Kaufman v. Commissioner

GORDON AND LORNA KAUFMAN, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 15997–09. Filed April 26, 2010.

In 2003, Ps transferred a facade easement and cash to a
qualified organization. With respect to the facade easement
contribution, Ps claimed a charitable contribution deduction
in 2003 and a corresponding carryover deduction in 2004;
with respect to the cash contribution, Ps claimed a charitable
contribution deduction in 2003. R disallowed the deductions,
which led to deficiencies. R also determined accuracy-related
penalties under sec. 6662, I.R.C. R has moved for summary
judgment. Ps object.
1. Held: With respect to the facade easement contribution,
Ps have failed to raise any genuine issue of material fact
regarding their compliance with sec. 1.170A–14(g)(6)(ii),
Income Tax Regs. Because the facade easement contribution
fails to satisfy the requirement in that provision, the interest
in property conveyed by the facade easement was not pro-
tected in perpetuity. Thus, the facade easement contribution
was not a qualified conservation contribution under sec.
170(h), I.R.C., see sec. 170(h)(2)(C), (5)(A), I.R.C., and Ps are
not entitled to any deduction therefor, see sec. 170(f)(3), I.R.C.

182

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00001 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 (182) KAUFMAN v. COMMISSIONER 183

2. Held, further, Ps have raised genuine issues of material
fact with respect to the cash contribution and the accuracy-
related penalties under sec. 6662(a), I.R.C.

Michael E. Mooney, Julie Pruitt Barry, and Eleanor E.
Farwell, for petitioners.
Carina J. Campobasso, for respondent.

OPINION

HALPERN, Judge: Respondent has determined deficiencies
in, and penalties with respect to, petitioners’ Federal income
tax, as follows: 1

Penalties

Year Deficiency Sec. 6662(a) Sec. 6662(h)
2003 $39,081 $1,097 $13,439
2004 36,340 --- 14,536

In 2003, petitioners contributed a facade easement and
cash to the National Architectural Trust (NAT). With respect
to the facade easement contribution, petitioners claimed a
charitable contribution deduction in 2003 and a cor-
responding carryover deduction in 2004; with respect to the
cash contribution, they claimed a charitable contribution
deduction in 2003. Respondent disallowed those deductions,
which led to the deficiencies. With respect to the portions of
the underpayments of tax in 2003 and 2004 attributable to
the facade easement contribution, respondent determined
accuracy-related penalties of 40 percent for a gross valuation
misstatement under section 6662(h); in the alternative, he
determined accuracy-related penalties of 20 percent 2 for neg-
ligence, substantial understatement of income tax, and
substantial valuation misstatement under section 6662(a).
With respect to the portion of the underpayment of tax in
2003 attributable to the cash contribution, respondent deter-
mined an accuracy-related penalty of 20 percent for neg-
ligence and substantial understatement of income tax under
section 6662(a).
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 amounts to the nearest dollar.
2 That is, half the amounts under sec. 6662(h) in the table above.

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00002 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 184 134 UNITED STATES TAX COURT REPORTS (182)

Respondent has moved for summary judgment (the
motion). Petitioners object (the response). At our request,
petitioners also filed a supplement to the response (the
supplement). We shall grant the motion only with respect to
the facade easement contribution. With respect to the cash
contribution and the penalties, we shall deny the motion.

Background
At the time they filed the petition, petitioners lived in
Massachusetts. The property here in question is a single-
family rowhouse located in a historic preservation district in
Boston. In December 2003, petitioners entered into a
preservation restriction agreement (the agreement) with NAT
pursuant to which petitioners granted to NAT a facade ease-
ment restricting the use of the property. NAT also required
petitioners to make a cash contribution, calculated as a
percentage of the estimated value of the facade easement, to
provide for ‘‘monitoring and administration’’ of the facade
easement. Later that month, petitioners contributed $16,840
to NAT, 3 and NAT accepted the agreement. At the time of the
contributions, Washington Mutual Bank, FA (the bank), held
a mortgage on the property.
On their 2003 Federal income tax return, petitioners
claimed a charitable contribution deduction of $220,800 for
the contribution of the facade easement. Because of the
limitations on charitable contribution deductions in section
170(b)(1)(C), petitioners claimed a charitable contribution
deduction with respect to the facade easement of only
$103,377. Petitioners also claimed a charitable contribution
deduction of $16,870 for the cash contribution, notwith-
standing that the cash contribution was only $16,840.
On their 2004 Federal income tax return, petitioners
claimed a carryover charitable contribution deduction of
$117,423 related to the facade easement contribution.

3 Previously, in October 2003, as part of their preservation restriction agreement application,

petitioners had made a $1,000 ‘‘good faith deposit’’.

