The recent decision by the Tax Court in the case of Harbor Loft Associates strikes me as another instance of the IRS nailing an entity on a technicality, which probably did not have a great case on the merits. It was a facade easement donation. Harbor Lofts had a long term lease (till 2056) on two buildings in Lynn Massachusetts that are owned by the Economic Development & Industrial Corporation of Lynn. The two buildings are the Daly Drug Building and the Vamp Building. I found something on the Vamp Building, but struck out on the Daly Drug Building.
Anyway, the Vamp building is pretty nice looking, if you like that sort of factory turned into apartments look, but there must be somebody who would like to change its looks a lot. Harbor Loft teamed up with its landlord to donate facade easements for the two buildings to the Essex National Heritage Commission. On its 2009 partnership return Harbor Lofts claimed a deduction of $4,457,515 as the value of the easement. So there is something that they might like to do to the buildings and giving up that right makes their interest worth that much less. That’s the logic, anyway. Sometimes the IRS will attack head on and claim that the easement really is not worth that much, if anything at all, as you can see here and here and here.
The “technicality” that is tripping up Harbor Lofts is pretty basic.
Harbor Lofts claimed on its 2009 Form 1065, U.S. Return of Partnership Income, a $4,457,515 charitable contribution deduction under section 170 for the donation of a facade easement. Harbor Lofts claimed that its contribution to Heritage Commission was a perpetual conservation restriction under section 170(h)(2)(C) and section 1.170A-14(b)(2), Income Tax Regs
That would be a “restriction (granted in perpetuity) on the use which may be made of the real property”.
Depending on your age and attitude 2056 might seem like a really long time from now. Well on the one hand, 38 years ago, when I was just a staff accountant at Joseph B Cohan and Associates sometimes doesn’t seem like all that long ago. On the other hand, according to the standard mortality table used by the IRS it is more than 99% likely that in 2056, I will be, you know, dead. Regardless, of your subjective impression of how far in the future 2056 is, it is not perpetual
Harbor Lofts does not hold a fee interest and cannot grant, through the use of an easement or other State law instrument, a perpetual restriction on the buildings. Harbor Lofts does not hold perpetual property rights in the buildings, so it is not possible for it to contribute a perpetual restriction on the use of the buildings. Harbor Lofts is correct that the Code does not specifically require a donor to hold a fee interest, but only the owner of real property or holder of a fee interest is able to grant a perpetual conservation restriction.
But that is not all. In order to qualify you have to be dealing with real property. That is a state law determination and here is the deal in the Commonwealth of Massachusetts.
But Harbor Lofts is not a fee owner. In Massachusetts “a demise for a period definitely fixed or at least capable of definite ascertainment” is a leasehold interest for a term of years. Farris v. Hershfield, 89 N.E.2d 636, 637 (Mass. 1950). Harbor Lofts’ lease agreement ends in 2056 and is therefore a leasehold interest for a term of years. Massachusetts has traditionally found a leasehold interest for a term of years to be personal property, more specifically a chattel real
Maybe They Should Quit Before They Get Further Behind
In one instance the First Circuit, which is the court that would get the appeal, overruled the Tax Court in sustaining IRS denial of an easement deduction. It had to do with the wording of a subordination agreement. When the case went back to the Tax Court, Judge Halpern knocked out the deduction based on valuation which led to a 40% penalty.
Lew Taishoff covered the decision and as he commonly does edified his readers , this time with a Wordsworth quote as his title “Hold the Gorgeous East in Fee” . That’s from On the Extinction of the Venetian Republic. You probably knew that already, but I had to look it up.
Bryan Camp on TaxProf had Lesson From The Tax Court: No Stopping The Perpetual Debate About Conservation Easements. Mr. Camp praises one of my posts putting him in the running for my new BFF. His article is an extensive discussion of the perpetuity issue and the peculiar relationship between the Tax Court and appellate courts.
Today’s post will therefore comment on the Tax Court’s approach to interpreting the perpetuity requirements for conservation easements. Long story short, I agree with it. The First Circuit’s liberal approach, while understandable, is wrong. This post will explain why.
Joshua Sage had something on ESD Law – No, A Lessee Cannot Grant A Conservation Easement.
So once again, a charitable conservation easement deduction is denied due to divergence from the statute and applicable regulations. Taxpayers are reminded that these gifts from Congress require compliance with the applicable rules as a strict condition to the receipt of the tax benefit.
Ed Zollars on Current Federal Tax Developments had Long-Term Lessee Not Able to Claim Deduction for Donation of Qualified Conservation Easement.