's "before" valuation is based largely upon his allegedly improper
adjustments to the sale prices of houses that he considered comparable to the
Lakewood house. That criticism is problematic in the light of petitioners'
acceptance of Mr. Flynn's "after" valuation, which makes adjustments to the sale
prices of comparable houses on the same bases that he used in adjusting the
"before" sale prices. Petitioners have not persuaded us that Mr. Flynn's valuation
of their facade easement is unreasonably low.
In the absence of expert testimony that the value of the easement was
greater than $35,000, we accept that amount as its value for purposes of
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[*22] determining whether petitioners are liable for section 6662(h) penalties for
gross valuation misstatement.
Accepting, as we do, that $35,000 constitutes the maximum value of
petitioners' facade easement, petitioners' $108,000 valuation thereof is more than
200% "of the amount determined to be the correct amount of such valuation",
thereby triggering the application of 40% gross valuation misstatement penalties
under section 6662(e)(1)(A) and (h) and satisfying respondent's burden of
production under section 7491(c). We shall, therefore, impose the penalty.
2. Conclusion
Petitioners are liable for 40% substantial valuation misstatement penalties
on the portions of their 2007 and 2008 underpayments attributable to reporting the
value of the facade easement to be in excess of $35,000.
Decision will be entered under
Rule 155.