FEDERAL INCOME TAX; CREDITS; QUALIFIED CONSERVATION CONTRIBUTIONS: Granting of historical facade easement preserving the appearance of a structure does not qualify as a charitable conservation contribution if the easement subordinate to a mortgage. Satullo v. Commissioner, T.C. Memo 1993-614, affirmed, ___ F.3d ___ (11th Cir. 1995). The case involved dedications of facade easements by owners of condominium units in the AL Hambra, a renovated residential condominium in Atlanta.
The statute itself (Sections 170(f)(3)(B)(iii)and 170(h)(5)(a)) merely requires that the easement be "protected in perpetuity." But the regulations establish a more stringent test.
"In the case of conservation contributions made after February 13, 1986, no deduction will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity. For conservation contributions made prior to February 14, 1986, the requirement of section 170(h)(5)(A) is satisfied in the case of mortgaged property (with respect to which the mortgagee has not subordinated its rights) only if the donor can demonstrate that the conservation purpose is protected in perpetuity without subordination of the mortgagee's rights." IRS Regs Section 1.170A-14(g)
Here, the court assumed that the donations of the easements occured in 1985, but still concluded that the taxpayer had the burden of demonstrating that, without subordination, the easement rights were "protected in perpetuity." It noted that the non-profit organization that had received the easements had a policy requiring subordination because it had suffered numerous foreclosures of its easement rights in the past. On this record, the taxpayer could not sustain the burden of showing protection in perpetuity.
A subsequent regs section provides that the deduction will not be denied if the circumstance by which the easement may be terminated "is so remote as to be negligible." The court concludes that a mortgage default is more than a "negligible possibility." (Not a difficult call.)
An interesting footnote on Georgia law: The Georgia statute on historical easements provides that they are not valid until recorded. Presumably, therefore, even a lender with actual knowledge of the preservation scheme would not be subordinated to it if the easement were not actually recorded prior to the mortgage loan. The court discussed this feature of Georgia law, but it it is not crystal clear whether it had any impact on the outcome.
Comment: In the editor's home town, historical facade easements are quite popular in center city neighborhoods undergoing "urban homesteading" (what some call "gentrification." The requirement that these easements must be subordinated to the mortgages on the properties is not part of the "neighborhood lore" and the editor suspects that deductions are being taken for subordinated easements.
One possible method of addressing the problem is to take the easement only upon resale of the property, recording it as part of a simultaneous closing after the first mortgage has been released and before the buyer's new purchase money mortgage is recorded. Of course, the buyer's lender will have to be made aware of the easement and this may affect the appraisal value.
DIRT readers with expertise in this area - is there a better way out? Is the problem the same with national vs. local historical districts?
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