Category Archives: Federal

Second Circuit Vacates Tax Court in Façade Easement Case

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Second Circuit Court of Appeals The Second Circuit Court of Appeals vacated and remanded the U.S. Tax Court’s finding that Ms. Huda Scheidelman failed to obtain a qualified appraisal for the 2004 façade easement donation over her New York City home.

In March of 2003, Ms. Scheidelman and her husband completed a façade conservation easement application and made a fully refundable $1,000 deposit to the National Architectural Trust (“NAT”). The taxpayers waited to pursue the donation until 2004, so that they could save enough money to pay for the appraisal.  In April of 2004, the taxpayers hired an appraiser from a list of appraisers provided by NAT.

The appraiser’s report used the sales comparison approach to determine that the estimated market value of the property was $1,015,000.  Looking at historical comparisons of attached row homes in New York City, the appraiser determined that the façade easement value is about 11% to 11.5% of the total value of the property.  Using these estimates the appraiser found that the value of the façade conservation easement would be estimated at $115,000 or 11.33% of the fee simple value of the property.

After receiving the appraisal, NAT notified Ms. Scheidelman that all of the trust’s easement owners must make a cash contribution toward operating costs equivalent to 10% of the cash value of their easement. Ms. Scheidelman wrote NAT a check for $9,275. NAT accepted the appraisal and the City of New York recorded the conservation deed of easement for the property. The taxpayers attached Form 8283 to their 2004 tax return reporting a $115,000 gift to charity. They carried over $63,083 of the reported contribution to their 2005 and 2006 tax returns.

The IRS conducted an examination of Ms. Scheidelman and disallowed her cash contribution to NAT and the deductions for her conservation easement in all three years. The IRS issued a notice of deficiency and Ms. Scheidelman filed a petition with the United States Tax Court. In Scheidelman v. Commissioner the Tax Court ruled that she did not obtain a “qualified appraisal” under Treas. Reg. § 1.170A-13(c)(3) because it did not use a sufficient method and basis of valuation. The Tax Court also disallowed a deduction for a cash contribution to NAT.

On appeal, the Second Circuit considered the Tax Court’s interpretation of Treas. Reg.  § 1.170A-13(c)(3), qualified appraisals. The appellate panel focused on the Tax Court’s interpretation of Treas. Reg. §§ 1.170A-13(c)(3)(ii)(J)&(K), requiring that a qualified appraisal specify both a method and a basis of valuation. 

The Court of Appeals disagreed with the Tax Court’s conclusion that the appraiser did not provide a proper method of valuation under Treas. Reg. § 1.170A-13(c)(3)(ii)(J). The court held that the appraiser’s use of the “before and after” method and his reliance on a published IRS article proposing an acceptable discount range for facade easements was appropriate.

Reviewing the basis of valuation requirement under Treas. Reg. § 1.170A-13(c)(3)(ii)(K), the Second Circuit found that the appraiser’s approach was “nearly identical” to the method used in Simmons v. Commissioner. The court noted the similarities between the two cases and held that the appraisal provided by Ms. Scheidelman gave the IRS “sufficient information to evaluate the claimed deduction,” thus satisfying Treas. Reg. § 1.170A-13(c)(3)(ii)(K).

The Second Circuit also held that Ms. Scheidelman’s $9,275 cash donation was a deductible charitable contribution because NAT did not give her any goods or services, any benefit, or anything of value in return for her donation. The Court noted that although Scheidelman hoped to obtain a charitable deduction for her gifts, it was not a quid pro quo because the facade easement deduction would not come directly from the receipt of the cash gift. 

The case was remanded to the Tax Court for further findings on the value of the easement consistent with the findings of the Court of Appeals.

Read the entire opinion here:
Scheidelman v. Commissioner, 682 F.3d 189 (2nd Cir., June 15, 2012).

1st Circuit Vacates Tax Court on Historical Facade Conservation Easement

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In a case that has been followed closely by many interested parties, the First Circuit Court of Appeals ruled in favor of the taxpayers and the validity of their charitable contribution of an historical façade conservation easement in Kaufman v. Shulman. The 1st Circuit vacated the Tax Court’s legal ruling on partial summary judgment and remanded the matter for further findings on the questions of penalties and valuation.

