Case: 09-60085 Document: 00511199847 Page: 1 Date Filed: 08/10/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 10, 2010
No. 09-60085 Lyle W. Cayce
Clerk
WHITEHOUSE HOTEL LIMITED PARTNERSHIP; QHR HOLDINGS -
NEW ORLEANS LIMITED, Tax Matters Partner,
Petitioners - Appellants
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee
Appeal from the United States Tax Court
No. 12104-03
Before BARKSDALE, GARZA, and DENNIS, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
This appeal by Whitehouse Hotel Limited Partnership, a Louisiana limited
partnership, concerns the allowable amount for its claimed $7.445 million
charitable-contribution deduction for its donation, in 1997, of a historic-
preservation facade easement. The easement burdens the Maison Blanche
building, owned by Whitehouse and located in New Orleans. In tax court,
Whitehouse challenged the Commissioner of Internal Revenue’s decision, in
2003, which disallowed $6.295 million of the amount claimed for the undisputed
qualified conservation easement and imposed an underreporting penalty for 40%
of the portion of underpayment of taxes due for tax-year 1997.
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Here, Whitehouse challenges the tax court’s agreeing both with most of
that disallowance and with the penalty. Primarily at issue is whether the tax
court properly considered the easement’s effect on Whitehouse’s opportunity to
build on top of a building also owned by Whitehouse and contiguous to the
Maison Blanche building. VACATED and REMANDED.
I.
Whitehouse was formed in 1995 for the purpose of purchasing and
renovating a parcel of New Orleans property. The parcel is contained within
both the Vieux Carré Historic District, as listed in 1966 in the National Register
of Historic Places, and the Canal Street Historic District (part of the Central
Business District).
This property included the Maison Blanche building (constructed between
1906 and 1908), which consists of a base level with six floors, a U-shaped tower
with eight floors, and two subsequently constructed annexes with five and six
floors, respectively. In 1980, the Maison Blanche building was designated as a
City of New Orleans landmark.
The property also included the six-story Kress building (constructed in
1910) that is contiguous to the Maison Blanche building on Canal Street; and a
parking garage contiguous to the Kress building (Kress garage). Whitehouse
also owned a second parking garage located across Iberville Street from the block
containing the above-described Maison Blanche and Kress buildings and the
Kress garage.
Whitehouse purchased the underlying land and these buildings, with
plans to renovate the buildings into, inter alia, a Ritz-Carlton hotel. Subsequent
to the donation of the historic-preservation facade easement, the property within
the above-described block was developed into a 452-room Ritz-Carlton Hotel with
a spa and parking garage; a 230-room Iberville Suites Hotel; a 75-room Maison
Orleans Hotel; and retail space.
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On 29 December 1997, Whitehouse conveyed the easement to the
Preservation Alliance of New Orleans d/b/a Preservation Resource Center (PRC),
a nonprofit corporation. As noted, the Maison Blanche and Kress buildings were
under common ownership when the easement was granted.
The easement prohibits alterations to the Maison Blanche building’s
facade, made primarily of terra-cotta. The white-glazed terra-cotta facade is
covered with ornate baroque-inspired decorations, including two-story columns
topped by an elaborate string course with garlands and lions’ heads.
The easement requires Whitehouse to maintain the terra-cotta facade in
a “good and sound state of repair”. And, regarding the prohibition against
altering the facade, the easement prohibits, inter alia, any construction or
alteration that would affect the appearance of
the exterior walls of the Lower Stories which are visible
from Canal and Dauphine Streets, the exterior portion
of the Improvement above the Lower Stories which is
not covered by the Upper Stories, [and] the exterior
walls of the Upper Stories which are visible from Canal,
Burgundy, Iberville, and Dauphine Streets.
Moreover, pursuant to the easement, PRC approved specific development
plans for the contiguous Maison Blanche and Kress buildings. For a point
critical to this appeal, those plans did not include construction on top of the
Kress building.
Concerning the requirement to maintain the Maison Blanche building’s
facade in a “good and sound state of repair”, the easement obligates the Maison
Blanche building’s owner to, inter alia: “make certain improvements to the
Facade which shall have a cost of at least $350,000”; perform and pay for work
deemed necessary by PRC in order to preserve, maintain, or repair the facade
and the building’s structural elements; provide and pay for periodic inspections;
and, “in the event of a change in conditions which would give rise to the judicial
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extinguishment” of the facade restrictions, provide PRC at least ten percent of
the proceeds of a subsequent transfer of the building. Testimony at the trial in
tax court in 2006 established that, since conveying the easement, Whitehouse
had spent $7.792 million repairing and restoring the terra-cotta facade, not
including $421,000 to repair damage from Hurricane Katrina.
The day after Whitehouse executed and donated the easement,
Whitehouse converted the Maison Blanche and Kress buildings into a single,
indivisible condominium unit: Unit RC. That same day, Unit RC was conveyed
to RC Hotel, L.L.C.
In its tax return for 1997, Whitehouse claimed a $7.445 million charitable-
contribution deduction for the conservation easement. See 26 U.S.C. § 170
(allowing deductions for charitable contributions, including “qualified
conservation contributions”). For doing so, and consistent with IRS regulations,
Whitehouse obtained a contemporary appraisal of the easement. See 26 C.F.R.
§ 1.170A-13(c)(2)(i)(A) (requiring donor to obtain “qualified appraisal” to
substantiate value of deduction). Richard Cohen performed this appraisal,
which valued the easement at the above-referenced $7.445 million. It is
undisputed that this easement constitutes a “qualified conservation
contribution” under 26 U.S.C. § 170(f)(3)(B)(iii) and 26 C.F.R. § 1.170A-14; only
the allowable amount of the deduction is at issue.
In 2003, through a Notice of Final Partnership Administrative
Adjustment, Commissioner allowed $1.15 million for the easement,
approximately $6.3 million less than claimed. In addition, Commissioner
assessed a gross undervaluation penalty of 40% of the portion of underpayment
of taxes for that year. See 26 U.S.C. § 6662 (“Imposition of accuracy-related
penalty on underpayments”).
Whitehouse challenged both assessments in tax court. See generally
Whitehouse Hotel Ltd. P’ship v. Comm’r, 131 T.C. 112 (2008). There, both
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Whitehouse and Commissioner presented expert testimony on both the
easement’s fair market value and the difference in the property’s before- and
after-easement values, see 26 C.F.R. § 1.170A-14(h)(3)(i). A serious illness
prevented Cohen, who prepared the underlying appraisal for the deduction, from
participating at trial; therefore, Richard Roddewig provided the expert testimony
for Whitehouse. Dunbar Argote did so for Commissioner.
Both Roddewig and Argote have extensive experience in valuing real
estate. Roddewig is a lawyer as well as a real-estate consultant and appraiser;
among other relevant experience, he had authored published works on
preservation easements and contributed to The Conservation Easement
Handbook. Argote had valued between 50 and 70 buildings intended for use as
hotels in New Orleans, including this being his fourth appraisal of the Maison
Blanche building.
Both experts’ written reports constituted their direct testimony at trial, on
which they were cross-examined. The outcome before the tax court largely
turned on the these expert opinions, which the tax court discussed at length. See
Whitehouse Hotel, 131 T.C. at 121-46.
Among other things, the experts disagreed on two threshold issues: which
property should be valued; and the nature of its “highest and best use”, which
is, of course, a key factor in determining fair market value. See, e.g., Stanley
Works & Subsidiaries v. Comm’r, 87 T.C. 389, 400 (1986) (“The fair market value
of property reflects the highest and best use of the property on the relevant
valuation date.”). Roddewig, for Whitehouse, determined the relevant property
to consist of the Maison Blanche building (including annexes) and the contiguous
Kress building, but not the Kress parking garage. Argote, for Commissioner,
valued only the Maison Blanche building (including annexes); Commissioner did
not ask him to opine on any potential reduction in the Kress building’s value.
