Couple Liable for Penalties After Charitable Deductions Denied

RICHARD I. PRESLEY AND MARTINE N. PRESLEY,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

Filed October 15, 2018

David J. Looby, for petitioners.

G. Chad Barton, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined a deficiency in, and an accuracy-related penalty under section 6662(a)¹ on, petitioners' Federal income tax (tax) for each of the years indicated, as follows:

Year	Deficiency	Accuracy-Related Penalty Under sec. 6662(a)
2010	$39,269	$7,853.80
2012	54,445	10,889.00

The issues remaining for decision are:

[*3] FINDINGS OF FACT²

Some of the facts have been stipulated and are so found.

Petitioners, Richard I. Presley (Mr. Presley) and Martine N. Presley (Ms. Presley),³ resided in Oklahoma at the time they filed the petition.

Businesses and Ministry of Mr. Presley

Mr. Presley has been an optometrist since around the early 1990s. He owned and operated several vision-care businesses (Mr. Presley's optometry businesses), each of which qualified as an S corporation.

On October 30, 1997, the Presleys, Rob Moritz (Mr. Moritz), who was Mr. Presley's brother-in-law, and Bertha Coffin (Ms. Coffin), who was a friend of the Presleys, incorporated Presley Family Ministries, Inc. (PFM), as a nonprofit corporation under the laws of the State of Oklahoma. Pursuant to its articles of incorporation, PFM had various powers and authority, including the power and authority “[t]o earnestly seek and promote the unity of God's people and churches in a Scriptural manner of Godly love, respect and faithful voluntary cooperation [*4] with liberty.” At all relevant times, including during 2010 and 2012, Mr. Presley was the pastor and primary spiritual leader of PFM.

Pursuant to its articles of incorporation, the registered agent of PFM was Mr. Presley, and the “post office address * * * and principal office” of PFM was the address of petitioners' single-family home and residential property (petitioners' residence) in Tulsa, Oklahoma (Tulsa), which they had purchased in May 1992 for $104,500.

Pursuant to its articles of incorporation, PFM was to have a board of trustees (PFM's board), the initial members of which were Mr. Presley, Ms. Presley, Mr. Moritz, and Ms. Coffin. Pursuant to those articles, the members of PFM's board were to be elected annually at a so-called annual business meeting of that board.

In a letter dated March 4, 1999 (March 4, 1999 letter), the Internal Revenue Service (IRS) determined that PFM (1) was an organization exempt from tax under section 501(a) because it was an organization described in section 501(c)(3) and (2) was not a private foundation within the meaning of section 509(a) because it was an organization described in sections 509(a)(1) and 170(b)(1)(A)(vi).

[*5] On June 25, 2004, an organization known as Universal Life Church⁴ issued a so-called certificate of ordination to Mr. Presley. On July 9, 2004, an organization known as World Christianship Ministries⁵ issued a certificate to Mr. Presley, which stated that it was conferring on him a “Barter of Divinity”.

In a letter dated September 17, 2004 (September 17, 2004 letter), the IRS modified the determination in its March 4, 1999 letter that PFM was not a private foundation within the meaning of section 509(a) because it was an organization described in sections 509(a)(1) and 170(b)(1)(A)(vi). In its September 17, 2004 letter, the IRS determined that PFM is not a private foundation within the meaning of section 509(a) because it is an organization described in sections 509(a)(1) and 170(b)(1)(A)(I) (i.e., a church). In its September 17, 2004 letter, the IRS also reaffirmed the determination in its March 4, 1999 letter that PFM is an organization described in section 501(c)(3).

During 2010 and 2012, PFM's board had the following four members: Mr. Presley, who served as chairman of PFM's board; Ms. Presley; Mr. Moritz; and [*6] Bobbi Hamilton, who was a friend of Mr. Presley. During those years, Mr. Presley served as the president of PFM, and Ms. Presley held the title “secretary” of PFM.

Although Ms. Presley was a member of PFM's board and held the title “secretary” of PFM, she did not perform the duties of those respective offices⁶ and did not attend any meetings of PFM's board, including any telephone meetings.⁷ Instead, Mr. Presley generally informed Ms. Presley that he had spoken informally with each of Mr. Moritz and Bobbi Hamilton, the two other members of PFM's board, before the respective dates that were shown in certain minutes of PFM board meetings as the respective dates of meetings of that board.

Moreover, although Mr. Moritz and Bobbi Hamilton were members of PFM's board, they did not always attend meetings, if any, of that board, including telephone meetings, and thus did not vote at any such meetings of PFM's board [*7] that they did not attend.⁸ In order to ascertain their respective views on a particular matter relating to PFM, Mr. Presley discussed informally at times with each of Mr. Moritz and Bobbi Hamilton that particular matter, which was thereafter reflected in certain minutes of PFM's board as a topic of a meeting of PFM's board.

At all relevant times, including during 2010 and 2012, the Presleys provided about 95 percent of the total funding of PFM. The Presleys also provided nonfinancial support of PFM. Mr. Presley spent about 20 hours each week on certain activities and certain events relating to PFM, which generally took place in petitioners' residence. For example, he conducted weekly worship services of PFM, which approximately 12 to 40 people attended. Approximately 30 to 40 people participated regularly in the activities or the events that the Presleys hosted for PFM. In addition, Mr. Presley at times performed weddings and baptisms and distributed communion. He also met with young adults, taught classes, and conducted Bible studies three evenings each week. Ms. Presley spent about four to five hours each week on certain activities and certain events relating to PFM. For example, she taught Bible studies and prepared meals for attendees of certain activities or certain events of PFM that the Presleys held at petitioners' residence.

[*8] Over the years since the Presleys, Mr. Moritz, and Ms. Coffin had incorporated PFM until the date of the trial in this case, the Presleys organized on behalf of PFM about 15 to 17 trips to remote and impoverished areas of certain foreign countries (PFM's mission trips). During PFM's mission trips, Mr. Presley, inter alia, preached the Gospel and provided free eye examinations and free eyeglasses to some of the residents of those areas. In order to prepare for PFM's mission trips, the Presleys trained a group of volunteers, helped them raise funds, and donated about $40,000 to $50,000 each year from Mr. Presley's optometry businesses in order to help pay for those trips.⁹ In 2010 and 2012, respectively, the Presleys organized PFM's mission trips to Bogotá, Colombia, and Panama.

PFM owned a 21.85-acre tract of land in Tulsa (PFM's Tulsa property) that it had acquired in March 1998.¹⁰ There were several buildings on PFM's Tulsa property. A caretaker lived in one of those buildings. The Presleys sometimes used the basement in one of the buildings on PFM's Tulsa property to conduct [*9] certain meetings and to host certain activities on behalf of PFM. Mr. Presley and/or an individual whom he retained used one or more of the buildings on PFM's Tulsa property as office space for the conduct of certain administrative and office work that PFM had. Mr. Presley and/or Mr. Presley's optometry businesses leased from PFM and used one or more buildings on PFM's Tulsa property as office space where certain administrative and office work of those businesses was conducted. In addition, Mr. Presley and/or PFM Farms used a building on PFM's Tulsa property as office space where certain administrative and office work of PFM Farms was conducted. Wes Douglas (Mr. Douglas), who did certain work for Mr. Presley, PFM, Mr. Presley's optometry businesses, and/or PFM Farms worked in one or more of the buildings on PFM's Tulsa property and performed, inter alia, bookkeeping services for the Presleys, PFM, and/or Mr. Presley's optometry businesses.

Sometime before February 2007, Mr. Presley concluded that he should start raising soft fruits on a portion of PFM's Tulsa property. At Mr. Presley's request, David Dryer (Mr. Dryer), his attorney,¹¹ prepared a document which was titled “Minutes of Special Meeting of the Board of Trustees of Presley Family Ministries, [*10] Inc.”,  and which was dated February 4, 2007 (February 4, 2007 minutes). Those minutes indicated that a meeting of PFM's board was held on February 4, 2007, “for the purpose of discussing potential avenues to assist missionaries with the financing of their local and overseas mission projects.” The February 4, 2007 minutes stated that all four members of PFM's board (namely, Mr. Presley, Ms. Presley, Mr. Moritz, and Bobbi Hamilton) were present at the meeting in person or by telephone.¹² The February 4, 2007 minutes further stated in pertinent part:

The first order of business related to the discussion of potential avenues to assist missionaries with the financing of their local and overseas mission projects.

The Board reviewed various funding methods that would allow Presley Family Ministries, Inc., and various missionary groups to work hand-in-hand to obtain funds for their mission goals and other long-term exempt activities of the organization. The Board determined that the growing of soft fruits is a highly lucrative method of obtaining funding for longterm mission goals. The following resolution was adopted by unanimous vote of the Board of Trustees of Presley Family Ministries, Inc.:

BE IT RESOLVED the Board of Trustees of Presley Family Ministries, Inc., directs the President of Presley Family Ministries, Inc., to obtain additional information over the upcoming years in [*11] order to determine the feasibility of using a portion of the property [PFM's Tulsa property] as a farm for growing soft fruits.

