Source: http://sewaneelegacy.com/?pageID=134&docID=377
Timestamp: 2018-01-23 03:48:09
Document Index: 217869068

Matched Legal Cases: ['§ 1', '§ 1', '§ 1', '§ 170', '§ 6', '§ 170', '§ 170', '§ 1', '§ 7482', '§ 7491', '§ 1', '§ 1', '§ 9', '§ 1', '§ 9', 'art 730', '§ 6664', '§ 6701', '§ 301', '§ 46']

Whitehouse Hotel Limited Partnership et al. v. Commissioner; No. 09-60085 (12 Aug 2010)
WHITEHOUSE HOTEL LIMITED PARTNERSHIP; QHR HOLDINGS-NEW ORLEANS LIMITED, TAX MATTERS PARTNER, Petitioners - Appellants v.
No. 12104-03
Before BARKSDALE, GARZA, and DENNIS, Circuit Judges.
Whitehouse was formed in 1995 for the purpose of purchasing and renovating a parcel of New Orleans property. The parcel is contained within both the Vieux Carr� Historic District, as listed in 1966 in the National Register of Historic Places, and the Canal Street Historic District (part of the Central Business District).
The easement requires Whitehouse to maintain the terra-cotta facade in a "good and sound state of repair". And, regarding the prohibition against altering the facade, the easement prohibits, inter alia, any construction or alteration that would affect the appearance of the exterior walls of the Lower Stories which are visible from Canal and Dauphine Streets, the exterior portion of the Improvement above the Lower Stories which is not covered by the Upper Stories, [and] the exterior walls of the Upper Stories which are visible from Canal, Burgundy, Iberville, and Dauphine Streets.
Whitehouse challenged both assessments in tax court. See generally Whitehouse Hotel Ltd. P'ship v. Comm'r, 131 T.C. 112 (2008). There, both Whitehouse and Commissioner presented expert testimony on both the easement's fair market value and the difference in the property's before- and after-easement values, see 26 C.F.R. § 1.170A-14(h)(3)(i). A serious illness prevented Cohen, who prepared the underlying appraisal for the deduction, from participating at trial; therefore, Richard Roddewig provided the expert testimony for Whitehouse. Dunbar Argote did so for Commissioner.
Both experts' written reports constituted their direct testimony at trial,on which they were cross-examined. The outcome before the tax court largely turned on the these expert opinions, which the tax court discussed at length. See Whitehouse Hotel, 131 T.C. at 121-46.
Among other things, the experts disagreed on two threshold issues: which property should be valued; and the nature of its "highest and best use", which is, of course, a key factor in determining fair market value. See, e.g., Stanley Works & Subsidiaries v. Comm'r, 87 T.C. 389,400 (1986) ("The fair market value of property reflects the highest and best use of the property on the relevant valuation date."). Roddewig, for Whitehouse, determined the relevant property to consist of the Maison Blanche building (including annexes)and the contiguous Kress building, but not the Kress parking garage. Argote, for Commissioner, valued only the Maison Blanche building (including annexes); Commissioner did not ask him to opine on any potential reduction in the Kress building's value. Whitehouse Hotel, 131 T.C. at 126. Restated, contrary to the basic regulatory requirements, discussed infra, he did not consider the easement's impact on the contiguous and commonly owned Kress building. See 26 C.F.R. § 1.170A14(h)(3)(i).
On the other hand, Argote concluded that the highest and best use of the Maison Blanche building (including its annexes) was as a mixed non-luxury hotel and retail complex, not a luxury hotel like the Ritz-Carlton. He also concluded that the easement did not limit the potential number of rooms. In other words, Argote opined the easement had no effect on Whitehouse's rights to construct additional rooms on top of the Kress building. In the light of this opinion, it is notable that Argote admitted to not having read the applicable treasury regulation (26 C.F.R. § 1.170A-14). Again, that regulation, discussed infra, requires, inter alia, considering the easement's effect on the fair market value of applicable contiguous property.
A four-day trial was held in December 2006. The tax court's 64-page opinion was rendered almost two years later, with the final decision being entered in January 2009. See Whitehouse Hotel, 131 T.C. 112.
