Deemed Approval Clause Dooms Facade Easement Charitable Deduction

• Date: 01 July 2020
• DOI: http://doi.org/10.1002/npc.30739
• Published date: 01 July 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

July 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

Overview

The proposed revenue procedure would change the

requirements for obtaining and maintaining a group

exemption (§ 3), the information needed in requesting a

group exemption letter (§ 5), and the information required

to maintain a group exemption (§ 6). It addresses the

annual filing requirements (§ 7), applicability of the declar-

atory judgment provisions (IRC § 7428) (§ 11), disclosure

of group exemption letter requests and group exemption

letters (§ 13), and termination of group exemptions (§ 8).

The proposal contains transition and other rules appli-

cable to existing group exemption requirements (§ 14).

Highlights

Some of the notable proposed changes include: (1)

a requirement that a central organization have at least

five subordinates to obtain a group exemption letter;

(2) a rule that a central organization may maintain only

one group exemption letter; (3) expanded definitions of

the terms affiliation, general supervision, and control;

(4) a mandate that all subordinates (other than those

described in IRC § 501(c)(3)) must be described by the

same National Taxonomy of Exempt Entities codes; (5) a

requirement that all subordinates (other than 501(c)(3)s)

adopt a uniform governing instrument, (6) an exclusion

of Type III supporting organizations and nonprofit health

insurance issuers from group exemptions, and (7) a

30-day annual reporting window rather than the existing

90-day one.

Definitions

A central organization must establish that each of

its subordinate organizations is affiliated with it and is

subject to its general supervision or control.

The concept of affiliation essentially amounts to a

combination of all of the information required to be

submitted by a central organization about a subordinate

organization, such as the nature of its tax-exempt status

and public charity classification, its purposes and activi-

ties, and its NTEE code classification.

A subordinate organization would be subject to the

central organization’s general supervision if the central

organization (1) annually obtains, reviews, and retains

information on the subordinate organization’s finances,

activities, and compliance with annual filing require-

ments and (2) transmits written information to, or oth-

erwise educates, the subordinate organization about the

requirements to maintain its tax-exempt status, including

the annual filing requirements.

A subordinate organization would be subject to the

central organization’s control if (1) the central organi-

zation appoints a majority of the subordinate organi-

zation’s trustees, directors, or officers or (2) a majority

of the subordinate organization’s trustees, directors, or

officers are trustees, directors, or officers of the central

organization.

Existing Subordinate Organizations

The definitions of general supervision and control

would not apply to subordinate organizations existing

before the effective date of the revenue procedure, nor

do the uniform governing instrument and certain other

requirements. These aspects of the law will apply, how-

ever, with respect to new subordinates of a preexisting

group exemption arrangement. [26.11] ◆

DEEMED APPROVAL CLAUSE

DOOMS FACADE EASEMENT

CHARITABLE DEDUCTION

Observing that “[f]orever is a really long time — no

less so in tax law” and “forever really means forever,”

the US Court of Appeals for the Sixth Circuit, by opinion

dated April 14, ruled that a donor of a facade easement

is not entitled to a charitable contribution deduction

for its gift because the contribution agreement accords

the donee a 45-day window in which to prevent certain

changes to the facade or airspace (Hoffman Properties II,

LP v. Commissioner).

Facts

The donor, owner of a historic building, contributed

an easement in the building’s facade and certain airspace

restrictions associated with the building to a qualified

public charity. A $15 million charitable deduction was

claimed. Essentially, this donor agreed to not alter the

historic character of the facade or build in the airspace

above or next to the building, subject to certain provi-

sions in the agreement.

These provisions involve “conditional rights” in the

form of actions the donor could take as long as the public

charity approved them. For example, the donor restricted

the right to “alter, reconstruct or change the appearance”

of the facade contrary to standards in Department of the

Interior regulations. The agreement provides that if the

public charity fails to act within 45 days of a proposed

change, the failure is deemed an approval of the change.

Law and Analysis

The appellate court held that this deemed approval

clause is a transgression of the requirement that for

there to be a charitable deduction for its contribution, a

conservation easement must be “protected in perpetu-

ity” (IRC § 170(h)(5)(A)). The court noted that if the char-

itable donee misses this window of time, for whatever

reason, it loses the ability to stop the change. It wrote

that “there’s a world of difference between restrictions

that are enforceable ‘in perpetuity’ and those that are

enforceable for only 45 days.”

The court wrote that a deductible gift of this type of

easement must affirmatively prevent uses of the property