Court Opinion

ID: 4337300
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:10.870575+00
Date Added: 2024-06-11T14:47:48.201837
License: Public Domain

131 T.C. No. 10

                    UNITED STATES TAX COURT

WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR HOLDINGS-NEW ORLEANS,
            LTD., TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

    Docket No. 12104-03.                 Filed October 30, 2008.

         The parties agree that W, a partnership, is
    entitled to a charitable contribution deduction on
    account of its having made a qualified conservation
    contribution to a qualified organization. They
    disagree as to the amount of the contribution. They
    further disagree as to whether, if W overstated the
    amount of the deduction, the overstatement amounted to
    a substantial valuation misstatement or a gross
    valuation misstatement and, if either, whether any
    resulting accuracy-related penalty is excused on
    account of reasonable cause. P also objects to the
    appraisal testimony of R’s expert witness, A, on the
    grounds that (1) he is not qualified to testify as an
    expert as to “facade donations” and (2) even if he is
    so qualified, his written report is per se unreliable
    since it is not in conformance with the Uniform
    Standards of Professional Appraisal Practice (USPAP),
    and it cannot, for that reason, be received into
    evidence by the Court pursuant to our duty imposed by
    Daubert v. Merrell Dow Pharmas., Inc., 509 U.S. 579
    (1993), Kumho Tire Co. v. Carmichael, 526 U.S. 137
    (1999), and Fed. R. Evid. 702 to exclude unreliable
    testimony.
                                - 2 -

          1.   Held:   A is qualified to testify as an expert.

         2. Held, further, Fed. R. Evid. 702 requires that
    expert testimony be based on “reliable principles and
    methods”, and we will not supplant our responsibility
    to assess an expert appraiser’s reliability by
    accepting USPAP as the defining standard of
    reliability; failure to adhere to USPAP may affect the
    weight we accord to an expert appraiser’s testimony;
    that failure does not, however, necessarily preclude
    our receiving the expert’s testimony into evidence; A’s
    testimony is the product of the application of reliable
    principles and methods of valuation to sufficient facts
    and data; it is admissible as expert testimony pursuant
    to Fed. R. Evid. 702.

         3. Held, further, value of qualified contribution
    determined: deduction overstated.

         4. Held, further, overstatement is a gross
    valuation misstatement.

         5. Held, further, accuracy-related penalty
    applicable because failure to make good-faith
    investigation of value of contribution precluded
    reasonable cause exception.

    Gary J. Elkins and Andrew L. Kramer, for petitioner.

     Linda J. Wise, Robert W. West, III, and Susan S. Canavello,

for respondent.
                                - 3 -

                              Contents

FINDINGS OF FACT ..........................................      5

OPINION ...................................................     14

I.    Introduction .........................................    14

II.   Objection to Mr. Argote’s Testimony ..................    15

      A.   Introduction .....................................   15
      B.   Qualification as an Expert Witness ...............   15
      C.   Reliability ......................................   20
           1. Introduction .................................    20
           2. Qualified Appraisal ..........................    21
           3. Exclusion of the Kress Building ..............    22
           4. Uniform Standards of Professional
               Appraisal Practice ...........................   23
           5. Conclusion ...................................    26
      D.   Conclusion .......................................   26

III. Expert Testimony as to the Value of the Servitude ....     26

      A.   Introduction .....................................   26
      B.   Highest and Best Use Considerations ..............   30
           1. Introduction .................................    30
           2. Discussion ...................................    31
           3. Conclusion ...................................    36
      C.   Cost Approach ....................................   36
           1. Introduction .................................    36
           2. Before Restriction Reproduction Cost .........    37
           3. After Restriction Reproduction Cost ..........    39
           4. Cost Approach Value ..........................    40
      D.   Income Approach ..................................   40
           1. Introduction .................................    40
           2. Before Restriction Income Approach ...........    41
           3. After Restriction Income Approach ............    42
           4. Income Approach Value ........................    43
      E.   Comparable Sales Approach ........................   44
           1. Introduction .................................    44
           2. Before Restriction Comparable
               Sales Approach ...............................   45
               a. Mr. Roddewig’s Approach ..................    45
               b. Mr. Argote’s Approach ....................    48
           3. After Restriction Comparable
               Sales Approach ...............................   49
           4. Comparable Sales Approach Value ..............    50
                                - 4 -

IV.   Value of the Servitude ...............................    51

      A.   Introduction .....................................   51
      B.   Cost Approach ....................................   52
           1. Introduction .................................    52
           2. First Impression .............................    54
           3. Terra Cotta Cost .............................    56
           4. External Obsolescence ........................    58
           5. Land Value ...................................    59
           6. Conclusion ...................................    60
      C.   Income Approach ..................................   61
           1. Introduction .................................    61
           2. Mr. Argote’s Opinion .........................    62
           3. Discussion and Conclusion ....................    62
      D.   Comparable Sales Approach ........................   66
           1. Introduction .................................    66
           2. Discussion ...................................    66
               a. Introduction .............................    66
               b. Mr. Roddewig’s Use of Nonlocal
                   Comparables ..............................   67
               c. His Use of Price Per Room ................    70
               d. The Experts’ Adjustments .................    71
               e. Before Restriction Value .................    74
                   (i)   Introduction .......................   74
                   (ii) The Pere Marquette Building ........    75
                   (iii) The Bell South Building ............   77
                   (iv) Magazine Street and Board of
                         Trade Place ........................   80
                   (v)   Conclusion .........................   83
               f. After Restriction Value ..................    83
           3. Conclusion ...................................    88
      E.   Conclusion .......................................   88

V.    Valuation Misstatement Penalty .......................    89

      A.   Introduction .....................................   89
      B.   Gross Valuation Misstatement .....................   89
      C.   Reasonable Cause Exception .......................   90
           1. Introduction .................................    90
           2. Discussion ...................................    92
           3. Conclusion ...................................    94
      D.   Conclusion .......................................   94

VI.   Conclusion ...........................................    94

APPENDIX ..................................................     95
                               - 5 -

     HALPERN, Judge:   By notice of final partnership

administrative adjustment (the notice), respondent proposed a

reduction of $6,295,000 in the amount of the charitable

contribution deduction claimed by Whitehouse Hotel Limited

Partnership (the partnership) on its 1997 Form 1065, U.S.

Partnership Return of Income (1997 Form 1065).   Respondent also

determined that an accuracy-related penalty is applicable.

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for 1997, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

     The parties agree that the partnership is entitled to a

charitable contribution deduction for 1997 on account of its

having made a qualified conservation contribution to a qualified

organization.   They disagree as to the amount of that

contribution.   If we find that the partnership overstated the

value of the property constituting the qualified conservation

contribution, we must then determine whether that overstatement

amounted to a substantial valuation misstatement or a gross

valuation misstatement and, if either, whether any resulting

penalty is excused on account of reasonable cause.

                         FINDINGS OF FACT

Introduction

     Some facts have been stipulated and are so found.    The

stipulation of facts, supplemental stipulation of facts, and

second supplemental stipulation of facts, with accompanying

exhibits, are incorporated herein by this reference.
                                - 6 -

     At the time the petition was filed, the partnership’s

principal place of business was in New Orleans, Louisiana.

Background

     The partnership is a Louisiana limited partnership formed on

December 15, 1995.   Its taxable year is a calendar year.    On

December 21, 1995, the partnership acquired a parcel of improved

real property in New Orleans, Louisiana, on the square (block)

bordered by Canal, Burgundy, Iberville, and Dauphine Streets.

Principally, the parcel consisted of a historic building, the

Maison Blanche Building, built between 1907 and 1909, two

annexes, one built in the 1920s and the other built in the 1950s,

and the land under all.   The Maison Blanche Building is on the

corner of Canal and Dauphine Streets, while the 1920s annex faces

Dauphine Street, and the 1950s annex is on the corner of Dauphine

and Iberville Streets.    At the time the partnership acquired the

parcel, the first through third floors of the Maison Blanche

Building were under lease to Maison Blanche, Inc., for use as a

department store.    The lessee had previously prepaid rent for a

term ending in 2004.   The upper floors of the building were

vacant.   The partnership agreed to pay $6 million for the parcel

plus additional amounts based on the partnership’s “Net Cash

Flow” and “Net Capital Proceeds”.   In September 1996, the

partnership paid an additional $625,000 in cancellation of its

obligation to pay those additional amounts and for other things.

In September 1996, the partnership bought out the remaining term
                                - 7 -

of the lease for $3,375,938 and obtained the right to use the

Maison Blanche name.

     On or about October 30, 1997, the partnership purchased

additional property in the same block as the Maison Blanche

Building, including the Kress Building, which is adjacent to the

Maison Blanche Building on Canal Street, and the Kress parking

garage, on the corner of Burgundy and Iberville Streets.      The

Kress Building was built in 1910.    The partnership paid $3.4

million for the additional property.

     The Maison Blanche Building consists of a base level and a

U-shaped tower.   The base level includes a basement and five

floors, with a mezzanine level between the first and second

floors.   The tower portion of the building has eight floors.       The

1920s annex has five floors, and the 1950s annex has six floors.

Exterior street facades of the Maison Blanche Building consist

almost entirely of glazed terra cotta; some interior portions of

the building (e.g., interior courtyard areas) are primarily

constructed of white glazed brick with less extensive terra cotta

ornamentation.    The Kress Building has six floors.

     The Maison Blanche Building is located adjacent to the Vieux

Carre (French Quarter) neighborhood of New Orleans.    It is in the

Vieux Carre National Historic District but not in the locally

designated Vieux Carre Historic District.    It is also located

within the Canal Street Historic District, which is part of the

Central Business District.    The Central Business District

Historic District Landmark Commission (the commission) is the
                               - 8 -

municipal body with oversight authority over the Canal Street

Historic District.   The commission is charged with preserving,

protecting, and regulating historic districts in the Central

Business District.   The New Orleans City Council may review,

approve, reject, or modify the commission’s actions, and the

council’s decisions are subject to review by the State’s courts.

The commission assigns ratings to buildings according to their

architectural and historic significance.   It designated the

Maison Blanche Building as a “Category B” building.   That rating

means the commission determined that the Maison Blanche Building

is a building of major architectural importance.   The commission

does not permit alterations to the exterior of buildings located

in the Central Business District until the work is approved by

the commission.   On June 24, 1996, the U.S. National Park Service

determined that the Maison Blanche Building is a certified

historical structure.

     On February 19, 1997, the partnership and the Ritz-Carlton

Hotel Company, L.L.C. (Ritz-Carlton), a Delaware limited

liability company, entered into agreements under which the

partnership agreed to renovate the Maison Blanche and Kress

Buildings, and Ritz-Carlton agreed to operate a Ritz-Carlton

Hotel in the renovated buildings.   Ritz-Carlton was to receive

certain fees and expense reimbursements in exchange for its

services.

     The Maison Blanche Building, its annexes, the Kress

Building, and the Kress parking garage were ultimately developed
                                - 9 -

into a 452-room Ritz-Carlton Hotel, a 230-room Iberville Suites

Hotel, a 75-room Maison Orleans Hotel, the Ritz-Carlton Spa,

approximately 20,000 square feet of retail space, and a parking

garage for approximately 290 cars.      The Ritz-Carlton Hotel, the

spa, and the garage commenced operations on October 6, 2000.      The

remaining facilities commenced operations thereafter.