The National Trust for Historic Preservation in the United States filed an amicus brief, pointing out that valuation of preservation easements is a fundamentally important issue to National Trust because,if such easements are deemed to have little or no value, the tax incentives Congress has established to encourage preservation would be severely weakened. National Trust also challenges Argote's appraisal and the court's conclusions, and asserts that the court's decision, if allowed to stand, will obscure the proper method for easement appraisals.
As a general rule, for charitable gifts of property, a taxpayer is "not allowed to take a deduction if the charitable gift consists of less than the taxpayer's entire interest in that property". Glass v. Comm'r, 471 F.3d 698, 706 (6th Cir. 2006). An exception to this rule is for a "qualified conservation contribution". Id. (citing 26 U.S.C. § 170(f)(3)(B)(iii)); see also Stephen J. Small, The Tax Benefits of Donating Easements in Scenic and Historic Property, 7 REAL EST. L.J. 304, 305 (1979) (noting Congress "made the basic policy decision that the preservation of historic property is a worthy goal and one that is appropriate to encourage through the medium of the tax code"). This exception has existed in its current form since 1980. See Pub. L. No. 96-541, § 6 (1980).
To constitute a "qualified conservation easement", the contribution must be "(A) of a qualified real property interest, (B) to a qualified organization, [and] (C) exclusively for conservation purposes". 26 U.S.C. § 170(h)(1). These requirements are defined in the statute's subsequent subsections. See 26 U.S.C. § 170(h)(2), (3), (4). Such an easement must "be based upon legally enforceable restrictions that will prevent uses of the retained interest in the property that are inconsistent with the conservation purposes of the contribution". Simmons v. Comm'r, T.C. Memo 2009-208, 2009 WL 1950610, at * 4 (15 Sept. 2009).
As noted supra, Commissioner agrees that the easement is a qualified conservation easement -- only its value is at issue. In that regard, the Internal Revenue Service has provided regulatory guidance for valuing qualified conservation easements. See 26 C.F.R. § 1.170A-14(h). The "before and after" valuation approach is to be employed where, as here, there is no "substantial record of sales of easements comparable to the donated easement". Id.; see also, e.g., Richmond v. United States, 699 F. Supp. 578, 581-84 (E.D. La. 1988) (valuing facade easement in Vieux Carr�); Hilborn v. Comm'r, 85 T.C. 677, 688700 (1985) (discussing background of before-and-after valuation method and applying it to value facade easement in Vieux Carr�); Simmons, 2009 WL 1950610,at *8-11 (valuing facade easement); Browning v. Comm'r, 109 T.C. 303, 320-325 (1997) (discussing and applying before-and-after valuation method in context of easement restricting development of land).
Notwithstanding this regulatory guidance, valuing preservation easements remains, most understandably, a complex and difficult undertaking that continues to challenge appraisers and the IRS. See, e.g., Bruzewicz v. United States, 604 F. Supp. 2d 1197, 1205 (N.D. Ill. 2009) (referring to valuation of real-estate easements as an "esoteric and specialized" subject). This complexity is reflected, for example, by a guidebook devoted to appraising land-conservation and historic-preservation easements. See LAND TRUST ALLIANCE & NATIONAL TRUST FOR HISTORIC PRESERVATION, APPRAISING EASEMENTS (3d ed. 1999).
Pursuant to Tax Court Rule 143(a), the Federal Rules of Evidence apply to trials in tax court. Similarly, its decisions are reviewed "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury". 26 U.S.C. § 7482(a); Houston Oil & Minerals Corp. v. Comm'r, 922 F.2d 283, 285 (5th Cir. 1991); see also Green v. Comm'r, 507 F.3d 857, 866 (5th Cir. 2007) ("We apply the same standard of review to decisions of the Tax Court that we apply to district court decisions." (citing Arevalo v. Comm'r, 469 F.3d 436, 438 (5th Cir. 2006))).
