House Bill Seeks to Correct Senate Version Of Easement Reform

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Tax Credit Advisor January, 2006: A bill was recently introduced in the U.S. House of Representatives that seeks to correct what preservationists believe is a serious flaw in the facade easement reform provisions included in the Senate’s tax reconciliation bill.

In most respects the House bill, H.R. 4534, which is sponsored by Rep. Phil English (R-Pa.), tracks the approach toward facade easements taken by S. 2020, the Senate bill. Both bills stipulate that a deduction for the donation of an easement on an historic building can only be taken if the easement restriction preserves the building’s entire exterior. Currently, deductions are allowed for easements on portions of a building’s exterior, which critics say has encouraged overvaluation of facades.

Both bills also tighten the imposition of penalties for misstatements about easement valuations, and specify that easements must not allow changes that are inconsistent with a building’s historical character.

Where the two bills diverge, however, is in their treatment of easement donations for non-building structures in registered historic districts. The House bill would permit them as tax deductions, while the Senate’s version would not. Preservationists say that the loss of easement donations for historic sites like battlefields or structures like bridges would be a real setback.

Easement reform has been brewing in Congress since December 2004, after media reports suggested widespread overvaluation of facade easement donations on historic buildings. Both H.R. 4534 and S. 2020s avoid the draconian remedy proposed early last year by the Joint Committee on Taxation, which urged Congress to end easement donations for owner-occupied historic properties and cap donations of easements on nonresidential properties.

In recent years, the donation of easements on buildings in historic areas has grown dramatically. These easements have typically required owners to agree not to alter the facades of the buildings. In return for the donation, they can deduct the amount by which the easement has lowered property value.

Strong Support for the House Version

“H.R. 4534 provides the House with the preservation community’s position on historic easements and makes some drafting improvements over the Senate-passed version,” said Patrick Lalley, director of legislative affairs at the National Trust for Historic Preservation. “The National Trust strongly supports H.R. 4534.”

In particular the National Trust favors deleting Section 314(b) of the Senate bill, entitled “Disallowance of Deduction for Structures and Land in Registered Historic Districts.” Section 314(b) would amend the longstanding definition of a “certified historic structure” under Section 170(h)(4)(B)ii of the Internal Revenue Code, eliminating reference to structures or land areas in registered historic districts.

If this language remains part of the Senate bill, it “may significantly reduce the availability of easement donations as a tool for preserving privately-owned land areas that encompass battlefields, archeological sites, and rural historic landscapes, since many of these resources are located within National Register historic districts,” wrote Richard Moe, the National Trust’s president, in a recent letter to Sen. Charles Grassley (R.-Iowa). Sen. Grassley, chairman of the Senate Finance Committee, sponsored S. 2020.

Lalley said that he expects H.R. 4534 to be taken in February, after the House returns. The bill, which was introduced in mid-December, has been referred to the House Committee on Ways and Means, where it awaits action. S. 2020 was passed by the Senate in November.

Other Similarities

H.R. 4534 and S. 2020 HR also share the following provisions.

Both bills would:

  • Impose a $500 filing fee when the donation is more than 3 percent of the building’s fair market value, or $10,000, whichever is greater.
  • Require a written agreement between the donor and recipient of the easement, certifying that the easement-holding organization is “qualified” to receive such donations under the tax code and has the means to manage the easement’s restrictions;
  • Require taxpayers claiming the deduction to include with their tax returns a qualified appraisal, exterior photographs, and a description of restrictions on the building’s development;
  • Amend the tax code to reduce the threshold for taxpayer penalties for “substantial” and “gross” valuation misstatements related to charitable deduction property. “Gross valuation misstatements” would be reduced from 400 to 200 percent of the amount determined to be the correct value. “Substantial valuation misstatements” would be set at 150 percent rather than 200 percent;
  • Provide new standards for qualified appraisers assessing charitable contribution deductions, requiring these professionals to have earned an appraisal designation for a recognized professional appraiser organization;
  • Impose penalties on appraisers who know or “reasonably should have known” that an appraisal would be used to misstate a property valuation.

The two bills provide for differing effective dates. The Senate bill would apply to contributions retroactive to December 2004, while the House bill would cover contributions make after enactment.