Pesky et al v. United States of America

Filing 122

MEMORANDUM AND ORDER Re: Motions for Summary Judgment and Motion to Strike- The Peskys' motion to strike is DENIED; the motions of the Peskys and the United States for summary judgment on the issue of deduction of the value of the Conservation Easement are DENIED; and the Peskys' motion for summary judgment on the United States' counterclaim for fraud penalties under 26 U.S.C. § 6663 with respect to the claimed deduction for the value of theConservation Easement is GRANTED. Signed by Judge William B. Shubb. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jp)

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UNITED STATES DISTRICT COURT

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DISTRICT OF IDAHO

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ALAN PESKY and WENDY PESKY,

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NO. CIV. 1:10-186 WBS

Plaintiffs,
MEMORANDUM AND ORDER RE:
MOTIONS FOR SUMMARY JUDGMENT
AND MOTION TO STRIKE

v.
UNITED STATES OF AMERICA,

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Defendant.
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Plaintiffs Alan and Wendy Pesky brought suit against

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the United States of America seeking a refund for taxes,

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penalties, and interest assessed against them for the 2003 and

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2004 tax years.

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cross motions for summary judgment pursuant to Federal Rule of

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Civil Procedure 56 and the Peskys’ motion to strike certain

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evidence and testimony from the United States’ motion for summary

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judgment.

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Currently before the court are the parties’

(Docket Nos. 105, 106, 108.)
The parties’ dispute can be divided into two general

topics: (1) deduction of the value of a conservation easement
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limiting development of real property in Idaho (“Conservation

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Easement”), and (2) deduction of various other expenses.

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carefully considering the parties’ briefs, the court finds that

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these two issues are best addressed in separate orders.

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Order addresses the parties’ claims regarding the Conservation

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Easement.

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I.

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After

This

Factual and Procedural Background
In May of 1985, Paul MacCaskill and John Hagestad

(“M&H”) owned three parcels of undeveloped land in Blaine County,

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Idaho (“Ketchum Property”).

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4).)

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Property”) abuts the Ketchum Property to the south.

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Hemingway had granted M&H an easement over the Hemingway Property

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to access the Ketchum Property (“Hemingway Easement”), but the

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Hemingway Easement was arguably legally defective.

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id. Ex. 3.)

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(“TNC”), a non-profit environmental conservation organization,

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became the owners of the Hemingway Property.

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(Yost Decl. Ex. 1 (Docket No. 105-

Another property owned by Mary Hemingway, (“Hemingway
(Id. ¶ 14.)

(Id. ¶ 17;

Upon Hemingway’s death, The Nature Conservancy

(Id. Ex. 3.)

TNC was concerned that M&H were going to develop the

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Ketchum Property and preferred that the Ketchum Property be

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accessed over an alternate easement approaching from the north.

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(Id. Ex. 5.)

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driveway to the Ketchum Property over the Hemingway Easement

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would require approval from the City of Ketchum (“City”) and

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Blaine County (“County”).

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eventually resulted in M&H filing an action to perfect the

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Hemingway Easement in state court.

It also appears that M&H and TNC believed that a

(Id.)

The dispute between M&H and TNC

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(Id. Ex. 1, Ex. 2 at 19:2-

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22:4.)1

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In a November 20, 1989 letter, Edward Lawson, attorney

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for TNC, sent M&H a settlement proposal which suggested that TNC

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would agree not to oppose a driveway application with the City

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and County while also amending the Hemingway Easement to provide

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for two homesites.

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a conservation easement on a portion of the Ketchum Property and

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would also make a $150,000 cash contribution.

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did not reach a settlement.

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(Id. Ex. 5.)

In exchange, M&H would give TNC

(Id.)

TNC and M&H

Shortly thereafter, Paul Street, attorney for the

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Peskys, proposed a similar transaction in a confidential

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memorandum to Alan Pesky: (1) TNC would obtain an option to

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purchase the Ketchum Property and assign that option to Mr.

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Pesky; (2) TNC would give Mr. Pesky an oral commitment for access

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over the Hemingway Property if the Peskys could not obtain access

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over other properties; and (3) the Peskys, “at a later date,”

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would contribute two of the three lots on the Ketchum Property to

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TNC “for charitable deduction for more than option [sic] based

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1
The Peskys move to strike, among other documents, Bruce
Runnel’s deposition testimony as a designated organizational
witness under Federal Rule of Civil Procedure 36(b)(6) for lack
of foundation. (Peskys’ Mot. to Strike at 13-19 (Docket No. 1081.) As this court has noted before, “seemingly appropriate
objections based on hearsay and failure to authenticate/lay a
foundation are difficult to address away from trial” because, for
example, “if one witness attempts to testify unsuccessfully [at
trial] about matters regarding which that witness lacks personal
knowledge, another witness may later be able to testify to the
same evidence based upon her firsthand knowledge.” Burch v.
Regents of Univ. of Cal., 433 F. Supp. 2d 1110, 1122 (E.D. Cal.
2006) (Shubb, J.).
The court has considered the Peskys’ motion to strike.
The court does not rely upon the vast majority of the material to
which the Peskys object. To the extent the court relies upon any
evidence objected to therein, the court will accordingly deny the
motion without prejudice to raising the objections at trial.

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upon access to property.”

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(Id. Ex. 6.)

On April 2, 1993, TNC paid $50,000 to acquire an option

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to purchase the Ketchum Property for approximately $1.6 million

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(“Option”).

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and subsequently passed by, TNC’s Board of Governors provided

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that TNC would obtain the Option while simultaneously raising the

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purchase price of $1.6 million or “locating an individual willing

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to purchase it for a single home site,” who “would then

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contribute all of the development rights on the 30+ acres to

(Id. Ex. 7.)

The Project Resolution presented to,

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[TNC] through a conservation easement or other mechanism.”

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Ex. 8.)

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(Id.

