Hilborn v. Comm'r of Internal Revenue, Docket No. 10246-83.

• Citation: 85 T.C. 677,85 T.C. No. 40
• Decision Date: 05 November 1985
• Docket Number: Docket No. 10246-83.
• Parties: MICHAEL G. HILBORN AND HELENE A. HILBORN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

85 T.C. 677

85 T.C. No. 40

MICHAEL G. HILBORN AND HELENE A. HILBORN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10246-83.

United States Tax Court

Filed November 5, 1985.

Ps were limited partners in S, which acquired a building located in the historic French Quarter of New Orleans. S granted to a qualified charitable organization an easement in perpetuity in the facade of the building, which grant qualified as ‘exclusively for conservation purposes‘ under section 170(f)(3)(B)(iii) and (C), I.R.C. 1954 (1979). HELD, fair market value of the facade donation determined by applying the ‘before and after‘ valuation approach. FRED R. HARBECKE, for the petitioners.

JOHN T. LORTIE and THOMAS C. BORDERS, for the respondent.

NIMS, JUDGE:

Respondent determined a deficiency of $1,690.64 in petitioners' 1979 Federal income tax.

After concessions, the issue for decision is the fair market value of an historical facade donated to the Vieux Carre Commission of New Orleans by a limited partnership pursuant to a servitude agreement under Louisiana law.

FINDINGS OF FACT

Certain facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioners Michael G. and Helene A. Hilborn (husband and wife, hereinafter sometimes referred to as petitioners) resided in Deerfield, Illinois, at the time of filing the petition herein. Petitioners are indirectly limited partners in St. Louis Partners, Ltd. (St. Louis Partners). They acquired their interest in St. Louis Partners through R & H Partners, an Illinois general partnership, of which petitioners are equal partners with Oscar Reid. R & H Partners has a 2.828 percent interest in St. Louis Partners. As 50 percent partners of R & H Partners, petitioners claimed their allowable share of losses, deductions and credits from St. Louis Partners.

St. Louis Partners is a limited partnership with three general partners: John Nedeau, Richard Schanhals and Bernard Wiczer (Wiczer). The purpose of the partnership was to acquire, rehabilitate, hold for investment and operate an apartment building located at 835 St. Louis Street, New Orleans, Louisiana (the building).

The property is located on St. Louis Street near the middle of the French Quarter (Vieux Carre) of New Orleans which is a registered historic district. The French Quarter is approximately 13 blocks long and six blocks wide. It is bounded by the Mississippi River, Canal Street, North Rampart Street and Esplanade Avenue. The building is situated in the square bounded by St. Louis Street, Toulouse Street, Bourbon Street and Dauphine Street. The building is a three and one-half story masonry townhouse with an attached three- story slave quarter in the rear. At the time of the trial of this case, the building was not listed in the National Register of Historic Places in Washington, D.C., and had not been certified by the Secretary of the Interior as being of historic significance to the Vieux Carre historical district.

The property is zoned VCR-1 (Vieux Carre Residential). At the time of the facade donation, the density allowed and the open space required by the zoning ordinance were three units and 975.6 square feet, respectively. There existed at the time of donation 10 apartment units, which were later converted into nine condominium units and 674.25 square feet of open space.

The zoning ordinance also provides in pertinent part as follows:

No occupancy permit shall be issued by the Director, Safety and Permits, for any change in the use of any existing building until and unless a special permit shall have been issued by the Vieux Carre Commission, except that where no change of exterior appearance is contemplated such permit by the Vieux Carre Commission shall not be required. Where any change in exterior appearance is contemplated, the Vieux Carre Commission shall hold a hearing, and if it approves such change, it shall issue a special permit to continue the same use, or for any other use not otherwise prohibited in this District, subject to the following conditions and safeguards:

a. The historic character of the Vieux Carre shall not be injuriously affected.

b. Signs which are garish or otherwise out of keeping with the character of the Vieux Carre shall not be permitted.

c. Building designs shall be in harmony with the traditional architectural character of the Vieux Carre.

d. The value of the Vieux Carre as a place of unique interest and character shall not be impaired.

