COMM. v. SIMMONS, Cite as 107 AFTR 2d 2011-XXXX, 06/21/2011
Commissioner of Internal Revenue Service, Appellant v.
Dorothy Jean Simmons, Appellee.
Case Information:
Code Sec(s):
Court Name: United
States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT,
Docket No.: No.
10-1063,
Date Argued:
02/04/2011
Date Decided:
06/21/2011.
Prior History:
Disposition:
HEADNOTE
.
Reference(s):
OPINION
Patrick J. Urda, Attorney, U.S. Department of Justice,
argued the cause for appellant. With him on the briefs was Kenneth L. Greene,
Attorney.
Robert J. Onda argued the cause for appellee. With him on
the brief was Timothy S. Rankin.
Matthew A. Eisenstein was on the brief foramici curiae The
National Trust For Historic Preservation, The L'Enfant Trust, and Foundation
for the Preservation of Historic Georgetown in support of appellee.
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA
CIRCUIT,
Appeal from the United States Tax Court
Before: Ginsburg and Garland, Circuit Judges, and Silberman,
Senior Circuit Judge.
Opinion for the Court filed by Circuit JudgeGinsburg.
Judge: Ginsburg, Circuit Judge:
The Commissioner of Internal Revenue appeals a decision of
the Tax Court holding taxpayer Dorothy Jean Simmons was entitled to claim
deductions in 2003 and 2004 for donating to the L'Enfant Trust, Inc.
conservation easements on the façades of two buildings located in an historic
district. The Commissioner argues Simmons may not take these deductions because
her contribution was not “exclusively for conservation purposes,” as required
by 26 U.S.C. § 170(h)(1)(C), and because she failed to obtain “qualified appraisals”
meeting the standards of Treasury Regulation § 1.170A-13(c)(3)(ii). We hold the
Tax Court did not clearly err in concluding the factual circumstances
supporting Simmons's deductions met the applicable statutory and regulatory
requirements.
I. Background
During the years at issue, Simmons owned two properties in
the Logan Circle neighborhood of Washington, D.C. — one on the Circle and one
nearby on Vermont Avenue. The two properties were and are subject to the
District of Columbia's Historic Landmark and Historic District Protection Act
of 1978, D.C. Code § 6-1101 et seq.. The
D.C. Historic Preservation Office may fine any person who violates the
District's preservation laws and can compel that person to restore a structure
that he impermissibly altered. Id. §
6-1110.
A. The Conservation Easement Deeds
The L'Enfant Trust, Inc. is a tax-exempt organization under
26 U.S.C. § 501(c)(3), dedicated to the preservation of historic properties. In
2003 Simmons executed a “Conservation Easement Deed of Gift” granting to
L'Enfant “an easement in gross, in perpetuity, in, on, and to the Property, the
Building and the Façade” on Logan Circle. In 2004 she granted to L'Enfant
another, essentially identical easement on the Vermont Avenue property.
Each deed prohibits Simmons from materially altering the
façade of the property without the written consent of L'Enfant, and requires
her to maintain the properties in good repair, periodically clean the façades,
and ensure any change to a façade will comply with “applicable federal, state
and local governmental laws and regulations.” The deeds give L'Enfant the right
to inspect the façades and to seek equitable remedies for any violation of the
easements. By their terms, the easements are binding upon Simmons and her
“successors, heirs and assigns,” run “in perpetuity with the land,” and
“survive any termination of Grantor's or the Grantee's existence.”
The deeds allow L'Enfant “to give its consent (e.g., to
changes in a Façade) or to abandon some or all of its rights” thereunder. The
deeds also acknowledge the properties were already encumbered by deeds of trust
securing loans to a mortgage company, but recite that the lenders have agreed
to subordinate their rights in the property to the rights of L'Enfant “and join
in the execution” of the easement deed for this limited purpose. Attached to
each deed are “Lender Acknowledgements” signed by a representative of the
lenders.
B. Simmons's Claim of Charitable Deductions
Simmons filed tax returns for 2003 and 2004 claiming
charitable deductions of, respectively, $162,500 and $93,000 for having donated
the conservation easements to L'Enfant. A taxpayer generally may not take a
charitable deduction for the gift of a partial interest in property. 26 U.S.C.
