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US TAX COURT ges US TAX COURT CLC RECEIVED % efiled JUN 24 2011 * JUN 24 2011 06:47 PM UNITED STATES TAX COURT ERNEST & BARBARA KAFKA, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Re spondent. ) ) ) ) ) Docket No. 26119-09 ) ) Filed Electronically ) ) RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT RESPONDENT MOVES, pursuant to the provisions of T.C. Rule 121, for a partial summary adjudication in respondent's favor in this case upon the issues of (1) whether petitioners' valuation report, prepared by Jerome Haims Realty, Inc. (the "JHR report"), is a qualified appraisal as defined in section 155(a) (4) of the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 691, and Treas. Reg. 1.170A-13(c) (3); (2) whether petitioners attached to their return a fully completed appraisal summary as required by DEFRA 155 (a) (1) (B) and (a) (3) and Treas. Reg. 1.170A-13 (c) (2) (B) ; (3) whether the doctrine of substantial compliance applies to the JHR report and appraisal summary; and (4) whether petitioners contributed a conservation easement in 2003. The granting of this motion will completely resolve the non-cash contribution deduction at issue in this case, leaving for trial only the deductibility of a cash contribution for the

Docket No. 26119-09 - 2 - taxable year 2003 and whether petitioners are liable for penalties under I.R.C. 6662 (h) (for the taxable years 2003 and 2004) and I.R.C. 6662(a) (for the taxable year 2003). IN SUPPORT THEREOF, respondent respectfully states: I. Background 1. At the time of filing the petition in this case, petitioners resided at 23 East 924 Street, New York, NY 10128-0607. 2. The pleadings in this case were closed on February 16, 2010. 3. This motion is made at least 30 days after the date that the pleadings in this case were closed and within such time as not to delay the trial. Tax Court Rule 121(a). 4. In support of this motion, respondent is filing a Memorandum of Law in Support of Respondent's Motion for Partial Summary Judgment ("memorandum" or "respondent's memorandum"), and incorporates that memorandum into this motion. 5. In the notice of deficiency upon which this case is based, respondent determined deficiencies of tax in the amount of $113,455.00 and $21,963.00, for the taxable years 2003 and 2004, respectively. Attached as Exhibit A to the declaration of attorney Derek W. Kelley filed in connection with this motion is a copy of the notice of deficiency. The deficiency amounts were the result of a disallowed noncash charitable deduction for 2003

Docket No. 26119-09 - 3 - in the amount of $405,197.00 and a disallowed carryover noncash charitable deduction for 2004 in the amount of $144,803.00. Respondent determined that petitioners had not established that all of the requirements of I.R.C. 170 had been satisfied for the noncash charitable contribution of a qualified conservation contribution, and, alternatively, had not established that the value of the contributed property was $550,000 as claimed on the 2003 return.1 6. The noncash charitable contribution deduction at issue for 2003 and the carryover noncash charitable contribution deduction for 2004 both relate to a Conservation Deed of Easement (the "Conservation Deed") granted by petitioner Barbara Kafka to the Trust for Architectural Easements f/k/a National Architectural Trust (the "Trust"), for 23 East 92" Street, New York, New York, a five story, two family residence (the "Property"). The notice of deficiency also asserts penalties under I.R.C. 6662 (h) in the amounts of $45,382.00 and $8,785.20 for 2003 and 2004, respectively. Also, although not part of the notice of deficiency, respondent filed an amended answer asserting a disallowance of a 2003 cash donation, resulting in an increase in the 2003 deficiency of $15,134.00 and a penalty under I.R.C. 6662(a) of $3,026.80. A trial on these issues will still be necessary if the Court grants this motion for partial summary judgment.

Docket No. 26119-09 - 4-7. The Conservation Deed is dated December 10, 2003 and was signed by a representative of the Trust on December 12, 2003. 8. The Conservation Deed was recorded on March 13, 2004 in the Office of the City Register of the City of New York. Attached as Exhibit B to the declaration of attorney Derek W. Kelley is a copy of the Conservation Deed along with the accompanying recording and Endorsement Cover Page showing a "Recorded/ Filed" date of "03-13-2004". 9. In connection with the easement grant, petitioner Barbara Kafka obtained a report from Jerome Haims Realty, Inc. entitled "Complete Summary Appraisal of a Historical Preservation Easement Located at 23 East 92 a Street, New York, New York" (the "JHR report"). Attached as Exhibit C to the declaration of attorney Derek W. Kelley is a copy of the JHR report.2 10. The JHR report states that it was prepared on December 16, 2003 and relates to a valuation and inspection of the Property on October 22, 2003. 2 The JHR report was obtained from Jerome Haims Realty, Inc. pursuant to a summons after petitioners failed to provide an appraisal report during the examination.

