                                                  GORDON AND LORNA KAUFMAN, PETITIONERS v.
                                                     COMMISSIONER OF INTERNAL REVENUE,
                                                                RESPONDENT
                                                        Docket No. 15997–09.                            Filed April 4, 2011.

                                                  In Kaufman v. Commissioner, 134 T.C. 182 (2010), we
                                               granted R partial summary judgment, sustaining his disallow-
                                               ance of charitable contribution deductions Ps claimed on
                                               account of PW’s grant to N of a facade easement burdening
                                               their residence. Ps ask that we reconsider our grant of partial
                                               summary judgment. We must also address PW’s cash con-
                                               tributions to N and R’s determination of accuracy-related pen-
                                               alties.
                                                  1. Held: We did not err in Kaufman v. Commissioner, supra,
                                               in concluding that the contribution of the facade easement
                                               failed as a matter of law to comply with the enforceability-in-
                                               perpetuity requirements under sec. 1.170A–14(g)(6), Income
                                               Tax Regs. We therefore affirm our grant of partial summary
                                               judgment to R on the grounds set forth in that report and
                                               shall deny Ps’ motion to reconsider it.
                                                  2. Held, further, PW’s 2003 cash payments to N were condi-
                                               tional at the end of 2003 and therefore not deductible for
                                               2003. Held, further, Ps may deduct PW’s cash payments to N
                                               for 2004.
                                                  3. Held, further, Ps are liable for an accuracy-related pen-
                                               alty only on account of their negligence in deducting the 2003
                                               cash payments for 2003.

                                        Frank Agostino, Julie Pruitt Barry, Eduardo S. Chung,
                                      Eleanor E. Farwell, Michael Mattaliano, and Michael E.
                                      Mooney, for petitioners.
                                        Carina J. Campobasso, for respondent.
                                        HALPERN, Judge: Respondent determined deficiencies in,
                                      and penalties with respect to, petitioners’ Federal income
                                      tax, as follows: 1

                                                                                                          Penalties

                                                Year                Deficiency              Sec. 6662(a)           Sec. 6662(h)

                                                2003                 $39,081                   $1,097                  $13,439
                                                2004                  36,340                    ---                     14,536

                                        1 Unless otherwise stated, section references are to the Internal Revenue Code in effect for

                                      the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
                                      We round all amounts to the nearest dollar.


                                      294




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                                      (294)                        KAUFMAN v. COMMISSIONER                                            295


                                      The deficiencies respondent determined result from his dis-
                                      allowance of petitioners’ deductions for contributions of a
                                      facade easement burdening their residence (the facade ease-
                                      ment) and of cash to the National Architectural Trust (NAT).
                                      The penalties are accuracy-related penalties relating to those
                                      deductions. By amendment to answer, respondent asserted
                                      an increased deficiency for 2004 of $37,248 and an increased
                                      section 6662 penalty for that year of $14,726.
                                         Earlier in this case, respondent moved for summary judg-
                                      ment, which we granted in part, with respect to the facade
                                      easement contribution, and denied in part, with respect to
                                      the cash contribution and the penalties. See Kaufman v.
                                      Commissioner, 134 T.C. 182 (2010). Petitioners then moved
                                      for us to reconsider our grant of partial summary judgment.
                                      Several organizations receiving facade or other preservation
                                      easements and otherwise concerned with historic preserva-
                                      tion asked permission to file briefs in support of petitioners’
                                      motion. 2 We took petitioners’ motion under advisement,
                                      instructing the parties that we would proceed with a trial on
                                      the remaining issues in the case (the cash contribution and
                                      the penalties) and would address the motion following the
                                      trial. We instructed the parties to incorporate their argu-
                                      ments in support of, or in opposition to, the motion in their
                                      posttrial briefs. We denied the organizations’ requests to file
                                      briefs but instructed them to work with petitioners to
                                      develop a coordinated position, which petitioners would set
                                      forth in their posttrial briefs. In their opening brief, peti-
                                      tioners assure us that it was prepared in accordance with our
                                      instruction. We therefore assume that petitioners’ briefs
                                      incorporate petitioners and the organizations’ joint position. 3
                                         We shall first set forth our findings of fact, which are nec-
                                      essary to dispose of the cash contribution issue and the pen-
                                      alties (and which should provide a useful background for our
                                      discussion of our grant of partial summary judgment). We
                                      shall then set forth our reasons for sustaining our grant of
                                      partial summary judgment and denying petitioners’ motion
                                         2 The organizations are: Trust for Architectural Easements (formerly National Architectural

                                      Trust), Foundation for the Preservation of Historic Georgetown, National Trust for Historic
                                      Preservation, and Capitol Historic Trust.
                                         3 The Trust for Architectural Easements notified us that it joined relevant portions of peti-

                                      tioners’ briefs.




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                                      296                136 UNITED STATES TAX COURT REPORTS                                      (294)


                                      to reconsider it; finally, we shall dispose of the remaining
                                      issues.
                                                                          FINDINGS OF FACT

                                      Introduction
                                        Some facts are stipulated and are so found. The stipulation
                                      of facts and the second stipulation of facts, with accom-
                                      panying exhibits, are incorporated herein by this reference.
                                        At the time the petition was filed, petitioners resided in
                                      Massachusetts.
                                      Background
                                        Petitioners are husband and wife. Gordon Kaufman 4 is the
                                      Morris A. Adelman Professor of Management Emeritus of the
                                      Sloan School of Management at the Massachusetts Institute
                                      of Technology. Lorna Kaufman has a Ph.D. in developmental
                                      psychology from Boston College and is president of her own
                                      company.
                                      The Property
                                        In 1999, Lorna Kaufman purchased real property (the
                                      property) in Boston, Massachusetts. The property consists of
                                      a lot and a single-family residence (a rowhouse), which is
                                      petitioners’ home. The property is in the South End historic
                                      preservation district.
                                      The October 13, 2003, Letter
                                        Lorna Kaufman received a letter dated October 13, 2003,
                                      from Mory Bahar (Mr. Bahar), an NAT area manager,
                                      thanking her for her inquiry about NAT’s Federal historic
                                      preservation tax incentive program. Among other things, Mr.
                                      Bahar stated that the program allowed the owner of a
                                      nationally registered historic building to deduct between 10
                                      and 15 percent of the value of the building on her Federal
                                      income tax return. He further stated that the program would
                                      require very little effort on her part because, as part of NAT’s
                                      service, NAT ‘‘will be handling all the red tape and paper-
                                      work.’’
                                       4 Since both petitioners hold doctoral degrees, and both could thus be referred to as Dr. Kauf-

                                      man, we shall avoid confusion by referring to them individually as Gordon Kaufman and Lorna
                                      Kaufman, respectively.




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                                      (294)                        KAUFMAN v. COMMISSIONER                                                297


                                      The Application
                                        In late October or early November 2003, Lorna Kaufman
                                      submitted an application, the ‘‘Preservation Restriction
                                      Agreement Application’’ (the application), to NAT, on its own
                                      form, identifying the property as property to be considered
                                      for a preservation donation. On the application, she esti-
                                      mated the fair market value of the property as $1.8 million
                                      and identified Washington Mutual Bank FA (the bank) as
                                      holding a mortgage on the property. In pertinent part, the
                                      application states:
                                      Deposit
                                      A good faith deposit of $1,000 is required at the time of application. If for
                                      any reason the necessary approvals cannot be obtained, the deposit will be
                                      promptly refunded. The deposit should be made to * * * [NAT].

                                                                      *        *      *       *   *       *   *
                                      Donor Endowment
                                      When the Trust accepts a donation it pledges to monitor and administer
                                      the donation in perpetuity. Since the Trust receives no government
                                      funding and has no other source of income, it requires that donors create
                                      an endowment that covers current operating costs and funds the Trust’s
                                      long term Stewardship Endowment which is reserved for future monitoring
                                      and administration purposes.
                                      The cash endowment contribution is set at 10% of the value of the dona-
                                      tion tax deduction * * *. * * * If the donation can not [sic] be processed
                                      in the timeframe required to qualify for a 2003 deduction, a 10% reduction
                                      in the cash contribution will be provided to the donor once the process is
                                      completed in 2004.

                                       At the time she submitted the application, Lorna Kaufman
                                      made the required $1,000 deposit.
                                      The December 16, 2003, Letter
                                        Lorna Kaufman received a letter dated December 16, 2003,
                                      from James Kearns (Mr. Kearns), president of NAT. In perti-
                                      nent part, the letter states:
                                      We are pleased to inform you that we have completed our discussions with
                                      the Massachusetts Historical Commission and have reached agreement on
                                      a Preservation Restriction Agreement. * * *
                                      In order to accept your donation in 2003, we ask that you agree to the fol-
                                      lowing:




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                                      298                136 UNITED STATES TAX COURT REPORTS                                      (294)


                                      1. Deliver to the Trust by December 26, 2003:
                                         a. An executed and notarized Preservation Restriction Agreement,
                                         b. A signed copy of this letter, and
                                         c. A check for a cash contribution to the Trust of $15,840, which is based
                                      on 8% of the estimated easement valuation of $198,000 * * * . Since the
                                      final cash contribution is 10% of the easement value, it is expected that
                                      an additional contribution amount will be due and the donor promises to
                                      send a check for that amount within ten days of receipt of the final
                                      appraisal report. In the event the appraised value of the easement deduc-
                                      tion generates a contribution amount less than the above calculated esti-
                                      mate, the Trust will refund the excess within ten days of receipt of the
                                      final appraisal report.
                                      2. Schedule an appraisal within fifteen days of receiving this letter and
                                      ensure its completion by February 28, 2004.
                                      3. The Trust must review the new Preservation Restriction Agreement
                                      with your lending institution(s) in order to ensure subordination according
                                      to its conditions.
                                      4. In the event that the subordination of your mortgage(s) or historic cer-
                                      tification can not [sic] be achieved, and/or your appraisal cannot be com-
                                      pleted by February 28, 2004, you will join with the Trust in voiding the
                                      easement. In this circumstance, the Trust will reimburse you for any
                                      disbursements made in an effort to achieve an enforceable donation,
                                      including the cost of appraisal and your cash contribution to the Trust.
                                      Once all the necessary steps have been completed, the Trust will provide
                                      you with an acknowledgment of your 2003 charitable contributions and the
                                      appropriate IRS form for you to submit with your tax return. The Trust
                                      will also arrange for the deed to be recorded * * *.

