[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
            TO REVIEW THE TAX DEDUCTION FOR FACADE EASEMENTS 

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 23, 2005

                               __________

                           Serial No. 109-34

                               __________


         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                    JIM RAMSTAD, Minnesota, Chairman

ERIC CANTOR, Virginia                JOHN LEWIS, Georgia
BOB BEAUPREZ, Colorado               EARL POMEROY, North Dakota
JOHN LINDER, Georgia                 MICHAEL R. MCNULTY, New York
E. CLAY SHAW, JR., Florida           JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
DEVIN NUNES, California
J.D. HAYWORTH, Arizona

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 16, 2005 announcing the hearing.................     2

                               WITNESSES

Internal Revenue Service, Steven T. Miller, Commissioner, Tax-
  Exempt and Government Entities Division........................     5

                                 ______

National Architectural Trust, Springfield Management Services, 
  Steven L. McClain..............................................    14
National Trust for Historic Preservation, Paul W. Edmondson......    23
New York Landmarks Conservancy, Peg Breen........................    27
Delta Associates, David C. Lennhoff..............................    31


            TO REVIEW THE TAX DEDUCTION FOR FACADE EASEMENTS

                              ----------                              


                        THURSDAY, JUNE 23, 2005

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 1100, Longworth House Office Building, Hon. Jim Ramstad 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
June 16, 2005
OV-2

                      Ramstad Announces Hearing to

             Review the Tax Deduction for Facade Easements

    Congressman Jim Ramstad (R-MN), Chairman, Subcommittee on Oversight 
of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing to review the tax deduction for facade 
easements. The hearing will take place on Thursday, June 23, 2005, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include officials from the Internal Revenue Service 
(IRS) and easement-holding organizations.
      

BACKGROUND:

      
    In 1980, Congress passed the Tax Treatment Extension Act (P.L. 96-
541), which made permanent a charitable tax deduction for certain 
conservation contributions to a qualified organization for conservation 
purposes. This law supplemented two previous laws--the 1966 National 
Historic Preservation Act (P.L. 89-665), which set guidelines for 
defining and listing historic properties, and the 1976 Tax Reform Act 
(P.L. 94-455), which established the historic preservation tax 
deduction on a temporary basis. Federal law allows a charitable 
deduction under Section 170(h) of the Internal Revenue Code for 
donations of qualified real property interests, including easements 
with respect to a certified historic structure granted in perpetuity to 
a qualified organization. A ``certified historic structure,'' is any 
building, structure or land area listed in the National Register or 
located in a registered historic district. The building must be 
certified by the National Park Service as contributing to the historic 
character of the district.
      
    A historic preservation easement, like other deed restrictions, is 
a voluntary legal agreement made between the property owner and a 
qualified organization to protect a significant historic, archeological 
or cultural resource in perpetuity from demolition, alteration or 
development. Under the terms of this type of easement, the property 
owner grants a portion of, or interest in, the owner's property rights 
to a qualified organization whose mission includes historic 
preservation. By donating a facade easement to a qualified 
organization, a property owner promises in perpetuity not to alter the 
facade of his or her structure without the permission of the easement-
holding organization. In return, the property owner may take a 
deduction equal to the value of the easement.
      
    In recent years, there has been a dramatic growth in the number of 
facade easements. Recent media reports have raised concerns about 
abuse, especially relating to inflated deductions that some taxpayers 
may be claiming. Some reports have also raised questions about the role 
of for-profit facilitators in marketing and promoting the donation of 
facade easements. According to some reports, some facilitators are 
advising potential donors that the easement will not negatively impact 
the value of the property, while at the same time encouraging the 
property owner to take a large deduction. In addition, when conducting 
a valuation of an easement, many appraisers appear to be applying 
similar percentage values to easements, regardless of the location, 
local historic ordinance restrictions or the varying types of 
restrictions in the easement deed.
      
    In announcing the hearing, Chairman Ramstad stated, ``The 
Subcommittee is interested in learning if the tax deduction for facade 
easements has been abused. I think it is important to review this 
deduction and how it is being administered to make sure American 
taxpayers are getting their money's worth.''
      

FOCUS OF THE HEARING:

      
    The hearing will review the tax deduction for the donation of 
facade easements, including the valuation of facade easements, and 
potential abuse relating to the marketing and promotion of facade 
easements.
      

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noted above.

                                 

    Chairman RAMSTAD. The hearing would please come to order. I 
would like to welcome our witnesses, distinguished members of 
the panel, as well as our visitors here today. The last 5 years 
have witnessed an exponential growth in the number of historic 
preservation easements donated by property owners. These 
easements are intended to serve an important historic 
preservation purpose. However, the rapid growth in easement 
donations combined with some, I must say, troubling accounts of 
abuse relating to the easement deduction, led us to hold this 
hearing today. As you all know, the Tax Code allows a deduction 
for a number of different conservation-related contributions. 
Today, we will focus solely on facade easements. Let me repeat: 
today, we will focus solely on facade easements. When owners 
donate an easement, they are effectively giving up control over 
the facade of that structure to a nonprofit organization. The 
Tax Code allows the property owner to take a deduction for 
giving up that partial property interest. The policy reason 
underlying this deduction is to encourage easement donations as 
a tool for historic preservation, to provide an incentive for 
historic preservation.
    While this deduction and the policy reasons underlying this 
deduction sound simple in theory, in practice it has become 
much more complex. The valuation of a facade easement is not a 
simple matter. How much is it worth for a property owner to not 
be able to alter the facade of his or her structure? That 
should depend on a number of different factors for which I 
believe there is a consensus. First, does the owner have the 
right to alter the facade of the building? Does the right exist 
to alter the facade? Many areas of our country are already 
subject to strict historic preservation laws that keep the 
property owner from changing the facade. Two, what does the 
easement cover? Some easements cover simply the facade; others 
cover the entire building. Different types of easements should 
obviously be worth different amounts. Three, does the appraisal 
reflect the actual facts and circumstances of the facade? It 
appears that some disturbing practices have emerged in the 
appraisal of easements. Rather than making careful 
individualized determinations concerning properties, it seems 
that a number of appraisers are applying a uniform rule in 
which they estimate all facade easements are worth between 10 
and 15 percent of the value of the property. Valuations like 
this are contrary to Internal Revenue Service (IRS) regulations 
and cast doubt on the easement deduction, generally.
    Today, we will hear testimony from the IRS, from three 
different easement holding organizations, and from an expert 
appraiser. We will try to learn more about the role that 
easement holding groups play in the valuation process and 
whether there are, in fact, problems with the way these 
organizations solicit and oversee easement donations. In a book 
about the easement appraisal process written several years ago, 
before the growth in easement donations, the Land Trust 
Alliance and the National Trust for Historic Preservation wrote 
the following, ``Organizations accepting easements should 
ensure to the extent possible that donors claim deductions 
based on competent independent appraisals. Failure to do so may 
result in disallowance of the donor's charitable contribution 
claim. More fundamentally, excessive deduction claims undermine 
public confidence in our tax system and could conceivably lead 
to congressional curtailment of this very important 
conservation and preservation tool.'' I agree with the caveat 
just read and provided by the Land Trust Alliance and the 
National Trust for Historic Preservation. I agree with their 
warning. If historic preservation tools are marketed as a way 
for some homeowners to take a hefty inappropriate tax deduction 
without giving anything up, it is clear some changes may be in 
order. I hope this hearing will allow this Subcommittee to 
determine the extent of the abuse of the facade easement 
deduction, so we can consider any necessary and appropriate 
reforms.
    Thank you again to our colleagues who are here today and 
our witnesses for being here. The Ranking Member, Mr. Lewis, 
called and said he was unable to be here today, as did a number 
of other Members on the other side of the aisle. Are there any 
opening statements from this side? If not, I would ask the 
panel to begin the testimony, recognizing the 5-minute rule 
that we have here. If you could keep your comments to 5 
minutes, by unanimous consent, the entire text of your prepared 
testimony will be entered into the record. Now that Mr. 
Lennhoff has arrived, we have the full complement of five 
members of the panel. Welcome, Mr. Lennhoff. Thank you for your 
call. I am sorry you got held up in traffic, but we are glad 
you are here. The five members of the panel are Mr. Steven T. 
Miller, Commissioner of the Tax Exempt and Government Entities 
Division of the IRS; Mr. Steven L. McClain, Director of the 
National Architectural Trust (NAT), and President of 
Springfield Management Services (SMS); Paul Edmondson, Vice 
President and General Counsel of the National Trust for 
Historic Preservation; Ms. Peg Breen, President of New York 
Landmarks Conservancy; and Mr. David C. Lennhoff, President of 
the Appraisal Division of Delta Associates. Mr. Miller, your 
testimony, please.

  STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX-EXEMPT AND 
     GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE

    Mr. MILLER. Yes. Thank you, Mr. Chairman, distinguished 
Members of the Subcommittee. Deductions for facade easements 
appear to be on the rise, as you have mentioned. They warrant 
our attention because of troubling valuation problems we are 
finding in this area. While we are still early in our 
enforcement work, let me say that we are concerned that some 
homeowners are being misled by charities, promoters, and 
appraisers into believing that a donation of a facade easement 
entitles them to a deduction in excess of what we believe is 
appropriate. I want to make it clear to the Subcommittee and to 
those in the easement community that those individuals who take 
improper facade deductions will hear from us. I outlined the 
law in this area in my written testimony, and while I will 
touch on it here, I want to concentrate more on our enforcement 
efforts and our challenges.
    Facade easements are intended to preserve historically 
important land areas or certified historic structures, 
including buildings, structures, or land areas that are either 
listed in the National Register of Historic Places, or located 
in a registered historic district and certified by the National 
Park Service as being of historic significance to that 
district. Thus, we generally rely upon the Park Service to 
determine historic significance. If an easement meets Park 
Service requirements, the question then becomes one of value. 
Generally, the amount of a deduction may not exceed the value 
of the property that is given up by the donor. We have 
enforcement efforts under way in this area. We have established 
an IRS team to lead our efforts. The team currently is 
overseeing 30 facade donor audits and is reviewing data to 
determine which, of an additional 1,600 or more identified 
donors, we will contact next. We are also examining a number of 
charities and promoters concerning their easement practices. As 
in some other areas within our sector, there may be 
overenthusiasm and commercialism creeping into this area.
    It is still too early to draw conclusive findings, but I do 
have some preliminary observations. The appraisal of facade 
easement presents opportunities for abuse and manipulation, and 
we are seeing problems. The validity of an appraisal of the 
valuation assigned to an easement depends upon the facts and 
circumstances of each case, and each case is unique. With 
respect to residential easements, appraisals we have seen to 
date do not include any meaningful analysis, but instead simply 
claim a flat percentage, generally between 10 and 15 percent of 
the value of the property. Let me state plainly that those who 
say the IRS will uniformly accept the flat 10 to 15 percent as 
a reasonable valuation without any underlying analysis are 
wrong. There is no such rule, and promoters, appraisers, and 
taxpayers should not proceed under the false assumption that 
this is some sort of safe harbor. Fixed percentage valuations 
are not based on the facts and circumstances of the individual 
case, and they ignore local factors, such as zoning ordinances, 
which must be taken into account. As opposed to residential 
facades, the issues we find in commercial property facade 
easements are often more complex. Although we have seen some 
fixed percentages being taken here as well, there are often 
additional valuation problems stemming from the way 
restrictions on further development of the property are valued.
    So, although facade easements serve a vital role in the 
preservation of our heritage, the problems we have seen so far 
concern us. These problems also present the issue of whether 
existing rules governing appraiser qualifications, appraisal 
standards, and the standards for referral to the Office of 
Professional Responsibility are sufficient. As you consider 
these issues, I ask you also to consider the IRS challenges and 
questions outlined by Commissioner Everson in his May testimony 
before the full Committee. First, are there gaps in the 
statutory or regulatory framework? For example, are current 
appraisal standards sufficient and are the standards for 
referral for disciplinary action workable? A second issue is 
whether the IRS has the flexibility it needs to respond 
appropriately to compliance issues. For example, should there 
be an intermediate sanction, as the Administration proposed in 
its 2006 budget proposal, for those charities that do not 
monitor the easements entrusted to their care? A third issue is 
whether more should be done for transparency purposes. This 
includes not only form changes and the need for enhanced 
electronic filing, which I have outlined in my written 
testimony, but the ability of the IRS to share information with 
those in the States and the Federal Government who co-
administer the conservation area. I would be happy to take any 
questions.
    [The prepared statement of Mr. Miller follows:]
Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government 
              Entities Division, Internal Revenue Service
    Mr. Chairman, Mr. Lewis, and distinguished Members of the 
Subcommittee, thank you for this opportunity to discuss the law 
relating to the deductibility of contributions for facade easements, 
and the steps the Internal Revenue Service is taking to enforce it. 
Congress has allowed an income tax deduction for owners of certified 
historic structures who give up the right to change the exterior 
appearance, the facade, so that the historic qualities of the structure 
might be preserved for future generations.
    The conservation contribution provisions of the Internal Revenue 
Code \1\ play a vital role in the preservation of historic structures 
with unique public value.
---------------------------------------------------------------------------
    \1\ Internal Revenue Code (IRC) Section 170(h).
---------------------------------------------------------------------------
    As I will discuss below, donations of facade easements appear to be 
on the rise based on the number of properties located in registered 
historic districts that are applying for certification by the National 
Park Service as of historic significance to the district. The rise in 
donations of facade easements warrants our attention because the IRS 
has seen signs that certain valuation practices employed with regard to 
facade easements may compromise the policies and the public benefit 
that Congress intended to promote.
    Let me say here that we are concerned that some taxpayers are being 
misled by charities, appraisers, and promoters into believing that the 
donation of a facade easement entitles them to a deduction greatly in 
excess of what is allowable. Taxpayers who are taking improper 
deductions for donated facade easements can expect to hear from us.
    Later, I will discuss these trends and problems in more detail, and 
explain what we are doing about them. But let me first briefly explain 
the tax provisions relating to conservation easements generally and to 
facade easements in particular.
Legal Requirements for Deductions for Facade Easements
    The analysis of a facade easement focuses on two issues. The 
threshold question is whether the interest the taxpayer conveys is a 
valid conservation easement, in this case an easement exclusively for 
the preservation of a certified historic structure. The second is 
whether the value of the easement is correct, that is, whether the 
required appraisal is honest and reasonable, or fanciful and inflated.
Threshold question_conservation easements in general
    A facade easement is one of four types of qualified conservation 
contributions described in section 170(h) of the Code. I will focus on 
facade easements today, but will cover all four types because they 
share some common features and sometimes intertwine. As we have 
recently testified, the Service has a large examination program 
underway with respect to open space conservation easements where we 
have seen problems due to a lack of significant public benefit and 
inflated valuations, but we have also begun an expanded examination 
program for facade easements.
    To begin, let me note an important distinction between donations of 
real property and donations of qualified conservation contributions, 
including conservation easements. Under general income tax rules, to be 
eligible for a deduction for a charitable contribution, a taxpayer must 
give his or her entire interest in the property to the charity, 
reserving no substantial rights for himself or herself. Under these 
rules, the recipient charity becomes the owner of all title and 
interest in the property. The donor generally may take a charitable 
contribution deduction for the fair market value of the property. In 
these cases, as with other gifts of property, our main concern usually 
is whether the donor has valued the gift correctly.
    There are only a few exceptions to this general rule, and a 
conservation easement is one of them. Section 170(f)(3)(B)(iii) allows 
a deduction for a qualified conservation contribution, even though it 
is only a gift of a partial interest in property.
    Section 170(h) defines ``qualified conservation contribution.'' It 
is a contribution:

      Of a qualified real property interest, including an 
easement granted in perpetuity that restricts the use that can be made 
of the property. Section 170(h)(2)(C).
      To a qualified organization. Generally, these are public 
charities and governmental units. Section 170(h)(3). Importantly, the 
recipient charity must have the resources and commitment to monitor and 
enforce the restrictions.
      Exclusively for conservation purposes.

    With respect to the last requirement, there are four allowable 
conservation purposes.

    1. The preservation of land areas for outdoor recreation or 
education of the general public.

    The donation of easements to preserve land areas for the 
recreational use of the general public or for the education of the 
public is the first conservation purpose enumerated in section 
170(h)(4) of the Code. Examples include the preservation of a water 
area for public recreation such as boating or fishing, or the 
preservation of land for a nature trail or hiking trail. Unlike 
easements for the three other conservation purposes, these easements 
require regular and substantial physical access by the general public.

    2. The protection of a relatively natural habitat of fish, 
wildlife, plants or similar ecosystem.

    The second category of conservation easements is to protect a 
significant natural habitat or ecosystem in which fish, wildlife, or 
plants live in a relatively natural state. Significant natural habitats 
include the habitats of rare, endangered, or threatened species of 
animals, fish, or plants, or natural areas that represent high quality 
examples of a terrestrial or aquatic community, or natural areas that 
contribute to the ecological viability of a park, nature preserve, 
wildlife refuge, or wilderness area. Limitations on public access to 
these areas will not render an easement donation nondeductible. For 
example, a restriction on access to the habitat of a threatened species 
is consistent with the conservation purpose of the easement.

    3. The preservation of open space (including farmland and forest 
land) for either the scenic enjoyment of the public, or pursuant to a 
clearly delineated governmental conservation policy.

    To determine that an easement will protect the scenic enjoyment of 
the public, it must be shown that development of the land would result 
either in an impairment of the scenic character of the landscape, or 
would interfere with a scenic view that can be enjoyed from a public 
place. At a minimum, visual access to or across the property is 
required. Under the terms of an open space easement on scenic property, 
the entire property need not be visible to the public, although the 
public benefit from the donation may be insufficient to qualify for a 
deduction if only a small portion of the property is visible to the 
public. No matter whether the easement is for the scenic enjoyment of 
the public or, alternatively, is pursuant to a governmental 
conservation policy, there must also be a significant public benefit 
that arises from an open space easement.\2\
---------------------------------------------------------------------------
    \2\ In determining whether a significant public benefit is present, 
the regulations provide a non-exclusive list of eleven factors that may 
be considered. Section 1.170A-14(d)(iv)(A). Some of these factors 
involve the uniqueness of the land; the intensity of current or 
foreseeable development; the likelihood of development that would lead 
to the degradation of the scenic, natural, or historic character of the 
area; the opportunity for the general public to use the property or 
appreciate its scenic values; and the importance of the property in 
maintaining a local or regional landscape or resource that attracts 
tourism or commerce to the area. These factors indicate the kind of 
open space contemplated as having a significant public benefit.

    4. The preservation of a historically important land area or a 
certified historic structure. Facade easements fall within this 
category, and this is the area that I am primarily concerned with in 
this testimony. The following discussion covers the law in this area.
Facade Easements for Certified Historic Structures
    Historic preservation easements are intended to preserve 
historically important land areas or certified historic structures. 
Historically important land areas include:

      An independently significant land area including any 
related historical resources (such as an archeological site), that 
meets the National Register Criteria for Evaluation administered by the 
National Park Service;
      Any land area within a registered historic district 
including any buildings on the land that contribute to the significance 
of the district; and
      Any land area, including related historical resources, 
adjacent to a property listed individually in the National Register of 
Historic Places, if the land contributes to the historic or cultural 
identity of the listed property.

    Certified historic structures mean buildings, structures, or land 
areas that are:

      Listed in the National Register of Historic Places; or
      Located in a registered historic district and certified 
by the National Park Service as being of historic significance to the 
district.

