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Bruzewicz v. United States

March 25, 2009

ELIZABETH A. BRUZEWICZ AND HOWARD B. PROSSNITZ, PLAINTIFFS,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge

MEMORANDUM OPINION AND ORDER

Elizabeth Bruzewicz and her husband Howard Prossnitz (collectively "Prossnitzes"*fn1 ) have brought this action against the United States seeking a refund of the taxes, penalties and interest they previously paid as a result of a notice of deficiency issued by the Internal Revenue Service ("IRS"). Those amounts related to a charitable deduction Prossnitzes took on their income tax returns for the years 2002-04 for the donation of a preservation facade easement on their home in Oak Park, Illinois.

Both sides have now invoked Fed. R. Civ. P. ("Rule") 56, each via a partial motion for summary judgment. For the reasons stated here, each motion is granted in part and denied in part.

Summary Judgment Standards

Every Rule 56 movant bears the burden of establishing the absence of any genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose courts consider evidentiary records in the light most favorable to nonmovants and draw all reasonable inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). But to avoid summary judgment a non-movant "must produce more than a scintilla of evidence to support his position" that a genuine issue of material fact exists (Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001)) and "must set forth specific facts that demonstrate a genuine issue of triable fact" (id.). Ultimately summary judgment is warranted only if a reasonable jury could not return a verdict for the non-movant (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

One more complexity is added where, as here, cross-motions for summary judgment are involved. Those same principles require the adoption of a dual perspective that this Court has sometimes referred to as Janus-like: As to each motion the non-movant's version of any disputed facts must be credited. What follows, then, is a summary of the undisputed facts.*fn2

Background

Prossnitzes own their residence at 203 Forest Avenue in Oak Park, Illinois (P. St. ¶19). Known as the "Orlando Blackmer House," the residence is located in the Frank Lloyd Wright-Prairie School of Architecture Historic District, an area containing 26 structures designed by Frank Lloyd Wright and over 60 additional buildings designed by members of the Prairie School (P. St. ¶20; P. Ex. G).

In November 2002 Mr. Prossnitz spoke to Mary Schmidt ("Schmidt"), the owner of LTV Real Estate Services, Ltd., about retaining her firm to conduct an appraisal of a preservation easement that Prossnitzes were considering donating to the Landmarks Preservation Council of Illinois ("Landmarks Council"). Landmarks Council was started in 1971 to protect and preserve historically significant buildings and has been the recipient of over 500 easement donations, including residential easements in Chicago and surrounding areas (P. St. ¶22-23). Schmidt and her associate Gwen Fiorenzo ("Fiorenzo") spent time gathering research on the preservation easement donation and visited Prossnitzes' home to inspect it for purposes of preparing the appraisal (G. St. ¶3; P. Resp. St. ¶3). Schmidt and Fiorenzo completed the appraisal on November 25, 2002 and sent it to Prossnitzes shortly thereafter (G. St. ¶3).

According to the terms of the easement, Prossnitzes cannot demolish or remove their home*fn3 or, without Landmarks Council's prior written approval, (1) change the front or two side facades of the house or (2) make any repairs or reconstruction after a casualty loss (P. St. ¶24). In addition, they must perform all necessary maintenance on the three facades, and Landmarks Council must be added as an insured under their homeowner's insurance policy (id.). All mortgages are subordinated to the rights of Landmarks Council to enforce the easement, which runs with the land (id.). Schmidt and Fiorenzo valued the proposed easement at $216,000 in their appraisal report.

Prossnitzes executed the proposed facade easement on December 3, 2002 and recorded it on December 16 (P. Ex. H). On their 2002 income tax return they deducted $216,000 as a charitable contribution (G. St. ¶13). On that year's return they also claimed a $21,600 deduction for a cash payment made to Landmarks Council during 2002 (id.).

As a result of certain deductibility limits, those deductions were spread over the years 2002-04 (id.). In 2005 the IRS audited Prossnitzes' returns and disallowed the claimed deductions for the $216,000 easement and the $21,600 cash donation (id.). Next the IRS issued Prossnitzes a statutory notice of deficiency that reflected a tax deficiency of $74,521 for the years 2002-04, generating $14,904.20 in penalties (id.). Prossnitzes paid the taxes and penalties together with interest and filed a claim for refund of those amounts (G. St. ¶15). After receiving a small portion of that claim, they then filed this action seeking a refund of the rest of the taxes, penalties and interest they had paid as a result of the deficiency notice.

Tax Code Provisions and Accompanying Regulations

Hintz v. Comm'r, 712 F.2d 281, 284 (7th Cir. 1983) is among the host of cases confirming this well-known principle:

As a general matter, a deduction from income for tax purposes may be taken only when support for it can be found in the language of a statute, appurtenant regulations, or legislative history.

For that purpose "it is the taxpayer who bears the burden of showing that he or she is entitled to a particular deduction" (id.).

Internal Revenue Code ("Code") §170*fn4 addresses the allowance of income tax deductions for charitable contributions and gifts. As a general rule charitable contributions are permitted "as a deduction only if verified under regulations prescribed by the Secretary" (Section 170(a)(1)). In addition to the requirements specified by such regulations, Section 170(f)(8)(A) provides:

No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).

In turn subparagraph (B) states that the acknowledgment must include (1) the amount of cash and a description of any property other than cash contributed, (2) whether the donee organization provided any goods or services in consideration for any such property and (3) if goods or services were provided in exchange, a description and good faith estimate of the value of such goods or services. And to satisfy the "contemporaneous" requirement, the acknowledgment must be obtained on or before the date on which the taxpayer files a tax return containing the charitable deduction or the deadline date for filing that return (Section 170(f)(8)(C)).

As directed by Congress in the Deficit Reduction Act of 1984, the Treasury Department enacted regulations (cited "Reg. §--") containing specific substantiation requirements applicable to taxpayers taking income tax deductions of charitable contributions of property other than cash. Reg. §1.170A-13(c)(2)(i) provides:

[A] donor who claims or reports a deduction with respect to a charitable contribution to which this paragraph (c) applies must comply with the following three requirements:

(A) Obtain a qualified appraisal (as defined in paragraph (c)(3) of this section) for such property contributed. If the contributed property is a partial interest, the appraisal shall be of a partial interest.

(B) Attach a fully completed appraisal summary (as defined in paragraph (c)(4) of this section) to the tax return...on which the deduction for the contribution is first claimed (or reported) by the donor.

(C) Maintain records containing the information required by paragraph (b)(2)(ii) of this section.

And Reg. §170.A-13(c)(3)(ii) prescribes the information required in a qualified appraisal:

(A) A description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is ...


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