Steven McClain and the Trust for Architectural Easements Inc. (f/k/a National Architectural Trust), Civil No. 11-1087
The District Court for the District of Columbia has permanently enjoined Steven McClain (co-founder and president) and the Trust for Architectural Easements Inc. (formerly known as the National Architectural Trust) from promoting a 10% to 15% property valuation for façade conservation easements under Code Sec. 170(h). Thus, they can't advise donors to use this valuation range (which purportedly reflected official IRS policy) in place of the actual value of the façade easements, as determined on a case-by-case basis. The parties consented to the injunction without admitting any wrongdoing.
Background. In general, Code Sec. 170(f)(3) bars a charitable contribution deduction for a contribution of an interest in property that is less than the taxpayer's entire interest in the property, but an exception is made for a qualified conservation contribution, i.e., the contribution of a qualified real property interest exclusively for conservation purposes. The interest in property conveyed by a façade easement must be protected in perpetuity for the contribution of the easement to be a qualified conservation contribution. (Code Sec. 170(h), Reg. §1.170A-14(a))
A qualified conservation contribution resulting from the creation of a conservation restriction in favor of a qualified organization yields a charitable contribution deduction if the value of the property burdened by the restriction is reduced on account of the creation of the restriction. A conservation restriction's value is determined by measuring the impact of the restriction on the value of the property affected by the restriction; i.e., the reduction (or enhancement) in value of that property resulting from the creation of the restriction. This involves determining the difference between the fair market value (FMV) of the affected property before and after the restriction is imposed. For the charitable contribution of a perpetual conservation restriction covering part of the donor's contiguous property, the amount of the deduction is the difference between the FMV of the entire contiguous parcel of property before and after the granting of the restriction. (Reg. §1.170A-14(h)(3)(i))
Injunction on appraisal methods for donation. Judge Gladys Kessler of the District Court for the District of Columbia entered a stipulated order of permanent injunction against Steven McClain and the Trust for Architectural Easements Inc. (formerly known as the National Architectural Trust). The parties consented to the injunction without admitting the allegations against them. The injunction doesn't preclude IRS from attempting to assess penalties.
As announced in a Justice Department press release, the order bars the parties from promoting a $1.2 billion scheme that, according to the government complaint, encouraged taxpayers in Boston, New York City, Baltimore and Washington D.C. to claim unwarranted charitable tax deductions for donations of façade conservation easements on historic buildings. The complaint alleges that the parties falsely told prospective customers that in exchange for donating easements on their historic properties preventing façade alteration, they could claim charitable deductions equal to 10% to 15% of the property value—a range that purportedly reflected official IRS policy. In fact, the complaint says, IRS never had any such policy, and the actual value of façade easements has to be determined on a case-by-case basis. The government maintains that the 10% to 15% valuation method has led to improper appraisals that resulted in $250 million tax revenue lost through 2006.
The injunction order bars the parties from promoting the existence of a 10% to 15% valuation range and from accepting donations of easements that the parties know or have reason to know lack a conservation purpose as defined by federal tax law. Specifically, they are barred from representing or communicating to potential donors of historic preservation easements granted on properties for a conservation purpose that: (1) donors can or should expect the appraisal of the conservation easement to produce a FMV that reflects 10% to 15% of the value of their fee simple property before the easement was donated; or (2) that IRS has promulgated a 10% to 15% “safe harbor” or benchmark (or any other safe harbor or benchmark) as the FMV of a conservation easement for purposes of calculating the donor's charitable contribution deduction.
Observation: In Comm. v. Simmons, (CA DC 6/21/2011) 107 AFTR 2d 2011-2632, the District of Columbia Circuit, affirming the Tax Court, upheld a taxpayer's deductions for a donation of conservation easements on the façades of two buildings located in a historic district, agreeing with the Tax Court's finding that the taxpayer's appraisals were “qualified.” Her appraiser stated he relied in part on an article written by Mark Primoli, an IRS employee, which stated, “Internal Revenue Service Engineers have concluded that the proper valuation of a façade easement should range from approximately 10% to 15% of the value of the property.” (Internal Revenue Service, Façade Easement Contributions (2000)). This article, which was included as a part of IRS's 1994 Market Segment Specialization Program Audit Technique Guide on the Rehabilitation Tax Credit, may well have been the basis for the “safe harbor” belief.
The order also bars the parties from participating in the appraisal process for an easement in any regard, including recommending or referring any appraiser, other than by referring donors to lists of potential appraisers prepared by neutral third parties.
They are enjoined from representing to donors that they can expect an easement to diminish the value of their property in all circumstances or automatically result in a charitable deduction. Specifically, they can't state or communicate to potential conservation easement donors that encumbering a property with a conservation easement will absolutely have a negative impact on the property's FMV or that the donor can expect to realize a specific charitable contribution deduction or a deduction within a specific range based on their historical experience. They may represent that donations may allow donors to claim a charitable contribution tax deduction for the value of the donation, as determined by a qualified appraiser and in accordance with Code Sec. 170(h) and the regs, and that the value of any conservation easement donation must be based on the particular facts and circumstances of the property.
Under the order, the parties are barred from accepting donations of conservation easements where they know or have reason to know that the proposed donation lacks a conservation purpose or is not protected in perpetuity. The parties are required to submit to independent monitoring of their practices for the next two years to ensure compliance with the injunction.
Observation: The Trust for Architectural Easements was involved in two recent cases where the Tax Court held that the gift of a facade easement did not result in a charitable contribution deduction because a bank held a mortgage on the underlying property and would have preference to insurance proceeds in the event of a casualty. As a result, the facade easement was not protected in perpetuity. It also was involved in a 2009 Tax Court case holding that a taxpayer could not deduct the value of a conservation easement that barred the development of part of the air rights over a historic structure.
References: For the charitable deduction allowed for qualified conservation contributions, see FTC 2d/FIN ¶K-3501; United States Tax Reporter ¶1704.47; TaxDesk ¶331,619; TG ¶19201.