Tuesday, January 19, 2010

Conservation Easements in US Tax Court: Simmons v. Commissioner

Logan Circle in Washington, DC

In Simmons v. Commissioner of Internal Revenue Service, the US Tax Court held (1) that the taxpayer was entitled to the charitable donation deduction for two conservation easement donations but (2) reduced the value of the donations.

Simmons was decided on September 15, 2009, and you can read the full opinion by Judge Goeke here.


Dorothy Jean Simmons donated historic preservation easements on two properties that she owned in Washington, DC (one in Logan Circle and the other on Vermont Avenue). Such easements are often referred to as "façade easements," because the deed restrictions focus on retaining the existing façade of the building.

Ms. Simmons's appraiser valued the Logan Circle easement donation at $162,500 and the Vermont Avenue donation at $93,000.

The IRS challenged the donations on several grounds:
  1. First, the IRS argued that no charitable purposes described in IRC Section 170(h) were served by the easements, because the deeds permitted the easement donee (the L'Enfant Trust) to consent to future changes to the buildings' façades notwithstanding the deed restrictions.

  2. Second, the IRS argued that the deeds of easement did not satisfy the subordination requirements of the Treasury Regulations (both properties were mortgaged; as we tell our easement-considering clients: if your property is subject to a mortgage/deed of trust, then contact your lender early in the process in order to make them aware of the contemplated easement and to obtain their package of subordination requirements!).

  3. Third, the IRS argued that Ms. Simmons's appraisals were not "qualified appraisals" for purposes of Treasury Regulation 1.170A(13)(c)(3).

  4. Fourth, the IRS argued that Ms. Simmons did not obtain the required "contemporaneous written acknowledgment" from the donee, L'Enfant Trust.

The Tax Court rejected each of the IRS's contentions and, in doing so, essentially followed a "substantial compliance" framework in evaluating the donations (and reporting thereof).

The adoption of a substantial compliance framework distinguishes Simmons from several earlier cases (not surprisingly, the decision is being hailed in the land trust community). The opinion means that clearer guidance awaits a future easement decision by a higher court.


Taking the above-arguments in order, the Simmons Court reasoned as follows:

  1. With respect to "conservation purposes": the Court stated that Treasury Regulation 1.170A-14(d)(5) expressly permits an easement donation to satisfy the "conservation purposes" test even if future development is allowed, so long as that development is subject to local, state and federal laws and regulations (and Ms. Simmons's deeds provided that future alterations were subject to such laws and regulations). Unfortunately, the Court does not delve into this issue other than to reference the terms of the deed, thus the opinion does not provide a great deal of guidance on "closer calls" that could arise with respect to the conservation purpose requirement in other easements.

  2. With respect to subordination requirements: the Court said that the requirements were met because both easement deeds contained paragraphs with specific references to the mortgages. Interestingly, the Court made this finding notwithstanding the IRS's contention that the deeds did not themselves contain subordination language. Without reviewing the Simmons deeds, it is difficult to know the basis for the IRS's argument (was the word "subordinate" omitted? Did the banks' trustees not sign?) and why the Court found it wanting.

  3. With respect to whether the appraisals were "qualified appraisals": the Court held that they were -- even though they did not, for instance, include a statement that they were prepared for income tax purposes and did not include the dates of the donations. In the discussion of the "qualified appraisal" question, the Court is most clearly adopting a "substantial" (rather than "strict") standard of compliance.

  4. With respect to the "contemporaneous written acknowledgment": the Court held that the deed of easement itself satisfies the acknoweldgment requirement. This is a particularly interesting holding because it rejects the IRS position that prior case law supports a standard of strict compliance with the contemporaneous written acknowledgement requirement.

In the second part of its holding, the Simmons Court reduced the value of the claimed donations -- more on that analysis in a future post.


The Simmons decision is certain to receive significant attention in light of the IRS's continuing scrutiny of conservation easement donations. Notwithstanding the Court's opinion -- and until additional opinions provide further clarity -- we believe that taxpayers are well-served to assume that the IRS (and the courts) will insist on strict, rather than substantial, compliance with Code and Treasury Regulation requirements.


Though most of our conservation easement work focuses on open space easements in Albemarle and surrounding counties, Richmond & Fishburne has also represented clients in connection with several historic preservation easements in central Virginia.