Wall v. Commissioner of Internal Revenue

US Tax Court, Memo 2012-169, June 18, 2012: Historic preservation easement not qualified for tax deduction because mortgagees have prior to claim to sale and insurance proceeds after extinguishment.

The taxpayer granted a historic preservation easement (façade easement) on his Illinois home and claimed a tax deduction for a “qualified conservation contribution”. The IRS denied the deduction because (among other things) the easement did not guarantee that the donee of the easement would receive all of the proportionate share of the proceeds of a sale or insurance proceeds following an extinguishment of the easement as required by Treas. Regs. section 1.170A-14(g)(6) as interpreted by the Tax Court in Kaufman v. Commissioner, 134 T.C. 182 (2010), reconsideration denied, 136 T.C. 294 (2011). The Tax Court agreed with the IRS.

The provisions of the easement regarding post-extinguishment proceeds included the following provisions:

“Net proceeds shall include, without limitation, insurance proceeds, condemnation proceeds or awards, proceeds from a sale in lieu of condemnation, and proceeds from the sale, financing or exchange by … [petitioner] of any portion of the Premises after the extinguishment, but shall specifically exclude any preferential claim of a Mortgagee under Section 22.” [Emphasis added.]

Section 22 of the easement said, “If a mortgage grants to a Mortgagee the right to receive the proceeds of condemnation proceedings arising from any exercise of the power of eminent domain as to all or any part of the Premises or the right to receive insurance proceeds as a result of any casualty, hazard, or accident occurring to or about the Premises, the Mortgagee shall have a prior claim to the insurance and condemnation proceeds and shall be entitled to same in preference to … [the donee] until the mortgage is paid off and discharged, notwithstanding that the mortgage is subordinate in priority to this Preservation Easement.” [Emphasis added.]

The property was subject to mortgages that assigned insurance and condemnation proceeds to the lender. The lenders “acknowledgments” of the easement (which the Court characterized as purportedly subordinating the lenders’ mortgage rights) essentially repeated the foregoing portion of section 22 of the easement agreement.

The taxpayer appeared before the Court pro se, and did not respond to the IRS’ motion for summary judgment.

Decision available at http://www.ustaxcourt.gov/InOpHistoric/WALLMemo.TCM.WPD.pdf.

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