Kaufman v. Commisioner of Internal Revenu , 784 F.3d 56 ( 2015 )

United States Court of Appeals
For the First Circuit
No. 14-1863
GORDON KAUFMAN; LORNA KAUFMAN,
Petitioners, Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
APPEAL FROM THE UNITED STATES TAX COURT
[Hon. James S. Halpern, U.S. Tax Court Judge]
Before
Lynch, Chief Judge,
Thompson and Kayatta, Circuit Judges.
Frank Agostino, with whom Tara Krieger, Agostino &
Associates, PC, Michael E. Mooney, and Nutter McClennen & Fish LLP
were on brief, for appellants.
Patrick J. Urda, Attorney, Tax Division, United States
Department of Justice, with whom David A. Hubbert, Deputy Assistant
Attorney General, and Jonathan S. Cohen, Attorney, Tax Division,
United States Department of Justice, were on brief, for appellee.
April 24, 2015
LYNCH, Chief Judge. This appeal turns on a
straightforward question: did the Tax Court clearly err when it
found that taxpayers Gordon and Lorna Kaufman must pay penalties
for claiming a charitable deduction on their tax returns for a
worthless historic preservation easement on their home? Finding no
clear error, we affirm.
The Kaufmans claimed a charitable deduction of $220,800
on their 2003 and 2004 returns. The deduction corresponded to the
purported value of a historic preservation facade easement on their
Boston home, which they donated to the National Architectural
Trust, since renamed the Trust for Architectural Easements ("the
Trust"). The Commissioner of Internal Revenue disallowed the
deduction and assessed deficiencies and accuracy-related penalties
for both tax years in question.
The Tax Court affirmed the disallowance of the deduction
on a motion for summary judgment, holding that the charitable
deduction was invalid as a matter of law, see Kaufman v. Comm'r,
134 T.C. 182 (2010) [hereinafter "Kaufman I"], and it reaffirmed
this ruling after holding a trial on the remaining issues in the
case, see Kaufman v. Comm'r, 136 T.C. 294 (2011) [hereinafter
"Kaufman II"]. The Kaufmans appealed to this court, and we vacated
the Tax Court's decision and remanded for further proceedings. See
Kaufman v. Shulman, 687 F.3d 21, 33 (1st Cir. 2012) [hereinafter
"Kaufman III"]. On remand, the Tax Court found that the value of
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the easement was zero and that the Kaufmans were liable under
applicable IRS regulations for a 40% accuracy-related penalty for
making a gross valuation misstatement. Kaufman v. Comm'r, 107
T.C.M. 1262 (2014) [hereinafter "Kaufman IV"].
The Kaufmans appeal for a second time. They do not
contest the Tax Court's finding that the value of the easement was
zero, but they argue that the court erred in imposing the
accuracy-related penalties. They also advance, for the first time,
an argument that the Commissioner did not comply with the
procedural requirements of 26 U.S.C. § 6751(b)(1)1 in assessing
those penalties.
We affirm. The Tax Court's finding that the Kaufmans are
liable for accuracy-related penalties was neither clearly erroneous
nor infected by any error of law. The Kaufmans failed to raise
their second argument before taking this appeal (or, indeed, at any
earlier point in the labyrinthine history of this litigation), and
so we deem it waived.
I. Facts And Procedural History
A. The Easement Donation
In 1999, Lorna Kaufman, a company president with a Ph.D.
in psychology, bought a single-family residence for herself and her
1
Unless otherwise noted, all references to Title 26 of the
United States Code (the Internal Revenue Code) and to IRS
regulations refer to the versions applicable in 2003 and 2004, the
tax years at issue.
-3-
husband Gordon at 19 Rutland Square in the South End of Boston for
just over $1 million. Kaufman III, 687 F.3d at 22. The home is
subject to certain zoning restrictions by virtue of its location in
the South End historic preservation district. Around October 2003,
she and Gordon, an emeritus professor of statistics at MIT,
"learned about a tax incentive program for historic preservation"
promoted by the Trust, which the Trust represented would allow the
couple to qualify for a charitable deduction in the amount of
10-15% of the value of the South End residence. Id. at 23. As
explained in Kaufman III,
A provision of the Internal Revenue
Code, 26 U.S.C. § 170(h) (2006), creates an
incentive for taxpayers to donate real
property interests to nonprofit organizations
and government entities for "conservation
purposes." . . . [T]he statute allows
taxpayers to claim a deduction for donating a
real property interest -- including an
easement -- "exclusively for conservation
purposes." These purposes include the
preservation of "historically important" land
areas or structures.
The deduction for granting the easement
is intended to reflect the value of what the
taxpayer has donated which, in the absence of
a "market" for such easements, can be measured
by "the difference between the fair market
value of the entire contiguous parcel of
property before and after the granting of the
restriction."
Id. (citations omitted).
In December 2003, the Kaufmans entered into a
Preservation Restriction Agreement (PRA) with the Trust, which
granted to the Trust an "easement in gross, in perpetuity, in, on,
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and to the Property, Building, and the Facade" and limited
alterations to the property. Under the Trust's system, donors were
also required to give a cash contribution to the Trust equal to 10%
of the value of the donated easement. Kaufman III, 687 F.3d at 23.
The Kaufmans did so.
