Charitable Contribution of Qualified Conservation Easement

By Larry Hamilton, CPA, Hughes, Pittman & Gupton, LLP, Raleigh, NC

Editor: Michael D. Koppel, CPA, PFS

On September 14, 2009, in Herman, T.C. Memo. 2009-205, the Tax Court held that a conservation easement of air space over an historic structure that was donated by a taxpayer to a nonprofit organization did not meet the requirements to be considered a qualified conservation easement. In this case, the court determined that the terms of the taxpayer’s covenant granting the easement did not “oblige the taxpayer or subsequent purchasers to preserve the building or underlying land.” Because the future integrity of the building and the land was not protected in the covenant, the taxpayer was not allowed to take a deduction for the contribution of air space. It is important for taxpayers who are contemplating a contribution of a qualified conservation easement to understand the aspects of this recent case so that they are aware of the implications and potential outcomes of their decisions.


The taxpayer, J. Maurice Herman, has owned property directly or indirectly in the Upper East Side Historic District on Fifth Avenue in New York City since 1975. The property consists of an apartment building with 11 stories at its rear and 8 stories at its front. The property has taller buildings on each side with no open space in between, making the front section of Herman’s building look incomplete.

Herman transferred his rights, title, and interest in the property to Windsor, a wholly owned limited liability company, and recorded a deed on August 5, 1998. On December 31, 1998, Windsor made an unrecorded assignment that transferred all its rights, title, and interest to Herman for its unused development rights of the property. Windsor also made an unrecorded agreement to assist Herman in “the development, improvement, sale, transfer, assignment or other disposition without limitation, of the aforementioned unused development rights.”

The National Park Service (NPS) has designated the property’s district as a registered historic district. The Landmarks Preservation Commission controls the historic properties in New York, and the commission must preapprove any changes to historic properties. Herman asked the NPS to recognize his property as having historic significance by filing a National Park Service Historic Preservation Certification Application Part 1—Evaluation of Significance on August 27, 2003. The NPS determined that the property was certified historic but did not specify whether the building, land, or unused development rights were included in its determination.

Later that year, Herman decided to contribute a conservation easement to a nonprofit organization, the National Architectural Trust, Inc. (NAT). The conservation easement included development rights to 10,000 of 22,000 square feet of air space over Herman’s property. Herman filed a declaration of restrictive covenant that was recorded in the Office of the City Register of the City of New York. The covenant set out that Herman would not build or improve 10,000 square feet of the air space for the benefit of NAT, and Windsor would comply with the covenant.

An appraisal was prepared for Herman that set the value of the 10,000 square feet of air space at $21,850,000. In order to properly appraise the air space, the appraisers included drawings of hypothetical expansions in the open area before and after the donation. Herman then claimed a deduction of $21,850,000 on his 2003 tax return for the charitable contribution of the conservation easement.

On March 20, 2007, the IRS filed a notice of deficiency against Herman for his 2003 tax return that disallowed the deduction for the charitable contribution of the conservation easement. The IRS determined that Herman’s 2003 federal tax was understated by $3,906,531 and imposed a $1,562,612.40 accuracy-related penalty under Sec. 6662(h). Herman took the issue to the Tax Court, which ruled in favor of the IRS, stating that the donation was not a qualified conservation easement under Sec. 170(h)(4)(A)(iv).

Applicable Code Sections

Sec. 170(h)(1) defines a “qualified conservation contribution” as a contribution of a qualified real property interest to a qualified organization, exclusively for conservation purposes. Under Sec. 170(h) (4)(A)(iv), the “conservation purpose” is defined as preserving an historically important land area or certified historic structure.

Sec. 170(h)(4)(B) states the special rules for buildings in registered historic districts. If the donor makes a contribution of the exterior of an historic building, it will generally not be considered to be used exclusively for conservation purposes unless certain restrictions that preserve the exterior of the building in perpetuity are included in detailed documentation.

Caution: The provision allowing deductions for qualified conservation contributions is currently scheduled to expire at the end of 2009 (Sec. 170(b)(1)(E)(vi)). On March 31, 2009, the Conservation Easement Incentive Act, H.R. 1831, was introduced into Congress. This bill would permanently allow private landowners to take tax deductions for donating qualified real property interests. As of this writing, the bill has been referred to the House Ways and Means Committee.

Tax Benefits and Rules

The IRS has objected to several deductions of conservation easements in the past, and Sec. 170(f)(3) generally denies a deduction for a charitable contribution of less than a taxpayer’s entire interest in the property; however, an exception applies to the donation of a qualified conservation contribution.

In order to meet the requirements to be a qualified conservation contribution, the structure or area must follow the rules laid out in Sec. 170(h). Taxpayers should pay close attention to these rules and the requirements of documentation to make sure their contribution qualifies and that it contains all the proper restrictions. Doing so will make the IRS more likely to accept the deduction for the qualified conservation contribution.

Under Sec. 170(h)(1), the owner of the donated property will receive a tax deduction on Schedule A, Itemized Deductions, equal to the fair market value of the qualified conservation contribution. In order to receive this deduction, several steps must be taken.

First, the taxpayer must certify that his or her structure or property meets the requirements of a qualified conservation contribution under Sec. 170(h)(1). The contributed easement must have a conservation purpose (i.e., preserving land areas for outdoor recreation or public enjoyment, protecting a relatively natural habitat or ecosystem, preserving open space for the enjoyment of the general public or pursuant to a governmental conservation policy, or preserving an historically important land area or certified historic structure) in order to qualify for the deduction. A taxpayer can obtain a certified historic designation through the NPS.

In addition, a real estate appraisal must be performed on the conservation easement in order to determine its fair market value. The appraisal should be attached to the tax return as further documentation, and the appraiser must sign Form 8283, Non-cash Charitable Contributions. Proper documentation conveying the easement should also be prepared. This documentation should include Form 8283, a description of the property being contributed, photographs of the property, and the easement deed.


The recent decision by the Tax Court in Herman emphasizes the importance of having proper documentation and understanding the implications of certain tax positions. In this case, the tax position concerned the donation of a qualified conservation easement of 10,000 square feet of airspace above the taxpayer’s historic apartment building. Because the taxpayer did not include restrictions in the easement’s documentation preventing the alteration of the apartment building, the easement did not have to keep the historical structure intact, and the IRS and the Tax Court denied a deduction for his contribution. Because the deduction for the contribution of a qualified conservation easement could be substantial, it is imperative to understand the associated laws and regulations.


Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

For additional information about these items, contact Mr. Koppel at (781) 407-0300, or

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