Friedberg v. Comm'r

T.C. Memo. 2011-238

UNITED STATES TAX COURT

BARRY S. FRIEDBERG AND CHARLOTTE MOSS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9530-09. Filed October 3, 2011.

David J. Fischer and Kathleen Pakenham, for petitioners.

Marc Lee Caine, Rachel L. Schiffman, and Alex Shlivko, for

respondent.

MEMORANDUM OPINION

WELLS, Judge: The instant case is before the Court on the

parties’ cross-motions for partial summary judgment pursuant to

Rule 121.1 Respondent determined a deficiency of $1,321,250 and

1
Unless otherwise indicated, section references are to the
(continued...)
 - 2 -

a penalty pursuant to section 6662(h) of $528,500 with respect to

petitioners’ 2003 tax year. The issues we must decide are: (1)

Whether the appraisal report regarding the donation of a

conservation easement on historic residential property was a

“qualified appraisal” within the meaning of section 1.170A-

13(c)(3), Income Tax Regs.; (2) whether petitioners attached a

fully completed appraisal summary of the appraisal report to

their return, as required by section 1.170A-13(c)(2)(i)(B),

Income Tax Regs.; (3) whether the purported transfer of unused

development rights on the property was a valid transfer

permitting petitioners to deduct the donation of the development

rights pursuant to section 170(a) or whether the conservation

easement otherwise restricted the use of the development rights;

and (4) whether the donation of the conservation easement was

granted in perpetuity, as required for a qualified conservation

contribution pursuant to section 170(h).

Background

The facts set forth below are based upon examination of the

pleadings, moving papers, responses, and attachments.

Petitioners are husband and wife (hereinafter referred to

individually as Mr. Friedberg and Ms. Moss) who resided in New

York at the time they filed their petition.

1
(...continued)
Internal Revenue Code of 1986, as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
 - 3 -

The Subject Property

During 2002, Mr. Friedberg purchased a six-story residential

townhouse in New York City on East 71st Street between Park

Avenue and Lexington Avenue (the subject property) for

$9,400,000. The subject property has never been subject to a

mortgage during the time Mr. Friedberg has owned it. After Mr.

Friedberg purchased the subject property, petitioners paid

approximately $4 million to extensively renovate it. Ms. Moss is

an interior designer, and after the renovation, House and Garden

magazine published an article featuring her work on the subject

property.

The subject property is in Manhattan’s Upper East Side

Historic District. It was constructed during 1884 in the Queen

Anne style. On October 15, 2003, the National Park Service

determined that the subject property “contributes to the

significance of the * * * [Upper East Side Historic District] and

is a ‘certified historic structure’ for a charitable contribution

for conservation purposes in accordance with the Tax Treatment

Extension Act of 1980.” The subject property is not on a corner

lot and is adjacent to two other properties on the same block of

East 71st Street. Because of the length of the lot, it also

abuts two properties on Lexington Avenue to the east and one

property on East 70th Street to the south. All of those

properties are also within the Upper East Side Historic District.
 - 4 -

Solicitation From NAT

During 2003, the National Architectural Trust2 (NAT)

contacted Mr. Friedberg to ask him to donate an easement on the

subject property. Mr. Friedberg met with Sean Zalka (Mr. Zalka),

a representative from NAT, to discuss donating a facade easement.

After the meeting, Mr. Zalka sent Mr. Friedberg an email in which

he wrote:

Per our conversation, attached please find the following
materials for your review:

1. A revised profile of your estimated tax benefit, showing
the additional tax benefits available for the extinguishment
of the development rights on the site. The sheet labeled
‘Development Rights Retained’ shows your estimated tax
benefits using our standard easement document. According to
my calculations, your total tax deduction would increase to
$3.5 million from $1.43 million.

2. Additional language for insertion into our standard
easement document to extinguish the development rights. All
or a portion of the development rights may be extinguished.

As we discussed, the extinguishment of all or a portion of
the additional development rights on a property such as
yours (located within a 9 FAR zoning district) would provide
an additional tax deduction of 100% of the value of those
development rights. Recent appraisals of development rights
in the Upper East Side Historic District have come in at
$150 to $170 per square foot. With an estimated 13,800
square feet of development rights, you would receive an
additional tax deduction of $2,070,000 (at $150 PSF).

2
The National Architectural Trust has since changed its name
to “Trust for Architectural Easements”.
 - 5 -

Per zoning regulations, you have the right to develop a
building of 20,700 square feet on the above referenced site.
However, local landmark regulations strictly limit your
ability to do so. Although this footage is currently
undevelopable given the location of the property within a
landmark district, the IRS allows these deductions based on
the perpetuity of the easement versus the local landmark
restrictions, which are entirely discretionary and can be
changed at any time (although this is highly unlikely).

We are currently working with a number of property owners to
structure deductions of this kind. In order to substantiate
these deductions, we recommend the use of a particular
appraiser based in Pittsburgh who is the most highly
respected in the specialty field of lost development rights
appraisals. He would charge approximately $16,000 for a
property of this kind (versus $2,500 for a standard
appraisal). We would also need a zoning consultant to
determine the exact amount of development rights that
currently exist on the site.

Please let me know if you are interested in taking advantage
of this aspect of our program.

Mr. Zalka attached a spreadsheet to his email that provided an

estimate of the tax savings available to Mr. Friedberg should he

decide to donate to NAT the facade easement and development

rights for the subject property. Mr. Zalka’s spreadsheet read as

follows:

THE NATIONAL ARCHITECTURAL TRUST

Profile of Estimated Tax Benefit1

134 East 71st Street (Development Rights Extinguished)

Estimated Fair Market Value $ 13,000,000

Conservation Easement Value (11% of FMV)2 $ 1,430,000
Estimated Development Rights Value $ 2,070,000
(See Development Rights Analysis Worksheet)
Total Estimated Gross Tax Deduction $ 3,500,000
 - 6 -

Tax-Deductible Cash Donations $ 350,000
(10% of Gross Tax Deduction)
Appraisal $ 16,000
Lender Subordination Fee (if applicable)
Total Estimated Tax-Deductible Costs $ 366,000

Total Estimated Charitable Contribution $ 3,866,000
Tax Deduction

Total Estimated Federal, State and City $ 1,643,050
Income Tax Savings (42.5% Tax Bracket)

Total Estimated Cash Savings $ 1,277,050

1
For illustrative purposes only. Please consult your tax
advisor.
2
Actual figure determined by appraisal, typically 11% of FMV
for comparable properties.

After reviewing NAT’s materials, Mr. Friedberg decided to donate

to NAT a facade easement and all the development rights

associated with the subject property.

Mr. Ehrmann’s Appraisal Report

Mr. Friedberg followed NAT’s recommendation and engaged

Michael Ehrmann (Mr. Ehrmann) of Jefferson & Lee Appraisals,

Inc., based in Pittsburgh, to appraise the subject property.

Mr. Friedberg paid $16,000 to Jefferson & Lee Appraisals, Inc.,

for the appraisal. Mr. Ehrmann visited the subject property and

conducted an inspection during November 2003. Mr. Ehrmann

prepared an appraisal report at some time after he had inspected

the subject property. The appraisal report states that the “as

of” date was variously October 5, 2003; November 13, 2003; or

November 15, 2003. Mr. Ehrmann signed, but did not date, the
 - 7 -

“certification of value” on page 3 of the appraisal report. The

cover letter accompanying the report is dated both December 5 and

December 15, 2003, but Mr. Ehrmann did not sign or date the cover

letter. The appraisal report includes the address for Mr.

Ehrmann’s firm, Jefferson & Lee Appraisals, Inc., and it lists

the address of the subject property.

The appraisal report states that it “has been prepared for

tax purposes, in order to determine the loss of value due to a

facade easement to be donated on the subject property.” The

appraisal report includes a number of pages of background on the

economic, social, cultural, environmental, and political forces

that influence property values in New York City. With regard to

the effect of political forces, including local zoning laws, on

property values, Mr. Ehrmann wrote:

Property values are influenced by government, political
and legal actions which effect [sic] the market forces of
supply and demand. * * * The extent and nature of local
zoning, building and health codes are also contributing
factors to land use as it [sic] affects the value of real
estate. National, state and local fiscal policies affect
property values and special legislation such as rent control
laws, statutory redemption laws, forms of ownership,
homestead exemption laws, environmental legislation and
legislation affecting mortgage lending institutions may
influence general property values.

On the basis of the lot’s location in an R9X zoning district,

permitting a “floor area ratio”3 (FAR) of 9.0 for residential

3
New York City’s Zoning Resolution provides the following
definition for “floor area ratio”:
(continued...)
 - 8 -

property, Mr. Ehrmann calculated that the lot had a maximum

development potential of 20,786.94 square feet, approximately

13,731 square feet of which was unused.4 Mr. Ehrmann wrote:

Although the underlying zoning would permit expansion
of the subject property up to the maximum development
potential, I believe that the New York City Landmarks
Preservation Commission, which has authority over the Upper
East Side Historical [sic] District, would block such an
expansion. However, the subject owner clearly has the right
to transfer/see [sic] these development rights for use on
neighboring blocks within the Historical District.
Furthermore, I believe that developments utilizing
Transferable Development Rights (TDR) would [be] feasible in
this area, particularly along Lexington Avenue.

New York statutes define transfer of development rights
(TDR) as “the process by which development rights are
transferred from one lot, parcel, or area of land in a
sending district to another lot, parcel, or area of land in
one or more receiving districts.” * * *

In many TDR programs, the zoning provisions applicable
to the sending district are amended to reduce the density at
which land can be developed. While losing their right to
develop their properties at the formerly permitted
densities, property owners in the sending district are
awarded development rights. These development rights are

3
(...continued)
“Floor area ratio” is the total floor area on a zoning lot,
divided by the lot area of that zoning lot. If two or more
buildings are located on the same zoning lot, the floor area
ratio is the sum of their floor areas divided by the lot
area. (For example, a zoning lot of 10,000 square feet with
a building containing 20,000 square feet of floor area has a
floor area ratio of 2.0, and a zoning lot of 20,000 square
feet with two buildings containing a total of 40,000 square
feet of floor area also has a floor area ratio of 2.0).

New York, N.Y., Zoning Resolution sec. 12-10 (2011).
4
Respondent accepts those numbers as accurate for purposes
of these motions.
 - 9 -

regarded as severable from the land ownership and
transferable by their owners. * * *

The appraisal report then describes different aspects of

transferable development rights programs in general, without any

reference to the particular program implemented in New York City.

Mr. Ehrmann found that the “sales comparison approach” was

the most appropriate valuation method for estimating the market

value of the subject property before and after the donation. He

wrote: “In the following sections of this report, I have

estimated the market value of the subject property both before

and after donation of the proposed easement utilizing the Sales

Comparison Approach to value.” Mr. Ehrmann used the following

sales to estimate the before value of the subject property:

Square Price Per Adjusted Historic
Date Address Sale Price Feet Square Foot $/Sq Ft District?

