June 20, 2017

What do you do when you are invested in a 10-story warehouse that was “built in 1928, [and] was designed by Cass Gilbert, who also designed the Woolworth Building and the United States Supreme Court?” Answer: gift a façade easement to the National Architectural Trust, Inc. (NAT), a qualified 501(c)(3) under Section 170. So, in 2004, the investors in the warehouse, Twenty Two Six Investors, donated a façade easement and took an $11,355,000 charitable deduction, which was determined by appraisal. All appeared well, until the Internal Revenue Service (IRS) denied the deduction because NAT had not recorded the deed in 2004. A representative of NAT accepted and signed the deed on December 30, 2004. However, NAT did not get around to recording the deed until 2006.  Because the restrictive deed was not recorded until 2006, the IRS argued that the taxpayer could not have taken a valid deduction for a charitable gift in 2004, determined a 40% gross valuation misstatement penalty under section 6662(a), and filed for summary judgment.

In its decision, the court turned to New York law (NYECL sec. 49-0305(4)) which stated “An instrument for the purpose of creating, conveying, modifying or terminating a conservation easement shall not be effective unless recorded.” As a result, in 2004, the perpetuity requirements of Section 170(h)(2)(C) and (5)(A) could not have been satisfied since the façade conservation easement transfer was not “effective” until it was recorded.

Summary and Conclusion

Gifting conservation and façade easements are fraught with danger for the taxpayer. More often than not, the IRS has been victorious in challenging such charitable deductions. The requirements of Section 170, are construed to be “strict” requirements with “substantial compliance” rulings sparse. These strict requirements are difficult enough to meet without the charitable organization failing to fulfill its part of the donation process, especially the leading organization for gifts of conservation and façade easements – NAT. Because of the invalid deduction claim, the IRS also applied valuation penalties. Regarding the penalties, the court decided to hold them in “abeyance.&rdquo


*Twenty Two Six Investors et al. v. Commissioner  – T.C. Memo. 2017-115  (June 15, 2017)