COMMISSIONER OF INTERNAL REVENUE SERVICE v SIMMONS

US Court of Appeals, District of Columbia Circuit, No. 10-1063, June 21, 2011: upheld the US Tax Court 2009 ruling in Simmons v. Commissioner, that a historic preservation façade easement was granted in perpetuity even if it allowed the Grantee to consent to façade changes and did not spell out what would happen to the easement on dissolution of the Grantee, and that the before-and-after appraisal was “qualified” even though the “after” value was based on subjective judgment of the “mindset” of buyers and sellers.

The Appeals Court review was only for clear error on the part of the Tax Court, and the Appeals Court found none.

Perpetuity: The IRS Commissioner contended that because a clause in the easement stated “nothing herein contained shall be construed to limit the Grantee’s right to give its consent (e.g., to changes in a façade) or to abandon some or all of its rights hereunder,” the Tax Court was wrong in finding that the Simmons easement qualified as being granted exclusively for conservation purposes under Internal Revenue Code. The Appeals Court said this easement clause has “no discrete effect upon the perpetuity of the easements”. The Appeals Court was evidently impressed by the amici briefs’ reasoning that “this type of clause is needed to allow a charitable organization that holds a conservation easement to accommodate such change as may become necessary ‘to make a building livable or usable for future generations’ while still ensuring the change is consistent with the conservation purpose of the easement.” (Arguably the Court’s reasoning here could apply to the need to uphold the conservation purposes of open space or agricultural easements by having flexibility to meet changed conditions.)

The IRS also asserted the Tax Court should have found fault with the failure of the easement to explicitly provide for the “perpetuation of the easements” if the Grantee ever ceases to exist or simply abandons its right to enforce the easements. The Appeals Court reasoned that the remote possibility of abandonment of the easement by the Grantee did not mean that the easement was not enforceable in perpetuity, because even if the easement did not “spell out precisely what would happen” if the Grantee dissolved, local (i.e., District of Columbia) law provides the easements would be transferred to another organization that engages in “activities substantially similar to those of” the Grantee. It was also significant to the Court that the State Historic Preservation Officer testified that upon dissolution the easement initially reverts to the District of Columbia, which then seeks to assign it to a conservation organization. The Appeals Court wrote, “Accordingly, the deeds do all the Commissioner can reasonably demand to ‘prevent’ uses of the properties inconsistent with conservation purposes, as required by Treasury Regulation § 1.170A-14(g)(1).”

In explaining its decision the Appeals Court also found it persuasive that the Grantee’s fear of action by the IRS against the Grantee’s tax exempt status and status as a qualified holder of conservation easements make it unlikely the Grantee would not enforce the easement as long as the Grantee sought to remain in operation.

Lastly, regarding perpetuity, the Appeals Court noted that even if the Grantee consented to ahistorical changes in the façade, the fact that the easement property is in a historic district that strictly regulates façade changes makes such changes unlikely. (The Appeals Court thereby turned on its head the argument sometimes made that donation of an easement that forbids something that is already forbidden by state or local law is not really of any value. See 1982 East, LLC  v Commissioner of Internal Revenue (aka Asser v Commissioner), US Tax Court, T.C. Memo. 2011-84, April 12, 2011.

Qualified Appraisal: The IRS argued the appraisal was not “qualified” as required by the Code because it failed to explain the “method of valuation” used and failed to include adequate detail to provide a substantive basis for the valuation. The Appeals Court determined that it was not clear error on the part of the Tax Court to accept the appraisal as qualified because for the “before” value the appraiser consulted sales of similar properties and  identified some of these sales in the appraisals, and for the “after” value the appraiser “spoke with and considered ‘the mindset of competent buyers and sellers’ and took account of the ‘considerations they have actually had, or are likely to have, in the buying or selling of a property encumbered by a façade easement.”

The Tax court has distinguished the Simmons appraisal, and it’s reasoning for accepting it, from the appraisal in Scheidelman v. Commissioner, 2010 TC Memo 151, July 14, 2010.

Decision available at http://www.cadc.uscourts.gov/internet/opinions.nsf/77D8B9AAA75C4697852578B60051AFAF/$file/10-1063-1314257.pdf.

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