Kaufman v. Commissioner

GORDON AND LORNA KAUFMAN, PETITIONERS v.

COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 15997–09. Filed April 4, 2011.

In Kaufman v. Commissioner, 134 T.C. 182 (2010), we

granted R partial summary judgment, sustaining his disallow-

ance 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 con-

tributions to N and R’s determination of accuracy-related pen-

alties.

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 condi-

tional 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 pen-

alty 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: 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

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.

294

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(294) KAUFMAN v. COMMISSIONER 295

The deficiencies respondent determined result from his dis-

allowance of petitioners’ deductions for contributions of a

facade easement burdening their residence (the facade ease-

ment) 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 judg-

ment, 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 preserva-

tion 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 argu-

ments 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, peti-

tioners 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 nec-

essary to dispose of the cash contribution issue and the pen-

alties (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

2 The organizations are: Trust for Architectural Easements (formerly National Architectural

Trust), Foundation for the Preservation of Historic Georgetown, National Trust for Historic

Preservation, and Capitol Historic Trust.

3 The Trust for Architectural Easements notified us that it joined relevant portions of peti-

tioners’ briefs.

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296 136 UNITED STATES TAX COURT REPORTS (294)

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 accom-

panying 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 paper-

work.’’

4 Since both petitioners hold doctoral degrees, and both could thus be referred to as Dr. Kauf-

man, we shall avoid confusion by referring to them individually as Gordon Kaufman and Lorna

Kaufman, respectively.

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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 esti-

mated 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 dona-

tion 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 perti-

nent 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 fol-

lowing:

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298 136 UNITED STATES TAX COURT REPORTS (294)

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 deduc-

tion generates a contribution amount less than the above calculated esti-

mate, 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 cer-

tification can not [sic] be achieved, and/or your appraisal cannot be com-

pleted 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

the architectural, historic, cultural and open space features of the property

will be retained and maintained forever substantially in their current

condition for conservation and preservation purposes in the public interest,

and to prevent any use or change of the Property that will significantly

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(294) KAUFMAN v. COMMISSIONER 299

impair or interfere with the Property’s conservation and preservation

values or that would be detrimental to the preservation of the Property.

That purpose is achieved by Lorna Kaufman’s grant and

conveyance to NAT by way of the agreement of ‘‘an easement

in gross, in perpetuity, in, on, and to the Property, Building

and the Facade, being a Preservation Agreement on the

Property,’’ with certain delineated rights. 5 In pertinent part,

section IV.C. of the agreement also provides:

In the event this Agreement is ever extinguished, whether through con-

demnation, judicial decree or otherwise, Grantor agrees on behalf of itself,

its heirs, successors and assigns, that Grantee, or its successors and

assigns, will be entitled to receive upon the subsequent sale, exchange or

involuntary conversion of the Property, a portion of the proceeds from such

sale, exchange or conversion equal to the same proportion that the value

of the initial easement donation bore to the entire value of the property

at the time of donation * * *, unless controlling state law provides that

the Grantor is entitled to the full proceeds in such situations, without

regard to the Agreement. Grantee agrees to use any proceeds so realized

in a manner consistent with the preservation purposes of the original con-

tribution.

The Lender Agreement

At the time the agreement was entered into, the bank held

a mortgage on the property. A representative of the bank

executed a document styled ‘‘LENDER AGREEMENT’’ (lender

agreement). The lender agreement was attached to and

recorded with the agreement. The lender agreement ref-

erences the property and, in pertinent part, provides:

[The bank] hereby joins in * * * [the agreement] for the * * * purpose of

subordinating its rights in the Property to the right of * * * [NAT] to

enforce * * * [the agreement] in perpetuity under the following conditions

and stipulations:

(a) The Mortgagee/Lender and its assignees shall have a prior claim to

all insurance proceeds as a result of any casualty, hazard or accident

occurring to or about the Property and all proceeds of condemnation, and

shall be entitled to same in preference to * * * [NAT] until the Mortgage

is paid off and discharged, notwithstanding that the Mortgage is subordi-

nate in priority to the Agreement[.]

5 The term ‘‘Preservation Agreement’’ in the quoted language probably should be read ‘‘Preser-

vation Restriction’’, since the agreement earlier recites Lorna Kaufman’s and NAT’s reciprocal

desires to grant and receive a ‘‘Preservation Restriction * * * as such term is defined in * * *

[Mass. Ann. Laws ch. 184, secs. 31 and 32 (LexisNexis 1996 & Supp. 2010)]’’ (conservation and

preservation restrictions).

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300 136 UNITED STATES TAX COURT REPORTS (294)

The lender agreement was attached to the agreement, and

the agreement was recorded in the Suffolk County,

Massachusetts, registry of deeds on October 1, 2004.

NAT’s Assistance

assisted Lorna Kaufman in obtaining the bank’s agree-

NAT

ment to subordinate its mortgage to the facade easement by

submitting the required documents to the bank and following

up to ensure the bank’s agreement. NAT provided Gordon

Kaufman with a list of whom it considered to be qualified

appraisers. It also negotiated the terms of the agreement

with the Massachusetts Historical Commission and facili-

tated approval of the agreement by it, the City of Boston,

and the National Park Service. Mr. Bahar answered basic

inquiries by Gordon Kaufman about the deductibility of

Lorna Kaufman’s contribution.

The Appraisal

Timothy J. Hanlon prepared an appraisal of the property

(the appraisal) as of January 20, 2004. He reported the value

of the property to be $1,840,000 before the grant of the

facade easement. He concluded: ‘‘The property is considered

to have a reduction in fair market value of 12% of the prop-

erty’s value prior to the easement donation, which equates to

a loss of $220,800 (rounded).’’

The Discount

Lorna Kaufman received a letter dated April 5, 2004, from

Victoria C. McCormick (Ms. McCormick), NAT vice president

of operations and finance, addressing, in part, her ‘‘cash

donation’’. Addressing an expected delay in petitioners’ being

able to file their 2003 joint income tax return on account of

the then as-yet-uncompleted contribution of the facade ease-

ment, Ms. McCormick stated:

[NAT] will discount your cash donation by 10% as calculated below.

Appraised easement value ................................................ $220,800

Cash contribution at 10% of appraised easement value 22,080

Discount of 10% .................................................................. 2,208

Discounted cash contribution ............................................ 19,872

Washington Mutual fees ................................................... 300

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Total amount due ............................................................... 20,172

Amounts paid to date ........................................................ 16,840

Net amount due ................................................................. 3,332

No amount is due at this time. Your final payment of $3,332 will be due

only after * * * [National Park Service] certification has been achieved.

Park Service Certification

On August 9, 2004, the U.S. Department of the Interior,

National Park Service, classified the property as a ‘‘certified

historic structure’’ for charitable contribution for conserva-

tion purposes.

The Final Payment and Form 8283

Lorna Kaufman paid NAT $3,332 by check received by it on

August 17, 2004. On that date, it sent her an IRS Form 8283,

Noncash Charitable Contributions, documenting her con-

tribution of the facade easement. Ms. McCormick testified

that donors to NAT were informed ‘‘up-front’’ that it ‘‘would

give them the [Form] 8283 after the cash contribution was

received.’’

Petitioners’ Tax Returns

Petitioners filed joint Federal income tax returns for 2003

and 2004. On their 2003 return, petitioners showed a chari-

table contribution 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 a

cash contribution to NAT, notwithstanding that, during 2003,

they paid NAT only $16,840.