Creation of the Servitude

     On December 29, 1997 (the valuation date), the partnership

conveyed certain of its rights in the Maison Blanche Building to

a Louisiana nonprofit corporation, Preservation Alliance of New

Orleans, Inc., d.b.a. Preservation Resource Center of New Orleans

(PRC).   The conveyance was by “Act of Donation of Perpetual Real

Rights” (the conveyance).   A copy of the conveyance, excluding

exhibits, is appended hereto.   In summary, the conveyance

provides that:   (1) The owner intends to convert the Maison

Blanche Building (described as the “Improvement”, to distinguish

it from the underlying land) into a hotel; (2) there is no

servitude or other encumbrance that would limit the rights

conveyed; (3) the rights conveyed (described as the “Servitude”

(servitude)) are conveyed in perpetuity; (4) the servitude

relates to certain exterior surfaces of the Improvement (referred

to as the “Facade” (the facade)); (5) the owner will maintain the

facade in a good and sound state of repair; (6) without

permission, the owner will do nothing in or to the facade that

would alter its appearance; and (7) PRC has the right to require

the owner to maintain the facade.
                              - 10 -

The 1997 Form 1065

     On account of the conveyance of the servitude to PRC, the

partnership claimed a charitable contribution deduction of $7.445

million on the 1997 Form 1065.   In making that claim, the

partnership relied on an appraisal made as of September 1, 1998,

by M. Richard Cohen (Mr. Cohen), an appraiser, who was of the

opinion that, taking into account the value of the Maison Blanche

Building both before and after conveyance of the servitude, the

diminution of the value of the Maison Blanche Building on account

of the conveyance was $7.445 million.   The partnership showed

that amount as the value of the servitude on a Form 8283, Noncash

Charitable Contributions, attached to the 1997 Form 1065.    Mr.

Cohen signed the “Declaration of Appraiser”, constituting part of

the Form 8283.   The 1997 Form 1065 is dated October 14, 1998.

Examination of the 1997 Form 1065
     Respondent examined the 1997 Form 1065 and determined that

the $7.445 million charitable contribution deduction should be

reduced by $6.295 million since the partnership had not
established that the loss of value on account of the conveyance

of the servitude exceeded $1.15 million.   On account of the size

of his reduction in value, respondent determined that an

accuracy-related penalty under section 6662(a) is applicable.

The notice, described previously, followed.
                               - 11 -

Petitioner’s Expert Witness

     Petitioner offered, and the Court accepted, Richard J.

Roddewig (Mr. Roddewig) as an expert witness with respect to (1)

the valuation of conservation easements and (2) the site

selection, feasibility, and valuation of hotels.   The Court

received Mr. Roddewig’s written report as his direct testimony.1

Mr. Roddewig is of the opinion that the conveyance of the

servitude to PRC by the partnership reduced the value of the

Maison Blanche Building and associated properties by $10 million.

     Mr. Roddewig is a real estate appraiser and attorney.      He is

a member of the Appraisal Institute and he holds its MAI

designation.2   He is also a member of the Counselors of Real

Estate, a professional organization for real estate appraisers

and development feasibility analysts.   He conducts his appraisal

business from Chicago.   He obtained a temporary license from the

State of Louisiana as a Certified General Real Estate Appraiser

for the purpose of making his appraisal here under consideration.

Before reaching his conclusion as to the loss in value occasioned

by the partnership’s conveyance of the servitude to PRC

(hereafter, sometimes, the value of the servitude) he spent 4 to

6 days in New Orleans.   His staff made additional visits.     Mr.

     1
        Generally, we receive an expert’s written report into
evidence as his direct testimony. Rule 143(f)(1).
     2
        Recently, in Schwartz v. Commissioner, T.C. Memo. 2008-
117 n.8, we said: “MAI is a designation awarded to qualifying
members of the Appraisal Institute * * * . Within the real
estate appraisal community MAI is viewed as the highest regarded
appraisal designation.”
                              - 12 -

Roddewig’s previous appraisal experience in Louisiana consisted

of two or three preliminary appraisals made in the early 1980s of

preservation easement grants in New Orleans and a market

feasibility study for a site in Lafayette, Louisiana.    Mr.

Roddewig determined the value of the servitude by estimating the

value of the Maison Blanche Building and associated properties

both before and after the conveyance of the servitude.    He used

three approaches: a cost approach, a comparable sales approach,

and a modified income approach.

Respondent’s Expert Witness
     Respondent offered Richard Dunbar Argote (Mr. Argote) as an

expert witness with respect to commercial real estate appraisal.

Petitioner objected to Mr. Argote’s qualification to appraise the

servitude.   Petitioner also objected to the admission of Mr.

Argote’s report as his direct testimony on the value of the

servitude on the ground that the testimony was unreliable.     We

reserved ruling on both objections, conditionally accepting Mr.

Argote as an expert and conditionally receiving his written
report as his direct testimony.   We instructed the parties to

address petitioner’s objections on brief.   Mr. Argote is of the

opinion that the conveyance of the servitude to PRC by the

partnership did not reduce the value of the Maison Blanche

Building by any amount.

     Mr. Argote is licensed by the State of Louisiana as a

Certified General Real Estate Appraiser and as a Real Estate

Broker.   Like Mr. Roddewig, he is a member of the Appraisal
                                - 13 -

Institute and holds its MAI designation.    He has completed

several appraisal courses offered by the American Institute of

Real Estate Appraisers.   He has attended many other seminars and

symposia on a variety of appraisal topics, including hotel and

motel feasibility and valuation, partial interest valuation, and

determining the highest and best use of commercial properties.

From 1986 to 1989, he was a member of the Board of Examiners of

the American Institute of Real Estate Appraisers.    He has

presented several seminars on various appraisal topics relating

primarily to commercial real estate.

     Mr. Argote has been appraising real estate in Louisiana for

over 25 years.   From 1990 to 2000, he appraised between 50 and 70

buildings in and around New Orleans that were to be used as, or

to be converted into, hotels.    About 85 percent of those

appraisals were of buildings located within the Central Business

District or the Vieux Carre.    Over the years, Mr. Argote has

appraised every building within the same square as the Maison

Blanche Building.   He has appraised the Maison Blanche Building

on three prior occasions.   He has valued easements of various

types, including one facade easement and one conservation

easement.

     On July 27, 2006, Mr. Argote inspected the Maison Blanche

Building for purposes of determining the value of the servitude.

He produced a report (his direct testimony) valuing the servitude

as of the valuation date.   To prepare his report, he used legal

descriptions and city maps to identify the Maison Blanche
                               - 14 -

Building.    He relied on an engineer’s report to confirm the size

of improvements made to the building.      He searched the multiple

listing service and courthouse records to locate property sales

and leases comparable to the building.      He identified comparable

property sales based on date of sale, proximity to the Maison

Blanche Building, physical characteristics, and any special

conditions of the sale.   To determine the value of the servitude

he determined the difference between the value of the Maison

Blanche Building before and after the conveyance of the

servitude, employing a comparable sales approach.      His report

states that it was produced in conformity with the Uniform

Standards of Professional Appraisal Practice.

                               OPINION

I.   Introduction
     The principal questions before us are whether the

partnership overstated the charitable contribution deduction to

which it was entitled for 1997 on account of its making a

qualified conservation contribution of the servitude to PRC, a
qualified organization, and, if so, the amount, if any, of any

resulting accuracy-related penalty.      Before we address those

questions, however, we must dispose of petitioner’s objections to

respondent’s expert witness (Mr. Argote) and his direct

testimony.
                               - 15 -

II.   Objection to Mr. Argote’s Testimony

      A.   Introduction

      Petitioner objects to Mr. Argote’s direct testimony on the

grounds that (1) he is not qualified to testify as an expert

witness with respect to “facade donations”, and (2) even if he is

so qualified, his direct testimony is inadmissible because it is

not reliable.

      B.   Qualification as an Expert Witness
      Proceedings in this Court are conducted in accordance with

the Federal Rules of Evidence.    See sec. 7453; Rule 143(a).   Rule

702 of the Federal Rules of Evidence states that one is qualified

as an expert witness “by knowledge, skill, experience, training,

or education”. Respondent offered Mr. Argote as an expert with

respect to commercial real estate appraisal, qualified on that

basis to testify as to the value of the servitude.    We must

determine whether he is so qualified.    “`The 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.’”    Hidden Oaks, Ltd. v. City of Austin, 138 F.3d 1036,

1050 (5th Cir. 1998) (emphasis omitted) (quoting United States v.

60.14 Acres of Land, 362 F.2d 660, 668 (3d Cir. 1966)).

      Mr. Argote is a licensed real estate appraiser in Louisiana

with over 25 years of experience appraising real estate in the

New Orleans area.    He is a member of the Appraisal Institute and

possesses its MAI designation.    He has taken many appraisal
                               - 16 -

courses, and he has presented seminars on commercial real estate

appraising.   He has extensive experience appraising buildings

used as or to be used as hotels in the New Orleans area.

Specifically, he appraised 50 to 70 of those buildings between

1990 and 2000, about 85 percent of which were located in the

Vieux Carre or the Central Business District of New Orleans, the

neighborhood in which the Maison Blanche Building is located.     He

has appraised commercial properties neighboring the Maison

Blanche Building.   Moreover, he has appraised the Maison Blanche

Building on three prior occasions.      In carrying out his appraisal

assignment for respondent, he used information gathered from

public records.   Mr. Argote inspected the property and studied

the zoning restrictions, plat maps, and an engineer’s report to

determine a value for the servitude.     He estimated the value of

the servitude by employing a comparable sales approach, an

approach that Mr. Roddewig also employed and that generally is

accepted by courts as the best evidence of value (if

comparability can be shown).   E.g., Estate of Jameson v.
Commissioner, 267 F.3d 366, 373 (5th Cir. 2001), vacating T.C.

Memo. 1993-43; Terrene Invs., Ltd. v. Commissioner, T.C. Memo.

2007-218.

     Mr. Argote’s experience, skills, approach, and the effort he

took to value the Maison Blanche Building place him squarely

within the definition of an individual qualified to provide

expert appraisal testimony on the value of commercial real

estate.   Petitioner argues, however, that Mr. Argote has
                                - 17 -

insufficient experience with conservation restrictions to be

accepted as an expert qualified to testify with respect to the

value of the servitude.   We do not agree.

     A taxpayer may be entitled to a charitable contribution

deduction on account of its contribution of a qualified

conservation contribution to a qualified organization.      See sec.

170(f)(3)(B)(iii).   “A qualified conservation contribution is the

contribution of a qualified real property interest to a qualified

organization exclusively for conservation purposes.”      Sec.

1.170A-14(a), Income Tax Regs.      “A perpetual conservation

restriction is a qualified real property interest.”      Sec. 1.170A-

14(b)(2), Income Tax Regs.    “A ‘perpetual conservation

restriction’ is a restriction granted in perpetuity on the use

which may be made of real property–-including, an easement or

other interest in real property that under state law has

attributes similar to an easement (e.g., a restrictive covenant

or equitable servitude).”    Id.3

     3
        The regulations continue: “For purposes of this section,
the terms ‘easement’, ‘conservation restriction’, and ‘perpetual
conservation restriction’ have the same meaning.” Sec. 1.170A-
14(b)(2), Income Tax Regs. We shall use the term “conservation
restriction” to describe that common meaning. The servitude is a
                                                    (continued...)
                               - 18 -

     A qualified conservation contribution resulting from the

creation of a conservation restriction in favor of a qualified

organization may give rise to a charitable contribution deduction

if the value of the property burdened by the restriction is

diminished on account of the creation of the restriction.     The

fair market value of a conservation restriction generally cannot

be determined by looking to sales of comparable property since a

market for the purchase and sale of conservation restrictions

rarely exists.    Symington v. Commissioner, 87 T.C. 892, 895
(1986).    Therefore, a conservation restriction’s value is

determined by measuring the impact of the restriction on the

value of the property affected by the restriction; i.e., the

diminution (or enhancement) in value of that property resulting

from the creation of the restriction.     See sec. 1.170A-

14(h)(3)(i) and (ii), Income Tax Regs.     The procedure involves

determining the difference between the fair market value of the

affected property before and after the restriction is imposed.

