Conn. Appellate Court, AC 36326, July 8, 2014: Stone wall is “permanent structure”
At issue was whether a stone wall erected by Medina, the defendant, at a location where a restrictive covenant between private parties prohibited construction of any “permanent structure,” was a permanent structure in violation of the covenant. A lower court agreed with Medina that the prohibition on permanent structures was ambiguous and, even though the wall is a structure that “is large in size, is undoubtedly heavy and is immobile” it was not permanent. The appeals court disagreed. It held that the phrase “permanent structure” was not ambiguous, and found that the wall is a permanent structure within the meaning of this restrictive covenant.
The court concluded that the term “permanent structure” has a common, natural and ordinary meaning and “equates to a structure that is not meant to be temporary or transient, but, rather, is meant to be fixed, lasting, and not readily abated.” The factors to be evaluated include the structure’s size, weight, durability, stability and mobility. The plaintiffs argued, and the court agreed, that even if the wall did not contain a concrete core, “gravity would affix this wall, with its pillars and fencing, to the ground.”
The case was remanded to the trial court for it to grant an injunction requiring Medina to remove all portions of the wall within the prohibited area. There were other controversies in this case, not relevant to this outcome.
Decision available at http://www.jud.ct.gov/external/supapp/Cases/AROap/AP151/151AP409.pdf.
NJ Super. Ct Appellate Division, Nos. A-5541-11T1, A-6364-11T1, June 20, 2014: Hearing required to amend conservation easement.
As of this writing the opinion is not approved for publication.
In 2001 the Italian American Sportsmen’s Club, Inc. (“IASC”) and developer Crestwood obtained approvals from the New Jersey DEP, including a wetlands transition area waiver (“the 2001 TAW”), to subdivide a large IASC parcel (“Lot 47”) and develop some of the lots. The DEP’s approval of the 2001 TAW was conditioned on the granting to DEP of a deed restriction or conservation easement, among other things. The conservation easement was never recorded. More recently another developer (“Sharbell”) obtained approvals from the DEP for a project on other lots carved out of Lot 47. As part of its application, Sharbell obtained approval (the “Sharbell TAW”) to modify the boundaries of the transition area specified in the 2001 TAW, by encroaching on some of the transition area while creating a larger transition area in other locations on the site. A local group, Save Hamilton Open Space (“SHOS”), said Sharbell should not be allowed any relief that would alter the 2001 TAW. SHOS appealed issuance of the Sharbell TAW, in part based on the failure to record the conservation easement. The DEP took the position that IASC’s violation of the easement recording requirement was a separate problem that should not stand in the way of Sharbell’s permits.
The court held that the failure to record the conservation easement required the DEP not to approve Sharbell’s proposed changes to the transition area, and it vacated the Sharbell TAW, without prejudice. The court pointed to a specific state regulation, Subsection (2)(i) of N.J.A.C. 7:7A-6.1(e), which required that the boundaries of the TAW originally approved by the DEP could not be modified except to a de minimis degree and then only if the conservation easement had been recorded. The court said that because the easement had not been recorded here, no modification should be allowed other than by following the procedure in New Jersey’s conservation easement enabling law (N.J.S.A. 13:8B) for releasing a conservation easement, in whole or in part. That procedure (which also applies to historic preservation easement) requires “that prior to any release, a public hearing shall be held … by the governmental body holding the restriction, or if held by a charitable conservancy, by the governing body of the municipality in which the land is situated.” As no such public hearing has been held in this case, the DEP, as holder of the easement, had not adhered to statutory procedure.
The court noted that the recording requirement for the conservation easement required as a condition to issuance of a TAW “presumably does not exist solely to guide only parties who may purchase or develop property containing wetlands or wetlands transition areas. The conservation restrictions are also intended to guide and protect the public at large, and to preserve freshwater wetlands as a valuable environmental resource for posterity. There is nothing in the text or history of the regulatory scheme to allow the recording obligation to be excused simply because compliance has become inconvenient due to the passage of time.”
The court said that the public hearing required by the conservation easement enabling act is “the appropriate forum to sort out the interests of all persons who are concerned about or affected by changes in the conservation restrictions, assuming that Sharbell still wishes to proceed with such changes.”
The unpublished decision is available until in or about July 7, 2014, at http://www.judiciary.state.nj.us/opinions/a5541-11a6364-11.pdf. Thereafter it should be available through the Rutgers Newark Law School web site.
US Tax Court, T.C. Memo 2014-124. June 19, 2014: quid pro quo for historic conservation easement not fully valued; deduction denied.
The claim by Seventeen Seventy Sherman Street, LLC (Petitioner) for a charitable deduction for a conservation easement it granted to a charitable organization was denied by the IRS. The Petitioner conceded that the grant of the easement was part of a quid pro quo transaction, but said the value of the easement was greater than the consideration the Petitioner received in return, and that excess value should be eligible for a deduction. The tax court upheld the IRS denial because it found that the Petitioner failed to identify or value a part of the consideration it received in the transaction. The court held that when a taxpayer grants a conservation easement as part of a quid pro quo transaction and fails to identify or value all of the consideration received in the transaction, the taxpayer is not entitled to any charitable contribution deduction with for the grant of easement.
The Petitioner needed planning board approval (a PUD 545) to proceed with its project. As part of that process, it obtained the recommendation of the Community Planning and Development Agency (CPDA) to approve a variance. In response to the CPDA’s position that it would not recommend approval unless the Petitioner committed to granting interior and exterior conservation easements, the Petitioner agreed in a development agreement with the city to grant the conservation easements to a charity if the city approved certain changes to the property. The Petitioner conceded that the development agreement was part of a quid pro quo arrangement, and therefore the value of the CPDA recommendation should be included in determining whether the contribution of the easements had value in excess of what the Petitioner received in return for granting them. But they argued that the Planning Board was so independent that it was doubtful the CPDA recommendation “would have any influence over the Planning Board or any real value to the recipient of the recommendation.” Therefore the Petitioner did not place any value on the CPDA recommendation.
The tax court said it should have valued the CPDA action. It concluded that the Petitioner itself “highly valued” the CPDA recommendation when seeking it, that the Planning Board would likely follow CPDA’s recommendation, and therefore the CPDA’s recommendation had to be be valued as part of the Petitioner’s quid pro quo exchange. Because the Petitioner did not value that recommendation in evaluating the quid pro quo, it did not meet its burden of proving that the grant of the conservation easement (assuming it was charitable) exceeded the consideration the Petitioner received in return.
The court had to review the valuation of the easement to determine whether to impose a 40% a gross valuation misstatement penalty on the Petitioner. In doing the review the court disagreed with the IRS position that local regulations on the property had already effectively restricted the exterior of the property as much as the conservation easement. Instead the court found that the exterior easement did have value. Accordingly, the court said the IRS failed to meet its burden of proof on the penalty question and therefore no penalty could be imposed.
The court agreed with the IRS that a 20% penalty should be imposed for underpayment of tax due to negligence or disregard of rules or regulations. It found the IRS met its burden of proof on this point and had shown that the Petitioner sought the contribution deduction based on a valuation without any adjustment for the consideration it received in exchange for the easements. Because the Petitioner hadn’t made “a reasonable attempt to ascertain the correctness of the charitable contribution deduction” the penalty was warranted.
The decision is available at http://www.ustaxcourt.gov/InOpHistoric/SeventeenSeventyShermanSt.LLC.Memo.Marvel.TCM.WPD.pdf.
US Court of Appeals, 2nd Circuit, No. 13-2650, June 18, 2014: evidence supports Tax Court; easement had no value for charitable contribution purposes.
