U.S. Dist. Court, SD New York, No. 11 Civ. 8157 (ER), February 1, 2016: Preservation easement recording date is contribution date in New York.
Mecox Partners LP (“Mecox”) donated a historic preservation easement and open space easement on property in New York State to a charitable organization. The deed of easement was fully executed in 2004, but was not recorded until November 2005. Mecox claimed a qualified conservation contribution deduction on its 2004 tax return. They submitted an appraisal of the contribution dated June 13, 2005, which stated the value of the easement as of November 1, 2004.
The IRS denied the deduction, saying that the easement was not contributed in the tax year for which it was claimed. The IRS also said the substantiation requirements for a qualified conservation contribution deduction were not satisfied because the appraisal was not conducted within 60 days of the on November 17, 2005, contribution date, as required by treasury regulation 26 C.F.R. § 1.170A-13(c)(3)(i). Mecox took the case directly to the U.S. District Court.
The court found for the IRS. The court looked to New York State law to determine the taxpayer’s interest in the property before turning to federal law to determine the tax consequences of that interest. The court found that under the applicable New York law, New York Environmental Conservation Law (“ECL”) Article 49, Title 3, for an instrument to be a “conservation easement” as defined in that statute the instrument must be recorded to be effective. ECL § 49-0305(4). Accordingly, the court held that federal law requires that a deduction for charitable contribution of a conservation easement in New York cannot be claimed until the easement is recorded. Because Mecox claimed the deduction for a tax year prior to the recording, the claimed deduction was denied.
The court cited support in two recent U.S. Tax Court decisions: Zarlengo v. Commissioner, 108 T.C.M. 155, (2014), and Rothman v. Commissioner, 103 T.C.M. 1864 (2012), vacated in part on unrelated grounds, 104 T.C.M. 126 (2012). (Tax Court decisions are not binding precedent on the US District Court.)
But the argument didn’t end there. Mecox made two alternative arguments to still try to hold onto the deduction. First, Mecox asserted that the ECL does not apply in this case because, according to them, the easement is not a “conservation easement” under ECL but “a common-law restrictive covenant, which does not require recordation to be effective.” The court rejected this reasoning, saying that the instrument makes clear the parties’ intent (which the court said governs how it should be construed under New York property law) for the instrument to be a conservation easement under the ECL, even if it does not precisely so state. Alternatively, Mecox argued that even if the ECL does apply to this easement, recordation is required only for a conveyance to be effective against subsequent purchasers, not as between the parties to the instrument. The court rejected this interpretation, saying it is in direct contradiction of the text of the ECL.
The court also addressed the substantiation problem about the date the appraisal was prepared. Having decided that the contribution date was the recording date of November 17, 2005, the court found the appraisal, conducted on June 13, 2005, was not prepared within 60 days before the contribution date of the appraised property, or before the extended due date of the tax return claiming the deduction. 26 C.F.R. § 1.170A-13(c)(3)(i).
The court did not address the IRS imposition of an accuracy-related penalty under 26 U.S.C. § 6662.
Decision available at http://www.leagle.com/decision/In%20FDCO%2020160201G39/MECOX%20PARTNERS%20LP%20EX%20REL.%20GOLDMAN%20v.%20U.S. or by Google search.