Taxpayer Failed to Show Building Was "Certified Historic Structure," Dooming Deduction

(Parker Tax Publishing January 2025)

The Tax Court held that a taxpayer was not entitled to take a $23.9 million conservation contribution deduction for its donation to a historic preservation organization of an easement over the exterior of a building in a registered historic district in Columbia, South Carolina. The court found that the taxpayer failed to establish that the building was a "certified historic structure" as defined in Code Sec. 170(h)(4) because the building was not listed in the National Register of Historic Places and the Secretary of the Interior had not issued a certification of historic significance to the Treasury Secretary. Capitol Places II Owner, LLC v. Comm'r, 164 T.C. No. 1 (2025).

Background

The Manson Building (Building) is a three-story classical revival masonry building designed by a prominent architect and located in a historic district of Columbia, South Carolina. Over the decades the Building went through its fair share of alterations and remodeling, perhaps most prominently the addition of a stucco facade to the top two floors in the 1960s. The early 2000s brought rehabilitation with a price: The removal of modern surface material damaged the Building's brick and flush stone ornamentation.

In June 2000, the then owner of the Building submitted an application to the National Park Service (NPS) to determine the Building's eligibility for listing on the National Register of Historic Places (National Register). NPS denied the application, finding that the Building "does not appear to meet the criteria for individual listing on the National Register" because it "has lost important character-defining features" and "[m]any of the storefronts on the first floor have also been altered." After concluding that the Building "does not qualify" as a certified historic structure, NPS further noted that, while the building was not "within an existing registered historic district or potentially eligible district," it could potentially contribute to a historic district "[b]ecause of its scale and prominence." According to a declaration by Joy Beasley, the Keeper of the National Register, the Building "is not individually listed in the National Register," and NPS "has no record of the . . . Building ever being individually listed in the National Register."

In 2014, the Historic Columbia Foundation, assisted by South Carolina's State Historic Preservation Officer, submitted to the NPS Form 10-900, National Register of Historic Places Registration Form, nominating the Columbia Commercial Historic District, in Columbia, South Carolina, for listing in the National Register of Historic Places as a historic district at the local level of significance. The form listed a total of 54 commercial buildings within the historic district, identifying 36, including the Building, as "contributing" and 18 as "noncontributing." The application was approved, and the Columbia Commercial Historic District was listed in the National Register on October 20, 2014. However, the Secretary of the Interior was not asked to certify and did not certify that, in the words of Code Sec. 170(h)(4)(C), the Building is "of historic significance to the district."

On December 17, 2014, Capital Places II Owner, LLC (CPII), which had become the owner of the Building, recorded a historic preservation easement deed, granting a facade easement over the Building to the Historic Columbia Foundation. The deed stated "the Building was listed in the National Register of Historic Places in 2014 as a contributing resource of the Columbia Commercial Historic District ... and, as such, is a 'certified historic structure' as defined under Section 170(h)." The grant was "specifically limited to the Building Facade and the Development Rights," and the purpose was "to assure that the Building Facade will be retained and maintained forever in its rehabilitated condition and state exclusively for conservation and preservation purposes." The "Building Facade" was defined as "the Building's entire exterior including but not limited to the front, side and rear exterior walls, height, roof, roof lines, color, building materials and windows."

CPII filed a short-year 2014 income tax return covering the period from December 4 through December 31, 2014, and claimed a charitable contribution deduction related to its conservation easement donation. The IRS disallowed the deduction and issued a notice of final partnership administrative adjustment, alleging that the alleged donation failed to satisfy the statutory and regulatory requirements for a noncash charitable contribution deduction.

To claim a charitable contribution deduction for the donation of a partial interest in property, such as an easement, Code Sec. 170(h)(1)(C) provides that the contribution must be "exclusively for conservation purposes." Under Code Sec. 170(h)(4)(A)(iv), the preservation of an historically important land area or a certified structure is a conservation purpose. The term "certified historic structure" is defined in Code Sec. 170(h)(4)(C) as: "(i) any building, structure, or land area which is listed in the National Register" or "(ii) any building which is located in a registered historic district (as defined in Code Sec. 47(c)(3)(B)) and is certified by the Secretary of the Interior to the Secretary as being of historic significance to the district."

The wording of Code Sec. 170(h)(4)(C) largely tracks Code Sec. 47(c)(3)(A), which defines a "certified historic structure" for purposes of eligibility for the rehabilitation credit. Code Sec. 47(c)(3)(A) was enacted in 1976. Four years later, when enacting what became Code Sec. 170(h)(4), Congress recycled nearly identical language, i.e., the "certified historic structure" definition and certification framework.

CPII argued that the term "listed in the National Register" in Code Sec. 170(h)(C)(4)(i) should be interpreted to include "resources within the boundaries of listed properties." Alternatively, CPII contended that even if the Building did not constitute a "certified historic structure," the easement deed nonetheless contained a valid conservation purpose in that its restrictions protect a "historically important land area" under Code Sec. 170(h)(4)(A)(iv).

Analysis

The Tax Court held that the Building did not meet either definition of "certified historic structure" under Code Sec. 170(h)(4)(C). Consequently, the preservation of the Building did not count as a conservation purpose that could support a charitable contribution deduction of a partial interest in property. The court noted that, although it has previously encountered Code Sec. 170(h)(4)(C), previous cases did not required it to analyze the requirements of the historic preservation conservation purpose.

Regarding the first requirement in Code Sec. 170(h)(4)(C)(i) that a certified historic structure is "any building, structure, or land area which is listed in the National Register," the court noted that the Building was not itself listed in the National Register, but the district in which it is located was so listed. The court determined that the phrase "listed in the National register" refers to a building, structure or land area individually listed in the National Register and not, as CPII argued, merely one located in a registered historic district. The court reasoned that if a building is necessarily "listed in the National Register" simply by being within the boundaries of a property listed in the National Register, such as a registered historic district, then the second requirement for a certified historic structure in Code Sec. 170(h)(4)(C)(ii) would be rendered superfluous.

As for the second requirement under Code Sec. 170(h)(4)(C)(ii), which encompasses any building is which is located in a registered historic district (as defined in Code Sec. 47(c)(3)(B)) and is certified by the Secretary of the Interior as being of historic significance to the district, the court found that it was undisputed that CPII made no written application to the Secretary of the Interior for such a certification and that accordingly, no such certification was made. The court disagreed with CPII's contention that acceptance of a building as a resource "contributing to" the historic district counts as a certification by the Secretary of the Interior of the Building's "historic significance to the district." The court saw no evidence that Congress wished to disturb or deviate from the certification regime and requirements established by the Department of the Interior when it recycled the language of Code Sec. 47(c)(3)(B).

The court further rejected CPII's alternative argument that, even if the Building did not constitute a "certified historic structure," the deed nonetheless contained a valid conservation purpose. The court explained that in general, courts consider only those purposes stated in an easement deed when determining whether an easement is exclusively for conservation purposes. According to the court, defining with precision the easement purpose is a crucial element for both the donor and the donee. The court said there was no doubt as to the deed's purpose in this case, which was to assure that the Building facade would be preserved in its rehabilitated condition.

For a discussion of the rules for contributions of partial interests in property, see Parker Tax ¶84,155.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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