UNITED STATES TAX COURT

T.C. Memo. 2006-16

UNITED STATES TAX COURT

HOWARD J.

KAPLAN AND BRENDA L. KAPLAN, ET AL.,¹ Petitioners y..

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 20716-03, 20717-03,

20718-03.

Filed February 2, 2006.

Thomas F. Foster, Robert A. Brinson, and Christopher C.

Finan,

for petitioners.

James R. Rich,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge:

Respondent determined for the taxable year

¹Cases of the following petitioners are consolidated herewith:

Matthew B. Marceron and Sherry R. M.arceron, docket No.

20717-03, and Dean A. Caldwell and Cathy M. Caldwell, docket No.

20718-03.

2MLYJMD fEB

2 2006

- 2 1999 the following deficiency in, and accuracy-related penalty

under section 6662(a)2 on, the Federal income tax (tax) of petitioners in each of these consolidated cases:

Petitioners

Howard J. Kaplan and

Brenda L. Kaplan

Matthew B. Marceron and

Sherry R. Marceron

Dean A. Caldwell and

Cathy M. Caldwell

Deficiency

$252,728

Accuracy-Related

Penalty

$91,714

18,169

6,839

137,931

49,736

The issues remaining for decision are:

(1)

Are petitioners in each of these cases entitled for

1999 to a deduction under section 170(a)

charitable contribution?

(2)

for a claimed noncash

We hold that they are not.

Are petitioners in each of these cases liable for 1999

for the accuracy-related penalty under section 6662(a)?

We hold

that they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

At the time they filed their respective petitions, Howard J.

Kaplan (Mr. Kaplan) and Brenda L. Kaplan (Ms. Kaplan) resided in

Winston-Salem, North Carolina, Matthew B. Marceron (Mr. Marceron)

and Sherry R. Marceron (Ms. Marceron) resided in Clemmons, North

Carolina, and Dean A. Caldwell

(Mr. Caldwell) and Cathy.M.

2All section references are to the Internal Revenue Code in

effect for the year at issue.

All Rule references are to the Tax

Court Rules of Practice and Procedure.

- 3 Caldwell

(Ms. Caldwell) resided in Winston-Salem, North Carolina.

In January 1995, KQC Investors, LLC

(KQC), a limited liabil-

ity company organized under North Carolina law, was formed to

acquire and develop real property, primarily for lease to early

childhood educational agencies, including Federal Head Start

(Head Start) agencies.

During 1999, Mr. Kaplan, Mr. Marceron,

and Mr. Caldwell, the three members of KQC, held the following

percentage interests in that limited liability company:

Name

Mr.

Mr.

Mr.

of member

Kaplan

Marceron

Caldwell

Percentage interest

59.4

5

35.6

In 1997, KQC purchased for $105,041 real property located at

474 Maple Street, Helena, Ohio (Maple Street), which consisted of

approximately 2.04 acres of land (KQC's land) on which there was

a school building that was constructed in 1958 and remodeled in

1994

(1958 school building).

(We shall sometimes refer to

(1) the property on Maple Street that KQC purchased in 1997 as

KQC's land and 1958 school building and (2) the property on Maple

Street that KQC purchased in 1997, including any improvements

made to that property thereafter (discussed below), as the

improved property on Ma'ple Street.)

warranty deed (April 18,

On April 18,

1997, a general

1997 general warranty deed) was executed

that transferred to KQC KQC's land and 1958 school building that

KQC purchased in 1997.

- 4 -

On or about April 21, 1997, KQC leased KQC's land and 1958

school building to Texas Migrant Council,

Inc.

(TMC), an organi-

zation described in sections 170(c) and 501(c) that provided Head

Start services to migrant families in communities throughout,

iñter alia, Ohio.

TMC intended to, and did, use KQC's land and

1958 school building that it leased from KQC in order to conduct

Head Start activities in Helena, Ohio.

The lease of KQC's land and 1958 school building by KQC to

TMC (April 21, 1997 lease) provided in pertinent part:

t

WHEREAS, Lessor [KQC] plans to purchase a 6,100

square foot child care facility located in * * * Helena, * * * Ohio on the property more particularly

described on Exhibit Al31 (the "Facility");

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WHEREAS, Lessee [TMC) is an agency of and regulated by the United States Department of Health and

Human Services ("HHS");

NOW, THEREFORE, in consideration of the premises

and of their mutual undertakings, the parties hereto

agree as follows:

1.

Lease of Real Property; Term:

Lessor, in

consideration of the rents hereinafter reserved, and

the terms, covenants, conditions and agreements set

forth herein to be kept and performed by Lessee, does

hereby agree to demise and let unto Lessee and Lessee

does hereby agree to hire and take from Lessor, the

following described assets, rights, interests and other

properties owned by Lessor and relating to the Facility

(herein the "Demised Premises"):

3The description of the property in Exhibit A attached to

the April 21, 1997 lease is virtually the same as the description

of the property set forth in the April 18, 1997 general warranty

deed.

- 5 (a)

Land:

The parcel of land more particularly described on Exhibit A (herein the "Parcel");

(b)

Improvements: All buildings, structures, fixtures and improvements erected or located on the Parcel, or affixed thereto (herein

the "Improvements");

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TO HAVE AND TO HOLD the Demised Premises unto

Lessee, its successors and permitted assigns, upon and

subject to all of the terms, covenants, conditions,

conditional limitations and agreements herein contained, for a term commencing on April 21, 1997 (herein

the "Commencement Date") and expiring twenty (20) years

later, or until said term is sooner terminated pursuant

to any of the conditional limitations or other provisions hereof (herein the "Primary Term").

For purposes

hereof, the Term "Lease Year" means a period of one

(1) year commencing on the Commencement Date or.the

annual anniversary.date thereof.

The Lessee shall have the right to extend the

Primary Term for an additional two (2) five (5) year

periods (the "Additional Terms"; the Primary Term and

any Additional Terms, hereafter, the "Term").

The

Lessee must exercise said option to extend in writing

no later than six (6) months prior to the expiration of

the Primary Term or Additional Terms * * *.

2.

Title to Demised Premises.

The Demised

Premises shall be demised and let by Lessor unto Lessee

free and clear of any and all liens, leases, mortgages,

pledges, security interests, conditional sale agreements, charges, claims, options, and other encumbrances

of any kind or nature whatsoever (collectiyely "Encumbrances"), except the following (collectively the

"Permitted Encumbrances"):

(a)

Zonina Laws:

The provisions of all

applicable zoning laws;

(b)

Taxes:

The liens of current real estate

and personal property taxes not delinquent; and

- 6 (c)

Other Existino Encumbrances:

The other

existing Encumbrances set forth on Exhibit B.

3.

Rent.

The Lessee shall pay to Lessor rent

for the Demised Premises * * * in an amount of One

Thousand Six Hundred and no/100 Dollars ($1,600.00) for

each month of the Term * * *.

It is understood that

non-federal funds acquired by Lessee cannot be used to

make rental payments if funds from HHS are terminated.

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5.

Mortgages.

Lessor has or may subject its

interests in the Demised Premises to liens of mor.tgages

thereon, and this Lease shall be subordinate to any

mortgage on Lessor's interest in the Demised Premises

(the "Fee Mortgage"). * * *

6.

Taxes and Utilities.

Lessee shall, at its

cost and expense, bear, pay and discharge, on or before

the last day upon which the same may be paid without

interest or penalty for late payment thereof, all

personal property taxes, assessments, sewer rents,

water rents and charges, dutiès, impositions, license

and permit fees, charges for public utilities of any

kind, payments and other charges of every kind or

nature whatsoever, ordinary or extraordinary, foreseen

or unforeseen, general or special (collectively herein

"Impositions") * * *

The foregoing notwithstanding, the parties agree

that the Lessor shall be responsible, and shall pay

when due, all.real property ad valorem taxes which may

be assessed against the Demised Premises (the "Taxes").

The Lessee agrees to reimburse the Lessor, on an annual

or semi-annual basis, for the amount of such ad valorem

property taxes due for the Demised Premises. * * *

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7.

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Asbestos Removal, Facility Repair and Replacement.

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(b)

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Repairs and Replacement:

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Lessee accepts

the Demised Premises from Lessor in "as is" condition and Lessor shall not be required to make any

improvements, replacements, or repairs of any kind

or character to the Demised Premises during the

Term of this Lease.

Lessee shall at all times

during the Term hereof, at its own cost and expense, keep the Demised Premises in good and reasonable operating condition and repair, and in

such condition as may be required by law and by

the terms of the insurance policies furnished

pursuant to the terms of this Lease, specifically

.including, but not limited to, the replacement of

any Tangibles which may be required by law or

regulations or which may have become worn or obsolete, whether or not such repairs or replacements

shall be structural or nonstructural, interior or

exterior, extraordinary or ordinary, and whether

or not the same can be said to be within the present contemplation of·the parties hereto. All such

repairs.or replacements shall be performed by duly

licensed contractors reasonably acceptable.to

Lessor and in a manner reasonably acceptable to

Lessor.

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(d)

Road Maintenance:

Lessee acknowledges

that access to the Demised Premises is .by an easement to a road which is more commonly.referred to

as "Maple Street." Lessee shall be solely responsible for any costs incurred by or imposed on

Lessor for the maintenance of such road.

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9.

Alterations.

Lessee shall not make any

alterations or additions to the Demised Premises without Lessor's prior approval, which approval may be

withheld in Lessor's sole and absolute discretión. Any

mechanic's lien filed against the Demised Premises for

work or materials claimed to have be.en furnished to

Lessee shall be discharged of record by Lessee within

ten (10) days thereafter, at Lessee's expense * * *.

10.

Use of Demised Premises.

Lessee shall use

and occupy the Demised Premises solely for operation as

a child day care facility.

Lessee agrees that the

Lessor, and its duly designated representatives, shall

have the right, but not the obligation, to review, from

time to time, the method and nature of the Lessee's

- 8 operation of the Facility.

It is Lessee's obligation

to operate the Facility in a quality manner and as a

"first class" day care facility.