Pursuant to the February 4, 2007 minutes, Mr. Presley continued to consider the feasibility of using a portion of PFM's Tulsa property as a farm for growing soft fruits. He was aware that PFM's Tulsa property had clay soil, some deep ravines, and no usable water source for irrigation such as ponds. Consequently, Mr. Presley concluded that, in order to produce soft fruits, substantial land improvement and development work, including the creation of one or more ponds for irrigation, was required on certain portions of PFM's Tulsa property, including the portion that was to be designated for any such production (required land improvement work).

Mr. Presley informed Mr. Dryer of his desire to grow soft fruits on PFM's Tulsa property and of the condition of that property, which necessitated that the required land improvement work be done before any attempt to produce soft fruit on PFM's Tulsa property began. Instead of his undertaking the required land improvement work directly, Mr. Presley followed the advice of Mr. Dryer, who recommended the creation of an entity such as a limited liability company that would perform that work and that would provide some liability protection to Mr. Presley [*12] in the event of, for example, a worker's personal injury resulting from the performance of that work.

Pursuant to Mr. Dryer's advice, in April 2007 Mr. Presley organized and wholly owned PFM Farms under the laws of the State of Oklahoma as a for-profit, single-member limited liability company for the purpose of growing blueberries or other soft fruits on PFM's Tulsa property. Mr. Presley structured PFM Farms as a flow-through disregarded entity for tax purposes so that any of its gains or losses would flow through to him and be reported in Schedule F, Profit or Loss From Farming (Schedule F), of any return that he filed. Success Vision Services, Inc., one of Mr. Presley's optometry businesses, served as the manager of PFM Farms.

On January 10, 2008, PFM Farms leased from PFM for an initial term of ten years and an additional term of five years (PFM Farms' lease) approximately four to five acres of PFM's Tulsa property (leased PFM property) for the purpose of growing blueberries on those leased acres.¹³ (We shall sometimes refer to the intended use of the leased PFM property by PFM Farms as PFM Farms' blueberry farm.)

[*13] Pursuant to PFM Farms' lease, PFM Farms was required to pay PFM annual rent of $1,000. However, the following statements appear in a document titled “Minutes of Annual Meeting of the Board of Trustees of Presley Family Ministries, Inc.”, which was dated April 13, 2008:

The first order of business related to payment of rent from PFM Farms to the ministry [PFM] under the cropland [PFM Farms'] lease. After due notice and review of the crop lease and the activity on the property it was the board's decision that all or a portion of the rent may be paid in kind with soft fruit crops.

Sometime before or in 2009, Mr. Presley asked his son, Chris Presley, to prepare a business plan for the improvement and the development of PFM's Tulsa property for the purpose of operating PFM Farms' blueberry farm on the leased PFM property. Chris Presley prepared that business plan in 2009 or 2010. (We shall refer to the business plan that Chris Presley prepared as PFM Farms' business plan.) In PFM Farms' business plan, Chris Presley projected that PFM Farms would generate a profit of $357,300 over a ten-year period. Chris Presley stated in pertinent part in PFM Farms' business plan:

Berryhill Blueberries will be a division of PFM Farms and will be a pick your own blueberry farm located in Tulsa, Oklahoma. The farm will provide the local community with a source of fresh hand picked blueberries while also allowing the local community to be a part of funding global medical missions.

[*14] All profit generated from the blueberry farm will be used to fund medical mission trips. The farm will mostly be staffed by volunteers who are either raising money for their own mission trip or helping raise money for one of their friends.

Objectives

Berryhill Blueberries keys to success include the following:

• Excellent product

• Family Friendly environment

• Growth and maintenance of a social network

• Becoming an established farm with high production per acre

Financial Objectives

• Breakeven within 5 years

• Create a long term and profitable revenue source that can be staffed by volunteers and future missionaries

Marketing Objectives

• Gain awareness throughout Tulsa community

• Be identified as healthy, friendly and socially minded

• Develop a loyal base of customers and maintain contact via social media

The Path to Success

Local and community farms are becoming increasingly popular; hence, Berryhill Blueberries is harnessing a great opportunity to become a well known and accepted blueberry farm because of the following characteristics:

• Blueberries will be locally grown using the type of blueberry plants that produce the best tasting [*15] blueberries in Oklahoma (tests will be done to ensure the optimal type of blueberry bushes are used).

• Berryhill Blueberries realizes the trend and the importance of community and will take the necessary steps to market itself in this manner.

• Berryhill Blueberries has positioned itself as a socially minded business, which will create a huge marketing advantage.

Critical success factors for Berryhill Blueberries include operational funding, superior sales personnel, high-quality management, strong branding, top-notch research and development, affiliation with proper alliances in the area, addressing specific needs of the business community and public, and adequate marketing and promotion.

Business Ownership

Berryhill Blueberries, will be organized as an LLC named PFM Farms. It will be owned by Richard Presley.

* * * * * * *

Financial Overview

Because Blueberries don't reach maturity for 5 years and because of the phased approach PFM Farms will use to minimize risk, it is forecasted that Berryhill Blueberries won't realize a profit until year 5 and won't fully breakeven until year 8. After year 8, the estimated annual profit will be approximately $185K * * *

* * * * * * *

[*16] Start-up Expenses

Berryhill Blueberries will realize approx. $125K in initial start up expenses within the first 12 to 18 months. The major expenses are as follows:

Initial Start Up Expenses

In PFM Farms' business plan, Chris Presley proposed that PFM Farms plant blueberry plants in three phases in order to mitigate any financial losses and crop losses. PFM Farms' business plan contained three charts which showed, inter alia, the duration of each phase and the projected profit or loss during each year of each phase. According to PFM Farms' business plan, during the first phase PFM Farms was to prepare the leased PFM property for the planting of blueberries and then test multiple types of blueberry plants on one acre of that leased property in order to determine the type(s) of blueberry plants that “will thrive in the Oklahoma climate.”

Pursuant to PFM Farms' business plan, during the second phase, which, depending on the success that PFM Farms had during the first phase, would start [*17] in the third year, PFM was to undertake the planting of blueberry plants on an additional four acres.

Pursuant to PFM Farms' business plan, during the third phase, which, depending on the success that PFM Farms had during the first phase, would start in the fourth year, PFM was to prepare an additional five acres¹⁴ for the planting of blueberry plants and then was to undertake the planting of blueberry plants on those additional five acres.

At a time not established by the record, PFM Farms' business plan was updated.¹⁵ That updated PFM Farms' business plan stated in pertinent part:

Business Update

The original plan and intent of PFM Farms was to use the learning from the 1 acre of bushes planted in year 1 to add an additional 4 acres of blueberries in year 3. Unfortunately the first acre of blueberries that were planted died due to suboptimal soil PH levels. This has delayed phase 2 by an additional year. * * *

[*18] Like PFM Farms' business plan, the updated PFM Farms' business plan contained three charts which showed, inter alia, the duration of each phase and the projected profit or loss during each year of each phase, as affected and updated by the effects on each of those phases of the failure of the first year's planting of blueberry plants. Those charts showed delays in the starting of the second phase and the third phase as well as a reduction of profit over a ten-year period from $357,300, as reflected in PFM Farms' business plan, to $156,300, as reflected in the updated PFM Farms' business plan.

During years before 2010, including 2008 and/or 2009, PFM Farms performed the required land improvement work and paid the cost of that work. The required land improvement work that PFM Farms performed on PFM's Tulsa property included work relating to (1) creating two ponds in an area of PFM's Tulsa property other than the leased PFM property and building a pump house, both of which were to be used in the installation of an irrigation system for PFM Farms' blueberry farm that PFM Farms intended to operate for profit on the leased PFM property; (2) filling ravines with dirt and leveling the land where ravines had existed; and (3) mulching that land.¹⁶

[*19] Mr. Dryer's Representation

Mr. Dryer's representation of Mr. Presley began around the mid-1990s and thereafter expanded to representing the Presleys, Mr. Presley's optometry businesses, PFM, and PFM Farms (Mr. Dryer's representation). Mr. Dryer has substantial experience that started during 1993 in, inter alia, providing legal services to nonprofit organizations, including nonprofit organizations that are exempt from tax (nonprofit experiences). Mr. Dryer's nonprofit experiences included providing advice as to (1) the deductibility as charitable contributions for tax purposes of certain donations to tax-exempt organizations and (2) the reasonableness of the compensation packages that nonprofit organizations provided to their directors and officers, including compensation packages that provided housing or housing allowances.

Mr. Dryer's representation included providing advice and preparing documents with respect to (1) Mr. Presley's optometry businesses; (2) the organization and the operation of PFM, including the obtaining of its tax exemption from the [*20] IRS and the preparation at all relevant times of virtually all, if not all, of certain of the minutes of meetings of PFM's board that Mr. Presley informed Mr. Dryer took place;¹⁷ (3) the organization and the operation of PFM Farms; and (4) the requirements for entitlement to tax deductions for contributions to or on behalf of PFM and certain other charitable organizations.

Claimed Charitable Contributions at Issue

At Mr. Presley's request, Mr. Dryer prepared and sent to Mr. Presley (or his designee) around late September 2010 a document which was titled “Minutes of Special Meeting of the Board of Trustees of Presley Family Ministries, Inc.” and which was dated October 20, 2010 (October 20, 2010 minutes).¹⁸ Those minutes indicated that a meeting of PFM's board was held on October 20, 2010, “for the purpose of reviewing the proposed donation of a tractor and land and soil preparation.” The October 20, 2010 minutes stated that all four members of PFM's board (namely, Mr. Presley, Ms. Presley, Mr. Moritz, and Bobbi Hamilton) were present [*21] at the meeting in person or by telephone.¹⁹ The October 20, 2010 minutes further stated in pertinent part:

The first order of business related to reviewing the proposed donation of the proposed donation [sic] of a tractor and land and soil preparation in order to develop ministry land for future needs in accord with its exempt purpose.

