                                                  GORDON AND LORNA KAUFMAN, PETITIONERS v.
                                                     COMMISSIONER OF INTERNAL REVENUE,
                                                                RESPONDENT
                                                        Docket No. 15997–09.                      Filed April 26, 2010.

                                                 In 2003, Ps transferred a facade easement and cash to a
                                               qualified organization. With respect to the facade easement
                                               contribution, Ps claimed a charitable contribution deduction
                                               in 2003 and a corresponding carryover deduction in 2004;
                                               with respect to the cash contribution, Ps claimed a charitable
                                               contribution deduction in 2003. R disallowed the deductions,
                                               which led to deficiencies. R also determined accuracy-related
                                               penalties under sec. 6662, I.R.C. R has moved for summary
                                               judgment. Ps object.
                                                 1. Held: With respect to the facade easement contribution,
                                               Ps have failed to raise any genuine issue of material fact
                                               regarding their compliance with sec. 1.170A–14(g)(6)(ii),
                                               Income Tax Regs. Because the facade easement contribution
                                               fails to satisfy the requirement in that provision, the interest
                                               in property conveyed by the facade easement was not pro-
                                               tected in perpetuity. Thus, the facade easement contribution
                                               was not a qualified conservation contribution under sec.
                                               170(h), I.R.C., see sec. 170(h)(2)(C), (5)(A), I.R.C., and Ps are
                                               not entitled to any deduction therefor, see sec. 170(f)(3), I.R.C.

                                      182




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                                                 2. Held, further, Ps have raised genuine issues of material
                                               fact with respect to the cash contribution and the accuracy-
                                               related penalties under sec. 6662(a), I.R.C.

                                        Michael E. Mooney, Julie Pruitt Barry, and Eleanor E.
                                      Farwell, for petitioners.
                                        Carina J. Campobasso, for respondent.

                                                                                  OPINION

                                        HALPERN, Judge: Respondent has determined deficiencies
                                      in, and penalties with respect to, petitioners’ Federal income
                                      tax, as follows: 1

                                                                                                      Penalties

                                                Year         Deficiency              Sec. 6662(a)              Sec. 6662(h)
                                                2003           $39,081                     $1,097                 $13,439
                                                2004            36,340                       ---                   14,536

                                         In 2003, petitioners contributed a facade easement and
                                      cash to the National Architectural Trust (NAT). With respect
                                      to the facade easement contribution, petitioners claimed a
                                      charitable contribution deduction in 2003 and a cor-
                                      responding carryover deduction in 2004; with respect to the
                                      cash contribution, they claimed a charitable contribution
                                      deduction in 2003. Respondent disallowed those deductions,
                                      which led to the deficiencies. With respect to the portions of
                                      the underpayments of tax in 2003 and 2004 attributable to
                                      the facade easement contribution, respondent determined
                                      accuracy-related penalties of 40 percent for a gross valuation
                                      misstatement under section 6662(h); in the alternative, he
                                      determined accuracy-related penalties of 20 percent 2 for neg-
                                      ligence, substantial understatement of income tax, and
                                      substantial valuation misstatement under section 6662(a).
                                      With respect to the portion of the underpayment of tax in
                                      2003 attributable to the cash contribution, respondent deter-
                                      mined an accuracy-related penalty of 20 percent for neg-
                                      ligence and substantial understatement of income tax under
                                      section 6662(a).
                                        1 Unless otherwise stated, section references are to the Internal Revenue Code in effect for

                                      the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
                                      We round all amounts to the nearest dollar.
                                        2 That is, half the amounts under sec. 6662(h) in the table above.




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                                      184                134 UNITED STATES TAX COURT REPORTS                                      (182)


                                        Respondent has moved for summary judgment (the
                                      motion). Petitioners object (the response). At our request,
                                      petitioners also filed a supplement to the response (the
                                      supplement). We shall grant the motion only with respect to
                                      the facade easement contribution. With respect to the cash
                                      contribution and the penalties, we shall deny the motion.

