                               T.C. Memo. 2012-169



                          UNITED STATES TAX COURT



                  FREDERICK M. WALL, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17209-09.                          Filed June 18, 2012.



      Frederick M. Wall, pro se.

      Julie A. Jebe, for respondent.



                            MEMORANDUM OPINION


      GALE, Judge: Respondent determined deficiencies in petitioner’s Federal

income tax for 2003 and 2004 of $39,525 and $34,141, respectively, and accuracy-

related penalties under section 6662(h) of $15,810 and $13,656, respectively.1


      1
        All section references are to the Internal Revenue Code of 1986, as in effect
for the years at issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. All dollar amounts are rounded to the nearest dollar.
                                            -2-

      In 2003 petitioner contributed a preservation easement encumbering certain

elements of his personal residence to Landmarks Preservation Council of Illinois

(LPCI). With respect to the preservation easement contribution, petitioner claimed

a charitable contribution deduction for 2003 and a corresponding carryover

deduction for 2004. Respondent disallowed those deductions and determined the

deficiencies at issue and accuracy-related penalties of 40% for a gross valuation

misstatement under section 6662(h).

          Pending before us is respondent’s motion for summary judgment under Rule

121. Therein he concedes that the accuracy-related penalties should not be

imposed if petitioner’s deductions are disallowed as a matter of law. Petitioner

was afforded an opportunity to respond but failed to do so. For the reasons set

forth below, we shall grant respondent’s motion.

                                       Background

          The facts set forth below are based upon examination of the pleadings and

the moving papers, declaration, and exhibits respondent submitted.2 Petitioner

resided in Illinois at the time he filed the petition.



      2
        Attached as exhibits to respondent’s declaration are various documents
related to a preservation easement agreement into which petitioner entered.
Petitioner has not disputed the authenticity, completeness, or relevance of these
documents.
                                              -3-

          The property at issue is a single-family house in a historic district in

Evanston, Illinois. On December 10, 2003, petitioner and Cynthia M. Keiser3

entered into a preservation easement agreement with LPCI wherein they granted

LPCI an easement for the purpose of protecting certain architecturally significant

elements of the house (facade easement). At the time the agreement was entered

into, Bank of America and First Bank & Trust held mortgages on the property.

          An appraisal in December 2003 valued petitioner’s contribution of the

facade easement at $400,000. The appraisers calculated the value of the

contribution by subtracting the market value of the property subject to the facade

easement from the value of the property unburdened by the easement.

          Petitioner reported a $400,000 noncash charitable contribution on his 2003

Federal income tax return for his donation of the facade easement. He claimed a

charitable contribution deduction with respect to the facade easement of only

$129,448, presumably because of the limitation in section 170(b)(1)(C) (a notation



      3
        Cynthia M. Keiser is listed along with petitioner as the grantor of the
preservation easement. She is also listed (in addition to petitioner) on the Form
8283, Noncash Charitable Contributions, attached to his 2003 Federal income tax
return, under “Name(s) shown on your income tax return”, although the filing status
claimed on the 2003 return was single. Respondent has not argued that the
charitable contribution deduction at issue should be disallowed because some or all
of the value of the claimed qualified conservation easement is allocable to Ms.
Keiser. Consequently, we do not consider the matter further.
                                           -4-

on his return indicated “disallowed contributions” of $270,552). On his 2004

Federal income tax return petitioner reported a carryover charitable contribution of

$270,552 and claimed a charitable contribution deduction of $104,088.4

          Respondent disallowed the deductions in a statutory notice of deficiency,

and petitioner timely petitioned this Court for redetermination.

                                       Discussion

          Summary judgment “is intended to expedite litigation and avoid and

unnecessary and expensive trials.” Fla. Peach Corp. v. Commissioner, 90 T.C.