As the Trust requested, the Kaufmans also sent a form
letter in late 20032 to their mortgage lender, Washington Mutual
Bank, asking it to subordinate its interest in the property to the
Trust's easement. Id. at 23-24. The letter stated that the
easement "convey[ed] the right of prior approval or [sic] any
future changes [the owner] wish[ed] to make on the exterior of the
property." Significantly, the letter also noted that "[t]he
easement restrictions are essentially the same restrictions as
those imposed by current local ordinances that govern this
property." Gordon later testified that he "[d]idn't notice" the
sentence stating that the PRA restrictions were the same as the
South End zoning restrictions already in place and that he "made a
mistake" in signing the form. He stated that he thought the PRA
restrictions were "much tougher," but admitted that he did not
compare the two sets of restrictions. Lorna testified similarly,
stating that she "probably didn't focus on" the sentence in
2
The letter is undated, but the Kaufmans apparently sent
it sometime between October 2003, when they began corresponding
with the Trust about the easement donation, and December 2003, when
the Kaufmans signed the final PRA.
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question and that she believed that granting the easement would
subject their home to stricter controls.
In order to obtain a charitable deduction for the
donation of the easement, the Kaufmans were required to obtain an
appraisal of its fair market value. See 26 U.S.C. § 170(f)(11).
The Trust offered the names of two appraisers it recommended, and
the Kaufmans selected Timothy Hanlon. Kaufman III, 687 F.3d at 24.
Hanlon was a certified professional appraiser who managed his own
residential appraisal company. Id. However, the only appraisals
of partial interests in real property that he had done were nine
appraisals of the value of facade easements donated to the Trust.
As the Tax Court explained, Hanlon had learned to appraise facade
easements by speaking with representatives from the Trust, who had
told him that "the range of values for facade easements is between
11% for properties in highly regulated areas and ('towards') 15% in
less regulated or unregulated areas." Trust representatives also
suggested language for him to include in his appraisals, which
Hanlon in fact incorporated "almost verbatim" into all of his
reports, regardless of the property involved.
Hanlon's January 2004 appraisal attempted to arrive at
the value of the easement through the "before and after" method of
valuation, which involved "determining the difference between 'the
fair market value of the property prior to donation of the easement
and the fair market value of it after donation of the easement.'"
-6-
He determined that the value of the property before the grant of
the easement was $1,840,000. He acknowledged that there was "much
overlap" between the burdens imposed by the PRA and the burdens
imposed by the South End zoning restrictions, but concluded that
the PRA restrictions were "stricter." His explanation for why the
PRA controls were purportedly stricter, however, was vague,
nonspecific, and not entirely logical. A representative excerpt
from his report reads as follows:
The [PRA] easement is granted in perpetuity
while the historic district ordinances and
local zoning practices may change over time to
reflect changes in political, economic and
aesthetic needs and tastes in a community.
The Historic District ordinances contain
relief for economic hardship, which the [PRA]
does not. The [PRA] may result in higher
insurance and property maintenance costs than
those on properties not so encumbered.
Rehabilitation costs may be higher also as the
property owner could be obligated to restore
or replace deteriorated materials rather than
replace them with cheaper substitute
materials. . . . Marketability could be
affected as a segment of the buying public may
show resistance to being subjected to yet
additional limitations and restrictions on
their property rights.
Despite his conclusion that the PRA imposed more robust
restrictions on the use of the property than did the South End
zoning restrictions, Hanlon also opined that the PRA did not change
or inhibit the property's development to its highest and best use
as a single-family dwelling.
-7-
Hanlon estimated that the burdens imposed by the PRA
would reduce the property's fair market value by 12%, and so he
calculated the value of the easement at $220,800. To reach this
conclusion, Hanlon relied on a document prepared by IRS employee
Mark Primoli stating that "the proper valuation of a facade
easement should range from approximately 10% to 15% of the value of
the property."3 Hanlon then made a list of burdens that he
believed would affect the value of a property encumbered by a
facade easement and assigned a percentage to each such that the
percentages added up to 15%. These calculations were based on his
"judgment, experience, and . . . 'common sense,'" not on any data
or statistical analysis. Kaufman IV, 107 T.C.M. 1262, slip
op. at 26. He then "adjusted the percentages" to "reflect th[e]
differences and similarities" between the South End zoning
restrictions and the restrictions imposed by the PRA. Hanlon
acknowledged that his method was "unique" and that it was "not a
generally accepted appraisal practice or valuation method."
3
The Primoli article, entitled "Facade Easement
Contributions," was prepared sometime prior to November 2003 (the
record does not disclose the precise date) "as part of an IRS
program focusing on specialized areas of tax law." Scheidelman v.
Comm'r, 682 F.3d 189, 196 n.5 (2d Cir. 2012). In crafting the
article, Primoli had "relied upon a 1994 IRS 'Audit Technique
Guide,' used to train tax examiners but not intended to set IRS
policy." Id. "In 2003 both the Audit Technique Guide and a
revised version of Primoli's article omitted any reference to the
ten to fifteen percent range for fear the numbers were being
misconstrued." Id. This omission was not mentioned in Hanlon's
January 2004 appraisal.
-8-
Gordon testified that he thought Hanlon's appraisal
"looked like a professionally [sic], respectable appraisal by a
credentialed appraiser." He sent the appraisal to his longtime
accountant, David Cohen. According to Gordon, Cohen replied that
"the appraisal looked professional and well done, [and] the results
were reasonable." Cohen testified that he "had seen many real
estate appraisals" and the Hanlon appraisal "seemed very similar to
the other ones [he] had seen." He also stated that he offered the
Kaufmans no opinion on whether the magnitude of the easement
valuation was reasonable.