On August 3, 1993, Street sent TNC a written offer to

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purchase the Option that included the following terms: (1) Pesky

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and Paul Stern2 would pay TNC $50,000 for the Option and would

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also each pledge to pay $200,000 apiece over a four year period;

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while (2) TNC would provide written agreements guaranteeing

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access over the Hemingway Easement to three home sites on the

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Ketchum Property; and (3) TNC would agree to support the Peskys’

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application to the City for construction of a driveway on the

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Hemingway Easement.

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(Id. Ex. 9.)

After negotiations between late August and late

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September, 1993, TNC and the Peskys entered into a series of

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agreements on or around September 29, 1993:

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Paul and Wendy Stern were apparently co-owners of the
Ketchum Property and were involved in many of the transactions
and documents at issue. Entities controlled by the Peskys, such
as FAWPEAS, were also involved. (See, e.g., Yost Decl. Ex. 41.)
For ease of description and because the parties themselves refer
generally to the Peskys when describing the facts, the court will
do the same.

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The Assignment Agreement - in which the Peskys paid TNC

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$50,000 to TNC, while TNC assigned the Option to Pesky,

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agreed to support the Peskys’ applications for driveway

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approval with the City and County, and agreed to enter

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into the Driveway Easement and Easement Agreement, (id.

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Ex. 19);

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The Driveway Easement - in which TNC granted the Peskys

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an easement over the Hemingway Property to the Ketchum

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Property, (id. Ex. 22);

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The Easement Agreement - in which the Peskys agreed to

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limit the height of structures on the Ketchum Property

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to twenty-five feet, (id. Ex. 23);

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The Pledge Agreement - in which the Peskys agreed to

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convey “all right to develop or improve the [Ketchum]

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Property except for one single-family residence” at a

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later date and pay $400,000 to TNC for a new office

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building; the Pledge Agreement provided that its

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existence be kept confidential unless TNC anticipated

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default by the Peskys, (id. Ex. 20); and

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Deeds of Trust - securing performance of the Pledge

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Agreement by naming TNC as beneficiaries to other real

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property owned by the Peskys, (id. Ex. 21).

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On September 29, 1993, the Peskys exercised the Option

24 and purchased the Ketchem Property for $1.6 million.
25 25.)

(Id. Ex.

Just a few months after purchasing the Ketchum Property,

26 the Peskys engaged a local real estate agent to market and sell
27 the Ketchum Property for a price between $6.5 and $9.5 million.
28 (Id. Ex. 26.)

The Peskys sought approval of a driveway over the
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1 Hemingway Property at Planning and Zoning Commission meetings and
2 through a series of applications.

(Id. Exs. 27, 28, 30-34.)

TNC

3 representatives attended these meetings and allegedly supported
4 approval of the driveway.
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(Id. Ex. 38.)

Around March 7, 2002, the Peskys fulfilled the terms of

6 the Pledge Agreement by granting the Conservation Easement to
7 TNC.

(Id. Ex. 41.)

The Conservation Easement limited

8 development to one single-family residence and a guest house.
9 (Id.)

The Conservation Easement also raised the height

10 restriction on Ketchum Property building from twenty-five to
11 thirty feet.

(Id.)

Around the same date, the Peskys entered

12 into a driveway easement agreement with two other property owners
13 over whose land–-in addition to the Hemingway Property–-a
14 driveway would have to pass to access the Ketchum Property
15 (“Whitmyre Easement”).
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(Id. Ex. 40.)

On March 12, 2002, the Peskys sold the Ketchum Property

17 for $6,900,000 plus deferred interest.

(Id. Ex. 42.)

The Peskys

18 claimed charitable contribution deductions for the value of the
19 Conservation Easement on their 2002, 2003, and 2004 tax returns.
20 In an appraisal submitted to the IRS, Mark Richey determined that
21 the Peskys’ portion of the Conservation Easement was worth over
22 $3 million (“Richey Appraisal”).
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(Id. Ex. 43.)

The Internal Revenue Service (“IRS”) allegedly issued

24 notices of deficiencies for the 2003 and 2004 tax years against
25 the Peskys, and the Peskys paid the assessments.
26 Compl. ¶¶ 6-13 (Docket No. 72).)

(First Am.

Peskys brought suit against the

27 United States in April 2010 seeking recovery of taxes, penalties,
28 and interest assessed by the IRS for the 2003 and 2004 tax years.
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1 (Docket No. 1.)

On September 20, 2011, the United States moved

2 to stay the action under 26 U.S.C. § 7422(e) because the IRS
3 issued new statutory notices of deficiency against the Peskys for
4 the 2003 and 2004 tax years.
5 (Docket No. 58).)

(United States’ Mot. to Stay

The new notices of deficiency included

6 adjustments to income and expenses as to both Alan and Wendy
7 Pesky.

With respect to Alan Pesky, the new notices added a civil

8 fraud penalty under 26 U.S.C. § 6663.

(Id. at 2, Ex. B.)

The

9 IRS also issued a new statutory notice of deficiency against the
10 Peskys for the 2002 tax year.
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(Id. at 2; FAC ¶¶ 15-19.)

After the court lifted the stay, the Peskys filed the

12 FAC.

The United States then brought counterclaims against Alan

13 Pesky3 alleging fraud in the deduction of the Conservation
14 Easement and certain Schedule C business deductions.
15 74.)

(Docket No.

After the court partially granted the Peskys’ motion to

16 dismiss the counterclaims, (Docket No. 84), the United States
17 filed amended counterclaims, (Docket No. 85).
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The United States now moves for summary judgment on the

19 issue of whether the Peskys are entitled to a charitable
20 deduction for the value of the Conservation Easement, arguing
21 that: (1) the Conservation Easement was a quid pro quo
22 transaction with TNC; (2) the Peskys failed to provide an
23 acknowledgment that they received goods and services in exchange
24 for the Conservation Easement; (3) the Richey Appraisal did not
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The IRS does not assess fraud penalties against Wendy
Pesky. Instead, it only seeks accuracy-related penalties,
including a gross valuation misstatement penalty. (United
States’ Mot. for Summ. J. at 23 n.14 (“U.S. MSJ”) (Docket No.
105).)
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1 consider the likelihood of development of the Ketchum Property;
2 and (4) the Richey Appraisal was not a qualified appraisal
3 because it did not include the terms of key agreements such as
4 the Pledge Agreement.
5 (Docket No. 105-1).)