678, 681 (1988). Summary judgment may be granted where there is no genuine

issue of material fact and a decision may be rendered as a matter of law. Rule

121(a) and (b). The moving party bears the burden of proving that there is no

genuine issue of material fact, and factual inferences are viewed in a light most

favorable to the nonmoving party. Craig v. Commissioner, 119 T.C. 252, 260

(2002); Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The party opposing

summary judgment must set forth specific facts which show that a genuine question

of material fact exists and may not rely merely on allegations or denials in the

pleadings. Rule 121(d); Grant Creek Water Works, Ltd. v. Commissioner, 91 T.C.


      4
        Similar to the statement he made in his 2003 return, petitioner indicated
“disallowed contributions” of $166,464 on his 2004 return.
                                             -5-

322, 325 (1988). If the adverse party does not so respond, then a decision, if

appropriate, may be entered against him. Rule 121(d).

          Section 170 allows a deduction for any charitable contribution, subject to

certain limitations, that a taxpayer makes during the taxable year. A charitable

contribution includes a gift of property to a charitable organization, made with

charitable intent and without the receipt or expectation of receipt of adequate

consideration. See Hernandez v. Commissioner, 490 U.S. 680, 690 (1989); sec.

1.170A-1(h)(1) and (2), Income Tax Regs. While a taxpayer is generally not

allowed a charitable contribution deduction for a gift of an interest in property that

is less than his entire interest in the property, an exception exists for qualified

conservation contributions. Sec. 170(f)(3)(A), (B)(iii).

          A qualified conservation contribution is a contribution of (1) a qualified real

property interest, (2) to a qualified organization,5 (3) made exclusively for

conservation purposes. Sec. 170(h)(1)-(5). A restriction, granted in perpetuity, on

the use which may be made of real property is a qualified real property interest.6


      5
      Respondent concedes that LPCI was a qualified organization within the
meaning of sec. 170(h)(3).
      6
        The regulations designate an easement restricting the use which may be
made of real property as a “perpetual conservation restriction”, which constitutes a
“qualified real property interest”. See sec. 1.170A-14(b)(2), Income Tax Regs.
                                          -6-

Sec. 170(h)(2)(C); sec. 1.170A-14(b)(2), Income Tax Regs. The preservation of

the facade of a certified historic structure may, subject to certain conditions,

constitute a conservation purpose. See sec. 170(h)(4)(B); sec. 1.170A-14(d)(5),

Income Tax Regs. However, a contribution is not treated as exclusively for

conservation purposes unless such purposes are protected in perpetuity. Sec.

170(h)(5)(A). Section 1.170A-14(g), Income Tax Regs., interprets the protected in

perpetuity requirement by setting forth a number of rules designed to safeguard the

conservation purpose of a donation. See Kaufman v. Commissioner, 134 T.C. 182,

186-187 (2010), reconsideration denied, 136 T.C. 294 (2011); see also 1982 East,

LLC v. Commissioner, T.C. Memo. 2011-84.

          Respondent argues that the conservation purpose of the facade easement

petitioner contributed to LPCI is not protected in perpetuity because the

contribution failed to satisfy section 1.170A-14(g)(6), Income Tax Regs.7 That

section addresses subsequent unexpected changes in the conditions surrounding


      7
        Respondent also argues that the conservation purpose is not protected in
perpetuity because LPCI can consent to changes to the facade that are inconsistent
with such purpose and because a subsequent assignee of LPCI is not required to
enforce the easement’s restrictions. Further, respondent contends that the deduction
should be disallowed because petitioner failed to satisfy the substantiation
requirements of sec. 1.170A-13(c)(2), Income Tax Regs. We find it unnecessary to
address these arguments because we conclude petitioner’s contribution failed to
satisfy sec. 1.170A-14(g)(6), Income Tax Regs., and its conservation purpose is
therefore not protected in perpetuity.
                                           -7-

the donated property that make it impossible or impractical to continue using it for

conservation purposes. Section 1.170A-14(g)(6)(ii), Income Tax Regs., requires

the donor to agree, at the time of the gift, that the donation of the perpetual

conservation restriction gives rise to a property right, immediately vested in the

donee organization, with a fair market value that, at the time of the gift, is at least

equal to the proportionate value that the perpetual conservation restriction bears to

the value of the property as a whole.8 If subsequent changes result in judicial

extinguishment of the easement, the conservation purpose of the contribution is

nonetheless treated as protected in perpetuity if the donee organization is entitled to

a portion of the proceeds from a subsequent sale, exchange, or involuntary

conversion of the subject property, which is at least equal to the proportionate

value of the perpetual conservation restriction, and it uses those proceeds in a

manner consistent with the conservation purpose of the original contribution. Sec.

