                         T.C. Memo. 2014-230



                   UNITED STATES TAX COURT



EDWARD M. REISNER AND MANDA K. WEINTRAUB, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 18426-09.                        Filed November 6, 2014.



        In 2004 Ps granted to a qualified organization a facade easement
 on a townhouse they owned. With respect to that donation they
 claimed a charitable contribution deduction for 2004 and carryover
 charitable contribution deductions for 2005 and 2006. R disallowed the
 deductions because he determined the easement was valueless. R also
 determined that Ps were liable for a gross valuation misstatement
 penalty pursuant to I.R.C. sec. 6662(h) on the underpayment
 attributable to the easement overvaluation for each year.

        Ps and R now agree that the easement Ps contributed to the
 qualified organization was valueless. They further agree that Ps had
 underpayments attributable to gross valuation misstatements on their
 2004, 2005, and 2006 returns attributable to the easement overvaluation
 but that Ps are not liable for penalties under I.R.C. sec. 6662(h) for
 2004 and 2005 because Ps had reasonable cause for those
 underpayments. R claims that 2006 amendments to I.R.C. sec. 6664(c)
 preclude Ps from raising a reasonable cause defense to the penalty for
 their 2006 underpayment attributable to the carryover of the charitable
                                        -2-

      [*2] contribution deduction. Ps argue that the reasonable cause
      exception is available to them because Congress did not intend to
      eliminate it for underpayments resulting from carryover deductions
      arising in years before the statute was amended.

             Held: Because their 2006 return was filed after the effective date
      of 2006 amendments to I.R.C. sec. 6664(c)(3), Ps are precluded under
      that section from raising a reasonable cause defense to imposition of
      the gross valuation misstatement penalty for the underpayment on their
      2006 return attributable to the carryover of their charitable contribution
      deduction.



      Edward M. Reisner and Manda K. Weintraub, pro sese.

      James P.A. Caligure and Marc L. Caine, for respondent.



                           MEMORANDUM OPINION


      GALE, Judge: The sole issue for decision in this case is whether petitioners

are liable for a gross valuation misstatement penalty of $3,300 for taxable year

2006. See sec. 6662(h).1 As explained below, we hold that petitioners are liable

for the penalty.




      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as in effect for the years at issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
                                         -3-

[*3]                                Background

       This case was submitted fully stipulated under Rule 122. The stipulated

facts are incorporated herein by this reference. Petitioners resided in New York

when the petition was filed.

       In 2004 petitioners entered into a preservation restriction agreement with the

National Architectural Trust (NAT) pursuant to which they granted to NAT a

facade easement on their townhouse in Brooklyn, New York.2

       On their joint 2004 Federal income tax return petitioners reported a

$190,000 noncash charitable contribution for their donation of the facade

easement. See sec. 170(h). Because of the limitations imposed by section 170(b),

petitioners claimed with respect to the donation a charitable contribution deduction

of $80,600 for 2004 and carryover charitable contribution deductions of $85,572

and $23,828 on their joint returns for 2005 and 2006, respectively. Petitioners’

2006 return was filed on April 16, 2007.

       Respondent issued a notice of deficiency to petitioners which disallowed the

foregoing charitable contribution deductions and determined gross valuation




       2
       NAT is tax exempt under sec. 501(c)(3) and a “qualified organization”
under sec. 170(h)(3). See 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84.
                                         -4-

[*4] misstatement penalties for 2004, 2005, and 2006 of $9,820, $10,101, and

$3,300, respectively.3 See sec. 6662(h). Petitioners timely petitioned for

redetermination.

      The parties have stipulated that the facade easement petitioners donated to

NAT in taxable year 2004 had zero value and that the notice of deficiency properly

disallowed the charitable contribution deductions petitioners claimed with respect

thereto. They have further stipulated that petitioners made gross valuation

misstatements on their 2004, 2005, and 2006 returns as a result of overvaluing the

facade easement. See sec. 6662(h)(2)(A). The parties agree that petitioners are not

liable for the gross valuation misstatement penalty for either 2004 or 2005 because

they satisfied the reasonable cause exception of section 6664(c)(1) and (2), as in

effect before the enactment of the Pension Protection Act of 2006 (PPA), Pub. L.

No. 109-280, 120 Stat. 780.4 The parties dispute only whether petitioners are liable

for the gross valuation misstatement penalty for 2006.




