                       T.C. Memo. 2020-120



                 UNITED STATES TAX COURT



PETER C. EMANOUIL AND PASCALE EMANOUIL, Petitioners v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5089-17.                        Filed August 17, 2020.



      P-H is a real estate developer. In 1999 he purchased 197 acres
of undeveloped property in Town W. Over the next several years,
P-H made various attempts to either develop or sell the 197 acres.
Ultimately, P-H obtained approval for an affordable housing project
(“AHP”) including 164 units on 104 of the 197 acres. Throughout the
approval process P-H made various concessions to mitigate Town
W’s concerns regarding the size of the development (including the
number of units and the acreage), potential impacts on Town W
(including traffic and other impacts), and potential environmental
concerns. In December 2008, as the approval of the project was
coming to its conclusion, P-H donated 16 acres of his remaining
property to Town W. Before making the donation, he had the
property appraised, and the value was determined to be $1.5 million.
In February 2009 Town W approved the AHP. In November 2009
P-H donated an additional 71 acres to Town W. Before making the
donation, he had the property appraised, and the value was
determined to be $2.5 million.
                                         -2-

[*2]          On their 2008 Form 1040, “U.S. Individual Income Tax
       Return,” Ps reported a $1.5 million gift to charity and included a
       Form 8283, “Noncash Charitable Contributions”; but because of
       limitations on claiming charitable contribution deductions, Ps claimed
       only about $700,000 and carried the remainder forward to be claimed
       on returns for subsequent years. Likewise, on their Form 1040 for
       2009, Ps reported a $2.5 million gift to charity and included a Form
       8283 but could claim only about $660,000 and carried the rest
       forward. On their Forms 1040 for 2010 through 2012, Ps claimed
       deductions for the remaining amounts.

              The IRS examined Ps’ 2010, 2011, and 2012 returns and issued
       a statutory notice of deficiency (“SNOD”) disallowing the carryover
       charitable contribution deductions and determining an
       accuracy-related penalty for each of those years. The SNOD stated
       the grounds for disallowing the deductions as: failure to substantiate
       the reported values of properties transferred and failure to show that
       the properties were transferred with charitable intent. Ps timely filed
       a petition to challenge the determinations in the SNOD. The issues
       for decision are: (1) whether Ps complied with the qualified appraisal
       requirements of I.R.C. sec. 170(f)(11)(C); (2) whether Ps’
       contributions were part of a quid pro quo exchange rather than a
       charitable gift; (3) what the fair market values were of the properties
       that Ps contributed; and (4) whether accuracy-related penalties apply.

             Held: Ps substantially complied with the qualified appraisal
       requirements.

            Held, further, Ps contributions were not part of a quid pro quo
       exchange.

             Held, further, the fair market value of the property that Ps
       contributed in 2008 was $1.5 million, as they reported; and the fair
       market value of the property that Ps contributed in 2009 was
       $2.5 million, as they reported.

             Held, further, accuracy-related penalties do not apply.
                                        -3-

[*3] Peter D. Anderson and Nicholas F. Casolaro, for petitioners.

      Patrick F. Gallagher and Carlton W. King, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GUSTAFSON, Judge: Pursuant to section 6212(a),1 the Internal Revenue

Service (“IRS”) determined deficiencies in tax and penalties for petitioners,

Peter C. and Pascale Emanouil, in the following amounts:2

                                                           Penalties
                Year              Deficiency             sec. 6662(h)
               2010                $184,158                 $73,663
               2011                 299,217                 119,687
               2012                 298,228                 119,291



      1
        Unless otherwise indicated, all section references are to the Internal
Revenue Code (26 U.S.C.), as amended, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All amounts are rounded to the nearest
dollar.
      2
        In the statutory notice of deficiency (“SNOD”), the IRS determined that the
Emanouils were liable for 40% accuracy-related penalties under section 6662(h)
for gross valuation misstatements. It appears that the Commissioner first asserted
in his answer, as an alternative, 20% penalties under section 6662(a) and (b) for
substantial valuation misstatements, negligence, or substantial understatements of
income tax. The parties did not address the burden of proof as to the alternative
penalties, but since we hold that the Emanouils do not owe the deficiencies, we
need not address that question.
                                         -4-

[*4] The deficiencies resulted from disallowed deductions for noncash charitable

contributions in the amounts of $1.5 million and $2.5 million. The Emanouils

claimed portions of the deductions on their 2008 and 2009 returns and carried

forward the remaining portions and deducted those amounts for 2010, 2011, and

2012. The IRS examined the Emanouils’ 2010, 2011, and 2012 returns and

disallowed the deductions. The Emanouils timely filed their petition to

redetermine the deficiencies. The issues to be decided are:

      (1) whether the contributions failed to qualify as deductible contributions

for lack of qualified appraisals (we hold that the appraisals were qualified);

      (2) whether the contributions failed to qualify as deductible contributions

because they were part of a quid pro quo arrangement (we hold that they were not

part of a quid pro quo arrangement and do not fail to qualify);

      (3) whether, as Ps claimed, the fair market value of the property that they

contributed in 2008 was $1.5 million, and the fair market value of the property that

they contributed in 2009 was $2.5 million (we hold that the fair market values

were as Ps claimed); and

      (4) whether the Emanouils are liable for accuracy-related penalties under

section 6662 (we hold that they are not).
                                         -5-

[*5]                              FINDINGS OF FACT

       Mr. and Mrs. Emanouil resided in Massachusetts at the time they filed their

petition. The primary focus of this case is on the business activities of

Mr. Emanouil, who owned and operated real estate businesses including Granite

Hill Estates, LLC (organized under the laws of Massachusetts in 1998), and its

successor, also called Granite Hill Estates, LLC (organized under the laws of

Massachusetts in 2008). (We refer to these entities collectively as “GHE LLC”.)

Property at issue

       On December 9, 1999, Mr. Emanouil acquired 197 acres of real property in

Westford, Massachusetts, for $470,000. The property was purchased through

GHE LLC and is referred to herein as “the Granite Hill property” or “the 197

acres”. The Granite Hill property consisted of the following lots and parcels (with

approximate acreage indicated):

       1.    lot 1, 104.5 acres;

       2.    lot 2, 26.9 acres;

       3.    lot 3, 44.8 acres;

       4.    lot 4, 1.66 acres;

       5.    lot 5, 1 acre;

       6.    lot 6, 2.85 acres;
                                         -6-

[*6] 7.      parcel E, 0.78 acres;

      8.     parcel F, 0.41 acres; and

      9.     the Allie Lane parcel, 15 acres.

Mr. Emanouil also attempted to purchase an additional 44-acre parcel of land that

abutted the Allie Lane parcel. He negotiated to purchase the 44 acres for

$200,000, of which $150,000 was for the land and $50,000 was for back taxes;

however, the attorney that Mr. Emanouil retained to negotiate for him had also

been working for the Town of Westford and ultimately helped the town (rather

than Mr. Emanouil) acquire the property in December 2000 for $425,000.

Mr. Emanouil later filed a suit against the attorney and the town. Mr. Emanouil

prevailed as to the attorney’s breach of fiduciary duty, but the town was dismissed

from the suit. The town then used the 44 acres for its Department of Public Works

and built a garage (“the highway garage”) on the property. Blasting during

construction of the garage caused perchlorate contamination on the Allie Lane

parcel.

Potential uses for the 197 acres

      Over the next several years, Mr. Emanouil considered various uses for the

Granite Hill property. Sometime around 2004 he offered to sell the Granite Hill

property to the town, but the town had recently purchased other property and was
                                         -7-

[*7] not in a position to make an additional purchase. Mr. Emanouil also

considered potential development opportunities for the property including a

flexible housing development (“the flexible development”), a local initiative

project (“the LIP”) to develop affordable housing under Massachusetts’s Local

Initiative Program pursuant to Massachusetts General Laws Chapter 40B (“chapter

40B” or simply “40B”), or a conventional 40B affordable housing project (“the

Graniteville Woods project”).3

Non-pursuit of the flexible development plan

      The flexible development would have used the entire 197 acres and

included 100 single-family homes, 56 apartments, 48 attached single-family

homes, and 44 units of age-55-and-over housing. The benefit for the flexible

development is that the plan was to be based on the number of units that could be

developed under a conventional development but with the flexibility for the

developer to change the layout of the houses in order to better use the natural

landscape and minimize road frontage necessary for the devolvement. However, it

      3
        Mass. Gen. Laws ch. 40B, secs. 20-23 (2020) and corresponding
regulations allow a developer to seek a single comprehensive permit from a
municipality’s Zoning Board of Appeals (rather than several permits from various
town boards). LIPs are a subset of chapter 40B projects administered by the
State’s Department of Housing and Community Development. For such projects,
a developer partners with a municipality in planning the development. See 760
Mass. Code Regs. sec. 56.02 (2020).
                                        -8-

[*8] became clear at a November 2005 town meeting that there was little or no

support for the flexible development, so Mr. Emanouil pursued the affordable

housing projects instead.