                                        On December 29, 2003, Lorna Kaufman signed a copy of
                                      the letter under the notation ‘‘Concurrence’’ and returned it
                                      to NAT, along with a check for $15,840 dated December 27,
                                      2003, drawn to NAT.
                                      The Agreement
                                        In December 2003, Lorna Kaufman entered into a
                                      preservation restriction agreement (the agreement) with NAT
                                      pursuant to which she granted to NAT the facade easement
                                      restricting the use of the property. The agreement recites its
                                      purpose:
                                      It is the purpose of this Preservation Restriction Agreement to assure that
                                      the architectural, historic, cultural and open space features of the property
                                      will be retained and maintained forever substantially in their current
                                      condition for conservation and preservation purposes in the public interest,
                                      and to prevent any use or change of the Property that will significantly




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                                      (294)                        KAUFMAN v. COMMISSIONER                                            299


                                      impair or interfere with the Property’s conservation and preservation
                                      values or that would be detrimental to the preservation of the Property.

                                        That purpose is achieved by Lorna Kaufman’s grant and
                                      conveyance to NAT by way of the agreement of ‘‘an easement
                                      in gross, in perpetuity, in, on, and to the Property, Building
                                      and the Facade, being a Preservation Agreement on the
                                      Property,’’ with certain delineated rights. 5 In pertinent part,
                                      section IV.C. of the agreement also provides:
                                      In the event this Agreement is ever extinguished, whether through con-
                                      demnation, judicial decree or otherwise, Grantor agrees on behalf of itself,
                                      its heirs, successors and assigns, that Grantee, or its successors and
                                      assigns, will be entitled to receive upon the subsequent sale, exchange or
                                      involuntary conversion of the Property, a portion of the proceeds from such
                                      sale, exchange or conversion equal to the same proportion that the value
                                      of the initial easement donation bore to the entire value of the property
                                      at the time of donation * * *, unless controlling state law provides that
                                      the Grantor is entitled to the full proceeds in such situations, without
                                      regard to the Agreement. Grantee agrees to use any proceeds so realized
                                      in a manner consistent with the preservation purposes of the original con-
                                      tribution.

                                      The Lender Agreement
                                        At the time the agreement was entered into, the bank held
                                      a mortgage on the property. A representative of the bank
                                      executed a document styled ‘‘LENDER AGREEMENT’’ (lender
                                      agreement). The lender agreement was attached to and
                                      recorded with the agreement. The lender agreement ref-
                                      erences the property and, in pertinent part, provides:
                                      [The bank] hereby joins in * * * [the agreement] for the * * * purpose of
                                      subordinating its rights in the Property to the right of * * * [NAT] to
                                      enforce * * * [the agreement] in perpetuity under the following conditions
                                      and stipulations:
                                         (a) The Mortgagee/Lender and its assignees shall have a prior claim to
                                      all insurance proceeds as a result of any casualty, hazard or accident
                                      occurring to or about the Property and all proceeds of condemnation, and
                                      shall be entitled to same in preference to * * * [NAT] until the Mortgage
                                      is paid off and discharged, notwithstanding that the Mortgage is subordi-
                                      nate in priority to the Agreement[.]

                                        5 The term ‘‘Preservation Agreement’’ in the quoted language probably should be read ‘‘Preser-

                                      vation Restriction’’, since the agreement earlier recites Lorna Kaufman’s and NAT’s reciprocal
                                      desires to grant and receive a ‘‘Preservation Restriction * * * as such term is defined in * * *
                                      [Mass. Ann. Laws ch. 184, secs. 31 and 32 (LexisNexis 1996 & Supp. 2010)]’’ (conservation and
                                      preservation restrictions).




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                                      The lender agreement was attached to the agreement, and
                                      the agreement was recorded in the Suffolk County,
                                      Massachusetts, registry of deeds on October 1, 2004.
                                      NAT’s Assistance
                                             assisted Lorna Kaufman in obtaining the bank’s agree-
                                           NAT
                                      ment to subordinate its mortgage to the facade easement by
                                      submitting the required documents to the bank and following
                                      up to ensure the bank’s agreement. NAT provided Gordon
                                      Kaufman with a list of whom it considered to be qualified
                                      appraisers. It also negotiated the terms of the agreement
                                      with the Massachusetts Historical Commission and facili-
                                      tated approval of the agreement by it, the City of Boston,
                                      and the National Park Service. Mr. Bahar answered basic
                                      inquiries by Gordon Kaufman about the deductibility of
                                      Lorna Kaufman’s contribution.
                                      The Appraisal
                                        Timothy J. Hanlon prepared an appraisal of the property
                                      (the appraisal) as of January 20, 2004. He reported the value
                                      of the property to be $1,840,000 before the grant of the
                                      facade easement. He concluded: ‘‘The property is considered
                                      to have a reduction in fair market value of 12% of the prop-
                                      erty’s value prior to the easement donation, which equates to
                                      a loss of $220,800 (rounded).’’
                                      The Discount
                                        Lorna Kaufman received a letter dated April 5, 2004, from
                                      Victoria C. McCormick (Ms. McCormick), NAT vice president
                                      of operations and finance, addressing, in part, her ‘‘cash
                                      donation’’. Addressing an expected delay in petitioners’ being
                                      able to file their 2003 joint income tax return on account of
                                      the then as-yet-uncompleted contribution of the facade ease-
                                      ment, Ms. McCormick stated:
                                      [NAT] will discount your cash donation by 10% as calculated below.
                                               Appraised easement value ................................................            $220,800

                                               Cash contribution at 10% of appraised easement value                                   22,080
                                               Discount of 10% ..................................................................      2,208

                                               Discounted cash contribution ............................................              19,872
                                               Washington Mutual fees ...................................................                300




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                                      (294)                           KAUFMAN v. COMMISSIONER                                                  301


                                               Total amount due ...............................................................   20,172
                                               Amounts paid to date ........................................................      16,840

                                               Net amount due .................................................................    3,332


                                      No amount is due at this time. Your final payment of $3,332 will be due
                                      only after * * * [National Park Service] certification has been achieved.

                                      Park Service Certification
                                         On August 9, 2004, the U.S. Department of the Interior,
                                      National Park Service, classified the property as a ‘‘certified
                                      historic structure’’ for charitable contribution for conserva-
                                      tion purposes.
                                      The Final Payment and Form 8283
                                         Lorna Kaufman paid NAT $3,332 by check received by it on
                                      August 17, 2004. On that date, it sent her an IRS Form 8283,
                                      Noncash Charitable Contributions, documenting her con-
                                      tribution of the facade easement. Ms. McCormick testified
                                      that donors to NAT were informed ‘‘up-front’’ that it ‘‘would
                                      give them the [Form] 8283 after the cash contribution was
                                      received.’’
                                      Petitioners’ Tax Returns
                                         Petitioners filed joint Federal income tax returns for 2003
                                      and 2004. On their 2003 return, petitioners showed a chari-
                                      table contribution of $220,800 for the contribution of the
                                      facade easement. Because of the limitations on charitable
                                      contribution deductions in section 170(b)(1)(C), petitioners
                                      claimed a charitable contribution deduction with respect to
                                      the facade easement of only $103,377. Petitioners also
                                      claimed a charitable contribution deduction of $16,870 for a
                                      cash contribution to NAT, notwithstanding that, during 2003,
                                      they paid NAT only $16,840.
                                         On their 2004 return, petitioners claimed a carryover
                                      charitable contribution deduction of $117,423 related to the
                                      facade easement contribution. They also claimed a charitable
                                      contribution deduction of $3,332 on account of the $3,032
                                      final installment of their ‘‘cash contribution’’ to NAT and $300
                                      on account of the bank fee paid by NAT.




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                                      302                136 UNITED STATES TAX COURT REPORTS                                      (294)


                                                                                  OPINION

                                      I. Reconsideration of Grant of Partial Summary Judgment
                                           A. Introduction
                                         We granted partial summary judgment to respondent, sus-
                                      taining his disallowance of any deduction for 2003 or 2004
                                      for the contribution of the facade easement to NAT. We con-
                                      cluded that the contribution failed as a matter of law to
                                      comply with the enforceability-in-perpetuity requirements
                                      found in section 1.170A–14(g), Income Tax Regs. Kaufman v.
                                      Commissioner, 134 T.C. at 187. For that reason, we found
                                      that the facade easement contribution was not protected in
                                      perpetuity and so was not a qualified conservation contribu-
                                      tion under section 170(h)(1). Id. Rule 161 affords us discre-
                                      tion to reconsider an opinion upon a showing of substantial
                                      error. Estate of Quick v. Commissioner, 110 T.C. 440, 441
                                      (1998).
                                         Petitioners argue that we should reconsider, and reverse,
                                      our grant of partial summary judgment because the agree-
                                      ment complies with the regulations. In particular, petitioners
                                      argue:
                                      [The agreement] sets out the exact terms of the agreement between the
                                      donor and donee that are required by Treas. Reg. § 1.170A–14(g)(6), and
                                      the Lender Agreement includes the provision required by Treas. Reg. §
                                      1.170A–14(g)(2). Separately, the Court should consider the application of
                                      Treas. Reg. § 1.170A–14(g)(3), which provides that a conservation interest
                                      will be regarded as ‘‘enforceable in perpetuity’’—even if defeasible upon the
                                      happening of a future event—‘‘if on the date of the gift it appears that the
                                      possibility that such act or event will occur is so remote as to be neg-
                                      ligible.’’