                                                                               Background
                                        At the time they filed the petition, petitioners lived in
                                      Massachusetts. The property here in question is a single-
                                      family rowhouse located in a historic preservation district in
                                      Boston. In December 2003, petitioners entered into a
                                      preservation restriction agreement (the agreement) with NAT
                                      pursuant to which petitioners granted to NAT a facade ease-
                                      ment restricting the use of the property. NAT also required
                                      petitioners to make a cash contribution, calculated as a
                                      percentage of the estimated value of the facade easement, to
                                      provide for ‘‘monitoring and administration’’ of the facade
                                      easement. Later that month, petitioners contributed $16,840
                                      to NAT, 3 and NAT accepted the agreement. At the time of the
                                      contributions, Washington Mutual Bank, FA (the bank), held
                                      a mortgage on the property.
                                        On their 2003 Federal income tax return, petitioners
                                      claimed a charitable contribution deduction of $220,800 for
                                      the contribution of the facade easement. Because of the
                                      limitations on charitable contribution deductions in section
                                      170(b)(1)(C), petitioners claimed a charitable contribution
                                      deduction with respect to the facade easement of only
                                      $103,377. Petitioners also claimed a charitable contribution
                                      deduction of $16,870 for the cash contribution, notwith-
                                      standing that the cash contribution was only $16,840.
                                        On their 2004 Federal income tax return, petitioners
                                      claimed a carryover charitable contribution deduction of
                                      $117,423 related to the facade easement contribution.




                                        3 Previously, in October 2003, as part of their preservation restriction agreement application,

                                      petitioners had made a $1,000 ‘‘good faith deposit’’.




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                                                                                 Discussion
                                      I.     Introduction
                                         We may grant summary judgment ‘‘if the pleadings,
                                      answers to interrogatories, depositions, admissions, and any
                                      other acceptable materials, together with the affidavits, if
                                      any, show that there is no genuine issue as to any material
                                      fact and that a decision may be rendered as a matter of law.’’
                                      Rule 121(b). In pertinent part, Rule 121(d) provides: ‘‘When
                                      a motion for summary judgment is made and supported
                                      * * *, an adverse party may not rest upon the mere allega-
                                      tions or denials of such party’s pleading, but such party’s
                                      response * * * must set forth specific facts showing that
                                      there is a genuine issue for trial.’’
                                         Respondent has moved for summary judgment, and so we
                                      infer facts in the manner most favorable to petitioners. See,
                                      e.g., Anonymous v. Commissioner, 134 T.C. 13, 15 (2010)
                                      (citing Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985)).
                                      II.      The Facade Easement Contribution
                                         Section 170 allows a deduction for any charitable contribu-
                                      tion, subject to certain limitations, that the taxpayer makes
                                      during the taxable year. In general, section 170(f)(3) denies
                                      any deduction for a contribution of an interest in property
                                      that is less than the taxpayer’s entire interest in the prop-
                                      erty. One exception to that general rule, however, is for a
                                      qualified conservation contribution. Sec. 170(f)(3)(B)(iii).
                                      Under section 170(h)(1), a qualified conservation contribution
                                      must be a contribution of a ‘‘qualified real property interest
                                      * * * exclusively for conservation purposes.’’ 4 The interest in
                                      property conveyed by a facade easement must be protected in
                                      perpetuity for the contribution of the easement to be a quali-
                                      fied conservation contribution. Under section 170(h)(2)(C), a
                                      qualified real property interest must be ‘‘a restriction
                                      (granted in perpetuity) on the use which may be made of the
                                      real property.’’ See also sec. 1.170A–14(b)(2), Income Tax
                                      Regs. Under section 170(h)(5)(A), ‘‘A contribution shall not be
                                      treated as exclusively for conservation purposes unless the
                                        4 The other requirement is that the contribution be to a ‘‘qualified organization’’. See sec.

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




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                                      conservation purpose is protected in perpetuity.’’ See also sec.
                                      1.170A–14(a), Income Tax Regs.
                                         If the facade easement was not protected in perpetuity,
                                      then its contribution was not a qualified conservation con-
                                      tribution, and petitioners are not entitled to any deduction
                                      therefor. Section 1.170A–14(g)(6)(ii), Income Tax Regs.,
                                      requires that, at the time of the gift, the donor must agree
                                      that the donation of the perpetual conservation restriction
                                      gives rise to a property right, immediately vested in the
                                      donee organization, with a fair market value that, at the
                                      time of the gift, is at least equal to the proportionate value
                                      that the perpetual conservation restriction bears to the value
                                      of the property as a whole. Moreover, section 1.170A–
                                      14(g)(6)(ii), Income Tax Regs., states in pertinent part:
                                      when a change in conditions give rise to the extinguishment of a perpetual
                                      conservation restriction * * *, the donee organization, on a subsequent
                                      sale, exchange, or involuntary conversion of the subject property, must be
                                      entitled to a portion of the proceeds at least equal to that proportionate
                                      value of the perpetual conservation restriction * * *

