In Capitol Places II Owner, LLC v. Commissioner (T.C. Memo. 2025-3), the U.S. Tax Court addressed a substantial charitable contribution deduction involving a historic facade easement. Capitol Places II Owner, LLC (CPII) claimed a $23.9 million deduction for donating an easement over a building located in Columbia, South Carolina. However, the IRS disallowed the deduction, and the Tax Court upheld this decision, emphasizing the strict requirements under IRC §170(h) for qualified conservation contributions.
This case is a critical read for tax practitioners, CPAs, and sophisticated real estate investors navigating the rules for conservation easements. Below, we summarize the court’s findings and highlight key lessons.
Case Overview: The Facade Easement Donation
In December 2014, CPII donated a facade easement over the Manson Building to the Historic Columbia Foundation. The building, located in the Columbia Commercial Historic District, was a three-story classical revival structure designed by a prominent local architect. CPII relied on an appraisal to claim a $23.9 million charitable contribution deduction under IRC §170(h).
The IRS disallowed the deduction, arguing that the easement failed to qualify as a “qualified conservation contribution” because the building was not a “certified historic structure” and the deed lacked sufficient conservation purpose. CPII challenged the IRS’s determination in Tax Court.
Key Issues and Findings
1. The Building Was Not a “Certified Historic Structure”
Under IRC §170(h)(4)(C), a certified historic structure must meet one of two criteria:
1. Be listed individually in the National Register of Historic Places, or
2. Be located in a registered historic district and certified by the Secretary of the Interior as being of historic significance to the district.
The court found that the Manson Building met neither requirement:
• Not Individually Listed: The National Park Service (NPS) confirmed that the building was not individually listed in the National Register.
• No Certification of Historic Significance: Although the building was identified as a contributing resource to the historic district, CPII did not apply for or obtain certification from the Secretary of the Interior as required by the statute.
2. The Easement Deed Did Not Protect a Valid Conservation Purpose
To qualify as a conservation contribution, the easement must protect a conservation purpose defined under IRC §170(h)(4)(A). CPII argued the deed preserved a historically important land area. However:
• The court found that the easement only covered the building’s facade and did not protect the surrounding land.
• CPII’s interpretation of “historically important land area” as including the facade was rejected as overly broad.
3. The Deed Could Not Be Amended Post-Facto
CPII attempted to argue that the easement could be amended to address any deficiencies. The court dismissed this argument, emphasizing that the conservation purpose must be clearly documented at the time of the contribution.
Tax Court’s Decision
The Tax Court granted partial summary judgment in favor of the IRS, concluding that CPII’s easement failed to meet the statutory and regulatory requirements for a charitable contribution deduction. Specifically:
• The building was not a certified historic structure.
• The deed did not establish a valid conservation purpose.
Key Takeaways for Practitioners
1. Conservation Easements Require Rigorous Documentation
This case underscores the importance of detailed, contemporaneous documentation to substantiate a charitable contribution deduction. Taxpayers must ensure:
• Properties meet the statutory definition of a certified historic structure.
• Easement deeds clearly establish a valid conservation purpose.
2. Certification Is Not Optional
For properties in a historic district, certification of historic significance by the Secretary of the Interior is mandatory. Simply being listed as a contributing resource is insufficient.
3. Scope of Conservation Purpose Matters
A conservation easement must protect a qualifying conservation purpose, such as preserving an entire historically important land area—not just a portion, like a facade.
4. Avoid Post-Facto Amendments
Amending an easement deed after the fact to address statutory deficiencies is not a viable strategy. Courts will evaluate the easement as it was at the time of the contribution.
5. Appraisal Risks
The IRS and Tax Court often scrutinize appraisals for overvalued easements. Practitioners should carefully vet appraisals to ensure they align with the true conservation purpose and statutory requirements.
Conclusion
Capitol Places II Owner, LLC v. Commissioner serves as a cautionary tale for taxpayers and advisors navigating the rules for conservation easements. The Tax Court’s decision reinforces the importance of adhering strictly to the statutory requirements under IRC §170(h).
For tax professionals advising clients on similar deductions, this case highlights the need for proactive planning, thorough documentation, and rigorous compliance with certification and conservation purpose rules. By addressing these requirements upfront, taxpayers can mitigate risks and avoid costly disputes with the IRS.