Progress with the LIP plan

      Under Mr. Emanouil’s proposed LIP, he would have had the town’s Board

of Selectmen (“the BOS”)4 be a co-applicant with him in applying for two

approvals--i.e., for approval by Massachusetts’ Department of Housing and

Community Development of the site location and overall project details for the

40B development, and for approval of a comprehensive plan by the town’s Zoning

Board of Appeals (“the ZBA”).5 Having the BOS join in the application would

have helped to streamline at least the ZBA approval if not both approvals. The

initial LIP plan proposed to encompass all of the Granite Hill property and to

include a mixture of single-family homes, condominiums, rental units, and age-55-

and-over housing; and as was required for a 40B project, 25% of the units would

be “affordable units”.


      4
        The BOS is the town’s chief executive body. See Mass. Gen. Laws ch. 39,
sec. 1 (2020); Westford Town Charter sec. 5(b).
      5
       The ZBA is an independent board comprising members appointed by the
BOS. The ZBA has the ultimate authority in the town to approve or reject
comprehensive permits applied for under chapter 40B. See Mass. Gen. Laws ch.
40A, secs. 12, 14 (2020); 760 Mass. Code Regs. sec. 56.01 (2020).
                                          -9-

[*9] In January 2006 Mr. Emanouil’s attorney, Douglas Deschenes, held various

meetings with owners of abutting land to discuss the LIP. The plan was slightly

modified, and on January 24, 2006, Mr. Deschenes attended a BOS meeting and

presented the modified plan under which only 150 acres of the Granite Hill

property would be used for the development. Actual development would occur on

only 40-50 acres, and the rest of the property would be preserved as open space for

trails, nature preservation, and similar uses. As an added benefit in the modified

plan, Mr. Deschenes told the BOS that Mr. Emanouil was considering donating

the remaining 20 acres of the Granite Hill property for the town to develop on its

own. (Mr. Emanouil began considering donations to the town as a result of an

article he read in a periodical about the tax benefits of charitable giving.)

AHC consideration of the LIP plan

      On January 25, 2006, the town’s affordable housing committee (“the AHC”)

met and was informed generally about the proposed LIP and Mr. Emanouil’s

desire to work with the town. At the next AHC meeting held February 22, 2006,

Mr. Deschenes presented an overview of the LIP, which would be built on 150

acres of the Granite Hill property and would include 66 single-family homes,

44 age-55-and-over single-family homes, 78 townhouse-style homes, and 60 rental

apartments in two 30-unit buildings; the project would include 248 units in total
                                         -10-

[*10] and would preserve roughly 62 units as affordable housing, though this

would not include any of the age-55-and-over units as Mr. Emanouil had

determined it too difficult to provide affordable housing with age restrictions.

      Mr. Deschenes also explained that as part of the LIP, Mr. Emanouil was

considering donating to the town the Allie Lane parcel--which abutted the 44 acres

the town had acquired in 1999 and used for the highway garage. Some of the

individuals present at the AHC meeting expressed concerns about the LIP

including future expenses the LIP would cause to the town for municipal services

relating to water, traffic, schools, etc. Other individuals at the meeting noted that

landowners have the right to develop their property and that the LIP was more

appealing than alternative developments or uses of the land. The AHC determined

to schedule a joint boards meeting to be held on March 29, 2006, so that all the

boards of the town and any owners of abutting land could discuss the LIP.

Proposal to sell to the town

      On March 10, 2006, Mr. Deschenes sent a letter on behalf of Mr. Emanouil

that indicated he was willing to sell all (or portions) of the Granite Hill property to

the town. The letter indicated the town could purchase 180 acres for $8.5 million

and Mr. Emanouil would donate his additional parcels of 20 and 25 acres, or the

town could purchase portions of the Granite Hill property, and Mr. Emanouil
                                        -11-

[*11] would look to develop the remaining portions. In a letter dated March 28,

2006, Mr. Deschenes corrected the number of acres stated in the proposed sale and

the proposed developments from 180 to 150--with Mr. Emanouil still being

willing to donate an additional 45 acres to the town, as he had previously

indicated.

Joint consideration by the town’s boards

      On March 29, 2006, at the joint boards meeting, the town discussed both the

proposed LIP and the offer from Mr. Emanouil to sell the Granite Hill property to

the town. The boards discussed the overview of the project and the additional

units it would add to the town’s affordable housing inventory. The town had an

obligation under Mass. Gen. Laws ch. 40B, sec. 20 (2020), to approve affordable

housing projects until it reached a level of 10% affordable housing. The town was

roughly 700 units short of its 10% requirement, so it was not in a strong position

to deny 40B projects. The town had been granted a one-year moratorium with

respect to approving 40B projects because of other projects that had recently been

approved, but that one-year moratorium would soon expire. If the town approved

the LIP, then under 760 Mass. Code Regs. sec. 56.03(1), (3) and (5) (2020), the

town could be granted an additional two-year moratorium. The boards

acknowledged that partnering in the LIP would give the town a greater
                                        -12-

[*12] opportunity to help shape the comprehensive plan, as compared to Mr.

Emanouil’s independently pursuing a conventional 40B project.

      The boards also discussed purchasing the land rather than partnering in the

LIP. There were concerns about purchasing some of the property including the

Allie Lane parcel. That parcel abutted the highway garage property but was

potentially contaminated with perchlorate from blasting that had taken place when

the garage was built. Nevertheless, purchasing the land would enable the town to

prevent development of the property--keeping the town from becoming more like

a densely populated city--and would also help the town to keep from incurring

increased infrastructure costs caused by the development. No final decision was

reached at the meeting, with respect either to joining in the LIP or to purchasing

any of the property.

      On June 27, 2006, the BOS met and discussed the fact that Mr. Emanouil

was waiting for a decision regarding either proposal and that, though he felt that

the LIP was dead, he would give the BOS until June 30 to decide. The BOS

understood that Mr. Emanouil had been considering a conventional 40B project in

the meantime and would likely proceed with such a project if the town did not

decide to join in the LIP or purchase the property. The BOS formed a

subcommittee to consider a potential purchase of the property for $8 million rather
                                           -13-

[*13] than approving the LIP. The subcommittee thereafter conducted studies to

determine the potential purchase options and risks to the town if it were to

purchase and develop the property, and in September 2006 they commissioned

Avery Associates to appraise the property for a potential purchase.

Mr. Emanouil’s submission of a conventional 40B plan

      By October 2006 Mr. Emanouil had not heard a final answer from the town

on either the LIP or the offer to sell. As anticipated by the town boards,

Mr. Emanouil submitted a plan for a conventional 40B project--i.e., the

Graniteville Woods project--to the Massachusetts Housing Finance Agency

(“MassHousing”), a State agency that subsidizes and administers non-LIPs. The

Graniteville Woods project consisted of 248 townhouse units of which at least

25% (i.e., 62 units) would be reserved as affordable housing. The project covered

the 104 acres of Mr. Emanouil’s lot 1 (rather than all 197 acres, as with the

previously considered flexible development plan, or 150 acres, as with the LIP).

(These 104 acres did not include the portions that Mr. Emanouil later donated, i.e.,

lots 2 and 3 and the Allie Lane parcel.)
                                        -14-

[*14] Town rejection of the LIP and the purchase proposal

       On October 11, 2006, Mr. Emanouil sent an additional letter to the BOS

reaffirming his willingness to sell parcels of the land to the town at values based

on appraisals by Byrne McKinney & Associates, Inc. (“BMA”), totaling $9.3

million. On October 16, 2006, Mr. Emanouil sent a letter to the BOS notifying

them of his application for a conventional 40B project submitted to MassHousing

for approval.

       The town held a special meeting on October 16 and 17, 2006, and voted to

appropriate up to $7.4 million to acquire all or certain portions of the property

from Mr. Emanouil. However, the appropriation was contingent on the town’s

also passing a measure to raise property taxes over the following 20 years to

provide the funding, and that taxing measure would be voted on in January 2007.

On October 23, 2006, the town received its appraisal from Avery Associates, who

valued the 180 acres (which did not include the Allie Lane parcel) at $6.8 million

in total.

       In January 2007 the town met to vote on the 20-year tax increase, but the

measure did not pass. The town did not move forward with either the LIP or a

purchase of any of the Granite Hill property.
                                         -15-

[*15] State approval of the Graniteville Woods project

      Over the next several months, Mr. Emanouil pursued the conventional 40B

project. To succeed in developing that project, Mr. Emanouil would need to

obtain on his own (without the BOS as a co-applicant) approvals from the State

and the ZBA. His representatives continued to attend town meetings and public

hearings and to work with the town to achieve a plan for the Graniteville Woods

project that would be acceptable to all parties.

      In May 2007 MassHousing approved Mr. Emanouil’s proposal for the 248-

unit Graniteville Woods project. He had submitted that proposal in October 2006

without any specific concessions regarding concerns expressed by town boards,

committees, or owners of abutting land. The MassHousing approval letter

included a section with various comments that MassHousing had received from

the town concerning issues that should be addressed in Mr. Emanouil’s

comprehensive permit application to the ZBA. These issues included such things

as compliance with statutory and regulatory restrictions as well as environmental

concerns (such as protection of wetlands, wildlife habitats, and conservation

areas), infrastructure concerns (such as potential traffic issues and the need for

sufficient crosswalks), and the need for an acceptable project schedule to be

negotiated with the ZBA in light of the size of the project. Nevertheless,
                                        -16-

[*16] MassHousing raised no issue concerning the number of units and overall

size of the Graniteville Woods project, nor was there mention of any need for Mr.

Emanouil to donate additional land outside of the 104-acre project site.