A week after receiving Hanlon's appraisal, Gordon
e-mailed Mory Bahar, a representative of the Trust. Lorna and
Cohen were copied on the e-mail. Gordon expressed concern as to
whether "the reduction in resale value of the property due to the
easement [would be] so large as to overwhelm the tax savings that
accrue from it." He then asked if Bahar had "statistical
documentation that bears on how much of a reduction in resale value
takes place for residential properties." Gordon also noted
Hanlon's statement "that the restrictions imposed by the . . .
Trust are much stricter than Boston Landmark's restrictions," and
he asked Bahar to "read that section of the appraisal and give me
your comments about it."
Bahar's reply to Gordon, copied to Lorna and Cohen,
reads, in relevant part, as follows (emphases added):
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In areas that are regulated by local historic
preservation ordinances and bodies such as
Boston historic neighborhoods (including
yours) the property owners are not allowed to
alter the facade of their historic buildings,
whether there is an easement or not. . . .
Therefore, properties with an easement are not
at a market value disadvantage when compared
to the other properties in the same
neighborhood. But if the district is not
being regulated and historic preservation is
not being enforced then the presence of the
easement . . . will be viewed negatively by
those buyers who would want to change the
facade or demolish the building.
And here are some supporting data for
that principle:
[] We have tracked 26 resold properties
to-date on which we held an easement, and none
was resold at a loss or had any issues for
resale that we are aware of. . . .
[] Over 100 lenders have approved to
subordinate their loans to our easements
to-date in over 800 cases. . . . Why would
these banks (including yours) approve these
transactions if they saw a risk or adverse
financial impact on their collateral??
. . . .
[] One of our directors, Steve McClain,
owns fifteen or so historic properties and has
taken advantage of this tax deduction himself.
He would never have granted any easement if he
thought there would be a risk or loss of value
in his properties.
Gordon testified that he found Bahar's e-mail "only
mildly informative because, . . . as a mathematical statistician,"
he was skeptical of the statistical significance of Bahar's
supporting data, and because Bahar was an "agent" of the Trust and
so had an interest in convincing Gordon to donate the easement.
However, he responded to Bahar, again copying Lorna and Cohen, and
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stated that he appreciated the "very detailed reply" and that he
would "talk to Dave Cohen about final implementation."
The Kaufmans decided to go forward with the easement
donation despite the warning signals in the Bahar e-mail. They
spread the $220,800 deduction over two tax years, 2003 and 2004,
because they otherwise would have exceeded the statutory limits on
deductions in a single year. Kaufman III, 687 F.3d at 24 (citing
26 U.S.C. § 170(b)(1)(E)).
B. The IRS Investigation And First Round Of Litigation
"In March 2007, evidently as part of a wide-ranging
investigation into perceived abuses of the easement program, the
IRS opened an investigation into the Kaufmans' claimed charitable
deductions." Id.4 In 2009, the IRS issued deficiencies of
$39,081.25 plus $14,535.80 in accuracy-related penalties for 2003,
and $36,340.00 plus $14,536.00 in accuracy-related penalties for
2004. The agency disallowed the deductions on two grounds relevant
here: (1) they were invalid as a matter of law because the easement
conveyance did not comply with relevant regulations, and (2) the
4
The IRS became concerned in the mid-2000s "that
individuals and organizations ha[d] been abusing the conservation
statute to improperly shield income or assets from taxation."
Kaufman III, 687 F.3d at 32 (internal quotation marks omitted)
(quoting IRS news releases from 2005 and 2006). In fact, the
agency placed historic preservation easements on its "Dirty Dozen"
list of tax scams in 2005, 2006, and 2009, and has continued taking
steps since then to crack down on abuse of the program. See
generally L.J. Kreissl & K.B. Friske, IRS Takes A Hard Stance on
Deductions for Conservation Easements, Prac. Tax Strategies, Feb.
2010.
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Kaufmans had not established that the value of the easement was
$220,800. Id. at 24-25.
The Kaufmans petitioned for review by the Tax Court,
which, on a motion for summary judgment, upheld the IRS's
disallowance on ground (1). Kaufman I, 134 T.C. 187. The court
reaffirmed that finding after a trial on other issues in the case.
Kaufman II, 136 T.C. 313. In its post-trial opinion, the Tax
Court did not reach the issue of valuation of the facade easement
and so did not impose any accuracy-related penalties on the
Kaufmans, reasoning that the court should "not now be required to
invest the time and effort necessary to resolve the difficult
factual questions of intent and value presented by" the IRS's claim
that the Kaufmans had acted negligently or unreasonably in claiming
the deduction. See id. at 324-26.
The Kaufmans then appealed to this court, challenging the
disallowance of the facade easement deduction. We found that the
Tax Court erred in disallowing the deduction as a matter of law and
vacated that aspect of the decision. Kaufman III, 687 F.3d at 30.5
5
The IRS had argued, and the Tax Court had agreed, that
the conveyance of the easement did not comply with 26 C.F.R.
§ 1.170A-14(g)(6), the "extinguishment provision." That provision
requires that "when a change in conditions
gives rise to the extinguishment of a
perpetual conservation restriction [by
judicial proceeding], the donee organization,
on a subsequent sale, exchange, or involuntary
conversion of the subject property, must be
entitled to a portion of the proceeds at least
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We further explained that, "since the Tax Court's decision not to
impose penalties with respect to the [facade easement deduction]
depended on the same rationale on which it based its grant of
partial summary judgment, . . . the Tax Court's decision not to
impose further penalties on the Kaufmans must be vacated as well."