The Board of Trustees reviewed the proposed donation and the following resolution was adopted by unanimous vote of the Board of Trustees of Presley Family Ministries, Inc.:

BE IT RESOLVED that the Board of Trustees of Presley Family Ministries, Inc. hereby approves the donation of a tractor and land and soil preparation from the donor, Dr. Richard Presley. The Board has directed the donor to obtain his own appraisal for purposes of valuation. The Board also indicated that Presley Family Ministries, Inc. cannot establish the value of this donated asset. The Board further directs its corporate officers to execute the appropriate section of IRS Form 8283 when the same is presented by the donor.

Mr. Dryer intentionally included as part of the resolution quoted above the sentence regarding PFM's board's “direct[ing] the donor to obtain his own appraisal for purposes of valuation” and the last sentence regarding PFM's board's directing “its corporate officers to execute the appropriate section of IRS Form 8283 when the same is presented by the donor.” (We shall refer to the sentence regarding the donor's obtaining an appraisal quoted from the October 20, 2010 minutes as the Form 8283 appraisal requirement language. We shall refer to the [*22] last sentence quoted from the October 20, 2010 minutes as the Form 8283 donor acknowledgement requirement language.) That was because he wanted the Form 8283 appraisal requirement language and the Form 8283 donor acknowledgement requirement language to serve as an important reminder to obtain an appraisal of any substantial noncash property donated to PFM and to include a properly completed and executed Form 8283, Noncash Charitable Contributions, with petitioners' 2010 return because of petitioners' proposed donations to PFM of “a tractor and land and soil preparation”.

Around the same time in late September 2010 when Mr. Dryer prepared the October 20, 2010 minutes at Mr. Presley's request, he also prepared at Mr. Presley's request and sent to him (or his designee) an undated and unsigned letter that was addressed to PFM Farms (Mr. Dryer's draft 2010 letter No. 1).²⁰ The body of Mr. Dryer's draft 2010 letter No. 1 stated: “This is to acknowledge and thank you for your support of Presley Family Ministries during 2010. You donated the beautiful water ponds to the ministry enabling our youth and others to [*23] enjoy water sports, fishing, wildlife, and the beautiful setting. This provides a wonderful ministry setting and we thank you.”

Mr. Dryer's draft 2010 letter No. 1 did not show the value of the “donated water ponds”. Nor did Mr. Dryer's 2010 draft letter No. 1 make any reference to a tractor, a tractor/mower, a mower, or other similar equipment. The following language appeared at the bottom of Mr. Dryer's draft 2010 letter no. 1: “No goods or services were provided for the contributions given.”

At one or more times not established by the record, Mr. Dryer or Mr. Douglas used Mr. Dryer's draft 2010 letter No. 1 as a model to prepare two additional undated and unsigned letters (PFM's two additional letters).²¹ Each of PFM's two additional letters, which were identical except in one material respect, stated in pertinent part: “This is to acknowledge and thank you for your support of Presley Family Ministries during 2010. You donated the equipment and beautiful water ponds to the ministry enabling our youth and others to enjoy water sports, [*24] fishing, wildlife, and the beautiful setting. This provides a wonderful ministry setting and we thank you.” The following language appeared at the bottom of PFM's two additional letters: “No goods or services were provided for the contributions given.”

One of PFM's two additional letters further stated:

Your donation of the following items was designated to have a total value of $110,364.

Tractor/Mower — $3,000
Land/Pond Work^[22] — $107,364

(We shall refer to the letter claiming a total value of $110,364 for claimed donations to PFM as PFM's draft letter No. 2.) Mr. Dryer did not prepare and was not responsible for any language in PFM's draft letter No. 2 that purported to show (1) “Tractor/Mower” and “Land/Pond Work ” as the nature of what that letter claimed was donated to PFM and (2) the respective values of those two claimed donations.

The other of PFM's two additional letters further stated:

Your donation of the following items was designated to have a total value of $153,000.

Tractor/Mower — $3,000
[*25] Land/Pond Work^[23] — $150,000

(We shall refer to the letter claiming a total value of $153,000 for claimed donations to PFM as PFM's draft letter No. 3.) Mr. Dryer did not prepare and was not responsible for any language in PFM's draft letter No. 3 that purported to show (1) “Tractor/Mower” and “Land/Pond Work ” as the nature of what that letter claimed was donated to PFM and (2) the respective values of those two claimed donations.

At Mr. Presley's request, Mr. Dryer prepared and sent to Mr. Presley (or his designee) a document which was titled “Minutes of Special Meeting of the Board of Trustees of Presley Family Ministries, Inc.” and which was dated April 20, 2012 (April 20, 2012 minutes). Those minutes indicated that a meeting of PFM's board was held on April 20, 2012, “for the purpose of reviewing the proposed donation of a certain parcel of land located in Tulsa County [i.e., petitioners' residence].” The April 20, 2012 minutes stated that all four members of PFM's board (namely, Mr. Presley, Ms. Presley, Mr. Moritz, and Bobbi Hamilton) were present at the meeting in person or by telephone.²⁴ The April 20, 2012 minutes further [*26] stated in pertinent part with respect to the proposed donation of petitioners' residence:

BE IT RESOLVED that the Board of Trustees of Presley Family Ministries, Inc. has reviewed the potential costs associated with the maintenance of the property located at 3724 S 74^th West P1 Tulsa OK 74107-4857 and has considered the auxiliary issues related to holding title to such property. Based on a review of these considerations, the Board hereby approves the donation of the above referenced property. The Board has directed the donor to obtain his own appraisal for purposes of valuation. The Board also indicated the Presley Family Ministries, Inc. cannot establish the value of this donated asset. The Board further directs its corporate officers to execute the appropriate section of IRS Form 8283 when the same is presented by the donor.

BE IT FURTHER RESOLVED that the Board of Trustees of Presley Family Ministries, Inc. hereby approves the donation and accepts the donation of the real property described as:

Lot Seventeen (17), Block One (1), ROLLING OAKS SOUTH III, an Addition to the City of Sand Springs, Tulsa County, State of Oklahoma, according to the Recorded Plat thereof a/k/a 3724 S 74^th West P1 Tulsa OK 74107-4857

Mr. Dryer included as part of the first resolution quoted above the sentence regarding PFM's board's “direct[ing] the donor to obtain his own appraisal for purposes of valuation.” That is the same language which appeared in the October 20, 2010 minutes and to which we refer as the Form 8283 appraisal requirement language. Mr. Dryer included as part of the first resolution in the April 20, 2012 minutes quoted above the last sentence regarding PFM's board's “direct[ing] its [*27] corporate officers to execute the appropriate section of IRS Form 8283 when the same is presented by the donor.” That is the same language which appeared in the October 20, 2010 minutes and to which we refer as the Form 8283 donor acknowledgement requirement language. Mr. Dryer included the Form 8283 appraisal requirement language and the Form 8283 donor acknowledgement requirement language in the April 20, 2012 minutes for the same reasons he included that language in the October 20, 2010 minutes. That is to say, Mr. Dryer included the Form 8283 appraisal requirement language and the Form 8283 donor acknowledgement requirement language in the April 20, 2012 minutes because he wanted that language to serve as an important reminder to obtain an appraisal of any substantial noncash property donated to PFM and to include a properly completed and executed Form 8283 with petitioners' 2012 return because of petitioners' proposed donation to PFM of petitioners' residence.

On April 30, 2012, pursuant to a general warranty deed (petitioners' deed) that Mr. Dryer had prepared, petitioners transferred to PFM legal title to petitioners' residence.²⁵ At the time of that transfer, petitioners' residence was free of any encumbrances. At the time they transferred legal title to petitioners' residence to [*28] PFM, petitioners expected to continue living in petitioners' residence without paying any rent to PFM for the right to do so. They also expected at that time to continue paying any utility bills relating to petitioners' residence (utility bills). From the time they executed petitioners' deed until at least the time of the trial in this case, petitioners continued to live in petitioners' residence and to pay all utility bills and never paid any rent to PFM for the right to live in that residence.²⁶

At Mr. Presley's request, Mr. Dryer prepared and sent to Mr. Presley (or his designee) a document which was titled “Minutes of Special Meeting of the Board of Trustees of Presley Family Ministries, Inc.” and which was dated May 25, 2012 (May 25, 2012 minutes). Those minutes indicated that a meeting of PFM's board was held on May 25, 2012, “for the purpose of reviewing the proposed donation of a certain parcel of land located in Tulsa County [i.e., petitioners' residence].” The May 25, 2012 minutes stated that all four members of PFM's board (namely, Mr. Presley, Ms. Presley, Mr. Moritz, and Bobbi Hamilton) were present at the meeting [*29] in person or by telephone.²⁷ The May 25, 2012 minutes further stated in pertinent part:

BE IT RESOLVED that the Board of Trustees of Presley Family Ministries, Inc. has reviewed the request of its pastor Dr. Richard Presley to utilize the above referenced property as a parson-age. It was approved in lieu of paying a full housing allowance to the pastor, Dr. Richard Presley, that Dr. Richard Presley and his family be allowed to use the property located at 3724 S 74^th West P1 Tulsa OK 74107-4857 as a parsonage and for other church related activities.²⁸

On December 5, 2013, Ronald Scott (Mr. Scott), a residential real estate appraiser who was certified by the State of Oklahoma, signed an appraisal report (Mr. Scott's December 5, 2013 appraisal report) which he prepared and in which he indicated that the date of that report was December 5, 2013, the same date on which he signed it. In Mr. Scott's December 5, 2013 appraisal report, Mr. Scott used the market approach, also known as the comparable sales approach, and opined that the fair market value of petitioners' residence as of May 10, 2012,²⁹ [*30] was $236,000. Mr. Scott's December 5, 2013 appraisal report stated in pertinent part:

THE INTENDED USER OF THIS APPRAISAL IS THE LENDER/ CLIENT. THE INTENDED USE IS TO EVALUATE THE PROPERTY THAT IS THE SUBJECT OF THIS APPRAISAL FOR A MORTGAGE FINANCE TRANSACTION, SUBJECT TO THE STATED SCOPE OF WORK, PURPOSE OF THE APPRAISAL, REPORTING REQUIREMENTS OF THIS APPRAISAL REPORT FORM AND DEFINITION OF MARKET VALUE, NO ADDITIONAL INTENDED USERS ARE IDENTIFIED BY THE APPRAISER.

* * * * * * *

INTENDED USE: The intended use of this appraisal report is for the lender/client to evaluate the property that is the subject of this appraisal for a mortgage finance transaction.

INTENDED USER: The intended user of this appraisal report is the lender/client.

Mr. Scott's December 5, 2013 appraisal report identified both the “Borrower” and the “Lender/Client” as PFM.

Mr. Scott's December 5, 2013 appraisal report did not mention or acknowledge that (1) petitioners transferred to PFM on April 30, 2012, legal title to petitioners' residence; (2) from the time they transferred legal title to petitioners' residence to PFM until at least December 5, 2013, the date of Mr. Scott's December 5, 2013 appraisal report, petitioners continued to live in petitioners' residence and to pay all utility bills and did not pay any rent to PFM for the right to live in that residence; [*31] and (3) Mr. Scott's December 5, 2013 appraisal report was to be used for tax purposes to support the claimed fair market value of petitioners' claimed charitable contribution to PFM of petitioners' residence on April 30, 2012.

Around the same time Mr. Dryer prepared the April 20, 2012 minutes and petitioners' deed at Mr. Presley's request, he also prepared at Mr. Presley's request and sent to him (or his designee) an undated and unsigned letter with respect to petitioners' residence that was addressed to the Presleys (Mr. Dryer's draft letter regarding petitioners' residence).³⁰ The body of Mr. Dryer's draft letter regarding petitioners' residence stated: “This is to acknowledge your donation of the house and property located at 3724 S 74th W Place Tulsa, OK 74107 [petitioners' residence].” The following language appeared at the bottom of Mr. Dryer's draft letter regarding petitioners' residence: “No goods or services were provided for the contributions given.” Mr. Dryer's draft letter regarding petitioners' residence did not show the value of that residence.

[*32] At some time after December 5, 2013, the date on which Mr. Scott signed and issued Mr. Scott's December 5, 2013 appraisal report, Mr. Douglas used Mr. Dryer's draft letter regarding petitioners' residence to prepare a letter that showed the date of October 12, 2012 (Mr. Douglas' draft letter dated October 12, 2012). Mr. Douglas' draft letter dated October 12, 2012 was identical to Mr. Dryer's draft letter regarding petitioners' residence except that it was dated October 12, 2012, and contained the following statement: “The appraised value of the house [petitioners' residence] is $236,000.” Mr. Dryer did not prepare and was not responsible for any language in Mr. Douglas' draft letter dated October 12, 2012, that purported to show the value of petitioners' residence.

Certain Tax Returns and Certain Tax Return Preparers of Petitioners

Petitioners generally did not prepare their individual tax returns or the S corporation tax returns of Mr. Presley's optometry businesses. Instead, they generally retained return preparers to prepare those tax returns.

The Presleys retained on a computer server (server) virtually all, if not all, of the records pertaining to Mr. Presley's optometry businesses, PFM, PFM Farms, and themselves. The Presleys allowed certain individuals who worked for Mr. Presley's optometry businesses, PFM, PFM Farms, and/or themselves, including Mr. Douglas, Mr. Dryer, and the individual who prepared their tax return [*33] and any amended tax return for each of their taxable years 2010 and 2012 (the two years at issue), to have access to that server.

Sometime on or after October 20, 2009, petitioners filed Form 1040, U.S. Individual Income Tax Return (Form 1040), for their taxable year 2008 (2008 return), which Shauna Wortinger, a certified public accountant (C.P.A.) and a so-called paid return preparer, had prepared.

In their 2008 return, petitioners reported total income of $203,997. In calculating that total income, petitioners reduced other items of income that they reported in their 2008 return by a claimed farm loss of $65,666.

As required because petitioners claimed in their 2008 return a farm loss of $65,666, petitioners included with that return Schedule F (2008 Schedule F). In their 2008 Schedule F, petitioners showed Mr. Presley as the proprietor and blueberries as the principal product of the business to which that schedule pertained. In their 2008 Schedule F, petitioners reported no income and claimed $65,666 of total expenses and a loss of the same amount.

Sometime on or after April 8, 2011, petitioners filed Form 1040X, Amended U.S. Individual Income Tax Return, for their taxable year 2008 (amended 2008 return), which Robert A. Johnson (Mr. Johnson), a C.P.A. and an employee of the Presleys, Mr. Presley's optometry businesses, and/or PFM Farms, had prepared. [*34] Mr. Johnson prepared petitioners' amended 2008 return in his capacity as an employee of petitioners, Mr. Presley's optometry businesses, and/or PFM Farms, not as a paid return preparer.

Petitioners included an attachment with their amended 2008 return that stated, inter alia: “Farm Income and Expense was incorrectly reported on the taxpayer's [sic] 2008 Form 1040 as originally prepared.” The amount of $65,666, which was the amount of the farm loss that petitioners claimed in their 2008 return and in their 2008 Schedule F, appeared next to that statement in that attachment to their amended 2008 return.

Petitioners filed Form 1040 for their taxable year 2009 (2009 return).³¹ In their 2009 return, petitioners reported total income of $813,776. In calculating that total income, petitioners reduced other items of income that they reported in their 2009 return by a claimed farm loss of $1,402.

As required because petitioners claimed in their 2009 return a farm loss of $1,402, petitioners included with their 2009 return Schedule F (2009 Schedule F). In their 2009 Schedule F, petitioners showed Mr. Presley as the proprietor and blueberries as the principal product of the business to which that schedule pertained. [*35] In their 2009 Schedule F, petitioners reported no income and claimed $1,402 of total expenses and a loss of the same amount.

On September 15, 2011, petitioners filed Form 1040 for their taxable year 2010 (2010 return), which Mr. Johnson had prepared. Mr. Johnson prepared petitioners' 2010 return in his capacity as an employee of petitioners, Mr. Presley's optometry businesses, and/or PFM Farms, not as a paid return preparer.

In their 2010 return, petitioners reported total income of $698,721. In calculating that total income, petitioners reduced other items of income that they reported in their 2010 return by a claimed farm loss of $45,995.

Petitioners included Schedule A, Itemized Deductions, with their 2010 return (2010 Schedule A). In their 2010 Schedule A, petitioners claimed, inter alia, charitable contribution deductions totaling $337,114. Of that total amount of claimed charitable contribution deductions, petitioners indicated in their 2010 Schedule A that (1) $257,217 represented “[g]ifts by cash or check,” (2) $4,145 represented gifts “[o]ther than cash or check,” and (3) $75,752 represented a “[c]arryover from prior year”.

As required because petitioners claimed in their 2010 return a farm loss of $45,995, petitioners included with their 2010 return Schedule F (2010 Schedule F). In their 2010 Schedule F, petitioners showed Mr. Presley as the proprietor [*36] and blueberries as the principal product of the business to which that schedule pertained. In their 2010 Schedule F, petitioners reported $129 of gross income and claimed $46,124 of total expenses and a loss of $45,995.