                                         Petitioners concede that the property had a mortgage and
                                      that the bank retained a ‘‘prior claim’’ to all proceeds of con-
                                      demnation and to all insurance proceeds as a result of any
                                      casualty, hazard, or accident occurring to or about the prop-
                                      erty. Moreover, petitioners do not dispute that the bank was
                                      entitled to those proceeds ‘‘in preference’’ to NAT until the
                                      mortgage was satisfied and discharged. The right of NAT to
                                      its proportionate share of future proceeds was thus not
                                      guaranteed. Petitioners argue that whether NAT would
                                      receive its proportionate share of any proceeds is a question
                                      of fact. In effect, petitioners argue that they have satisfied
                                      the requirement in section 1.170A–14(g)(6)(ii), Income Tax
                                      Regs., because NAT might be entitled to its proportionate
                                      share of future proceeds. Yet that provision states that the
                                      donee organization must be so entitled. See id. The require-
                                      ment is not conditional. Petitioners cannot avoid the strict
                                      requirement in section 1.170A–14(g)(6)(ii), Income Tax Regs.,
                                      simply by showing that they would most likely be able to sat-
                                      isfy both their mortgage and their obligation to NAT. The
                                      facade easement contribution thus fails to satisfy the require-
                                      ment in section 1.170A–14(g)(6), Income Tax Regs., and so




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                                      fails to satisfy the enforceability in perpetuity requirement
                                      under section 170(h)(2)(C) and (5)(A).
                                         The facade easement contribution thus fails as a matter of
                                      law to comply with the enforceability in perpetuity require-
                                      ments under section 1.170A–14(g), Income Tax Regs. For
                                      that reason, we find that the facade easement contribution
                                      was not protected in perpetuity and so was not a qualified
                                      conservation contribution under section 170(h)(1). 5 We shall
                                      grant the motion with respect to the facade easement con-
                                      tribution.
                                      III.     The Cash Contribution
                                         Respondent argues that we should disallow the charitable
                                      contribution deduction for the cash contribution for two rea-
                                      sons. First, respondent argues that the cash contribution was
                                      a conditional gift and so violated section 1.170A–1(e), Income
                                      Tax Regs. Second, respondent argues that the cash contribu-
                                      tion was part of a quid pro quo and so violated the rule of
                                      Hernandez v. Commissioner, 490 U.S. 680 (1989). Petitioners,
                                      however, raise genuine issues of material fact with respect to
                                      both arguments.
                                         First, section 1.170A–1(e), Income Tax Regs., states:
                                      If as of the date of a gift a transfer for charitable purposes is dependent
                                      upon the performance of some act or the happening of a precedent event
                                      in order that it might become effective, no deduction is allowable unless
                                      the possibility that the charitable transfer will not become effective is so
                                      remote as to be negligible. * * *

                                         In neither the response nor the supplement do petitioners
                                      dispute that the cash contribution was a conditional gift; that
                                      is, petitioners seem to concede that the agreement required
                                      NAT to refund the cash contribution if the appraisal found the
                                      facade easement to have no value.
                                         Petitioners, however, rely on the exception (quoted above)
                                      in section 1.170A–1(e), Income Tax Regs. They argue that the
                                      possibility that the charitable transfer would not become
                                      effective—that is, the possibility that the appraisal would
                                      find the facade easement to have no value—was ‘‘so remote
                                      as to be negligible.’’ See id. Moreover, according to peti-
                                      tioners, that inquiry is inherently factual. We agree.
                                        5 We therefore need not address respondent’s additional arguments that we should disallow

                                      the charitable contribution deduction for the facade easement contribution.




