By David I. Kempler, Esq. and Elizabeth Carrott
Buchanan Ingersoll & Rooney PC, Washington, DC
In 61 York Acquisition v. Commissioner, T.C. Memo
2013-266, the Tax Court held that a taxpayer failed to make a
qualified conservation contribution because when the taxpayer
granted the facade conservation easement it did not have the right
to restrict the entire exterior of the building. Over the last few
years, the IRS has successfully challenged a number of charitable
deductions claimed with respect to facade easements donated to the
same exempt organization on a variety of issues, including whether
the claimed facade conservation easement was made "exclusively for
conservation purposes," as was the case here, whether the appraisal
of the contribution was a qualified appraisal and whether the
facade conservation easement was contingent.
Under §170(f)(3)(A), as a general rule, a taxpayer may not take
a charitable deduction for the contribution of a partial interest
in property. However, pursuant to §170(h)(1) and the regulations
thereunder, there is an exception for "a qualified conservation
contribution," which is a contribution of a "qualified real
property interest" to a "qualified organization" that is made
"exclusively for conservation purposes." Under §170(h)(4)(A)(iv),
one conservation purpose, "the preservation of a historically
important land area or a certified historic structure," encompasses
facade conservation easements. However, §170(h)(4)(B)
provides that a contribution that consists of an easement on the
exterior of a certified historic structure is not exclusively for
conservation purposes unless the interest: (i) includes a
restriction which preserves the entire exterior of the building and
(ii) prohibits any change in the exterior of the building that is
inconsistent with the historical character of the
Through a Delaware limited liability company treated as a
disregarded entity for federal income tax purposes, Taxpayer, a
partnership, owned a partial interest in a Chicago property
classified as a "certified historic structure" for charitable
contribution purposes by the National Park Service. Ownership of
the property was divided into two parts: the "Office Property,"
which consisted of the first 14 floors of the property, and the
"Residential Property," which consisted of residential condominium
units on the top six floors of the property. Taxpayer owned the
entire interest in the Office Property. A 2000 amendment between
the property owners gave Taxpayer, as the owner of the Office
Property, the right to grant a facade conservation easement. The
term facade was defined in the agreement as follows: "the exterior
wall of the Building facing Michigan Avenue and Van Buren Street
from the street level up to the Roof … but excluding…" various
items including (i) the glass in the windows, window frames, window
systems, joints and seals located in the building and (ii) the roof
structure, membrane, flashings and seals over the cornice."
In 2006, Taxpayer granted an easement in the property to
National Architectural Trust (NAT), a qualified organization. The
easement terms required Taxpayer to obtain prior written consent
from NAT before making any changes to the facade subject to the
easement. On its 2006 federal income tax return, Taxpayer claimed a
charitable contribution deduction of $10,730,000 with respect to
the easement contribution.
In 2012, the IRS issued to Taxpayer a notice of final
partnership administrative adjustment (FPAA) disallowing the
charitable contribution deduction on the grounds that easement
granted by Taxpayer was not "exclusively for conservation purposes"
under §170(h)(4)(B) because the entire exterior of the structure
could not be subject to the easement where Taxpayer did not own the
entire exterior of the building. Conversely, Taxpayer asserted
that, under Illinois law, ownership of the entire exterior was not
required to grant an easement which imposes enforceable
restrictions on the entire exterior of the building.
State law determines the nature of the property rights, and
federal law determines the appropriate federal tax treatment of
those property rights.1 Accordingly, the
Tax Court stated that, in order to determine whether the facade
conservation easement complied with the requirements for the
deduction under federal tax law for a qualified conservation
contribution, it had to look to state law to determine the effect
of the easement.
The Tax Court concluded that, under Illinois law, "a person can
grant only a right which he himself possesses."2
Accordingly, the Tax Court held that Taxpayer did not grant an
easement in the entire exterior of the structure, as required under
federal law, because Taxpayer had rights only to portions of two
sides of the facade and not the entire facade contributed.
The Tax Court rejected Taxpayer's argument that it had an
assignable right in the entire exterior because Taxpayer had an
obligation under the owner's agreement to maintain the entire
exterior. The Tax Court, however, declined to find that an
obligation under contract created a property right absent any
Illinois case law in support of this proposition.
Additionally, the Tax Court rejected Taxpayer's argument that
the owner's agreement, which disallowed certain alterations to the
property without the prior written consent of the other property
owner, granted Taxpayer an assignable right to restrict with
respect to the entire exterior of the property. However, the Tax
Court noted that the altering owner must obtain prior written
consent from the other owner only if the alteration would
materially alter the facade of the property. Thus, Taxpayer did not
have the right to restrict alterations to the two sides of the
structure not covered by the definition of facade, or to the
excluded portions of the other two sides. The Tax Court held that
Taxpayer could not contribute a right it did not possess and,
therefore, the Tax Court concluded that the easement granted was
not a qualified conservation contribution.
This case is the latest in a string of cases wherein the IRS
challenged charitable deductions claimed with respect to facade
easements donated to NAT,3 now known as the
Trust for Architectural Easements, Inc. In 2011, the
Department of Justice also filed suit against NAT alleging that NAT
was engaged in abusive practices encouraging taxpayers in Boston,
New York City, Baltimore and Washington D.C. to claim unwarranted
charitable deductions for donations of facade conservation
easements totaling approximately $1.2 billion. The suit ultimately
settled with NAT not admitting any wrong doing but agreeing to an
injunction barring NAT from promoting that the IRS had approved
deductions in the range from 10 to 15% of the property value and
from accepting donations of easements that NAT knows or have reason
to know lacked a conservation purpose.
For more information, in the Tax Management Portfolios, see
Kirschten & Freitag, 863 T.M., Charitable Contributions:
Income Tax Aspects, and in Tax Practice Series, see ¶2390,
Charitable Contributions: Requirements for Deduction.
Copyright©2013 by The Bureau of
National Affairs, Inc.
3 See, e.g., Kaufman v.
Shulman, 687 F.3d. 21 (1st Cir. 2012); Gorra v.
Commissioner, T.C. Memo 2013-254; Friedberg v.
Commissioner, T.C. Memo 2013-224; Graev v.
Commissioner, 140 T.C. No. 17 (2013); Rothman v.
Commissioner, T.C. Memo 2012-218; Dunlap v.
Commissioner, T.C. Memo 2012-126; 1982 East LLC v.
Commissioner, T.C. Memo 2011-84; Herman v.
Commissioner, T.C. Memo 2009-205.
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