ZBA consideration of the Graniteville Woods project

      In September 2007, Mr. Emanouil submitted a comprehensive permit

application to the ZBA for approval. ZBA consideration of the proposal would

not be finished until almost a year and a half later, in February 2009.

      At the time Mr. Emanouil submitted his application to the ZBA, the town

was no longer in its 40B safe harbor, meaning that the town could not afford to

summarily deny proposed 40B developments. The application reflected various

concessions that Mr. Emanouil would make for environmental and other issues

raised in the MassHousing approval letter. Additionally, Mr. Emanouil’s

application reduced the number of units from 248 to 208, and he indicated that he

would consider donating an open space easement to the town’s Conservation

Commission on 68 of the 104 acres.

      At the October 2007 ZBA meeting, Mr. Emanouil’s attorney Mr. Deschenes

discussed the various measures Mr. Emanouil had been taking to address the

town’s concerns as expressed in the MassHousing approval letter. This included

studies for environmental and traffic impacts as well as measures to increase and
                                         -17-

[*17] ensure added open areas for such uses as recreation and conservation. To

the latter point, someone at the meeting (the record does not say who) asked

Mr. Deschenes whether any of the 104 acres that would not be developed could be

“deeded” to the town’s Conservation Commission, and Mr. Deschenes said “yes”.

(The question did not pertain to the portions later donated--lots 2 and 3 and the

Allie Lane parcel.)

      At its November 2007 meeting, the ZBA discussed a potential issue

regarding 25 to 30 acres in the northwest of the project site (i.e., within the 104

acres) that were potential habitats for protected turtles. But the actual

development would not infringe on that area, so it was decided that there would

not be an issue. At its December meeting, the ZBA discussed the civil engineers

who would consult as to traffic and water issues and any potential blasting issues

concerning perchlorate. Blasting reports were prepared and discussed further at

the February 2008 meeting; and the ZBA’s chair, Robert Herrmann, stated that he

had conducted a site visit during which he had determined that the abutting

properties were not as close to the potential development areas as previously

thought; furthermore, the ZBA could add conditions to the permit approval that

would require more stringent test blasting to ensure there would be minimal issues

with blasting during the project. Traffic issues were further addressed at the
                                        -18-

[*18] March 2008 ZBA meeting; potential drainage issues were addressed at the

April 2008 meeting; and the town hired a consultant in April to prepare a financial

impact analysis.

      At its May 2008 meeting, the ZBA discussed the potential for developing

other parcels of land as affordable housing alternatives to the Graniteville Woods

project and discussed whether other land that Mr. Emanouil owned (including the

Allie Lane parcel) could be donated to the town6 or traded for other town-owned

land that Mr. Emanouil might be able to develop--though no decisions were made

toward alternative developments or land exchanges. In response Mr. Deschenes

indicated that Mr. Emanouil might be willing to further reduce the total number of


      6
        As the parties stipulated, during the May 21, 2008, ZBA meeting,
Mr. Deschenes indicated that “they have discussed many options which could
result in a better project at Graniteville Woods, a new different project for the
town on town owned land with a high percentage of affordable units, and perhaps
a significant amount of open space land being contributed to the Town.”
Mr. Deschenes further indicated that the “104-acre[s] that are proposed as part of
Graniteville Woods project are in the northeast corner o[f] Mr. Emanouil’s
property and is being built in the front 30-40 acres. It is currently proposed that
the other 60 acres of property [within the 104 acres of lot 1] will be open space as
part of Graniteville Woods.” In addition, he said, “there is another 16 acre parcel,
parcel D, that abuts three pieces of town owned land, as well as parcel C, which is
35 acres, and parcel A which is 13 acres. Mr. Emanouil also owns the parcel on
the other side of the road, parcel B. They have talked about the possibility of
donating some portions of these parcels to the town, or trading for the Forest Road
Parcel.” What he called “parcel D” is evidently the Allie Lane parcel. We cannot
precisely reconcile his description of the parcels with the list above at pp. 5-6.
                                        -19-

[*19] units and also move from a 100% townhouse design and to integrate single-

family homes.

      At the June 2008 ZBA meeting Mr. Deschenes explained that Mr. Emanouil

had been working with the ZBA’s consultant in order to develop different

potential designs for the Graniteville Woods project and that they could reduce the

total number of units from 208 to 176 with a mixture of attached and unattached

single-family homes. Mr. Herrmann indicated that he preferred this reduced plan,

and the ZBA indicated the overall agreement with the revised plan because Mr.

Emanouil had done “exactly what they had requested.” Before the meeting was

closed, Mr. Deschenes indicated that the Allie Lane parcel and the additional 35-

plus acres remained on the table as proposed gifts to the town if the project were to

go forward.7

      7
        The relevant portion of the minutes from the June 18, 2008, ZBA Meeting
are as follows:

      Herrmann [the chair] indicated he likes this mixed use development
      and would like to see the applicant proceed with this plan [176 units]
      rather than the original plan [208 units]. Deschenes indicated if the
      Board likes this plan they would proceed with only this plan and go
      ahead with engineering. The Board indicated as the applicant has
      done exactly what they had requested they would like to proceed with
      this plan. Deschenes indicated in addition to the mitigation already
      discussed, Mr. Emanouil owns a 16 acre parcel near Allie Lane
      contiguous with town land and is on the table as a proposed gift to the
                                                                      (continued...)
                                        -20-

[*20] At the September 2008 ZBA meeting, Mr. Deschenes provided an update on

the project including the layout and number of units with 74 units being single-

family homes and 102 units being townhouses in 17 buildings. However,

Mr. Herrmann indicated that he was not happy with the configuration because

there was too much segregation between the townhouses and single-family homes

and that the ZBA would like to see the percentage of single-family homes

increased. Mr. Decshenes stated he would get answers to the ZBA’s questions and

concerns raised and for the two outstanding issues concerning drainage

engineering and traffic reviews. No mention was made in this meeting of any

contribution by Mr. Emanouil of property outside the 104 acres.

      At the October 2008 ZBA meeting, Mr. Deschenes addressed the issues

previously raised and informed the ZBA that as a result of the concerns for traffic,

the total number of units had been further reduced to 164 units comprising 68

single-family units and 96 townhouse units. Mr. Deschenes reviewed the plan and

described where units had been removed and explained that the drainage plan had

also been redesigned; he also noted that they had had a preliminary meeting with

      7
       (...continued)
      town if the project were to go forward, along with an additional 35+
      acres contiguous with town owned land, representing an approximate
      value of $2 million. The 176 units make the project economically
      feasible.
                                           -21-

[*21] the Water Department and a meeting with the Conservation Commission and

that the plan met or exceeded the requirements for local wetland bylaws. Again,

no mention was made in this meeting of any contribution by Mr. Emanouil of

property outside the 104 acres.

      In November 2008 Mr. Deschenes sent a letter to the ZBA’s fiscal

consultant to provide the revised plan details for purposes of the fiscal impact

study. The letter included various references to revisions in engineering plans,

development of recreational fields, and construction of sidewalks and trail

networks. The letter also included the proposed land donations of the Allie Lane

parcel and the other tracts.8 In addition to sending the letter, Mr. Deschenes


      8
          Relevant excerpts from the letter are as follows:

             The Site contains approximately 104+/- acres and is located on
      the easterly side of North Main Street, the northerly side of West
      Street and the Easterly side of Cowdry Hill Road. Graniteville
      Woods, LLC, an entity controlled by Mr. P. Charles Emanouil, has
      site control of the property. Mr. Emanouil also controls a parcel to
      the west of the site as well as a parcel to the north of the subject site,
      abutting the new Westford Public Works facility. These abutting
      parcels are not part of the subject Comprehensive Permit application,
      however, at this time Mr. Emanouil is proposing to donate a large
      portion of the abutting properties to the Town of Westford.

                      *     *      *     *        *   *       *

                                                                         (continued...)
                                         -22-

[*22] attended the ZBA meeting that month at which he informed the ZBA that

virtually all of the concerns previously raised had been addressed and that the

information had been provided for the financial impact analysis, which was in

process.

      In December 2008 Mr. Deschenes attended the Conservation Commission’s

meeting and informed them that the plan was “to donate many acres to the Town

for preservation”, i.e., 68 of the 104 acres in the project. (Initially, Mr. Emanouil’s

intention was to donate the land to the Conservation Commission in fee simple.

However, the town did not want to hold the 68 acres, which had significant granite

      8
          (...continued)
                               Donations/Mitigation

      -Memorandum of Understanding for Bid on “Edwards Parcel”
      -Engineering on “Edwards Parcel” including on site testing and plans
      -Development of a Recreational Field Inside the Project
      -Construction and Design of sidewalk from Project to St. Catherine’s
      Church (Valued at approximately $70,000.00)
      -Construction and Design of sidewalk from Project to Hillside Avenue or
      Equivalent donation or work at other location. (Valued at approximately
      $45,000.00)
      -Establishment of Trail network within Project with lighted trail from
      Project to St. Catherine’s Church
      -Land Donations
             -Allie Lane Subdivision Parcel. 16.0 acres, worth approximately 1.9
      Million Dollars.
             -“Lot 2” as shown on enclosed plan, less one buildable lot and West
      Street/Cowdry Hill Parcel, less one buildable lot together worth
      approximately 2 Million Dollars.
                                         -23-

[*23] holes from previous quarrying activity, and instead directed Mr. Emanouil to

grant a conservation easement in favor of the Conservation Commission. That

contribution is not at issue in this case.) This 68 acres did not include the portions

at issue here that were later donated--lots 2 and 3 and the Allie Lane parcel.