    For a contribution of a historically important land area or 
certified historic structure to qualify for an income tax deduction, 
the public must have at least some visual access to the donated 
property. In the case of a historically important land area, the entire 
property need not be visible to the public, but the public benefit from 
the donation may be too small to qualify for a deduction if only a 
small part of the property is visible. If the historic land area or 
certified historic structure is not visible from a public way (for 
example, if it is hidden by a wall or by shrubbery, or is too far from 
the public way), the terms of the easement must be such that the 
general public is given the opportunity on a regular basis to view the 
characteristics of the property that are preserved by the easement.
    Factors to consider in determining the type and amount of public 
access include the historical significance of the property, the nature 
of the features that are the subject of the easement, the remoteness or 
accessibility of the site, the possibility of physical hazards to the 
public viewing the property, the extent to which public access would be 
an unreasonable intrusion on any privacy interests of individuals 
living on the property, the degree to which public access would impair 
the preservation interests that are the subject of the donation, and 
the availability of opportunities for the public to view the property 
by means other than visits to the site.
    If the terms of an easement allow future development in a 
registered historic district, a deduction is allowable only if the 
easement requires such development to conform to appropriate local, 
state or federal standards for construction or rehabilitation within 
the historic district.
Amount of the deduction_the appraisal and rules of valuation
    If the facade easement contribution meets all requirements of 
section 170, and qualifies as a conservation contribution, the inquiry 
then turns to the valuation of the easement. Generally, the amount of 
the deduction may not exceed the fair market value of the easement on 
the date of the contribution (reduced by the fair market value of 
anything received by the donor in return). Fair market value is the 
price at which the contributed property would change hands between a 
willing buyer and a willing seller, neither being under any compulsion 
to buy or sell, and each having reasonable knowledge of relevant facts.
    If there is a substantial record of sales of easements comparable 
to the donated easement (such as purchases pursuant to a governmental 
program), the fair market value of the donated easement is based on the 
prices of the comparable sales. If no substantial record of marketplace 
sales is available to use as a meaningful or valid comparison, as a 
general rule (but not in all cases) the fair market value of a 
conservation restriction is equal to the difference between the fair 
market value of the property before the granting of the restriction and 
the fair market value of the property after the granting of the 
restriction.
    Under the regulations, if such before-and-after valuation is used, 
the fair market value of the property before contribution must take 
into account not only the current use of the property but also an 
objective assessment of how immediate or remote is the likelihood that 
the property, absent the restriction, would in fact have been 
developed, or its historic character modified. The valuation also must 
take into account the effect of any zoning, conservation or historic 
preservation laws that already restrict the property's potential 
highest and best use. Further, there may be instances where the grant 
of a conservation restriction may have no material effect on the value 
of a property, or may in fact enhance, rather than reduce, the value of 
property. In such instances, no deduction would be allowable. For 
certified historic structures, the fair market value of the property 
after contribution of the restriction must take into account the amount 
of access permitted by terms of the easement. Additionally, if before-
and-after valuation is used, an appraisal of the property after 
contribution of the restriction must take into account the effect of 
restrictions that reduce the potential fair market value represented by 
highest and best use, but nevertheless permit uses of the property that 
will increase its fair market value above that represented by its 
current use.
    If the donor reasonably can expect to receive financial or economic 
benefits greater than those to be obtained by the general public as a 
result of the donation of a conservation easement, no deduction is 
allowable. If development is permitted on the property to be protected, 
the fair market value of the property after contribution of the 
restriction must take into account the effect of the development.
The recipient of the easement_qualified organizations
    To be qualified to receive a conservation easement, an organization 
must be a governmental unit, or one of several types of public 
charities. To be a qualified organization, the organization also must 
be committed to protect the conservation purposes of the donation, and 
must have the resources to enforce the restrictions. However, it need 
not set aside funds for this purpose.
    As with any charity, a qualified organization is subject to certain 
rules described in section 501(c)(3). The organization must operate 
exclusively for charitable, educational, or other tax-exempt purposes. 
It cannot serve private interests unless such interests are only 
incidental to its exempt purposes, and it cannot serve a substantial 
nonexempt purpose. If the organization becomes derelict in its duties 
to ensure that donated easements continue to serve an exempt purpose, 
or if the organization subordinates the interests of the public to the 
interests of the donor, the organization's tax exemption may be open to 
question.
Role of the National Park Service and Trends with Respect to Facade 
        Easements
    A principal qualification for eligibility for a historic easement 
income tax deduction is that the National Park Service (NPS) list the 
property in the National Register of Historic Places, or recognize the 
property as located in a registered historic district and certify that 
the property is of historic significance to that district. Thus, the 
NPS serves as a gatekeeper for what is historically significant. The 
Service relies upon the NPS for this determination. As years pass, the 
NPS, using its criteria for evaluation of these properties, will 
certify as historic an increasing number of our older houses, 
buildings, and neighborhoods that significantly or uniquely represent 
our past. We should expect more and more neighborhoods that meet the 
NPS criteria to apply for certification and be deemed historic. We also 
should expect the owners of more and more structures in those and in 
existing historic districts to apply for certification as the tax 
benefits of facade easement donations are promoted.
    As we work these cases, there appear to be two distinct categories 
of property with respect to which a facade easement is donated: 
residential and commercial. The distinction matters to our discussion 
because the valuation problems discussed below vary by type of 
property. That is, appraisers have used different approaches in valuing 
these two categories.
    The number of possible facade easements is large. NPS data tells us 
that there are more than 1.27 million buildings that either are already 
listed in the National Register of Historic Places or are existing 
properties that may contribute to the historic character of an existing 
historic district (a new building in a historic district would not be 
included in the above number).
    Our information systems do not currently provide us with the 
ability to identify the number of current easements or the claimed 
value of deductions for these easements, including any facade 
easements. However, it appears that the number of facade easements is 
increasing based on the number of certifications applied for and 
approved by NPS. The number of applications to NPS for certification of 
historic property has grown in the last five years. NPS data shows that 
74 applications were submitted between 1995 and 1999; 154 were 
submitted in 2001; 705 in 2003, and 750 last year. While we believe 
that this growth is reflected in the number of residential facade 
easements, it is less clear whether commercial facade easements are 
also increasing.
    Certifications also seem to be geographically clustered. The 
largest number of facade easements is concentrated in three locations: 
Washington, D.C., New York City, and Chicago. We believe that qualified 
recipient organizations actively solicit easements in selected 
neighborhoods by promising large deductions. One resident on a street 
applies, and then another, and soon the whole block may be dotted with 
them.
Internal Revenue Service Enforcement in the Area of Facade Conservation 
        Easements
Overview
    In this portion of my testimony I will outline the enforcement 
actions the IRS has taken in this area and what we have found to date. 
First, I will discuss the reporting requirements for exempt 
organizations and their donors, and steps the IRS is taking to improve 
such reporting. Then, I will discuss our examination activity in the 
area.
Reporting
    Facade easements are easier for us to track than other types of 
conservation easements because of valuable data we receive from the 
NPS. At least with respect to newer certifications, NPS has information 
that identifies the owners of properties eligible for facade easement 
donations. Consequently, the reporting improvements for donors which I 
will outline, while helpful in the facade easement area, will assist us 
primarily with respect to open space, wildlife habitat, and 
recreational easements, for which we do not have a source of 
information similar to the NPS.
    We need to be able to determine systematically which organizations 
and individuals have been involved in conservation easement 
transactions. To address this, we are revising our tax forms to gather 
more information about organizations with conservation easement 
programs and their donors. We recently revised Form 1023, ``Application 
for Recognition of Exemption Under Section 501(c)(3) of the Internal 
Revenue Code,'' to add new questions that will help us identify 
organizations with conservation easement donation programs in order to 
ensure that they meet the requirements for exemption, including the 
ability to meet conservation responsibilities.
    Charities and other tax-exempt organizations annually file Form 
990, ``Return of Organization Exempt From Income Tax,'' an information 
return that reports income, expenses, assets, and liabilities of these 
organizations, along with specific information about their operations 
and programs. We are concerned that the public is not getting enough 
information from Form 990 to understand what activities many of our 
charities are engaged in. As an interim step, we will revise the 2005 
Form 990 so that both the IRS and the public have a better 
understanding of which organizations receive easements. We expect that 
this will be in the form of a new checkbox that will identify those 
organizations that received a conservation easement donation during the 
year.
    All exempt organizations can now file their annual returns 
electronically. Electronic filing was available for Form 990 and 990EZ 
filers in 2004, and is available this year as well for private 
foundations, which file Form 990-PF. We want to encourage e-filing 
because it reduces taxpayer errors and omissions and allows us, and 
ultimately the public, ready access to the information on the return. 
For this reason, we have required e-filing in certain cases. Under 
proposed and temporary regulations, we will require electronic filing 
for larger public charities and all private foundations by 2007.
    We also are working on larger scale improvements to the Form 990. 
The current form could be more user-friendly while also eliciting more 
of the information that we need. We anticipate that the revised form 
will have specific questions or separate schedules that focus on 
certain problem areas. For example, filers should not be surprised to 
find specific schedules or detailed questions relating to credit 
counseling activities, supporting organizations, compensation 
practices, and organizational governance. The easement area is also 
under consideration. The timing of the revision of the Form 990 is 
dependent on budget issues and our partners, including the states, 37 
of which use the Form 990 as a state filing, and software developers.
    When donors make gifts of property in one year with a claimed value 
that exceeds $500, they file Form 8283, ``Noncash Charitable 
Contributions,'' with their income tax returns. On the form donors list 
the property they are donating. For most donations with a claimed value 
that exceeds $5,000, the form requires a written appraisal \3\ and the 
identity and signature of the appraiser, along with a signed 
acknowledgement of the gift by an officer of the charity that receives 
the gift.
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    \3\ The requirements for qualified appraisals are set forth in 
section 1.170A-13(c)(3) of the Income Tax Regulations. Such appraisals 
must be made by a qualified appraiser no earlier than 60 days before 
the date of the donation and no later than the due date of the return 
(including extensions) on which a deduction is claimed. The appraiser 
must sign and date the appraisal and may not charge a fee based upon a 
percentage of the value of the property or based upon the amount of the 
deduction claimed by the donor. The appraisal must include certain 
specified information.
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    We are revising Form 8283 to provide a new checkbox to identify 
donors of conservation easements, and we are modifying the form's 
instructions to better describe what is permissible and to obtain 
better information on the type of property donated. The revised form 
also will reflect new qualified appraisal requirements enacted by 
Congress last year in section 170(f)(11). Where the donation is in 
excess of $500,000, the form will require taxpayers to attach the 
appraisal to the return.
    Once implemented, these changes will enable us to better identify 
the universe of organizations and donors who are involved in 
conservation easement transactions, including facade easement 
transactions, and they will allow us to better target our future 
enforcement efforts. In the meantime, we will pursue the active 
enforcement program we have in place now.
Examination Activity in the Area of Facade Conservation Easements_
        Review and Findings to Date
Formation of a cross-functional team
    Earlier this year, we formed a cross-functional team to attack all 
aspects of the problem of conservation easements. The team includes 
members from three IRS business units (Large and Midsize Business, 
Small Business and Self-Employed, and Tax Exempt and Government 
Entities), as well as representatives from the IRS Appeals Office, 
Chief Counsel, and the Office of Professional Responsibility.
    Our team has selected cases and set strategic priorities as to 
which cases are worked first. It has trained and is continuing to train 
IRS agents and appraisers on conservation easement issues, and will 
serve as a resource for legal and technical questions for our field 
personnel.
    Toward this end, the IRS is sponsoring an e-mail address to receive 
questions and concerns from the community, so that the group can 
collect stakeholder input as we move forward in this area. The address 
is [email protected], and it is up and running.
    We are looking not only at donors and recipient charitable 
organizations, but also at promoters. The team will be alert for 
developing patterns of abuse and will identify promoters of potentially 
abusive easement donations. In the course of our examinations, we are 
finding appraisers that appear to be associated with abusive promotions 
on a recurring basis. We are going to shine a searchlight in their 
direction, and will use all civil and criminal tools at our disposal to 
combat abuses. We also will continue to partner effectively with both 
the NPS and state and local preservation offices.
Inventory of cases and findings to date
    Donor Audits. As noted, the Service has a more mature enforcement 
program looking at open space easements. However, we also have done 
work in the facade area and will be doing much more into the future.
    Currently, we have 30 facade easement audits underway, including 9 
audits of facade easement donations relating to commercial property. 
With regard to residential properties, the team is currently comparing 
the NPS data on some 1,600 certifications to our master file to 
determine which cases to pursue next. We are also comparing this data 
to partnership return data in order to identify and select appropriate 
cases involving commercial property.
    In some of the geographic areas where residential facade easements 
are clustered, we may also pursue market studies to determine the 
proper valuation of easements in those areas to use in our enforcement 
program.
    Our findings to date indicate that while the threshold requirements 
for a qualified conservation contribution are being met, taxpayers are 
taking excessive deductions for facade easements. As I have mentioned, 
there are two categories of property, residential and commercial. 
Generally, appraisers have used different approaches to these two 
categories, but with inflated results in both.
    In granting a facade easement, residential owners agree not to 
modify the facade of their historic house and they give an easement to 
this effect to a recognized charity. However, if the facade was already 
subject to restrictions under local zoning ordinances, the taxpayers 
may, in fact, have nothing or very little to give up. A taxpayer cannot 
give up a right to change the facade of a building if he or she does 
not hold the right in the first place, as may be the case where a 
zoning ordinance has taken this right from the property owner. Even if 
a zoning variance is possible, both the likelihood of that variance and 
the extent of change likely to be permitted under a variance would 
reduce the value of a facade easement.
    Some rather troubling valuation practices in residential housing 
have come to our attention. Based upon a sample of cases from 
Washington, D.C., New York City, Chicago, and Cleveland, it appears 
that appraisers are not undertaking any meaningful analyses with 
respect to facade easements, but instead may simply be placing a value 
on a donated facade easement that is equal to a fixed percentage 
(generally 10-15%) of the value of the underlying property, with little 
support provided for the percentage selected.
    Let me state plainly that those who say the Service will accept a 
flat percentage of 10-15% as a reasonable residential facade valuation 
without any underlying analysis are wrong. There is no such rule, and 
taxpayers and appraisers should not proceed under the assumption that 
this constitutes a safe harbor. It does not.
    Issues we find in commercial property facade easements are 
different. Although we have seen fixed percentages being taken in these 
cases, there are often additional valuation problems. In some cases, 
the appraiser may use extraordinary valuation methods to achieve a high 
value for the donation. These methods include inflating the value of 
the property before the donation by ignoring sales of comparable 
properties and asserting instead an inflated value for a theoretical 
highest and best use of the property. The commercial cases tend to 
resemble the issues we see in the valuation of open space easements, 
such as how to value restrictions on future development. Appraisals may 
ignore one or more important issues, such as whether the claimed 
highest and best use is in fact economically feasible. We have seen 
cases where development is assumed to be successful (for example, added 
office or hotel space) where such development actually is questionable 
because of current market conditions (for example, where there is a 
glut of such space).
    Other assumptions are made that are equally troubling. Existing 
zoning restrictions are disregarded by assuming that the restrictions 
will be waived by local authorities, where experience indicates 
otherwise. Some appraisals may even assert an enhanced valuation of the 
property before the easement is donated by assuming the foregone 
development has already taken place, and by ignoring the time and 
expense associated with carrying out the potential development.
    Audits of the recipient charity. We are also looking at a number of 
charities that are engaged in the receipt of conservation easements 
generally, including some that pertain specifically to facade 
easements. This includes some charities that we believe may have been 
involved in particular abuses. Currently, we have seven organizations 
under examination, and we will begin examination of four more 
organizations shortly. As I mentioned, it appears that certain of these 
organizations actively solicit facade easements within historic 
neighborhoods. The promotional materials offer the possibility of large 
deductions to the owners, and supply everything the owner needs to 
complete the conveyance of the easement. The solicitation materials may 
refer the owner to preferred appraisers, and may require the owner to 
pay a fee to the organization for arranging the transaction and, 
ostensibly, for monitoring the easement into the future.
    Promoter referrals and audits. We are also seeing promoted investor 
syndications seeking to profit from conservation easements. To date 
these appear to be limited to areas other than facade easements. This 
may be more prevalent in certain states that allow transfers of tax 
credits. Some of these states have provided referral information to us 
on questionable easement donations.
    We are currently looking or have looked at the activity of more 
than 20 promoters, including some involving facade easements, and five 
promoters involved in easements have been recommended for 
investigation. Promoters and other persons involved in these 
transactions may be subject to penalties under sections 6700, 6701, and 
6694, or an injunction under section 7408.
    Sanctions against appraisers. Before 1984, attorneys and 
accountants, but not appraisers, could be barred from practice before 
the IRS. In 1984, Congress amended the law, and Circular 230 was 
modified to include appraisers. Circular 230 currently requires that 
the section 6701 penalty, aiding and abetting in the understatement of 
tax, be imposed before action may be taken against an appraiser. The 
IRS must demonstrate, by a preponderance of the evidence, that the 
appraiser had actual knowledge that the taxpayer would rely on a 
document that would lead to an understatement of tax by the taxpayer.
    When a section 6701 penalty is asserted against an appraiser, an 
information referral to the Office of Professional Responsibility is 
mandatory. The Office of Professional Responsibility may disqualify any 
appraiser against whom such a penalty has been assessed. Thereafter, a 
disqualified appraiser is barred from presenting evidence or testimony 
in any administrative proceeding before the Department of the Treasury 
or the IRS, and an appraisal he or she makes after the date of 
disqualification will have no probative effect.
    In light of the appraisal practices I have outlined above, we are 
actively considering penalties against appraisers. We have alerted the 
Director, Office of Professional Responsibility, of possible referrals 
of at least three appraisers arising out of questionable valuations of 
donated easements. To date, these appraisers work in the open space 
easement area.
IRS Challenges
    Although the conservation contribution provisions of the Internal 
Revenue Code play a vital role in the preservation of our historic 
structures, we are concerned with valuations of property that appear to 
be informed primarily by tax considerations rather than actual property 
values. In challenging such valuations, our outstanding but small staff 
of appraisers (48 in all, 20 of who work wholly or in part on 170(h) 
cases) must perform detailed appraisal work using accepted and 
recognized valuation standards. It is neither easy nor quick work. Our 
work to date raises the question of whether rules governing appraiser 
qualifications, appraisal standards, and the standards for referral to 
the Office of Professional Responsibility are sufficient.
    As you discuss changes in this and other areas involving the tax-
exempt sector, I also ask you to recall and consider the focus areas 
outlined in Commissioner Everson's testimony before the Committee on 
Ways and Means on May 26, 2005. You may recall that these focus areas 
include whether there are gaps in the statutory or regulatory 
framework; whether the IRS has the flexibility it needs to respond 
appropriately to compliance issues; whether more should be done to 
promote transparency; and whether we have the resources we need to do 
the job. In this regard, please consider the intermediate sanction 
recommended by the Administration when taxpayers claim charitable 
contribution deductions for contributions of perpetual conservation 
restrictions, but the charities that receive those contributions fail 
to monitor and enforce the conservation restrictions for which the 
charitable contribution deductions were claimed.
    The Administration has made this recommendation in its FY 2006 
budget proposals.\4\ Specifically, the proposal would impose 
significant penalties on any charity that removes or fails to enforce a 
conservation restriction for which a charitable contribution was 
claimed, or transfers such an easement without ensuring that the 
conservation purposes will be protected in perpetuity. The amount of 
the penalty would be determined based on the value of the conservation 
restriction shown on the appraisal summary provided to the charity by 
the donor.
---------------------------------------------------------------------------
    \4\ General Explanations of the Administration's Fiscal Year 2006 
Revenue Proposals, Department of the Treasury, February 2005, pp. 112-
113.
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    The Secretary would be authorized to waive the penalty in certain 
cases, such as if it is established to the satisfaction of the 
Secretary that, due to an unexpected change in the conditions 
surrounding the real property, retention of the restriction is 
impossible or impractical, the charity receives an amount that reflects 
the fair market value of the easement, and the proceeds are used by the 
charity in furtherance of conservation purposes. The Secretary also 
would be authorized to require such additional reporting as may be 
necessary or appropriate to ensure that the conservation purposes are 
protected in perpetuity.
    In conclusion, the IRS remains committed to doing all it can to 
make the conservation easement provisions of the tax code work in the 
manner Congress intended. Legitimate conservation easements serve an 
important role in the preservation of our open lands and our cultural 
heritage. However, what began as a laudable conservation easement 
program to save our open space, natural habitats, and historic sites 
may have become distorted. We are committed, as we progress through our 
enforcement program, to determine the size of this distortion and to 
take all steps necessary to stem the abuse of these programs. Clearly, 
the public should be able to expect that only those donations of facade 
and other easements that are fairly valued and that result in an 
identified public good will result in favorable tax treatment.

                                 

    Chairman RAMSTAD. Thank you, Mr. Miller. Mr. McClain, 
please.