Whitehouse Hotel, 131 T.C. at 126. Restated, contrary to the basic regulatory
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requirements, discussed infra, he did not consider the easement’s impact on the
contiguous and commonly owned Kress building. See 26 C.F.R. § 1.170A-
14(h)(3)(i).
Roddewig also determined that the before-donation highest and best use
of this property, at the time the easement was conveyed, was as a Ritz-Carlton
hotel with 512 hotel rooms, an all-suites hotel with 268 rooms (for a total of 780
hotel rooms), and retail on the bottom floors. He found the after-donation
highest and best use to be the same, but with only 720 hotel rooms. The 60-room
difference (reduction) was pursuant to Roddewig’s understanding that the
easement precluded the possibility of building those rooms on top of the Kress
building.
On the other hand, Argote concluded that the highest and best use of the
Maison Blanche building (including its annexes) was as a mixed non-luxury
hotel and retail complex, not a luxury hotel like the Ritz-Carlton. He also
concluded that the easement did not limit the potential number of rooms. In
other words, Argote opined the easement had no effect on Whitehouse’s rights
to construct additional rooms on top of the Kress building. In the light of this
opinion, it is notable that Argote admitted to not having read the applicable
treasury regulation (26 C.F.R. § 1.170A-14). Again, that regulation, discussed
infra, requires, inter alia, considering the easement’s effect on the fair market
value of applicable contiguous property.
Each expert determined a value of the property he appraised for before
and after the easement was donated, then subtracted the latter from the former.
Roddewig’s report used three recognized methods to reach a before-donation
value: replacement-cost, income, and comparable-sales. These yielded the
following before-donation values for the appraised property: $43 million for the
replacement-cost method; $29.5 million for the income; and $40 million for the
comparable-sales. Roddewig only reached an after-deduction figure under the
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first two methods: $35 million for replacement-cost; and $18 million for income.
He did not include an after-donation comparable-sales valuation because he did
not find any sales of easement-encumbered properties in New Orleans that he
considered comparable. Reconciling these values, Roddewig’s final valuation set
the before-donation value at $41 million and the after-donation value at $31
million, resulting in an easement value of $10 million.
In contrast, Argote used only the comparable-sales method. He concluded
there was no difference in the before and after values of the property he
appraised: each was $10.3 million. Accordingly, and rather extraordinarily, he
assigned the easement a value of zero. See, e.g., Schwab v. Comm’r, T.C. Memo
1994-232, 1994 WL 223175, at *11 (25 May 1994) (“We find it hard to imagine
a prospective purchaser of a [tract of] land who would not have considered the
restrictions of the open-space easement in determining the price.”), cited with
approval in Hughes v. Comm’r, T.C. Memo 2009-94, 2009 WL 1227938, at *15
(6 May 2009) (“[W]e disagree with [Commissioner’s expert’s] conclusion that the
conservation easement may have had no, or only a nominal, impact on the fair
market values of the [encumbered land].”). Notwithstanding Commissioner’s
expert’s having valued the easement at zero, Commissioner continued to urge
as the proper deductible amount the $1.15 million allowed in the above-
referenced 2003 Notice of Final Partnership Administrative Adjustment.
A four-day trial was held in December 2006. The tax court’s 64-page
opinion was rendered almost two years later, with the final decision being
entered in January 2009. See Whitehouse Hotel, 131 T.C. 112.
The tax court did not credit all of either expert’s report and testimony, but
undertook its own analysis, based on parts of each expert’s evaluation. It
disregarded as unreliable Roddewig’s valuations under the replacement-cost and
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income methods. Whitehouse Hotel, 131 T.C. at 152, 154-56 (explaining basis for
finding replacement-cost and income methods unreliable).
Utilizing only the comparable-sales method, the tax court found a before-
donation value of $12,092,301 and an after-donation value of $10.3 million,
resulting in a charitable-contribution deduction of $1,792,301; accordingly, it
ruled Whitehouse overstated the deductible amount by $5,652,699. Whitehouse
Hotel, 131 T.C. at 171-72. The tax court’s accepting Argote’s exact after-donation
value of $10.3 million resulted, at least in part, from its use of only the
comparable-sales method. Because Roddewig did not engage in an after-
donation comparable-sales valuation, the tax court relied on Argote’s after-
donation valuation (after rejecting Whitehouse’s challenges to it). See id. at 168-
71.
This gave rise to a potential penalty for gross valuation misstatement,
with Whitehouse having had the opportunity at trial to show it satisfied the
reasonable-cause exception. See 26 U.S.C. § 6664(c). As discussed supra, when
it claimed the deduction, Whitehouse had relied on the contemporary appraisal
prepared by Cohen. Whitehouse also presented testimony from Robert
Drawbridge, the hotel’s asset manager and an executive vice president of assets
at Whitehouse’s general partner and tax-matters partner. He testified that, in
claiming the deduction, Whitehouse also relied on both another contemporary
appraisal performed by Revac, Inc., and the professional advice of its lawyers
and accountants.
The tax court ruled any reliance on the Revac appraisal was misplaced
because it did not determine a value for the easement specifically. Further,
because Drawbridge was not associated with Whitehouse until several years
after the deduction was claimed, the tax court rejected as not credible his
testimony regarding Whitehouse’s efforts at the time it claimed the deduction.
It therefore assessed a gross valuation misstatement penalty of 40% of the
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portion of underpayment of 1997 taxes. See Whitehouse Hotel, 131 T.C. at 172-
76.
II.
On numerous bases, Whitehouse challenges the tax court’s valuation of the
conservation (facade) easement. Whitehouse also maintains the tax court erred
by imposing the underreporting penalty.
In claiming the tax court undervalued the easement, Whitehouse contends:
the court erred in admitting Argote’s report based on his qualifications and his
report’s reliability; had the report been excluded, the court’s failure to shift the
burden of proof would constitute reversible error; and, even if Argote’s report
was admissible, it lacked such credibility that the tax court’s placing any weight
on it constituted an abuse of discretion and contributed to the tax court’s
erroneous valuation of the easement. Whitehouse’s contention regarding
Argote’s report’s credibility revolves largely around his failure to consider the
effect the easement had on the right to construct additional rooms on top of the
contiguous Kress building. Similarly, its challenge to the tax court’s decision
turns primarily on the tax court’s failure to properly account for the easement’s
precluding building on top of that building.
The National Trust for Historic Preservation in the United States filed an
amicus brief, pointing out that valuation of preservation easements is a
fundamentally important issue to National Trust because, if such easements are
deemed to have little or no value, the tax incentives Congress has established to
encourage preservation would be severely weakened. National Trust also
challenges Argote’s appraisal and the court’s conclusions, and asserts that the
court’s decision, if allowed to stand, will obscure the proper method for easement
appraisals.
As a general rule, for charitable gifts of property, a taxpayer is “not
allowed to take a deduction if the charitable gift consists of less than the
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taxpayer’s entire interest in that property”. Glass v. Comm’r, 471 F.3d 698, 706
(6th Cir. 2006). An exception to this rule is for a “qualified conservation
contribution”. Id. (citing 26 U.S.C. § 170(f)(3)(B)(iii)); see also Stephen J. Small,
The Tax Benefits of Donating Easements in Scenic and Historic Property, 7 R EAL
E ST. L.J. 304, 305 (1979) (noting Congress “made the basic policy decision that
the preservation of historic property is a worthy goal and one that is appropriate
to encourage through the medium of the tax code”). This exception has existed
in its current form since 1980. See Pub. L. No. 96-541, § 6 (1980).