Preparing for the donations

      Before donating any land to the town, Mr. Emanouil informed Morris &

Morris, P.C., the accounting firm who would prepare his tax returns, that he

desired to make the charitable contributions. He told them that he wanted to know

what was required to claim corresponding deductions. Morris & Morris

researched the rules and reporting requirements (including the instructions for

Form 8283, “Noncash Charitable Contributions”) and informed Mr. Emanouil of

the requirements for deducting such contributions and of the documentation they

would need in order to prepare the returns.

Donation of the Allie Lane parcel

      In addition to donating a conservation restriction on 68 acres of the land

within the Graniteville Woods project, Mr. Emanouil decided to donate outright

additional parcels of land including the Allie Lane parcel, which were outside of

and unrelated to the development. On December 15, 2008 (less than 30 days

before the donation), Mr. Emanouil received an appraisal from BMA giving a
                                        -24-

[*24] “current market value estimate” of the Allie Lane parcel at $1.5 million,

based on the highest and best use of the land being a 12-lot subdivision for single

family residential use. The appraisal stated that its purpose was “[t]o inform a

potential disposition.”

      On December 16, 2008, the BOS met and Mr. Herrmann updated the BOS

on the status of the project. The BOS indicated the ZBA had done a wonderful job

working with Mr. Emanouil on the Graniteville Woods project. On December 17,

2008, the ZBA met, and the chair, Mr. Herrmann, indicated that nearly all issues

concerning engineering, traffic, perchlorate contamination caused by the town’s

blasting, and the mitigation package for the Graniteville Woods project had been

addressed and that only the revised pro forma and the fiscal impact report

remained outstanding. As a result, he was in favor of “closing” (i.e., concluding)

the public hearing process even without the updated pro forma and the fiscal

impact report; if the other members of the ZBA did not agree, Mr. Herrmann

wanted to schedule another meeting before the end of the year.

      Concluding the hearing before the end of the year was desired to facilitate

Mr. Emanouil’s donating the Allie Lane parcel before year’s end; and although the

donation was not in fact a condition of the ZBA’s approval or an aspect of

“mitigation” required by the ZBA to approve the permit, Mr. Herrmann wished to
                                        -25-

[*25] close the hearing and oblige Mr. Emanouil. The ZBA agreed and closed the

public hearing, though the voting to actually approve the permit would not take

place until the beginning of 2009.

      After the ZBA voted to close the hearing, Mr. Herrmann informed

Mr. Deschenes that the proposed donation of the Allie Lane parcel was to go

under the control of the BOS, rather than the Conservation Commission.

      Mr. Emanouil executed a quitclaim deed on behalf of GHE LLC to donate

the Allie Lane parcel to the BOS on December 29, 2008.9 For the reasons

explained below in part III.B, we find that at that time the parcel had a value of

$1.5 million.10

Final ZBA approval

      In its January 2009 meeting, the ZBA voted to approve all but three of the

waivers that had been requested for the Graniteville Woods project. The three

remaining waivers needed revised wording.



      9
        The deed was recorded in February 2010. However, the parties have
stipulated that the Allie Lane parcel “was effectively conveyed to the Town of
Westford on December 29, 2008”, and the Commissioner has not disputed that
2008 was the proper year for claiming the deduction.
      10
        At trial petitioners’ expert valued the Allie Lane parcel at $1.5 million, and
the Commissioner’s expert valued it at $130,000, less than a tenth of petitioners’
expert’s valuation. We assess these competing claims below in part III.B.
                                        -26-

[*26] On February 11, 2009, the ZBA met and voted to approve the remaining

waivers. On February 17, 2009, the ZBA voted to issue the permit for the

Graniteville Woods project.

Donation of the remaining parcels

      At the ZBA meeting on March 18, 2009, the members discussed

Mr. Emanouil’s desire to donate the remaining parcels of land (i.e., lots 2 and 3)

that were not part of the Graniteville Woods project. At that point the parcels

needed to be subdivided to create individual lots to be donated to the town.

      On September 4, 2009 (i.e., more than six months after the ZBA issued the

permit for the Graniteville Woods project), Mr. Emanouil sent a letter to the

town’s Conservation Commission stating that he intended to deed lots 2 and 3 to

the Conservation Commission.11 On September 14, 2009, he sent a similar letter

to the BOS regarding the proposed transfers. In October 2009 Mr. Emanouil

received an appraisal from BMA giving--“as of October 23, 2009”--a “current

      11
         Mr. Emanouil’s letter to the Conservation Commission (and his
subsequent letter to the BOS) also stated that he intended to grant, in favor of the
Westford Land Trust, conservation restrictions on lots 2 and 3 (and on
approximately 68 acres within the Graniteville Woods project). The record shows
a conservation restriction granted on the 68 acres within Graniteville Woods but
does not show whether he granted such a conservation restriction on lots 2 and 3.
Neither party’s appraisal mentions any conservation restriction on lots 2 and 3,
and neither party argues that any such restriction affects the value of the donation
to the town’s Conservation Commission, so we do not address it further.
                                         -27-

[*27] market value estimate” for lots 2 and 3 of approximately $2.5 million, which

was based on the highest and best use for the land being a 38-lot subdivision.

Like the previous appraisal for the Allie Lane parcel, the appraisal for lots 2 and 3

stated that its purpose was “[t]o inform a potential disposition.”

      On November 17, 2009 (less than 30 days after the appraisal date),

Mr. Emanouil executed a quitclaim deed on behalf of GHE LLC to donate lots 2

and 3 to the town’s Conservation Commission, which accepted the deed on

November 18, 2009. For the reasons explained below in part III.C, we find that as

of the date of contribution lots 2 and 3 had a value of $2.5 million.12

Tax returns and claimed charitable contribution deductions

      The Emanouils hired Morris & Morris to prepare their returns for 2008

through 2010, hired Anstiss & Co., P.C., to prepare their return for 2011, and hired

Litmangerson Associates to prepare their return for 2012. For 2008 and 2009

Mr. Emanouil provided to Morris & Morris the documentation, which included

fair market value appraisals of the contributed properties; and for each subsequent

year, the Emanouils’ accountants prepared the returns using the documentation

that Mr. Emanouil provided.

      12
        At trial petitioners’ expert valued lots 2 and 3 at $2.5 million, and the
Commissioner’s expert valued them at $1.42 million. We assess these competing
claims below in part III.C.
                                        -28-

[*28] On their Form 1040, “U.S. Individual Income Tax Return,” for 2008, the

Emanouils reported a $1.5 million gift to charity for their donation of the Allie

Lane parcel. The Emanouils included with their return a Form 8283 showing the

date of the contribution and attached the appraisal prepared by BMA that valued

the land at $1.5 million on the basis of a highest and best use of the land being a

12-lot subdivision.

      The appraisal attached to the return did not include a statement explicitly

indicating that it was prepared for income tax purposes; and the appraisal did not

include a statement as to the expected date of contribution. The fair market value

as determined in the appraisal would not have been different had the appraisal

included a statement that it was prepared for income tax purposes, and the

appraisal date--“as of December 1, 2008”--was in fact within 30 days of the date

of contribution, December 29, 2008. Despite the claimed $1.5 million appraised

value, the Emanouils claimed for 2008 a charitable contribution deduction of only

$683,329 (in compliance with the annual limits of section 170) and carried

forward $809,481 (which included $2,810 of other gifts by cash or check claimed

on Schedule A, “Itemized Deductions,” of the return).

      On their Form 1040 for 2009, the Emanouils reported a charitable

contribution of $2.5 million for their donation of lots 2 and 3. The Emanouils
                                        -29-

[*29] included with their return a Form 8283 showing the date of the contribution,

and they attached the BMA appraisal valuing the land at $2.5 million as of

October 23, 2009, on the basis of the highest and best use being a 38-lot

subdivision. The appraisal did not state that it was prepared for income tax

purposes; and the appraisal did not include an expected contribution date. In

compliance with the limits of section 170, the Emanouils claimed carryover

charitable contribution deductions of $658,613--from 2008--and carried forward

$2,651,277 to subsequent years.

      On their Form 1040 for 2010, the Emanouils reported carryover charitable

contributions of $2,651,277 from which they claimed deductions of $526,111 and

carried forward the remaining $2,125,166. For 2011 they reported carryover

charitable contributions of $2,125,166 and claimed $1,071,170 in deductions

(including additional gifts of $2,537); and for 2012 they reported a carryover of

$1,056,533 and claimed deductions of $1,060,079 (including additional gifts of

$3,546).

Examination, SNOD, and Tax Court petition

      The IRS examined the Emanouils’ 2010, 2011, and 2012 returns and issued

a statutory notice of deficiency (“SNOD”) dated December 2, 2016, disallowing

the carryover charitable contribution deductions claimed for 2010, 2011, and 2012
                                        -30-

[*30] and determining an accuracy-related penalty for each of those years. The

SNOD included a Form 886-A, “Explanation of Items,” which stated the grounds

for disallowing the deductions as: failure to substantiate the reported values of

properties transferred; failure to show that the properties were transferred with

charitable intent; and failure to show sufficient bases for claimed deductible

amounts. (The SNOD did not state that the Emanouils’ failed to satisfy the

“qualified appraisal” requirements of section 170(f)(11)(C).)