Id. (citations omitted). We remanded for the Tax Court to consider
"the grounds left unaddressed, including the proper value of the
easement." Id. (internal quotation mark omitted). We also noted
that, if the value was determined to be zero, "then the Kaufmans
would be liable for penalties under 26 U.S.C. § 6662 . . . unless
they could show 'reasonable cause.'" Id.
C. The Tax Court's Decision On Remand
1. The Easement Valuation
On remand, the Tax Court, in a thorough analysis, found
that the easement's value was zero. The court accepted Hanlon as
equal to that proportionate value of the
perpetual conservation restriction, unless
state law provides that the donor is entitled
to the full proceeds from the conversion."
Kaufman III, 687 F.3d at 26 (alteration in original) (quoting 26
C.F.R. § 1.170A-14(g)(6)(ii)). The Tax Court held that, because
the Kaufmans' mortgage lender had retained a "claim to all
insurance proceeds . . . and all proceeds of condemnation" superior
to the claim of the Trust, the Trust was not guaranteed to receive
its due proportion of the proceeds in the event of a condemnation
of the Kaufmans' residence. Id. (alteration in original). We held
that this was error because it was sufficient that the Trust
retained a claim to its due proportion of the proceeds as against
the owner-donor; the regulation did not require the Trust to have
an absolute right to those proceeds as against the rest of the
world. Id. at 27.
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an expert appraiser of partial interests in property but evaluated
his testimony with some skepticism given his "closeness to [the
Trust] and the singularity of his experience in valuing facade
easements for clients and for a patron all interested in
establishing high values for the easements." Kaufman IV, 107
T.C.M. 1262, slip op. at 46-49. The court ultimately
rejected Hanlon's methodology and assumptions as unsupported and
unreliable. See id. at 51-54.
Instead, the Tax Court found persuasive the testimony of
the IRS's expert, John Bowman. See id. at 57. Bowman, who, like
the Tax Court, rejected Hanlon's analysis, see id. at 14, 30-35,
opined that the donation of the facade easement would not result in
a diminution in property value for several reasons. First, he
agreed with Hanlon that after the donation, "there would be no
change in the highest and best use of the property." Id. at 14,
36. Second, Bowman found, based on a "component by component"
comparison of the South End zoning restrictions with the PRA
restrictions, that the latter were "'basically duplicative' of, and
'not materially different' from" the former. Id. at 36, 38; see
also id. at 57-63. Finally, relying both on published literature
and on his own study of data concerning sales and resales of
residential properties in the Boston area, Bowman found no evidence
that owners of restriction-encumbered properties have historically
had difficulty marketing or financing them or that
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restriction-encumbered properties actually sell for less than
comparable properties without restrictions. Id. at 34-36, 39-43.
Bowman accordingly concluded that the easement was worthless. Id.
at 43-44. The Tax Court agreed and sustained the IRS's
disallowance of the Kaufmans' charitable deduction for the easement
donation. Id. at 63-64.
2. The Accuracy-Related Penalties
The court then turned to the issue of penalties. Before
explaining the Tax Court's findings, we provide an overview of the
relevant statutory provisions. Section 6662 of the Internal
Revenue Code imposes a penalty equal to 20% of any underpayment of
income tax due to, among other things, "[n]egligence or disregard
of rules or regulations," "[a]ny substantial understatement of
income tax," or "[a]ny substantial valuation misstatement." 26
U.S.C. § 6662.6 In the case of a "gross valuation misstatement,"
defined as a 400% or more overstatement of the value of any
property claimed on a tax return, the penalty is increased to 40%
of the underpayment. Id. § 6662(h). "The value . . . claimed on
a return of any property with a correct value . . . of zero is
considered to be 400% or more of the correct amount," and the
6
A "substantial understatement of income tax" is defined
as at least 10% of the actual amount of the tax or $5,000,
whichever is greater. 26 U.S.C. § 6662(d)(1)(A). A "substantial
valuation misstatement" occurs if "the value of any property . . .
claimed on any return of tax . . . is 200 percent or more of the
amount determined to be the correct amount of such valuation." Id.
§ 6662(e)(1)(A).
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applicable penalty is 40%. 26 C.F.R. § 1.6662-5(g). Only one
accuracy-related penalty may be assessed with respect to a given
underpayment, even if the underpayment is subject to a penalty on
multiple grounds. See id. § 1.6662-2(c).
There are exceptions to imposition of penalties. Section
6664(c) sets forth a "reasonable cause exception" for
underpayments. It provides, in relevant part:
(1) In general. No penalty shall be
imposed . . . with respect to any portion of
an underpayment if it is shown that there was
a reasonable cause for such portion and that
the taxpayer acted in good faith with respect
to such portion.
(2) Special rule for certain valuation
overstatements. In the case of any
underpayment attributable to a substantial or
gross valuation overstatement . . . with
respect to charitable deduction property,
paragraph (1) shall not apply unless--
(A) the claimed value of the property
was based on a qualified appraisal
made by a qualified appraiser, and
(B) in addition to obtaining such
appraisal, the taxpayer made a good
faith investigation of the value of the
contributed property.