1.170A-14(g)(6)(i), Income Tax Regs.




      8
       The proportionate value of the donee organization’s property right remains
constant. Sec. 1.170A-14(g)(6)(ii), Income Tax Regs.
                                         -8-

   Section 1.170A-14(g)(6), Income Tax Regs., is unconditional; if the donee

organization is not entitled to a proportionate share of such proceeds, then the

conservation purpose of the contribution is not protected in perpetuity. Kaufman

v. Commissioner, 136 T.C. at 309; Kaufman v. Commissioner, 134 T.C. at 186-

187. The taxpayers in Kaufman claimed a deduction for their contribution of a

facade easement to a nonprofit organization. Kaufman v. Commissioner, 134 T.C.

at 184. Consistent with the regulation, the easement agreement granted the

nonprofit organization a proportionate share of future proceeds. See Kaufman v.

Commissioner, 136 T.C. at 299. However, the property was subject to a mortgage,

and a “lender acknowledgment” recorded with the easement agreement granted the

mortgagee a “prior claim” to insurance and condemnation proceeds in preference

to the nonprofit organization. Id. at 299-300. We held that the conservation

contribution failed as a matter of law to comply with the enforceability in

perpetuity requirement because the nonprofit organization was not guaranteed its

proportionate share of the proceeds (i.e., after preferential payment to the

mortgagee there might not have been sufficient proceeds for the nonprofit
                                           -9-

organization).9 Kaufman v. Commissioner, 134 T.C. at 187. We reached the same

conclusion on similar facts in 1982 East.

    Similar to the contributions in Kaufman and 1982 East, petitioner’s contribution

of the facade easement to LPCI does not satisfy the requirements of section

1.170A-14(g)(6), Income Tax Regs. Section 19 of the easement

agreement, captioned “Stipulated Value of Grantee’s Interest”, provides in

pertinent part:

      [Petitioner] acknowledges that upon execution and recording of this
    Preservation Easement, * * * [LPCI] shall be immediately vested with a real
    property interest in the Premises and that such interest of * * * [LPCI] shall
    have a stipulated fair market value, for purposes of allocating net proceeds in
    an extinguishment pursuant to Section 21, equal to the ratio between the fair
    market value of the Preservation Easement and the fair market value of the
    Premises prior to considering the impact of the Preservation Easement
    (hereinafter the “Preservation Easement Percentage”) as determined in the
    Qualified Appraisal * * *

In relevant part, section 21of the agreement provides that in the event the easement

is extinguished by judicial decree:


      9
         We accepted the taxpayers’ claim that the easement agreement gave the
nonprofit organization a contractual right against the taxpayers and their successors
for its proportionate share of the proceeds but found such right insufficient to satisfy
sec. 1.170A-14(g)(6), Income Tax Regs. See Kaufman v. Commissioner, 136 T.C.
294, 309 (2011). We held that the taxpayers could not avoid the strict requirement
of the regulation by showing that they would most likely be able to satisfy both their
mortgage and their obligation to the nonprofit organization. See Kaufman v.
Commissioner, 134 T.C. 182, 186 (2010).
                                            -10-

     (ii) [LPCI] shall be entitled to share in any net proceeds resulting from or
     related to the extinguishment in an amount equal to the Preservation
     Easement Percentage determined pursuant to Section 19 multiplied by
     the net proceeds.

     (iii) [LPCI] agrees to apply all of the portion of the net proceeds it receives to
      the preservation and conservation of other buildings, structures, or sites
      having historical, architectural, cultural, or aesthetic value and
      significance to the people of the State of Illinois.

