Graev

Graev

GiftLaw Note: In Lawrence G. Graev et ux. v. Commissioner; 140 T.C. No. 17; No. 30638-08 (24 Jun 2013), the Tax Court denied a deduction for a gift of a façade easement because the charity sent a "side letter" promising to return the gift if the IRS denied the deduction.

Taxpayer Graev acquired a historic property in New York in 1999 for $4.3 million. The property is on the National Register of Historic Places. Following discussions with the National Architectural Trust (NAT), in late 2004 Graev deeded a façade easement on the residence to NAT. Previously, Graev had requested a "side letter" from NAT that promised to abandon the easement and return any gift if the IRS denied the charitable deduction. In addition, the easement deed stated that NAT would be permitted "to abandon some or all of its rights hereunder."

Graev obtained a qualified appraisal and the deduction for the conservation easement was determined to be approximately 11% of the value of the property or $990,000. As part of the plan, Graev was also required to give a cash gift to NAT of 10% of the $990,000 easement value. Graev made both gifts in 2004 and reported charitable deductions for the total value during 2004 and 2005. The IRS denied the deductions because this was a conditional gift.

The Tax Court noted that a charitable deduction under Sec. 170(a)(1) is subject to the Sec. 170(f)(3) provisions on conditional gifts. Reg. 1.170A-14(g)(3) notes that a deduction will be permitted so long as the condition that may defeat the gift is "so remote as to be negligible."

In IRS Notice 2004-41, the Service expressed an intention "to disallow such deductions" for conservation easement gifts that did not meet certain standards. The court noted that a conservation easement gift may be disallowed if the organization is not qualified, the property is not a certified historic structure or other qualified asset, it is not a qualified real property interest, the easement is not in perpetuity, there is a mortgagee that is not subordinated, the appraisal summary is not attached, the type of appraisal is not qualified, the appraiser does not have the appropriate qualification, the easement is not recorded or there are insufficient records.

The deed provisions permitted NAT to abandon the easement if the deduction was denied. Graev claimed that NAT would not be able to abandon the easement under various provisions of New York law. However, the court determined that the deed granted NAT the right to abandon the easement. Because there was a substantial possibility of an IRS challenge and both state and local law permitted NAT to abandon the easement, there was no qualified deduction.

Editor's Note: While the taxpayer lost a very substantial deduction, it seems probable that NAT was required to return the easement. With the substantial increase in New York property values between 2004 and 2013, the taxpayer could recontribute the qualified conservation easement and obtain relatively similar total tax benefits.