Simmons v. Commissioner, T.C. Memo. 2009-208 (2009).
Question for the Tax Court
[W]hether petitioner, Simmons, is entitled to charitable contribution deductions with respect to facade conservation easements petitioner granted to L'Enfant Trust, Inc. (L'Enfant). (2).
Background
Simmons was a real estate agent . . . operating under the real estate brokerage firm of Coldwell Banker. (2). She owned two improved properties in Washington, D.C. . . . Both were rowhouses subject to the Historic Landmark and Historic Preservation Act of 1978 during the years at issue. (3). Simmons granted facade easements on both properties to L'Enfant, a 501(c)(3) nonprofit corporation. (3-4). Each facade conservation easement was memorialized by a 'Conservation Easement Deed of Gift' (the deed). (4). The deeds provided in effect that Simmons could not make any material changes to the respective facades in any way without L'Enfant's consent. (4). The deeds also provided that should petitioner sell the subject properties, the easements would remain in force. (5).
Simmons hired appraisers to determine the values of the conservation easements. (5). The appraiser valued the Logan Circle easement at $162,500, and the Vermont Avenue easement at $93,000. (5). At trial . . . Simmons and the Commissioner introduced expert reports valuing the contributions. (7).
Commissioner's Three Arguments
[T]he easements granted to L'Enfant are not valid easements for purposes of section 170; that even if . . . the easements are valid, Simmon's appraisals are not qualified appraisals; [and] Simmon's has not met her burden of proof because her appraisals are not credible. (8).
Section 170 Rules for Conservation Easements
Section 170(h)(1) provides that a contribution of real property may constitute a qualified conservation contribution if the real property is a 'qualified real property interest,' the donee is a qualified organization, and the contribution is 'exclusively for conservation purposes. All three requirements must be met for a donation to qualify as a qualified conservation contribution. (9).
[A] 'qualified real property interest' means 'a restriction (granted in perpetuity) on the use which may be made of the real property.' . . . . See sec. 1.170A-14(g)(1), Income Tax Regs. (9). [T]he term 'conservation purpose' means the preservation of an historically important land area or a certified historic structure. (9).
Commissioner's Arguments Against Valid Easement
[N]o conservation purpose described in section 170(h)(4) has been met because L'Enfant: (1) can consent to changes in the facades, even if they are contrary to the conservation purposes of the easements and (2) has the right not to exercise any of its obligations under the easements. (10).
[T]he requirements of section 1.170A-14(g), Income Tax Regs., have not been met because the restrictions in the easements allow L'Enfant to consent to changes in the facades. (10).
The Contributions Here are Qualified Conservation Easements
Although the grants do allow L'enafant to consent to changes to the properties, the grants require rehabilitative work or new construction on the facades to comply with the requirements of all applicable Federal, State, and local government laws and regulations. (11). Section 1.170A-14(d)(5), Income Tax Regs., specifically allows . . . future development [that] is subject to local, State, and Federal laws and regulations. (11).
Reporting Requirements for Charitable Contributions
Section 1.170A-13(c)(3)(i) and (ii), Income Tax Regs., contains the specific requirements that a "qualified appraisal" must meet. (14). In Bond v. Commissioner, 100 T.C. 32, 41 (1993) . . . This Court found the requirements to be directory rather than mandatory, and found the taxpayers to have substantially complied with the qualified appraisal requirements because substantially all of the information required had been provided . . . . (15).
Commissioner argues that the appraisals . . . are not qualified appraisals as defined in section 1.170A-13(c)(3), Income Tax Regs., because they: (1) Fail to adequately describe the properties contributed; (2) fail to accurately identify the method of valuation used to determine the fair market value of the contributed easements or to adequately describe the specific basis for valuation; (3) do not include a statement that the appraisals were prepared for income tax purposes; and (4) do not provide the dates of contributions. (17).
[Here], [t]he appraisals adequately describe the parcels of land owned by petitioner . . . . The appraisals also contain lengthy discussions of historic preservations easements in general. (17).
Although the appraisals did not contain an explicit statement that they were prepared for income tax purposes, the appraisals did contain statements that the owner . . . was contemplating donating conservation easements to L'Enfant. The appraisals also include discussion of IRS practice and cases of this Court concerning facade easements. (18).
Accordingly, petitioner has complied with the substantiation requirements of section 170. (18).
Valuation of Conservation Easements
The "before and after" approach has been used on numerous occasions to determine the fair market values of restrictive easements with respect to which charitable contribution deductions are claimed. (citations omitted). (18). The "before" value of the property generally reflects the highest and best use of the property in its condition just before the donation of the easement. (19).
The Court does not define "after" value and its significance in the "before" and "after" approach. The "after" value is the fair market value of the property including the easement. Generally, the fair market value of a parcel of property will decrease "after" an easement is placed on the property. Consequently, in the context of charitable contributions, the taxpayer's charitable contribution is the difference between the "before" value and the "after" value. The larger the decrease in the value, the greater the charitable contribution. In these instance, each side hires an expert appraiser. Then the Court must decide which appraiser they believe.
The Court Accepts the Taxpayer's "Before" Value
The difference in the "before" valuations . . . mainly stem from the taxpayer's expert putting a premium on the Logan Circle parcel's view. Because the view from the Logan Circle parcel is of Logan Circle Park, the taxpayer's expert increased his valuation by $50,000. (21).
We find petitioner's "before" valuations to be reasonable and we adopt them. (21).
But Rejects the Taxpayer's "After" Value
The parties' disagreement concerns how the easements affect the fair market value of the properties. The Taxpayer's appraisals apply a 13-percent decline in value to Logan Circle parcel and and 11-percent decline to the Vermont Avenue parcel. (21). The IRS's expert reports did not find any change in the fair market value of either property as a result of the granting of the easements. (21).
We agree with the taxpayer that the easements granted do affect the fair market value . . . . However, we do not agree with the amounts . . . claimed. [W]e . . . find that the easements resulted in only a 5-percent reduction in the values of the subject properties. (25).
This decrease stems from the heightened financial burdens of an eased facade and L'Enfant's affirmative enforcement of its easements. (25). [E]ven though the property was subject to local preservation laws before the granting of the easement, . . . it is important to note that granted easements to L'Enfant meant that the taxpayer would be subject to a higher level of enforcement than that provided by the District of Columbia. (25).
[P]etitioner is entitled to charitable contribution deductions of $56,250 for 2003 and $42,250 for 2004. (27).
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