Originally published on Forbes.com.
We’ve had two charitable easement cases in the last couple of weeks or so. Mecox Partners LP was a about a facade easement in Greenwich Village. Palmer Ranch Holdings is a conservation case. I’m torn between which has the most interesting back story. Greenwich Village or American eagles? Depends on whether you are a country or a city mouse, I guess. I’m a little bit of both.
Close To A Free Lunch
If you sincerely want property you own to be preserved indefinitely in its current form, a charitable easement deduction is as close as you can come to a free lunch. To do it right you need to spend some money on appraisals and a reputable recipient, which is what you should go with, will require you to make a contribution, but other than that you get a tax deduction for essentially not doing something you did not want to do anyway. The biggest abuse in the area is valuation. Since there is no market for easements to speak of, you typically value the easement by taking the highest and best use of the property without the easement and subtracting the value of the property with the easement.
Of course, if the property is already at its highest and best use (meaning the use that will yield the most money in the long run), the easement has little or no value. That often turns out to be the case with easements on buildings in historic districts. There are already plenty of restrictions on the property. The method that can raise eyebrows out in the country is subdivision analysis. I read somewhere that if all the hypothetical subdivisions that have supported easement donations were built, we would have enough houses for the next couple of centuries and very little in the way of farmland.
Some of the abuse is by people who learning that their development plan is infeasible use the deduction to get the government to reimburse them for not executing a plan that cannot be executed. I once got a call from somebody who was raising money to buy property and promising that the return would come, pretty quickly, from contributing conservation easements. In order for that to work, they had to either be buying property from very stupid people or, you know, fibbing on the valuation
At any rate, the IRS has been keeping a sharp eye on these things and perhaps sometimes being too hard on people leaving a lot for the courts to sort out. Here is the lastest from the front.
Preserving Authors’ Row
Mecox looked to be the type of case that would be challenged on the grounds that the easement had no value. The easement was granted to the National Architerctural Trust, which had quite a bit of trouble with its New York City easements. The building in question was 1 Jane Street, which according to Warren Allen Smith was known as “Authors’ Row”. He describes 1 Jane Street as
The Archbishopric of New York hired architect Charles Kreymborg to build a simple six-story brick apartment here in 1938-1939. The structure replaced a late Federal house at the corner of Jane and Greenwich, in addition to the two town houses next to it on the Greenwich Avenue side.
Instead of losing on valuation, the taxpayers in Mecox were hung on a technicality. They entered into a contract with NAT in 2004, so the partnership claimed the deduction on its 2004 return. The easement was not recorded until November 17, 2005, which kills the 2004 deduction.
As a matter of law, Mecox did not make a “qualified conservation contribution” in 2004, because the Conservation Deed of Easement was not effective until it was recorded on November 17, 2005.
The late recording also made the appraisal which supported a deduction of $2.21 million no good, since it was more than sixty days before the donation.
That was kind of a devilish detail to be caught on. The problem with these decision is that you never get the whole story. I am burning with curiosity as to whether the taxpayers will manage to get a 2005 deduction somehow. Professor Nancy McLaughlin, who covered the case here, wrote me that the 2005 deduction would use the Zarlengo decision as a precedent.
The $25 Million Dollar Eagles Nest
Palmer Ranch
As recently as 2007, Southwestern Florida served as a proud home to the American, or bald, eagle. One bald eagle nest, SA-010, was located on the eastern side of an 82.19 acre parcel of land known as B-10, in Sarasota County. To the west of B-10 lies Sarasota Bay, where the eagles would fly to feed. To allow the eagles to reach their feeding grounds safely, B-10 sported a nest-to-coast flyway in the form of a “wildlife corridor.” The wildlife corridor also provided a habitat to small urban animals of considerably less patriotic interest.
The IRS challenged the deduction and the taxpayers took it to Tax Court, where they mostly won. The IRS argued to cut their $25,200,000 donation back to $7,750,000. The Tax Court found the taxpayer’s appraisal more persuasive
Partly because the tax court held that B-10’s highest and best use was MDR-level development, the tax court deemed Durrance’s MDR-predicated appraisal ($25,200,000) to be “more accurate” than Page’s lower-use figure ($7,750,000).
Still, the Tax Court carved over $4 million off the deduction. Both sides appealed. The Eleventh Circuit pretty much went along with the Tax Court in its acceptance of the higher appraisal but did not think that the $4 million carve back was well-supported.
In other words, the tax court’s valuation was premised on an old appraisal as modified by monthly appreciation rates, instead of on comparable sales. Without being based on comparable sales, the valuation cannot have been a comparable-sales valuation. Because the parties’ appraisers both used the comparable-sales method, and because the tax court neither voiced disapproval nor acknowledged (much less explained) its departure from the method, that departure was error. The tax court must at minimum explain why it departed from the comparable-sales method in valuing B-10
This is probably a case of the Tax Court being tripped up by a devilish detail – usually, it is the taxpayer.
Other Coverage
Preservation Law Digest had a brief piece about Mecox. As noted above Nancy McLaughlin covered Mecox. She mentioned thirteen other cases of litigated challenges to facade easements donated to NAT- Ouch.
Anthoney Cavender had something on Palmer. I think he found a better-looking eagle than I did. Law 360 interviewed Thor Hearne who represented the taxpayer
Thor Hearne of ArentFox LLP, who represents Palmer Ranch, told Law360 on Monday that his clients were delighted by the ruling and considered it a “100 percent win.” He said he expects the Tax Court to accept Palmer Ranch’s $25.2 million appraisal on remand.
You can get links to more background on the case from the Arent Fox website. They were, as it turns out correctly, optimistic about their clients chances in this case.
ArentFox partner Thor Hearne argued the case before the Eleventh Circuit. “This is another example of ‘no good deed goes unpunished.’ The IRS is seeking to do exactly what Congress said the IRS should not do,” Mr. Hearne said. “The Tax Court rejected the IRS’s ridiculous theory and I anticipate the Eleventh Circuit will do the same. Hugh and Eliza Culverhouse engaged in exactly the kind of philanthropy Congress intended to encourage and the IRS now wants to punish them for doing what Congress encouraged by making them run this gauntlet of litigation. The IRS is wrong. And I am confident the IRS will lose – again.”
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