                          T.C. Memo. 2006-16



                       UNITED STATES TAX COURT



 HOWARD J. KAPLAN AND BRENDA L. KAPLAN, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20716-03, 20717-03,       Filed February 2, 2006.
                 20718-03.



     Thomas F. Foster, Robert A. Brinson, and Christopher C.

Finan, for petitioners.

     James R. Rich, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined for the taxable year



     1
      Cases of the following petitioners are consolidated here-
with: Matthew B. Marceron and Sherry R. Marceron, docket No.
20717-03, and Dean A. Caldwell and Cathy M. Caldwell, docket No.
20718-03.
                                - 2 -

1999 the following deficiency in, and accuracy-related penalty

under section 6662(a)2 on, the Federal income tax (tax) of peti-

tioners in each of these consolidated cases:

                                                  Accuracy-Related
         Petitioners               Deficiency         Penalty
   Howard J. Kaplan and             $252,728           $91,714
     Brenda L. Kaplan
   Matthew B. Marceron and              18,169            6,839
     Sherry R. Marceron
   Dean A. Caldwell and                 137,931          49,736
     Cathy M. Caldwell

     The issues remaining for decision are:

     (1)   Are petitioners in each of these cases entitled for

1999 to a deduction under section 170(a) for a claimed noncash

charitable contribution?    We hold that they are not.

     (2)   Are petitioners in each of these cases liable for 1999

for the accuracy-related penalty under section 6662(a)?      We hold

that they are.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time they filed their respective petitions, Howard J.

Kaplan (Mr. Kaplan) and Brenda L. Kaplan (Ms. Kaplan) resided in

Winston-Salem, North Carolina, Matthew B. Marceron (Mr. Marceron)

and Sherry R. Marceron (Ms. Marceron) resided in Clemmons, North

Carolina, and Dean A. Caldwell (Mr. Caldwell) and Cathy M.


     2
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                                  - 3 -

Caldwell (Ms. Caldwell) resided in Winston-Salem, North Carolina.

     In January 1995, KQC Investors, LLC (KQC), a limited liabil-

ity company organized under North Carolina law, was formed to

acquire and develop real property, primarily for lease to early

childhood educational agencies, including Federal Head Start

(Head Start) agencies.   During 1999, Mr. Kaplan, Mr. Marceron,

and Mr. Caldwell, the three members of KQC, held the following

percentage interests in that limited liability company:

               Name   of member       Percentage interest
                Mr.   Kaplan                  59.4
                Mr.   Marceron                 5
                Mr.   Caldwell                35.6

     In 1997, KQC purchased for $105,041 real property located at

474 Maple Street, Helena, Ohio (Maple Street), which consisted of

approximately 2.04 acres of land (KQC’s land) on which there was

a school building that was constructed in 1958 and remodeled in

1994 (1958 school building).      (We shall sometimes refer to

(1) the property on Maple Street that KQC purchased in 1997 as

KQC’s land and 1958 school building and (2) the property on Maple

Street that KQC purchased in 1997, including any improvements

made to that property thereafter (discussed below), as the

improved property on Maple Street.)       On April 18, 1997, a general

warranty deed (April 18, 1997 general warranty deed) was executed

that transferred to KQC KQC’s land and 1958 school building that

KQC purchased in 1997.
                               - 4 -

     On or about April 21, 1997, KQC leased KQC’s land and 1958

school building to Texas Migrant Council, Inc. (TMC), an organi-

zation described in sections 170(c) and 501(c) that provided Head

Start services to migrant families in communities throughout,

inter alia, Ohio.   TMC intended to, and did, use KQC’s land and

1958 school building that it leased from KQC in order to conduct

Head Start activities in Helena, Ohio.

     The lease of KQC’s land and 1958 school building by KQC to

TMC (April 21, 1997 lease) provided in pertinent part:

          WHEREAS, Lessor [KQC] plans to purchase a 6,100
     square foot child care facility located in * * * Hel-
     ena, * * * Ohio on the property more particularly
     described on Exhibit A[3] (the “Facility”);

         *      *       *       *        *      *        *

          WHEREAS, Lessee [TMC] is an agency of and regu-
     lated by the United States Department of Health and
     Human Services (“HHS”);

          NOW, THEREFORE, in consideration of the premises
     and of their mutual undertakings, the parties hereto
     agree as follows:

          1.   Lease of Real Property; Term: Lessor, in
     consideration of the rents hereinafter reserved, and
     the terms, covenants, conditions and agreements set
     forth herein to be kept and performed by Lessee, does
     hereby agree to demise and let unto Lessee and Lessee
     does hereby agree to hire and take from Lessor, the
     following described assets, rights, interests and other
     properties owned by Lessor and relating to the Facility
     (herein the “Demised Premises”):


     3
      The description of the property in Exhibit A attached to
the April 21, 1997 lease is virtually the same as the description
of the property set forth in the April 18, 1997 general warranty
deed.
                           - 5 -


            (a) Land: The parcel of land more particu-
       larly described on Exhibit A (herein the “Par-
       cel”);

            (b) Improvements: All buildings, struc-
       tures, fixtures and improvements erected or lo-
       cated on the Parcel, or affixed thereto (herein
       the “Improvements”);

   *        *       *       *       *       *        *

     TO HAVE AND TO HOLD the Demised Premises unto
Lessee, its successors and permitted assigns, upon and
subject to all of the terms, covenants, conditions,
conditional limitations and agreements herein con-
tained, for a term commencing on April 21, 1997 (herein
the “Commencement Date”) and expiring twenty (20) years
later, or until said term is sooner terminated pursuant
to any of the conditional limitations or other provi-
sions hereof (herein the “Primary Term”). For purposes
hereof, the Term “Lease Year” means a period of one
(1) year commencing on the Commencement Date or the
annual anniversary date thereof.

     The Lessee shall have the right to extend the
Primary Term for an additional two (2) five (5) year
periods (the “Additional Terms”; the Primary Term and
any Additional Terms, hereafter, the “Term”). The
Lessee must exercise said option to extend in writing
no later than six (6) months prior to the expiration of
the Primary Term or Additional Terms * * *.

     2.   Title to Demised Premises. The Demised
Premises shall be demised and let by Lessor unto Lessee
free and clear of any and all liens, leases, mortgages,
pledges, security interests, conditional sale agree-
ments, charges, claims, options, and other encumbrances
of any kind or nature whatsoever (collectively “Encum-
brances”), except the following (collectively the
“Permitted Encumbrances”):

            (a) Zoning Laws: The provisions of all
       applicable zoning laws;

            (b) Taxes: The liens of current real estate
       and personal property taxes not delinquent; and
                           - 6 -

            (c) Other Existing Encumbrances: The other
       existing Encumbrances set forth on Exhibit B.

     3.   Rent. The Lessee shall pay to Lessor rent
for the Demised Premises * * * in an amount of One
Thousand Six Hundred and no/100 Dollars ($1,600.00) for
each month of the Term * * *. It is understood that
non-federal funds acquired by Lessee cannot be used to
make rental payments if funds from HHS are terminated.

   *        *       *       *       *       *       *

     5.   Mortgages. Lessor has or may subject its
interests in the Demised Premises to liens of mortgages
thereon, and this Lease shall be subordinate to any
mortgage on Lessor’s interest in the Demised Premises
(the “Fee Mortgage”). * * *

     6.   Taxes and Utilities. Lessee shall, at its
cost and expense, bear, pay and discharge, on or before
the last day upon which the same may be paid without
interest or penalty for late payment thereof, all
personal property taxes, assessments, sewer rents,
water rents and charges, duties, impositions, license
and permit fees, charges for public utilities of any
kind, payments and other charges of every kind or
nature whatsoever, ordinary or extraordinary, foreseen
or unforeseen, general or special (collectively herein
“Impositions”) * * *.

     The foregoing notwithstanding, the parties agree
that the Lessor shall be responsible, and shall pay
when due, all real property ad valorem taxes which may
be assessed against the Demised Premises (the “Taxes”).
The Lessee agrees to reimburse the Lessor, on an annual
or semi-annual basis, for the amount of such ad valorem
property taxes due for the Demised Premises. * * *

   *        *       *       *       *       *       *

       7.   Asbestos Removal, Facility Repair and Re-
            placement.

   *        *       *       *       *       *       *

            (b) Repairs and Replacement: Lessee accepts
       the Demised Premises from Lessor in “as is” condi-
       tion and Lessor shall not be required to make any
                           - 7 -

       improvements, replacements, or repairs of any kind
       or character to the Demised Premises during the
       Term of this Lease. Lessee shall at all times
       during the Term hereof, at its own cost and ex-
       pense, keep the Demised Premises in good and rea-
       sonable operating condition and repair, and in
       such condition as may be required by law and by
       the terms of the insurance policies furnished
       pursuant to the terms of this Lease, specifically
       including, but not limited to, the replacement of
       any Tangibles which may be required by law or
       regulations or which may have become worn or obso-
       lete, whether or not such repairs or replacements
       shall be structural or nonstructural, interior or
       exterior, extraordinary or ordinary, and whether
       or not the same can be said to be within the pres-
       ent contemplation of the parties hereto. All such
       repairs or replacements shall be performed by duly
       licensed contractors reasonably acceptable to
       Lessor and in a manner reasonably acceptable to
       Lessor.

   *        *       *        *       *       *       *

            (d) Road Maintenance: Lessee acknowledges
       that access to the Demised Premises is by an ease-
       ment to a road which is more commonly referred to
       as “Maple Street.” Lessee shall be solely respon-
       sible for any costs incurred by or imposed on
       Lessor for the maintenance of such road.

   *        *       *        *       *       *       *

     9.   Alterations. Lessee shall not make any
alterations or additions to the Demised Premises with-
out Lessor’s prior approval, which approval may be
withheld in Lessor’s sole and absolute discretion. Any
mechanic’s lien filed against the Demised Premises for
work or materials claimed to have been furnished to
Lessee shall be discharged of record by Lessee within
ten (10) days thereafter, at Lessee’s expense * * *.

