Billy L v. Comm'r Of Internal Revenue

• Decision Date: 22 September 2010
• Docket Number: T.C. Memo. 2010-207,Docket No. 8309-08.
• Parties: BILLY L. AND RENETTA J. EVANS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

BILLY L. AND RENETTA J. EVANS, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2010-207

Docket No. 8309-08.

United States Tax Court

Filed September 22, 2010

Billy L. Evans, for petitioners.

Jeffrey S. Luechtefeld and Robert Dillard, for respondent.

Ps granted two facade easements to a qualified conservation organization and claimed a $154,350 charitable contribution deduction on their 2004 Federal income tax return. R determined a deficiency, in part, on the basis that Ps overstated the amount of their charitable contribution deduction, and R subsequently asserted an accuracy-related penalty under sec. 6662, I.R.C.

Held: Ps are liable for the deficiency.

Held, further, Ps are not liable for that portion of the accuracy-related penalty under sec. 6662, I.R.C., that relates to the disallowed charitable contribution deduction.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, J.:

In 2004 petitioners granted facade easements with respect to two properties in the Capitol Hill Historic District of Washington, D.C. They claimed a $154,350 charitable contribution deduction on their 2004 Federal income tax return for doing so. Respondent disallowed the deduction and determined a Federal income tax deficiency of $58,896 for 2004. This case is before the Court on a petition for redetermination of that deficiency. In addition, respondent affirmatively asserted in his June 3, 2008, answer that petitioners are also liable for an $11,779 accuracy-related penalty pursuant to section 6662(a) for 2004.¹ The issues for decision are whether petitioners are liable for (1) the Federal income tax deficiency and (2) the accuracy-related penalty.²

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts and accompanying exhibits are hereby incorporated by reference into our findings. At the time the petition was filed, petitioner Billy Evans resided in Florida and petitioner Renetta Evans resided in California. The parties have stipulated that the appropriate venue for any review of our decision in this matter will be the U.S. Court of Appeals for the Eleventh Circuit. See sec. 7482(b)(2); Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Petitioner Billy Evans purchased a single-family rowhouse in Washington, D.C., on December 29, 1995. Petitioners purchased another single-family rowhouse in Washington, D.C., on June 7, 2004. Both properties are in the Capitol Hill Historic District of Washington, D.C. On December 29, 2004, petitioner Billy Evans executed two "Conservation Deed of Easement" documents and petitioner Renetta Evans executed one of the two "Conservation Deed of Easement" documents. These documents were intended to grant facade easements to Capitol Historic Trust, Inc., with respect to the two properties.

On their joint 2004 Form 1040, U.S. Individual Income Tax Return, petitioners claimed a $154,350 charitable contribution deduction attributable to the facade easements. Petitioners attached page 2 of two Forms 8283, Noncash Charitable Contributions, to their return.³ On January 10, 2008, respondent issued a notice of deficiency determining, inter alia, that the claimed $154,350 charitable contribution deduction was not allowable. Petitioners filed a timely petition for redetermination of the deficiency on April 7, 2008. A trial was held on January 14, 2009, in Tampa, Florida. The parties submitted opening briefs and reply briefs.

OPINION

I. Applicable Law

Section 170 allows a deduction for a qualified conservation contribution that a taxpayer makes during the taxable year. Sec. 170(c), (f)(3)(B)(iii), (h). The value of a qualified conservation contribution "is the fair market value of the perpetual conservation restriction at the time of the contribution." Sec. 1.170A-14(h)(3)(i), Income Tax Regs.

Fair market value "is 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." Sec. 1.170A-1(c)(2), Income Tax Regs. Although the fair market value of a facade easement would ideally be based on the sale prices of comparable easements, sec. 1.170A-14(h)(3)(i), Income Tax Regs., such information is seldom available because conservation easements are typically granted by deed of gift rather than sold, Symington v. Commissioner, 87 T.C. 892, 895 (1986). A common alternative is the before-and-after approach, which compares the fair market value of the easement-encumbered property before it is encumbered by the easement and after. Stanley Works & Subs, v. Commissioner, 87 T.C. 389, 399 (1986); sec. 1.170A-14(h)(3)(i) and (ii), Income Tax Regs.