Whitehouse claims the tax court erred by admitting Argote's expert opinion. In doing so, Whitehouse challenges both Argote's qualifications and the reliability of his report and testimony. See generally FED. R. EVID. 702 (stating witness may qualify as expert through "knowledge, skill, experience, training, or education"); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) (establishing district court as "gatekeeper" for admitting scientific expert testimony under Rule 702's five factors); Kumho Tire Co. v. Carmichael,526 U.S. 137 (1999) (extending Daubert to apply to non-scientific experts). In Gibbs v. Gibbs, 210 F.3d 491, 500 (5th Cir. 2000), our court noted that the importance of the trial court's gatekeeper role is significantly diminished in bench trials, as in this instance, because, there being no jury, there is no risk of tainting the trial by exposing a jury to unreliable evidence.
A tax court's admissibility determination for expert evidence is reviewed for abuse of discretion. E.g., Kumho Tire, 526 U.S. at 142; Knight v. Kirby Inland Marine Inc., 482 F.3d 347, 351 (5th Cir. 2007). "[A trial judge has] wide latitude in determining the admissibility of expert testimony, and 'the discretion of the trial judge and his or her decision will not be disturbed on appeal unless 'manifestly erroneous'". Watkins v. Telsmith, Inc., 121 F.3d 984, 988 (5th Cir. 1997) (quoting Eiland v. Westinghouse Elec., 58 F.3d 176, 180 (5th Cir. 1995)). The same standard applies both for assessment of the witness' qualifications and for reliability determinations. E.g., Hidden Oaks Ltd. v. City of Austin, 138 F.3d 1036, 1050 (5th Cir. 1998) (qualifications); Hodges v. Mack Trucks, Inc., 474 F.3d 188, 194-95 (5th Cir. 2006) (reliability). Accordingly, the tax court has broad discretion to accept or reject all or part of an expert's opinion. Helvering v. Nat'l Grocery Co., 304 U.S. 282, 294-95 (1938).
Whitehouse claims Argote's general qualifications as a real-estate appraiser do not give him the requisite "knowledge, skill, expertise, training, or education" to value historic-preservation facade easements. See FED. R. EVID. 702. "[T]he essential elements of the real estate expert's competency include his knowledge of the property and of the real estate market in which it is situated, as well as his evaluating skill and experience as an appraiser". United States v. 60.14 Acres of Land, 362 F.2d 660, 668 (3d Cir. 1966), quoted with approval in Hidden Oaks, 138 F.3d at 1050. In this light, Argote is qualified to offer expert opinion on the value of real estate in New Orleans. He is a licensed appraiser in Louisiana with over 25 years' appraisal experience, and he has appraised: 50 to 70 hotels between 1990 and 2000; commercial properties neighboring the Maison Blanche building; and the Maison Blanche building itself three times prior to the present case.
Whitehouse maintains, however, that a conservation-easement appraisal requires additional or different qualifications. In doing so, Whitehouse relies heavily on Bruzewicz, 604 F. Supp. 2d 1197. There, plaintiffs challenged Commissioner's disallowance of their claimed charitable-contribution deduction. See id. at 1199. The Bruzewicz district court held plaintiffs' failure to provide a "contemporaneous written acknowledgment" of the donation (as required by statute) was "alone fatal to their claimed deduction", but also noted that mere inclusion of the appraisers' license numbers in the appraisal did not constitute substantial compliance with the regulatory requirement that the appraisal provide the appraisers' qualifications. Id. at 1204-05.
Whitehouse also cites two decisions by our court that discuss excluded expert opinions: Smith v. Goodyear Tire & Rubber Co., 495 F.3d 224, 226 (5th Cir. 2007); and Caracci v. Comm'r, 456 F.3d 444, 451-52 (5th Cir. 2006). Argote is, however, distinctly more qualified than the witnesses who offered those excluded opinions.
In sum, Whitehouse's contention that Argote was not sufficiently qualified to offer expert testimony on the easement's value fails. A real-estate appraiser with his background is sufficiently qualified to value a specific type of property interest -- even one as "esoteric and specialized" as a conservation easement, Bruzewicz, 604 F. Supp. 2d at 1205. Finding Argote qualified was not a "manifestly erroneous" abuse of discretion, especially because of the diminished importance of the tax court's role, sitting without a jury, as a gatekeeper. See Gibbs, 210 F.3d at 500.