4/15/03 36 East 67th St $9,750,000 16,235 $1,216.51 $1,655.80 Yes
3/26/03 631 Park Ave 9,650,000 5,143 1,876.34 1,778.20 Yes
1/17/03 151 East 72d St 8,187,500 5,885 1,391.25 1,701.13 No
1/15/03 123 East 73d St 10,250,000 8,625 1,188.41 1,775.24 Yes
8/26/02 54 East 92d St 9,000,000 4,320 2,083.33 2,595.79 No
6/17/02 10 East 87th St 8,200,000 8,791 932.77 1,609.16 No
5/6/02 46 East 69th St 10,250,000 8,500 1,205.88 1,755.77 Yes
2/16/02 20 East 73d St 17,000,000 9,345 1,819.15 2,281.21 Yes
2/14/02 10 East 75th St 8,250,000 8,930 923.85 1,527.13 Yes

Mr. Ehrmann adjusted those sale prices to take into account

differences between those properties and the subject property due

to the following factors: Time of sale; location; condition of

the property; size; and whether the property included a finished

basement. Although the properties were subject to different

zoning, Mr. Ehrmann did not make any adjustments because, he
 - 10 -

wrote: “I do not believe that the varying zones have an impact

on subject value.” After making all of his adjustments, Mr.

Ehrmann averaged the adjusted prices and arrived at $1,853.27 per

square foot, which he rounded to $1,855 and used as his estimate

for the value of the subject property as of the appraisal date.

On the basis of the subject property’s gross floor area of 7,056

square feet, Mr. Ehrmann estimated that the subject property’s

total value was $13,090,000.

In addition to estimating the subject property’s fair market

value, Mr. Ehrmann sought to appraise the development rights that

“could be transferred to a nearby property s [sic] as TDRs.” To

do so, he identified five transfers involving development rights

on the east side of Manhattan. Three of the five transfers

involved the sale of development rights by themselves; the other

two involved the sale of an entire tract that included

development rights previously acquired. Mr. Ehrmann calculated

the price per FAR foot for each of the sales and then averaged

those figures to reach an average of $154.40 per FAR foot. He

then considered some general categories of adjustments, including

time, location, size, zoning, and historic restrictions. With

regard to historic restrictions, he wrote:

The subject is part of the Upper East Side Historic
District, with significant historic restrictions. None of
the previous improvements on the comparable sites had a
similar status. Furthermore, there do not appear to be
historically protected properties in the immediate
vicinities of the TDR comparables. As discussed previously,
 - 11 -

the subject TDRs can only be utilized in a limited
geographic area near the site. However, the TDRs
transferred to the comparable properties do not appear to
have had the same restriction.

I believe that the restrictions on the subject TDRs
make these development rights somewhat less valuable than
the apparently unrestricted rights purchased in the
comparable transactions.

Mr. Ehrmann’s comments reflect the fact that none of the other

sales he considered was in a historic district. The average

price per FAR foot of the comparable sales reported by Mr.

Ehrmann was $154.40. However, Mr. Ehrmann estimated that the

value of the unused development rights on the subject property

was $170 per FAR foot. He explained his reasoning as follows:

I have identified five adjustment factors applicable to
the TDR comparables. Three of the factors -- time,
location, and size of the TDR -- support upward adjustments
of a number of the comparable unit prices. The two other
factors -- zoning and landmark limitations -- support
downward adjustments of all of the comparable unit prices.

TDR transactions are complex. I have not made specific
adjustments of each comparable for each adjustment factor
discussed above. However, based on the overall adjustments,
I estimate that the value of the TDRs on the subject
property as of $170.00 per FAR foot.

Mr. Ehrmann calculated that the total value of the unused

development rights associated with the subject property was

$2,335,000. He then added that value to his before estimate of

the value of the subject property to arrive at a total value for

the subject property of $15,425,000.

The second half of the appraisal report provides an estimate

of the value of the subject property after the facade easement.
 - 12 -

In an introduction, Mr. Ehrmann explained that there are several

reasons property values are negatively affected by facade

easements. One of the factors he listed was “the loss of the

right to develop the property up to the maximum density allowed

under the subject zone.” Other factors included potentially

increased maintenance costs, loss of flexibility in changing

exterior design, and the inability of future owners to use the

tax advantages from an easement contribution. Mr. Ehrmann noted:

The best measure of the impact of these elements on
property values is the market place [sic]. I have been able
to identify a number of examples of the impact of easements
on properties in both New Orleans and Washington, two cities
where facade easements have been most actively used.

Mr. Ehrmann provided six examples of sales of eased properties in

Washington, D.C., during the mid-1980s and two examples of

transactions involving eased properties in New Orleans during the

mid-1990s.

Mr. Ehrmann constructed the following table to summarize his

research on comparable sales involving facade easements:

Property # Easement Loss

1 27.9%
2 18.3%
3 8.9%
4 18.6%
5 22.5%
6 8%
7 30-40% increase in renovation costs
8 11+%

The average facade “easement loss” of the six sales of eased

properties (i.e., properties 1 through 6, the Washington, D.C.,
 - 13 -

sales) was 17.4 percent. However, Mr. Ehrmann estimated that the

facade easement on the subject property decreased its value by 11

percent. He provided the following analysis to explain his

reasoning:

The comparable data shows estimated losses ranging from
8% to 27.9%. The residential properties had losses
ranging from 8% to 22.5%. Most of the examples that I have
identified took place during the 1980s, when the facade
easement programs in both Washington and New Orleans were
relatively new. Comparables #7 and #8 are based on recent
market developments.

The subject property is a residential dwelling in
excellent condition and degree of finish. Based on the
comparable data, with particular emphasis on Eased Property
#8, I estimate that [the] facade easement will result in a
loss of value of 11% of the value of the actual subject
improvement before donation of the easement.

On the basis of his estimate of 11 percent, Mr. Ehrmann

calculated that the facade easement would reduce the value of the

subject property by $1,439,000, which he rounded to $1,440,000.

He stated that, after the easement, the unused development rights

would have no value. He therefore estimated that the “after”

value of the subject property was $11,650,000. Mr. Ehrmann

concluded that the loss in value due to the facade easement was

$3,775,000.5

5
That figure reflects the value of both the facade easement
and the development rights, but Mr. Ehrmann stated that it
represented “the estimated market value of the loss due to the
easement.”
 - 14 -

The Donation

On December 3, 2003, Mr. Friedberg executed a Conservation

Deed of Easement (conservation deed). The conservation deed

provided, in part:

II.

The Grantor does hereby grant and convey to the Grantee, TO
HAVE AND TO HOLD, an easement in gross, in perpetuity, in,
on, and to the Property, Building and to the Facade, being a
Scenic, Open Space and Architectural Facade Conservation
Easement on the Property, with the following rights:

A. Without the express written consent of the Grantee,
which consent may be withheld, conditioned or delayed in the
sole and absolute discretion of the Grantee, the Grantor
will not undertake nor suffer nor permit to be undertaken
with respect to that part of the Facade visible from the
street-level on the opposite side of 134 E. 71st Street:

1. any alteration, construction or remodeling of
existing improvements on the Property, or the placement
thereon or on the Building of signs or markers, that
would materially alter or change the appearance of the
Facade;

2. the exterior extension of existing improvements on
the Property or the erection of any new or additional
improvements on the property or in the open space above
or the erection of any new or additional improvements
on the Property or in the open space above or
surrounding the existing improvements except for,
subject to the consent of the Grantee which consent
will not be unreasonably withheld, the erection of new
improvements, including an architecturally consistent
Facade, to replace existing improvements which have
been wholly or partially destroyed (e.g., by fire); or

3. the painting or cleaning of the Facade in a manner
incompatible with the protection and preservation of
the Facade * * *.

* * * * * * *
 - 15 -

D. Grantor hereby agrees that the following acts or uses
are expressly forbidden in, on, over, or under the Property,
except as otherwise conditioned or permitted in writing by
Grantee: there shall be no use, exercise or transfer by
Grantor or Grantee of development rights from or to the
Property, any portion thereof or derived from any portion
thereof. For the purposes hereof, the term “development
rights” includes, without limitation, any and all rights,
however designated, now or hereafter associated with the
Property or any other property that may be used, pursuant to
applicable zoning laws or other governmental laws or
regulations to compute permitted size, height, bulk or
number of structures, development density, lot yield, or any
similar development variable on or pertaining to the
Property or any other property. Both parties hereto
recognize and agree that, subject to all other conditions of
this Easement, all current and future development rights
have been donated to the Grantee for the purposes of forever
(i) removing such rights from the Property, (ii)
extinguishing such rights, and (iii) further preventing the
transfer or use of such rights.

* * * * * * *

IV.

A. This easement is binding not only upon Grantor but also
upon its successors, heirs and assigns and all other
successors in interest to the Grantor, and shall continue as
a servitude running in perpetuity with the land. This
easement shall survive any termination of the Grantor’s or
the Grantee’s existence. The rights of the Grantee under
this instrument shall run for the benefit of and may be
exercised by its successors and assigns, or by its designees
duly authorized in a deed of easement.

B. Grantor covenants that it will not transfer, assign or
otherwise convey its rights under this conservation easement
except to another “qualified organization” described in
Section 170(h)(3) of the Internal Revenue Code of 1986 and
controlling Treasury regulations, and Grantee further agrees
that it will not transfer this easement unless the
transferee first agrees to continue to carry out the
conservation purposes for which the easement was created,
provided, however, that nothing herein contained shall be
construed to limit the Grantee’s right to give its consent
(e.g., to changes in the Facade) or to abandon some or all
of its rights hereunder.
 - 16 -

C. In the event this easement is ever extinguished, whether
through condemnation, judicial decree or otherwise, Grantor
agrees on behalf of itself, its heirs, successors and
assigns, that Grantee, or its successors or assigns, will be
entitled to receive upon the subsequent sale, exchange or
involuntary conversion of the Property, a portion of the
proceeds from such sale, exchange or conversion equal to the
same proportion that the value of the initial easement
donation bore to the entire value of the property at the
time of donation as estimated by a state licensed appraiser,
unless controlling state law provides that the Grantor is
entitled to the full proceeds in such situations, without
regard to the easement. Grantee agrees to use any proceeds
so realized in a manner consistent with the conservation
purposes of the original contribution.

The conservation deed was the only agreement between Mr.

Friedberg and NAT. The conservation deed was recorded with the

New York City Department of Finance, Office of the City Register.

By letter dated December 17, 2003, NAT acknowledged Mr.

Friedberg’s gift of a conservation easement on the subject

property. That letter certified that no goods or services were

received by Mr. Friedberg in exchange for his gift.

Procedural History

Petitioners timely filed their joint 2003 Federal income tax

return. They deducted $3,775,000 for the donation of the facade

easement and development rights on the subject property.

