Wednesday, April 28, 2010

Tax Court: No Deduction for Façade Easement where Bank Has Prior Claim

Tax Notes Today reports that the United States Tax Court, in an opinion granting summary judgment to the IRS, has denied a taxpayer-couple's charitable contribution deduction for a façade easement that they granted to a charity.  In Kaufman v. Commissioner, the Tax Court found the taxpayers’ easement failed to satisfy the requirements of section 170(h) of the Internal Revenue Code and the regulations thereunder.  Under section 1.170A-14(g)(6)(ii) of the regulations, the donor must agree that the donation of the perpetual conservation restriction confers a property right, immediately vested in the donee, with a fair market value that, at the time of the gift, is at least equal to the proportionate value that the perpetual conservation restriction bears to the value of the property as a whole. Moreover, section 1.170A-14(g)(6)(ii) of the regulations states that, when changed conditions extinguish a perpetual conservation restriction and there is a subsequent sale, exchange, or involuntary conversion of the property, the donee generally must be entitled to a portion of the proceeds at least equal to that same proportionate value.  The Tax Court then reasoned as follows:

Petitioners concede that the property had a mortgage and that the bank retained a "prior claim" to all proceeds of condemnation and to all insurance proceeds as a result of any casualty, hazard, or accident occurring to or about the property. Moreover, petitioners do not dispute that the bank was entitled to those proceeds "in preference" to [the donee] until the mortgage was satisfied and discharged. The right of [the donee] to its proportionate share of future proceeds was thus not guaranteed.

The case is available electronically at 2010 TNT 80-12.


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