Docket No. 26119-09 - 5-11. Petitioners attached to their 2003 income tax return a partially completed page 2 of a Form 8283 (the "Form 8283" or "petitioners' Form 8283"). Attached as Exhibit D to the declaration of attorney Derek W. Kelley is a copy of the Form 8283. 12. In Section B, Part I, line 5(a) of the Form 8283 petitioners describe the donated property as "23 East 9240 St.". On line (5) (b) petitioners describe the donated property further as "Historic Preservation Easement." 13. Section B, Part I, lines 5(d), (e), (f) and (g) of the Form 8283 are blank. 14. Section B, Part III, of the Form 8283 states that the date of appraisal of the donated property was October 22, 2003. Section B, Part IV, of the Form 8283 states that the donated property was received by the donee on December 11, 2003. II. The JHR Report Is Not a "Qualified Appraisal" 15. The JHR report fails to include a method of valuation for determining the fair market value of the façade easement as required by DEFRA 155(a) (4) and Treas. Reg. 1.170A- 13(c) (3) (ii) (J). 16. The JHR report utilizes what it calls the "Court Case History Measurement" method as its so-called method to determine

Docket No. 26119-09 - 6 - the correct value of the façade easement. This is no method at all. 17. The JHR report fails to include a "specific basis" for the valuation as required by Sec. 155(a) (4) (B) of DEFRA and Treas. Reg. 1.170A-13(c) (3) (ii) (K). 18. The JHR report uses comparable sales as a basis for determining the before value, but uses no basis at all for determining the after value and no basis for determining the easement value. 19. The JHR report fails to include the fair market value on the date of contribution as required by Section 155(a) (4) (B) of DEFRA and Treas. Reg. 1.170A-13(c) (3) (ii) (C) and (I), by omitting the date or expected date of contribution. 20. The JHR report was not timely, as required by Treas, Reg. 1.170A-13(c) (i) (A). 21. The JHR report states that it was prepared on December 16, 2003, but the Conservation Deed was not recorded until March 13, 2004. Under applicable New York law, N.Y. Env. Law 49-0305(4), March 13, 2004 was the easement's effective date. 22. The JHR report does not describe the property appraised as required by DEFRA 155(a) (4) (A) and Treas Reg. 1.170A- 13(c) (3) (ii) (A).

Docket No. 26119-09 - 7-23. The JHR report attaches a blank Conservation Deed of Easement form, which fails to list the address of the subject property, the legal description of the property, the day the easement was granted, the donor, and the address of the donor. 24. Therefore, the JHR report is not a "qualified appraisal" under Treas. Reg. 1.170A-13(c) (3). III. Petitioners Failed to Attach a Fully Completed Appraisal Summary 25. DEFRA 155(a) (1) (B) and (3) requires an appraisal summary to be attached to returns claiming noncash contribution deduction in excess of $5,000. Treas. Reg. 1.170A-13(c) (2) (2B) states that for charitable contribution deductions in excess of $5,000, a taxpayer must substantiate a claimed charitable contribution deduction by attaching a "fully completed appraisal summary" to the tax return on which the deduction for the contribution is first claimed. 26. Treas. Reg. 1.170A-(13) (c) (4) (ii) (lb) requires that an appraisal summary include a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed. 27. The Form 8283 fails to adequately describe the donated property.

Docket No. 26119-09 - 8-28. Section B, Part I, lines 5(a) and (b) of the Form 8283 describe the façade easement as merely "23 East 92" St." and "Historic Preservation Easement", respectively. 29. Section B, Part I, lines 5(d), (e), (f) and (g) of the Form 8283 are blank, so that the Form 8283 fails to state the manner and the date of the acquisition of the property, the cost or other basis of the property, or whether the contribution of the easement was made in a bargain sale, as required by DEFRA 155(a) (1) (c) and Treas. Reg. 1.170A-(13) (c) (4) (ii) (D), (E) and (H). 30. Section B, Part III of the summary states that the date of appraisal is October 22, 2003 and Section B, Part IV states that the donee accepted the donated property on December 11, 2010. 31. The Form 8283 fails to include the appraised fair market value of the property on the date of the contribution as required by Treas. Reg. 1.170A-(13) (c) (4) (ii) (J). IV. The Doctrine of Substantial compliance Does Not Apply in This Case 32. Petitioners may argue that even if the JHR report and appraisal summary did not meet all of the statutory and regulatory requirements, they have substantially complied.

Docket No. 26119-09 - 9-33. Section 155(a) of DEFRA sets forth clear mandates that a taxpayer claiming a deduction for a charitable contribution must substantiate a noncash contribution in the manner set forth in the statutes and regulations as prescribed by the Secretary. 34. The Secretary has prescribed detailed regulations for taxpayers claiming deductions in excess of $5,000 for certain charitable contributions of property. See generally Treas. Reg. 1.170A-13(c). This regulation, including Treas. Reg. 1.170A-13 (c) (2) (i), was promulgated pursuant to the Congressional mandate in section 155 of DEFRA. 35. DEFRA and the mandated regulations thereunder must receive deference under the standard set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984). 36. Consequently, the doctrine of substantial compliance is not applicable to the "qualified appraisal" and "appraisal summary" requirements in this case. They must be strictly construed. Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.). V. The Conservation Easement Was Not Transferred in 2003 37. Under New York law the Conservation Deed did not become effective until it was recorded on March 13, 2004.

Docket No. 26119-09 - 10-38. Since the Conservation Deed did not become effective until 2004, for purposes of I.R.C. 170 the easement was not transferred in 2003 and petitioners are not entitled to a charitable contribution deduction for the easement in 2003. VI. Conclusion 39. The JHR report is not a qualified appraisal as defined in section 155(a) (4) of DEFRA and Treas. Reg. 1.170A-13(c) (3 40. Petitioners did not attach to their return a fully completed appraisal summary as required by DEFRA 155(a) (1) (B) and (a) (3) and Treas. Reg. 1.170A-13(c) (2) (B). 41. The doctrine of substantial compliance does not apply to the JHR report and appraisal summary. 42. For purposes of I.R.C. 170 the easement was not transferred in 2003. 43. Respondent respectfully states that counsel of record has reviewed the administrative file and on the basis of the review of the file and the pleadings, concludes that there remains no genuine issue of material fact for trial upon the issues stated above. 44. Petitioners object to the granting of this motion.