      The Emanouils timely filed a petition to challenge the IRS’s determinations

in the SNOD. This case was tried in Boston, Massachusetts, in October 2018.

                                     OPINION

I.    Burden of proof

      In general, the IRS’s deficiency determinations in an SNOD are presumed

correct, and the taxpayers bear the burden to prove otherwise and to show their

entitlement to any claimed deduction. See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Proving entitlement to a claimed deduction generally

includes proving that the taxpayers satisfied the specific requirements for any

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

      Section 7491(a) provides an exception that shifts the burden of proof to the

Commissioner as to any factual issue relevant to the taxpayers’ liability if they
                                        -31-

[*31] provide credible evidence with respect to that issue and also substantiate the

item, maintain records, and cooperate with the Commissioner’s reasonable

requests for information. Taxpayers bear the burden of proving that they have met

the section 7491(a) requirements. Rolfs v. Commissioner, 135 T.C. 471, 483

(2010), aff’d, 668 F.3d 888 (7th Cir. 2012).

      Rule 142(a)(1) provides that the Commissioner shall bear the burden of

proof “in respect of any new matter, increases in deficiency, and affirmative

defenses, pleaded in the answer”. A new theory that “merely clarifies or develops

the original determination is not a new matter”. Wayne Bolt & Nut Co. v.

Commissioner, 93 T.C. 500, 507 (1989). But a new theory that either “alters the

original deficiency or requires the presentation of different evidence” is a new

matter for which the Commissioner bears the burden of proof. Id. In this case the

Commissioner’s argument that the Emanouils failed to satisfy the “qualified

appraisal” requirements of section 170(f)(11)(C) does not appear in the SNOD

(nor in the Commissioner’s answer, nor in his pretrial memorandum) and is

therefore “new matter” as to which the Commissioner bears the burden of proof.

      When each party has satisfied its burden of production by offering some

evidence, then the party supported by the greater weight of the evidence will

prevail, and thus the burden of proof has real significance only in the event of an
                                         -32-

[*32] evidentiary tie. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008),

supplementing T.C. Memo. 2007-340. We do not perceive an evidentiary tie in

this case and are able to decide the issues on the preponderance of the evidence.

The issues are: (1) whether the contributions of the Allie Lane parcel and lots 2

and 3, respectively, were deductible contributions for purposes of section 170,

(2) if so, what was the fair market value of those contributions, and (3) whether

accuracy-related penalties apply.

II.   Charitable contributions

      A.     General requirements

      Section 170(a)(1) provides that a taxpayer may deduct any charitable

contribution (as defined under subsection (c)) made in the taxable year.

Section 170(c) defines the term “charitable contribution” as a contribution or gift

to or for the use of a qualified recipient. (There is no dispute here that the donee

town was a qualified recipient.) In order for a charitable contribution to be

deductible, the contribution must be verified under regulations prescribed by the

Secretary, i.e., the taxpayer must comply with specified reporting requirements.

Sec. 170(a). For deductions in excess of $5,000, the taxpayer must obtain a

qualified appraisal of the property, attach to the tax return a fully completed

appraisal summary (i.e., Form 8283), and maintain records regarding the property,
                                          -33-

[*33] the terms of the contribution, and the donee organization. See

sec. 170(f)(11)(C); 26 C.F.R. sec. 1.170A-13(c)(2), Income Tax Regs.

      The Commissioner argues that the Emanouils failed to properly substantiate

their contributions because their appraisals attached to their returns for the years of

the contributions13 did not identify the dates (or expected dates) of the

contributions and did not contain statements that the appraisals were prepared for

income tax purposes--i.e., the appraisals were not “qualified appraisals”. See 26

C.F.R. sec. 1.170A-13(c)(2)(i)(A), (3).

      B.     Qualified appraisal

             1.     The requirements generally

      Section 170(f)(11)(C) provides that, “[i]n the case of contributions of

property for which a deduction of more than $5,000 is claimed,” the taxpayer must

“obtain[] a qualified appraisal of such property and attach[] to the return * * *

such information regarding such property and such appraisal as the Secretary may

require.” The regulations define the term “qualified appraisal” as an appraisal

document that, among other things, “[i]ncludes the information required by

paragraph (c)(3)(ii) of this section”. 26 C.F.R. sec. 1.170A-13(c)(3)(i). Paragraph

      13
        The Commissioner does not assert any distinct defects in the attachments
to the Emanouils’ returns for the years for which carryover contributions were
deducted.
                                        -34-

[*34] (c)(3)(ii) requires the following eleven items of information to be included

in the appraisal:

             (A) A description of the property in sufficient detail for a
      person who is not generally familiar with the type of property to
      ascertain that the property that was appraised is the property that was
      (or will be) contributed;

            (B) In the case of tangible property, the physical condition of
      the property;

             (C) The date (or expected date) of contribution to the donee;

             (D) The terms of any agreement or understanding entered into
      * * * by or on behalf of the donor or donee that relates to the use,
      sale, or other disposition of the property contributed * * *;

             (E) The name, address, and * * * the identifying number of the
      qualified appraiser * * *;

            (F) The qualifications of the qualified appraiser who signs the
      appraisal, including the appraiser’s background, experience,
      education, and membership, if any, in professional appraisal
      associations;

            (G) A statement that the appraisal was prepared for income tax
      purposes;

             (H) The date (or dates) on which the property was appraised;

             (I) The appraised fair market value * * * of the property on the
      date (or expected date) of contribution;

             (J) The method of valuation used to determine the fair market
      value, such as the income approach, the market-data approach, and
      the replacement-cost-less-depreciation approach; and
                                          -35-

[*35]          (K) The specific basis for the valuation, such as specific
        comparable sales transactions or statistical sampling, including a
        justification for using sampling and an explanation of the sampling
        procedure employed. [Emphasis added.]

Of these 11 items, the Commissioner points to the absence from the appraisals at

issue here of only the two items underlined above--i.e., the expected date of the

contribution and a statement that the appraisal was prepared for income tax

purposes.

              2.     Strict vs. “substantial” compliance

        Strict compliance will necessarily satisfy the elements of a qualified

appraisal. However, the taxpayer who does not strictly comply may nevertheless

satisfy the elements if he has substantially complied with the requirements. That

is, the above requirements are “directory” (i.e., “helpful to respondent in the

processing and auditing of returns on which charitable deductions are claimed”)

rather than “mandatory” (i.e., literal compliance is required); and “[t]he fact that a

Code provision conditions the entitlement of a tax benefit upon compliance with

respondent’s regulation does not mean that literal as opposed to substantial

compliance is mandated.” Bond v. Commissioner, 100 T.C. 32, 41 (1993); see

also Costello v. Commissioner, T.C. Memo. 2015-87, at *22; cf. Hewitt v.

Commissioner, 109 T.C. 258, 264 (1997) (holding that substantial compliance
                                         -36-

[*36] would not apply where the taxpayers “furnished practically none of the

information required by either the statute or the regulations”), aff’d without

published opinion, 166 F.3d 332 (4th Cir. 1998).

      In Cave Buttes, L.L.C. v. Commissioner, 147 T.C. 338 (2016), we noted the

legislative history of the qualified appraisal statute and observed that its purpose

was to provide the Commissioner with sufficient information to “deal more

effectively with the prevalent use of overvaluations.” Id. at 349-350 (citing S. Prt.

98-169 (Vol. I), at 444-445 (S. Comm. Print 1984), and Staff of J. Comm. on

Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction

Act [“DEFRA”] of 1984 (“General Explanation”), at 505-508 (J. Comm. Print

1985)). In Alli v. Commissioner, T.C. Memo. 2014-15, at *56, we stated that the

purpose of the appraisal requirements is to “ensur[e] that the correct values of

donated property are reported”. Accordingly, it would follow that if the appraisal

at issue does generally provide the information required in the regulations to do

just that--i.e., to ensure that the correct values of donated property are reported--

then the “essential requirements of the governing statute”, Estate of Evenchik v.

Commissioner, T.C. Memo. 2013-34, at *12 (quoting Estate of Clause v.

Commissioner, 122 T.C. 115, 122 (2004)), can be satisfied despite certain defects

that may not be significant in a given case.
                                         -37-

[*37] This case does not involve the abuse, mentioned in the General Explanation,

arising from “tax shelter promotions”.14 But Congress was also “concerned with

situations, not involving organized tax shelters, where individuals overvalue

donated property * * *, such as interests in real estate”. General Explanation at

503 (emphasis added.) The property that the Emanouils contributed was real

estate, but the phrase “interests in real estate” especially connotes and implicates

partial interests, such as easements. A deduction for the contribution of a

conservation easement is permitted by section 170(h); but such partial interests in

real estate are seldom the subject of arm’s-length transactions, and valuing them

reliably involves special challenges, which qualified appraisal rules address. Of

course, one could also overvalue an owner’s entire property held in fee simple

      14
        As was explained in Staff of J. Comm. on Taxation, General Explanation
of the Revenue Provision of the Deficit Reduction Act of 1984, at 503 (J. Comm.
Print 1985):

      Congress recognized that in recent years, opportunities to offset
      income through inflated valuations of donated property have been
      increasingly exploited by tax shelter promoters. Under typical tax
      shelter promotions, individuals acquire objects such as limited edition
      lithographs, books, gems, and the like, hold the property for at least
      the capital gains holding period, and then contribute the items to a
      museum, library, educational institution, or other qualified donee at
      their “appreciated” fair market value. The shelter package may
      include an “independent” appraisal, and the potential donor may be
      assured that his or her subsequent gift will be accepted by a charitable
      organization.
                                         -38-

[*38] absolute, and the substantiation rules do apply to contributions of entire

interests as well; but they were not the bull’s eye at which DEFRA took aim.

