Gemperle v. Comm’r—Tax Court Denies Deduction for Façade Easement Donation for Failure to Include Appraisal In Tax Return Filing
Background
In 2007, the Gemperles granted a façade easement on their historic residence in the Lakewood/Balmoral neighborhood of Chicago to the Landmarks Preservation Council of Illinois (Landmarks). The house, which was built in 1898, is located in a registered historic district and listed on the National Register of Historic Places. The taxpayers obtained an appraisal of the easement from an appraiser included on a list of appraisers Landmarks furnished. The appraiser estimated that the easement had a value of $108,000 and the taxpayers claimed deductions in that amount on their 2007 and 2008 income tax returns. The taxpayers also made a cash contribution to Landmarks of $10,800 (10% of the estimated value of the easement).
The IRS challenged the deductions claimed with regard to the easement donation, arguing, among other things, that:
(i) the taxpayers’ appraisal was not a “qualified appraisal” as required by IRC § 170(f)(11)(A) and (C);
(ii) the façade easement was not “granted in perpetuity” and its conservation purpose was not “protected in perpetuity” as required by IRC §§ 170(h)(2)(C) and 170(h)(5)(A);
(iii) the taxpayers failed to include a completed “appraisal summary” (IRS Form 8283) with their 2007 return as required by Treas. Reg. § 1.170A-13(c)(2)(i)(B) and (4);
(iv) the taxpayers failed to include a copy of a qualified appraisal or photographs of the house with their 2007 return as required by IRC § 170(h)(4)(B)(iii); and
(v) the taxpayers failed to prove that the façade easement reduced the value of their residence by $108,000.
Because the Tax Court found that the taxpayers failed to include a copy of a qualified appraisal with their 2007 return, and that omission was fatal to the claimed deductions, it did not address the IRS’s alternative grounds for denying the deductions.
In 2006, in response to reports of abuse, Congress added new requirements to § 170(h) with regard to donations of façade easements on buildings located in registered historic districts, including the requirements that the full qualified appraisal and photographs of the entire exterior of the building must be filed with the return filed for the year of the contribution.
Penalties
The Tax Court found the Gemperles liable for 20% penalties for “disregard of rules or regulations” under IRC § 6662(a) and (b)(1), explaining that the requirement that the full qualified appraisal be included with the tax return filed for the year of the contribution is stated not only in the Internal Revenue Code but also in the instructions for the IRS Form 8283. The court explained that the Form 8283 “itself warned [the taxpayers] that an appraisal is generally required for donated property over $5,000 and directed them to the Form 8283 instructions,” and “[the taxpayers] were at least careless, if not reckless, in ignoring the warning that an appraisal was required.” The taxpayers also failed to qualify for the reasonable clause exception (IRC § 6664(c)(1)) or the exception for adequate disclosure of a position contrary to a rule or regulation (Treas. Reg. § 1.6662-3(a)).
The Tax Court further found that the Gemperles were, in the alternative, liable for 40% penalties under IRC § 6662(h) for making gross valuation misstatements on their 2007 and 2008 returns with regard to the easement. The gross valuation misstatement penalty is imposed if the value asserted on a return is more than 200% of the value determined by the court to be the correct value. The IRS offered expert testimony that the easement had a value of between $0 and $35,000, while the Gemperles failed to provide expert testimony that the value of the easement was greater than $35,000 (the Gemperles failed to make their “alleged qualified appraiser” available for cross-examination and the Tax Court thus found her appraisals to be inadmissible hearsay evidence). Accordingly, the Tax Court accepted $35,000 as the “correct” value of the easement for purposes of determining liability for the gross valuation misstatement penalty, and since the $108,000 value the Gemperles claimed for the easement on their 2007 and 2008 returns was more than two times (200% of) $35,000, the Gemperles were liable for the penalty with regard to both returns.
The gross valuation misstatement penalty is a strict liability penalty (no reasonable cause exception applies) with regard to façade easement deductions claimed on returns filed after July 25, 2006.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law