On their 2004 return, petitioners claimed a carryover

charitable contribution deduction of $117,423 related to the

facade easement contribution. They also claimed a charitable

contribution deduction of $3,332 on account of the $3,032

final installment of their ‘‘cash contribution’’ to NAT and $300

on account of the bank fee paid by NAT.

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OPINION

I. Reconsideration of Grant of Partial Summary Judgment

A. Introduction

We granted partial summary judgment to respondent, sus-

taining his disallowance of any deduction for 2003 or 2004

for the contribution of the facade easement to NAT. We con-

cluded that the contribution failed as a matter of law to

comply with the enforceability-in-perpetuity requirements

found in section 1.170A–14(g), Income Tax Regs. Kaufman v.

Commissioner, 134 T.C. at 187. For that reason, we found

that the facade easement contribution was not protected in

perpetuity and so was not a qualified conservation contribu-

tion under section 170(h)(1). Id. Rule 161 affords us discre-

tion to reconsider an opinion upon a showing of substantial

error. Estate of Quick v. Commissioner, 110 T.C. 440, 441

(1998).

Petitioners argue that we should reconsider, and reverse,

our grant of partial summary judgment because the agree-

ment complies with the regulations. In particular, petitioners

argue:

[The agreement] sets out the exact terms of the agreement between the

donor and donee that are required by Treas. Reg. § 1.170A–14(g)(6), and

the Lender Agreement includes the provision required by Treas. Reg. §

1.170A–14(g)(2). Separately, the Court should consider the application of

Treas. Reg. § 1.170A–14(g)(3), which provides that a conservation interest

will be regarded as ‘‘enforceable in perpetuity’’—even if defeasible upon the

happening of a future event—‘‘if on the date of the gift it appears that the

possibility that such act or event will occur is so remote as to be neg-

ligible.’’

Respondent answers that the agreement and the lender

agreement must be read together, that it is insufficient for

the agreements merely to parrot the regulations, and that,

when read together, the agreements constitute a conveyance

that fails to conform to the extinguishment provision found

in section 1.170A–14(g)(6), Income Tax Regs. Respondent

argues that the mortgage subordination requirements found

in section 1.170A–14(g)(2), Income Tax Regs., are irrelevant,

having been relied on neither by him in support of the

motion for summary judgment nor by the Court in Kaufman

v. Commissioner, 134 T.C. 182 (2010). Finally, respondent

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(294) KAUFMAN v. COMMISSIONER 303

argues that the requirements of section 1.170A–14(g)(3),

Income Tax Regs., addressing remote future events, should

not be read into the requirements of section 1.170A–14(g)(6),

Income Tax Regs.

Before setting forth the pertinent details of section 170 and

the regulations and discussing the parties’ arguments, we

shall provide some background information with respect to

the difficulties in making a conservation restriction per-

petual.

B. Perpetual Conservation Restrictions

Under common law doctrines, it is difficult for a real prop-

erty owner to split the Blackstonian bundle of rights consti-

tuting ownership of the property to give one not holding the

remaining rights perpetual control over the use that may be

made of the property. The principal difficulties are assign-

ability and duration, common law disfavoring the creation of

an assignable right of unlimited duration to control the use

of land. See 4–34A Powell, Real Property, sec. 34A.01 (M.

Wolf ed. 2010); Airey, ‘‘Conservation Easements in Private

Practice’’, 44 Real Prop. Tr. & Est. L.J. 745, 750–758 (2010).

Statutory authority, however, to create assignable restric-

tions of unlimited duration for conservation, preservation,

and similar purposes now can be found in the codes of every

State and the District of Columbia. See 4–34A Powell, supra

sec. 34A.01 n.1 (list). Indeed, the agreement both character-

izes the facade easement as ‘‘an easement in gross’’, a

common law interest, and references Mass. Gen. Laws ch.

184, secs. 31 and 32 (conservation and preservation restric-

tions).

Yet, as the Powell treatise makes clear, notwithstanding

State law statutory provisions facilitating the creation of per-

petual conservation restrictions, there are many means by

which conservation restrictions may be modified or termi-

nated. 4–34A Powell, supra sec. 34A.07[1]. Those include:

Condemnation (eminent domain), the foreclosure of pre-

existing liens, foreclosure for unpaid taxes, Marketable Title

Acts, merger or abandonment, the doctrine of changed condi-

tions, and release by the holder. Id.

The Powell treatise states with respect to release: ‘‘Some

statutes confirm the common-law principle that an easement

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304 136 UNITED STATES TAX COURT REPORTS (294)

or covenant may be released by the holder.’’ Id. It gives as

an example Mass. Gen. Laws., ch. 184, sec. 32 (after a public

hearing). Id. n.6.

It states with respect to condemnation: ‘‘Thus if a con-

servation easement restricts the development of real property

that is needed for a school, hospital, or publicly aided

housing, eminent domain may be exercised.’’ Id. sec.

34A.07[2]. It notes that the method of valuation of the

interest represented by the conservation restriction and

whether and to whom compensation may be awarded are

controversial issues, but it states that the better view, fol-

lowed by most States, ‘‘is that the condemnation of an ease-

ment is the taking of an interest in property that requires

compensation to the holder.’’ Id.

It states that a conservation easement may be terminated

without the consent of the holder:

through the foreclosure of a pre-existing mortgage or mechanic’s lien on

property subsequently encumbered by the easement. Such a foreclosure,

when consummated by a sale, will result in the termination of the ease-

ment. The purchaser takes title free of the restrictions imposed subsequent

to the attachment of the lien. * * * [Id. sec. 34A.07[3].]

It recognizes that the doctrine of changed circumstances

may apply to conservation restrictions: ‘‘An action for an

injunction against the violation of a restrictive covenant will

be defeated, if the owner * * * can show that conditions in

the neighborhood have changed so substantially that the

original purposes to be served by the restriction can no

longer be achieved.’’ Id. sec. 34A.07[6]; see also 2 Restate-

ment, Property 3d (Servitudes), sec. 7.11 (2000). The Powell

treatise states that a good case to be made for the inapplica-

bility of the doctrine to conservation restrictions on policy

grounds and references another commentator who suggests

that, on the obsolescence of a conservation restriction,

because of its public nature ‘‘the servient owner should either

pay the easement holder the value of the easement or a court

should attempt to reform the terms of the easement to pre-

serve its purpose based on the doctrine of cy pres.’’ 4–34A

Powell, supra sec. 34A.07[6] (citing Note, ‘‘Conservation

Easements and the Doctrine of Changed Conditions’’, 40

Hastings L.J. 1187, 1221 (1989)); see also 2 Restatement,

supra sec. 7.11.

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C. Section 170 and the Pertinent Regulations

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.’’ 6 Under section

170(h)(2)(C), a qualified real property interest includes ‘‘a

restriction (granted in perpetuity) on the use which may be

made of the real property.’’ Under section 170(h)(5)(A), ‘‘A

contribution shall not be treated as exclusively for conserva-

tion purposes unless the conservation purpose is protected in

perpetuity.’’ See also sec. 1.170A–14(a), Income Tax Regs.

The regulations introduce the term ‘‘perpetual conservation

restriction’’. Section 1.170A–14(b)(2), Income Tax Regs.,

states: ‘‘A perpetual conservation restriction is a qualified

real property interest.’’ It defines such restriction as ‘‘a

restriction granted in perpetuity on the use which may be

made of real property—including, [sic] an easement or other

interest in real property that under state law has attributes

similar to an easement (e.g., a restrictive covenant or equi-

table servitude).’’ Id.

Section 1.170A–14(g), Income Tax Regs., elaborates on the

enforceability-in-perpetuity requirement. Paragraph (g)(1)

requires generally that legally enforceable restrictions pre-

vent use of the retained interest by the donor (and his

successors in interest) inconsistent with the conservation

purposes of the donation.