(U.S. Mot. for Summ. J. at 5 (“U.S. MSJ”)
The United States also moves for summary

6 judgment on accuracy penalties associated with the Conservation
7 Easement.

(Id.)

The United States explicitly does not move for

8 summary judgment on its counterclaims for a seventy-five percent
9 fraud penalty, as it “believes that this is an issue for trial.”4
10 (Id. at 2.)
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The Peskys file their own motion for summary judgment

12 on the following issues: (1) whether the Peskys’ could deduct the
13 value of the Conservation Easement as a charitable contribution;
14 and (2) whether the Peskys fraudulently deducted the value of the
15 Conservation Easement and are therefore subject to the United
16 States’ counterclaims for fraud penalties.

(Peskys Mot. for

17 Summ. J. at 2-3 (“Peskys MSJ”) (Docket No. 106-1).)
18 II.

Legal Standard

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Summary judgment is proper “if the movant shows that

20 there is no genuine dispute as to any material fact and the
21 movant is entitled to judgment as a matter of law.”
22 P. 56(a).

Fed. R. Civ.

A material fact is one that could affect the outcome

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The United States clarifies that “because [it] is not
moving on the issue of fraud, it is also not moving on any of
Plaintiffs’ tax liabilities for 2002. These liabilities were
assessed after the statute of limitations in 26 U.S.C. [§]
6501(a) had expired, pursuant to an exception in § 6501(a)(1) for
a false or fraudulent return. Thus, to obtain a judgment on the
2002 liabilities, the United States would first need to prove
that some portion of the return was false or fraudulent.” (U.S.
MSJ at 2 n.1.)
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1 of the suit, and a genuine issue is one that could permit a
2 reasonable jury to enter a verdict in the non-moving party’s
3 favor.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

4 (1986).
5

The party moving for summary judgment bears the initial

6 burden of establishing the absence of a genuine issue of material
7 fact and can satisfy this burden by presenting evidence that
8 negates an essential element of the non-moving party’s case.
9 Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
10 Alternatively, the moving party can demonstrate that the
11 non-moving party cannot produce evidence to support an essential
12 element upon which it will bear the burden of proof at trial.
13 Id.
14

In deciding a summary judgment motion, the court must

15 view the evidence in the light most favorable to the non-moving
16 party and draw all justifiable inferences in its favor.
17 255.

Id. at

“Credibility determinations, the weighing of the evidence,

18 and the drawing of legitimate inferences from the facts are jury
19 functions, not those of a judge . . . ruling on a motion for
20 summary judgment . . . .”
21

Id.

The court notes that the vast majority of cases cited

22 by the parties and considered by the court in connection with
23 this motion were decided by the Tax Court after a bench trial,
24 presumably because the taxpayers challenging the IRS assessments
25 at issue in those cases, unlike the Peskys here, did not pay the
26 assessments before bringing suit.

See Olshausen v. Comm’r, 273

27 F.2d 23, 27 (9th Cir. 1959) (“Having taken advantage of the
28 deficiency notice procedure by filing a petition in the Tax Court
9

1 without paying the tax first, petitioner now makes the claim that
2 he was deprived thereby of a jury trial.
3 due to his own act.

Such deprivation was

If he desired a jury trial, he should have

4 paid the tax first and then sued for a refund in the district
5 court.

There is no right to a jury trial without paying first as

6 a statutory matter, and no right to a jury trial at all in tax
7 matters as a constitutional requirement.” (internal citations
8 omitted)).
9 III. Analysis
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A.

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Quid Pro Quo Exchange
“Section 170(a) of the Internal Revenue Code of 1954

12 allows a deduction for charitable contributions . . . .”

Collman

13 v. Comm’r, 511 F.2d 1263, 1266 (9th Cir. 1975); see 26 U.S.C. §
14 170(a).

“A charitable contribution is a gift of property to a

15 charitable organization, made with charitable intent and without
16 the receipt or expectation of receipt of adequate consideration.”
17 Id.

(citing Hernandez v. Comm’r, 490 U.S. 680, 690 (1989);

18 United States v. Am. Bar. Endowment, 477 U.S. 105, 116-18; 26
19 C.F.R. § 170A-1(h)(1)-(2)).

“While a taxpayer is generally not

20 allowed a charitable deduction for a gift of property consisting
21 of less than an entire estate in that property, an exception is
22 made for a ‘qualified conservation contribution.’”

Mitchell v.

23 Comm’r, 138 T.C. 324, 329 (2012); see 26 U.S.C. §§ 170(f)(3)(A),
24 (f)(3)(B)(iii), (h).
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“The sine qua non of a charitable contribution is a

26 transfer of money or property without adequate consideration.”
27 Am. Bar Endowment, 477 U.S. at 118.
28 Court:
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As explained by the Supreme

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If a transaction is structured in the form of a quid pro
quo, where it is understood that the taxpayer’s money
will not pass to the charitable organization unless the
taxpayer receives a specific benefit in return, and where
the taxpayer cannot receive the benefit unless he pays
the required price, then the transaction does not qualify
for the deduction under section 170.

5 Graham v. Comm’r, 822 F.2d 844, 849 (9th Cir. 1987), aff’d sub
6 nom. Hernandez v. Comm’r, 490 U.S. 680 (1989).

“The

7 consideration need not be financial; medical, educational,
8 scientific, religious, or other benefits can be consideration
9 that vitiates charitable intent.”

Scheidelman v. Comm’r, 682

10 F.3d 189, 199 (2d Cir. 2012).
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“In ascertaining whether a given payment was made with

12 the expectation of any quid pro quo, the IRS has customarily
13 examined the external features of the transaction in question.”
14 Hernandez, 490 U.S. at 690.

