Jan 27, 2017
IRS deems façade easements to be façades
Generally, no charitable deduction is permitted for the contribution of a partial interest in property to charity. However, the Internal Revenue Code carves out an exception for façade conservation easements. This is the contribution of a qualified real property interest to a qualified charitable organization exclusively for conservation purposes. The term “conservation purposes” includes the preservation of open spaces and historic preservation.
For example, in the Tax Court case Simmons vs. C.I.R. which was affirmed by the Appeals Court, the taxpayer donated to a charity a conservation easement on the façades of two buildings located in a historic district. The easements prohibited the taxpayer from materially altering the façade of the properties without the written consent of the charity. There the court determined that the taxpayer was entitled to a charitable deduction equal to the value of the property before the easement, less the value of the property after the easement.
Despite the authorization of façade easement deduction in the Internal Revenue Code and by the courts, the IRS has continually challenged this deduction on a number of different theories, including improper valuation method, no diminution in value by the easement, failure to obtain contemporaneous written acknowledgement from the charity and that the easement was not in perpetuity. Further, the IRS began assessing a 40 percent gross valuation misstatement penalty.
Apparently these IRS challenges have not been enough. The IRS has now issued Notice 2017-10 claiming that syndicated conservation easement transactions are tax avoidance transactions and constitute listed transactions. The Notice refers to a scenario in which a pass-through entity owns real property. Promoters syndicate the ownership interests and suggest to prospective investors that each investor may expect to receive a charitable deduction that equals or exceeds 2 ½ times their investment amount.
Taxpayers who entered into this or any similar transaction on or after January 1, 2010, are required to disclose the transaction or be subject to penalties. Taxpayers who already claimed a deduction in prior tax years are urged to file amended returns.
The message is that even if a deduction is permitted under the Internal Revenue Code, the deduction can still be challenged if the IRS doesn’t like the transaction.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: David B. Shiner, Principal
This alert originally appeared in the February 2017 Shiner's Dollars with Sense newsletter.