Paragraph (g)(2) addresses mortgages and, in pertinent

part, provides that ‘‘no deduction will be permitted * * * for

an interest in property which is subject to a mortgage unless

the mortgagee subordinates its rights in the property to the

right of the * * * [donee] organization to enforce the con-

servation purposes of the gift in perpetuity.’’

6 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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306 136 UNITED STATES TAX COURT REPORTS (294)

Paragraph (g)(3) is entitled ‘‘Remote future event’’ and

addresses events that may defeat the property interest that

has passed to the donee organization. It provides that a

deduction will not be disallowed merely because on the date

of the gift there is the possibility that the interest will be

defeated so long as on that date the possibility of such defeat

is so remote as to be negligible. Id.

Paragraph (g)(6) is entitled ‘‘Extinguishment’’ and recog-

nizes that, after the donee organization’s receipt of an

interest in property, an unexpected change in the conditions

surrounding the property can make impossible or impractical

the continued use of the property for conservation purposes.

Subdivision (i) of paragraph (g)(6) provides that those pur-

poses will nonetheless be treated as protected in perpetuity

if the restrictions limiting use of the property for conserva-

tion purposes ‘‘are extinguished by judicial proceeding and all

of the donee’s proceeds * * * from a subsequent sale or

exchange of the property are used by the donee organization

in a manner consistent with the conservation purposes of the

original contribution.’’

Subdivision (ii) of paragraph (g)(6) is entitled ‘‘Proceeds’’

and, in pertinent part, provides:

for a deduction to be allowed under this section, at the time of the gift the

donor must agree that the donation of the perpetual conservation restric-

tion gives rise to a property right, immediately vested in the donee

organization, with a fair market value that is at least equal to the propor-

tionate value that the perpetual conservation restriction at the time of the

gift * * * bears to the value of the property as a whole at that time. * * *

For purposes of this paragraph (g)(6)(ii), that proportionate value of the

donee’s property rights must remain constant. Accordingly, when a change

in conditions give rise to the extinguishment of a perpetual conservation

restriction under paragraph (g)(6)(i) of this section, 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 * * *.

D. Discussion

1. Introduction

The drafters of section 1.170A–14, Income Tax Regs.,

undoubtedly understood the difficulties (if not impossibility)

under State common or statutory law of making a conserva-

tion restriction perpetual. They required legally enforceable

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(294) KAUFMAN v. COMMISSIONER 307

restrictions preventing inconsistent use by the donor and his

successors in interest. See sec. 1.170A–14(g)(1), Income Tax

Regs. They defused the risk presented by potentially

defeasing events of remote and negligible possibility. See sec.

1.170A–14(g)(3), Income Tax Regs. (sometimes, simply, the

so-remote-as-to-be-negligible standard). They did not, how-

ever, consider the risk of mortgage foreclosure per se to be

remote and negligible and required subordination to protect

from defeasance. See sec. 1.170A–14(g)(2), Income Tax Regs.

(sometimes, simply, the subordination requirement). They

understood that forever is a long time and provided what

appears to be a regulatory version of cy pres to deal with

unexpected changes that make the continued use of the prop-

erty for conservation purposes impossible or impractical. See

sec. 1.170A–14(g)(6), Income Tax Regs. (sometimes, simply,

the extinguishment provision). It is the extinguishment

provision that directly concerns us here.

The following are uncontested facts. The bank held a mort-

gage on the property at the time Lorna Kaufman and NAT

entered into the agreement. The lender agreement provides

that the bank has ‘‘prior claim’’ to all insurance proceeds as

a result of any casualty, hazard, or accident occurring to or

about the property and all proceeds of condemnation. The

lender agreement also provides that the bank was entitled to

those proceeds ‘‘in preference’’ to NAT until the mortgage was

satisfied and discharged.

In Kaufman v. Commissioner, 134 T.C. at 186, we found

that NAT’s right to its proportionate share of future proceeds

was thus not guaranteed and, since we interpreted the

extinguishment provision to lay down an unconditional

requirement that the donee organization be entitled to its

proportionate share of future proceeds, the agreement did not

satisfy the terms of the provision. As a result, we in effect

held that the agreement did not establish a perpetual con-

servation restriction, and the facade easement was not a

qualified real property interest. Id. at 186–187. We found

that Lorna Kaufman’s contribution of the facade easement to

NAT was not, therefore, a qualified conservation contribution

within the meaning of section 170(h)(1). 7 Id. at 187.

7 Our concern in Kaufman v. Commissioner, 134 T.C. 182 (2010), was with the allocation of

proceeds on a sale or, exchange, or involuntary conversion of property following judicial extin-

Continued

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308 136 UNITED STATES TAX COURT REPORTS (294)

2. Petitioners’ Arguments

a. The Agreement Contains the Necessary Language

Petitioners argue that the requirements of the extinguish-

ment provision are met if, in the event a conservation restric-

tion is extinguished by judicial action and the underlying

property is sold, the donee organization ‘‘has a contractual

entitlement against the donor and his successors for the

organization’s proportionate share of the sales proceeds as

defined in Treas. Reg. § 1.170A–14(g)(6)(ii).’’ Petitioners ref-

erence section IV.C. of the agreement, set forth above, and

argue that the agreement ‘‘explicitly sets forth this entitle-

ment.’’ They conclude: ‘‘This is precisely what the Regulation

requires, and all that it requires.’’

As to how NAT would fare if, for instance, the property

were taken by condemnation following the extinguishment of

the facade easement in a judicial proceeding, petitioners

state: ‘‘If the entire property is the subject of a condemnation

action, the mortgagee may have a priority right to condemna-

tion proceeds under a Lender Agreement comparable to that

involved in this case.’’ That, they argue, ‘‘does not absolve the

property owner [Lorna Kaufman] of * * * [her] obligation to

make good on the easement-holding organization’s [NAT’s]

entitlement to a pro-rata share of the proceeds realized from

the sale or involuntary conversion of the property’’. With

respect to the fact that the lender agreement stands the bank

in front of NAT in line for a share of the condemnation pro-

ceeds, they explain: ‘‘The Lender Agreement defines priority

to insurance and condemnation proceeds as between * * *

[the bank] and * * * [NAT]; it has no effect on the donor or

subsequent property owner.’’ NAT, they explain, can still look

to Lorna Kaufman or her successors in interest for

reimbursement.

guishment of a conservation restriction burdening the property. We did not then, nor do we now,

rule on whether the language establishing the restriction must incorporate provisions requiring

judicial extinguishment (and compensation) in all cases in which an unexpected change in sur-

rounding conditions frustrates the conservation purposes of the restriction. Such a rule is sug-

gested, however, by the last sentence in sec. 1.170A–14(c)(2), Income Tax Regs. (‘‘Transfers by

donee’’), although the reference therein to ‘‘paragraph (b)(3)’’ probably should be to ‘‘paragraph

(b)(2)’’ and the cross-reference to sec. 1.170A–14(g)(5)(ii) probably should be to sec. 1.170A–

14(g)(6)(ii). See sec. 1.170A–13, Proposed Income Tax Regs., 48 Fed. Reg. 22941 (May 23, 1983)

(apparently the Secretary failed to update the cross-references in the final regulations).

