Lessee cannot take deduction for facade easement contribution.

• Author: Beavers, James A.

The Tax Court held that a partnership that leased two buildings and, along with the owners of the buildings, contributed a facade easement on the buildings to a not-for-profit preservation corporation could not take a charitable deduction for the contribution.

Background

The Economic Development & Industrial Corporation of Lynn (the EDC), a not-for-profit development corporation, is the fee simple owner of the Daly Drug Building and the Vamp Building in Lynn, Mass. In 1979, Harbor Lofts Associates, a partnership, took a 61-year term lease on the buildings. Under the lease, Harbor Lofts is allowed to use the buildings for multifamily residential housing. Shortly after leasing the buildings, it renovated the buildings and converted them into apartments. Since the early 1980s the buildings have been listed on the National Register of Historic Places.

In 2009, the EDC and Harbor Lofts together transferred a facade easement to preserve the buildings' exteriors to the Essex National Heritage Commission Inc., a qualified organization under Sec. 170(h)(3). Under the easement agreement, Harbor Lofts and the EDC are responsible for all repairs and must maintain the buildings' facade in the condition and appearance existing on the date of the grant of the easement.

On the day the facade easement was recorded, Harbor Lofts and the EDC amended the lease term on the buildings until Dec. 31,2056, and revised the rent payment schedule. In conjunction with these amendments, Harbor Lofts paid $4,500,000 to the EDC.

On its 2009 return, Harbor Lofts claimed a charitable contribution deduction of $4.458 million for its donation of the facade easement. The partnership claimed that the contribution of the easement was a contribution of a perpetual restriction on the use of the property that was a deductible qualified conservation contribution.

In 2016, the IRS issued a notice of final partnership administrative adjustment that disallowed the deduction for the contribution of the facade easement. Harbor Lofts challenged the IRS's determination in Tax Court.

The law

Under Sec. 170(f)(3)(A), a taxpayer generally cannot take a charitable contribution deduction for a contribution of a partial interest in property, but under Sec. 170(f)(3)(B), an exception is made for qualified charitable conservation contributions. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization made exclusively for conservation...