A landmark ruling emphasizes the strict requirements for conservation contributions.

The Tax Court’s Landmark Decision

The Tax Court recently upheld the IRS’s denial of a $23 million charitable contribution deduction claimed by Capital Places II Owner, LLC (CPII). The case (Capitol Places II Owner, LLC, (1/2/2025) 164 TC No. 1) revolved around an historic facade preservation easement on a South Carolina building. CPII argued the easement qualified as a charitable contribution, but the court disagreed. Here’s why.

The Historic Facade Preservation Easement

In December 2014, CPII donated an historic facade preservation easement on an early 20th-century building in Columbia, South Carolina. While the building was part of a historic district and designed by a notable architect, James Urquhart, it had undergone significant alterations. A stucco addition in the 1960s caused damage to its original brick and stone ornamentation, disqualifying it from being a “certified historic structure.”

Key Points of IRS Rejection

The IRS argued the easement failed to meet the criteria for a “qualified conservation contribution.” According to the law, such contributions must be:

1. Exclusively for conservation purposes
2. On a certified historic structure or deemed historically significant by the Secretary of the Interior.

The building did not meet these qualifications, as:

1. The National Park Service deemed it ineligible for certification due to its altered state.
2. CPII failed to secure certification that the building held historic significance to its district.

The Tax Court’s Rationale

The Tax Court sided with the IRS, stating CPII’s easement lacked the necessary conservation purpose under the law.

Not a Certified Historic Structure

The court clarified that for an easement to qualify, the building must either:

1. Be certified as historically significant, or
2. Be deemed significant to a registered historic district by the Interior Secretary.

CPII’s building met neither criterion. Although it contributed to the district, it wasn’t formally certified as significant.

Misinterpretation of Conservation Purpose

CPII argued the facade easement preserved a historically important land area. However, the court rejected this claim, stating:

1. A facade easement alone cannot protect a historic district or land area.
2. Broadly interpreting “land area” would undermine the specific definition of “certified historic structure.”

Lessons for Taxpayers

This case underscores the importance of following regulations for conservation easements. Taxpayers must:

1. Secure proper certifications from the Interior Secretary.
2. Ensure the building meets the strict standards for a certified historic structure.
3. Avoid relying on general claims about conservation purposes.

Failing to meet these requirements can lead to significant financial losses and penalties.

Conclusion

The IRS and Tax Court have made it clear: taxpayers must adhere strictly to the law when claiming deductions for historic facade preservation easements. This ruling serves as a cautionary tale for those looking to leverage charitable contributions for tax benefits without following proper procedures.

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