T.C. Memo. 2013-224
UNITED STATES TAX COURT
BARRY S. FRIEDBERG AND CHARLOTTE MOSS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 9530-09. Filed September 23, 2013.
Kathleen M. Pakenham, for petitioners.
Alex Shlivko, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
WELLS, Judge: Respondent determined a deficiency of $1,321,250 and a
penalty pursuant to section 6662(h)1 of $528,500 with respect to petitioners’ 2003
*
This opinion supplements Friedberg v. Commissioner, T.C. Memo. 2011-
238.
1
Unless otherwise indicated, section references are to the Internal Revenue
(continued...)
-2-
[*2] tax year. In a prior opinion filed September 3, 2011, Friedberg v.
Commissioner, T.C. Memo. 2011-238, 2011 WL 4550136 (prior opinion), we
granted partial summary judgment on the issue of whether the appraisal report
prepared by Michael Ehrmann of Jefferson & Lee Appraisals, Inc., and attached to
petitioners’ 2003 joint Federal income tax return (Ehrmann appraisal) was a
qualified appraisal as defined in section 1.170A-13(c)(3), Income Tax Regs. We
held that the Ehrmann appraisal was not a qualified appraisal as it related to
petitioners’ facade easement. We further held that there remained issues of
material fact regarding whether the Ehrmann appraisal was a qualified appraisal as
it related to petitioners’ transfer of development rights. Petitioners move the
Court, pursuant to Rule 161, to reconsider our prior opinion.
Background
Many of the underlying facts are set out in detail in our prior opinion and
are incorporated herein by reference. We summarize the factual and procedural
background briefly here and make additional findings as required for our ruling on
petitioners’ motion for reconsideration. The facts are based upon examination of
1
(...continued)
Code of 1986, as amended (Code) and in effect at all relevant times, and Rule
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
-3-
[*3] the pleadings, moving papers, responses, and attachments, including
numerous affidavits supplied by petitioners. Petitioners are husband and wife who
resided in New York at the time they filed their petition.
During 2002, Mr. Friedberg purchased a residential townhouse in New York
City on East 71st Street between Park Avenue and Lexington Avenue (subject
property) for $9,400,000, and then paid approximately an additional $4 million for
extensive renovations. The subject property is in Manhattan’s Upper East Side
Historic District. 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.”
During 2003, the National Architectural Trust (NAT) contacted Mr.
Friedberg to ask him to donate an easement on the subject property. Mr. Friedberg
met with Sean Zalka, a representative from NAT, to discuss donating a facade
easement and development rights related to the subject property. Mr. Zalka then
sent Mr. Friedberg a spreadsheet that provided an estimate of the tax savings
available to Mr. Friedberg should he decide to donate to NAT the facade easement
-4-
[*4] 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
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.
-5-
[*5] After reviewing NAT’s materials, Mr. Friedberg decided to donate to NAT a
facade easement and all of the development rights associated with the subject
property.
Mr. Friedberg followed NAT’s recommendation and engaged Michael
Ehrmann of Jefferson & Lee Appraisals, Inc., based in Pittsburgh, to appraise the
subject property. Mr. Ehrmann visited the subject property and conducted an
inspection during November 2003 and subsequently prepared the Ehrmann
appraisal, which 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 Ehrmann appraisal includes a number of pages of background on
the economic, social, cultural, environmental, and political forces that influence
property values in New York City.
On the basis of the lot’s location in an R9X zoning district, permitting a
“floor area ratio”2 (FAR) of 9.0 for residential property, Mr. Ehrmann calculated
2
New York, N.Y. Zoning Resolution sec. 12-10 (2011) provides the
following definition for “floor area ratio”:
“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
(continued...)
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[*6] that the lot had a maximum development potential of 20,786.94 square feet,
approximately 13,731 square feet of which was unused.3 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 regarded as severable from the land ownership and transferable by
their owners. * * *
2
(...continued)
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).
3
Respondent accepts those numbers as accurate for purposes of the parties’
cross motions for partial summary judgment addressed in our prior opinion.
