MEMORANDUM AND ORDER RE: MOTIONS FOR SUMMARY JUDGMENT AND MOTION TO STRIKE
WILLIAM B. SHUBB, District Judge.
Plaintiffs Alan and Wendy Pesky brought suit against the United States of America seeking a refund for taxes, penalties, and interest assessed against them for the 2003 and 2004 tax years. Currently before the court are the parties' cross motions for summary judgment pursuant to Federal Rule of Civil Procedure 56 and the Peskys' motion to strike certain evidence and testimony from the United States' motion for summary judgment. (Docket Nos. 105, 106, 108.)
The parties' dispute can be divided into two general topics: (1) deduction of the value of a conservation easement limiting development of real property in Idaho ("Conservation Easement"), and (2) deduction of various other expenses. After carefully considering the parties' briefs, the court finds that these two issues are best addressed in separate orders. This Order addresses the parties' claims regarding the Conservation Easement.
I. Factual and Procedural Background
In May of 1985, Paul MacCaskill and John Hagestad ("M&H") owned three parcels of undeveloped land in Blaine County, Idaho ("Ketchum Property"). (Yost Decl. Ex. 1 (Docket No. 105-4).) Another property owned by Mary Hemingway, ("Hemingway Property") abuts the Ketchum Property to the south. (Id. ¶ 14.) Hemingway had granted M&H an easement over the Hemingway Property to access the Ketchum Property ("Hemingway Easement"), but the Hemingway Easement was arguably legally defective. (Id. ¶ 17; id. Ex. 3.) Upon Hemingway's death, The Nature Conservancy ("TNC"), a non-profit environmental conservation organization, became the owners of the Hemingway Property. (Id. Ex. 3.)
TNC was concerned that M&H were going to develop the Ketchum Property and preferred that the Ketchum Property be accessed over an alternate easement approaching from the north. (Id. Ex. 5.) It also appears that M&H and TNC believed that a driveway to the Ketchum Property over the Hemingway Easement would require approval from the City of Ketchum ("City") and Blaine County ("County"). (Id.) The dispute between M&H and TNC eventually resulted in M&H filing an action to perfect the Hemingway Easement in state court. (Id. Ex. 1, Ex. 2 at 19:2-22:4.)
In a November 20, 1989 letter, Edward Lawson, attorney for TNC, sent M&H a settlement proposal which suggested that TNC would agree not to oppose a driveway application with the City and County while also amending the Hemingway Easement to provide for two homesites. (Id. Ex. 5.) In exchange, M&H would give TNC a conservation easement on a portion of the Ketchum Property and would also make a $150, 000 cash contribution. (Id.) TNC and M&H did not reach a settlement.
Shortly thereafter, Paul Street, attorney for the Peskys, proposed a similar transaction in a confidential memorandum to Alan Pesky: (1) TNC would obtain an option to purchase the Ketchum Property and assign that option to Mr. Pesky; (2) TNC would give Mr. Pesky an oral commitment for access over the Hemingway Property if the Peskys could not obtain access over other properties; and (3) the Peskys, "at a later date, " would contribute two of the three lots on the Ketchum Property to TNC "for charitable deduction for more than option [sic] based upon access to property." (Id. Ex. 6.)
On April 2, 1993, TNC paid $50, 000 to acquire an option to purchase the Ketchum Property for approximately $1.6 million ("Option"). (Id. Ex. 7.) The Project Resolution presented to, and subsequently passed by, TNC's Board of Governors provided that TNC would obtain the Option while simultaneously raising the purchase price of $1.6 million or "locating an individual willing to purchase it for a single home site, " who "would then contribute all of the development rights on the 30 acres to [TNC] through a conservation easement or other mechanism." (Id. Ex. 8.)
On August 3, 1993, Street sent TNC a written offer to purchase the Option that included the following terms: (1) Pesky and Paul Stern would pay TNC $50, 000 for the Option and would also each pledge to pay $200, 000 apiece over a four year period; while (2) TNC would provide written agreements guaranteeing access over the Hemingway Easement to three home sites on the Ketchum Property; and (3) TNC would agree to support the Peskys' application to the City for construction of a driveway on the Hemingway Easement. (Id. Ex. 9.)