The IRS denied Scheidelman a charitable deduction for a façade easement on a property in a New York City historic district. The Tax Court sided with the IRS in Scheidelman v. Commissioner, T.C. Memo. 2010-151 (Scheidelman I), saying that Scheidelman’s appraisal was not a “qualified appraisal.” On appeal in the Second Circuit Court of Appeals vacated the tax court decision as to the qualification of the appraisal and remanded the case for further proceeding as to the fair market value of the easement for deduction purposes. Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II). On remand, the Tax Court agreed with the IRS that the easement did not diminish the value of Scheidelman’s property and therefore no deduction could be taken. T.C. Memo. 2013-18 (Scheidelman III). Scheidelman appealed that decision too.
The court explained that the tax court valuation must be upheld if it was supported by substantial evidence, but it first considered as a question of law whether the tax court erred in how it weighed the evidence. The court found there was no legal error when the tax court gave no weight to the evidence offered by two appraisers testifying for Scheidelman. One appraiser’s report “made no serious attempt to determine the ‘after’ value of Scheidelman’s property based on any factors actually related to the property.” The other report did not accurately describe the easement, relied on outdated information, and used comparables from other geographical areas. The tax court credited the valuation report by the IRS’ expert, which gave no valued to the easement, based on the particular terms of the easement, zoning laws, local regulations, an evaluation of the neighborhood. The appeals court found this testimony, as well as that of another IRS expert, to be substantial evidence that supported the tax court’s finding and conclusion that the easement had no value for charitable contribution purposes.
Scheidelman also argued on appeal that the tax court should have shifted the burden of proof to the IRS. The court said that even if that were true (which the court did not decide, but assumed for the purpose of the appeal) it made no difference because the IRS more than countered whatever proof Scheidelman offered.
Decision available at http://www.ca2.uscourts.gov/decisions/isysquery/2bf522aa-559e-4d82-8c8d-3c4b734c3504/8/doc/13-2650_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/2bf522aa-559e-4d82-8c8d-3c4b734c3504/8/hilite/.
US Court of Appeals, 5th Circuit, No. 13-60131, June 11, 2014: Reliance on qualified appraisal and accountant advice can be good faith basis to avoid tax penalty, but tax court’s valuation decision upheld.
This decision is the fourth in this historic preservation façade easement tax case. The case began when Whitehouse made a charitable contribution of a façade easement on a historic property in New Orleans and claimed a federal tax deduction for it. In the first decision the IRS entirely rejected the deduction and assessed a penalty for gross underpayment of taxes under § 662(h)(2) of the tax Code. Whitehouse sought to overturn the IRS decision in the US Tax Court. In Whitehouse Hotel Ltd. P’ship v. Comm’r, 131 T.C. 112 (2008) (Whitehouse I), the tax court held that Whitehouse was entitled to a deduction but set the value of the easement contribution far below Whitehouse’s claim, found that Whitehouse did not qualify for the good faith exception to the gross underpayment penalty rules, and thus imposed the penalty.
Whitehouse appealed. In Whitehouse Hotel Ltd. P’ship v. Comm’r, 615 F.3d 321 (5th Cir. 2010) (Whitehouse II) the Fifth Circuit Court of Appeals vacated the tax court’s valuation of the easement and therefore also vacated the gross undervaluation penalty, and remanded the matter back to the tax court for further consideration on issues about the easement’s valuation and the denial of the good faith exception. The appeals court told the tax court to do three things: (1) reconsider valuation using the replacement cost and income methods, in addition to the comparable sales method; (2) determine the parcel’s “highest and best use” for the purposes of its valuation; and (3) consider the effect of the easement on an adjoining building which the tax court had said should not be considered in the valuation.
Grudgingly doing the review, on remand Whitehouse Hotel Ltd. P’ship v. Comm’r, 139 T.C. 304 (2012) (Whitehouse III) the tax court still found that Whitehouse had overvalued the easement (although it allowed about a 4% higher value that in Whitehouse I) and was subject to the overstatement penalty because it had not proved its case of a good faith exception.
Whitehouse took the case back to the 5th Circuit for appellate review of Whitehouse III. In its new decision (Whitehouse IV) the appeals court held that the tax court had taken the reconsideration steps as instructed in Whitehouse II, upheld the tax court’s valuation decision as not being wrong on the law, but overturned the tax court as to the law on the penalty question. Most of the appeals court decision focused on questions of whether the tax court had indeed complied with the remanding instructions, and not with the tax court’s factual conclusion (so long as there wasn’t clear error).
The appeals court held against Whitehouse on each of the three errors Whitehouse argued were made by the tax court’s valuation decision on remand: (1) continued refusal to use the results of a replacement cost or income analysis in valuation; (2) the “highest and best use” for valuation purposes; and (3) the exclusion of the adjoining building from the valuation.
Valuation Methods – Reproduction Cost: On remand, the tax court again rejected the reproduction cost approach because it concluded reproducing the historic façade after complete destruction would make no business sense. The appeals court questioned whether complete destruction was the only scenario to consider when evaluating “business sense” in this context, but nevertheless decided that the tax court’s conclusion about the facts in this case was not so clearly in error as to warrant a remand in this point. As a matter of law, the appeals court noted precedent for being dubious about the likelihood of reproduction as a “reasonable business venture.” On the other hand, the court also noted that this easement imposed more repair and replacement requirements in the event of partial destruction rather than total loss, and that “reproducing or repairing some substantial portion of the façade might be a significant burden that arises only because of the existence of the easement. The more limited repairs, though, might make business sense. Such obligations could diminish the value of the building to a potential owner, since the later owner would bear that cost.” The appeals court was not willing, however, to substitute its judgment for the tax court’s judgment on this question.
Valuation Methods – Income: The tax court on remand refused to use the income approach to valuation in this case because it found the income calculations of Whitehouse’s appraiser too unreliable to use, particularly since comparable sales data were available as the basis for a more reliable alternative method. The appeals court said there was no applicable legal precedence for overturning the tax court’s conclusion on this issue, and therefore let it stand.
Valuation Methods – Non-Local Comparable Sales: In its earlier decision (Whitehouse II), the appeals court questioned the tax court’s refusal to consider the non-local comparable sales in Whitehouse’s appraisal, but the appeals court did not require the tax court to weigh those non-local sales in its valuation decision. Therefore the tax court’s continued rejection of those non-local comparable sales on remand was also not grounds for another remand.
Highest and Best Use: The problem about “highest and best use” the appeals court had with the tax court’s first Whitehouse decision was that the appeals court couldn’t “decipher” whether the tax court had actually reached a conclusion about it. In the current decision, the appeals court said its instructions on remand were only to make a conclusive finding on the subject, without prejudicing the outcome. The choices for highest and best use were as a Ritz-Carlton luxury hotel or a non-luxury hotel. Solomonically, the tax court on remand said the highest and best use could be either one, which the appeals court was willing to accept as fulfilling the remand instructions.
Exclusion of Adjoining Building: The appeals court found that having reconsidered this question, the tax court did what was required of it on remand, and again that the tax court’s conclusion was not reversible error.
Good Faith Defense to Penalty: On this issue, the appeals court said its decision should be based on its own interpretation of the law, without regard to the tax court’s interpretation, and that the tax court was wrong. The tax court on remand wanted more of Whitehouse than reliance on advice of attorneys and accountants. The appeals court cited the precedent in United States v. Boyle, 469 U.S. 241, 251 (1985) that “[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for a taxpayer to rely on that advice.” The appeals court noted that reliance on such advice is particularly appropriate in the absence of a two-party “haggle over price” of this easement or easements generally. The court threw out the tax court’s imposition of the penalty, saying, “Obtaining a qualified appraisal, analyzing that appraisal, commissioning another appraisal, and submitting a professionally-prepared tax return is sufficient to show a good faith investigation as required by law.