To constitute a “qualified conservation easement”, the contribution must
be “(A) of a qualified real property interest, (B) to a qualified organization, [and]
(C) exclusively for conservation purposes”. 26 U.S.C. § 170(h)(1). These
requirements are defined in the statute’s subsequent subsections. See 26 U.S.C.
§ 170(h)(2), (3), (4). Such an easement must “be based upon legally enforceable
restrictions that will prevent uses of the retained interest in the property that
are inconsistent with the conservation purposes of the contribution”. Simmons
v. Comm’r, T.C. Memo 2009-208, 2009 WL 1950610, at * 4 (15 Sept. 2009).
As noted supra, Commissioner agrees that the easement is a qualified
conservation easement—only its value is at issue. In that regard, the Internal
Revenue Service has provided regulatory guidance for valuing qualified
conservation easements. See 26 C.F.R. § 1.170A-14(h). The “before and after”
valuation approach is to be employed where, as here, there is no “substantial
record of sales of easements comparable to the donated easement”. Id.; see also,
e.g., Richmond v. United States, 699 F. Supp. 578, 581-84 (E.D. La. 1988)
(valuing facade easement in Vieux Carré); Hilborn v. Comm’r, 85 T.C. 677, 688-
700 (1985) (discussing background of before-and-after valuation method and
applying it to value facade easement in Vieux Carré); Simmons, 2009 WL
1950610, at *8-11 (valuing facade easement); Browning v. Comm’r, 109 T.C. 303,
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320-325 (1997) (discussing and applying before-and-after valuation method in
context of easement restricting development of land).
Notwithstanding this regulatory guidance, valuing preservation easements
remains, most understandably, a complex and difficult undertaking that
continues to challenge appraisers and the IRS. See, e.g., Bruzewicz v. United
States, 604 F. Supp. 2d 1197, 1205 (N.D. Ill. 2009) (referring to valuation of real-
estate easements as an “esoteric and specialized” subject). This complexity is
reflected, for example, by a guidebook devoted to appraising land-conservation
and historic-preservation easements. See L AND T RUST A LLIANCE & N ATIONAL
T RUST FOR H ISTORIC P RESERVATION, A PPRAISING E ASEMENTS (3d ed. 1999).
Louisiana law is applied for determining the rights transferred by the
easement at issue. See Adams v. United States, 218 F.3d 383, 386 (5th Cir.
2000) (“To arrive at a reasonable conclusion regarding the value of the property
at issue . . . , one must first determine the rights afforded to the owner of such
property by the applicable state law.”). Valuation is generally reviewed for clear
error; but, of course, to the extent such valuation is predicated on “a legal
conclusion regarding the rights inherent in the property”, that conclusion is
subject to de novo review. Id.; see also Succession of McCord v. Comm’r, 461 F.3d
614, 623 (5th Cir. 2006) (“The determination of the nature of the property rights
transferred is a question of state law that this Court reviews de novo.” (citing
Adams, 218 F.3d at 386)).
Pursuant to Tax Court Rule 143(a), the Federal Rules of Evidence apply
to trials in tax court. Similarly, its decisions are reviewed “in the same manner
and to the same extent as decisions of the district courts in civil actions tried
without a jury”. 26 U.S.C. § 7482(a); Houston Oil & Minerals Corp. v. Comm’r,
922 F.2d 283, 285 (5th Cir. 1991); see also Green v. Comm’r, 507 F.3d 857, 866
(5th Cir. 2007) (“We apply the same standard of review to decisions of the Tax
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Court that we apply to district court decisions.” (citing Arevalo v. Comm’r, 469
F.3d 436, 438 (5th Cir. 2006))).
A.
1.
Whitehouse claims the tax court erred by admitting Argote’s expert
opinion. In doing so, Whitehouse challenges both Argote’s qualifications and the
reliability of his report and testimony. See generally F ED. R. E VID. 702 (stating
witness may qualify as expert through “knowledge, skill, experience, training,
or education”); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579
(1993) (establishing district court as “gatekeeper” for admitting scientific expert
testimony under Rule 702’s five factors); Kumho Tire Co. v. Carmichael, 526 U.S.
137 (1999) (extending Daubert to apply to non-scientific experts). In Gibbs v.
Gibbs, 210 F.3d 491, 500 (5th Cir. 2000), our court noted that the importance of
the trial court’s gatekeeper role is significantly diminished in bench trials, as in
this instance, because, there being no jury, there is no risk of tainting the trial
by exposing a jury to unreliable evidence.
A tax court’s admissibility determination for expert evidence is reviewed
for abuse of discretion. E.g., Kumho Tire, 526 U.S. at 142; Knight v. Kirby
Inland Marine Inc., 482 F.3d 347, 351 (5th Cir. 2007). “[A trial judge has] wide
latitude in determining the admissibility of expert testimony, and ‘the discretion
of the trial judge and his or her decision will not be disturbed on appeal unless
‘manifestly erroneous’”. Watkins v. Telsmith, Inc., 121 F.3d 984, 988 (5th Cir.
1997) (quoting Eiland v. Westinghouse Elec., 58 F.3d 176, 180 (5th Cir. 1995)).
The same standard applies both for assessment of the witness’ qualifications and
for reliability determinations. E.g., Hidden Oaks Ltd. v. City of Austin, 138 F.3d
1036, 1050 (5th Cir. 1998) (qualifications); Hodges v. Mack Trucks, Inc., 474 F.3d
188, 194-95 (5th Cir. 2006) (reliability). Accordingly, the tax court has broad
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discretion to accept or reject all or part of an expert’s opinion. Helvering v. Nat’l
Grocery Co., 304 U.S. 282, 294-95 (1938).
a.
Whitehouse claims Argote’s general qualifications as a real-estate
appraiser do not give him the requisite “knowledge, skill, expertise, training, or
education” to value historic-preservation facade easements. See F ED. R. E VID.
702. “[T]he essential elements of the real estate expert’s competency include his
knowledge of the property and of the real estate market in which it is situated,
as well as his evaluating skill and experience as an appraiser”. United States v.
60.14 Acres of Land, 362 F.2d 660, 668 (3d Cir. 1966), quoted with approval in
Hidden Oaks, 138 F.3d at 1050. In this light, Argote is qualified to offer expert
opinion on the value of real estate in New Orleans. He is a licensed appraiser
in Louisiana with over 25 years’ appraisal experience, and he has appraised: 50
to 70 hotels between 1990 and 2000; commercial properties neighboring the
Maison Blanche building; and the Maison Blanche building itself three times
prior to the present case.
Whitehouse maintains, however, that a conservation-easement appraisal
requires additional or different qualifications. In doing so, Whitehouse relies
heavily on Bruzewicz, 604 F. Supp. 2d 1197. There, plaintiffs challenged
Commissioner’s disallowance of their claimed charitable-contribution deduction.
See id. at 1199. The Bruzewicz district court held plaintiffs’ failure to provide
a “contemporaneous written acknowledgment” of the donation (as required by
statute) was “alone fatal to their claimed deduction”, but also noted that mere
inclusion of the appraisers’ license numbers in the appraisal did not constitute
substantial compliance with the regulatory requirement that the appraisal
provide the appraisers’ qualifications. Id. at 1204-05.
Whitehouse incorrectly construes Bruzewicz as holding an appraisal
license alone does not qualify a witness to offer expert testimony on conservation
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easements. Bruzewicz centers on appraisers’ failure to include their
qualifications in their report, not their substantive qualifications as appraisers.
See id. at 1205.