Petitioners included with their 2010 return Form 8283 (2010 Form 8283) relating to noncash charitable contributions claimed in their 2010 return. Petitioners completed Section A, Donated Property of $5,000 or Less and Certain Publicly Traded Securities (2010 Section A), of their 2010 Form 8283. In their 2010 Section A, petitioners showed noncash contributions to Goodwill Industries for filing cabinets, keyboards, a TV, linens, toys, clothes, books, a suitcase, and housewares and claimed a total value for those items of $3,179. Nowhere in their 2010 Section A, their 2010 Form 8283, or in any other form, schedule, or attachment to their 2010 return did petitioners include any reference to or any information regarding a claimed charitable contribution deduction for a tractor/mower or any other similar equipment. Nonetheless, petitioners included $3,000 for a tractor/mower (tractor/mower in question) as part of their claimed total charitable contribution deductions of $337,114 in their 2010 Schedule A.³² It was Mr. Johnson [*37] who calculated the amount that petitioners claimed as a charitable contribution deduction for the tractor/mower in question that petitioners had told him they contributed to PFM. He made that calculation on the basis of, inter alia, his review of the invoice for the purchase of the tractor/mower in question. He also reviewed on various websites the prices of other tractor/mowers that he considered to be similar in type and age to the tractor/mower in question. Mr. Johnson assigned a value of $3,000 to the tractor/mower in question because that value was between the highest price and the lowest price shown for such other similar tractor/mowers on the websites that he visited.³³

Petitioners left blank the following parts of Section B (2010 Section B) of their 2010 Form 8283 relating to donated property valued over $5,000 (except certain publicly traded securities): Part I, Information on Donated Property (Part I); Part III, Declaration of Appraiser (Part III); and Part IV, Donee Acknowledgement (Part IV). Mr. Presley signed and dated September 15, 2011, Part II, [*38] Taxpayer (Donor) Statement (Part II), of their 2010 Section B. Nowhere in their 2010 Schedule A, their 2010 Form 8283, or any other form, schedule, or attachment to their 2010 return did petitioners include any reference to or any information regarding a claimed charitable contribution deduction with respect to PFM Farms' blueberry farm, the required land improvement expenses that PFM Farms paid before 2010, the ponds that PFM Farms created on PFM's Tulsa property, or any other improvements that PFM Farms made to PFM's Tulsa property. Nonetheless, petitioners included the required land improvement expenses of $107,364 that PFM Farms had paid before 2010 as part of their claimed deductions of $257,217 for charitable “[g]ifts by cash or check”.³⁴

When Mr. Johnson prepared petitioners' 2010 return, he was not aware that the reason PFM Farms created the ponds on PFM's Tulsa property was to provide irrigation to PFM Farms' blueberry farm, which PFM intended to operate on the PFM leased property. When Mr. Johnson prepared petitioners' 2010 return, he was aware that PFM owned the property on which PFM Farms had created the [*39] ponds and that PFM Farms was leasing certain acres on that property from PFM.

Mr. Johnson advised the Presleys that they should claim a charitable contribution deduction for the required land improvement expenses that PFM Farms had paid before 2010.³⁵ He gave them that advice because, as he explained to them, they should have deducted those expenses for taxable years before their taxable year 2010 but did not do so because of errors in the preparation of their 2008 return and their 2009 return. When Mr. Johnson advised petitioners to deduct the required land improvement expenses in their 2010 return, he had not [*40] done any research regarding the propriety of a charitable contribution deduction for a taxpayer's expenses paid by the taxpayer before the year for which the deduction is claimed.

On November 19, 2013, respondent received from petitioners Form 1040X for their taxable year 2010 (2010 Form 1040X), which Kathy L. Burch (Ms. Burch), a C.P.A. and an attorney with a master's degree in taxation, had prepared.³⁶ Respondent did not process petitioners' 2010 return Form 1040X (unprocessed 2010 Form 1040X).

Petitioners included Form 1040 for taxable year 2010 with their unprocessed 2010 Form 1040X, which Ms. Burch had prepared and on which someone had stamped at the top of each page the words “AS AMENDED”. (We shall refer to Form 1040 for taxable year 2010, which petitioners included with their unprocessed 2010 Form 1040X, as unprocessed amended 2010 return.) In their unprocessed amended 2010 return, petitioners reported total income of $676,891 and claimed, inter alia, in Schedule A (2010 amended Schedule A) charitable contribution deductions totaling $337,114. Of that total amount of charitable contribution deductions claimed in their 2010 amended Schedule A, petitioners indicated that [*41] (1) $332,969 represented “[g]ifts by cash or check” and (2) $4,145 represented gifts “[o]ther than cash or check.

Petitioners included with their unprocessed amended 2010 return Schedule F (unprocessed amended 2010 Schedule F). Petitioners' unprocessed amended 2010 Schedule F was identical in all material respects to their 2010 Schedule F that they had included with their 2010 return.

Petitioners did not include Form 8283 with their unprocessed amended 2010 return. Nowhere in their unprocessed amended 2010 return or in any form, schedule, or attachment to that return did petitioners include any reference to or any information regarding a claimed charitable contribution deduction with respect to PFM Farms' blueberry farm, the expenses that PFM incurred for the required land improvement work on PFM's Tulsa property, the ponds that PFM Farms created on the PFM leased property, any other improvements that PFM Farms made to PFM's Tulsa property, a tractor/mower, or any other similar equipment.

On October 15, 2013, petitioners timely filed Form 1040 for their taxable year 2012 (2012 return), which Ms. Burch had prepared. In their 2012 return, petitioners reported total income of $880,879. In calculating that total income, petitioners reduced other items of income that they reported in their 2012 return by a claimed farm loss of $27,259.

[*42] Petitioners included Schedule A with their 2012 return (2012 Schedule A). In their 2012 Schedule A, petitioners claimed, inter alia, charitable contribution deductions totaling $440,440. Of that total amount of charitable contribution deductions claimed, petitioners indicated in their 2012 Schedule A that (1) $267,213 represented “[g]ifts by cash or check” and (2) $235,422 represented gifts “[o]ther than cash or check”.³⁷ The $235,422 claimed deduction for gifts “[o]ther than cash or check” was the charitable contribution deduction that petitioners claimed in their 2012 return with respect to petitioners' residence.

As required because petitioners claimed in their 2012 return a farm loss of $27,259, petitioners included with their 2012 return Schedule F (2012 Schedule F). In their 2012 Schedule F, petitioners showed Mr. Presley as the proprietor and blueberries as the principal product of the business to which that schedule pertained. In their 2012 Schedule F, petitioners reported $1,711 of gross income and claimed $28,970 of total expenses and a loss of $27,259.

Petitioners included with their 2012 return Section B only of Form 8283 (2012 Section B). In their 2012 Section B, petitioners completed Part I, the listing [*43] of information on the “donated” property, (1) by checking the box next to the preprinted phrase “Other Real Estate”; (2) by describing the “donated property” as a single family residence and its condition at the time of the “gift” as good; and (3) by representing (a) that the appraised fair market value of the “donated property” was $235,422, (b) that it was acquired in May 1992 by purchase, and (c) that the donor's cost or adjusted basis was $104,500. Petitioners left blank Part II, which was the donor statement. Part III, which was the declaration of the appraiser, was also left blank. Part IV, which was the donee acknowledgement, was partially completed and contained the following information: (1) the “donated” property was received by the donee on April 30, 2012; (2) the donee did not intend to use that property for an “unrelated use”; and (3) the donee was PFM.³⁸ No authorized representative of PFM (or any other individual) signed and dated Part IV of petitioners' 2012 Section B.

At times not disclosed by the record before petitioners filed their 2012 return, Mr. Dryer had done some research and had discussed with Mr. Presley (or his designee) on three different occasions whether he believed that petitioners should be entitled to a charitable contribution deduction with respect to their transferring [*44] to PFM legal title to petitioners' residence while continuing to live in that residence. Mr. Dryer's research included research as to whether PFM's allowing petitioners to continue to live in petitioners' residence as a parsonage (parsonage benefit) after they deeded that residence to PFM would constitute a so-called return benefit to them (i.e., a benefit that petitioners received from PFM in return for their deeding petitioners' residence to PFM), which would result in their not being entitled to deduct the value of petitioners' residence as a charitable contribution to PFM. Mr. Dryer concluded on the basis of his research that petitioners' continuing to live in petitioners' residence after they deeded it to PFM should not be considered a return benefit. That was because he believed that PFM's providing that parsonage benefit to petitioners should be viewed as compensation to which Mr. Presley would be entitled in return for conducting various activities and performing other services for or on behalf of PFM.

After completing his research and analysis, Mr. Dryer advised petitioners (or their designee) that, in his opinion, they should be entitled to a charitable contribution deduction with respect to their transferring to PFM legal title to petitioners' residence while continuing to live in that residence as a parsonage. Mr. Dryer further informed petitioners that his advice as to the deductibility of the value of petitioners' residence as a charitable contribution was conditioned on petitioners' [*45] compliance with the pertinent tax law and all the pertinent rules and regulations applicable to gifts to charity of substantial noncash contributions, including obtaining an appraisal of petitioners' residence because petitioners' residence had a value in excess of $5,000³⁹ and completing certain parts, and having completed by an appraiser and PFM (the donee charity) certain other respective parts, of Section B of Form 8283. In formulating his advice with respect to whether petitioners should be entitled to a charitable contribution deduction if they were to donate petitioners' residence to PFM and continue to live in it, Mr. Dryer reviewed the version of Form 8283 that was in effect for taxable year 2012 and gave petitioners some instructions about how to complete that form in order to comply with the various rules and regulations applicable to substantial noncash charitable contributions. Mr. Dryer further advised petitioners (or their designee) that if Mr. Presley were to stop conducting activities and performing other services for or on behalf of PFM and were to desire to continue living in petitioners' residence, they would be required to pay to PFM fair rental value for the right to do so.