The decision is temporarily available at http://www.ca5.uscourts.gov/opinions%5Cpub%5C13/13-60131-CV0.pdf and should eventually be findable at http://www.ca5.uscourts.gov/opinions.aspx.
U.S. Tax Court, 142 T.C. 16, May 14, 2014: Preservation easement valuation zero in historic district. 2006 carryover deduction claim subject to accuracy penalty.
At issue was the valuation for federal income tax deduction purposes of historic preservation façade easements on two single-family residences in Boston’s South End Historic District. The question was whether the burdens imposed by the façade easements were different from those imposed by the historic district regulations, and if so, the affect of the difference on the value of the property after the donation of the façade easement. In this case, the court determined that while there were differences between the burdens of the easement and those of the historic district, the differences made no difference in the value of the properties. Hence, the court found the façade easements had zero value and no deduction was allowed.
The court recognized differences between the scope, monitoring, and enforcement of the façade easement and historic district restrictions, but said, “… a typical buyer would perceive no difference between the two sets of applicable restrictions here.” Accordingly, the court found that, in the before and after analysis of fair market value, there would be no difference between the “after” value of a South End Historic District residence with a façade easement or without one. The result was that the façade easement donation had no value and no tax deduction could be taken.
The perception of the easement by potential buyers as a decisive factor in valuation was something that the court implied is present in residential property but not (or not decisively) in commercial property. The court noted that historic preservation easements on commercial property impair the value more tangibly than they do on residential property because of the easement’s affect on future cash flows. “Construction restrictions affect residential property values more subtly,” the court wrote, and do so “only to the extent their unique restrictions diminished petitioners’ property values.” The implication that can be taken is that to the court, residential property values are not based on bottom-line objective facts but on market perception.
The denial of the tax deduction meant that taxpayer was liable for a 40% gross valuation misstatement accuracy-related penalty under Internal Revenue Code section 6662 unless some exception applied. The taxpayer first claimed a portion of the charitable contribution deduction on their 2004 return but had also claimed the deduction in 2005 and 2006 as a carryover. The Pension Protection Act of 2006 (PPA) changed tax law for all returns filed after July 25, 2006, by eliminated the ability of taxpayers to avoid the penalty under certain circumstances if they made the misstatement in good faith and with reasonable cause (the “reasonable cause exception”). The taxpayer argued that to the extent their underpayment of 2006 (post-PPA) tax resulted from the carryover of charitable contribution deductions they first claimed on their 2004 return (pre-PPA), denying their right to raise a reasonable cause defense would amount to improperly retroactively applying the PPA.
The court said this was a novel issue, but decided it against the taxpayer, resulting in a 40% gross valuation misstatement accuracy-related penalty as to the taxes due for 2006. As to the taxes due for 2004 and 2005, applying the pre-PPA rules, the court found the taxpayer eligible for the reasonable cause exception because the deduction claim was based on a qualified appraiser’s qualified appraisal (even if an erroneous one) and the taxpayer made a good-faith investigation of the property’s value. The court found that even well educated persons like the taxpayer have no experience valuing easements and “would not know where to start to value a conservation easement.” They are entitled to give “substantial weight” to the qualified appraisal and “rely heavily on the opinions of professionals.” The taxpayer’s reliance on the appraisal and corroborating opinion of an experienced accountant amounted to a good-faith attempt to determine the easements’ values. Therefore no penalty was due for misstatement of the charitable deduction for tax years 2004 and 2005. The court distinguished this situation from one such as that in Kaufman v. Commissioner T.C. Memo 2014-52, (Kaufman IV), where the taxpayer had reason to doubt the appraisal.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/ChandlerDiv.Goeke.TC.WPD.pdf.
Massachusetts Supreme Judicial Court, No. 11432, May 15, 2014: Nonprofit’s forest conservation land entitled to property tax exemption.
New England Forestry Foundation, Inc. (NEFF) is a nonprofit corporation, whose purposes include to “create, foster, and support conservation, habitat, water resource, open space preservation, recreational, and other activities” by “promoting, supporting, and practicing forest management policies and techniques to increase the production of timber in an ecologically and economically prudent manner.” NEFF owns a 120-acre parcel of forest land in the town of Hawley, abutted on two sides by a state forest, and operates it under a “forest management plan.”
NEFF applied to the town board of assessors (assessors) for a charitable property tax exemption on the parcel under M.G.L. c. 59, § 5, Third (“Clause Third”). Clause Third provides that the real property of a charitable organization is exempt from taxation if the land is occupied by the charitable organization or its officers for the purposes for which it was organized. The assessors denied NEFF’s application and NEFF appealed to the state appellate tax board (“board), which also denied the exemption. NEFF appealed that decision.
The board denied NEFF’s exemption because it said NEFF didn’t prove that it occupied the land for a charitable purpose within the meaning of Clause Third. The board reached that conclusion because it said (1) forest management is not a traditional charitable purpose; (2) NEFF’s efforts to promote the use of the land by the public was insufficient for the benefits of NEFF’s activities to inure to a sufficiently large and fluid class of persons; (3) NEFF’s description of “active management” of the land was “at best vague testimony,” showing only one planned educational activity to take place in the Hawley forest.
The court overturned the board and held in favor of NEFF’s exemption for this land. The court’s lengthy analysis of the Clause Third requirements provides a roadmap for other conservation organizations and Massachusetts boards of assessors to determine whether conservation land ought to qualify for a property tax exemption.
Clause Third, the court wrote, initially sets up a two pronged test, each prong of which may pose complex questions: the organization seeking the exemption must qualify as a “charitable” organization within the meaning of the statute, and the organization must “occupy” the property in furtherance of its charitable purposes. The court ruled that NEFF purposes and occupancy in this case met those tests.
To be a “charitable” organization within the meaning of the statute, the dominant purpose of the organization must be “to perform work for the public good, not merely its own members,” and the charitable programs and activities of the organization need to be “of the sort that their benefit inures to an indefinite number of people.” The court made several pronouncements to counter the notion that benefits provided by “land held as open space or in its natural state” need to come from “direct access of people to that land for such purposes as recreation, scenic views, or education.” Instead the benefit of such land may derive from, among other things, mitigating the effects of climate change, contributing to “ecosystem resilience,” absorbing and dissipating stormwater runoff, cleaning the air, purifying the fresh water supply, and protecting wildlife habitats. The court concluded that by providing such benefits “combined with engaging in sustainable harvests to ensure the longevity of the forest,” NEFF charitable activities benefit the general public. In addition, an organization may be charitable if it assists in lessening the burdens of government. The court found abundant evidence that conservation and environmental protection “are express obligations of the government in Massachusetts” (evidenced by the article of the Massachusetts Constitution creating a public environmental rights and the charge to a State cabinet level office to carry out State environmental protection policy) and that several State statutory schemes involve “organizations that align their missions with the conservation goals of the State … as essential partners in Statewide conservation efforts” (e.g., permitting municipalities appropriations to buy open space “community preservation” lands, the conservation easement enabling law, and allowing nonprofit conservation organization to be assigned municipalities’ right of first refusal under the special forest land tax classification (Chapter 61) discussed below).
The second prong of the Clause Third test is whether the organization “occupies” the land in furtherance of its charitable purposes. The legal precedents for this determination required “active appropriation to the immediate uses of the charitable cause for which the owner was organized,” and that the dominant use “contribute[s] immediately to the promotion of the charity and … participate[s] physically in the forwarding of its beneficent objects,” while at the same time deferring to the organization’s own determination of “the extent of property required and the specific uses of the land that will best promote those purposes” if the organization acts in good faith and not unreasonably. The balance of these approaches was characterized by the court as “seeking to ensure that the land is not being held as a private landowner would hold it but that it is being held as an entity would hold it for the public good.”