     10. Use of Demised Premises. Lessee shall use
and occupy the Demised Premises solely for operation as
a child day care facility. Lessee agrees that the
Lessor, and its duly designated representatives, shall
have the right, but not the obligation, to review, from
time to time, the method and nature of the Lessee’s
                            - 8 -

operation of the Facility. It is Lessee’s obligation
to operate the Facility in a quality manner and as a
“first class” day care facility. Failure of the Lessee
to do so, as reasonably determined by the Lessor or its
duly designated representatives, shall constitute an
event of default under this Lease. The Lessee agrees
to provide access to the Demised Premises to duly
authorized representatives of the Lessor. * * *

   *         *       *       *       *       *       *

     11. Net Lease. This is an absolute net lease and
Lessor shall not be required to provide any services or
do any act or thing with respect to the Demised Pre-
mises and the rent reserved herein shall be paid to
Lessor without any claim on the part of Lessee for
diminution, setoff or abatement, and nothing shall
suspend, abate or reduce any rent to be paid hereunder
except as otherwise specifically provided herein.

       12.   Insurance.

            (a) Liability Insurance. At all times dur-
       ing the Term hereof, Lessee shall, at its own cost
       and expense, provide and keep in force liability
       insurance policies as follows:

                  (1) Commercial general liability insur-
             ance including, without limitation upon the
             generality of the provisions of this para-
             graph protecting Lessor and Lessee against
             accident or disaster in or about the Demised
             Premises with limits not less than Two Mil-
             lion Dollars ($2,000,000.00) combined single
             limit for bodily injury (including death) and
             one Million Dollars ($1,000,000.00) for prop-
             erty damage;

                  (2) Excess liability coverage of One
             Million Dollars ($1,000,000.00);

                  (3) Professional liability insurance,
             with limits not less than One Million Dollars
             ($1,000,000.00) including sexual molestation
             and abuse coverage; and
                    - 9 -

          (4) Workers’ compensation insurance,
     with limits not less than those required by
     law.

     (b) Hazard Insurance. At all times during
the Term hereof, Lessee shall, at its own cost and
expense, keep:

          (1) The Demised Premises insured
     against loss or damage by fire, lightning,
     windstorm, hail, explosion, riot, damage from
     aircraft, smoke damage, sprinkler leakage
     damage, war damage (when available) and such
     other insurance risks, casualties and hazards
     as are insured against by owners of compara-
     ble premises in an amount equal to one hun-
     dred percent (100%) of the replacement cost
     thereof (the initial replacement cost shall
     be $120,000.00), said replacement cost to be
     determined, on Lessor’s request not more
     frequently than at annual intervals, by one
     or more of the insurers, or by an architect,
     contractor, appraiser or appraisal company
     selected by Lessee. * * *

          (2) In addition, Lessee shall, at its
     own cost and expense, keep the net rental
     value of the Demised Premises insured against
     loss or damage by fire, lightning, windstorm,
     hail, explosion, riot, damage from aircraft,
     smoke damage, and such other insurance risks,
     casualties and hazards as are insured against
     by owners of comparable premises, in the
     amount of $22,000.00. The Lessor reserves
     the right, upon notice to the Lessee, to
     adjust the coverage amount.

All insurance to be furnished by Lessee under this
paragraph shall be by policies which shall provide
that the loss, if any, shall be payable to Lessee.
All such insurance proceeds received by Lessee
(other than rent insurance proceeds, for which
provision is made in Paragraph 12(b)(2) hereof)
shall be available for application to the cost of
demolition, restoration, repair, replacement and
rebuilding of the damage which occasioned the
payment of such proceeds.
                         - 10 -

           (c) Indemnity Insurance. At all times dur-
      ing the Term hereof, Lessee shall, at its own cost
      and expense, provide and keep in force a policy or
      policies of insurance insuring Lessee against all
      liability of Lessee under Paragraph 13, which such
      policy or policies shall provide for the payment
      of any proceeds thereof to Lessor or Lessee as
      their interests may appear.

  *        *       *        *       *       *       *

     14. Fire and other Casualty. If any Improvement
or Tangible shall be damaged or destroyed by fire or
other casualty, then, irrespective of the cause, Lessee
shall give prompt written notice thereof to Lessor, and
shall proceed * * * to restore, repair, replace and
rebuild such Improvements or Tangibles at Lessee’s own
cost and expense. Such rebuilding or restoration shall
be in accordance with plans and specifications submit-
ted by Lessee to Lessor and subject to Lessor’s reason-
able approval and shall further be carried out by duly
licensed contractors acceptable to Lessor. * * *

     Rent shall not abate hereunder by reason of any
damage to or destruction of the Demised Premises, and
Lessee shall continue to perform and fulfill all of its
obligations, covenants and agreements hereunder not-
withstanding any such damage or destruction. The
foregoing notwithstanding, the obligation to continue
Rent payments shall be subject to the availability to
Lessee of loss of rents or business interruption insur-
ance. Any loss of rent insurance proceeds received by
Lessee by reason of such damage or destruction shall be
applied by Lessee to the payment of Rent payable by
Lessee under Paragraph 3 hereof, Impositions payable by
Lessee under Paragraph 6 hereof and premiums for any
insurance required to be maintained by Lessee hereun-
der, but this shall not relieve Lessee of its obliga-
tions to pay punctually all such Rent, debt service,
Impositions and insurance premiums in the event rent
insurance proceeds received by Lessee are insufficient
to pay the same or for any reason such rent insurance
proceeds are not actually applied by Lessee to the
payment of such amounts. If and when Lessee shall
complete all demolition, restoration, repair, replace-
ment and rebuilding which Lessee is required to carry
out under this paragraph, then any balance of insurance
proceeds then held by Lessee shall be retained by
                                  - 11 -

    Lessee free of trust.

    15.       Condemnation.

          (a) Entire Condemnation. If at any time during
     the Term hereof all or substantially all of the Parcel
     and the Improvements shall be taken in the exercise of
     the power of eminent domain by any sovereign, munici-
     pality or other public or private authority, then this
     Lease shall terminate on the date of taking of posses-
     sion by such authority. Substantially all of the
     Parcel and the Improvements shall be deemed to have
     been taken if the remaining Improvements cannot
     feasibly be repaired and restored so that they shall
     constitute a complete structural unit or units which
     can be operated as a day care facility on an economi-
     cally feasible basis under the provisions hereof. The
     award or awards for any such taking of all or substan-
     tially all of the Parcel and the Improvements shall be
     paid to the Lessor.

          *        *          *     *      *      *       *

          30. Obligations Upon Termination. Lessee shall,
     upon any termination hereof prior to the expiration of
     the Term, well and truly surrender and deliver up the
     Demised Premises into the possession and use of Lessor,
     without fraud or delay and in good order, condition and
     repair, ordinary wear and tear excepted, free and clear
     of all lettings and occupancies and free and clear of
     all encumbrances other than those existing on the date
     hereof and those, if any, created by Lessor without any
     payment or allowance whatever by Lessor.

          *        *          *     *      *      *       *

          36. Governing Law. This Lease shall be governed
     by and subject to the laws of the state [Ohio] in which
     the Facility is located. [Reproduced literally.]

     On May 15, 1997, shortly after the effective date of the

April 21, 1997 lease, TMC entered into a contract (May 15, 1997

construction contract) with Stone Oak Construction, Inc. (Stone

Oak Construction).     Under that contract, Stone Oak Construction
                              - 12 -

agreed to perform the following work for TMC with respect to

KQC’s land that TMC was leasing from KQC:   (1) Install new

concrete ramp at the main entrance; (2) modify the emergency exit

ramp; (3) remove all existing playground equipment except for the

swing set; (4) remove four feet of blacktop from the inside of

existing driveway and two feet from the outside of such driveway;

(5) remove debris and trees to enlarge area for bus turnaround

and parking and develop area with gravel stones; (6) install

chainlink fences with double gate; and (7) install chainlink

fence to subdivide existing playground with two regular standard

gates.   In return for completing the foregoing work, TMC agreed

to pay Stone Oak Construction $33,010.   On a date in 1997 not

disclosed by the record, Stone Oak Construction completed all of

the work that it agreed to perform under the May 15, 1997 con-

struction contract.

     On August 9, 1997, TMC applied to the U.S. Department of

Health and Human Services (HHS) for a grant (TMC’s grant applica-

tion) to make improvements to, inter alia, KQC’s land and 1958

school building that TMC was leasing from KQC.   TMC’s grant

application requested $556,500 to make certain improvements to

such leased land and school building.    On or about September 30,

1997, HHS approved TMC’s grant application, including its request

for $556,500 to make certain improvements to KQC’s land and 1958

school building, and made, inter alia, a $556,500 grant to TMC
                                - 13 -

with respect to that request.

     On March 4, 1998, TMC entered into two construction con-

tracts (collectively March 4, 1998 construction contracts) with

Stone Oak Construction.   Under one of those contracts, Stone Oak

Construction agreed to perform the following additional work for

TMC with respect to KQC’s land and 1958 school building that TMC

was leasing from KQC:    (1) Install child-size cabinets and sinks

in six classrooms; (2) remove existing outdated windows that do

not meet safety codes and replace with insulated safety glass

windows; (3) install 2-inch asphalt over existing eroded parking

lot surface and driveway; (4) enclose and caulk the perimeter of

the foundation of the 1958 school building, using specialized

engineering techniques; (5) enclose the septic tank and trans-

former with a fence built to certain specifications; (6) upgrade

the septic system; and (7) drill a second well.     In return for

completing the foregoing work, TMC agreed to pay Stone Oak

Construction $262,000.

     Under the second construction contract that TMC entered into

with Stone Oak Construction on March 4, 1998, Stone Oak Construc-

tion agreed to construct a new building (new building) on KQC’s

land that TMC was leasing from KQC.      In return for completing the

construction of that building, TMC agreed to pay Stone Oak

Construction $398,000.

     On dates in 1998 not disclosed by the record, Stone Oak
                              - 14 -

Construction completed all of the work that it agreed to perform

under the two March 4, 1998 construction contracts, including

construction of the new building on KQC’s land.

