Zarlengo v. Commissioner

U.S. Tax Court, T.C. Memo. 2014-161, August 11, 2014: Recording of NY easement determines date of compliance with tax regs. Substantial compliance with appraisal date requirement adequate.

Marco Zarlengo (“Zarlengo”) and his ex-wife Merilyn Sandin-Zarlengo (“Sandin-Zarlengo) signed a “facade conservation easement” (historic preservation easement) in 2004, and it was recorded in 2005. They each claimed a qualified conservation contribution deduction for 2004. Because of limitations on charitable contribution deductions in one year, Sandin-Zarlengo claimed only part of the easement’s value as stated in their appraisal, and carried the excess value forward and claimed it in subsequent years. The property was in a historic district in New York, subject to certain New York City Landmarks Preservation Commission (LPC) requirements. The IRS rejected any deduction and sought penalties.

The court held that no deduction was available for 2004 because the failure to record the easement in that year meant that it did not meet the perpetuity requirement of the tax laws. The court ruled that under New York law, which determines the enforceability of the easement, a conservation easement is not effective unless recorded, and a good faith purchaser of the property would not have been bound by it until it was recorded.

Because Sandin-Zarlengo is not entitled to the 2004 deduction, the court said it follows that she is not entitled to the carryover deductions. However, the court determined that she would be entitled to take a deduction in 2005, based on the recording of the easement that year, if she met the substantiation requirements.

Although the IRS asserted that the appraisal failed to meet the substantiation requirements on numerous grounds, the principal argument was whether the appraisal was not timely under section 1.170A-13(c)(3)(i) of the Income Tax Regulations., i.e., it was not prepared between 60 days before the contribution date and the extended due date of the return first claiming the deduction. The court, while agreeing that the appraisal was untimely, rejected that argument. It said that precedent had established that the substantiation requirements are “directory, requiring substantial compliance, rather than mandatory, requiring strict compliance.” It held that the timeliness requirement “does not relate to the essence” of the conservation easement deduction requirements.

As to valuation, based on the “before and after” method of valuation, the expert for each party adjusted the “before” value based on a variety of factors. The court found the positions of both parties’ experts were unreasonable, and calculated a value between the two. The court rejected the IRS’ experts assertion that a facade easement at this location would have no negative effect on the property’s fair market value, but it also criticized the taxpayers’ expert’s calculations, and again reached its own conclusion.

It is worth noting that the court, in a lengthy footnote, found that the conservation easement did have a “conservation purpose” within the meaning of sec. 170(h)(4)(A)(iv), contrary to the IRS position, because it provides an additional layer of protection over and above that provided by the LPC’s regulations.

As to penalties, the court had to differentiate between returns filed before and after the July 25, 2006, the effective date of the Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280, 120 Stat. 780. One significant change made by the PPA was to eliminate the reasonable cause exception for gross valuation misstatements of charitable deduction property for post-PPA returns. The court found that both Zarlengo and Sandin-Zarlengo meet the reasonable cause and good faith exception for their 2004 joint return and Sandin-Zarlengo met the exception for her 2005 return. Sandin-Zarlengo’s 2006 and 2007 returns, on which she claimed carryover deductions, were post-PPA so the reasonable cause and good faith exception was not available to her.

Decision available at


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