Docket No. 26119-09 - 11 - WHEREFORE, respondent requests that this motion be granted. WILLIAM J. WILKINS Chief Counsel Internal Revenue Service Date: D REK W. KELLEY Attorney (Small Business/Self-Employed) Tax Court Bar No. KD0442 Tip O'Neill Bldg. 10 Causeway Street Room 401 Boston, MA 02222-1061 Telephone: (617) 565-7860 OF COUNSEL: THOMAS R. THOMAS Division Counsel (Small Business/Self-Employed) FRANCES F. REGAN Area Counsel (Small Business/Self-Employed:Area 1) JANET F. APPEL Associate Area Counsel (Small Business/Self-Employed)

US TAX COURT CLC p3es oo US TAX COURT efiled RECEIVED JUN 24 2011 06:50 PM * JUN 24 2011 UNITED STATES TAX COURT ERNEST & BARBARA KAFKA, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 26119-09 ) ) Filed Electronically ) ) MEMORANDUM OF LAW IN SUPPORT OF RESPONDENT' S MOTION FOR PARTIAL SUMMARY JUDGMENT Respondent files this Memorandum of Law in support of his Motion for Summary Judgment on the questions of (1) whether petitioners' valuation report, prepared by Jerome Haims Realty, Inc. (the "JHR report"), is a qualified appraisal as defined in section 155 (a) (4) of the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 691, and Treas. Reg. 1.170A-13(c) (3); (2) whether petitioners attached to their return a fully completed appraisal summary as required by DEFRA 155 (a) (1) (B) and (a) (3) and Treas. Reg. 1.170A-13(c) (2) (B); (3) whether the doctrine of substantial compliance applies to the JHR report and appraisal summary; and (4) whether petitioners contributed a conservation easement in 2003. respondent's motion should be For the reasons discussed below, granted. I. SUMMARY JUDGMENT IS APPROPRIATE WHERE THERE IS NO GENUINE DISPUTE AS TO ANY MATERIAL FACT This Court may grant summary judgment where there is no SERVED Jun 27 2011

Docket No. 26119-09 - 2 - genuine issue of material fact and a decision may be rendered as a matter of law. T.C. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Disputes over facts that are not outcomedeterminative will not preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the Court does not weigh the evidence, but determines "whether there is a genuine issue for trial." Id. at 249. In making this determination, the Court construes all facts in a light most favorable to the nonmoving party and views all inferences drawn from the evidence in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986), citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); see also Lockheed Martin Corp. v. United States, 70 Fed. Cl. 745, 749 (2006); L.P. Consulting Group, Inc. v. United States, 66 Fed. Cl. 238, 240 (2005). II. PETITIONERS FAILED TO OBTAIN A "QUALIFIED APPRAISAL" A deduction for a charitable contribution is allowed only if verified by the taxpayer under regulations prescribed by the Secretary. I.R.C. 170(a) (1). In section 155(a) of DEFRA Congress provided a mechanism for the Commissioner to obtain sufficient return information to deal more effectively with the

Docket No. 26119-09 - 3 - prevalent use of charitable contribution overvaluations. Hewitt v. Commissioner, 109 T.C. 258, 265 (1997) (citing S. Comm. on Finance, Deficit Reduction Act of 1984, S. Rep. 98-169 (Vol. I), at 444-445 (S. Comm. Print 1984), and Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (J. Comm. Print 1985)), aff'd without published opinion, 166 F.3d 332 (4th Cir. 1998), In section 155(a) (1) of DEFRA, Congress addressed the potential for abuse in valuing noncash contributions, directing the Secretary to prescribe regulations under I.R.C. 170(a) (1) requiring taxpayers claiming charitable contribution deductions under I.R.C. 170 in excess of $5,000 to obtain qualified appraisals of the property contributed. Pursuant to detailed directions in section 155(a) of DEFRA, the Secretary issued Treas. Reg. 1.170A-13(c), stating that a deduction for a noncash contribution in excess of $5,000 will not be allowed unless the taxpayer obtains a "qualified appraisal" of the property contributed. DEFRA 155(a) (1) (A); Treas. Reg. 1.170A-13(c) (2) (i) (A). No deduction is allowed for a contribution of property for which an appraisal is required unless the "statutorily imposed" requirements of DEFRA 155(a) (1) (A) and 170(a) (1) for a qualified appraisal are satisfied. Hewitt v. Commissioner at

Docket No. 26119-09 - 4-263. The obligation to substantiate charitable contributions is clear and unambiguous. Blair v. Commissioner, T.C. Memo. 1988-581.1 Petitioners rely upon the JHR report to support the claimed deductions. Declaration of Derek W. Kelley, Exhibit C.2 As discussed below, the JHR report is not a "qualified appraisal" as defined by DEFRA 155(a) (4) and Treas. Reg. 1.170A- 13 (c) (3). DEFRA 155(a) (4) states that a qualified appraisal means an appraisal prepared by a qualified appraiser which includes: (A) A description of the property appraised; (B) the fair market value of such property on the date of contribution and the specific basis for the valuation; (C) a statement that such appraisal was prepared for income tax purposes; (:D) (E) the qualifications of the qualified appraiser; the signature and TIN of such appraiser; and I.R.C. 170(f) (11), as added by section 883 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004), strengthened the statutory substantiation requirements in DEFRA. Section 170(f) (11), however, does not apply to petitioners' case since I.R.C. 170(f) (11) is only effective for contributions made after June 3, 2004. The conservation contribution in this case was made before the I,R.C. 170(f) (11) effective date. 2 All subsequent references to Exhibits are to those attached to the declaration of attorney Derek W. Kelley, filed in connection with Respondent's Motion for Partial Summary Judgment.