Failure of the Lessee

to do so, as reasonably determined by the Lessor or its

duly designated representatives, shall constitute an

event of default under this Lease.

The Lessee agrees

to provide access to the Demised Premises to duly

authorized representatives of the Lessor. * * *

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11.

Net Lease.

This is an absolute net lease and

Lessor shall not be required to provide any services or

do any act or thing with respect to the Demised Premises and the rent reserved herein shall be paid to

Lessor without any claim on the part of Lessee for

diminution, setoff or abatement, and nothing shall

suspend, abate or reduce any rent to be paid hereunder

except as otherwise specifically provided herein.

12.

Insurance.

(a)

Liability Insurance.

At all times during the Term hereof, Lessee shall, at its own cost

and expense, provide and keep in force liability

insurance policies as follows:

(1)

Commercial general liability insurance including, without limitation upon the

generality of the provisions of this paragraph protecting Lessor and Lessee against

accident or disaster in or about the Demised

Premises with limits not less than Two Million Dollars ($2,000,000.00) combined single

limit for bodily injury (including death) and

one Million Dollars ($1,000,000.00) for property damage;

(2)

Excess liability coverage of One

Million Dollars ($1,000,000.00);

(3)

Professional liability insurance,

with limits not less than One Million Dollars

($1,000,000.00) including sexual molestation

and abuse coverage; and

I

_ 9 _

(4)

Workers' compensation insurance,

with limits not less than those required by

law.

(b)

Hazard Insurance. At all times during

the Term hereof, Lessee shall, at its own cost and

expense, keep:

(1)

The Demised Premises insured

against loss or damage by fire, lightning,

windstorm, hail, explosion, riot, damage from

aircraft, smoke damage, sprinkler leakage

damage, war damage (when available) and such

other insurance risks, casualties and hazards

as are insured against by owners of comparable premises in an amount equal to one hundred percent (100%) of the replacement cost

thereof (the initial replacement cost shall

be $120,000.00), said replacement cost to be

determined, on Lessor's request not more

frequently than at annual intervals, by one

or more of the insurers, or by an architect,

contractor, appraiser or appraisal company

selected by Lessee. * * *

(2)

In addition, Lessee shall, at its

own cost and expense, keep the net rental

value of the Demised Premises insured against

loss or damage by fire, lightning, windstorm,

hail, explosion, riot, damage from aircraft,

smoke damage, and such other insurance risks,

casualties and hazards as are insured against

by owners of comparable premises, in the

amount of $22,000.00.

The Lessor reserves

the right, upon notice to the Lessee, to

adjust the coverage amount.

All insurance to be furnished by Lessee under this

paragraph shall be by policies which shall provide

that the loss, if any, shall be payable to Lessee.

All such insurance proceeds received by Lessee

(other than rent insurance proceeds, for which

provision.is made in Paragraph 12(b)(2) hereof)

shall be available for application to the cost of.

demolition, restoration, repair, replacement and

rebuilding of the damage which occasioned the

payment of such proceeds.

- 10 (c)

Indemnity Insurance. At all times during the Term hereof, Lessee shall, at its own cost

and expense, provide and keep in force a policy or

policies of insurance insuring Lessee against all

liability of Lessee under Paragraph 13, which such

policy or policies shall provide for the payment

of any proceeds thereo.f to Lessor or Lessee as

their interests may appear.

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14.

Fire and other Casualty.

If any Improvement

or Tangible shall be damaged or destroyed by fire or

other casualty, then, irrespective of the cause, Lessee

shall give prompt written notice thereof to Lessor, and

shall proceed * * * to restore, repair, replace and

rebuild such Improvements or Tangibles at Lessee's own

cost and expense.

Such rebuilding or restoration shall

be in accordance with plans and specifications submitted by Lessee to Lessor and subject to Lessor's reasonable approval and shall further be carried out by duly

licensed contractors acceptable to Lessor. * * *

Rent shall not abate hereunder by reason of any

damage to or destruction of the Demised Premises, and

Lessee shall continue to perform.and fulfill all of its

obligations, covenants and agreements hereunder notwithstanding any such damage or destruction.

The

foregoing notwithstanding, the obligation to continue

Rent payments shall be subject to the availability to

Lessee of loss of rents or business interruption insurance.

Any loss of rent insurance proceeds received by

Lessee by reason of such damage or destruction shall be

applied by Lessee to the payment of Rent payable by

Lessee under Paragraph 3 hereof, Impositions payable by

Lessee under Paragraph 6 hereof and premiums for any

insurance required to be maintained by Lessee hereunder, but this shall not relieve Lessee of its obligations to pay punctually all such Rent, debt service,

Impositions and insurance premiums in the event rent

insurance proceeds received by Lessee are ·insufficient

to pay the same or for any reason such rent insurance

proceeds are not actually applied by Lessee to the

payment of such amounts.

If and when Lessee shall

complete all demolition, restoration, repair, replacement and rebuilding which Lessee is required to carry

out under this paragraph, then any ba·lance of insurance

proceeds then held by Lessee shall be retained by

- 11 Lessee free of trust.

15.

Condemnation.

(a)

Entire Condemnation.

If at any time during

the Term hereof all or substantially all of the Parcel

and the Improvements shall be taken in the exercise of

the power of eminent domain by any sovereign, municipality or other public or private authority, then this

Lease shall terminate on the date of taking of possession by such authority.

Substantially all of the

Parcel and the Improvements shall be deemed to have

been taken if the remaining Improvements cannot

feasibly be repaired and restored so that they shall

constitute a complete structural unit or units which

can be operated as a day care facility on an economically feasible basis under the provisions hereof.

The

award or awards for any such taking of all or substantially all of the Parcel and the Improvements shall be

paid to the Lessor.

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30.

Obligations Upon Termination.

Lessee shall,

upon any termination hereof prior to the expiration of

the Term, well and truly surrender and deliver up the

Demised Premises into the possession and use of Lessor,

without fraud or delay and in good order, condition and

repair, ordinary wear and tear excepted, free and clear

of all lettings and occupancies and free and clear of

all encumbrances other than those existing on the date

hereof and those, if any, created by Lessor without any

payment or allowance whatever by Lessor.

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36.

Governing Law.

This Lease shall be governed

by and subject to the laws of the state [Ohio] in which

the Facility is located.

[Reproduced literally.]

On May 15,

April 21,

1997,

shortly after the effective date of the

1997 lease, TMC entered into a contract

(May 15,

construction contract) with Stone Oak Construction,

Oak Construction).

Under that contract,

Inc.

1997

(Stone

Stone Oak Construction

- 12 agreed to perform the following work for TMC with respect to

KQC's land that TMC was leasing from KQC:

concrete ramp at the main entrance;

ramp;

(1)

Install new

(2) modify the emergency exit

(3) remove all existing playground equipment except for the

swing set;

(4) remove four feet of blacktop from the inside of

existing driveway and two feet from the outside of such driveway;

(5) remove debris and trees to enlarge area for bus turnaround

and parking and develop area with gravel stones;

(6)

install

chainlink fences with double gate; and (7) install chainlink

fence to subdivide existing playground with two regular standard

gates.

In return for completing the foregoing work, TMC agreed

to pay Stone Oak Construction $33,010.

On a date in 1997 not

disclosed by the record, Stone Oak Construction completed all of

the work that it agreed to perform under the May 15,

1997 con-

struction contract.

On August 9, 1997, TMC applied to the U.S. Department of

Health and Human Services (HHS)

for a grant

(TMC's grant applica-

tion) to make improvements to, inter alia, KQC's land and 1958

school building that TMC was leasing from KQC.

TMC's grant

application requested $556,500 to make certain improvements to

such leased land and school building.

On or.about September 30,

1997, HHS approved TMC's grant application, including ·its request

for $556,500 to make certain improvements to KQC's land and 1958

school buildîng, and made,

inter alia, a $556,500 grant to TMC

- 13 with respect to that request.

On March 4,

tracts

1998, TMC entered into two construction con-

(collectively March 4,

Stone Oak Construction.

1998 construction contracts) with

Under one of those contracts, Stone Oak

Construction agreed .to perform the following additional work for

TMC with respect to KQC's land and 1958 school building that TMC

was leasing from KQC:

in six classrooms;

(1)

Install child-size cabinets and sinks

(2) remove existing outdated windows that do

not meet safety codes and replace with insulated safety glass

windows;

(3)

install 2-inch asphalt over existing. eroded parking

lot surface and'driveway;

(4) enclose and caulk the perimeter of

the foundation of the 1958 school building, using specialized

engineering techniques;

(5) enclose the septic tank and trans-

former with a fence built to certain specifications;

the septic system; and (7) drill a second well.

(6) upgrade

In return for

completing the foregoing work, TMC agreed to pay Stone Oak

Construction $262,000.

Under the second construction contract that TMC entered into

with Stone Oak Construction on March 4,

1998, Stone Oak Construc-

tion agreed to construct a new building (new building) on KQC's

land that TMC was leasing from KQC.

In return for completing the

construction of that building, TMC agreed to pay Stone Oak

Construction $398,000.

On dates in 1998 not disclosed by the record, Stone Oak

- 14 Construction completed all of the work that it agreed to perform

under the two March 4, 1998 construction contracts, including

construction of the new building on KQC's land.

On May 15,

1998, a document entitled "NOTICE OF FEDERAL

INTEREST" (notice of Federal interest) wi.th respect to the

improved property on Maple Street was filed with the Recorder's

office,

Sandusky County, Ohio (Sandusky County recorder's of-

fice).

As of May 12, 2005, the notice of Federal interest had

not been canceled.

The notice of Federal interest provided in

pertinent part:

This is to serve notice to all potential sellers,

purchasers, transferors and recipients of a transfer of

the real property described below as to the Federal

government's revisionary interests as set forth in 45

CFR Part 92, (or if appropriate, 45 CFR Part 74) which

have arisen as a result of (Texas Migrant council, Inc.

Ohio Region) receipt and use of Department of Health

and Human Service's grant funds in connection with the

purchase of said property. The property to which this

notice is applicable is (Helena Migrant Head Start

Center 474 Maple St.