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00003 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 (182) KAUFMAN v. COMMISSIONER 185

Discussion
I. Introduction
We may grant summary judgment ‘‘if the pleadings,
answers to interrogatories, depositions, admissions, and any
other acceptable materials, together with the affidavits, if
any, show that there is no genuine issue as to any material
fact and that a decision may be rendered as a matter of law.’’
Rule 121(b). In pertinent part, Rule 121(d) provides: ‘‘When
a motion for summary judgment is made and supported
* * *, an adverse party may not rest upon the mere allega-
tions or denials of such party’s pleading, but such party’s
response * * * must set forth specific facts showing that
there is a genuine issue for trial.’’
Respondent has moved for summary judgment, and so we
infer facts in the manner most favorable to petitioners. See,
e.g., Anonymous v. Commissioner, 134 T.C. 13, 15 (2010)
(citing Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985)).
II. The Facade Easement Contribution
Section 170 allows a deduction for any charitable contribu-
tion, subject to certain limitations, that the taxpayer makes
during the taxable year. In general, section 170(f)(3) denies
any deduction for a contribution of an interest in property
that is less than the taxpayer’s entire interest in the prop-
erty. One exception to that general rule, however, is for a
qualified conservation contribution. Sec. 170(f)(3)(B)(iii).
Under section 170(h)(1), a qualified conservation contribution
must be a contribution of a ‘‘qualified real property interest
* * * exclusively for conservation purposes.’’ 4 The interest in
property conveyed by a facade easement must be protected in
perpetuity for the contribution of the easement to be a quali-
fied conservation contribution. Under section 170(h)(2)(C), a
qualified real property interest must be ‘‘a restriction
(granted in perpetuity) on the use which may be made of the
real property.’’ See also sec. 1.170A–14(b)(2), Income Tax
Regs. Under section 170(h)(5)(A), ‘‘A contribution shall not be
treated as exclusively for conservation purposes unless the
4 The other requirement is that the contribution be to a ‘‘qualified organization’’. See sec.

170(h)(1)(B). Respondent concedes that, at the time of the contributions, NAT was a qualified
organization under sec. 170(h)(3).

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00004 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 186 134 UNITED STATES TAX COURT REPORTS (182)

conservation purpose is protected in perpetuity.’’ See also sec.
1.170A–14(a), Income Tax Regs.
If the facade easement was not protected in perpetuity,
then its contribution was not a qualified conservation con-
tribution, and petitioners are not entitled to any deduction
therefor. Section 1.170A–14(g)(6)(ii), Income Tax Regs.,
requires that, at the time of the gift, the donor must agree
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. Moreover, section 1.170A–
14(g)(6)(ii), Income Tax Regs., states in pertinent part:
when a change in conditions give rise to the extinguishment of a perpetual
conservation restriction * * *, the donee organization, on a subsequent
sale, exchange, or involuntary conversion of the subject property, must be
entitled to a portion of the proceeds at least equal to that proportionate
value of the perpetual conservation restriction * * *

Petitioners concede that the property had a mortgage and
that the bank retained a ‘‘prior claim’’ to all proceeds of con-
demnation and to all insurance proceeds as a result of any
casualty, hazard, or accident occurring to or about the prop-
erty. Moreover, petitioners do not dispute that the bank was
entitled to those proceeds ‘‘in preference’’ to NAT until the
mortgage was satisfied and discharged. The right of NAT to
its proportionate share of future proceeds was thus not
guaranteed. Petitioners argue that whether NAT would
receive its proportionate share of any proceeds is a question
of fact. In effect, petitioners argue that they have satisfied
the requirement in section 1.170A–14(g)(6)(ii), Income Tax
Regs., because NAT might be entitled to its proportionate
share of future proceeds. Yet that provision states that the
donee organization must be so entitled. See id. The require-
ment is not conditional. Petitioners cannot avoid the strict
requirement in section 1.170A–14(g)(6)(ii), Income Tax Regs.,
simply by showing that they would most likely be able to sat-
isfy both their mortgage and their obligation to NAT. The
facade easement contribution thus fails to satisfy the require-
ment in section 1.170A–14(g)(6), Income Tax Regs., and so

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00005 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 (182) KAUFMAN v. COMMISSIONER 187

fails to satisfy the enforceability in perpetuity requirement
under section 170(h)(2)(C) and (5)(A).
The facade easement contribution thus fails as a matter of
law to comply with the enforceability in perpetuity require-
ments under section 1.170A–14(g), Income Tax Regs. For
that reason, we find that the facade easement contribution
was not protected in perpetuity and so was not a qualified
conservation contribution under section 170(h)(1). 5 We shall
grant the motion with respect to the facade easement con-
tribution.
III. The Cash Contribution
Respondent argues that we should disallow the charitable
contribution deduction for the cash contribution for two rea-
sons. First, respondent argues that the cash contribution was
a conditional gift and so violated section 1.170A–1(e), Income
Tax Regs. Second, respondent argues that the cash contribu-
tion was part of a quid pro quo and so violated the rule of
Hernandez v. Commissioner, 490 U.S. 680 (1989). Petitioners,
however, raise genuine issues of material fact with respect to
both arguments.
First, section 1.170A–1(e), Income Tax Regs., states:
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. * * *

