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.