The taxpayers in Kaufman owned an approximately 150 year-old row house in the historic district of South End in Boston. The home reflected mid-nineteenth century architecture and included a unique Venetian-Gothic style façade. In 2003, the taxpayers executed a “Preservation Restriction Agreement” donating an easement over the property to a qualified charitable organization for the purpose of protecting and preserving the historical features of the home. On the advice of the donee, the taxpayers obtained an appraisal of the contribution from an experienced appraiser who valued the easement at $220,800. The taxpayers took deductions on their 2003 and 2004 tax returns for the value of the donated easement, subject to the limits of IRC Sec. 170(b)(1)(E).

The property was subject to a mortgage when the taxpayers made the donation. The taxpayers obtained an agreement from the lender subordinating certain of the mortgage-holder’s rights in the property to the donee in accordance with the regulations governing the charitable donation of conservation easements. The agreement included several restrictive clauses, one of which became the focus of the Tax Court’s determination and the 1st Circuit’s ruling. That clause read as follows:

The Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty, hazard or accident occurring to or about the Property and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged, notwithstanding that the Mortgage is subordinate in priority to the [Preservation Restriction] Agreement.

Following an examination of their 2003 and 2004 returns, the IRS issued a notice of deficiency to the Kaufmans disallowing the deductions for the charitable contribution of the easement. The IRS maintained that the donation did not meet the regulatory requirements of Section 170(h). The taxpayers petitioned the U.S. Tax Court.

The Tax Court, in a division opinion by Judge Halpern, ruled for the IRS on a motion for partial summary judgment. Kaufman v. Commissioner, 134 T.C. 182 (2010). The Tax Court held that the conservation easement as executed failed to satisfy the requirement of Treas. Reg. Sec. 1.170A-14(g)(6). The Tax Court’s position on summary judgment, as summarized by the First Circuit, was that

although the Kaufmans in the Preservation Restriction Agreement governing 19 Rutland Square granted the Trust an entitlement to a proportionate share of post-extinguishment proceeds, thus seemingly complying with the regulation, the lender agreement executed by Washington Mutual undercut this commitment–and so defeated the deduction–by stipulating that “[t]he Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds . . . and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged.”

Even though the Tax Court decided for the government “entirely” on the basis of Treas. Reg. Sec. 1.170A-14(g)(6), the Court of Appeals also addressed paragraphs (g)(1) (perpetuity), (g)(2) (remote events), and g(3) (subordination) of the regulation in its opinion. The First Circuit observed that the IRS’s arguments in support of the Tax Court’s decision under g(6) would “appear to doom practically all donations of easements, which is surely contrary to the purpose of Congress.” The appellate court continued that it “cannot find reasonable an impromptu reading [of a regulation] that is not compelled and would defeat the purpose of the statute, as we think is the case here.” So on the big issue in the case, whether the mortgage subordination clause that granted the lender a prior claim to insurance and condemnation proceeds defeated the deduction, the First Circuit vacated the Tax Court’s legal conclusion.

The First Circuit made clear that it did not rest its decision on either the application of paragraphs (g)(3), addressing the defeasance of the deduction by remote future events, or (g)(2) which the taxpayers argued would have upheld the subordination agreement regardless of the extinguishment provision. This caveat seems to preserve the Tax Court’s recent opinion in Mitchell v. Commissioner from the scope of this ruling.

The appellate panel also addressed the “in perpetuity” requirement of Treas. Reg. Sec. 1.170A-14(g)(1) and the language in the agreement stating that “nothing herein contained shall be construed to limit the [Trust’s] right to give its consent (e.g., to changes in the façade) or to abandon some or all of its rights hereunder.” The First Circuit noted its agreement with the D.C. Circuit who decided the same issue in Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) and added that the question was not whether the paragraph was a reasonable interpretation of the underlying statute, Sec. 170(h)(5), but whether the IRS’s interpretation of the regulation was reasonable. The court concluded that the regulation did not support the IRS’s stringent view.

Read the entire opinion here:
Kaufman v. Shulman, Docket No. 11-2017P-01A (1st Cir., July 19, 2012)

This Train is Coming: IRS Notice Challenges Outbound Intangible Reorganizations

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Often the best way to defend a tax position is to see the train before it gets to the station.

On Friday, the Internal Revenue Service issued Notice 2012–39, which addresses certain transactions that allow a U.S. taxpayer to repatriate foreign income in a tax efficient manner by using low basis domestic intangibles and the corporate reorganization rules. The Notice announced that the IRS will be issuing new regulations, with an effective date of July 13, 2012, to prevent these transactions. In the meantime, taxpayers are expected to follow the guidance in the Notice to report income from transactions that might be described in the Notice.

