Chandler v. Commissioner

U.S. Tax Court, 142 T.C. 16, May 14, 2014: Preservation easement valuation zero in historic district. 2006 carryover deduction claim subject to accuracy penalty.

At issue was the valuation for federal income tax deduction purposes of historic preservation façade easements on two single-family residences in Boston’s South End Historic District.  The question was whether the burdens imposed by the façade easements were different from those imposed by the historic district regulations, and if so, the affect of the difference on the value of the property after the donation of the façade easement.  In this case, the court determined that while there were differences between the burdens of the easement and those of the historic district, the differences made no difference in the value of the properties. Hence, the court found the façade easements had zero value and no deduction was allowed.

The court recognized differences between the scope, monitoring, and enforcement of the façade easement and historic district restrictions, but said, “… a typical buyer would perceive no difference between the two sets of applicable restrictions here.” Accordingly, the court found that, in the before and after analysis of fair market value, there would be no difference between the “after” value of a South End Historic District residence with a façade easement or without one. The result was that the façade easement donation had no value and no tax deduction could be taken.

The perception of the easement by potential buyers as a decisive factor in valuation was something that the court implied is present in residential property but not (or not decisively) in commercial property. The court noted that historic preservation easements on commercial property impair the value more tangibly than they do on residential property because of the easement’s affect on future cash flows.  “Construction restrictions affect residential property values more subtly,” the court wrote, and do so “only to the extent their unique restrictions diminished petitioners’ property values.” The implication that can be taken is that to the court, residential property values are not based on bottom-line objective facts but on market perception.

The denial of the tax deduction meant that taxpayer was liable for a 40% gross valuation misstatement accuracy-related penalty under Internal Revenue Code section 6662 unless some exception applied. The taxpayer first claimed a portion of the charitable contribution deduction on their 2004 return but had also claimed the deduction in 2005 and 2006 as a carryover.  The Pension Protection Act of 2006 (PPA) changed tax law for all returns filed after July 25, 2006, by eliminated the ability of taxpayers to avoid the penalty under certain circumstances if they made the misstatement in good faith and with reasonable cause (the “reasonable cause exception”).  The taxpayer argued that to the extent their underpayment of 2006 (post-PPA) tax resulted from the carryover of charitable contribution deductions they first claimed on their 2004 return (pre-PPA), denying their right to raise a reasonable cause defense would amount to improperly retroactively applying the PPA.

The court said this was a novel issue, but decided it against the taxpayer, resulting in a 40% gross valuation misstatement accuracy-related penalty as to the taxes due for 2006. As to the taxes due for 2004 and 2005, applying the pre-PPA rules, the court found the taxpayer eligible for the reasonable cause exception because the deduction claim was based on  a qualified appraiser’s qualified appraisal (even if an erroneous one) and the taxpayer made a good-faith investigation of the property’s value. The court found that even well educated persons like the taxpayer have no experience valuing easements and “would not know where to start to value a conservation easement.” They are entitled to give “substantial weight” to the qualified appraisal and “rely heavily on the opinions of professionals.”  The taxpayer’s reliance on the appraisal and corroborating opinion of an experienced accountant amounted to a good-faith attempt to determine the easements’ values. Therefore no penalty was due for misstatement of the charitable deduction for tax years 2004 and 2005. The court distinguished this situation from one such as that in Kaufman v. Commissioner T.C. Memo 2014-52, (Kaufman IV), where the taxpayer had reason to doubt the appraisal.

Decision available at http://www.ustaxcourt.gov/InOpHistoric/ChandlerDiv.Goeke.TC.WPD.pdf.

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