Docket No. 26119-09 - 5 - (F) such additional information as the Secretary prescribes in such regulations. Section 1.170A-13(c) (3) (i) states that a "qualified appraisal" means an appraisal document that: (A) Relates to an appraisal that is made not earlier than 60 days prior to the date of contribution of the appraised property nor later than the date specified by Treas. Reg. 1.170A-13(c) (3) (iv) (B); (lb) Is prepared, signed and dated by a qualified appraiser; (C) Includes the information required by Treas. Reg. 1.170A-13(c) (3) (ii); and (:D) Does not involve an appraisal fee prohibited by Treas. Reg. 1.170A-13(c) (6). Section 1.170A-13(c) (3) (ii) requires a qualified appraisal to include the following information: (A) A sufficiently detailed description of the property so a person who is not generally familiar with the type of property can determine that the property contributed is the same property appraised; (B) In the case of tangible property, the physical condition of the property; (C) The date (or expected date) of contribution to the donee; (D) The terms of any restriction on disposition of the property contributed; (E) The name, address, and identifying number of the qualified appraiser; (F) The qualifications of the appraiser who signs the

Docket No. 26119-09 - 6 - appraisal; (G) A statement that the appraisal was prepared for income tax purposes; (H) The date on which the property was appraised; (I) The appraised fair market value (within the meaning of Treas. Reg. 1.170A-1(c) (2)) of the property on the date (or expected date) of contribution; (J) The method of valuation to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and (K) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed. In this case, the appraisal fails to comply with the many statutory and regulatory requirements for a qualified appraisal. Specifically, the requirements of DEFRA 155(a) (4) (B) (requiring the appraisal to include "the specific basis for the valuation"), DEFRA 155(a) (4) (A) (requiring the appraisal to include "a description of the property appraised"), and Treas. Reg. 1.170A-13(c) (3) (ii) (J) & (K) (requires the appraisal to include the method and basis for the valuation), are not met. In addition, the appraisal does not include the date or expected date of contribution to the donee, as required by DEFRA 155(a) (4) (]B) and Treas. Reg. 1.170A-13(c) (3) (ii) (C), or the appraised fair market value of the easement on the date or

Docket No. 26119-09 - 7 - expected date of contribution, as required by DEFRA 155(a) (4) (:B) and Treas. Reg. 1.170A-13(c) (3) (ii) (I). Also, the appraisal report was not timely prepared. See Treas. Reg. 1.170A-13(c) (3) (i) (A). Because the appraisal that petitioners rely on to substantiate their charitable contribution deduction is not a "qualified appraisal," as expressly described in detail in DEFRA 155(a) (4) and Treas. Reg. 1.170A-13(c) (3), the petitioners' noncash charitable contribution deduction must be disallowed. A. The JHR report fails to include a method of valuation for determining the fair market value of the façade easement as required by Treas. Reg. 1.170A- 13(c) (3) (ii) (J). In order to be a "qualified appraisal," an appraisal must include the method of valuation used to determine the fair market value such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach. Treas. Reg. 1.170A-13 (c) (3) (ii) (J). When appraisal reports do not provide the method or the specific basis for a valuation, a charitable contribution deduction should be disallowed. See D'Arcangelo v. Commissioner, T.C. Memo. 1994-572; see also Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.); 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84 (April 12,

Docket No. 26119-09 - 8-2011); But cf. Commissioner v. Simmons, 2011 U.S, App. LEXIS 12480 (D.C. Cir. June 21, 2011), aff's T.C. Memo. 2009-208 (stating that the Tax Court "did not clearly err" in concluding the appraisal sufficiently identified the method and basis). This Court's objective in easement contribution cases is to determine whether, and to what degree, the easement changes the use and value of the subject property. Hilborn v. Commissioner, 85 T.C. 677, 689-690 (1985). The "before and after" approach accomplishes this objective by subtracting the value of the property immediately after the imposition of the easement from the value of the property immediately before the imposition of the easement. Id. Congress provided substantial, detailed guidance in the legislative history of I.R.C. 170(h) about the "before and after" approach, much of which was incorporated in Treas. Reg. 1.170A-14(h) (3). See S. Rept. No. 96-1007, at 14-15 (1980), 1980-2 C.B. 599, at 606. Congress explicitly stated that the "before and after" test "should not be applied mechanically." S. Rept. No. 96-1007, at 14-15 (1980), 1980-2 C.B. 599, at 606. Courts have reiterated Congress' intent that the "before and after" valuation of a façade easement is not based on an arbitrary percentage diminution in value. See, e.g., Hilborn v. Commissioner, 85 T.C. 677, 689-690 (1985); Nicoladis v. Commissioner, T.C. Memo.

