Joel E. Miller in Board Operations on November 8, 2012
The "what-is-involved?" question is easy enough to answer. In essence, all that is required is that the owner or owners of the building’s exterior deliver to an eligible organization an enforceable promise to maintain the building’s exterior in substantially its present form forever.
The "does-it-work?" question is harder to answer. The starting point is the Internal Revenue Code. As is well known, the code provides for an income-tax deduction for the donation of certain kinds of property to a charity. Less well known is that some years ago Congress added a special rule to the code under which a proper maintain-the-façade promise can be treated as a piece of property that can be the subject of a charitable donation.
Although a great deal of paperwork is involved, there is no doubt about that rule, and the paperwork can be handled.
Deducts All in a Row?
The tricky part is establishing the amount of the deduction that results from a qualified easement donation. The normal rule is that (subject to certain limitations) the amount that is deductible is the fair market value (FMV) of the donated property. But, because there is no market in which façade easements are bought and sold, the usual valuation methods cannot be used.
Congress did not address that problem, but the Department of the Treasury, cognizant that the absence of a method would frustrate the legislative purpose, provided by regulation that the "value" of a façade easement is conclusively deemed to be equal to the difference between the FMV of the building before the promise and its FMV thereafter.
Helpful as that is, it does not entirely solve the problem. It is true that, because there are established markets in which unburdened buildings are bought and sold, determining a "before" value can be done by traditional methods. However, there is no such market for façade-easement-burdened buildings. It thus remained unclear as to how the "value" of a façade easement was to be determined.
That was regarded by some as a golden opportunity. There sprang up a number of organizations that were willing, for a price, to do the following two things:
(1) they would provide an appraiser who would solemnly aver that the making of a façade-maintenance promise would enormously reduce the amount for which the building could be sold — often by as much as 15 percent of its "before" value;
(2) they would serve as the promisee and guide the promisor through the entire process.
In what probably ought to have alerted potential promisors that something was not quite right, these organizations would at the same time assure potential promisors that the huge value-reduction amounts sworn to by the appraisers were for IRS purposes only, and that the actual resale value of their buildings would be reduced only minimally if at all.
Many building owners believed these organizations and happily paid them large sums and "donated façade easements" to them.
Not surprisingly, the IRS viewed such schemes as abusive and proceeded to disallow the claimed deductions in whole or in part. And despite some pro-taxpayer rulings on very technical points (which have sometimes been misinterpreted as blessing inflated valuations for façade easements), the courts in recent years have made it abundantly clear that what may be regarded as "phony" valuations will not be permitted to stand.
Nevertheless, it appears some organizations have not given up and are still promoting get-a-big-deduction-with-no-real-cost schemes.
There are two additional discouraging thoughts — one for co-op owners and one for condo owners — even assuming (contrary to what seems to be the case) that a huge valuation can be sustained:
(1) There would be little or no benefit for the cooperative itself, inasmuch as a corporation is allowed to deduct for charitable donations in any year no more than 10 percent of its taxable income for that year, and few cooperatives have any appreciable taxable income. Also, there is no provision that would allow a pass-through to the tenant-shareholders.
(2) The problem for condo unit-owners is quite different. It is largely logistical. Because the building’s exterior is a common element that is directly co-owned by all the unit-owners, each and every one would have to join in the donation and, if the unit were mortgaged, obtain the consent of the mortgagee as well.
All in all, extreme caution is indicated.
Joel E. Miller is a partner at the Queens law firm Miller & Miller.
Photo by Jennifer Wu
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