Whitehouse claims: both experts acknowledged they were bound by USPAP; Louisiana law requires that all licensed appraisers shall comply with USPAP; such compliance is required for all federally related transactions; and the IRS treats USPAP as providing the applicable appraisal standards. Further, Whitehouse claims Argote's valuation is merely ipse dixit, an insufficient basis upon which to admit opinion testimony. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (holding district court is not required "to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert").
Whitehouse points to several instances where Argote's report allegedly fails to comply with USPAP standards. It is unnecessary, of course, to analyze each instance unless strict compliance with USPAP is required for the report to be admissible. Otherwise, the nature and extent of the deviations concern only the report's credibility (i.e., the weight it should be given). Therefore, the threshold question is a legal one: whether strict compliance with USPAP is a pre-requisite for admissibility.
As the tax court noted, Whitehouse "has not cited any authority, nor do we know of any, for the proposition that an appraiser's compliance with USPAP is the sole determining factor as to whether an appraiser's valuation report is reliable". Whitehouse, 131 T.C. at 127. Especially in the light of the tax court's serving as the fact finder as well as the expert-testimony gatekeeper, Whitehouse has failed to show the court abused its discretion in treating the alleged USPAP violations as concerning credibility rather than admissibility. See Gibbs, 210 F.3d at 500 ("Most of the safeguards provided for in Daubert are not as essential . . . where a district judge sits as the trier of fact in place of a jury."). In other words, the tax court acted within its ample discretion in considering USPAP compliance as relevant to the weight Argote's report should be given, instead of whether it should be admitted.
Whitehouse also contends the tax court erred in failing to shift the burden of proof from Whitehouse to Commissioner. Whitehouse asserts: the burden should have shifted because Whitehouse introduced credible evidence with respect to a factual issue, see 26 U.S.C. § 7491 ("Burden shifts where taxpayer produces credible evidence."); and, alternatively, Commissioner's assertion both at trial and in the post-trial brief that the donation value was zero (in contrast to the earlier Notice of Final Partnership Administrative Adjustment, which stated the deductible amount was $1.15 million)triggered the "new matter rule", see T.C. RULE 142(a)(1) (placing burden on petitioner with several exceptions, including one for "any new matter", for which it is on respondent). The tax court did not explicitly rule on the burden-shifting issue, and Whitehouse notes the court likely considered it moot because two experts' reports were weighed against one another.
"The allocation of the burden of proof is a legal issue reviewed de novo." E.g., Marathon Fin. Ins., Inc., RRG v. Ford Motor Co., 591 F.3d 458, 464 (5th Cir. 2009) (citing Grilletta v. Lexington Ins. Co., 558 F.3d 359, 364 (5th Cir. 2009)). The tax court need not decide whether the burden shifted where, as here, both parties offered some admissible evidence. Blodgett v. Comm'r, 394 F.3d 1030, 1039 (8th Cir. 2005). "In a situation in which both parties have satisfied their burden of production by offering some evidence, then the party supported by the weight of the evidence will prevail regardless of which party bore the burden of persuasion, proof or preponderance." Id.; see also, e.g., Knudsen v. Comm'r, 131 T.C. 185, 189 (2008) ("[A]n allocation of the burden of proof is relevant only when there is equal evidence on both sides. . . . In a case where the standard of proof is preponderance of the evidence and the preponderance of the evidence favors one party, we may decide the case on the weight of the evidence and not on an allocation of the burden of proof.").
Whitehouse next maintains the tax court erred by ignoring the income and replacement-cost valuation methods in favor of relying solely on the comparable-sales method. Again, "[v]aluation is a mixed question of law and fact, the factual premises being subject to review on a clearly erroneous standard, and the legal conclusion being subject to de novo review". In re Stembridge, 394 F.3d 383, 385 (5th Cir. 2004) (quoting In re T-H New Orleans Ltd. P'ship, 116 F.3d 790, 799 (5th Cir. 1997)). The tax court's determination of the proper fair-market valuation method is a conclusion of law; thus, our review is de novo. Cook v. Comm'r, 349 F.3d 850, 853 (5th Cir. 2003) (citing Estate of Dunn v. Comm'r, 301 F.3d 339, 348 (5th Cir. 2002)).
