Originally published on forbes.com on May 7th. 2012.
If you have property that you would like to be preserved in its present form, there is nothing so close to a free lunch as the donation of an easement. Out in the country, you will call it a conservation easement. In the big city it is a facade easement. In either case the principle is the same. You could make a freaking fortune turning your cow pasture into the site for a Walmart or your historic brownstone into a McDonalds, but you give up that right to a bunch of nosy do-gooder not for profit types, along with a cash donation (That is why it is “close” to a free lunch.) who will make sure you or your heirs do not yield to that temptation. For that you get a charitable deduction. As with any charitable donation of property, there is a valuation issue. That is what they were arguing about in a recent Tax Court case – Loren Dunlap, et ux., et al. v.Commissioner, TC Memo 2012-126 .
There were several parties in the case because the facade easement was on the Cobblestone Loft Condominium in the Tribeca North Historic district in Manhattan. TriBeCa is short for triangle below Canal Street in case you are wondering. Here I am sixty years old and learning about another little corner of Manhattan. According to Forbes TriBeCa 10013 is the seventh most expensive zip code in the country. At any rate, the facade easement donation to the National Architectural Trust (since renamed Trust for Architectural Easements) was approved by the board of the condominium association and then the resulting deduction of $8,171,000 (12% of the pre-easement value) was apportioned among the owners of the units and parking spaces. Another blogger with more persistence than I noted that the people involved in this case represent less than 20% of the total. The other 80+% may have gotten their deductions, settled or not taken a deduction in the first place. We are unlikely to ever know.
There are a number of requirements that need to be met for an easement deduction to stand up. One is that the organization receiving the easement be committed to enforcing it and capable. The Tax Court seemed a little concerned about that:
A review of NAT’s financial data also appears to show an organization more concerned with making money for SMS (a for-profit entity which employed many of the people who were held out to third parties as working for NAT and which was owned by the same two people who founded NAT and worked as directors and presidents of NAT) than monitoring and enforcing the terms of the facade easements it held. From 2002 to 2006 NAT paid the following amounts to SMS: $483,456, $5.5 million, $5.8 million, $2.6 million, and $181,154, respectively. From 2001 to 2003 NAT paid the following amounts in monitoring photography expenses: less than $553, less than $7,629, and $900, respectively. From 2004 to 2007 NAT spent the following amounts on total monitoring expenses: $13,345, $12,113, $56,585, and $115,884, respectively. At the end of years 2001 to 2007 NAT held approximately the following number of easements: 18, 86, 320, 570, 650, 750, and 800, respectively.
The Tax Court did not have to go delving much further into that and other technical aspects, because it concluded that the easement was not worth anything at all. It seems rather odd, since these folks paid NAT over half a million dollars to keep an eye on their building so they didn’t mess with the facade or tear it down and build a parking garage. At least according to the Tax Court NAT did not really add anything to protections that are already in place. The City has a Landmark Preservations Commission:
The LPC has over 60 staff members performing a variety of duties. Four of the full-time staff members are dedicated specifically to enforcement of LPC regulations. While LPC staff do not perform annual monitoring visits of the 26,000 historic properties covered by LPC regulations, staff members do pay visits to or review photographs of properties for a variety of other purposes. During such visits or reviews staff members may notice a violation of LPC regulations and act on it.
Cobblestone is a historic property subject to LPC regulations. In addition, Cobblestone also has a “sound, first-class condition” designation under LPC regulations. This special designation applied to approximately 150 of the 26,000 properties subject to LPC regulations and results in designated properties’ being subject to a higher standard of preservation than the normal LPC standard. The “sound, first-class condition” designation applies to a property in perpetuity.
If the Cobblestone owners tried to mess with their building facade, there would be plenty of people in the neighborhood who would rat them out to the Landmark Preservations Commission for free. They don’t need people flying up from Washington to do it.
The case has almost exactly the same facts as 1982 East LLC which was another Manhattan historic facade donated to NAT that had no value due to already existing restrictions. Somewhat more entertaining were Boltar LLC where the appraiser came up with a hypothetical development that would not fit on the property and Esgar Corporation which involved a fantasy gravel mine.
The taxpayers were allowed deductions for the cash contributions to NAT and were not hit with penalties. The penalty discussion is worth paying attention to. The people they relied on did not testify at trial so the Tax Court did not consider them:Although we do not make an adverse inference from petitioners’ failure to have someone from Herrick Feinstein testify, we do not believe petitioners have proven that their reliance on Herrick Feinstein’s opinion letter was reasonable. Petitioners provided no evidence concerning the fact that Mr. Russo did not sign the opinion letter or that the opinion letter appears to have been written after July 2004 (given that the opinion letter cites a document not released until that month), a point after which many of petitioners had already filed their 2003 tax returns claiming a deduction resulting from the facade easement donation. We also note that petitioners apparently made no inquiries into Herrick Feinstein’s qualifications to represent Cobblestone. We find petitioners have not proven that their reliance on Herrick Feinstein’s advice was reasonable,
That led to a lengthy discussion about adequate disclosure. It is worth reading the whole thing, but here is the point I noted:
Respondent first argues the Forms 8283 are not sufficient because petitioners did not complete all portions. However, the Instructions for Form 8283 indicate that the only portions of the form petitioners did not complete (regarding the donor’s cost or basis in the donated property, the date the donor acquired the property, and how the donor acquired the property) are not absolutely necessary. The instructions notify the taxpayer that these portions may be left blank if the taxpayer has reasonable cause and attaches an explanation to the return. Instructions for Form 8283 (Rev. 1998). Although petitioners did not demonstrate reasonable cause or attach explanations, we do not believe the portions of Forms 8283 petitioners left blank are necessary to substantially comply with the Instructions.
The Tax Court cut the taxpayers a break, but there was really no excuse for not filling out the 8283 thoroughly given the exposure that the return had. You should always read the instructions, but sometimes it is more important than others.
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