      STATEMENT OF STEVEN L. McCLAIN, DIRECTOR, NATIONAL 
  ARCHITECTURAL TRUST, AND PRESIDENT, SPRINGFIELD MANAGEMENT 
                            SERVICES

    Mr. MCCLAIN. Mr. Chairman, Congressman Lewis, Members of 
the Subcommittee, thank you for the opportunity to testify in 
this hearing on conservation easements. I am Steve McClain, 
Senior Vice President of NAT. Formed in 2001, the Trust is a 
Section 501(c)(3) organization dedicated to the protection of 
property certified as historic by the Secretary of the 
Interior. While Federal legislation provides for the Department 
of the Interior to be the resource for listing historic places, 
the Constitution does not give the Federal Government the 
authority to regulate the preservation of these properties. 
This authority only exists with the State and municipal 
governments. Destruction of many historic properties during the 
urban renewal era of the 1960s and 1970s brought to light the 
fact that political and economic pressure on municipal and 
State governments have and will result in destruction of our 
historic resources. Critics of the program argue that 
properties in which conservation easements are granted are 
already protected through local ordinances. This criticism is 
not supported by facts. Many, but not all, of the properties in 
our portfolio are located in cities that have passed local 
ordinances restricting changes to historic properties.
    For approximately 25 percent of the properties in which NAT 
holds an easement, there is no local protection of any kind. 
The National Architectural Trust is the only institution with 
the legal authority to protect these properties from changes, 
neglect, or demolition, and to retain and restore property in 
the event the property owners fail to act. Our easements are 
permanent and carry on in perpetuity. Local ordinances may be 
canceled at any time. Conservation easements are an effective 
tool for neighborhood revitalization. In fact, 50 percent of 
all properties in Federal historic districts are in poverty 
areas as defined by the last census. A report by the Federal 
Reserve Bank of New York states that ``Conservation easements, 
when combined with other economic incentives such as the 
historic rehabilitation tax credit, have proven to be effective 
in revitalizing neighborhoods throughout the United States.'' 
Some nearby examples include the Willard Hotel, the Old Post 
Office Building, and the planned development within the 
Anacostia Historic District.
    Some question whether an easement granted on a property 
covered by local ordinances and commissions should qualify as a 
charity deduction-donation. This position is taken in spite of 
the fact that the value of conservation easements granted on 
such properties was thoroughly considered six times by U.S. tax 
court. In each case, the court ruled that easements generate a 
loss of value through a reduction in the property owners' 
bundle of rights that constitutes property ownership in this 
country. In each of the six cases, the property was located in 
a district protected by local ordinances. There is criticism of 
the monitoring and enforcement of conservation easements by 
easement holding organizations. The NAT currently holds 
approximately 550 easements. We take the responsibility to 
monitor and enforce the easements forever as our most important 
responsibility; in so doing, NAT has taken the necessary steps 
to ensure that it has the resources to carry out all its 
responsibilities in perpetuity.
    The NAT has had growing pains. Everything we have done has 
been in consultation with legal advisers and was done to 
further the mission of NAT. However, in response to criticism 
of our organization and to ensure that there is no doubt about 
our commitment to our mission, we have taken the following 
actions: We have adopted the practice of having an annual 
financial audit conducted by an independent accounting firm; we 
have adopted the Land Trust Alliance's new standards and 
practices; we have terminated NAT's contractual relationship 
with SMS, a for-profit company that previously provided 
marketing and processing services to NAT.
    In conclusion, I would like to discuss possible reforms to 
the conservation easement program. First, NAT, along with other 
preservation and conservation organizations, opposes the Joint 
Committee on Taxation's recommendations regarding conservation 
easements. These recommendations would effectively dismantle 
what has proven to be a highly effective, cost-efficient 
conservation and historic preservation program. Second, to 
ensure that the program continues as an effective preservation 
tool and to eliminate possible abuses of the program, NAT 
suggests for the Subcommittee's consideration the following: 
One, adopt the President's fiscal year 2006 budget proposal to 
impose penalties on easement holding organizations that fail to 
enforce the restrictions contained in their conservation 
easements; Two, adopt the Appraisal Institute's recommendations 
to require all appraisals to be certified as competent in 
easement donation valuation, and to follow accepted Uniform 
Standards of Professional Appraisal Practice (USPAP) appraisal 
standards; Three, require easement holding organizations to be 
certified by an organization such as the Land Trust Alliance; 
and four, require easement holding organizations to set aside 
sufficient financial resources to enable them to monitor and 
enforce the easements they hold in perpetuity. That concludes 
my statement. Thank you again for allowing me to testify today. 
I will try to answer any questions.
    [The prepared statement of Mr. McClain follows:]
Statement of Steven L. McClain, Director, National Architectural Trust 
             and President, Springfield Management Services
    Mr. Chairman, Congressman Lewis and members of the Subcommittee, 
thank you for the opportunity to present the views of the National 
Architectural Trust at this hearing on conservation easements. I am 
Steven McClain, Senior Vice President of the National Architectural 
Trust. Formed in 2001, the National Architectural Trust is a Section 
501(c)(3) tax-exempt, nonprofit organization dedicated to the 
protection of properties certified as historic by the U.S. Secretary of 
the Interior. The legal mechanism the National Architectural Trust uses 
to protect historic properties is a Conservation Easement which is 
recorded in the local land records and runs with the land in 
perpetuity. This easement legally requires the current and all future 
owners to honor its restrictive provisions forever. The easement 
identifies the external historic features of the property; prohibits 
changes to the appearance of the protected features without the 
National Architectural Trust's specific consent; requires that the 
structural integrity of the entire property be properly maintained; 
grants the National Architectural Trust enforcement rights; and 
includes all provisions required by IRS regulations Sec. 1.170A-14 to 
qualify as a charitable donation.
    The National Architectural Trust supports ``voluntary 
preservation;'' whereby property owners protect their historic 
properties by granting an easement on the property to the National 
Architectural Trust. In accepting the easement, the National 
Architectural Trust pledges to monitor and enforce the easement 
forever. Since the acceptance of our first easement in 2001, our 
portfolio of protected historic properties has grown to approximately 
550. The National Architectural Trust has accepted these easements on 
historic properties in New York, Massachusetts, Maryland, Virginia and 
New Jersey.
    While Federal legislation provides for the Department of the 
Interior to be the resource for listing historic places, the United 
States Constitution does not give the Federal Government the authority 
to regulate the preservation of these properties. This authority only 
exists with state and municipal governments. Congress is forced to rely 
on these governments through the adoption of local ordinances to 
protect our nation's architectural heritage. If allowed by state or 
municipal governments, any building identified as an individual 
landmark or contributing to a historic district on the National 
Register can be legally destroyed.
    The destruction of many such historic properties during the urban 
renewal era of the 1960's and 1970's brought to light the fact that 
political and economic pressures on municipal and state governments 
have and will result in the destruction of our historic resources. 
Thus, Congress passed Public Law 94-445 in 1976 which provides a tax 
incentive for the preservation of certified historic properties. The 
program was designed to encourage owners of properties on the National 
Register to participate directly, and voluntarily, in the historic 
preservation process.
    Conservation easements remain an effective tool for permanently 
protecting America's historic treasures by encouraging owners of 
properties deemed to be of high historic importance to voluntarily 
ensure that these architectural treasures remain intact for the 
enjoyment and enrichment of future generations. A donation of a 
conservation easement provides a personal income tax deduction to the 
owner, which is an important incentive that ensures participation in 
the program. After all, these owners are surrendering property rights 
and assuming a number of obligations for the benefit of the public.
    The National Architectural Trust and the many other nonprofit 
organizations that accept easement donations exist for the purpose of 
championing historic preservation. The National Architectural Trust was 
co-founded four and a half years ago by me and James Kearns. Mr. Kearns 
was a career public servant who retired as a Vice President of the 
World Bank. I have been a preservationist for twenty-five years, and am 
a member of numerous preservation organizations, such as:

      Society of Architectural Historians
      Institute of Classical Architecture
      DC Preservation League
      National Housing & Rehabilitation Association's Historic 
Preservation Development Council

    The National Architectural Trust's primary mission is to protect 
historic properties and the historic neighborhoods they anchor by 
accepting easement donations that are monitored and enforced in 
perpetuity.
Municipal Ordinances Fail to Protect Historic Properties
    Critics of the program argue that properties on which conservation 
easements are granted are already protected through local ordinances. 
This criticism is not supported by the facts.
    Many but not all of the properties in our portfolio are located in 
cities that have passed local ordinances restricting changes to 
historic properties and that have created local historic preservation 
commissions. For approximately 25% of the properties on which the 
National Architectural Trust holds an easement, there is no local 
protection of any kind. The National Architectural Trust is the only 
institution with the legal authority to protect these properties from 
changes, neglect or demolition, and to maintain and restore property in 
the event that property owners fail to act. Even for the properties 
covered by local restrictive ordinances, the protection that our 
easement provides goes much further than the local protection 
mechanisms. Our easements are permanent and carry on in perpetuity; 
local ordinances may be cancelled at any time.
    For example, the Chicago Tribune reported that after the city 
identified 17,000 historically significant buildings as requiring 
protection in a survey published in 1996, nearly 800 of them had been 
destroyed by 2002. Chicago is not alone. Boston recently granted 
permission for demolition of the historic Gaiety Theater despite the 
objections of historians and preservation advocates. Historic buildings 
continue to disappear all across the country despite local protections.
    In addition, recent studies and reports reveal that local 
ordinances and enforcement commissions have significant weaknesses. A 
report of a survey conducted by the National Alliance of Preservation 
Commissions in 1998 revealed many weaknesses, including:

      42% of the commissions lack an operating budget;
      30% have no professional staff;
      41% need owner consent to designate a building historic; 
and,
      Only 60% have the power to enforce their orders, while 
40% are just advisory.

    Even in Washington, DC, which is thought to have the best historic 
preservation ordinances and enforcement in the nation, Tresh Boasborg, 
Chairman of the DC Historic Preservation Review Board, was recently 
quoted in the North West Current as saying to the DC Council: ``We 
don't have the power to enforce our own orders.''
    Architectural Historian Anthony Robins prepared a recent report at 
the request of the National Architectural Trust entitled THE CASE FOR 
PRESERVATION EASEMENTS--When Municipal Ordinances Fail to Protect 
Historic Properties. In it Mr. Robins, once an employee for the New 
York Landmarks Preservation Commission, wrote the following:

          ``One major reason for the continuing losses is that most 
        landmarks regulation takes place at the local level, and the 
        hundreds of landmarks or historic district commissions across 
        the country vary enormously in their ability to protect 
        landmarks. . . . Even the strongest commissions are hobbled by 
        limited resources, political pressure, and weak enforcement 
        powers. And many--perhaps most--communities still lack 
        preservation ordinances of any kind.''

    Additionally, Mr. Robins found that:

          ``One of the major issues facing local communities is the 
        price of preservation. Historic preservation is a public 
        benefit that is often purchased at a private cost. Ultimately, 
        owners of historic properties are the ones who bear that cost, 
        either through lost development opportunities or through the 
        extra costs associated with restoring or maintaining an 
        historic property. . . .''
          ``Today there is only one tool available that both offers a 
        level of protection for historic landmarks that is consistent 
        across the country, and also provides a nationally available 
        source of financial support for the owners of historic 
        properties: historic preservation easements. . . .''

    Mr. Robins concludes that ``Preservation easements make a major 
contribution to historic preservation, and therefore both to the 
livability of our towns and cities and to their economic development. 
Undoing such a successful--and in the long run economical--program 
would be a serious blow to the future of preservation. Given the minor 
savings that, at best, would accrue to the Treasury, the country is 
likely to lose far more than it would gain by eliminating preservation 
easements.'' I request permission to add to the record the Executive 
Summary of Mr. Robins' report.
Conservation Easements Revitalize Historic Neighborhoods
    Conservation easements are an effective tool for neighborhood 
revitalization. Not only does the conservation easement program 
preserve historic properties, many donors apply their tax benefit to 
the restoration of their properties, thereby furthering the 
preservation effort and boosting their local economy.
    In addition, 50% of all properties in Federal Historic Districts 
are in poverty areas as defined by the last Census. The Federal Reserve 
Bank of New York has completed a report stating that conservation 
easements when combined with other economic incentives such as the 
Historic Rehabilitation Tax Credit have proven to be effective at 
revitalizing neighborhoods throughout the United States. The 
conservation easement tax benefit has been combined with the Historic 
Rehabilitation Tax Credit to revitalize many historic neighborhoods. 
Some examples are:

      Downtown Washington, DC
      Willard Hotel
      Old Post Office Building--offices
      Woodward & Lothrap Building--offices and retail
      Anacostia Historic District
      New York
      100 Atlantic Avenue, Brooklyn--condominiums
      21-23 South William Street--offices
      20 Exchange Place--offices
      Pittsburg, Pennsylvania
      H.J. Heinz Factory--300 loft apartments
      Armstrong Cork Building--offices and retail
      Richmond, Virginia
      Projects in the Fan Historic District
      Projects in the Franklin Street Historic District
      Georgia
      Projects in Savannah's North Historic District
      Atlanta, Americus Hardware Building--offices
      Athens, The Sun Trust Bank Offices
      Denver, Colorado
      Wynkoop Brewing Company--restaurant
      1818 Blake Street--offices
      Cleveland, Ohio
      Colonial Arcade--offices
      Bingham Building, West 9th Street--offices
      Marshall Building--offices
      Indianapolis, Indiana
      Black Building--offices and retail
      Detroit, Michigan
      Book Cadillac Hotel Project

    These revitalization projects may never have been initiated in 
these historic neighborhoods had the developer not had federal tax 
incentives to help make the project financially feasible.
Loss of Value Created by Conservation Easements
    There is criticism of the appraisal process when determining loss 
of value created by conservation easements. Tax deductions taken for 
easement donations, as with all deductions for non-cash donations 
valued at greater than $5,000 require an independent, professional 
appraisal to determine proper valuation. The National Architectural 
Trust has received easement appraisals from over sixty different 
appraisal companies; some of these companies are the largest and most 
respected in the United States, including: Jefferson & Lee; Cushman 
Wakefield; Mitchell, Maxwell and Jackson; Jerome Haimes and Associates. 
The National Architectural Trust has never accepted a donation without 
a qualified appraisal.
    Some people question whether an easement granted on a property 
covered by local ordinances and commissions should qualify as a 
charitable donation. This position is taken in spite of the fact that 
during the 1980s the value of conservation easements granted on such 
properties was thoroughly considered six times by the U.S. Tax Court. 
In each of the six cases, the Tax Court ruled that easements generate a 
loss of value through a reduction in the bundle of rights that 
constitute property ownership in this country. In each of these six 
cases, the property was located in a district covered by a local 
ordinance enforced by a local commission.
    The Appraisal Institute and the American Society of Appraisers have 
written the members of the House Committee on Ways and Means 
recommending that Congress should require that appraisers adhere to the 
Uniform Standards of Professional Appraisal Practice (USPAP) to correct 
appraisal abuse for conservation easements. The National Architectural 
Trust supports this recommendation.
    In the book: Appraising Easements, 3rd edition, published by the 
Land Trust Alliance, there is guidance to appraisers and easement 
holding organizations. The guidance to easement holding organizations 
is:

    1.  Appraisals must be adequately documented.
    2.  Easement holding organizations should have a basic 
understanding of the appraisal process.
    3.  The easement holding organization may not be involved in the 
appraisal process; the appraiser must be independent, however the 
organization may reject a donation if the appraisal seems over-valued.

    The National Architectural Trust follows this guidance.
Monitoring and Enforcement of Conservation Easements
    There is criticism of the monitoring and enforcement of 
conservation easements by easement holding organizations.
    The National Architectural Trust supports President Bush's fiscal 
year 2006 budget proposal to impose penalties on easement holding 
organizations that fail to enforce restrictions contained in their 
conservation easements.
    The National Architectural Trust currently holds approximately 550 
easements. The National Architectural Trust takes its responsibility to 
monitor and enforce the easement forever as its most important 
responsibility. And, in doing so, the National Architectural Trust has 
taken the necessary steps to ensure that it has the resources to carry 
out all of its responsibilities in perpetuity.
    As such, the National Architectural Trust has demonstrated its full 
commitment to easement monitoring and enforcement by:

    1.  Creating a Stewardship Fund of approximately $12.5 million that 
is reserved exclusively for future year monitoring and enforcement--55% 
of all cash contributions to the National Architectural Trust, since 
its inception, have been and continue to be deposited and remain 
securely in the Stewardship Fund;
    2.  Creating a state-of-the-art database to store data and images 
about each easement the National Architectural Trust holds with 
appropriate backup and security protections;
    3.  Annually informing each owner of property on which the National 
Architectural Trust holds an easement of his obligations and the 
beginning of the annual monitoring effort;
    4.  Visiting properties each year to photograph the protected 
facade and observe the structural condition of the building; and
    5.  Reviewing the new photographs against the originals and 
subsequent photographs to detect any unauthorized changes.

    The National Architectural Trust is extremely proud of its vigilant 
monitoring process and believes its process and thoroughness is 
unrivaled in the historic preservation community. To review easements 
the National Architectural Trust has three university-trained 
architectural historians on staff and relationships with other 
respected architectural historians in cities the National Architectural 
Trust serves.
Conservation Easement Quality Control
    In addition to the care and attention the National Architectural 
Trust applies to easement monitoring and enforcement, the National 
Architectural Trust is also highly attentive to ensuring that the 
easements it accepts are proper in every respect.
    Donating an easement is complicated and time-consuming. There are 
numerous IRS regulations that must be strictly followed. The National 
Architectural Trust is committed to making sure that each easement it 
accepts is proper in every respect. The actions the National 
Architectural Trust takes to review each conservation easement 
application are essential to ensure the legality and appropriateness of 
the donation. The National Architectural Trust's efforts ensure:

  The required photographs are those of the actual property being 
        donated and are of sufficient quality to serve our ongoing 
        monitoring and enforcement efforts.
  The property has been properly certified as historically significant 
        by the Secretary of the Interior.
  The mortgage holder(s) has subordinated to the easement's restrictive 
        and enforcement provisions.
  The appraiser chosen by the client understands the laws and history 
        associated with the conservation easement program.
  Donors seek and follow the advice of their own legal and tax 
        professionals.
  Sufficient cash funds are donated along with the easement to cover 
        the current operating costs and to supplement the Stewardship 
        Fund to cover the future costs of monitoring and enforcement; 
        and
  The appraisal report specifies both the fair market value of the 
        property and the loss of value produced by the donated 
        easement; incorporates a copy of the easement; has followed 
        appropriate valuation methodologies; and contains reasonable 
        valuations.

    The National Architectural Trust also ensures that its 
representatives are trained and competent in the National Architectural 
Trust's policies, practices and ethical values.
National Architectural Trust Internal Reforms
    The National Architectural Trust has had growing pains. Everything 
we have done has been in consultation with legal advisors and was done 
to further the mission of the National Architectural Trust. However, in 
response to criticism of our organization and to ensure that there is 
no doubt about the National Architectural Trust's commitment to its 
mission, the National Architectural Trust's Board of Directors has 
taken the following actions:

    1.  Adopted the practice of having an annual financial audit 
conducted by an accounting firm that is completely independent of the 
National Architectural Trust and reports its findings directly to its 
Board of Directors. The National Architectural Trust has completed its 
audit for 2003 and is about to complete the audit for 2004. The 
auditors have made helpful recommendations but have found no 
irregularities or weakness in our operations;
    2.  Adopted the Land Trust Alliance's New Standards and Practices 
and have developed, with the approval of the Board, a plan to be in 
full compliance by June, 2006;
    3.  Adopted a strict conflict of interest policy and obtained 
conflict of interest disclosure statements from all officers, directors 
and staff members;
    4.  Worked closely with expert legal counsel and tax advisers to 
ensure that all policies and practices of the National Architectural 
Trust are in strict compliance with all applicable laws and 
regulations;
    5.  Adopted compensation practices that are in strict accordance 
with the standards of the Association of Fundraising Professionals; and
    6.  Terminated the National Architectural Trust's contractual 
relationship with Springfield Management Services, a for-profit company 
that previously provided marketing services to the National 
Architectural Trust and easement processing services to the National 
Architectural Trust and its easement donors.
Recommended Reforms to the Conservation Easement Program
    In conclusion, I would like to discuss possible reforms to the 
conservation easement program.
    First: The National Architectural Trust, along with other 
preservation and conservation organizations opposes the Joint Committee 
on Taxation's recommendations regarding conservation easements. These 
recommendations would effectively dismantle what has proven to be a 
highly effective, cost-efficient and long standing conservation and 
historic preservation program.
    Second: To ensure that the program continues as an effective 
preservation tool and to eliminate potential abuses of the program, the 
National Architectural Trust suggests for the Subcommittee's 
consideration the following:
Recommended Reforms for Easement Holding Organizations
    1.  Adopt the President's fiscal year 2006 budget proposal to 
impose penalties on easement holding organizations that fail to enforce 
the restrictions contained in their conservation easements;
    2.  Establish credentialing or standard setting for organizations 
that accept easements on properties for conservation and preservation 
purposes; and
    3.  Require additional information on IRS Form 8283, which is 
required of all non-cash charitable donations. This additional 
information could be collected on an additional form that would better 
allow the IRS to identify possible abuse.