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                                        Second, under Hernandez v. Commissioner, supra, a
                                      transfer is not a charitable contribution if it is part of a quid
                                      pro quo. Respondent argues that the cash contribution was
                                      payment for a service. Respondent seems to argue that, in
                                      return for the cash contribution, NAT accepted the facade
                                      easement contribution so that petitioners could claim a chari-
                                      table contribution deduction. Even if NAT required petitioners
                                      to make the cash contribution, however, we are not convinced
                                      that that is sufficient to deny a charitable contribution
                                      deduction under Hernandez. 6
                                        Because petitioners raise genuine issues of material fact
                                      regarding the cash contribution, we shall deny the motion
                                      with respect to the cash contribution.
                                      IV.      Accuracy-Related Penalties
                                         Respondent concedes that ‘‘if the facade easement contribu-
                                      tion is disallowed as a matter of law * * *, the gross
                                      misstatement valuation (and the substantial valuation
                                      misstatement) penalties would not apply.’’ We accept his
                                      concession. For both the facade easement contribution and
                                      the cash contribution, we must decide only whether to sus-
                                      tain the accuracy-related penalties of 20 percent for neg-
                                      ligence and substantial understatement of income tax under
                                      section 6662(a). Because petitioners raise genuine issues of
                                      material fact regarding the applicability of the reasonable
                                      cause defense to the penalties, we must deny the motion with
                                      respect to those penalties.
                                         Section 6664(c)(1) provides that the accuracy-related pen-
                                      alty shall not be imposed with respect to any portion of an
                                      underpayment if the taxpayer shows that there was reason-
                                      able cause for that portion and the taxpayer acted in good
                                      faith with respect to that portion. Further:
                                      The determination of whether a taxpayer acted with reasonable cause and
                                      in good faith is made * * * case-by-case * * *, taking into account all
                                      pertinent facts and circumstances. * * * Reliance on * * * professional
                                      advice * * * constitutes reasonable cause and good faith if, under all the

                                         6 Respondent does not explicitly allege fraud or collusion. That is, he does not state (although

                                      he implies) that the cash contribution was a payment to NAT for its compliance in helping peti-
                                      tioners claim a deduction for the facade easement—a deduction that, respondent implies, both
                                      NAT and petitioners knew was illegitimate because the facade easement itself was worthless.
                                      Nonetheless, even if respondent did so argue, petitioners have alleged enough facts to raise a
                                      genuine issue as to fraud or collusion.




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                                      (182)                        KAUFMAN v. COMMISSIONER                                            189


                                      circumstances, such reliance was reasonable and the taxpayer acted in
                                      good faith. * * *

                                      Sec. 1.6664–4(b)(1), Income Tax Regs.; see also sec. 1.6664–
                                      4(c), Income Tax Regs. (‘‘Reliance on opinion or advice’’).
                                         Respondent argues that petitioners may not, as a matter
                                      of law, rely on the reasonable cause exception. 7 In so con-
                                      cluding, respondent relies on communications between Mr.
                                      Kaufman and a representative of NAT that suggest Mr. Kauf-
                                      man had reason to believe the facade easement in fact had
                                      no value. Petitioners assert that the significance of those
                                      communications must be determined in the light of all the
                                      relevant facts and circumstances, and we agree. Petitioners
                                      argue that they relied on the advice of their accountant. Peti-
                                      tioners argue that at trial (1) their accountant would testify
                                      to show that they had reasonable cause for claiming a chari-
                                      table contribution deduction for their contributions to NAT of
                                      the facade easement and the cash and (2) they themselves
                                      would testify as to their understanding of the value of the
                                      facade easement and their good faith belief that their con-
                                      tribution was a qualified conservation contribution under sec-
                                      tion 170(h)(1).
                                         Because petitioners raise genuine issues of material fact
                                      regarding the applicability of the reasonable cause exception
                                      to the accuracy-related penalties, we shall deny the motion
                                      with respect to those penalties.
                                      V.      Conclusion
                                        For the reasons stated, we shall grant the motion with
                                      respect to the facade easement contribution. With respect to
                                      the cash contribution and the penalties, we shall deny the
                                      motion.
                                                                                 An appropriate order will be issued.

                                                                               f




                                        7 Respondent also argues that petitioners may not, as a matter of law, rely on the substantial

                                      authority exception under sec. 6662(d)(2)(B)(i). Because we find that petitioners have raised a
                                      genuine issue of material fact as to the applicability of the reasonable cause defense, we need
                                      not address the substantial authority exception.




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