Sec. 1.170A-14(h)(3)(i), Income Tax Regs.; e.g., Thayer v.
Commissioner, T.C. Memo. 1977-370.      Of that procedure, we have

said:    “This valuation procedure involves traditional real estate

valuation principles, except it is necessary to derive two

valuations rather than one.”    Thayer v. Commissioner, supra.       The

second valuation may be more difficult than the first because the

property is then encumbered by the conservation restriction,

     3
      (...continued)
conservation restriction within that meaning of the term
“conservation restriction”.
                              - 19 -

whose effect on the value of the property may be difficult to

judge.   Nevertheless, it is common that real estate appraisers

value encumbered property (e.g., improved or unimproved realty

subject to an easement).   By definition, a conservation

restriction is an encumbrance on real property.   Petitioner has

failed to show a categorical difference in the skills necessary

to value property encumbered by a conservation restriction as

opposed to the skills necessary to value property encumbered by

some other restriction or burden.   Indeed, petitioner admits on

brief that, within the field of real estate appraisal, “there may

not be a formal subspeciality of facade donations”.   Moreover, on

past occasions, in determining the value of a conservation

restriction, we have accepted the testimony of a real estate

appraiser with no prior experience in valuing that type of

restriction.   Johnston v. Commissioner, T.C. Memo. 1997-475;
Losch v. Commissioner, T.C. Memo. 1988-230.   Besides, Mr. Argote

has valued easements of various types, including one facade

easement and one conservation easement.   Neither this Court nor
the Court of Appeals for the Fifth Circuit, the court to which,

barring a stipulation to the contrary, an appeal would lie, see

sec. 7482(b)(1)(E), has ever denied expert testimony from an

appraiser based on his lack of specific experience with

conservation restrictions.

     As stated, Mr. Argote is qualified to provide expert

appraisal testimony on the value of commercial real estate.     The

specific subject matter of his direct testimony in this case is
                                - 20 -

the before restriction and after restriction values of the Maison

Blanche Building.    It is within his qualifications to so testify.

Indeed, considering Mr. Argote’s history of valuing hotels in the

Central Business District, and the fact that he has valued the

Maison Blanche Building on three prior occasions, he is perhaps

more familiar with that subject matter than petitioner’s expert

witness.

     We find respondent’s witness, Mr. Argote, eminently well

qualified to give expert testimony as to the value of the

servitude.    Petitioner’s objection to the contrary is overruled.

     C.    Reliability
            1.   Introduction

     Petitioner argues that Mr. Argote’s direct testimony (i.e.,

his written report) “has numerous and significant deficiencies

* * * [that] render it unreliable and appropriate for exclusion”.

Specifically, petitioner criticizes Mr. Argote’s direct testimony

for failing to (1) comply with certain provisions of the

Secretary’s regulations governing charitable contribution
deductions and (2) conform to the Uniform Standards of

Professional Appraisal Practice.    Reliability is made a

prerequisite to expert testimony by rule 702 of the Federal Rules

of Evidence, which, in pertinent part, provides that a witness

qualified as an expert with respect to scientific, technical, or

other specialized knowledge may provide testimony thereto: “if

(1) the testimony is based upon sufficient facts or data, (2) the

testimony is the product of reliable principles and methods, and
                                - 21 -

(3) the witness has applied the principles and methods reliably

to the facts of the case.”    Mr. Argote arrived at his opinion as

to the value of the servitude by a three-step comparable sales

approach:    He first determined the value of the Maison Blanche

Building unencumbered by the servitude; he then determined its

value encumbered by the servitude; lastly, he determined the

value of the servitude by calculating the difference (which he

found to be zero).    Mr. Argote’s direct testimony was of a

technical nature.    See Gross v. Commissioner, T.C. Memo. 1999-254
(finding a discounted cashflow analysis to be a reliable tool to

determine the value of a minority stock interest), affd. 272 F.3d
333 (6th Cir. 2001).    We therefore must determine the reliability

of Mr. Argote’s proffered direct testimony.      See Fed. R. Evid.

104(a).

            2.   Qualified Appraisal

     Petitioner’s first claim is that Mr. Argote’s direct

testimony is unreliable because it is not a qualified appraisal

as defined by section 1.170A-13(c)(3), Income Tax Regs.      We can
summarily dispose of that claim.       Petitioner fails to understand

that the requirements of section 1.170A-13(c)(3), Income Tax

Regs., are applicable to taxpayers in connection with certain

charitable contributions of property.      The regulation has no

application to an appraisal obtained by respondent in support of

litigation.
                              - 22 -

          3.   Exclusion of the Kress Building

     Petitioner argues that Mr. Argote’s direct testimony is

unreliable because, in valuing the servitude, he failed to take

account of the detriment in value to the Kress Building on

account of the conveyance of the servitude to PRC, as required by

section 1.170A-14(h)(3)(i), Income Tax Regs.     In pertinent part,

that regulation specifies that the amount of the deduction in the

case of a charitable contribution of a conservation restriction

covering a portion of contiguous property owned by the donor is

the difference between the before and after values of the entire

contiguous parcel.   The Maison Blanche and Kress Buildings are

contiguous, and petitioner believes that the conveyance of the

servitude reduced not only the value of the Maison Blanche

Building but also the value of the Kress Building.    It is

respondent’s position that the servitude does not burden or

affect the Kress Building.   Moreover, as evidenced by his direct

testimony, the appraisal assignment given Mr. Argote was “[t]o

estimate the market value of the facade donation on the subject

improvements”, which he identifies as “a 13-story retail/office

building known as the Maison Blanche Building”.    Petitioner

criticizes Mr. Argote for, in effect, misidentifying the parcel

giving rise to petitioner’s charitable contribution deduction.

Petitioner does not, however, bring into question the reliability

of what Mr. Argote did, which was to estimate the change in value

of the Maison Blanche Building to the partnership on account of

its conveyance of the servitude to PRC.   Petitioner may argue
                                 - 23 -

that Mr. Argote’s direct testimony provides no basis to support

respondent’s adjustment to the partnership’s charitable

contribution deduction, but we shall not exclude that direct

testimony as unreliable for failing to take account of any value

reduction to the Kress Building.     Mr. Argote was not asked by

respondent to opine on that issue.

             4.   Uniform Standards of Professional Appraisal
                  Practice

     Uniform Standards of Professional Appraisal Practice (USPAP)

are promulgated by the Appraisal Standards Board of The Appraisal

Foundation, a nonprofit organization comprising other nonprofit

organizations that represent appraisers and users of appraisal

services.4    Petitioner argues that Mr. Argote’s direct testimony

is unreliable because in various respects it is not in

conformance with USPAP.     The premise underlying petitioner’s

argument is that USPAP is the defining standard for an

appraiser’s reliability.     Petitioner claims:   “Daubert [v.
Merrell Dow Pharmas., Inc., 509 U.S. 579 (1993)] and its progeny
mandate that the Argote Appraisal be tested for its compliance

with USPAP.”5

     4
        The Appraisal Foundation, Frequently Asked Questions:
http://www.appraisalfoundation.org/s_appraisal/doc.asp?CID=9&DID=
172 (last visited Oct. 25, 2008).
     5
        In Daubert v. Merrell Dow Pharmas., Inc., 509 U.S. 579
(1993), the Supreme Court charged trial judges with the
responsibility of acting as gatekeepers to exclude unreliable
expert testimony, and the Court in Kumho Tire Co. v. Carmichael,
526 U.S. 137 (1999), clarified that that gatekeeper function
applies to all expert testimony, not just testimony based in
science. Fed. R. Evid. 702 was amended in 2000 in response to
                                                    (continued...)
                                - 24 -

     USPAP is widely recognized and accepted as containing

standards applicable to the appraisal profession.6   Adherence to

those standards is evidence that the appraiser is applying

methods that are generally accepted within the appraisal

profession.   Therefore, at a minimum, compliance with USPAP is an

indication that the appraiser’s valuation report is reliable.

However, a noncompliant valuation report is not per se

unreliable.   Full compliance with professional standards is not

the sole measure of an expert’s reliability.7

     Petitioner 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.    This and other courts have found

that an expert’s valuation opinion that does not fully comport

with USPAP is still admissible although it may or may not be

helpful.   See Kohler v. Commissioner, T.C. Memo. 2006-152 (expert
report not conforming to USPAP considered but given no weight);

     5
      (...continued)
Daubert and the many cases applying it, including Kumho. See
Fed. R. Evid. 702 advisory committee’s note (2000 amendment), 28
U.S.C. app. at 893-896 (2000).
     6
        Many States have incorporated compliance with Uniform
Standards of Professional Appraisal Practice into their appraiser
licensing requirements. See, e.g., Ill. Admin. Code tit. 68,
sec. 1455.240 (2007); Tit. 876 Ind. Admin. Code sec. 3-6-2
(2008); Tit. 22 Tex. Admin. Code Pt. 8, sec. 155.1 (2001).
     7
        As professors Saltzburg, Martin, and Capra state: Expert
witness testimony can be “reliable even though the expert’s
methodology is not generally accepted in her field.” 3 Saltzburg
et al., Federal Rules of Evidence Manual, sec. 702.02[5], at 702-
718 (9th ed. 2006).
                              - 25 -

EPCO, Inc. v. Commissioner, T.C. Memo. 1999-103 (report of expert

not familiar with USPAP received into evidence but of little use

to Court); Cheatle v. Katz, 2004 WL 906249 (E.D. Pa. 2004)

(report of “highly qualified and credible” expert considered

although a portion in contravention of USPAP); McKesson Corp. v.

Islamic Republic of Iran, 116 F. Supp. 2d 13, 23 n.6 (D.D.C.

2000) (expert’s valuation testimony admissible although he

conceded that, in performing his valuation, he had violated the

ethics rules established in USPAP), affd. in part, revd. in part

on other issues and remanded sub nom. McKesson HBOC, Inc. v.
Islamic Republic of Iran, 271 F.3d 1101 (D.C. Cir. 2001), vacated

in part 320 F.3d 280 (D.C. Cir. 2003).   Petitioner essentially

asks the Court to supplant its responsibility to assess an

expert’s reliability with a rigid standard of reliability.   Sole

reliance on USPAP is a far more inflexible definition of

reliability than the definition (depending on “reliable

principles and methods”) incorporated into rule 702 of the

Federal Rules of Evidence.   Therefore, we decline to adopt USPAP
as the sole standard for reliability of an expert appraiser under

rule 702 of the Federal Rules of Evidence.

     Mr. Argote arrived at his conclusion as to the value of the

servitude by rejecting two approaches to determining that value

accepted by Mr. Roddewig, the cost approach and the income

approach.   He relied exclusively on a comparable sales approach,

an approach on which Mr. Roddewig also relied.   Like Mr.

Roddewig, Mr. Argote relied on a comparison of the before
                                - 26 -

restriction and after restriction values of the building.

Petitioner’s catalog of the alleged deficiencies under USPAP in

Mr. Argote’s direct testimony goes to the “`bases and sources’”

of that testimony, see United States v. 14.38 Acres of Land, 80
F.3d 1074, 1077 (5th Cir. 1996) (quoting Viterbo v. Dow Chem.

Co., 826 F.2d 420, 422 (5th Cir. 1987)), and accordingly, if of

any consequence, those alleged deficiencies affect the weight we

accord that testimony, see id., not the threshold question of its

reliability.

             5.   Conclusion
       Mr. Argote’s direct testimony is the product of the

application of reliable principles and methods of valuation to

sufficient facts and data (as we shall discuss).     It is

admissible as expert testimony pursuant to rule 702 of the

Federal Rules of Evidence.     Petitioner’s objection to the

contrary is overruled.

       D.   Conclusion

       Mr. Argote is accepted as an expert witness with respect to
commercial real estate appraisal qualified to testify as to the

value of the servitude, and his written report, received into

evidence conditionally, is received absolutely.