Where, as here, there is no "substantial record of sales of easements comparable to the donated easement", see 26 C.F.R § 1.170A-14(h)(3)(i), there are three commonly recognized methods for valuing real property: comparable sales, income, and replacement-cost. Hilborn, 85 T.C. at 689; see also USPAP Standards Rule 1-4 (identifying three methods and noting each is to be used "when . . . necessary"). A description of the three methods follows.
As the definition indicates, comparability is largely a function of three variables: characteristics of the properties, their geographic proximity to one another, and the time differential. For any particular [valued] property, there may be an entire spectrum of comparable open market sales: from almost simultaneous sales of adjoining, virtually identical property to sales of such dissimilar and distant properties occurring so long ago that they are not in any sense of the term "comparable" sales. Generally, the more comparable a sale is, the more probative it will be of the fair market value of the . . . property [at issue]. In most cases, of course, there are no open market sales "ideally" comparable (i.e., virtually identical characteristics, immediate vicinity, and within a short time of the [date on which property at issue was valued]), but instead an assortment of sales that are only reasonably comparable in all or several respects. Sound and just trial practice is to admit as many of the "most comparable" sales available as is necessary to fairly permit each side to present its argument of fair market value for the [fact-finder's] consideration.
The income method involves analyzing data from comparable properties to determine the property's earnings capacity, operating expenses, and rates of capitalization and discount. This information is combined with any "reasonably clear and appropriate evidence" of future income potential and expenses to estimate the property's value. USPAP Standards Rule 1-4(c); see also United States v. 6.45 Acres of Land, 409 F.3d 139, 143 n.6 (3d Cir. 2005) (explaining that the "income capitalization approach" determines fair market value by dividing the "net income that a tract of land can produce in a typical year" by "a factor called a 'capitalization rate'", which is a "ratio representing the relationship between the land's annual net income and its value").
The tax court explained why it rejected Roddewig's use of the replacement-cost and income methods. It ruled the replacement-cost method is of little use when reproduction of the property is unlikely. Whitehouse Hotel, 131 T.C. at 147 (citing United States v. Toronto, Hamilton & Buffalo Navigation Co., 338 U.S. 396, 403 (1949)). The court stated it was unconvinced by Whitehouse that "the owners of the building would want to, or would be required to, reconstruct that 100-year-old structure if it were destroyed". Id. Further, the court explained that, even if the building would be replaced if destroyed, reliance on the replacement-cost method would still be inappropriate because it "is a poor indicator of value when estimating the value of older, special purpose buildings, since any estimate of obsolescence . . . is subjective". Id. (citing Crocker v. Comm'r, T.C. Memo 1998-204, 1998 WL 294052 (8 June 1998)).
In rejecting the income method, the court noted: while that method is favored when comparable sales are unavailable,it is an unsatisfactory valuation method where the property has no track record of earnings that provides past income data to evaluate. Id. at 153 (citing Duncan Indus., Inc. v. Comm'r, 73 T.C. 266, 280 n.13 (1979); Pittsburgh Terminal Corp. v. Comm'r, 60 T.C. 80, 89 (1973)). Without such information, the appraiser must rely on data from similar properties, which reduces the appraisal's reliability. Id. (citing Ambassador Apartments, Inc. v. Comm'r, 50 T.C. 236, 243 (1968)).
"As a general rule, [as noted,] valuation of property for federal tax purposes is a question of fact that we review for clear error." Adams, 218 F.3d at 385-86 (citing Estate of Bonner v. United States, 84 F.3d 196 (5th Cir. 1996)). As discussed supra, to the extent, however, the finding is "predicated on a legal conclusion regarding the rights inherent in the property, its valuation is subject to de novo review". Id. at 386 (citing Fuji Photo Film Co. v. Shinohara Shoji Kabushiki Kaisha, 754 F.2d 591, 595 & n.4 (5th Cir. 1985)) (emphasis added).