-7-
[*7] The Ehrmann appraisal 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
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[*8] 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 on that basis because, he
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 each
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 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:
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[*9] 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, 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 properties he
considered was in a historic district. The average price per FAR foot of the
comparable properties Mr. Ehrmann reported on was $154. 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.
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[*10] 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 Ehrmann appraisal provides an estimate of the value
of the subject property after the facade easement. 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
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[*11] following table to summarize his research on sales of comparable properties
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., sales) was 17.4%. However, Mr.
Ehrmann estimated that the facade easement on the subject property decreased its
value by 11%. 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.
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[*12] On the basis of his estimate of 11%, 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 $3,775,000.4
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.
Petitioners also attached to their tax return a copy of the Ehrmann appraisal. 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.
During December 2010, each party filed a motion for partial summary
judgment. Petitioners moved that, inter alia, the Court grant summary judgment
that the Ehrmann appraisal of the value of the easement was a “qualified
4
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.”
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[*13] appraisal” within the meaning of section 1.170A-13(c)(3), Income Tax Regs.
Respondent moved that the Court grant summary judgment that petitioners are not
entitled to a charitable contribution deduction related to their 2003 donation of the
facade easement and development rights because, inter alia, “petitioners failed to
substantiate their deduction * * * as required by section 155(a) of the Deficit
Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 691, (“DEFRA”) and Treas. Reg.
§ 1.170A-13(c).” Specifically, we were asked to determine whether the Ehrmann
appraisal included the “method of valuation” and the “specific basis for the
valuation” pursuant to section 1.170A-13(c)(3)(ii)(J) and (K), Income Tax Regs.
On October 3, 2011, we issued our prior opinion addressing the parties’
cross-motions for partial summary judgment. Relying in part on Scheidelman v.
Commissioner, T.C. Memo. 2010-151, 2010 WL 2788205 (Scheidelman I),
vacated and remanded, 682 F.3d 189 (2d Cir. 2012), we held that petitioners were
not entitled to a deduction for the donation of the facade easement because the
Ehrmann appraisal was not a “qualified appraisal” pursuant to section
1.170A-13(c)(3), Income Tax Regs., with respect to its valuation of the facade
easement. Accordingly, we granted respondent’s motion for partial summary
judgment with respect to that issue. However, with respect to the valuation of the
development rights, we concluded that disputed issues of material fact remained as
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[*14] to whether the Ehrmann appraisal was a qualified appraisal. Accordingly,
we denied both parties’ motions for partial summary judgment with respect to that
issue.
On June 15, 2012, the U.S. Court of Appeals for the Second Circuit vacated
our decision in Scheidelman I and remanded the case. Scheidelman v.
Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II). On July 17, 2012,
respondent deposed Mr. Ehrmann in the presence of petitioners’ counsel. During
the deposition Mr. Ehrmann stated that he had never appraised other transferrable
development rights before issuing the Ehrmann appraisal and that Mr. Friedberg
knew of this fact.
On August 1, 2012, petitioners moved the Court to reconsider our prior
opinion because of the change in law governing the issues noted above. On
September 7, 2012, respondent filed a response to petitioners’ motion for
reconsideration.
Discussion
Reconsideration under Rule 161 is intended to correct substantial errors
of fact or law and allow the introduction of newly discovered evidence that the
moving party could not have introduced, by the exercise of due diligence, in the
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[*15] prior proceeding. See Knudsen v. Commissioner, 131 T.C. 185 (2008);
Estate of Quick v. Commissioner, 110 T.C. 440, 441-442 (1998). We have broad
discretion as to whether to grant a motion for reconsideration, but will not do so
unless the moving party can point to unusual circumstances or substantial error.
Estate of Quick v. Commissioner, 110 T.C. at 441-442; see also Vaughn v.
Commissioner, 87 T.C. 164, 166-167 (1986). “Reconsideration is not the
appropriate forum for rehashing previously rejected legal arguments or tendering
new legal theories to reach the end result desired by the moving party.” Estate of
Quick v. Commissioner, 110 T.C. at 441-442.