Crucially, the court held that holding the land for the public good does not require an affirmative duty to promote and facilitate public access on conservation lands. Not only did the court find that such duty “exceeds the scope of the inquiry at the core of Clause Third’s occupancy requirement” but it also wrote that “in certain circumstances, such as in the case of a particularly fragile habitat or ecosystem, a public access requirement could operate to thwart the very conservation objectives an organization is seeking to achieve.… [W]e conclude that in a case such as NEFF’s where the entry of the public onto the land is not necessary for the organization to achieve its charitable purposes, the promotion and achievement of public access is not required to demonstrate occupancy of the land in order to qualify for a Clause Third exemption. The right that is most central to the ‘bundle’ of rights enjoyed by a private property owner is not the freedom from an obligation to invite visitors, it is the affirmative right to exclude others from one’s property. [citation omitted] Consequently, the appropriate inquiry begins with whether the entity takes affirmative steps to exclude the public from the land. … the organization faces a heightened burden to show that such exclusion of the public is necessary to enable it to achieve its charitable purposes. … it may do so only by presenting compelling facts demonstrating that the exclusion of the public is necessary to achieve a public benefit through other activities carried out on, or through use of, the land….”
The Appellate Tax Board had also denied the exemption to NEFF on the theory that the Legislature, by its enactment of another statute (M.G.L. c. 61), showed it intended only to reduce the tax burden on forest land, not to eliminate it completely. The court disagreed. Chapter 61 provides for a reduced tax rate for forest land in an undeveloped state that is managed according to a forest management plan issued by a licensed State forester. It gives the municipality a right of first refusal to buy the land if the owner wants to take it out of qualifying use. The court characterized Chapter 61 as a financial incentive not to develop forest land. It is available to all private owners, whether individuals, for profit business entities or nonprofits, and in prior years NEFF had received forest-land classification for the Hawley forest under chapter 61. The court held that Chapter 61 and Clause Third serve distinct purposes. While Chapter 61 creates incentives to encourage conservation by any and all private landowners, Clause Third is a property tax exemption based on the theory that property held for philanthropic, charitable, religious, or other quasi-public purposes in fact helps to relieve the burdens of government.
The court also rejected the theory put forward by the board that the legislative charter creating The Trustees of Reservations (the first land conservation entity of its kind in the United States) included a property tax exemption that by implication meant that Clause Third did not apply to land privately held for conservation purposes by any other charitable organization.
The decision is available until May 27, 2014, as a slip opinion at http://massreports.com/SlipOps/Default.aspx, and should eventually appear at http://masscases.com/name.html.
U.S. Tax Court, T.C. Memo. 2014-79, May 6, 2014: Rezoning history to old to affect highest & best use of conservation easement land; no penalty assessed.
At issue was the fair market value of a donated qualified conservation contribution based on the “highest and best use” of the land before imposition of the conservation easement. The appraisal for the taxpayer, Palmer Ranch, reached the judgment that the land could be more intensely developed (and therefore much more valuable) than current zoning allowed if a rezoning were approve and that approval of a rezoning was probable. The IRS’ appraiser concluded that a rezoning was not reasonably probable given four factors: (1) a recent failed rezoning history, (2) environmental concerns, (3) limited access to outside roads, and (4) neighborhood opposition.
The rezoning history was that there had been a proposal more than two years before the deduction was claimed to rezone the Palmer Ranch parcel and another parcel together. The proponent of that zoning change revised it to exclude the Palmer Ranch parcel, but the rezoning petition was denied. The IRS argued that this showed a rezoning of the Palmer Ranch parcel was unlikely. The court found the legal precedents cited by the IRS to be distinguishable because the Palmer Ranch history was less recent, the environmental concerns here were less significant than in the precedent, and, in the court’s judgment, the Palmer Ranch’s appraisal accounted for various environmental concerns while the taxpayer in the cited precedent did not. The court analyzed the circumstances of the prior rezoning denial, the concerns raise, and the vote margin of previous rezoning denial to reach essentially a political judgment about the likelihood of a future rezoning. The court’s conclusion was that the “rezoning history does not eliminate the reasonable probability on the valuation date of a successful rezoning.”
The IRS also contended that the presence of an eagle nesting area made the rezoning unlikely. The court agreed with Palmer Ranch that the rezoning history indicated that the local authorities would not automatically disapprove any development of the parcel that included the nesting area but would allow “moderate development” if it did not encroach on the nesting area.
As to road access, the IRS argued that a rezoning was unlikely because the parcel lacks the required two fully functional access points to both arterial and collector roads, and that neighborhood opposition would prevent Palmer Ranch from obtaining such access. The court found that there was sufficient potential for the required access that this factor did not make rezoning unlikely.
The IRS tried to use the intense neighborhood opposition to the prior rezoning attempt to argue that a future rezoning would be unlikely. The court found that this argument required too many assumptions that it declined to make.
As a result of this analysis, the court found a reasonable probability that the parcel could have been successfully rezoned to allow for the development used in the taxpayer’s appraisal as justification for the highest and best use. The court then analyzed other real estate market factors to conclude that the before value was higher than the IRS appraisal but not as high as the Palmer Ranch appraisal. It therefore allowed a somewhat lower deduction than Palmer Ranch had claimed.
The court then turned its attention to whether Palmer Ranch should be assessed a 20% accuracy related penalty for underpayment of taxes, that is, claiming a deduction higher than allowed. The IRS argued that Palmer Ranch had not acted in good faith when it failed to disclose the rezoning history to its appraiser, and therefore the resulting underpayment (based on the appraisal) was “negligence or disregard of rules or regulations.” The court disagreed, in part based on its own discounting of the rezoning history.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/PalmerRanchMemo.Goeke.TCM.WPD.pdf.
Massachusetts Appeals Court, No. 13-P-354, April 3, 2014: Recreational use law from liability even when defendant gets economic benefit; no consumer protection liability either.
Linda Patterson brought suit after she was injured from a fall inside a historic church while she toured it. The Pattersons claimed the recreational use statute, M.G.L. c. 21, § 17C (current version at https://malegislature.gov/Laws/GeneralLaws/PartI/TitleII/Chapter21/Section17C), did not bar liability on her negligence claims, and that she was entitled to remedies for unfair and deceptive trade practices under the consumer protection act, M.G.L. c. 93A. The trial judge found against the Pattersons and they appealed. The appeals court upheld the trial court judgment.
The injury happened during a tour of the church offered by a nonprofit foundation (foundation), organized to put on tours and historical programs at the church. The foundation has a memorandum of understanding (MOU) with the church. Under the MOU the foundation pays the church for the right to operate at the church. The foundation raises revenue from its gift shop, from fees for specialized tours to exclusive areas of the church, and from other fundraising efforts. Neither the Pattersons nor anyone in their sightseeing group were charged a fee to enter or tour the church. Mrs. Patterson attributed her fall to the difference in height between the floor of an aisle and the floor of a pew and the painting of the step the same color as the aisle carpet.
The only recreational use statute issue on appeal was whether the foundation lost the protections of the statute because it “impose[d] a charge or fee” under the statute. The Pattersons asserted that the foundation lost that protection because it generates revenue and pays the church an annual fee, arguing that a defendant who reaps an economic benefit from property utilized by the public free of charge is barred from relief under the statute.
