Those familiar with conservation easements know that to qualify for a federal tax deduction, a conservation easement must meet several rigorous requirements found in Internal Revenue Code Section 170 and Section 1.170A-14 of the Treasury Regulations, not the least of which is the requirement that the easement be granted “in perpetuity.” In addition, the easement must be subject to “legally enforceable restrictions” (such as by recordation) that will prevent uses inconsistent with the conservation purposes of the donation.
The Tax Court disallowed yet another façade easement deduction in T.C. Memo 2017-115, Ten Twenty Six Investors, v. Commissioner (June 15, 2017), for failing to meet the perpetuity requirement of Code Section 170(h)(5)(A) and Treas. Regs. Section 1.170A-14(g)(1). The latest in a series of similar cases, here, the taxpayer granted a historic façade easement over its building in New York to the National Architectural Trust (“NAT”) on December 21, 2004 and claimed a deduction on its 2004 tax return. NAT did not record the easement until December 14, 2006. The IRS disallowed the taxpayer’s claim for the 2004 deduction.
Although the taxpayer had a novel argument that its façade easement was not a “conservation easement” and was neither subject to state law recordation requirements nor the Code and Regulations’ perpetuity requirements, the Tax Court disagreed. Looking to New York law and several recent tax court and federal court precedents, the court held that the façade easement was a conservation easement that (1) pursuant to state law, must be recorded to be effective and (2) must be recorded in the year of the claimed donation in order to meet the perpetuity requirement of the Code and Regulations.