      3
      Alternatively, the notice of deficiency determined a penalty under sec.
6662(a) for each year.
      4
       The parties also stipulated that petitioners are not liable for penalties under
sec. 6662(a) for any of the years at issue because they had reasonable cause with
respect to the underpayments attributable to the deductions for the facade easement
donation. See sec. 6664(c)(1).
                                         -5-

[*5]                                Discussion

       Section 6662(h)(1) imposes a 40% penalty on the portion of an

underpayment of tax that is attributable to a gross valuation misstatement. For

returns filed after August 17, 2006, a gross valuation misstatement exists if the

value of any property claimed on the return is 200% or more of the amount

determined to be the correct value.5 Sec. 6662(h)(2)(A)(i); PPA sec.

1219(a)(2)(A), (e)(1), 120 Stat. at 1083, 1085. The penalty “applies to any portion

of an underpayment for a year to which a * * * deduction * * * is carried that is

attributable to a * * * gross valuation misstatement for the year in which the

carryback or carryover of the * * * deduction * * * arises”. Sec. 1.6662-5(c)(1),

Income Tax Regs.

       Section 6664(c)(1) provides that, generally, no penalty shall be imposed

under section 6662 with respect to any portion of an underpayment if it is shown

that there was a reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion (hereafter, reasonable cause exception).

Section 6664 has also, both before and after its amendment by the PPA, limited the

availability of the reasonable cause exception in the case of any underpayment

attributable to a substantial or gross valuation overstatement with respect to

       5
       For returns filed on or before August 17, 2006, a gross valuation
misstatement existed if the claimed value was 400% or more of the correct value.
                                        -6-

[*6] “charitable deduction property”.6 Before its amendment by the PPA, then-

section 6664(c)(2) limited the availability of the reasonable cause exception for

such underpayments to circumstances where the claimed value of the property was

based on a qualified appraisal by a qualified appraiser and the taxpayer had made a

good-faith investigation of the value of the contributed property. However, PPA

sec. 1219(a)(3), 120 Stat. at 1084, amended section 6664(c)(2)--now designated

section 6664(c)(3)7 --by eliminating the reasonable cause exception entirely for

underpayments attributable to gross valuation overstatements of charitable

deduction property. The statute as amended provides that “[i]n the case of any

underpayment attributable to a * * * gross valuation overstatement under chapter 1

with respect to charitable deduction property, paragraph (1) [section 6664(c)(1)]

shall not apply.” Sec. 6664(c)(3).8 In the case of facade easement contributions,



      6
       “[C]haritable deduction property” is defined for this purpose generally as
“any property contributed by the taxpayer in a contribution for which a deduction
was claimed under section 170.” Sec. 6664(c)(4)(A). Before amendment by the
Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, sec.
1409(c)(1)(A), 124 Stat. at 1069, the foregoing definition was codified as sec.
6664(c)(3)(A).
      7
      Sec. 6664(c)(2) was redesignated sec. 6664(c)(3) by the Health Care and
Education Reconciliation Act of 2010, sec. 1409(c)(1)(A).
      8
       The qualified appraisal and good-faith investigation requirements of prior
law continue to apply to underpayments attributable to substantial valuation
overstatements. See sec. 6664(c)(3)(A) and (B).
                                         -7-

[*7] the elimination by PPA sec. 1219(a)(3) of the reasonable cause exception for

underpayments attributable to gross valuation overstatements applies “to returns

filed after July 25, 2006.” PPA sec. 1219(e)(3), 120 Stat. at 1086.9

      Respondent contends that the statute as amended eliminates the reasonable

cause exception to the gross valuation misstatement penalty for the portion of any

underpayment that is attributable to a gross valuation overstatement of charitable

deduction property. Therefore, respondent argues, because petitioners filed their

2006 return after July 25, 2006, and it has been stipulated that a portion of their

underpayment for that year was attributable to a gross valuation misstatement of

charitable deduction property, petitioners may not assert reasonable cause to

prevent imposition of the penalty. See id.; sec. 1.6662-5(c)(1), Income Tax Regs.