    Possible additional disclosures might include:

  Whether the value of the donation is significantly greater than the 
        donee's cost or basis (which would be normal in long-held 
        properties, but an indicator of potential problems in 
        properties held for a shorter period of time);
  Whether the donee or any employee or board member of the donee has 
        had a business relationship with the easement donor within the 
        past 5 years, and the nature of that relationship;
  Require two independent appraisals of properties where large 
        donations are taken. The average of the two appraisals could be 
        used for the final donation amount. These additional appraisals 
        should only be required in cases where there is a very large 
        deduction; otherwise the additional appraisal costs could be 
        prohibitive; and
  Prohibit donations by any board member of the accepting easement 
        holding organization.
Recommended Reforms for an Independent Appraisal
    1.  Require appraisals of conservation easement donations to be 
performed by state-licensed general certified appraisers. This is the 
highest of three state licensing standards required of states by 
federal statute (Financial Institutions Reform Recovery and Enforcement 
Act (FIRREA));
    2.  Require that appraisals conform to the Uniform Standards of 
Professionals Appraisal Practice (USPAP). All appraisals used for 
federally related mortgages and all federal property acquisition 
appraisals are required to meet the USPAP standard;
    3.  Require that appraisers include in the appraisal report the 
effect existing local historic preservation laws, if any, have on the 
appraiser's valuation of a loss from a facade conservation easement and 
certify that this has been taken into consideration in the value 
reflected on the IRS Form 8283;
    4.  Increase penalties for over-valuation of donations by donors, 
promoters and appraisers. Taxpayers can be fined based on the amount by 
which they have inflated the value of their donation. There is no 
objection to raising those fines, or to increase penalties for 
appraisers and other parties to an inflated appraisal, who currently 
face only a $1,000 maximum penalty; and
    5.  Disqualify an appraiser who is found to have ``substantially 
misstated'' a valuation in an appraisal used for tax purposes from 
being allowed to submit future appraisals for federal tax purposes. 
Current law defines a ``substantial misstatement'' as being 200 percent 
of the actual value (see IRC 6662(E)).

    That concludes my statement. Thank you again for the opportunity to 
testify before the Subcommittee.
    I am prepared to answer any questions you may have.
                  THE CASE FOR PRESERVATION EASEMENTS
    How Municipal Ordinances Fail to Protect Historic Properties \1\
                           EXECUTIVE SUMMARY
    During the past half century, historic preservation in the United 
States has grown from a marginal activity focusing on house museums and 
memorials into a major cultural and economic force at the local, state 
and national levels. Preservation is generally recognized as a major 
success story--a movement that contributes to a common sense of shared 
American history, helps create attractive environments and stable 
neighborhoods, and plays a constructive role in economic development 
and urban revitalization.
---------------------------------------------------------------------------
    \1\ Prepared by Anthony Robins, Thompson & Columbus, Inc., February 
15, 2005.
---------------------------------------------------------------------------
    Most landmarks regulation takes place at the local level, where it 
is overseen by hundreds of landmarks commissions and historic district 
commissions all across the country. Contrary to popular belief, 
however, those commissions vary widely in the resources at their 
disposal, and in the level of protection they bring to local historic 
properties. Many areas have no local commission at all. Many have weak 
commissions--some because their powers are strictly advisory, others 
because their regulatory decisions can be, and often are, overruled by 
higher bodies.
    Even strong commissions have weaknesses. Some commissions with the 
legal power to turn down inappropriate alterations and demolitions 
sometimes approve them instead. Some commissions lack the resources to 
enforce their decisions. Some commissions offer strong protection to 
many of their landmarks, but a lesser level of protection to other 
historic properties. In general, commissions are only as effective as 
their political support allows them to be, and can only protect the 
buildings that their often limited resources enable them to designate 
as official landmarks.
    One of the chief issues facing local commissions is the price of 
preservation. Specifically, historic preservation is a public benefit 
that is purchased at a private cost. Ultimately it is the owners of 
historic properties who bear that cost, either through lost development 
opportunities, or through the extra costs associated with caring for an 
historic property. Various states and cities attempt to offer some 
financial relief, but such attempts are spotty and inconsistent. In the 
meantime, sentiment against imposing private costs for land-use 
regulation is growing nationwide. There is only one nationally 
available source of financial support for owners of historic 
properties: preservation easements. In exchange for a one-time federal 
tax deduction, owners voluntarily give up--in perpetuity--the right to 
make inappropriate alterations to their historic properties.
    Created in 1976 as part of a major national initiative to support 
historic preservation, easements are a carefully constructed tool that 
supports preservation in two ways. On the one hand, easements help 
property owners pay the private cost of the public benefit of 
preservation. On the other, easements provide an additional layer of 
protection for those properties, no matter how strong the local 
landmarks commission may be.
    Easements bring additional benefits to historic preservation. Being 
national in scope, easements operate independently of local politics. 
Being voluntary, easements eliminate the contentious issue of owner 
opposition to landmarks designation. And being financially attractive, 
easements eliminate a major impediment to owner acceptance of 
preservation.
    Moreover, many historic properties are protected by easements but 
not by local commissions. To qualify for an easement, a property must 
be listed in the National Register of Historic Places, a program 
administered by the states in partnership with the National Parks 
Service. Unlike local commissions, which designate new landmarks 
according to their own schedules and priorities, the State Historic 
Preservation Offices will consider any meritorious nomination presented 
to them. In response to the financial incentive offered by easements, 
the owners of many historic properties not yet protected by local 
commissions have supported the nomination of their properties to the 
National Register, and donated preservation easements that are now 
protecting those properties.
    The value of preservation easements has long been recognized by 
dozens of organizations across the country. Easements today are 
accepted by national nonprofit organizations, statewide organizations, 
citywide organizations, and even local governments.
    Yet, despite their proven worth, preservation easements--and the 
protection they bring to the nation's historic resources--might 
disappear, in whole or in part. On January 27th of this year, the staff 
of Congress's Joint Committee on Taxation released a study, Options To 
Improve Tax Compliance And Reform Tax Expenditures, which includes a 
proposal to ``Modify Charitable Deduction for Contributions of 
Conservation and Facade Easements'' (sec. 170). The study proposes 
dramatically reducing the value of the easement for non-residential 
properties, and completely eliminating the availability of easements 
for residential properties.
    Preservation easements currently offer the only nationally 
available tool for protecting historic properties. They offer the only 
nationally consistent mechanism for helping private property owners 
bear the cost of the public good of preservation. They bring those 
owners to a commitment to preservation voluntarily. And in the long 
term, they represent a bargain: The cost of an easement, in foregone 
tax revenues, is paid just once, but the easement continues in 
perpetuity--over time, the cost amortizes to very little. And the cost 
of monitoring and regulating those easements is borne not by the 
public, but by the nonprofit easement-holding organizations--financed 
by property-owner donations. Undoing such a successful--and in the long 
run economical--program will harm the nation's historic preservation 
efforts, while realizing only minor savings to the Treasury.

                                 

    Chairman RAMSTAD. Thank you, Mr. McClain. Mr. Edmondson, 
please.

  STATEMENT OF PAUL W. EDMONDSON, VICE PRESIDENT AND GENERAL 
       COUNSEL, NATIONAL TRUST FOR HISTORIC PRESERVATION

    Mr. EDMONDSON. Good afternoon, Mr. Chairman, and Members of 
the Subcommittee. I appreciate being invited to appear today. 
For more than 50 years, the National Trust has worked to 
protect the Nation's heritage as the congressionally chartered 
leader of the private preservation movement in America. 
Consistent with our congressional charter and with the support 
of a quarter of a million members, we carry out a wide variety 
of programs and activities to ensure that the places that 
reflect our history as Americans will continue to be enjoyed 
for future generations. Since 1973, the National Trust has 
effectively used easements as a tool for historic preservation. 
We protect some 100 historic sites around the country with 
easements, and we also assist and encourage preservation 
organizations, at the statewide and local levels, to use 
easements as a preservation tool. There are many qualified 
preservation organizations that accept and administer easements 
as part of a broad range of statewide or community-based 
preservation activities, including nonprofit organizations like 
the Florida Trust for Historic Preservation, Historic Denver, 
The Preservation Alliance of Minnesota, The New York Landmarks 
Conservancy, or the Georgia Trust for Historic Preservation, 
just to name a few.
    A number of governmental entities at the State level also 
hold preservation easements. These organizations take seriously 
their responsibility to monitor and enforce easement 
restrictions to ensure the effective, long-term preservation of 
these historic places. In fact, our policy is to encourage 
easement donations to be given to statewide and local 
organizations rather than to us. Because we consider 
preservation easements to be such an effective tool and because 
we value the tax incentive that supports them, reports of 
abuses in this area are alarming to us. My written statement 
provides a more detailed discussion of the subject, but I would 
offer a few observations that may be of interest to the 
Subcommittee.
    First, regarding the problem of exaggerated deductions, we 
fully agree that taxpayers who grant simple facade easements in 
tightly regulated historic districts should not expect to be 
well rewarded under the Tax Code. A simple facade easement on a 
residential property, particularly an easement that only 
restricts changes to the front, should not produce a 
significant tax deduction if the easement does little more than 
is already required by strong local preservation law. That is, 
of course, a big ``if.'' Many local preservation laws, in fact, 
provide little more than honorific recognition, and many 
historic properties actually have no level of local protection. 
In addition, many preservation organizations use easements and 
impose restrictions going well beyond the obligations imposed 
by local preservation laws, and in those cases, an easement 
deduction may justify significant tax benefits. To suggest that 
simple easements in strong local districts shouldn't produce 
significant deductions is not simply a matter of common sense, 
but it is a concept embodied in the IRS regulations that cover 
this area. It also happens to be the guidance that the National 
Trust has provided to preservation organizations and to the 
public for the past 20 years through the publication of 
Appraising Easements, which the Chairman noted. Another area of 
concern relates to the way that facade easements have been 
aggressively promoted in recent years as a tax-saving device. 
While most preservation organizations are highly responsible, 
we have seen too many examples of promotions that grossly 
oversimplify the tax benefits of easement deductions, in 
particular by suggesting a standard 10 to 15-percent deduction 
for simple facade easements. We think that those who solicit 
easement donations have an obligation to be clear that 
significant deductions are only available if the obligations of 
the easement significantly reduce the value of the property. 
Unfortunately, this has not always been the case.
    How can these problems be addressed? First, it is worth 
noting that actions already taken by the IRS, in particular 
statements that it will aggressively audit in this area, are 
already having an effect. We have seen both historic 
preservation organizations and appraisers approach this issue 
with a new sense of caution. Steps can also be taken, and are 
being taken, by the broader preservation community. The 
National Trust and our preservation partners are committed to 
developing standards and practices that will help to ensure the 
integrity of this important program. We also believe that 
Congress should consider changes that would, in particular, 
address valuation problems. Appraisal standards should be 
enhanced to ensure that appraisers are properly trained and 
certified, that valuations are accurate, and that the impact of 
local preservation and zoning laws are fully considered. 
Stronger penalties should be adopted for valuation 
misstatements; easement deductions should not be granted for 
easements that protect only a facade if other significant 
historic features of a property are unprotected or if the 
structure is at risk; and easements, as well as easement 
holding organizations, should adhere to the highest 
professional standards. Thank you again for the opportunity to 
provide the views of the National Trust for Historic 
Preservation. We stand ready to work with Congress to address 
these issues and to ensure that this important incentive is 
retained.
    [The prepared statement of Mr. Edmondson follows:]
  Statement of Paul W. Edmondson, Vice President and General Counsel, 
                National Trust for Historic Preservation
    Good afternoon, Mr. Chairman and members of the Subcommittee. I 
appreciate this opportunity to assist the Subcommittee as it reviews 
the federal tax incentives for historic preservation easements. The 
National Trust considers easements and the tax deductions that support 
them to be valuable tools for historic preservation, and we are deeply 
concerned by reports of abuses in this area. We are eager to work with 
Congress to ensure that steps are taken to ensure the integrity of this 
important incentive for historic preservation.
    By way of background, the National Trust is the only nonprofit 
organization chartered by Congress to promote public participation in 
the preservation of America's heritage. For more than half a century, 
the National Trust has actively pursued this mission--through the 
operation of historic sites open to the public; through public 
education, financial assistance, and advocacy; by providing technical 
assistance to hundreds of independent historic preservation 
organizations operating at the statewide and local levels; and by using 
preservation as the core focus of community revitalization activities 
across the country. With the support of more than a quarter of a 
million members, the National Trust has sought to ensure that the 
places that reflect our history as Americans will continue to be 
enjoyed by future generations.
    With the pressures of urban sprawl, in-town tear-downs, and the 
bottom-line realities of the real estate development world, the 
preservation of America's historic places could not be accomplished 
without effective public policy tools and incentives at the federal, 
state, and local levels. Municipal landmark laws, state regulations and 
incentives, and federal laws that promote rehabilitation and reuse of 
historic properties all create a framework of policies and incentives 
that help to promote historic preservation as a strong public value. 
While these policies and incentives are relatively modest in scope and 
cost, they are incredibly important, because without them our history 
would simply be history.
Historic Preservation Easements Serve as a Valuable Preservation Tool
    Preservation easements are a uniquely effective preservation tool--
a tool that uses private--and voluntary--agreements to protect historic 
structures and significant historic areas from demolition or 
inappropriate alteration. For well over three decades, hundreds of 
nonprofit organizations--and governmental agencies at the federal, 
state, and local levels--have responsibly used preservation easements 
to protect many thousands of historic structures, archaeological sites, 
battlefields, and rural landscapes. For many of these properties, 
easements serve as the only legal protection to preserve their historic 
or architectural values. And, for more than a quarter of a century, 
Congress has recognized the value of such easements by granting tax 
incentives to taxpayers who donate them to qualified easement-holding 
organizations.
    Since the early 1970s, the National Trust has actively encouraged 
the use of conservation and preservation easements to preserve historic 
places. Pursuant to our mission and Congressional Charter, the National 
Trust has published reference materials on easements, and has provided 
advice and assistance to other preservation and conservation 
organizations holding easements. Over that same period--over the past 
30 years--the National Trust has itself acquired approximately 100 
easements, protecting a variety of historic sites in 21 states and the 
District of Columbia. Some of these easements were donated to the 
National Trust, some were obtained by the National Trust as a condition 
of grants or other financial assistance, and many were imposed on 
historic properties given outright to the National Trust for other 
disposition.
    The easements that the National Trust holds and administers protect 
a wide variety of historic resources, including archaeological ruins in 
rural Colorado, open farmland next to our historic sites in Virginia, a 
modest but unaltered Cape Cod saltbox cottage in Massachusetts, a 
modernist classic in California, a frontier fort in Texas, and a number 
of important National Historic Landmark structures from Florida to 
Oregon. Our easements are very restrictive, going far beyond a simple 
``facade'' easement, by protecting the entire structure, its historic 
setting, and, very often, interior historic features as well. And these 
restrictions are backed up by an active monitoring and enforcement 
program, with support from an endowment of more than $1 million, and 
with the help of an on-staff architect specifically assigned to this 
area.
    While the National Trust is an easement-holding organization, it is 
worth noting that the National Trust does not actively solicit easement 
donations for itself. Instead, pursuant to a board policy adopted in 
1995, we first encourage prospective donors to work with qualified 
statewide and local preservation organizations that accept and 
administer easements as part of their mission to serve a broad range of 
community-based preservation activities. There are many capable 
easement-holding organizations at the state and local levels that also 
rely on restrictive easements, and that take seriously their 
responsibility to monitor and enforce easement restrictions to ensure 
the effective long-term preservation of these historic places. Some of 
these organizations include prominent nonprofit preservation groups, 
such as the New York Landmarks Conservancy, the Preservation Resource 
Center of New Orleans, Historic Denver, the Cleveland Restoration 
Society, the Pittsburgh History & Landmarks Foundation, the Georgia 
Trust for Historic Preservation, the Florida Trust for Historic 
Preservation, the Utah Heritage Foundation, the Foundation for San 
Francisco's Architectural Heritage, the Historic Charleston 
Foundation--just to name a handful. Others are state government offices 
that are specifically dedicated to protecting historic sites, such as 
the Texas Historical Commission, the Minnesota Historical Society, the 
Virginia Department of Historic Resources, and the Maryland Historical 
Trust.
Concerns About ``Facade'' Easement Valuation Abuses
    Because of our longstanding interest in easements, and the tax 
incentives that help to encourage them, the National Trust is seriously 
concerned by reports that some donors of historic ``facade'' easements 
have abused this important tax incentive by submitting exaggerated 
deduction claims. While we have no specific information regarding the 
actions of individual taxpayers, the fact that the IRS believes that 
there has been widespread overvaluation of facade easement donations 
should be of concern to any easement-holding organization. On the other 
hand, the recent announcement by the IRS that it plans to conduct pre-
audit reviews of a large number of facade easement donations is an 
important sign that the agency plans to take a more active and critical 
role in this area, which we hope will in turn lead to greater caution 
on the part of easement donors, and the appraisers, accountants, 
lawyers--and, yes, the preservation organizations--who advise them.
    Statements made by the IRS on this topic note one concern in 
particular: that donors often claim significant deductions for simple 
facade easements on historic properties located in historic districts 
that are already tightly regulated by local municipalities, and where 
the imposition of new restrictions would likely have little valuation 
impact. While each situation must be addressed on its own merits (for 
example, many historic district laws are actually quite weak, or poorly 
enforced), the National Trust agrees that simple facade easements--
particularly those that only restrict changes to the front of a 
historic structure--are generally not likely to justify significant tax 
deductions for historic properties already subject to strong local 
preservation laws, and especially for properties that have substantial 
market value because of their historic character. This is not only a 
matter of common sense, but it is a concept embodied in the regulations 
accompanying this area of the tax code. It also happens to be the 
guidance that the National Trust has long provided, first published in 
the 1984 manual ``Appraising Easements'' (jointly produced by the 
National Trust and the Land Trust Alliance, and currently in its third 
edition).
    On the other hand, it is essential to stress that many qualified 
easement-holding organizations use restrictive easements that go well 
beyond the preservation restrictions of local preservation laws, and 
that many easement donations protect historic sites that are not 
protected in any other manner. In these cases, both the IRS regulations 
and the guidance available to appraisers suggest that significant 
deductions should be permitted for such easements, again depending on 
the circumstances of any individual case.
    And, it is important to state that, from a substantive preservation 
standpoint, most easements do provide important preservation values, 
even for properties already regulated by local historic preservation 
laws. Such easements can serve--and indeed have served--as an important 
``backstop'' to local preservation ordinances, which are often subject 
to economic hardship or special merit exemptions, variances, or changes 
to permit development as a result of political or economic pressure. 
These additional protections should be considered as part of the 
valuation process, as noted in the applicable IRS regulations.
Concerns About Over-Promotion of ``Facade'' Easement Donations
    In addition to concerns raised about exaggerated valuation claims 
for facade easements, recent media reports have focused on the 
significant increase over the past several years in activities by 
organizations and individuals involved in promoting facade easement 
donations as a tax-saving device.
    There is nothing wrong, per se, with easement-holding 
organizations--or private promoters--encouraging donors to take 
advantage of duly authorized tax incentives. Congress created the tax 
incentive in 1976 to encourage the use of this tool for historic 
preservation, and it is important for potential donors to understand 
that such incentives exist. However, the National Trust has been quite 
concerned with the marketing practices used by some organizations in 
recent years to solicit donations of simple facade easements. Some of 
those promotions have prominently claimed that easement donations 
should be worth between ten and fifteen percent of a historic 
property's overall value, without making any qualification regarding 
the nature of the easement or the other restrictions to which the 
property may already be subject. Although promotion of this ten to 
fifteen percent figure may have been prompted by guidance once used by 
the IRS, the Service's regulations and the decisions of the Tax Court 
in this area have long made it clear that there is no ten to fifteen 
percent ``safe harbor'' for easement donations. Deductions may be far 
less--or in some cases even greater--than these percentages, depending 
on the type of property, the restrictiveness of the easement, and the 
effect of existing local preservation and zoning controls.
    The National Trust has also been concerned that many easement 
promoters have failed to provide any meaningful acknowledgement that 
significant tax deductions for easement donations can only be obtained 
if the easement's restrictions result in a corresponding reduction in 
the value of the property encumbered by the easement. Instead, a number 
of statements in promotional materials have effectively reassured 
donors that the real impact of easements on property rights is truly 
minimal--particularly when the property is already regulated as part of 
a local historic district. And, for easements that truly have a minimal 
impact on property rights--such as easements that only protect the view 
of the front facade of a property from the other side of the main 
frontage street--the easement may actually be less restrictive than 
local preservation laws, and have little or no value at all, both from 
a substantive preservation standpoint, and from a valuation standpoint.
Recommendations
    As previously indicated, it is the view of the National Trust that 
historic preservation easements, and the tax incentives that support 
them, serve as important tools to promote the preservation of America's 
historic places. The National Trust is committed to working with our 
partner organizations to provide increased training and guidance, and 
to develop standards and practices that will help to ensure that the 
integrity of this important program is not compromised. We have also 
discussed with our partners the concept of creating a voluntary system 
of accreditation for historic preservation organizations that accept 
easement donations. In addition, we have had discussions with 
representatives of the appraisal industry about creating better 
guidance and additional training for appraisers.
    Fundamentally, however, we believe that many of the concerns raised 
about valuation problems, and about questionable promotion of easement 
deductions can--and should--be addressed by Congress. Appraisal and 
appraiser standards should be enhanced to ensure that appraisers are 
properly trained and certified, that valuations are accurate, and that 
the impact of local preservation and zoning laws are fully considered. 
Stronger penalties should be adopted for valuation misstatements, and 
appraisers who significantly misstate easement values should be barred 
from practice before the IRS. Easement deductions should not be granted 
for easements that protect only a facade if other significant historic 
features of a property are unprotected, or if the structure itself is 
at risk. And easements--as well as easement-holding organizations--
should also adhere to the highest professional standards for review and 
approval of changes.
    We stand ready to work with the Ways & Means Committee to address 
these issues, and to ensure that this important incentive is retained.