Docket No. 26119-09 - 9-1988-163; Losch v. Commissioner, T.C. Memo. 1988-230; Richmond v. United States, 699 F. Supp. 578 (E.D. La. 1988). In Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.), this Court held that an appraisal report did not constitute a qualified appraisal where the appraiser failed to provide a methodology for the valuation of easementencumbered property. In that case, the petitioner's appraiser "applied mechanically a percentage with no demonstrated support... other than acceptance of similar percentages in prior controversies." Scheidelman is directly on point. Instead of using an acceptable method to determine a correct value for petitioners' property, the JHR report utilizes what it calls the "Court Case History Measurement" method, which is no method at all. (Exhibit C, p.53.) According to the JHR report, the "value of the easement can be also based on a percentage of the subject's market value." (Exhibit C, p.36.) The JHR report then states: There have been a series of court cases involving the valuation of such easements and have also obtained direct feedback from the Internal Revenue Service [sic]. As a result, an acceptable range of value loss associated with the easement, expressed as a percentage, has been established through the court system. This effectively becomes the method of measurement since currently there is no empirical market data to abstract the value of the loss in property rights. The

Docket No. 26119-09 - 10 - Internal Revenue Service has concluded that the acceptable valuation of a façade easement should range from approximately 10% to 15% of the value of the property. In a more heavily regulated market like Manhattan, the lower end of the range is more appropriate... since the market value impact of this modification of the bundle of rights on value would likely be less than in a minimally regulated market. (Exhibit C, p,36; see also Exhibit C, p.53.) Further, the JHR report's claim that "an acceptable range of value loss associated with the easement, expressed as a percentage, has been established through the court system" is simply erroneous. (Exhibit C, p.53) Although diminution in value can always be expressed as a percentage by comparing the independently-calculated "before" and "after" values of the underlying property, the fair market value of an easement is not arrived at by simply applying a percentage to the value of the property before the imposition of the easement. See, e.g., Nicoladis v. Commissioner, T.C. Memo. 1988-163. This Court in Nicoladis discussed whether Hilborn established a "10-percent rule" and definitively concluded that " [w]e did not there and do not here." The Court explained that "Hilborn establishes as acceptable the before and after method of valuation, and while under the circumstances of that case a 10-percent figure was relied upon, valuation itself is still a question of facts and

Docket No. 26119-09 - 11 - circumstances." The percentage "method" used in the JHR report is merely the mechanical application of a set percentage to the before value of the underlying property. The JHR report erroneously states that the Internal Revenue Service had concluded that the acceptable valuation of a façade easement should range from approximately 10% to 15% of the value of the property. However, the JHR report does not cite any authority for this erroneous statement nor present any information on how such a range, even if acceptable, would constitute a method. Instead, without reasoned analysis, the JHR report simply concludes that the façade easement granted by petitioner Barbara Kafka decreased the value of the property by 11%, or $550,000. (Exhibit C, p.53.) The JHR report does not provide, cite, or otherwise analyze the court cases that purportedly allowed for a 10% to 15% easement value. Further, the JHR report lacks any support for its conclusion regarding the Internal Revenue Service's nonexistent 10% to 15% "safe harbor." The mechanical application of a percentage to the value of the underlying property is not a method of valuation within the meaning of Treas. Reg. 1.170A-13(c) (3) (ii) (J) and Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.).

Docket No. 26119-09 - 12 - Therefore, the JHR report is not a "qualified appraisal" under section 155(a) (4) of DEFRA and Treas. Reg. 1.170A-13 (c) (3). B. The JHR report fails to include a "specific basis" for the valuation as required by Sec. 155(a) (4) (lb) of DEFRA and Treas. Reg. 1.170A-13(c) (3) (ii) (K). In order to be a "qualified appraisal," an appraisal must include the "specific basis" for the valuation, such as specific comparable sales transactions. Section 155(a) (4) (B) of DEFRA; Treas. Reg. 1.170A-13 (c) (3) (ii) (K). The case at hand is similar to Scheidelman. In Scheidelman, the taxpayer's appraiser, Mr. Drazner, stated that he used a sales comparison approach. Mr. Drazner then assigned an 11.33% diminution in value to the fair market value before conveyance of the façade easement, The Court, noting that the Drazner Report provided no meaningful analysis to explain the percentages he used, found that Mr. Drazner failed to explain how the specific attributes of Ms. Scheidelman's property led to the value determined in the Drazner report. The Scheidelman Court rejected Mr. Drazner's report for (1) lack of employing a recognized methodology, and (2) lack of a specific basis for the calculation of the after value. The JHR report, like the Drazner report in Scheidelman, lacks a specific basis for the calculation of the after value. Although the JHR report uses comparable sales as a basis for

Docket No. 26119-09 - 13 - determining the before value, it uses no basis at all for determining the after value and no basis for determining the easement value. The JHR report merely contains the following general statement: "In a more heavily regulated market like Manhattan, the lower end of the range [10% to 15%] is more appropriate since the market value impact on this modification of the bundle of rights on value would likely be less than in a minimally regulated market." (Exhibit C, p.53.)3 3 The appraisal does list five "additional restrictions" on the property that apparently result from conservation façade easements in general, but none of these are explained or make sense. The first "restriction" is based on the conclusion that the tax deduction resulting from the easement is nontransferable. (Exhibit C, p.52.) This conclusion employs the following faulty circular reasoning: an easement reduces the value of property because future owners cannot take a deduction for a restriction on the property. The tax implications of the transaction are irrelevant with respect to the value of the easement. The second "restriction" is an unsupported, speculative claim that the easement is in perpetuity, while the local law restrictions governing historic districts are not. (Exhibit C, p.52.) Regardless of the fact that the local laws have been in place for forty years, the JHR report does not analyze the terms of the actual easement petitioners placed on their property or compare those terms to local law. The third "restriction" is that taxpayers with easements on their properties must seek approval for modifications from the Trust for Architectural Easements f/k/a National Architectural Trust (the "Trust"), in addition to the approval they must seek from the Landmarks Preservation Commission (the "LPC"). (Exhibit C, p.52.) There is no support for the claim that seeking approval from both the Trust and the LPC is any more onerous than simply seeking approval from the LPC, or that

