Dorothy Jean Simmons v. Commissioner, T.C. Memo 2009-208 (U.S.T.C. 2009)

"Simmons v. Commissioner, 646 F.3d 6 (D.C. Cir. 2011), affirming T.C. Memo 2009-208 (U.S.T.C. 2009)

State: District of Columbia

Procedural Status: Case concluded.

Date: 2011

Summary of Facts and Issues: Dorothy Jean Simmons owned two separate rowhouses in Washington, D.C., one on Logan Circle, the second on Vermont Avenue. Both properties were subject to D.C.’s Historic Landmark and Historic Preservation Act of 1978. In November 2003 and January 2004, respectively, Simmons donated historic preservation façade easements on both buildings to L’Enfant Trust (L’Enfant), a nonprofit 501(c)(3) corporation. The easements provided that Simmons could not make any material changes to the respective facades without L’Enfant’s consent. But they did not include a standard for such consent and expressly included the holder’s right to abandon the easement, stating that ""nothing herein contained shall be construed to limit the Grantee's right to give its consent (e.g., to changes in a Façade) or to abandon some or all of its rights hereunder."" In addition, the easements required that any work on the facades must be in compliance with federal, state, and local laws and regulations. Simmons hired an appraiser, who valued the Logan Circle easement at $162,500, based on a before-easement value of $1,250,000, and the Vermont Avenue easement at $93,000, based on a before-easement value of $845,000. The percentage reductions in value were thus 13% and 11%, respectively. For unspecified reasons, Simmons did not file any federal income tax returns for 2003 or 2004, and the IRS prepared substitute returns and filed notices of deficiencies for both years. In 2007, as this case was pending, Simmons did file returns for these tax years, but the IRS did not process the returns due to the active case. In June 2008, a trial was held and many different issues were litigated. The IRS asserted four different reasons that no deductions should be permitted: (1) the easements did not qualify under section 170(h) because of the consent and abandonment language; (2) there was no “contemporaneous written acknowledgement” as required by section 170(f)(8); (3) the appraisals were not “qualified appraisals” within the meaning of Treasury Reg. § 1.170A-13(c)(3); and (4) the easements should be valued at zero because they did not add restrictions beyond those already existing under D.C. land use ordinances. As for section 170(h) qualification, the IRS presented a variety of sub-issues. It claimed that the easements do not qualify because L’Enfant could consent to changes in the facades or abandon its enforcement rights, even if contrary to the conservation purposes of the easements. Furthermore, the IRS argued, L’Enfant had the right not to exercise any of its obligations under the easements. Finally, the IRS contended that Simmons did not properly subordinate the different mortgages on the two properties, as the mortgagees’ “lender acknowledgements” of the easements were not formal subordinations.

Holding: In relatively short order, the Tax Court rejected all of the IRS’ 170(h) qualification arguments. The Tax Court also found that the easement deeds themselves qualified as “contemporaneous written acknowledgements” for the purposes of section 170(f)(8), as they were signed by L’Enfant and adequately described the donated properties. Next, the Tax Court held that the appraisals substantially complied with the Treasury Regulations for “qualified appraisals.” Finally, the Tax Court agreed with Simmons’ appraiser on the before-easement values, but essentially split the difference on the easements’ valuation, finding for a 5% reduction in value for each easement. Thus, the Tax Court held that Simmons was entitled to deductions of $56,250 for 2003 and $42,250 for 2004. The IRS appealed to the D.C. Circuit.

July 2011 Update: The D.C. Circuit affirmed the Tax Court’s decision on the two grounds of appeal, that the easements qualified under section 170(h) and that the appraisals were “qualified appraisals.”

Analysis and Notes: The Tax Court opinion covers a lot of ground in 27 pages. The ruling on subordination is favorable to taxpayers, as many mortgagees commonly use “acknowledgements” or “consents” to easements rather than an explicit “subordination.” (Nevertheless, a subordination is usually preferable from the land trust’s perspective.) The ruling on section 170(f)(8) provides a ray of hope for easement donors who may not have obtained a contemporaneous written acknowledgment, and certainly is more favorable to the taxpayer than other section 170(f)(8) rulings discussed here. Finally, this case presents yet another example of the courts’ rejections of the IRS’ zero-valuation arguments. Significantly, Simmons was able to show that L’Enfant enforced its easements more stringently than the District of Columbia enforced its historic preservation ordinance. Tellingly, the Tax Court opinion’s findings of facts devotes a lengthy paragraph to describing L’Enfant’s monitoring practices.

July 2011 Update: On appeal, the IRS strived to show that the consent and abandonment language of the easements proved fatal to their tax deductibility, as the properties were not “protected in perpetuity.” The IRS also claimed that the easements lacked any language providing for the easements’ continued existence in the event that L’Enfant dissolved as an entity. However, the D.C. Circuit rejected these arguments, pointing to: (a) perpetuity language in the easements, (b) a section of the easements stating that they would ""survive any termination of Grantor's or the Grantee's existence,” and (c) District of Columbia law regarding the disposition of assets upon the dissolution of a nonprofit corporation, buttressed by the testimony of the D.C. Historic Preservation Officer. The D.C. Circuit also found that the chances of L’Enfant abandoning the easements were so remote as to be negligible, as per Treas. Reg. § 1.170A-14(g)(3). Despite its passing the test of this case, the easement’s language on consent and abandonment is unusual for a conservation easement and is not recommended, for it is likely to attract IRS scrutiny. As for the “qualified appraisal” issue, the D.C. Circuit found that the appraisals provided enough specificity in the before and after analysis. In particular, for the after calculation, it appears that the appraisals did not include direct comparables, but rather enumerated the considerations that prospective parties have actually had, or are likely to have, in the buying or selling of a property encumbered by a façade easement. The D.C. Circuit concluded that there was no clear error in the Tax Court’s finding this methodology sufficient. Note that The National Trust for Historic Preservation, L’Enfant, and the Foundation for the Preservation of Historic Georgetown filed a joint amicus brief in support of the taxpayer.