Academic journal article Journal of Accountancy

Tax Court's Denial of Easement Deduction Deemed Unreasonable

Academic journal article Journal of Accountancy

Tax Court's Denial of Easement Deduction Deemed Unreasonable

Article excerpt

The First Circuit recently held that a Tax Court decision disallowing a couple's deduction for a qualified conservation contribution of a facade easement was an unreasonable and overly restrictive interpretation of the extinguishment provision of Regs. Sec. 1.170A-14. The First Circuit viewed the Tax Court's reading of the regulation as contrary to the intended purpose of the associated statute. The First Circuit's decision is relevant because the Tax Court has applied its own reading of the extinguishment provision in a number of other opinions disallowing conservation easement deductions, and these may be appealed. Also uncertain is whether the Tax Court will alter its interpretation in cases pending before it but appealable to other circuits.

Gordon and Lorna Kaufman granted the National Architectural Trust (NAT) an easement restricting alterations to the facade of their row house in a Boston historic preservation district. NAT required the Kaufmans to make a cash contribution of approximately 10% of the estimated value of the facade easement to create an endowment for future monitoring and administration. It also required the Kaufmans to acquire a subordination agreement from the bank that held a mortgage on the property to satisfy the perpetuity provision of the Code. The Kaufmans complied with both requirements, but the bank limited its subordination by reserving first claim to all insurance proceeds from any casualty.

Under Sec. 170(h) and the associated regulations, an easement grant must be protected in perpetuity for it to be deductible. The regulations further add that no deduction is allowed for an interest in property subject to a mortgage unless the mortgagee subordinates its rights to those of the donee organization. When a change in conditions results in extinguishment of a perpetual conservation restriction, the donee organization "must be entitled to a portion of the proceeds at least equal to the proportionate value" of the conservation restriction (Regs. …

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