The court found that the foundation’s other income and financial relationship with the church did not create an indirect fee for the Pattersons’ to enter or tour the church. This distinguished the facts in this case from precedents in other cases in which an indirect fee was found to exist, thereby depriving the defendants in those cases from the statute’s protection. The court found that the Pattersons made no contribution, direct or indirect, to the payments the foundation made to the church, and that would be so even if it were true that the church would not have been open to the public free of charge in the absence of the foundation’s annual payment to it.
(The recreational use statute applies under certain conditions to property used for recreational, educational, religious, or charitable purposes. The court said the undisputed facts showed that the situation met those conditions because the foundation has an interest in the land, Mrs. Patterson was injured when engaged in a recreational activity on that land, and the foundation did not “impos[e] a charge or fee” for the injured plaintiff’s use of the land. Under the statute a person engaged in a recreational activity is owed “only the standard of care applicable to trespassers: that is, landowners must refrain from willful, wanton, or reckless conduct as to their safety,” and not the duty of reasonable care owed other lawful visitors. On appeal the Pattersons did not dispute that the high volume of tourism activity does not disqualify the Pattersons’ visit from being considered a “recreational use” or that visiting a tourist destination while on vacation is a “recreational activity,” or that the foundation’s actions or omissions rose to the level of wilful, wanton, or reckless conduct.)
The Pattersons asked the court to interpret the legislative history of the recreational use statute to exclude the foundation and church from the statute’s protection the foundation they generate revenue on the church property. The court held that the purposes and requirements of the recreational use statute are sufficiently clear on its face that it would be inappropriate for the court to delve into the legislative history.
The court also rejected the Pattersons’ claim that because the church was not in compliance with certain accessibility requirements when Mrs. Patterson was injured, the church and the foundation are liable under the Massachusetts Consumer Protection Act, M.G.L. c. 93A. The court said there was nothing in the record to support the contention that, whatever negligence there might have been, it was or resulted in an unfair or deceptive act or practice. The implication was that in order for noncompliance with the accessibility requirements to be or result in an unfair or deceptive act or practice, the result had to be intentional, or there had to be fraud or deceit. The court found the foundation and church had not been fraudulent or deceitful by encouraging church visitors to sit in the pew boxes.
Lastly the court held that the accessibility regulations are not directed at the protection of consumers in the marketplace, but instead regulate building accessibility, and therefore the failure to comply with them did not violate the Attorney General’s Chapter 93A Regulations (940 CMR § 3.16(3)).
The decision is available at http://www.universalhub.com/2014/linda-patterson-and-another-vs-christ-church-city and until April 17 at http://weblinks.westlaw.com/result/default.aspx?action=Search&cnt=DOC&db=MA-ORSLIP&eq=search&fmqv=c&fn=_top&method=TNC&mt=Westlaw&n=1&origin=Search&query=TO%28ALLAPP+ALLAPPRS%29&rlt=CLID_QRYRLT6275833401374&rltdb=CLID_DB6149333401374&rlti=1&rp=%2Fsearch%2Fdefault.wl&rs=MAOR1.0&service=Search&sp=MassOF-1001&srch=TRUE&ss=CNT&sskey=CLID_SSSA2449333401374&sv=Split&vr=1.0. It may eventually be available at http://masscases.com/name.html by searching for “Patterson”.
U.S. Tax Court, T.C. Memo 2014-52, March 31, 2014: Façade Easement had zero value; penalties imposed.
The issues in this case about the federal tax deduction for a “qualified conservation contribution” (a historic preservation façade easement) were principally the valuation of the façade easement and what, if any, penalties the taxpayer should pay for misstating the value in their tax return. The case was before the tax court on remand from the U.S. Court of Appeals for the First Circuit. Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), aff’g in part, vacating and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010). It is the latest in a number of decisions involving problematic appraisal of façade easements granted to the National Architectural Trust (NAT).
The property is in Boston’s designated South End historic district and is subject to the South End Landmark District Residential Standards and Criteria (South End Standards and Criteria). The court described those rules as requiring approval by the South End Landmarks Commission (commission) for almost all exterior alterations to any property within the district, and providing specific repair criteria for many elements of the exterior.
The court weighed the credibility of competing appraisals’ assumptions and conclusions about whether and to what extent the preservation easement reduced the value of the property any more than the South End Standards and Criteria did. The court found the weight of evidence convincing that that the restrictions of the NAT façade easement are “basically duplicative of, and not materially different from, the South End Standards and Criteria.”
The Kaufmans’ appraiser, Hanlon (who had been recommended by NAT), concluded the façade easement reduced the property’s value prior to the easement donation by 12%, allowing a deduction of $220,800. The IRS appraiser, Bowman, concluded the easement caused no reduction in the property’s “after” value, yielding zero deduction.
The court found the IRS appraisal far more credible and decided the façade easement had no deduction value. The court did not like Hanlon’s starting point of accepting a general 15% reduction in value as proposed in the now-infamous IRS article, “Facade Easement Contributions,” by Mark Primoli (Primoli article). Hanlon had also modified this general number by assigning a percentage value to each separate “burden” that he thought were imposed by the easement (with the sum of the assigned percentages equal to 15%), and then adjusting the weight of those separate burdens by the differences he identified between the restrictions in the Kaufman preservation easement as compared to those imposed by the South End Standards and Criteria. The court wrote, “Even were we to accept that he identified the constituent burdens constituting the overall burden imposed by a facade easement, we accept neither his 15% starting point nor the relative percentages that he assigned to each constituent burden.” While the court did not entirely reject Hanlon’s concepts it did find “the lack of general acceptance and the uniqueness of his method are facts relevant to our determining its reliability … support[s] our conclusion that his method is not reliable.”
The court found credible the opinions of IRS’s appraiser, Bowman, that the easement did not change the highest and best use of the property (which Hanlon had conceded), there was no significant difference between the restrictions in the NAT easement and the underlying South End Standards and Criteria “that would likely be recognized by a typical buyer” [emphasis added], and no evidence of diminution in value or difficulty in marketing or financing preservation restriction-encumbered properties. The court also gave credence to Bowman’s testimony that insurance and maintenance costs for the property would not be greater than for other property in the historic district owned by a prudent owner or subject to mortgage lender requirements.
Because of the infinite percentage difference between the claimed deduction ($280,000) and what the court found to be appropriate ($0), it found that an accuracy-related penalty of 40% on account of a gross valuation misstatement (Code Sec. 6662(h)(1) and (2)(A)(i)) could be imposed unless the “reasonable cause exception” (Code Section 6664(c)) applies. The reasonable cause exception would not be available for a gross valuation overstatement of a charitable contribution deduction unless the claimed value of the property was based on a “qualified appraisal” by a “qualified appraiser” and the taxpayer made a good-faith investigation of the value of the contributed property. (Code Sec. 6664(c)(2) and (3); sec. 1.6664-4(h), Income Tax Regs.) The court, while finding that Hanlon and his appraisal minimally met the standards of a qualified appraiser and appraisal, did not find that the Kaufmans conducted a good faith investigation.
The court did not say what would constitute a good faith investigation but did say that the Kaufmans had not met their burden of proving that they had conducted one by simply (a) believing that the preservation easement was more restrictive than the South End Standards and Criteria, (b) having their accountant review the appraisal and tell them it was “consistent in form with other real estate appraisals that he had seen,” (c) relying on the Primoli article’s range of values, and (d) expressing concern to a NAT representative about resale value. The court held it against Mr. Kaufman that he is “a sophisticated consumer of statistical analyses” and opined he had good reason to question the appraisal’s value conclusion.