However, an intervening change of controlling law may warrant our
exercising that discretion. See Doe v. N.Y.C. Dep’t of Soc. Servs., 709 F.2d 782,
789 (2d Cir. 1983); see also Alioto v. Commissioner, T.C. Memo. 2008-185, 2008
WL 2945349, at *8. We based our prior opinion in part on a similar legal analysis
as that contained in Scheidelman I. The U.S. Court of Appeals for the Second
Circuit vacated and remanded Scheidelman I, see Scheidelman II, 682 F.3d 189,
and, absent stipulation to the contrary, this case is appealable to that court. In
accordance with Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445
F.2d 985 (10th Cir. 1971), we conclude that the decision by the Court of Appeals
- 16 -
[*16] in Scheidelman II specifically alters the underlying law and, therefore,
requires that we reconsider our prior opinion.
Petitioners ask us to reconsider whether the Ehrmann appraisal met the
requirements of a “qualified appraisal” pursuant to section 1.170A-13(c)(3)(ii)(J)
and (K), Income Tax Regs., with respect to both the facade easement and the
development rights. We address each issue in turn.
I. Facade Easement
In our prior opinion we determined that Mr. Ehrmann’s approach to valuing
the subject property after the facade easement donation diverged significantly
from the accepted comparable sales method, which was the method Mr. Ehrmann
claimed to apply. We determined that Mr. Ehrmann instead used sale and nonsale
transactions of eased properties in locations other than New York City, which is
the site of the subject property, to estimate a percentage diminution in value
associated with a facade easement. Mr. Ehrmann then multiplied the before value
of the subject property, the calculation of which respondent did not contest, by the
percentage diminution that he purported to derive from the transactions noted
above to estimate the loss in value on account of the facade easement.5 In
5
As we noted in our prior opinion in this case, it appears that Mr. Ehrmann
arrived at 11%, the percentage of fair market value that NAT had told Mr.
(continued...)
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[*17] Scheidelman I, we 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),
Income Tax Regs. Scheidelman I, 2010 WL 2788205, at *9. Accordingly, our
prior opinion in this case held, consistent with our decision in Scheidelman I, that
the Ehrmann appraisal was not a qualified appraisal with respect to the facade
easement because it lacked a method and specific basis for the determined value.
The U.S. Court of Appeals for the Second Circuit vacated this Court’s
decision in Scheidelman I and remanded the case. See Scheidelman II, 682 F.3d
189. Concerning whether an appraisal includes the method of valuation as
required by section 1.170A-13(c)(3)(ii)(J), Income Tax Regs., the Court of
Appeals in Scheidelman II stated:
For the purpose of gauging compliance with the reporting
requirement, it is irrelevant that the * * * [Commissioner] believes the
method employed was sloppy or inaccurate, or haphazardly applied
* * *. The regulation requires only that the appraiser identify the
valuation method “used”; it does not require that the method adopted
be reliable. * * * By providing the information required by the
regulation, * * * [the appraiser] enabled the * * * [Commissioner] to
evaluate his methodology.
5
(...continued)
Friedberg was typical for facade easements, in spite of his research on comparable
sales and not because of it.
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[*18] Id. at 196-197 (fn. ref. omitted). The Court of Appeals held that “the
Commissioner’s interpretation, that an unreliable method is no method at all, goes
beyond the wording of the regulation, which imposes only a reporting
requirement.” Id. n.6. Concerning whether an appraisal includes the specific basis
for the valuation as required by section 1.170A-13(c)(3)(ii)(K), Income Tax Regs.,
the Court of Appeals stated that the purpose of that reporting regulation was to
provide the Commissioner with “sufficient information to evaluate the claimed
deduction and ‘deal more effectively with the prevalent use of overvaluations.’”