Petitioners appended Form 8283, Noncash Charitable Contributions,

signed by Mr. Ehrmann and by the president of NAT. It described

the subject property by providing its address, and it described

the condition of the subject property as “Historic Facade

Conservation Easement”. Petitioners did not provide information
 - 17 -

on the Form 8283 about the date they acquired the subject

property, how they acquired it, or their cost or adjusted basis

in the subject property. The Form 8283 did not mention the

donation of the development rights. The date of appraisal

provided on the Form 8283 was November 15, 2003. Petitioners

also attached to their tax return a copy of Mr. Ehrmann’s

appraisal report.

On or about January 23, 2009, respondent mailed to

petitioners’ last known address a statutory notice of deficiency.

Petitioners timely filed their petition with this Court on April

20, 2009.

Discussion

Rule 121(a) provides that either party may move for summary

judgment upon all or any part of the legal issues in controversy.

Full or partial summary judgment may be granted only if no

genuine issue exists as to any material fact and the issues

presented by the motion may be decided as a matter of law. See

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994). As explained below,

we conclude that we are able to resolve some of the issues

presented on the basis of the undisputed facts contained in the

parties’ moving papers, including the attachments thereto.
 - 18 -

I. Whether the Appraisal Report Was a “Qualified Appraisal”

Section 170(a)(1) allows taxpayers to deduct charitable

contributions only if those contributions are verified under

regulations prescribed by the Secretary. Those regulations

require that a taxpayer claiming a noncash charitable

contribution of more than $5,000: (1) Obtain a qualified

appraisal of the property contributed; (2) attach a fully

completed appraisal summary (i.e., Form 8283) to the tax return

on which the deduction is claimed; and (3) maintain records

pertaining to the claimed contribution in accordance with section

1.170A-13(b)(2)(ii), Income Tax Regs. Sec. 170A-13(c)(2), Income

Tax Regs. To constitute a qualified appraisal, the regulations

require, among other things, that an appraisal be made not

earlier than 60 days before the date of contribution of the

appraised property nor later than the due date of the tax return

on which a deduction is first claimed; be prepared, signed, and

dated by a qualified appraiser; and include the following

information:

(A) A description of the property in sufficient detail
for a person who is not generally familiar with the type of
property to ascertain that the property that was appraised
is the property that was (or will be) contributed;

(B) In the case of tangible property, the physical
condition of the property;

(C) The date (or expected date) of contribution to the
donee;
 - 19 -

(D) The terms of any agreement or understanding
entered into (or expected to be entered into) by or on
behalf of the donor or donee that relates to the use, sale,
or other disposition of the property contributed, * * *

* * * * * * *

(E) The name, address, and * * * identifying number of
the qualified appraiser; and, if the qualified appraiser is
acting in his or her capacity as * * * an employee of any
person * * *, the name, address, and taxpayer identification
number * * * of the * * * person who employs or engages the
qualified appraiser;

(F) The qualifications of the qualified appraiser who
signs the appraisal, including the appraiser’s background,
experience, education, and membership, if any, in
professional appraisal associations;

(G) A statement that the appraisal was prepared for
income tax purposes;

(H) The date (or dates) on which the property was
appraised;

(I) The appraised fair market value (within the
meaning of § 1.170A-1(c)(2)) of the property on the date (or
expected date) of contribution;

(J) The method of valuation used to determine the fair
market value, such as the income approach, the market-data
approach, and the replacement-cost-less-depreciation
approach; and

(K) The specific basis for the valuation, such as
specific comparable sales transactions or statistical
sampling, including a justification for using sampling and
an explanation of the sampling procedure employed.

Sec. 1.170A-13(c)(3)(ii), Income Tax Regs. Those regulations

were promulgated in response to Congress’ mandate in the Deficit

Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec. 155, 98 Stat.

691. As we explained in Hewitt v. Commissioner, 109 T.C. 258,

265 (1997), affd. without published opinion 166 F.3d 332 (4th
 - 20 -

Cir. 1998), the primary purpose of DEFRA section 155 was to

“provide a mechanism whereby respondent would obtain sufficient

return information in support of the claimed valuation of

charitable contributions of property to enable respondent to deal

more effectively with the prevalent use of overvaluations.”

Respondent contends that Mr. Ehrmann’s appraisal report

fails to meet the requirements of section 1.170A-13(c)(3)(ii)(C),

(H), (I), (J), and (K), Income Tax Regs. With respect to

subdivision (ii)(C), (H), and (I), respondent contends that the

appraisal report is not a qualified appraisal because it does not

contain the date of the contribution, is ambiguous as to the date

the subject property was appraised, and does not value the

subject property as of the date it was actually contributed.

Petitioners contend that, although the appraisal report contains

typographical errors with regard to dates, those errors are minor

and the report substantially complies with subdivision(ii)(C),

(H), and (I) of section 1.170A-13(c)(3), Income Tax Regs.

Petitioners rely on our holding in Bond v. Commissioner, 100 T.C.

32, 41 (1993), in which we concluded that because the reporting

requirements of section 1.170A-13, Income Tax Regs., did not

“relate to the substance or essence of whether or not a

charitable contribution was actually made” and because the

taxpayers had satisfied all the elements required to establish

the “substance or essence” of their contribution, the taxpayers
 - 21 -

were entitled to the deduction claimed because they had

“substantially complied” with the requirements of the

regulations.

Similarly, in the instant case, the errors regarding the

date of the appraisal report do not relate to the substance or

essence of the contribution. Rather, the requirements relating

the proper dating of the appraisal and contribution are more

procedural. See Bond v. Commissioner, supra at 41; Dunavant v.

Commissioner, 63 T.C. 316, 319-320 (1974) (noting that

nonadherence to requirements that are “procedural and therefore

directory” may sometimes be excused). Although there may be

cases in which the failure to meet those requirements would be

significant, the instant case is not such a case. We are

persuaded that the discrepancies were merely typographical errors

and that the report was completed within the 60-day period before

the date of contribution, as required by section 1.170A-

13(c)(3)(ii)(A), Income Tax Regs. Accordingly, we conclude that

the appraisal report substantially complies with the requirements

of subdivision (ii)(C), (H), and (I).

Additionally, respondent contends that the appraisal report

does not meet the requirements of subdivision (ii)(J) and (K)

because it fails to include the method and the specific basis for

valuing the facade easement and the development rights. In

general, the amount allowed as a charitable contribution
 - 22 -

deduction is the fair market value of the contributed property.

Sec. 1.170A-1(c)(1), Income Tax Regs. The fair market value of a

property is the price at which it would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or sell and both having reasonable knowledge of

relevant facts. Sec. 1.170A-1(c)(2), Income Tax Regs. Because

no established market exists for determining the fair market

value of an easement, the “before and after” approach has often

been applied to determine the fair market values of restrictive

easements with respect to which charitable contribution

deductions have been claimed. See, e.g., Hilborn v.

Commissioner, 85 T.C. 677 (1985); Simmons v. Commissioner, T.C.

Memo. 2009-208, affd. 646 F.3d 6 (D.C. Cir. 2011); Griffin v.

Commissioner, T.C. Memo. 1989-130, affd. 911 F.2d 1124 (5th Cir.

1990). The before and after method operates by taking the

difference between the value of the property immediately before

the contribution and the value of the property immediately after.

Hilborn v. Commissioner, supra at 689. An appraiser may use the

comparable sales method, or another accepted method, to estimate

the before and after values. Id.

An appraiser using the comparable sales method, also known

as the market-data approach, locates sales of properties that

meet three criteria: (1) The properties themselves are similar

to the property being appraised; (2) the sales are arm’s-length
 - 23 -

transactions; and (3) the sales have occurred within a reasonable

time of the valuation date. Wolfsen Land & Cattle Co. v.

Commissioner, 72 T.C. 1, 19 (1979). Because no two sales and no

two properties are ever identical, the appraiser then considers

aspects of the comparable transactions, such as time, size of the

property, or other significant features, and makes appropriate

adjustments for each to approximate the qualities of the property

being appraised. Estate of Spruill v. Commissioner, 88 T.C.

1197, 1229 n.24 (1987); Wolfsen Land & Cattle Co. v.

Commissioner, supra at 19. Although the Court has accepted the

use of the comparable sales method, we recognize that it, like

all valuation techniques, is far from an exact science. Wolfsen

Land & Cattle Co. v. Commissioner, supra at 19.

The “before” value of the property considers the highest and

best use of the property before its restriction by the easement.

Hilborn v. Commissioner, supra at 689. If different from the

current use, a proposed highest and best use requires “closeness

in time” and “reasonable probability”. Id. The highest and best

use takes into account existing zoning or historic preservation

laws that restrict the property’s development potential even

without a preservation easement. Simmons v. Commissioner, supra.

We have held that an explanation of the valuation method

used and the specific basis for the appraised value are essential

because “‘Without any reasoned analysis, * * * [the appraiser’s]
 - 24 -

report is useless.’” Friedman v. Commissioner, T.C. Memo. 2010-

45 (quoting Jacobson v. Commissioner, T.C. Memo. 1999-401);

Scheidelman v. Commissioner, T.C. Memo. 2010-151, on appeal (2d

Cir., Sept. 2, 2010, Dec. 30, 2010).

Petitioners contend that Mr. Ehrmann used the comparable

sales method to estimate the value of the subject property before

and after Mr. Friedberg donated the facade easement and the

development rights to NAT. Indeed, Mr. Ehrmann stated in his

appraisal report that he was applying the “Sales Comparison

Approach”. For purposes of the instant motions, respondent does

not contest the method Mr. Ehrmann used to arrive at the “before”

value for the subject property, nor does respondent contest that

value.6 Rather, respondent contends that Mr. Ehrmann failed to

properly apply the comparable sales method to valuing the subject

property after the facade easement, and respondent contends that

Mr. Ehrmann failed to apply any acceptable method to valuing the

development rights. We will first consider respondent’s

contention with respect to the facade easement.

A. Appraising the Facade Easement

Mr. Ehrmann’s method for using comparable sales to estimate

the before value of the subject property offers a textbook

6
Respondent does not contest the “before” value Mr. Ehrmann
estimated using comparable sales, but respondent does contest Mr.
Ehrmann’s appraisal of the development rights and his addition of
that value to the “before” value. See infra pp. 36-54.
 - 25 -

example of how the comparable sales method works. He located

nine sales of similar properties that were close to the subject

property in both time and geography. He made a series of

adjustments to the sale price of each property and explained in

detail his rationale for making those adjustments. Finally,

after making the adjustments, he averaged the prices per square

foot for all of the properties and used that average price per

square foot to estimate the market value of the subject property

before Mr. Friedberg donated the easement.

In contrast to his before valuation, Mr. Ehrmann’s approach

to valuing the subject property after the easement donation

diverged significantly from the accepted comparable sales method.