Respondent assigned a revenue agent to examine petitioners' taxable years 2010 and 2012. The revenue agent, inter alia, proposed the initial determination [*46] that petitioners are liable for each of their taxable years 2010 and 2012 for the accuracy-related penalty under section 6662(a). After the revenue agent in question made that initial determination under section 6662(a), she gave the manager of the group (group manager) in which she worked, who was her immediate supervisor, a document titled “Civil Penalty Approval Form” (penalty approval form), which she had completed as follows. The following statements appeared in a section of the penalty approval form titled “Reason(s) for Assertion of Penalty(s)”: “The additional tax due for 2010 and 2012 is over $5,000 so the substantial understatement penalty does apply. TPs were negligent for not keeping proper documentation.” The following pertinent portion of a preprinted statement appared on the penalty approval form immediately below those just-quoted statements: “Group Manager Approval to Assess Penalties Identified Above”. On July 16, 2014, the group manager signed and dated July 16, 2014, the penalty approval form as completed by the revenue agent.

On July 7, 2016, respondent issued a notice of deficiency to petitioners for their taxable years 2010 and 2012 (notice).⁴⁰ In the notice, respondent determined [*47] for petitioners' taxable year 2010 to disallow the respective claimed charitable contribution deductions of $107,364 for the required land improvement expenses and $3,000 for the donated tractor/mower.⁴¹ In the notice, respondent further determined for petitioners' taxable year 2012 to disallow the claimed noncash charitable contribution deduction of $235,422 for petitioners' residence.⁴²

In the notice, respondent also determined that petitioners are liable for each of their taxable years 2010 and 2012 for the accuracy-related penalty under section 6662(a).

[*48] OPINION

Petitioners bear the burden of establishing that the determinations in the notice that remain at issue are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and petitioners bear the burden of proving entitlement to any deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Code and the regulations thereunder required petitioners to maintain records sufficient to establish the amounts of any deductions claimed. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Before considering the issues presented, we summarize our evaluation of the following witnesses who testified at the trial in this case: Mr. Presley, Ms. Presley, Mr. Johnson, Ms. Burch, and Mr. Dryer.

We found the testimony of Mr. Presley to be inconsistent in certain material respects with certain testimony of certain other witnesses and with certain documentary evidence. We also found Mr. Presley's testimony to be questionable in certain other material respects.

We found the testimony of Ms. Presley to be internally inconsistent at times and to be inconsistent at other times with Mr. Presley's testimony.

[*49] We found the testimony of Mr. Johnson to be internally inconsistent in certain material respects and to be inconsistent in certain material respects with certain testimony of certain other witnesses and with certain documentary evidence.

We found the testimony of Ms. Burch to be not credible in certain material respects.

We found the testimony of Mr. Dryer to be inconsistent in certain material respects with certain testimony of certain other witnesses and with certain documentary evidence.

We are not required to, and we will not, rely on the testimony of any witness whose testimony we question in order to establish petitioners' position with respect to each of the issues remaining for decision. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Claimed Charitable Contribution Deductions

We must decide whether petitioners are entitled for their taxable year 2010 to deduct under section 170(a): (1) $107,364 for a claimed charitable contribution to PFM relating to certain required land improvement expenses that PFM Farms paid before 2010 and (2) $3,000 for a claimed charitable contribution of the tractor/mower in question. We must also decide whether petitioners are entitled for their taxable year 2012 to deduct under section 170(a) $235,422 for a claimed [*50] charitable contribution to PFM of petitioners' residence. Before addressing those issues, we summarize briefly the relevant statutory and regulatory framework within which we must resolve each of them.

Section 170(a) allows a deduction for any charitable contribution, as defined in section 170(c), that is made during a taxable year. A taxpayer claiming a deduction under section 170(a) must satisfy certain statutory and regulatory requirements. See, e.g., sec. 170(a), (c), (f); secs. 1.170A-1, 1.170A-13(a) through (f), Income Tax Regs. (We shall sometimes refer collectively to the requirements under section 170 and the regulations thereunder that are pertinent here as the pertinent charitable contribution deduction requirements.) The pertinent charitable contribution deduction requirements that a taxpayer must satisfy vary depending on (1) whether the claimed contribution consists of money or property other than money and (2) the claimed value of the contribution. See sec. 170(a), (c), (f); secs. 1.170A-1, 1.170A-13(a)-(c), Income Tax Regs.

2010

Claimed charitable contribution deduction relating to required land improvement expenses

We consider whether petitioners are entitled for their taxable year 2010 to deduct under section 170(a) $107,364 for a claimed charitable contribution to [*51] PFM relating to the required land improvement expenses that PFM Farms paid before 2010. In stating that issue, we intentionally use the phrase “relating to” the required land improvement expenses. That is because it is unclear from our review of the record what petitioners are contending Mr. Presley contributed to PFM during 2010 relating to the required land improvement expenses for which they are claiming a deduction under section 170(a). In this regard, we note that certain testimonial evidence (e.g., the respective testimonies of Mr. Presley, Mr. Dryer, and Mr. Johnson) and certain documentary evidence (e.g., the October 20, 2010 minutes of PFM's board that Mr. Dryer drafted, Mr. Dryer's draft 2010 letter No. 1, PFM's draft letter No. 2, and PFM's draft letter No. 3) contain inconsistent (and sometimes internally inconsistent) statements about what Mr. Presley purportedly contributed to PFM during 2010 relating to the required land improvement expenses.

By way of illustration of certain inconsistent (and sometimes internally inconsistent) testimonial evidence, Mr. Presley testified that he informed Mr. Dryer and Mr. Johnson that in 2010 he donated to PFM his wholly owned limited liability company, PFM Farms. Certain testimony of Mr. Dryer⁴³ is inconsistent [*52] with that testimony. Mr. Dryer testified that it was his understanding that in 2010 Mr. Presley contributed to PFM the ponds that PFM Farms had created on PFM's Tulsa property and that those ponds were to be used for swimming, fishing, canoeing, paddle boating, and other forms of enjoyment.⁴⁴

Certain testimony of Mr. Johnson⁴⁵ regarding his understanding of what Mr. Presley contributed to PFM in 2010 relating to the required land improvement expenses also is inconsistent with Mr. Presley's testimony and is consistent with Mr. Dryer's testimony. Mr. Johnson testified that it was his understanding when he prepared petitioners' 2010 return that Mr. Presley had donated to PFM in 2010 the ponds that PFM Farms had created on PFM's Tulsa property and that those ponds were to be used for swimming, fishing, canoeing, paddle boating, and other forms of enjoyment.⁴⁶

[*53] However, certain other testimony of Mr. Johnson appears to be internally inconsistent with his testimony described above and also inconsistent with Mr. Dryer's testimony regarding what Mr. Presley contributed to PFM in 2010 relating to the required land improvement expenses. Mr. Johnson testified, and we have found, that he advised the Presleys that they should claim a charitable contribution deduction for the required land improvement expenses that PFM Farms paid before 2010.⁴⁷ Mr. Presley also testified, and we have also found, that he gave the Presleys that advice because, as he explained to them, they should have deducted those expenses for taxable years before their taxable year 2010 but did not do so because of errors in the preparation of their 2008 return and their 2009 return.

By way of illustration of certain inconsistent (and sometimes internally inconsistent) documentary evidence, the October 20, 2010 minutes of PFM's board stated in pertinent part: “The first order of business related to reviewing the proposed donation of * * * land and soil preparation in order to develop ministry [*54] land for future needs in accord with its exempt purpose.”⁴⁸ Mr. Dryer's draft 2010 letter No. 1 is inconsistent with the October 20, 2010 minutes in that that draft letter stated: “You donated the beautiful water ponds to the ministry enabling our youth and others to enjoy water sports, fishing, wildlife, and the beautiful setting. This provides a wonderful ministry setting and we thank you.”⁴⁹ PFM's draft letter No. 2 and PFM's draft letter No. 3 are both consistent and inconsistent with the October 20, 2010 minutes and Mr. Dryer's draft 2010 letter No. 1. Those letters stated: “You donated the equipment and beautiful water ponds to the ministry enabling our youth and others to enjoy water sports, fishing, wildlife, and the beautiful setting. This provides a wonderful ministry setting and we thank you.” However, those same two letters also stated inconsistently that Mr. Presley's donation to PFM was “Land/Pond Work”.

On brief, petitioners further compound the problems created by certain testimonial and documentary evidence as to what Mr. Presley purportedly contributed to PFM in 2010 relating to the required land improvement expenses. Petitioners do so when they (1) contend a few times on brief that Mr. Presley [*55] “made an outright gift [in 2010] of the land improvements to PFM”⁵⁰ and (2) also contend throughout their brief, inconsistently we believe, that they are entitled for their taxable year 2010 to deduct $107,364 of the required land improvement expenses under section 1.170A-1(g), Income Tax Regs.,⁵¹ Van Dusen v. Commissioner, 136 T.C. 515 (2011), and Babilonia v. Commissioner, T.C. Memo. 1980-207, 1980 WL 4053, aff'd per curiam, 681 F.2d 678 (9th Cir. 1982).⁵²

Despite the lack of clarity in the record as to what petitioners are claiming and what purportedly Mr. Presley contributed to PFM during 2010 relating to the required land improvement expenses, as well as regarding what their representatives, [*56] Mr. Dryer and Mr. Johnson, understood Mr. Presley contributed to PFM in 2010 relating to those expenses, we now address whether petitioners are entitled for their taxable year 2010 to deduct under section 170(a) $107,364 for a claimed charitable contribution relating to the required land improvement expenses.