This “structural analysis” “has the

15 advantage of obviating the need for the IRS to conduct imprecise
16 inquiries into the motives of individual taxpayers.”

Id. at 690-

17 91.
18

Neither party cites a case in which a court decided at

19 summary judgment whether or not a deduction under § 170 was
20 disallowed as a matter of law due to receipt of substantial
21 benefit, and the Ninth Circuit has upheld jury instructions when
22 the district court conducted a jury trial on the issue.

See

23 Stubbs v. United States, 428 F.2d 885, 887 (9th Cir. 1970); see
24 also Patel v. Comm’r, 138 T.C. 395, 425 (2012) (Gale, J.
25 dissenting) (after disagreeing with the majority that a claimed
26 deduction was barred because it was a partial interest in
27 property, explaining that “[p]etitioners must show that the value
28 of the house, taking into account the conditions on its donation,
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1 exceeded the value of the benefit they received from the fire
2 department in the form of demolition services,” and expressing
3 that the better path would be, “if petitioners wished, [to]
4 proceed to trial on that question of fact”); McLennan v. United
5 States, 24 Cl. Ct. 102, 105-06 (1991) (noting that the court,
6 while granting summary judgment on other issues, held a trial on
7 the issue of whether a contribution was part of a quid pro quo
8 transaction).
9

Here, the United States contends that the donation of

10 the Conservation Easement was part of a larger quid pro quo
11 transaction between the Peskys and TNC.

Under the United States’

12 description of the transaction, TNC provided: (1) an option to
13 buy the property for $2 million; (2) an easement over the
14 Hemingway Property; and (3) support for the Pesky’s driveway
15 applications before the City of Ketchum.

The improved access

16 allegedly increased the value of the Ketchum Property.

In

17 exchange, the Peskys allegedly provided $450,000, a height
18 restriction on buildings, and the eventual Conservation Easement
19 that restricted development on the property to a single home
20 site.
21

(See U.S. MSJ at 3-4, 10-11.)
According to the United States, the Peskys and TNC

22 attempted to mask the quid pro quo nature of the transaction by
23 breaking the transaction into multiple documents, keeping the
24 Pledge Agreement secret, and recording the Conservation Easement
25 long after TNC conferred the benefits of the Assignment Agreement
26 and Driveway Easement on the Peskys.
27

Looking to the structure of the transaction, the Pledge

28 Agreement itself provides that it “arises out of and is integral
12

1 with the Assignment Agreement of even date between the parties.”
2 (U.S. MSJ Ex. 20.)

The Pledge Agreement and Assignment Agreement

3 were signed on the same date.

(Id. Exs. 19, 20.)

In

4 correspondence during negotiations, multiple documents refer to
5 the “Nature Conservancy Transaction” or the “The Nature
6 Conservancy Pesky/Stern Transaction” in the singular.

(Id. Exs.

7 11-18.)
8

While the United States has produced evidence that the

9 conservation easement was part of a quid pro quo transaction, the
10 evidence is not so convincing as to compel summary judgment in
11 its favor.

The Assignment Agreement’s explicit terms provides

12 that TNC will assign an option to purchase the Ketchum Property,
13 will support the Pesky’s applications for driveway approvals with
14 local authorities, and will agree to enter into the Driveway
15 Easement providing access over the Hemingway Property--all for
16 $50,000 from the Peskys.

Nowhere does the Assignment Agreement

17 discuss a restriction on development; nor does it provide that
18 the benefits it confers are consideration for the Pledge
19 Agreement and subsequent Conservation Easement.

Both the

20 Assignment Agreement and the Pledge Agreement have clauses
21 providing that “the instrument constitutes the sole agreement
22 between the parties with respect to the subject matter hereof.”
23 (Id. Ex. 19 ¶ 8; id. Ex. 20 ¶ 8.)
24

In the correspondence between the attorneys during the

25 negotiations, it does not appear that the two Agreements were
26 drafted as a single document.

Paul Street, the Peskys’ attorney

27 at the time, admits that the two Agreements were reviewed at the
28 same time, but denies that the Pledge Agreement was negotiated as
13

1 consideration for the Assignment Agreement.

(Schwartzman Decl.

2 Ex. 1 at 69:4-11, 154:5-21 (Docket No. 110-2).)

Alan Pesky

3 similarly denied in a second deposition that the promises in the
4 Pledge Agreement were contingent upon the promises TNC made in
5 the Assignment Agreement.
6

(Id. Ex. 2 at 243:4-9.)

According to the Peskys, “trad[ing] a promise (i.e.,

7 pledge) to give a future undefined land interest which ‘might’ or
8 ‘might not’ be a conservation easement” cannot constitute a
9 sufficient benefit conferred to TNC such that the transaction
10 becomes a quid pro quo exchange.

(See Peskys Opp’n to Mot. for

11 Summary J. at 14-16 (“Peskys Opp’n”) (Docket No. 110).)

The

12 Peskys cite IRS regulations and cases providing that a promise to
13 pay is not a “contribution” to a charitable organization for the
14 year in which the promise is granted.

See Rev. Rul. 82-197,

15 1982-2 C.B. 72; Don E. Williams Co. v. Comm’r, 429 U.S. 569, 578
16 (1977); Musgrave v. Comm’r, 80 T.C.M. (CCH) 341, 2000 WL 1258400,
17 at *4-5 (2000).
18

The cases and regulations cited by the Peskys focus on

19 whether a contribution was completed within the taxable year and
20 do not decide whether a promise can constitute a benefit that
21 vitiates a contribution’s charitable nature.

