In 2006, the petitioners, a married couple, granted a land preservation easement to a county (under the county's Agricultural Land Preservation Program (AALP) in exchange for being entitled to sell to a developer the development rights on the tract - known as a "density exchange option." As a result of the easement grant, the petitioners claimed a charitable deduction of $5.54 million which they carried over, in part, to 2007 and 2008 due to deduction limitations. The IRS denied the deductions due to the petitioners' failure to satisfy the reporting requirement for this type of charitable contribution and because of the lack of donative intent because of a quid pro quo exchange. As a result, the IRS asserted deficiencies of $1.3 million also levied accuracy-related penalties totaling almost $260,000. The court sustained the IRS position. The court determined that that the appraisal of the property was not a "qualified appraisal" as required by Treas. Reg. Sec. 1.170A-13(c)(3) because it lacked an accurate description of the property, the date of the contribution and the terms of the agreement. The court also noted that the appraisal summary required by Treas. Reg. Sec. 1.170A-13(c)(2)(I)(B) that is submitted on Form 8283 did not have the donee's signature and did not disclose the consideration received. Also, the court held that the petitioners were not entitled to substantial compliance. The court also held that the transaction involved a quid pro quo and could not be re-characterized as a bargain-sale transaction. As for computation of the gain from the sale of the development rights, the court held that it was not possible to determine the basis of the development right and, as such, the "equitable apportionment" doctrine did not apply. The court upheld the imposition of the 20 percent accuracy-related penalty for a substantial valuation misstatement under I.R.C. Sec. 6662(b)(3) for which reasonable cause did not apply. Costello v. Comr., T.C. Memo. 2015-87
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