     On May 15, 1998, a document entitled “NOTICE OF FEDERAL

INTEREST” (notice of Federal interest) with respect to the

improved property on Maple Street was filed with the Recorder’s

office, Sandusky County, Ohio (Sandusky County recorder’s of-

fice).   As of May 12, 2005, the notice of Federal interest had

not been canceled.   The notice of Federal interest provided in

pertinent part:

     This is to serve notice to all potential sellers,
     purchasers, transferors and recipients of a transfer of
     the real property described below as to the Federal
     government’s revisionary interests as set forth in 45
     CFR Part 92, (or if appropriate, 45 CFR Part 74) which
     have arisen as a result of (Texas Migrant council, Inc.
     Ohio Region) receipt and use of Department of Health
     and Human Service’s grant funds in connection with the
     purchase of said property. The property to which this
     notice is applicable is (Helena Migrant Head Start
     Center 474 Maple St. Helena, Ohio 43435) and identi-
     fied Parcel (See Attached Legal Description)[4] in the
     books and records of Sandusky County Ohio. * * * In
     accordance with 45 CFR 92.11 (or, if appropriate, 45
     CFR 74.134), this property may not be sold, trans-
     ferred, or its title encumbered, without approval from
     the Department of Health and Human Services. * * *
     [Reproduced literally.]

     By letter dated November 8, 1999, KQC asked Richard W.

Mumford (Mr. Mumford) to make a preliminary real estate appraisal



     4
      The document “Attached Legal Description” referred to in
the notice of Federal interest is a copy of the April 18, 1997
general warranty deed.
                              - 15 -

of the improved property on Maple Street that TMC was using for

its Head Start activities.   Pursuant to KQC’s request, Mr.

Mumford sent KQC a letter dated December 17, 1999 (Mr. Mumford’s

December 17, 1999 letter).   In that letter, Mr. Mumford, who died

before the time of the trial in these cases, stated in pertinent

part:

     Following your letter of November 8, 1999 authorizing a
     Preliminary Real Estate Appraisal on the above property
     [the improved property on Maple Street], we can report
     the following items:

          A At the time of examination and photography, no
          one was at the Subject. THIS PRELIMINARY AP-
          PRAISAL IS FROM THE EXTERIOR ---- no entry to the
          INTERIOR was possible.

          B The property is owned by KQC * * *.

          D The School is at the end of Maple Street in
          Helena OH. * * *

          E The lot size is irregular and contains 2.0435
          acres.

          F There are TWO BUILDINGS on the Property. Both
          are one story in height and have no basements.
               Building # 1 is 72 by 162’ and has 11,664
               sqft.
               Building # 2 is 45’ by 80’ and has.... 3,600
               sqft.

               BOTH BUILDINGS TOTAL.............15,264 SQFT.

          G Building # 1 was built as an elementary school
          in 1958. In 1994, this Building was remodeled
          into a Migrant Head Start School Building. Build-
          ing # 2 was built for School Uses in 1998. BOTH
          Buildings are rated by FLR SABRE SYSTEMS as
          100/Grade C. Exterior of Building # 1 is brick.
          Concrete block is the exterior of Building # 2.
          One forced air heat and air conditioning Unit is
          shown in the attached photos. Both Buildings have
                          - 16 -

       Central Heat and Air Conditioning.

       H The Building Data shows Public Water. The
       School has its own private sanitary sewer system.

       I There is 25,000 sf. of asphalt paving. The play
       ground area is well fenced with chain link. Play-
       ground equipment is in good condition.

       K No repairs were need from AN EXTERIOR EXAMINA-
       TION. No deferred maintainence was visibile on
       the property. The Subject has good design and
       construction.

   *        *       *        *       *       *       *

The Preliminary Real Estate Assignment is in TWO PARTS:

1. To give a Professional Opinion of current market
value of BOTH Land and Improvements in their current
condition.

AND

2. To give a market value Opinion of Ground Rent IF
the Improvements were to be sold.

Normal Procedure in giving an Opinion of Market Value
is to utilize THREE APPROACHES to VALUE...
     • COST APPROACH
     • SALES COMPARISON APPROACH
     • INCOME APPROACH

   *        *       *        *       *       *       *

IF there are NO similar, current, proximate nor appro-
priate Comparable Sales... then the substitution of the
County Auditor’s Public Record Values is permitted. IF
there is NO present income from the Subject Property,
reliable Data from the Marketplace and the Appraiser’s
own files will give ranges of Rents and Expenses. At
this point, the Appraiser must use the Training, Educa-
tion, Background and Experience to sort thru the Data
to select and report the BEST Opinions of Rent and
Expenses that better fit the Subject.

   *        *       *        *       *       *       *
                          - 17 -

Using PACENET, we have researched EVERY Comparable Sale
in the Four Townships surrounding the Subject AND in
the City of Fremont, for all of 1999 thru October...

WE FOUND NO SIMILAR, CURRENT, PROXIMATE OR APPROPRIATE
COMPARABLE SALES TO THE SUBJECT

   *       *       *        *          *       *       *

                       COST APPROACH

From the current Marshall & Swift Cost Manual for Class
C Schools of Average Construction. The Area Multiplier
is 1.02

  **************************************************

Base Cost=$ 72.13 sf. x 1.02 Area Multiplier=
$ 73.57 sqft.

  **************************************************

Building # 1 was built in 1958 and then remodeled in
1994. Class C Schools with average masonry construc-
tion have an expected Building Life of 45 years. The
EFFECTIVE AGE of Building # 1 is 10 years. Physical
Depreciation for this Building is 20% using the
AGE/LIFE/CONDITION METHOD

  **************************************************

            COST BREAKDOWN FOR BUILDING # 1
11.664 sf. @ $ 73.57 sf. LESS 0% Depreciation=
$ 686,500

  **************************************************

Building # 2 was built in 1998 and has     ZERO% Physical
Depreciation[.] The expected Building      Life of a Class
C, average construction masonry School     is 45 years.
Building # 2 has an EFFECTIVE AGE of 1     year

  **************************************************

            COST BREAKDOWN FOR BUILDING # 2
3.600 sf. @ $ 73.57 sf. LESS 0% Depreciation= $ 263,500

  **************************************************
                        - 18 -


ZERO % Functional and External Depreciation-BOTH BLDGS
TOTAL DEPRECIATED VALUES--BOTH # 1 & #2= $ 950,000 PLUS
depreciated values for the Storage Shed, Chain Link
Fence and Sanitary Sewer System - $ 40,000
IMPROVEMENT COSTS...$ 990,000 LAND...2.0435 ACRES...
$ 35,000 (2.0435 acres @ $17,000 acre)

TOTAL COST OPINION OF VALUE-$1,025,000

   *       *       *       *         *     *       *

                 PUBLIC RECORD VALUES

From the Sandusky County Auditor’s Office in Fremont[,]
OH-December 1999[.] AUDITOR’S TRUE VALUES of the
Subject BUILDING # 1 built in 1958 and remodeled in
1994. AUDITOR’S COST NEW @ $ 34.74 sf. 11,664 sf. LESS
82% Physical Depreciation= $ 73,000 ($ 405,000 less
82%)

  **************************************************

AUDITOR’S TRUE VALUES of the Subject BUILDING # 2 built
in 1998. 3,600 sf. @ 38.86 sf. LESS 5% Physical Depre-
ciation= $ 139,900 ($ 140,000 less $ 7000)

  **************************************************

AUDITOR’S TRUE VALUES of the Subject Driveways and
Parking Areas 25,000 sf. @ $1.50 sf. LESS 13% Physical
Depreciation= $ 32,500

  **************************************************

NOTE: The Storage Shed with 120 sf. and the private
Sanitary Sewer System were NOT INCLUDED in the AUDI-
TOR’S TRUE VALUES

  **************************************************

IMPROVEMENT TRUE VALUES= $ 245,400

  **************************************************

AUDITOR’S TRUE VALUES of Subject LAND of 2.0435 acres
$ 30,000 or $ 14,680 per Acre
TOTAL IMPROVEMENTS and LAND $ 275,000
                           - 19 -

  *       *       *          *       *    *       *

                       INCOME APPROACH

   *       *       *         *       *     *       *

IF there is no VERIFIABLE RENTAL DATA we can NOT USE
the INCOME APPROACH

Because we found NO RENTAL DATA for SCHOOLS in Sandusky
County...

We were NOT ABLE to DEVELOP The INCOME APPROACH OPINION

   *       *       *         *       *     *       *

                     GROUND LEASE
                   APPROACH OPINION

     The SECOND PART of the original Preliminary Ap-
praisal Assignment is to PROJECT a valid Ground Lease
Rent in the Event that the Owners would SELL the Im-
provements and RETAIN the Land.
                    WORD OF CAUTION
IF the Improvement Sale is desired, the area of Liabil-
ity Insurance could be a problem. We found NO local
Agent that sells a Liability Policy for a School to the
Owners of the LAND ONLY ! They all require that the
IMPROVEMENT BUYER secure the Liability Insurance with
the LAND OWNER being included as an ADDITIONAL INSURED
PARTY.This would be an important question to raise with
your present Insurance Agent.

  **************************************************

         LAND VALUE from the COST APPROACH is
             $ 35,000 or $17,000 per acre

     The goal of a Reasonable Ground Lease Program is
to select Rates that will give a Return on the Invest-
ment and a Return of the Capital Value over a fixed
period of time. To develop a Reasonable Rate per year
to accomplish these Two Goals, the Built Up Rate Method
is the most feasible one for the Subject Land.This
Method uses a SAFE Rate, a RISK Rate, an INFLATION
Rate, a LAND TAX Land Tax Rate, and a RETURN OF CAPITAL
INVESTED Rate over a 20 year period.
                Projected Built-Up Rate:
                                 - 20 -

      •   SAFE RATE is the Passbook Savings rate ...    3%/year
      •   RISK RATE for land under a School ........    3%/year
      •   INFLATION RATE averages .................     3%/year
      •   LAND TAXES ...............................    1%/YEAR
      •   HOLDING PERIOD for Land--20 years ........    5%/year

                            BUILT-UP RATE ........... 15%/year

     PRESENT LAND VALUE @$ 35,000 @ 15% /year = $ 5,250/
     year OR $ 437.50/month Projected GROUND LEASE RENT

          *        *       *        *         *     *       *

     RECONCILIATION of the Various Approaches to Value

              • COST OPINION... $ 1,025,000

              • PUBLIC RECORD VALUES... $ 275,000

              • SALES COMPARISON and INCOME OPINIONS CONSIDERED
              but NOT USED [ see page two and page five ]

     We SELECTED as the BEST OPINION of VALUE the COST
     APPROACH OPINION in the sum of $ 1,025,000

          **************************************************

     The HIGHEST and BEST USE of the Subject is its PRESENT
     USE

          **************************************************

     •PROJECTED GROUND LEASE RENT OPINION $ 5,250 YEAR /
     $ 437.50 MONTH [Reproduced literally.]