      The Emanouils contributed not an easement or other partial interest but

rather their entire fee simple interest in the Allie Lane parcel and in lots 2 and 3,

and the valuation issue here is the garden-variety question of the fair market

values of pieces of real estate. In the absence of a heightened potential for abuse,

it is appropriate to recall that Congress generally favors charitable giving and that

the courts have honored that legislative intent by broadly construing statutes

“begotten from motives of public policy” like section 170 and similar statutes

“enacted to benefit * * * charitable organizations”. See Helvering v. Bliss, 293

U.S. 144, 150-151 (1934); Estate of Crafts v. Commissioner, 74 T.C. 1439, 1455

(1980) (“As a relief provision which inures to the benefit of charity, we believe

that it should be construed liberally so that the intended charitable purposes are

furthered”).

      The Emanouils acknowledge that they did not strictly comply with the

requirements--since neither of their appraisals stated the date of contribution or

stated that it was prepared for income tax purposes--but they argue that they

substantially complied with the qualified appraisal requirements. Because this is

not a case where the taxpayers “furnished practically none of the information
                                         -39-

[*39] required”, the substantial compliance doctrine can apply. Hewitt v.

Commissioner, 109 T.C. at 264. To that end we consider whether the Emanouils

provided most of the information required (they did) and whether the defects in

their appraisals were so significant that they failed to establish the “substance or

essence” of a “qualified appraisal” (they were not). See Hewitt v. Commissioner,

109 T.C. at 265; Bond v. Commissioner, 100 T.C. at 42.

             3.     Date of contribution

      The Commissioner points to no specific purpose for the requirement that the

date (or expected date) of contribution be included in a qualified appraisal. We

have previously held that “[r]equiring an appraisal to include the actual or

expected date of the contribution allows an individual (such as the

Commissioner’s revenue agent) to compare the appraisal and contribution dates

for purposes of isolating fluctuations in the property’s fair market value between

those dates.” Rothman v. Commissioner, T.C. Memo. 2012-163, slip op. at 36

(finding no substantial compliance in a facade easement case where the appraisal

failed to satisfy several substantiation requirements including the requirement to

provide the date (or expected date) of the contribution), supplemented and vacated

in part on other grounds by T.C. Memo. 2012-218. In this case the appraisals were

dated within 30 days of the contributions, and in each instance the appraisal
                                         -40-

[*40] explicitly stated that it gave “a current market value” (emphasis added),

rather than a historic value as of a previous date.

      We have held that failing to include the date of contribution in the appraisal

is not significant when the return includes a Form 8283 that specifies the date of

contribution. See Zarlengo v. Commissioner, T.C. Memo. 2014-161, at *36

(finding that taxpayers substantially complied by disclosing contribution date on

appraisal summary); Simmons v. Commissioner, T.C. Memo. 2009-208, 98

T.C.M. (CCH) 211, 215 (2009) (same), aff’d, 646 F.3d 6 (D.C. Cir. 2011).

Because the Emanouils’ returns for 2008 and 2009 included the respective Forms

8283 and disclosed the respective dates of the contributions, the absence of that

information from the appraisal is not fatal in this case.

             4.     Income tax purpose

      The Commissioner explains in his brief the reason that the statute requires

an appraisal to include a statement that it was prepared for income tax purposes:

      The requirement of a statement of the intended use for an appraisal is
      intended to mirror the appraisal requirements set forth in the Uniform
      Standards of Professional Appraisal Practice (“USPAP”). * * * The
      USPAP, Statement 9 for 2008-2009 further states:

             Identification of the intended use is one of the assignment
             elements necessary to properly identify the appraisal, appraisal
             review, or appraisal consulting problem. Identification of the
                                          -41-

[*41]        intended use helps the appraiser and the client make two
             important decisions about the assignment:

                   the appropriate scope of work for the appraisal, appraisal
             review, or appraisal consulting development process; and

                   the level of detail to provide in the appraisal, appraisal
             review, or appraisal consulting report.

In other words, the importance of providing an income tax purpose statement is to

help the appraiser and the client identify the appropriate scope of work for the

appraisal and the level of detail to provide in the appraisal, i.e., to make sure that

all the information required for relying on the appraisal--for income tax purposes--

is included in the appraisal.15 But we do not perceive that the appraisals at issue

here reflect any lack of this information. Although we accept the importance of a

shared understanding by appraiser and client of the purpose of an appraisal, a

statement of purpose may not always be necessary to achieve substantial

compliance, especially not when the appraisal otherwise includes the level of


        15
         The Senate Committee on Finance provided the following explanation for
the requirement of stating the income tax purpose of the appraisal: “[T]he
appraisal must state that it is being prepared for income tax purposes, and must be
signed by the appraiser, whose tax identification number must be listed.
Accordingly, the appraiser is a person to whom the civil tax penalty for aiding and
abetting an understatement of tax liability (sec. 6701) could apply.” S. Prt. 98-169
(Vol. I) at 446 (S. Comm. Print 1984). The Commissioner makes no mention of
this rationale from the legislative history, nor how it would affect the analysis of
“substantial compliance” in this case, so we do not address this rationale further.
                                         -42-

[*42] detail necessary to estimate the fair market value of the property in question.

See Consol. Inv’rs Grp. v. Commissioner, T.C. Memo. 2009-290, slip op. at 58

(finding substantial compliance where “[t]he appraisal did lack a statement that it

was prepared specifically for income tax purposes; however, we find this omission

to be insubstantial”).

      The purpose stated in the appraisals in this case was “[t]o inform a potential

disposition”. The appraiser elaborated at trial:

             Q      And what was the purpose of this appraisal?

           A      The purpose of this appraisal was to prepare a
      market-value opinion for the property in question.

            Q      And when you’re preparing a market-value appraisal,
      does the intended use or user of the appraisal affect the potential
      value conclusion?

             A      Market value is market value, and whether you are
      preparing this for an owner or a bank, or a public entity, or for any
      purpose, that market value premise governs, and the analysis must be
      true to that principle. The intended use and user is inconsequential.

It is certainly true that there is no such thing as an “income tax value” distinct

from fair market value. A competently performed valuation that was prepared for

income tax purposes should be identical to a valuation prepared for advising a

sale. The appraisals used the word “disposition”, a term broad enough to include a

sale or (as was relevant) a donation. There is no reason to suppose that
                                         -43-

[*43] Ms. McKinney’s valuation would have been different if its stated purpose

had been “income tax”.

      We have not previously held that failing to include a statement of income

tax purpose in an appraisal would by itself defeat substantial compliance for

purposes of a claimed deduction for a charitable contribution. Cf. Irby v.

Commissioner, 139 T.C. 371, 387 (2012) (“The IRS has not provided to the public

a specific form for the tax purpose statement, and respondent has not proffered any

instance where a suboptimal tax purpose statement, by itself, invalidated an

otherwise qualified appraisal”); Alli v. Commissioner, T.C. Memo. 2014-15,

(finding that an appraisal was not qualified because of at least five failures

including the lack of a statement of an income tax purpose and, more significantly,

because the appraisal was nearly 10 years old and failed to use any of the three

commonly accepted approaches (capitalization, cost, or comparable sales) to

determine fair market value); Estate of Evenchik v. Commissioner, T.C. Memo.

2013-34 (finding that an appraisal was not qualified because of numerous failures

including the lack of an income tax purpose statement and, most significantly, the

appraisal valued the wrong asset).

      In this case each appraisal valued the correct asset (a fee simple interest in

real property) according to the correct standard (fair market value); each was
                                        -44-

[*44] prepared within 30 days of the date of contribution; and each used a

commonly accepted approach (the income approach) to estimate fair market value

for the contribution (discussed below in part III). In other words, the appraisals do

not have multiple cumulative defects that we have previously held to be fatal for

deducting charitable contributions.

      We hold that the Emanouils provided sufficient information to permit the

IRS to evaluate the reported contributions and to investigate and address concerns

about overvaluation and other aspects of the reported charitable contributions.

The IRS did perform that investigation without any impediment arising from the

two alleged defects in the appraisals, and the SNOD issued by the examination

personnel did not mention the omissions (which, rather, were raised for the first

time in this litigation). Thus, the Emanouils have substantially complied with the

regulations for qualified appraisals.

      C.     Quid pro quo

      The Supreme Court in Hernandez v. Commissioner, 490 U.S. 680, 701-702

(1989), stated: “The relevant inquiry in determining whether a payment is a

‘contribution or gift’ under § 170 is * * * whether the transaction in which the

payment is involved is structured as a quid pro quo exchange.” In examining

whether a transfer was made with the expectation of a quid pro quo, we give most
                                        -45-

[*45] weight to the external features of the transaction, avoiding imprecise

inquiries into taxpayers’ subjective motivations. See id. at 690-691. If it is

understood that the property will not pass to the charitable recipient unless the

taxpayer receives a specific benefit, and, most relevant to our determination in this

case, if the taxpayer cannot garner that benefit unless he makes the required

“contribution”, then the transfer does not qualify the taxpayer for a deduction

under section 170. See Graham v. Commissioner, 822 F.2d 844, 849 (9th Cir.