Whitehouse also cites two decisions by our court that discuss excluded
expert opinions: Smith v. Goodyear Tire & Rubber Co., 495 F.3d 224, 226 (5th
Cir. 2007); and Caracci v. Comm’r, 456 F.3d 444, 451-52 (5th Cir. 2006). Argote
is, however, distinctly more qualified than the witnesses who offered those
excluded opinions.
Smith affirmed the exclusion of a polymer scientist’s opinion on whether
a tire was defective. 495 F.3d at 226. Smith held it was “the science’s
application to tires that concerns us here, and [the scientist] has absolutely no
experience applying polymer science to tires”. Id. at 227. Whitehouse’s attempts
to analogize a polymer scientist’s qualifications to opine on tires to a real estate
appraiser’s qualifications to opine on an easement’s effect on real estate’s value
are unpersuasive, especially in the light of Argote’s noted qualifications.
Likewise, Caracci is inapposite: there, although critical of an expert, our court
did not rule on his qualifications or even consider his opinion’s admissibility. See
456 F.3d at 451-54, 58.
In sum, Whitehouse’s contention that Argote was not sufficiently qualified
to offer expert testimony on the easement’s value fails. A real-estate appraiser
with his background is sufficiently qualified to value a specific type of property
interest—even one as “esoteric and specialized” as a conservation easement,
Bruzewicz, 604 F. Supp. 2d at 1205. Finding Argote qualified was not a
“manifestly erroneous” abuse of discretion, especially because of the diminished
importance of the tax court’s role, sitting without a jury, as a gatekeeper. See
Gibbs, 210 F.3d at 500.
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b.
Whitehouse also contends Argote’s report should have been held unreliable
(and, therefore, inadmissible) because it failed to comply with the Uniform
Standards of Professional Appraisal Practice (USPAP). In other words,
Whitehouse casts USPAP compliance vel non as an issue of reliability (and thus
admissibility), not credibility.
Whitehouse claims: both experts acknowledged they were bound by
USPAP; Louisiana law requires that all licensed appraisers shall comply with
USPAP; such compliance is required for all federally related transactions; and
the IRS treats USPAP as providing the applicable appraisal standards. Further,
Whitehouse claims Argote’s valuation is merely ipse dixit, an insufficient basis
upon which to admit opinion testimony. See Gen. Elec. Co. v. Joiner, 522 U.S.
136, 146 (1997) (holding district court is not required “to admit opinion evidence
that is connected to existing data only by the ipse dixit of the expert”).
Whitehouse points to several instances where Argote’s report allegedly
fails to comply with USPAP standards. It is unnecessary, of course, to analyze
each instance unless strict compliance with USPAP is required for the report to
be admissible. Otherwise, the nature and extent of the deviations concern only
the report’s credibility (i.e., the weight it should be given). Therefore, the
threshold question is a legal one: whether strict compliance with USPAP is a
pre-requisite for admissibility.
As the tax court noted, Whitehouse “has not cited any authority, nor do we
know of any, for the proposition that an appraiser’s compliance with USPAP is
the sole determining factor as to whether an appraiser’s valuation report is
reliable”. Whitehouse, 131 T.C. at 127. Especially in the light of the tax court’s
serving as the factfinder as well as the expert-testimony gatekeeper, Whitehouse
has failed to show the court abused its discretion in treating the alleged USPAP
violations as concerning credibility rather than admissibility. See Gibbs, 210
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F.3d at 500 (“Most of the safeguards provided for in Daubert are not as essential
. . . where a district judge sits as the trier of fact in place of a jury.”). In other
words, the tax court acted within its ample discretion in considering USPAP
compliance as relevant to the weight Argote’s report should be given, instead of
whether it should be admitted.
c.
Whitehouse also contends the tax court erred in failing to shift the burden
of proof from Whitehouse to Commissioner. Whitehouse asserts: the burden
should have shifted because Whitehouse introduced credible evidence with
respect to a factual issue, see 26 U.S.C. § 7491 (“Burden shifts where taxpayer
produces credible evidence.”); and, alternatively, Commissioner’s assertion both
at trial and in the post-trial brief that the donation value was zero (in contrast
to the earlier Notice of Final Partnership Administrative Adjustment, which
stated the deductible amount was $1.15 million) triggered the “new matter rule”,
see T.C. R ULE 142(a)(1) (placing burden on petitioner with several exceptions,
including one for “any new matter”, for which it is on respondent). The tax court
did not explicitly rule on the burden-shifting issue, and Whitehouse notes the
court likely considered it moot because two experts’ reports were weighed
against one another.
“The allocation of the burden of proof is a legal issue reviewed de novo.”
E.g., Marathon Fin. Ins., Inc., RRG v. Ford Motor Co., 591 F.3d 458, 464 (5th
Cir. 2009) (citing Grilletta v. Lexington Ins. Co., 558 F.3d 359, 364 (5th Cir.
2009)). The tax court need not decide whether the burden shifted where, as
here, both parties offered some admissible evidence. Blodgett v. Comm’r, 394
F.3d 1030, 1039 (8th Cir. 2005). “In a situation in which both parties have
satisfied their burden of production by offering some evidence, then the party
supported by the weight of the evidence will prevail regardless of which party
bore the burden of persuasion, proof or preponderance.” Id.; see also, e.g.,
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Knudsen v. Comm’r, 131 T.C. 185, 189 (2008) (“[A]n allocation of the burden of
proof is relevant only when there is equal evidence on both sides. . . . In a case
where the standard of proof is preponderance of the evidence and the
preponderance of the evidence favors one party, we may decide the case on the
weight of the evidence and not on an allocation of the burden of proof.”).
Accordingly, Whitehouse’s contention that the tax court erred in failing to
shift the burden of proof is inextricable from its contention that Argote’s opinion
was inadmissible. Because Argote’s opinion was admissible, as discussed supra,
and because there is no indication that the tax court’s decision turned on the
allocation of the burden, there was no error in the tax court’s not addressing the
burden of proof. Therefore, it is unnecessary to analyze Whitehouse’s
contentions regarding how the burden shifted. (Along that line, as discussed,
Commissioner at trial did not seek a lower donation value than the $1.15 million
allowed in the notice in 2003.)
2.
Whitehouse next maintains the tax court erred by ignoring the income and
replacement-cost valuation methods in favor of relying solely on the comparable-
sales method. Again, “[v]aluation is a mixed question of law and fact, the factual
premises being subject to review on a clearly erroneous standard, and the legal
conclusion being subject to de novo review”. In re Stembridge, 394 F.3d 383, 385
(5th Cir. 2004) (quoting In re T-H New Orleans Ltd. P’ship, 116 F.3d 790, 799
(5th Cir. 1997)). The tax court’s determination of the proper fair-market-
valuation method is a conclusion of law; thus, our review is de novo. Cook v.
Comm’r, 349 F.3d 850, 853 (5th Cir. 2003) (citing Estate of Dunn v. Comm’r, 301
F.3d 339, 348 (5th Cir. 2002)).
Where, as here, there is no “substantial record of sales of easements
comparable to the donated easement”, see 26 C.F.R § 1.170A-14(h)(3)(i), there
are three commonly recognized methods for valuing real property: comparable-
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sales, income, and replacement-cost. Hilborn, 85 T.C. at 689; see also USPAP
Standards Rule 1-4 (identifying three methods and noting each is to be used
“when . . . necessary”). A description of the three methods follows.
Comparable sales are defined as “sales from a willing seller to a willing
buyer of similar property in the vicinity at or about the same time” as the
property being valued. United States v. 320.0 Acres of Land, 605 F.2d 762, 798
(5th Cir. 1979) (quoting United States v. Trout, 386 F.2d 216, 223 (5th Cir.