The Peskys fail to

22 provide a compelling reason why the court should exclude the
23 Conservation Easement from its quid pro quo analysis and focus
24 solely on the Pledge Agreement’s promise to limit the property to
25 one homesite.
26

Furthermore, even if the court restricts its analysis

27 to the Pledge Agreement and adopts the Peskys’ characterization
28 of it as a “promise to give a future benefit,” (Peskys Opp’n at
14

1 15), cases have “den[ied] charitable contribution deductions
2 where taxpayers transferred property . . . in exchange for a
3 promise by the city to construct schools or widen roads.”
4 Osborne v. Comm’r, 87 T.C. 575, 581 (1986) (emphasis added)
5 (citing Stubbs, 428 F.2d at 887).
6

In Stubbs, for example, taxpayers agreed to dedicate a

7 portion of property for a public road in exchange for rezoning of
8 their land.

Stubbs, 428 F.2d at 886.

The taxpayers transferred

9 the land to the city, and the city formally adopted the proposed
10 rezoning ordinance four months later.

Id.

The Ninth Circuit

11 found that there was sufficient evidence to support a jury
12 verdict against the taxpayers, noting that “as the jury found,
13 the ‘gift’ . . . was in expectation of the receipt of certain
14 specific direct economic benefits within the power of the
15 recipient to bestow directly or indirectly, which otherwise might
16 not be forthcoming.”

Id. at 887.

The court rejected the

17 taxpayer’s argument that no quid pro quo transaction could have
18 occurred because the dedication did not increase the value of
19 their property, explaining that the “[t]axpayers’ subsequent
20 disappointment in the ultimate monetary value of the benefits
21 sought and received cannot affect the situation.”

Id.

Even

22 assuming arguendo that the Peskys are correct in characterizing
23 the benefit allegedly received by TNC as a “promise to give a
24 future benefit,” this does not preclude a finding that the
25 transaction was a quid pro quo exchange rather than a charitable
26 contribution.
27

See id.; Osborne, 87 T.C. at 581.

Ultimately, a reasonable juror could find that the

28 transaction detailed in the Assignment Agreement was a stand15

1 alone and self-contained transaction, and that the transfer of
2 property contained in the Pledge Agreement and Conservation
3 Easement was a separate contribution provided without
4 consideration from TNC.5

Looking to the external features of how

5 the transaction was structured, there is a genuine issue of
6 material fact as to whether the Peskys provided the Conservation
7 Easement “without the receipt or expectation of receipt of
8 adequate consideration.”

Mitchell, 138 T.C. at 329.

The court

9 will accordingly deny both parties’ motions for summary judgment
10 based on this issue.
11

B.

Contemporaneous Written Acknowledgement of Goods and

12

Services Received

13

The United States also argues that, because there is

14 “no genuine dispute that Mr. Pesky received substantial benefits
15 from TNC in exchange for the Conservation Easement,” he failed to
16 disclose the goods and services provided in consideration for the
17 Conservation Easement in a contemporaneous written acknowledgment
18 as required by 26 U.S.C. § 170(f)(8)(B)(ii) and 26 C.F.R. §§
19 1.170A-13(f)(5) & (6).

(U.S.’s MSJ at 11.)

The United States

20 does not dispute that the Peskys submitted a letter from TNC,
21 created contemporaneously to the Conservation Easement,
22 confirming that TNC “provided no goods or services in exchange
23
5

24
25
26
27
28

The United States argues that, even looking to the
Conservation Easement alone, the fact that the Conservation
Easement raises the building height restriction from twenty-five
feet to thirty feet provides sufficient benefit to show a quid
pro quo transaction. (U.S. MSJ at 11.) Even adopting this
narrow view, the court declines to hold that, as a matter of law,
a five-foot building height increase would be adequate
consideration to show a quid pro quo transaction involving the
exchange of a conservation easement valued at over $6 million in
return.
16

1 for [the] gift.”

(Yost Decl. Ex. 45.)

Nor does the United

2 States object to the form or timing of the letter.

The United

3 States’ claim appears to rely on the court finding that a good or
4 service was received in consideration for the Conservation
5 Easement.
6

As explained above, because a genuine issue of material

7 fact exists as to whether TNC provided any goods or services in
8 exchange for the Conservation Easement, the court will
9 accordingly deny the United States’ motion for summary judgment
10 based on § 170(f)(8)(B) and the related regulations.
11
12

C.

Appraisal of the Deduction
The United States also moves for summary judgment on

13 the ground that, even if the Conservation Easement was a
14 charitable contribution, it was not properly appraised under IRS
15 regulations and therefore was wrongfully deducted.
16

Title 26 U.S.C. § 170 provides that “no deduction shall

17 be allowed under subsection (a) for any contribution of property
18 for which a deduction of more than $500 is claimed unless such
19 person meets the requirements of subparagraphs (B), (C), and (D),
20 as the case may be, with respect to such contribution.”
21 U.S.C. § 170(f)(11)(A)(i).

26

Subparagraph (D) provides that when

22 claiming a charitable contribution of more than $500,000 for an
23 easement or other property that is not readily valued, the
24 taxpayer must include a “qualified appraisal” of the value of the
25 contribution to his tax return.
26

Id. § 170(f)(11)(D).

The IRS has established regulations detailing the

27 requirements for a qualified appraisal.
28 § 1.170A-13(c)(3)(ii).

See generally 26 C.F.R.