Notice 2012–39 describes the primary transaction of concern as follows:

USP, a domestic corporation, owns 100 percent of the stock of UST, a domestic corporation. USP’s basis in its UST stock equals its value of $100x. UST’s sole asset is a patent with a tax basis of zero. UST has no liabilities. USP also owns 100 percent of the stock of TFC, a foreign corporation. UST transfers the patent to TFC in exchange for $100x of cash and, in connection with the transfer, UST distributes the $100x of cash to USP and liquidates.

The taxpayer takes the position that neither USP nor UST recognizes gain or dividend income on the receipt of the $100x of cash. USP then applies the section 367(d) regulations to include amounts in gross income under §1.367(d)-1T(c)(1) in subsequent years. USP also applies the 367(d) regulations to establish a receivable from TFC in the amount of USP’s aggregate income inclusion. USP takes the position that TFC’s repayment of the receivable does not give rise to income (notwithstanding the prior receipt of $100x in connection with the reorganization). Accordingly, under these positions, the transactions have resulted in a repatriation in excess of $100x ($100x at the time of the reorganization and then through repayment of the receivable in the amount of USP’s income inclusions over time) while only recognizing income in the amount of the inclusions over time.

The Notice also notes that the transaction can be accomplished through the foreign subsidiary’s assumption of liabilities belonging to the domestic corporation. Another variation on the theme occurs when a controlled foreign corporation (CFC) uses deferred earnings to acquire the stock of a domestic corporation from an unrelated party for cash, followed by an outbound asset reorganization of the domestic corporation, avoiding income inclusion under section 956.

Given the IRS’s “significant policy concerns” about these transactions, this Notice should be taken as a warning for taxpayers who may have engaged in these transactions in recent years – expect the issue to be challenged under examination. Those companies may want to revisit their financial accounting reserve for these items and prepare for the controversy coming up around the bend.

Read the notice here:
IRS Notice 2012-39

Tax Court: Deed Is Substantiation of Conservation Easement Donation

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The Tax Court continues to define the limits on the charitable donation of conservation easements while the IRS maintains its frontal assault on these transactions. In Averyt v. Commissioner, the Tax Court considered respondent’s motion for summary judgment and petitioner’s cross-motion for partial summary judgment on the question of whether or not the timely recorded deed of conservation easement satisfied the substantiation requirements of IRC Sec. 170(f)(8).

IRC Sec. 170(f)(8) generally requires that a charitable contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee organization. A written acknowledgement must include

(i) the amount of cash and a description (but not value) of any property other than cash contributed; (ii) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property; and (iii) a description and good faith estimate of the value of any goods or services.

The IRS argued that, as a matter of law, the taxpayers had not met the substantiation requirements of Section 170(f)(8). The taxpayers argued that the conservation deed was a contemporaneous written acknowledgment of the charitable contribution that satisfied Section 170(f)(8).

The Commissioner relied on Schrimsher v. Commissioner, T.C. Memo. 2011-71, where the court held that the contribution of a conservation easement was not deductible because the taxpayers did not receive a contemporaneous written acknowledgment from the donee organization. The taxpayers in Schrimsher relied on the conservation deed as evidence that the donee acknowledged the donation. The deed recited consideration of “the sum of TEN DOLLARS, plus other good and valuable consideration.” The Court held that the deed did not meet two of the three requirements of Section 170(f)(8) because it did not describe the property donated or provide a good faith estimate of its value.

The deed recorded in this case, however, recited consideration more particularly. The conservation easement in Averyt was granted “in consideration of the foregoing recitations and of the mutual covenants, terms, conditions, and restrictions hereinunder set forth.” The Court found that the deed language in this case compared favorably with the deed in Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646 F.3d 6 (D.C. Cir. 2011) where the Court held that the deed satisfied the Sec. 170(f)(8) substantiation requirements. Accordingly, the Court found that the deed in this case met all of the requirements of Section 170(f)(8) including the provision that no goods or services were received in exchange for the donation.

The Court granted petitioner’s motion for partial summary judgment. The Court also determined that material questions of fact remained with regard to the other issues in dispute, so a trial may be forthcoming to determine those facts.

Read the opinion here:
Averyt v. Commissioner, TC Memo. 2012-198

Tax Court: Apartment Building Cost Segregation Largely Denied

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This case arises from an unusual set of circumstances that include an aggressive cost segregation report and a “missing” taxpayer. The potentially avoidable determinations made in this case may concern many who specialize in property depreciation and cost segregation.

