61 York Acquisition, LLC v. Commissioner

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.

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