Kaufman v. Comm'r of Internal Revenue

• Decision Date: 04 April 2011
• Docket Number: No. 15997–09.,15997–09.
• Citation: 136 T.C. 294,136 T.C. No. 13
• Parties: Gordon and Lorna KAUFMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

136 T.C. 294
136 T.C. No. 13

Gordon and Lorna KAUFMAN, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15997–09.

United States Tax Court.

April 4, 2011.

In Kaufman v. Commissioner, 134 T.C. 182, (2010), we granted R partial summary judgment, sustaining his disallowance of charitable contribution deductions Ps claimed on account of PW's grant to N of a facade easement burdening their residence. Ps ask that we reconsider our grant of partial summary judgment. We must also address PW's cash contributions to N and R's determination of accuracy-related penalties.

1. Held: We did not err in Kaufman v. Commissioner, supra, in concluding that the contribution of the facade easement failed as a matter of law to comply with the enforceability-in-perpetuity requirements under sec. 1.170A–14(g)(6), Income Tax Regs. We therefore affirm our grant of partial summary judgment to R on the grounds set forth in that report and shall deny Ps' motion to reconsider it.

2. Held, further, PW's 2003 cash payments to N were conditional at the end of 2003 and therefore not deductible for 2003. Held, further, Ps may deduct PW's cash payments to N for 2004.

3. Held, further, Ps are liable for an accuracy-related penalty only on account of their negligence in deducting the 2003 cash payments for 2003.

Frank Agostino, Julie Pruitt Barry, Eduardo S. Chung, Eleanor E. Farwell, Michael Mattaliano, and Michael E. Mooney, for petitioners.

Carina J. Campobasso, for respondent.

HALPERN, Judge:

[136 T.C. 294]

Respondent 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 ¦
                +------------------------------------------------------+
                

[136 T.C. 295]

The deficiencies respondent determined result from his disallowance of petitioners' deductions for contributions of a facade easement burdening their residence (the facade easement) and of cash to the National Architectural Trust (NAT). The penalties are accuracy-related penalties relating to those deductions. By amendment to answer, respondent asserted an increased deficiency for 2004 of $37,248 and an increased section 6662 penalty for that year of $14,726.

Earlier in this case, respondent moved for summary judgment, which we granted in part, with respect to the facade easement contribution, and denied in part, with respect to the cash contribution and the penalties. See Kaufman v. Commissioner, 134 T.C. 182, (2010). Petitioners then moved for us to reconsider our grant of partial summary judgment. Several organizations receiving facade or other preservation easements and otherwise concerned with historic preservation asked permission to file briefs in support of petitioners' motion. ² We took petitioners' motion under advisement, instructing the parties that we would proceed with a trial on the remaining issues in the case (the cash contribution and the penalties) and would address the motion following the trial. We instructed the parties to incorporate their arguments in support of, or in opposition to, the motion in their posttrial briefs. We denied the organizations' requests to file briefs but instructed them to work with petitioners to develop a coordinated position, which petitioners would set forth in their posttrial briefs. In their opening brief, petitioners assure us that it was prepared in accordance with our instruction. We therefore assume that petitioners' briefs incorporate petitioners and the organizations' joint position.³

We shall first set forth our findings of fact, which are necessary to dispose of the cash contribution issue and the penalties (and which should provide a useful background for our discussion of our grant of partial summary judgment). We shall then set forth our reasons for sustaining our grant of partial summary judgment and denying petitioners' motion

[136 T.C. 296]

to reconsider it; finally, we shall dispose of the remaining issues.

FINDINGS OF FACT Introduction

Some facts are stipulated and are so found. The stipulation of facts and the second stipulation of facts, with accompanying exhibits, are incorporated herein by this reference.

At the time the petition was filed, petitioners resided in Massachusetts.

Background

Petitioners are husband and wife. Gordon Kaufman ⁴ is the Morris A. Adelman Professor of Management Emeritus of the Sloan School of Management at the Massachusetts Institute of Technology. Lorna Kaufman has a Ph.D. in developmental psychology from Boston College and is president of her own company.

