Source: http://tspf.pgdc.com/pgdc/appeals-court-affirms-ruling-permitting-deductions-facade-easements
Timestamp: 2017-12-13 01:43:25
Document Index: 167396016

Matched Legal Cases: ['§ 170', '§ 1', '§ 170', '§ 1', '§ 501', '§ 170', '§ 170', '§ 170', '§ 170', '§ 170', '§ 1', '§ 1', '§ 170', '§ 1', '§ 1']

Appeals Court Affirms Ruling Permitting Deductions for Facade Easements | The Saint Paul Foundation
Appeals Court Affirms Ruling Permitting Deductions for Facade Easements
News story posted in U.S. Court of Appeals by Marc Hoffman on 22 June 2011| comments
audience: National Publication | last updated: 22 June 2011
The U.S. Court of Appeals for the District of Columbia has held the Tax Court did not err in ruling a donor met the applicable statutory and regulatory requirements in claiming deductions for the donation of conservation easements on the façades of two buildings despite the Commissioner's argument the contribution was not "exclusively for conservation purposes," as required by 26 U.S.C. § 170(h)(1)(C), and because the donor failed to obtain "qualified appraisals" meeting the standards of Treasury Regulation § 1.170A-13(c)(3)(ii).
Citation: Commissioner v. Dorothy Jean Simmons; No. 10-1063
DOROTHY JEAN SIMMONS,
GINSBURG, Circuit Judge: The Commissioner of Internal Revenue appeals a decision of the Tax Court holding taxpayer Dorothy Jean Simmons was entitled to claim deductions in 2003 and 2004 for donating to the L'Enfant Trust, Inc. conservation easements on the façades of two buildings located in an historic district. The Commissioner argues Simmons may not take these deductions because her contribution was not "exclusively for conservation purposes," as required by 26 U.S.C. § 170(h)(1)(C), and because she failed to obtain "qualified appraisals" meeting the standards of Treasury Regulation § 1.170A-13(c)(3)(ii). We hold the Tax Court did not clearly err in concluding the factual circumstances supporting Simmons's deductions met the applicable statutory and regulatory requirements.
The L'Enfant Trust, Inc. is a tax-exempt organization under 26 U.S.C. § 501(c)(3), dedicated to the preservation of historic properties. In 2003 Simmons executed a "Conservation Easement Deed of Gift" granting to L'Enfant "an easement in gross, in perpetuity, in, on, and to the Property, the Building and the Façade" on Logan Circle. In 2004 she granted to L'Enfant another, essentially identical easement on the Vermont Avenue property.
Each deed prohibits Simmons from materially altering the façade of the property without the written consent of L'Enfant, and requires her to maintain the properties in good repair, periodically clean the façades, and ensure any change to a façade will comply with "applicable federal, state and local governmental laws and regulations." The deeds give L'Enfant the right to inspect the façades and to seek equitable remedies for any violation of the easements. By their terms, the easements are binding upon Simmons and her "successors, heirs and assigns," run "in perpetuity with the land," and "survive any termination of Grantor's or the Grantee's existence."
The deeds allow L'Enfant "to give its consent (e.g., to changes in a Façade) or to abandon some or all of its rights" thereunder. The deeds also acknowledge the properties were already encumbered by deeds of trust securing loans to a mortgage company, but recite that the lenders have agreed to subordinate their rights in the property to the rights of L'Enfant "and join in the execution" of the easement deed for this limited purpose. Attached to each deed are "Lender Acknowledgements" signed by a representative of the lenders.
Simmons filed tax returns for 2003 and 2004 claiming deductions of, respectively, $162,500 and $93,000 for having donated the conservation easements to L'Enfant. A taxpayer generally may not take a charitable deduction for the gift of a partial interest in property. 26 U.S.C. § 170(f)(3)(A). There is an exception, however, for a "qualified conservation contribution," id. § 170(f)(3)(B)(iii), defined as the contribution "(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes," id. § 170(h)(1). The parties agree the easements are "qualified real property interest[s]" and L'Enfant is a "qualified organization." See id. § 170(h)(2)(C), (3).
