It won’t help you. That’s Judge Goeke’s lesson to Logan M. Chandler and Nanette Ambrose-Chandler, in 142 T. C. 16, filed 5/14/14.

Strike up the band, Sir Billy Walton, and shout it out, Dame Edie Sitwell, it’s time for more Façade.

Logan and Nanette owned two buildings in Boston’s now-ritzy South End. They sold one, but had put historic façade easements on both, and claimed heavy-duty Section 170 charitable deductions for both. They even followed the advice of the National Parks Service, who were advocating this sort of thing. IRS agreed they followed the rules, except that their appraisal didn’t prove either building lost any value.

Note that the vendor of these dodges, our old chums National Architectural Trust (NAT) provided surveillance (which Boston’s own municipal landmarks authority didn’t do, the Beantown landmarkniks relying on local whistleblowers), annual inspections to make sure the properties remained in their original state, and had an easement that covered the rear as well as the façade.

See my blogpost “Cover Your Rear”, 11/12/13.

No dice, says Judge Goeke. “We must determine the value diminution resulting from these additional restrictions. We recently performed this analysis under identical circumstances. In Kaufman v. Commissioner, T.C. Memo. 2014-52, we reviewed a NAT easement on a property in the South End Historic District. There we determined that the differences outlined above do not affect property values, because buyers do not perceive any difference between the competing sets of restrictions. Id. at *57. We see no reason to break with that result here. Mr. E’s report, which petitioners exclusively rely on to demonstrate their easements’ values, was not credible. Respondent has persuasively argued that a typical buyer would perceive no difference between the two sets of applicable restrictions here. We recognize technical differences between the easements and local law, but we agree with respondent’s conclusion that the restrictions were practically the same. Because petitioners have not proved that the easements they donated had value, we sustain respondent’s disallowance of the charitable contribution deductions they claimed.” 142 T. C. 16, at pp. 19-20 (name omitted).

Now since the deductions were greater than would be allowed to offset taxable income in any one year, Logan and Nanette spread them over three years. IRS wants the 40% chop for all, but Logan and Nanette argue they have reasonable cause, and the drop in overvaluation from 400% to 200% in 2006, and the elimination in that year of a good faith defense, cannot be applied retroactively.

Judge Goeke blows retroactivity away: “Under either version of section 6662(h) the valuation misstatements are ‘gross’ and trigger the 40% penalty. However, the facts raise a novel issue concerning petitioners’ right to raise a reasonable cause defense for their 2006 underpayment. Petitioners note that a portion of the underpayment resulted from the carryover of charitable contribution deductions they first claimed on their 2004 return, which they filed before the PPA’s effective date. Accordingly, they argue, denying their right to raise a reasonable cause defense would amount to retroactively applying the PPA [Pension Protection Act, which changed the rules].” 142 T. C. 16, at pp. 24-25. “When taxpayers file a return that includes carryforward information, they essentially reaffirm that information. The amended reasonable cause rules were in effect when petitioners filed their 2006 return, which reaffirmed the … easement’s grossly misstated value. Applying those rules does not amount to retroactive application. The plain language of the statute makes the rules applicable for all returns filed after July 25, 2006. Petitioners filed their 2006 return after that date and consequently may not raise a reasonable cause defense for their 2006  underpayment, which resulted exclusively from gross valuation misstatements.” 142 T. C. 16, at pp. 25-26.

Notwithstanding the foregoing, as my high-priced colleagues would say, Judge Goeke lets Logan and Nanette off the penalty for the two years when reasonable cause was a defense to the 40% chop. Logan is a lawyer and an MBA, and Nanette is a self-employed interior decorator. But that doesn’t mean they know about valuing easements.

Most people can form some hazy idea of the value of regular real estate, but even the experts come seriously unglued when it comes to historic façade easements (and how!). After all, Judge Goeke bounced both Logan’s and Nanette’s appraiser and IRS’ appraiser, finding fault with both. And Logan and Nanette followed the National Parks Service guidelines. Unlike the Kaufmans in the cited case (and in my blogpost “A Joy Forever? Not Hardly”, 3/31/14), neither Logan nor Nanette evinced the misgivings that sent Gordo Kaufman to ask Mory Bahar of NAT whether the easement would really depress the value of Lorna’s mansion, and get the reply that sinks the Kaufmans without trace.

So Logan and Nanette avoid two years’ worth of 40% chop, but get nailed for the last. Looks like covering your rear is insignificant when facades are in play. at least in Judge Goeke’s courtroom. Hit it, Edie and Sir Billy!