In the alternative, the court held that an accuracy-related penalty on account of negligence may be imposed. In addition to the absence of a good faith investigation, the court found negligence based on the Kaufmans’ certification to their lender, after getting the Hanlon appraisal, that “[t]he easement restrictions are essentially the same restrictions as those imposed by current local ordinances that govern this property.” The court brushed aside the Kaufmans’ attempt to say that they had not really read what they signed, saying that at the very least they were careless, “whether in not reading what they signed, in not reading carefully what they signed, or, in Gordon Kaufman’s case, in reaching a subjective conclusion in willful ignorance of relevant data.”
Decision available at http://www.ustaxcourt.gov/InOpHistoric/KaufmanMemo.Halpern.TCM.WPD.pdf
Iowa Court of Appeals, Nos. 3-1154/13-0328, March 26, 2014: Certiorari exclusive remedy for project permit approval in historic district.
A permit (COA) is required for certain exterior construction in the historic districts of the unincorporated villages known as Amana Colonies. The permit decision is made by the Amana Colonies Land Use District Board of Trustees (Board). The Cutlers applied for and received a COA after months of hearings and project plan revisions. Opponents of the project, aggrieved residents of the Amana Colonies, challenged the Board decision in district court and sought summary judgment. That court held that the exclusive remedy to challenge the Board’s decision was by certiorari and that the court lacked jurisdiction over the declaratory judgment action. The district court also concluded, in the alternative (if it had jurisdiction), that the Board did not act unreasonably, arbitrarily, or capriciously in approving the project. The appeals court affirmed the lower court decision.
First, the appeals court ruled that the Board’s decision was “quasi-judicial” and therefore could be challenged by a certiorari action under the Iowa Rule of Civil Procedure. The Board’s determination in a COA decision was quasi-judicial because it required the exercise of discretion in finding facts and applying the law, like a zoning decision. Then the court held that certiorari is the exclusive remedy to challenge this type of land use decision, when only the grant or denial of a particular application is at issue. Declaratory judgment would be available only if the validity of the ordinances were at issue. The court therefore upheld the dismissal of the action.
The court went on, however, to also affirm the lower court’s decision that even if declaratory judgment were an available remedy, the Board’s grant of the permit would stand because, on the undisputed facts, the Board’s decision was facially valid and a rational exercise of its authority
Decision available at http://www.iowacourts.gov/About_the_Courts/Court_of_Appeals/Court_of_Appeals_Opinions/Recent_Opinions/20140326/3-1154.pdf.
Mich. Court of Appeals, No. 302385, March 25, 2014: Land trust did not tortuously interfere with owners business relationships.
In this litigation, the Glasses, who were subject to an unsuccessful attempt by the IRS to disallow a federal income tax deduction for a conservation easement the Glasses donated to the Little Traverse Conservancy Trust (LTC) (Glass v Comm’r of Internal Revenue, 471 F3d 698, 706 (CA 6, 2006), sued LTC and the Van Lokerens (neighbors and Mary Ann Van Lokeren became a member of the LTC board). At issue were actions of LTC and the Van Lokerens in connection with the Glasses’ attempt to sell land subject to the conservation easement. The Van Lokerens alleged these parties intentionally interfered with the Glasses’ sale of their property, tortuously interfered with the Glasses’ “business/economic relationships,” conspired to maliciously prosecute the Van Lokerens in a 2008 case brought by LTC and the Van Lokerens in connection with the attempted sale, and abused process by placing and maintaining a lis pendens on Glass’s property. The court affirmed a lower court decision and dismissed the Glasses’ claims.
The legal issues in this case are not particularly about conservation easements or land trusts, but the facts may offer perspective to holders of conservation easements and owners of land subject to conservation easements about activities by a land trust that could be alleged to be — but in the end were found not to be — tortuous interference with a business relationship, or creating a libel (or cloud) on title. The facts and circumstances can be found in the unpublished decision at http://publicdocs.courts.mi.gov:81/opinions/final/coa/20140325_c302385_64_302385.opn.pdf.
Texas Court of Appeals, 4th Dist., No. 04-13-00221-CV, March 19, 2014: No abuse of discretion if board relies on non-expert opinion of neighbors in demolition decision.
Reilly sought a permit from the City historic preservation officer to demolish a house in a historic district in San Antonio. When the permit was denied, Reilly appealed to the Board of Adjustment, which also denied the demolition permit. Reilly appealed that decision in court, and the court overruled the Board. The Board then appealed to the Court of Appeals.
To obtain a demolition permit for a structure in the historic district, the City’s Unified Development Code requires the owner to establish “by a preponderance of the evidence that the structure or property has undergone significant and irreversible changes which have caused it to lose historic, cultural, architectural, or archaeological significance.” (Note that the Code authorizes the denial of a demolition permit, not merely a demolition delay.) The issue at trial and on appeal was whether the Board abused its discretion by finding that Reilly did not meet this burden.
At the Board’s hearing, Reilly presented evidence that the house had lost its significance. Local residents testified in opposition, offering information about the property’s past and current significance to the community. On appeal, Reilly’s primary argument was that the evidence presented by the residents was not relevant or competent because the residents were not experts. Reilly argued the Board was required to rely on the opinions of experts to evaluate loss of significance.
The court upheld the Board and the denial of a demolition permit, and overturned the lower court decision. The court held that the Board did not act improperly to listen to the non-expert testimony of the residents and to use it as a legitimate factor to decide that the house retained significance. The court wrote that the board was not required to apply strict judicial rules of evidence, and that even under those rules, the residents’ testimony was “in all likelihood permissible” (“A non-expert witness may offer opinion testimony when it is rationally based on his perception and helpful to a clear understanding of his testimony or the determination of a fact issue”). Further, the court noted that the City Code requires demolition decisions to be based on the Secretary of the Interior’s standards and guidelines for archaeology and historic preservation, and that the Guidelines “emphasize the overall importance of public participation in the historic preservation process…”
The court’s own decision making process followed cited precedents that the board’s decision is presumed to be legal; the party attacking it bears the burden of establishing that the board clearly abused its discretion; a trial court may not substitute its judgment for the judgment of the board as to factual findings; and – most significantly – that a party challenging a board’s factual findings “must establish that the board could have reasonably made only one decision, and not the decision it made.” [Emphasis added]
The decision is available at http://www.search.txcourts.gov/SearchMedia.aspx?MediaVersionID=9f52f13f-8848-45f6-9e1c-0242487d12ca&MediaID=b45e7d4d-77fb-407c-ad6f-823e92a71747&coa=%22%20+%20this.CurrentWebState.CurrentCourt%20+%20@%22&DT=Opinion.
US Tax Court, 142 TC 7, March 11, 2014: No federal tax deduction for conservation easement when state law limits easement to 99 years.
Wachter, in a bargain sale transaction, donated to a land trust a portion of the value of a conservation easement on North Dakota land. Wachter claimed a tax deduction for donation of a qualified conservation contribution. The IRS denied the deduction, saying that the conservation easement did not satisfy the requirements of the Tax Code and Treasury Regulations that the easement must be enforceable in perpetuity. The IRS argued that North Dakota law limits the term of most easements to 99 years, and therefore this conservation easement would not exist in perpetuity. Wachter argued that the 99-year limitation qualifies as a “remote future event” under Treas. Reg. section 1.170A-14(g)(3), thereby coming within an exception or defense to the perpetuity requirement.
The court sided with the IRS. It noted that North Dakota is the only State that has a law that provides for a maximum duration that may not be overcome by agreement. It wrote that logically, the event termination of the North Dakota conservation easement is not remote, but on the contrary, “On the dates of the donations it [termination] was not only possible, it was inevitable.” The court cited prior tax court and other federal court decisions defining “so remote as to be negligible” as “`a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’”, and “`a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance’.”
Because other questions of fact remained unresolved between Wachter and the IRS, the court declined to issue a summary judgment ruling on another issue, whether Wachter provided to the IRS with a “contemporaneous written acknowledgment” that met the requirements of Tax Code section 170(f)(8) and Treasury Regs. section 1.170A-13(f)(15).