In neither the response nor the supplement do petitioners
dispute that the cash contribution was a conditional gift; that
is, petitioners seem to concede that the agreement required
NAT to refund the cash contribution if the appraisal found the
facade easement to have no value.
Petitioners, however, rely on the exception (quoted above)
in section 1.170A–1(e), Income Tax Regs. They argue that the
possibility that the charitable transfer would not become
effective—that is, the possibility that the appraisal would
find the facade easement to have no value—was ‘‘so remote
as to be negligible.’’ See id. Moreover, according to peti-
tioners, that inquiry is inherently factual. We agree.
5 We therefore need not address respondent’s additional arguments that we should disallow

the charitable contribution deduction for the facade easement contribution.

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00006 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 188 134 UNITED STATES TAX COURT REPORTS (182)

Second, under Hernandez v. Commissioner, supra, a
transfer is not a charitable contribution if it is part of a quid
pro quo. Respondent argues that the cash contribution was
payment for a service. Respondent seems to argue that, in
return for the cash contribution, NAT accepted the facade
easement contribution so that petitioners could claim a chari-
table contribution deduction. Even if NAT required petitioners
to make the cash contribution, however, we are not convinced
that that is sufficient to deny a charitable contribution
deduction under Hernandez. 6
Because petitioners raise genuine issues of material fact
regarding the cash contribution, we shall deny the motion
with respect to the cash contribution.
IV. Accuracy-Related Penalties
Respondent concedes that ‘‘if the facade easement contribu-
tion is disallowed as a matter of law * * *, the gross
misstatement valuation (and the substantial valuation
misstatement) penalties would not apply.’’ We accept his
concession. For both the facade easement contribution and
the cash contribution, we must decide only whether to sus-
tain the accuracy-related penalties of 20 percent for neg-
ligence and substantial understatement of income tax under
section 6662(a). Because petitioners raise genuine issues of
material fact regarding the applicability of the reasonable
cause defense to the penalties, we must deny the motion with
respect to those penalties.
Section 6664(c)(1) provides that the accuracy-related pen-
alty shall not be imposed with respect to any portion of an
underpayment if the taxpayer shows that there was reason-
able cause for that portion and the taxpayer acted in good
faith with respect to that portion. Further:
The determination of whether a taxpayer acted with reasonable cause and
in good faith is made * * * case-by-case * * *, taking into account all
pertinent facts and circumstances. * * * Reliance on * * * professional
advice * * * constitutes reasonable cause and good faith if, under all the

6 Respondent does not explicitly allege fraud or collusion. That is, he does not state (although

he implies) that the cash contribution was a payment to NAT for its compliance in helping peti-
tioners claim a deduction for the facade easement—a deduction that, respondent implies, both
NAT and petitioners knew was illegitimate because the facade easement itself was worthless.
Nonetheless, even if respondent did so argue, petitioners have alleged enough facts to raise a
genuine issue as to fraud or collusion.

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00007 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA
 (182) KAUFMAN v. COMMISSIONER 189

circumstances, such reliance was reasonable and the taxpayer acted in
good faith. * * *

Sec. 1.6664–4(b)(1), Income Tax Regs.; see also sec. 1.6664–
4(c), Income Tax Regs. (‘‘Reliance on opinion or advice’’).
Respondent argues that petitioners may not, as a matter
of law, rely on the reasonable cause exception. 7 In so con-
cluding, respondent relies on communications between Mr.
Kaufman and a representative of NAT that suggest Mr. Kauf-
man had reason to believe the facade easement in fact had
no value. Petitioners assert that the significance of those
communications must be determined in the light of all the
relevant facts and circumstances, and we agree. Petitioners
argue that they relied on the advice of their accountant. Peti-
tioners argue that at trial (1) their accountant would testify
to show that they had reasonable cause for claiming a chari-
table contribution deduction for their contributions to NAT of
the facade easement and the cash and (2) they themselves
would testify as to their understanding of the value of the
facade easement and their good faith belief that their con-
tribution was a qualified conservation contribution under sec-
tion 170(h)(1).
Because petitioners raise genuine issues of material fact
regarding the applicability of the reasonable cause exception
to the accuracy-related penalties, we shall deny the motion
with respect to those penalties.
V. Conclusion
For the reasons stated, we shall grant the motion with
respect to the facade easement contribution. With respect to
the cash contribution and the penalties, we shall deny the
motion.
An appropriate order will be issued.

f

7 Respondent also argues that petitioners may not, as a matter of law, rely on the substantial

authority exception under sec. 6662(d)(2)(B)(i). Because we find that petitioners have raised a
genuine issue of material fact as to the applicability of the reasonable cause defense, we need
not address the substantial authority exception.

VerDate 0ct 09 2002 10:55 May 24, 2013 Jkt 372897 PO 20009 Frm 00008 Fmt 2847 Sfmt 2847 V:\FILES\KAUFMAN.134 SHEILA