Id. at 198 (quoting Hewitt v. Commissioner, 109 T.C. 258, 265 (1997), aff’d, 166
F.3d 332 (4th Cir. 1998)). The Court of Appeals held that the requirement of
section 1.170A-13(c)(3)(ii)(K), Income Tax Regs., is fulfilled if the appraiser’s
analysis is present, even if the Commissioner deems it to be unconvincing.
Scheidelman II, 682 F.3d at 198.
In their motion for reconsideration, petitioners contend that the Ehrmann
appraisal included a method of valuation because it supplied enough information
to enable the Commissioner to evaluate his methodology and showed how he
applied the method. Petitioners acknowledge that we previously concluded that
Mr. Ehrmann’s stated method was improperly applied and unreliable but contend
that reliability is not a factor for purposes of determining whether the Ehrmann
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[*19] appraisal is a qualified appraisal. Respondent opposes petitioners’ motion
for reconsideration with respect to the facade easement and contends that (1)
petitioners misstate the proper standard articulated by the Court of Appeals in
Scheidelman II, (2) the Ehrmann appraisal is not a qualified appraisal even if we
apply the standard that petitioners advocate, and (3) the Ehrmann appraisal fails to
include a specific basis for valuation.6 We disagree with all three of respondent’s
contentions.
Respondent first contends that petitioners misstate the standard that the
Court should apply and that the proper standard is to determine whether the
method of valuation stated in the appraisal is the method actually used by the
6
Respondent also contends that we did not rest our prior opinion entirely on
the legal analysis contained in Scheidelman v. Commissioner, T.C. Memo. 2010-
151, 2010 WL 2788205 (Scheidelman I), vacated and remanded, 682 F.3d 189 (2d
Cir. 2012) (Scheidelman II), pointing to our scarce citations of that case and that
we instead relied on Friedman v. Commissioner, T.C. Memo. 2010-45, 2010 WL
845949, and Jacobson v. Commissioner, T.C. Memo. 1999-401, 1999 WL
1127811, which the Court of Appeals for the Second Circuit approved.
Respondent’s contention is without merit. The Court of Appeals’ opinion in
Scheidelman II vacated this Court’s decision in Scheidelman I with respect to the
same analysis we used in this case in our prior opinion and distinguished both
Friedman and Jacobson. See Scheidelman II, 682 F.3d at 197-198 (stating that the
appraisals in those cases “failed altogether to ‘even indicate the valuation method
used or the basis for the appraised values’” (quoting Friedman v. Commissioner,
2010 WL 845949, at *4) and “‘provided no methodology or rationale’” (quoting
Jacobson v. Commissioner, 1999 WL 1127811, at *2). Pursuant to Golsen v.
Commissioner, 54 T.C. at 757, the Court of Appeals’ opinion controls our analysis
in the instant case.
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[*20] appraiser. We disagree. In Scheidelman II, 682 F.3d at 197, the Court of
Appeals stated that the relevant question is whether the information provided
“enabled the * * * [Commissioner] to evaluate * * * [the appraiser’s]
methodology”. See also Rothman v. Commissioner, T.C. Memo. 2012-218, 2012
WL 3101513, at *4. Moreover, the Court of Appeals clarified that “it is irrelevant
that the * * * [Commissioner] believes the method employed was sloppy or
inaccurate, or haphazardly applied”. Scheidelman II, 682 F.3d at 197 (emphasis
added). Scheidelman II is clear; the regulations are a reporting requirement. Id. at
197 & n.6. Thus, pursuant to Scheidelman II, any evaluation of accuracy is
irrelevant for purposes of deciding whether the appraisal is qualified pursuant to
section 1.170A-13(c)(3)(ii)(J), Income Tax Regs.
Respondent also contends that the Ehrmann appraisal fails to enable
respondent to evaluate Mr. Ehrmann’s methodology. Respondent argues that the
Ehrmann appraisal “merely set forth certain disconnected and meaningless steps
that Mr. Ehrmann took” and that “the 11% value was arrived at in spite of his
research.” While we note that we previously determined that “[n]othing in Mr.