Helena, Ohio 43435) and identified Parcel (See Attached Legal Description)

in the

books and records of Sandusky County Ohio. * * *

In

accordance with 45 CFR 92.11 (or, if appropriate, 45

CFR 74.134), this property may not be sold, transferred, or its title encumbered, without approval from

the Department of Health and Human Services. * * *

[Reproduced literally.]

By letter dated November 8,

Mumford

(Mr. Mumford)

1999, KQC asked Richard W.

to make a preliminary real estate appraisal

dThe document "Attached Legal Descri.ption" referred to in

the notice of Federal interest is.a copy of the April 18, 1997

general warranty deed.

- 15 of the improved property on Maple Street that TMC was using for

its Head Start activities.

Pursuant to KQC's request, Mr.

Mumford sent KQC a letter dated December 17,

December 17,

1999 letter).

1999

(Mr. Mumford's

In that letter, Mr. Mumford, who died

before the time of the trial in these cases, stated in pertinent

part:

Following your letter of November 8, 1999 authorizing a

Preliminary Real Estate Appraisal on the above property

[the improved property on Maple Street), we can report

the following items:

A At the time of examination and photography, no

one was at the Subject.

THIS PRELIMINARY APPRAISAL IS FROM THE EXTERIOR ---- no entry to the

INTERIOR was possible.

B The property is owned by KQC * * *.

D The School is at the end of Maple Street in

Helena OH. * * *

E The lot size is irregular and contains 2.0435

acres.

F There are TWO BUILDINGS on the Property.

Both

are one story in height and have no basements.

Building # 1 is 72 by 162' and has 11,664

sqft.

Building # 2 is 45' by 80' and has.... 3,600

sqft.

BOTH BUILDINGS TOTAL.............15,264 SQFT.

G Building # 1 was built as an elementary school

in 1958.

In 1994, this Building was remodeled

into a Migrant Head Start School Building.

Building # 2 was built for School Uses in 1998.

BOTH

Buildings are rated by FLR SABRE SYSTEMS as

100/Grade C.

Exterior of Building # 1 is brick.

Concrete block is the exterior of Building # 2.

One forced air heat and air conditioning Unit is

shown in the attached photos.

Both Buildings have

- 16 Central Heat and Air Conditioning.

H The Building Data shows Public Water.

The

School has its own private sanitary sewer system.

I There is 25,000 sf. of asphalt paving.

The play

ground area is well fenced with chain link.

Playground equipment is in good condition.

K No repairs were need from AN EXTERIOR EXAMINA-

TION. No deferred maintainence was visibile on

the property.

The Subject has good design and

construction.

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The Preliminary Real Estate Assignment is in TWO PARTS:

1.

To give a Professional Opinion of current market

value of BOTH Land and Improvements in their current

condition.

AND

2.

To give a market value Opinion of Ground Rent IF

the Improvements were to be sold.

Normal Procedure in giving an Opinion of Market Value

is to utilize THREE APPROACHES to VALUE...

042

COST APPROACH

042

SALES COMPARISON APPROACH

042

INCOME APPROACH

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IF there are NO similar, current, proximate nor appropriate Comparable Sales... then the substitution of the

County Auditor's Public Record Values is permitted.

IF

there is NO present income from the Subject Property,

reliable Data from the Marketplace and the Appraiser's

own files will give ranges of Rents and Expenses. At

this point, the Appraiser must use.the Training, Education, Background and Experience to sort thru the Data

to select and report the BEST Opinions of Rent and

Expenses that better fit the Subject.

- 17 Using PACENET, we have researched EVERY Comparable Sale

in the Four Townships surrounding the Subject AND in

the City of Fremont, for all of 1999 thru October...

WE FOUND NO SIMILAR, CURRENT, PROXIMATE OR APPROPRIATE

COMPARABLE SALES TO THE SUBJECT

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COST APPROACH

From the current Marshall & Swift Cost Manual for Class

C Schools of Average Construction.

The Area Multiplier

is 1.02

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Base Cost=$ 72.13 sf. x 1.02 Area Multiplier=

$ 73.57 soft.

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Building # 1 was built in 1958 and then remodeled in

1994.

Class C Schools with average masonry construction have an expected Building Life of 45 years.

The

EFFECTIVE AGE of Buildino # 1 is 10 years.

Physical

Depreciation for this Building is 20% using the

AGE/LIFE/CONDITION METHOD

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COST BREAKDOWN FOR BUI.LDING # 1

11.664 sf. @ $ 73.57 sf. LESS 01 Depreciation=

$ 686,500

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Building # 2 was built in 1998 and has

Depreciation[.]

The expected Building

C, average construction masonry School

Building # 2 has an EFFECTIVE AGE of 1

ZERO% Physical

Life of a Class

is 45 years.

year

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COST BREAKDOWN FOR BUILDING # 2

3.600 sf. @ $ 73.57 sf. LESS 0% Depreciation= $ 263,500

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- 18 ZERO % Functional and External Depreciation-BOTH BLDGS

TOTAL DEPRECIATED VALUES--BOTH # 1 & #2= $ 950,000 PLUS

depreciated values for the Storage Shed, Chain Link

Fence and Sanitary Sewer System - $ 40,000

IMPROVEMENT COSTS...$ 990,000 LAND...2.0435 ACRES...

$ 35,000

(2.0435 acres @ $17,000 acre)

TOTAL COST OPINION OF VALUE-$1,025,000

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PUBLIC RECORD VALUES

From the Sandusky County Auditor's Office in Fremont[,]

OH-December 1999[.]

AUDITOR'S TRUE VALUES of the

Subject BUILDING # 1 built in 1958 and remodeled in

1994.

AUDITOR'S COST NEW @ $ 34.74 sf. 11,664 sf. LESS

82% Physical Depreciation= $ 73,000 ($ 405,000 less

82%)

**************************************************

AUDITOR'S TRUE VALUES of the Subject BUILDING # 2 built

in 1998.

3,600 sf. @ 38.86 sf. LESS 5%. Physical Depreciation= $ 139,900 ($ 140,000 less $ 7000)

**************************************************

AUDITOR'S TRUE VALUES of the Subject Driveways and

Parking Areas 25,000 sf. @ $1.50 sf. LESS 13% Physical

Depreciation= $ 32,500

**************************************************

NOTE:

The Storage Shed with 120 sf. and the private

Sanitary Sewer System were NOT INCLUDED in the AUDITOR'S TRUE VALUES

**************************************************

IMPROVEMENT TRUE VALUES= $ 245,400

**************************************************

AUDITOR'S TRUE VALUES of Subject LAND of 2.0435 acres

S 30,000 or $ 14,680 per Acre

TOTAL IMPROVEMENTS and LAND $ 275,000

- 19 -

*

*

*

*

*

*

*

*

*

*

INCOME APPROACH

*

*

*

*

IF there is no VERIFIABLE RENTAL DATA we can NOT USE

the INCOME APPROACH

Because we found NO RENTAL DATA for SCHOOLS in Sandusky

County...

We were NOT ABLE to DEVELOP The INCOME APPROACH OPINION

*

*

*

*

*

*

*

GROUND LEASE

APPROACH OPINION

The SECOND PART of the original Preliminary Appraisal Assignment is to PROJECT a valid Ground Lease

Rent in the Event that the Owners would SELL the Improvements and RETAIN the Land.

WORD OF CAUTION

IF the Improvement Sale .is desired, the area of Liability Insurance could be a problem.

We found NO local

Agent that sells a Liability Policy for a School to the

Owners of the LAND ÓNLY !

They all require that the

IMPROVEMENT BUYER secure the Liability Insurance with

the. LAND OWNER being included as an ADDITIONAL INSURED

PARTY.This would be an important question to raise with

your present Insurance Agent.

**************************************************

LAND VALUE from the COST APPROACH is

$ 35,000 or $17,000 per acre

The goal of a Reasönable Ground Lease Program is

to select Rates that will give a Return on the Investment and a Return of the Capital Value over a fixed

period of time.

To develop a Reasonable Rate per year

to accomplish these Two Goals, the Built Up Rate Method

is the most feasible one for the Subject Land.This

Method uses a SAFE Rate, a RISK Rate, an INFLATION

Rate, a LAND TAX Land Tax Rate, and a RETURN OF CAPITAL

INVESTED Rate over a 20 year period.

Proiected Built-Up Rate:

- 20 042

SAFE RATE is the Passbook Savings rate ...

042

RISK RATE for land under a School ........

3%/year

3%/year

042LAND TAXES ...............................

1%/YEAR

042INFLATION RATE averages .................

3%/year

042

HOLDING PERIOD for Land--20 years ........

5%/year

BUILT-UP RATE ...........

15%/year

PRESENT LAND VALUE @$ 35,000 @ 15% /year = $ 5,250/

vear OR $ 437.50/month Proiected GROUND LEASE RENT

*

*

*

*

*

*

*

RECONCILIATION of the Various Approaches to Value

042

COST OPINION...

$ 1,025,000

042

PUBLIC RECORD VALUES... $ 275,000

042

SALES COMPARISON and INCOME OPINIONS CONSIDERED

but NOT USED [ see page two and page five ]

We SELECTED as the BEST OPINION of VALUE the COST

APPROACH OPINION in the sum of $ 1,025,000

**************************************************

The HIGHEST and BEST USE of the Subject is its PRESENT

USE

*'*************************************************

042PROJECTED

GROUND LEASE RENT OPINION $ 5,250 YEAR /

$.437.50 MONTH

[Reproduced literally.]

Mr. Mumford's December 17,

1999 letter made no reference to

the notice of Federal interest that on May 15,

1998, was filed

with respect to the impròved property on Maple Street with the

Sandusky County recorder's office and did not contain the actual

or expected date of a charitable contribution of all or a portion

of the improved property on Maple Street that was the subject of

that letter.

Nor did Mr. Mumford's December 17,

1999 letter

- 21 -

indicate that Mr. Mumford prepared it in order to substantiate a

charitable contribution for tax purposes.