III.    Expert Testimony as to the Value of the Servitude

       A.   Introduction

       The parties agree that the partnership is entitled to a

charitable contribution deduction for 1997 on account of its

making a qualified conservation contribution of the servitude (a
                                - 27 -

conservation restriction) to PRC.    They disagree as to the amount

of that deduction because they disagree as to the value of the

servitude.   Notwithstanding respondent’s expert’s (Mr. Argote’s)

opinion that the value of the servitude was zero, respondent does

not ask that we find that its value was any less than determined

by respondent in his examination and set forth in the notice;

viz, $1.15 million.

     Section 170 allows for a charitable contribution deduction.

In pertinent part, the Secretary’s regulations interpreting

section 170 provide:   “If a charitable contribution is made in

property other than money, the amount of the contribution is the

fair market value of the property at the time of the

contribution”.   Sec. 1.170A-1(c)(1), Income Tax Regs.   “The fair

market value is the price at which the property 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.   As noted supra in section II.B. of this report, a market
for the purchase and sale of conservation restrictions rarely

exists, and a conservation restriction’s value is determined by

measuring the impact of the restriction on the fair market value

of the donor’s property affected by the restriction; i.e., any

diminution in that fair market value resulting from the creation

of the restriction.

     The parties rely exclusively on their experts to establish

the value of the servitude.   Each expert arrived at an opinion as
                               - 28 -

to the fair market value of the servitude by making the before

and after comparison contemplated by the regulations.      See sec.

1.170A-14(h)(3)(i), Income Tax Regs.    Mr. Roddewig (petitioner’s

expert) determined the requisite before and after values in three

different ways.    He relied primarily on a cost approach and an

income approach, but he also used, in part, a comparable sales

approach.    He determined that the appropriate parcel of property

to value was the Maison Blanche Building, the 1920s and 1950s

annexes, and the Kress Building (the Maison Blanche-Kress

parcel).    He determined the following before and after

restriction values:

                      Before Restriction Values
     Cost approach                                  $43,000,000
     Adjusted income approach                        41,000,000
     Comparable sales approach                       40,000,000

                      After Restriction Values

     Cost approach                                  $35,500,000
     Adjusted income approach                        28,000,000
     Comparable sales approach                           --

He determined no after restriction comparable sales approach
value because, although he had found “[a] few sales in New

Orleans that were precisely comparable to the * * * [Maison

Blanche-Kress parcel] in * * * [its before restriction]

condition”, he could find no “directly relevant” postrestriction

sales.   With respect to the relevant weights to be given to the

adjusted income and cost approaches, he concluded that, because

on the valuation date the Maison Blanche-Kress parcel “was a

truly unique property in New Orleans”, “significant weight”
                                - 29 -

should be given to the greater difference between before and

after restriction values determined under the adjusted income

approach.   Taking into account his three approaches, he reached

the following ultimate determinations as to the before and after

restriction values of the Maison Blanche-Kress parcel and the

value of the servitude:

                        Value of the Servitude

     Before restriction value                        $41,000,000
     After restriction value                          31,000,000
     Difference; i.e., fair market
       value of the servitude                         10,000,000

     Mr. Argote relied exclusively on a comparable sales

approach.   He concluded that the before restriction value of the

Maison Blanche Building was $10.3 million and the after

restriction value was $10.3 million.     He determined that the

value of the servitude was zero.

     The fair market value of property is determined by taking

into account the highest and best use of that property on the

relevant valuation date.    E.g., Stanley Works v. Commissioner, 87
T.C. 389, 400 (1986).    The experts differ on whether the

conveyance changed the highest and best use of the property each

valued.   Mr. Roddewig determined the highest and best use of the

Maison Blanche-Kress parcel before the conveyance was a mixed use

development, including a Ritz-Carlton Hotel with 512 rooms (60 of

them above the Kress Building), an additional all-suites hotel

with approximately 268 rooms, and retail use on the first two

floors and mezzanine of the Maison Blanche Building.     He

determined that the highest and best use of the Maison Blanche-
                                - 30 -

Kress parcel after the conveyance was different in that:       “The

opportunity to add up to 60 additional hotel rooms [above the

Kress Building] * * * [had] been eliminated.”      That difference

contributed to his conclusion that, under both the cost and

income approaches, the fair market value of the Maison Blanche-

Kress parcel was reduced on account of the conveyance.       Mr.

Argote believes the highest and best use of the Maison Blanche

Building both before and after the conveyance was use as a hotel

(not necessarily a Ritz-Carlton Hotel) with retail space.

     We begin with a discussion of the parties’ differences as to

whether, on account of the conveyance, the highest and best use

of the Maison Blanche-Kress parcel changed.      We then explain each

expert’s valuation methods, and we follow with our conclusions as

to the persuasiveness of each expert’s opinion.

     B.    Highest and Best Use Considerations
            1.   Introduction

     “The realistic, objective potential uses for property

control the valuation thereof.”    Stanley Works v. Commissioner,
supra.    The potential uses of the property must have a

“reasonable probability”, however.       Id. at 401.   While respondent

believes that the possibility that the partnership would add 60

rooms above the Kress Building was too remote and speculative to

be taken into account in determining the highest and best use of

the Maison Blanche-Kress parcel, respondent’s principal argument

is that Mr. Roddewig erred in his belief that the conveyance

eliminated the possibility of constructing 60 hotel rooms above
                               - 31 -

the Kress Building.    Whether Mr. Roddewig erred in that belief

presents a question of local law.

          2.   Discussion

     We have summarized the terms of the conveyance supra, and

set it out in full (excluding exhibits) in an appendix.

Petitioner contends that the conveyance “prevents * * * [the

partnership] from constructing additional floors above the Kress

Building and from selling the Kress Building unencumbered”.

Petitioner describes the conveyance as granting PRC a “servitude

of view”, which petitioner further describes as “a servitude of

the view of [the] Facade, including that visible from and above
the former Kress Building side of the Facade.”    Petitioner

describes the partnership’s risk from building above the Kress

Building or selling the Kress Building “unencumbered” as the

“risk of being sued by the PRC for breach of contract.”

Petitioner concedes:    “No portion of the protected Facade is

actually located on the * * * Kress building, and the definition

of ‘Improvement’ in the * * * [conveyance] does not include the
* * * Kress building.”    Petitioner maintains, however, that the

Maison Blanche and Kress Buildings share a common wall, which is

a part of the facade and is included in the term “improvement”.

Petitioner claims that the servitude “was created in accordance

with the express statutory provisions of * * * [La. Rev. Stat.

Ann. sec. 9:1252 (1991)]”.

     La. Rev. Stat. Ann. sec. 9:1252 (1991) provides for the

creation of a perpetual real right burdening the whole or any
                                - 32 -

part of immovable property, including but not limited to its

facade, in favor of an entity formed exclusively for certain

public purposes.    Pertinent portions of that section are set out

in the margin.8    A commentator has observed:   “Since facade

servitudes and conservation servitudes are usually in favor of an

entity rather than an estate, they are properly classified as

rights of use rather than predial servitudes.”     1 Title, La.

     8
         Creation of real right for educational, charitable, or
         historic purposes

     A. The owner of immovable property may create a perpetual
real right burdening the whole or any part thereof of that
immovable property, including, but not limited to, the facade,
exterior, roof, or front of any improvements thereon to any
corporation, trust, community chest, fund, or foundation,
organized and operated exclusively for religious, scientific,
literary, charitable, educational, or historical purposes, no
part of the net earnings of which inure to the benefit of any
private shareholder or individual, or to the United States, the
state of Louisiana, or any political subdivision of any of the
foregoing. A real right established pursuant hereto may
additionally obligate the owner of the immovable property as is
necessary to fully execute the rights granted herein.

     B. A real right created pursuant to this Section shall be
binding on the grantor, his heirs, successors, assigns, and all
subsequent owners of the immovable property, regardless of the
fact that the grantee does not own or possess any interest in a
neighboring estate or the fact that the real right is granted to
the grantee and not to the estate of the grantee, the fact that
the real right was not created as a part of a common development
or building plan, devised by an ancestor in title of the grantor.

     C. A real right created under the authority of this
Section shall be granted by authentic act and shall be effective
against third parties when filed for registry in the conveyance
records of the parish in which the immovable property is located.
Any right or obligation imposed on the owner of the immovable
property by the real right created pursuant hereto, including any
affirmative obligation established therein, shall be enforceable
by the grantee through judicial proceeding by actions for
injunctions or damages brought by the grantee.

     [La. Rev. Stat. Ann. sec. 9:1252 (1991).]
                               - 33 -

Prac. Real Est., sec. 3:47 (2d ed. 2007).    The Louisiana Civil

Code explains with respect to servitudes:    “There are two kinds

of servitudes: personal servitudes and predial servitudes.”       La.

Civ. Code Ann. art. 533 (1980).    “A personal servitude is a

charge on a thing for the benefit of a person.”    Id. art. 534.

“A predial servitude is a charge on a servient estate for the

benefit of a dominant estate.”    La. Civ. Code Ann. art. 646

(2008).    A right of use is a type of personal servitude.    See La.

Civ. Code Ann. art. 534 (1980).    It “confers in favor of a person

a specified use of an estate less than full enjoyment.”      Id. art.
639.

       The point to be taken from this recitation of local law is

that La. Rev. Stat. Ann. sec. 9:1252 allows the owner of

immovable property to create a right burdening the property in

favor of another person.    The difficulty with respect to

petitioner’s argument relying on La. Rev. Stat. Ann. sec. 9:1252

is his concession that the servitude created by the conveyance

does not burden the Kress Building, except, perhaps, for the
common wall it shares with the Maison Blanche Building.      To

appreciate that difficulty, we need to understand something more

of local law.

       Except where the rule is incompatible, a right of use is

regulated by application of the rules governing usufruct and

predial servitudes.    La. Civ. Code Ann. art. 645 (1980).    With

respect to predial servitudes, La. Civ. Code Ann. art. 730 (2008)

provides:    “Doubt as to the existence, extent, or manner of
                               - 34 -

exercise of a predial servitude shall be resolved in favor of the

servient estate.”    Comment (b) accompanying that article

observes:

          (b) It is a cardinal rule of interpretation that,
     in case of doubt, instruments purporting to establish
     predial servitudes are always interpreted in favor of
     the owner of the property to be affected. The rule
     incorporates into Louisiana law the civilian principle
     that any doubt as to the free use of immovable property
     must be resolved in favorem libertatis. * * * The
     Louisiana Supreme Court has repeatedly declared that
     “servitudes are restraints on the free disposal and use
     of property, and are not, on that account, entitled to
     be viewed with favor by the law.” Parish v.
     Municipality No. 2, 8 La. Ann. 145, 147 (1853), cited
     with approval in Buras Ice Factory, Inc. v. Department
     of Highways, 235 La. 158, 103 So. 2d 74 (1958). See
     also McGuffy v. Weil, 240 La. 758, 767, 125 So. 2d 154,
     158 (1960): “any doubt as to the interpretation of a
     servitude encumbering property must be resolved in
     favor of the property owner”. The rule that the proper
     interpretation of an ambiguous instrument is that which
     least restricts the ownership of the land has been
     applied by Louisiana courts in a variety of contexts.
     See, e.g., Whitehall Oil Co. v. Heard, 197 So. 2d 672
     (La. App. 3rd Cir.), writ refused 250 La. 924, 199 So.
2d 923 (1967) (determination of the question whether a
     landowner created a single servitude over contiguous
     tracts or a series of multiple interests). [Id.
     (Revision Comments-1977).]

     The Court of Appeal of Louisiana has held that an agreement
to establish a servitude that is ambiguous is unenforceable.

Exxon Corp. v. Barry, 384 So. 2d 826 (La. Ct. App. 1980).