Ehrmann’s report supports his conclusion about the after value of the subject
property”, Friedberg v. Commissioner, 2011 WL 4550136, at *15, we concede that
reaching that determination first required us to evaluate Mr. Ehrmann’s
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[*21] methodology. Although we continue to question whether the Ehrmann
appraisal is reliable or properly applied methodology to reach its conclusions, we
conclude that it provides sufficient information to enable respondent to evaluate
Mr. Ehrmann’s underlying methodology. Accordingly, we conclude that the
Ehrmann appraisal includes a method of valuation as required by section 1.170A-
13(c)(3)(ii)(J), Income Tax Regs., with respect to the facade easement.
Regarding the requirements of section 1.170A-13(c)(3)(ii)(K), Income Tax
Regs., respondent contends that the Ehrmann appraisal did not provide a specific
basis for the valuation because it lacked reasoned analysis and arrived at the value
of the facade easement in spite of Mr. Ehrmann’s research, not because of it. The
Court of Appeals held that there is a specific basis for the valuation if the
appraiser’s analysis is present, even if the Commissioner deems it unconvincing.
Scheidelman II, 682 F.3d at 198 (“The Commissioner may deem * * * [the
appraiser’s] ‘reasoned analysis’ unconvincing, but it is incontestably there.”). As
we stated in our prior opinion, the Ehrmann appraisal compared eight different
properties with facade easements, for which Mr. Ehrmann allegedly considered,
inter alia, each property’s location, size, local government laws and regulations,
use, date of easement, appreciation of value, and improvements. Although we
criticized and disagreed with Mr. Ehrmann’s analysis, it was “incontestably there”.
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[*22] See id. Indeed, respondent’s own argument concedes that the Ehrmann
appraisal contained some research and analysis because respondent concludes that
value was determined in spite of that research. Accordingly, we conclude that the
Ehrmann appraisal includes a specific basis for Mr. Ehrmann’s valuation as
required by section 1.170A-13(c)(3)(ii)(K), Income Tax Regs., with respect to the
facade easement.
Consequently, pursuant to Scheidelman II, we conclude that the Ehrmann
appraisal is a qualified appraisal pursuant to section 1.170A-13(c)(3)(ii), Income
Tax Regs., with respect to petitioners’ facade easement. However, we specifically
do not opine on the reliability and accuracy of the methodology and specific basis
of valuation in the Ehrmann appraisal, a matter we leave to be decided at trial.
II. Development Rights
In our prior opinion we determined that Mr. Ehrmann’s method of using
five comparable transactions involving development rights to estimate the value of
the subject property’s unused development rights was inconsistent and contained
mathematical errors and erroneous assumptions. Although we determined that Mr.
Ehrmann claimed to be applying the comparable sales method to calculate a price
per square foot of the development rights, we were not convinced that the
comparable sales transactions were truly comparable. Instead of comparing the
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[*23] purchase prices per square foot for additional development rights, Mr.
Ehrmann compared prices per square foot of properties that included no additional
development rights or averaged prices per square foot for both development rights
attached to the property and additional development rights. However, we
determined that the Ehrmann appraisal nonetheless explained the method and
specific basis of valuation with respect to the development rights. Because we
questioned the Ehrmann appraisal’s accuracy and reliability and whether it
adequately evaluated the market demand for and transferability of development
rights, we held that issues of material fact remained regarding whether the
Ehrmann appraisal was a qualified appraisal with respect to the development
rights.7
In their motion for reconsideration, petitioners contend that our prior
opinion concludes that the Ehrmann appraisal included the method of valuation
and specific basis for the valuation of the development rights. Petitioners contend
that remaining issues of material fact, which caused us to deny petitioners’ motion
for summary judgment with respect to this issue in our prior opinion, are relevant
7
This Court did not discuss qualified appraisals of development rights in
Scheidelman I. However, the Court of Appeals for the Second Circuit’s analysis
of sec. 1.170A-13(c)(3)(ii)(J) and (K), Income Tax Regs., applies as much to a
valuation of development rights as it does to a valuation of a facade easement. We
do not deem it necessary to restate that analysis, which we discussed above.