Docket No. 26119-09 - 14 - The undisputed material facts in this case show that the JHR report fails to include a "specific basis" for the valuation, as required by section 155(a) (4) (B) of DEFRA.. Treas. Reg. 1.170A-13(c) (3) (ii) (K) provides an explanation of what is meant by "basis" in section 155(a) (4) (B) DEFRA. Therefore, the JHR report is not a "qualified appraisal" under section 155(a) (4) of DEFRA and Treas. Reg. 1.170A-13(c) (3). C. The JHR report fails to include the fair market value on the date of contribution as required by Section 155(a) (4) (:B) of DEFRA and Treas. Reg. 1.170A- 13(c) (3) (ii) (C) and (I). DEFRA 155(a) (4) (B) states that an appraisal of property in excess of $5,000 must include the fair market value of the property contributed "on the date of contribution." Treas. Reg. 1.170A-13(c) (3) (ii) (C) requires appraisals in support of a charitable contribution in excess of $5,000 to include the date or expected date of contribution, and Treas. Reg. 1.170Aapproval would be denied by the Trust in situations where it would be allowed by the LPC. The fourth and fifth "restrictions" relate to claims that the Trust has additional power to authorize repair or modifications and property maintenance. (Exhibit C, p.52.) These are not restrictions on the grantor, but (in theory) additional rights the grantee might have to help maintain (not diminish) the property's value. Of course the grantee could sue the grantor to recover this cost. But to view this "right" as a "restriction" on the grantor, the appraisal has to implicitly assume that the typical homeowner would buy a property with the intention of letting it fall into disrepair.

Docket No. 26119-09 - 15-13(c) (3) (ii) (I) requires such appraisals to include the appraised fair market value (within the meaning of 1.170A- 1(c)) of the property on the date or expected date of the contribution. The JHR report is deficient because it omits the date or expected date of contribution. In Lord v. Commissioner, T.C. Memo. 2010-196, a fully stipulated case, a deduction for a conservation easement contribution was disallowed where the appraisal did not include the following information: The easement contribution date, the date the appraisal was performed, and the appraised fair market value of the easement contribution on the contribution date. The Court stated that the doctrine of substantial compliance does not apply where significant information is omitted, and these omissions were significant. See also Smith v. Commissioner, T.C. Memo. 2007-368, aff'd without published opinion, 364 Fed. Appx. 317 (9th Cir. 2009). In the present case, the failure to value the property as of the date of contribution and failure to even state the date or expected date of the contribution further demonstrate that the appraisal obtained by petitioners is not a "qualified appraisal" under section 155(a) (4) and DEFRA and Treas. Reg. 1.170A-13(c) (3).

Docket No. 26119-09 - 16 - D. The JHR report was not timely, as required by Treas. Reg. 1.170A-13(c) (i) (A). In order to be a "qualified appraisal," the appraisal must be "made not earlier than 60 days prior to the date of contribution of the appraised property." Treas. Reg. 1.170A- 13(c) (3) (i) (A). The JHR report states that it was prepared on December 16, 2003. This date is too early to be timely. As for the date of contribution, although the Conservation Deed is dated December 10, 2003, it was not recorded in the Office of the City Register of the City of New York until approximately three months later, on March 13, 2004. Treas. Reg. 1.170A-1(b) provides that "[o]rdinarily, a contribution is made at the time delivery is effected." The regulation does not provide guidance on when delivery of real property is effected, and this Court has looked to state law for guidance. Greer v. Commissioner, 70 T.C. 294 (1978), aff'd on another issue, 634 F.2d 1044 (6th Cir. 1980) (a charitable contribution deduction case involving tangible personal property, looking to Tennessee law); Dyer v. Commissioner, T.C. Memo. 1990-51 (a charitable contribution deduction case involving transfer of real property, looking to Maine law; citing Greer); Douglas v. Commissioner, T.C, Memo. 1989-592 (same, looking to California

Docket No. 26119-09 - 17 - law; citing Greer); Brotzler v. Commissioner, T.C. Memo. 1982-615 (same, looking to Minnesota law; citing Greer). In Alioto v. Commissioner, T.C. Memo. 1980-360, aff'd, 692 F.2d 762 (9th Cir. 1982), the taxpayer, who owned real property in California, executed deeds to transfer the property to charitable organizations but did not physically deliver the deeds until he recorded them, which he did in the year following the year of execution. California law did not treat the mere execution of a deed as effecting delivery. Under California law, there was a presumption of delivery when a deed was recorded. The Court held that for purposes of I.R.C. 170(a), the date of delivery was the recordation date. In New York, the state's environmental conservation statute is the sole authority for creation of a conservation easement in gross (i.e., not appurtenant to an interest in real property) that is enforceable notwithstanding certain defenses available under New York's general laws, at common law or in equity. See N.Y. Env. Law 49-0301-0311. The easement in the present case is an easement in gross, and its purpose is purportedly that of historic preservation and open space, and is subject to the New York statute. N.Y. Env. Law 49-0303(1). A conservation easement subject to the New York statute can be created or conveyed only by a deed or another conveyance in

