Deemed Approval Clause Dooms Facade Easement Charitable Deduction

Date01 July 2020
Published date01 July 2020
July 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
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).
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.
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
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]
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).
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

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