After negotiations between late August and late September, 1993, TNC and the Peskys entered into a series of agreements on or around September 29, 1993:
The Assignment Agreement - in which the Peskys paid TNC $50, 000 to TNC, while TNC assigned the Option to Pesky, agreed to support the Peskys' applications for driveway approval with the City and County, and agreed to enter into the Driveway Easement and Easement Agreement, (id. Ex. 19);
The Driveway Easement - in which TNC granted the Peskys an easement over the Hemingway Property to the Ketchum Property, (id. Ex. 22);
The Easement Agreement - in which the Peskys agreed to limit the height of structures on the Ketchum Property to twenty-five feet, (id. Ex. 23);
The Pledge Agreement - in which the Peskys agreed to convey "all right to develop or improve the [Ketchum] Property except for one single-family residence" at a later date and pay $400, 000 to TNC for a new office building; the Pledge Agreement provided that its existence be kept confidential unless TNC anticipated default by the Peskys, (id. Ex. 20); and
Deeds of Trust - securing performance of the Pledge Agreement by naming TNC as beneficiaries to other real property owned by the Peskys, (id. Ex. 21).
On September 29, 1993, the Peskys exercised the Option and purchased the Ketchem Property for $1.6 million. (Id. Ex. 25.) Just a few months after purchasing the Ketchum Property, the Peskys engaged a local real estate agent to market and sell the Ketchum Property for a price between $6.5 and $9.5 million. (Id. Ex. 26.) The Peskys sought approval of a driveway over the Hemingway Property at Planning and Zoning Commission meetings and through a series of applications. (Id. Exs. 27, 28, 30-34.) TNC representatives attended these meetings and allegedly supported approval of the driveway. (Id. Ex. 38.)
Around March 7, 2002, the Peskys fulfilled the terms of the Pledge Agreement by granting the Conservation Easement to TNC. (Id. Ex. 41.) The Conservation Easement limited development to one single-family residence and a guest house. (Id.) The Conservation Easement also raised the height restriction on Ketchum Property building from twenty-five to thirty feet. (Id.) Around the same date, the Peskys entered into a driveway easement agreement with two other property owners over whose land-in addition to the Hemingway Property-a driveway would have to pass to access the Ketchum Property ("Whitmyre Easement"). (Id. Ex. 40.)
On March 12, 2002, the Peskys sold the Ketchum Property for $6, 900, 000 plus deferred interest. (Id. Ex. 42.) The Peskys claimed charitable contribution deductions for the value of the Conservation Easement on their 2002, 2003, and 2004 tax returns. In an appraisal submitted to the IRS, Mark Richey determined that the Peskys' portion of the Conservation Easement was worth over $3 million ("Richey Appraisal"). (Id. Ex. 43.)
The Internal Revenue Service ("IRS") allegedly issued notices of deficiencies for the 2003 and 2004 tax years against the Peskys, and the Peskys paid the assessments. (First Am. Compl. ¶¶ 6-13 (Docket No. 72).) Peskys brought suit against the United States in April 2010 seeking recovery of taxes, penalties, and interest assessed by the IRS for the 2003 and 2004 tax years. (Docket No. 1.) On September 20, 2011, the United States moved to stay the action under 26 U.S.C. § 7422(e) because the IRS issued new statutory notices of deficiency against the Peskys for the 2003 and 2004 tax years. (United States' Mot. to Stay (Docket No. 58).) The new notices of deficiency included adjustments to income and expenses as to both Alan and Wendy Pesky. With respect to Alan Pesky, the new notices added a civil fraud penalty under 26 U.S.C. § 6663. (Id. at 2, Ex. B.) The IRS also issued a new statutory notice of deficiency against the Peskys for the 2002 tax year. (Id. at 2; FAC ¶¶ 15-19.)
After the court lifted the stay, the Peskys filed the FAC. The United States then brought counterclaims against Alan Pesky alleging fraud in the deduction of the Conservation Easement and certain Schedule C business deductions. (Docket No. 74.) After the court partially granted the Peskys' motion to dismiss the counterclaims, (Docket No. 84), the United States filed amended counterclaims, (Docket No. 85).
The United States now moves for summary judgment on the issue of whether the Peskys are entitled to a charitable deduction for the value of the Conservation Easement, arguing that: (1) the Conservation Easement was a quid pro quo transaction with TNC; (2) the Peskys failed to provide an acknowledgment that they received goods and services in exchange for the Conservation Easement; (3) the Richey Appraisal did not consider the likelihood of development of the Ketchum Property; and (4) the Richey Appraisal was not a qualified appraisal because it did not include the terms of key agreements such as the Pledge Agreement. (U.S. Mot. for Summ. J. at 5 ("U.S. MSJ") (Docket No. 105-1).) The United States also moves for summary judgment on accuracy penalties associated with the Conservation Easement. (Id.) The United States explicitly does not move for summary judgment on its counterclaims for a seventy-five percent fraud penalty, as it "believes that this is an issue for trial." (Id. at 2.)
The Peskys file their own motion for summary judgment on the following issues: (1) whether the Peskys' could deduct the value of the Conservation Easement as a charitable contribution; and (2) whether the Peskys fraudulently deducted the value of the Conservation Easement and are therefore subject to the United States' counterclaims ...