Around December 20,

1999, Mr. Kaplan contacted Betty Schadle

(Ms. Schadle), who at that time was a tax principal with Ernst &

Young, LLP (Ernst & Young), for tax advice regarding a proposed

contribution that KQC was contemplating making to a tax-exempt

organization of a building that such tax-exempt organization was

leasing from KQC (leased building).

Mr. Kaplan advised Ms.

Schadle that the tax-exempt organization had made improvements

totaling about $800,000 to the leased building5 and that KQC had

made no adjustments because of such improvements to the rent that

it was charging the tax-exempt organization with respect to such

building.

Mr. Kaplan also informed Ms. Schadle that the improve-

ments that the lessee made to the leased building were owned by

KQC,

Mr. Kaplan did not inform Ms. Schadle, and she was not

otherwise aware, that,

in addition to the leased building,

including the improvements to that building, that KQC contemplated giving to the tax-exempt organization, there was a new

building located on KQC's land that the tax-exempt organization

had constructed with HHS's funds.

Nor did Mr. Kaplan inform Ms.

Schadle, nor was she otherwise aware, that on May 15,

1998, a

notice of Federal interest with respect to the improved property

4r. Kaplan did not advise Ms. Schadle, and she was not

otherwise aware, that the tax-exempt organization had used HHS's

funds to make improvements to the leased building.

- 22 on Maple Street had been filed with the Sandusky County recorder's office.

On December 30,

1999, Ronald A. Matamoros

had a letter that he prepared

(Mr. Matamoros)

(Mr. Matamoros's December 30,

1999

letter) hand delivered to Mr. Kaplan and faxed to Ms. Schadle.

When Mr. Matamoros prepared that letter, he was not aware

(1) that TMC had a new building constructed on KQC's land with

HHS's grant funds and (2) that on May 15,

1998, a notice of

Federal interest with respect to the improved property on Maple

Street was filed with the Sandusky County recorder's office.

Matamoros's December 30,

1999 letter stated in pertinent part:

You have asked us .to review the lease agreement

between KQC Investors, LLC and Texas Migrant Counsel

[sic], Inc. relating to a child care facility located

in Helena, Ohio.

Specifically, you have asked us to

opine as to the ownership of the improvements located

on the property.

We understand that the tenant has made certain

improvements to your property which they are presently

occupying pursuant to the provisions of the lease

agreement.

Once those improvements were incorporated

into the property, i.e., as fixtures located within the

building, title to those improvements immediately

vested in your company subject only to the possessory

rights of the tenant under the lease agreement and

provided, however, that the tenant maintains its obligations under the lease agreement in good standing.

The provisions of the lease that support this

interpretation are as follows:

a.

The description of the "Demised Premises" in

paragraph 1 clearly identifies the property owned by

you as "all buildings, structures, fixtures and improvements erected or located on the Parcel, ·or affixed

thereto;"

Mr.

- 23 b.

Paragraph 14 clearly provides that all insurance proceeds with regard to the building and any

improvements are the property of your company;

c.

Paragraph 15(a) clearly recites that all

condemnation awards, as the result of an entire condemnation, are payable to your company;

d.

Paragraph 30.requires that the tenant, upon

termination of the lease, surrender the possession of

the Demised Premises, which includes all improvements.

To further support your transfer of ownership, we

understand that you are amending the lease to remove

any references to the improvements as being owned by

you.

This includes the reduction of the rent amount to

an amount related solely to the value of the land and

also adjusts each of the items set out in paragraphs

(a) through (d) above.

Based on this analysis, .it is our opinion that

your company could transfer ownership, by way of a bill

of sale, of all the improvements to the tenant notwithstanding the fact that the lease term continues.

On December 31,

Villarreal

1999, Mr. Kaplan on behalf of KQC and Oscar

(Mr. Villarreal) on behalf of TMC executed a document

entitled "BILL OF SALE" (bill of sale) that Mr. Matamoros had

prepared for KQC.

When Mr. Matamoros prepared that document for

KQC, he was not aware (1) that TMC had a new building constructed

on KQC's land with HHS's grant funds and (2)

that on May 15,

1998, a notice of Federal interest with respect to the.improved

property on Maple Street was filed with the Sandusky County

recorder's office.

The bill of sale provided in pertinent part:

Donor [KQC] is the Lessor under a Lease Agreement

dated April 21, 1997, wi.th Donee [TMC], as Lessee (the

"Lease").

Donor has agreed to transfer and assign all

of its rights, title and interest in and to thé Improvements (as defined in the Lease) to the Donee as a

- 24 charitable contribution and the Donor and Donee shall,

simultaneously with the execution of this Bill of Sale,

modify and amend the Lease to reflect said charitable

contribution.

KNOW ALL MEN BY THESE PRESENTS,

that for consider-

ation of $1.00 received from Donee, the receipt and

sufficiency of which are hereby acknowledged, Donor

does hereby donate, convey, set over, assign, transfer

and deliver to Donee, its ·successors and assigns, with

effect as of the date hereof, all of Donor's right,

title and interest in and to the Improvements.

TO HAVE AND TO HOLD any and all of the Improvements hereby donated, conveyed, set over, assigned,

. transferred and delivered to Donee, its successors and

assigns, for its and their own use and benefit forever.

The Donor hereby warrants to the Donee that the Donor

is the lawful owner of the Improvements, that the

Improvements are free and clear of all liens and that

the Donor has the right to donate the Improvements.

From time to time after the Closing, Donor shall

execute and deliver all such other instruments and

shall take all such other action as Donee may reasonably request to more effectively transfer to and vest

in Donee, and to put Donee in possession of, any of the

Improvements.

This Bill of Sale shall be governed by, and construed in accordance with, the laws of the State of

Ohio, without regard to the conflicts of laws and rules

of such state.

Mr. Kaplan did not acknowledge his signing the bill of sale on

behalf of KQC in the presence of two witnesses.6

Nor did Mr.

Kaplan acknowledge his signing the bill of sale on behalf of KQC

before a judge of a court of record in Ohio or a clerk thereof, a

county auditor, a county engineer, a notary public, a mayor, or

6As a result, there were not two witnesses who attested to

Mr. Kaplan's signing the bill of sale on behalf of KQC and who

subscribed their names to such attestation.

- 25 county court judge.'

It was not until March 27, 2000, that KQC

gave TMC the bill of sale.

On December 31,

1999, Mr. Kaplan on behalf of KQC and Mr.

Villarreal on behalf of TMC executed an amendment to the April

21,

1997 lease (lease amendment).

The lease amendment provided

in pertinent part:

WHEREAS, Lessor [KQC] and Lessee [TMC] did enter

into a lease agreement dated the 21 day of April, 1997

[April 21, 1997 lease] (hereinafter referred to as the

"Lease") relating to a child care facility located in

Helena, Ohio (the "Project"); and

WHEREAS, simultaneously with the execution of this

Lease Amendment, the Lessor has conveyed all of its

rights,. title and interest in and to the building and

all other improvements relating thereto which comprises

the Project; and

WHEREAS, the parties are desirous of modifying and

amending the Lease to reflect the transfer of the

ownership of the improvements from Lessor to Lessee.

NOW, THEREFORE, in consideration of the mutual

covenants and conditions, the receipt and sufficiency

of which are hereby acknowledged, the parties hereto do

agree as follows:

1.

Paragraph 1 of the Lease is hereby modified

and amended to reflect that the Demised Premises now ·shall include only the land upon

which the building and Improvements are located.

2.

The rent is hereby reduced to $437.50 per

month.

7As a result, there was no such person who certified Mr.

Kaplan's acknowledgment of his signing the bill of sale on behalf

of KQC and who subscribed such person's name to a certificate of

such acknowledgment.

- 26 -

*

*

*

*

*

*

*

4.

Any and all other provisions of the Lease

which reflect any rights of ownership of

Lessor in the Improvements shall be deemed

hereby deleted.

It is the intent of the

parties to revise the Lease to reflect solely

the ownership by the Lessor of the land.

5.

Except as hereinabove modified, the Lease

remains in full force and effect.

An Ernst & Young memorandum dated January 11, 2000 that was

prepared under Ms. Schadle's supervision stated in pertinent

part:

FACTS

The Transaction

KQC Investors, Inc. ("KQC"), a North Carolina limited

liability company, is owned by Hal Kaplan, Dean

Caldwell and Matthew Marceron.

KQC purchased a child

care facility located in Helena, Ohio.

In April of

1997, KQC entered into an operating lease with Texas

Migrant Counsel [sic], Inc. ("Texas") [TMC] relating to

said facility.

Texas qualifies as an exempt organization under IRS §501(c)(3).

KQC's cost basis in the f.acility is approximately

$125,000.

Since April of 1997, Texas has made substantial leasehold improvements to the facility.

KQC

estimates -that Texas spent approximately $800,000 on

these improvements. After the improvements were completed, the building was appraised at a value of

$1,000,000.

No depreciation was taken on these leasehold improvements by either KQC or Texas, nor were the

leasehold improvements ever carried on the books of

KQC.

On December 31,

1999, KQC and Texas entered into an

agreement whereby KQC agreed to transfer and assign all

of its rights, title and interest in and to the building (including the leasehold improvements) to Texas as

a charitable contribution.

The owners of KQC intend to

take a charitable contribution deduction for the full

fair market value of this property.

- 27 The Opinion Letter

Blanco, Tackabery, Combs & Matamoros, P.A., Kaplan's

law firm, has provided an opinion letter stating that

various parts of the lease agreement indicate that

title to the leasehold improvements immediately vested

with KQC and that Texas had only possessory rights

subject to the lease agreement. According to this

·letter, the following are specific provisions of the

lease that support this interpretation:

042

In the event of an entire condemnation, the

award for any such taking shall be paid to

the Lessor;

042

Property owned by KQC is identified to include "improvements erected or located on the

Parcel, or affixed thereto";

042

All insurance proceeds with regard to the

building and improvements are the property of

KQC;

042

Texas is required, upon termination of the

lease, to surrender the possession of the

premises, which includes all improvements.

