In Uncategorized on 05/02/2012 at 00:36

Or, Answering to a Higher Authority

Judge Goeke takes a look at a historic facade easement in Loren Dunlap and Nancy Dunlap, et al., 2012 T.C. Mem. 126, filed 5/1/12. And the easement is worth–nothing. That’s because their high-priced New York City condominium must, like a famous New York City hot dog, answer to a higher authority.

Loren and Nancy and their fellow unit owners in the chi-chi Cobblestone Loft Condominium, located in New York City’s Tribeca North Historic District, were sold the facade easement deduction by their managing agent. See my blogposts “Skimp on the Form but Attach the Appraisal”, 10/3/11, and “A Joy Forever”, 4/4/11.

Briefly, the National Architectural Trust (NAT), a Section 501(c)(3) not-for-profit, shepherded the Cobblestoners’ application through National Parks Service, got the condo designated as historic, and recommended a law firm (which had represented NAT and its for-profit affiliate SMS) to take care of drafting and recording the easement. A well-known appraisal firm (which had done other work for NAT) prepared an appraisal of the facade, which was distributed to all the Cobblestoners.

The appraiser never testified at the trial, however, and his report was thrown out as evidence. But it was good enough to let the Cobblestoners escape Section 6662 penalties.

The Cobblestoners took charitable deductions for their proportionate shares of the appraised worth of the easement.

The Cobblestoners had to make cash contributions to NAT, which IRS claimed was payment for services and not a Section 170 contribution. This doesn’t convince Judge Goeke, who finds the “services” to be minimal, and he allows the cash. But the facade deduction collapses.

Judge Goeke carefully deconstructs the appraisal and the expert testimony at trial, finding them deficient, but the point of the case is that the facade was already protected, and better protected, before NAT came on the scene, by the New York City Landmarks Preservation Commission (LPC), the governmental guardian of New York City’s architectural heritage.

Cobblestone was one of the very few buildings to achieve the LPC’s coveted “sound, first-class condition” status. As a result, Cobblestone entered into a continuing maintenance agreement with LPC.  Judge Goeke: “Under the continuing maintenance agreement, Cobblestone was required to have Cobblestone inspected every five years by a ‘Preservation Architect’ (to be selected from a list provided by the LPC) to make sure the building remained in sound, first class condition. The inspection was to cover various elements of both the interior and the exterior of the building. The preservation architect was required to prepare a report 45 days after each inspection which detailed work which should be completed to maintain the building in sound, first-class condition. Within nine months from the report date Cobblestone was required to either complete the work detailed in the report or else contest the required work with the LPC. The inspection, the report, and the work were all to be completed at Cobblestone’s expense. Other provisions of the continuing maintenance agreement imposed reporting obligations on Cobblestone in case of fire or other damage to the property.” 2012 T.C. Mem. 126, at p. 44, footnote 17.

This was far more than NAT ever did.

Judge Goeke again: “…we do not believe that the facade easement restrictions and enforcement were any more stringent than the LPC regulations and enforcement as of the date for which … valued the easement (December 29, 2003). The LPC is a well-staffed organization which works with community groups and preservation activists to enforce its regulations applicable to historic structures such as Cobblestone. Although the LPC’s regulations are slightly less rigorous than those promulgated by the Secretary of the Interior (which are the regulations purportedly enforced by NAT), Cobblestone had a special ‘sound, first- class condition’ designation with the LPC which caused it to be subject to a higher standard of preservation than most other historic structures in New York City. Only 150 of the 26,000 structures covered by LPC regulations had this special designation.” 2012 T.C. Mem. 126, at pp. 49-50.

Judge Goeke blasts NAT, finding its monitoring efforts to be poor or non-existent at the time the easement was granted, and that NAT was “…an organization more concerned with making money for SMS (a for-profit entity which employed many of the people who were held out to third parties as working for NAT and which was owned by the same two people who founded NAT and worked as directors and presidents of NAT) than monitoring and enforcing the terms of the facade easements it held.” 2012 T.C. Mem. 126, at p. 51.

So the easement was worth nothing. So no deductions.

Finally, the Cobblestoners acted reasonably and in good faith, so no penalties. The disregarded appraisal was attached to their tax returns, and they substantially complied with the requirements of the Form 8283 attached to their returns.


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