U.S. Tax Court Upholds Tax Deductions for Preservation Easements on Historic Buildings
By Caitlin Jones
3 min read
Tax Credit Advisor, December 2009: In a recent decision of potential industry significance, the U.S. Tax Court has ruled against the Internal Revenue Service and upheld federal tax deductions for charitable donations of preservation easements on two historic residential properties in Washington, D.C. (T.C. Memo 2009-208)
In the case, Simmons v. Commissioner of Internal Revenue, the IRS had contended that the easements were not valid conservation (i.e. preservation) easements, that the appraisals for the easements were not valid, and that the easements did not cause a loss in the fair market value of the properties. The Court, however, found otherwise on each point. However, it held that the reduction in value was just 5% for each property, and said that the taxpayer was entitled to tax deductions totaling $98,500 rather than the $255,000 claimed.
The case centered around two historic row houses owned by a real estate agent who made charitable donations of easements on the facades of the buildings to The L’Enfant Trust, a nonprofit organization that holds the easements and is responsible for enforcing the related restrictions.
A preservation easement is a legal agreement between the owner of an historic building and a nonprofit organization chartered to preserve such properties. It conveys the legal rights to a physical portion of an historic building, typically the facade, and restricts future alterations without the consent of the easement holder in order to preserve the structure’s conservation purpose. The fair market value of an easement must be determined by a qualified appraisal. In return for making a charitable donation of the easement, the taxpayer can claim a federal tax deduction for its value. This deduction is for the determined loss in fair market value of the property due to the restrictions imposed by the easement.
In the past year or two, the IRS has contested deductions for preservation easements in a number of cases in certain parts of the U.S., through tax return audits on both historic residential properties (i.e. single-family homes) and commercial properties. In some cases the Service has settled with taxpayers, agreeing to some level of deduction, sometimes without penalty. In a few cases, taxpayers have appealed to U.S. Tax Court.
The stepped-up IRS activity comes despite letters to two organizations from a Service official in March 2008 that said the IRS does not believe that all conservation easements, including facade easements, are intrinsically of little or no value, and saying that the value of an individual easement depends on the particular facts and circumstances in each case.
Michael Ehrmann, of Jefferson & Lee Appraisals, Inc., Pittsburgh, Pa., who does easement appraisals, described the Simmons decision as “significant,” noting, “It’s an important case in support of the notion, of the concept, that preservation easements have an impact on value.”
The decision is believed the first by the Tax Court in years regarding a residential preservation easement. Two other such cases are pending before the Court involving residential properties in New York.
Ehrmann indicated that the Simmons decision could have significance as well for preservation easements on historic commercial properties as well as residential properties, because of the principles upheld in the case by the Tax Court.
Ehrmann said, “It’s my perception that easement activity has not stopped but it has slowed.”
Additional effects from the increased IRS scrutiny, he added, are that appraisals for preservation easements, and well as management of easements, have been “tightened.”