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(294) KAUFMAN v. COMMISSIONER 309

We shall accept petitioners’ claim that the agreement gives

NAT a contractual right against Lorna Kaufman and her

successors for its proportionate share of the proceeds from

the sale of the property following judicial extinguishment of

the facade easement. In the face of the bank’s priority under

the lender agreement, however, we believe that right to be

insufficient to satisfy the requirements of subdivisions (i) and

(ii) of section 1.170A–14(g)(6), Income Tax Regs. (sometimes,

simply, subdivision (i) or subdivision (ii)). Subdivision (ii)

requires that the donor, at the time of the gift, must agree

that the donation ‘‘gives rise to a property right * * * imme-

diately vested in the donee organization’’. Subdivision (i),

addressing generally the disposition of sale proceeds fol-

lowing judicial extinguishment of conservation restriction,

speaks specifically of ‘‘the donee’s proceeds * * * from a sub-

sequent sale or exchange of the property’’. (Emphasis added.)

While subdivision (ii) specifies that the donee’s vested prop-

erty right must have a value proportional to the value of the

encumbered property, it does not otherwise describe the

property in which the donee must have a vested right. Never-

theless, considering the ‘‘property right’’ language in subdivi-

sion (ii) together with the term ‘‘donee’s proceeds’’ in subdivi-

sion (i), we think it the intent of the drafters of section

1.170A–14(g)(6), Income Tax Regs., that the donee have a

right to a share of the proceeds and not merely a contractual

claim against the owner of the previously servient estate.

Petitioners having in effect conceded that NAT enjoyed no

such right to proceeds under the agreement or the lender

agreement, we conclude that, notwithstanding that section

IV.C. of the agreement tracks the language of subdivision (ii),

the agreement, as qualified by the lender agreement, fails to

satisfy the requirements of section 1.170A–14(g)(6), Income

Tax Regs.

b. Subordination

On brief, petitioners head one of their arguments: ‘‘The

Facade Easement Contribution Satisfies The Requirements

of Treas. Reg. § 1.170A–14(g)(2)’’. They appear to believe that

respondent is arguing that the agreement fails to establish

a perpetual conservation restriction ‘‘because * * * [the

bank] did not subordinate its rights to * * * [NAT’s] right to

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310 136 UNITED STATES TAX COURT REPORTS (294)

receive a proportionate share of condemnation or insurance

proceeds, and therefore the * * * [agreement] somehow fails

to comply with Treas. Reg. § 1.170A–14(g)(6).’’ Put another

way, they appear to believe that respondent has conflated

the subordination requirement found in section 1.170A–

14(g)(2), Income Tax Regs., with the extinguishment provi-

sion found in section 1.170A–14(g)(6), Income Tax Regs., so

that, in order for a donor to show that its donation satisfies

the extinguishment provision, any mortgagee must ‘‘subordi-

nate its interests so that a donee organization has a priority

interest in insurance or condemnation proceeds.’’ Respondent

disavows making that argument, stating that neither his

motion for summary judgment nor our Opinion, Kaufman v.

Commissioner, 134 T.C. 182 (2010), even references section

1.170A–14(g)(2), Income Tax Regs. He believes that he

argued, and we decided, that the facade easement contribu-

tion failed to satisfy the extinguishment provision without

regard to whether the bank had subordinated its rights in

the property to NAT’s rights therein, so as to satisfy the

subordination requirement. He is correct.

Satisfying the subordination requirement immunizes

against the effect of the general rule, described supra section

I.B. of this report, that an easement is lost by the foreclosure

of a mortgage or trust deed burdening the servient tenement,

when such mortgage or trust deed was executed prior to the

creation of the easement. Annotation, ‘‘Foreclosure of mort-

gage or trust deed as affecting easement claimed in, over, or

under property’’, 46 A.L.R. 2d 1197 (1956 & Supp.); see also,

e.g., Camp Clearwater, Inc. v. Plock, 146 A.2d 527, 536–537

(N.J. Super. Ct. Ch. Div. 1958) (‘‘The foreclosure of a mort-

gage vests in the purchaser at the foreclosure sale a legal

right to the property free of easements and encumbrances

imposed upon it subsequent to the mortgage provided that

the holders of such easement rights or encumbrances are

made parties to the foreclosure.’’), affd. 157 A.2d 15 (N.J.

Super. Ct. App. Div. 1959).

We did not base our grant of partial summary judgment

for respondent on any consideration of the consequences of

foreclosure of the bank’s mortgage. We based our grant solely

on the fact, conceded by petitioners, that, because, following

a judicial extinguishment of the facade easement, NAT might

not receive its proportional share of any future proceeds, the

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(294) KAUFMAN v. COMMISSIONER 311

agreement failed to satisfy the requirements of section

1.170A–14(g)(6), Income Tax Regs., and so failed to satisfy

the enforceability-in-perpetuity requirements under section

1.170A–14(g), Income Tax Regs., and section 170(h)(2)(C) and

(5)(A). We think it unnecessary to our result, and reach no

conclusion, as to whether the bank subordinated its rights in

the property to the right of NAT to enforce the facade ease-

ment so as to satisfy the requirements of section 1.170A–

14(g)(2), Income Tax Regs.

c. Section 1.170A–14(g)(3), Income Tax Regs.

Referring to the so-remote-as-to-be-negligible standard

found in section 1.170A–14(g)(3), Income Tax Regs., peti-

tioners argue that, in determining whether the enforce-

ability-in-perpetuity requirement embodied in section

1.170A–14(g), Income Tax Regs., is met, ‘‘a court must con-

sider * * * the remoteness of any future event that is

alleged to defeat the interest passing to charity.’’ They then

hypothesize ‘‘a very low probability of occurrence’’ for a set

of events 8 that would deprive NAT of its proportional share

of the proceeds (determined under section 1.170A–14(g)(6)(ii),

Income Tax Regs.) following judicial extinguishment of the

facade easement and a subsequent sale of the property. They

conclude that the possibility of such deprivation is ‘‘so remote

as to be negligible’’ and, thus, to be disregarded under the so-

remote-as-to-be-negligible standard in determining whether

the facade easement is enforceable in perpetuity.

As stated, respondent argues that the so-remote-as-to-be-

negligible standard is irrelevant to the extinguishment provi-

sion. Respondent believes the extinguishment provision

establishes ‘‘a strict, standalone requirement enacted to

ensure that the conservation purposes of an extinguished

easement be carried out by the donee as nearly as possible.’’

He considers the extinguishment provision to establish a rule

‘‘similar to the rule of cy pres’’. He also argues: ‘‘It assumes

an event, extinguishment of the easement, that is virtually

by definition, remote. Therefore, it would be illogical to read

8 ‘‘Condemnation of the property, judicial extinguishment of the easement, existence of the

subordination agreement at that time, insufficiency of the condemnation proceeds to cover the

bank’s prior claim to proceeds, and judgment-proof status of the property owner’’. Attaching a

10-percent probability to the occurrence of each of those events, they calculate a joint probability

of 0.001 percent.

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312 136 UNITED STATES TAX COURT REPORTS (294)

* * * [the so-remote-as-to-be-negligible standard] into * * *

[the extinguishment provision].’’