The Lease

The Lease Agreement contains no specific mention of

conveying the title to the improvements.

See the Lease

Agreement, dated April 1997, for specific lease terms

and conditions negotiated between Texas and KQC.

ISSUES

Were the leasehold improvements made by Texas the

property of KQC prior to the termination of the lease,

thereby entitling KQC to a charitable contribution

deduction under IRC §170(b)(1)(C) equal to the fair

market value of the renovated property?

CONCLUSION

There is exposure in taking the position that once the

improvements to the property were made [by TMC], title

to such improvements vested immediately with KQC.

Due

to the substantial dollar amount involved, the IRS is

likely to question the ownership of the improvements

located on the property.

Based on previous determinations made in this area, it is very likely that the IRS

will take the position that these improvements should

7

- 28 -

not be considered the property of KQC while the lease

was still in effect. Accordingly, KQC's deduction may

be limited to the fair market value of the property at

the time of the donation excluding the renovations made

by Texas.

DISCUSSION AND ANALYSIS

The predominant issue is that of establishing ownership

of the leasehold improvements at the time of transfer.

There are two positions on this:

a) the leasehold

improvements immediately vested in KQC when made,

subject only to the possessory rights of Texas under

the lease agreement or b) the leasehold improvements do

not become the property of KQC until termination of the

lease agreement.

*

*

*

*

*

*

*

KQC had a basis only of approximately $125,000 in the

property when they donated it to Texas.

KQC made no

investment in the significant improvements made by

Texas and had no depreciable interest in them.

Therefore, based on the numerous case law and opinions of

the Service discussed above, significant risk ensues as

to whether or not the Service will allow KQC a full

fair market value charitable contribution deduction.

Lease Terms

Additionally, the specific terms of the lease should be

considered in determining ownership of the leasehold

improvements. As enumerated in the facts above,

Kaplan's law firm has provided what they believe to be

provisions of the lease agreement that support the

interpretati.on that ownership resided with KQC.

It is

important to note a few facts regarding these provisions.

In the event of a total condemnation, the lease

agreement shall also terminate. Accordingly, ownership

in the improvements may be interpreted to reside with

KQC as a result of the termination of the lease rather

than as a result of the condemnation. Additionally,

while the lease agreement does include all improvements

in the description of property owned by KQC, this same

section states that KQC agrees to "let" and Texas

agrees to take from KQC "said property".

This state-

ment therefore does not clearly indicate ownership of

leasehold improvements made during the term of the

lease agreement. * * * The last provision provided by

- 29 the attorneys involves.the requirement that Texas

surrender the possession of all improvements upon

termination of the lease.

This seems to be an indication that the improvements are presently the property

of Texas while the lease agreement is still in effect,

rather than an indication that they are not.

It should be further noted that Section 14, Fire and

Casualty, of the lease agreement between Texas and KQC

states the following;

If and when Lessee shall complete all demolition,

restoration, repair, replacement and rebuilding

which Lessee is required to carry out under this

paragraph, then any balance of insurance proceeds

then held by Lessee shall be retained by Lessee

free of trust.

Where the lessee is able to keep insurance proceeds in

excess of required replacements, there is an indication

that ownership of land and improvements reside with the

lessee during the lease term.

During the period January through March 2000, TMC paid

$1,600 a month rent to KQC (or a total of $4,800), which was the

amount of monthly rent that TMC was required to pay to KQC under

the April 21,

1997 lease. - In April 2000, KQC refunded such

monthly rent

(or a total of $4,800) to TMC and sent it an invoice

for each of the months January, February, and March 2000 that.

showed monthly rent due of $437.50, which TMC paid.

Thereafter,

through March 2001, TMC paid rent to KQC of $437.50 a month.

On June 29, 2000, KQC timely filed Form 1065, U.S. Partnership Return of Income,

Tutor

for 1999 (KQC's 1999 return).

George S.

(Mr. Tutor), who was a tax manager with Ernst & Young in

2000 when KQC's 1999 return was being prepared, signed that

return as return preparer.

Mr. Tutor supervised David Johnston

- 30 (Mr. Johnston), who was a tax specialist with Ernst & Young in

2000 when KQC's 1999 return was bëing prepared and who prepared

KQC's 1999 return on the basis of information provided to him by

KQC.

Mr. Tutor, inter alia, reviewed KQC's 1999 return and

satisfied himself that he was able to sign that return as return

preparer.

During the course of preparing KQC's 1999 return, Mr.

Johnston had discussions with Mr. Marceron about KQC's claimed

noncash charitable contribution.to TMC.

In those discussions,

Mr. Marceron informed Mr. Johnston that KQC had contributed to

TMC, a nonprofit organization, a building located on the improved

property on Maple Street, which had a cost basis of $95,000 on

KQC's books and an appraised value of $1 million.

Mr. Marceron

explained to Mr. Johnston that the value of the building that KQC

claimed .to havé given to TMC had increased to $1 million because

TMC made improvements to that building.

In the discussions that

Mr. Johnston had with Mr. Marceron about KQC's claimed noncash

charitable contribution to. TMC, Mr. Marceron indicated that he

believed that claiming a deduction with respect to such claimed

charitable contribution would be a "push"; that is to say, Mr.

Marceron believed that there was a substantial risk that respondent would disallow any such claimed deduction.

Mr.. Marceron completed portions, but not all, of Form 8283,

Noncash Charitable Contributions (Form 8283), with respect to the

purported contribution to TMC and sent it to Mr. Johnstó'n for his

review.

Mr. Johnston reviewed Form 8283 that Mr. Marceron had

prepared and informed Mr. Marceron, inter alia, that Part IV,

Donee Acknowledgment

(donee acknowledgment), had to be completed

by TMC, the purported donee, before KQC included it, as required,

with the tax return that it was filing for 1999.

KQC, and not Ernst & Young, handled the actual filing of

KQC's 1999 return.

In that return, KQC claimed a noncash chari-

table contribution of $1,025,000.

"Deductions" .in Schedule K,

In the section entitled

Partners'

Shares of Income, Credits,

Deductions, etc., KQC showed a charitable contribution of

$1,025,000.

In an explanatory statement attached to that sched-

ule, KQC described that claimed contribution as "TEXAS MIGRANT

SCHOOL PROPERTY--HELENA, OH".

Form 8283 that KQC included as

part of KQC's 1999 return (KQC's Form 8283) indicated that the

name of the organization to which KQC claimed it gave certain

noncash property was "Texas.Migrant School Property" and gave the

following description of the property that KQC claimed it gave to

TMC:

"Maple Street, Helena, Sandusky County, OH".

KQC's Form

8283 indicated that the donated property was "Real Estate" and

that the condition of such property was "good".

KQC's Form 8283

showed the fair market value of the claimed donated property as

$1,025,000.8

In disregard of Mr. Johnston's advice that, before

°Mr. Mumford's December 17, 1999 letter indicated that a

(continued...)

- 32 KQC filed KQC's 1999 return, KQC was required to have TMC, the

purported donee, complete the donee acknowledgment in KQC's Form

8283, such donee acknowledgment was left blank.9

KQC's Form 8283 did not contain:

identification number,

In addition,

(1) KQC's name and taxpayer

(2) the date.and manner of KQC's acquisi-

tion of the property purportedly contributed, and (3) the cost or

other basis of the property purportedly contributed, adjusted as

8(...continued)

preliminary real estate appraisal of KQC's land, the 1958 school

building on that land as well as the improvements thereto made by

TMC, other improvements to KQC's land made by TMC, and the new

building built on that land by TMC was $1,025,000.

'The donee acknowledgment in Form 8283 required the following information to be provided by the charitable organization

receiving the claimed noncash charitable contribution:

This charitable organization acknowledges that it is a

qualified organization under section 170(c) and that it

received the donated property as described in Section

B, Part I [of Form 8283], above on »

(Date)

Furthermore, this organization affirms that in the

event it sells, exchanges, or otherwise disposes of the

property described in Section B, Part. I (or any portion

thereof) within 2 years after the date of receipt, it

will file Form 8282, Donee.Information Return, with the

IRS and give the donor a copy of that form.

This

acknowledgment does not represent agreement with.the

claimed fair market value

Does the organization intend to use the property for an

unrelated use? . . . . . . . . ...'. . . > 0 yes O No

An authorized representative of the charitable organization

receiving the claimed noncash charitable contribution was required (1) to provide in the donee acknowledgment in Form 8283

the name of such organization, its employer identification

number, and its address and (2) to sign and date such donee

acknowledgment.

- 33 provided by section 1016.

Neither Ms. Schadle, Mr. Tutor, nor Mr. Johnston was aware

that TMC had constructed a new building on KQC's land with HHS's

grant funds.

Nor was any of them aware that KQC was reporting in

KQC's 1999 return a charitable contribution in an amount equal to

the preliminary real estate appraisal

(i.e., $1,025,000)

set

forth in Mr. Mumford's December 17, 1999 letter of KQC's land,

the 1958 school building on that land as well as the improvements

thereto made by TMC,

other improvements to KQC's land made by

TMC, and the new building constructed on that land by TMC.

Mr. Kaplan and Ms. Kaplan (collectively the Kaplans), Mr.

Marceron and Ms. Marceron (collectively the Marcerons), and Mr.

Caldwell and Ms. Caldwell (collectively the Caldwells) timely

filed their respective Forms 1040, U.S. Individual Income Tax

Returns,

for 1999 (petitioners' respective returns).

In peti-

tioners' respective returns, the Kaplans, the Marcerons, and the

Caldwells claimed the following amounts of noncash charitable

contribution deductions attributable to KQC's claiming in KQC's

1999 return a noncash charitable contribution to TMC of

$1,025,000:

Petitioners

The Kaplans

The Marcerons

The Caldwells

Amount of Claimed

Charitable Contribution

$608,850

51,250

364,900

(We shall refer to the respective noncash charitable contribution

- 34 -

deductions that the Kaplans, the Marcerons, and the Caldwells

claimed in petitioners'

respective returns as petitioners'

respective claimed noncash charitable contribution deductions.)