To properly apply the comparable sales method, Mr. Ehrmann should

have located sales of similar properties in New York City with

facade easements, made appropriate adjustments, and then used the

average prices of those sales to estimate the after value of the

subject property. However, without explanation, Mr. Ehrmann

elected to use sales of eased properties in Washington, D.C., and

transactions related to eased properties in New Orleans to

estimate the percentage diminution in value associated with

facade easements in general. Mr. Ehrmann then used the

percentage diminution he purported to derive from those

transactions and multiplied it by his estimated before value of

the subject property to estimate the loss in value associated
 - 26 -

with the facade easement. That approach is not consistent with

the comparable sales method Mr. Ehrmann claimed he was applying.

Not only did Mr. Ehrmann not actually use the comparable

sales method or any other method the Court has sanctioned, but he

also failed to consistently apply a single method to his

estimates of percentage diminution, and the various methods he

used were unreasonable. To reasonably apply the method Mr.

Ehrmann appeared to use, to which we will hereinafter refer as

the percentage diminution method, Mr. Ehrmann would have needed

to apply the comparable sales method to each of the Washington,

D.C., and New Orleans properties he considered. Instead, he

applied a hodgepodge of approaches, most of which were

unreasonable.

The first Washington, D.C., property Mr. Ehrmann considered

was a mixed-use building with a gallery and two rental units. It

was purchased in 1982 for $350,000, underwent $80,000 of

improvements, and was resold in September 1984 for $330,000. Mr.

Ehrmann’s estimate, which was based on the amount invested in the

property and on a survey showing that sale prices in the Dupont

Circle neighborhood appreciated by a total of 6.5 percent during

the period from 1981 to 1984, indicated that the easement

decreased the property’s value by 27.9 percent.

Mr. Ehrmann did not explain how the $80,000 was used to

improve the property, nor why it was appropriate to simply add
 - 27 -

$80,000 to the price of the property to estimate what it would

have been worth without the easement. Without such an

explanation, it was unreasonable for Mr. Ehrmann to assume that

the $80,000 increased, dollar for dollar, the value of the

property.7 Moreover, it was unreasonable for Mr. Ehrmann to

apply a 6.5-percent appreciation to the property on the grounds

that the properties in the neighborhood appreciated by that

amount over the course of 3 years, given that the owner held the

property for only 2 years.

The second Washington, D.C., property was a residential

building with two rental units that was sold during July 1985 for

$237,000, or $69.71 per square foot. On the basis of the sale of

a similar property on the same block for $85.29 per square foot

during July 1984, Mr. Ehrmann estimated that the easement reduced

the property’s value by 18.3 percent.

Mr. Ehrmann’s method of estimating the percentage diminution

with regard to the second property can best be described as a

very abbreviated comparable sales method. He found one other

property that he considered similar, made no adjustments to the

price of that property, and simply assumed that the eased

7
It is conceivable that the $80,000 could have increased the
value of the property by more than $80,000, that it could have
increased it by less than that amount, or that it could even have
decreased the value of the property. For instance, the owner
could have spent $80,000 painting and decorating the house in a
manner peculiar to his own aesthetic tastes but displeasing to
most buyers.
 - 28 -

property would have sold for the same price absent the easement.

In contrast, the acceptable comparable sales method requires the

examination of multiple similar properties and corresponding

adjustments, accompanied by explanations. See Wolfsen Land &

Cattle Co. v. Commissioner, 72 T.C. at 19. Mr. Ehrmann’s

shortcut was an unreasonable approach to estimating the

percentage diminution of the eased property’s value.

The third Washington, D.C., property Mr. Ehrmann considered

was an owner-occupied home with a rental unit in the basement

that sold for $610,000 during December 1986. The sale price

included 3 months of free rent for the seller. Pursuant to the

terms of an agreement with the buyer, the seller reduced the sale

price and claimed the tax deduction for a facade easement on the

house donated at about the same time as the sale. According to

an appraisal of the property as of December 1986, the easement

reduced the value of the property by 8.9 percent.

With regard to the third property, Mr. Ehrmann relied

entirely upon another appraisal, about which nothing is set forth

in his report. Without information regarding that appraiser’s

methods, experience, etc., it is impossible to review the

reasonableness of the conclusion reached in that appraisal. We

assume, therefore, that it was unreasonable for Mr. Ehrmann to

rely on that appraisal as an estimate of the percentage

diminution attributable to the facade easement.
 - 29 -

Mr. Ehrmann’s fourth Washington, D.C., property was a

single-family house that sold for $215,000 during March 1985.

On the basis of the sale for $255,000 of a slightly larger but

otherwise “almost identical” home on the same block at around the

same time, Mr. Ehrmann estimated that the easement decreased the

value of the property by 18.6 percent.8

The approach Mr. Ehrmann used to estimate the percentage

diminution in value of his fourth Washington, D.C., property is

similar to the approach used with the second. It is unreliable

for the same reasons we set forth above and for an additional

reason: he did not make any attempt to adjust the sale price of

the comparable property to reflect the fact that the eased

property was smaller.

The fifth Washington, D.C., property was a two-unit, owner-

occupied property sold for $127,400 during July 1985. Solely

8
It is unclear how Mr. Ehrmann arrived at 18.6 percent. A
reduction from $255,000 to $215,000 represents a decrease in
value of 15.7 percent. According to Mr. Ehrmann’s report, the
$255,000 home was “slightly larger” than the home with the
easement, which would presumably require a reduction in the sale
price of $255,000 by some amount to reflect the fact that the
eased home, being smaller, would have sold for less than the
$255,000 home even without an easement. Mr. Ehrmann did not
appear to make any such adjustment; any adjustment made would
have corresponded to a decrease in value of less than 15.7
percent. We suspect that Mr. Ehrmann actually divided $40,000
(i.e., the difference between the $255,000 sale and the $215,000
sale) by $215,000 to arrive at his figure of 18.6 percent. That
calculation was an error. When calculating the percentage
reduction in value, the numerator should be the amount of the
reduction and the denominator should be the “before” value, not
the “after” value.
 - 30 -

upon the basis of the original asking price of $159,000, Mr.

Ehrmann estimated that the easement reduced the property’s value

by 22.5 percent.9

To reach his estimate of the percentage diminution in the

value of the fifth property, Mr. Ehrmann made another

unreasonable assumption: that the asking price for the house was

an accurate estimate of the value of the property before the

easement. We see no reason to believe that an asking price is an

accurate measure of the value of a house, and Mr. Ehrmann has

provided no reason to believe it was.

Mr. Ehrmann’s sixth Washington, D.C., property was a single-

family home with a separate English basement apartment that sold

during July 1985 for $155,000, or $55.75 per square foot. Five

other properties were sold on neighboring blocks during the same

period for $58.16 to $120.40 per square foot. After making

unexplained adjustments for “degree of finish and time of sale”,

Mr. Ehrmann concluded that “the data supports at least an 8% loss

in value” due to the easement.

Mr. Ehrmann’s method for estimating the percentage

diminution in the value of the sixth property was the only method

that resembled any reasonable method for estimating such a value.

9
Even if we accept Mr. Ehrmann’s logic, the reduction in
value is only 19.9 percent, not 22.5 percent. Mr. Ehrmann again
erred by dividing the reduction in value by the “after” value of
the property instead of the “before” value.
 - 31 -

However, it was also flawed because Mr. Ehrmann provided no

explanation for how he made adjustments to account for

differences in degree of finish and time of sale. Given that the

property was sold during 1985, it would have been very difficult

for Mr. Ehrmann to have made reasonable adjustments for the

differences in finish between neighboring properties since such

adjustments would probably have been little better than

guesswork.

The two other transactions Mr. Ehrmann considered were

nonsale transactions on properties in New Orleans. Mr. Ehrmann

reported that design changes mandated because of an easement on

one residential property increased renovation costs by 35 to 40

percent. The easement on that property was granted during 1996,

but Mr. Ehrmann’s report provided no date for the renovation.

The second New Orleans transaction was the settlement of a

lawsuit filed by the 1994 purchasers of a property alleging that

the sellers failed to disclose the existence of the facade

easement. The case was settled out of court, and Mr. Ehrmann was

not able to discover the exact amount of the settlement.

However, he wrote that it “reportedly” exceeded 11 percent of the

purchase price of the property. Mr. Ehrmann did not disclose the

source from which he obtained the approximate amount of the

settlement.
 - 32 -

Because they were not sales, the transactions involving

eased properties in New Orleans provide little insight about the

effect of facade easements on the sales of eased properties.

Even setting aside the problems with Mr. Ehrmann’s estimates

of the percentage diminution in value for each of the above

properties, the problems with his approach are manifold. Mr.

Ehrmann provided no explanation for his conclusion that the

properties in Washington, D.C., and New Orleans were comparable

to the subject property in New York City. Indeed, those

properties were very different. Most of the properties in

Washington, D.C., included at least one rental unit, and one of

the properties was even a multiunit rental property with a

gallery on the first floor. Mr. Ehrmann himself discounted the

utility of that property when, because it was a nonresidential

property, he excluded it from his calculation of the average

diminution. He provided no information about the facade

easements to which the other properties were subject despite the

fact that the provisions of such easements, depending upon how

restrictive they were, might have resulted in different after

values.

Additionally, Mr. Ehrmann failed to provide any rationale

for comparing properties from cities other than New York City.

Indeed, his use of properties from cities other than New York

City appears inconsistent with reasoning from his appraisal
 - 33 -

report, where he wrote that property values are influenced by

local government actions and that the “extent and nature of local

zoning, building and health codes are also contributing factors

to * * * the value of real estate.”

Similarly, the appraisal report provides no indication of

why Mr. Ehrmann thought it appropriate to consider sales from the

mid-1980s in his valuation of a donation made during 2003. Mr.

Ehrmann himself cast doubt on the value of using sales from the

mid-1980s when he placed more emphasis on the New Orleans

transactions from the mid-1990s because, as he explained, those

transactions “are based on recent market developments.”

Accordingly, even if Mr. Ehrmann’s percentage diminution

method had been a reasonable means to estimate the after value of

the subject property, Mr. Ehrmann’s application of that method

was so riddled with errors and unreasonable assumptions as to

make his estimate of the subject property’s after value

worthless. Moreover, even Mr. Ehrmann’s percentage diminution

method, accepted at face value, does not substantiate the 11-

percent diminution in value that his report concluded was

appropriate to apply to the subject property. As noted above,

the average percentage diminution for the six sale properties was

17.4 percent, not 11 percent.

Mr. Ehrmann chose to place “particular emphasis” on the

eighth property instead of basing his estimated percentage
 - 34 -

diminution on the average of all the properties he had

considered. However, the percentage diminution he reached for

his eighth property (a New Orleans property) was not even based

on the sale of an eased property. Instead, it was based on the

settlement amount stemming from a lawsuit filed by a purchaser

against a seller because the seller had not disclosed the

existence of a facade easement on the sale property. Mr. Ehrmann

provided no explanation of why he considered the amount of the

settlement to accurately establish how much the easement had

affected the value of the property, and we find such an

assumption unreasonable.10 Worse, Mr. Ehrmann was not even sure

about the actual amount of the settlement. Instead, he wrote

that it “reportedly” exceeded 11 percent of the purchase price.