     There is no language in the conveyance that identifies the

partnership as the owner of the Kress Building and obligates it,

as owner of that building, to preserve a view of the Maison

Blanche Building.9   There is no language in the conveyance that

     9
        Petitioner has asked us to find that, on Dec. 30, 1997,
petitioner established a condominium regime by which the Maison
                                                    (continued...)
                              - 35 -

grants PRC (or anyone else) any use whatsoever of the Kress

Building.   Indeed, there is no mention whatsoever of the Kress

Building in the conveyance.   Moreover, as we have discussed, in

determining whether an estate is burdened by a servitude, we must

resolve doubt in favor of the negative.   See La. Civ. Code Ann.

art. 730 and discussion of that article supra.   On the evidence

before us, we find that the conveyance creates no charge on the

Kress Building in favor of PRC.10   Petitioner has therefore failed

to prove that, by the conveyance, and pursuant to La. Rev. Stat.

     9
      (...continued)
Blanche Building and the Kress Building were established as one
condominium unit. We have not made that finding in part because
petitioner concedes that the condominium declaration was recorded
on the day following the conveyance. Petitioner’s proposed
finding, even if supportable, would have little, if any
relevance, to the valuation date questions before us.
     10
        We note in passing that petitioner’s claim that the
Maison Blanche and Kress Buildings share a common wall that is a
part of the facade and that is included in the term “improvement”
may not be to petitioner’s advantage. Where a common wall is
between two properties, and the owner opens the wall for the
admission of light, he may by acquisitive prescription burden the
neighboring estate with a servitude of light that includes the
right to prevent the neighbor from obstructing the opening.
Palomeque v. Prudhomme, 664 So. 2d 88, 91 (La. 1995); see La.
Civ. Code Ann. art. 703 (2008). Blueprints of the Maison Blanche
Building depict about 120 windows on the common wall that rises
above the Kress Building. We assume that they are old and, by
acquisitive prescription or otherwise, their existence may, on
the valuation date, the date of the conveyance, have burdened the
Kress Building with a servitude of light in favor of the Maison
Blanche Building. Such a servitude would likely have a negative
affect on the highest and best use of the Maison Blanche-Kress
parcel since it would appear to deprive the owner of the Kress
Building of some freedom to add to the height of that building.
Mr. Roddewig did not consider the possibility of a pre-existing
servitude that limited the addition of height to the Kress
Building, thus, he may have erred in determining that the highest
and best use of the Maison Blanche-Kress parcel before the
conveyance included 60 hotel rooms above the Kress Building.
                                - 36 -

Ann. sec. 9:1252, the partnership granted PRC a perpetual real

right (servitude) of any extent in the Kress Building.     While the

partnership may have obligated itself personally to maintain a

view of the Maison Blanche Building, petitioner has failed to

show how that promise binds anyone who does not undertake it;

e.g., a person acquiring ownership of the Kress Building by

eminent domain or as a result of the owner of the building’s

bankruptcy.     Petitioner has failed to show that the highest and

best use of the Maison Blanche-Kress parcel after the conveyance

differed from its highest and best use before the conveyance on

account of the conveyance’s depriving the partnership of the

ability to add 60 hotel rooms above the Kress Building.

           3.    Conclusion
     Mr. Roddewig erred in his opinion that the highest and best

use of the Maison Blanche-Kress parcel differed after the

conveyance on account of the partnership’s disability to add 60

hotel rooms above the Kress Building.    We shall take that error

into account in considering his valuation conclusions.
     C.   Cost Approach

           1.    Introduction

     The cost approach to valuing improved real property is based

on the principle of substitution.    E.g., Talkington v.

Commissioner, T.C. Memo. 1998-412:

     The cost approach derives the value of a property by
     estimating the reproduction or replacement cost of the
     improvements, deducting therefrom the estimated
     depreciation, and then adding the market value of the
     land. This approach estimates value based on the
     assumption that a prudent person will not pay more for
                              - 37 -

     a property than it would cost to acquire a site and
     erect a comparable structure (less accrued
     depreciation) * * *.

          2.   Before Restriction Reproduction Cost

     Mr. Roddewig calculated the before restriction cost to

reproduce the Maison Blanche Building shell,11 the building’s

annexes, and the Kress Building.    He used the Marshall Valuation

Service manual, which he described as a commonly used

construction cost manual published by Marshall and Swift, for

estimating construction costs for excavation and site

preparation, the foundation, the frame, the floors, portions of

the exterior walls, the basement walls, and the roof structure.

For the terra cotta portions of the exterior walls of the Maison

Blanche Building, he relied on reproduction cost estimates that

he obtained from one or more companies specializing in the

manufacture of terra cotta.   He estimated those terra cotta

portions to cost $42.025 million.   Finally, he added other

development costs, such as architect and project management fees.

He arrived at a total reproduction cost of $54.3 million before

depreciation and obsolescence.

     To the $54.3 million so determined, he first applied a

discount of 20 percent for physical depreciation to arrive at a

tentative depreciated reproduction cost.   He then applied

discounts of 10 and 15 percent for functional obsolescence (due

     11
        Mr. Roddewig believed that only the basic shell
structure of the Maison Blanche Building contributed to its
market value on the valuation date since the rehabilitation plan
for the building was to remove all interior partitions as well as
mechanical and electrical systems.
                               - 38 -

to the antiquated design of the Maison Blanche Building), and

external obsolescence (due to local preservation restrictions),

respectively, to arrive at a depreciated reproduction cost of

$32.58 million.

     His last step was to add the value of the land.    He

identified six land sales in New Orleans that he considered sales

of comparable properties (all involving land sales for hotel

construction).    He made adjustments for the type of interest

conveyed, market conditions, an adjacent purchaser premium in one

case, locality, zoning, size, hotel price point, demolition

costs, and retail space.    The range of adjusted prices he

determined for those sales, on a square foot basis, was $65 to

$126, and he decided to use $95 per square foot in valuing the

land under the Maison Blanche-Kress parcel.    Applying that to the

parcel’s land area of 68,105 square feet, he arrived at a value

of $6,469,975 for the land.

     He also derived a value for the cost of the land based on

the land cost per hotel room constructed (room cost) for his six

comparable parcels.    He made adjustments for the same factors

that he considered in his price per square foot calculations.

The range of the room costs was $9,212 to $19,340.    He determined

that the Maison Blanche-Kress parcel land should be valued on the

basis of a room cost of $15,000.    He applied that cost to 780

rooms (which included 60 rooms above the Kress Building), and

that indicated to him a land value of $11.7 million.    Giving more

weight to his room cost analysis than his square footage
                                - 39 -

analysis, he determined a before restriction value for the Maison

Blanche-Kress parcel land of $10.5 million.

     The following table summarizes the results of Mr. Roddewig’s

before restriction approach:

               Before Restriction Reproduction Cost

     Reproduction cost before depreciation
       and obsolescence                             $54,300,000
     Less: Physical depreciation (20%)               10,860,000
     Depreciated reproduction cost                   43,440,000
     Less: Functional obsolescence (10%)              4,344,000
           External obsolescence (15%)                6,516,000
     Depreciated reproduction cost                   32,580,000
     Plus: Value of land                             10,500,000
       Total before restriction reproduction
         cost (rounded)                               43,000,000

     3.   After Restriction Reproduction Cost

     Mr. Roddewig assumed that the cost to reproduce the Maison

Blanche Building shell, the building’s annexes, and the Kress

Building, before depreciation and obsolescence, did not change on

account of the conveyance.   He reduced his estimate of physical

depreciation from 20 percent to 15 percent because he believed

the useful life of the buildings would be greater by 5 years
after the conveyance on account of PRC’s monitoring and

enforcement of the servitude.    He did not change his estimate of

functional obsolescence.   He increased his estimate of external

obsolescence from 15 percent to 30 percent.

     He reduced his estimate of the cost of land from $10.5

million, before restriction, to $8 million, after restriction,

because the conveyance had reduced the partnership’s interest in

the Maison Blanche-Kress parcel to less than a fee simple
                                - 40 -

interest and, he believed, the partnership had lost the right to

construct 60 rooms above the Kress Building.

     The following table summarizes the results of Mr. Roddewig’s

after restriction approach:

                  After Restriction Reproduction Cost

     Reproduction cost before depreciation
       and obsolescence                             $54,300,000
     Less: Physical depreciation (15%)                8,145,000
     Depreciated reproduction cost                   46,155,000
     Less: Functional obsolescence (10%)              4,615,500
           External obsolescence (30%)               13,846,500
     Depreciated reproduction cost                   27,693,000
     Plus: Value of land                              8,000,000
       Total after restriction reproduction
         cost (rounded)                                 35,500,000

            4.   Cost Approach Value

     Mr. Roddewig determined the value of the servitude using the

cost approach to be $7.5 million, calculated as follows:

          Value of Servitude Determined Using Cost Approach

     Before restriction reproduction cost           $43,000,000
     Less: After restriction reproduction cost       35,500,000
     Value of servitude                               7,500,000

     D.   Income Approach
            1.   Introduction

     The income approach to valuing real property involves

discounting to present value the expected cashflows from the

property.    E.g., Marine v. Commissioner, 92 T.C. 958, 983 (1989),

affd. without published opinion 921 F.2d 280 (9th Cir. 1991).

The theory behind the approach is that an investor would be

willing to pay no more than the present value of a property’s

anticipated net income.
                                - 41 -

            2.   Before Restriction Income Approach

     Mr. Roddewig calculated a before restriction value for the

Maison Blanche Building as of December 29, 1997, using the income

approach.    He made various assumptions, among which were the

following.    The building would be rehabilitated to house a 452-

room Ritz-Carlton Hotel.    Construction would commence on January

1, 1998; it would be completed on December 31, 1999, and the

hotel would open on January 1, 2000.     The building would be held

until the end of 2002 and would then be sold.    Development costs

to rehabilitate the building for the operation of the hotel would

be $887,938, $22,549,691, and $47,689,058 for 1997, 1998, and

1999, respectively.    Net operating income from operation of the

hotel would be $9,262,297, $10,825,659, and $13,149,400 for 2000,

2001, and 2002, respectively.    The selling price of the building

at the end of 2002, determined by applying a capitalization rate

of 9.5 percent to expected net operating income for 2003 of

$12,947,254, would be, rounded, $136.3 million, which, after

deducting selling expenses of $3,407,500 (2.5 percent of the

selling price), would produce a net selling price of

$132,892,500, which, after payment of a $8.95 million developer’s

note, would leave net sales proceeds of $123,942,500.    All

cashflows were discounted at 13 percent, to produce a before

restriction net present value of $29,275,863, which he rounded to

$29.5 million.
                                - 42 -

            3.   After Restriction Income Approach

     Mr. Roddewig’s calculation of an after restriction value

using the income approach differed in important particulars from

his before restriction approach.    He explained those differences

as being due to the burden of the servitude.    He reduced his

estimates of net operating income from operation of the hotel for

each of the years 2000 through 2003 on account of increased

administrative and general expenses, operations and maintenance

expenses, and insurance expenses.    The average increase in each

of those categories was $197,500, $201,500, and $99,250 for 2000

through 2003, respectively.    For each of those years, he further

reduced his estimate of net operating income by $370,000 on

account of an annual addition to an accounting reserve for the

purpose of replacing the Maison Blanche Building’s terra cotta

facade.

     He increased from 2.5 to 2.75 percent his estimate of the

cost to sell the building at the end of 2002, which increase he

attributed to additional marketing, legal, and administrative

expenses.    He increased from 9.5 to 10 percent the capitalization

rate that he used to determine the selling price of the building,

and he increased from 13 to 13.5 percent the rate he used to

discount all cashflows, which increases he attributed to the

additional risks and uncertainties he believed attended the

servitude.