The Property

In 1999, Lorna Kaufman purchased real property (the property) in Boston, Massachusetts. The property consists of a lot and a single-family residence (a rowhouse), which is petitioners' home. The property is in the South End historic preservation district.

The October 13, 2003, Letter

Lorna Kaufman received a letter dated October 13, 2003, from Mory Bahar (Mr. Bahar), an NAT area manager, thanking her for her inquiry about NAT's Federal historic preservation tax incentive program. Among other things, Mr. Bahar stated that the program allowed the owner of a nationally registered historic building to deduct between 10 and 15 percent of the value of the building on her Federal income tax return. He further stated that the program would require very little effort on her part because, as part of NAT's service, NAT “will be handling all the red tape and paperwork.”

[136 T.C. 297]

The Application

In late October or early November 2003, Lorna Kaufman submitted an application, the “Preservation Restriction Agreement Application” (the application), to NAT, on its own form, identifying the property as property to be considered for a preservation donation. On the application, she estimated the fair market value of the property as $1.8 million and identified Washington Mutual Bank FA (the bank) as holding a mortgage on the property. In pertinent part, the application states:

Deposit

A good faith deposit of $1,000 is required at the time of application. If for any reason the necessary approvals cannot be obtained, the deposit will be promptly refunded. The deposit should be made to* * * [ NAT].

* * * Donor Endowment

When the Trust accepts a donation it pledges to monitor and administer the donation in perpetuity. Since the Trust receives no government funding and has no other source of income, it requires that donors create an endowment that covers current operating costs and funds the Trust's long term Stewardship Endowment which is reserved for future monitoring and administration purposes.

The cash endowment contribution is set at 10% of the value of the donation tax deduction * * *. * * * If the donation can not [sic] be processed in the timeframe required to qualify for a 2003 deduction, a 10% reduction in the cash contribution will be provided to the donor once the process is completed in 2004.

At the time she submitted the application, Lorna Kaufman made the required $1,000 deposit.

The December 16, 2003 Letter

Lorna Kaufman received a letter dated December 16, 2003, from James Kearns (Mr. Kearns), president of NAT. In pertinent part, the letter states:

We are pleased to inform you that we have completed our discussions with the Massachusetts Historical Commission and have reached agreement on a Preservation Restriction Agreement. * * *

In order to accept your donation in 2003, we ask that you agree to the following:

[136 T.C. 298]

1. Deliver to the Trust by December 26, 2003:

a. An executed and notarized Preservation Restriction Agreement,

b. A signed copy of this letter, and

c. A check for a cash contribution to the Trust of $15,840, which is based on 8% of the estimated easement valuation of $198,000 * * *. Since the final cash contribution is 10% of the easement value, it is expected that an additional contribution amount will be due and the donor promises to send a check for that amount within ten days of receipt of the final appraisal report. In the event the appraised value of the easement deduction generates a contribution amount less than the above calculated estimate, the Trust will refund the excess within ten days of receipt of the final appraisal report.

2. Schedule an appraisal within fifteen days of receiving this letter and ensure its completion by February 28, 2004.

3. The Trust must review the new Preservation Restriction Agreement with your lending institution(s) in order to ensure subordination according to its conditions.

4. In the event that the subordination of your mortgage(s) or historic certification can not [sic] be achieved, and/or your appraisal cannot be completed by February 28, 2004, you will join with the Trust in voiding the easement. In this circumstance, the Trust will reimburse you for any disbursements made in an effort to achieve an enforceable donation, including the cost of appraisal and your cash contribution to the Trust.

Once all the necessary steps have been completed, the Trust will provide you with an acknowledgment of your 2003 charitable contributions and the appropriate IRS form for you to submit with your tax return. The Trust will also arrange for the deed to be recorded * * *.

On December 29, 2003, Lorna Kaufman signed a copy of the letter under the notation “Concurrence” and returned it to NAT, along with a check for $15,840 dated December 27, 2003, drawn to NAT.

The Agreement

In December 2003, Lorna Kaufman entered into a preservation restriction agreement (the agreement) with NAT pursuant to which she granted to NAT the facade easement restricting the use of the property. The agreement recites its purpose:

It is the purpose of this Preservation Restriction Agreement to assure that...