The Commissioner argues Simmons is not entitled to deductions for charitable contributions because the easements she granted L'Enfant satisfy neither the statute nor the regulation quoted above. More specifically, the Commissioner points to the clause in the deeds stating "nothing herein contained shall be construed to limit the Grantee's right to give its consent (e.g., to changes in a Façade) or to abandon some or all of its rights hereunder." This clause, he maintains, is inconsistent with conservation in perpetuity because it leaves L'Enfant free to consent to an a historical change in the façade and to abandon altogether its right to enforce the restrictions set out in the deeds. The Commissioner also asserts the deeds will not prevent uses of the properties "inconsistent with" their conservation because neither easement includes a clause providing for the perpetuation of the easements in the event L'Enfant ceases to exist or simply abandons its right to enforce the easements.
We also note any change in the façade to which L'Enfant might consent would have to comply with all applicable laws and regulations, including the District's historic preservation laws.2 In short, because the donated easements will prevent in perpetuity any changes to the properties inconsistent with conservation purposes, we hold Simmons has made a contribution "exclusively for conservation purposes," in accordance with 26 U.S.C. § 170(h)(1)(C).
The Commissioner argues the Tax Court erred in holding Simmons's appraisals were "qualified." First, he contends Donnelly failed to explain the "method of valuation" he used and to include a substantive basis for the valuation, as required by paragraphs (J) and (K), set out above. In doing the appraisals, Donnelly had relied upon an article prepared by Mark Primoli, an IRS employee, which stated, "Internal Revenue Service Engineers have concluded that the proper valuation of a façade easement should range from approximately 10% to 15% of the value of the property." Internal Revenue Service, Façade Easement Contributions (2000). The Commissioner suggests Donnelly arbitrarily picked a percentage between 10 and 15 rather than stating any identifiable method to determine the "after-easement" value.
We hold the Tax Court did not clearly err in concluding the appraisals sufficiently identified the method and basis for the valuations. To determine the fair market value of the property before being encumbered, Donnelly consulted sales of similar properties and identified some of these sales in the appraisals. In ascertaining the fair market value after encumbrance, Donnelly explained he spoke with and considered "the mindset of competent buyers and sellers" and took account of the "considerations they have actually had, or are likely to have, in the buying or selling of a property encumbered by a façade easement." For example, each appraisal noted the property would lose some value because the easement imposed more onerous requirements than does D.C. law. It also listed several factors that would lower the value of the encumbered property, such as potential legal exposure if the donor were to breach the easement and L'Enfant's right of prior approval for any change to the façade.
1 The issue whether the Tax Court improperly valued the easements is not before us because, as the Commissioner clarified during oral argument, he did not raise this point as an independent basis for objecting to the judgment of the Tax Court.
2 The Commissioner makes the rather niggling argument that, because of certain administrative shortcomings, compliance with the District's preservation scheme would not perpetuate the conservation purposes of the deeds. Appearing as it does for the first time in the reply brief, the argument is forfeit and we do not address it. See Sitka Sound Seafoods, Inc. v. NLRB, 206 F.3d 1175, 1181 (D.C. Cir. 2000).
3 The Commissioner also contends the requirements of § 1.170A-13(c)(3) are mandatory rather than directory and therefore cannot be satisfied by merely substantial compliance. Cf. Bond v. Comm'r, 100 T.C. 32, 41 (1993) (if Treasury regulations "are procedural or directory in that they are not of the essence of the thing to be done ..., they may be fulfilled by substantial, if not strict compliance") (quoting Taylor v. Comm'r, 67 T.C. 1071, 1077-78 (1977)). For her part, Simmons argues the requirements in § 1.170A-13(c)(3) are directory because they do not go to "the essence" of whether a charitable contribution has been made under § 170. See Bond, 100 T.C. at 40-41 (reporting requirements of § 1.170A-13(c)(2)(i)(A) and (3) are "directory and not mandatory"). We need not, however, resolve the issue whether a taxpayer can fulfill the requirements of § 1.170A-13(c)(3) through substantial compliance because we conclude above that the Tax Court did not clearly err in finding Simmons fully "complied with the substantiation requirements" by including "all of the required information." 98 T.C.M. (CCH) at 216.