The Vieux Carre Commission (VCC) was created by an amendment to the Louisiana Constitution in 1936. Its purpose is stated in Section 65-6, Chapter 65, City Code of New Orleans as follows:

The Vieux Carre shall have for its purpose the preservation of such buildings in the Vieux Carre section of the city as, in the opinion of the Commission, shall have architectural and historical value and which should be preserved for the benefit of the people of the city and State.

Thus, the VCC is charged by the Louisiana Constitution and the Code of the City of New Orleans with the duty of preserving the historic character of buildings located in the French Quarter. The VCC is an organization described in section 170(c)(1). ¹

All buildings and structures fronting streets or alleys located within the Vieux Carre section of New Orleans are subject to the jurisdiction of the VCC. Before a property owner can perform any renovations to the exterior facade of a building in the Vieux Carre section, the owner must apply to the VCC for a permit. When applying for a permit, a property owner must submit plans and specifications of the proposed renovation to the VCC. The VCC has authority to specify any reasonable change to the proposed plans necessary to preserve the historic and architectural character of the building.

The written policy of the VCC, as adopted on December 4, 1979, with respect to facade donations, is as follows:

FACADE EASEMENT POLICY

When the United States Congress enacted the 1976 Tax Reform Act legislation, which allowed for accelerated amortization of rehabilitation costs on buildings of historic and architectural significance, it mandated procedures for both Certification of the building and any rehabilitation. Rules known as ‘The Secretary of the Interior's Standards for Rehabilitation‘ were adopted and tax benefits accrued only to those applicants who followed these preservation guidelines. The purpose is to protect the facade of historically important buildings for the public while allowing the owner a tax advantage for that which he gives to the public.

However, a prospective facade donor DOES NOT have to have his building certified prior to making a donation for tax purposes. Although the building must be of architectural or historical importance, no formal standards have been adopted.

The standards for accepting facade donations as set forth in the VCC's Facade Easement Policy are as follows:

Buildings located in the Vieux Carre can be considered differently. The public interest is protected to a large degree because the buildings and their existing facades are already protected by law. Therefore, a greater standard can and should be applied to a structure which applies for a facade donation. That greater standard should require restoration to prevent deterioration and to restore the building architecturally, if necessary, to a standard acceptable to the Vieux Carre Commission. Additionally, non-conforming (yet legal because they existed over two (2) years) uses, signs, or additions found to be obnoxious may be required to be eliminated. The degree of restoration will be determined by the Vieux Carre Commission on a case-by-case basis.

Thus, it was the policy of the VCC in 1979 to accept the donation of the facade of any structure in the Vieux Carre which had been historically and architecturally restored to a degree acceptable to the Commission or to accept the facade donation where the plans for restoration had been approved by the Commission and the work had been guaranteed by the donor.

On October 10, 1979, Wiczer, acting on behalf of St. Louis Partners, entered into a purchase agreement to acquire the building for $300,000 from a group of individuals, one of which was Neville Landry (Landry). Landry at some time also became a limited partner in St. Louis Partners. The closing took place on November 30, 1979.

At the time of acquisition, the building was vacant and partially gutted. The $300,000 purchase price consisted of (1) an earnest money deposit of $10,000, (2) $20,000 cash at closing, (3) $30,000 cash to be paid by March 1, 1980, evidenced by a promissory note bearing 11- 1/2 percent interest and (4) a $240,000 wrap-around nonrecourse mortgage to the seller. The contract of purchase was conditioned upon the VCC agreeing to accept a donation of the building's facade pursuant to section 170(f)(3)(C) and the qualification of the building as a historical landmark on the Federal Register. In addition, St. Louis Partners was obligated under the contract to perform rehabilitation of the building, exclusive of facade repairs, for an amount not to exceed $185,000.

To ensure that adequate funds would be available to meet the $185,000 renovation obligation, the contract called for the establishment of an escrow fund. St. Louis Partners was required to deposit $80,000 at the time of closing with Landry Title Insurance, Inc., escrowee for the partners. Rather than naming Landry Title Insurance, Inc., as escrowee, St. Louis Partners on November 30, 1979, deposited $80,000 into account number 01-36314-2 at National American Bank of New Orleans. Wiczer and Landry were joint signatories on the account.

On December 4, 1979, the VCC voted unanimously to accept the facade donation subject to the donor's compliance with 23 recommendations written by the VCC staff and approval by the VCC of three sets of drawings (plans and elevations) incorporating the...