The Tax Court opened the new year with a charitable easement decision. It is pretty disappointing. Charitable easements are a great area of creative abuse, but David and Kathryn Gemperle weren’t up to anything wicked. Instead they lost from poor return preparation.
Facade Easement
The stakes were not all that high $17,201 in tax for 2007 from a charitable deduction of $108,000 some of which carried over to 2008 yielding another $9,724 in contested tax savings. Charitable easements come in two flavors. There are conservation easements where you give up the right to turn your cow pasture or whatever into a massive housing sub-development. Then there are the histoirc easements where you promise not to turn your home, which is a sterling example of Greek revival architecture into a MacDonalds or something like that. The Gemperles’s donation was of the latter sort – also known as a facade easement.
The Gemperles own and reside in a house built in 1898 in the Lakewoood/Balmoral neighborhood of Chicago. The neighborhood has been a historic district since 1999 and in 2007 the National Park Service certified their home as a historic structure. In 2007, the Gemperles donated an easement to the Landmark Preservation Council of Illinois along with a $10,800 cash contribution, which was not challenged by the IRS.
This One Was Not Sketchy
I have been following these cases for a while and have always thought that the facade easements were among the sketchiest. Often the buildings already have so much restriction on them already that promising not to alter them is a little like me renouncing my superpowers. That was not the case with the Lakewood house. The taxpayers introduced testimony that zoning would allow them to substantially alter the facade going either up or out. The IRS did not dispute that.
Also in many of the cases in the last few years the donee organizations have been on the sketchy side. I was speaking to Nancy McLaughlin, a law professor at the University of Utah for a more expansive post on easements and she told me that states are having to deal with “orphan easements” made to fly by night not-for-profits. Landmark Preservation Council of Illinois, however, appears to be pretty substantial with net assets over $7.8 million some of which can be spared to monitor the 551 easements that have been entrusted to it.
Of course, there is always a valuation question. Easements are not generally bought and sold, so their value is generally determined indirectly by a before and after analysis if the property. The IRS expert opined that the easement was worth somewhere between $0 and $35,000. This is where I think procedurally things become unfair to the taxpayers for being pro se and the case being low stakes. Their appraisal prepared by Gwendolyn J. Fiorenzo was not admitted into evidence because Ms. Fiorenzo was not made available as a witness. My suspicion is that that was probably because her being a witness would have cost extra.
Read The Instructions
The admission of the appraisal as evidence may have helped on penalties but it would not have cured the problem that the Tax Court went with in disallowing any deduction.
Petitioners timely made joint returns of income on Forms 1040, U.S. Individual Income Tax Return, for their 2007 and 2008 taxable (calendar) years (2007 and 2008 return, respectively). Those returns show that they were prepared by a paid tax return preparer, __________, certified public accountant (C.P.A.). Petitioners attached to the 2007 return an incomplete Form 8283, Noncash Charitable Contributions, claiming a deduction for the noncash charitable contribution of the facade easement to Landmark. No appraisal is included with the 2007 return. On or around October 22, 2010, petitioners submitted a correctedForm 8283 to respondent. Both Forms 8283 show that they are a version of Form 8283 that was revised in December 2006. Both state: “An appraisal is generally required for property listed in Section B (see instructions).” Section B addresses donated property valued at over $5,000. Instructions for Form 8283, also revised December 2006, state that, for contributions of easements made on buildings in historic districts, the taxpayer must include with his return a “qualified appraisal”.
I know you can get the CPA’s name by going to the decision, but in a bit of professional courtesy and respect for my elders, you are not getting it from me. I’m going to call him Harry. Harry did not have a very common name and there was only one CPA in Illinois with that name whose license was issued in 1976 and expired in 2009. There is somebody by the exact same name who died in Chicago in 2009 at the age of 86 which means he would have been about 84 or so when he prepared the return and failed to attach the appraisal.
]RIP, Harry. I hope I am still writing when I’m in my eighties, but I sure hope I’m not still preparing returns.
Raw Deal
Regardless I think the Gemperles got a pretty raw deal and given the amount of abuse that is going on with charitable easements, the IRS should not be using its resources to shoot small fish in barrels. The taxpayers used a CPA and hired an appraiser, so I think the penalties were really overkill.
In preparation for my large piece on easements I also spoke with Mike Greenwald of Friedman LLP. Most of his advice had to do with dotting your i’s and crossing your t’s, since this is an area that gets a lot of IRS attention. He emphasized the importance of the appraisal.
Make sure you are working with an appraiser who has done this successfully and has a track record. Not just a local guy who does the appraisal for your mortgage but a specialist in this type of appraisal. Make sure what you’re giving up you are truly giving up in full.
You might also want to make sure that it is not the first time through for your tax preparer and don’t forget Reilly’s Fourth Law of Tax Planning – Execution isn’t everything but it’s a lot.
Other Coverage
Professor McLaughlin covered the case on the Nonprofit Law Prof Blog. There is also a summary in the Preservation Law Digest. Lew Taishoff, probably the most thorough Tax Court chronicler in the tax blogosphere passed on covering the inaugural memo decision. When I asked him about it he wrote me:
Mr Reilly, no, it was just a dud appraisal; probably another Primoli boobytrap. To parse Reg. 1.170A-14(h) yet again seemed to me to go over ground I’d covered many times. As for not hiring counsel, deficiencies plus penalties were less than $65K per the opinion. Trial counsel would have cost nearly half that amount, and the appraiser wasn’t going to testify for free either. You might note that Interior was coaxing people into easements (scenic and facade) by touting tax benefits without warning of the pitfalls. “I’m from the government, and I’m here to help” are still the most dangerous words in the language.
The landmarkers, like Interior and the Illinois outfit in Gemperle, want to encourage people to landmark their property. Not every locality has restrictions like NYC and Boston. And when they do, landmark status adds tons of cost to any alteration, as the bodies charged with preservation want to take over the job. And do it their way, regardless of cost. Cf Dunlap, 2012 T. C. Memo. 126. And the municipalities aren’t going to pay the owners for this privilege. So the landmarkers run dog-and-pony shows to try to get the property owner convinced that the US taxpayer will pay via Section 170. And they gloss over the hoops and obstacles the property owner must surmount in order to get the goodies.
With Lew’s comments in mind, I have to wonder why there is no indication that the Landmark Preservation Council of Illinois was not there for the Gemperles. You can’t fault the Landmark group for the poor tax return preparation, but maybe they could have provided some pro bono expert testimony to alleviate the penalties.
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