On or about February 8, 2001, respondent's revenue agent

notified Mr. Marceron that·KQC's 1999 return was under examination.

Thereafter, but before March 13, 2001, KQC asked Mr.

Matamoros to prepare a general warranty deed transferring the

improved property on Maple Street to TMC.

such a deed (KQC's deed).

Mr. Matamoros prepared

On March 13, 2001, Mr. Kaplan on

behalf of KQC signed KQC's deed in the presence of Mr. Marceron

and Mr. Matamoros and acknowledged such signing before Mr.

Matamoros,

a notary public.

On March 22,

2001, KQC's deed was

filed with the auditor of Sandusky County, Ohio.

As of December

20, 2001, TMC was unaware of KQC's deed.

Mr. Marceron sent a letter to TMC dated January 8, 2002

Marceron's January 8, 2002 letter).

That letter stated in

pertinent part:

Please find enclosed our [KQC's] check #1135 in the

amount of Ten Thousand Five Hundred Dollars

($10,500.00) representing overpayment of rent for the

period from January 1, 2000 through December 31, 2001.

A review of our records indicates that you [TMC] have

continued to pay rent on the real estate, which our

partnership [KQC] believed that it owned, adjacent to

the property that we gifted to the Head Start Center in

December 1999.

It was not our intent to charge you

rent on the property that we have in fact gifted to

Texas Migrant Council, Inc.

Also enclosed is a copy of the Deed [KQC's deed] prepared by our attorney to evidence completion of our

(Mr.

- 35 intended gift.

We understand you have been unable to

locate a copy of this deed in your files.

Mr. Marceron enclosed with Mr. Marceron's January 8, 2002 letter

(1) a $10,500 check payable to TMC and (2) a copy of KQC's deed.

Respondent issued respective notices of deficiency (notices)

to the Kaplans, the Marcerons, and the Caldwells.

(We shall

refer to the respective notices to the Kaplans, the Marcerons,

and the Caldwells as petitioners'

petitioners'

respective notices.)

In

respective notices, respondent determined, inter

alia, to disallow petitioners'

respective claimed noncash chari-

table contribution deductions.

In petitioners'

respective

notices, respondent further determined that the Kaplans, the

Marcerons, and the Caldwells are liable for the accuracy-related

penalty under section 6662(a).

OPINION

Although respondent must have commenced respondent's exami-

nation of petitioners'

respective returns after July 22,

1998,

petitioners in each of these cases do not address section

7491(a).

On the record before us, we conclude that petitioners'

burden of proof in each of these cases,

Helvering,

290 U.S.

111,

115

(1933),

see Rule 142(a); Welch v.

does not shift to respondent

under section 7491(a) with respect to such petitioners'

respec-

tive deficiencies in tax that respondent determined.¹°

Moreover,

l°0n the record before us, we also find that petitioners in

each of these cases have failed to carry their burden of estab(continued...)

- 36 deductions are strictly a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to the deduction

claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).

We turn first to the issue presented under section 170.

parties agree that,

The

in order to be entitled to petitioners'

respective claimed noncash charitable contribution deductions,

petitioners must establish, inter alia, that KQC's claimed

noncash charitable contribution to TMC on December 31, 1999, of

the improved property on Maple Street¹¹ quali.fies as a charitable

contribution under section 170(a).¹²

(We shall hereinafter refer

to KQC's claimed noncash charitable contribution to TMC on

December 31,

tion to TMC.)

1999, as KQC's claimed noncash charitable contribuThe parties also agree that,

in order for KQC's

claimed noncash charitable contribution to TMC to qualify as a

charitable contribution under section 170(a), the following

essential elements of a valid inter vivos gift

(essential ele-

¹°(...continued)

lishing that they satisfied the applicable requirements of sec.

7491(a)(2).

¹¹The improved property on Maple Street consisted of KQC's

land and 1958 school building that KQC purchased in 1997 and any

improvements made by TMC to that property, including the new

building that TMC constructed thereon with HHS's grant funds.

¹²Sec. 170(a) generally allows a taxpayer a deduction for

any charitable contribution, as defined in sec. 170(c), made

during the taxable year.

Sec. 170(c) defines the term "charitable contribution" to mean a contribution or gift to or for the

use of one or more specified organizations.

The parties agree

that KQC is one of the organizations specified in sec. 170(c).

- 37 -

ments of a bona fide inter vivos gift) must be present:

(1) a donor competent to make the gift; (2) a

donee capable of taking the gift; (3) .a clear

and unmistakable intention on the part of the

donor to absolutely and irrevocably divest

himself of the title, dominion., and control

of the subject matter of the gift, in

praesenti; (4) the irrevocable transfer of

the present legal title and of the dominion

and control of the entire gift to the donee,

so that the donor can exercise no further act

of dominion or control over it; (5) a delivery by the donor to the donee of the subject

of the gift or of the most effectual means of

commanding the dominion of it; (6) acceptance

of the gift by the donee * * *

Guest v. Commissioner, 77 T.C. 9,

Commissioner, 31 B.T.A. 899,

15-16 (1981)

(quoting Weil v.

906 (1934), affd. 82 F.2d 561

(5th

Cir. 1936)).

The parties disagree over whether all of the essential

elements of a bona fide inter vivos gift were present on December

31,

1999, with respect to KQC's claimed noncash charitable

contribution to TMC.

According to petitioners, all of those

elements were present on that date.

Although respondent agrees

that certain of those elements were present on December 31,

1999,

respondent disagrees that all of those elements were present on

that date (or at any other time in 1999).¹³

13Respondent acknowledges, inter alia, that KQC owned and

was thus competent to make a gift of KQC's land and 1958 school

building.

However, respondent contends that KQC did not own., and

that the U.S. Government had an interest in, the new building

that TMC constructed on KQC's land with HHS's grant funds.

As a

result, according to respondent, KQC was not competent to give

the new building to TMC.

Respondent also contends that in 1999:

(continued...)

- 38 On the record before us, we find that petitioners in each of

these cases have failed to carry their burden of establishing

that all of the essential elements of a bona fide inter vivos

gift were present on December 31, 1999 (or at any other time in

1999) with respect to KQC's claimed noncash charitable contribution to TMC.

We shall address only whether one of those elements

was present on that date (or at any other time in 1999), viz,

whether KQC made an irrevocable transfer to TMC of legal title to

the improved property on Maple Street or to any portion of such

property.

That is because our resolution of that question is

determinative of the issue under section 170 presented in these

cases.

In support of their position that in 1999 KQC made an

irrevocable transfer to TMC of legal title to the improved

property on Maple Street or to the 1958 school building and the

new building on KQC's land," petitioners argue:

¹³(...continued)

(1) Although KQC intended to make a gift to TMC, KQC did not make

a gift to TMC; (2) KQC did not irrevocably transfer to TMC legal

title to and control over the improved property on Maple Street

or any portion of such property; (3) KQC did not deliver a gift

to TMC; and (4) TMC did not accept KQC's claimed noncash charitable contribution to TMC.

"In KQC's 1999 return, KQC reported KQC's claimed noncash

charitable contribution to TMC of the improved property on Maple

Street, i.e., KQC's land and 1958 school building that KQC

purchased in 1997 and any improvements made by TMC to that

property, including the new building that TMC constructed with

HHS's grant funds.

On brief, petitioners appear to muddle their

position as to what they claim KQC gave to TMC on Dec. 31, 1999.

(continued...)

- 39 KQC made an effective conveyance of its interest

in the improvements on December 31, 1999, as evidenced

by the bill of sale * * * and by the testimony of Mr.

Kaplan * * *.

The bill of sale was executed by KQC to

convey all of its rights, title and interest. in and to

the improvements and warrants that KQC is the lawful

owner of the improvements, which are free and clear of

all liens, and that KQC has the right to donate the

improvements.

These steps were taken in accord with

the advice and recommendation of Mr. Matamoros * * *

and using the form that Mr. Matamoros had provided

* * *.

The bill of sale was signed by the then President of TMC evidencing the acceptance of the contribution by TMC for the express consideration of ONE DOLLAR

($1.00) only.

The deed issued and recorded in March, 2001,

merely documents the manifest intent of the parties in

December, 1999.

Until this formality was completed, as

between the parties, the long-standing common law rule

in Ohio is that the grantee of a defective conveyance

has an equitable interest that can be enforced against

the grantor. * * * This substance of this rule is now

exists in Ohio Revised Code § 5301.25, which permits

only a bona fide purchased for value that does not have

knowledge of a prior conveyance that has not been

recorded to defeat such conveyance. * * *

There was a clear and unmistakable intention on

the part of KQC to transfer, in praesenti, all of the

title, dominion and control of the improvements to the

Helena property in December 1999.

The subsequent deed

to the land was executed and recorded in March 2001,

relating back to the contribution on December 31, 1999.

KQC has parted with all dominion and control over the

property in favor of TMC.

Presuming that the bill of

sale in December 1999 operates to convey only the

ownership of the improvements, it is an absolute and

"(...continued)

At times, petitioners appear to argue on brief that KQC gave to

TMC on Dec. 31, 1999, the 1958 school building and the new

building on KQC's land, but not KQC's land.

At other times,

petitioners appear to argue on brief that KQC gave TMC on Dec.

31, 1999, the improved property on Maple Street.

Because petitioners' position on brief is not clear, we shall consider

whether KQC made a gift to TMC on Dec. 31, 1999, of the improved

property on Maple Street or any portion of such property.

- 40 -

complete conveyance.

TMC retains no interest in the

improvements.

Conveyance of the improvements subject

to a land lease has been recognized as a deductible

charitable contribution. Arbor Towers Associates, Ltd.

v. Commissioner, 1999 T.C.Memo 213.

The substance of

this gift is substantially more than the right to use

the improvements rent-free.

[Reproduced literally.]