     Mr. Mumford’s December 17, 1999 letter made no reference to

the notice of Federal interest that on May 15, 1998, was filed

with respect to the improved property on Maple Street with the

Sandusky County recorder’s office and did not contain the actual

or expected date of a charitable contribution of all or a portion

of the improved property on Maple Street that was the subject of

that letter.      Nor did Mr. Mumford’s December 17, 1999 letter
                                  - 21 -

indicate that Mr. Mumford prepared it in order to substantiate a

charitable contribution for tax purposes.

       Around December 20, 1999, Mr. Kaplan contacted Betty Schadle

(Ms. Schadle), who at that time was a tax principal with Ernst &

Young, LLP (Ernst & Young), for tax advice regarding a proposed

contribution that KQC was contemplating making to a tax-exempt

organization of a building that such tax-exempt organization was

leasing from KQC (leased building).        Mr. Kaplan advised Ms.

Schadle that the tax-exempt organization had made improvements

totaling about $800,000 to the leased building5 and that KQC had

made no adjustments because of such improvements to the rent that

it was charging the tax-exempt organization with respect to such

building.       Mr. Kaplan also informed Ms. Schadle that the improve-

ments that the lessee made to the leased building were owned by

KQC.       Mr. Kaplan did not inform Ms. Schadle, and she was not

otherwise aware, that, in addition to the leased building,

including the improvements to that building, that KQC contem-

plated giving to the tax-exempt organization, there was a new

building located on KQC’s land that the tax-exempt organization

had constructed with HHS’s funds.       Nor did Mr. Kaplan inform Ms.

Schadle, nor was she otherwise aware, that on May 15, 1998, a

notice of Federal interest with respect to the improved property


       5
      Mr. Kaplan did not advise Ms. Schadle, and she was not
otherwise aware, that the tax-exempt organization had used HHS’s
funds to make improvements to the leased building.
                             - 22 -

on Maple Street had been filed with the Sandusky County re-

corder’s office.

     On December 30, 1999, Ronald A. Matamoros (Mr. Matamoros)

had a letter that he prepared (Mr. Matamoros’s December 30, 1999

letter) hand delivered to Mr. Kaplan and faxed to Ms. Schadle.

When Mr. Matamoros prepared that letter, he was not aware

(1) that TMC had a new building constructed on KQC’s land with

HHS’s grant funds and (2) that on May 15, 1998, a notice of

Federal interest with respect to the improved property on Maple

Street was filed with the Sandusky County recorder’s office.   Mr.

Matamoros’s December 30, 1999 letter stated in pertinent part:

          You have asked us to review the lease agreement
     between KQC Investors, LLC and Texas Migrant Counsel
     [sic], Inc. relating to a child care facility located
     in Helena, Ohio. Specifically, you have asked us to
     opine as to the ownership of the improvements located
     on the property.

          We understand that the tenant has made certain
     improvements to your property which they are presently
     occupying pursuant to the provisions of the lease
     agreement. Once those improvements were incorporated
     into the property, i.e., as fixtures located within the
     building, title to those improvements immediately
     vested in your company subject only to the possessory
     rights of the tenant under the lease agreement and
     provided, however, that the tenant maintains its obli-
     gations under the lease agreement in good standing.

          The provisions of the lease that support this
     interpretation are as follows:

          a. The description of the “Demised Premises” in
     paragraph 1 clearly identifies the property owned by
     you as “all buildings, structures, fixtures and im-
     provements erected or located on the Parcel, or affixed
     thereto;”
                               - 23 -

          b. Paragraph 14 clearly provides that all insur-
     ance proceeds with regard to the building and any
     improvements are the property of your company;

          c. Paragraph 15(a) clearly recites that all
     condemnation awards, as the result of an entire condem-
     nation, are payable to your company;

          d. Paragraph 30 requires that the tenant, upon
     termination of the lease, surrender the possession of
     the Demised Premises, which includes all improvements.

          To further support your transfer of ownership, we
     understand that you are amending the lease to remove
     any references to the improvements as being owned by
     you. This includes the reduction of the rent amount to
     an amount related solely to the value of the land and
     also adjusts each of the items set out in paragraphs
     (a) through (d) above.

          Based on this analysis, it is our opinion that
     your company could transfer ownership, by way of a bill
     of sale, of all the improvements to the tenant notwith-
     standing the fact that the lease term continues.

     On December 31, 1999, Mr. Kaplan on behalf of KQC and Oscar

Villarreal (Mr. Villarreal) on behalf of TMC executed a document

entitled “BILL OF SALE” (bill of sale) that Mr. Matamoros had

prepared for KQC.    When Mr. Matamoros prepared that document for

KQC, he was not aware (1) that TMC had a new building constructed

on KQC’s land with HHS’s grant funds and (2) that on May 15,

1998, a notice of Federal interest with respect to the improved

property on Maple Street was filed with the Sandusky County

recorder’s office.   The bill of sale provided in pertinent part:

          Donor [KQC] is the Lessor under a Lease Agreement
     dated April 21, 1997, with Donee [TMC], as Lessee (the
     “Lease”). Donor has agreed to transfer and assign all
     of its rights, title and interest in and to the Im-
     provements (as defined in the Lease) to the Donee as a
                             - 24 -

     charitable contribution and the Donor and Donee shall,
     simultaneously with the execution of this Bill of Sale,
     modify and amend the Lease to reflect said charitable
     contribution.

          KNOW ALL MEN BY THESE PRESENTS, that for consider-
     ation of $1.00 received from Donee, the receipt and
     sufficiency of which are hereby acknowledged, Donor
     does hereby donate, convey, set over, assign, transfer
     and deliver to Donee, its successors and assigns, with
     effect as of the date hereof, all of Donor’s right,
     title and interest in and to the Improvements.

          TO HAVE AND TO HOLD any and all of the Improve-
     ments hereby donated, conveyed, set over, assigned,
     transferred and delivered to Donee, its successors and
     assigns, for its and their own use and benefit forever.
     The Donor hereby warrants to the Donee that the Donor
     is the lawful owner of the Improvements, that the
     Improvements are free and clear of all liens and that
     the Donor has the right to donate the Improvements.

          From time to time after the Closing, Donor shall
     execute and deliver all such other instruments and
     shall take all such other action as Donee may reason-
     ably request to more effectively transfer to and vest
     in Donee, and to put Donee in possession of, any of the
     Improvements.

          This Bill of Sale shall be governed by, and con-
     strued in accordance with, the laws of the State of
     Ohio, without regard to the conflicts of laws and rules
     of such state.

Mr. Kaplan did not acknowledge his signing the bill of sale on

behalf of KQC in the presence of two witnesses.6   Nor did Mr.

Kaplan acknowledge his signing the bill of sale on behalf of KQC

before a judge of a court of record in Ohio or a clerk thereof, a

county auditor, a county engineer, a notary public, a mayor, or


     6
      As a result, there were not two witnesses who attested to
Mr. Kaplan’s signing the bill of sale on behalf of KQC and who
subscribed their names to such attestation.
                              - 25 -

county court judge.7   It was not until March 27, 2000, that KQC

gave TMC the bill of sale.

     On December 31, 1999, Mr. Kaplan on behalf of KQC and Mr.

Villarreal on behalf of TMC executed an amendment to the April

21, 1997 lease (lease amendment).   The lease amendment provided

in pertinent part:

          WHEREAS, Lessor [KQC] and Lessee [TMC] did enter
     into a lease agreement dated the 21 day of April, 1997
     [April 21, 1997 lease] (hereinafter referred to as the
     “Lease”) relating to a child care facility located in
     Helena, Ohio (the “Project”); and

          WHEREAS, simultaneously with the execution of this
     Lease Amendment, the Lessor has conveyed all of its
     rights, title and interest in and to the building and
     all other improvements relating thereto which comprises
     the Project; and

          WHEREAS, the parties are desirous of modifying and
     amending the Lease to reflect the transfer of the
     ownership of the improvements from Lessor to Lessee.

          NOW, THEREFORE, in consideration of the mutual
     covenants and conditions, the receipt and sufficiency
     of which are hereby acknowledged, the parties hereto do
     agree as follows:

          1.   Paragraph 1 of the Lease is hereby modified
               and amended to reflect that the Demised Pre-
               mises now shall include only the land upon
               which the building and Improvements are lo-
               cated.

          2.   The rent is hereby reduced to $437.50 per
               month.



     7
      As a result, there was no such person who certified Mr.
Kaplan’s acknowledgment of his signing the bill of sale on behalf
of KQC and who subscribed such person’s name to a certificate of
such acknowledgment.
                                 - 26 -

          *        *       *       *       *       *       *

              4.   Any and all other provisions of the Lease
                   which reflect any rights of ownership of
                   Lessor in the Improvements shall be deemed
                   hereby deleted. It is the intent of the
                   parties to revise the Lease to reflect solely
                   the ownership by the Lessor of the land.

              5.   Except as hereinabove modified, the Lease
                   remains in full force and effect.

     An Ernst & Young memorandum dated January 11, 2000 that was

prepared under Ms. Schadle’s supervision stated in pertinent

part:

     FACTS
     The Transaction
     KQC Investors, Inc. (“KQC”), a North Carolina limited
     liability company, is owned by Hal Kaplan, Dean
     Caldwell and Matthew Marceron. KQC purchased a child
     care facility located in Helena, Ohio. In April of
     1997, KQC entered into an operating lease with Texas
     Migrant Counsel [sic], Inc. (“Texas”) [TMC] relating to
     said facility. Texas qualifies as an exempt organiza-
     tion under IRS §501(c)(3).

        KQC’s cost basis in the facility is approximately
        $125,000. Since April of 1997, Texas has made substan-
        tial leasehold improvements to the facility. KQC
        estimates that Texas spent approximately $800,000 on
        these improvements. After the improvements were com-
        pleted, the building was appraised at a value of
        $1,000,000. No depreciation was taken on these lease-
        hold improvements by either KQC or Texas, nor were the
        leasehold improvements ever carried on the books of
        KQC.