In other words, it appears that Mr. Ehrmann’s estimate for

the effect of a facade easement granted during 2003 on the value

10
Given that the suit was brought after the purchasers had
begun to renovate the home, had been enjoined from conducting
those renovations by the holder of the easement, and had
subsequently reached an agreement with the easement holder to
complete modified renovations, it is likely that the settlement
amount also took into account damages to the purchaser resulting
from that suit, from increased costs of required changes to the
renovation work, and from any contract claims that may have
arisen from being forced to change renovation plans. Suffice it
to say that the purchaser’s claims probably were considerably
more complex than simply the diminution in value of the property
resulting from the easement. Moreover, even if the purchaser’s
claims had been related only to the diminution in value, there is
no reason to believe that the settlement amount would have been
an accurate indication of how much the easement affected the
value of the property.
 - 35 -

of the subject property in New York City was actually based upon

a rumor about a settlement agreement reached during the mid-1990s

of a lawsuit filed against a seller for failing to disclose the

existence of a facade easement on a property in New Orleans.

Petitioners contend that the very inclusion of comparable

sales, regardless of how reasonable the use of those comparable

sales was, indicates compliance with the regulatory requirements

of a qualified appraisal. We disagree. Nothing in Mr. Ehrmann’s

report supports his conclusion about the after value of the

subject property. Indeed, it appears that Mr. Ehrmann arrived at

11 percent, the percentage of fair market value that NAT had told

Mr. Friedberg was typical for facade easements, in spite of his

research on comparable sales and not because of it. We note that

we previously have held that the mechanical application of a

percentage diminution to the fair market value before donation of

a facade easement does not constitute a method of valuation as

contemplated under section 1.170A-13(c)(3)(ii), Income Tax Regs.

See Scheidelman v. Commissioner, T.C. Memo. 2010-151; see also

1982 East, LLC v. Commissioner, T.C. Memo. 2011-84. We similarly

conclude that Mr. Ehrmann’s appraisal report was not a qualified

appraisal with respect to its valuation of the facade easement.

Unlike the requirements of section 1.170A-13(c)(3)(ii)(C),

(H), and (I), Income Tax Regs., the requirements of subdivision

(ii)(J) and (K) do relate to the substance or essence of the
 - 36 -

contribution and the substantial compliance doctrine therefore

does not apply. See Scheidelman v. Commissioner, supra. As we

explained in Scheidelman: “the lack of a recognized methodology

or specific basis for the calculated after-donation value is too

significant for us to ignore under the guise of substantial

compliance.” Id. Accordingly, because petitioners did not

submit a qualified appraisal, they are not entitled to the

claimed deduction for the facade easement. See Hewitt v.

Commissioner, 109 T.C. 258 (1997); Scheidelman v. Commissioner,

supra.

B. Appraising the Development Rights

We now consider whether Mr. Ehrmann’s appraisal report

constituted a qualified appraisal with respect to the development

rights. We begin by examining the nature of the development

rights in issue.

1. Transferring Development Rights in New York City

The transferability of the development rights in issue in

the instant case is governed by New York City’s Zoning

Resolution.11 Pursuant to the Zoning Resolution, lot owners are

11
The concept of development rights stems from restrictions
on the use of “air rights”, the rights to construct a building on
top of the owner’s land. Air rights are rooted in the bundle of
rights associated with land ownership. The New York Court of
Appeals has explained the concept of air rights as follows:

[A]ir rights, at the heart of the concept of zoning lot
merger, have historically been conceived as one of the
(continued...)
 - 37 -

not permitted to construct buildings larger than a certain bulk,

determined by multiplying the lot’s area by the FAR established

for the lot by the Zoning Resolution. New York, N.Y., Zoning

Resolution sec. 12-10 (2011). For example, the owner of a

10,000-square-foot lot with an FAR of 10 would not be allowed to

construct a building with a floor area of more than 100,000

square feet. The Zoning Resolution defines many different zoning

districts, which permit development in varying degrees. See New

York, N.Y., Zoning Resolution secs. 11-122 (creating zoning

districts), 23-00 to 24-68 (laying out bulk restrictions for

residential districts), 33-00 to 35-63 (laying out bulk

restrictions for commercial districts), 43-00 to 43-61 (laying

11
(...continued)
bundle of rights associated with ownership of the land
rather than with ownership of the structures erected on the
land. Air rights are incident to the ownership of the
surface property -- the right of one who owns the land to
utilize the space above it. This right has been recognized
as an inherent attribute of the ownership of land since the
earliest times as reflected in the maxim, “[cujus] est
solum, ejus est usque ad coelum et ad inferos” [“to
whomsoever the soil belongs, he owns also to the sky and to
the depths”].

Macmillan, Inc. v. CF Lex Associates, 437 N.E.2d 1134, 1137 (N.Y.
1982) (internal citations omitted). However, the Zoning
Resolution limits the use of those air rights and gives property
owners the limited ability to transfer those air rights. New
York City enacted the original Zoning Resolution during 1916 in
response to concerns about the shadows cast by newly constructed
skyscrapers. See Note, “Development Rights Transfer in New York
City”, 82 Yale L.J. 338 (1972). Because the original height and
setback limitations proved insufficient to constrain crowding
growth, the Zoning Resolution was amended during 1961 to
incorporate FAR limitations. See id. at 344-348.
 - 38 -

out bulk restrictions for manufacturing districts). The zoning

designation and attendant development rights assigned to a parcel

depend on factors such as neighborhood character, access to

public transportation, and street width. Marcus, “Air Rights in

New York City: TDR, Zoning Lot Merger and the Well-Considered

Plan”, 50 Brook. L. Rev. 867, 869 (1984).

For the most part, rights to develop the lots are stationary

and may not be transferred to other lots, but the Zoning

Resolution provides several means by which the owner of one lot

may transfer some of the unused development rights associated

with that lot to another. See New York, N.Y., Zoning Resolution

secs. 12-10 (defining zoning lot and explaining merged zoning

lots), 74-79 (transfer of development rights from landmark

sites); see also Landis et al., “Transferring Development Rights

in New York City”, N.Y.L.J., Sept. 29, 2008; Marcus, supra;

Selver & Sillerman, “Transfers of Development Rights: What’s New

-- And What Is Not”, N.Y.L.J., Aug. 24, 2009. The amount of

unused development rights associated with a given lot is the

difference between the actual floor area of the building

constructed on the lot and the maximum floor area that would be

permitted for that lot under the Zoning Resolution.

When New York City’s Zoning Resolution was first amended to

incorporate FAR limitations during 1961, it permitted only one

means of transferring unused development rights: property owners
 - 39 -

were allowed to transfer those unused development rights to

adjacent properties on the same block via a zoning lot merger.

Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 113-

114 (1978); Marcus, supra at 870-874. During 1968, a new

ordinance was enacted that gave additional transfer opportunities

to owners of properties that the Landmarks Preservation

Commission had designated landmarks.12 Penn Central Transp. Co.

v. City of New York, supra at 114. Under that ordinance, unused

development rights could be transferred from landmark sites to

properties across the street or across an intersection. Id.

During 1969, another amendment further increased options for

transferring development rights in certain commercial

districts.13 Id. Under the new amendment, development rights

from a landmark could be transferred to any lot in a chain of

contiguous properties under common ownership, as long as part of

12
During 1965, in response to concerns about the destruction
of buildings with significant historical, architectural, and
cultural value, New York City adopted its Landmarks Preservation
Law. Penn Central Transp. Co. v. City of New York, 438 U.S. 104,
108-109 (1978); see N.Y. City Admin. Code, ch. 25, sec. 303. The
task of administering the law was given to the Landmarks
Preservation Commission. Penn Central Transp. Co. v. City of New
York, supra at 110; see New York City Charter ch. 74, sec. 3020.
The Landmarks Preservation Commission was given the power to
designate landmarks, interior landmarks, and historic districts.
N.Y. City Admin. Code ch. 25, sec. 303(a).
13
The 1968 and 1969 amendments were enacted to ensure that
the owners of Grand Central Terminal would have options to sell
their unused development rights. Penn Central Transp. Co. v.
City of New York, supra at 114.
 - 40 -

the chain was contiguous to or across the street from the

landmark site. Id. A chain of common ownership could extend

across streets or intersections. Id.; see New York, N.Y., Zoning

Resolution secs. 74-79 to 74-793.14 Aside from special transfer

rights granted to certain districts,15 zoning lot mergers and

14
Zoning Resolution sec. 74-79 provides:

In all districts except R1, R2, R3, R4 or R5 Districts or C1
or C2 Districts mapped within such districts, for
developments or enlargements, the City Planning Commission
may permit development rights to be transferred to adjacent
lots from lots occupied by landmark buildings * * *

* * * * * * *

For the purposes of this Section, the term “adjacent lot”
shall mean a lot that is contiguous to the lot occupied by
the landmark building or other structure or one that is
across a street and opposite to the lot occupied by the
landmark building or other structure, or, in the case of a
corner lot, one that fronts on the same street intersection
as the lot occupied by the landmark building or other
structure. It shall also mean, in the case of lots located
in C5-3, C5-5, C6-6, C6-7 or C6-9 Districts, a lot
contiguous or one that is across a street and opposite to
another lot or lots that except for the intervention of
streets or street intersections, form a series extending to
the lot occupied by the landmark building or other
structure. All such lots shall be in the same ownership.
15
Two such special districts are the Special South Street
Seaport District and the Theater Subdistrict. The Special South
Street Seaport District was created during 1972, and it allowed
excess development rights from certain lots in the core of the
district to be transferred to designated “receiving lots” near
the periphery of the district. Peck Slip Associates, LLC v. City
Council of New York, 789 N.Y.S.2d 806, 809 (Sup. Ct. 2004); see
New York, N.Y., Zoning Resolution, secs. 91-60 to -69. During
1998, the Zoning Resolution was amended to authorize the transfer
of development rights from “listed theaters” to receiving sites
anywhere within the Theater Subdistrict. Fisher v. Giuliani, 720
(continued...)
 - 41 -

transfers from landmarks to adjacent properties linked by a chain

of common ownership remain the only means by which property

owners may transfer their unused development rights. See Fisher

v. Giuliani, 720 N.Y.S.2d 50, 52 (App. Div. 2001); see also

Kruse, “Constructing the Special Theater Subdistrict: Culture,

Politics, and Economics in the Creation of Transferable

Development Rights”, 40 Urb. Law. 95, 115-119 (2008).