We address first whether petitioners are entitled for their taxable year 2010 to a charitable contribution deduction for $107,364 because, as petitioners contend a few times on brief and Mr. Dryer and Mr. Johnson testified at trial, Mr. Presley contributed to PFM in 2010 the ponds that PFM Farms created on PFM's Tulsa property. Petitioners concede that PFM, not petitioners through PFM Farms, owned PFM's Tulsa property on which PFM Farms created the ponds. Petitioners also concede on brief that “petitioners did not own the improvements made to the [PFM] land or any of the existing ponds” that PFM Farms created. Petitioners through PFM Farms could not have contributed to PFM in 2010 or any other year the ponds which PFM Farms created on PFM's Tulsa property and which they concede they did not own through PFM Farms.

On the record, before us, we find that petitioners have failed to carry their burden of establishing that in 2010 Mr. Presley contributed to PFM the ponds that [*57] PFM Farms created on PFM's Tulsa property.⁵³ On that record, we find that petitioners have failed to carry their burden of establishing that they are entitled for their taxable year 2010 to a charitable contribution deduction of $107,364 for the ponds that PFM Farms created on PFM's Tulsa property.

We turn next to whether petitioners are entitled for their taxable year 2010 to deduct under section 170(a) $107,364 of the required land improvement expenses that PFM Farms paid before 2010. As discussed above, section 170(a) allows a deduction for any charitable contribution, as defined in section 170(c), that is made during a taxable year. See sec. 1.170A-1(a), Income Tax Regs.⁵⁴ Petitioners acknowledge that PFM Farms paid the required land improvement expenses before 2010. On the record before us, we find that petitioners have failed to carry their burden of establishing that they are entitled for their taxable [*58] year 2010 to deduct under section 170(a) $107,364 of the required land improvement expenses that PFM Farms paid before 2010.

Even if PFM Farms had paid the required land improvement expenses in 2010, we would find on the record before us that petitioners have failed to carry their burden of establishing that they satisfy section 1.170A-1(g), Income Tax Regs. Pursuant to that regulation, in order for the required land improvement expenses to be deductible under section 170(a), PFM Farms must have incurred them “incident to the rendition of services to” PFM. We have held that in order to be deductible under section 170(a) and section 1.170A-1(g), Income Tax Regs., “unreimbursed expenses must be directly connected with and solely attributable to the rendition of services to a charitable organization.” Van Dusen v. Commissioner, 136 T.C. at 525 (citing Saltzman v. Commissioner, 54 T.C. 722, 724 (1970)). PFM Farms paid the required land improvement expenses for the purpose of, inter alia, creating the ponds on PFM's Tulsa property in order to have an irrigation source for PFM Farms' blueberry farm, which PFM Farms intended to operate for profit on the leased PFM property. On the record before us, even if PFM Farms had paid the required land improvement expenses in 2010, we would find that petitioners have failed to carry their burden of establishing that the required land [*59] improvement expenses that PFM Farms paid were directly connected with or solely attributable to the rendition of services to PFM by PFM Farms.

Even if PFM Farms had paid the required land improvement expenses in 2010 and those expenses were directly connected with and solely attributable to the rendition of services to PFM by PFM Farms, we would find on the record before us that petitioners have failed to carry their burden of establishing that they satisfy the substantiation requirements in section 170(f)(8)(A) and (C) and section 1.170A-13(f)(1) and (3), Income Tax Regs. Those authorities, which apply to contributions of $250 or more, required petitioners to substantiate the claimed contribution relating to the required land improvement expenses with a contemporaneous written acknowledgement from PFM. See Van Dusen v. Commissioner, 136 T.C. at 536. In order for the acknowledgement to be considered contemporaneous, the taxpayer must obtain it before the earlier of (1) the date on which the taxpayer files the return claiming the deduction or (2) the due date, including extensions, within which the taxpayer must file the return claiming the deduction. See sec. 170(f)(8)(C); sec. 1.170A-13(f)(3), Income Tax Regs.; see also Van Dusen v. Commissioner, 136 T.C. at 536-537.

The record contains the following three different purported acknowledgement letters from PFM that were addressed to PFM Farms: Mr. Dryer's draft 2010 [*60] letter No. 1, PFM's draft letter No. 2, and PFM's draft letter No. 3. None of those letters is dated. Although the copy of each of those letters that is in the record is signed by Mr. Douglas,⁵⁵ petitioners have failed to carry their burden of establishing that Mr. Douglas in fact signed Mr. Dryer's draft 2010 letter No. 1, PFM's draft letter No. 2, and/or PFM's draft letter No. 3. Even if the record had established that Mr. Douglas signed one or more of those letters, petitioners have failed to carry their burden of establishing when he signed any of them and sent any of them to PFM Farms, Mr. Presley, and/or petitioners. On the record before us, even if PFM Farms had paid the required land improvement expenses in 2010 and those expenses were directly connected with and solely attributable to the rendition of services to PFM by PFM Farms, we would find that petitioners have failed to carry their burden of establishing that they satisfy the substantiation requirements in section 170(f)(8)(A) and (C) and section 1.170A-13(f)(1) and (3), Income Tax Regs.

Even if PFM Farms had paid the required land improvement expenses in 2010, those expenses were directly connected with and solely attributable to the rendition of services to PFM, and Mr. Dryer's draft 2010 letter No. 1, PFM's draft [*61] letter No. 2, and/or PFM's draft letter No. 3 had been signed by Mr. Douglas and had been sent to PFM within the time prescribed in section 170(f)(8)(C) and section 1.170A-13(f)(3), Income Tax Regs., we would find on the record before us that petitioners have failed to carry their burden of establishing that they satisfy the substantiation requirements in section 170(f)(8)(B)(ii) and (iii) and section 1.170A-13(f)(2)(ii) and (iii), Income Tax Regs. Section 1.170A-13(f)(2)(ii), Income Tax Regs., which was promulgated under section 170(f)(8)(B)(ii), requires a donee organization to indicate in a contemporaneous written acknowledgement “whether or not the donee organization provides any goods or services in consideration, in whole or part, for any of the cash or other property transferred to the donee organization.” Where the donee organization provides any goods or services, section 170(f)(8)(B)(iii) and section 1.170A-13(f)(2)(iii), Income Tax Regs., require the donee organization to indicate in the contemporaneous written acknowledgement “a description and good faith estimate of the value of those goods or services”. Where the acknowledgement incorrectly states that “[n]o goods or services were provided for the donation”, that donor acknowledgement fails to satisfy the substantiation requirements in section 170(f)(8)(B)(ii) and (iii) and section 1.170A-13(f)(2)(ii) and (iii), Income Tax Regs. See Viralam v. Commissioner, 136 T.C. 151, 171 (2011). The following language appeared in each of the [*62] purported acknowledgement letters (i.e., Mr. Dryer's draft 2010 letter No. 1, PFM's draft letter No. 2, and PFM's draft letter No. 3): “No goods or services were provided for the contributions given.” We have found that PFM Farms paid the required land improvement expenses, inter alia, to create the ponds on an area of PFM's Tulsa property other than the leased PFM property as a source of irrigation for PFM Farms' blueberry farm, which PFM Farms intended to operate for profit on that leased property.⁵⁶ On the record before us, we find that PFM Farms expected to benefit financially from the required land improvement expenses that it paid by establishing and operating PFM Farms' blueberry farm with the intention of making a profit.⁵⁷ On that record, even if PFM Farms had paid the required land improvement expenses in 2010, those expenses were directly connected with and solely attributable to the rendition of service to PFM, and Mr. Dryer's draft 2010 letter No. 1, PFM's draft letter No. 2, and/or PFM's draft letter No. 3 had [*63] been signed by Mr. Douglas and had been sent to PFM within the time prescribed by section 170(f)(8)(C) and section 1.170A-13(f)(3), Income Tax Regs., we would find that petitioners have failed to carry their burden of establishing that they satisfy the substantiation requirements in section 170(f)(8)(B)(ii) and (iii) and section 1.170A-13(f)(2)(ii) and (iii), Income Tax Regs.⁵⁸

Based upon our examination of the entire record before us, we find that petitioners have failed to carry their burden of establishing that they are entitled for their taxable year 2010 to deduct under section 170(a) $107,364 of the required land improvement expenses that PFM Farms paid before 2010.

Claimed charitable contribution deduction for the tractor/mower in question

We consider next whether petitioners are entitled for their taxable year 2010 to deduct under section 170(a)(1) $3,000 for a claimed charitable contribution to PFM of the tractor/mower in question. It is respondent's position that petitioners are not entitled to do so because they did not comply with certain charitable contribution [*64] deduction substantiation requirements that apply to petitioners' claimed $3,000 deduction for the tractor/mower in question.

Petitioners concede on brief that they

failed to properly substantiate the donation of the Toro Tractor [the tractor/mower in question] as they did not include any of the required information on Form 8283 in their 2010 tax return showing: (1) a description of the donated property; (2) the approximate date the mower was acquired and the manner of its acquisition; (3) the cost or other basis of the mower; (4) the fair market value of the mower at the time it was contributed; and (5) the method used in determining its fair market value. See I.R.C. § 170(f)(11)(B); Treas. Reg. §§ 1.170A-13(b)(ii)(C) [sic] and (D), (3)(i)(A) and (B).