We described supra section I.B. of this report some of the

means by which conservation restrictions may be modified or

terminated, and we voiced our belief supra section I.D.1. of

this report that the drafters of section 1.170A–14(g), Income

Tax Regs., sought to mitigate or otherwise address the threat

to the enforceability-in-perpetuity requirement presented by

some of those possibilities. Satisfying the so-remote-as-to-be-

negligible standard immunizes against the risk that acts or

events of such low probability will defeat the donee’s interest

in the servient property. Section 1.170A–14(g)(3), Income Tax

Regs., is silent with respect to the right of the donee to any

recompense on account of the actual occurrence of the risk,

and it appears that the drafters’ intent was simply to fore-

close any argument that a charitable contribution deduction

is unavailable because the donee’s interest could be defeated

by remote, improbable events. That point is nicely illustrated

by Stotler v. Commissioner, T.C. Memo. 1987–275, a case

petitioners cite for the proposition that the enforceability-in-

perpetuity requirement is per se satisfied if the possibility of

a defeasing event is so remote as to be negligible. 9 The case

stands for no such thing, addressing neither section 1.170A–

14(g), Income Tax Regs., in general, nor paragraph (g)(6)

thereof in particular, since the contribution in the case

occurred before the effective date of that regulation. To deter-

mine whether the contribution in that case satisfied the

enforceability-in-perpetuity requirement as it existed before

promulgation of section 1.170A–14(g), Income Tax Regs., we

had to determine whether the possibility of condemnation of

the servient property was so remote as to be negligible, as

required by section 1.170A–1(e), Income Tax Regs. We found

in the affirmative, notwithstanding that, if the particular

property in question were condemned, the underlying ease-

ment would terminate, and the donor would be entitled to all

of any condemnation proceeds, as if the property had not

been burdened by the easement.

9 Satullo v. Commissioner, T.C. Memo. 1993–614, affd. without published opinion 67 F.3d 314

(11th Cir. 1995), applying sec. 1.170A–14(g), Income Tax Regs., might be taken as support for

the proposition, but petitioners do not cite the case for that point, and our discussion of the

point was speculative, since the taxpayers in the case did not set forth facts showing that the

possibility of foreclosure of the easement was so remote as to be negligible.

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(294) KAUFMAN v. COMMISSIONER 313

It perhaps belabors the obvious to point out that the risk

addressed by the extinguishment provision—an ‘‘unexpected’’

change in conditions surrounding the property—likely

describes a class of events the range of whose probabilities

includes, if it is not coincident with, the range of proba-

bilities of events that are so remote as to be negligible. One

does not satisfy the extinguishment provision, however,

merely by establishing that the possibility of a change in

conditions triggering judicial extinguishment is unexpected,

for, unlike the risk addressed by the so-remote-as-to-be-neg-

ligible standard, to satisfy the extinguishment provision, sec-

tion 1.170A–14(g)(6), Income Tax Regs., provides that the

donee must ab initio have an absolute right to compensation

from the postextinguishment proceeds for the restrictions

judicially extinguished. It is Lorna Kaufman’s failure to

accord NAT an absolute right to a fixed share of the

postextinguishment proceeds that causes her gift to fail the

extinguishment provision. It is not a question as to the

degree of improbability of the changed conditions that would

justify judicial extinguishment of the restrictions. Nor is it a

question of the probability that, in the case of judicial

extinguishment following an unexpected change in condi-

tions, the proceeds of a condemnation or other sale would be

adequate to pay both the bank and NAT. As we said in Kauf-

man v. Commissioner, 134 T.C. at 186, the requirement in

section 1.170A–14(g)(6)(ii), Income Tax Regs., that NAT be

entitled to its proportionate share of the proceeds 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.’’

E. Conclusion

Petitioners have failed to persuade us that we erred in

Kaufman v. Commissioner, 134 T.C. 182 (2010), in con-

cluding that the contribution of the facade easement failed as

a matter of law to comply with the enforceability-in-per-

petuity requirements under section 1.170A–14(g)(6), Income

Tax Regs. We therefore affirm our grant of partial summary

judgment to respondent on the grounds set forth in Kauf-

man. We shall deny petitioners’ motion for reconsideration.

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314 136 UNITED STATES TAX COURT REPORTS (294)

II. Cash Contribution

A. Introduction

In determining the deficiency for 2003, respondent dis-

allowed a charitable contribution deduction of $16,870 peti-

tioners claimed for a cash contribution to NAT. Respondent

explained that he disallowed the deduction ‘‘because it was

made subject to or in contemplation of subsequent event(s).’’

In determining the deficiency for 2004, respondent did not

disallow any charitable contribution deduction on account of

a cash contribution to NAT. Lorna Kaufman paid $3,332 to

NAT in 2004. The parties have both amended their pleadings

relating to Lorna Kaufman’s payments to NAT.

In May 2010, before trial, petitioners amended their peti-

tion in the belief that respondent’s disallowance of the cash

contribution deduction for 2003 was based on the ground

that Lorna Kaufman’s obligation to make the contribution

was conditional on her receipt of a qualified appraisal (the

conditional-payment ground). Petitioners added the following

to their prayer for relief: ‘‘[I]f petitioners [sic] cash contribu-

tions to the Donee were made subject to a condition, peti-

tioners are entitled to [a] deduction of $16,840 in the 2004

tax year.’’

In June 2010, after trial, we allowed respondent to amend

the answer to, among other things, assert both an increased

deficiency and an accuracy-related penalty for 2004. He justi-

fied that amendment on the ground that he had only recently

become aware that Lorna Kaufman paid $3,332 to NAT in

2004 and that petitioners claimed a charitable contribution

deduction therefor on their 2004 return. By the amendment

to answer, he first argued that $300 of the $3,332 Lorna

Kaufman paid to NAT in 2004 is not deductible because it

reimbursed NAT for a fee it paid to the bank on her behalf.

Petitioners apparently concede that the $300 payment is not

deductible, a concession we accept, and we shall not further

discuss that payment.

As to both the remaining $3,032 Lorna Kaufman paid to

NAT in 2004 and the $16,840 she had paid it in 2003,

respondent by the amendment to answer sets forth two

grounds for disallowing any charitable contribution deduc-

tion. First, those sums were paid in exchange for substantial

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(294) KAUFMAN v. COMMISSIONER 315

services provided by NAT to petitioners ‘‘to facilitate peti-

tioners’ deduction of a large, unjustified noncash contribution

of a facade easement that both petitioners and NAT knew had

no value’’ (the quid pro quo ground). Second, the total of the

payments, $19,872, ‘‘was based on the value of the facade

easement and/or the value of the [resulting] tax deduction’’

petitioners claimed, either, or both, of which could turn out

to be zero (i.e., the conditional-payment ground). With

respect only to the $3,032 paid to NAT in 2004, respondent

adds a third ground: ‘‘Petitioners relied on a contempora-

neous written acknowledgment that they knew was inac-

curate in claiming the erroneous charitable deduction of

$3,032.’’

Respondent bears the burden of proof with respect to the

increased deficiency and penalty for 2004 resulting from his

disallowance of a deduction for the $3,032 paid by Lorna

Kaufman to NAT in 2004. See Rule 142(a)(1). He also bears

the burden of proof with respect to the quid-pro-quo ground

for disallowing petitioners a deduction for Lorna Kaufman’s

payment of $16,840 to NAT in 2003 (and now, because of the

amended petition, claimed, alternatively, to be deductible for

either 2003 or 2004). He bears that burden because the quid-

pro-quo ground constitutes new matter, requiring petitioners

to present different evidence from that necessary to rebut his

original ground (the conditional-payment ground) for dis-

allowing the deduction in 2003. See id.; Shea v. Commis-

sioner, 112 T.C. 183, 191 (1999).