The decision is available at http://www.ustaxcourt.gov/InOpHistoric/WachterDiv.Buch.TC.WPD.pdf.
U.S. Court of Appeals, Tenth Circuit, No. 12-9009, March 7, 2014: Highest and best use in easement appraisal must be most reasonably probable in the reasonably near future.
Esgar appealed the decision of the Tax Court in Esgar v. Commissioner (Esgar I), US Tax Court, 2012 TC Memo 35, February 6, 2012. In Esgar I the Tax Court calculated the fair market value of a donated conservation easement. In doing so it determined the “before” value of the property using as the highest and best use the property’s present use as agricultural, and rejected Esgar’s claim that highest and best use was gravel mining, a hypothetical use. The Esgar I court also held the income from the sale of Esgar’s transferable tax credits from the State of Colorado was a short term capital gain because the time Esgar held the tax credit (two weeks) was the relevant holding period, not Esgar’s holding period for the underlying property.
On appeal the court upheld the Tax Court regarding the definition of highest and best use, saying the appropriate standard is “the use that was most reasonably probable in the reasonably near future.” The court cited prior rulings that a highest and best use, if it is not the current use, must be realistic, a use “for which the property is adaptable and needed or likely to be needed in the reasonably near future,” and one that would occur with reasonable probability and “closeness in time.” The court said this is the same standard as required by Treasury Regulation § 1.170A-14 (h)(3)(ii). The court found it was not clear error for the Tax Court to determine that gravel mining was not the highest and best use but the current use, agriculture, was. The court also held that it is acceptable to refer to eminent domain case decisions for precedent in determining highest and best use in qualified conservation contribution cases.
Before reaching this conclusion the court considered Esgar’s contentions about the appropriate rules of evidence. It found that section 7491 of the Tax Code did not shift the burden of proof to the IRS, because both parties produced evidence. The court also found that the Tax Court was reasonable in finding that preponderance of evidence favored the IRS.
The court also upheld the Tax Court holding that the income from the sale of Colorado conservation easement tax credits was a short term capital gain.
The decision can be found by searching at https://www.ca10.uscourts.gov/opinion/search.
Mass. Appeals Court, No. 13-P-145, February 28, 2014: No municipal duty to enforce preservation easement; no standing for mandamus declaratory judgment.
Van Liew brought a mandamus action against the Selectmen of Chelmsford, MA, to require them to enforce a preservation easement. (In Massachusetts, Preservation easements and conservation easements are governed by the same statute, M.G.L. chapter 184, section 32, and referred to as “restrictions”.) The easement, contained in a deed when the Town sold the property, prohibited constructing any additional buildings other than “barnlike structures and silos … [with] the exterior appearance of farm buildings and barns.” A subsequent owner, Epsilon Group, LLC (“Epsilon”) obtained permits to construct a two-story office building, a parking lot, and other structures on the property. The Selectmen voted not to take legal action to enforce the preservation restriction. (These facts are taken from the Superior Court opinion, civil action 12-1581, Nov. 9, 2012) and the recorded easement.) Van Liew contended that the proposed construction violates the easement and that Selectmen have a nondiscretionary statutory duty to enforce the easement. He sought a writ of mandamus compelling the Board to initiate legal action to enforce the easement and declaratory relief to that same effect. The trail court held Van Liew lacks standing to seek mandamus because the Selectmen have no “public duty” to enforce the easement. It also said Van Liew was not entitled to a declaratory judgment because did not have a “legally cognizable injury.” (According to his appellate brief, Van Liew is a resident of the Town, but it makes no mention of where he lives in relation to the easement property.) The trial court granted the Town’s motion to dismiss. Van Liew appealed.
The appeals court upheld the trial court’s decision. As to mandamus the court wrote, “As the judge correctly determined, the public right exception is unavailing here because enforcement of the preservation restriction, rather than a duty required by law, is discretionary. See G. L. c. 184, § 32.” As to declaratory judgment, the court agreed that the absence of a “particularized interest” meant that Van Liew has no legally cognizable injury.
The court’s decision was issued under a rule that it may be cited for its persuasive value but not as binding precedent.
The decision is available at Google Scholar at http://scholar.google.com/scholar_case?case=12244023845822915253&q=Van+Liew+v.+Board+of+Selectmen+of+Chelmsford&hl=en&as_sdt=40000006&as_vis=1 and is currently also at http://weblinks.westlaw.com/result/default.aspx?action=Search&cnt=DOC&db=MA-ORCS-WEB&eq=search&fmqv=c&fn=_top&method=TNC&n=1&origin=Search&query=CO%28APPFTT%29+%26+DA%2802%2F28%2F2014%29+%26+TI%28VAN+LIEW%29&rlt=CLID_QRYRLT89787625973&rltdb=CLID_DB96460625973&rlti=1&rp=%2Fsearch%2Fdefault.wl&rs=MACS1.0&service=Search&sp=MassOF-1001&srch=TRUE&ss=CNT&sskey=CLID_SSSA94475625973&vr=1.0. Because of the limitations of the ruling, the decision is unlikely to appear the Massachusetts Trial Court Law Libraries website http://masscases.com/.
IRS, Written Determination 201405018, January 31, 2014: 501(c)(3) status of organization that received three conservation easements revoked due to numerous irregularities.
Private Letter Ruling 201405018 available at http://www.irs.gov/pub/irs-wd/1405018.pdf. A full description and explanation of the revocation written by Prof. Nancy A. McLaughlin is featured at the Nonprofit Law Prof Blog posting “IRS Rules Tax-Exempt Status of Organization Accepting Conservation Easements Should be Revoked,” February 5, 2014.
Thanks to Prof. McLaughlin for bringing this Letter Ruling to public attention.
US District Court, M.D. Pennsylvania, January 13, 2014, No. 3:11cv514: Attorneys fees and costs approved for easement defense.
As reported here in August 2013, the court had previously found that a conservation easement held by Norcross unambiguously bans fracking. Norcross then sought payment from Stockport of Norcross’ attorneys fees and court costs. Section 7.2 of the Easement provides, in relevant part, that “any costs incurred by Grantee [Norcross] in enforcing the terms of this Easement against Grantor [Stockport], including, without limitation, costs of suit, expert witness fees and attorneys’ fees… shall be born by Grantor.” Stockport objected to a portion of the fee payment sought by Norcross as excessive or unnecessary because they were not incurred in “enforcing” the terms of the Easement. The court found such fees were reasonable and therefore ordered Stockport to pay them.
The court’s memorandum and order is available at http://courtweb.pamd.uscourts.gov/courtwebsearch/pamd/tW90JNKhV1.pdf#xml=http://courtweb.pamd.uscourts.gov/courtweb/PDFResult.aspx.
U.S. Tax Court, T.C. Memo. 2013-266, November 19, 2013: No historic preservation easement deduction when donor doesn’t have right to restrict entire exterior.
A historic preservation easement was donated by a partnership (the “Partnership”) on the façade of a building divided for ownership purposes into two segments: an “Office Property”, which consists of the first 14 floors of the property, and the “Residential Property”, which consists of residential condominium units on the top 6 floors of the property. The Partnership owns the Office Property. The owner(s) of the Residential Property did not join in the preservation easement.
Before granting the preservation easement the owners of the Office Property and the Residential Property entered into an agreement that set out their respective rights and obligations as to the building (the “Amended Declaration”). That agreement defined the capitalized word “Façade” to mean only two sides of the building exterior. Under that definition, the owner of the Office Property owns the “Facade” and the Amended Declaration said that the owner of the Office Property has the sole right to grant an easement in or dedicate the “Façade” to or for the benefit of any private, city, county, state or federal historic preservation agency or trust. It also said that neither owner could materially alter the “Façade” without the consent of the other owner.