Docket No. 26119-09 - 18 - writing, subscribed by both the grantor and the grantee. N.Y. Env. Law 49-0305(1); N.Y. Gen. Obl. Law 5-703. Such a conservation easement is not effective until it is recorded in accordance with New York real property law. N.Y. Env. Law 49-0305(4). Here, the Conservation Deed was recorded on March 13, 2004. Under New York law, because the easement is in gross, the easement is not enforceable against any person other than the original grantor upon its creation or conveyance until it is recorded. Furthermore, until the recordation, enforcement against the grantor could be challenged under one or more defenses available under New York general laws or in equity, such as laches, estoppel, or waiver. N.Y. Env. Law 49-0305(5). Therefore, the date of contribution was March 13, 2004, the date that the Conservation Deed was recorded. Given that the date of contribution was March 13, 2004, in order for the JHR report to have been timely prepared under Treas. Reg. 1.170A-13(c) (3) (i) (A), it must have been made no earlier than January 13, 2004. See 1982 East, LLC v. Commissioner, supra, footnote 14. The JHR report states that it is prepared on December 16, 2003. Accordingly, the JHR report was not timely under Treas. Reg. 1.170A-13(c) (3) (i) (A), and the appraisal obtained by petitioners is not a "qualified

Docket No. 26119-09 - 19 - appraisal" under section 155(a) (4) of DEFRA and Treas. Reg. 1.170A-13(c) (3). E. The JHR report did not describe the property appraised as required by DEFRA 155(a) (4) (A) and Treas Reg. 1.170A-13(c) (3) (ii) (A). DEFRA 155(a) (4) (A) provides that a qualified appraisal must include a description of the property appraised. Treas. Reg. 1.170A-13(c) (3) (ii) (A) further provides that a qualified appraisal must include a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that will be contributed. The JHR report does not describe the contributed property, which is the easement. Instead of attaching a filled-in copy of the Conservation Deed signed by petitioners and donee, or describing the deed's restrictions, the JHR report attaches a copy of a blank Conservation Deed of Easement form. This blank form fails to list the address of the subject property, the legal description of the property, the day the easement was granted, the donor, and the address of the donor. Because it fails to describe the easement, the JHR report is not a "qualified appraisal" under section 155(a) (4) and DEFRA or Treas. Reg. 1.170A-13(c) (3).

Docket No. 26119-09 - 20 - III. PETITIONERS FAILED TO ATTACH TO THEIR RETURN A FULLY COMPLETED APPRAISAL SUMMARY AS REQUIRED BY DEFRA 155(a) (1) (B) TREAS. REG. 1.170A-13(c) (2) ()B) DEFRA 155 (a) (1) (B) and (3) requires an appraisal summary to be attached to returns claiming noncash contribution deduction in excess of $5,000. Treas. Reg. 1.170A-13 (c) (2) (B) states that for charitable contribution deductions in excess of $5,000, a taxpayer must substantiate a claimed charitable contribution deduction by attaching a "fully completed appraisal summary" to the tax return on which the deduction for the contribution is first claimed. Section 1.170A-13(c) (4) (i) of the Treasury Regulations provides that an appraisal summary is a summary of a qualified appraisal made on the form prescribed by the Internal Revenue Service that is signed and dated by both the donee and the qualified appraiser and includes the information required by Treas. Reg. 1.170A-13 (c) (4) (ii). See DEFRA 155(a) (3). Form 8283, Noncash Charitable Contributions, is the form prescribed by the Internal Revenue Service to serve as the appraisal summary. Section 1.170A-13(c) (4) (ii) of the Treasury Regulations requires that an appraisal summary include the following information:

Docket No. 26119-09 - 21 - (A) The name and tax identification number of the donor (social security number if the donor is an individual or employer identification number if the donor is a partnership or corporation); (B) A description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed; (C) For tangible property, a brief description of the overall physical condition of the property at the time of the contribution; (:D) The manner and date of acquisition of the property by the donor; (E) The cost or other basis of the property; (F) The name, address, and taxpayer identification number of the donee; (G) The date the donee received the property; (H) A statement explaining whether or not the contribution was made by means of a bargain sale and the amount of any consideration received from the donee for the contribution; (I) The name, address, and the identifying number of the qualified appraiser who signed the appraisal summary; (J) The fair market value of the property on the date of contribution; (K) A declaration by the appraiser stating that he holds himself out to the public as an appraiser or that he performs appraisals on a regular basis, that he is qualified to appraise the type of property appraised, that he is not one of the persons described in Treas. Reg. 1.170A-13(c) (5) (iv), and that he understands that a false or fraudulent overstatement of value could subject him to a civil penalty;

Docket No. 26119-09 - 22 - (L) A declaration by the appraiser stating that the fee charged for the appraisal is not of a type prohibited by Treas. Reg. 1.170A-13(c) (6), and that his or her appraisals are not being disregarded under 31 U.S.C. 330(c) on the date the appraiser signs the appraisal summary; and (M) Such other information required by the form (Form 8283). The Form 8283 attached to petitioners' 2003 income tax return leaves a number of spaces blank and fails to include key information about the donated property. Specifically, the Form 8283 is not an appraisal summary because it does not comply with DEFRA and the regulations governing appraisal summaries for the following reasons: 1. It does not contain a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed as required by Treas. Reg. 1.170A-13(c) (4) (ii) (lb). The Form 8283 merely describes the property contributed as "23 East 9240 St." and "Historic Preservation Easement." This is not a detailed description of the property. It does not describe what type of property 23 East 92nd Street is, what portions of the property the easement affected, or what restrictions the easement included.