§ 170(f)(3)(A). There is an exception, however, for a “qualified conservation
contribution,” id. § 170(f)(3)(B)(iii),
defined as the contribution “(A) of a qualified real property interest, (B) to
a qualified organization, (C) exclusively for conservation purposes,” id. § 170(h)(1). The parties agree the easements
are “qualified real property interest[s]” and L'Enfant is a “qualified
organization.” See id. , § 170(h)(2)(C),
(3).
As required by the applicable Treasury regulations,see Treas. Reg. § 1.170A-13(c)(2)–(3), Simmons
obtained appraisals performed by a licensed and certified appraiser, estimating
the fair market value of each easement, which appraisals she submitted with her
tax returns. The appraiser, James Donnelly, determined that prior to the
easement the fair market value of the Logan Circle property was $1,250,000 and
that of the Vermont Avenue property was $845,000. Donnelly estimated donation
of the easement would diminish the value of the former by $162,500 (13
percent), and that of the latter by $93,000 (11 percent).
Before the Tax Court, the Commissioner argued Simmons could
not claim a charitable deduction because (1) the easements were not granted
“exclusively for conservation purposes,” (2) Simmons had failed to submit
“qualified appraisals” proving the fair market value of the easements, and (3)
as shown by an appraisal done by an employee of the Internal Revenue Service,
the easements were of no value. The Tax Court disagreed in all respects but
held the easements were worth only $56,250 and $42,250 respectively. Simmons v.
Comm'r, 98 T.C.M. (CCH) 211, 212 [TC
Memo 2009-208] (2009).
II. Analysis
On appeal the Commissioner argues the Tax Court erred in
holding (1) the easements donated by Simmons were “exclusively for conservation
purposes,” § 170(h)(1)(C), and (2)
Simmons had obtained “qualified appraisals” as required by Treasury Regulation
§ 1.170A-13(c)(3)(ii). * Because his arguments raise mixed questions of fact
and law, our review is only for clear error. See Jombo v. Comm'r, 398 F.3d 661, 663 [95 AFTR 2d 2005-1141]
(D.C. Cir. 2005).
A. Exclusively for Conservation Purposes
To reiterate, a taxpayer may take a deduction for a
“conservation contribution” only if it constitutes a qualified interest in real
property given exclusively for a “conservation purpose[].” For a contribution
to be deemed exclusively for a conservation purpose, that purpose must be
“protected in perpetuity.” 26 U.S.C. § 170(h)(5)(A). A regulation promulgated
by the Department of the Treasury states further that “any interest in the
property retained by the donor ... must be subject to legally enforceable
restrictions ... that will prevent uses of the retained interest inconsistent
with the conservation purposes of the donation.” Treas. Reg. § 1.170A-14(g)(1).
The Commissioner argues Simmons is not entitled to
deductions for charitable contributions because the easements she granted
L'Enfant satisfy neither the statute nor the regulation quoted above. More
specifically, the Commissioner points to the clause in the deeds stating
“nothing herein contained shall be construed to limit the Grantee's right to
give its consent (e.g., to changes in a Façade) or to abandon some or all of
its rights hereunder.” This clause, he maintains, is inconsistent with
conservation in perpetuity because it leaves L'Enfant free to consent to an
ahistorical change in the façade and to abandon altogether its right to enforce
the restrictions set out in the deeds. The Commissioner also asserts the deeds
will not prevent uses of the properties “inconsistent with” their conservation
because neither easement includes a clause providing for the perpetuation of
the easements in the event L'Enfant ceases to exist or simply abandons its
right to enforce the easements.
Simmons objects that each deed states explicitly the
parties' intent to preserve the subject property and that, in any event, both
she and L'Enfant are limited in what they can change by the District's historic
preservation laws. She also points out that L'Enfant's interest in preserving
its tax-exempt status will prevent it from approving changes inconsistent with
the conservation purposes of — let alone abandoning — the easements. Finally,
Simmons maintains if L'Enfant is dissolved, then the easements will be
transferred to another organization that engages in similar activities, citing
the testimony of the State Historic Preservation Officer.
We conclude the easements meet the requirement of perpetuity
in § 170(h)(5)(A). The deeds impose an
affirmative obligation upon Simmons “in perpetuity” to maintain the properties
in a manner consistent with their historic character and grant L'Enfant the
authority to inspect the properties and to enforce the easements. By their
terms, the deeds will “survive any termination of Grantor's or the Grantee's
existence.” Although the deeds do not spell out precisely what would happen
upon the dissolution of L'Enfant, D.C. law provides the easements would be
transferred to another organization that engages in “activities substantially
similar to those of” L'Enfant. D.C. Code
§§ 29-301.48, 29-301.56. More specifically, the State Historic
Preservation Officer testified the easement initially reverts to the District
of Columbia, which then seeks to assign it to a conservation organization.