                                 

    Chairman RAMSTAD. Thank you, Mr. Edmondson. Ms. Breen, 
please.

     STATEMENT OF PEG BREEN, PRESIDENT, NEW YORK LANDMARKS 
                CONSERVANCY, NEW YORK, NEW YORK

    Ms. BREEN. Mr. Chairman, Members of the Subcommittee, I am 
Peg Breen. I am President of the New York Landmarks 
Conservancy, and I thank you for this opportunity to testify. 
The Landmarks Conservancy is a 31-year-old, private, nonprofit 
organization based in New York City. We offer financial and 
technical help to building owners. Our professional staff 
includes architects, an engineer, and trained building 
conservators. The Landmarks Conservancy holds 34 preservation 
easements. These range from Fraunces Tavern in Lower Manhattan, 
where General Washington bade farewell to his troops, to 
individual row houses, a Civil War-era loft building, to a 
small Dutch-era farmhouse in southern Brooklyn. None of these 
easements are limited to the front facade; they protect the 
entire structure. Some of these properties are within local 
historic districts, several are not. There are several historic 
neighborhoods in New York, many, in fact, that have no local 
protection. Conservancy staff monitors each of these properties 
annually. Every 5 years we also hire outside architects and 
engineers to inspect the buildings and prepare thorough 
condition assessment reports. Any deficiencies identified in 
the reports must be repaired by the owner in a timely manner. 
Our easement agreement is 41 pages long and emphasizes the 
owner's preservation and maintenance responsibilities. We must 
also review and approve any proposed changes or alterations. If 
a property is within a historic district, the owner then must 
also seek approval from the city's Landmarks Commission. If an 
owner does not comply with the provisions of our easement 
agreement, we have the right to seek redress in court. In two 
recent instances we came close to commencing court actions. 
Fortunately, the required repairs were made prior to the actual 
start of legal action, but if we had to go to court, we would 
not hesitate to do so. Our ability to enforce the easement 
provisions gives us an unmatched ability to proactively 
safeguard the historic significance of each property.
    Despite a strong landmarks law, in most respects, our local 
Landmarks Commission does not have the power to proactively 
require that buildings be kept in good repair. Our easement 
agreement gives us that clear authority. We believe that the 
public value of an easement is directly related to the easement 
holding organization's ability to enforce it, and their 
expertise in historic preservation and the regulation of 
historic properties. We have never advertised nor promoted our 
easement program. We received several of our early easements 
from a separate nonprofit organization that realized it did not 
have the staff nor expertise to monitor them. The city's 
Landmarks Commission required the owners of some individual 
landmarks to give us an easement in return for the ability to 
sell unused development rights. Since NAT started vigorously 
promoting easements in New York City, we have received hundreds 
of calls from property owners possibly interested in donating 
easements. As a result, we have accepted 10 new easements in 
the past 2 years. We took many early easements without asking 
for a donation from the property owner; then we realized that 
we needed to cover inspection costs and possible legal costs 
associated with enforcing the easements.
    We do not have a set formula or percentage to determine 
donations. We look at each property and try to determine the 
costs of our cyclical inspections. We keep an easement reserve 
fund of more than $1 million. The interest generated helps to 
defray the inspection costs, and the fund is there in case we 
need to go to court or make repairs ourselves. We have always 
kept at arm's length from the appraisal process. We believe it 
is between the owner and the IRS. We only see the appraised 
value when we receive the IRS Form 8283 for our signature.
    Since we firmly believe that easements are an important 
preservation tool, let me suggest some reforms and refinements 
that might help eliminate any abuses or concerns. Several of 
the panelists have already mentioned them, but we also agree 
that appraisers should receive specific training, that very 
high appraised valuations over a set threshold should trigger a 
second independent appraisal; and these should be the property 
owners' responsibility. Nonprofit groups do not have the 
expertise to second-guess or judge the accuracy of appraised 
valuations. Easement holders should perform regular inspections 
and have sufficient easement reserve funds. We also have no 
problem with President Bush's suggestion of fines for groups 
that fail to perform proper inspections. Easement holders 
should not agree to accept proposed changes that don't conform 
to the highest standards of accepted historic preservation 
practice. Groups should be very cautious in promoting specific 
tax benefits to individuals. Property owners should be guided 
to think of easements as long-term preservation protection for 
property they care about. While we welcome constructive 
suggestions or changes, we believe Congress was right to have 
created tax incentives for preservation easements. We hope to 
work with you so that responsible groups may continue to employ 
this program which is doing so much to save our Nation's 
architectural heritage.
    [The prepared statement of Ms. Breen follows:]
Statement of Peg Breen, President, New York Landmarks Conservancy, New 
                             York, New York
    Good afternoon Chairman Ramstad, Ranking Member Lewis, Members of 
the Committee.
    I'm Peg Breen, President of the New York Landmarks Conservancy, and 
I thank you for the opportunity to testify as you examine easements, an 
important preservation tool.
    The Landmarks Conservancy is a 31-year-old private nonprofit 
organization based in New York City. We offer financial and technical 
help to building owners throughout the City and State of New York. We 
have so far lent or granted over 28 million dollars to individual 
building owners seeking to preserve and restore New York's historic 
buildings. We have a professional staff of architects, an engineer and 
trained building conservators. We also advocate for preservation at the 
city, state and federal levels of government.
    The Landmarks Conservancy holds 34 preservation easements. Over 
twenty years ago, the Conservancy saved an entire block of early 
nineteenth century buildings from demolition through preservation 
easements. That block includes the Fraunces Tavern, where General 
Washington bid farewell to his troops after the Revolutionary War. 
Recently, we accepted an easement on a small, Dutch-era farmhouse in 
southern Brooklyn, in an area that would not qualify as an historic 
district. Many of our easements protect row houses. We also hold 
easements on two historic commercial office buildings, on several 
apartment buildings, on a Civil War-era loft building and on an 1854 
former bank in Lower Manhattan that now houses a club and restaurant. 
None of these easements are limited to the front facade, they protect 
the entire structure.
    Some of these properties are within local historic districts, 
several are not. Conservancy staff monitors each of the properties 
annually. In addition, every 5 years, we hire outside architects and 
engineers to inspect the buildings and prepare a thorough conditions 
assessment reports. Copies of these reports are mailed to the owners 
and any deficiencies identified in the reports must be repaired in a 
timely manner by the owner. These inspections ensure that the buildings 
are kept in sound, first-class condition.
    Any changes or alterations proposed by the owners are also reviewed 
by us and require our written approval prior to their execution. In 
cases where a property is located within an historic district, we 
review the changes first. If we approve the proposed changes the 
application goes on to the City's Landmarks Commission for their 
review.
    In cases where an owner does not comply with the provisions of our 
easement agreement, we have the right to seek redress in court. In two 
recent instances, we have come close to commencing court actions to 
ensure that proper repairs and restoration occurred. In these cases, 
the required repairs were made prior to the actual start of legal 
action. But if we had to go to court, we would not hesitate to do so.
    The ability of our organization to enforce the provisions of the 
easement gives us an unmatched ability to pro-actively safeguard the 
historic significance of each property. Ongoing maintenance is crucial 
to the conservation of historic buildings. Despite a strong Landmarks 
law in most respects, our local Landmarks Commission does not have the 
power to pro-actively require that buildings be kept in good repair. 
Our easement agreement does give us the clear authority to require that 
each of our historic buildings be kept in good repair and that they 
receive appropriate levels of maintenance based on the findings of our 
cyclical inspections.
    We believe that the public value of an easement is directly related 
to the easement holding organization's ability to enforce the 
easement's preservation requirements and their expertise in historic 
preservation and the regulation of historic properties. Our easement 
agreement is 41 pages long and emphasizes the owner's responsibility to 
maintain and keep the building in good repair.
    We received several of our early easements from a separate 
nonprofit organization that was affiliated with the City's Landmarks 
Preservation Commission. That group realized that it did not have the 
staff or the expertise to monitor easements. We have also accepted 
several easements on properties that received special permits from the 
Landmarks Commission allowing the transfer of unused development 
rights. As part of the stipulations of those special permits, the 
historic properties were always to be maintained in excellent repair. 
The City's Landmarks Preservation Commission understood that the best 
way to ensure this was to have the owners donate an easement to the 
Conservancy.
    We have not advertised nor promoted our easement program. Since the 
National Architectural Trust started vigorously promoting easements in 
New York City, we have received hundreds of calls from property owners 
possibly interested in donating easements. People seek our advice 
because we are the long-established nonprofit group in the city dealing 
with historic preservation issues. As a result of these many calls, we 
have accepted a total of ten new easements in the past two years.
    We took many early easements without asking for a donation from the 
property owner but then realized that we needed to cover inspection 
costs and possible legal costs associated with enforcing the easements. 
We don't have a set percentage to determine the size of each donation's 
endowment. We look at each property and try to determine the costs of 
our cyclical inspections. We keep an easement reserve fund of more than 
$1 million, which generates interest income that defrays the cost of 
the inspections and which is there in case we need to go to court to 
enforce an easement or make repairs ourselves.
    In terms of the appraisal report, we have no idea what it contains 
until after we have closed on the easement and the owners send us the 
IRS form 8283 for our signature. We have always kept at arms length 
from the appraisal process because we believe that it is between the 
donor and the IRS. Our interest in the property and amount of 
contribution to us has nothing to do with the amounts contained in the 
appraisal report.
    Since we start from the firm belief that easements are an important 
preservation tool, let me suggest some reforms and refinements that 
might help eliminate any abuses or concerns.
    We believe it would be helpful if real estate appraisers involved 
in appraisals of easements were specifically trained and certified. We 
believe that any easement appraisal needs to take into account whether 
the property is subject to landmarks regulations at a local level and 
how strict those regulations are.
    In cases where very high appraised valuations are involved, a 
threshold should be set that when exceeded would trigger the need for a 
second independent appraisal. These should be the responsibility of the 
property owner. Nonprofit groups do not have the expertise to second 
guess or judge the accuracy of appraised valuations.
    Easement holders should perform regular inspections and have 
sufficient funds set aside that would allow them to go to court or to 
make emergency repairs. We have no problem with President Bush's 
suggestion of fines for groups that fail to perform proper inspections.
    Easement holders should not agree to accept proposed changes that 
do not conform to the highest standards of accepted practice in the 
field of historic preservation. Groups should be very cautious in 
promoting specific tax benefits to individuals. Property owners should 
be guided to think of easements as long term preservation protection 
for property they care about.
    In conclusion, we believe very strongly that easements on 
significant historic buildings have important public benefits. They 
help to ensure that buildings that are important to the cultural and 
aesthetic history of communities are protected from demolition or 
unsympathetic alteration. Easements also ensure that these properties 
are properly maintained and kept up regardless of who owns them or how 
often they change hands. While we welcome constructive suggestions or 
changes, we believe that Congress was right to have created tax 
incentives for preservation easements and we urge Congress to allow 
responsible groups to continue to employ this program, which is doing 
so much to save our nation's architectural heritage.

                                 

    Chairman RAMSTAD. Thank you, Ms. Breen. Mr. Lennhoff, 
please.

STATEMENT OF DAVID C. LENNHOFF, PRESIDENT, APPRAISAL DIVISION, 
               DELTA ASSOCIATES, VIENNA, VIRGINIA

    Mr. LENNHOFF. Mr. Chairman, good afternoon. Distinguished 
Members of the Committee, I am David Lennhoff. I am a local 
real estate appraiser, a Member-Appraisal Institute (MAI), and 
appreciate the opportunity to talk with you. I apologize again 
for being late. I have been asked to address a few issues 
related to the appraisal process in facade easements, 
specifically from an appraiser's perspective; I have selected 
three general areas. Number one has already been touched on, 
and that is the propriety of a benchmark percentage adjustment 
as representative of the value of an easement. The second area 
that I am going to address briefly will be the appropriate 
methodology for valuing an easement, which gives you a little 
bit of an insight into the first issue. The third area I am 
going to address is the significance or importance of employing 
qualified appraisers and having a regular review of the 
appraisal process in place to protect the integrity of the 
process.
    The premise of the facade easement is that something is 
lost when an easement is given; otherwise, no one would give 
it. If they expect to be paid for something, it is because they 
feel something is being lost, and, in fact, there are two 
possibilities for a loss. One is, it restricts what you can do 
to the property, and it forces you to do certain things, 
depending on the specific easement. It might restrict additions 
to the property, it might restrict demolition. On the other 
hand, it may force you to paint it a particular color, it may 
force you to use particular people to repair the property. 
Those are the areas that create the perception that there is a 
value loss; and when a donation is made, people expect such a 
benefit. In 1985, the Hilborn court decision involving the IRS 
resulted in a decision by the judge that 10 percent was the 
appropriate value lost due to the easement, and perhaps it was. 
What happened, unfortunately, was that a lot of appraisers 
globbed onto that as being the right answer to every facade 
easement question, and it simply is not.
    There is no one answer to every facade easement value 
problem. They are very complex appraisal assignments, and they 
have to be approached individually. So, the answer to the 
question of the propriety of a percentage benchmark is, ``It is 
not appropriate.'' With respect to the appropriate methodology, 
there is a method. It is a method that is used in almost all 
condemnation appraisal. It is a method that is supported by 
coursework in private-professional organizations such as the 
Appraisal Institute and in the Federal Government itself in 
publications such as the Yellow Book, which describes the way 
that government values takings. The method is the before-and-
after method, and it is a simple concept. You value the 
property as if there was no easement in it before, and then you 
value the same property, as of the same date, recognizing the 
restriction placed on it, and the difference between the two 
represents the loss in value due to the easement. If it is 10 
percent, it is 10 percent. The fact is, empirical research 
evidence suggests that an urban row house in a historic 
district--the example I am thinking of was in New Orleans--
incurs minimal loss. On the other hand, empirical research 
evidence of a couple of office buildings in the Pioneer Square 
district of Seattle, where we are talking about facade 
easements, indicates that they sustained huge losses. So, the 
point is, the 10 percent figure is insignificant; you have to 
do an appraisal through an individual process.
    My last issue is competent appraisers. This is an area 
where you can solve a lot of the problems by requiring that 
competent appraisers be hired. Competent appraisers mean people 
with education, especially in this area, people with experience 
in this particular valuation problem, and people with 
accreditation beyond just licensing, which is pretty much just 
an accounting mechanism. Organizations like the Appraisal 
Institute, which award professional designations, give you some 
assurance that you are going to get a quality product. 
Notwithstanding that, the last area that I wanted to touch on 
was the need for the donor to have in place a review appraisal 
process; that also is a specialized area that requires a 
reviewer with specific education and experience in this 
particular problem. If you do have that, I think what you do 
is, number one, you impress upon the appraisers that there is 
some accountability there; if you are starting with the high-
level appraisers to begin with, you eliminate most of the 
problem. Those are my comments. Thank you very much for 
listening to me. I look forward to any questions that you might 
have.
    [The prepared statement of Mr. Lennhoff follows:]
 Statement of David C. Lennhoff, President, Appraisal Division, Delta 
                      Associates, Vienna, Virginia
INTRODUCTION
    The purpose of a historic preservation easement is ``to preserve 
and conserve the historic, architectural, scenic, and cultural values 
of a certified historic structure. In the case of properties located in 
registered historic districts, the easement will also protect the 
historic district through limitations on uses that might jeopardize the 
architectural scale, style, and sense of cultural identity of the 
district. The easement does this by restricting alteration and 
modification of the property in ways that would change its historic 
appearance or remove or replace historic building fabric.''
    Federal tax law provides for a donation of an easement to a 
nonprofit organization or a government body, and that donors will 
receive a deduction from income taxes equal to the market value of the 
rights donated. ``The major premise underlying easement tax deductions 
is that the value of property so encumbered is diminished. An 
encumbrance that transfers rights in a parcel of real estate to another 
entity cannot fail to affect the encumbered property.'' Usually, the 
question is the matter of how much. Sometimes the value can be greatly 
diminished, such as when the highest and best use of the property is 
prohibited. On the other hand, if the easement is no more restrictive 
than the controlling local landmark ordinances, then the loss might be 
negligible. Furthermore, it has been noted that the imposition of a 
facade easement, especially of the sort found on historic urban row 
houses, may call attention to ``the character and prestige of a 
particular building and possibly enhance its market value.''
    Since the Hilborn decision in 1985, 10% has been widely used to 
represent the diminution in value caused by a facade easement that does 
not involve a potential change in use, with little property specific 
analysis to support its appropriateness. This amount may or may not be 
the correct market value of the easement. The value of the potential 
loss will vary from property to property, situation to situation. No 
one percentage applies to all situations equally. Accurate estimation 
requires an expert real property appraisal. My testimony will describe 
the appropriate methodology for estimating the market value of the 
easement, and highlight the importance of properly selecting the 
appraiser and carefully reviewing the appraisal.
BEFORE AND AFTER METHOD
    ``Before and After'' is the universally accepted method for 
estimating the loss, if any, caused by a facade easement. The method 
begins with an estimation of the market value of the real property 
before the easement, from which the market value of the property as 
encumbered by the easement is subtracted. Although simple sounding, the 
calculation is not a simple matter. The ``before'' calculation must 
take into account not only the value of the property for its existing 
use, but the suitability of the property for other, more profitable and 
presumably higher and better uses. The ``after'' calculation also must 
consider any possible economic benefits to the value of the property 
from the donation of the easement.
    Both before and after valuations can be accomplished by whatever 
combination of the three traditional approaches to value--Cost, Sales 
Comparison, and Income Capitalization--might be applicable and 
appropriate. Any method used in the before easement valuation, however, 
should also be used in the after valuation.
    The Cost Approach is helpful because it isolates the land and 
building components; easement donors must reduce their building basis 
in the property in proportion to the diminution caused by the easement. 
The Income Capitalization Approach is best suited for identifying 
changes in expenses. If sales of easement-encumbered properties are 
available, the Sales Comparison Approach provides the most direct and 
convincing measure of the after easement value.
    The ``before'' valuation methodology does not differ from 
appraisals for any other purpose. The ``after'' analysis, on the other 
hand, must take into account the easement restrictions. Special 
consideration should be given to restrictions that affect future use, 
diminish anticipated future income, and increase operating expenses. 
Market yield rates and overall capitalization rates are influenced by 
risk and changes in income and value.
    Some of the specific factors that can affect use and value include:

        Effects on Operational Income

    1.  Because of the preserved components' age, normal maintenance 
may be more expensive.
    2.  Maintenance in conformity with agreed upon standards to protect 
the historic structure may be required. Typically, the maintenance 
costs involved exceed the costs ordinarily anticipated for comparable 
structures.
    3.  The owner may be required to keep the property fully insured 
against casualty loss, and to reconstruct the improvements if they are 
destroyed.

        Effects on Reversionary Income

    1.  Prohibit demolition.
    2.  Prohibit or severely limit subdivision.
    3.  Prohibit or limit further construction or development 
(additions, for examples).
    4.  Prohibit changes to the exterior (and sometimes interiors) of 
historic or architecturally significant buildings.
QUALIFIED APPRAISERS
    An accurate appraisal is the key element in any facade easement 
donation program: it will influence the taxpayer's deduction on his or 
her tax return, the donee organization that is seeking to preserve the 
community appearance, the federal and state governments facing impacts 
on revenue, and the public. Selection of a qualified appraiser, 
therefore, is critical to the success of the process. That individual 
must be competent--as indicated by a combination of specialized 
education, experience and professional accreditation--to handle the 
particular type of property and assignment conditions.
    The current IRS definition of ``Qualified Appraiser'' includes 
anyone who declares himself or herself capable of doing the valuations. 
This low performance standard, unfortunately, opens the door for 
participation by both the unscrupulous and unqualified.
    A new definition of ``Qualified Appraiser'' has been proposed and, 
if adopted, should greatly improve the situation. From ``Options to 
Improve Tax Compliance and Reform Tax Expenditures,'' Joint Committee 
on Taxation Staff Report, January 27, 2005,

          Under the proposal, a qualified appraiser is ``an individual 
        who affirms: (1) that the fair market value of the subject 
        property has been determined in accordance with generally 
        accepted appraisal standards; (2) with respect to the specific 
        property and transaction type, that he or she: (a) has 
        successfully completed educational coursework, including for 
        continuing education credits, in generally accepted appraisal 
        practices, principles, concepts, methodologies, and ethics from 
        a recognized provider of such courses; or has earned an 
        appraisal designation from a recognized organization that 
        teaches, tests, and provides continuing education to its 
        members in valuation; and (b) regularly performs appraisals for 
        which he or she receives compensation and has a minimum of two 
        years experience in doing so; and (3) has not been subject to 
        disbarment from practice before the IRS by the Secretary 
        pursuant to 31 U.S.C. section 330(c).514.''
APPRAISAL REVIEW
    Closely related to the selection of an appropriate appraiser is 
careful review of the individual appraisals submitted to support the 
denotation deduction amount. This highly specialized job requires 
equally specific skills that include education, experience and 
impartiality. This quality control mechanism is indispensable: no 
program of this type will be reliable without regular, quality reviews 
of the appraiser work product.
CONCLUDING COMMENTS
    Rules of thumb are simply not adequate as a methodology for 
estimating the market value of an individual facade easement. 10% is 
just not the universal answer to the value question. These highly 
complex appraisal problems require the services of specially educated, 
impartial appraisers, with experience in easement valuation and 
professional accreditation such as the designations MAI and SRA awarded 
by the Appraisal Institute, which bind their members to adherence to 
the Uniform Standards of Professional Appraisal Practice (USPAP) and 
Code of Professional Conduct. Furthermore, the appraisers' work product 
needs scrutiny by competent and experienced appraisal reviewers.
    Proper, impartial easement valuations benefit and protect the 
taxpayer, the donee organizations, governmental agencies and the 
public. An understanding of the appraisal issues, and the need for 
qualified, quality appraiser and appraisal review participation will 
support the integrity of the program.
    Thank you for allowing me the opportunity to share these comments 
with you. I am hopeful they will be useful in your evaluation of this 
important matter.