        On December 31, 1999, KQC and Texas entered into an
        agreement whereby KQC agreed to transfer and assign all
        of its rights, title and interest in and to the build-
        ing (including the leasehold improvements) to Texas as
        a charitable contribution. The owners of KQC intend to
        take a charitable contribution deduction for the full
        fair market value of this property.
                        - 27 -

The Opinion Letter
Blanco, Tackabery, Combs & Matamoros, P.A., Kaplan’s
law firm, has provided an opinion letter stating that
various parts of the lease agreement indicate that
title to the leasehold improvements immediately vested
with KQC and that Texas had only possessory rights
subject to the lease agreement. According to this
letter, the following are specific provisions of the
lease that support this interpretation:

     •    In the event of an entire condemnation, the
          award for any such taking shall be paid to
          the Lessor;

     •    Property owned by KQC is identified to in-
          clude “improvements erected or located on the
          Parcel, or affixed thereto”;

     •    All insurance proceeds with regard to the
          building and improvements are the property of
          KQC;

     •    Texas is required, upon termination of the
          lease, to surrender the possession of the
          premises, which includes all improvements.

The Lease
The Lease Agreement contains no specific mention of
conveying the title to the improvements. See the Lease
Agreement, dated April 1997, for specific lease terms
and conditions negotiated between Texas and KQC.

ISSUES
Were the leasehold improvements made by Texas the
property of KQC prior to the termination of the lease,
thereby entitling KQC to a charitable contribution
deduction under IRC §170(b)(1)(C) equal to the fair
market value of the renovated property?

CONCLUSION
There is exposure in taking the position that once the
improvements to the property were made [by TMC], title
to such improvements vested immediately with KQC. Due
to the substantial dollar amount involved, the IRS is
likely to question the ownership of the improvements
located on the property. Based on previous determina-
tions made in this area, it is very likely that the IRS
will take the position that these improvements should
                        - 28 -

not be considered the property of KQC while the lease
was still in effect. Accordingly, KQC’s deduction may
be limited to the fair market value of the property at
the time of the donation excluding the renovations made
by Texas.

DISCUSSION AND ANALYSIS
The predominant issue is that of establishing ownership
of the leasehold improvements at the time of transfer.
There are two positions on this: a) the leasehold
improvements immediately vested in KQC when made,
subject only to the possessory rights of Texas under
the lease agreement or b) the leasehold improvements do
not become the property of KQC until termination of the
lease agreement.

   *       *       *       *       *       *       *

KQC had a basis only of approximately $125,000 in the
property when they donated it to Texas. KQC made no
investment in the significant improvements made by
Texas and had no depreciable interest in them. There-
fore, based on the numerous case law and opinions of
the Service discussed above, significant risk ensues as
to whether or not the Service will allow KQC a full
fair market value charitable contribution deduction.

Lease Terms

Additionally, the specific terms of the lease should be
considered in determining ownership of the leasehold
improvements. As enumerated in the facts above,
Kaplan’s law firm has provided what they believe to be
provisions of the lease agreement that support the
interpretation that ownership resided with KQC. It is
important to note a few facts regarding these provi-
sions. In the event of a total condemnation, the lease
agreement shall also terminate. Accordingly, ownership
in the improvements may be interpreted to reside with
KQC as a result of the termination of the lease rather
than as a result of the condemnation. Additionally,
while the lease agreement does include all improvements
in the description of property owned by KQC, this same
section states that KQC agrees to “let” and Texas
agrees to take from KQC “said property”. This state-
ment therefore does not clearly indicate ownership of
leasehold improvements made during the term of the
lease agreement. * * * The last provision provided by
                               - 29 -

     the attorneys involves the requirement that Texas
     surrender the possession of all improvements upon
     termination of the lease. This seems to be an indica-
     tion that the improvements are presently the property
     of Texas while the lease agreement is still in effect,
     rather than an indication that they are not.

     It should be further noted that Section 14, Fire and
     Casualty, of the lease agreement between Texas and KQC
     states the following:

          If and when Lessee shall complete all demolition,
          restoration, repair, replacement and rebuilding
          which Lessee is required to carry out under this
          paragraph, then any balance of insurance proceeds
          then held by Lessee shall be retained by Lessee
          free of trust.

     Where the lessee is able to keep insurance proceeds in
     excess of required replacements, there is an indication
     that ownership of land and improvements reside with the
     lessee during the lease term.

     During the period January through March 2000, TMC paid

$1,600 a month rent to KQC (or a total of $4,800), which was the

amount of monthly rent that TMC was required to pay to KQC under

the April 21, 1997 lease.    In April 2000, KQC refunded such

monthly rent (or a total of $4,800) to TMC and sent it an invoice

for each of the months January, February, and March 2000 that

showed monthly rent due of $437.50, which TMC paid.    Thereafter,

through March 2001, TMC paid rent to KQC of $437.50 a month.

     On June 29, 2000, KQC timely filed Form 1065, U.S. Partner-

ship Return of Income, for 1999 (KQC’s 1999 return).    George S.

Tutor (Mr. Tutor), who was a tax manager with Ernst & Young in

2000 when KQC’s 1999 return was being prepared, signed that

return as return preparer.    Mr. Tutor supervised David Johnston
                               - 30 -

(Mr. Johnston), who was a tax specialist with Ernst & Young in

2000 when KQC’s 1999 return was being prepared and who prepared

KQC’s 1999 return on the basis of information provided to him by

KQC.    Mr. Tutor, inter alia, reviewed KQC’s 1999 return and

satisfied himself that he was able to sign that return as return

preparer.

       During the course of preparing KQC’s 1999 return, Mr.

Johnston had discussions with Mr. Marceron about KQC’s claimed

noncash charitable contribution to TMC.    In those discussions,

Mr. Marceron informed Mr. Johnston that KQC had contributed to

TMC, a nonprofit organization, a building located on the improved

property on Maple Street, which had a cost basis of $95,000 on

KQC’s books and an appraised value of $1 million.    Mr. Marceron

explained to Mr. Johnston that the value of the building that KQC

claimed to have given to TMC had increased to $1 million because

TMC made improvements to that building.    In the discussions that

Mr. Johnston had with Mr. Marceron about KQC’s claimed noncash

charitable contribution to TMC, Mr. Marceron indicated that he

believed that claiming a deduction with respect to such claimed

charitable contribution would be a “push”; that is to say, Mr.

Marceron believed that there was a substantial risk that respon-

dent would disallow any such claimed deduction.

       Mr. Marceron completed portions, but not all, of Form 8283,

Noncash Charitable Contributions (Form 8283), with respect to the
                                  - 31 -

purported contribution to TMC and sent it to Mr. Johnston for his

review.       Mr. Johnston reviewed Form 8283 that Mr. Marceron had

prepared and informed Mr. Marceron, inter alia, that Part IV,

Donee Acknowledgment (donee acknowledgment), had to be completed

by TMC, the purported donee, before KQC included it, as required,

with the tax return that it was filing for 1999.

       KQC, and not Ernst & Young, handled the actual filing of

KQC’s 1999 return.       In that return, KQC claimed a noncash chari-

table contribution of $1,025,000.       In the section entitled

“Deductions” in Schedule K, Partners’ Shares of Income, Credits,

Deductions, etc., KQC showed a charitable contribution of

$1,025,000.       In an explanatory statement attached to that sched-

ule, KQC described that claimed contribution as “TEXAS MIGRANT

SCHOOL PROPERTY--HELENA, OH”.       Form 8283 that KQC included as

part of KQC’s 1999 return (KQC’s Form 8283) indicated that the

name of the organization to which KQC claimed it gave certain

noncash property was “Texas Migrant School Property” and gave the

following description of the property that KQC claimed it gave to

TMC:       “Maple Street, Helena, Sandusky County, OH”.   KQC’s Form

8283 indicated that the donated property was “Real Estate” and

that the condition of such property was “good”.       KQC’s Form 8283

showed the fair market value of the claimed donated property as

$1,025,000.8      In disregard of Mr. Johnston’s advice that, before


       8
        Mr. Mumford’s December 17, 1999 letter indicated that a
                                                     (continued...)
                             - 32 -

KQC filed KQC’s 1999 return, KQC was required to have TMC, the

purported donee, complete the donee acknowledgment in KQC’s Form

8283, such donee acknowledgment was left blank.9   In addition,

KQC’s Form 8283 did not contain:   (1) KQC’s name and taxpayer

identification number, (2) the date and manner of KQC’s acquisi-

tion of the property purportedly contributed, and (3) the cost or

other basis of the property purportedly contributed, adjusted as


     8
      (...continued)
preliminary real estate appraisal of KQC’s land, the 1958 school
building on that land as well as the improvements thereto made by
TMC, other improvements to KQC’s land made by TMC, and the new
building built on that land by TMC was $1,025,000.
     9
      The donee acknowledgment in Form 8283 required the follow-
ing information to be provided by the charitable organization
receiving the claimed noncash charitable contribution:

     This charitable organization acknowledges that it is a
     qualified organization under section 170(c) and that it
     received the donated property as described in Section
     B, Part I [of Form 8283], above on <___________________
                                            (Date)

     Furthermore, this organization affirms that in the
     event it sells, exchanges, or otherwise disposes of the
     property described in Section B, Part I (or any portion
     thereof) within 2 years after the date of receipt, it
     will file Form 8282, Donee Information Return, with the
     IRS and give the donor a copy of that form. This
     acknowledgment does not represent agreement with the
     claimed fair market value

     Does the organization intend to use the property for an
     unrelated use? . . . . . . . . . . . . . < G Yes G No

An authorized representative of the charitable organization
receiving the claimed noncash charitable contribution was re-
quired (1) to provide in the donee acknowledgment in Form 8283
the name of such organization, its employer identification
number, and its address and (2) to sign and date such donee
acknowledgment.
                               - 33 -

provided by section 1016.

     Neither Ms. Schadle, Mr. Tutor, nor Mr. Johnston was aware

that TMC had constructed a new building on KQC’s land with HHS’s

grant funds.    Nor was any of them aware that KQC was reporting in

KQC’s 1999 return a charitable contribution in an amount equal to

the preliminary real estate appraisal (i.e., $1,025,000) set

forth in Mr. Mumford’s December 17, 1999 letter of KQC’s land,

the 1958 school building on that land as well as the improvements

thereto made by TMC, other improvements to KQC’s land made by

TMC, and the new building constructed on that land by TMC.

     Mr. Kaplan and Ms. Kaplan (collectively the Kaplans), Mr.

Marceron and Ms. Marceron (collectively the Marcerons), and Mr.