     (iv) Net proceeds shall include, without limitation, insurance proceeds,
      condemnation proceeds or awards, proceeds from a sale in lieu of
      condemnation, and proceeds from the sale, financing or exchange by * * *
      [petitioner] of any portion of the Premises after the extinguishment,
      but shall specifically exclude any preferential claim of a Mortgagee under
      Section 22. [Emphasis added.]

Section 22 of the agreement, captioned “Subordination of Mortgages”, provides in

pertinent part:

      [Petitioner] and * * * [LPCI] agree that all mortgages and rights in the
      Premises of all mortgagees and holders of other liens and encumbrances
      (collectively “lienholders”) are subject and subordinate at all times to the
      rights of * * * [LPCI] to enforce the purposes of this Preservation
      Easement. * * * [Petitioner] represents and warrants that it [sic] has
      provided a copy of this instrument to all lienholders as of the date
      hereof, and the agreement of each lienholder to subordinate its mortgage
      to this Preservation Easement is attached hereto. The following
      provisions apply to all Mortgagees (as hereinafter defined) now existing
      or hereafter holding a mortgage on the Premises:

      *           *          *          *          *          *         *
                                           -11-

      (c) If a mortgage grants to a Mortgagee the right to receive the proceeds
      of condemnation proceedings arising from any exercise of the power of
      eminent domain as to all or any part of the Premises or the right to receive
      insurance proceeds as a result of any casualty, hazard, or accident occurring
      to or about the Premises, the Mortgagee shall have a prior claim to the
      insurance and condemnation proceeds and shall be entitled to same in
      preference to * * * [LPCI] until the mortgage is paid off and discharged,
      notwithstanding that the mortgage is subordinate in priority to this
      Preservation Easement. [Emphasis added.]

      *          *          *          *          *         *          *

      (h)    For purposes of this instrument, the term “Mortgagee” shall
      include only the holder of a bona fide indebtedness secured by a
      mortgage or trust deed, provided that such holder is an institutional
      lender or other third party unrelated to * * * [petitioner].

      Bank of America and First Bank & Trust held mortgages on the property at the

time the easement agreement was entered into and were thus “Mortgagees” under the

agreement. The terms of each mortgage assigned insurance and condemnation

proceeds to the lender. As required by the easement agreement, representatives of

the banks executed documents styled “LENDER ACKNOWLEDGMENT-

PRESERVATION EASEMENT” which purported to subordinate the banks’

mortgage rights to LPCI’s rights under the easement agreement. However, the

lender acknowledgments contain clauses that are essentially identical to section 22,

paragraph (c) of the easement agreement, which grant the banks a “prior claim” to

insurance and condemnation proceeds “in preference to” LPCI.
                                         -12-

      Under the easement agreement Bank of America and First Bank & Trust have

preferential claims to all future insurance and condemnation proceeds up to the

amounts of the outstanding balances of their respective mortgages at the time. As a

result, LPCI does not have a guaranteed right to its proportionate share of such

proceeds as required by section 1.170A-14(g)(6), Income Tax Regs. See Kaufman

v. Commissioner, 134 T.C. at 186. The effect of the easement agreement in this case

is indistinguishable from the effect of similar agreements in Kaufman and 1982 East,

and our opinions in those cases are squarely on point. Petitioner’s facade easement

contribution fails as a matter of law to comply with the enforceability in perpetuity

requirements of section 170A-14(g)(6), Income Tax Regs., and therefore is not

exclusively for conservation purposes. See sec. 170(h)(5)(A). For that reason, it is

not a qualified conservation contribution under section 170(h)(1), and petitioner is

not allowed a deduction therefor.

      We conclude that no genuine issues of material fact exist and that

respondent is entitled to judgment as a matter of law with respect to the facade

easement contribution. In his memorandum of law in support of summary

judgment respondent concedes the accuracy-related penalties are not appropriate if

petitioner’s deduction is disallowed as a matter of law. Accordingly, we shall

grant respondent’s motion for summary judgment.
                            -13-

To reflect the foregoing,


                                         An appropriate order and

                                   decision will be entered.