“The regulatory requirements of a
17

1 qualified appraisal are many . . . but generally require
2 information about the property, terms of the donation, identity
3 of the appraiser, and fair market value of the donation.”
4 Scheidelman v. Comm’r, 682 F.3d 189, 194 (2d Cir. 2012).6

“The

5
6
7
8
9
10
11
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13
14
15
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18
19
20
21
22
23
24
25
26
27
28

6

Specifically, 26 C.F.R. § 1.170A-13(c)(3)(ii) requires
that a qualified appraisal include:
(A) A description of the property in sufficient
for a person who is not generally familiar with
type of property to ascertain that the property
was appraised is the property that was (or will
contributed;

detail
the
that
be)

(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 agreement or understanding entered
into (or expected to be entered into) by or on behalf
of the donor or donee that relates to the use, sale, or
other disposition of the property contributed . . .;
(E) The name, address, and (if a taxpayer
identification number is otherwise required by section
6109 and the regulations thereunder) the identifying
number of the qualified appraiser . . . .;
(F) The qualifications of the qualified appraiser who
signs the appraisal, including the appraiser’s
background, experience, education, and membership, if
any, in professional appraisal associations;
(G) A statement that the appraisal was prepared for
income tax purposes;
(H) The date (or dates) on which the property was
appraised;
(I) The appraised fair market value (within the meaning
of § 1.170A–1(c)(2)) of the property on the date (or
expected date) of contribution;
(J) 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; and
18

1 procedural regulations requiring an appraisal report and summary
2 are designed to provide information ‘sufficient to permit [the
3 IRS] to evaluate the [taxpayer]’s reported contribution and
4 monitor and address concerns about overvaluation.’”

Kaufman v.

5 Shulman, 687 F.3d 21, 29 (1st Cir. 2012) (alterations in
6 original) (quoting Consol. Investors Grp. v. Comm’r, T.C.M. (CCH)
7 601, 2009 WL 4840246, at *23 (2009)).

If the appraisal fails to

8 include one or more of the requirements of § 1.170-13(c)(3)(ii)
9 and thus is not a “qualified appraisal,” the deduction based upon
10 the value of the alleged charitable contribution may be
11 disallowed in its entirety.

See, e.g., Estate of Evenchik v.

12 Comm’r, 105 T.C.M. (CCH) 1231, 2013 WL 424791, at *6 (2013)
13 (“These defects [in the appraisal] prevented the Commissioner
14 from properly evaluating the property interest contributed.

The

15 Evenchiks are not, therefore, entitled to the deduction they
16 seek.”).
17

One of the provisions at issue here, 26 C.F.R. §

18 1.170A-13(c)(3)(ii)(D), requires that a qualified appraisal must
19 include “[t]he terms of any agreement or understanding entered
20 into (or expected to be entered into) by or on behalf of the
21 donor or donee that relates to the use, sale, or other
22 disposition of the property contributed.”

Examples include the

23 terms of any agreements or understandings that “[r]estrict[]
24 temporarily or permanently a donee’s right to use or dispose of
25 the donated property,” or “reserve[] to, or confer[] upon, anyone
26
27
28

(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.
19

1 (other than a donee organization . . .) any right to the income
2 from the contributed property or to the possession of the
3 property.”
4

26 C.F.R. §§ 170A-13(c)(3)(ii)(D)(1)-(2).

Another requirement at issue here, 26 C.F.R. § 1.170A-

5 14(h)(3)(ii), regulates how the qualified appraisal places a
6 value on the conservation easement.

A qualified appraisal may

7 use the “before-and-after” valuation method, which determines the
8 fair market value of the property immediately before the
9 conservation easement is granted, and then determines the fair
10 market value immediately after the conservation easement is
11 granted.

The value of the conservation easement, and thus the

12 value reported for deduction, is the difference between the
13 “before” and “after” fair market values.

See 26 C.F.R. § 1.170A-

14 14(h)(3)(i) (“If no substantial record of market-place sales [of
15 properties with comparable easements] is available to use as a
16 meaningful or valid comparison, as a general rule . . . the fair
17 market value of a perpetual conservation restriction is equal to
18 the difference between the fair market value of the property it
19 encumbers before the granting of the restriction and the fair
20 market value of the encumbered property after granting the
21 restriction.”); Hilborn v. Comm’r, 85 T.C. 677, 688-89 (1985)
22 (describing the before-and-after approach as “measuring the
23 difference between the fair market value of the property
24 immediately before the easement was granted and the fair market
25 value of the property immediate after the easement was granted;”
26 “[s]tated another way, the question becomes: what was the
27 difference, if any, in the value of the property with and without
28 the easement?”).
20

1

Section 1.170A-14(h)(3)(ii) requires that “[i]f before

2 and after valuation is used, the fair market value of the
3 property before contribution of the conservation restriction must
4 take into account not only the current use of the property but
5 also an objective assessment of how immediate or remote the
6 likelihood is that the property, absent the restriction, would in
7 fact be developed.”
8

26 C.F.R. § 1.170A-14(h)(3)(ii).

Here, the United States argues that by failing to

9 mention the Pledge Agreement and Whitmyre Easement,7 the Richey
10 Appraisal did not adequately include “[t]he terms of any
11 agreement or understanding entered into (or expected to be
12 entered into) . . . that relates to the use, sale, or other
13 disposition of the property contributed.”
14 1.170A-13(c)(3)(ii)(D).8

See 26 C.F.R. §

The United States also argues that the

15 Richey Appraisal overestimated the “highest and best use” of the
16 Ketchum Property “before” the Conservation Easement when it left
17 out the fact that the Whitmyre Easement arguably provides for
18 only one home site independently of the Conservation Easement.
19 (U.S. MSJ at 12-17.)
20

Even if the court were to find that the Richey

21
22
23
24
25
26
27
28

7
The Whitmyre Easement is apparently an easement over
two other neighbors’ properties, in addition to the Hemingway
property, over which the driveway to access the Ketchum Property
had to pass. (U.S.’s MSJ at 13.) The Whitmyre Easement was
granted around the same time as the Conservation Easement and
similarly limits access to the Ketchum Property to one singlefamily residence. (Yost Decl. Ex. 40.)
8

The United States also argues that the Richey Appraisal
failed to take into account the fact that the Conservation
Easement was only a partial interest due to co-ownership with the
Sterns, and that the Appraisal failed to specify that it was
prepared for tax purposes. (U.S. MSJ at 16-17.)
21

1 Appraisal failed to satisfy the requirements of a qualified
2 appraisal, however, a genuine issue of material fact exists as to
3 whether the Peskys should be excused from those requirements for
4 reasonable cause.