Caldwell and Ms. Caldwell (collectively the Caldwells) timely

filed their respective Forms 1040, U.S. Individual Income Tax

Returns, for 1999 (petitioners’ respective returns).   In peti-

tioners’ respective returns, the Kaplans, the Marcerons, and the

Caldwells claimed the following amounts of noncash charitable

contribution deductions attributable to KQC’s claiming in KQC’s

1999 return a noncash charitable contribution to TMC of

$1,025,000:

                                    Amount of Claimed
                Petitioners      Charitable Contribution
               The Kaplans               $608,850
               The Marcerons               51,250
               The Caldwells              364,900

(We shall refer to the respective noncash charitable contribution
                              - 34 -

deductions that the Kaplans, the Marcerons, and the Caldwells

claimed in petitioners’ respective returns as petitioners’

respective claimed noncash charitable contribution deductions.)

     On or about February 8, 2001, respondent’s revenue agent

notified Mr. Marceron that KQC’s 1999 return was under examina-

tion.   Thereafter, but before March 13, 2001, KQC asked Mr.

Matamoros to prepare a general warranty deed transferring the

improved property on Maple Street to TMC.    Mr. Matamoros prepared

such a deed (KQC’s deed).   On March 13, 2001, Mr. Kaplan on

behalf of KQC signed KQC’s deed in the presence of Mr. Marceron

and Mr. Matamoros and acknowledged such signing before Mr.

Matamoros, a notary public.   On March 22, 2001, KQC’s deed was

filed with the auditor of Sandusky County, Ohio.    As of December

20, 2001, TMC was unaware of KQC’s deed.

     Mr. Marceron sent a letter to TMC dated January 8, 2002 (Mr.

Marceron’s January 8, 2002 letter).    That letter stated in

pertinent part:

     Please find enclosed our [KQC’s] check #1135 in the
     amount of Ten Thousand Five Hundred Dollars
     ($10,500.00) representing overpayment of rent for the
     period from January 1, 2000 through December 31, 2001.
     A review of our records indicates that you [TMC] have
     continued to pay rent on the real estate, which our
     partnership [KQC] believed that it owned, adjacent to
     the property that we gifted to the Head Start Center in
     December 1999. It was not our intent to charge you
     rent on the property that we have in fact gifted to
     Texas Migrant Council, Inc.

     Also enclosed is a copy of the Deed [KQC’s deed] pre-
     pared by our attorney to evidence completion of our
                              - 35 -

     intended gift. We understand you have been unable to
     locate a copy of this deed in your files.

Mr. Marceron enclosed with Mr. Marceron’s January 8, 2002 letter

(1) a $10,500 check payable to TMC and (2) a copy of KQC’s deed.

     Respondent issued respective notices of deficiency (notices)

to the Kaplans, the Marcerons, and the Caldwells.   (We shall

refer to the respective notices to the Kaplans, the Marcerons,

and the Caldwells as petitioners’ respective notices.)   In

petitioners’ respective notices, respondent determined, inter

alia, to disallow petitioners’ respective claimed noncash chari-

table contribution deductions.   In petitioners’ respective

notices, respondent further determined that the Kaplans, the

Marcerons, and the Caldwells are liable for the accuracy-related

penalty under section 6662(a).

                              OPINION

     Although respondent must have commenced respondent’s exami-

nation of petitioners’ respective returns after July 22, 1998,

petitioners in each of these cases do not address section

7491(a).   On the record before us, we conclude that petitioners’

burden of proof in each of these cases, see Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933), does not shift to respondent

under section 7491(a) with respect to such petitioners’ respec-

tive deficiencies in tax that respondent determined.10   Moreover,

     10
      On the record before us, we also find that petitioners in
each of these cases have failed to carry their burden of estab-
                                                   (continued...)
                              - 36 -

deductions are strictly a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to the deduction

claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

     We turn first to the issue presented under section 170.   The

parties agree that, in order to be entitled to petitioners’

respective claimed noncash charitable contribution deductions,

petitioners must establish, inter alia, that KQC’s claimed

noncash charitable contribution to TMC on December 31, 1999, of

the improved property on Maple Street11 qualifies as a charitable

contribution under section 170(a).12   (We shall hereinafter refer

to KQC’s claimed noncash charitable contribution to TMC on

December 31, 1999, as KQC’s claimed noncash charitable contribu-

tion to TMC.)   The parties also agree that, in order for KQC’s

claimed noncash charitable contribution to TMC to qualify as a

charitable contribution under section 170(a), the following

essential elements of a valid inter vivos gift (essential ele-



     10
      (...continued)
lishing that they satisfied the applicable requirements of sec.
7491(a)(2).
     11
      The improved property on Maple Street consisted of KQC’s
land and 1958 school building that KQC purchased in 1997 and any
improvements made by TMC to that property, including the new
building that TMC constructed thereon with HHS’s grant funds.
     12
      Sec. 170(a) generally allows a taxpayer a deduction for
any charitable contribution, as defined in sec. 170(c), made
during the taxable year. Sec. 170(c) defines the term “charita-
ble contribution” to mean a contribution or gift to or for the
use of one or more specified organizations. The parties agree
that KQC is one of the organizations specified in sec. 170(c).
                              - 37 -

ments of a bona fide inter vivos gift) must be present:

          (1) a donor competent to make the gift; (2) a
          donee capable of taking the gift; (3) a clear
          and unmistakable intention on the part of the
          donor to absolutely and irrevocably divest
          himself of the title, dominion, and control
          of the subject matter of the gift, in
          praesenti; (4) the irrevocable transfer of
          the present legal title and of the dominion
          and control of the entire gift to the donee,
          so that the donor can exercise no further act
          of dominion or control over it; (5) a deliv-
          ery by the donor to the donee of the subject
          of the gift or of the most effectual means of
          commanding the dominion of it; (6) acceptance
          of the gift by the donee * * *

Guest v. Commissioner, 77 T.C. 9, 15-16 (1981) (quoting Weil v.

Commissioner, 31 B.T.A. 899, 906 (1934), affd. 82 F.2d 561 (5th

Cir. 1936)).

     The parties disagree over whether all of the essential

elements of a bona fide inter vivos gift were present on December

31, 1999, with respect to KQC’s claimed noncash charitable

contribution to TMC.   According to petitioners, all of those

elements were present on that date.    Although respondent agrees

that certain of those elements were present on December 31, 1999,

respondent disagrees that all of those elements were present on

that date (or at any other time in 1999).13

     13
      Respondent acknowledges, inter alia, that KQC owned and
was thus competent to make a gift of KQC’s land and 1958 school
building. However, respondent contends that KQC did not own, and
that the U.S. Government had an interest in, the new building
that TMC constructed on KQC’s land with HHS’s grant funds. As a
result, according to respondent, KQC was not competent to give
the new building to TMC. Respondent also contends that in 1999:
                                                   (continued...)
                              - 38 -

     On the record before us, we find that petitioners in each of

these cases have failed to carry their burden of establishing

that all of the essential elements of a bona fide inter vivos

gift were present on December 31, 1999 (or at any other time in

1999) with respect to KQC’s claimed noncash charitable contribu-

tion to TMC.   We shall address only whether one of those elements

was present on that date (or at any other time in 1999), viz,

whether KQC made an irrevocable transfer to TMC of legal title to

the improved property on Maple Street or to any portion of such

property.   That is because our resolution of that question is

determinative of the issue under section 170 presented in these

cases.

     In support of their position that in 1999 KQC made an

irrevocable transfer to TMC of legal title to the improved

property on Maple Street or to the 1958 school building and the

new building on KQC’s land,14 petitioners argue:

     13
      (...continued)
(1) Although KQC intended to make a gift to TMC, KQC did not make
a gift to TMC; (2) KQC did not irrevocably transfer to TMC legal
title to and control over the improved property on Maple Street
or any portion of such property; (3) KQC did not deliver a gift
to TMC; and (4) TMC did not accept KQC’s claimed noncash charita-
ble contribution to TMC.
     14
      In KQC’s 1999 return, KQC reported KQC’s claimed noncash
charitable contribution to TMC of the improved property on Maple
Street, i.e., KQC’s land and 1958 school building that KQC
purchased in 1997 and any improvements made by TMC to that
property, including the new building that TMC constructed with
HHS’s grant funds. On brief, petitioners appear to muddle their
position as to what they claim KQC gave to TMC on Dec. 31, 1999.
                                                   (continued...)
                             - 39 -

          KQC made an effective conveyance of its interest
     in the improvements on December 31, 1999, as evidenced
     by the bill of sale * * * and by the testimony of Mr.
     Kaplan * * *. The bill of sale was executed by KQC to
     convey all of its rights, title and interest in and to
     the improvements and warrants that KQC is the lawful
     owner of the improvements, which are free and clear of
     all liens, and that KQC has the right to donate the
     improvements. These steps were taken in accord with
     the advice and recommendation of Mr. Matamoros * * *
     and using the form that Mr. Matamoros had provided
     * * *. The bill of sale was signed by the then Presi-
     dent of TMC evidencing the acceptance of the contribu-
     tion by TMC for the express consideration of ONE DOLLAR
     ($1.00) only.

          The deed issued and recorded in March, 2001,
     merely documents the manifest intent of the parties in
     December, 1999. Until this formality was completed, as
     between the parties, the long-standing common law rule
     in Ohio is that the grantee of a defective conveyance
     has an equitable interest that can be enforced against
     the grantor. * * * This substance of this rule is now
     exists in Ohio Revised Code § 5301.25, which permits
     only a bona fide purchased for value that does not have
     knowledge of a prior conveyance that has not been
     recorded to defeat such conveyance. * * *

          There was a clear and unmistakable intention on
     the part of KQC to transfer, in praesenti, all of the
     title, dominion and control of the improvements to the
     Helena property in December 1999. The subsequent deed
     to the land was executed and recorded in March 2001,
     relating back to the contribution on December 31, 1999.
     KQC has parted with all dominion and control over the
     property in favor of TMC. Presuming that the bill of
     sale in December 1999 operates to convey only the
     ownership of the improvements, it is an absolute and

     14
      (...continued)
At times, petitioners appear to argue on brief that KQC gave to
TMC on Dec. 31, 1999, the 1958 school building and the new
building on KQC’s land, but not KQC’s land. At other times,
petitioners appear to argue on brief that KQC gave TMC on Dec.
31, 1999, the improved property on Maple Street. Because peti-
tioners’ position on brief is not clear, we shall consider
whether KQC made a gift to TMC on Dec. 31, 1999, of the improved
property on Maple Street or any portion of such property.
                                 - 40 -

     complete conveyance. TMC retains no interest in the
     improvements. Conveyance of the improvements subject
     to a land lease has been recognized as a deductible
     charitable contribution. Arbor Towers Associates, Ltd.
     v. Commissioner, 1999 T.C.Memo 213. The substance of
     this gift is substantially more than the right to use
     the improvements rent-free. [Reproduced literally.]