Although they concede that they do not satisfy certain charitable contribution deduction substantiation requirements that apply to their claimed $3,000 deduction for the tractor/mower in question, petitioners take the position that they nonetheless are entitled to that claimed deduction. That is because, according to petitioners, their “failure to meet those requirements is due to 'reasonable cause and not to willful neglect.'” As support for their position, petitioners rely on section 170(f)(11)(A)(ii)(II). That section provides that section 170(f)(11)(A)(i)⁵⁹ [*65] “shall not apply if it is shown that the failure to meet such requirements [in section 170(f)(11)(A)(i)] is due to reasonable cause and not to willful neglect.”

In support of their position under section 170(f)(11)(A)(ii)(II), petitioners contend as follows:

Petitioners relied upon their competent tax adviser (Robert Johnson, C.P.A.) to prepare the [2010] Form 8283 with respect to the donation of the Toro Tractor mower. Mr. Johnson testified that he had unfettered access to Petitioners' records and was provided with the make, model, and year of the mower as well as a soft copy of the invoice showing the original purchase, but simply failed to include the information on their [2010] Form 8283. Petitioners had no reason to doubt Mr. Johnson's competence and believed that the mower had been correctly reported on their 2010 tax return.

Neither section 170(f)(11)(A)(ii)(II) nor the regulations thereunder provide a definition of, or any helpful guidance with respect to, the term “reasonable cause” which those authorities use.⁶⁰ However, the term “reasonable cause” also is used in certain Code provisions imposing additions to tax and penalties.⁶¹ See, e.g., secs. 6651, 6652, 6664(c). Consequently, as we did in Crimi v. Commissioner, T.C. Memo. 2013-51, at *99, we look for guidance as to the meaning of the [*66] term “reasonable cause” in section 170(f)(11)(A)(ii)(II) to caselaw that has considered the same term in the context of issues presented under those other provisions.

We note initially that reasonable cause requires a taxpayer to exercise ordinary business care and prudence. See, e.g., United States v. Boyle, 469 U.S. 241, 246 (1985); McNair Eye Ctr., Inc. v. Commissioner, T.C. Memo. 2010-81, 2010 WL 1558164, at *3. Moreover, the inquiry into whether reasonable cause is present is a fact-intensive inquiry that requires a case-by-case examination of all the facts and circumstances presented in each case. See, e.g., Crimi v. Commissioner, at *99.

Where, as here, a taxpayer claims to have relied on the advice of a professional, such as a C.P.A. or an attorney, the taxpayer has the burden of establishing the following facts in order for us to sustain that claim: (1) the taxpayer reasonably believed that the professional was a competent tax adviser with sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the professional who gave advice to the taxpayer; and (3) the taxpayer relied in good faith on that advice. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98-99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002); Crimi v.Commissioner, at *99.

[*67] We decide only the question of whether petitioners relied in good faith on Mr. Johnson when he presented them for their review the 2010 return which he had prepared and in which there was a claimed charitable contribution deduction of $3,000 for the tractor/mower in question.⁶² That is because our resolution of that question resolves the issue under section 170(f)(11)(A)(ii)(II) of whether petitioners' failure to meet the requirements in section 170(f)(11)(A)(i) that apply to their claimed charitable contribution deduction of $3,000 for the tractor/mower in question is due to reasonable cause and not to willful neglect.

Although Mr. Johnson prepared petitioners' 2010 return, Mr. Dryer also gave advice to petitioners with respect to certain appraisal and return reporting requirements that applied to their proposed donation to PFM of the tractor/mower in question (and their proposed donation to PFM of the “land and soil preparation”). He did so when he included the Form 8283 appraisal requirement language and the Form 8283 donor acknowledgement requirement language as part of the resolution set forth in the October 20, 2010 minutes of PFM's board, which he had prepared at the request of Mr. Presley and which addressed the proposed donation to PFM of “a tractor and land and soil preparation”. Mr. Dryer included that language because he wanted it to serve as an important reminder to obtain an appraisal [*68] of any substantial noncash property donated to PFM and to include a properly completed and executed Form 8283 with petitioners' 2010 return because of those proposed donations.

Petitioners do not address on brief Mr. Dryer's advice to obtain an appraisal of any substantial noncash property donated to PFM and to include a properly completed and executed Form 8283 with petitioners' 2010 return. We believe that they do not do so because they did not follow that advice. Although the 2010 return that Mr. Johnson had prepared for petitioners included their 2010 Form 8283,⁶³ that form was incomplete and thus not properly completed. Petitioners' 2010 Form 8283 did not make any reference in Section A relating to donated property of $5,000 or less (and certain publicly traded securities) to a claimed deduction of the tractor/mower in question or any other similar equipment.⁶⁴ A review of the 2010 return that Mr. Johnson had prepared for petitioners, in particular [*69] a review of petitioners' 2010 Form 8283 that he had prepared, would have caused a reasonable person, especially in the light of Mr. Dryer's advice, to ask Mr. Johnson why he did not include in that form any reference to or any information regarding a claimed deduction for their donation of the tractor/mower in question. The record does not establish that petitioners made any such inquiry of Mr. Johnson, presumably because they did not.

On the record before us, we find that petitioners have failed to carry their burden of establishing that they exercised ordinary business care and prudence or otherwise did what a reasonable person would do under the facts and circumstances. On that record, we find that petitioners have failed to carry their burden of establishing that they relied in good faith on Mr. Johnson when he presented them for their review the 2010 return that he had prepared and that included nowhere in their 2010 Form 8283 or in any other form, schedule, or attachment to that return any reference to or any information regarding a claimed charitable contribution deduction for the tractor/mower in question. On the record before us, we find that petitioners have failed to carry their burden of establishing that their failure to satisfy certain charitable contribution deduction substantiation requirements that apply to their claimed charitable contribution deduction of $3,000 for the [*70] tractor/mower in question is due to reasonable cause and not to willful neglect within the meaning of section 170(f)(11)(A)(ii)(II).

Based upon our examination of the entire record before us, we find that petitioners have failed to carry their burden of establishing that they are entitled for their taxable year 2010 to deduct under section 170(a) $3,000 for the tractor/mower in question.

2012

We address whether petitioners are entitled for their taxable year 2012 to deduct under section 170(a) $235,422 for a claimed charitable contribution to PFM of petitioners' residence. It is respondent's position that petitioners are not entitled to do so. In support of respondent's position, respondent argues that (1) petitioners retained dominion and control over petitioners' residence after they purportedly contributed it to PFM; (2) when they made the purported contribution to PFM of petitioners' residence, petitioners expected to, and did, receive a substantial benefit in return because PFM allowed them to reside in that residence without paying any rent to it; and (3) petitioners failed to comply or substantially comply with certain charitable contribution deduction substantiation requirements that apply to the claimed charitable contribution of petitioners' residence.

[*71] Petitioners disagree with each of respondent's three arguments. In addition, petitioners maintain that even if we were to find that petitioners did not comply or substantially comply with all of the applicable charitable contribution deduction substantiation requirements, their failure to meet those requirements is due to reasonable cause. Petitioners maintain that consequently, pursuant to section 170(f)(11)(A)(ii)(II), section 170(f)(11)(A)(i) does not disallow their claimed charitable contribution deduction of $235,422 for petitioners' residence.

We address only respondent's third argument set forth above. That is because our findings as to whether petitioners complied or substantially complied with certain charitable contribution deduction substantiation requirements that apply to their claimed charitable contribution deduction of $235,422 for petitioners' residence resolves the question of whether section 170(f)(11)(A)(i) disallows that claimed deduction.⁶⁵

We turn now to respondent's third argument that petitioners did not comply or substantially comply with certain charitable contribution deduction substantiation [*72] requirements that apply to the claimed charitable contribution of petitioners' residence to PFM. Section 170(f)(11)(C) provides in pertinent part:

Qualified appraisal for contributions of more than $5,000. — In the case of contributions of property for which a deduction of more than $5,000 is claimed, the requirements of this subparagraph are met if the individual * * * obtains a qualified appraisal of such property and attaches to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require.

The regulations that the Secretary promulgated under section 170(f)(11)(C) provide in pertinent part:

(2) Substantiation requirements. — (i) In general. — * * * [a] donor who claims or reports a deduction with respect to a charitable contribution to which this paragraph (c) [relating to claimed charitable deductions in excess of $5,000] 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. * * *

(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.

Sec. 1.170A-13(c)(2)(i), Income Tax Regs.

We address first whether, as required by section 170(f)(11)(C) and section 1.170A-13(c)(2)(i), Income Tax Regs., petitioners obtained a qualified appraisal. [*73] Section 170(f)(11)(E) defines the term “qualified appraisal” and the term “qualified appraiser” that is used in that definition, as follows:

Qualified appraisal and appraiser. — For purposes of this paragraph —

(i) Qualified appraisal. — The term “qualified appraisal” means, with respect to any property, an appraisal of such property which —

(I) is treated for purposes of this paragraph as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and

(II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I).

(ii) Qualified Appraiser. — Except as provided in clause (iii), the term “qualified appraiser” means an individual who —

(I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary,

(II) regularly performs appraisals for which the individual receives compensation, and

(III) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.