26 U.S.C. § 6664(c). The regulations instruct that "[t]he
determination of whether a taxpayer acted with reasonable cause and
in good faith is made on a case-by-case basis, taking into account
all pertinent facts and circumstances," including, inter alia, the
taxpayer's "experience, knowledge, and education"; whether the
taxpayer relied on an appraisal, and if so, whether such reliance
was reasonable and in good faith; and whether the taxpayer relied
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on information in a W-2 or other tax form, provided that the
"taxpayer did not know or have reason to know the information was
incorrect." 26 C.F.R. § 1.6664-4(b)(1).
The Tax Court found the Kaufmans liable for a 40% penalty
for a gross valuation misstatement because they claimed a deduction
for the donation of a facade easement whose true value was zero.
Kaufman IV, 107 T.C.M. 1262, slip op. at 66-67. The court
further determined that the "reasonable cause" exception was not
applicable. That was because, although the first prong of the test
was met, that is, "the reported value of the easement was based on
a qualified appraisal made by a qualified appraiser," the second
prong was not, that is, the Kaufmans had not made a good faith
investigation of the easement's value. Id. at 71-75. The court
explained that "there is no evidence that, other than consulting
Mr. Bahar" -- who in fact told them that the donation of the
easement would not reduce the value of their home -- the Kaufmans
"made any independent investigation of the value of the facade
easement, much less an investigation confirming that its value was
the value they reported on the 2003 and 2004 returns, viz,
$220,800." Id. at 75. In a separate analysis, the court also
found, for essentially the same reason, that the Kaufmans had not
acted with reasonable cause and in good faith. Id. at 76-81.7
7
The Tax Court held in the alternative that the Kaufmans
were liable for a 20% penalty for substantial understatement of
income tax and negligence. Kaufman IV, 107 T.C.M. 1262, slip
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This appeal followed. The Kaufmans challenge the Tax
Court's finding that they are liable for accuracy-related
penalties. They have not, however, appealed the court's finding
that the actual value of the easement was zero.
II. Penalty For Gross Valuation Misstatement
A. Standard Of Review
The parties agree that "[o]ur review of the tax court's
ruling is 'in most respects similar to our review of district court
decisions: factual findings for clear error and legal rulings de
novo.'" Schussel v. Werfel, 758 F.3d 82, 87 (1st Cir. 2014)
(quoting Drake v. Comm'r, 511 F.3d 65, 68 (1st Cir. 2007)). "The
Tax Court has the primary function of finding the facts in tax
disputes, weighing the evidence, and choosing from among
conflicting factual inferences and conclusions those which it
considers most reasonable," and we "have no power to change or add
to those findings of fact or to reweigh the evidence." Scheidelman
v. Comm'r, 755 F.3d 148, 151 (2d Cir. 2014) (per curiam) (quoting
Comm'r v. Scottish Am. Inv. Co., 323 U.S. 119, 123-24 (1944))
(internal quotation marks omitted).
In turn, "[t]he determination that a taxpayer is liable
for an accuracy-related penalty is [] a factual determination
reviewed for clear error." Curcio v. Comm'r, 689 F.3d 217, 225 (2d
op. at 81-86. Because of our disposition of this case, we need not
address these rulings.
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Cir. 2012); accord Daoud v. Comm'r, 548 F. App'x 441, 441 (9th Cir.
2013); Rovakat, LLC v. Comm'r, 529 F. App'x 124, 128 (3d Cir.
2013); Stobie Creek Invs. LLC v. United States, 608 F.3d 1366, 1381
(Fed. Cir. 2010); see also Kikalos v. Comm'r, 434 F.3d 977, 986-87
(7th Cir. 2006); cf. United States v. Boyle, 469 U.S. 241, 249 n.8
(1985) ("Whether the elements that constitute 'reasonable cause'
are present in a given situation is a question of fact, but what
elements must be present to constitute 'reasonable cause' is a
question of law.").
Specifically, courts have treated the issue of whether a
taxpayer acted in "good faith" for purposes of the good faith
investigation requirement and the reasonable cause and good faith
exception as an issue of fact appropriately reviewed for clear
error. See Whitehouse Hotel Ltd. P'ship v. Comm'r, 755 F.3d 236,
247-50 (5th Cir. 2014). This makes particularly good sense,
including in the context of this case. The Tax Court, which heard
firsthand the evidence -- including, importantly, the testimony of
the Kaufmans themselves and their accountant -- was in the best
position to make the determination of whether the taxpayers acted
in good faith. See Frank Sawyer Trust of May 1992 v. Comm'r, 712
F.3d 597, 606 (1st Cir. 2013) ("[D]eferential clear error review is
especially appropriate when -- as here -- knowledge and intent are
pivotal to the Tax Court's ruling and credibility determinations
comprise a prime element of the court's ultimate conclusion."
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(quoting Crowley v. Comm'r, 962 F.2d 1077, 1080 n.4 (1st Cir.
1992)) (internal quotation marks omitted)).
B. Analysis
1. The Tax Court's Holding That The Kaufmans Did Not
Conduct A Good Faith Investigation
After a careful review of the record, we cannot say that
the Tax Court's finding that the Kaufmans failed to make a good
faith investigation into the value of the easement was clearly
erroneous. Indeed, the conclusion was well supported by the
evidence. Specifically, it was clearly reasonable for the court to
conclude that events after the Kaufmans' receipt of Hanlon's
appraisal would have put a reasonable person on notice that further
investigation was required to verify the purported value of the
donated easement. After receiving Hanlon's appraisal, Gordon,
expressly concerned that the donation of the easement to the Trust
might hurt the market value of the house, e-mailed Bahar for
reassurance, and Bahar unequivocally told him that he did not
expect the donation to decrease the value of the residence at all.