Docket No. 26119-09 - 23-2. It does not state the manner and date of acquisition of the property by the donor, as required by DEFRA 155 (a) (1) (C) and Treas. Reg. 1.170A-13(c) (4) (ii) (D). 3. It does not state the cost basis of the property, as required by DEFRA 155(a) (1) (C) and Treas. Reg. 1.170A- 13 (c) (4) (ii) (E). 4. It does not contain a statement as to whether the contribution of the façade easement was made by means of a bargain sale, and the amount of any consideration received from the donee, as required by Treas. Reg. 1.170A-13(c) (4) (ii) (H). 5. It does not provide the fair market value of the easement on the date of contribution, as required by Treas. Reg. 1.170A-13(c) (4) (ii) (J). In sum, petitioners' deduction for a purported charitable contribution of the easement should be disallowed because petitioners failed to attach a fully completed appraisal summary to their return. See Scheidelman, supra (stating that the failure to include the date and manner of acquisition or cost or other basis (see 2. and 3. above) are "defects" that "alone demonstrate that there has not been strict compliance with the regulation requirements"). See also 1982 East, LLC, supra; Friedman v. Commissioner, T.C. Memo. 2010-45; Hewitt v. Commissioner, 109 T.C. 258 (1997), aff'd without published

Docket No. 26119-09 - 24 - opinion, 166 F.3d 332 (4th Cir. 1998); Smith v. Commissioner, T.C. Memo. 2007-368. IV. THE DOCTRINE OF SUBSTANTIAL COMPLIANCE DOES NOT EXCUSE PETITIONERS' NONCOMPLIANCE Petitioners may argue that even if the JHR report and appraisal summary did not meet all of the statutory and regulatory requirements, they have substantially complied. However, substantial compliance cannot excuse petitioners' noncompliance with the statute and the regulations. Section 155(a) of DEFRA sets forth clear mandates that a taxpayer claiming a deduction for a charitable contribution must substantiate a noncash contribution in the manner set forth in the statutes and regulations as prescribed by the Secretary. I.R.C. 170(a) (1) provides that a charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary. As described in II and III above, petitioners failed to comply with a number of specific requirements set forth in DEFRA 155. Moreover, the Secretary has prescribed detailed regulations for taxpayers claiming deductions in excess of

Docket No. 26119-09 - 25 - $5,000 for certain charitable contributions of property. See generally Treas. Reg. 1.170A-13(c). This regulation, including Treas. Reg. 1.170A-13(c) (2) (i), was promulgated pursuant to the Congressional mandate in section 155 of DEFRA. The regulations require that the taxpayer, among other things, obtain a qualified appraisal and attach a fully-completed appraisal summary to the tax return. The regulations also provide detailed definitions for the terms "qualified appraisal" and "appraisal summary." When a court reviews an agency regulation interpreting the construction of a statute, the first question is "whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984); Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 (2011) (using the Chevron standard for FICA tax). Here, section 155(a) of DEFRA sets forth substantiation requirements and sets forth instructions to the Secretary to issue regulations. DEFRA specifically instructed the Secretary to issue regulations on the qualified appraisal, and appraisal

Docket No. 26119-09 - 26 - summary requirements. Therefore, DEFRA and the mandated regulations thereunder must receive deference under the Chevron standard. Consequently, the doctrine of substantial compliance is not applicable to the "qualified appraisal" and "appraisal summary" requirements in this case. They must be strictly construed. Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.)." When an appraisal summary or qualified appraisal of a conservation easement has not met the requirements of DEFRA and the Treasury Regulations, this Court has properly refused to apply the doctrine of substantial compliance to excuse a taxpayer's failure to meet the qualified appraisal requirement. See, e g, Scheidelman v. Commissioner, T.C. Memo. 2010-151 (appeal pending, 2d Cir.) (the lack of a recognized methodology or specific basis in the qualified appraisal is too significant to ignore under the guise of substantial compliance; taxpayer's failure to include the date and manner of acquisition or cost or other basis show there was no strict compliance); Hewitt v. Commissioner, 109 T.C. at 264-266; D'Arcangelo v. Commissioner, s See also 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84, at footnote 14, where this Court states that the appraisals failed to be qualified appraisals for the reasons set forth in Scheidelman. The appraisals in 1982 East, LLC were prepared by Jerome Haims Realty, Inc., the same appraisal firm that prepared petitioners' appraisal report.

Docket No. 26119-09 - 27 - T.C. Memo. 1994-572. Thus, the doctrine of substantial compliance does not excuse petitioners' noncompliance with the qualified appraisal and appraisal summary requirements of section 155(a) (3) and (4) of DEFRA and Treas. Reg. 1.170A-13 (c) (3) and (4). V. THE CONSERVATION EASEMENT WAS NOT TRANSFERRED IN 2003 I.R.C. 170(a) allows as a deduction any charitable contribution made within the taxable year (emphasis added). See al_so Treas. Reg. 1.170A-l(b). Here, petitioners claimed a charitable contribution deduction for the easement in 2003 and a carryover noncash charitable deduction for the easement in 2004. As set forth in Section II(D) above, however, under New York law the Conservation Deed did not become effective until it was recorded on March 13, 2004.6 Therefore, for purposes of I.R.C. 170, the easement was not transferred in 2003, and petitioners are not entitled to a charitable contribution deduction for the easement in 2003. See, e.g., Guest v. Commissioner, 77 T.C. 9, 18 (1981) (no contribution in the year of the purported charitable contribution when the deed was not acknowledged until the following year). 6 Because the transfer did not occur in 2003, it was also not granted, protected, or enforceable in perpetuity in 2003. See I.R.C. 170 (h) (2) (C) and (5), and Treas. Reg. 1.170A-14 (g), requiring a deductible easement to be granted, protected, and enforceable in perpetuity.