The parties dispute (1) whether the facade easements were qualified conservation contributions under section 170(h); (2) whether petitioners satisfied the substantiation requirement of section 170(f); and (3) what the fair market values of the facade easements were at the time of their contribution.

II. Burden of Proof

Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any claimed exemptions or deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Moreover, the Commissioner's determination of value is normally presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Schwab v. Commissioner, T.C. Memo. 1994-232.

Under section 7491(a), the burden may shift to the Commissioner with respect to factual matters if the taxpayer produces credible evidence and meets several other requirements. The Commissioner also bears the burden of proof with respect to any new matter that is not raised in the notice of deficiency but that either increases the original deficiency or requires the taxpayer to present different evidence. See Rule 142(a); Shea v. Commissioner, 112 T.C. 183, 197 (1999); Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989); see also sec. 7522.

Petitioners argue that the burden of proving the fair market values of the facade easements shifts to respondent under section 7491(a) because they presented credible evidence of the fair market values. As described below, however, petitioners failed to present credible evidence of fair market values. Accordingly, the burden of proof does not shift under section 7491(a).

Petitioners also argue that respondent bears the burden of proof with respect to the fair market values of the facade easements because respondent failed to raise the issue in the notice of deficiency. In the Explanation of Adjustments attached to the notice of deficiency, respondent stated: "It is determined that you did not establish that the amount of $154,350.00 was (a) a contribution, and (b) paid during taxable year 2004." Although respondent could have phrased his statement more explicitly, we find that the notice of deficiency adequately apprised petitioners that the amount of the claimed conservation contribution deduction was at issue. The burden of proof with respect to fair market values therefore remains with petitioners.

III. Values of the Facade Easements

Both parties have offered reports and testimony of expert witnesses to establish the amounts of petitioners' charitable contributions. An expert's opinions are admissible if they assist the trier of fact to understand the evidence or to determine a fact in issue. Fed. R. Evid. 702. We evaluateexpert opinions in light of each 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 determine how to weigh 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 an expert's opinions and may accept or reject an expert opinion in full or in part in the exercise of sound judgment. See Helvering v. Natl. Grocery Co., 304 U.S. 282, 295 (1938); Parker v. Commissioner, supra at 561-562. We may also reach a determination of value based on our own examination of the evidence in the record. Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285.

Petitioners called two expert witnesses: Sandy L. Lassere, who prepared appraisal reports with respect to the facade easements, and Calvin Mark Lassere, who reviewed the reports. Mrs. Lassere has a marketing degree from the University of Washington and is a certified residential appraiser in the District of Columbia and Virginia. She testified that she has been appraising property for almost 10 years and that she has appraised upwards of 30 easements. Mr. Lassere has a bachelor of science degree from Purdue University, is a certified general appraiser in the District of Columbia, and has other appraisallicenses in Florida, Georgia, New York, North Carolina, Virginia, and Maryland. Mr. and Mrs. Lassere are coowners of CML & Associates, L.L.C., and serve as principal and president of the firm, respectively.

Mrs. Lassere claimed to have used both the comparable sales method and the before-and-after approach to value the facade easements.⁴ On cross-examination, she admitted to a variety ofmistakes in her prepared reports, such as incorrectly describing the restrictions imposed by the easements, ⁵ making improper size adjustments with respect to sales of several comparable properties, and committing numerous miscalculations and spelling and other typographical errors. Her testimony also cast doubt on the rigor and validity of her analysis. For example, she did not adjust sale prices for amenities or garage parking, had difficulty explaining and justifying the adjustments she did make, and did not review the deeds of easement encumbering comparable properties. In addition, Mrs. Lassere's testimony also...