A property's highest and best use is the "reasonable and probable use that supports the highest present value". Frazee v. Comm'r, 98 T.C. 554, 563 (1992) (quoting Symington v. Comm'r, 87 T.C. 892, 897 (1986)). "To determine what uses are reasonable and probable, we focus on '[t]he highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.'" Id. (quoting Olson v. United States, 292 U.S. 246, 255 (1934)) (alteration in Frazee); see also 26 C.F.R. § 1.170A-14(h)(3)(ii) (noting: where, as here, the tax court employs before-and-after valuation, "the fair market value of the property before contribution of the conservation restriction must take into account not only the current use of the property but also an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed").
Needless to say, finding a property's highest and best use is a critical aspect for determining its fair market value. Olson, 292 U.S. at 255 (holding highest and best use is to be considered "to the full extent that the prospect of demand for such use affects the market value"); Frazee, 98 T.C. at 563 ("Property should be valued to reflect the highest and best use of the property on the date of the valuation." (citing Symington, 87 T.C. at 896; Stanley Works, 87 T.C. at 400)). The key inquiry is what a hypothetical willing buyer would consider in deciding how much to pay for the property. 320.0 Acres, 605 F.2d at 781. In other words, "[i]f a hypothetical buyer would not reasonably have taken into account that potential use in agreeing to purchase the property, such potential use should not be considered in valuing the property". Stanley Works, 87 T.C. at 402 (citing 320.0 Acres, 605 F.2d at 781).
The tax court is required to "aid the appellate court by affording it a clear understanding of the ground or basis of [its] decision". Curtis v. Comm'r, 623 F.2d 1047, 1050 (5th Cir. 1980) (quoting Golf City, Inc. v. Wilson Sporting Goods Co., 555 F.2d 426, 432 (5th Cir. 1977)); see also Copeland v. Wasserstein, Perella & Co., 278 F.3d 472, 485 (5th Cir. 2002) (remanding for "more detailed findings . . . including a fuller explication of the court's ruling"); Barrientes v. Johnson, 221 F.3d 741, 763 (5th Cir. 2000) (noting: "where a district court fails to make necessary findings, a remand for entry of such findings is the usual recourse for an appellate court" (alteration omitted)); Bell v. City of Dallas, Tex., 81 F. App'x 490, 491 (5th Cir. 2003) (unpublished) ("If we are unable to determine the basis for a district court's ruling, we cannot review it and must remand for a more specific determination." (citing Curtis, 623 F.3d at 1053)). Because the tax court's opinion can be read in either of the two above-described ways, we are left with findings that are "inadequate to permit us to fairly review [the tax court's] ultimate conclusions". Curtis, 623 F.2d at 1053. Moreover, because we must remand for re-valuation, this highest-and-best-use issue necessarily comes back into play and must be reconsidered.
Along this line, to be reconsidered on remand is the tax court's rejecting the idea that luxury-hotel developers operate in a national marketplace -- this is the theory upon which Roddewig relied to justify his price-point adjustments. See Whitehouse Hotel, 131 T.C. at 160. Roddewig explained: because luxury-hotel developers "have their own criteria for rates of return, and they don't price [a property] based on what their competition in the local market is willing to pay and go a dollar more", luxury-hotel developers are willing to pay more than the local market demands. In the light of this theory, Roddewig relied, in part, on comparable sales from properties located in other cities, including hotels in New York City, Washington, D.C., Boston, and Cleveland.
As discussed, it is also possible to interpret the tax court's rejection of Roddewig's adjustments in a second way: as an implicit agreement with Argote's opinion that the Maison Blanche and Kress buildings' highest and best use was as a non-luxury, not a Ritz-Carlton, hotel. In that case, the relevant question would be whether there was a "reasonable possibility" that the property would be developed into a non-luxury hotel. See Olson, 292 U.S. at 256-57.
Although Argote's opinion seems implausible -- the extent to which redevelopment was underway renders highly unlikely his conjecture that the project might never come to fruition -- we are not faced with the task of reviewing the tax court's ruling on this point (if indeed it made one). Rather, on remand, the tax court will have the opportunity to "make the subsidiary findings necessary to render its ultimate conclusions comprehensible, or, if necessary, to modify its conclusions to conform to the evidence". Curtis, 623 F.2d at 1054.