2. Mr. Friedberg’s Ability To Transfer the Unused
Development Rights

The parties disagree about whether Mr. Friedberg could

transfer the unused development rights. As we explained above,

with the exception of properties in a few specially designated

districts, there are only two means by which a property owner can

transfer unused development rights: (1) Through a zoning lot

merger, or (2) through the sale of unused development rights to a

property linked to that property by a chain of common ownership.

However, the second option is available only to owners of

properties that have been designated landmarks by the Landmarks

Preservation Commission. See New York, N.Y., Zoning Resolution

sec. 74-79. Respondent contends that because the subject

property has not been designated a landmark, Mr. Friedberg’s

options for transferring the unused development rights are

15
(...continued)
N.Y.S.2d 50, 52 (App. Div. 2001); see New York, N.Y., Zoning
Resolution sec. 81-744.
 - 42 -

limited to the first option. Petitioners do not squarely address

respondent’s argument because petitioners failed to identify the

relevant law governing the transfer of development rights in New

York City.

Petitioners premise their arguments regarding the sale of

their development rights on the 1989 New York State law that

authorizes cities to set up transferable development rights

programs. See N.Y. Gen. City Law sec. 20-f (McKinney 2003).

That law provides:

2. In addition to existing powers and authorities to
regulate by planning or zoning including authorization to
provide for transfer of development rights pursuant to other
enabling law, the legislative body of any city is hereby
empowered to provide for transfer of development rights
subject to the conditions hereinafter set forth and such
other conditions as the city legislative body deems
necessary and appropriate that are consistent with the
purposes of this section, except that in cities of over one
million any transfer of development rights shall be provided
in the zoning ordinance after adoption by the city planning
commission and board of estimate. * * *

* * * * * * *

4. Nothing in this section shall be construed to
invalidate any provision for the transfer of development
rights heretofore or hereafter developed by any local
legislative body, or, in the case of cities over one
million, by the board of estimate.

Id. As the State law makes clear, it was not intended to

invalidate or supplant any existing transferable development

rights program. Indeed, the law’s only effect is to enable local

governments to enact transferable development rights programs

similar to the one already adopted by New York City. New York
 - 43 -

City’s Zoning Resolution, already in place well before the State

enacted New York General City Law section 20-f, remains the law

governing the transfer of development rights in New York City.

As noted above, New York City’s Zoning Resolution generally

permits development rights transfers only via zoning lot mergers

and from “lots occupied by landmark buildings or other

structures”. New York, N.Y., Zoning Resolution secs. 12-10, 74-

79. Section 74-79 of the Zoning Resolution stipulates that a

“landmark building or other structure shall include any structure

designated as a landmark by the Landmarks Preservation Commission

and the Board of Estimate”. It also expressly states that it

does not permit the transfer of development rights from

structures within historic districts: “No transfer of

development rights is permitted pursuant to this Section from

those portions of zoning lots used for cemetery purposes, any

structures within historic districts, statues, monuments or

bridges.”16 Id.

16
During 1970, city planners floated a proposal that would
have allowed owners of smaller midblock townhouses on the Upper
East Side’s cross-streets to transfer their unused development
rights to developers building high-rise buildings fronting the
avenues. Note, “Development Rights Transfer in New York City”,
82 Yale L.J. at 361-362. However, the plan met strong resistance
from neighborhood residents and was defeated. Id. at 362.
Critics feared that such a plan would change the character of the
neighborhood, endanger light to the midblock areas, and
overburden the neighborhood’s already crowded subway line. Id.
at 365-367.
 - 44 -

Accordingly, Mr. Friedberg’s options for transferring the

unused development rights from the subject property were quite

limited. Because his property was not a designated landmark, his

only option for transferring his unused development rights was

via a zoning lot merger. Given that all of the adjacent lots

were also within the boundaries of the Upper East Side Historic

District, owners of those properties were unlikely to be able to

use the unused development rights because any alteration of those

buildings would have required approval by the Landmarks

Preservation Commission, which must approve all alterations of

buildings within historic districts. See N.Y. City Admin. Code,

ch. 25, sec. 305(a)(1). However, we cannot conclude, as a matter

of law, that Mr. Friedberg was unable to transfer or otherwise

use the development rights. Although any use of those

development rights would have been subject to the review of the

Landmarks Preservation Commission, it is not certain that the

Landmarks Preservation Commission would have blocked all use of

the development rights. Rather, whether the development rights

could have been used is a disputed issue of material fact.

Accordingly, that issue is not ripe for summary judgment.

3. The Market for Development Rights

Because of New York City’s restrictions on transferring

development rights, the value of the development rights

associated with any given property is highly variable. Whether
 - 45 -

those development rights have any value depends upon the demand

for development rights in the immediate vicinity of the property.

The New York Court of Appeals has described the difficulties of

selling development rights:

By compelling the owner to enter an unpredictable real
estate market to find a suitable receiving lot for the
rights, or a purchaser who would then share the same
interest in using additional development rights, the
amendment renders uncertain and thus severely impairs the
value of the development rights before they were severed.

Fred F. French Investing Co., Inc. v. City of New York, 350

N.E.2d 381, 388 (N.Y. 1976). At least one New York court has

refused to allow a condemnation award with regard to the unused

development rights attached to a property because valuing those

rights was “too speculative”. See In re New York State Urban

Dev. Corp., 765 N.Y.S.2d 239, 239 (App. Div. 2003). That court

considered whether there was any probability that those

development rights would have been used in the reasonably near

future. Id. This Court has similarly required that, when

considering the highest and best use of property, only those uses

that are reasonably likely in the near future should be

considered. Hilborn v. Commissioner, 85 T.C. at 689.

Respondent contends that Mr. Ehrmann’s report fails to

address the probability that the unused development rights

attached to the subject property would be purchased in the near

future. Respondent contends that without such an assessment, the

appraisal report is not a qualified appraisal. Petitioners
 - 46 -

contend that the Court may consider such issues in deciding how

much weight to accord the appraisal report but that those issues

are irrelevant to deciding whether the appraisal report counts as

a qualified appraisal.

The market for unused development rights in the immediate

vicinity of the subject property is an important factor in

determining the market price of those rights, and Mr. Ehrmann’s

report acknowledged that the subject property’s location would

influence the demand for those rights. He made a downward

adjustment in his estimate of the price for the development

rights to account for the subject property’s location in a

historic district, but he did not explain in any detail how he

estimated the appropriate adjustment or arrived at his conclusion

regarding the market demand for the development rights. Whether

his report adequately assessed the market demand for those rights

is a disputed issue of material fact that we will not decide on

the parties’ motions for partial summary judgment.

4. Mr. Ehrmann’s Appraisal of the Development Rights

Respondent contends that Mr. Ehrmann’s appraisal of the

development rights was not a qualified appraisal within the

meaning of section 1.170A-13(c)(3)(ii), Income Tax Regs., and

that we should therefore sustain respondent’s disallowance of

petitioners’ deduction for the donation of those rights. In his

appraisal report, Mr. Ehrmann sought to estimate a value for the
 - 47 -

unused development rights associated with the subject property.

To do so, he located five transactions involving properties near

the subject property where development rights had been purchased

from neighboring properties. However, his method of using those

comparable transactions to estimate the value of the unused

development rights on the subject property was inconsistent. In

several cases, it contained mathematical errors and erroneous

assumptions.

With regard to two of the transactions he considered

comparable, Mr. Ehrmann erred by using the price per square foot

of the development rights already attached to the land instead of

the price per square foot of the additional development rights

purchased. For instance, his second comparable transaction

consisted of the purchase of a parcel, a purchase of development

rights from an adjacent parcel, and the purchase of additional

development rights from inclusionary housing bonuses.17 The

parcel, which had an FAR of 13.04 and a land area of 8,434 square

feet, was purchased for $25.1 million. The price per square foot

for the floor area associated with the parcel was therefore

$228.22. In addition, the purchaser paid $1.08 million for 9,000

square feet of development rights and $2.04 million for 17,000

17
New York City’s Inclusionary Housing Program grants
“bonus” floor area in exchange for the creation or preservation
of affordable housing units for low-income households. See New
York, N.Y., Zoning Resolution secs. 23-90 to -962.
 - 48 -

square feet of inclusionary housing bonus floor area. The prices

per square foot for the development rights and the inclusionary

housing bonuses were both $120 per square foot. However, Mr.

Ehrmann reported that the price per square foot for the entire

transaction was $228.36, which was actually the price per square

foot of the development rights attached to the parcel, not the

price per square foot for the additional floor area.18 Mr.

Ehrmann erred when he used $228.36. The comparable part of the

transaction was the purchase of the additional floor area, the

price for which was $120 per square foot.

Mr. Ehrmann made a similar error with regard to his fourth

comparable transaction. That transaction included a land area of

11,815 square feet with an FAR of 18.1, plus an additional 78,496

square feet of development rights previously acquired from

adjacent parcels. Although it is unclear how Mr. Ehrmann arrived

at a price per square foot of $101.27, it appears that he

calculated that price by dividing the total price of the

building, after it had been constructed using additional

development rights, by the development rights that came with the

parcel.19 In other words, his calculation completely ignored the

18
We presume Mr. Ehrmann meant to use the price per square
foot for floor area associated with the parcel, which we
calculate to be $228.22 but that his calculation was off because
of a minor rounding or transcription error.
19
Carrying out that calculation yields a price per square
(continued...)
 - 49 -

development rights acquired from adjacent parcels. That number

is clearly an inaccurate measure of the price per square foot of

the development rights.

Mr. Ehrmann made a different error with regard to his first

comparable transaction. The building’s zoning permitted an FAR

of 10.0 with a land area of 10,070 square feet, and the building

had acquired additional development rights from adjacent parcels

of 50,913 square feet and 40,272 square feet from inclusionary

housing bonuses. The building therefore had a total of 191,885

square feet available. Mr. Ehrmann reported that the price per

square foot was $119.86. It is unclear whether Mr. Ehrmann

understood what his reported price per square foot actually

represented because he wrote that the price per square foot

“noted above is applicable to the additional development rights”.

Reproducing Mr. Ehrmann’s calculation shows that the reported

price per square foot was actually the average price per square

foot for the entire building, not just the additional development

rights. That calculation assumes the same price per square foot

for both the original parcel and the additional development

rights. Without further explanation, such an assumption is

unrealistic. For instance, in his second comparable transaction,

19
(...continued)
foot of $102.21, close to Mr. Ehrmann's $101.27. We assume the
numbers are slightly off because of rounding or transcription
errors made by Mr. Ehrmann.
 - 50 -

there was more than a $100-per-square-foot difference between the

price per square foot for the additional development rights and

that for the rights associated with the original parcel.20

The fifth comparable considered by Mr. Ehrmann was actually

two separate purchases of development rights from two different

sites: One purchase of 24,000 square feet for $104.17 per square

foot and one purchase of 16,216 square feet for $291.13 per

square foot. Both of those purchases were used to develop one

property. Both sales would seem to be comparable to the type of

sale Mr. Ehrmann claims Mr. Friedberg would have been able to

make with the unused development rights on the subject property.

