Kaufman v. Comm'r of Internal Revenue, 15997–09.

• Decision Date: 26 April 2010
• Docket Number: No. 15997–09.,15997–09.
• Parties: Gordon and Lorna KAUFMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

134 T.C. 182

134 T.C. No. 9

Gordon and Lorna KAUFMAN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15997–09.

United States Tax Court.

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 protected 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. 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 corresponding 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 negligence, 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 determined an accuracy-related penalty of 20 percent for negligence and substantial understatement of income tax under section 6662(a).

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 easement 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, notwithstanding 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.

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 allegations 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. ––––, ––––, (2010) (slip op. at 3–4) (citing Dahlstrom v. Commissioner, 85 T.C. 812, 821, 1985 WL 15413 (1985)).

II. The Facade Easement Contribution

Section 170 allows a deduction for any charitable contribution, 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 property. 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 qualified 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 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 contribution, 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 condemnation and to all insurance proceeds as a result of any casualty, hazard, or accident occurring to or about the property. 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 requirement 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 satisfy both their mortgage and their obligation to NAT. The facade easement contribution thus fails to satisfy the requirement in section 1.170A–14(g)(6), Income Tax Regs., and so 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 requirements 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...