In recent years, the Internal Revenue Service has denied 70 percent of facade easement deductions, court filings show. Since 2002, the Justice Department estimates that inflated easement deductions have totaled $1.2 billion.
“These are very wealthy people taking a massive deduction on their taxes, for plenty of nothing,” said Dean Zerbe, who investigated abusive tax shelters while legal counsel for the Senate Finance Committee. “The request for the client list will give the IRS a road map for additional doors to knock on.”
Under the donation system, property owners promise 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 though they had given an armful of old coats to a neighborhood thrift shop. Some property owners have claimed tax deductions exceeding $1 million.
But preservation laws in the District and many other cities already forbid unapproved changes to the exterior of historic homes, meaning the property owners are promising not to alter something they cannot legally change anyway.
“It’s money for nothing,” Zerbe said.
In a civil complaint filed last month, the Justice Department asked a D.C. federal judge to order Steven McClain and the nonprofit organization he heads to stop telling homeowners that they were entitled to deductions of up to 15 percent of the value of their property.
The complaint contends that reforms that McClain and his associates claim to have made in 2005, after The Washington Post raised questions about their operations, were “cosmetic” and created “the illusion that they took seriously criticisms of their practices.” Behind the scenes, however, they hired a team of lobbyists, political consultants and public relations specialists, and abuse continued, the complaint says.
The IRS estimates that, between 2002 and 2006, such deductions cost the Treasury revenue totaling more than $250 million.
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 Washington, where McClain’s operation started and is based. Other cities targeted by the nonprofits include New York, Baltimore and Boston.