                                        Respondent answers that the agreement and the lender
                                      agreement must be read together, that it is insufficient for
                                      the agreements merely to parrot the regulations, and that,
                                      when read together, the agreements constitute a conveyance
                                      that fails to conform to the extinguishment provision found
                                      in section 1.170A–14(g)(6), Income Tax Regs. Respondent
                                      argues that the mortgage subordination requirements found
                                      in section 1.170A–14(g)(2), Income Tax Regs., are irrelevant,
                                      having been relied on neither by him in support of the
                                      motion for summary judgment nor by the Court in Kaufman
                                      v. Commissioner, 134 T.C. 182 (2010). Finally, respondent




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                                      (294)                        KAUFMAN v. COMMISSIONER                                            303


                                      argues that the requirements of section 1.170A–14(g)(3),
                                      Income Tax Regs., addressing remote future events, should
                                      not be read into the requirements of section 1.170A–14(g)(6),
                                      Income Tax Regs.
                                        Before setting forth the pertinent details of section 170 and
                                      the regulations and discussing the parties’ arguments, we
                                      shall provide some background information with respect to
                                      the difficulties in making a conservation restriction per-
                                      petual.
                                           B. Perpetual Conservation Restrictions
                                         Under common law doctrines, it is difficult for a real prop-
                                      erty owner to split the Blackstonian bundle of rights consti-
                                      tuting ownership of the property to give one not holding the
                                      remaining rights perpetual control over the use that may be
                                      made of the property. The principal difficulties are assign-
                                      ability and duration, common law disfavoring the creation of
                                      an assignable right of unlimited duration to control the use
                                      of land. See 4–34A Powell, Real Property, sec. 34A.01 (M.
                                      Wolf ed. 2010); Airey, ‘‘Conservation Easements in Private
                                      Practice’’, 44 Real Prop. Tr. & Est. L.J. 745, 750–758 (2010).
                                         Statutory authority, however, to create assignable restric-
                                      tions of unlimited duration for conservation, preservation,
                                      and similar purposes now can be found in the codes of every
                                      State and the District of Columbia. See 4–34A Powell, supra
                                      sec. 34A.01 n.1 (list). Indeed, the agreement both character-
                                      izes the facade easement as ‘‘an easement in gross’’, a
                                      common law interest, and references Mass. Gen. Laws ch.
                                      184, secs. 31 and 32 (conservation and preservation restric-
                                      tions).
                                         Yet, as the Powell treatise makes clear, notwithstanding
                                      State law statutory provisions facilitating the creation of per-
                                      petual conservation restrictions, there are many means by
                                      which conservation restrictions may be modified or termi-
                                      nated. 4–34A Powell, supra sec. 34A.07[1]. Those include:
                                      Condemnation (eminent domain), the foreclosure of pre-
                                      existing liens, foreclosure for unpaid taxes, Marketable Title
                                      Acts, merger or abandonment, the doctrine of changed condi-
                                      tions, and release by the holder. Id.
                                         The Powell treatise states with respect to release: ‘‘Some
                                      statutes confirm the common-law principle that an easement




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                                      304                136 UNITED STATES TAX COURT REPORTS                                      (294)


                                      or covenant may be released by the holder.’’ Id. It gives as
                                      an example Mass. Gen. Laws., ch. 184, sec. 32 (after a public
                                      hearing). Id. n.6.
                                        It states with respect to condemnation: ‘‘Thus if a con-
                                      servation easement restricts the development of real property
                                      that is needed for a school, hospital, or publicly aided
                                      housing, eminent domain may be exercised.’’ Id. sec.
                                      34A.07[2]. It notes that the method of valuation of the
                                      interest represented by the conservation restriction and
                                      whether and to whom compensation may be awarded are
                                      controversial issues, but it states that the better view, fol-
                                      lowed by most States, ‘‘is that the condemnation of an ease-
                                      ment is the taking of an interest in property that requires
                                      compensation to the holder.’’ Id.
                                        It states that a conservation easement may be terminated
                                      without the consent of the holder:
                                      through the foreclosure of a pre-existing mortgage or mechanic’s lien on
                                      property subsequently encumbered by the easement. Such a foreclosure,
                                      when consummated by a sale, will result in the termination of the ease-
                                      ment. The purchaser takes title free of the restrictions imposed subsequent
                                      to the attachment of the lien. * * * [Id. sec. 34A.07[3].]

                                        It recognizes that the doctrine of changed circumstances
                                      may apply to conservation restrictions: ‘‘An action for an
                                      injunction against the violation of a restrictive covenant will
                                      be defeated, if the owner * * * can show that conditions in
                                      the neighborhood have changed so substantially that the
                                      original purposes to be served by the restriction can no
                                      longer be achieved.’’ Id. sec. 34A.07[6]; see also 2 Restate-
                                      ment, Property 3d (Servitudes), sec. 7.11 (2000). The Powell
                                      treatise states that a good case to be made for the inapplica-
                                      bility of the doctrine to conservation restrictions on policy
                                      grounds and references another commentator who suggests
                                      that, on the obsolescence of a conservation restriction,
                                      because of its public nature ‘‘the servient owner should either
                                      pay the easement holder the value of the easement or a court
                                      should attempt to reform the terms of the easement to pre-
                                      serve its purpose based on the doctrine of cy pres.’’ 4–34A
                                      Powell, supra sec. 34A.07[6] (citing Note, ‘‘Conservation
                                      Easements and the Doctrine of Changed Conditions’’, 40
                                      Hastings L.J. 1187, 1221 (1989)); see also 2 Restatement,
                                      supra sec. 7.11.




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                                      (294)                        KAUFMAN v. COMMISSIONER                                            305


                                           C. Section 170 and the Pertinent Regulations
                                         Section 170 allows a deduction for any charitable contribu-
                                      tion, subject to certain limitations, that the taxpayer makes
                                      during the taxable year. In general, section 170(f)(3) denies
                                      any deduction for a contribution of an interest in property
                                      that is less than the taxpayer’s entire interest in the prop-
                                      erty. One exception to that general rule, however, is for a
                                      qualified conservation contribution. Sec. 170(f)(3)(B)(iii).
                                      Under section 170(h)(1), a qualified conservation contribution
                                      must be a contribution of a ‘‘qualified real property interest
                                      * * * exclusively for conservation purposes.’’ 6 Under section
                                      170(h)(2)(C), a qualified real property interest includes ‘‘a
                                      restriction (granted in perpetuity) on the use which may be
                                      made of the real property.’’ Under section 170(h)(5)(A), ‘‘A
                                      contribution shall not be treated as exclusively for conserva-
                                      tion purposes unless the conservation purpose is protected in
                                      perpetuity.’’ See also sec. 1.170A–14(a), Income Tax Regs.
                                         The regulations introduce the term ‘‘perpetual conservation
                                      restriction’’. Section 1.170A–14(b)(2), Income Tax Regs.,
                                      states: ‘‘A perpetual conservation restriction is a qualified
                                      real property interest.’’ It defines such restriction as ‘‘a
                                      restriction granted in perpetuity on the use which may be
                                      made of real property—including, [sic] an easement or other
                                      interest in real property that under state law has attributes
                                      similar to an easement (e.g., a restrictive covenant or equi-
                                      table servitude).’’ Id.
                                         Section 1.170A–14(g), Income Tax Regs., elaborates on the
                                      enforceability-in-perpetuity requirement. Paragraph (g)(1)
                                      requires generally that legally enforceable restrictions pre-
                                      vent use of the retained interest by the donor (and his
                                      successors in interest) inconsistent with the conservation
                                      purposes of the donation.
                                         Paragraph (g)(2) addresses mortgages and, in pertinent
                                      part, provides that ‘‘no deduction will be permitted * * * for
                                      an interest in property which is subject to a mortgage unless
                                      the mortgagee subordinates its rights in the property to the
                                      right of the * * * [donee] organization to enforce the con-
                                      servation purposes of the gift in perpetuity.’’
                                        6 The other requirement is that the contribution be to a ‘‘qualified organization’’. See sec.

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




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                                         Paragraph (g)(3) is entitled ‘‘Remote future event’’ and
                                      addresses events that may defeat the property interest that
                                      has passed to the donee organization. It provides that a
                                      deduction will not be disallowed merely because on the date
                                      of the gift there is the possibility that the interest will be
                                      defeated so long as on that date the possibility of such defeat
                                      is so remote as to be negligible. Id.
                                         Paragraph (g)(6) is entitled ‘‘Extinguishment’’ and recog-
                                      nizes that, after the donee organization’s receipt of an
                                      interest in property, an unexpected change in the conditions
                                      surrounding the property can make impossible or impractical
                                      the continued use of the property for conservation purposes.
                                      Subdivision (i) of paragraph (g)(6) provides that those pur-
                                      poses will nonetheless be treated as protected in perpetuity
                                      if the restrictions limiting use of the property for conserva-
                                      tion purposes ‘‘are extinguished by judicial proceeding and all
                                      of the donee’s proceeds * * * from a subsequent sale or
                                      exchange of the property are used by the donee organization
                                      in a manner consistent with the conservation purposes of the
                                      original contribution.’’
                                         Subdivision (ii) of paragraph (g)(6) is entitled ‘‘Proceeds’’
                                      and, in pertinent part, provides:
                                      for a deduction to be allowed under this section, at the time of the gift the
                                      donor must agree that the donation of the perpetual conservation restric-
                                      tion gives rise to a property right, immediately vested in the donee
                                      organization, with a fair market value that is at least equal to the propor-
                                      tionate value that the perpetual conservation restriction at the time of the
                                      gift * * * bears to the value of the property as a whole at that time. * * *
                                      For purposes of this paragraph (g)(6)(ii), that proportionate value of the
                                      donee’s property rights must remain constant. Accordingly, when a change
                                      in conditions give rise to the extinguishment of a perpetual conservation
                                      restriction under paragraph (g)(6)(i) of this section, the donee organization,
                                      on a subsequent sale, exchange, or involuntary conversion of the subject
                                      property, must be entitled to a portion of the proceeds at least equal to
                                      that proportionate value of the perpetual conservation restriction * * *.

