Summary

In Simmons v. Commissioner, the federal appeals court for the D.C. Circuit affirmed a decision of the Tax Court allowing deductions for two facade easements on rowhouses in an historic preservation district.

Extended Summary

The dispute at the trial level focused on valuation, with the government asserting that the easement restrictions were redundant with local historic preservation laws and thus had no effect on the market value of the underlying properties (see our earlier commentary). The Service abandoned this issue on appeal, and instead pursued two technical arguments that failed.

First, the Commissioner argued that the deed granting the facade easement did not prevent using the properties inconsistent with conservation purposes, as required by regulation, because the grantee reserved a right to consent to changes to the facade or to abandon the easement. The appeals court rejected this argument, noting any easement holder might fail to enforce its rights, but a tax-exempt entity "would do so at its peril," and that in any event the contingency was "so remote as to be negligible."

Second, the Commissioner argued that the taxpayer failed to provide a "qualified appraisal" to support her claimed deduction, because the appraiser did not fully explain his methodology and had relied in part on a "tax brief" prepared by an IRS territory manager in 2000, which stated that IRS engineers:

"have concluded that the proper valuation of a facade easement should range from approximately 10% to 15% of the value of the property."

This language was redacted from later versions of the "tax brief."

The appeals court rejected the Commissioner's suggestion the appraiser arbitrarily selected a value within the stated range. It accepted the Tax Court's findings that the appraiser had compared sales of similarly encumbered properties and had interviewed parties to those transactions to ascertain what effect the facade easement had actually had on the sale price.

CPC Commentary

The 10% to 15% figure mentioned in the "tax brief" cited in the Commissioner's argument was also carried for some time in an IRS audit guide. The figure has been withdrawn from both documents. It is on the strength of these two documents that some promoters of facade easement transactions have suggested to prospective donors that IRS has promulgated a "safe harbor" or benchmark for valuing the fair market value of a facade easement.

Last week the Department of Justice sued to enjoin one of these promoters from facilitating the overvaluation of claimed facade easement contribution deductions (see our earlier commentary). The individual promoter in that case, Steven L. McClain, placed a number of facade easements with the L'Enfant Trust, the charity involved in the Simmons case, before establishing his own separate entity to receive and monitor facade easements.

Relevant Documents

	Primoli Facade Easements Tax Brief	6/21/11
	Dorothy Simmons v. Commissioner, IRS (DC Circuit)	6/21/11
	CPC Commentary: DOJ Sues to Enjoin Facade Easement Promoter	6/17/11
	CPC Commentary: Tax Court Allows Disputed Facade Easement Deductions	9/17/09
	Simmons T.C. Memo. 2009-208	9/16/09
	Reg. Sec. 1.170A-14: Qualified conservation contributions.	9/16/12