B. Discussion

1. Conditional Payment

Respondent’s original explanation of the conditional-pay-

ment ground, supplemented by an argument in the amended

petition, is that the $16,840 Lorna Kaufman paid to NAT in

2003 and the $3,032 she paid to it in 2004 (in total, $19,872)

were conditional payments (subject to refund) if either the

appraisal reported the value of the facade easement to be

zero or we disallow petitioners’ charitable contribution deduc-

tion for the contribution of the facade easement to NAT. Peti-

tioners answer respondent’s first alternative as follows:

‘‘While there may be an argument that the * * * [$16,840]

cash donation * * * made in 2003, became ‘final’ and deduct-

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316 136 UNITED STATES TAX COURT REPORTS (294)

ible in 2004, this does not support a complete disallowance,

but simply moves the deduction into 2004.’’ Petitioners

answer respondent’s second alternative: ‘‘The * * * wit-

nesses [from NAT] and Petitioners were in uniform agreement

that * * * [it] was not their understanding’’ that ‘‘Petitioners

might be entitled to a refund of the cash donation should

their tax deduction for the facade easement contribution be

disallowed.’’

Neither party disputes that the amount of the cash pay-

ment contemplated from Lorna Kaufman was a function of

the appraised value of the facade easement, which was not

determined until 2004. Respondent argues that, at the end of

2003, it was possible that the appraisal would show the

facade easement to be valueless, thus entitling Lorna Kauf-

man to a refund of the $16,840 she paid in that year.

Respondent further argues that possibility was not so remote

as to be negligible, thereby depriving petitioners of a 2003

deduction for the cash payment. See sec. 1.170A–1(e), Income

Tax Regs. As stated, petitioners concede there ‘‘may be’’ an

argument that the $16,840 payment became final and, if

deductible, is deductible for 2004. We assume that peti-

tioners’ concession is based on their receiving the appraisal

in 2004 and their conclusion that, before receipt of the

appraisal in 2004, there was the possibility that NAT would

refund some or all of the $16,840 Lorna Kaufman had paid

it in 2003. Petitioners bear the burden of proving that, at the

end of 2003, the possibility of a zero appraisal value was not

so remote as to be negligible. They have not carried that bur-

den. Indeed, there is in evidence an email from Mr. Bahar

(NAT’s area manager) to Gordon Kaufman, dated February 6,

2004, assuring him that properties in a historic neighborhood

(like the property) ‘‘are not at a market value disadvantage

when compared to the other properties in the same neighbor-

hood.’’ We sustain respondent’s disallowance of a deduction

for $16,840 paid by Lorna Kaufman to NAT in 2003.

Respondent’s alternative argument that the cash payments

were conditional because refundable if we disallow any

deduction for the facade easement contribution is based on

the clause in the application that the ‘‘cash endowment con-

tribution is set at 10% of the value of the donation tax deduc-

tion’’. (Emphasis added.) We found credible the testimony of

both NAT’s representatives and petitioners that that was not

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(294) KAUFMAN v. COMMISSIONER 317

the intent of the clause. We also found credible Gordon

Kaufman’s testimony that petitioners did not expect to

receive any money back. We find that the cash contributions

were not conditional on the success of petitioners’ charitable

contribution deductions for the contribution of the facade

easement to NAT.

After she received the appraisal in January 2004, Lorna

Kaufman had no right to a refund of $19,872 of cash pay-

ments made to NAT.

2. Quid Pro Quo

a. Introduction

Respondent questions Lorna Kaufman’s charitable intent.

He argues: ‘‘[T]he record shows that petitioners made the

cash payments because they knew they had to in order for

NAT to accept the donation of the facade easement and to

sign their Form 8283, which allowed them to take a deduc-

tion worth over $75,000.’’ Additionally, he argues:

NAT provided substantial services to petitioners in exchange for these

cash payments. NAT accepted and processed the preservation restriction

agreement application, provided a form preservation restriction agreement

that it had developed and negotiated with Massachusetts Historical

Commission, dealt with the local and federal authorities in obtaining the

necessary approvals, and dealt with Lorna Kaufman’s mortgage holder,

Washington Mutual, procuring Washington Mutual’s execution of the

‘‘Lender Agreement.’’ * * * [NAT’s representative] even gave * * *

[Gordon] Kaufman tax advice.

Most importantly, NAT gave * * * [Gordon] Kaufman the names of

NAT-approved appraisers * * *. * * *

In his reply brief, respondent mitigates his first argument:

‘‘Respondent * * * agrees with the general proposition that

the expected receipt of a tax deduction is not a benefit that

invalidates the deduction.’’ Nevertheless, he continues to

argue that petitioners are entitled to no deduction for the

cash payments because Lorna Kaufman was ‘‘required’’ to

make them.

b. Required Cash Donation

Petitioners answer respondent’s first argument (a cash

donation was required) as follows: ‘‘[NAT] solicits cash dona-

tions to enable it to pay its operating expenses, and to build

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318 136 UNITED STATES TAX COURT REPORTS (294)

its stewardship fund so that it can monitor eased properties

and enforce its rights under facade conservation easements

in perpetuity.’’ They add that, ‘‘[a]part from donors’ cash con-

tributions, * * * [NAT] had no meaningful source of [oper-

ating] funds’’. They deny that NAT’s acceptance of the facade

easement and its issuance to petitioners of a Form 8283 were

conditioned on its receipt of a cash contribution. They claim

that many donee organizations benefiting from preservation

restrictions require accompanying cash contributions. They

point to the parties’ stipulation 10 that the National Park

Service currently advises visitors to its Web site: 11

Many easement holding organizations require the easement donor to make

an additional donation of funds to help administer the easement. These

funds are often held in an endowment that generates an annual income

to pay for easement administration costs such as staff time and travel

expenses, or needed legal services.

Of course, we agree with respondent: ‘‘Only unrequited

payments to qualified recipients are deductible. Hernandez v.

Commissioner, 490 U.S. 680, 690 (1989).’’ Neither party, how-

ever, has provided us with any authority governing the

deductibility of a payment to a charitable organization when

the organization’s acceptance of a contribution of property is

conditioned on the donor’s cash donation sufficient to main-

tain the property and contribute to operating costs. 12 The

practice may be common, and no doubt provides funds to

serve the charitable purposes of the donee. In the situation

described by the National Park Service, it is difficult to see

how the cash donation benefits the donor other than in

making possible the contribution of the associated property

10 Respondent

objects to the stipulation as irrelevant; we disagree and overrule the objection.

11 http://www.nps.gov/hps/tps/tax/download/easements—2010.pdf (last visited, Feb. 2, 2011), at

which can be found a pamphlet, ‘‘Easements to Protect Historic Properties: A Useful Historic

Preservation Tool with Potential Tax Benefits’’. Language similar to the quoted language is at

8.

12 In McMillan v. Commissioner, 31 T.C. 1143 (1959), we disallowed a charitable contribution

deduction for $75 paid by adoptive parents to a charitable organization operating an adoption

program as a prerequisite to placing a child in their home preliminary to an adoption. The pay-

ment was regarded by the organization as a fee for service to cover part of the cost of operating

an adoption program. We concluded that whatever charitable aspects there may have been to

the payment lose significance when compared to the personal benefits that would result to the

taxpayers from the completed adoption. McMillan is distinguishable because, as discussed in the

text, the personal benefits Lorna Kaufman received were the accomplishment of the contribution

and entitlement to charitable contribution deductions on account of both the facade easement

and cash contributions.

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(294) KAUFMAN v. COMMISSIONER 319

and giving rise to an added charitable contribution deduction

(an acceptable benefit).

While the parties have wrestled over the value of the

facade easement, given our disposition of the facade ease-

ment contribution issue on legal grounds, that is not a ques-

tion of fact we must decide. Moreover, respondent does not

claim that the cash payments were in consideration for NAT’s

facilitation of a sham transfer. Seeing no benefit to Lorna

Kaufman other than facilitation of her contribution of the

facade easement (which we discuss in the next paragraph)

and an increased charitable contribution deduction, we shall

not deny petitioners’ deduction of the cash payments on the

ground that the application required a ‘‘donor endowment’’ to

accompany the contribution of facade easement.

c. Fee for Services

As to respondent’s second argument (a fee for services),

petitioners principally respond that NAT’s actions were taken

primarily to benefit it, and any benefit to petitioners was

ancillary. Recently, in Scheidelman v. Commissioner, T.C.