                                           D. Discussion
                                           1. Introduction
                                         The drafters of section 1.170A–14, Income Tax Regs.,
                                      undoubtedly understood the difficulties (if not impossibility)
                                      under State common or statutory law of making a conserva-
                                      tion restriction perpetual. They required legally enforceable




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                                      restrictions preventing inconsistent use by the donor and his
                                      successors in interest. See sec. 1.170A–14(g)(1), Income Tax
                                      Regs. They defused the risk presented by potentially
                                      defeasing events of remote and negligible possibility. See sec.
                                      1.170A–14(g)(3), Income Tax Regs. (sometimes, simply, the
                                      so-remote-as-to-be-negligible standard). They did not, how-
                                      ever, consider the risk of mortgage foreclosure per se to be
                                      remote and negligible and required subordination to protect
                                      from defeasance. See sec. 1.170A–14(g)(2), Income Tax Regs.
                                      (sometimes, simply, the subordination requirement). They
                                      understood that forever is a long time and provided what
                                      appears to be a regulatory version of cy pres to deal with
                                      unexpected changes that make the continued use of the prop-
                                      erty for conservation purposes impossible or impractical. See
                                      sec. 1.170A–14(g)(6), Income Tax Regs. (sometimes, simply,
                                      the extinguishment provision). It is the extinguishment
                                      provision that directly concerns us here.
                                        The following are uncontested facts. The bank held a mort-
                                      gage on the property at the time Lorna Kaufman and NAT
                                      entered into the agreement. The lender agreement provides
                                      that the bank has ‘‘prior claim’’ to all insurance proceeds as
                                      a result of any casualty, hazard, or accident occurring to or
                                      about the property and all proceeds of condemnation. The
                                      lender agreement also provides that the bank was entitled to
                                      those proceeds ‘‘in preference’’ to NAT until the mortgage was
                                      satisfied and discharged.
                                        In Kaufman v. Commissioner, 134 T.C. at 186, we found
                                      that NAT’s right to its proportionate share of future proceeds
                                      was thus not guaranteed and, since we interpreted the
                                      extinguishment provision to lay down an unconditional
                                      requirement that the donee organization be entitled to its
                                      proportionate share of future proceeds, the agreement did not
                                      satisfy the terms of the provision. As a result, we in effect
                                      held that the agreement did not establish a perpetual con-
                                      servation restriction, and the facade easement was not a
                                      qualified real property interest. Id. at 186–187. We found
                                      that Lorna Kaufman’s contribution of the facade easement to
                                      NAT was not, therefore, a qualified conservation contribution
                                      within the meaning of section 170(h)(1). 7 Id. at 187.
                                        7 Our concern in Kaufman v. Commissioner, 134 T.C. 182 (2010), was with the allocation of

                                      proceeds on a sale or, exchange, or involuntary conversion of property following judicial extin-
                                                                                                 Continued




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                                           2. Petitioners’ Arguments
                                           a. The Agreement Contains the Necessary Language
                                         Petitioners argue that the requirements of the extinguish-
                                      ment provision are met if, in the event a conservation restric-
                                      tion is extinguished by judicial action and the underlying
                                      property is sold, the donee organization ‘‘has a contractual
                                      entitlement against the donor and his successors for the
                                      organization’s proportionate share of the sales proceeds as
                                      defined in Treas. Reg. § 1.170A–14(g)(6)(ii).’’ Petitioners ref-
                                      erence section IV.C. of the agreement, set forth above, and
                                      argue that the agreement ‘‘explicitly sets forth this entitle-
                                      ment.’’ They conclude: ‘‘This is precisely what the Regulation
                                      requires, and all that it requires.’’
                                         As to how NAT would fare if, for instance, the property
                                      were taken by condemnation following the extinguishment of
                                      the facade easement in a judicial proceeding, petitioners
                                      state: ‘‘If the entire property is the subject of a condemnation
                                      action, the mortgagee may have a priority right to condemna-
                                      tion proceeds under a Lender Agreement comparable to that
                                      involved in this case.’’ That, they argue, ‘‘does not absolve the
                                      property owner [Lorna Kaufman] of * * * [her] obligation to
                                      make good on the easement-holding organization’s [NAT’s]
                                      entitlement to a pro-rata share of the proceeds realized from
                                      the sale or involuntary conversion of the property’’. With
                                      respect to the fact that the lender agreement stands the bank
                                      in front of NAT in line for a share of the condemnation pro-
                                      ceeds, they explain: ‘‘The Lender Agreement defines priority
                                      to insurance and condemnation proceeds as between * * *
                                      [the bank] and * * * [NAT]; it has no effect on the donor or
                                      subsequent property owner.’’ NAT, they explain, can still look
                                      to Lorna Kaufman or her successors in interest for
                                      reimbursement.

                                      guishment of a conservation restriction burdening the property. We did not then, nor do we now,
                                      rule on whether the language establishing the restriction must incorporate provisions requiring
                                      judicial extinguishment (and compensation) in all cases in which an unexpected change in sur-
                                      rounding conditions frustrates the conservation purposes of the restriction. Such a rule is sug-
                                      gested, however, by the last sentence in sec. 1.170A–14(c)(2), Income Tax Regs. (‘‘Transfers by
                                      donee’’), although the reference therein to ‘‘paragraph (b)(3)’’ probably should be to ‘‘paragraph
                                      (b)(2)’’ and the cross-reference to sec. 1.170A–14(g)(5)(ii) probably should be to sec. 1.170A–
                                      14(g)(6)(ii). See sec. 1.170A–13, Proposed Income Tax Regs., 48 Fed. Reg. 22941 (May 23, 1983)
                                      (apparently the Secretary failed to update the cross-references in the final regulations).




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                                         We shall accept petitioners’ claim that the agreement gives
                                      NAT    a contractual right against Lorna Kaufman and her
                                      successors for its proportionate share of the proceeds from
                                      the sale of the property following judicial extinguishment of
                                      the facade easement. In the face of the bank’s priority under
                                      the lender agreement, however, we believe that right to be
                                      insufficient to satisfy the requirements of subdivisions (i) and
                                      (ii) of section 1.170A–14(g)(6), Income Tax Regs. (sometimes,
                                      simply, subdivision (i) or subdivision (ii)). Subdivision (ii)
                                      requires that the donor, at the time of the gift, must agree
                                      that the donation ‘‘gives rise to a property right * * * imme-
                                      diately vested in the donee organization’’. Subdivision (i),
                                      addressing generally the disposition of sale proceeds fol-
                                      lowing judicial extinguishment of conservation restriction,
                                      speaks specifically of ‘‘the donee’s proceeds * * * from a sub-
                                      sequent sale or exchange of the property’’. (Emphasis added.)
                                      While subdivision (ii) specifies that the donee’s vested prop-
                                      erty right must have a value proportional to the value of the
                                      encumbered property, it does not otherwise describe the
                                      property in which the donee must have a vested right. Never-
                                      theless, considering the ‘‘property right’’ language in subdivi-
                                      sion (ii) together with the term ‘‘donee’s proceeds’’ in subdivi-
                                      sion (i), we think it the intent of the drafters of section
                                      1.170A–14(g)(6), Income Tax Regs., that the donee have a
                                      right to a share of the proceeds and not merely a contractual
                                      claim against the owner of the previously servient estate.
                                         Petitioners having in effect conceded that NAT enjoyed no
                                      such right to proceeds under the agreement or the lender
                                      agreement, we conclude that, notwithstanding that section
                                      IV.C. of the agreement tracks the language of subdivision (ii),
                                      the agreement, as qualified by the lender agreement, fails to
                                      satisfy the requirements of section 1.170A–14(g)(6), Income
                                      Tax Regs.
                                           b. Subordination
                                        On brief, petitioners head one of their arguments: ‘‘The
                                      Facade Easement Contribution Satisfies The Requirements
                                      of Treas. Reg. § 1.170A–14(g)(2)’’. They appear to believe that
                                      respondent is arguing that the agreement fails to establish
                                      a perpetual conservation restriction ‘‘because * * * [the
                                      bank] did not subordinate its rights to * * * [NAT’s] right to