This should have immediately raised red flags as to whether the
value of the easement was zero. Yet the evidence shows Gordon made
an immediate decision to press ahead with the donation after
Bahar's reassurance that it would not hurt the value of the
residence. Moreover, the Kaufmans had signed a letter stating that
the restrictions imposed by the PRA were the same as those already
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in place on the residence by virtue of the South End zoning
restrictions.
The Tax Court was entitled to reject as not credible
Gordon's testimony that he did not put much stock in Bahar's
assessment of the effect of the easement donation on the value of
the property.8 It was also entitled to reject the Kaufmans'
testimony that they did not notice the language about the easement
restrictions in the letter they sent to Washington Mutual. And,
even accepting that testimony, it was within the Tax Court's
purview to find that the Kaufmans should have done further
investigation and that they failed to do so.
The Kaufmans' protestations that they were unable to
critically evaluate the Hanlon appraisal because they were not
experts in easement valuation are beside the point. The Tax Court
did not suggest that the Kaufmans should have been able to critique
the Hanlon appraisal in a vacuum, or that they should have known
from the outset that the value of the easement was zero. Rather,
8
Gordon's testimony that he discounted Bahar's analysis
because it was not sufficiently statistically rigorous could easily
be doubted. It was also striking in its self-contradiction. This
statement is belied by Gordon's failure to apply the same
statistical rigor to Hanlon's analysis, which was not based on any
statistical analysis at all -- just Hanlon's judgment, experience,
and "common sense." Kaufman IV, 107 T.C.M. 1262, slip op. at
26. Indeed, Gordon admitted that he had no basis upon which to
accept Hanlon's analysis other than the fact that Hanlon was a
professional appraiser, and that he could not judge the accuracy of
Hanlon's 10-15% range because "to judge its accuracy you would have
to see the sample data on which it was based." Id. at 79.
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the court found that the Kaufmans should have recognized obvious
warning signs indicating that the appraisal's validity was subject
to serious question, and should have undertaken further analysis in
response.
The Kaufmans also miss the mark in arguing that it was
conventional wisdom during the tax years in question that a
conservation easement, in general, would decrease the value of a
piece of property. The IRS regulations themselves reject any
notion that the grant of a conservation easement itself affects the
fair market value. As the Scheidelman court observed,
[t]o the contrary, the regulations provide
that an easement that has no material effect
on the obligations of the property owner or
the uses to which the property may be put "may
have no material effect on the value of the
property." And sometimes an easement "may in
fact serve to enhance, rather than reduce, the
value of the property. In such instances no
deduction would be allowable."
Scheidelman, 755 F.3d at 152 (footnote omitted) (quoting 26 C.F.R.
§ 170A-14(h)(3)(ii)); see also id. at 152 n.1 (noting that "[t]his
is especially true if only a simple facade easement has been
granted over a property that has substantial market value because
of its historic character" (alterations, citation, and internal
quotation marks omitted)). Moreover, "neither the Tax Court nor
any Circuit Court of Appeals has held that the grant of a
conservation easement effects a per se reduction in the fair market
value." Id. at 152 (alteration in original) (citations and
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internal quotation marks omitted); see also Nicoladis v. Comm'r, 55
T.C.M. 624 (1988) (disclaiming adoption of any "general
'10-percent rule' . . . with respect to facade donations").
The Tax Court did not purport to equate "good faith
investigation" with "exhaustive investigation." It merely required
that the Kaufmans do some basic inquiry into the validity of an
appraisal whose result was squarely contradicted by other available
evidence glaringly in front of them. There was no clear error in
such reasoning.
The Kaufmans also argue that they must be found to have
acted in good faith because they reasonably relied on their
accountant, Cohen, who reviewed the Hanlon appraisal and expressed
no reservations about the Kaufmans taking the easement deduction.
But Cohen testified that he offered the Kaufmans no opinion on
whether the easement valuation was reasonable or not.9 And so,
reliance on Cohen could not, by definition, constitute a "good
faith investigation of the value of the contributed property," 26
U.S.C. § 6664(c)(2)(B) (emphasis added), particularly given the
other information available to the Kaufmans that cast doubt on the
validity of the appraisal.
9
Gordon testified that Cohen said the results of the
Hanlon appraisal were "reasonable." But the Tax Court, as
factfinder, was entitled to weigh the credibility of the
conflicting testimony, and to credit Cohen's testimony over
Gordon's. See Frank Sawyer Trust, 712 F.3d at 606.
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The Fifth Circuit's decision in Whitehouse, upon which
the Kaufmans rely, is not to the contrary and is consistent with
our conclusions. There, the taxpayer had relied on two appraisals,
and moreover, the valuations were much more complicated because
many issues were in dispute, including the property's boundaries,
its highest and best use, and how the donation of the easement
would affect the highest and best use. See Whitehouse, 755 F.3d at
239-41, 247-48, 250. Most importantly, there is no indication that
the taxpayer in Whitehouse encountered "red flags" suggesting that
the easement had no value.
The Kaufmans mistakenly attempt to rely on the Tax
Court's decision in Chandler v. Commissioner, 142 T.C. 279 (2014).
It is also distinguishable. There, as here, the taxpayers relied
on an appraisal and the advice of their accountant. Id. at 295.