                                 

    Chairman RAMSTAD. Thank you, Mr. Lennhoff. I want to thank 
all five of you for your testimony here today. As I said 
earlier, the complete text of your testimony will be printed in 
the record. My first question is addressed to you, Commissioner 
Miller. I understand that over the past several years a 
substantial number, indeed a growing number, of easements have 
been valued consistently between 10 and 15 percent--the bulk at 
11 percent--of the value of the underlying property. I also 
understand that a number of appraisers claim the IRS set a 
guideline that facade easements should be valued between 10 and 
15 percent of the property, and they point to an article which 
we will put up on the screen here, Exhibit 6. As you can see, 
the article from the mid-1990s states that ``IRS engineers have 
concluded that the proper valuation of a facade easement should 
range from approximately 10 percent to 15 percent of the value 
of the property.''
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    Chairman RAMSTAD. My question for you, Commissioner Miller: 
Is it reasonable for appraisers to think this article 
established the guideline for the appraisal of facade 
easements?
    Mr. MILLER. Thank you, Mr. Chairman. I will start with a 
flat, ``No,'' it is not reasonable, and then I will explain why 
I have that view. That article stems from an old audit 
guideline that was used as a training mechanism for our agents. 
It was not intended nor did it have any impact on the 
regulation which requires a facts and circumstances appraisal 
on each property. At best, it was a rule of thumb for an agent 
who is taking a look at the tax return. Again, it didn't say, 
``Appraisers, you do not have to do your job; you do not have 
to do an appraisal, you can just use this percentage.''
    Chairman RAMSTAD. I appreciate that explanation. So, the 
simple answer to the question is, ``no,'' and it is not a 
guideline?
    Mr. MILLER. Right.
    Chairman RAMSTAD. I appreciate also the explanation which 
does shed some light certainly on the question.
    Mr. McClain, do you use the acronym NAT?
    Mr. MCCLAIN. National Architectural Trust? Yes.
    Chairman RAMSTAD. National Architectural Trust. Most of 
your easements are valued where?
    Mr. MCCLAIN. Our easements vary from 6 percent to 15.5 
percent.
    Chairman RAMSTAD. It is true that most of them, the bulk of 
them, the majority of them are valued between 10 and 12 
percent?
    Mr. MCCLAIN. Yes.
    Chairman RAMSTAD. In fact, is it true that 99 percent of 
your easements are valued at 10 or 11 percent of the property 
value?
    Mr. MCCLAIN. No.
    Chairman RAMSTAD. It is not true that 99 percent of your 
easements were valued between 10 and 11 percent of the property 
value?
    Mr. MCCLAIN. No.
    Chairman RAMSTAD. Do you recall a meeting on April 8, 2005, 
with members of the staff of this Subcommittee?
    Mr. MCCLAIN. Well, I have had meetings with your 
Subcommittee staff. I don't know the dates, sir.
    Chairman RAMSTAD. You don't recall telling our staff that 
99 percent of your easements, NAT's easements, were valued at 
10 to 11 percent of the property value?
    Mr. MCCLAIN. We had done a study--we had a statistics guy 
go through all our easements, and basically, 46 percent of our 
easements are not at 11 percent, and they vary from 6 percent 
to 15.5. If I misspoke----
    Chairman RAMSTAD. I am just trying to establish if it is 
factually correct, the statement you made on April 8, 2005 to 
members of our Subcommittee staff that--and I am quoting now--
``99 percent of your easements are valued at 10 to 11 percent 
of the property value.'' Is that factually correct?
    Mr. MCCLAIN. If indeed I did say that, then I misspoke. I 
apologize.
    Chairman RAMSTAD. I am sorry.
    Mr. MCCLAIN. If indeed I did say that, then I misspoke, and 
I apologize.
    Chairman RAMSTAD. Let us digress for a minute. Where are 
the bulk of your appraisals?
    Mr. MCCLAIN. Over 50 percent are at about 11 percent. That 
is true.
    Chairman RAMSTAD. Over 50. Does that mean 60 or 90?
    Mr. MCCLAIN. Fifty-four percent.
    Chairman RAMSTAD. Fifty-four percent. Now, we have received 
from various sources a number of examples of the ways in which 
NAT has encouraged, has provided incentives to its donors to 
expect an easement value of about 11 percent. We have three 
statements we will put on the screen for you to see from your 
marketing materials or from solicitors and facilitators 
operating on your behalf, on behalf of NAT. The first: ``The 
tax deduction is usually 10 to 15 percent of the fair market 
value of your property as determined by a qualified 
appraiser.'' The second: ``To estimate the easement value, when 
completing the application the area manager should use his 
experience in the area to estimate the fair market value of the 
property and the easement value. If the area manager does not 
have enough experience in the area, he can obtain comparables 
to estimate the fair market value of the property and use 11 
percent or 12.5 percent to calculate an estimated easement 
value for residential and commercial properties, respectively. 
Thirdly: ``The Federal historic preservation tax incentive 
program provides for a tax deduction of approximately 11 
percent of the property's fair market value, generating for a 
$1 million property a tax deduction of $110,000 and in-pocket 
savings of $55,000.'' That is Exhibit 7. Let me just ask you, 
Mr. McClain, wouldn't you agree that NAT and solicitors, 
facilitators working on behalf of NAT gave donors at least the 
impression that their easement would be worth between 10 to 15 
percent, usually 10 or 11 percent of the value of the property?
    Mr. MCCLAIN. Yes, sir, but all that material is old 
material. We don't have any of that material.
    Chairman RAMSTAD. How old, Mr. McClain?
    Mr. MCCLAIN. Well, 2003. We have altered everything as of 
around 2004, except for the very top one, and that has been 
changed as well. People do ask us, sir. They say, well, if I am 
going to go through--it is a complex program. It takes 3 or 4 
months; you have to have an independent appraisal. What do you 
have--what is your estimate? We are not saying we have changed 
this to say that it completely depends on the appraiser, but 
the way they have been coming in is within this range; that is 
an accurate statement. It is based on what the appraisals that 
we are receiving are typifying.
    Chairman RAMSTAD. Thank you, Mr. McClain. Ms. Breen, your 
organization operated in the same market, I know, as Mr. 
McClain's. Did you ever see any evidence that potential 
easement donors had been given the impression by other 
organizations that their facade easements should be worth about 
10 or 11 percent of the property value? Is that common 
practice? Did you see any examples of it?
    Ms. BREEN. We saw examples of fliers that NAT distributed 
in neighborhoods when they asked people to come to meetings to 
talk about it, that initially had these percentages. It was 
clear to us when people, who had been first approached by NAT, 
called us, that the amount of the tax break was utmost in those 
people's minds.
    Chairman RAMSTAD. My time is up, and I am going to also try 
to honor the 5-minute rule. Thank you, Ms. Breen. At this time, 
the Chair recognizes Mr. Linder.
    Mr. LINDER. Mr. Miller, you had 72 of these in 2000. Is 
that correct?
    Mr. MILLER. I am sorry, sir?
    Mr. LINDER. You had 72 of these in 2000, and 760 last year?
    Mr. MILLER. We have--I think the numbers you are referring 
to, sir, are National Park Service certifications that they 
have approved in those years. Last year I think it was in the 
750 range or something like that, and it has spiraled up 95 to 
99, I think it was, less than 100, maybe in the 74 range.
    Mr. LINDER. How many people would be willing to save this 
valued national architecture if they didn't have a tax break?
    Mr. MILLER. That, I wouldn't know, sir. I am sure people 
are driven by different things; I am quite sure it is an 
incentive, and that was Congress's intention, obviously.
    Mr. LINDER. Mr. McClain?
    Mr. MCCLAIN. Yes, sir.
    Mr. LINDER. How many people would be dealing with this if 
there were no tax break for them? Do you sell the tax break 
first before you sell the idea?
    Mr. MCCLAIN. No, sir. Basically, the taxpayer receives a 
benefit when these historic resources are protected. There are 
aesthetic, historic, social and cultural benefits to all 
taxpayers. The issue, though, is that the burden for protecting 
these historic districts is borne by the individual property 
owner; and it is unlikely that the property owner would put 
permanent restrictions on his property that would reduce its 
value without some kind of tax incentive.
    Mr. LINDER. It is also unlikely that they would come to 
your meetings without looking for some tax incentive, right?
    Mr. MCCLAIN. Well, the incentive is in the law to 
incentivize people to participate in the program, yes, sir.
    Mr. LINDER. Ms. Breen, you have a private not-for-profit 
organization?
    Ms. BREEN. Yes, sir.
    Mr. LINDER. How do you operate? Do you sell the idea to 
various people based on tax deductibility?
    Ms. BREEN. No. We don't advertise our program at all. We 
have never promoted it.
    Mr. LINDER. Then how do you do it?
    Ms. BREEN. Many of our easements were required by the city 
itself when an individual landmark sold unused development 
rights, the city required them to give us an easement. We 
received many from another nonprofit organization that realized 
they didn't have the staff or expertise, and then, quite 
honestly, it has never been much of an issue, but when NAT 
started promoting them in New York, we received many more calls 
coming in to us from people who were possibly interested in 
donating easements.
    Mr. LINDER. So, the instigation, in your case, comes from 
the city wanting to protect facades?
    Ms. BREEN. In a few of our instances. Again, there have 
been instances where we have required easements. We saved a 
group of early 19th century buildings next to Fraunces Tavern. 
We bought them when a developer wanted to tear them down, and 
then resold them to a developer who would use them, and placed 
easements on them before the resale so that we could protect 
them in perpetuity.
    Mr. LINDER. At times when you get the easements, you get a 
cash donation at the same time?
    Ms. BREEN. In many of our early ones we didn't get a tax 
donation. Then we realized that it costs us staff time and the 
cost of outside experts--every 5 years we have our outside 
experts do a thorough assessment report. So, we do ask for that 
so that we can defray those costs.
    Mr. LINDER. Are the cash contributions somehow related to 
the size of the deduction?
    Ms. BREEN. Not at all. Again, we don't know what the 
appraised value is or the amount of their easement valuation is 
until we see their tax forms. We tell everyone that that is 
between--we ask them to get a qualified appraiser, and say that 
the actual amount of their deduction is between them and the 
IRS; and we have kept it at total arm's length.
    Mr. LINDER. Then how do you determine what the cash 
contribution is going to be?
    Ms. BREEN. We look at each property and try to assess its 
size, its complexity, and kind of cast out into the future how 
much it is going to take to inspect it. There is no set 
formula. We really look at each property as an individual. 
Obviously, a smaller townhouse we would ask less for than a 
commercial building, but we don't have set formulas.
    Mr. LINDER. Mr. McClain, do you have a formula?
    Mr. MCCLAIN. We ask for a contribution of around 10 
percent, but it varies.
    Mr. LINDER. Ten percent of the deduction?
    Mr. MCCLAIN. Of the deduction amount. It is our feeling 
that the greater the benefit to the property owner, the more 
they should contribute to the stewardship fund for enforcing 
and monitoring the program. It varies, though, all the way down 
to 2 percent.
    Mr. LINDER. Do the stewardship fund and NAT commingle----
    Mr. MCCLAIN. National Architectural Trust.
    Mr. LINDER. Do they commingle the moneys?
    Mr. MCCLAIN. Commingle the money? Absolutely not.
    Mr. LINDER. Thank you, Mr. Chairman.
    Chairman RAMSTAD. The Chair now recognizes Mr. Nunes from 
California.
    Mr. NUNES. Thank you, Mr. Chairman, and thank you for 
welcoming me to the Committee. It is a pleasure to be here. 
Thank you for taking up this very important issue. I worked in 
the Committee on Resources earlier this year on reauthorizing 
the National Historic Preservation Act (P.L. 89-665), which--of 
course, this is one part of the Historic Preservation Act. I 
want to urge you to continue down this road of monitoring what 
is happening with this act, because I think that there are some 
abuses.
    I want to say, Mr. Edmondson, that when I released a 
draft--we had someone else from your nonprofit come and testify 
before the Committee on Resources, and the comments that were 
being made there were that we were trying to--with our draft, 
we were trying to eliminate 70 percent of the historic sites in 
America, which is complete rhetoric. It got to the point where 
your group was sending out e-mails and conjuring up my own 
constituents and other people's constituents such that other 
Members on the floor were coming to discuss this with me, about 
my elimination proposal of 70 percent of the historic sites in 
America, which had to do with a change in Section 106, which I 
am sure you are familiar with, of the Historic Preservation 
Act. I would be curious to know, because I don't know this: You 
are a nonprofit agency, correct?
    Mr. EDMONDSON. We are a nonprofit, but we are 
congressionally chartered. A Federal statute passed in 1949 
that sets up the National Trust.
    Mr. NUNES. Up until 1998, you received Federal dollars?
    Mr. EDMONDSON. A portion of our operating funds were 
covered by an appropriation from an appropriated grant, 
essentially through the National Park Service; that was 
eliminated some years ago. We have been on private funding ever 
since.
    Mr. NUNES. So, when you say you are privately funded, how 
do you receive your funding? For example, who contributes to 
you? Is it small donations? Large donations?
    Mr. EDMONDSON. It is a mixture. Like many nonprofits, we 
rely on a variety of sources of revenues. We have a quarter of 
a million members who pay membership dues, which is a very 
important source of revenue. We have grants that are received 
from various foundations. We do have a very active fundraising 
component and seek funding support from individuals and 
corporations and others.
    Mr. NUNES. You also have an active lobbying arm to some exte
nt?
    Mr. EDMONDSON. Like any nonprofit organization at the 
national level, we do engage in public policy issues, and that 
includes lobbying. I have to say, I am not familiar with the 
specifics of the circumstances that you just mentioned. If 
there was some misstatement, I certainly would apologize for 
that on behalf of the organization. I would be happy to convey 
those concerns that you have raised to our policy staff and 
have them contact your staff and figure out what, exactly, was 
going on.
    Mr. NUNES. Well, I think it is important, because I 
believe--although I haven't gotten into enough on this 
Committee with these tax provisions--that a lot of this is 
being generated not to save historic America. I have just a 
hunch that it is to save--there are a lot of people who are 
profiting from these tax credits, not only from money that is 
being authorized by the Park Service to give money to rebuild 
these facades, but also through the tax credit side. A bigger 
concern, other than the money trail that I think has definitely 
happened in the past--I would like to ask you this, have you 
seen these preservation easements as a tool to stop 
development?
    Mr. EDMONDSON. As a tool to stop development? Sometimes 
easements are used as a tool to stop inappropriate development. 
Sometimes they are actually used by developers. This is because 
the incentive can be packaged with other types of tax 
incentives at the Federal and State level, which provides 
funding for redevelopment and rehabilitation of historic 
properties.
    Mr. NUNES. To be deemed historic, it has to be 50 years old 
or older? Is that the same with these facades?
    Mr. EDMONDSON. These properties have to be listed on the 
National Register of Historic Places. That usually means at 
least 50 years old. There are some exceptions to that. Or they 
have to be certified as contributing structures in a National 
Register historic district.
    Mr. NUNES. Thank you, Mr. Chairman. My time has expired.
    Chairman RAMSTAD. I want to say, as Chairman of the 
Subcommittee, it is a real privilege and pleasure to welcome 
you to the Subcommittee. You are a bright, rising star in the 
Congress and we are grateful to have you on the Subcommittee on 
Oversight. The Chair now would recognize Mr. Shaw, the 
distinguished gentleman from Florida.
    Mr. SHAW. If you would like to say something nice about me 
before----
    Chairman RAMSTAD. It would take too long. We have to 
adjourn by 4:00.
    Mr. SHAW. Maybe the falling star or something? Mr. Miller, 
what type of documentation would be filed with one's income tax 
return to substantiate--if any, to substantiate a deduction for 
this type of a contribution?
    Mr. MILLER. Well, Congressman, the individual would file a 
Form 8283 with their tax return if, in fact, more than a $500 
value was placed on this. If it was over $5,000, they would 
have to fill out a portion of that that involves an appraisal. 
So, they have to get an appraisal at $5,000. At $500,000, they 
have to attach the appraisal as well, but it is the 8283 that 
would be attached.
    Mr. SHAW. Where does that document originate?
    Mr. MILLER. It originates with the donor. It gets signed by 
the donee organization as well.
    Mr. SHAW. The donee signs it as well?
    Mr. MILLER. Correct.
    Mr. SHAW. That is just an attachment to the 1040?
    Mr. MILLER. Yes, sir.
    Mr. SHAW. In your experience, does this type of deduction 
trigger an audit?
    Mr. MILLER. In my experience--the experience is changing; 
we will put it that way. In recent days when we have seen what 
we are perceiving to be problems in valuation in the facade 
area, those individuals who have taken deductions generally 
will have gone to the National Park Service; and so they are 
not difficult for us to identify and to take a look at and 
classify as to whether we should begin an examination. We are 
in that process as we speak.
    Mr. SHAW. Mr. Lennhoff, when you go out and make an 
appraisal, what has been your experience? Do you go and look at 
the city ordinances or the applicable laws in the area that 
might affect what one can do?
    Mr. LENNHOFF. Yes, sir.
    Mr. SHAW. I will give you an example. Here in Washington I 
have a townhouse here on the Hill. I don't think I could change 
the front of it if I wanted to.
    Mr. LENNHOFF. That fact is, what creates the minimal 
diminution, typically--or I would expect minimal diminution 
with an urban row house in an historic district--it already is 
restricted. It does raise a question of why, then, would 
someone give a preservation easement if there is nothing to be 
gained from it. Others have suggested that it may in some 
situations enhance the value of the property because it calls 
attention to the character and lends some prestige to the 
particular building. The direct answer to your question is, it 
would be my responsibility to investigate the neighborhood and 
local ordinance, as well as the individual property regulation.
    Mr. SHAW. As an appraiser, then, as your testimony was 
given, you look at the diminution of value of the property more 
than anything else as far as what type of deduction that you 
would----
    Mr. LENNHOFF. Well, Mr. Shaw, there may not be one. You 
would go in and you would do a ``before'' and an ``after.'' I 
think the appraiser has to be careful that you don't go in 
assuming that there is going to be, for instance, a 10 percent 
diminution when, in fact, there may be zero, or there may even 
be an enhancement. You do go in and estimate the value without 
the easement, and then you estimate with the easement, and you 
do the math, and you see what the diminution or lack of 
diminution is.
    Mr. SHAW. So, you never use that 10 percent or 11 percent?
    Mr. LENNHOFF. No, sir.
    Mr. SHAW. Or 10 or 15 percent? That is just not done?
    Mr. LENNHOFF. It is absolutely not an acceptable, 
professional appraisal practice. I will say that it is not 
inappropriate for an appraiser when he finishes his assignment 
to step back and look at the answer and--okay, say, you come up 
with 50 percent as a diminution. Typically, for this sort of 
property, people are suggesting it is closer to 15. So, you go 
back and look at your problem and see what might explain why 
yours is so much higher. So, it does serve a purpose as kind of 
a test of the reasonableness; but as a direct method, it has no 
validity at all.
    Mr. SHAW. Ms. Breen, in your experience do these easements 
last in perpetuity? Or can something happen that would destroy 
the easement that you might have, such as a fire or something 
of that nature?
    Ms. BREEN. The only thing that would extinguish our 
easement would be the total destruction of the building, and we 
would have to be satisfied that it was beyond repair and could 
not be rebuilt. That is the only instance. Perpetuity is a long 
time, but that is how they are supposed to last.
    Mr. SHAW. Thank you, Mr. Chairman.
    Chairman RAMSTAD. The Chair thanks the distinguished 
Chairman of the Subcommittee on Trade, and would now recognize 
Mr. Beauprez, the distinguished gentleman from Colorado.
    Mr. BEAUPREZ. I thank the Chairman. Mr. Miller, I want to 
go back to a point that was raised earlier. I think in your 
testimony we found that in 2000 you had 72 of these properties; 
but more recently, 2004, or last year, you had about 706. Is 
that correct?
    Mr. MILLER. The numbers are roughly correct.
    Mr. BEAUPREZ. Where are they? I am curious where and what 
kind of prompts are we finding coming into this program?
    Mr. MILLER. Well, let me give you a little more background 
on the numbers. Again, the numbers are stemming from those 
people who have gone to the National Park Service to get a 
certification that their building is of historical significance 
to the district in which it sits. So, they fill out quite a bit 
of information. We do have a sharing agreement with the Park 
Service. We believe that most of the properties can be found--
and I think I put this in our testimony--at New York City. The 
District of Columbia is number one, New York City is number 
two, Chicago is number three, and there are some in Maryland as 
well. They are fairly scattered across the other States, mostly 
in the East, but they are fairly scattered as well.
    Mr. BEAUPREZ. Historic preservation is a noble objective. I 
have been involved in a little bit of that myself, but it 
crosses my mind, and maybe Mr. Lennhoff wants to respond to 
this. Have you seen evidence, Mr. Lennhoff, that by providing 
this kind of tax incentive that what we are really creating--
and I guess with all due respect to all of you, you are 
somewhat evidence of this, we have kind of created another 
industry out there. More to the point, is it possible that what 
we are seeing is just an inflationary factor on the value of 
properties?
    Mr. LENNHOFF. I think, frankly, to a certain extent that 
does occur, because when you see 10 to 15 percent amounts as a 
diminution for a row house on an exterior facade in a historic 
district that already has restrictions, you have to wonder, why 
is it so much? On the other hand, there are lots of situations 
where the diminution is far greater than that, but that usually 
involves a situation where the restriction prohibits using the 
property to its highest and best use; either demolishing and 
using the land for another use or something else. I think if 
you see a lot of instances where there is this 10 or 15 percent 
range on an urban row house, it is questionable. That is why I 
think quality appraisal and appraisal review are important 
elements.
    Mr. BEAUPREZ. Recently there was a story, I think in the 
local media, about what is going on out in Georgetown, and 
specifically that local regulation--and I know this is the case 
back in many of my communities in Colorado. Local regulation is 
already--as I think Congressman Shaw mentioned--in place to 
control, and in some cases prohibit or dictate what you can do 
with a facade anyway. How necessary is this, I guess, is a 
legitimate question. Ms. Breen? I see you are wanting to 
answer.
    Ms. BREEN. I see I can't conceal my facial expressions. 
Sorry, Congressman.
    Mr. BEAUPREZ. It will depend on your answer.
    Ms. BREEN. Local laws vary. New York City does have a 
strong local landmarks preservation law, but it varies from 
community to community. In one case I know, in Pittsburgh, the 
city rescinded half of a historic district so the buildings 
could be torn down. So, I think it is very important for 
appraisers to understand each of 
the local regulations and how much regulation they actually impo
se.
    Mr. BEAUPREZ. If I could very quickly--and you might want 
to do this for the record, but I would be interested. 
Obviously, to me, we have kind of stood up an industry again. 
There is a layer of regulation and requirement and appraisal, 
and there is some stuff out there. There is also, it seems to 
me--and I think we have talked about this at least around the 
edges, there is maybe an opportunity, almost an incentive, for 
abuse out there. With that in mind, I would ask all of you if 
you have advice for this Committee as to how we can better 
reform the system to make it--if the objective is historic 
preservation, how can we achieve that objective, not create 
nightmares for Mr. Miller, undue expense and regulatory 
headache for everybody else, and also address the possibility 
of abuse of the system, which I think is this Committee's 
primary concern, or one of them. With that, I would just ask 
that you respond in writing, if you would, and I yield back.
    [The information was not received at the time of printing.]
    Chairman RAMSTAD. Thank you again to all the witnesses. We 
do have time for some follow-up questions if the Members are so 
inclined. Again, the 5-minute rule will apply. I would like to 
ask Mr. Edmondson, is it fair to say that the National Trust 
for Historic Preservation has had concerns for some time about 
the relationship between NAT and SMS; and if it is true, could 
you describe the nature of your concerns?
    Mr. EDMONDSON. Mr. Chairman, I think it is fair to say the 
National Trust for Historic Preservation has had a number of 
concerns with NAT. We have discussed with the staff some of the 
concerns we have had over the years. There are three basic 
areas. One is the name. We feel that there is a problem with 
public confusion about the name, and we actually have filed a 
complaint with the U.S. Patent and Trademark Office. It is 
still pending.
    We have also raised issues with respect to their marketing 
and promotional activities, and those are detailed in some of 
the letters, exchange of correspondence, we have had with NAT, 
which the Committee staff has seen. A lot of this relates to 
this 10 to 15 percent concept. The informational pieces that 
you provided, Mr. Chairman, on the screen, are just a few 
examples of many other promotions that we describe as 
referring, mantra-like, to a 10 to 15 percent reduction. As Mr. 
McClain has indicated, they have changed their promotional 
activities in recent years, which we think is important. We 
think it is very unfortunate that promotions, whether it is by 
NAT or others, have oversimplified the types of tax benefits 
that should be available.
    The other area of concern that we have raised is with the 
relationship between NAT and SMS, a for-profit company owned by 
several of the directors of NAT. We indicated to them last year 
that we thought that there were some conflicts of interest 
there--at least the appearance of a conflict of interest--that 
should be addressed. I understand from Mr. McClain they have 
been looking at that and have made some changes there as well.
    Chairman RAMSTAD. Let me also ask Mr. Edmondson, are there 
other similar organizations about which you have those 
concerns?
    Mr. EDMONDSON. Since NAT was created and became so active 
in the last couple of years, really for the last 3 or 4 years, 
there have been several other organizations that have also 
recently been created. These are not established organizations, 
such as the New York Landmarks Conservancy, but they have 
recently appeared on the scene and they are focused primarily 
on easement acquisition and often using similar types of 
promotional activities. We have not had as much experience with 
those. There is an organization in New Jersey and there is an 
organization, I believe, in New Orleans. There is also an 
organization that was created fairly recently in Washington, 
D.C. I would say that we would express some of the same 
concerns, particularly about marketing activities, but I think 
the Committee staff has done a lot more looking into the 
operations of those organizations than we certainly have.
    Chairman RAMSTAD. In fairness, Mr. McClain, do you have any 
response or any comments concerning those questions or Mr. 
Edmondson's responses?
    Mr. MCCLAIN. Yes, thank you. Everything that NAT has done 
has been legal and proper. However, as I said in my opening 
comments, it has been the Board's decision, given some negative 
press regarding the relationship between SMS and NAT, that we 
have terminated that relationship and we have adopted the Land 
Trust Alliance's new best practices. The new best practices not 
only require you to be legal and proper, but they actually hold 
you to a higher standard than legal and proper; and basically, 
you can't even have a perception of a conflict of interest. We 
have all signed statements to that effect, and we are all 
following through with that, so thanks for the opportunity to 
speak on that.
    Chairman RAMSTAD. Also, Mr. McClain, is it a fair 
statement--it is your own statement that you changed your 
promotional material?
    Mr. MCCLAIN. We changed all of our promotional material.
    Chairman RAMSTAD. In 2004?
    Mr. MCCLAIN. Yes, sir.
    Chairman RAMSTAD. I am just curious, how many years did you 
use those representations? For how long did you use those?
    Mr. MCCLAIN. The National Architectural Trust was formed in 
2001.
    Chairman RAMSTAD. Mr. Nunes, do you have further questions?
    Mr. NUNES. Yes, Mr. Chairman, just briefly. Mr. McClain, 
you are obviously taking some heat here, which may be right, 
may be not right, but I think--one of the problems, I believe, 
and I will make a statement here, is the Historic Preservation 
Act has not been reauthorized for many years, has not been 
looked over by Congress; and I think a lot of this comes from 
section 106, which is related to 107. There were administrative 
changes done in 1978 that were never approved by the Congress, 
and I think part of that is what has led to some of the 
problems that you are having. I am interested in not only 
hearing from you, Mr. McClain, but I think the rest of the 
panel--other than Mr. Miller, of course, since he is with the 
government. I would like to know, don't you think it would be 
beneficial for us, the Congress, to reauthorize historic 
preservation and to really look at section 106? That way we can 
clarify a lot of the problems that have happened not only to 
your organization, but others in the past.
    Mr. MCCLAIN. I would have to acquiesce to the judgment of 
Paul Edmondson. I understand what 106 is, but I have very 
little involvement with it, and I am not familiar with it.
    Mr. NUNES. I understand. Mr. Edmondson?
    Mr. EDMONDSON. I think 106 has been a very important piece 
of legislation. The National Historic Preservation Act has 
really been one of the core pieces of legislation that has 
helped to preserve the character of many of America's 
communities. Easements are really a very useful tool in 
addressing some of the issues that section 106 raises. When 
Federal agencies are required to consider the impacts of their 
actions, and there are major projects that are involved, very 
often there are mitigation solutions for Federal action that 
impacts historic properties. Often these are in the context of 
development, often in the context of things like base closures 
and so on. Very often, easements are a very important tool that 
is used by Federal agencies and by developers as well.
    Mr. NUNES. I understand that section 106 was--there was an 
administrative change that basically took power away from the 
Secretary of the Interior. My question to you is, should we 
look at this, to clarify the administrative change that was 
made, and to try to reauthorize the Historic Preservation Act? 
I think that--without reauthorization, I think section 107 is 
going to be more heavily scrutinized by this Committee.
    Mr. EDMONDSON. Congressman, I guess I am not sure what you 
are referring to in terms of an administrative change that 
changed the impact of 106. I would be happy on behalf of the 
National Trust to talk to you and talk to your staff and figure 
out ex- 
actly how we might help to address some of the issues you are ra
ising.
    Mr. NUNES. I think the point I am trying to make is that 
because this has not been reauthorized, this act, I think it 
would be beneficial to all involved in the historic community 
to look at reauthorizing the act. Hopefully, that will cut down 
on some of the rhetoric, like when we hear things like people 
putting out draft releases that then create commotion that we 
are going to eliminate 70 percent of historic sites. I don't 
think that is helpful rhetoric which--you have already heard me 
discuss this. I would be glad to send you a letter in writing. 
I think you have already commented on reauthorization of the 
Historic Preservation Act. Maybe not you, but your organization 
has.
    Mr. EDMONDSON. Certainly any other issues, or the issues 
specifically you are raising, we would be happy to look at in 
detail. As I said earlier, I have not been directly involved in 
that, but on behalf of the organization, I would be certainly 
happy to address the issues you are raising.
    Mr. NUNES. Thank you. Ms. Breen, I don't know if you have 
any comment.
    Ms. BREEN. I am not familiar with the specific 
administrative changes you are suggesting, but I certainly 
would welcome a look at any and all practices of historic 
preservation. I think it would withstand scrutiny. As someone 
who used to work for the New York City Council and help with 
legislative proceedings, I think it is healthy to have 
occasional reviews.
    Mr. NUNES. Thank you. Mr. Lennhoff?
    Mr. LENNHOFF. Mr. Nunes, I am not close enough to that 
topic. It probably wouldn't be appropriate.
    Mr. NUNES. That is fair enough. Thank you, Mr. Chairman.
    Chairman RAMSTAD. Thank you, Mr. Nunes. I just have some 
follow-up questions, Mr. McClain: you said you have terminated 
the relationship between NAT, and SMS; is that right?
    Mr. MCCLAIN. Yes, sir.
    Chairman RAMSTAD. Could you just explain why you and Mr. 
Kearns decided to terminate the relationship? Was it the 
adverse publicity?
    Mr. MCCLAIN. Well, the Board of NAT terminated the 
relationship because of the adverse publicity and to avoid any 
sense of a conflict of interest, even though we had legal 
counsel that said there was none. That is why that was done. 
The reason SMS was terminated--it also helped a couple of other 
nonprofits. Given the confusion evident from many of the IRS 
statements in the press about the valuation of easements, there 
was no purpose for SMS, because it basically was processing and 
soliciting easements, and there is no way to solicit easements 
without knowing under what conditions they would be accepted. 
So, it wouldn't work. We certainly don't want to misrepresent, 
so that is why.
    Chairman RAMSTAD. It is true that there are six members on 
the board of directors of NAT? You and Mr. Kearns are two of the
m?
    Mr. MCCLAIN. That is correct.
    Chairman RAMSTAD. You appointed the other four?
    Mr. MCCLAIN. We didn't appoint them.
    Chairman RAMSTAD. Can you tell us how they became board 
members?
    Mr. MCCLAIN. Well, I have been in preservation for 25 
years, and I know lawyers and architects who have an interest 
in that. Two of the people on the board, or one of them is an 
architect who has been in Washington, D.C., for 25 years, 30 
years, and the other one is a lawyer. Another person is a lady 
who has been in preservation for a number of years. One of the 
ladies that was on our board has since passed away. Then we 
brought on someone who was a public relations expert, because 
we felt that that would be useful.
    Chairman RAMSTAD. A couple more questions: Is it accurate 
that NAT, a nonprofit organization, loaned $157,435 to SMS for 
a period of 5 years?
    Mr. MCCLAIN. No, sir
    Chairman RAMSTAD. That is not accurate?
    Mr. MCCLAIN. No. When SMS was created, there a safe-harbor 
was created. There was an outside source; an outside accounting 
firm came in, did an analysis to determine the proper 
compensation between what the for-profit SMS and the nonprofit 
NAT should be, to pay for services to a for-profit, for what 
services SMS was willing to provide. Once SMS was in place, it 
was thought that since SMS was going to have other clients who 
might do reasonably well financially, that NAT might benefit 
from having an investment, which they agreed to. Then outside 
counsel came in and said, no, because that might compromise 
NAT's ability to fire SMS should they want to. So, the 
investment was recharacterized as a loan and it was paid off in 
full at 10 percent interest.
    Chairman RAMSTAD. I want to thank you, Mr. McClain, 
particularly, and all of the witnesses for being very 
forthcoming in terms of answering the questions of our 
Subcommittee staff in anticipation of this hearing. I would 
also ask unanimous consent that the letter dated May 18, 2005, 
from Mr. Steven McClain, President of SMS, to Mr. David Kass, 
Staff Director of the Subcommittee on Oversight of the House 
Committee on Ways and Means, be entered into the record.
    [The information follows:]