See Crimi v. Comm’r, 105 T.C.M. (CCH) 1330,

5 2013 WL 561347, at *34-35 (2013); see also Rothman v. Comm’r, 104
6 T.C.M. (CCH) 126, 2012 WL 3101513, at *5 (2012) (“Whereas our
7 ruling that petitioners failed to obtain a qualified appraisal
8 generally leads towards a denial of those deductions, the
9 deductions are not disallowed if the failure was due to
10 reasonable cause and not to willful neglect.

Whether petitioners

11 acted with reasonable cause is . . . an issue that must be
12 tried.”).
13

While the regulations discussed above provide some of

14 the requirements to qualify a conservation easement for a
15 charitable contribution deduction, 26 U.S.C. § 170 provides that
16 a taxpayer’s deduction will not be denied for failure to meet the
17 regulatory requirements “if it is shown that failure to meet such
18 requirements is due to reasonable cause and not to willful
19 neglect.”

Id. § 170(ii)(II).

“Neither the statute nor the

20 regulations tell us what constitutes reasonable cause in the
21 context of failure to obtain a qualified appraisal.”
22 WL 561347, at *35.

Crimi, 2013

“However, the concept of ‘reasonable cause’

23 pervades the part of the Code relating to the imposition of
24 additions to tax and penalties for failures to comply with
25 certain sections of the Code.”

Id. (citing 26 U.S.C. §§ 6651,

26 6652, 6664).
27

“Reasonable cause requires the taxpayer have exercised

28 ordinary business care and prudence as to the challenged item.”
22

1 Id. (citing United States v. Boyle, 469 U.S. 241 (1985)).

“Thus,

2 the inquiry is inherently a fact-intensive one, and facts and
3 circumstances must be judged by on a case-by-case basis.”
4

Id.

As explained by the Tax Court in Crimi:

5

A taxpayer’s reliance on the advice of a professional,
such as a certified public accountant, would constitute
reasonable cause and good faith if the taxpayer could
prove by a preponderance of the evidence that: (1) the
taxpayer reasonably believed the professional was a
competent tax adviser with sufficient expertise to
justify reliance; (2) the taxpayer provided necessary and
accurate information to the advising professional; (3)
the taxpayer actually relied in good faith on the
professional’s advice.

6
7
8
9
10
11

Id. (citing Rovakat, LLC v. Comm’r, 102 TCM (CCH) 264 (2011)).

12

In Crimi, the Tax Court appeared to agree with the

13 argument that an appraisal for real property contained multiple
14 deficiencies, including being prepared four years before the
15 contribution date, incorrectly describing the property as having
16 more acreage than what was actually transferred, and failing to
17 include the date or expected date of the contribution.
18 2013 WL 561347, at *34.

Crimi,

While the court was “doubtful the 2000

19 appraisal was in substantial compliance,” the court went on to
20 hold that it need not reach the issue because it “agree[d] with
21 petitioners that their noncompliance would be in any event
22 excused for reasonable cause because they reasonably and in good
23 faith relied on [their accountant’s] advice that the 2000
24 appraisal met all legal requirements to claim the deduction.”
25 Id.
26

At a deposition, Mr. Pesky testified that “[e]verything

27 I did was done with the advice of my advisors and with my belief
28 and my absolute statement to them that nothing should be done
23

1 that isn’t completely legal.”

(Schwartman Aff. in Supp. of MSJ

2 Ex. 14 at 230:5-8 (Docket No. 106-6).)

When Richey inquired

3 about the terms of the Pledge Agreement and whether its terms
4 should be included in his appraisal, it appears that one of the
5 Peskys’ attorneys, Nicholas Marshall, advised Richey that its
6 terms did not apply.

(See Yost Decl. Ex. 60.)

The deposition of

7 D. John Thornton also implies that the attorneys at Thornton
8 Byron were intimately involved with decisions regarding the
9 Richey Appraisal, and that it is the firm’s responsibility to
10 make sure that all the regulations concerning deduction of the
11 easement are met.

(See Schwartman Aff. in Supp. of MSJ Ex. 45

12 (“Thornton Dep.”) at 34:23-38:5, 42:10-16 (Docket No. 106-8).)
13

Thus, whether the Peskys are excused from the

14 requirements regarding submission of a qualified appraisal due to
15 reasonable cause is a genuine issue of material fact.
16 Accordingly, the United States’ motion for summary judgment based
17 upon failure to comply with qualified appraisal regulations will
18 be denied.
19
20

C.

Fraud Penalties
Section 6663 provides that “[i]f any part of any

21 underpayment of tax required to be shown on a return is due to
22 fraud, there shall be added to the tax an amount equal to 75
23 percent of the portion of the underpayment which is attributable
24 to fraud.”
25

26 U.S.C. § 6663(a).

In the context of the seventy-five percent penalty of §

26
27
28
24

1 6663,9 “fraud is intentional wrongdoing on the part of the
2 taxpayer with the specific intent to avoid a tax known to be
3 owing.”

Bradford v. Comm’r, 796 F.2d 303, 307 (9th Cir. 1986)

4 (quoting Akland v. Comm’r, 767 F.2d 618, 621 (9th Cir. 1985)).
5 To establish liability for the civil fraud penalty, “the
6 Government must establish: (1) a knowing falsehood; (2) an intent
7 to evade taxes; and (3) an underpayment of tax.”

Considine v.

8 United States, 683 F.2d 1285, 1286 (9th Cir. 1982).
9

The government “must prove fraud by clear and

10 convincing evidence, but intent can be inferred from strong
11 circumstantial evidence.”

Bradford, 796 F.2d at 307 (quoting

12 Akland, 767 F.2d at 621 (internal citations omitted)) (emphasis
13 added); see 26 U.S.C. § 7454(a) (“In any proceeding involving
14 whether the petitioner has been guilty of fraud with intent to
15 evade tax, the burden of proof in respect to such issue shall be
16 upon the Secretary.”).

“Because fraudulent intent is rarely

17 established by direct evidence, this court has inferred intent
18 from various kinds of circumstantial evidence.