Accordingly, the deeds do all the Commissioner can reasonably demand to
“prevent” uses of the properties inconsistent with conservation purposes, as
required by Treasury Regulation §
1.170A-14(g)(1).
The clauses permitting consent and abandonment, upon which
the Commissioner so heavily relies, have no discrete effect upon the perpetuity
of the easements: Any donee might fail to enforce a conservation easement, with
or without a clause stating it may consent to a change or abandon its rights,
and a tax-exempt organization would do so at its peril. As the amici curiae —
the National Trust for Historic Preservation, L'Enfant, and the Foundation for
the Preservation of Historic Georgetown — further explain, this type of clause
is needed to allow a charitable organization that holds a conservation easement
to accommodate such change as may become necessary “to make a building livable
or usable for future generations” while still ensuring the change is consistent
with the conservation purpose of the easement.
Moreover, the Commissioner has not shown the possibility
L'Enfant will actually abandon its rights is more than negligible. L'Enfant has
been holding and monitoring easements in the District of Columbia since 1978,
yet the Commissioner points to not a single instance of its having abandoned
its right to enforce. Simmons's deeds in particular make express L'Enfant's
intention to ensure her properties “remain essentially unchanged.” Treasury
Regulation § 1.170A-14(c)(1) also provides “an eligible donee” — as L'Enfant
undisputedly is — must have a “commitment to protect the conservation purposes
of the donation” and “the resources to enforce the restrictions.” Simmons's
entitlement to a deduction for a “qualified conservation contribution” under 26
U.S.C. § 170(f)(3)(B)(iii), therefore, is supported by the limitation in Treasury Regulation § 1.170A-14(g)(3):
A deduction shall not be disallowed under section
170(f)(3)(B)(iii) and this section merely because the interest which passes to,
or is vested in, the donee organization may be defeated by the performance of
some act or the happening of some event, if on the date of the gift it appears
that the possibility that such act or event will occur is so remote as to be
negligible.
Simmons's deductions cannot be disallowed based upon the
remote possibility L'Enfant will abandon the easements.See Stotler v. Comm'r
, 53 T.C.M. (CCH) 973, 980–81 [¶87,275
PH Memo TC] (1987) (concluding easement was granted in perpetuity even though
grantee could abandon it because possibility future events would undermine
perpetuity was “so remote as to be negligible”).
We also note any change in the façade to which L'Enfant
might consent would have to comply with all applicable laws and regulations,
including the District's historic preservation laws. * In short, because the
donated easements will prevent in perpetuity any changes to the properties
inconsistent with conservation purposes, we hold Simmons has made a
contribution “exclusively for conservation purposes,” in accordance with 26
U.S.C. § 170(h)(1)(C).
B. Qualified Appraisals
Section 155(a) of the
Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, 691, directs
the Secretary of the Treasury to prescribe regulations requiring an individual
claiming a charitable deduction pursuant to
§ 170 for property valued at more than $5,000 to obtain “a qualified
appraisal for the property contributed.” The regulations contain
“substantiation requirements,” viz., that the appraisal include, as relevant
here:
(J) The method of valuation used to determine the fair
market value, such as the income approach, the market-data approach, and the
replacement-cost-less-depreciation approach; and
(K) The specific basis for the valuation, such as specific
comparable sales transactions or statistical sampling ....
Treas. Reg. §
1.170A-13(c)(2)–(3).
The Commissioner argues the Tax Court erred in holding
Simmons's appraisals were “qualified.” First, he contends Donnelly failed to
explain the “method of valuation” he used and to include a substantive basis
for the valuation, as required by paragraphs (J) and (K), set out above. In
doing the appraisals, Donnelly had relied upon an article prepared by Mark
Primoli, an IRS employee, which stated, “Internal Revenue Service Engineers
have concluded that the proper valuation of a façade easement should range from
approximately 10% to 15% of the value of the property.” Internal Revenue
Service,Façade Easement Contributions (2000). The Commissioner suggests
Donnelly arbitrarily picked a percentage between 10 and 15 rather than stating
any identifiable method to determine the “after-easement” value.