      9
      The Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, sec.
1219(e)(3), 120 Stat. at 1086, provides:

      In the case of a contribution of a qualified real property interest which
      is a restriction with respect to the exterior of a building described in
      section 170(h)(4)(C)(ii) of the Internal Revenue Code of 1986, and an
      appraisal with respect to the contribution, the amendments made by
      subsections (a) [modifying the thresholds for substantial and gross
      valuation misstatements and eliminating the reasonable cause
      exception for underpayments attributable to gross valuation
      overstatements of charitable deduction property] and (b) [imposing
      the sec. 6695A penalty on substantial and gross valuation
      misstatements attributable to incorrect appraisals] shall apply to
      returns filed after July 25, 2006.
                                          -8-

[*8]   Petitioners argue that imposing such strict liability on taxpayers for claiming

a charitable contribution deduction for a facade easement donation that is a

carryover from a year before the reasonable cause exception was eliminated is not

a required construction of the statute, constitutes a retroactive imposition of a

penalty on conduct that occurred before enactment of the PPA, and is contrary to

congressional intent.

       As for the latter claim, petitioners urge that we look at what was a

comprehensive set of changes in the PPA directed at charitable contribution

deductions for donations of facade easements. Petitioners note that, in addition to

the revisions to the penalty regime under sections 6662 and 6664 for taxpayers

making substantial or gross valuation misstatements (including both a reduction in

the overvaluation percentages triggering the “substantial” and “gross” valuation

misstatement labels and the elimination of the reasonable cause exception at issue

here), the PPA also made amendments to section 170(h)(4) requiring, inter alia,

that a contributed easement include a restriction which preserves the entire exterior

of a building rather than merely its facade; that the donor and donee enter into a

written agreement certifying the donee’s satisfaction of certain requirements; and

that a qualified appraisal, photographs of the building, and a description of the

restrictions on the building’s development be included with the taxpayer’s return
                                             -9-

[*9] for the taxable year of the contribution. See PPA sec. 1213(a), 120 Stat. at

1075-1076.

      Petitioners note that Congress provided that the amendments to section

170(h)(4) were to apply “to contributions made after July 25, 2006.” PPA sec.

1213(e)(1), 120 Stat. at 1076 (emphasis added). In petitioners’ view, since the

amendments to section 170(h)(4) were part of Congress’ comprehensive scheme

and were targeted at the timing of the contribution rather than the filing of a return

claiming a resulting deduction, Congress intended the focus of the antiabuse

measures to be on the conduct associated with making the contribution and not on

the terms under which carryovers of those deductions were to be allowed.

      Petitioners buttress the point by citing this Court’s analysis of the penalty

issues in Pollard v. Commissioner, T.C. Memo. 2013-38. Petitioners point out that

in Pollard, which like the instant case involved an easement donation made and

charitable contribution deductions first claimed before enactment of the PPA but

carried over into post-PPA taxable years, the Tax Court focused its reasonable

cause analysis on the taxpayer’s actions in the year the contribution was made

without once alluding to the elimination of the reasonable cause exception for

returns filed after July 25, 2006.10

      10
           Petitioners also find support for their position in the original and remand
                                                                              (continued...)
                                         - 10 -

[*10] Petitioners’ argument cannot be reconciled with the statute’s clear terms.

While petitioners are correct that the PPA amendments to section 170(h)(4) were

made effective for “contributions made after July 25, 2006”,11 the provision

eliminating the reasonable cause exception for underpayments attributable to gross

valuation overstatements of easement donations in PPA sec. 1219(a)(3) (codified

as section 6664(c)(3)) was made effective for “returns filed after July 25, 2006.”

PPA sec. 1219(e)(3). Thus, Congress clearly intended a distinction in the effective

dates for the amendments to sections 170(h)(4) and 6664(c)(3)--the former

applicable to contributions made after July 25, 2006, and the latter to returns filed

after that date.




       10
         (...continued)
opinions in Scheidelman v. Commissioner, T.C. Memo. 2010-151, vacated, 682
F.3d 189 (2d Cir. 2012), remanded to T.C. Memo. 2013-18, aff’d, 755 F.3d 148
(2d Cir. 2014). However, that case did not involve the penalty for gross valuation
misstatements or the repeal of the reasonable cause exception for underpayments
attributable to gross valuation overstatements of charitable deduction property.
Consequently, it is not relevant to the issue at hand.
       11
         Specifically, PPA sec. 1213(e)(1), 120 Stat. at 1076, provides: “The
amendments made by subsection (a) [amending paragraph 4 of Code sec. 170(h)]
shall apply to contributions made after July 25, 2006.” For completeness we note
that the new requirement in sec. 170(h)(4)(B)(iii) that an appraisal, photographs,
and a description of restrictions on development be attached to the return includes
a codified effective date making it applicable “in the case of any contribution made
in a taxable year beginning after the date of the enactment [August 17, 2006] of
this subparagraph”.
                                         - 11 -