AmeriSouth XXXII was one of several apartment complexes owned by general partner AmeriSouth Texas and controlled by real estate investor Ruel Hamilton. AmeriSouth XXXII acquired a then 33-year old “garden-style” apartment complex in 2003. It promptly started a $2 million renovation and commissioned a cost segregation report. The report broke down the apartment complex (generally 27.5 year property) into over 1000 parts and moved several items into 5 year and 15 year property classifications for depreciation purposes. The changes substantially accelerated AmeriSouth’s depreciation expense on the property. AmeriSouth XXXII reported depreciation expense of $632,674 in 2003, $1,578,212 in 2004, and $818,143 in 2005. Under examination the IRS adjusted the depreciation expense in each year by $314,996, $508,977, and $255,778, respectively. That is the aggressive cost segregation study.

The missing client is more unusual. Either very near or during the time the case went to trial, AmeriSouth Texas and Mr. Hamilton sold the apartment complex held by AmeriSouth XXXII and decided to abandon its defense of the claimed depreciation. It did this by refusing to respond to communications from the Tax Court, IRS Counsel and its own lawyers, even as they were litigating the case at a Buffalo trial session. After an extension of time and several attempts to reestablish communication, the litigation team requested permission to withdraw from the matter prior to post-trial briefings. The court allowed the attorneys to withdraw but there is little question that the lack of post-trial briefing did not benefit the taxpayer and resulted in several of the conclusions reached by the court. That is the missing taxpayer.

Before we get to the court’s determinations, there is one more thing to cover. This case, AmeriSouth XXXII v. Commissioner, is a Memorandum Opinion of the Tax Court heard and authored by Judge Mark V. Holmes. As experienced observers know, depreciation cases are always fact intensive and rarely result in new legal conclusions. Thus, they are often not published as official reports of the Tax Court, i.e., division or conference opinions. Rather, depreciation cases are often disposed of, as this case was, in memorandum opinions where the emphasis is on the application of well established law to the particular facts of the case.

Memorandum opinions are not published in the official Tax Court Reports and have limited, if any, legal precedent. However, all memorandum opinions since 1995 are published on the U.S. Tax Court website and have been published in print by various legal publishing houses for decades. These opinions establish the application of settled law in certain factual circumstances. While many will insist, correctly, that memorandum opinions are not legal precedents they nonetheless are important guideposts for the court on factual matters. When on point, these cases are often followed by the Tax Court when similar facts reappear before the court (presumably in order to create a pattern of consistency and predictability for taxpayers). As further evidence of the relative importance of memorandum opinions, please consider that the court recently announced a uniform method for spot-citing memorandum opinions and will adopt that method in its own opinions beginning on August 1, 2012. In short, observers should not be surprised if the same determinations made on specific items of property in this case are cited in future decisions of the court. You can also almost certainly expect to see revenue agents relying on these determinations to make adjustments under examination.

Given all of that, where did Judge Holmes come down on the reclassified items claimed by the taxpayers? The list of reclassed items in this case is long, and as the judge quipped in the opinion, “[t]he details of depreciation spur many to more interesting pastures.” Accordingly, the entire 61-page opinion is included below for those who wish to sift through the details.

Highlights include wins for the taxpayer on the water-distribution system, the underground portion of “site electric”, and the gas lines (once it reached the apartments). However, the taxpayer won these issues because the Commissioner did not raise them until trial and thus bore the burden of proof, which he did not carry. Judge Holmes also allowed the taxpayers to depreciate electrical outlets located in the apartments to service refrigerators, stoves and laundry machines over 5 years under the rationale that they were not structural components, i.e. depreciable over the same 27.5 year period as the apartment building, but instead were personal property which served a specific piece of equipment. See generally, Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21, 54-55 (1997). The Commissioner won nearly every other item claimed by AmeriSouth including some that may surprise practitioners who specialize in this area such as site preparation, HVAC and sanitary sewer.

Read the entire opinion here:
AmeriSouth XXXII v. Commissioner, TC Memo. 2012-67

Tax Court: No Deduction for Burning Down the House

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The Tax Court held that taxpayers who allowed local firefighters to conduct training exercises in a house they owned, which included burning the house to the ground, could not deduct the value of the destroyed structure as a charitable contribution under Section 170.