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[*24] only to determining the value of the development rights and not to
determining whether the Ehrmann appraisal is qualified under the Scheidelman II
analysis. We agree with petitioners. Under Scheidelman II, section 1.170A-
13(c)(3)(ii)(J) and (K), Income Tax Regs., “imposes only a reporting requirement”
and the taxpayer only needs to include sufficient information to allow the
Commissioner to evaluate the methodology and specific basis for valuation.
Scheidelman II, 692 F.3d at 196-198, n.6. In our prior opinion, we stated that,
despite errors, the Ehrmann appraisal “explained the method of valuation and the
specific basis for the valuation” of the development rights. Friedberg v.
Commissioner, 2011 WL 4550136, at *22. The remaining issues of material fact
(e.g., the effect of the market demand, the transferability of the development
rights, and the accuracy and reliability of the Ehrmann appraisal) are relevant to
our analysis of valuation but are irrelevant as to whether the Ehrmann appraisal is
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[*25] qualified pursuant to section 1.170A-13(c)(3), Income Tax Regs.8 See
Scheidelman II, 692 F.3d at 196-198.
Respondent does not object to petitioners’ motion for reconsideration with
respect to whether the Ehrmann appraisal is a qualified appraisal of development
rights but contends that we should consider additional factual developments that
have arisen since our prior opinion and, in result, grant summary judgment to
respondent. Specifically, respondent contends that, at a deposition after our prior
opinion, Mr. Ehrmann confirmed that he had never appraised other transferrable
development rights before issuing the Ehrmann appraisal and that Mr. Friedberg
knew of this fact. Consequently, respondent contends that Mr. Ehrmann was not a
qualified appraiser of transferable development rights pursuant to section 1.170A-
8
Respondent contends that the Ehrmann appraisal is not qualified because it
assumed a highest and best use for the development rights without adequately
assessing the market demand for those rights with a market study. We disagree.
We have previously held that, when using the comparable sales method, the before
value “is arrived at by first determining the highest and best use of the property in
its current condition unrestricted by the easement.” Hilborn v. Commissioner, 85
T.C. 677, 689 (1985). However, valuation is not a precise science, and the fair
market value of property on a given date is a question of fact to be resolved on the
basis of the entire record. Kiva Dunes Conservation, LLC v. Commissioner, T.C.
Memo. 2009-145, 2009 WL 1748862, at *3. Like the other questions of fact noted
above, respondent’s contentions as to the defects of the Ehrmann appraisal are
irrelevant as to whether the Ehrmann appraisal is a qualified appraisal pursuant to
sec. 1.170A-13(c)(3), Income Tax Regs.
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[*26] 13(c)(5), Income Tax Regs., and therefore, the Ehrmann appraisal was not a
qualified appraisal.9 We disagree.
Pursuant to section 1.170A-13(c)(5), Income Tax Regs.,10 a qualified
appraiser is an individual who includes on the appraisal summary11 a declaration
that: (1) the individual either holds himself or herself out to the public as an
appraiser or performs appraisals regularly; (2) the appraiser is qualified to make
appraisals of the type of property being valued;12 (3) the appraiser is not excluded
9
Pursuant to sec. 1.170A-13(c)(3)(i)(B), Income Tax Regs., a qualified
appraisal must be “prepared, signed, and dated by a qualified appraiser (within the
meaning of paragraph (c)(5) of * * * [that] section).”
10
While we recognize that “qualified appraiser” is now defined in sec.
170(f)(11)(E)(ii), that section was not in effect at the time petitioners filed the
return for their 2003 tax year. See Pension Protection Act of 2006, Pub. L. No.
109-280, sec. 1219(c)(1), 120 Stat. at 1084 (effective for appraisals prepared with
respect to returns filed after August 17, 2006).