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                                      receive a proportionate share of condemnation or insurance
                                      proceeds, and therefore the * * * [agreement] somehow fails
                                      to comply with Treas. Reg. § 1.170A–14(g)(6).’’ Put another
                                      way, they appear to believe that respondent has conflated
                                      the subordination requirement found in section 1.170A–
                                      14(g)(2), Income Tax Regs., with the extinguishment provi-
                                      sion found in section 1.170A–14(g)(6), Income Tax Regs., so
                                      that, in order for a donor to show that its donation satisfies
                                      the extinguishment provision, any mortgagee must ‘‘subordi-
                                      nate its interests so that a donee organization has a priority
                                      interest in insurance or condemnation proceeds.’’ Respondent
                                      disavows making that argument, stating that neither his
                                      motion for summary judgment nor our Opinion, Kaufman v.
                                      Commissioner, 134 T.C. 182 (2010), even references section
                                      1.170A–14(g)(2), Income Tax Regs. He believes that he
                                      argued, and we decided, that the facade easement contribu-
                                      tion failed to satisfy the extinguishment provision without
                                      regard to whether the bank had subordinated its rights in
                                      the property to NAT’s rights therein, so as to satisfy the
                                      subordination requirement. He is correct.
                                         Satisfying the subordination requirement immunizes
                                      against the effect of the general rule, described supra section
                                      I.B. of this report, that an easement is lost by the foreclosure
                                      of a mortgage or trust deed burdening the servient tenement,
                                      when such mortgage or trust deed was executed prior to the
                                      creation of the easement. Annotation, ‘‘Foreclosure of mort-
                                      gage or trust deed as affecting easement claimed in, over, or
                                      under property’’, 46 A.L.R. 2d 1197 (1956 & Supp.); see also,
                                      e.g., Camp Clearwater, Inc. v. Plock, 146 A.2d 527, 536–537
                                      (N.J. Super. Ct. Ch. Div. 1958) (‘‘The foreclosure of a mort-
                                      gage vests in the purchaser at the foreclosure sale a legal
                                      right to the property free of easements and encumbrances
                                      imposed upon it subsequent to the mortgage provided that
                                      the holders of such easement rights or encumbrances are
                                      made parties to the foreclosure.’’), affd. 157 A.2d 15 (N.J.
                                      Super. Ct. App. Div. 1959).
                                         We did not base our grant of partial summary judgment
                                      for respondent on any consideration of the consequences of
                                      foreclosure of the bank’s mortgage. We based our grant solely
                                      on the fact, conceded by petitioners, that, because, following
                                      a judicial extinguishment of the facade easement, NAT might
                                      not receive its proportional share of any future proceeds, the




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                                      agreement failed to satisfy the requirements of section
                                      1.170A–14(g)(6), Income Tax Regs., and so failed to satisfy
                                      the enforceability-in-perpetuity requirements under section
                                      1.170A–14(g), Income Tax Regs., and section 170(h)(2)(C) and
                                      (5)(A). We think it unnecessary to our result, and reach no
                                      conclusion, as to whether the bank subordinated its rights in
                                      the property to the right of NAT to enforce the facade ease-
                                      ment so as to satisfy the requirements of section 1.170A–
                                      14(g)(2), Income Tax Regs.
                                           c. Section 1.170A–14(g)(3), Income Tax Regs.

                                         Referring to the so-remote-as-to-be-negligible standard
                                      found in section 1.170A–14(g)(3), Income Tax Regs., peti-
                                      tioners argue that, in determining whether the enforce-
                                      ability-in-perpetuity requirement embodied in section
                                      1.170A–14(g), Income Tax Regs., is met, ‘‘a court must con-
                                      sider * * * the remoteness of any future event that is
                                      alleged to defeat the interest passing to charity.’’ They then
                                      hypothesize ‘‘a very low probability of occurrence’’ for a set
                                      of events 8 that would deprive NAT of its proportional share
                                      of the proceeds (determined under section 1.170A–14(g)(6)(ii),
                                      Income Tax Regs.) following judicial extinguishment of the
                                      facade easement and a subsequent sale of the property. They
                                      conclude that the possibility of such deprivation is ‘‘so remote
                                      as to be negligible’’ and, thus, to be disregarded under the so-
                                      remote-as-to-be-negligible standard in determining whether
                                      the facade easement is enforceable in perpetuity.
                                         As stated, respondent argues that the so-remote-as-to-be-
                                      negligible standard is irrelevant to the extinguishment provi-
                                      sion. Respondent believes the extinguishment provision
                                      establishes ‘‘a strict, standalone requirement enacted to
                                      ensure that the conservation purposes of an extinguished
                                      easement be carried out by the donee as nearly as possible.’’
                                      He considers the extinguishment provision to establish a rule
                                      ‘‘similar to the rule of cy pres’’. He also argues: ‘‘It assumes
                                      an event, extinguishment of the easement, that is virtually
                                      by definition, remote. Therefore, it would be illogical to read
                                         8 ‘‘Condemnation of the property, judicial extinguishment of the easement, existence of the

                                      subordination agreement at that time, insufficiency of the condemnation proceeds to cover the
                                      bank’s prior claim to proceeds, and judgment-proof status of the property owner’’. Attaching a
                                      10-percent probability to the occurrence of each of those events, they calculate a joint probability
                                      of 0.001 percent.




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                                      * * * [the so-remote-as-to-be-negligible standard] into * * *
                                      [the extinguishment provision].’’
                                         We described supra section I.B. of this report some of the
                                      means by which conservation restrictions may be modified or
                                      terminated, and we voiced our belief supra section I.D.1. of
                                      this report that the drafters of section 1.170A–14(g), Income
                                      Tax Regs., sought to mitigate or otherwise address the threat
                                      to the enforceability-in-perpetuity requirement presented by
                                      some of those possibilities. Satisfying the so-remote-as-to-be-
                                      negligible standard immunizes against the risk that acts or
                                      events of such low probability will defeat the donee’s interest
                                      in the servient property. Section 1.170A–14(g)(3), Income Tax
                                      Regs., is silent with respect to the right of the donee to any
                                      recompense on account of the actual occurrence of the risk,
                                      and it appears that the drafters’ intent was simply to fore-
                                      close any argument that a charitable contribution deduction
                                      is unavailable because the donee’s interest could be defeated
                                      by remote, improbable events. That point is nicely illustrated
                                      by Stotler v. Commissioner, T.C. Memo. 1987–275, a case
                                      petitioners cite for the proposition that the enforceability-in-
                                      perpetuity requirement is per se satisfied if the possibility of
                                      a defeasing event is so remote as to be negligible. 9 The case
                                      stands for no such thing, addressing neither section 1.170A–
                                      14(g), Income Tax Regs., in general, nor paragraph (g)(6)
                                      thereof in particular, since the contribution in the case
                                      occurred before the effective date of that regulation. To deter-
                                      mine whether the contribution in that case satisfied the
                                      enforceability-in-perpetuity requirement as it existed before
                                      promulgation of section 1.170A–14(g), Income Tax Regs., we
                                      had to determine whether the possibility of condemnation of
                                      the servient property was so remote as to be negligible, as
                                      required by section 1.170A–1(e), Income Tax Regs. We found
                                      in the affirmative, notwithstanding that, if the particular
                                      property in question were condemned, the underlying ease-
                                      ment would terminate, and the donor would be entitled to all
                                      of any condemnation proceeds, as if the property had not
                                      been burdened by the easement.
                                        9 Satullo v. Commissioner, T.C. Memo. 1993–614, affd. without published opinion 67 F.3d 314

                                      (11th Cir. 1995), applying sec. 1.170A–14(g), Income Tax Regs., might be taken as support for
                                      the proposition, but petitioners do not cite the case for that point, and our discussion of the
                                      point was speculative, since the taxpayers in the case did not set forth facts showing that the
                                      possibility of foreclosure of the easement was so remote as to be negligible.




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                                         It perhaps belabors the obvious to point out that the risk
                                      addressed by the extinguishment provision—an ‘‘unexpected’’
                                      change in conditions surrounding the property—likely
                                      describes a class of events the range of whose probabilities
                                      includes, if it is not coincident with, the range of proba-
                                      bilities of events that are so remote as to be negligible. One
                                      does not satisfy the extinguishment provision, however,
                                      merely by establishing that the possibility of a change in
                                      conditions triggering judicial extinguishment is unexpected,
                                      for, unlike the risk addressed by the so-remote-as-to-be-neg-
                                      ligible standard, to satisfy the extinguishment provision, sec-
                                      tion 1.170A–14(g)(6), Income Tax Regs., provides that the
                                      donee must ab initio have an absolute right to compensation
                                      from the postextinguishment proceeds for the restrictions
                                      judicially extinguished. It is Lorna Kaufman’s failure to
                                      accord NAT an absolute right to a fixed share of the
                                      postextinguishment proceeds that causes her gift to fail the
                                      extinguishment provision. It is not a question as to the
                                      degree of improbability of the changed conditions that would
                                      justify judicial extinguishment of the restrictions. Nor is it a
                                      question of the probability that, in the case of judicial
                                      extinguishment following an unexpected change in condi-
                                      tions, the proceeds of a condemnation or other sale would be
                                      adequate to pay both the bank and NAT. As we said in Kauf-
                                      man v. Commissioner, 134 T.C. at 186, the requirement in
                                      section 1.170A–14(g)(6)(ii), Income Tax Regs., that NAT be
                                      entitled to its proportionate share of the proceeds is not
                                      conditional: ‘‘Petitioners cannot avoid the strict requirement
                                      in section 1.170A–14(g)(6)(ii), Income Tax Regs., simply by
                                      showing that they would most likely be able to satisfy both
                                      their mortgage and their obligation to NAT.’’
                                           E. Conclusion
                                        Petitioners have failed to persuade us that we erred in
                                      Kaufman v. Commissioner, 134 T.C. 182 (2010), in con-
                                      cluding that the contribution of the facade easement failed as
                                      a matter of law to comply with the enforceability-in-per-
                                      petuity requirements under section 1.170A–14(g)(6), Income
                                      Tax Regs. We therefore affirm our grant of partial summary
                                      judgment to respondent on the grounds set forth in Kauf-
                                      man. We shall deny petitioners’ motion for reconsideration.