Petitioners' argument fails to address the requirements of

Ohio law (discussed below) that must have been satisfied in order

to establish one of the essential elements of a bona fide inter

vivos gift with respect to KQC's claïmed noncash charitable

contribution to TMC, viz, that KQC made an irrevocable transfer

to TMC of legal title to the improved property on Maple Street or

to any portion of such property.

reject petitioners'

On the record before us, we

argument that on December 31,

1999, KQC made

such an irrevocable transfer.

With respect to the bill of sale on which petitioners rely,

that bill of sale purports to convey to TMC all of KQC's rights,

title, and interest in and to only the "improvements" on KQC's

land, and not to KQC's land itself.,

With respect to the "im-

provements" to which the bill of sale referred, the parties

dispute whether such "improvements" consisted of the 1958 school

building, as respondent maintains, or both the 1958 school

building and the new building that TMC constructed on KQC's land

with HHS's grant funds,

as petitioners maintain.

resolve that dispute."

That is because,

We need not

assuming arguendo that

"We note, however, that, when Mr. Matamoros prepared the

(continued...)

- 41 -

the improvements to which the bill of sale referred consisted of

both the 1958 school building and the new building that TMC

constructed on KQC's land with HHS's grant funds, on the record

before us, we find that petitioners in each of these cases have

failed to carry their burden of establishing that on December 31,

1999 (or at any other time in 1999) KQC made an irrevocable

transfer to TMC of legal title to either such 1958 school building or such new building.

On that record, we further find that

petitioners in each of these cases have failed to carry their

burden of proving that on December 31,

1999

(or at any other time

in 1999) KQC made an irrevocable transfer to TMC of legal title

to KQC's land or to the improved property on Maple Street.¹6

The parties agree that we must look to the law of the State

of Ohio

1999

(Ohio law) in order to determine whether on December 31,

(or at any other time in 1999) KQC made an irrevocable

¹³(...continued)

bill of sale for KQC, he was.not aware that TMC had constructed a

new building on.KQC's land with HHS's grant funds.

¹°Indeed, as petitioners acknowledge, the bill of sale on

which they rely does not even purport to transfer KQC's land to

TMC.

Moreover, we reject petitioners' suggestion that the '

general warranty deed pertaining to the improved property on

Maple Street that Mr. Matamoros prepared for KQC between Feb. 8

and Mar. 13, 2001, and that Mr. Kaplan executed on behalf of KQC

on Mar.. 13, 2001, relates back to the bill of sale that Mr.

Kaplan executed on behalf of KQC on Dec. 31, 1999, thereby

supporting petitioners' position that on that date KQC made an

irrevocable. transfer to TMC of legal title to the improved

property on Maple Street or to any portion of such property.

Petitioners do not cite, and we have not found, any authority

supporting such a suggestion.

- 42 -

transfer. to TMC of legal title to the improved property on Maple

Street or to any portion of such property.

Ohio has held:

"Whether or not recorded,

The Supreme Court of

a deed in Ohio passes

title upon its proper execution and delivery, so far as the

grantor is able to convey it."

Wayne Bldg. & Loan Co. of Wooster

v. Yarborough, 228 N.E.2d 841,

853 (Ohio 1967); see also Kniebbe

v. Wade,

118 N.E.2d 833,

835 (Ohio 1954).

With respect to the requirement of "proper execution", Ohio

law in effect in 1999 required 'that,

in order for a deed of any

interest in real property to be executed properly, the

deed * * * shall be signed by the grantor * * *.

The

signing shall be acknowledged by the grantor * * * in

the presence of two witnesses, who shall attest the

signing and subscribe their names to the attestation.

The signing shall be acknowledged by the grantor * * *

before a judge or clerk of a court of record in this

state, or a county auditor, county engineer, notary

public, or mayor, who shall certify the acknowledgment .

and subscribe his name to the certificate of the acknowledgment.

Ohio Rev. Code Ann. sec. 5301.01

(Anderson 1999).

(We.shall

hereinafter refer to Ohio Rev. Code Ann. sec. 5301.01

(Anderson

1999) in effect in 1999 as section 5301.01 of the Ohio Revised

Code in effect in 1999.)

1,

As pertinent here, effective February

2002, there was an amendment (2002 amendment) of section

5301.01 of the Ohio Revised Code in effect in 1999, which. deleted

the second sentence thereof (quoted above).

If a deed" was

"Although KQC used a document entitled "Bill of Sale",

respondent does not appear to suggest that such document may not

(continued...)

- 43 executed prior to February 1, 2002, the effective date of the

2002 amendment, and was not acknowledged in the presence of, or

was not attested by, two witnesses, but was signed by the grantor

and acknowledged by the grantor before a judge or clerk of a

court of record in Ohio, or a county auditor, county engineer,

notary public, or a mayor, who certified the acknowledgment and

subscribed his or her name to the certificate of the acknowledgment, as required by section 5301.01 of the Ohio Revised Code in

effect in 1999, inter alia, the instrument is deemed executed

properly and is presumed to be valid unless the signature of the

grantor was obtained by fraud.

Ohio Rev. Code Ann. sec.

5301.01

(LexisNexis Supp. 2005).

On the record before us, we find that the bill of sale that

Mr. Kaplan executed on behalf of KQC on December 31,.1999, was

not properly executed in accordance with section 5301.01 of the

Ohio Revised Code in effect.in 1999 and,

2002 amendment.

as pertinent here,

the

That is because the signing of the bi-ll of sale

by Mr. Kaplan on behalf of KQC was not acknowledged by him on

behalf of KQC before a judge or clerk of a court of record in

Ohio, a county auditor, county engineer, notary public, or mayor,

who certified the acknowledgment and subscribed his or her name

to the certificate of the acknowledgment.

¹²(...continued)

constitute a deed for purposes of Ohio law.

Thus, we shall

proceed on the assumption that such document may constitute a

deed for purposes of Ohio law.

- 44 -

With.respect to the additional requirement of Ohio law that,

in order to pass title, there must be delivery of a properly

executed deed, Wayne Bldg.

& Loan Co. of Wooster v. Yarborough,

supra, on the record before us, we find that that additional

requirement was nöt satisfied on December 31, 1999 (or at any

other time in 1999).

We have found that KQC did not deliver the

bill of sale to TMC until March 27,

2000.¹ª

We have found on the record before us that petitioners in

each .of these cases have failed to carry their burden of estab-

lishing that on December 31, 1999 (or at any other time in 1999)

KQC made an irrevocable transfer to TMC of legal title to the

improved property on Maple Street or to any portion of such

property.

On that record, we further find that petitioners in

each of these cases have failed to carry.their burden of establishing that all of the essential elements of a bona fide inter

vivos gift were present on December 31,

1999 (or at any other

time in 1999) with respect to KQC's claimed noncash charitable

contribution to TMC.¹9

¹ªOn brief, petitio.ners acknowledge that TMC did not receive

the bill of sale from KQC until Mar. 27, 2000.

We rejected above

petitioners' suggestion that the general warranty deed pertaining

to the improved property on Maple Street that Mr. Kaplan executed

on behalf of KQC on Mar. 13, 2001, relates back to the bill of

sale and thereby effected in 1999 an irrevòcable transfer by KQC

to TMC of legal title to such property or any portiön of such

property.

See supra note 16.

¹9Consequently, we need not address whether on Dec. 31, 1999

(or at any other time in 1999) the remaining essential elements

(continued...)

- 45 -

Based upon our examination of the entire record before us,

we find that petitioners in each of these cases have failed to

carry their burden of establishing that under section 170 they

are entitled for 1999 to petitioners'

respective claimed noncash

charitable contribution deductions or to any other deductions

attributable to KQC's claimed noncash charitable contribution to

TMC of the improved property on Maple Street or any portion of

such property.

"(...continued)

of a bona fide inter vivos gift that are in dispute were present

with respect to KQC's claimed noncash charitable contribution to

TMC.

Nor do we have to address respondent's position that

petitioners in each of these cases have failed to carry their

burden of showing that they substantially complied with all of

the substantiation requirements under sec. 170 and the regulations thereunder.

We note, however, that Mr. Mumford's December

17,.1999 letter (1) did not contain the actual or expected date

of a charitable contribution of all or a portion of the improved

property on Maple Street that was the subject of that letter,

(2) did not.indicate that Mr. Mumford prepared it in order to

substantiate a charitable contribution for tax purposes, and

(3) made no reference to the notice of Federal interest that on

May 15, 1998, was filed with respect to the improved property on

Maple Street with the Sandusky County.recorder's office.

We also

note (1) that KQC's Form 8283 included as part of KQC's 1999

return did not contain certain information required by that form

(e.g., the date and manner of KQC's acquisition of the property

purportedly contributed to TMC or the cost or other basis of such.

property, adjusted as provided by sec. 1016) and (2) that the

donee acknowledgment in that form was not completed by TMC but

was left blank.

Finally, in light of our finding that petitioners have failed to carry their burden of establishing that all of

the essential elements of a bona fide inter vivos gift were

present on Dec. 31, 1999 (or at any other time in 1999) with

respect to KQC's claimed noncash charitable contribution to TMC,

we need not address the parties' dispute over the fair market

value of any such claimed contribution.

In'this regard, we need

not make any comments in addition to the comments that we made at

the trial in these cases with respect to the parties' respective

experts and such experts' respective reports.

- 46 We turn now to the issue presented under section 6662.

Respondent determined that petitioners in each of these cases are

liable for 1999 for the accuracy-related penalty under section

6662(a) because of a gross valuation misstatement under section

6662(h).

In the alternative,

respondent determined that peti-

tioners are liable for 1999 for that penalty because of negligence or disregard of rules or regulations under section

6662(b)(1) or a substantial understatement of tax under section

6662(b)(2).

On brief, respondent concedes that if the.Court were

to find that petitioners are not entitled for 1999 to the respective charitable contribution deductions that they are claiming

"on the ground that KQC did not transfer property to TMC in 1999,

or on the ground that KQC did not meet the substantiation requirements of I.R.C. § 170", petitioners would not be liable for

the accuracy-related penalty because of a gross valuation mis-

statement under section 6662(h).