[*11] The import of eliminating the reasonable cause exception for returns filed

after a given date rather than for contributions made after that date lies in the

operation of section 1.6662-5(c), Income Tax Regs., which governs the application

of the gross valuation misstatement penalty in the case of carryovers or carrybacks

of deductions attributable to gross valuation misstatements. As noted, that

regulation provides that the gross valuation misstatement penalty applies to any

portion of an underpayment for a year to which a deduction is carried that is

attributable to a gross valuation misstatement for the year in which the carryback

or carryover of the deduction arises. Thus, by its terms, the regulation

characterizes the penalty-bearing portion of the underpayment in the carryover or

carryback year as “attributable to” the gross valuation misstatement in the

originating year. This terminology matters because the PPA’s elimination of the

reasonable cause exception for gross valuation overstatements12 of charitable

deduction property in section 6664(c)(3) applies “[i]n the case of any

underpayment attributable to a * * * gross valuation overstatement”. Since under

the regulation an underpayment arising from a carried over deduction is

“attributable to” the valuation misstatement in the originating year, it follows that


      12
        We note that valuation “overstatements” are a subset of valuation
“misstatements” and arise where the value of property has been overstated rather
than understated.
                                        - 12 -

[*12] the section 6664(c)(3) elimination of the reasonable cause exception applies

to the underpayment in the carryover or carryback year, because section 6664(c)(3)

eliminates the exception in the case of any underpayment “attributable to” a gross

valuation overstatement.

      In crafting the effective date of section 6664(c)(3), Congress is presumed to

be aware of, and to adopt, any longstanding administrative interpretation of the

penalty statutes when it takes no step to modify that interpretation. See

Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 846 (1986);

Lorillard v. Pons, 434 U.S. 575, 580-581 (1978). When Congress amended section

6664(c) in the PPA to eliminate the reasonable cause exception, section 1.6662-

5(c)(1), Income Tax Regs., had been in place for nearly 15 years. The regulation

was promulgated shortly after Congress enacted a wholescale revision and

reorganization of the accuracy-related penalty regime of subchapter A of chapter

68 of the Internal Revenue Code in 1989, see Omnibus Budget Reconciliation Act

of 1989, Pub. L. No. 101-239, sec. 7721, 103 Stat. at 2395, and represented a

deliberate policy determination that elements of the new penalty regime enacted in

1989 should apply to carryover years even when the original valuation

misstatements had occurred in years before 1989, see T.D. 8381, 1992-1 C.B. 374,

378. Given Congress’ presumed awareness and adoption of the position in section
                                          - 13 -

[*13] 1.6662-5(c)(1), Income Tax Regs., when it enacted the PPA, the drafting of

the effective date for the elimination of the reasonable cause exception on the basis

of returns filed after July 25, 2006, is readily interpreted as intended to cut off the

exception for carryovers attributable to gross valuation overstatements first made

in years before enactment of the PPA.

       As to petitioners’ contention that the impact is retroactive, we answered that

argument in Chandler v. Commissioner, 142 T.C.          ,     (slip op. at 24-26) (May

14, 2014). As was the case with the taxpayer in Chandler, the PPA amendment

eliminating the reasonable cause exception was in effect when petitioners filed

their return for 2006. Petitioners thus “reaffirmed” their gross valuation

overstatement when they filed the return after enactment of the PPA amendment.

See id. at    (slip op. at 25). Petitioners could have chosen not to claim the

carryover for 2006 in view of the change in the statute but did not do so.

       Our decision in Pollard v. Commissioner, T.C. Memo. 2013-38, does not

contradict the conclusion we reach here (or our conclusion in Chandler). On brief

in Pollard the Commissioner stated he would concede the gross valuation

misstatement penalties for 2006 and 2007 if the taxpayer established that he

satisfied the reasonable cause exception of section 6664(c)(2) for 2003, 2004, and

2005, which he did.
                                       - 14 -

[*14] Because the parties’ concessions on other issues give rise to computational

adjustments,


                                                      Decision will be entered

                                                under Rule 155.