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                                      II. Cash Contribution
                                           A. Introduction
                                         In determining the deficiency for 2003, respondent dis-
                                      allowed a charitable contribution deduction of $16,870 peti-
                                      tioners claimed for a cash contribution to NAT. Respondent
                                      explained that he disallowed the deduction ‘‘because it was
                                      made subject to or in contemplation of subsequent event(s).’’
                                      In determining the deficiency for 2004, respondent did not
                                      disallow any charitable contribution deduction on account of
                                      a cash contribution to NAT. Lorna Kaufman paid $3,332 to
                                      NAT in 2004. The parties have both amended their pleadings
                                      relating to Lorna Kaufman’s payments to NAT.
                                         In May 2010, before trial, petitioners amended their peti-
                                      tion in the belief that respondent’s disallowance of the cash
                                      contribution deduction for 2003 was based on the ground
                                      that Lorna Kaufman’s obligation to make the contribution
                                      was conditional on her receipt of a qualified appraisal (the
                                      conditional-payment ground). Petitioners added the following
                                      to their prayer for relief: ‘‘[I]f petitioners [sic] cash contribu-
                                      tions to the Donee were made subject to a condition, peti-
                                      tioners are entitled to [a] deduction of $16,840 in the 2004
                                      tax year.’’
                                         In June 2010, after trial, we allowed respondent to amend
                                      the answer to, among other things, assert both an increased
                                      deficiency and an accuracy-related penalty for 2004. He justi-
                                      fied that amendment on the ground that he had only recently
                                      become aware that Lorna Kaufman paid $3,332 to NAT in
                                      2004 and that petitioners claimed a charitable contribution
                                      deduction therefor on their 2004 return. By the amendment
                                      to answer, he first argued that $300 of the $3,332 Lorna
                                      Kaufman paid to NAT in 2004 is not deductible because it
                                      reimbursed NAT for a fee it paid to the bank on her behalf.
                                      Petitioners apparently concede that the $300 payment is not
                                      deductible, a concession we accept, and we shall not further
                                      discuss that payment.
                                         As to both the remaining $3,032 Lorna Kaufman paid to
                                      NAT in 2004 and the $16,840 she had paid it in 2003,
                                      respondent by the amendment to answer sets forth two
                                      grounds for disallowing any charitable contribution deduc-
                                      tion. First, those sums were paid in exchange for substantial




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                                      services provided by NAT to petitioners ‘‘to facilitate peti-
                                      tioners’ deduction of a large, unjustified noncash contribution
                                      of a facade easement that both petitioners and NAT knew had
                                      no value’’ (the quid pro quo ground). Second, the total of the
                                      payments, $19,872, ‘‘was based on the value of the facade
                                      easement and/or the value of the [resulting] tax deduction’’
                                      petitioners claimed, either, or both, of which could turn out
                                      to be zero (i.e., the conditional-payment ground). With
                                      respect only to the $3,032 paid to NAT in 2004, respondent
                                      adds a third ground: ‘‘Petitioners relied on a contempora-
                                      neous written acknowledgment that they knew was inac-
                                      curate in claiming the erroneous charitable deduction of
                                      $3,032.’’
                                         Respondent bears the burden of proof with respect to the
                                      increased deficiency and penalty for 2004 resulting from his
                                      disallowance of a deduction for the $3,032 paid by Lorna
                                      Kaufman to NAT in 2004. See Rule 142(a)(1). He also bears
                                      the burden of proof with respect to the quid-pro-quo ground
                                      for disallowing petitioners a deduction for Lorna Kaufman’s
                                      payment of $16,840 to NAT in 2003 (and now, because of the
                                      amended petition, claimed, alternatively, to be deductible for
                                      either 2003 or 2004). He bears that burden because the quid-
                                      pro-quo ground constitutes new matter, requiring petitioners
                                      to present different evidence from that necessary to rebut his
                                      original ground (the conditional-payment ground) for dis-
                                      allowing the deduction in 2003. See id.; Shea v. Commis-
                                      sioner, 112 T.C. 183, 191 (1999).
                                           B. Discussion
                                           1. Conditional Payment
                                         Respondent’s original explanation of the conditional-pay-
                                      ment ground, supplemented by an argument in the amended
                                      petition, is that the $16,840 Lorna Kaufman paid to NAT in
                                      2003 and the $3,032 she paid to it in 2004 (in total, $19,872)
                                      were conditional payments (subject to refund) if either the
                                      appraisal reported the value of the facade easement to be
                                      zero or we disallow petitioners’ charitable contribution deduc-
                                      tion for the contribution of the facade easement to NAT. Peti-
                                      tioners answer respondent’s first alternative as follows:
                                      ‘‘While there may be an argument that the * * * [$16,840]
                                      cash donation * * * made in 2003, became ‘final’ and deduct-




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                                      ible in 2004, this does not support a complete disallowance,
                                      but simply moves the deduction into 2004.’’ Petitioners
                                      answer respondent’s second alternative: ‘‘The * * * wit-
                                      nesses [from NAT] and Petitioners were in uniform agreement
                                      that * * * [it] was not their understanding’’ that ‘‘Petitioners
                                      might be entitled to a refund of the cash donation should
                                      their tax deduction for the facade easement contribution be
                                      disallowed.’’
                                         Neither party disputes that the amount of the cash pay-
                                      ment contemplated from Lorna Kaufman was a function of
                                      the appraised value of the facade easement, which was not
                                      determined until 2004. Respondent argues that, at the end of
                                      2003, it was possible that the appraisal would show the
                                      facade easement to be valueless, thus entitling Lorna Kauf-
                                      man to a refund of the $16,840 she paid in that year.
                                      Respondent further argues that possibility was not so remote
                                      as to be negligible, thereby depriving petitioners of a 2003
                                      deduction for the cash payment. See sec. 1.170A–1(e), Income
                                      Tax Regs. As stated, petitioners concede there ‘‘may be’’ an
                                      argument that the $16,840 payment became final and, if
                                      deductible, is deductible for 2004. We assume that peti-
                                      tioners’ concession is based on their receiving the appraisal
                                      in 2004 and their conclusion that, before receipt of the
                                      appraisal in 2004, there was the possibility that NAT would
                                      refund some or all of the $16,840 Lorna Kaufman had paid
                                      it in 2003. Petitioners bear the burden of proving that, at the
                                      end of 2003, the possibility of a zero appraisal value was not
                                      so remote as to be negligible. They have not carried that bur-
                                      den. Indeed, there is in evidence an email from Mr. Bahar
                                      (NAT’s area manager) to Gordon Kaufman, dated February 6,
                                      2004, assuring him that properties in a historic neighborhood
                                      (like the property) ‘‘are not at a market value disadvantage
                                      when compared to the other properties in the same neighbor-
                                      hood.’’ We sustain respondent’s disallowance of a deduction
                                      for $16,840 paid by Lorna Kaufman to NAT in 2003.
                                         Respondent’s alternative argument that the cash payments
                                      were conditional because refundable if we disallow any
                                      deduction for the facade easement contribution is based on
                                      the clause in the application that the ‘‘cash endowment con-
                                      tribution is set at 10% of the value of the donation tax deduc-
                                      tion’’. (Emphasis added.) We found credible the testimony of
                                      both NAT’s representatives and petitioners that that was not




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                                      the intent of the clause. We also found credible Gordon
                                      Kaufman’s testimony that petitioners did not expect to
                                      receive any money back. We find that the cash contributions
                                      were not conditional on the success of petitioners’ charitable
                                      contribution deductions for the contribution of the facade
                                      easement to NAT.
                                        After she received the appraisal in January 2004, Lorna
                                      Kaufman had no right to a refund of $19,872 of cash pay-
                                      ments made to NAT.
                                           2. Quid Pro Quo
                                           a. Introduction
                                         Respondent questions Lorna Kaufman’s charitable intent.
                                      He argues: ‘‘[T]he record shows that petitioners made the
                                      cash payments because they knew they had to in order for
                                      NAT to accept the donation of the facade easement and to
                                      sign their Form 8283, which allowed them to take a deduc-
                                      tion worth over $75,000.’’ Additionally, he argues:
                                         NAT provided substantial services to petitioners in exchange for these
                                      cash payments. NAT accepted and processed the preservation restriction
                                      agreement application, provided a form preservation restriction agreement
                                      that it had developed and negotiated with Massachusetts Historical
                                      Commission, dealt with the local and federal authorities in obtaining the
                                      necessary approvals, and dealt with Lorna Kaufman’s mortgage holder,
                                      Washington Mutual, procuring Washington Mutual’s execution of the
                                      ‘‘Lender Agreement.’’ * * * [NAT’s representative] even gave * * *
                                      [Gordon] Kaufman tax advice.
                                         Most importantly, NAT gave * * * [Gordon] Kaufman the names of
                                      NAT-approved appraisers * * *. * * *

                                      In his reply brief, respondent mitigates his first argument:
                                      ‘‘Respondent * * * agrees with the general proposition that
                                      the expected receipt of a tax deduction is not a benefit that
                                      invalidates the deduction.’’ Nevertheless, he continues to
                                      argue that petitioners are entitled to no deduction for the
                                      cash payments because Lorna Kaufman was ‘‘required’’ to
                                      make them.
                                           b. Required Cash Donation
                                         Petitioners answer respondent’s first argument (a cash
                                      donation was required) as follows: ‘‘[NAT] solicits cash dona-
                                      tions to enable it to pay its operating expenses, and to build




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                                      its stewardship fund so that it can monitor eased properties
                                      and enforce its rights under facade conservation easements
                                      in perpetuity.’’ They add that, ‘‘[a]part from donors’ cash con-
                                      tributions, * * * [NAT] had no meaningful source of [oper-
                                      ating] funds’’. They deny that NAT’s acceptance of the facade
                                      easement and its issuance to petitioners of a Form 8283 were
                                      conditioned on its receipt of a cash contribution. They claim
                                      that many donee organizations benefiting from preservation
                                      restrictions require accompanying cash contributions. They
                                      point to the parties’ stipulation 10 that the National Park
                                      Service currently advises visitors to its Web site: 11
                                      Many easement holding organizations require the easement donor to make
                                      an additional donation of funds to help administer the easement. These
                                      funds are often held in an endowment that generates an annual income
                                      to pay for easement administration costs such as staff time and travel
                                      expenses, or needed legal services.