As noted, for valuation, factual findings are reviewed for clear error; legal conclusions, de novo. In re Stembridge, 394 F.3d at 385. The easement's effect on property rights in the Kress building is, of course, a legal question, reviewed de novo and with applicable state law -- in this instance, Louisiana -- being applied. Succession of McCord, 461 F.3d at 623 ("Where a question of fact, such as valuation, requires legal conclusions, this Court reviews those underlying legal conclusions de novo. . . . The determination of the nature of the property rights transferred is a question of state law that this Court reviews de novo." (citing Adams, 218 F.3d at 386)).
In other words, the easement conveys a perpetual real right that burdens the Maison Blanche building. See LA.REV.STAT.ANN.§ 9:1252 (allowing "owner of immovable property [to] create a perpetual real right burdening the whole or any part thereof of that immovable property, including . . . the facade" for "charitable[] or historic purposes"). The tax court was correct in ruling that the easement does not burden the Kress building in the same manner because the easement does not mention the Kress building. See Whitehouse Hotel, 131 T.C. at 131-35. The tax court's analysis ended there.
26 C.F.R. § 1.170A-14(h)(3)(i) (emphasis added); see also Browning, 109 T.C. at 316 ("[For] a charitable contribution of a perpetual conservation restriction covering a portion of the contiguous property owned by a donor, . . . the amount of the deduction . . . is the difference between the fair market value of the entire contiguous parcel of property before and after the granting of the restriction." (emphasis added)). Accordingly, determining the easement's effect on the fair market value of the Kress building -- contiguous property owned by Whitehouse at the time of the donation -- is crucial for determining the fair market value of the easement. This is true regardless of the easement's not burdening the Kress building in the same way it burdens the Maison Blanche building, via the earlier-cited Louisiana law, § 9:1252.
This is important because, if the hypothetical buyer would not have contemplated the legal and functional combination of the two buildings -- based on, for example, the fact that the buildings were not legally or functionally combined on the date of donation -- then the easement would have a different effect on the Kress building's fair market value. But, if the hypothetical buyer would have considered the buildings' pending legal and functional combination and the easement's resulting effect on the opportunity to build on top of the Kress building, then that should have been taken into account in determining fair market value.
To that end, a hypothetical buyer would have contemplated the pending combination of the buildings in deciding on a purchase price. Along that line, both buildings were then owned by Whitehouse. Regarding the legal combination of the buildings (i.e., the condominium regime), it is implausible that a hypothetical buyer of the Kress building on 29 December 1997 would have no knowledge of the plan to combine the buildings into a single piece of property via a condominium regime imposed the next day. (When questioned at oral argument here, counsel for Whitehouse explained the condominium regime was recorded after the facade donation to comply with "other provisions in the applicable treasury regulations" that required "the facade donation actually be recorded in order to prime the construction mortgage".)
The tax court found that the post-conveyance timing of the condominium declaration rendered it either minimally relevant or irrelevant to the valuation. Whitehouse Hotel, 131 T.C. at 134 n.9 (noting its decision not to consider the condominium declaration was "in part" because it was recorded the day after the easement conveyance, but not providing any other reasons). The tax court erred in failing to consider the effect on fair market value of the pending condominium regime's precluding any future legal separation between ownership of the two buildings.
Second, regardless of the Maison Blanche and Kress buildings' being combined, Commissioner contends the wall of the Maison Blanche building that rises above the Kress building is not one the easement burdens. Commissioner points to the omission of this wall from photographs, attached to the easement, that were included to determine the easement's coverage "[i]n the event of uncertainty". Whitehouse Hotel, 131 T.C. at 179 (easement document as appendix to opinion). There is not, however, any uncertainty on this point in the easement's language. The wall is unambiguously included in the easement's definition of the covered "exterior surfaces" of the Maison Blanche building: "the exterior walls of the Lower Stories which are visible from Canal and Dauphine Streets . . . [and] the the exterior walls of the Upper Stories which are visible from Canal, Burgundy, Iberville, and Dauphine Streets". Because this language leaves no "doubt" regarding which walls are protected, there is no reason to look to the photographs or invoke the statutory-construction principle of resolving doubt in favor of the servient estate. See La. Civ. Code Ann. art 730 ("Doubt as to the existence, extent, or manner of exercise of a predial servitude shall be resolved in favor of the servient estate.").