1987), aff’g 83 T.C. 575 (1984), aff’d sub nom. Hernandez v. Commissioner, 490

U.S. 680 (1989).

      The Commissioner argues that the Emanouils’ case fails the quid pro quo

analysis for various reasons, most notably for reasons similar to those in Pollard v.

Commissioner, T.C. Memo. 2013-38. Specifically, the Commissioner argues that

Mr. Emanouil used the proposed donations as a “bargaining chip” to induce the

town’s ZBA to approve the Graniteville Woods comprehensive permit and that

once the donations had been proposed, they could not be separated from the

negotiations. See id. at *18-*25.

      However, having heard the testimony of the witnesses as they were

examined and cross-examined, we conclude that the donations were given with

donative intent, were received as gifts, and were not an inducement for the ZBA’s
                                        -46-

[*46] approvals. Rather, Mr. Emanouil had acquired the 197 acres in order to do

as big and profitable a development as he could; and when the reasonable prospect

proved to be not 197 acres (which the flexible development plan would have

used), nor 150 acres (which the LIP would have used), but only 104 acres, he then

needed to decide what to do with the excess. No prospects to sell the property

panned out, and he rationally considered the possibility of making a charitable

donation of the property and receiving a tax benefit. It was natural that he thought

of the town as a donee--not because he could get a benefit from the town but

because the town was a known, nearby entity that could receive a tax-deductible

contribution and might want the property. In his letter in November 2008 (sent to

the ZBA’s fiscal impact consultant) and at a meeting in December 2008 (with the

town’s Conservation Commission), Mr. Deschenes did mention Mr. Emanouil’s

intention to donate the Allie Lane parcel and may in effect have suggested the

donation as a possible “mitigation” that the ZBA might consider. But the ZBA did

not respond to this suggestion, did not thereafter include such a donation in its

required mitigations, and dropped the idea from its considerations.

      The evidence does not suggest that, without the additional contributions,

Mr. Emanouil would have been unable to secure the ZBA’s approval or could not

have appealed a denial and otherwise secured the comprehensive permit. See
                                        -47-

[*47] Graham v. Commissioner, 822 F.2d at 849 (holding that “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” (emphasis added)); Bd. of

Appeals of Woburn v. Hous. Appeals Comm., 887 N.E.2d 1051, 1054-1055

(Mass. 2008) (explaining that denying a comprehensive permit requires a local

concern which supports the denial and that outweighs the regional housing need).

      In the process that led to the eventual approval of the project, the ZBA was

clear and frank about concessions that it would require of Mr. Emanouil before it

would give approvals. Those numerous concessions--expressly required by the

ZBA and granted by Mr. Emanouil--included Mr. Emanouil’s donation of an open

space conservation easement on approximately 68 acres of lot 1 and the reduction

of the overall size of the development from 248 units down to 164 (despite the

approval letter from MassHousing for 248 units) to address the town’s concerns as

identified in the MassHousing approval letter. The evidence does not suggest any

reason to suppose that, in addition to these requirements, the town would also

have expected two gifts of additional property in return for its approvals but would

have refrained from putting the requirement in writing, instead trusting
                                        -48-

[*48] Mr. Emanouil to carry through with an unenforceable secret undertaking. If

the town was indeed requiring these additional concessions, it is highly unlikely

that it would have given the approvals before receiving the second of his two gifts,

and unlikely that it would have let six months go by after granting its approval

before the second gift was made.

      Furthermore, the Commissioner has not produced (and we do not find to

exist) any documents or other evidence that shows the town directing the ZBA not

to approve the project unless the additional donations of the Allie Lane parcel and

lots 2 and 3 were included as a surreptitious part of the proposal. Cf. Pollard v.

Commissioner, T.C. Memo. 2013-38. No witness testified that there was any quid

pro quo arrangement. To the contrary, the relevant witnesses--not only Mr.

Emanouil and Mr. Deschenes but also the ZBA chair, Mr. Herrmann--testified

credibly that there was no quid pro quo with respect to the donations and the

ZBA’s approval of the Graniteville Woods comprehensive permit.

      One can imagine a circumstance in which two parties with mutual interests

and a high level of trust could conduct some business with each other (here, the

application for and approval of permits) that depended on a side agreement (here,

for the donation of additional property) that was never reduced to writing and

could never be enforced. That is, in effect, what the Commissioner posits, but we
                                         -49-

[*49] find it is unlikely here. The town and Mr. Emanouil seem to have had civil

and cooperative business dealings, but they were hardly allies. About eight years

earlier he had sued the town concerning another property acquisition, so they had

no reason for special trust of each other.

       We are persuaded by the evidence that Mr. Emanouil’s concessions to

secure the ZBA’s approval were those that he and the town expressly negotiated

and to which they agreed, and that his contribution of the Allie Lane parcel and

lots 2 and 3 was not a quid pro quo for that approval.

III.   Valuing the contributions

       A.    General principles

       In general, the amount of a charitable contribution of property under section

170(a) is the “fair market value” of the property at the time it is contributed. See

26 C.F.R. sec. 1.170A-1(a), (c)(1). The regulations define “fair market value” as

“the price at which the property would change hands between a willing buyer and

a willing seller, neither being under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts.” Id. para. (c)(2). Valuation is not a

precise science, and the fair market value of property on a given date is a question

of fact to be resolved on the basis of the entire record. See, e.g., Kaplan v.

Commissioner, 43 T.C. 663, 665 (1965); Arbini v. Commissioner, T.C. Memo.
                                         -50-

[*50] 2001-141. In considering the evidence in the record, we take into account

not only the current use of the property but also its highest and best use. See

Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986); 26 C.F.R. sec.

1.170A-14(h)(3)(i) and (ii). A property’s highest and best use is the highest and

most profitable use for which it is adaptable and needed or likely to be needed in

the reasonably near future. Olson v. United States, 292 U.S. 246, 255 (1934). The

highest and best use can be any realistic, objective potential use of the property.

Symington v. Commissioner, 87 T.C. 892, 896 (1986).

      The parties have offered the reports and testimonies of expert witnesses to

establish the value of the contributions. We evaluate expert opinions in the light

of the expert’s demonstrated qualifications and all other evidence in the record.

See Parker v. Commissioner, 86 T.C. 547, 561 (1986). Where experts offer

competing estimates of fair market value, we decide how to weight those estimates

by, inter alia, examining the factors they considered in reaching their conclusions.

See Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not bound by the

opinion of any expert witness, and we may accept or reject expert testimony in the

exercise of our sound judgment. Helvering v. Nat’l Grocery Co., 304 U.S. 282

(1938); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217 (1990). We may

also reach a decision as to the value of property that is based on our own
                                        -51-

[*51] examination of the evidence in the record. Silverman v. Commissioner, 538

F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.

      B.     Allie Lane

      The Emanouils rely on an appraisal by Pamela McKinney from BMA for

determining the contribution value of the Allie Lane parcel. The appraisal used an

income approach for the undeveloped parcel and determined the highest and best

use was as a 12-lot subdivision that would be worth $1.5 million.

Ms. McKinney’s valuation (and, in particular, its determination of highest and best

use) relied on a capacity study undertaken by Hancock Associates, a civil

engineering firm, which concluded that the property had a potential for 12 finished

lots. On the basis of information obtained by Mr. Deschenes, Ms. McKinney

determined that an additional access point necessary for development could be

acquired from owners of abutting property for $50,000 to $100,000.

      Ms. McKinney’s appraisal estimated an absorption rate of three to four lots

annually--though zero sales in the first year to allow for permitting and

entitlements (i.e., waivers for road extensions and right-of-way acquisitions to

access the property). She estimated a sale price of $300,000 per lot on the basis of

sales of comparable properties ranging from $200,000 to $400,000 in Westford

and surrounding communities. Ms. McKinney then adjusted for various costs
                                         -52-

[*52] (legal fees, construction, etc.) and applied a discount rate of 20% (based on

actual rates of 14% to 37% with a 23% average and pro forma rates of 12% to

32% with a 20% average) and determined a resulting value of $1.5 million for the

12 lots, approximately $125,000 per lot.16

      The Commissioner relies on an appraisal by Michael Hart from LandVest,

Inc., who ultimately determined that the highest and best use for the Allie Lane

parcel was not as a development but as land held for passive recreation, with a

resulting value of $130,000. Mr. Hart dismissed the possibility of developing the

parcel into 12 lots. Neither Mr. Hart nor the Commissioner took issue with the

layout or general feasibility of the 12 potential lots; but instead, the primary

objection to Ms. McKinney’s proposed development use was the fact (noted

above) that, to be developed, the property would need a 1,500-foot road extension

from Allie Lane, which already exceeded the 1,000-foot limit on dead-end roads in

Westford. Mr. Hart opined that any extension of that 1,000-foot limit would have

required a waiver from the town; and despite precedent that such a waiver could

      16
        BMA’s 2008 appraisal was lower than, but conceptually consistent with, a
prior appraisal of the Allie Lane parcel that Ms. McKinney had prepared for the
Emanouils in 2006 when the town was considering the potential purchase of all
197 acres. The 2006 appraisal valued the Allie Lane parcel at $1.9 million with
the highest and best use as a 12-lot development (as in the 2008 appraisal) but
using a shorter sellout period of two years and applying a lower discount rate of
18%.
                                         -53-

[*53] be obtained, he opined that the waiver would be granted only if the owner

obtained an additional access point for emergency vehicles. Mr. Hart’s appraisal

acknowledged such access could have been purchased from one of the owners of

abutting land (which included the town itself, as the owner of the adjacent parcel

where the highway garage was located). But he considered that possibility too

“speculative”: “In my opinion, the forgoing combination of contingencies make

subdivision a much too speculative assumption on which to base the market value

of the subject Allie Lane parcel in its ‘as-is’, non-permitted condition as of the

effective valuation date.” Ultimately Mr. Hart opined that development of 12 lots

was not feasible because of the required road extension and that therefore the

highest and best use of the Allie Lane parcel was for passive recreation, with a

sales-comparison value of $130,000, approximately $8,000 per acre. Thus, the

primary point of contention between the two appraisals is whether a waiver could

be obtained to extend Allie Lane for a 12-lot development.