                                        Of course, we agree with respondent: ‘‘Only unrequited
                                      payments to qualified recipients are deductible. Hernandez v.
                                      Commissioner, 490 U.S. 680, 690 (1989).’’ Neither party, how-
                                      ever, has provided us with any authority governing the
                                      deductibility of a payment to a charitable organization when
                                      the organization’s acceptance of a contribution of property is
                                      conditioned on the donor’s cash donation sufficient to main-
                                      tain the property and contribute to operating costs. 12 The
                                      practice may be common, and no doubt provides funds to
                                      serve the charitable purposes of the donee. In the situation
                                      described by the National Park Service, it is difficult to see
                                      how the cash donation benefits the donor other than in
                                      making possible the contribution of the associated property
                                           10 Respondent
                                                       objects to the stipulation as irrelevant; we disagree and overrule the objection.
                                           11 http://www.nps.gov/hps/tps/tax/download/easements—2010.pdf  (last visited, Feb. 2, 2011), at
                                      which can be found a pamphlet, ‘‘Easements to Protect Historic Properties: A Useful Historic
                                      Preservation Tool with Potential Tax Benefits’’. Language similar to the quoted language is at
                                      8.
                                         12 In McMillan v. Commissioner, 31 T.C. 1143 (1959), we disallowed a charitable contribution

                                      deduction for $75 paid by adoptive parents to a charitable organization operating an adoption
                                      program as a prerequisite to placing a child in their home preliminary to an adoption. The pay-
                                      ment was regarded by the organization as a fee for service to cover part of the cost of operating
                                      an adoption program. We concluded that whatever charitable aspects there may have been to
                                      the payment lose significance when compared to the personal benefits that would result to the
                                      taxpayers from the completed adoption. McMillan is distinguishable because, as discussed in the
                                      text, the personal benefits Lorna Kaufman received were the accomplishment of the contribution
                                      and entitlement to charitable contribution deductions on account of both the facade easement
                                      and cash contributions.




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                                      and giving rise to an added charitable contribution deduction
                                      (an acceptable benefit).
                                         While the parties have wrestled over the value of the
                                      facade easement, given our disposition of the facade ease-
                                      ment contribution issue on legal grounds, that is not a ques-
                                      tion of fact we must decide. Moreover, respondent does not
                                      claim that the cash payments were in consideration for NAT’s
                                      facilitation of a sham transfer. Seeing no benefit to Lorna
                                      Kaufman other than facilitation of her contribution of the
                                      facade easement (which we discuss in the next paragraph)
                                      and an increased charitable contribution deduction, we shall
                                      not deny petitioners’ deduction of the cash payments on the
                                      ground that the application required a ‘‘donor endowment’’ to
                                      accompany the contribution of facade easement.
                                           c. Fee for Services
                                         As to respondent’s second argument (a fee for services),
                                      petitioners principally respond that NAT’s actions were taken
                                      primarily to benefit it, and any benefit to petitioners was
                                      ancillary. Recently, in Scheidelman v. Commissioner, T.C.
                                      Memo. 2010–151, we addressed a similar claim by the
                                      Commissioner that a cash payment made to NAT ancillary to
                                      a facade easement contribution to it was a quid pro quo for
                                      NAT’s assistance in obtaining a tax deduction. We stated the
                                      familiar rule: ‘‘A payment of money or transfer of property
                                      generally cannot constitute a charitable contribution if the
                                      contributor expects a substantial benefit in return.’’ Id.
                                      (citing United States v. Am. Bar Endowment, 477 U.S. 105,
                                      116 (1986)). We elaborated:
                                      ‘‘If a transaction is structured in the form of a quid pro quo, where it is
                                      understood that the taxpayer’s money will not pass to the charitable
                                      organization unless the taxpayer receives a specific benefit in return, and
                                      where the taxpayer cannot receive the benefit unless he pays the required
                                      price, then the transaction does not qualify for the deduction under section
                                      170.’’

                                      Id. (quoting Graham v. Commissioner, 822 F.2d 844, 849 (9th
                                      Cir. 1987), affd. sub nom. Hernandez v. Commissioner, 490
                                      U.S. 680 (1989)). The burden was on the taxpayers in
                                      Scheidelman to prove that they made no quid pro quo pay-
                                      ment to NAT for something of substantial value or, if they
                                      did, that their payment exceeded the value of what they




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                                      received. Because they failed to provide evidence necessary to
                                      carry their burden, we denied them any deduction for their
                                      cash payment to NAT. Id.
                                         The shoe is on the other foot here, since, as discussed
                                      supra section II.A. of this report, respondent’s quid-pro-quo
                                      ground constitutes new matter, requiring different evidence,
                                      for which respondent bears the burden of proof pursuant to
                                      Rule 142(a)(1). For respondent to succeed with his fee-for-
                                      services argument, the evidence must show a quid pro quo;
                                      i.e., that, reciprocally, Lorna Kaufman made a payment and
                                      NAT provided services of substantial value. Respondent
                                      argues that the evidence shows that Lorna Kaufman’s pay-
                                      ments reciprocated NAT’s accepting and processing her
                                      application, providing her with a form preservation restric-
                                      tion agreement, undertaking to obtain approvals from the
                                      necessary government authorities, securing the lender agree-
                                      ment from the bank, giving Gordon Kaufman basic tax
                                      advice, and providing him with a list of approved appraisers.
                                      The evidence, however, is ambiguous as to whether Lorna
                                      Kaufman’s payments reciprocated NAT’s undertakings. We do
                                      have in evidence NAT’s October 13, 2003, introductory letter
                                      to Lorna Kaufman, representing that her contribution to NAT
                                      would require very little effort by her because NAT would
                                      handle all of the red tape and paperwork. We also have in
                                      evidence Mr. Kearns’ (NAT’s president’s) December 16, 2003,
                                      letter to her, asking her to sign the agreement and send NAT
                                      a check for $15,840. By that date, however, NAT had under-
                                      taken and completed many of the tasks of concern to
                                      respondent although it had received only a $1,000 deposit
                                      from her. Moreover, Mr. Kearns also states in that letter
                                      that, if, by February 28, 2004, the bank did not subordinate,
                                      she failed to receive historic certification of the property, or
                                      an appraisal could not be obtained, NAT would join with her
                                      in voiding the agreement, reimburse her costs, and refund
                                      her cash contribution. Certainly, NAT was accommodating to
                                      Lorna Kaufman, but it was in its interest as much as hers
                                      to complete the contribution of the facade easement. We
                                      assume moreover that NAT undertook the delineated tasks in
                                      anticipation of a cash contribution if a facade contribution
                                      were made but cognizant of the risk that a facade contribu-
                                      tion might not be made (or might be unwound if the delin-
                                      eated conditions were not satisfied). The evidence does not




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                                      convince us that Lorna Kaufman’s payments reciprocated
                                      NAT’s undertakings. Finally, we assume that respondent’s
                                      position is that NAT’s undertakings were of monetary value
                                      to Lorna Kaufman (saving her time and expense), yet the
                                      record is devoid of evidence of the value (much less the
                                      substantial value) of those undertakings. Respondent has
                                      failed to make the necessary showing of a quid pro quo. We
                                      shall not disallow petitioners a deduction for the cash pay-
                                      ments as a fee-for-services quid pro quo, as argued by
                                      respondent.
                                           3. Failure To Substantiate
                                         Section 170(f)(8)(A) provides that a taxpayer may not
                                      deduct any contribution of $250 or more unless she substan-
                                      tiates the contribution with a contemporaneous written
                                      acknowledgment of the contribution by the donee organiza-
                                      tion that meets the requirements of section 170(f)(8)(B). The
                                      donee’s written acknowledgment must state the amount of
                                      cash and describe other property contributed, indicate
                                      whether the donee organization provided any goods or serv-
                                      ices in consideration for the contribution, and provide a
                                      description and good faith estimate of the value of any goods
                                      or services provided by the donee organization. Sec.
                                      170(f)(8)(B).
                                         In Addis v. Commissioner, 118 T.C. 528, 537 (2002) (citing
                                      sections 1.170A–1(h)(4)(ii) and 1.170A–13(f)(7), Income Tax
                                      Regs.), affd. 374 F.3d 881 (9th Cir. 2004), we stated:
                                        Section 170(f)(8) disallows a charitable contribution deduction in cir-
                                      cumstances such as these, where the donee organization’s contempora-
                                      neous written acknowledgment is erroneous and is not a good faith esti-
                                      mate of the value of goods or services it provided, and where the taxpayer
                                      unquestioningly and self-servingly uses that erroneous statement to claim
                                      a charitable contribution larger than the one to which he or she would be
                                      entitled under section 170. * * *

                                         NAT sent Lorna Kaufman letters acknowledging her con-
                                      tributions of both the facade easement and the cash pay-
                                      ments. In those letters it certified that she had received no
                                      goods or services in return for her gifts. Respondent catalogs
                                      most of the items we described supra section II.B.2. of this
                                      report (e.g., NAT negotiated with government agencies to
                                      obtain the necessary approvals). He then claims that peti-