These ‘badges of

19 fraud’ include: (1) understatement of income; (2) inadequate
20 records; (3) failure to file tax returns; (4) implausible or
21 inconsistent explanations of behavior; (5) concealing assets; and
22 (6) failure to cooperate with tax authorities.”

Id. (internal

23 citations omitted).
24
9

25
26
27
28

The Tax Reform Act of 1986, Pub. L. No. 99-514, 100
Stat. 2085 (1986), amended 26 U.S.C. § 6653(b) to increase the
civil penalty for fraud from fifty percent to seventy-five
percent. Cooley v. Comm’r, 87 T.C.M. (CCH) 1025, 2004 WL 406756,
at *7 n.4 (2004). The Omnibus Budget Reconciliation Act of 1989,
Pub. L. No. 101-239, 103 Stat. 2106 (1989), subsequently removed
the civil penalty for fraud from § 6653(b) and replaced it with §
6663. Id.
25

1

The United States rests its fraud counterclaim

2 essentially on Alan Pesky’s alleged role in failing to disclose
3 or provide a copy of the Pledge Agreement to the IRS and City of
4 Ketchum officials.

From the evidence before the court, the

5 primary actors in the IRS dispute over disclosure of the Pledge
6 Agreement were Alan Pesky’s attorneys.

There is evidence that

7 Alan Pesky relied upon Paul Street when determining whether the
8 Pledge Agreement and subsequent Conservation Easement would
9 qualify as a charitable contribution.

(See Schwartman Aff. in

10 Supp. of MSJ Ex. 15 (“Street Dep.”) at 134:6-13, 138:4-7
11 (“[T]here certainly was reliance on [the Peskys’ attorneys] to
12 understand that-–to identify any major challenges [to a
13 charitable deduction] if [they] saw some.”)
14

From the testimony, it appears that the attorneys had

15 good faith reasons for their decisions, separate from any intent
16 to conceal the Pledge Agreement from the IRS.

In his deposition,

17 D. John Thornton explained that it was his decision not to turn
18 over the Richey Appraisal file, which contained the firm’s copy
19 of the Pledge Agreement.

(Thornton Dep. at 40:7-41:15.)

20 Thornton told Alan Pesky that they were not going to provide the
21 Richey Appraisal file because it was the firm’s practice not to
22 turn over such information.

(Id. Ex. 45.)

This decision was not

23 obviously unreasonable, as the court agreed that the Richey
24 Appraisal file was privileged before being overturned by the
25 Ninth Circuit.

See United States v. Richey, No. CV 08-452-S-EJL,

26 2009 WL 595588 (D. Idaho Mar. 6, 2009), rev’d and remanded, 632
27 F.3d 559 (9th Cir. 2011).
28

The evidence from which the United States argues that
26

1 Alan Pesky fraudulently concealed the Pledge Agreement from city
2 officials is similarly susceptible to an innocent interpretation.
3 The United States produces a memorandum from Paul Street to Alan
4 Pesky explaining that, when asked by counsel for the City of
5 Ketchum to review the Pledge Agreement, “Lawson[, attorney for
6 TNC,] and [Street] agreed that we should not distribute the
7 scenic easement to [City Counsel] because then it could be
8 distributed to others.”

(Hatzimichalis Decl. in Opp’n to Peskys

9 MSJ Ex. 71 (Docket No. 109-4).)

As with the allegedly fraudulent

10 failure to produce the Pledge Agreement to the IRS, the evidence
11 before the court points to Alan Pesky’s attorneys as the primary
12 decisionmakers regarding strategy before the City of Ketchum.
13

Furthermore, even if Pesky was involved in the decision

14 to allow counsel from the city of Ketchum to view, but not
15 photocopy, the Pledge Agreement, the evidence shows that Pesky
16 and the attorneys had a legitimate reason to limit disclosure of
17 the Pledge Agreement to the City of Ketchum.

As explained by

18 Street in his memo to Alan Pesky, Street’s “concern about a
19 release of the document is that the City will then try to provide
20 its thoughts and suggestions on changes to the document.”

(Id.)

21 Street and Lawson were concerned that the City of Ketchum would
22 try to make approval of the driveway permit contingent upon
23 changes to the Pledge Agreement, but the attorneys “didn’t really
24 want to have the city as a partner at [that] stage.”

(Street

25 Dep. at 118:15-20.)
26

Thus, even assuming that Alan Pesky agreed with his

27 attorneys’ decisions regarding nondisclosure of the Pledge
28 Agreement, and viewing all evidence in the light most favor the
27

1 United States, the court cannot conclude that a reasonable juror
2 could find it “highly likely” that Alan Pesky’s deduction of the
3 Conservation Easement was due to fraud.

See Ninth Circuit Model

4 Jury Instruction 1.4 (“When a party has the burden of proving any
5 claim or defense by clear and convincing evidence, it means you
6 must be persuaded by the evidence that the claim or defense is
7 highly probable.

This is a higher standard of proof than proof

8 by a preponderance of the evidence.”).

Because the United States

9 has not produced sufficient evidence to meet its heightened
10 burden of showing fraud by clear and convincing evidence, Alan
11 Pesky’s motion for summary judgment on the United States’
12 counterclaim for fraud penalties under § 6663 with respect to the
13 claimed deduction for the value of the Conservation Easement must
14 be granted.
15

IT IS THEREFORE ORDERED that:

16

(1) the Peskys’ motion to strike be, and the same

17 hereby is, DENIED;
18

(2) the motions of the Peskys and the United States for

19 summary judgment on the issue of deduction of the value of the
20 Conservation Easement be, and the same hereby are, DENIED; and
21

(3) the Peskys’ motion for summary judgment on the

22 United States’ counterclaim for fraud penalties under 26 U.S.C. §
23 6663 with respect to the claimed deduction for the value of the
24 Conservation Easement be, and the same hereby is, GRANTED.
25 DATED:

July 8, 2013

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