No Per Se Deduction for Conservation Easements

Many of the exciting conservation easement cases (yes I did say "exciting conservation easement cases") come up in the context of facade easements. I think facade easements just sound sketchy questionable to many of us. Someone with a beautiful historic building gets a tax deduction for agreeing not to destroy the facade of that beautiful home. My gut reaction is to object that the landowners unlikely had any plan to mar one of the aspects that likely drew them to purchasing the building. In fact, I have heard more than one landowner brag that they just got a tax deduction for doing what they were already doing. On further consideration though, we can see that there might be value to the public here. This is particularly so in an area where (1) landowner are having trouble affording the upkeep on the homes or (2) where economic pressures or a lack of other protection mechanisms put the buildings at risk. Some have argued that such restrictions always have value. That is, even if we have a landowner who was already planning to protect the building and the home is in a district where local laws prevent destruction (or require upkeep), you never know what the future holds in terms of other landowners or changing government whims so a facade easement may end up saying the parcel one day. Personally, such speculative value doesn't seem the best use of public funds when we can confidently identify so many places where conservation yields immediate results.

Scheidelman v. C.I.R. (2014 WL 2748623) decided yesterday by the Second Circuit is the latest in a saga over the deduction of a Brooklyn townhouse. In 1997, Huda Scheidelman paid $255,000 for this house in the designated Fort Greene Historic District. The district is designated as a historic district by the National Park Service and by NYC's Landmarks Preservation Commission. Under these protections, it is illegal to alter the facade without the consent of the Landmarks Preservation Commission.

In 2003, Scheidelman donated a facade conservation easement to the National Arhcitectural Trust, now renamed the Trust for Architectural Easements. The Trust's recommended appraiser valued the conservation easement at $115,000 and Scheidelman claimed a charitable deduction for that amount on her 2004 tax return.

After an audit the IRS rejected her claimed deduction as not being accompanied by a "qualified appraisal" as required by statute. The Tax Court agreed, but the Second Circuit vacated and sent the case back for a de novo review of the fair market value of the conservation easement. After doing so, the Tax Court determined that the value of the conservation easement should be $0 because it did not diminish the property value of Scheidelman's townhouse. Using the standard before and after method of appraisal, this calculation makes sense. Because other laws already restrict the property, the presence of the conservation easement doesn't change the value of the property. Of course, some may argue that the before and after method isn't appropriate and perhaps instead we should do some calculation based on value to the public but well... that's a harder number to crunch and more open to abuse. The Second Circuit just upheld the tax court's finding that the deduction had no value.

My favorite line of the Second Circuit (per curiam) opinion is the statement that conservation easements do not represent a per se reduction in fair market value and in fact may even serve to enhance property value.