     He determined an after restriction net present value of

$17,868,456, which he rounded to $18 million.
                              - 43 -

          4.   Income Approach Value

     Using the income approach, Mr. Roddewig determined the value

of the servitude to be $11.5 million, calculated as follows:

     Value of the Servitude Determined Using Income Approach

     Before restriction net present value            $29,500,000
     Less: After restriction net present value        18,000,000
     Value of the servitude                           11,500,000

Mr. Roddewig explained that that determination of value was

incomplete, however, because it ignored the portions of the

Maison Blanche-Kress parcel devoted to retail department store

use and to the planned 268-room all-suites hotel (including 41

rooms to be constructed above the existing building).    Because he

lacked data as to income and expenses with respect to those uses

and therefore could not pursue an income approach with respect to

them, he made adjustments to his preliminary calculations using

information developed under the cost approach.   That hybrid

approach produced the following results:

                Before Restriction Hybrid Approach
Preliminary determination of value                   $29,500,000
Plus: Adjustment for department store space
  (128,463 sq. ft. x $62.65 per sq. ft.)               8,048,207
Plus: Adjustment for portion of building devoted
  to all-suites hotel (48,325 sq. ft. x $62.65 per
    sq. ft.)                                           3,027,561
Plus: Adjustment for additional rooms constructed
  above building (41 rooms x $14,000 per room)           574,000
    Total adjusted value by income approach (rounded) 41,000,000
                                - 44 -

                   After Restriction Hybrid Approach

Preliminary determination of value                   $18,000,000
Plus: Adjustment for department store space
  (128,463 sq. ft. x $53.25 per sq. ft.)               6,840,655
Plus: Adjustment for portion of building devoted
  to all-suites hotel (48,325 sq. ft. x $53.25 per
    sq. ft.)                                           2,573,306
Plus: Adjustment for additional rooms constructed
  above building (41 rooms x $12,000 per room)           492,000
    Total adjusted value by income approach (rounded) 28,000,000

     Mr. Roddewig determined the value of the servitude using the

hybrid income approach to be $13 million, calculated as follows:

   Value of Servitude Determined Using Hybrid Income Approach
     Before restriction reproduction cost              $41,000,000
     Less: After restriction reproduction cost          28,000,000
     Value of servitude                                 13,000,000

     E.   Comparable Sales Approach

            1.   Introduction

     Messrs. Roddewig and Argote both employed the comparable

sales approach.    Mr. Roddewig employed it only in aid of

determining a before restriction value for the Maison Blanche-

Kress parcel.    He did not employ it in aid of determining an

after restriction value for the parcel because he could find no
sales “that were directly comparable.”    Mr. Argote employed the

comparable sales approach exclusively to determine both the

before and after restriction values of the Maison Blanche

Building.

     The “comparable sales” (or “market data”) approach to

valuing real property involves gathering information on sales of

property similar to the subject property and then comparing and

weighing that information to determine a value for the subject
                                    - 45 -

property.     E.g., Estate of Spruill v. Commissioner, 88 T.C. 1197,

1229 n.24 (1987); Estate of Rabe v. Commissioner, T.C. Memo.

1975-26, affd. without published opinion 566 F.2d 1183 (9th Cir.

1977).    The rationale is that the marketplace is the best

indicator of value, based on the conflicting interests of many

buyers and sellers.       Estate of Rabe v. Commissioner, supra.      That

in turn is based on the principle of substitution; i.e., that a

prudent man will pay no more for a given property than he would

for a similar property.       Id.   One using the comparable sales

approach makes adjustments to the sales prices of the comparable

properties to reflect differences between the comparables and the

subject property being valued.        E.g., Talkington v. Commissioner,

T.C. Memo. 1998-412.      “Positive adjustments are made to

comparable properties that are inferior in some fashion to the

subject property; negative adjustments are made to comparable

properties that are superior in some fashion to the subject

property.”    Id. n.8.

             2.   Before Restriction Comparable Sales Approach
                   a.   Mr. Roddewig’s Approach

     Mr. Roddewig identified two sets of buildings suitable for

his comparable sales approach.        The first set included downtown

New Orleans buildings purchased as shells for adaptive reuse as

hotels.   He identified five purchases, two of which involved

properties that the purchaser combined to form one hotel.        He

determined the sales price per square foot of each building and

made adjustments to those prices for several major and a few
                               - 46 -

minor differences to arrive at an adjusted price per square foot

for each building.12   He made positive adjustments at the rate of

7.5 percent a year to account for appreciation in the New Orleans

hotel market from the date of purchase of each comparable to

December 1, 1997.   He believed that the location of each of the

comparables was inferior to that of the Maison Blanche Building,

so he made a positive adjustment to each, ranging from 10 to 25

percent, to account for that difference.   He made positive or

negative adjustments to each comparable to reflect the relative

burden of zoning and historic designation differences.    He made

negative adjustments to several of the comparables for size and

configuration differences.   He made a positive adjustment to each

comparable ranging from 15 to 60 percent to reflect the higher

room rates expected for a Ritz-Carlton Hotel.   Finally, he made a

positive adjustment to each comparable of 25 percent to reflect

each’s lack of retail space.   He calculated the average adjusted

price per square foot to be $53.44.

     He also determined the sales price per room for each

building in the first set and made the same adjustments he made

in determining the adjusted price per room, although, without

explanation, some of his percentages differed slightly.   He

calculated the average adjusted price per room to be $31,263.

     12
        The minor adjustments were relatively small and affected
only two of the properties. One is a 10-percent reduction for a
sale that involved seller financing and the other is a 10-
percent reduction for the property being purchased by the owner
of the adjacent property.
                               - 47 -

     The second set of buildings consisted of office buildings

outside of New Orleans purchased for conversion to hotel use.

He identified seven buildings, four of which were located in

Manhattan, one in Boston, another in Washington, D.C., and a

final one in Cleveland.    He used those sales to calculate an

average adjusted price per square foot and per room.    He made

adjustments with respect to the members of the second set similar

to the adjustments he made with respect to the members of the

first set; however, he applied different percentages.    For the

location adjustment, he made negative adjustments to six of the

comparables, ranging from 25 to 40 percent, and he made a

positive adjustment to one of 45 percent.    He calculated the

average price per square foot for the non-New Orleans properties

to be $75.42 and the adjusted price per room to be $60,886.

     The following table summarizes the average adjusted prices

Mr. Roddewig calculated.

      Average Adjusted Prices Per Square Foot and Per Room
     Set 1: (New Orleans buildings)
       Adjusted price per sq. ft.                       $53.44
       Adjusted price per hotel room                 31,263.00
     Set 2: (buildings in other cities)
       Adjusted price per sq. ft.                        75.42
       Adjusted price per hotel room                 60,886.00

Based on those average adjusted prices, he determined that the

value of the Maison Blanche-Kress parcel could be determined by

assuming a value of $70 per square foot for the existing

improvements and $55,000 for each hotel room to be built.    On a

square footage basis, assuming that the existing improvements

(including the Kress Building) comprised 530,646 square feet, he
                              - 48 -

determined a value of $37,145,220, and, on a hotel room basis he

determined a value of $39.6 million if only 720 rooms were to be

built and $42.9 million if 780 rooms were to be built (i.e.,

including 60 rooms above the Kress Building).   Determining that

“[a]nalyzing the comparables based upon a price paid per room

results in a more accurate way of comparing the hotel potential”

of the comparables to the Maison Blanche-Kress parcel, he

concluded the value of the parcel under the comparable sales

approach as of December 1997 was $40 million.

               b.   Mr. Argote’s Approach
     Mr. Argote identified nine buildings in New Orleans that he

thought comparable to the Maison Blanche Building and that were

sold between January 1995 and December 1997.    He determined the

sales price per square foot of each building and made adjustments

for differences in conditions of sale, time of sale, location,

size, and configuration.   He made positive adjustments at the

rate of 5 percent a year to account for appreciation in prices

paid for New Orleans buildings suitable for conversion to hotels.
He made positive adjustments to eight of the buildings, ranging

from 5 to 20 percent, to account for what he thought were the

inferior locations of those buildings.   He made negative

adjustments to all of the buildings, ranging from 5 to 30

percent, to account for the greater size of the Maison Blanche

Building (which he viewed as a detriment).   He made positive or

negative adjustments to four of the buildings to account for

configuration and layout differences.
                                 - 49 -

     He calculated the average adjusted price per square foot to

be $20.12.     He decided that the value of the Maison Blanche

Building should be calculated assuming a value of $20 per square

foot.     He assumed the gross building area of the Maison Blanche

Building to be 514,697 square feet, which led to his conclusion

that the value of the building before the restriction was

(rounded) $10.3 million.13

             3.   After Restriction Comparable Sales Approach
     Only Mr. Argote used the comparable sales approach to

determine an after restriction value.        He identified five

buildings in New Orleans that he thought comparable to the Maison

Blanche Building, were encumbered by facade restrictions, and

were sold between December 1991 and December 1997.        He determined

the sales price per square foot of each building and made

adjustments for differences in conditions of sale, time of sale,

location, size, and configuration.        One building was sold by a

lender who obtained the property by foreclosure and might have

had a strong motivation to sell; on that account, Mr. Argote made
a positive adjustment of 30 percent.        He made positive

adjustments at the rate of 5 percent a year to account for

appreciation in prices paid for New Orleans buildings suitable

     13
        Messrs. Roddewig’s and Argote’s square footage
calculations differ in substantial part because Mr. Roddewig
included the area of the Kress Building in the area of the
property he was valuing and Mr. Argote did not. If the area of
the Kress Building is eliminated from Mr. Roddewig’s calculation
of the area of the property he was valuing, the resulting area
equals 514,436 square feet, not substantially different from the
area assumed by Mr. Argote; i.e., 514,697 square feet.
                                - 50 -

for conversion to hotels.    He made positive adjustments to four

of the buildings, ranging from 20 to 30 percent, to account for

what he thought were the inferior locations of those buildings.

He made negative adjustments to all of the buildings, ranging

from 15 to 30 percent, to account for the greater size of the

Maison Blanche Building.    He made positive adjustments to two of

the buildings, one by 30 percent and the other by 10 percent, to

account for configuration and layout differences.

     He calculated the average adjusted price per square foot to

be $20.75.    He decided that the value of the Maison Blanche

Building after the restriction should be calculated assuming a

value of $20 per square foot.    He therefore concluded that the

value of the Maison Blanche Building after the restriction was

the same as its value before the restriction; viz, (rounded)

$10.3 million.

            4.   Comparable Sales Approach Value
     Mr. Roddewig did not determine the value of the servitude

using the comparable sales approach because he was unable to
determine an after restriction value for the property under that

approach.    Mr. Argote determined the value of the servitude using

the comparable sales approach to be zero because he determined

the value of the Maison Blanche Building both before and after

the restriction was the same.
                                 - 51 -

IV.   Value of the Servitude

      A.   Introduction

      Valuation is not a precise science, and determining 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.       E.g., Kaplan v.

Commissioner, 43 T.C. 663, 665 (1965); Arbini v. Commissioner,

T.C. Memo. 2001-141.      Expert testimony may assist the Court to

understand areas requiring scientific, technical, or other

specialized knowledge.      See Fed. R. Evid. 702.   Of course, we are

not bound by the opinion of any expert witness, and we may accept

or reject expert testimony in the exercise of our sound judgment.

Helvering v. Natl. Grocery Co., 304 U.S. 282 (1938); Estate of
Newhouse v. Commissioner, 94 T.C. 193, 217 (1990).       Although we

may largely accept the opinion of one party’s expert over that of

the other party’s expert, see Buffalo Tool & Die Manufacturing

Co. v. Commissioner, 74 T.C. 441, 452 (1980), we may be selective

in determining what portions of each expert’s opinion, if any, to

accept, Parker v. Commissioner, 86 T.C. 547, 562 (1986).
Finally, because valuation necessarily involves an approximation,

the figure at which we arrive need not be directly traceable to

specific testimony if it is within the range of values that may

be properly derived from consideration of all the evidence.

E.g., Peracchio v. Commissioner, T.C. Memo. 2003-280.