Taxpayers purchased a property in Vienna, Virginia with the intent of tearing down the existing structure and building a new home on it. Rather than simply tearing the existing house down the taxpayers allowed the Fairfax County Fire and Rescue Department to burn the house down as part of a training exercise. Before allowing the fire department to destroy the house, the taxpayers hired an outside appraisal firm to value the property with the then-existing structure. The taxpayers deducted approximately one half of the appraised value of the property as a non-cash charitable deduction. The IRS disallowed the deduction under examination and imposed accuracy-related penalties.

The court held that the taxpayers only gave the fire department a license to use the house and did not convey a property interest in the property. Since the taxpayers donated only the use of the property, it only constituted a partial property interest and therefore did not meet the requirements of Section 170(f)(3). Despite disallowing the deduction in full, the court refused to impose penalties.

Read the entire opinion here:
Patel v. Commissioner, 138 T.C. No. 23 (2012)

Please note that the opinion made no mention of the Talking Heads or their music. Compare U.S. v. Abner, 825 F.2d 835 (5th Cir. 1987).

U.S. Supreme Court Upholds the Healthcare Individual Mandate under the Taxing Clause

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The United States Supreme Court has just ruled that the individual mandate in the Patient Protection and Affordable Care Act (Obamacare) may be upheld as within Congress’s power under the Taxing Clause. The opinion of the court was delivered by Chief Justice John Roberts.

Read the full text of the slip opinion here:
NFIB v. Sebelius, Docket No 11-393 (U.S. Sup. Ct. June 28, 2012)

Tax Court Collection Due Process Standard of Review Upended by the First Circuit

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In an decision that could dramatically change collection due process, the First Circuit Court of Appeals held that the standard of review applied to collection due process cases by the Tax Court for more than a decade is incorrect. In Dalton v. Commissioner, No. 11-2217P-01A (1st Cir. June 20, 2012), the First Circuit Court of Appeals reviewed a division opinion of the Tax Court which found that the IRS Office of Appeals abused its discretion when it sustained a collection action based on an incorrect application of the law. The First Circuit reversed the Tax Court on the basis that it applied an “improper standard of review” with respect to the Office of Appeals determination. The First Circuit held that the Tax Court’s review is limited to whether the Office of Appeals’ determination was “reasonable,” not necessarily whether or not it was correct.

In Dalton v. Commissioner, 135 T.C. 393 (2010), the Tax Court reviewed a collection due process determination applying the standard of review established in Sego v. Commissioner, 114 T.C. 604 (2000). Sego requires that

where the validity of the underlying tax liability is
properly at issue, the Court will review the matter on a de
novo basis. However, where the validity of the underlying
tax liability is not properly at issue, the Court will
review the Commissioner’s administrative determination for
abuse of discretion. Sego, at 610.

The Tax Court applied the second prong of Sego finding an abuse of discretion in the Appeals Officer’s incorrect application of the law. The underlying legal question was whether or not petitioners owned property held in a trust and which body of law, state, federal or both, should be applied to answer that question.

The Court of Appeals did not address Sego in its opinion. The appellate court, however, did hold that the role of the Tax Court in reviewing collection due process determinations was

to decide whether the IRS’s subsidiary factual and legal determinations are
reasonable and whether the ultimate outcome of the CDP proceeding
constitutes an abuse of the IRS’s wide discretion.

The First Circuit, by Senior Judge Seyla, explained that a more deferential standard of review was “consistent with the nature and purpose of the CDP process” and that the question for the reviewing court was not the correctness, or not, of the determination but rather whether the determination “falls within the universe of reasonable outcomes.” The Court further explained that regardless of whether the Appeals determination was based on a factual finding, a legal question, or a mixed question of law and fact, the reviewing Court’s role was only to evaluate the reasonableness of the determination.

The First Circuit’s opinion is the fourth milepost in petitioners’ legal saga since their first encounter with the IRS Office of Appeals. In 2006, petitioners requested review of their collection due process determination when the Appeals Officer rejected their offer in compromise. Respondent moved for summary judgment. Petitioners’ responded maintaining that their offer in compromise should have been accepted because there was doubt as to the collectibility of tax and the appeals officer erred by attributing assets to petitioners that they did not own. The Tax Court denied respondent’s motion in a memorandum decision and remanded the case to Appeals for a redetermination on the applicable law. Dalton v. Commissioner, T.C. Memo. 2008-165. Following the second review by the Appeals Officer, the case returned to the Tax Court on petitioners’ motion for summary judgment. The IRS filed a response to petitioner’s motion for summary judgment and lodged a second motion for summary judgment. In the reviewed opinion noted above, the Tax Court found that the Office of Appeals’ decision to continue with the collection action was an abuse of discretion because the Appeals Officer rejected petitioners’ offer in compromise on erroneous legal grounds. Dalton v. Commissioner, 135 T.C. 393 (2010). The Dalton’s final encounter in the Tax Court resulted in a memorandum opinion awarding them legal fees. Dalton v. Commissioner, T.C. Memo. 2011-136. All three decisions in favor of the Dalton’s were reversed by the First Circuit.

