Judge bars D.C. charity from promoting ‘facade easement’ tax deductions

July 19, 2011

A federal judge has barred a Washington-based charity and its founder from telling property owners that they can get huge tax deductions by giving the nonprofit organization “facade easements” on their high-end homes and commercial buildings.

U.S. District Judge Gladys Kessler issued a nine-page injunction against Steven McClain and the Trust for Architectural Easements permanently restricting them from what the federal government said were abusive and illegal practices that have cost the U.S. Treasury hundreds of millions of dollars.

Kessler’s order bars the trust from telling facade donors that the Internal Revenue Service has established a benchmark allowing tax deductions of up to 15 percent of a building’s value. It also bars the trust from steering property owners to particular real estate appraisers and from accepting facade easements that lack any “conservation purpose.”

Under the donation system, property owners promise that they will not change the outward appearance of their historic homes and office buildings without permission. They “donate” the promises — in the form of easements — to preservation organizations and deduct an amount estimated to represent the gifts’ cash value from their income taxes as a charitable contribution, just as if they had given old clothing to a charity thrift shop. Some individual property owners have claimed tax deductions exceeding $1 million.

But preservation laws in the District and many other cities forbid unapproved changes to the exterior of historic homes, meaning the property owners are promising not to alter something they cannot legally change.

The judge prohibited the trust from asking property owners to give it a percentage of the tax deduction they expected to receive from the IRS. And she ordered the trust to pay an independent monitor to ensure that it complies. Kessler did not rule on whether the trust is entitled to retain its tax-exempt status, which the Justice Department called a question “for a different forum.”

The Justice Department says that the easements have cost U.S. taxpayers $1.2 billion in recent years and that many of the related deductions have been wildly inflated. As a result, the IRS is examining the returns of hundreds of taxpayers in New York, Baltimore, Boston and the District.

The trust said in a statement that it was admitting no wrongdoing and accused the government of overreaching. It described the injunction as a “favorable settlement” that “vindicated the Trust and its long-standing practices.”

“The Trust is gratified that the settlement puts this matter behind it and allows the Trust to return its full attention to its historic preservation mission,” McClain said in a statement.

Under the rules of the easement laws, the tax write-offs are supposed to represent the decline in the property’s worth attributable to the restriction on altering the facade. But market studies show that the easements generally do not hurt resale, making the tax breaks unwarranted, the Justice Department said.

In return for help arranging the donations, the property owners have contributed millions of dollars to a handful of nonprofit organizations and private businesses associated with McClain that made the transactions possible, the Justice Department said.

Most of those property owners live in the District, where McClain’s operation started and is based. The lucrative arrangements were first described in “Rich With History,” a 2004 Washington Post investigative series.


The Trust for Architectural Easements said that it was admitting no wrongdoing and accused the government of overreaching. (Lucian Perkins/TWP)
Joe Stephens joined The Washington Post in 1999 and specializes in in-depth enterprise reporting.
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