In ruling on the merits of a reasonable-cause-exception claim, which, as stated, we are not doing here, reviewed for clear error is the tax court's determination of whether the elements that constitute "reasonable cause" were proven; reviewed de novo is its determination of "what elements must be present to constitute 'reasonable cause'". Roberts v. Comm'r, 860 F.2d 1235, 1241 (5th Cir. 1988) (citing United States v. Boyle, 469 U.S. 241, 250 n.8 (1985)). The tax court held that, although § 6664(c)(2)'s first provision (qualified appraisal) had been met (as conceded by Commissioner), the second (good faith investigation) had not. 131 T.C. at 174.
The testimony by Drawbridge,the representative for Whitehouse, was the tax court's primary reason for rejecting Whitehouse's proof of its good faith investigation. Id. Drawbridge testified that, in determining the easement's value, Whitehouse relied, inter alia, on two appraisals: the one by Cohen, and the one by Revac, Inc. The Cohen appraisal was described supra. The Revac post-donation appraisal, dated 14 January 1998, was obtained in connection with a mortgage on the property.
The tax court found this insufficient. First (and most importantly), the tax court refused to credit Drawbridge's testimony because he did not become asset manager of Whitehouse until 2000, two years after Whitehouse submitted its 1997 Form 1065 ("U.S. Return of Partnership Income"). 131 T.C. at 174. (Drawbridge became the hotel's asset manager through his position as executive vice president of asset management for Quorum Hotels and Resorts (QHR). QHR served as general partner and tax-matters partner of Whitehouse through QHR Holdings-New Orleans, Ltd., a named party to this action.) Second, the tax court found that the Revac appraisal did not speak to the value of the easement. Id. at 174-75. Having discredited the evidence Whitehouse submitted on this issue, the court ruled that Whitehouse failed to meet its burden of proof for entitlement to the reasonable-cause exception. See Higbee v. Comm'r, 116 T.C. 438, 446 (2001) (noting petitioner has burden to prove reasonable cause).
Further, when Drawbridge testified, he had the 1997 Form 1065 before him. That form, which was admitted into evidence, states that it was prepared by Whitehouse's financial auditors. It may be that this is direct evidence Whitehouse relied on professional advice in the preparation of the tax form, and such preparation required evaluation of the reasonableness of the stated value of the easement. Cf. United States v. Baisden, 2007 WL 1087162, at *17 (E.D. Cal. 10 April 2007) (issuing preliminary injunction enjoining a certified public accountant from preparing taxes where he had "engaged in conduct subject to penalty under I.R.C. § 6701 by preparing federal tax returns for customers for submission to the IRS containing items he knew would result in understatements of customers' tax liability").
To demonstrate reasonable cause, a taxpayer "must show that he exercised 'ordinary business care and prudence.'" Treas. Reg. § 301.6651-1(c)(1). "When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice." Boyle, 469 U.S. at 251. . . .
GARZA, CIRCUIT JUDGE, CONCURRING IN PART
I concur in Part I, Part II.A.1, Part II.A.3.b, and Part III of the court's opinion. The remaining parts of the court's opinion, which describe and characterize issues that we ultimately do not decide, are unnecessary to resolve this case and have no bearing on the judgment. Federal courts are only permitted to rule upon an actual "case or controversy," and lack jurisdiction to render merely advisory opinions beyond the rulings necessary to resolve a dispute. See SEC v. Medical Committee for Human Rights, 404 U.S. 403, 407 (1972); Hayburn's Case, 2 U.S. 408 (1792), as interpreted in Muskrat v. United States, 219 U.S. 346, 351)353 (1911); see also 28 U.S.C. § 46(b), (c) (2010) (stating that panels shall hear "cases and controversies"). Whether or not the Tax Court finds the extended discussion helpful does not change the fact that it is dicta and amounts to an impermissible advisory opinion.