     Petitioners’ argument fails to address the requirements of

Ohio law (discussed below) that must have been satisfied in order

to establish one of the essential elements of a bona fide inter

vivos gift with respect to KQC’s claimed noncash charitable

contribution to TMC, viz, that KQC made an irrevocable transfer

to TMC of legal title to the improved property on Maple Street or

to any portion of such property.     On the record before us, we

reject petitioners’ argument that on December 31, 1999, KQC made

such an irrevocable transfer.

     With respect to the bill of sale on which petitioners rely,

that bill of sale purports to convey to TMC all of KQC’s rights,

title, and interest in and to only the “improvements” on KQC’s

land, and not to KQC’s land itself.       With respect to the “im-

provements” to which the bill of sale referred, the parties

dispute whether such “improvements” consisted of the 1958 school

building, as respondent maintains, or both the 1958 school

building and the new building that TMC constructed on KQC’s land

with HHS’s grant funds, as petitioners maintain.       We need not

resolve that dispute.15     That is because, assuming arguendo that

     15
          We note, however, that, when Mr. Matamoros prepared the
                                                       (continued...)
                              - 41 -

the improvements to which the bill of sale referred consisted of

both the 1958 school building and the new building that TMC

constructed on KQC’s land with HHS’s grant funds, on the record

before us, we find that petitioners in each of these cases have

failed to carry their burden of establishing that on December 31,

1999 (or at any other time in 1999) KQC made an irrevocable

transfer to TMC of legal title to either such 1958 school build-

ing or such new building.   On that record, we further find that

petitioners in each of these cases have failed to carry their

burden of proving that on December 31, 1999 (or at any other time

in 1999) KQC made an irrevocable transfer to TMC of legal title

to KQC’s land or to the improved property on Maple Street.16

     The parties agree that we must look to the law of the State

of Ohio (Ohio law) in order to determine whether on December 31,

1999 (or at any other time in 1999) KQC made an irrevocable


     15
      (...continued)
bill of sale for KQC, he was not aware that TMC had constructed a
new building on KQC’s land with HHS’s grant funds.
     16
      Indeed, as petitioners acknowledge, the bill of sale on
which they rely does not even purport to transfer KQC’s land to
TMC. Moreover, we reject petitioners’ suggestion that the
general warranty deed pertaining to the improved property on
Maple Street that Mr. Matamoros prepared for KQC between Feb. 8
and Mar. 13, 2001, and that Mr. Kaplan executed on behalf of KQC
on Mar. 13, 2001, relates back to the bill of sale that Mr.
Kaplan executed on behalf of KQC on Dec. 31, 1999, thereby
supporting petitioners’ position that on that date KQC made an
irrevocable transfer to TMC of legal title to the improved
property on Maple Street or to any portion of such property.
Petitioners do not cite, and we have not found, any authority
supporting such a suggestion.
                              - 42 -

transfer to TMC of legal title to the improved property on Maple

Street or to any portion of such property.    The Supreme Court of

Ohio has held:   “Whether or not recorded, a deed in Ohio passes

title upon its proper execution and delivery, so far as the

grantor is able to convey it.”   Wayne Bldg. & Loan Co. of Wooster

v. Yarborough, 228 N.E.2d 841, 853 (Ohio 1967); see also Kniebbe

v. Wade, 118 N.E.2d 833, 835 (Ohio 1954).

     With respect to the requirement of “proper execution”, Ohio

law in effect in 1999 required that, in order for a deed of any

interest in real property to be executed properly, the

     deed * * * shall be signed by the grantor * * *. The
     signing shall be acknowledged by the grantor * * * in
     the presence of two witnesses, who shall attest the
     signing and subscribe their names to the attestation.
     The signing shall be acknowledged by the grantor * * *
     before a judge or clerk of a court of record in this
     state, or a county auditor, county engineer, notary
     public, or mayor, who shall certify the acknowledgment
     and subscribe his name to the certificate of the ac-
     knowledgment.

Ohio Rev. Code Ann. sec. 5301.01 (Anderson 1999).   (We shall

hereinafter refer to Ohio Rev. Code Ann. sec. 5301.01 (Anderson

1999) in effect in 1999 as section 5301.01 of the Ohio Revised

Code in effect in 1999.)   As pertinent here, effective February

1, 2002, there was an amendment (2002 amendment) of section

5301.01 of the Ohio Revised Code in effect in 1999, which deleted

the second sentence thereof (quoted above).   If a deed17 was

     17
      Although KQC used a document entitled “Bill of Sale”,
respondent does not appear to suggest that such document may not
                                                   (continued...)
                              - 43 -

executed prior to February 1, 2002, the effective date of the

2002 amendment, and was not acknowledged in the presence of, or

was not attested by, two witnesses, but was signed by the grantor

and acknowledged by the grantor before a judge or clerk of a

court of record in Ohio, or a county auditor, county engineer,

notary public, or a mayor, who certified the acknowledgment and

subscribed his or her name to the certificate of the acknowledg-

ment, as required by section 5301.01 of the Ohio Revised Code in

effect in 1999, inter alia, the instrument is deemed executed

properly and is presumed to be valid unless the signature of the

grantor was obtained by fraud.   Ohio Rev. Code Ann. sec. 5301.01

(LexisNexis Supp. 2005).

     On the record before us, we find that the bill of sale that

Mr. Kaplan executed on behalf of KQC on December 31, 1999, was

not properly executed in accordance with section 5301.01 of the

Ohio Revised Code in effect in 1999 and, as pertinent here, the

2002 amendment.   That is because the signing of the bill of sale

by Mr. Kaplan on behalf of KQC was not acknowledged by him on

behalf of KQC before a judge or clerk of a court of record in

Ohio, a county auditor, county engineer, notary public, or mayor,

who certified the acknowledgment and subscribed his or her name

to the certificate of the acknowledgment.

     17
      (...continued)
constitute a deed for purposes of Ohio law. Thus, we shall
proceed on the assumption that such document may constitute a
deed for purposes of Ohio law.
                                - 44 -

     With respect to the additional requirement of Ohio law that,

in order to pass title, there must be delivery of a properly

executed deed, Wayne Bldg. & Loan Co. of Wooster v. Yarborough,

supra, on the record before us, we find that that additional

requirement was not satisfied on December 31, 1999 (or at any

other time in 1999).     We have found that KQC did not deliver the

bill of sale to TMC until March 27, 2000.18

     We have found on the record before us that petitioners in

each of these cases have failed to carry their burden of estab-

lishing that on December 31, 1999 (or at any other time in 1999)

KQC made an irrevocable transfer to TMC of legal title to the

improved property on Maple Street or to any portion of such

property.   On that record, we further find that petitioners in

each of these cases have failed to carry their burden of estab-

lishing that all of the essential elements of a bona fide inter

vivos gift were present on December 31, 1999 (or at any other

time in 1999) with respect to KQC’s claimed noncash charitable

contribution to TMC.19

     18
      On brief, petitioners acknowledge that TMC did not receive
the bill of sale from KQC until Mar. 27, 2000. We rejected above
petitioners’ suggestion that the general warranty deed pertaining
to the improved property on Maple Street that Mr. Kaplan executed
on behalf of KQC on Mar. 13, 2001, relates back to the bill of
sale and thereby effected in 1999 an irrevocable transfer by KQC
to TMC of legal title to such property or any portion of such
property. See supra note 16.
     19
      Consequently, we need not address whether on Dec. 31, 1999
(or at any other time in 1999) the remaining essential elements
                                                   (continued...)
                             - 45 -

     Based upon our examination of the entire record before us,

we find that petitioners in each of these cases have failed to

carry their burden of establishing that under section 170 they

are entitled for 1999 to petitioners’ respective claimed noncash

charitable contribution deductions or to any other deductions

attributable to KQC’s claimed noncash charitable contribution to

TMC of the improved property on Maple Street or any portion of

such property.

     19
      (...continued)
of a bona fide inter vivos gift that are in dispute were present
with respect to KQC’s claimed noncash charitable contribution to
TMC. Nor do we have to address respondent’s position that
petitioners in each of these cases have failed to carry their
burden of showing that they substantially complied with all of
the substantiation requirements under sec. 170 and the regula-
tions thereunder. We note, however, that Mr. Mumford’s December
17, 1999 letter (1) did not contain the actual or expected date
of a charitable contribution of all or a portion of the improved
property on Maple Street that was the subject of that letter,
(2) did not indicate that Mr. Mumford prepared it in order to
substantiate a charitable contribution for tax purposes, and
(3) made no reference to the notice of Federal interest that on
May 15, 1998, was filed with respect to the improved property on
Maple Street with the Sandusky County recorder’s office. We also
note (1) that KQC’s Form 8283 included as part of KQC’s 1999
return did not contain certain information required by that form
(e.g., the date and manner of KQC’s acquisition of the property
purportedly contributed to TMC or the cost or other basis of such
property, adjusted as provided by sec. 1016) and (2) that the
donee acknowledgment in that form was not completed by TMC but
was left blank. Finally, in light of our finding that petition-
ers have failed to carry their burden of establishing that all of
the essential elements of a bona fide inter vivos gift were
present on Dec. 31, 1999 (or at any other time in 1999) with
respect to KQC’s claimed noncash charitable contribution to TMC,
we need not address the parties’ dispute over the fair market
value of any such claimed contribution. In this regard, we need
not make any comments in addition to the comments that we made at
the trial in these cases with respect to the parties’ respective
experts and such experts’ respective reports.
                              - 46 -

     We turn now to the issue presented under section 6662.