      With those principles in mind, we address the question of

the value of the servitude.
                                - 52 -

     B.   Cost Approach

           1.    Introduction

     We have in the past questioned the suitability of the

reproduction cost approach when applied to value older, historic

structures.     Dorsey v. Commissioner, T.C. Memo. 1990-242; Losch

v. Commissioner, T.C. Memo. 1988-230.     For example, reproduction

cost is of little assistance if no one would think of reproducing

the property.     United States v. Toronto, Hamilton & Buffalo
Navigation Co., 338 U.S. 396, 403 (1949).     The Maison Blanche

Building was built between 1907 and 1909.    It is true that the

servitude obligates the building’s owner to repair the facade and

structural elements of the building if they are damaged.     In the

case of a total loss or destruction of the building, however, the

servitude provides:    “Owner shall promptly remove all debris and

trash and properly maintain the Land.    Owner must obtain Donee’s

written approval of and prior consent to any construction or

reconstruction of * * * [the Maison Blanche Building], as

provided herein.”    Petitioner has failed to convince us that,
notwithstanding the historic significance of the Maison Blanche

Building, the owners of the building would want to, or would be

required to, reconstruct that 100-year-old structure if it were

destroyed.    Moreover, even if an older building would be

reconstructed if destroyed, there are reasons why the cost

approach is an inappropriate method for valuing older buildings.

In Crocker v. Commissioner, T.C. Memo. 1998-204, we said that the
                               - 53 -

cost method is a poor indicator of value when estimating the

value of older, special-purpose buildings, since any estimate of

obsolescence (a necessary component of the valuation process) is

subjective.   In Losch v. Commissioner, supra, we said:   “[I]n

dealing with an older, historic structure, it is highly

questionable whether the replacement cost method can be used to

provide meaningful results.”   Finally, the Court of Appeals for

the Fifth Circuit has also raised a cautionary flag with respect

to the admissibility of reproduction cost evidence.     United
States v. Benning Housing Corp., 276 F.2d 248, 250 (5th Cir.

1960) (“absent some special showing, reproduction cost evidence

is not admissible in a condemnation proceeding”).

     While our jurisprudence does not reject the reproduction

cost approach altogether, we have considered it an appropriate

measure of value only where the taxpayer establishes a probative

correlation between such cost and the fair market value of the

property.   See Crocker v. Commissioner, supra.    Generally, as a

precondition to using the approach, the taxpayer must show that
the property is unusual in nature and other methods of valuation,

such as comparable sales or income capitalization, are not

applicable.   Id.   Whether the Maison Blanche Building is unusual

or not, petitioner’s application of the income approach and

comparable sales approach (at least with respect to the before

restriction value of the building) would seem to rule out our

consideration of the cost approach in this case.    While that is a
                                - 54 -

sufficient basis for us to give no weight to Mr. Roddewig’s cost

approach testimony, we shall continue our analysis because, in

addition, we find his testimony on that subject to be

unpersuasive.    Therefore, even if there were no other applicable

methods of valuation, we would find that petitioner has failed to

establish a probative correlation between Mr. Roddewig’s estimate

of reproduction cost and the fair market value of the Maison

Blanche-Kress parcel.

            2.   First Impression
     Our first impression of Mr. Roddewig’s estimate of a before

restriction value of $43 million for the Maison Blanche-Kress

parcel is that it defies reason.    The partnership paid $6,625,000

for the Maison Blanche Building, $6 million in December 1995 and

an additional $625,000 in September 1996 (all of which, for ease

of analysis, we shall consider as having been paid in December

1995).   It paid $3.4 million for both the Kress Building and the

Kress parking garage in October 1997.    Petitioner proposes that

we find as a fact that the cost of the Kress Building was $1
million, which amount we shall accept for purposes of this

analysis.    Mr. Roddewig testified that, in September 1999, the

partnership paid $3,375,938 to buy out the remaining term of the

Maison Blanche Building retail lessee.    We shall for this

analysis accept that amount as an estimate of the value of the

lease to the partnership in September 1999.    We shall further

assume that (1) the $1 million that the partnership paid for the
                                - 55 -

Kress Building in 1997 is what it would have paid in December

1995 (although that is contradictory to Mr. Roddewig’s testimony

about the direction of real estate prices during that time

period); and (2) the $3,375,938 it paid to buy out the lease is

what it would have paid in December 1995 (although, at that time,

it may have been willing to pay more because of the longer

remaining term of the lease).    Thus, altogether, the partnership

can be deemed to have paid $11,000,938 ($6,625,000 + $1,000,000 +

$3,375,938) for the Maison Blanche-Kress parcel in December 1995.

If Mr. Roddewig is correct that, on the valuation date (before

the conveyance), the parcel was worth $43 million, then the

parcel had appreciated in value by 291 percent during the 2 years

between December 1995 and December 1997.   While he recites a list

of reasons for the “significant increase in the market value of

the * * * [Maison Blanche Building]”, including improvement of

the hotel market in New Orleans and the agreements entered into

by the partnership and Ritz-Carlton Hotel chain, his evaluation

of the real estate market in and around New Orleans indicates no

comparable increase.   He describes the single-family housing

market as “growing at a relatively stable pace as of the end of

1997.”   He describes office market conditions during the 1991

through 1997 period as “generally not good”, and he describes the

industrial market as being “in a condition similar to the office

market.”   He describes the retail vacancy rate as stable between

1994 and 1997, although he reports Rosen Consulting Group as
                                - 56 -

saying that the downtown retail market “had fared relatively

well.”   He adds:   “The retail market as of December of 1997 was

expected to remain stable over the next few years”.    With respect

to the hotel market, and in particular with respect to what he

describes as the “New Orleans Upscale and Luxury Lodging Market”,

in which the planned Ritz-Carlton Hotel would compete, he

testified:    “Overall market supply and demand increased at

compound annual rates of 1.9 and 1.8 percent, respectively, from

1995 to 1997.”    In response to a question from the Court, Mr.

Roddewig ascribed some increase in value due to the common

ownership of the Maison Blanche and Kress Buildings, but he did

not quantify that increase.    Simply put, we cannot reconcile Mr.

Roddewig’s report of a New Orleans real estate market enjoying,

at best, stable growth with his explanation of 291-percent

appreciation in the value of the Maison Blanche-Kress parcel.        We

shall continue by examining particular aspects of his cost

approach.

            3.   Terra Cotta Cost
     Mr. Roddewig has failed to convince us that the reproduction

cost of the Maison Blanche Building shell and the Kress Building

on the valuation date, before depreciation and obsolescence, was

$54.3 million.    Of that total estimated cost of reproduction,

$42.025 million is attributable to reproducing the terra cotta

facade on the Maison Blanche Building.    Mr. Roddewig’s testimony

as to that cost is the only evidence of it in the record.      His
                              - 57 -

testimony is based upon estimates which he obtained from terra

cotta industry specialists, rather than from his own experience.14

The estimated cost is not detailed or broken down, making it

impossible for us to know what is and is not included and how the

cost was determined.   While the terra cotta specialists he relied

on may be highly qualified, he has not articulated the facts

relied on by, and the reasoning of, those specialists, which

prevents us from properly evaluating both their and his

conclusions.   See Estate of Palmer v. Commissioner, T.C. Memo.
1992-48 (quoting 15 Mertens, Law of Federal Income Taxation, sec.

     14
        Mr. Roddewig’s testimony with respect to how many
specialists he relied on is inconsistent. Note 5 to the table in
his written report labeled “Segregated Cost Analysis: Before
Preservation Easement Maison Blanche Hotel Complex (Ritz-Carlton
Hotel)–-Building Shell Only–-As of December 29, 1997” explains
that the terra cotta reproduction cost “has been estimated based
on calculations from terra cotta specialists.” Note 40 to that
written report explains: “The costs used by us to calculate the
reproduction cost of the Maison Blanche exterior were determined
based upon multiple calls with Mr. Pete Pederson of Gladding
McBean terra cotta between February 23 and March 4, 2005.” We
cannot determine how many terra cotta specialists Mr. Roddewig
consulted. We shall continue to use the term “specialists”
although we are uncertain as to whether there was one or more.
                               - 58 -

59.08, at 26 (1989)).15   The estimated cost of $42.025 million to

reproduce the terra cotta portion of the facade is the major

element of his reproduction cost estimate.   Without adequate

support for a terra cotta cost of $42.025 million, we give no

weight to his conclusion that the total cost to reproduce the

Maison Blanche Building shell and the Kress Building is $54.3

million.

           4.   External Obsolescence
     In both his before and after restriction calculations of

reproduction cost, Mr. Roddewig deducted an amount to reflect

external obsolescence: 15 percent of the before restriction

depreciated reproduction cost and 30 percent of the after

restriction depreciated reproduction cost ($6,516,000, and

$13,846,500, respectively).   He described the before restriction

external obsolescence as resulting from the designation of the

Maison Blanche-Kress parcel as part of the Canal Street Historic

     15
        15 Mertens, Law of Federal Income Taxation, sec. 59.08,
at 26 (1989):

          A common fallacy in offering opinion evidence is
     to assume that the opinion is more important than the
     facts. To have any persuasive force, the opinion
     should be expressed by a person qualified in
     background, experience, and intelligence, and having
     familiarity with the property and the valuation problem
     involved. It should also refer to all the underlying
     facts upon which an intelligent judgment of valuation
     should be based. The facts must corroborate the
     opinion, or the opinion will be discounted. [Fn. refs.
     omitted.]
                              - 59 -

District.   He justified the after transaction increase as

follows:

          We concluded earlier that the regulations enforced
     by the * * * [Central Business District Historic
     District Landmarks Commission] resulted in external
     obsolescence of 15%. Our analysis indicates that the
     additional restrictions resulting from the operation of
     the preservation and conservation easement add an
     additional layer of restriction at least as severe as
     those imposed by the New Orleans historic district
     regulations. It is appropriate, therefore, to deduct
     an additional 15% for the external obsolescence created
     by the easement, an amount of external obsolescence
     equal to that also created by regulation of the Maison
     Blanche and Kress buildings by the * * * [Central
     Business District Historic District Landmarks
     Commission]. The result is total external obsolescence
     “after” considering the easement of 30% compared to
     only 15% “before” the easement was imposed.

In his oral testimony, Mr. Roddewig explained his adjustments for

external obsolescence as being based on his experience and on

market data indicating that some buyers reject buildings burdened

by preservation easements.   Some adjustment is plausible.    He

further testified that he arrived at his percentage adjustments

as a matter of judgment.   What is important here is not Mr.

Roddewig’s application of a 15-percent adjustment both before and

after the restriction for external obsolescence on account of

historic district regulations.   By itself, that adjustment does

not contribute to the value of the servitude.   What is important

is his failure to provide us with anything beyond a request to

trust in his judgment that the enforcement of the provisions of

the servitude doubles the cost of external obsolescence.     As

illustrated by our discussion supra of our first impression, Mr.
                                - 60 -

Roddewig has failed to engender in us full confidence in his

judgment.    Moreover:   “We need not rely on the unsupported

opinion of an expert witness.”     Holman v. Commissioner, 130 T.C.
170, 213 (2008).

            5.   Land Value

     In moving from his before to after restriction value, Mr.

Roddewig reduced his estimate of the cost of land by $2.5 million

because the conveyance had reduced the partnership’s interest in

the Maison Blanche-Kress parcel to less than a fee simple

interest and, he believed, the partnership had lost the right to

construct 60 rooms above the Kress Building.     We have already,

supra, in section III.B.2. of this report, described our reasons
for disagreeing with his second conclusion.     While Mr. Roddewig

may be right that, after the conveyance, the partnership held

less than a fee simple interest in the Maison Blanche-Kress

parcel, we reject the translation of that conclusion into a 10-

percent negative adjustment to the prices of his six comparable

parcels.    Mr. Roddewig testified that he was unable to find any
sale of land in New Orleans encumbered by a preservation

easement.    As a result, to determine the after restriction land

cost component of his reproduction cost analysis, he considered

the same six sales he utilized earlier but he “adjust[ed] each

comparable downward by 10% to account for the decrease in the

property interest resulting from the imposition of the * * *

[servitude].”    The question before us is whether a servitude
                                 - 61 -

requiring maintenance of a building’s facade would survive and

affect the value of the underlying land if that land were wiped

clean of the building.    While for the sake of argument we will

concede that possibility, Mr. Roddewig’s conclusion of a 10-

percent reduction in value as a general rule is not persuasive,

and we do not accept it.      See Holman v. Commissioner, supra

at 213.