Consequently, we consider only

respondent's alternative argument that petitioners are liable for

the accuracy-related penalty under àection 6662(a) because of

negligence or disregard of rules or regulations under section

6662(b)(1) or a substantial understatement of tax under section

6662(b)(2).

Section 6662(a) 1mposes an accuracy-related penalty equal to

20 percent of thé.underpayment of tax attributable to.,

alia, a substantial.understatement of tax, sec.

inter

6662(b)(2).

An

- 47 -

understatement is equal to the excess of the amount of tax

required to be shown in the tax return over the amount of tax

shown in the tax return, sec. 6662(d)(2) (A), and is substantial

in the case of an individual if it exceeds the greater of 10

percent of the tax required to be shown or $5,000, sec.

6662(d)(1)(A).

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to,

such portion.

Sec. 6664(c)(1).

The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circumstances,

including the taxpayer's efforts to assess such tax-

payer's proper tax liability, the kndwledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant or an attorney.

Regs.

Sec. 1.6664-4(b)(1), ,Income Tax

The determination of whether a taxpayer acted with reason-

able cause and in good faith with respect to an underpayment that

is related to an item reflected in the return of a passthrough

entity is made on the basis of all the pertinent facts and

circumstances, including the taxpayer's own actions, as well as

the actions of the passthrough entity.

Tax Regs.

Sec.

1.6664-4(e),

Income

Reliance on the advice of a professional does not

necessarily demonstrate reasonable cause and good faith.unless,

- 48 under all the circumstances, such reliance was reasonable and the

taxpayer acted in good faith.

Regs.

Sec. 1.6664-4(b)(1),

Income Tax

In this connection, a taxpayer must demonstrate that the

taxpayer's reliance on the advice of a professional concerning

substantive tax law was objectively reasonable.

Commissioner, 39 F.3d 402, 408

1993-480.

Goldman v.

(2d Cir. 1994), affg. T.C. Memo.

In the case of claimed reliance on the accountant who

prepared the taxpayer's tax return, the taxpayer must establish

that correct and complete information was provided to the accountant and that the item incorrectly omitted, claimed, or reported

in the return was the result of the accountant's error.

Westbrook v. Commissioner,

68 F.3d 868,

881

See

(5th Cir. 1995),

affg. T.C. Memo. 1993-634; Weis v. Commissioner,

94 T.C. 473, 487

(1990); Ma-Tran Corp. v. Commissioner, 70 T.C. 158,

173 (1978).

Respondent has the burden of production under section

7491(c) with respect to the accuracV-related penalty under

section 6662(a).

To meet that burden, respondent must come

forward with sufficient evidence showing that it is appropriate

to impose the accuracy-related penalty.

116 T.C. 438,

446 (2001).

Hiobee v. Commissioner,

Although respondent bears the burden

of production with respect to the accuracy-related penalty at

issue,

respondent "need not introduce evidence regarding reason-

able cause,

substantial authority, or similar provisions. * * *

the taxpayer bears the burden of proof with regard to those

-

issues."

49

-

.

.

Id.

On brief, petitioners in each of these consolidated cases.

indicate that they are not disputing certain determinations in

petitioners'

respective notices that gave rise to a portion of

the respective deficiencies that respondent determined.

We have

sustained the remaining determinations in petitioners' respective

notices that petitioners in each of these cases have contested

and that gave rise in large part to the respective deficiencies

that respondent determined.

nations in petitioners'

As a result,

the deficiency determi-

respective notices are sustained in full.

On the record before us, we find that there are substantial

understatements of tax in petitioners'

1999.

respective returns for

On that record, we find that respondent has satisfied

respondent's burden of production under section 7491(c).

Petitioners argue that respondent's determinations under

section 6662(a) are wrong because "KQC made a good faith and

reasonable effort to obtain qualified professional advice regarding its ability to claim a tax deduction for the charitable

contribution and the requirements to sustain that deduction."2°

(We shall refer to that argument as petitioners' professional

advice argument.)

On the record before us, we reject petition-

ers' professional advice argument.

On that record, we find that

2°Petitioners in each of these cases advance no argument

with respect to the portions of the underpayments in petitioners'

respective returns for 1999 that are attributable to determinations in the respective notices that petitioners do not dispute.

- 50 the various advisors on whom KQC claims to have relied did not

have complete and accurate information with respect to KQC's

claimed noncash charitable contribution to TMC.

By way of

illustration, when Mr. Matamoros prepared Mr. Matamoros's December 30,

1999 letter and the bill of sale that petitioners claim

transferred to TMC the "improvements" on KQC's land, including

the new building that TMC constructed with HHS's grant funds, he

was not aware of (1) that new building2¹ and (2) the notice of

Federal interest that was filed on May 15,

1998, with respect to

the improved property on Maple Street with the Sandusky County

recorder's office.22

By way of further illustration that the various advisors on

which KQC claims to have relied did not have complete and accurate information, representatives of Ernst & Young23 whom KQC

2¹In his testimony at the trial in these cases, Mr.

Matamoros expressed the view that any new building that TMC

constructed on KQC's land with HHS's grant funds about.which he

was unaware when he prepared Mr. Matamoros's December 30, 1999

letter and the bill of sale would be owned by KQC, but only upon

termination of the April 21, 1997 lease pursuant to its terms or

earlier if TMC were to be in default under such lease and were to

be evicted by KQC.

22Mr. Kaplan testified that he did not become aware until

shortly before the·trial in these cases that a notice of Federal

interest with respect to the improved property on Maple Street

had been filed with the Sandusky County recorder's office.

Even

if we were to accept Mr. Kaplan's testimony, such testimony does

not change the fact that neither Mr. Matamoros nor Ernst & Young

representatives were aware of the filing of such notice of

Federal interest.

23Mr. Kaplan on behalf of KQC consulted Ms. Schadle, a tax

(continued...)

- 51 -

consulted with respect to KQC's claimed noncash charitable

contribution to TMC were not aware that TMC had constructed a new

building on KQC's land with HHS's grant funds.24

Nor were such

representatives aware that KQC was claiming in KQC's 1999 return

a charitable contribution for the improved property on Maple

Street,25 see supra note 11,

in an amount equal to the prelimi-

nary real estate appraisal

(i.e., $1,025,000)

Mumford's December 17,

set forth in Mr.

1999 letter for such improved property.

Furthermore, Ernst & Young representatives.did not know that on

May 15,

1998, a notice of Federal interest with respect to the

23(...continued)

principal with Ernst & Young in 1999 and 2000, and Mr. Marceron

on behalf of KQC consulted Mr. Johnston, a tax specialist with

Ernst & Young in 2000 who prepared KQC's 1999 return on the basis

of information provided to him.by KQC. Although Mr. Tutor, a tax

manager with Ernst & Young in 2000, signed KQC's 1999 return as

return preparer, the record does not disclose that KQC representatives consulted him directly.

24In discussions that Mr. Johnston had with Mr. Marceron

about KQC's claimed noncash charitable contribution to TMC, Mr.

Marceron did not inform Mr. Johnston that TMC had constructed a

new building on KQC's land with HHS's grant funds.

Instead, Mr.

Marceron advised Mr. Johnston that KQC had contributed to TMC a

building located on the improved property on Maple Street, which

had a cost basis of $95,000 on KQC's books and an appraised value

of $1 million.

Mr. Marceron explained to Mr. Johnston that the

value of the building that KQC claimed to have given to TMC had

increased to $1 million because TMC had made improvements to that

building.

25Mr. Kaplan and Mr. Marceron informed certain Ernst & Young

representatives that KQC intended to and did give to a tax-exempt

organization a building located on certain land that KQC owned.

They did not advise those representatives that KQC intended to

and did give to a tax-exempt organization certain land that KQC

owned, including all of the buildings and improvements on such

land.

- 52 improved property on Maple Street had been filed with the

Sandusky County recorder's office.

The record establishes that none of the advisors on whom KQC

claims to have relied gave any advice regarding the noncash

charitable contribution to TMC that KQC claimed in KQC's 1999

return of the improved property on Maple Street consisting of

KQC's land and 1958 school building that KQC purchased in 1997

and any improvements made by TMC to that property, including the

new building that TMC constructed thereon with HHS's grant funds.

On the record before us, we find that petitioners have failed to

carry their burden of establishing that KQC's claimed reliance on

certain advisors was objectively reasonable.

Commissioner, 39 F.3d at 408.

See Goldman v.

On that record, we further find

that petitioners have failed to carry their burden of establishing that the noncash charitable contribution to TMC of the

improved property on Maple Street that KQC claimed in KQC'S 1999

return and petitioners' respective claimed noncash charitable

contribution deductions were the result of any error on the part

of the advisors on whom KQC claims to have relied.

v. Commissioner,

See Westbrook

68 F.3d at 881.

Finally, in our consideration of the issue presented under

section 6662, we have in mind that, in discussions that Mr.

Johnston had with Mr. Marceron with respect to KQC's claimed

noncash charitable contribution to TMC, Mr. Marceron indicated

- 53 that he believed that claiming a deduction with respect to such

claimed charitable contribution would be a "push"; that is to

say, Mr. Marceron believed that there was a substantial risk that

respondent would disallow any such claimed deduction.

On the record before us, we find that petitioners in each of

these cases have failed to carry their burden of establishing

that there was reasonable cause for, and that they acted in good

faith with respect to, any portion of the underpayments in

petitioners'

respective returns for 1999.

Based upon our examination of the entire record before us,

we find that petitioners in each of these cases have failed to

carry their burden of establishing that they are not liable for

1999 for the accuracy-related penalty under section 6662(a)

because of a substantial understatement of tax under sec.

6662(b)(2).26

We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

26In light of our finding under sec. 6662(a) and (b)(2), we

need not address respondent's argument that petitioners in each

of these cases are liable for 1999. for the accuracy-related

penalty under sec. 6662(a) because of negligence or disregard of

rules or regulations under sec. 6662(b)(1).

- 54 To reflect the foregoing and the concessions of the parties,

Decisions wi.ll be entered

for respondent with respect to·

petitioners'

respective deficien-

cies and the respective accuracyrelated penalties under section

6662 (a) and (b) (2) .