US Court of Appeals 2nd Circuit, Nos. 10-3587-ag(L), 10-5316-ag(XAP), June 15, 2012: Mandatory cash contribution with qualified historic preservation easement or conservation easement is deductible; appraisal that states method and basis of valuation is “qualified” even if unpersuasive.
In the case of Scheidelman and Perry v. Commissioner, the Tax Court (T.C. Memo, no. 15171-08, decided, July 14, 2010) held that (1) a mandatory cash payment by taxpayers to a façade easement grantee (a stewardship contribution) was not a “contribution or gift” under Income Tax Regulation 1.170A because taxpayers did not sustain their burden of proving either that the payment was not made as a quid pro or, if they did receive something of substantial value, that the payment exceeded the value of the benefits received, and (2) the application of a percentage to the fair market value before conveyance of a facade easement, without explanation, cannot constitute a method of valuation contemplated under Income Tax Regulations. Scheidelman appealed.
The Court emphatically overturned the Tax Court on the deductibility of the stewardship contribution. The Court acknowledged that the stewardship contribution could be seen as a “prerequisite” to the acceptance of the easement donation by the recipient (the “grantee” or “donee”, in this case the National Architectural Trust). The Court found that in exchange for her donation of the easement, Scheidelman received no benefit from the donee (distinguishing prior cases involving health or adoption services). The Court wrote, “A donee’s agreement to accept a gift does not transfer anything of value to the donor, even though the donor may desire to have his gift accepted, and may expect to derive benefit elsewhere (such as by deductibility of the gift on her income taxes).” The Court recognized stewardship contributions as “commonplace” parts of easement donations that enable appropriate monitoring of compliance with the easement. It wrote, “When a cash contribution (even mandatory in nature) serves to fund the administration of another charitable donation, it is likewise an ‘unrequited gift.’” [Editorial note: The logic of the Court's analysis would apply equally to all "qualified conservation contributions": historic preservation easements and conservation easement.]
Regarding the appraisal, the Court remanded the case to the Tax Court for further determination of the value of the easement, but held that the appraisal submitted by Scheidelman was “qualified”. The Tax Court had decided that the appraisal was not “qualified” because it “insufficiently explained the method and basis of valuation” and failed to provide the “specific basis for the valuation”.
The Appeals Court found that the appraisal both stated the method it used (the so-called “before-and-after” method) and explained how that method was applied. The Court wrote, “For the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied–it remains a method, and [the appraiser] described it. The regulation requires only that the appraiser identify the valuation method ‘used’; it does not require that the method adopted be reliable.”
The Court also found that the appraisal did explicitly state the basis for the valuation (“IRS publications (since removed from circulation), tax court decisions, [the appraiser’s] past valuation experience, and the location of the house in the regulatory environment of New York City”). The Court found this description like the basis for valuation upheld in Simmons v. Commissioner, 646 F.3d 6 (D.C. Cir. 2011), if less persuasively supported by statistical data. The Court distinguished Scheidelman’s appraisal from the one held not to be “qualified” in Friedman v. Commissioner, T.C. Memo. 2010-45, which did not state the valuation method used or the basis for appraised value.
Decision available at http://law.justia.com/cases/federal/appellate-courts/ca2/10-3587/10-3587-2012-06-15.html.