Tax Court denies $23 million façade easement deduction

The Tax Court denied a limited liability company’s (LLC’s) claimed charitable conservation contribution deduction under Sec. 170(h) for its donation of a façade easement because the LLC failed to establish that the building was a “certified historic structure” under Sec. 170(h)(4)(C). The court also rejected the LLC’s argument that the easement nonetheless demonstrated a valid conservation purpose because it protected a historically important land area under Sec. 170(h)(4)(A)(iv).

Facts: Capitol Places II Owner LLC (CPII) owned the Manson Building, located in a registered historic district in Columbia, S.C. On its 2014 tax return, CPII claimed a charitable contribution deduction of $23,900,000 pursuant to Sec. 170(h) for a qualified conservation contribution of a façade easement on the property to a qualified historic preservation organization.

The Manson Building was designed by James Urquhart, a prominent early-20th century Columbia architect. Over the years, the three-story classical revival masonry building went through several modifications. In June 2000, the building’s then-owner applied to the National Park Service (NPS) to determine the building’s eligibility for listing on the National Register of Historic Places, which was denied due to its loss of “character-defining features.” The building, however, had been identified in the 2014 application to the National Register of the Columbia Commercial Historic District as “contributing” to the district at the “local level of significance.” However, the building was not certified as a historical structure by the NPS.

Later in 2014, CPII granted a façade easement over the building to the Historic Columbia Foundation. On its short-year 2014 tax return, CPII claimed a charitable contribution deduction relating to the easement donation.

The IRS issued CPII a notice of final partnership administrative adjustment denying the charitable contribution deduction, and CPII filed a petition for redetermination with the Tax Court. The IRS moved for summary judgment that the donation was not a qualified conservation contribution under Secs. 170(f)(3)(B)(iii) and (h) and because it was not exclusively for conservation purposes under Sec. 170(h)(1)(C). In particular, the IRS contended the Manson Building was not a certified historic structure under Sec. 170(h)(4)(C).

Issues: Under Sec. 170(h)(1)(C), taxpayers may claim a charitable contribution deduction for a donation of a partial interest in property, including an easement, if the contribution is “exclusively for conservation purposes.” One such purpose is “the preservation of an historically important land area or a certified historic structure” (Sec. 170(h)(4)(A)(iv)). A “certified historic structure” is defined as: (i) any building, structure, or land listed in the National Register, or (ii) any building “located in a registered historic district” that has been “certified by the Secretary of the Interior to the Secretary [of the Treasury] as being of historic significance to the district” (Sec. 170(h)(4)(C)).

CPII first argued that the Manson Building qualified as a certified historic structure under Sec. 170(h)(4)(C)(i) because it was located within a registered historic district. Even though it was not listed in the National Register, its inclusion within the historic district’s boundaries raised an issue of material fact as to whether it was in fact listed and therefore qualified under Sec. 170(h)(4)(C), CPII claimed. The Tax Court accordingly considered whether the statutory term “listed in the National Register” includes structures that are geographically bounded by a listed district, even if not explicitly included in the National Register, and concluded that it did not.

Second, CPII argued that the building met the requirements under Sec. 170(h)(4)(C)(ii) because, once it had been accepted as a resource “contributing” to the historic district, it was thereby certified by the secretary of the Interior as being of historic significance to the district. The court considered this argument and concluded that without a formal certification process, the building did not meet the requirements of Sec. 170(h)(4)(C)(ii).

CPII also made an alternative argument under Sec. 170(h)(4)(A)(iv) that the easement preserved a historically important land area. Under Tax Court precedent, only those purposes stated in an easement deed determine whether an easement is “exclusively for conservation purposes.” The court noted that the easement was over only the single building’s façade, precluding its application to a land area.

Holding: The Tax Court granted summary judgment to the IRS, holding that the building did not meet the definition of a “certified historic structure” under Sec. 170(h)(4)(C). The court emphasized that “listed in the National Register” requires individual entry in the register, not merely location within a registered district. Because the building was not individually listed and the taxpayer failed to obtain the required certification from the secretary of the Interior, the easement donation did not qualify for the deduction.

Furthermore, the court rejected the taxpayer’s alternative claim that the façade easement preserved a “historically important land area.”

Capitol Places II Owner, LLC, 164 T.C. No. 1 (2025)

— Thomas Godwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M., are both professors of the practice in accounting and taxation in the SC Johnson College of Business, and Jieshuai Zhu is a graduate of the SC Johnson College of Business, all at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.