Inexplicably, instead of using each of the two sales as an

individual comparable, Mr. Ehrmann combined them and used their

weighted average of $179.83 as his fifth comparable sale.21 Such

a calculation makes little sense.22

20
The reason the price per square foot for the development
rights associated with the land parcel will usually be higher
than the price per square foot for the additional development
rights is that the development rights associated with the land
parcel include the land itself, and the land is necessary to
actually build anything. The purchased development rights, also
known as “air rights”, only allow the purchaser to build a bigger
building on the land already owned.
21
The weighted average is actually $179.56 per FAR foot. We
assume Mr. Ehrmann’s figure is different because of minor
rounding or transcription errors.
22
Assuming that those sales were comparable to the
hypothetical sale of the unused development rights associated
with the subject property, Mr. Ehrmann should have simply used
(continued...)
 - 51 -

Only Mr. Ehrmann’s third comparable provided a reasonable

estimate of what development rights might sell for in the

neighborhood of the subject property. His third comparable was

the sale of 42,048 square feet of development rights for $6

million, or $142.69 per square foot.

Using Mr. Ehrmann’s numbers, he arrived at an average price

per square foot of $154.40. He then discussed general

adjustments relating to time, location, number of square feet of

floor area, zoning, and landmark limitations. He did not

specifically describe those adjustments but concluded that the

price per square foot of the unused development rights on the

subject property was $170 per square foot. Mr. Ehrmann

multiplied $170 by the amount of the unused development rights he

calculated for the subject property. That calculation gave him a

total value of $2,335,000.

Inexplicably, Mr. Ehrmann then added that amount to his

previously estimated before value of the subject property. He

did not explain why it was proper to do so. Unless all of the

comparable properties Mr. Ehrmann used to estimate a before value

for the subject property had zero unused development rights, a

22
(...continued)
the price per square foot of each of them as a separate
comparable transaction. It was an error to average them. If Mr.
Ehrmann had been using the sales as separate comparable
transactions, it would also have been inappropriate for him to
calculate a weighted average.
 - 52 -

proposition that seems highly unlikely, the value of the unused

development rights would already have been reflected in the

market prices for those properties. Therefore, Mr. Ehrmann’s

estimate of the before value for the subject property, which was

based on the sales of those comparable properties, would have

also included the value of the development rights.23 If the

development rights were worth $2,335,000, Mr. Ehrmann should have

subtracted that value from the before value, not added it.24

Respondent contends that Mr. Ehrmann’s appraisal of the

unused development rights associated with the subject property is

not a qualified appraisal because, inter alia, it failed to

include the method and specific basis for valuing the development

rights. Petitioners contend that Mr. Ehrmann’s appraisal used

23
It is worth noting that the floor area of development
rights associated with a particular parcel is directly affected
by its zoning designation, which sets the FAR for that parcel
(i.e., a zoning designation with a higher FAR allots more floor
area of development rights to a given parcel). If those
development rights can be used or sold, the floor area of
development rights associated with a given parcel will affect
that parcel’s value. That fact is inconsistent with Mr.
Ehrmann’s assertion in his report that different zoning
designations would have no effect on the values of his chosen
comparable properties.
24
Additionally, we note that separately appraising the
unused development rights and the facade easement may have
overstated the loss in value due to the conservation easement.
If it is true, as Mr. Ehrmann wrote in his report, that one of
the reasons facade easements decrease the values of eased
properties is that facade easements restrict the rights of owners
to develop those properties, then Mr. Ehrmann’s calculations
would double count some of the loss in value because of the
restriction of the development rights.
 - 53 -

the comparable sales method to value the development rights and

that he explained the basis for his valuation.

It is true that Mr. Ehrmann claimed to be applying the

comparable sales method and that he identified what purported to

be five comparable sales. As noted above, because of some

erroneous assumptions and calculation errors, many of Mr.

Ehrmann’s comparable sales were not truly comparable. Instead,

some of his prices per square foot reflected either prices per

square foot of properties that included no additional development

rights (his second and fourth comparable sales) or prices that

reflected an average price per square foot for both the

development rights attached to the property and additional

development rights (his first comparable sale). Mr. Ehrmann

should have been comparing the purchase prices per square foot

for additional development rights.25

25
Mr. Ehrmann’s errors are puzzling in light of the fact
that his report contained five purchases of development rights
that would have been comparable to the potential sale of
development rights from the subject property, yet he failed to
identify them as comparable. His report contained the following
five comparable purchases of development rights: The purchases
of development rights and inclusionary housing floor area that
were part of his second comparable, both of which were priced at
$120 per square foot; the purchases of development rights that
were part of his fifth comparable, which were priced at $104.17
and $291.13 per square foot; and the third comparable, priced at
$142.69. The average of those five purchases is $155.60 per
square foot. Or, excluding the $291.13 purchase, which is more
than twice the price of any of the other purchases and seems to
be an outlier, the average is $121.70 per square foot.
 - 54 -

Despite its many errors, Mr. Ehrmann’s appraisal of the

development rights explained the method of valuation and the

specific basis for the valuation. His valuation was not merely a

mechanical application of some predetermined figure.

Accordingly, that portion of the appraisal report does not suffer

from the same fatal flaws as Mr. Ehrmann’s appraisal of the

facade easement. We therefore conclude that respondent is not

entitled to summary judgment with respect to the issue of whether

Mr. Ehrmann’s appraisal of the development rights constituted a

qualified appraisal. Because disputed issues of material fact

remain, we will also deny petitioners’ motion for partial summary

judgment with respect to the same issue.

II. Whether Petitioners Attached a Fully Completed Appraisal
Summary to Their Tax Return

Section 1.170A-13(c)(4)(ii), Income Tax Regs., lays out the

required contents of the appraisal summary, which include:

(B) A description of the property in sufficient detail
for a person who is not generally familiar with the type of
property to ascertain that the property that was appraised
is the property that was contributed;

(C) In the case of tangible property, a brief summary
of the overall physical condition of the property at the
time of the contribution;

(D) The manner of acquisition (e.g., purchase,
exchange, gift, or bequest) and the date of acquisition of
the property by the donor * * *

(E) The cost or other basis of the property * * *
 - 55 -

Respondent contends that petitioners’ Form 8283 complied with

none of those requirements. Respondent contends that because of

those omissions, the entire contribution should be disallowed.

Respondent cites three cases that he contends support his

argument.

Petitioners contend that they substantially complied with

the requirements in the regulations. Additionally, they argue

that they were not required to provide information about their

acquisition of or basis in the subject property because the

contribution was not a contribution of tangible property.

The Form 8283 attached to petitioners’ return described the

subject property by providing its street address, described its

condition as “Historic Facade Conservation Easement”, and

provided no information about Mr. Friedberg’s acquisition of the

subject property. The Form 8283 does not, by itself, describe

the subject property in sufficient detail for respondent to

determine the nature of the contribution. Indeed, it does not

even mention the contribution of the unused development rights.

However, petitioners also attached to their tax return the

appraisal report completed by Mr. Ehrmann, which describes the

contributions of a facade easement and unused development rights

in sufficient detail. Petitioners contend that it is not

necessary that the appraisal summary reprise everything in the

appraisal; they contend it is sufficient if the appraisal summary
 - 56 -

enables respondent to identify the subject property in the

appraisal report, which it does.

Respondent contends that we have held that taxpayers are not

entitled to charitable contribution deductions when they fail to

provide fully completed appraisal summaries. However, in each of

the cases respondent cites, the taxpayers’ failures to comply

with the regulations went significantly beyond the failure to

fully complete the appraisal summary. In Todd v. Commissioner,

118 T.C. 334 (2002), the taxpayers did not provide a qualified

appraisal, did not provide an appraisal summary, and failed to

keep the records required by the regulations. In Hewitt v.

Commissioner, 109 T.C. at 263, the taxpayers similarly did not

obtain a qualified appraisal and attached no appraisal summary to

their tax returns. Finally, in Smith v. Commissioner, T.C. Memo.

2007-368, affd. 364 Fed. Appx. 317 (9th Cir. 2009), we held that

the taxpayers were not entitled to charitable contribution

deductions where the Forms 8283 attached to their returns were

“in many respects either improperly or incompletely prepared”,

the taxpayers did not establish that their accountant was a

qualified appraiser, they never produced some of the appraisal

reports, none of the appraisal reports were prepared or submitted

on time, and those appraisal reports that they did submit did not

adequately explain the appraisal methodology as required by the

regulations. Accordingly, our holdings in those cases do not
 - 57 -

support respondent’s argument that petitioners are not entitled

to a charitable deduction solely because they submitted a Form

8283 that was partially incomplete. In Bond v. Commissioner, 100

T.C. at 41-42, we held that because the Form 8283 the taxpayers

attached to their return provided all of the important facts

except for the qualifications of the appraiser, the taxpayers

substantially complied with the regulations despite their failure

to attach an appraisal report to their return. In the instant

case, petitioners attached to their return an appraisal report

that contained all of the required information, but they failed

to fully complete the Form 8283 summarizing the contents of the

appraisal report. If, as we held in Bond, a fully completed Form

8283 can excuse the failure to attach an appraisal report under

the doctrine of substantial compliance, then, a fortiori,

attaching a completed appraisal report may excuse the failure to

fully complete a Form 8283 under the doctrine of substantial

compliance. Consequently, we conclude that petitioners

substantially complied with the requirements of section 1.170A-

13(c)(4)(ii), Income Tax Regs. Their minor omissions on the Form

8283 are not enough, by themselves, to disqualify the

contribution.
 - 58 -

III. Whether the Purported Transfer of Unused Development Rights
Was a Valid Transfer Permitting a Deduction Pursuant to
Section 170(a) or Whether the Conservation Deed Otherwise
Restricted the Use of the Development Rights

Petitioners contend that Mr. Friedberg’s donation of the

unused development rights is deductible pursuant to section

170(a) without regard to whether the donation was a qualified

conservation contribution pursuant to section 170(h).

Petitioners argue that Mr. Friedberg’s unused development rights

are transferable under New York City law and that they are a

separate interest in real property. Petitioners contend that Mr.

Friedberg transferred those development rights to NAT by the

conservation deed.

Respondent contends that the conservation deed signed by Mr.

Friedberg and NAT did not validly transfer to NAT the unused

development rights associated with the subject property or

otherwise restrict Mr. Friedberg’s ability to use those rights.

Respondent’s contention is based on the premise that development

rights in New York City can be transferred only pursuant to the

Zoning Resolution. Respondent contends that even if Mr.

Friedberg did validly transfer unused development rights to NAT,

pursuant to the terms of the conservation deed, those rights were

extinguished upon transfer and are therefore worthless.

The conservation deed is ambiguous as to whether Mr.