Simmons argues that because there was no market price for
conservation easements, Donnelly properly used the “before and after approach,”
Hilborn v. Comm'r, 85 T.C. 677, 688–89
(1985): He calculated the “difference between the fair market value of the
property” prior to donation and “the fair market value of the encumbered
property after the granting of the restriction,” as permitted by §
1.170A-14(h)(3). To estimate the fair market value of each property once subject
to the easement, Donnelly examined sales of similarly encumbered properties and
took into account factors a buyer would consider in valuing such a property.
The Commissioner, however, complains Donnelly did not identify the properties
examined or the parties with whom he spoke and therefore did not provide
adequate detail; instead, he said he had considered “subjective and conjectural
factors” that would lower the value of the properties after being encumbered by
easements.
We hold the Tax Court did not clearly err in concluding the
appraisals sufficiently identified the method and basis for the valuations. To
determine the fair market value of the property before being encumbered,
Donnelly consulted sales of similar properties and identified some of these sales
in the appraisals. In ascertaining the fair market value after encumbrance,
Donnelly explained he spoke with and considered “the mindset of competent
buyers and sellers” and took account of the “considerations they have actually
had, or are likely to have, in the buying or selling of a property encumbered
by a façade easement.” For example, each appraisal noted the property would
lose some value because the easement imposed more onerous requirements than
does D.C. law. It also listed several factors that would lower the value of the
encumbered property, such as potential legal exposure if the donor were to
breach the easement and L'Enfant's right of prior approval for any change to
the façade.
After examining sales of easement-encumbered properties and
speaking with interested parties, Donnelly concluded the donation of each
easement would diminish the value of the property by from 10 to 15 percent, as
contemplated by Primoli's article. Specifically, he determined the Logan Circle
and the Vermont Avenue properties would lose, respectively, 13 and 11 percent
of their value. Although the appraisals might have elaborated further upon the
specific bases for reaching each valuation, and thus avoided litigation of this
issue, it was not clear error for the Tax Court to conclude Simmons satisfied
the substantiation requirements concerning valuation. *
In a footnote, the Commissioner “suggests” the appraisals
“failed to satisfy other requirements of [Treasury Regulation] §
1.170A-13(c)(3)(ii)” but acknowledges the “omissions might seem venal [sic]
sins.” It is not our practice, however, to indulge “cursory arguments made only
in a footnote.”Spirit of the Sage Council v. Norton , 411 F.3d 225, 229 n.
(D.C. Cir. 2005) (internal quotation marks omitted). Accordingly, we hold the
Tax Court did not err in holding Simmons provided the Commissioner with
“qualified appraisals.”
III. Conclusion
For the foregoing reasons, the judgment of the Tax Court
that Simmons was entitled to claim the deductions at issue is
Affirmed.
*
The issue whether
the Tax Court improperly valued the easements is not before us because, as the
Commissioner clarified during oral argument, he did not raise this point as an
independent basis for objecting to the judgment of the Tax Court.
*
The Commissioner
makes the rather niggling argument that, because of certain administrative
shortcomings, compliance with the District's preservation scheme would not
perpetuate the conservation purposes of the deeds. Appearing as it does for the
first time in the reply brief, the argument is forfeit and we do not address
it. See Sitka Sound Seafoods, Inc. v. NLRB, 206 F.3d 1175, 1181 (D.C. Cir.
2000).
*
The Commissioner
also contends the requirements of §
1.170A-13(c)(3) are mandatory rather than directory and therefore cannot be
satisfied by merely substantial compliance. Cf. Bond v. Comm'r, 100 T.C. 32, 41 (1993) (if Treasury
regulations “are procedural or directory in that they are not of the essence of
the thing to be done ..., they may be fulfilled by substantial, if not strict
compliance”) (quotingTaylor v. Comm'r ,
67 T.C. 1071, 1077–78 (1977)). For her part, Simmons argues the
requirements in § 1.170A-13(c)(3) are directory because they do not go to “the
essence” of whether a charitable contribution has been made under § 170. See Bond, 100 T.C. at 40–41 (reporting
requirements of § 1.170A-13(c)(2)(i)(A)
and (3) are “directory and not mandatory”). We need not, however, resolve the
issue whether a taxpayer can fulfill the requirements of § 1.170A-13(c)(3) through substantial
compliance because we conclude above that the Tax Court did not clearly err in
finding Simmons fully “complied with the substantiation requirements” by
including “all of the required information.” 98 T.C.M. (CCH) at 216.
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