1967)). Our court has explained:
As the definition indicates, comparability is largely a
function of three variables: characteristics of the
properties, their geographic proximity to one another,
and the time differential. For any particular [valued]
property, there may be an entire spectrum of
comparable open market sales: from almost
simultaneous sales of adjoining, virtually identical
property to sales of such dissimilar and distant
properties occurring so long ago that they are not in any
sense of the term “comparable” sales. Generally, the
more comparable a sale is, the more probative it will be
of the fair market value of the . . . property [at issue].
In most cases, of course, there are no open market sales
“ideally” comparable (i.e., virtually identical
characteristics, immediate vicinity, and within a short
time of the [date on which property at issue was
valued]), but instead an assortment of sales that are
only reasonably comparable in all or several respects.
Sound and just trial practice is to admit as many of the
“most comparable” sales available as is necessary to
fairly permit each side to present its argument of fair
market value for the [fact-finder’s] consideration.
Id. (footnotes omitted).
The income method involves analyzing data from comparable properties
to determine the property’s earnings capacity, operating expenses, and rates of
capitalization and discount. This information is combined with any “reasonably
clear and appropriate evidence” of future income potential and expenses to
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estimate the property’s value. USPAP Standards Rule 1-4(c); see also United
States v. 6.45 Acres of Land, 409 F.3d 139, 143 n.6 (3d Cir. 2005) (explaining that
the “income capitalization approach” determines fair market value by dividing
the “net income that a tract of land can produce in a typical year” by “a factor
called a ‘capitalization rate’”, which is a “ratio representing the relationship
between the land’s annual net income and its value”).
Finally, for the replacement-cost method, the appraiser first determines
the underlying property’s value, as if there were no improvements on it. He then
estimates the amount it would cost to construct the property’s improvements as
new. Next, he determines the present worth of the improvements, as currently
depreciated. Finally, to reach a replacement-cost valuation, he subtracts that
present worth from the as-new cost of the improvements. The resulting figure
is the replacement-cost value. USPAP Standards Rule 1-4(b); see also N.
Natural Gas v. United States, 470 F.2d 1107, 1110-11 (8th Cir. 1973) (explaining
replacement-cost method and approving its use).
The tax court explained why it rejected Roddewig’s use of the replacement-
cost and income methods. It ruled the replacement-cost method is of little use
when reproduction of the property is unlikely. Whitehouse Hotel, 131 T.C. at 147
(citing United States v. Toronto, Hamilton & Buffalo Navigation Co., 338 U.S.
396, 403 (1949)). The court stated it was unconvinced by Whitehouse that “the
owners of the building would want to, or would be required to, reconstruct that
100-year-old structure if it were destroyed”. Id. Further, the court explained
that, even if the building would be replaced if destroyed, reliance on the
replacement-cost method would still be inappropriate because it “is a poor
indicator of value when estimating the value of older, special purpose buildings,
since any estimate of obsolescence . . . is subjective”. Id. (citing Crocker v.
Comm’r, T.C. Memo 1998-204, 1998 WL 294052 (8 June 1998)).
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In rejecting the income method, the court noted: while that method is
favored when comparable sales are unavailable, it is an unsatisfactory valuation
method where the property has no track record of earnings that provides past
income data to evaluate. Id. at 153 (citing Duncan Indus., Inc. v. Comm’r, 73
T.C. 266, 280 n.13 (1979); Pittsburgh Terminal Corp. v. Comm’r, 60 T.C. 80, 89
(1973)). Without such information, the appraiser must rely on data from similar
properties, which reduces the appraisal’s reliability. Id. (citing Ambassador
Apartments, Inc. v. Comm’r, 50 T.C. 236, 243 (1968)).
Here, there was no track record of earnings because, at the time of the
donation, the hotel had yet to be constructed. Any post-construction earnings
data had no bearing on Roddewig’s income-method valuation, which limited
itself to information available at the valuation date, 29 December 1997.
Therefore, it relied on income as projected on that date.
Based on these findings, the tax court found the comparable-sales method
to be “the most reliable indicator of value”. Id. at 147-56. Because, as discussed
infra, we must remand for re-valuation, we do not reach whether the tax court
erred in rejecting the income and replacement-cost methods. On remand, the
tax court should reconsider all three methods, including which may be
applicable, in determining the easement’s value.
3.
According to Whitehouse, the tax court miscomprehended the highest and
best use of the Maison Blanche and Kress buildings, both owned by Whitehouse
on the date of donation of the easement. Whitehouse contends: such use is as
a Ritz-Carlton, instead of as a non-luxury, hotel; and, the easement prohibited
construction on top of the Kress building, thereby eliminating the possibility of
constructing 60 additional hotel rooms.
“As a general rule, [as noted,] valuation of property for federal tax
purposes is a question of fact that we review for clear error.” Adams, 218 F.3d
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at 385-86 (citing Estate of Bonner v. United States, 84 F.3d 196 (5th Cir. 1996)).
As discussed supra, to the extent, however, the finding is “predicated on a legal
conclusion regarding the rights inherent in the property, its valuation is subject
to de novo review”. Id. at 386 (citing Fuji Photo Film Co. v. Shinohara Shoji
Kabushiki Kaisha, 754 F.2d 591, 595 & n.4 (5th Cir. 1985)) (emphasis added).
A property’s highest and best use is the “reasonable and probable use that
supports the highest present value”. Frazee v. Comm’r, 98 T.C. 554, 563 (1992)
(quoting Symington v. Comm’r, 87 T.C. 892, 897 (1986)). “To determine what
uses are reasonable and probable, we focus on ‘[t]he highest and most profitable
use for which the property is adaptable and needed or likely to be needed in the
reasonably near future.’” Id. (quoting Olson v. United States, 292 U.S. 246, 255
(1934)) (alteration in Frazee); see also 26 C.F.R. § 1.170A-14(h)(3)(ii) (noting:
where, as here, the tax court employs before-and-after valuation, “the fair
market value of the property before contribution of the conservation restriction
must take into account not only the current use of the property but also an
objective assessment of how immediate or remote the likelihood is that the
property, absent the restriction, would in fact be developed”).
Needless to say, finding a property’s highest and best use is a critical
aspect for determining its fair market value. Olson, 292 U.S. at 255 (holding
highest and best use is to be considered “to the full extent that the prospect of
demand for such use affects the market value”); Frazee, 98 T.C. at 563 (“Property
should be valued to reflect the highest and best use of the property on the date
of the valuation.” (citing Symington, 87 T.C. at 896; Stanley Works, 87 T.C. at
400)). The key inquiry is what a hypothetical willing buyer would consider in
deciding how much to pay for the property. 320.0 Acres, 605 F.2d at 781. In
other words, “[i]f a hypothetical buyer would not reasonably have taken into
account that potential use in agreeing to purchase the property, such potential
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use should not be considered in valuing the property”. Stanley Works, 87 T.C.
at 402 (citing 320.0 Acres, 605 F.2d at 781).
a.
As stated, Whitehouse contends the highest and best use of the Maison
Blanche and Kress buildings was as a Ritz-Carlton (per Roddewig’s opinion), not
as a non-luxury hotel (per Argote’s opinion). The tax court did not explicitly rule
on this issue, but it did not accept Roddewig’s opinion on highest and best use.
Accordingly, on this issue, the tax court’s decision can be construed in two ways:
even if the highest and best use was as a Ritz-Carlton, that had no effect on the
property’s value; or, a non-luxury hotel was the highest and best use. See
Whitehouse Hotel, 131 T.C. at 159-60.