Unlike in this case, there were no "red flags" analogous to the
Bahar e-mail or the Washington Mutual letter. Indeed, the Chandler
court expressly distinguished this case on that precise basis. See
id. (noting that Kaufman involved "different circumstances,"
namely, "[t]he taxpayers' continued reliance on the initial
appraisal in the face of [Bahar]'s comments"). Such "red flags"
were likewise missing from the other cases cited by the Kaufmans.
See Zarlengo v. Comm'r, 108 T.C.M. 155 (2014); Scheidelman v.
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Comm'r, 100 T.C.M. 24 (2010), vacated and remanded, 682 F.3d
189 (2d Cir. 2012).10
2. The Tax Court's Alternate Holding That The
Kaufmans Did Not Act With Reasonable Cause And In
Good Faith
The Tax Court also did not clearly err in finding, as an
alternate holding, that the Kaufmans did not satisfy the reasonable
cause and good faith exception, for the same reasons already
discussed. "Generally, the most important factor" in the
reasonable cause and good faith determination "is the extent of the
taxpayer's effort to assess the taxpayer's proper tax liability."
26 C.F.R. § 1.6664-4(b)(1). Courts should "tak[e] into account all
pertinent facts and circumstances," "including the experience,
knowledge, and education of the taxpayer." Id. The Kaufmans were
highly intelligent, very well-educated people, and the Tax Court
reasonably found that developments casting doubt on the Hanlon
appraisal should have alerted them that they needed to take further
steps to assess their "proper tax liability."
Moreover, and importantly for our purposes,
10
We also note that, because of the applicable standard of
review, the cases cited by the Kaufmans in which the Tax Court
found that the taxpayer acted in good faith are of limited help to
the Kaufmans. Even if the Kaufmans were identically situated to
the taxpayers in those cases (and they are not), and even if the
Tax Court's findings on the good faith issue in those cases would
have been affirmed on appeal as not clearly erroneous, it would not
logically follow that the Tax Court clearly erred in finding a lack
of good faith in this case.
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[r]easonable cause and good faith ordinarily
is not indicated by the mere fact that there
is an appraisal of the value of property.
Other factors to consider include the
methodology and assumptions underlying the
appraisal, the appraised value, the
relationship between appraised value and
purchase price, the circumstances under which
the appraisal was obtained, and the
appraiser's relationship to the taxpayer or to
the activity in which the property is used.
26 C.F.R. § 1.6664-4(b)(1). Hanlon's assumptions and methodology
were questionable at best, and the appraisal value was suspiciously
high in view of other evidence available to the Kaufmans. Further,
Hanlon at least arguably had an incentive to calculate a high value
for the easement, given that he performed appraisals for the Trust
and the Trust received cash donations corresponding to a set
percentage of the assessed value of the donated easements, see
Kaufman III, 687 F.3d at 32. In view of these facts, the Tax Court
did not clearly err in concluding that the Kaufmans' reliance on
Hanlon's appraisal was not sufficient to satisfy the reasonable
cause and good faith exception.
3. The Kaufmans' Remaining Arguments
The Kaufmans advance three additional arguments in an
effort to show that the Tax Court's analysis was infected by legal
error. We address and reject each in turn.
First, the Kaufmans argue that the IRS did not meet its
burden of production to impose any penalty. Not so. In addition
to the basic underlying facts, the IRS submitted the expert
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testimony of Bowman, who concluded, based on market research and a
comparison of the South End zoning restrictions with the
restrictions imposed by the PRA, that the value of the easement was
zero. The Kaufmans criticize Bowman for not relying on
"contemporary comparable sales data to determine the 'after'
value," but they concede elsewhere that this sort of data was
"nonexistent" and that accordingly it was reasonable to compare the
South End zoning restrictions with the PRA restrictions to arrive
at a valuation of the easement. Bowman's testimony, while not
compelling a finding that the value of the easement was zero,
certainly heavily supported such a finding -- a point the Kaufmans
seem to have implicitly conceded by their decision not to challenge
the Tax Court's valuation of the easement.
Second, the Kaufmans argue that the Tax Court employed an
erroneous definition of the term "good faith." The court used the
phrase "honesty in belief" and required the Kaufmans to
"demonstrate how they honestly came to believe that, beyond being
simply the amount determined in the Hanlon appraisal, the value of
the facade easement was $220,800." Kaufman IV, 107 T.C.M.
1262, slip op. at 72. The Kaufmans contend that this "is an
impossibly high standard of proof" and that "[a] more suitable
definition for good faith . . . would be the absence of 'bad' faith
-- that is, the absence of 'dishonesty of belief or purpose.'" At
oral argument, counsel for the Kaufmans framed this argument
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somewhat differently, asserting that the Tax Court employed an
overly "subjective" standard in evaluating the Kaufmans' good
faith.
The Kaufmans' proposed objective/subjective distinction
is unhelpful and not supported by the text of the regulations. The
inquiry must necessarily be somewhat subjective, since courts must
consider "the experience, knowledge, and education of the
taxpayer." 26 C.F.R. § 1.6664-4(b)(1); see also id. (providing
that "an honest misunderstanding of fact or law that is reasonable
in light of all of the facts and circumstances" may be indicative
of reasonable cause and good faith (emphasis added)). At the same
time, the inquiry is not entirely subjective, as the regulations
instruct courts to consider whether the taxpayer would "know or
have reason to know" that information on which he or she relied was
incorrect. Id. (emphasis added). The more helpful framing of the
issue is that set forth in the regulations: whether, "taking into
account all pertinent facts and circumstances," the taxpayer acted
in good faith. Id. That is the standard the Tax Court used.