The historic preservation façade easement defined “Protected Façade” differently from the Amended Declaration’s definition of “Façade”. It said “Protected Façade” means “the existing facades on the front, sides and rear of the Building and the measured height of the Building.” Thus, the preservation easement protected more of the building than the Partnership owned or was explicitly allowed by the Amended Declaration to grant an easement on. That easement said that before making any change to the “Protected Facades” it was necessary to obtain the consent of the easement holder.
The sole question before the court was whether the donation of the preservation easement met the test for a “qualified conservation contribution” under the Tax Code. Section 170(h)(4)(B) of the Code requires, among other things, that in order for a façade easement on a certified historic structure to qualify it must preserve the entire exterior of the building, including the front, sides, rear, and height of the building. While the preservation easement’s restrictions covered the entire exterior (as defined by the Tax Code), the question before the court was whether the grant by Partnership could effectively protect the entire exterior given the ownership position of the Partnership and its rights under the Amended Declaration.
The court explained that it would look to State law to determine the nature of the property rights and whether under State law the Partnership could grant an easement that restricted the entire exterior of the property.
The court first concluded that the partnership only had ownership rights to the “Façade” as defined by the Amended Declaration. It then held that the Partnership did not gain the additional right to grant a preservation easement on the parts of the building that were not the “Façade” (as so defined) by dint of the provision in the Amended Declaration that said that the owner of the Residential Property could not make certain alterations to the property without the prior written consent of the Partnership as owner of the Office Property. The court said that that provision only limited alterations that will “materially alter the Façade” of the property. Accordingly, the court held, the Partnership does not have the right to restrict alterations to the two sides of the building not covered by the “Façade” (as defined by the Amended Declaration) or certain excluded portions of the two sides included in the defined “Façade”. Because the Partnership lacked that right, they could not legally contribute what they did not have, i.e., a preservation restriction that would meet the test for a qualified conservation contribution eligible for a tax deduction.
The court did not reach the question of whether under Illinois State law, an ownership right in the entire exterior of a building is required to grant a preservation easement on it, because the court reached its conclusion based on the limitations of the Amended Declaration.
Decision available at https://www.ustaxcourt.gov/InOpHistoric/61YorkMemo.Laro.TCM.WPD.pdf.
US Tax Court, T.C. Memo. 2013-254, November 12, 2013: Preservation easement deductible despite similar restrictions in local New York City historic preservation law.
The court held that this façade easement for a “certified historic structure” qualifies for a tax deduction despite some overlap with New York City’s Landmarks Law. The decision offers reasons that the circumstances in this case differ from those in prior tax court decisions that denied a deduction for a façade easement for buildings subject to New York’s Landmarks Law.
The Gorra property, a “certified historic structure,” is in a Historic District of New York City. The Gorras granted a historic preservation façade easement to the National Architectural Trust, now known as the Trust for Architectural Easements (Trust). Under the easement, the Trust’s consent, in its sole discretion, is required for any change to the existing facades on the front, sides and rear of the building and the “measured height” of the building.
The building is also subject to the City’s Landmarks Law (N.Y. City Admin. Code sec. 25-303 et seq.). The Landmarks Law requires property owners to keep designated properties in good repair and to obtain approval from the New York City Landmarks Preservation Commission (LPC) before starting alterations that that require a buildings permit or will affect the building’s exterior (other than height).
In this case the IRS said that because the easement doesn’t preserve the property any more than local law does, the easement didn’t satisfy the tax law requirement that to be eligible for a deduction, a donated easement must be exclusively for “conservation purposes” (as defined by the law). The Tax Code (Section 170(h)(4)(A)(iv)) says preservation of a historically important land area or a certified historic structure is a valid conservation purpose, but it doesn’t prohibit a deduction when local laws aim at the same goal. The Gorras argued in the alternative that (1) the question of whether a conservation easement or preservation easement is any more restrictive than local development laws should only address whether the easement causes any reduction in value of a property, and (2) their easement is more restrictive than the Landmarks Law.
Without explicitly analyzing whether the interplay of local law and preservation easements should be a question of conservation purpose, the court agreed with the Gorras that the conservation purposes test was satisfied because of the particulars of this easement and the Landmarks Law, and the monitoring record of the Trust as compared with the LPC. To do so, the court had to distinguish this case from earlier tax court decisions and to assess the monitoring record differently than had been done in the past.
The differences between this easement and the Landmarks Law cited by the court included:
- Protected features: the easement restricted the height and open spaces; the law does not.
- Decision process & criteria: the easement gives the Trust “unlimited” discretion as to façade alterations; LPC’s decision making has to follow certain specific guidelines, their approval is based on whether an alteration remains consistent with the exterior architectural features of neighboring improvements, and their decisions may be appealed.
- Height: the easement requires Trust consent for changes to height; the Landmarks Law doesn’t regulate or limit the height and bulk of buildings or the area of yards and other open spaces.
- Monitoring: the Trust “actively” inspects annually and keeps a photographic record; the LPC primarily relies on complaints or building department procedures and doesn’t regularly photograph.
- Enforcement access: because the easement restricts the “open spaces” of the property as well as the facades, the Trust’s monitoring visits require an appointment to access the property’s backyard. [Editorial note: protection of the backyard would not be a “conservation purpose” unless it were “a historically important land area”.]
Despite the negative judgments expressed by the tax court in prior decisions about Trust and its record of performance’s, and the injunction imposed by the US District Court for District Of Columbia on the Trust prohibiting it from various activities regarding historic preservation easements, the court nevertheless found that the Trust’s monitoring and enforcement record as to the Gorra property was more burdensome and effective than the LPC’s procedures and record.
The court distinguished these facts and circumstances from those of prior tax court decisions in which a façade easement was held not to require more protection than the New York City Landmarks Law, as follows:
- 1982 East, LLC: The Gorra easement protects the rear of the building, while the easement in 1982 East, LLC did not.
- Scheidelman: The Gorra easement limits the height of the building, while the Scheidelman easement did not, although the court noted that the Scheidelman donation was completed in 2004, before the law required protection of a certified historic structure’s height to qualify for a deduction.
- Dunlap: The Dunlap property was designated by the City to be in “a sound, first-class condition,” and thus was subject to a higher standard of preservation than the Gorra property, which was not so designated, so the Dunlap easement did not add anything.
- Herman: The Gorra easement protects the building height, front, side, rear, and the building’s surrounding property, while in Herman the donation was only of unused development air rights.
The court noted that in Simmons v. Commissioner, it found that the easements were more restrictive than Washington, D.C. law because even though substantively not more restrictive, “the easements still added an additional level of approval before any changes could be made to the properties.”
The court concluded that the appraisal done for the Gorras overvalued the easement. The appraiser testifying in support of the Gorras’ claimed deduction of 9% of value of the property before the easement said, “There’s no scientific way to break down the parts” of the 9% diminution in value. The appraiser for the IRS said there was zero diminution in value.
Finding the Gorra easement more restrictive than the Landmarks Law, the court agreed there was a reduction in value, but decided it was 2%.
Because the Gorras’ claimed deduction was more than 200% of the court’s determination of value, the taxpayer was liable for a 40% penalty for gross valuation misstatement. The court noted the reasonable cause exception does not apply in the case of gross valuation misstatements for charitable donations.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/GorraMemo.Kerrigan.TCM.WPD.pdf.
This decision was first brought to my attention by Nancy McLaughlin’s post at Nonprofit Law Prof Blog.