Source: http://taxtrials.com/tag/scheidelman/
Timestamp: 2019-04-19 00:43:31+00:00

Document:
On Wednesday, June 18, 2014, the Second Circuit Court of Appeals affirmed the U.S. Tax Court’s ruling in Scheidelman v. Commissioner, TC Memo 2013-18.
This is Scheidelman’s second, and likely final, visit to the Second Circuit Court of Appeals. See our previous discussion of the Second Circuit’s decision to vacate and remand the case back to the U.S. Tax Court.
Read the full opinion here: Scheidelman v. Commissioner, No. 13-2650 (2d. Cir., June 18, 2014).
The proper standard for a qualified appraisal in the façade easement context has been vigorously contested by the IRS in recent years. In a rare reversal on reconsideration, the Tax Court adopted the Second Circuit Court of Appeals’ view of the necessary elements for a qualified appraisal in the context of these easement deductions. In short, the Court affirmed that the regulatory standard for a qualified appraisal requires only a method of valuation and a basis for valuation.
The decision under reconsideration was Friedberg v. Commissioner , TC Memo. 2011-238. In the reversal the Tax Court observed its practice of following the precedent of the U.S Court of Appeals to which a case may be appealed, first established in Golsen v. Commissioner, 54 T.C. 742 (1970).
In 2002, the taxpayers, Mr. Friedberg and Ms. Moss, purchased a townhouse in Manhattan’s Upper East Side Historic District for $9,400,000. In 2003, the National Architectural Trust (NAT) contacted Mr. Friedberg and asked him to donate a façade easement. Mr. Friedberg agreed and contacted an appraiser, recommended by NAT, who appraised the value of the easement. The appraisal concluded that the total loss of value, including the easement and the value of unused development rights, was $3,775,000. The taxpayers deducted that amount on their 2003 tax return as a charitable donation of a qualified conservation easement. The Commissioner challenged the deduction with a statutory notice of deficiency. The taxpayers filed a petition in the Tax Court.
Though Friedberg and Moss lost on that issue, not all of the argued issues were decided, including whether the appraisal was “qualified” as to the valuation of the unused development rights. The parties continued discovery on that question.
Meanwhile, in Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II), the Second Circuit vacated the Tax Court on the qualified appraisal standard referenced in the Friedberg opinion. The Court of Appeals held that Huda Scheidelman had obtained a qualified appraisal under the regulations because her appraisal adequately specified the appraiser’s method of, and basis for, determining the easement’s fair market value.
Friedberg and Moss were still hashing out interrogatories and depositions when the Second Circuit decided Ms. Scheidelman’s case. They filed a motion for reconsideration of the Court’s earlier ruling under Tax Court Rule 161. The Tax Court granted the motion.
Accordingly, the Court re-examined the two elements necessary for a qualified appraisal under Treas. Reg. §1.170A-13(c)(3): (1) a method of valuation and (2) a specific basis for the valuation. With regard to the first element, the Court found that Mr. Freidberg’s appraiser provided sufficient information to enable the Commissioner to evaluate his underlying methodology. Thus it included a method of valuation. The Court then considered and found that the appraisal included “some research and analysis” which was enough to establish a specific basis for the appraisal. The legal standard met, the Court reversed its holding in favor of the government and granted summary judgment for the taxpayers on the question of whether they had obtained a qualified appraisal.
The case is hardly over for Friedberg and Moss though. The Court specifically did not opine on the reliability and accuracy of the appraisal, reserving that factual determination for trial. Nonetheless, the Court’s reconsideration reversed its legal ruling in favor of the government and re-established the appraisal as qualified under the regulations. Whether the merits of the appraisal will withstand the scrutiny of a trial remains to be determined.
The IRS continues to scrutinize qualified appraisals in the context of façade easements, particularly in the historic districts of New York City. In a Memorandum Opinion issued July 14, 2010, Judge Cohen found that the taxpayers, Huda T. Schneidelman and Ethan W. Perry, failed to obtain a qualified appraisal for their donation of a historic façade easement. In 1997, taxpayers purchased a townhome for $255,000 in the Fort Greene Historic District of Brooklyn. In 2002, taxpayers received a postcard from the National Architectural Trust (NAT) announcing an upcoming meeting in the New York City area to provide information regarding the donation of a façade conservation easement and possible related tax benefits.
The taxpayer contacted her accountant, who had 40 years of experience, and asked him about the façade easement. He had not heard of façade easements before, but attended the NAT meeting and determined that the façade easement contribution deduction was appropriate under the Internal Revenue Code.
The appraiser taxpayer used was a “qualified expert in the field of real estate appraisal and valuation.” In his report, the appraiser used the sales comparison approach to determine that the estimated market value of the property was $1,015,000 as of the appraisal date. Looking at historical comparisons of attached row homes in New York City, the appraiser determined that the façade easement value was about 11% to 11.5% of the total value of the property. Using these estimates the appraiser found that the value of the façade conservation easement would be estimated at $115,000 or 11.33% of the fee simple value of the property.
NAT accepted the appraisal and the City of New York recorded the conservation deed of easement for the property. Taxpayer attached Form 8283 to her 2004 tax return reporting a $115,000 gift to charity. She applied part of the deduction to her 2004 return and carried over $63,083 of the reported contribution to her 2005 and 2006 tax returns.
The Tax Court rejected the appraiser’s idea that façade easements were generally valued between 10% and 15% of the total property value. The Court relied on Nicoladis v. Commissioner, T.C. Memo. 1988-163, to emphasize the point that valuation is a question of facts and circumstances. For that reason the Court rejected the appraiser’s report because it “failed to outline and analyze qualitative factors for the Vanderbilt property.” The application of a percentage of value lost because of the easement without a detailed explanation was not enough to constitute a valid method of valuation under Treas. Reg. § 1.170A-13(c)(3)(ii). The Tax Court did not address the valuation of the easement.
The Tax Court considered two other issues including whether the taxpayer’s payment to NAT was deductible as a charitable contribution and whether the taxpayer was liable for an accuracy related penalty under IRC § 6662. The Court found that the payments to NAT were not deductible because taxpayer failed to provide evidence necessary to show that they did not receive anything of substantial value in return for the cash payment. The taxpayer did not have to pay the § 6662 penalty because she reasonably relied on a competent tax professional and acted in good faith as to any underpayment for 2004.

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