Respondent determined that petitioners in each of these cases are

liable for 1999 for the accuracy-related penalty under section

6662(a) because of a gross valuation misstatement under section

6662(h).   In the alternative, respondent determined that peti-

tioners are liable for 1999 for that penalty because of negli-

gence or disregard of rules or regulations under section

6662(b)(1) or a substantial understatement of tax under section

6662(b)(2).   On brief, respondent concedes that if the Court were

to find that petitioners are not entitled for 1999 to the respec-

tive charitable contribution deductions that they are claiming

“on the ground that KQC did not transfer property to TMC in 1999,

or on the ground that KQC did not meet the substantiation re-

quirements of I.R.C. § 170”, petitioners would not be liable for

the accuracy-related penalty because of a gross valuation mis-

statement under section 6662(h).   Consequently, we consider only

respondent’s alternative argument that petitioners are liable for

the accuracy-related penalty under section 6662(a) because of

negligence or disregard of rules or regulations under section

6662(b)(1) or a substantial understatement of tax under section

6662(b)(2).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax attributable to, inter

alia, a substantial understatement of tax, sec. 6662(b)(2).    An
                              - 47 -

understatement is equal to the excess of the amount of tax

required to be shown in the tax return over the amount of tax

shown in the tax return, sec. 6662(d)(2)(A), and is substantial

in the case of an individual if it exceeds the greater of 10

percent of the tax required to be shown or $5,000, sec.

6662(d)(1)(A).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant or an attorney.   Sec. 1.6664-4(b)(1), Income Tax

Regs.   The determination of whether a taxpayer acted with reason-

able cause and in good faith with respect to an underpayment that

is related to an item reflected in the return of a passthrough

entity is made on the basis of all the pertinent facts and

circumstances, including the taxpayer’s own actions, as well as

the actions of the passthrough entity.   Sec. 1.6664-4(e), Income

Tax Regs.   Reliance on the advice of a professional does not

necessarily demonstrate reasonable cause and good faith unless,
                                - 48 -

under all the circumstances, such reliance was reasonable and the

taxpayer acted in good faith.    Sec. 1.6664-4(b)(1), Income Tax

Regs.   In this connection, a taxpayer must demonstrate that the

taxpayer’s reliance on the advice of a professional concerning

substantive tax law was objectively reasonable.    Goldman v.

Commissioner, 39 F.3d 402, 408 (2d Cir. 1994), affg. T.C. Memo.

1993-480.   In the case of claimed reliance on the accountant who

prepared the taxpayer’s tax return, the taxpayer must establish

that correct and complete information was provided to the accoun-

tant and that the item incorrectly omitted, claimed, or reported

in the return was the result of the accountant’s error.    See

Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir. 1995),

affg. T.C. Memo. 1993-634; Weis v. Commissioner, 94 T.C. 473, 487

(1990); Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).

     Respondent has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662(a).   To meet that burden, respondent must come

forward with sufficient evidence showing that it is appropriate

to impose the accuracy-related penalty.    Higbee v. Commissioner,

116 T.C. 438, 446 (2001).   Although respondent bears the burden

of production with respect to the accuracy-related penalty at

issue, respondent “need not introduce evidence regarding reason-

able cause, substantial authority, or similar provisions. * * *

the taxpayer bears the burden of proof with regard to those
                                - 49 -

issues.”     Id.

     On brief, petitioners in each of these consolidated cases

indicate that they are not disputing certain determinations in

petitioners’ respective notices that gave rise to a portion of

the respective deficiencies that respondent determined.      We have

sustained the remaining determinations in petitioners’ respective

notices that petitioners in each of these cases have contested

and that gave rise in large part to the respective deficiencies

that respondent determined.     As a result, the deficiency determi-

nations in petitioners’ respective notices are sustained in full.

On the record before us, we find that there are substantial

understatements of tax in petitioners’ respective returns for

1999.     On that record, we find that respondent has satisfied

respondent’s burden of production under section 7491(c).

     Petitioners argue that respondent’s determinations under

section 6662(a) are wrong because “KQC made a good faith and

reasonable effort to obtain qualified professional advice regard-

ing its ability to claim a tax deduction for the charitable

contribution and the requirements to sustain that deduction.”20

(We shall refer to that argument as petitioners’ professional

advice argument.)     On the record before us, we reject petition-

ers’ professional advice argument.       On that record, we find that


     20
      Petitioners in each of these cases advance no argument
with respect to the portions of the underpayments in petitioners’
respective returns for 1999 that are attributable to determina-
tions in the respective notices that petitioners do not dispute.
                                 - 50 -

the various advisors on whom KQC claims to have relied did not

have complete and accurate information with respect to KQC’s

claimed noncash charitable contribution to TMC.     By way of

illustration, when Mr. Matamoros prepared Mr. Matamoros’s Decem-

ber 30, 1999 letter and the bill of sale that petitioners claim

transferred to TMC the “improvements” on KQC’s land, including

the new building that TMC constructed with HHS’s grant funds, he

was not aware of (1) that new building21 and (2) the notice of

Federal interest that was filed on May 15, 1998, with respect to

the improved property on Maple Street with the Sandusky County

recorder’s office.22

     By way of further illustration that the various advisors on

which KQC claims to have relied did not have complete and accu-

rate information, representatives of Ernst & Young23 whom KQC


     21
      In his testimony at the trial in these cases, Mr.
Matamoros expressed the view that any new building that TMC
constructed on KQC’s land with HHS’s grant funds about which he
was unaware when he prepared Mr. Matamoros’s December 30, 1999
letter and the bill of sale would be owned by KQC, but only upon
termination of the April 21, 1997 lease pursuant to its terms or
earlier if TMC were to be in default under such lease and were to
be evicted by KQC.
     22
      Mr. Kaplan testified that he did not become aware until
shortly before the trial in these cases that a notice of Federal
interest with respect to the improved property on Maple Street
had been filed with the Sandusky County recorder’s office. Even
if we were to accept Mr. Kaplan’s testimony, such testimony does
not change the fact that neither Mr. Matamoros nor Ernst & Young
representatives were aware of the filing of such notice of
Federal interest.
     23
          Mr. Kaplan on behalf of KQC consulted Ms. Schadle, a tax
                                                       (continued...)
                              - 51 -

consulted with respect to KQC’s claimed noncash charitable

contribution to TMC were not aware that TMC had constructed a new

building on KQC’s land with HHS’s grant funds.24   Nor were such

representatives aware that KQC was claiming in KQC’s 1999 return

a charitable contribution for the improved property on Maple

Street,25 see supra note 11, in an amount equal to the prelimi-

nary real estate appraisal (i.e., $1,025,000) set forth in Mr.

Mumford’s December 17, 1999 letter for such improved property.

Furthermore, Ernst & Young representatives did not know that on

May 15, 1998, a notice of Federal interest with respect to the


     23
      (...continued)
principal with Ernst & Young in 1999 and 2000, and Mr. Marceron
on behalf of KQC consulted Mr. Johnston, a tax specialist with
Ernst & Young in 2000 who prepared KQC’s 1999 return on the basis
of information provided to him by KQC. Although Mr. Tutor, a tax
manager with Ernst & Young in 2000, signed KQC’s 1999 return as
return preparer, the record does not disclose that KQC represen-
tatives consulted him directly.
     24
      In discussions that Mr. Johnston had with Mr. Marceron
about KQC’s claimed noncash charitable contribution to TMC, Mr.
Marceron did not inform Mr. Johnston that TMC had constructed a
new building on KQC’s land with HHS’s grant funds. Instead, Mr.
Marceron advised Mr. Johnston that KQC had contributed to TMC a
building located on the improved property on Maple Street, which
had a cost basis of $95,000 on KQC’s books and an appraised value
of $1 million. Mr. Marceron explained to Mr. Johnston that the
value of the building that KQC claimed to have given to TMC had
increased to $1 million because TMC had made improvements to that
building.
     25
      Mr. Kaplan and Mr. Marceron informed certain Ernst & Young
representatives that KQC intended to and did give to a tax-exempt
organization a building located on certain land that KQC owned.
They did not advise those representatives that KQC intended to
and did give to a tax-exempt organization certain land that KQC
owned, including all of the buildings and improvements on such
land.
                                - 52 -

improved property on Maple Street had been filed with the

Sandusky County recorder’s office.

     The record establishes that none of the advisors on whom KQC

claims to have relied gave any advice regarding the noncash

charitable contribution to TMC that KQC claimed in KQC’s 1999

return of the improved property on Maple Street consisting of

KQC’s land and 1958 school building that KQC purchased in 1997

and any improvements made by TMC to that property, including the

new building that TMC constructed thereon with HHS’s grant funds.

On the record before us, we find that petitioners have failed to

carry their burden of establishing that KQC’s claimed reliance on

certain advisors was objectively reasonable.   See Goldman v.

Commissioner, 39 F.3d at 408.    On that record, we further find

that petitioners have failed to carry their burden of establish-

ing that the noncash charitable contribution to TMC of the

improved property on Maple Street that KQC claimed in KQC’S 1999

return and petitioners’ respective claimed noncash charitable

contribution deductions were the result of any error on the part

of the advisors on whom KQC claims to have relied.   See Westbrook

v. Commissioner, 68 F.3d at 881.

     Finally, in our consideration of the issue presented under

section 6662, we have in mind that, in discussions that Mr.

Johnston had with Mr. Marceron with respect to KQC’s claimed

noncash charitable contribution to TMC, Mr. Marceron indicated
                             - 53 -

that he believed that claiming a deduction with respect to such

claimed charitable contribution would be a “push”; that is to

say, Mr. Marceron believed that there was a substantial risk that

respondent would disallow any such claimed deduction.

     On the record before us, we find that petitioners in each of

these cases have failed to carry their burden of establishing

that there was reasonable cause for, and that they acted in good

faith with respect to, any portion of the underpayments in

petitioners’ respective returns for 1999.

     Based upon our examination of the entire record before us,

we find that petitioners in each of these cases have failed to

carry their burden of establishing that they are not liable for

1999 for the accuracy-related penalty under section 6662(a)

because of a substantial understatement of tax under sec.

6662(b)(2).26

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.




     26
      In light of our finding under sec. 6662(a) and (b)(2), we
need not address respondent’s argument that petitioners in each
of these cases are liable for 1999 for the accuracy-related
penalty under sec. 6662(a) because of negligence or disregard of
rules or regulations under sec. 6662(b)(1).
                        - 54 -

To reflect the foregoing and the concessions of the parties,


                              Decisions will be entered

                         for respondent with respect to

                         petitioners’ respective deficien-

                         cies and the respective accuracy-

                         related penalties under section

                         6662(a) and (b)(2).
