Recently, another favorable opinion was issued for donors of preservation easements. In Scheidelman v. Commissioner of Internal Revenue the U.S. Court of Appeals for the Second Circuit rejected the Tax Court’s determination that a donor failed to supply a qualified appraisal supporting her donation. The court also rejected the Tax Court’s disallowance of a deduction for a cash contribution made to the easement holding organization for an easement endowment, even though the contribution was required by the easement holding organization in order to accept the donation of the easement.
This case is important because it represents a rejection of the IRS’ general approach to challenging easement donations in the majority of its cases against taxpayers. By challenging the technical merits of these donations and by winning those challenges, the IRS has succeed in setting aside the donor’s deduction altogether without regard to the easement’s valuation. This case is also important because it provides some clarity with regard to the deductibility of cash donations for easement endowments.
The Case: Background and Court Findings
In 2004 Huda Scheidelman donated an easement to the Trust for Architectural Easements (formally known as the National Architectural Trust). The property is located in Brooklyn’s historic Fort Greene neighborhood. The IRS claimed, among other things, that Scheidelman failed to provide a qualified appraisal to support her donation. In order for an appraisal to be a qualified appraisal it must meet certain regulatory requirements, such as:
- stating the method of valuation
- the basis for the valuation
- a description of the property
- the date of the contribution
- the name, address, and identifying number of the qualified appraiser
- the qualifications of the qualified appraiser
- and a statement that the appraisal was prepared for income tax purposes
The IRS claimed that Scheidelman’s appraisal was not qualified because it failed to state a method of and basis for valuation. The court determined that a method of valuation was stated and that the appraiser had in fact explained how he arrived at his figures for the easement’s value. The court stated:
“[f]or the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied – it remains a method . . . .”
Citing the appraiser’s use of IRS publications, tax court decisions, past valuation experience, and his consideration of the property’s location in a regulated historic district, the court also determined that the appraiser provided a sufficient basis for his valuation.
The IRS also took issue with Scheidelman’s easement endowment contribution, claiming that it constituted a quid pro quo. Under the court’s analysis, it found that Scheidelman did not receive any goods or services or benefit in return for her cash gift. Even though the easement holding organization required the cash contribution as a part of the easement donation, the court said that an easement holder’s “agreement to accept a gift does not transfer anything of value to the donor, even though the donor may desire to have [her] gift accepted, and may expect to derive a benefit elsewhere” (such as by deductibility of the gift on her income taxes). The court also noted that these cash contributions are commonplace among easement holding organizations and serve to fund the administration of the easement.
After rejecting the Tax Court’s findings on these issues, the court sent the case back to the Tax Court for further consideration. Now that these two issues have been resolved, the Tax Court will consider the other issues it did not address, such as whether the easement was donated exclusively for conservation purposes and whether the easement protected the property in perpetuity.
For information on Simmons vs Commissioner, an earlier case involving preservation easements click here. #Legal #ForumBulletin #PreservationTools #easements