Friedberg transferred the unused development rights to NAT or

merely restricted the use of those rights. The conservation deed
 - 59 -

states that, except as allowed by NAT, “there shall be no use,

exercise or transfer by Grantor or Grantee of development rights

from or to the Property.” It later states that “all current and

future development rights have been donated to the Grantee for

the purpose of forever (i) removing such rights from the

Property, (ii) extinguishing such rights, and (iii) further

preventing the transfer or use of such rights.” For the reasons

explained below, we need not decide whether the conservation deed

effectively transferred the unused development rights to NAT.

Petitioners contend that Mr. Friedberg’s donation of the

unused development rights is deductible under section 170(a)

regardless of whether that donation is a qualified conservation

easement. Their contention appears to be that even if the

donation served no conservation purpose, it was still the

contribution of something valuable and petitioners should be

entitled to a deduction for the value of that gift. Yet,

according to the terms of the conservation deed whereby

petitioners contend Mr. Friedberg contributed the unused

development rights, those development rights were contributed for

the purpose of extinguishing those rights and NAT agreed not to

use or transfer them. Accordingly, although the development

rights may have had some value before the transfer to NAT,

pursuant to the terms of that transfer those development rights

became worthless.
 - 60 -

Pursuant to the regulations, the value of a charitable

contribution of property other than money is the fair market

value of the property at the time of contribution. Sec. 1.170A-

1(c)(1), Income Tax Regs. Petitioners appear to contend that the

value of such a contribution should be the fair market value at

the moment before contribution even if the terms of the

contribution itself make the property worthless upon

consummation. We conclude that such an interpretation is

inconsistent with the regulations. We conclude that, even if Mr.

Friedberg transferred the unused development rights to NAT

according to the terms of the conservation deed, the value of

those development rights was zero. Consequently, unless Mr.

Friedberg’s donation of the unused development rights served some

conservation purpose that permits it to qualify for a deduction

under section 170(h), petitioners are not entitled to a

deduction.26

26
Whether Mr. Friedberg’s transfer or restriction of the
unused development rights served a conservation purpose is not an
issue raised in the parties’ motions. Consequently, we need not
decide whether the instant case is distinguishable from Herman v.
Commissioner, T.C. Memo. 2009-205, where we held that the
taxpayer’s contribution of a conservation easement that
restricted the use of some of his unused development rights was
not a qualified conservation contribution because it did not
preserve a “historically important land area” or a “certified
historic structure” within the meaning of sec. 170(h)(4)(A)(iv).
 - 61 -

In the alternative, petitioners contend that the

conservation deed restricted Mr. Friedberg’s use of the unused

development rights. Petitioners stated in their answers to

respondent’s interrogatories that the conservation deed

transferred the development rights to NAT, not that it restricted

those rights. Respondent contends that petitioners should be

bound by their responses to interrogatories and that therefore we

should not consider petitioners’ alternative argument. We

disagree. Our interpretation of the conservation deed is not

bound by petitioners’ interpretation of that document. Whether

or not the conservation deed effectively transferred the unused

development rights to NAT, it did restrict Mr. Friedberg’s use of

development rights associated with the subject property.

Mr. Friedberg granted a conservation easement to NAT. At

common law, an easement is “a permanent right conferred by grant

or prescription, authorizing one landowner to do or maintain

something on the adjoining land of another, which, although a

benefit to the land of the former, and a burden upon the land of

the latter, is not inconsistent with general ownership.”

Trustees of Freeholders & Commonalty of the Town of Southampton

v. Jessup, 56 N.E. 538, 539 (N.Y. 1900). New York has enacted a

statute permitting the creation of conservation easements. See

N.Y. Envtl. Conserv. Law sec. 49-0305 (McKinney 2008). Pursuant

to the statute, a conservation easement may be created or
 - 62 -

conveyed by a written instrument that complies with New York’s

statute of frauds. Id.; N.Y. Gen. Oblig. Law sec. 5-703

(McKinney 2008). A conservation easement may be held by a not-

for-profit conservation organization and is of perpetual duration

unless otherwise provided in the instrument granting it. N.Y.

Envtl. Conserv. Law sec. 49-0305. The easement must be recorded

in the appropriate office, and it must provide an adequate legal

description of the property encumbered. Id. Conservation

easements are distinct from easements recognized at common law in

that conservation easements are statutorily excepted from many

defenses that might defeat common law easements. Id.; Stonegate

Family Holdings, Inc. v. Revolutionary Trails, Inc., 900 N.Y.S.2d

494, 499 (App. Div. 2010). For instance, conservation easements

need not be appurtenant to an interest in real property. N.Y.

Envtl. Conserv. Law sec. 49-0305; Stonegate Family Holdings, Inc.

v. Revolutionary Trails, Inc., supra at 499.

Granting a conservation easement on a tract of land does not

actually transfer ownership of the property, but it may

nonetheless restrict the grantee’s use of it. According to the

conservation deed, in addition to granting a facade easement on

the subject property, Mr. Friedberg gave up his right to any

future use or transfer of development rights. The conservation

deed complied with New York’s requirements for a valid

conservation easement. Accordingly, we conclude that, by grant
 - 63 -

of the conservation deed, Mr. Friedberg restricted the use of

development rights associated with the subject property.

Nonetheless, petitioners are not entitled to a deduction unless

the restriction of the unused development rights served a

conservation purpose that permits it to qualify for a deduction

pursuant to section 170(h). See 1982, LLC v. Commissioner, T.C.

Memo. 2011-84; Herman v. Commissioner, T.C. Memo. 2009-205.

IV. Whether the Donation of the Conservation Easement Was
Granted in Perpetuity

Respondent contends that Mr. Friedberg’s contribution of the

conservation easement was not a qualified conservation

contribution because it was not granted in perpetuity.

Respondent’s contention is based on the following language from

the conservation deed: “nothing herein contained shall be

construed to limit * * * [NAT’s] right to give its consent (e.g.,

to changes in the Facade) or to abandon some or all of its rights

hereunder” (abandonment clause). Petitioners contend that

respondent’s argument ignores prior decisions of this Court in

which we have held that deeds with similar language nonetheless

granted conservation easements in perpetuity.

A contribution will not be considered to be exclusively for

conservation purposes unless such purposes are “protected in

perpetuity” (perpetuity requirement). Sec. 170(h)(5)(A); see

also sec. 1.170A-14(g)(1), Income Tax Regs. However, the

regulations permit a deduction even if the deed allows some
 - 64 -

future development as long as “the terms of the restrictions

require that such development conform with appropriate local,

state, or Federal standards for construction or rehabilitation

within the district.” Sec. 1.170A-14(d)(5), Income Tax Regs.

In Simmons v. Commissioner, 646 F.3d 6 (D.C. Cir. 2011),

affg. T.C. Memo. 2009-208, the Court of Appeals for the District

of Columbia Circuit considered whether language identical to the

abandonment clause violated the perpetuity requirement. The

Court of Appeals rejected the Commissioner’s argument that such

language violates the perpetuity requirement. It noted that the

deeds imposed obligations upon the taxpayer “in perpetuity”. Id.

at 10. It also noted that the terms of the deeds stated that

they would “survive any termination of the Grantor’s or Grantee’s

existence.” Although the deeds did not specify what would happen

if the donee organization dissolved, the Court of Appeals found

it sufficient that District of Columbia law provides that such

easements would be transferred to another organization performing

similar activities.

Similarly, Mr. Friedberg’s conservation deed imposes

obligations in perpetuity and states that the easement will

survive any termination of the grantor’s or grantee’s existence.

The conservation deed also states that NAT may not transfer the

easement except to another “‘qualified organization’ described in

Section 170(h)(3)”. New York State law provides that a
 - 65 -

conservation easement held by a not-for-profit organization may

be modified or extinguished only: “(a) as provided in the

instrument creating the easement; or (b) in a proceeding pursuant

to section nineteen hundred fifty-one of the real property

actions and proceedings law; or (c) upon the exercise of the

power of eminent domain.” N.Y. Envtl. Conserv. Law sec. 49-0307

(McKinney 2008). A New York court could permit abandonment of a

conservation easement only if it found “no actual and substantial

benefit * * * either because the purpose of the restriction has

already been accomplished or, by reason of changed conditions or

other cause, its purpose is not capable of accomplishment, or for

any other reason.” N.Y. Real. Prop. Acts. Law sec. 1951

(McKinney 2009). We conclude that the terms of the conservation

deed, combined with the New York State law governing conservation

easements, do not violate the perpetuity requirement of section

170(h)(5)(A).

However, the Court of Appeals in Simmons also considered a

factual issue: the remoteness of the possibility that the donee

would actually abandon its rights. Even though the conservation

easement might be protected by the terms of the conservation deed

and even by State law, it is nonetheless essential that the donee

actively monitor the property and enforce any violations of the

terms of the easement. In Simmons v. Commissioner, supra at 10,

the Court of Appeals stated that “the Commissioner has not shown
 - 66 -

the possibility L’Enfant [the donee] will actually abandon its

rights is more than negligible.” The Court of Appeals noted that

L’Enfant has been holding and monitoring easements since 1978,

yet the Commissioner had failed to point to a single instance

where L’Enfant had abandoned its right to enforce those

easements. Id. Similarly, in Stotler v. Commissioner, T.C.

Memo. 1987-275, this Court rejected the Commissioner’s argument

that the contribution failed the perpetuity requirement because

we concluded that the possibility the donee would abandon the

conservation easement was “so remote as to be negligible”. As in

Simmons, our decision in Stotler was based in part on facts in

the record that allowed us to conclude that the possibility of

abandonment was remote.

In the instant case, the parties have not addressed NAT’s

history of enforcing easements, and there is nothing in the

record that would allow us to consider the likelihood that NAT

would abandon the easement. Accordingly, although we hold the

abandonment clause does not violate the perpetuity requirement,

we do not decide whether the possibility that NAT would abandon

the conservation easement is “so remote as to be negligible”.

We conclude that respondent is entitled to summary judgment

on the issue of whether petitioners submitted a qualified

appraisal with respect to the facade easement. Consequently, we

hold that petitioners are not entitled to a charitable
 - 67 -

contribution deduction with respect to the facade easement. We

further conclude that petitioners are entitled to summary

judgment on the issues of whether their appraisal report

substantially complied with section 1.170A-13(c)(3)(ii)(C), (H),

and (I), Income Tax Regs., whether their appraisal summary

substantially complied with section 1.170A-13(c)(4)(ii), Income

Tax Regs., and whether the conservation deed restricted Mr.

Friedberg’s use of the unused development rights. With respect

to the remaining issues, including the issue of whether

petitioners submitted with their return a qualified appraisal

with respect to the development rights, we conclude that there

are disputed issues of material fact and we will deny the

parties’ motions for partial summary judgment.

In reaching these holdings, we have considered all the

parties’ arguments, and, to the extent not addressed herein, we

conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order will be

issued.