      Ms. McKinney’s valuation assumed that all the applicable permits (or

waivers) would be obtained for the potential development, and her valuation thus

included--but discounted--the value of the potential 12 lots in her appraisal. At

trial, Ms. McKinney explained that with larger scale projects involving hundreds

of units, the permitting process can be very difficult because there are more
                                        -54-

[*54] significant concerns with how the project might affect a community;

however, developing 12 lots is (she credibly explained) not fraught with the same

level of concern, and thus it is customary for an appraiser to assume that permits

on such projects can be obtained and to estimate the value accordingly. Ms.

McKinney further explained that obtaining such permits would be reflected in

discount rates and absorption period, as she had done in her appraisal.

      As for the reasonableness of obtaining road-extension permits or waivers

from the town, Joseph Penzola (director of engineering for Hancock Associates)

testified credibly on the basis of his prior experience that the town has previously

approved, as alternatives to additional emergency access, various measures to

mitigate the concerns for road extensions and access for emergency vehicles, e.g.,

installing additional sprinkler systems in homes, or providing a gated access or

preserving a dedicated lane specifically for emergency vehicles. He testified that

such mitigation was approved 50% of the time, depending on the community.

      To the same effect, Mr. Deschenes testified that he has requested and

received waivers for dead-end road extensions on behalf of various clients over

the years, and that with respect to secondary access for emergency vehicles, the

town was already concerned, on its own behalf, that there was only one point of

access to the highway garage. Mr. Deschenes observed that granting a waiver to
                                         -55-

[*55] extend Allie Lane could have provided the town with a second access point

through Allie Lane and that such access had been a primary interest when the town

considered purchasing the Allie Lane parcel in 2006 and 2007. We are persuaded

that it was reasonable to assume that a waiver to extend Allie Lane for the 12-lot

development could be obtained. Furthermore, we are satisfied that Ms.

McKinney’s appraisal made appropriate adjustments in its discount rate and

sellout period to account for the additional time and costs to obtain the waiver.

Thus, we find that, as Ms. McKinney reasonably determined, the fair market value

of the Allie Lane parcel was $1.5 million.

      C.     Lots 2 and 3

      Ms. McKinney and Mr. Hart also each provided appraisals of lots 2 and 3.

Ms. McKinney determined that the highest and best use was as a 38-lot

development--on the basis of a capacity plan prepared, again, by Hancock

Associates--with the total development valued at $2.5 million. Ms. McKinney

used an income approach to value the property. She determined an absorption rate

of four to five lots annually with a total sellout period of eight years and estimated

that the value of each lot was approximately $280,000, noting the real estate

market had begun to stabilize in the second quarter of 2009 and that sale prices of

comparable properties ranged from $225,000 to $450,000. Ms. McKinney also
                                        -56-

[*56] determined that there would be no increase in lot prices for the first two

years and then a 3% increase each year thereafter. For value reductions she

applied a discount rate of 20%, noting that discount ranges had increased 150

basis points from the fourth quarter 2008 average, and she made reductions for

legal fees and other development costs--all of which resulted in the final value of

$2.5 million, or approximately $66,000 per lot.

      Mr. Hart’s appraisal determined that the highest and best use of lots 2 and 3

was to divide the lots into a total of six new lots: four lots (approximately 2.75

acres each) that would have road frontage and could be developed for residential

use without requiring subdivision approval, and two lots (approximately 21.4

acres each) that could not be developed because they would lack road frontage but

would instead be held for recreation purposes. Mr. Hart determined that the total

value of the property put to this use was approximately $1,420,000. Despite his

preferred six-lot development, Mr. Hart’s appraisal acknowledged that lots 2 and 3

could be developed into a 38-lot development as proposed in the Hancock

Associates capacity plan. However, Mr. Hart determined that the total value of a

38-lot development would be only $1,060,000 (not Ms. McKenney’s estimated

$2.5 million). In reaching his conclusion, Mr. Hart first calculated the value of the

potential 38-lot development using a 22.5% discount rate (rather than
                                        -57-

[*57] Ms. McKinney’s 20%)--presuming that entitlements would be obtained--and

an average sale price of $240,000 per lot (rather than Ms. McKinney’s $280,000).

Mr. Hart then reduced the value for various costs and estimated a final value of

$1,580,000, or $42,000 per lot. He then raised his discount rate to 26.5% (adding

400 basis points to account for the lack of entitlements) and increased the

projected sellout period by 12 months for the entitlement approval period. These

adjustments resulted in a $1,060,000 value for the 38 lots if developed.

      Thus, both appraisers agreed that the Hancock Associates 38-lot plan was

possible. The difference in their valuations arises from the different manner in

which each appraiser accounted for risks attributable to entitlements and the status

of the real estate market during 2009. The Emanouils argue that Mr. Hart

improperly compounded risk factors by both applying a higher discount rate of

26.5% on a semi-annual basis and also assuming an 18-month period during which

no lots would be sold. Though they do not agree with either adjustment, the

Emanouils argue that only one such adjustment should have been applied to

account for the stated risks of obtaining entitlements and combating an uncertain

real estate market. The Emanouils argue further that Mr. Hart compounded the

same market risks by selecting an “overly conservative” $240,000 lot price

“selected from such a limited range of comparable sales” (using sales from only
                                        -58-

[*58] two of the nearby towns) in order to arrive at $1,060,000 valuation of the

38-lot development.

      The Commissioner offers general critiques of Ms. McKinney’s appraisal,

arguing that she relied on a subdivision plan prepared by another person (a plan,

however, on which the Commissioner’s expert was also content to rely), that she

used too favorable data for comparable sales (taken from higher priced

neighborhoods), that she applied too low a discount rate, and that she further

failed to make downward adjustments to the discount rate to account for lack of

entitlements.17

      We agree with the Emanouils and are persuaded that Ms. McKinney’s 2009

appraisal reasonably estimated the fair market value of lots 2 and 3. As to the

Commissioner’s critiques, we find that Ms. McKinney used reasonable inferences

when selecting her discount rate and absorption periods; and with respect to her

      17
         The Commissioner also argued that Ms. McKinney failed to account for a
protected wildlife habitat and perchlorate contamination that could have added
costs to the development. On the basis of testimony and other evidence regarding
environmental impact studies and soil testing for the suitability for a septic system,
and the town’s apparent responsibility for the origin of the potential perchlorate
contamination, we are persuaded that there was minimal economic risk with
respect to protected wildlife and that any such risk would be mitigated in Ms.
McKinney’s estimated absorption period. The Commissioner’s expert did not
quantify the perchlorate problem nor its cost, and we find that this issue (which the
town might have been obligated to mitigate) was not material to the value of
lots 2 and 3.
                                        -59-

[*59] sales of comparable properties, we find that she made reasonable downward

adjustments for homes in the more favorable areas, and we agree with her final

average value per lot. With respect to entitlements, we find that Ms. McKinney’s

absorption period accounted for the time needed to obtain entitlements and that it

was reasonable for Ms. McKinney to have presumed entitlements would be

secured--as Mr. Hart also presumed. Thus, we find that, as Ms. McKinney

reasonably determined, the fair market value of lots 2 and 3 was $2.5 million.

IV.   Penalties

      Section 6662(a) and (b) imposes an accuracy-related penalty if any part of

an underpayment of tax required to be shown on a return is due to negligence, a

substantial understatement of income tax, or a substantial valuation misstatement.

The penalty is equal to 20% of the portion of the underpayment to which the

section applies. Section 6662(e)(1)(A) provides that a valuation misstatement is

“substantial” if the value claimed on the return is “150 percent or more of the

amount determined to be the correct amount”. Section 6662(h) provides that in

the case of a “gross valuation misstatement”, where the value claimed on the

return is 200% or more of the amount determined to be the correct amount, the

penalty is increased from 20% to 40%. We have found that the value of the

contributions of the Allie Lane parcel and lots 2 and 3 were $1.5 million and
                                        -60-

[*60] $2.5 million, respectively--as the Emanouils reported on their returns. Since

we do not sustain the deficiencies in tax that the IRS determined, penalties do not

apply in this case.

      To reflect the foregoing,


                                               Decision will be entered for

                                       petitioners.