Memo. 2010–151, we addressed a similar claim by the

Commissioner that a cash payment made to NAT ancillary to

a facade easement contribution to it was a quid pro quo for

NAT’s assistance in obtaining a tax deduction. We stated the

familiar rule: ‘‘A payment of money or transfer of property

generally cannot constitute a charitable contribution if the

contributor expects a substantial benefit in return.’’ Id.

(citing United States v. Am. Bar Endowment, 477 U.S. 105,

116 (1986)). We elaborated:

‘‘If a transaction is structured in the form of a quid pro quo, 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.’’

Id. (quoting Graham v. Commissioner, 822 F.2d 844, 849 (9th

Cir. 1987), affd. sub nom. Hernandez v. Commissioner, 490

U.S. 680 (1989)). The burden was on the taxpayers in

Scheidelman to prove that they made no quid pro quo pay-

ment to NAT for something of substantial value or, if they

did, that their payment exceeded the value of what they

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320 136 UNITED STATES TAX COURT REPORTS (294)

received. Because they failed to provide evidence necessary to

carry their burden, we denied them any deduction for their

cash payment to NAT. Id.

The shoe is on the other foot here, since, as discussed

supra section II.A. of this report, respondent’s quid-pro-quo

ground constitutes new matter, requiring different evidence,

for which respondent bears the burden of proof pursuant to

Rule 142(a)(1). For respondent to succeed with his fee-for-

services argument, the evidence must show a quid pro quo;

i.e., that, reciprocally, Lorna Kaufman made a payment and

NAT provided services of substantial value. Respondent

argues that the evidence shows that Lorna Kaufman’s pay-

ments reciprocated NAT’s accepting and processing her

application, providing her with a form preservation restric-

tion agreement, undertaking to obtain approvals from the

necessary government authorities, securing the lender agree-

ment from the bank, giving Gordon Kaufman basic tax

advice, and providing him with a list of approved appraisers.

The evidence, however, is ambiguous as to whether Lorna

Kaufman’s payments reciprocated NAT’s undertakings. We do

have in evidence NAT’s October 13, 2003, introductory letter

to Lorna Kaufman, representing that her contribution to NAT

would require very little effort by her because NAT would

handle all of the red tape and paperwork. We also have in

evidence Mr. Kearns’ (NAT’s president’s) December 16, 2003,

letter to her, asking her to sign the agreement and send NAT

a check for $15,840. By that date, however, NAT had under-

taken and completed many of the tasks of concern to

respondent although it had received only a $1,000 deposit

from her. Moreover, Mr. Kearns also states in that letter

that, if, by February 28, 2004, the bank did not subordinate,

she failed to receive historic certification of the property, or

an appraisal could not be obtained, NAT would join with her

in voiding the agreement, reimburse her costs, and refund

her cash contribution. Certainly, NAT was accommodating to

Lorna Kaufman, but it was in its interest as much as hers

to complete the contribution of the facade easement. We

assume moreover that NAT undertook the delineated tasks in

anticipation of a cash contribution if a facade contribution

were made but cognizant of the risk that a facade contribu-

tion might not be made (or might be unwound if the delin-

eated conditions were not satisfied). The evidence does not

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(294) KAUFMAN v. COMMISSIONER 321

convince us that Lorna Kaufman’s payments reciprocated

NAT’s undertakings. Finally, we assume that respondent’s

position is that NAT’s undertakings were of monetary value

to Lorna Kaufman (saving her time and expense), yet the

record is devoid of evidence of the value (much less the

substantial value) of those undertakings. Respondent has

failed to make the necessary showing of a quid pro quo. We

shall not disallow petitioners a deduction for the cash pay-

ments as a fee-for-services quid pro quo, as argued by

respondent.

3. Failure To Substantiate

Section 170(f)(8)(A) provides that a taxpayer may not

deduct any contribution of $250 or more unless she substan-

tiates the contribution with a contemporaneous written

acknowledgment of the contribution by the donee organiza-

tion that meets the requirements of section 170(f)(8)(B). The

donee’s written acknowledgment must state the amount of

cash and describe other property contributed, indicate

whether the donee organization provided any goods or serv-

ices in consideration for the contribution, and provide a

description and good faith estimate of the value of any goods

or services provided by the donee organization. Sec.

170(f)(8)(B).

In Addis v. Commissioner, 118 T.C. 528, 537 (2002) (citing

sections 1.170A–1(h)(4)(ii) and 1.170A–13(f)(7), Income Tax

Regs.), affd. 374 F.3d 881 (9th Cir. 2004), we stated:

Section 170(f)(8) disallows a charitable contribution deduction in cir-

cumstances such as these, where the donee organization’s contempora-

neous written acknowledgment is erroneous and is not a good faith esti-

mate of the value of goods or services it provided, and where the taxpayer

unquestioningly and self-servingly uses that erroneous statement to claim

a charitable contribution larger than the one to which he or she would be

entitled under section 170. * * *

NAT sent Lorna Kaufman letters acknowledging her con-

tributions of both the facade easement and the cash pay-

ments. In those letters it certified that she had received no

goods or services in return for her gifts. Respondent catalogs

most of the items we described supra section II.B.2. of this

report (e.g., NAT negotiated with government agencies to

obtain the necessary approvals). He then claims that peti-

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322 136 UNITED STATES TAX COURT REPORTS (294)

tioners should be denied a charitable contribution deduction

for Lorna Kaufman’s cash payments to NAT because (1) NAT’s

acknowledgment letters ‘‘were erroneous and did not contain

a good faith estimate of the value of the goods or services

NAT provided’’ and (2) ‘‘petitioners ‘unquestioningly and self-

servingly’ relied on these letters, which they knew to be inac-

curate, to claim deductions for the cash payments’’.

Respondent’s argument here is limited by his pleading to

the $3,032 payment Lorna Kaufman made to NAT in 2004. It

also suffers from respondent’s failure to prove the monetary

value, if any, of what Lorna Kaufman may have received

from NAT. Moreover, respondent has failed to prove that

Lorna Kaufman knew the items had value (if, indeed, they

did) and, therefore, knew that the letters were inaccurate (if,

indeed, they were). We shall not disallow a deduction for the

2004 $3,032 cash payment on the ground of a failure to

substantiate.

C. Conclusion

Petitioners are entitled to a charitable contribution deduc-

tion for 2004 of $19,872 for cash payments Lorna Kaufman

made to NAT in 2003 and 2004.

III. Penalty

A. Introduction

Section 6662 imposes an accuracy-related penalty if any

part of an underpayment of tax required to be shown on a

return is due to, among other things, negligence or disregard

of rules or regulations (without distinction, negligence), a

substantial understatement of income tax, or a substantial

valuation misstatement. Sec. 6662(a) and (b)(1), (2), and (3).

The penalty is 20 percent of the portion of the underpayment

of tax to which the section applies. Sec. 6662(a). In the case

of a gross valuation misstatement, 20 percent is increased to

40 percent. Sec. 6662(h)(1).