Turning to the argument in the Kaufmans' brief, the
contention that the "honesty in belief" standard is "impossibly
high" is undercut by the fact that the Tax Court has in fact
recently applied that definition of "good faith" in a case in which
it found in favor of the taxpayers. See Zarlengo, 108 T.C.M.
155, slip op. at 57-58. Importantly, Black's Law Dictionary
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seemingly treats both definitions as paths to reach a finding. It
defines "good faith" as having several components: "[a] state of
mind consisting in (1) honesty in belief or purpose, (2)
faithfulness to one's duty or obligation, (3) observance of
reasonable commercial standards of fair dealing in a given trade or
business, or (4) absence of intent to defraud or to seek
unconscionable advantage." Black's Law Dictionary 808 (10th ed.
2014) (emphases added).11
Third, the Kaufmans make an argument that obtaining a
qualified appraisal made by a qualified appraiser "[a]utomatically"
constitutes a good-faith investigation. This interpretation of the
statute cannot be correct. Section 6664(c)(2) sets forth two
separate requirements that must be met in order for the reasonable
cause exception to apply to a gross valuation overstatement: "(A)
the claimed value of the property was based on a qualified
appraisal made by a qualified appraiser, and (B) in addition to
obtaining such appraisal, the taxpayer made a good faith
investigation of the value of the contributed property." The
11
Insofar as the Kaufmans mean to argue that it would be
error to require them to determine that the easement was worth
precisely $220,800 -- as opposed to, say, $215,000 (or $220,799)
-- we do not understand the Tax Court's opinion to require that
level of precision. The court's analysis, considered as a whole,
suggests that it merely required that the Kaufmans, after a good-
faith investigation of the value of the easement, believe that
Hanlon's appraisal was reasonably accurate. Cf. Fire & Police
Pension Ass'n of Colo. v. Simon, 778 F.3d 228, 241 n.5 (1st Cir.
2015) (citing Connor B ex rel. Vigurs v. Patrick, 774 F.3d 45, 54
n.9 (1st Cir. 2014)).
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Kaufmans' reading would render the second requirement meaningless,
in violation of the rule that "a statute ought, upon the whole, to
be so construed that, if it can be prevented, no clause is rendered
superfluous, void, or insignificant." Young v. United Parcel
Serv., Inc., 135 S. Ct. 1338, 1352 (2015) (citations and internal
quotation marks omitted) (declining to read the second clause of
the Pregnancy Discrimination Act as "simply defin[ing] sex
discrimination to include pregnancy discrimination" because "[t]he
first clause accomplishes that objective").
Simply obtaining an appraisal is not the same as
reasonably relying on that appraisal. The Kaufmans concede as much
in their reply brief, acknowledging that "'obtaining' a qualified
appraisal alone will not satisfy the good-faith investigation
requirement, nor will 'unreasonable' reliance." There may well be
situations in which the taxpayer need do little more than read an
appraisal and note that there is no other evidence that reasonably
casts doubt on the accuracy of the appraisal. Here, however, the
Tax Court supportably found that the Kaufmans obtained a qualified
appraisal from a qualified appraiser, but that other facts
available to the Kaufmans should have alerted them that it was not
reasonable to rely on that appraisal.
The Tax Court's analysis with respect to the accuracy-
related penalties was sound as a legal matter and not clearly
erroneous as a factual matter.
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III. Compliance With 26 U.S.C. § 6751
The Kaufmans also argue, for the first time on appeal,
that the Commissioner's assessment of the accuracy-related
penalties did not comply with 26 U.S.C. § 6751(b)(1), which
provides that no tax penalty "shall be assessed unless the initial
determination of such assessment is personally approved (in
writing) by the immediate supervisor of the individual making such
determination or such higher level official as the Secretary [of
the Treasury] may designate."12 We do not consider this argument
because it was not preserved.
We generally treat arguments not raised below as waived.
E.g., Anderson v. Hannaford Bros. Co., 659 F.3d 151, 158 n.5 (1st
Cir. 2011). The Supreme Court has recognized the wisdom of this
rule in the specific context of appeals from tax courts, noting
that the practice "is essential in order that parties may have the
opportunity to offer all the evidence they believe relevant to the
issues which the trial tribunal is alone competent to decide" and
"in order that litigants may not be surprised on appeal by final
decision there of issues upon which they have had no opportunity to
introduce evidence." Hormel v. Helvering, 312 U.S. 552, 556
(1941).
12
The Commissioner disputes the accuracy of this assertion
as a matter of fact.
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The Kaufmans acknowledge that they did not raise this
argument below but urge us to consider it notwithstanding that
general rule because it "involves a question of law and facts that
are not in dispute." As the government explains, that is wrong;
the question of whether the requirements of § 6751(b)(1) were in
fact met in this case is a question of fact, the resolution of
which would require further development of the record.
The Kaufmans contend in their reply brief that it was the
IRS's burden to show that the requirements were met, and that the
Commissioner cannot now "enlarge the record to demonstrate
compliance with section 6751." But the question whose burden it
was to show compliance with § 6751 is beside the point. The
Kaufmans had the responsibility of arguing in the Tax Court that
the Commissioner had not complied with the statute in order to put
the Commissioner on notice that the issue was in dispute. Having
failed to make that argument below, the Kaufmans cannot now fault
the Commissioner for introducing no evidence to rebut it. See
Hormel, 312 U.S. at 556.
IV. Conclusion
The judgment of the Tax Court is affirmed.
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