Kaufman v. Shulman
2012 U.S. App. LEXIS 14858
| 1st Cir. | 2012Background
- Kaufmans bought 19 Rutland Square in Boston in 1999 for $1,050,000 and renovated the historic façade.
- In 2003 they donated a perpetual façade easement to the National Architectural Trust (now Trust for Architectural Easements) and paid a cash endowment, with a $1,000 deposit and a promised 10% endowment of the easement value.
- The Trust guided the donation process and appraisers; the Kaufmans obtained lender consent subordinating the mortgage to the easement.
- The IRS issued a Notice of Deficiency in 2009 disallowing the noncash contribution, the 2003 cash contribution, and imposing penalties; the Tax Court partially sustained and then reversed portions in Kaufman II (2011).
- The Tax Court later remanded for value determination and the parties appealed; the First Circuit vacated the easement deduction and penalties, ordering remand for value and related issues.
- The court ultimately remanded for the Tax Court to determine the proper value of the easement while preserving certain cash-deduction and penalty findings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the extinguishment provision (g)(6) bars a deduction despite the lender’s super-priority claim | Kaufmans: bank’s priority does not defeat the deduction; extinguishment shares must be allowed proportionally. | IRS: lender’s priority defeats the donee’s post-extinguishment rights, undermining the regulation. | Remand to determine value; not upheld on summary judgment for extinguishment alone. |
| Whether paragraph (g)(1) requires impossible-to-fulfill perpetual restrictions to deny the deduction | Kaufmans: clause allowing trust consent/abandonment is necessary for flexibility and not fatal. | IRS: consent clause shows potential not to enforce perpetuity, defeating the requirement. | IRS interpretation rejected; cannot disallow based on remote possibility of abandonment. |
| Whether the recordkeeping/appraisal requirements (1.170A-13) were met | Kaufmans: substantial compliance; appraisal summary acknowledged minor technical defects. | IRS: defects undermine eligibility; valuation overstatement evidence exists. | Summary-judgment failure; issues of valuation remanded; appraisal defects alone not dispositive. |
| Whether the value of the easement was properly determined and deductible under §170(h) | Kaufmans: the appraised value ($220,800) should support the deduction. | IRS: value likely far less; require proper valuation and application of penalties if grossly overstated. | Remand to determine true value in the first instance; not decided on the summary-judgment grounds. |
| Whether penalties and portions of the deduction should be sustained or vacated | Kaufmans: penalties not justified given valuation dispute. | IRS: penalties may apply for substantial misstatement or underpayment. | Penalties to be reconsidered on remand consistent with the value determination. |
Key Cases Cited
- Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) (perpetuity and consent clauses are compatible with conservation purposes; not a basis to deny deductions for remote contingencies)
- United States v. Cleveland Indians Baseball Co., 532 U.S. 200 (Supreme Court 2001) (agency deference to regulation interpretations limited by statutory purpose)
- Grunbeck v. Dime Sav. Bank of N.Y., FSB., 74 F.3d 331 (1st Cir. 1996) (courts defer to agency regulations but require reasonable interpretation consistent with statute)