                                    Springfield Management Services
                                             Washington, D.C. 20009
                                                       May 18, 2005

Mr. David Kass
Staff Director, Subcommittee on Oversight
House Committee on Ways and Means
1136 Longworth House Office Building
Washington, DC 20515

Dear Mr. Kass,

    Springfield Management Services appreciates the opportunity to 
provide the following information:

    1. Total Compensation Received by James Kearns and Steven McClain, 
September 2000 to April 2005
    2. Springfield Management Services Compensation to Independent 
Contractors
    3. Tim Maywalt

    We hope that this information answers your questions regarding 
Springfield Management Services and the Historic Preservation 
Conservation Easement program.

            Sincerely,

                                                     Steven McClain
                                                          President

                                ------                                


                                                         Total Compensation Received By Kearns and McClain September 2000 to April 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                              A                                   B       C         D           E         F        G          H           I           J          K            L            M
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          NAT                                                  SMS                                Total
                                                              ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                        Average
                                                                 2000    2001      2002        2003      2004     2005       2002        2003        2004       2005     NAT and SMS    Annual
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Kearns                                                            $0      $0    $ 50,000    $105,000      $0    $16,666         $0    $220,000    $575,000    $75,000    $1,041,666    $227,438
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
McClain                                                           $0      $0    $125,000          $0      $0    $16,666    $58,333    $200,000    $566,667    $75,000    $1,041,666    $227,438
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:

(1) Columns A-K are actual figures from NAT and SMS accounts.
(2) Compensation includes all receipts from the organization except expenses for which a documented expense reimbursement request was submitted.
(3) Averages are calculated using September 1, 2000 as the date Kearns and McClain began additional work that led to the creation of NAT and subsequently SMS.
(4) Part of Kearns/McClain compensation from SMS is attributable to work SMS performed on donations to the L'Enfant and Tri State/Capital Historic Trusts.



                                                           ------


Springfield Management Services Compensation to Independent Contractors
    02-03--The highest compensation to an independent contractor for 
assisting donors to participate in the Historic Preservation 
Conservation Easement program was approximately $151,000. The average 
compensation to independent contractors was $37,391.
    03-04--The highest compensation to an independent contractor for 
assisting donors to participate in the Historic Preservation 
Conservation Easement program was approximately $440,000 (this amount 
represents 9.6% of the cash contributions to the Trust originated by 
this independent contractor). The average compensation to independent 
contractors was $115,330.
    04-05--The highest compensation to an independent contractor for 
assisting donors to participate in the Historic Preservation 
Conservation Easement program was approximately $428,000 (this amount 
represents 9.9% of the cash contributions to the Trust originated by 
this independent contractor). The average compensation to independent 
contractors was $122,500.

                                 ______
                                 
              Springfield Management Services Tim Maywalt
    During a three-year period, Tim Maywalt assisted approximately 100 
donors per year participate in the Historic Preservation Conservation 
Easement program. The majority of these donors live in Washington, D.C.

                                 

    Chairman RAMSTAD. I just have one final question, Mr. 
McClain. According to your letter and your chart here, entitled 
Total Compensation Received by Kearns and McClain, September 
2000 to April 2005, the statement just entered into the record, 
according to your own statement here, from 2000 to 2005, just 
from 2002 to 2004, the two principals of NAT and SMS made a 
total of $1.9 million from those two organizations, that is, 
you and Mr. Kearns. I want to ask you, Mr. Edmondson, did you 
have any idea that their work in promoting facade easements are 
that lucrative, and are there comparable organizations 
profiting to that extent?
    Mr. EDMONDSON. Mr. Chairman, I am not aware of any other 
preservation organization that has the type of structure where 
the directors of the nonprofit organization have contractual 
relations through a for-profit entity that they own for this 
type of work. So, I think the answer to that question is 
``certainly not.'' In terms of the compensation level, we were 
certainly aware that through the reports that NAT has provided 
publicly that large amounts of funds were being received, 
primarily through cash donations at the 10 percent of the 
easement valuation fees, and this was in the range of millions 
of dollars. That is the first time I have heard the actual 
compensation numbers.
    Chairman RAMSTAD. Mr. McClain, would you care to further 
comment?
    Mr. MCCLAIN. Yes, sir. From 2000 to 2004, my average annual 
compensation has been $227,000, which is on that chart as well. 
My 2004 compensation of $566,000 is a result of salary, bonuses 
and deferred compensation. Since SMS, has been--has no 
employees now and no clients and has to stay dormant for 3 
years before it can be closed up, we have had outside human 
resource experts come in, who are experts in nonprofit 
compensation, and they have set parameters for every job in 
NAT, and we are staying within the criterion that they have 
established.
    Chairman RAMSTAD. Thank you, Mr. McClain. Before we 
adjourn, do any of the other witnesses have any further 
comments in response to any of the questions that have been 
asked?
    Ms. BREEN. I would just like to thank you again for the 
opportunity, and say that we have been working with the 
National Trust and other long-standing preservation groups in 
recent years on this issue, and we want to be held to the 
highest standards and keep this valuable program working to the 
best possible means.
    Mr. EDMONDSON. I would like to echo that sentiment. We have 
had some very frank discussions with the Subcommittee staff, 
and we also have had a number of ideas that we think would be 
helpful for the Subcommittee and the full Committee, when it 
gets to it, to consider in terms of how to address some of 
these issues. As I mentioned in my opening statement, we are 
alarmed by the reports of abuses. We do think that the tax 
incentive is important. It does help motivate donors, and we 
would like to see it remain as a valuable preservation tool.
    Chairman RAMSTAD. Mr. Lennhoff, anything further?
    Mr. LENNHOFF. No, sir.
    Chairman RAMSTAD. Mr. McClain?
    Mr. MCCLAIN. No, sir.
    Chairman RAMSTAD. Mr. Miller?
    Mr. MILLER. No, sir.
    Chairman RAMSTAD. I want to thank all five of you for 
appearing here today. I believe this hearing shed some light on 
facade easements. Hopefully, it will be a first step in curbing 
some alleged abuses that have occurred in the past. I want to 
thank you again for your time and your testimony. Before we 
adjourn, I ask unanimous consent to include in the record the 
opening statement of Ranking Member Lewis. Without objection, 
so ordered.
    [The opening statement of Mr. Lewis follows:]
  Opening Statement of the Honorable John Lewis, a Representative in 
                   Congress from the State of Georgia
                             June 23, 2005
    Today's hearing will focus on the donation of facade conservation 
easements to charitable organizations. The purpose of such an easement 
is to ensure that the architectural integrity of a historic property's 
exterior is maintained permanently. The historic trust organization 
obtaining the easement is responsible for monitoring the preservation 
of the structure's facade and for approving any changes. A taxpayer 
making a facade conservation easement may be eligible to claim a 
charitable donation income tax deduction for the value of the easement.
    There are many important questions that need to be addressed by the 
Subcommittee. News reports indicate abuse of the current law tax 
deduction for facade easements. The Joint Committee on Taxation 
recommends that the deduction be repealed for facade easements on 
personal residences. Easement-holding historic preservation 
organizations support continuation of facade easement donations and 
believe they provide valuable conservation benefits to the public at 
large.
    Getting the facts is always helpful in evaluating the effectiveness 
of a tax provision. Questions worth pursuing at this hearing include: 
Do facade easements serve meaningful conservation purposes? Should 
charitable deductions be allowed where state or local laws already 
prohibit changes to the fronts of historic properties? Are proposals 
for increased enforcement and additional standards on appraisers 
realistic?
    I commend Subcommittee Chairman Ramstad for having a hearing on 
this subject. I look forward to our followup discussions.

