Kaufman v. Commissioner (Kaufman V)

Court of Appeals, 1st Circuit, No. 14-1863, April 24, 2015: Penalty upheld for gross valuation misstatement.

The Kaufmans’ claim of a federal income tax deduction for donating a historic preservation easement (“preservation restriction” in Massachusetts) was denied after multiple court proceedings culminating in the Tax Court finding that the value of the easement was zero and that the Kaufmans were liable for a 40% accuracy-related penalty for making a gross valuation misstatement. Kaufman v. Commissioner, 107 T.C.M. 1262, T.C. Memo 2014-52 (2014) (“Kaufman IV”). The Kaufmans appealed that decision, and now the Appeals Court affirmed the Tax Court, ruling that the Tax Court did not “clearly err” when it found the Kaufmans must pay the penalties.

The 40% accuracy-related penalty in question comes under Section 6662 of the Internal Revenue Code, imposed for a 400% or more overstatement of the value of any property claimed on a tax return (§ 6662(h)).  The Kaufmans argued that they should be excused from the penalty under the “reasonable cause exception” (§ 6664(c)). That exception requires that the taxpayer had reasonable cause, acted in good faith, based the claimed value on a qualified appraisal made by a qualified appraiser, and a good faith investigation by the taxpayer of the value of the contributed property.

Good Faith: the Tax Court found that the Kaufmans did not have reasonable cause or act in good faith in claiming the deduction and failed to make a good faith investigation; the appeals court held that these finding were not clearly erroneous.  The findings at the Tax Court included facts showing that after the Kaufmans got the appraisal, Mr. Kaufman was unequivocally assured by a representative of the grantee Trust that he did not expect the donation to decrease the value of the Kaufman residence at all. The court said this “would have put a reasonable person on notice that further investigation was required to verify the purported value of the donated easement” and, “This should have immediately raised red flags as to whether the value of the easement was zero.” Also arguing against good faith was the fact the Kaufmans had signed a letter stating that the restrictions were the same as those already in place by virtue of local zoning restrictions.

Among the court’s rejections of various arguments made by the Kaufmans, the court said that obtaining a qualified appraisal made by a qualified appraiser does not automatically constitute a good-faith investigation.

Decision available at http://media.ca1.uscourts.gov/pdf.opinions/14-1863P-01A.pdf.

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