The tax court is required to “aid the appellate court by affording it a clear
understanding of the ground or basis of [its] decision”. Curtis v. Comm’r, 623
F.2d 1047, 1050 (5th Cir. 1980) (quoting Golf City, Inc. v. Wilson Sporting Goods
Co., 555 F.2d 426, 432 (5th Cir. 1977)); see also Copeland v. Wasserstein, Perella
& Co., 278 F.3d 472, 485 (5th Cir. 2002) (remanding for “more detailed findings
. . . including a fuller explication of the court’s ruling”); Barrientes v. Johnson,
221 F.3d 741, 763 (5th Cir. 2000) (noting: “where a district court fails to make
necessary findings, a remand for entry of such findings is the usual recourse for
an appellate court” (alteration omitted)); Bell v. City of Dallas, Tex., 81 F. App’x
490, 491 (5th Cir. 2003) (unpublished) (“If we are unable to determine the basis
for a district court’s ruling, we cannot review it and must remand for a more
specific determination.” (citing Curtis, 623 F.3d at 1053)). Because the tax
court’s opinion can be read in either of the two above-described ways, we are left
with findings that are “inadequate to permit us to fairly review [the tax court’s]
ultimate conclusions”. Curtis, 623 F.2d at 1053. Moreover, because we must
remand for re-valuation, this highest-and-best-use issue necessarily comes back
into play and must be reconsidered.
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Along this line, to be reconsidered on remand is the tax court’s rejecting
the idea that luxury-hotel developers operate in a national marketplace—this is
the theory upon which Roddewig relied to justify his price-point adjustments.
See Whitehouse Hotel, 131 T.C. at 160. Roddewig explained: because luxury-
hotel developers “have their own criteria for rates of return, and they don’t price
[a property] based on what their competition in the local market is willing to pay
and go a dollar more”, luxury-hotel developers are willing to pay more than the
local market demands. In the light of this theory, Roddewig relied, in part, on
comparable sales from properties located in other cities, including hotels in New
York City, Washington, D.C., Boston, and Cleveland.
The tax court disagreed that luxury-hotel developers would pay more than
local market price: “Without evidence of th[is] phenomenon more convincing
than Mr. Roddewig’s testimony, we will not take the risk of inaccuracy that
those adjustments carry”. Id. The tax court’s reasoning for rejecting this
national-marketplace basis would seem to extend to its decision not to consider
the nonlocal comparables utilized by Roddewig, any use of which also represents
diminished reliance on the local market in favor of data from the national
market. Again, this point is to be reconsidered on remand.
As discussed, it is also possible to interpret the tax court’s rejection of
Roddewig’s adjustments in a second way: as an implicit agreement with Argote’s
opinion that the Maison Blanche and Kress buildings’ highest and best use was
as a non-luxury, not a Ritz-Carlton, hotel. In that case, the relevant question
would be whether there was a “reasonable possibility” that the property would
be developed into a non-luxury hotel. See Olson, 292 U.S. at 256-57.
Along that line, plans for financing redevelopment into a Ritz-Carlton
were already in place before the easement was granted on 29 December 1997.
For example, Whitehouse’s contract to build the Ritz-Carlton hotel was signed
on 19 February 1997. In addition, Whitehouse procured architectural plans for
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conversion into the Ritz-Carlton in the summer of that year. The agreement
with Ritz-Carlton and the architectural plans contemplated converting both the
Maison Blanche and Kress buildings into the hotel.
On the other hand, Argote testified that he had seen hotel projects in
similar degrees of development never come to fruition. As stated, he opined that
a higher and better use for the property would be as a non-luxury hotel.
Although Argote’s opinion seems implausible—the extent to which
redevelopment was underway renders highly unlikely his conjecture that the
project might never come to fruition—we are not faced with the task of reviewing
the tax court’s ruling on this point (if indeed it made one). Rather, on remand,
the tax court will have the opportunity to “make the subsidiary findings
necessary to render its ultimate conclusions comprehensible, or, if necessary, to
modify its conclusions to conform to the evidence”. Curtis, 623 F.2d at 1054.
b.
Whitehouse next contends the tax court erred in failing to consider the
effect of the historic-preservation facade easement on the contiguous Kress
building. The tax court considered only whether the easement burdened the
Kress building; concluding it did not, the court found there was no difference
between the potential use of the building before and after the conveyance of the
easement. See Whitehouse Hotel, 131 T.C. at 131-35; see also id. at 161 (“We
shall disregard the Kress Building in our calculations because Mr. Roddewig
erred in believing that it was burdened by the servitude.”).
As noted, for valuation, factual findings are reviewed for clear error; legal
conclusions, de novo. In re Stembridge, 394 F.3d at 385. The easement’s effect
on property rights in the Kress building is, of course, a legal question, reviewed
de novo and with applicable state law—in this instance, Louisiana—being
applied. Succession of McCord, 461 F.3d at 623 (“Where a question of fact, such
as valuation, requires legal conclusions, this Court reviews those underlying
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legal conclusions de novo. . . . The determination of the nature of the property
rights transferred is a question of state law that this Court reviews de novo.”
(citing Adams, 218 F.3d at 386)).
Several threshold matters are clear: Whitehouse owned both the Maison
Blanche and Kress buildings on the day the easement was conveyed; because of
the easement, Whitehouse could not build on top of the Kress building; the
easement prohibits any future owner of the Maison Blanche building from
obscuring its wall adjacent to the Kress building and, therefore, any successor
who, like Whitehouse, owned both the Maison Blanche and Kress buildings could
not build on top of the Kress building; any successor who separately owned the
Kress building would not be bound by the easement; and, the condominium
regime, established the day after conveyance of the easement, combined the
Maison Blanche and Kress buildings into a single, indivisible unit of property.
In other words, the easement conveys a perpetual real right that burdens
the Maison Blanche building. See L A. R EV. S TAT. A NN. § 9:1252 (allowing “owner
of immovable property [to] create a perpetual real right burdening the whole or
any part thereof of that immovable property, including . . . the facade” for
“charitable[] or historic purposes”). The tax court was correct in ruling that the
easement does not burden the Kress building in the same manner because the
easement does not mention the Kress building. See Whitehouse Hotel, 131 T.C.
at 131-35. The tax court’s analysis ended there.
The easement’s not burdening the Kress building does not, however,
render that building irrelevant for easement-valuation purposes, because the
relevant determination is the effect of the easement on the fair market value of
the entire contiguous property owned by Whitehouse:
The amount of the deduction in the case of a charitable
contribution of a perpetual conservation restriction
covering a portion of the contiguous property owned by
a donor . . . is the difference between the fair market
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value of the entire contiguous parcel of property before
and after the granting of the restriction.
26 C.F.R. § 1.170A-14(h)(3)(i) (emphasis added); see also Browning, 109 T.C. at
316 (“[For] a charitable contribution of a perpetual conservation restriction
covering a portion of the contiguous property owned by a donor, . . . the amount
of the deduction . . . is the difference between the fair market value of the entire
contiguous parcel of property before and after the granting of the restriction.”
(emphasis added)). Accordingly, determining the easement’s effect on the fair
market value of the Kress building—contiguous property owned by Whitehouse
at the time of the donation—is crucial for determining the fair market value of
the easement. This is true regardless of the easement’s not burdening the Kress
building in the same way it burdens the Maison Blanche building, via the
earlier-cited Louisiana law, § 9:1252.
To determine the easement’s effect on the fair market value of the
contiguous Kress building, owned by Whitehouse, the relevant inquiry is
whether, when the easement was conveyed, it was reasonable and probable that
a hypothetical buyer would determine the amount he would pay for the Maison
Blanche and Kress buildings, including in the light both of the pending
condominium agreement’s combining the two properties into one legal unit and
of the pending development’s combining the two properties into one functional
unit. See Frazee, 98 T.C. at 563 (stating highest and best use is the “reasonable
and probable use that supports the highest present value” (quoting Symington,
87 T.C. at 897)); 320.0 Acres, 605 F.2d at 781 (noting fair market value depends
on the potential uses that a hypothetical purchaser will consider when
evaluating how much to pay for the property).