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                                      tioners should be denied a charitable contribution deduction
                                      for Lorna Kaufman’s cash payments to NAT because (1) NAT’s
                                      acknowledgment letters ‘‘were erroneous and did not contain
                                      a good faith estimate of the value of the goods or services
                                      NAT provided’’ and (2) ‘‘petitioners ‘unquestioningly and self-
                                      servingly’ relied on these letters, which they knew to be inac-
                                      curate, to claim deductions for the cash payments’’.
                                         Respondent’s argument here is limited by his pleading to
                                      the $3,032 payment Lorna Kaufman made to NAT in 2004. It
                                      also suffers from respondent’s failure to prove the monetary
                                      value, if any, of what Lorna Kaufman may have received
                                      from NAT. Moreover, respondent has failed to prove that
                                      Lorna Kaufman knew the items had value (if, indeed, they
                                      did) and, therefore, knew that the letters were inaccurate (if,
                                      indeed, they were). We shall not disallow a deduction for the
                                      2004 $3,032 cash payment on the ground of a failure to
                                      substantiate.
                                           C. Conclusion
                                         Petitioners are entitled to a charitable contribution deduc-
                                      tion for 2004 of $19,872 for cash payments Lorna Kaufman
                                      made to NAT in 2003 and 2004.
                                      III. Penalty
                                           A. Introduction
                                        Section 6662 imposes an accuracy-related penalty if any
                                      part of an underpayment of tax required to be shown on a
                                      return is due to, among other things, negligence or disregard
                                      of rules or regulations (without distinction, negligence), a
                                      substantial understatement of income tax, or a substantial
                                      valuation misstatement. Sec. 6662(a) and (b)(1), (2), and (3).
                                      The penalty is 20 percent of the portion of the underpayment
                                      of tax to which the section applies. Sec. 6662(a). In the case
                                      of a gross valuation misstatement, 20 percent is increased to
                                      40 percent. Sec. 6662(h)(1).
                                        Section 6664(c) provides a reasonable cause exception to
                                      the accuracy-related penalty. Generally, under section
                                      6664(c)(1), no penalty is imposed under section 6662 with
                                      respect to any portion of an underpayment if it is shown that
                                      there was reasonable cause for such portion and that the tax-
                                      payer acted in good faith with respect to such portion. The




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                                      reasonable cause exception does not apply, however, in the
                                      case of a substantial or gross valuation overstatement with
                                      respect to property for which a charitable contribution deduc-
                                      tion was claimed under section 170 unless the claimed value
                                      of the property was based on a ‘‘qualified appraisal’’ by a
                                      ‘‘qualified appraiser’’ and the taxpayer made a good faith
                                      investigation of the value of the contributed property. Sec.
                                      6664(c)(2) and (3).
                                         Under section 7491(c), the Commissioner bears the burden
                                      of production with regard to penalties and must come for-
                                      ward with sufficient evidence indicating that it is proper to
                                      impose penalties. Higbee v. Commissioner, 116 T.C. 438, 446
                                      (2001). However, once the Commissioner has met the burden
                                      of production, the burden of proof remains with the taxpayer,
                                      including the burden of proving that the penalties are
                                      inappropriate because of reasonable cause. Id. at 446–447.
                                         Initially, respondent determined that, on account of his
                                      disallowance of their deduction for the contribution of the
                                      facade easement to NAT, petitioners underpaid the tax
                                      required to be shown on their 2003 return and were liable for
                                      the accuracy-related penalty on the grounds of either neg-
                                      ligence, a substantial understatement of income tax, a
                                      substantial valuation misstatement, or a gross valuation
                                      misstatement. On brief, however, respondent concedes that,
                                      if we do not reach the issue of valuation of the facade ease-
                                      ment contribution because we sustain our grant of summary
                                      judgment for respondent (so that the deduction is denied as
                                      a matter of law), no accuracy-related penalty on the grounds
                                      of either a substantial or gross valuation misstatement will
                                      apply. Respondent adds: ‘‘However, the 20% negligence and
                                      substantial understatement of tax penalties will still be
                                      applicable, although not imposed cumulatively.’’ 13
                                           B. Negligence Penalty
                                        Petitioners argue, and respondent agrees, that, because it
                                      presents an issue of first impression, no negligence penalty
                                      is warranted on account of our disallowing petitioners a
                                      deduction for the contribution of the facade easement if the
                                        13 Apparently on the basis of his abandonment of valuation misstatement as grounds for an

                                      accuracy-related penalty if we sustain our order granting him partial summary judgment (which
                                      we do), respondent makes no argument that petitioners are precluded by sec. 6664(c)(2) from
                                      arguing for application of the sec. 6664(c)(1) reasonable cause exception.




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                                      disallowance is on the ground that the contribution failed as
                                      a matter of law to comply with the enforceability-in-per-
                                      petuity requirements under section 1.170A–14(g)(6), Income
                                      Tax Regs. See, e.g., Rolfs v. Commissioner, 135 T.C. 471, 496
                                      (2010) (considering, among other things, ‘‘uncertain state of
                                      the law’’ in sustaining section 6664(c)(1) ‘‘reasonable cause’’
                                      and ‘‘good faith’’ defense).
                                         Nevertheless, respondent argues for petitioners’ negligence
                                      in claiming a deduction for the contribution of the facade
                                      easement on the basis of respondent’s claim that petitioners
                                      ‘‘knew * * * that * * * [the contribution of the facade ease-
                                      ment] would not diminish the value of their property.’’ What
                                      petitioners knew is a factual question hotly contested by the
                                      parties. The question involves not only the subjective issue of
                                      their states of mind but the objective issue of how much, if
                                      any, conveyance of the facade easement reduced the value of
                                      the property, an issue the parties address with expert testi-
                                      mony. ‘‘Summary judgment is intended to expedite litigation
                                      and avoid unnecessary and expensive trials.’’ Fla. Peach
                                      Corp. v. Commissioner, 90 T.C. 678, 681 (1988). It may be
                                      granted only if there is no genuine issue as to any material
                                      fact. See Rule 121(b). We granted respondent partial sum-
                                      mary judgment, disallowing petitioners’ deductions for Lorna
                                      Kaufman’s contribution of the facade easement to NAT, on the
                                      basis that the contribution failed as a matter of law to
                                      comply with the enforceability-in-perpetuity requirements
                                      under section 1.170A–14(g)(6), Income Tax Regs. We had no
                                      need to consider the value of the facade easement and think
                                      it consistent with the underlying premises for summary adju-
                                      dication that we not now be required to invest the time and
                                      effort necessary to resolve the difficult factual questions of
                                      intent and value presented by respondent’s claim of neg-
                                      ligence. See, e.g., Trout Ranch, LLC v. Commissioner, T.C.
                                      Memo. 2010–283 (illustrating the laborious undertaking that
                                      determining the value of a conservation restriction may
                                      present to the trier of fact).
                                         Moreover, whatever argument respondent might make that
                                      we should now, in the penalty phase of the case, focus on
                                      value as a basis for negligence is negated by his abandon-
                                      ment of value as a basis for imposition of the accuracy-
                                      related penalty on account of a valuation misstatement with
                                      respect to the facade easement.




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                                        We shall, for the reasons stated, reject respondent’s argu-
                                      ment that petitioners negligently overstated the charitable
                                      contribution deductions they claimed on account of the facade
                                      easement contribution. Because respondent has made no
                                      other argument for petitioners’ negligence in connection with
                                      those deductions, we find that, in connection with those
                                      deductions, they were not negligent.
                                        With respect to our disallowance of a deduction for the
                                      2003 cash contribution, petitioners virtually concede that a
                                      2003 deduction was in error. Petitioners were negligent in
                                      claiming that deduction and have not established reasonable
                                      cause and good faith as a defense. We sustain an accuracy-
                                      related penalty with respect to the resultant underpayment.
                                           C. Substantial Understatement of Income Tax
                                         Section 6662(d)(1)(A) defines ‘‘substantial understatement
                                      of income tax’’ as an amount exceeding the greater of 10 per-
                                      cent of the tax required to be shown on the return or $5,000.
                                         Respondent asserts that substantial understatements of
                                      income tax exist for 2003 and 2004. Each of the understate-
                                      ments of income tax, after disallowance of the charitable con-
                                      tribution deductions attributable to the easements, is greater
                                      than $5,000 and greater than 10 percent of the amount of tax
                                      required to be shown on the return. Respondent has met his
                                      burden of production for 2003 and 2004.
                                         In opposition to respondent’s claims of underpayments of
                                      tax due to section 6662(b)(2) substantial understatements of
                                      income tax, petitioners raise a section 6664(c)(1) reasonable
                                      cause and good faith defense. Respondent answers in part:
                                      [F]or the same reasons petitioners are liable for the negligence prong of
                                      the penalty under I.R.C. § 6662(b)(2), they cannot escape the penalty
                                      under the reasonable cause exception: They * * * [knew] that the ease-
                                      ment likely had no value and yet nonetheless claimed a charitable deduc-
                                      tion for it. They did not act in good faith.

                                        Consistent with our refusal supra section III.B. of this
                                      report to consider misvaluation as a basis for negligence, we
                                      refuse to consider it a reason for the underpayment in
                                      income tax that respondent has shown. We granted
                                      respondent partial summary judgment because, and only
                                      because, Lorna Kaufman’s contribution of the facade ease-
                                      ment to NAT failed as a matter of law to comply with the




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                                      326                136 UNITED STATES TAX COURT REPORTS                                      (294)


                                      enforceability-in-perpetuity requirements under section
                                      1.170A–14(g)(6), Income Tax Regs. We think it consistent
                                      with the underlying premises for summary adjudication that
                                      we consider only that ground as giving rise to petitioners’
                                      underpayments of tax for 2003 and 2004. 14
                                        As respondent concedes, see supra section III.B. of this
                                      report, that ground presents an issue of first impression.
                                      Consistent with our analysis in Rolfs v. Commissioner, supra
                                      at 495–496, we find that there was reasonable cause for the
                                      portions of petitioners’ 2003 and 2004 underpayments due to
                                      that ground and that they acted in good faith with respect
                                      to those portions.
                                           D. Conclusion
                                        We sustain an accuracy-related penalty only on the basis
                                      of petitioners’ negligence with respect to the underpayment
                                      of their 2003 tax that is attributable to Lorna Kaufman’s
                                      cash payments to NAT in 2003.
                                      IV. Conclusion
                                        We shall issue an order denying petitioners’ motion for
                                      reconsideration of our grant of partial summary judgment.
                                      Otherwise,
                                                                     An appropriate order will be issued, and
                                                                   decision will be entered under Rule 155.

                                                                               f




                                        14 Putting aside the disallowance of the cash contribution for 2003, which we dealt with supra

                                      sec. III.B. of this report.




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