Section 6664(c) provides a reasonable cause exception to

the accuracy-related penalty. Generally, under section

6664(c)(1), no penalty is imposed under section 6662 with

respect to any portion of an underpayment if it is shown that

there was reasonable cause for such portion and that the tax-

payer acted in good faith with respect to such portion. The

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(294) KAUFMAN v. COMMISSIONER 323

reasonable cause exception does not apply, however, in the

case of a substantial or gross valuation overstatement with

respect to property for which a charitable contribution deduc-

tion was claimed under section 170 unless the claimed value

of the property was based on a ‘‘qualified appraisal’’ by a

‘‘qualified appraiser’’ and the taxpayer made a good faith

investigation of the value of the contributed property. Sec.

6664(c)(2) and (3).

Under section 7491(c), the Commissioner bears the burden

of production with regard to penalties and must come for-

ward with sufficient evidence indicating that it is proper to

impose penalties. Higbee v. Commissioner, 116 T.C. 438, 446

(2001). However, once the Commissioner has met the burden

of production, the burden of proof remains with the taxpayer,

including the burden of proving that the penalties are

inappropriate because of reasonable cause. Id. at 446–447.

Initially, respondent determined that, on account of his

disallowance of their deduction for the contribution of the

facade easement to NAT, petitioners underpaid the tax

required to be shown on their 2003 return and were liable for

the accuracy-related penalty on the grounds of either neg-

ligence, a substantial understatement of income tax, a

substantial valuation misstatement, or a gross valuation

misstatement. On brief, however, respondent concedes that,

if we do not reach the issue of valuation of the facade ease-

ment contribution because we sustain our grant of summary

judgment for respondent (so that the deduction is denied as

a matter of law), no accuracy-related penalty on the grounds

of either a substantial or gross valuation misstatement will

apply. Respondent adds: ‘‘However, the 20% negligence and

substantial understatement of tax penalties will still be

applicable, although not imposed cumulatively.’’ 13

B. Negligence Penalty

Petitioners argue, and respondent agrees, that, because it

presents an issue of first impression, no negligence penalty

is warranted on account of our disallowing petitioners a

deduction for the contribution of the facade easement if the

13 Apparently on the basis of his abandonment of valuation misstatement as grounds for an

accuracy-related penalty if we sustain our order granting him partial summary judgment (which

we do), respondent makes no argument that petitioners are precluded by sec. 6664(c)(2) from

arguing for application of the sec. 6664(c)(1) reasonable cause exception.

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324 136 UNITED STATES TAX COURT REPORTS (294)

disallowance is on the ground that the contribution failed as

a matter of law to comply with the enforceability-in-per-

petuity requirements under section 1.170A–14(g)(6), Income

Tax Regs. See, e.g., Rolfs v. Commissioner, 135 T.C. 471, 496

(2010) (considering, among other things, ‘‘uncertain state of

the law’’ in sustaining section 6664(c)(1) ‘‘reasonable cause’’

and ‘‘good faith’’ defense).

Nevertheless, respondent argues for petitioners’ negligence

in claiming a deduction for the contribution of the facade

easement on the basis of respondent’s claim that petitioners

‘‘knew * * * that * * * [the contribution of the facade ease-

ment] would not diminish the value of their property.’’ What

petitioners knew is a factual question hotly contested by the

parties. The question involves not only the subjective issue of

their states of mind but the objective issue of how much, if

any, conveyance of the facade easement reduced the value of

the property, an issue the parties address with expert testi-

mony. ‘‘Summary judgment is intended to expedite litigation

and avoid unnecessary and expensive trials.’’ Fla. Peach

Corp. v. Commissioner, 90 T.C. 678, 681 (1988). It may be

granted only if there is no genuine issue as to any material

fact. See Rule 121(b). We granted respondent partial sum-

mary judgment, disallowing petitioners’ deductions for Lorna

Kaufman’s contribution of the facade easement to NAT, on the

basis that the contribution failed as a matter of law to

comply with the enforceability-in-perpetuity requirements

under section 1.170A–14(g)(6), Income Tax Regs. We had no

need to consider the value of the facade easement and think

it consistent with the underlying premises for summary adju-

dication that we not now be required to invest the time and

effort necessary to resolve the difficult factual questions of

intent and value presented by respondent’s claim of neg-

ligence. See, e.g., Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010–283 (illustrating the laborious undertaking that

determining the value of a conservation restriction may

present to the trier of fact).

Moreover, whatever argument respondent might make that

we should now, in the penalty phase of the case, focus on

value as a basis for negligence is negated by his abandon-

ment of value as a basis for imposition of the accuracy-

related penalty on account of a valuation misstatement with

respect to the facade easement.

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(294) KAUFMAN v. COMMISSIONER 325

We shall, for the reasons stated, reject respondent’s argu-

ment that petitioners negligently overstated the charitable

contribution deductions they claimed on account of the facade

easement contribution. Because respondent has made no

other argument for petitioners’ negligence in connection with

those deductions, we find that, in connection with those

deductions, they were not negligent.

With respect to our disallowance of a deduction for the

2003 cash contribution, petitioners virtually concede that a

2003 deduction was in error. Petitioners were negligent in

claiming that deduction and have not established reasonable

cause and good faith as a defense. We sustain an accuracy-

related penalty with respect to the resultant underpayment.

C. Substantial Understatement of Income Tax

Section 6662(d)(1)(A) defines ‘‘substantial understatement

of income tax’’ as an amount exceeding the greater of 10 per-

cent of the tax required to be shown on the return or $5,000.

Respondent asserts that substantial understatements of

income tax exist for 2003 and 2004. Each of the understate-

ments of income tax, after disallowance of the charitable con-

tribution deductions attributable to the easements, is greater

than $5,000 and greater than 10 percent of the amount of tax

required to be shown on the return. Respondent has met his

burden of production for 2003 and 2004.

In opposition to respondent’s claims of underpayments of

tax due to section 6662(b)(2) substantial understatements of

income tax, petitioners raise a section 6664(c)(1) reasonable

cause and good faith defense. Respondent answers in part:

[F]or the same reasons petitioners are liable for the negligence prong of

the penalty under I.R.C. § 6662(b)(2), they cannot escape the penalty

under the reasonable cause exception: They * * * [knew] that the ease-

ment likely had no value and yet nonetheless claimed a charitable deduc-

tion for it. They did not act in good faith.

Consistent with our refusal supra section III.B. of this

report to consider misvaluation as a basis for negligence, we

refuse to consider it a reason for the underpayment in

income tax that respondent has shown. We granted

respondent partial summary judgment because, and only

because, Lorna Kaufman’s contribution of the facade ease-

ment to NAT failed as a matter of law to comply with the

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326 136 UNITED STATES TAX COURT REPORTS (294)

enforceability-in-perpetuity requirements under section

1.170A–14(g)(6), Income Tax Regs. We think it consistent

with the underlying premises for summary adjudication that

we consider only that ground as giving rise to petitioners’

underpayments of tax for 2003 and 2004. 14

As respondent concedes, see supra section III.B. of this

report, that ground presents an issue of first impression.

Consistent with our analysis in Rolfs v. Commissioner, supra

at 495–496, we find that there was reasonable cause for the

portions of petitioners’ 2003 and 2004 underpayments due to

that ground and that they acted in good faith with respect

to those portions.

D. Conclusion

We sustain an accuracy-related penalty only on the basis

of petitioners’ negligence with respect to the underpayment

of their 2003 tax that is attributable to Lorna Kaufman’s

cash payments to NAT in 2003.

IV. Conclusion

We shall issue an order denying petitioners’ motion for

reconsideration of our grant of partial summary judgment.

Otherwise,

An appropriate order will be issued, and

decision will be entered under Rule 155.

f

14 Putting aside the disallowance of the cash contribution for 2003, which we dealt with supra

sec. III.B. of this report.

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