This is important because, if the hypothetical buyer would not have
contemplated the legal and functional combination of the two buildings—based
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on, for example, the fact that the buildings were not legally or functionally
combined on the date of donation—then the easement would have a different
effect on the Kress building’s fair market value. But, if the hypothetical buyer
would have considered the buildings’ pending legal and functional combination
and the easement’s resulting effect on the opportunity to build on top of the
Kress building, then that should have been taken into account in determining
fair market value.
As noted, the tax court limited its inquiry to whether the easement legally
bound the Kress building; it merely considered a snapshot of the property’s legal
status as at the date of the conveyance. Noting that the easement does not
mention the Kress building, the tax court ruled: Whitehouse had “failed to show
how [its easement contractual] promise binds anyone who does not undertake
it; e.g., a person acquiring ownership of the Kress Building by eminent domain
or as a result of the owner of the building’s bankruptcy”. Whitehouse Hotel, 131
T.C. at 135 (emphasis added).
But, the analysis should not have ended here: the tax court should have
considered the easement’s effect on fair market value in the light of the
imminent legal and functional consolidation of the two buildings. In other
words, the tax court was correct that, because, on the day of donation, the
condominium regime was not yet in effect, a successor could have purchased the
Kress building separately that day and would not have been bound by the
easement; but, as a matter of valuation, the tax court erred by not considering
the effect on market value of the buildings’ pending combination.
To that end, a hypothetical buyer would have contemplated the pending
combination of the buildings in deciding on a purchase price. Along that line,
both buildings were then owned by Whitehouse. Regarding the legal
combination of the buildings (i.e., the condominium regime), it is implausible
that a hypothetical buyer of the Kress building on 29 December 1997 would have
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no knowledge of the plan to combine the buildings into a single piece of property
via a condominium regime imposed the next day. (When questioned at oral
argument here, counsel for Whitehouse explained the condominium regime was
recorded after the facade donation to comply with “other provisions in the
applicable treasury regulations” that required “the facade donation actually be
recorded in order to prime the construction mortgage”.)
The tax court found that the post-conveyance timing of the condominium
declaration rendered it either minimally relevant or irrelevant to the valuation.
Whitehouse Hotel, 131 T.C. at 134 n.9 (noting its decision not to consider the
condominium declaration was “in part” because it was recorded the day after the
easement conveyance, but not providing any other reasons). The tax court erred
in failing to consider the effect on fair market value of the pending condominium
regime’s precluding any future legal separation between ownership of the two
buildings.
Likewise, regarding the functional combination of the two buildings, a
prospective buyer would have been aware that the renovation plans, which were
already in place, involved the Kress building’s containing, among other things,
the porte cochere and air-conditioning supply units necessary to operate a hotel
in the Maison Blanche building. For example, the porte cochere was required for
operation of a Ritz-Carlton (luxury) hotel.
That hypothetical buyer would have realized that the effect of this
functional combination of the buildings into a single unit was to preclude sale
of one building separately from the other. It would be clear to him that, as a
practical matter, the buildings only remain functional while under common
ownership.
Thus, because, from the perspective of the hypothetical buyer, any future
owner of the Kress building would also own the Maison Blanche building, that
future owner would be precluded from constructing rooms that obscured the
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Maison Blanche building’s facade. This loss of opportunity would reduce the
amount a willing buyer would pay for the parcel, and thereby reduce its fair
market value.
Therefore, regardless of the easement’s not burdening the Kress building,
it affected the fair market value of the Maison Blanche and Kress buildings.
Accordingly, the tax court erred in not determining that effect. Regarding that
effect, Commissioner presents the following two erroneous contentions.
First, Commissioner asserts Roddewig failed to value all contiguous
property because he did not consider either the Kress garage, which is
contiguous to the Kress building, or the garage located across Iberville Street,
also owned by Whitehouse. On the other hand, at oral argument here,
Commissioner appeared to concede that the tax court erred when it failed to
consider the easement’s effect on all contiguous property. When questioned
about that apparent concession, counsel for Commissioner stated: Whitehouse
did not provide sufficient proof regarding the parking garages; and, therefore,
the tax court was not presented with sufficient evidence to consider the
easement’s effect on all contiguous property.
Roddewig testified, however, that neither garage was contiguous to the
burdened Maison Blanche building. Further, he testified that, even if the Kress
garage were considered contiguous because it is contiguous to the Kress
building, which is contiguous to the Maison Blanche building, the easement
would not affect that garage’s before-and-after value because it was already built
to its highest potential. (Because Argote did not include the garage in his
valuation, he presumably agreed that it did not affect the easement’s value.) In
the light of this testimony, even if the Kress garage was contiguous, the tax
court’s not considering it does not present the same legal concerns as its not
considering the Kress building.
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Second, regardless of the Maison Blanche and Kress buildings’ being
combined, Commissioner contends the wall of the Maison Blanche building that
rises above the Kress building is not one the easement burdens. Commissioner
points to the omission of this wall from photographs, attached to the easement,
that were included to determine the easement’s coverage “[i]n the event of
uncertainty”. Whitehouse Hotel, 131 T.C. at 179 (easement document as
appendix to opinion). There is not, however, any uncertainty on this point in the
easement’s language. The wall is unambiguously included in the easement’s
definition of the covered “exterior surfaces” of the Maison Blanche building: “the
exterior walls of the Lower Stories which are visible from Canal and Dauphine
Streets . . . [and] the the exterior walls of the Upper Stories which are visible
from Canal, Burgundy, Iberville, and Dauphine Streets”. Because this language
leaves no “doubt” regarding which walls are protected, there is no reason to look
to the photographs or invoke the statutory-construction principle of resolving
doubt in favor of the servient estate. See La. Civ. Code Ann. art 730 (“Doubt as
to the existence, extent, or manner of exercise of a predial servitude shall be
resolved in favor of the servient estate.”).
In sum, the tax court erred in declining to consider the Maison Blanche
and Kress buildings’ highest and best use in the light of both the reasonable and
probable condominium regime and the reasonable and probable combination of
those buildings into a single functional unit, both of which foreclosed the
realistic possibility, for valuation purposes, that the Kress and Maison Blanche
buildings could come under separate ownership. This combination affected the
buildings’ fair market value.
The effect of the easement’s impact on the property’s fair market value,
such as prohibiting building 60 additional rooms on top of the Kress building, is
a question of fact for the tax court to decide on remand. Therefore, we vacate its
valuation and remand for reconsideration of the easement’s value. As discussed
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supra, in making this valuation on remand, the tax court should, among other
things, reconsider the experts’ reports and valuation methods (including, inter
alia, using non-local comparables) and their conclusions regarding highest and
best use as a luxury or non-luxury hotel.
B.
Finally, Whitehouse claims the tax court erred in upholding the gross
undervaluation penalty. Obviously, our vacating the tax court’s decision
includes the penalty ruling’s being vacated. And, subject to the tax court’s
valuation decision on remand, it may be that the penalty issue will be moot. In
the alternative, the penalty may be at issue in the light of that decision.
Accordingly, consistent with the constitutional prohibition against
advisory opinions, it is questionable whether we should reach this issue.
Without deciding any issues related to a possible penalty, but in the interest of
preserving judicial resources, we provide the following discussion to guide the
tax court should the penalty be at issue on remand. See, e.g., Berger v. Compaq
Computer Corp., 257 F.3d 475, 482 (5th Cir. 2001) (vacating class certification
because district court erred in shifting burden of proof for seeking class
certification to party not seeking certification, but providing guidance on
adequacy of class representative for district court on remand).