Read the First Circuit’s opinion here:
Dalton v. Commissioner, No. 11-2217P-01A (1st Cir. June 20, 2012)

Tax Court: Facade Easement Denied on Summary Judgment

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The Tax Court rejected a pro se taxpayer’s deduction for the contribution of a facade easement on the government’s motion for summary judgment.

The court found in favor of respondent as a matter law based on its decision in Kaufman v. Commissioner, 134 T.C. 182 (2010). Kaufman held that where the subordination agreement to the mortgagee under the easement does not grant the donee a priority interest in the distribution of proceeds upon involuntary conversion or foreclosure, then the easement fails the perpetuity requirement of Treas. Reg. Sec. 170A-14(g)(6). Kaufman was reheard on a motion for reconsideration with the same result, 136 T.C. No. 13, and currently is under appeal to the 1st Circuit Court of Appeals.

In a final note on this decision, the respondent conceded penalties in its motion for summary judgment, which would have required a trial to satisfy the government’s burden of proof, in order to meet the requirement for summary judgment under Tax Ct. R. 121 that no material facts are in dispute.

Read the opinion here:
Wall v. Commissioner, T.C. Memo 2012-169

Tax Court Denies New York Facade Easement

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us_tax_courtIn Rothman v. Commissioner, T.C. Memo. 2012-163, the Tax Court held that petitioners failed to provide a qualified appraisal under IRC § 70(f)(11) for the donation of a facade easement on their residence in Brooklyn, New York.    The Court followed its decision in Scheidelman v. Commissioner, T.C. Memo. 2010-151, finding that “applying a fixed percentage to the before value of the subject property, without explanation, does not constitute a valuation method under IRC § 1.170A-13(c)(3).”

The case came to the Court on petitioners’ motion for partial summary judgment and respondent’s motion for partial summary judgment on the issue of whether petitioners obtained a qualified appraisal in connection with their charitable deduction for the donation of a facade easement in 2004.  The petitioners donated an open space and architectural facade easement to the National Architectural Trust (NAT) on their home in Brooklyn, New York.  The petitioners hired a New York real estate appraisal firm to appraise the property and the easement.

The appraiser used the before and after method to determine the easement’s fair market value.  He estimated the value of the property before the easement to be $2.6 million by comparing five sales of similar properties in the area.  Similar to Scheidelman, the appraiser was unable to identify sales of comparable eased properties to determine the after value of the property, so he cited historical precedence to reduce the subject property’s before value by 11.15%.  Thus, the appraisal valued the petitioners’ facade easement at $290,000.  The petitioners claimed a noncash charitable deduction of $247,010 on their 2004 Federal income tax return and an excess charitable contribution carryover of $42,990 on their 2005 Federal income tax return.

The Court noted that the appraisal presented by petitioners was “identical in all material respects, including the typographical errors, to the one petitioners obtained.”  Citing Scheidelman, the Court rejected the appraiser’s argument that applying a percentage to a property’s before provided a method or specific basis for determining a property’s after value.  The Court also questioned the appraiser’s interpretation and reliance on the decision in Hillborn v. Commissioner, 85 T.C. 677, to grant a general 10% rule for facade easement donations.  Instead, the Court held that the easement’s terms and covenants must be analyzed individually and collectively and compared to existing zoning restrictions to estimate the extent to which the easement affects the property’s fair market value.  The Court found that the appraisal language, identical to Scheidelman, failed to explain how the specific attributes of the property led to the value determined in the appraisal.

The Court held that the appraisal was not a qualified appraisal because it failed to include a valuation method or specific basis for the value of the easement determined as required under Treas. Reg. §§ 1.170A-13(c)(3)(J) and (K).

Read the Tax Court Opinion here:  Rothman v. Commissioner, T.C. Memo. 2012-16