                                 

    Chairman RAMSTAD. Mr. Nunes?
    Mr. NUNES. I want to thank you again, Mr. Chairman, for 
holding this hearing. I think that if the historic community is 
willing to work to reauthorize this Historic Preservation Act, 
it would be very beneficial to what you are trying to do here. 
If they are not supportive of trying to reauthorize that act, I 
think it is very important that you continue down this path to 
determine just where the money is going, and if there are 
abuses by the historic community to the Tax Code and to the 
taxpayer. So, I hope that we can work closely with the historic 
community to reauthorize this act, and look forward to working 
with you in the future.
    Chairman RAMSTAD. I certainly associate myself with your 
remarks and agree 100 percent. If there is no further business 
before the Subcommittee, the hearing is adjourned.
    [Whereupon, at 3:25 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Ramstad to Steven T. 
Miller, Steven L. McClain, Paul W. Edmondson and Peg Breen, and 
their responses follow:]
          Questions from Chairman Ramstad to Steven T. Miller
    Question: Should the extent of existing legal restrictions on the 
use of property have a significant impact on the appraisal of a facade 
easement?

    Answer: Yes. The extent of existing legal restrictions on the use 
of property does have a significant impact on the appraised value of a 
facade easement, and should be considered by the appraiser in 
determining the change in value due to the placement of the facade 
easement.

    Question: Some argue that even if there are significant legal 
restrictions on the use of property, an easement can have significant 
value. This argument claims that because local historic preservation 
laws can be changed, and because an easement theoretically lasts 
forever, an easement can still have significant value. How do you 
respond to this argument?

    Answer: We believe that in most circumstances the argument has 
little merit. To be successful, the taxpayer would have to show that 
the law change was impending or highly likely to occur, based upon 
specific evidence. For example, the taxpayer would need to show that 
local authorities effectively had made the change or were about to do 
so. However, the mere theoretical possibility that the law might be 
changed at some unknown time in the future, or that existing legal 
restrictions might not be enforced, is insufficient.
    It is important to note that the change in the value of the 
taxpayer's property as a result of a granting of an easement is 
measured as of the date of the donation based upon facts known or 
reasonably expected on that date, not based on uncertainties and 
speculation. A taxpayer should not be permitted to value a property 
today by treating an uncertain event (such as a potential law change) 
as having occurred.

                                 
          Questions from Chairman Ramstad to Steven L. McClain
    Question: During the hearing, you mentioned that your office had a 
study of the value of the National Architectural Trust's (NAT) 
easements. You said that 54% of your easements were valued at 11%. 
Please provide a breakdown of the number and percentage value of the 
remaining easements along with their zip codes. Please state how many 
easements were valued between 5%, 6%, 7%, 8%, 9%, 10%, 12%, etc. and 
what percentage of NAT's easements were valued at each percentage 
value. In addition, please provide the study you cited for the record.

    Answer: The value for a conservation easement deduction is 
determined by an independent professional appraiser. Final 
responsibility for the adequacy and completeness of the appraisal data 
submitted to substantiate a donor's claim for a charitable contribution 
deduction rests with the donor. The National Architectural Trust 
reviews all submitted conservation easement appraisals to determine 
that they are done in a competent and professional manner.
    When the Oversight Subcommittee staff asked several months ago what 
proportion of easement donations held by the National Architectural 
Trust were valued at eleven percent by independent appraisers, the 
Trust did not have the necessary information to answer this question.
    Subsequently, the National Architectural Trust requested that an 
outside contractor review the easement appraisals the Trust had 
received to determine the proportion of facade conservation easement 
donations valued at eleven percent by independent appraisers. The 
answer provided by the outside contractor was 54%.
    After further in-house review and analysis, however, the National 
Architectural Trust has determined that 52.4% of all facade 
conservation easements held by the National Architectural Trust have an 
easement percentage value of 11%. The National Architectural Trust's 
easement percentage values range from 8% to 16%.
    The following table, ``Easements Held by National Architectural 
Trust through December 31, 2004,'' provides a breakdown of the number 
and percentage value of easements held by the Trust as well as the zip 
codes of easements at each easement percentage value.


                    Easements Held by National Architectural Trust through December 31, 2004
----------------------------------------------------------------------------------------------------------------
                                                                      Percentage of Total
Number of Easements Held by National Architectural      Easement       Easements Held by
                       Trust                        Percentage Value        National             Zip Codes
                                                                      Architectural Trust
----------------------------------------------------------------------------------------------------------------
1                                                              8.0%                 0.3%                  10012
----------------------------------------------------------------------------------------------------------------
1                                                              9.0%                 0.3%                  11215
----------------------------------------------------------------------------------------------------------------
                                                                                           01945, 02568, 07302,
                                                                                           08833, 10024, 11207,
                                                                                           11217, 11231, 21230,
18                                                            10.0%                 5.0%    22301, 10014, 11225
----------------------------------------------------------------------------------------------------------------
                                                                                           01945, 10014, 02116,
                                                                                           02464, 10024, 01983,
                                                                                           02108, 02114, 02118,
                                                                                           07302, 10003, 10011,
                                                                                           10013, 10014, 10021,
                                                                                           10023, 10024, 10025,
                                                                                           10027, 10028, 10128,
                                                                                           11201, 11215, 11217,
                                                                                           11231, 11963, 14801,
                                                                                           20003, 21210, 21217,
                                                                                           21218, 22079, 22301,
                                                                                           22314, 10010, 21224,
                                                                                           11201, 02115, 11225,
188                                                           11.0%                52.4%    02116, 11238, 11225
----------------------------------------------------------------------------------------------------------------
                                                                                           02116, 10003, 10024,
                                                                                           02116, 11225, 10014,
                                                                                           02108, 10021, 11238,
                                                                                           01746, 01821, 02114,
                                                                                           02118, 02125, 10011,
                                                                                           10013, 10024, 11201,
                                                                                           11215, 11225, 14201,
                                                                                           21210, 21212, 21217,
                                                                                           21218, 21230, 21231,
                                                                                           21401, 01950, 10022,
                                                                                           02118, 02445, 11205,
67                                                            12.0%                18.7%                  02120
----------------------------------------------------------------------------------------------------------------
                                                                                           02461, 10011, 11215,
                                                                                           11238, 02116, 11215,
                                                                                           10128, 10018, 11217,
                                                                                           11201, 10028, 02556,
                                                                                           10013, 21210, 21212,
                                                                                           21218, 21401, 10016,
30                                                            13.0%                 8.4%           10014, 10128
----------------------------------------------------------------------------------------------------------------
                                                                                           02108, 02111, 02115,
                                                                                           02116, 02118, 02446,
                                                                                           11226, 10014, 02478,
                                                                                           02468, 01938, 02114,
                                                                                           02445, 02461, 10012,
                                                                                           21210, 10010, 10003,
28                                                            14.0%                 7.8%    11379, 10013, 10011
----------------------------------------------------------------------------------------------------------------
                                                                                           02116, 02118, 10010,
                                                                                           10003, 10024, 10021,
                                                                                           10013, 10027, 10011,
                                                                                           10001, 10023, 10028,
24                                                            15.0%                 6.7%    11215, 11235, 10014
----------------------------------------------------------------------------------------------------------------
2                                                             16.0%                 0.6%           10003, 10023
----------------------------------------------------------------------------------------------------------------
359
----------------------------------------------------------------------------------------------------------------


    It is also important to note again (as referenced during the oral 
testimony of Steven McClain), the National Architectural Trust is 
completely independent from the appraisal process. The National 
Architectural Trust accepts easement appraisals from over 60 different 
appraisal companies and in no way is involved in the determination of 
the value attached to an easement donation.
    We again refer the Subcommittee to Mr. McClain's testimony on June 
23rd in its relation to recommended reforms to the appraisal process 
for facade easement donations.

    Question: How many easements did the National Architectural Trust 
receive before it revised its marketing materials in late 2004 to 
remove the language indicating that donors could expect the easement to 
be worth 10 to 15% of the value of the property, and other references 
to the tax deduction? In addition, please provide a breakdown of the 
number and percentage value of those easements.

    Answer: This question is difficult to answer because a property 
owner's decision to donate an easement is typically made over a long 
period of time, after consultations with personal accountants, lawyers, 
tax specialists, colleagues, and spouses. Although the National 
Architectural Trust used the ``ten to fifteen percent'' language in its 
educational materials for property owners, it is likely that a property 
owner's final decision was influenced by advice and information from 
other sources such as the National Park Service \1\ (NPS) and the 
Internal Revenue Service (IRS). The National Architectural Trust was 
relying on the ``ten to fifteen percent'' \2\ guideline included in the 
NPS and IRS publications in the development of its educational 
material.
---------------------------------------------------------------------------
    \1\ The National Park Service Publication. Historic Preservation 
Easements: A Historic Preservation Tool with Federal Tax Benefits.
    \2\ Internal Revenue Service Website. ``IRS guidelines suggest that 
in many cases facade easements can be appraised at approximately 10 to 
15 percent of the value of the property.''
---------------------------------------------------------------------------
    Therefore, even though the National Architectural Trust acted 
quickly to remove the ``ten to fifteen percent'' language from the 
information provided in its materials and website following the 
issuance of IRS Notice 2004-41 concerning the valuation of facade 
conservation easements and the removal of this valuation range from two 
IRS publications, it is not safe to assume that all interested facade 
easement donors immediately refrained from using the ``ten to fifteen 
percent'' language as part of their decisionmaking process.
    Although the National Architectural Trust eliminated the reference 
to the ``ten to fifteen percent'' language from all marketing materials 
as of approximately October 15, 2004, it could not change or eliminate 
materials disseminated prior to that date. There is no way to determine 
what material donors may have reviewed and how many donors had already 
used the marketing material in their facade conservation easement 
decisionmaking process.
    The National Architectural Trust held approximately 380 completed 
easements as of October 15, 2004.

    Question: The National Architectural Trust holds approximately 550 
easements. Have you ever found a violation of one of your easements? 
Have you ever enforced an easement? If so, please provide a detailed 
explanation of the violations and the action taken by the National 
Architectural Trust and how these violations were resolved.

    Answer: The primary mission of the National Architectural Trust is 
to protect qualified historic properties in perpetuity. The means of 
accomplishing this mission is the use of conservation deeds of 
easement. Annually, the National Architectural Trust reminds property 
owners of the deed restrictions on their property, that the Trust's 
approval is required for any property changes, and that the Trust 
conducts annual on-site inspections.
    Many property owners discuss proposed facade changes with the 
National Architectural Trust prior to the submission of a written 
request. This discussion can occur during the application process or 
subsequent to the completion of the easement donation. As a result, the 
National Architectural Trust is able to address potential issues prior 
to the submission of a formal change request.
    In some cases, property owners in the process of applying for 
participation in the Federal Historic Preservation Tax Incentive 
program have consulted the National Architectural Trust regarding 
proposed changes that did not meet the Secretary of the Interior's 
Standards and Guidelines for Preservation and Rehabilitation--the 
foundation for the National Architectural Trust's decisions on easement 
enforcement. These property owners were informed that the proposed 
changes would be denied. In these few instances, the property owners 
did not proceed with the easement application process. A specific 
example of this occurred at 5415 Spring Lake Way in Baltimore, 
Maryland.
    All change requests must be in writing and all changes should be 
guided by the Secretary of the Interior's Standards and Guidelines for 
Preservation and Rehabilitation. The annual review of each property 
conducted by the National Architectural Trust serves to confirm that 
the work done is according to specifications authorized by the Trust.
    The National Architectural Trust has received formal written change 
requests for the following properties, among others:

    --439 West 22nd Street, New York, NY 10011
    --120 West 88th Street, New York, NY 10024
    --33 West 81st Street, New York, NY 10024
    --71 Bedford Street, New York, NY 10014
    --117 West 88th Street, New York, NY 10024
    --492 1st Street, Brooklyn, NY 11215
    --18 Fiske Place, Brooklyn, NY 11215
    --5415 Spring Lake Way, Baltimore, MD 21212
    --105 Saint Dunstans Road, Baltimore, MD 21212

    The National Architectural Trust is presently conducting its 2005 
annual review of each property. Thus far, we have identified the 
following property changes made without prior written National 
Architectural Trust approval. These changes were subsequently reviewed 
and then approved.

    --209 South Saint Asaph Street, Alexandria, VA 22314
    --219 South Alfred Street, Alexandria, VA 22314

    The National Architectural Trust 2005 annual review has thus far 
identified one property (311 East Howell Avenue, Alexandria, VA 22301) 
where a change was made without prior written approval and the change 
violates the National Architectural Trust guidelines. This violation 
issue has not yet been resolved.

                                 
          Questions from Chairman Ramstad to Paul W. Edmondson
    Question: Are there significant differences between the easement 
deeds used by various easement holding organizations? For example, the 
National Architectural Trust uses an easement deed which covers just 
the front facade of a structure. Many other easement holding groups use 
a deed which protects the entire building envelope. Should a front-
facade only easement be worth less than a whole building easement?

    Answer: Yes, significant differences exist among easement deeds 
used by various easement holding organizations around the country. The 
National Trust for Historic Preservation publishes a model Preservation 
and Conservation Easement as guidance for state and local preservation 
organizations to use when drafting their own preservation and 
conservation easements, but a number of organizations use different 
models, and in any case the easement should be adapted to meet the 
specific circumstances of a particular property.
    Many preservation organizations use easements that protect all 
significant historic features of the exterior of a historic property 
and its historic setting--and some organizations, including the 
National Trust, often protect interior historic features as well. It is 
fairly common for preservation organizations to use easements that 
protect all exterior facades and roof surfaces, although the specific 
provisions of an easement may vary considerably in terms of the degree 
of oversight and/or control held by the easement-holding organization 
even for an easement that covers the entire exterior envelope of a 
historic property. Many preservation easements also protect the context 
of a historic property, for example prohibiting subdivision of historic 
farm property and protecting historic gardens and outbuildings.
    As you note, a small number of organizations accept easements that 
protect only the publicly visible facades of a historic property as 
seen from the other side of the main frontage street. This form of 
``front-only'' facade easement is much less restrictive from the 
property owner's perspective and may permit additional square footage 
or other development.
    Regarding the question of valuation, as a general matter we agree 
that an easement that protects only the front facade of a building is 
likely to be worth less than an easement that protects a building's 
entire exterior envelope. Of course, easement valuation is a complex 
process that requires consideration of a number of different variables. 
But key among those factors is the nature of the restrictions imposed 
by the easement. Depending on the property, an easement that only 
limits a property owner's right to alter a structure's front facade is 
likely to be far less restrictive than an easement protecting the 
entire exterior envelope. A property owner who chooses to donate an 
easement protecting the entire exterior envelope of a structure gives 
up a greater portion of her ``bundle'' of rights to make alterations or 
changes to her property. In addition, if the easement includes 
affirmative maintenance obligations (which most do), an owner of a 
property subject to a ``front-only'' facade easement may have 
substantially less affirmative maintenance obligations than an owner 
subject to an easement requiring maintenance of the entire property.

    Question: Are front-facade only easements of much value as 
preservation tools? For example it is my understanding that the 
National Architectural Trust easement deed would allow a structure with 
an easement on it to be entirely torn down, so long as the facade was 
preserved.

    Answer: From a preservation perspective, front-only facade 
easements may help to maintain the historic ambiance of a streetscape, 
and they may help to protect the historic or architectural character of 
properties with character-defining features primarily limited to the 
front facade, such as a simple row house. But in many other contexts, 
where significant architectural features exist on other portions of a 
historic property or where preservation of the property's setting is 
important, a front-only facade easement would have limited value as a 
preservation tool, since it may allow an owner to alter, damage, or 
even demolish other portions of a historic property that have historic 
or architectural significance in their own right. In this context, an 
easement that protects an entire historic structure and its setting 
would be far more valuable as a preservation tool.
    In addition, depending on the wording of the easement, front-only 
facade easements may allow a property owner to make inappropriate 
alternations to, or even tear down, the remainder of the building (to 
replace it with another building), so long as the facade is preserved. 
This is a practice that is commonly described by preservationists as a 
``facadomy'' or a ``facadectomy,'' and is not highly valued as an 
effective preservation technique except as a last resort if other 
preservation options are unavailable.

    Question: Do you agree that an easement in an area where there are 
strict historic preservation laws is worth less than an area in which 
there are weak or nonexistent preservation laws?

    Answer: Yes, as I indicated in my testimony, the National Trust 
agrees that--depending on the circumstances of the particular case--a 
simple preservation easement is likely to have less value in a district 
that has restrictive preservation laws when compared to the value of a 
similar easement granted on a similarly situated property subject to 
weak or minimal restrictions under local law. But, as I also indicated, 
many local jurisdictions have no local preservation controls, or only 
minimal levels of restrictions, and in those cases even simple facade 
easements may have substantial value. And, many easements in areas with 
strict historic preservation laws go well beyond minimalist ``front-
only'' facade easements, and are in fact highly restrictive, and 
therefore likely to be quite valuable. It is also worth noting that 
easements on commercial properties may have a significant impact on 
their value even in highly regulated historic districts, particularly 
under the income approach to valuation.

                                 
              Questions from Chairman Ramstad to Peg Breen
    Question: Do you have any concerns about an easement holding 
organization basing the amount of the cash paid to it on the appraised 
value of the easement?

    Answer: The Landmarks Conservancy is concerned about an easement 
holding organization basing the amount of the donation paid to it on 
the appraised value of the easement. While there are a number of bona 
fide preservation organizations that use a percentage-of-value basis 
for calculating cash contributions accompanying easement donations, we 
believe that this practice may, either directly or indirectly, provide 
an incentive to promote higher appraisals. As I mentioned in my 
testimony, the Landmarks Conservancy has never based our donation 
request on the appraised valuation of the property or the easement. We 
base our request on a case by case assessment of the cost of our 
inspections. In most cases, we do not see appraisal values until we are 
sent IRS form 8283 to sign.

    Question: Have you ever heard complaints from the National 
Architectural Trust about the New York Landmarks Conservancy charging 
less of a cash donation than the National Architectural Trust?

    Answer: The National Architectural Trust did complain once about 
the Conservancy charging less of a cash donation than the NAT. James 
Kearns of the NAT called me in, I believe, the fall of 2003 after we 
had accepted an easement on a commercial building NAT had solicited. 
The owners asked the Conservancy if we would be interested in an 
easement because they had dealt with the Conservancy architect in 
charge of our easements on other issues in the past. Mr. Kearns took 
issue with our donation request and I explained how we based such 
requests on an estimate of inspection costs. Mr. Kearns suggested that 
we cooperate in the future. NAT would tell us what easements they were 
interested in and we could tell them if we had easement interests. I 
told Mr. Kearns I did not wish to cooperate. The Conservancy has 
avoided contact with NAT since that time.

    Question: During the hearing you mentioned that your organization 
had seen easement holding groups engaging in marketing practices that 
concerned you. Please describe and provide examples of these practices.

    Answer: The Conservancy became concerned about NAT's marketing 
practices after we received numerous calls from homeowners NAT had 
approached. These callers suggested to us that NAT was telling property 
owners that there would be a tax deduction within a specific, narrow 
range. Several callers were upset when we said we could not guarantee a 
specific tax deduction and urged them to consult with their tax 
attorney. Our understanding that NAT was suggesting a specific range 
was confirmed when people sent us samples of NAT literature. Two 
Conservancy staffers who live in separate historic districts also 
received NAT flyers at their homes and each subsequently attended an 
information session offered by NAT representatives in their respective 
neighborhoods. One staffer expressed his concern with NAT's assurances 
of a specific tax deduction. The other staffer was concerned that NAT 
representatives told the attendees that they wouldn't have to worry 
about additional regulation with an easement, that NAT would simply 
take pictures of their building annually.

                                 
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