Source: https://www.rosenbergmartin-tax.com/news/making-most-lesser-known-tax-benefits-and-avoiding-pitfalls-associated-revitalization-projects/
Timestamp: 2019-04-25 10:23:26+00:00

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In recent years, there has been a shift back towards “city life” and many efforts have been made to spur revitalization, both commercial and residential. Those looking to capitalize on revitalization opportunities should be mindful of tax incentives offered by state and local governments, such as the Enterprise Zone Property Tax Credit, Historic Restoration and Rehabilitation Property Tax Credit, just to name a few. Even if those incentives are not available, individuals and businesses may be able to benefit from other tax opportunities, through the charitable contribution of façade easements (and other preservation easements) and “deconstruction;” however, these opportunities should be carefully considered as they will likely be subject to intense scrutiny by the Internal Revenue Service. Procedural foot-faults can lead to substantial assessments of tax and penalties.
What is a “Façade Easement”?
This is a type of preservation easement whereby a property owner conveys certain rights that preserve the historical nature of the façade of a building in perpetuity. Pursuant to I.R.C. § 170(h), the transfer of a façade easement on a “certified historic structure” may qualify for a deduction as a charitable contribution. In other words, if a developer purchases a property that is listed in the National Register or is located in a registered historic district certified by the Secretary of Interior as being of historic significance, it may be able to reap significant tax benefits in the redevelopment process if it agrees to preserve the façade by transferring rights to certain types of charitable organizations. In determining whether redevelopment is financially feasible, this tax provision may play a large role in construction projects involving certain historical buildings.
Each of these requirements contains further technical clarifications which requires consideration before making a decision to pursue this deduction and its tax benefits.
While those claiming the contribution deduction may have the best intentions, the Service often attacks these deductions for failure to meet technical requirements and for perceived valuation errors. See, e.g., Dunlap v. Commissioner, T.C. Memo 2012-126 (disallowing entire charitable contribution deduction of façade easement in the amount of $8,171,000 based on lack of substantiation); Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (reversing decision of Tax Court, which found that appraisal insufficiently explained valuation of façade easement contribution); Kaufman v. Commissioner, T.C. Memo 2014-52 (Tax Court denied deduction for contribution of façade easement and sustained penalties for valuation misstatement). And the Internal Revenue Service has begun to challenge such easements on the basis that they are no more restrictive than the general regulations of a neighborhood and, therefore, cannot have any value. See, e.g., Scheidelman, 755 F.3d 148 (2d Cir. 2014) (finding that “easement does not add any new restrictions…because the historical preservation laws of the City of New York already require a specific historic review of any proposed changes to the exterior…”).
Therefore, if a deduction for a façade easement is sought, it is more important than ever that, from the outset, developers engage appraisers and tax counsel knowledgeable in local zoning and building regulations and the requirements of I.R.C. § 170 and its accompanying guidance. If these technical requirements are not met, the Service can, and likely will, assess a variety of penalties, including the accuracy-related penalty, gross valuation misstatement penalty, and fraud penalty, amongst others. The combination of taxes and penalties can quickly turn a financial boon into a boondoggle.
This niche industry has grown precipitously in the past decade as a result of several factors, has provided numerous jobs to individuals in economically-deprived neighborhoods, and has helped revitalize these communities. Some of these factors include an older housing stock, increased severity of environmental laws raising demolition costs, and an increase in overall environmental awareness. There are a growing number of organizations in the region that offer deconstruction services. While deconstruction may not be suitable to all redevelopment projects, due to the increased base cost of deconstruction versus demolition and potential time constraints, certain redevelopment of historical structures may be able to benefit from this technique. Further, developers can benefit from reduced waste management costs, landfill disposal costs, and if certain materials are not contributed to a charity, a future low-cost source of materials for other projects.
This means that, if deconstruction is pursued, a developer should consider the costs associated with a professional appraisal, maintaining required substantiation, and paying a filing fee. Environmental impacts aside, if the materials being donated are not of significant value, the value of the deduction may not justify this method from a financial standpoint. Developers should also ensure that the donee is an organization recognized by the Internal Revenue Service to receive used building materials; otherwise, the deduction could be disallowed.
While deductions for deconstruction efforts have been subject to less challenges by the Internal Revenue Service than façade easements, developers should be mindful of potential legal pitfalls and that somewhat similar techniques have been disallowed. See, e.g., Patel v. Commissioner, 138 T.C. No. 23 (June 27, 2012) (donation of house to fire department for conducting training exercises did not allow taxpayers to deduct value of house as charitable contribution); Scharf v. Commissioner, T.C. Memo 1973-265 (also involving donation to fire department for controlled burning exercises). Furthermore, it is important to note that the deductibility of any deconstruction is based upon the value of the items contributed, not the value of the property as a whole.
These descriptions are provided for informational purposes only. If I.R.C. § 170 may have any impact on a prior or prospective rehabilitation or revitalization project, you should contact a tax attorney. For a free consultation, please contact Brandon Mourges at 410.951.1149 orbmourges@rosenbergmartin.com.

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