11
Pursuant to sec. 1.170A-13(c)(2)(i)(B), Income Tax Regs., a fully
completed appraisal summary must be attached to the tax return on which the
deduction for contribution is first claimed. The appraisal summary, which differs
from a qualified appraisal, must comply with the requirements set forth in sec.
1.170A-13(c)(4), Income Tax Regs.
12
Pursuant to sec. 1.170A-13(c)(3)(ii)(F), Income Tax Regs., the qualified
appraisal should include “[t]he qualifications of the qualified appraiser who signs
the appraisal, including the appraiser’s background, experience, education, and
membership, if any, in professional appraisal associations”. Respondent makes no
claim regarding whether Mr. Ehrmann failed to report his qualifications pursuant
(continued...)
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[*27] from qualifying under section 1.170A-13(c)(5)(iv), Income Tax Regs.;13 and
(4) the appraiser understands that an intentionally false or fraudulent
overstatement of the value of the property described in the qualified appraisal or
appraisal summary may subject the appraiser to a civil penalty under section 6701
for aiding and abetting an understatement of tax liability. According to the plain
language of the regulation, an appraiser is a qualified appraiser if he or she makes
the requisite declaration that he or she is qualified to appraise the value of the
contributed property; the regulation does not direct the Commissioner to analyze
the appraiser’s qualifications to determine whether he or she has sufficient
education, experience, or other characteristics. We conclude that the analysis of
the Court of Appeals for the Second Circuit in Scheidelman II regarding the
method and specific basis of valuation of a qualified appraisal applies equally to
the appraiser’s qualification for purposes of section 1.170A-13(c)(5)(i)(B), Income
12
(...continued)
to sec. 1.170A-13(c)(3)(ii)(F), Income Tax Regs., so we do not further address that
issue.
13
Pursuant to sec. 1.170A-13(c)(5)(iv), Income Tax Regs., an individual is
not a qualified appraiser if the individual is, inter alia, the donor, the donee, any
person employed by the donor or donee, or an appraiser who is regularly used by
the donor or donee and who does not perform most of his or her appraisals for
other persons. Respondent makes no claim regarding whether Mr. Ehrmann is
excluded from qualifying as a qualified appraiser pursuant to sec. 1.170A-
13(c)(5)(iv), Income Tax Regs., so we do not further address that issue.
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[*28] Tax Regs. Accordingly we conclude that section 1.170A-13(c)(5)(i)(B),
Income Tax Regs., is a reporting requirement, i.e., an appraiser is qualified if the
declaration is present, regardless of whether it is “unconvincing”. See
Scheidelman II, 682 F.3d at 198. Accordingly, respondent’s contention that Mr.
Ehrmann is not a qualified appraiser is without merit.
Respondent has conceded that Mr. Ehrmann signed the appraisal summary
that contains the necessary declaration. Consequently, Mr. Ehrmann is a qualified
appraiser pursuant to section 1.170A-13(c)(5), Income Tax Regs., and the
Ehrmann appraisal is a qualified appraisal of the value of the development rights
petitioners contributed.14
III. Conclusion
Upon due consideration of the foregoing, we hold that petitioners are
entitled to summary judgment on the issue of whether the Ehrmann appraisal is a
qualified appraisal pursuant to section 1.170A-13(c)(3), Income Tax Regs., with
respect to both the facade easement and the development rights. Consequently, we
reconsider our holding in our prior case that petitioners are not entitled to a
14
However, we note that we do not at this time opine on whether Mr.
Ehrmann’s qualifications are sufficient to qualify as an expert witness to testify in
this Court regarding the value of the development rights in this case or whether the
Ehrmann appraisal may be admitted as an expert report pursuant to Rule 143(g)
for that purpose.
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[*29] charitable contribution deduction with respect to the facade easement.
However, the other holdings of our prior opinion remain.
We have considered all arguments made, and to the extent not specifically
addressed herein, conclude they have been previously addressed in our prior
opinion in this case or are irrelevant, moot, or without merit.
To reflect the foregoing,
An appropriate order will be
issued.