If You Want a Section 170 Façade Deduction

Wm. Wordsworth’s words echo today for Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner, 151 T. C. 3, filed 8/27/18.

Harbor Lofts had a 61-year triple-net-lease of the historical Daly Drug Building and the Vamp Building in Lynn, Massachusetts. The lessor was Economic Development & Industrial Corporation of Lynn (EDIC), a Massachusetts public corporation. Harbor Lofts had benefits-and-burdens.

Harbor Lofts and EDIC gave a joint historic façade easement to a real Section 170(h)(3), Essex National Heritage Commission, Inc., to protect, preserve, defend, etc.

Harbor Lofts claims a $4 million charitable. Negatory, says IRS, you’re not fee owner. You can’t guarantee perpetuity, because at year 61 you’re outta there. But you can have a 40% overvaluation chop at no extra charge.

EDIC’s grant is valid, of course. EDIC owns the fee, so can tie it up the façade. But MA law says leases are chattels real, not real property. And State law controls characterization, while Federal law controls how taxed.

Harbor Lofts claims it’s a tenant-in-common with EDIC.

Except Judge Buch says they aren’t.

“Harbor Lofts is not a fee owner, tenant in common, or joint tenant and has not been granted a life estate or remainder interest.  Rather, Harbor Lofts leased property from the Economic Development Corp., and ‘a commercial lease is a contract rather than a conveyance of property.’” 151 T. C. 3, at p. 13 (Citation omitted).

“Harbor Lofts is correct that the Code does not specifically require a donor to hold a fee interest, but only the owner of real property or holder of a fee interest is able to grant a perpetual conservation restriction.

“Harbor Lofts has given up something of value:  the rights to make improvements, alterations, and additions to the buildings.  But those rights, initially created under the contract by which Harbor Lofts leases the property, were ceded to the Economic Development Corp.  Harbor Lofts gave up contractual rights under the lease agreement, which are personal property rights.  And a charitable contribution of a personal property right is not a qualified real property interest under section 170(h)(2)(C). “ 151 T. C. 3, at p. 14.

Finally, “Harbor Lofts also argues that its interest under the lease has made them equitable owners of the property for tax purposes.  But it supports its argument only with cases involving sale leaseback transactions and rulings applying economic substance and disguised-sale doctrines.  These cases are not relevant here.  Although Harbor Lofts took on many of the rights and obligations often associated with property ownership, its possession of these rights and obligations is of a finite duration ending on the lease’s expiration.  Section 170(h)(2)(C) specifically sets forth a perpetuity requirement for a facade easement.  Even if we were to find that Harbor Lofts holds equitable ownership in the buildings, it is equitable ownership for only a finite period and cannot satisfy the perpetuity requirements of section 170(h)(2)(C).” 151 T. C. 3, at p. 15. (Citation omitted).