In challenging the penalty, Whitehouse contends the tax court should have
found it satisfied both requirements of the reasonable-cause exception under 26
U.S.C. § 6664(c)(2). Pursuant to that exception, a gross undervaluation penalty
shall not be assessed if: “(A) the claimed value of the property was based on a
qualified appraisal made by a qualified appraiser, and (B) in addition to
obtaining such appraisal, the taxpayer made a good faith investigation of the
value of the contributed property”. 26 U.S.C. § 6664(c)(2) (emphasis added).
In ruling on the merits of a reasonable-cause-exception claim, which, as
stated, we are not doing here, reviewed for clear error is the tax court’s
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determination of whether the elements that constitute “reasonable cause” were
proven; reviewed de novo is its determination of “what elements must be
present to constitute ‘reasonable cause’”. Roberts v. Comm’r, 860 F.2d 1235,
1241 (5th Cir. 1988) (citing United States v. Boyle, 469 U.S. 241, 250 n.8 (1985)).
The tax court held that, although § 6664(c)(2)’s first provision (qualified
appraisal) had been met (as conceded by Commissioner), the second (good faith
investigation) had not. 131 T.C. at 174.
The testimony by Drawbridge, the representative for Whitehouse, was the
tax court’s primary reason for rejecting Whitehouse’s proof of its good faith
investigation. Id. Drawbridge testified that, in determining the easement’s
value, Whitehouse relied, inter alia, on two appraisals: the one by Cohen, and
the one by Revac, Inc. The Cohen appraisal was described supra. The Revac
post-donation appraisal, dated 14 January 1998, was obtained in connection
with a mortgage on the property.
The Revac appraisal appraised the proposed Ritz-Carlton hotel, which
included some or all of the Maison Blanche building, the Kress building, and the
Kress parking garage. It found the following fair market values for the property:
“as is” on 4 December 1997, $35 million; upon prospective completion of
construction, $125 million; and upon reaching stabilized occupancy, $135
million.
The Revac appraisal was admitted into evidence solely to determine the
applicability vel non of an underreporting penalty. Drawbridge also testified
that Whitehouse relied on the professional tax advice it received from its
auditors and legal counsel.
The tax court found this insufficient. First (and most importantly), the tax
court refused to credit Drawbridge’s testimony because he did not become asset
manager of Whitehouse until 2000, two years after Whitehouse submitted its
1997 Form 1065 (“U.S. Return of Partnership Income”). 131 T.C. at 174.
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(Drawbridge became the hotel’s asset manager through his position as executive
vice president of asset management for Quorum Hotels and Resorts (QHR).
QHR served as general partner and tax-matters partner of Whitehouse through
QHR Holdings-New Orleans, Ltd., a named party to this action.) Second, the tax
court found that the Revac appraisal did not speak to the value of the easement.
Id. at 174-75. Having discredited the evidence Whitehouse submitted on this
issue, the court ruled that Whitehouse failed to meet its burden of proof for
entitlement to the reasonable-cause exception. See Higbee v. Comm’r, 116 T.C.
438, 446 (2001) (noting petitioner has burden to prove reasonable cause).
Whitehouse contends the tax court erred by discrediting Drawbridge’s
testimony. Although Whitehouse concedes Drawbridge lacked personal
knowledge about the advice and counsel Whitehouse received in preparing its
1997 Form 1065, it contends that, because Drawbridge testified as a
representative of an entity (which, of course, cannot speak for itself), Drawbridge
was competent to testify on matters within the limited partnership’s knowledge.
Such knowledge includes whether Whitehouse relied on legal and accounting
advice in submitting its tax form.
Under Brazos River Authority v. GE Ionics, Inc., 469 F.3d 416, 434 (5th
Cir. 2006), where a witness “acts as the agent for the corporation, he should be
able to present [the corporation’s] subjective beliefs . . . as long as those beliefs
are based on the collective knowledge of [the corporation’s] personnel”. In
Brazos, defendant corporation designated its employee to be deposed as its
representative under Federal Rule of Civil Procedure 30(b)(6). Id. at 432. The
employee was then called to testify at trial, and defendant objected pursuant to
Federal Rule of Evidence 602, which requires a witness to have a basis of
personal knowledge for his testimony. Id. The trial court sustained defendant’s
objections and agreed that the witness lacked personal knowledge. Id. Our
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court reversed, holding the testimony should not have been so limited. Id. at
432.
Here, of course, the tax court did not exclude Drawbridge’s testimony per
se, but instead treated the issue as one of credibility. Regardless, if the penalty
is at issue on remand, this determination must be reconsidered. Under our
court’s precedent, Drawbridge may have been competent and credible as
Whitehouse’s representative to testify to facts within the limited partnership’s
knowledge. Such facts include whether Whitehouse relied on professional advice
in filing its 1997 Form 1065. Drawbridge testified that it did.
Further, when Drawbridge testified, he had the 1997 Form 1065 before
him. That form, which was admitted into evidence, states that it was prepared
by Whitehouse’s financial auditors. It may be that this is direct evidence
Whitehouse relied on professional advice in the preparation of the tax form, and
such preparation required evaluation of the reasonableness of the stated value
of the easement. Cf. United States v. Baisden, 2007 WL 1087162, at *17 (E.D.
Cal. 10 April 2007) (issuing preliminary injunction enjoining a certified public
accountant from preparing taxes where he had “engaged in conduct subject to
penalty under I.R.C. § 6701 by preparing federal tax returns for customers for
submission to the IRS containing items he knew would result in
understatements of customers’ tax liability”).
Should this penalty be at issue on remand, a question will be whether
Whitehouse met its burden of proof for reasonable cause.
To demonstrate reasonable cause, a taxpayer “must
show that he exercised ‘ordinary business care and
prudence.’” Treas. Reg. § 301.6651–1(c)(1). “When an
accountant or attorney advises a taxpayer on a matter
of tax law, such as whether a liability exists, it is
reasonable for the taxpayer to rely on that advice.”
Boyle, 469 U.S. at 251 . . . .
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New York Guangdong Finance, Inc. v. Comm’r, 588 F.3d 889, 896 (5th Cir.
2009). Given that Whitehouse offered proof that it relied on its accountants’ and
attorneys’ opinions of Cohen’s appraisal, a possible issue on remand is whether
Whitehouse needed to prove more to show reasonable cause. That is yet another
question for the tax court to address, if necessary, on remand.
III.
For the foregoing reasons, the tax court’s decision is VACATED and this
matter is REMANDED for further proceedings consistent with this opinion.
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No. 07-40651
GARZA, Circuit Judge, concurring in part.
I concur in Part I, Part II.A.1, Part II.A.3.b, and Part III of the court’s
opinion. The remaining parts of the court’s opinion, which describe and
characterize issues that we ultimately do not decide, are unnecessary to resolve
this case and have no bearing on the judgment. Federal courts are only
permitted to rule upon an actual “case or controversy,” and lack jurisdiction to
render merely advisory opinions beyond the rulings necessary to resolve a
dispute. See SEC v. Medical Committee for Human Rights, 404 U.S. 403, 407
(1972); Hayburn’s Case, 2 U.S. 408 (1792), as interpreted in Muskrat v. United
States, 219 U.S. 346, 351)353 (1911); see also 28 U.S.C. § 46(b), (c) (2010)
(stating that panels shall hear “cases and controversies”). Whether or not the
Tax Court finds the extended discussion helpful does not change the fact that it
is dicta and amounts to an impermissible advisory opinion.
36