            6.   Conclusion
     Mr. Roddewig has failed to persuade us that $43 million and

$35.5 million are reliable estimates of the before and after

restriction reproduction costs of the Maison Blanche-Kress parcel

or that the resulting value of the servitude is $7.5 million.        We

shall disregard petitioner’s cost approach in determining the

value of the servitude.

     C.   Income Approach

            1.   Introduction

     The income approach to valuation is a recognized method that

has been favored where comparable market sales were lacking.      See
Chertkof v. Commissioner, 72 T.C. 1113, 1122 (1979), affd. 649
F.2d 264 (4th Cir. 1981); Gottlieb v. Commissioner, T.C. Memo.

1974-178.    The usefulness of the income approach diminishes,

however, as the quality of the evidence of the income- producing

potential of the property (usually evidence of its past

performance) diminishes.      It has been judged an unsatisfactory

valuation method for property that does not have a track record
                              - 62 -

of earnings.   See Duncan Indus., Inc. v. Commissioner, 73 T.C.
266, 280 n.13 (1979); Pittsburgh Terminal Corp. v. Commissioner,

60 T.C. 80, 89 (1973), affd. without published opinion 500 F.2d
1400 (3d Cir. 1974); Sec. Mortgage Co. v. Commissioner, 58 T.C.
667, 675 (1972).   In the absence of that track record, the

appraiser has no alternative to using data from similar

properties or estimates of the property’s income-producing

potential, which may reduce the reliability of his conclusions.

See Ambassador Apartments, Inc. v. Commissioner, 50 T.C. 236, 243
(1968) (“a computation based on the actual income and expenses of

the property to be valued [an apartment building] is more

reliable” than a computation based on “income and expense figures

ascertained from comparable apartments in the * * * vicinity”),

affd. 406 F.2d 288 (2d Cir. 1969).     The weakness of the income

approach is the many judgment calls often required in its

application.   See Estate of Berg v. Commissioner, T.C. Memo.

1991-279 (“The principal weakness of the Income Approach is that

the value estimate can be easily distorted by the use of
inappropriate or incorrect income figures, expense figures, and

capitalization rates.”), affd. in part, revd. in part on another

issue and remanded 976 F.2d 1163 (8th Cir. 1992).

          2.   Mr. Argote’s Opinion

     Mr. Argote did not use the income approach.     He testified

that, as applied to the Maison Blanche Building, the income

approach relied upon too many assumptions, thus making it prone
                                - 63 -

to error.    He believes that even a small change in estimated

construction costs, the timing of those costs, the length of time

to complete construction, estimated income, estimated expenses,

capitalization rate, or discount rate could substantially affect

the present value arrived at using a discounted cashflow

analysis.

            3.   Discussion and Conclusion

     Mr. Roddewig did use the income approach, but he did not

rely on the Maison Blanche Building’s track record because he

took it as a fact that the building would be rehabilitated to

house a 452-room Ritz-Carlton Hotel.     He assumed a construction

period from 1997 through 1999, and he further assumed the

development costs incurred in each of those years.    He assumed

what the net operating income of the hotel would be for 2000

through 2002, and he assumed the amount that the building would

fetch if sold at the end of 2002.    Based on those assumptions and

an assumption as to an appropriate discount rate, he determined

that “the most probable price that a purchaser would be willing

to pay for the unrehabilitated * * * [Maison Blanche-Kress

parcel] prior to considering the impact of the * * * [servitude]”

was $29.5 million.    Making some adjustments to his assumptions,

he determined an after restriction value of approximately $18

million, which led to his assigning to the servitude a value of

$11.5 million.
                               - 64 -

     There are obvious risks of error in the assumptions Mr.

Roddewig made: e.g., the hotel might not be finished on

schedule;16 occupancy might be less than expected; the hotel might

not fetch $123,942,500 at the end of 2002 (ignoring the

servitude).   Moreover, in estimating construction costs and hotel

receipts and costs alone, Mr. Roddewig made hundreds of

assumptions, involving amounts both large ($9,904,936 in

construction period interest) and small ($4.50-a-night telephone

revenue from occupied rooms), each carrying with it some risk of

error.    He has provided us with no measure of the overall risk of

error in his assumptions.   Our own calculations, set forth infra,
show that relatively minor changes in only a few of his

assumptions would have large bottom-line effects.   We agree with

Mr. Argote that the many assumptions made by Mr. Roddewig make

his conclusions prone to error, and, without some estimate of the

risk of error in his assumptions, we are reluctant to accept

those conclusions at face value.   Moreover, an important reason

for his income analysis is to show the loss in value brought
about by the conveyance of the servitude.   We have specific

concerns about some of the assumptions he made in determining a

     16
        And apparently it was not finished on schedule. Mr.
Roddewig assumed that construction would end on Dec. 31, 1999,
and the hotel would open the next day, Jan. 1, 2000. Petitioner
makes no objection to respondent’s proposed finding of fact that
the hotel commenced operations on Oct. 6, 2000, and we have so
found.
                               - 65 -

lower value for the Maison Blanche-Kress parcel after the

conveyance of the servitude.

     Mr. Roddewig increased his estimate of operating expenses to

reflect (1) increased administrative costs on account of dealing

with PRC, (2) increased maintenance costs for the protected part

of the Maison Blanche Building, (3) increased insurance costs for

“reproduction insurance”, and (4) annual additions of $370,000 to

a “facade replacement reserve”.    Mr. Roddewig estimated the cost

of replacing the facade to be $46,719,755, of which the cost of

terra cotta would be $42,025,000.   We have already expressed our

doubts as to that latter amount.    See supra section IV.B.3. of
this report.   We express further doubt as to other components of

the facade replacement cost that are not adequately explained,

including an almost $3 million architect’s fee, approximately $4

million for a development fee, interest, real estate taxes,

“Etc.”, a project management fee of approximately $2.6 million,

and a financing fee of approximately $4.7 million.   Mr. Roddewig

also offers little support for the amounts he estimates as
increased administrative, maintenance, and insurance costs.

     In determining an after restriction value, Mr. Roddewig also

increased the capitalization rate he used in determining the

selling price of the building in 2002 from 9.5 to 10 percent, and

he increased the interest rate used to discount all cashflows

from 13 to 13.5 percent.   He explained those adjustments as

resulting from the additional risks and uncertainties attendant
                                - 66 -

on owing a building subject to a preservation easement.    As

examples of those risks he identified the risk that, on account

of the servitude, the rehabilitation cost of the Maison Blanche

Building for hotel use would increase and, in particular, that

the reproduction cost of the terra cotta facade would increase.

He made no attempt to quantify the influence of the various risks

he identified on the two rates, nor did he explain why overall

rehabilitation costs and terra cotta costs were risky enough to

contribute to rate changes but safe enough to accept without

reservation in calculating the development costs and the

additions to the facade replacement reserve included in his after

restriction analysis.    If we reduce his 0.5-percent increase in

both the capitalization and discount rates by 0.1 percent (a 20-

percent reduction), the value that he calculated for the

servitude would be reduced by close to $1 million.17   Mr. Roddewig

has offered an inadequate explanation of why any after

restriction increase in risk justifies a rate change of 0.5

percent.

     17
        We illustrate the effects of a 0.1- and a 0.2-percent
change in the capitalization and discount rates:

                        Capitalization    Discount
                          Rate After     Rate After      Value of
                          Restriction    Restriction     Servitude
As assumed by
  Mr. Roddewig              10.0%           13.5%      $11,407,407
0.1 % adjustment             9.9            13.4        10,534,740
0.2 % adjustment             9.8            13.3         9,649,088
                                - 67 -

     The risk of error inherent in the income approach as applied

by Mr. Roddewig in this case, together with the fact that we have

reliable alternative evidence of value arrived at by the

comparable sales approach, is sufficient grounds for us to reject

the income approach, and we do.18

     D.   Comparable Sales Approach
           1.   Introduction

     We have found the comparable sales approach to be the most

reliable indicator of value when there is sufficient data about

sales of properties similar to the subject property.   See, e.g.,

Estate of Spruill v. Commissioner, 88 T.C. at 1229 n.24; Estate
of Rabe v. Commissioner, T.C. Memo. 1975-26.

           2.   Discussion

                 a.   Introduction

     As we reported supra in section III.E.1. of this report, Mr.

Roddewig employed the comparable sales approach only in aid of

determining a before restriction value for the Maison Blanche-

Kress parcel, while Mr. Argote employed it as his exclusive
approach to determine both the before and after restriction value

of the Maison Blanche Building.

     18
        Because we give no weight to the income approach, we
need not decide the parties’ disagreement over whether it is
appropriate to use the financial results of operating the hotel
in determining the fair market value of the Maison Blanche
Building.
                                - 68 -

                 b.   Mr. Roddewig’s Use of Nonlocal Comparables

     Mr. Roddewig identified two sets of building sales he

believed were suitable for comparison to the Maison Blanche

Building.    One set comprised downtown New Orleans buildings

purchased as shells for adaptive use as hotels.    The second set

comprised office buildings outside of New Orleans purchased for

the same purpose.     Mr. Roddewig explained that he had a need for

nonlocal comparables because none of the buildings that he found

in downtown New Orleans were similar to the Maison Blanche-Kress

parcel in size, luxury, or hotel market orientation.    He added:

“Buildings purchased for rehabilitation into first class luxury

hotels trade in a national marketplace, so it is appropriate to

analyze sales in other cities for purposes of establishing the

value of the Maison Blanche Hotel Complex by the Sales Comparison

Approach.”

     Mr. Argote disagreed on the need for nonlocal comparables.

While he agreed that, on occasion, an appraiser has to look

outside the location of the subject property for comparables,

“particularly when there are no sales available”, he was of the

opinion that, “in the New Orleans market at that point in time,

there were at least nine sales that he [Mr. Roddewig] could have

used, and he did not do that.”

     In determining the fair market value of property under the

comparable sales approach, we have preferred evidence of local
                                - 69 -

sales.19    The reason is simply that location plays a huge role in

determining the desirability, and, thus, the value of real

estate.20   We reduce substantially the risk of error in employing

the comparable sales approach if, on account of proximity, we can

eliminate (or reduce the significance of) location as a

distinguishing factor.    Indeed, Mr. Roddewig testified that more

weight should be given to local sales, but that the adjusted

values for those sales should be considered in light of the

higher adjusted values he determined for his nonlocal sales.    The

adjusted values he determined for his nonlocal sales were

     19
        See, e.g., Garwood Irrigation Co. v. Commissioner, T.C.
Memo. 2004-195 (rejecting use of comparable property located in a
different market than subject property); Borgatello v.
Commissioner, T.C. Memo. 2000-264 (declining to place weight on
comparable properties located in other communities); Eugene D.
Lanier, Inc. v. Commissioner, T.C. Memo. 1998-7 (disregarding
comparable properties located in other cities without evidence
that these markets were similar to subject property market);
Estate of Hillebrandt v. Commissioner, T.C. Memo. 1986-560
(placing little to no weight on appraiser’s use of comparable
located farther from subject property where closer comparable
properties existed); Marks v. Commissioner, T.C. Memo. 1985-179
(relying on value of properties in closer proximity to subject
property); Kewaunee Engg. Corp. v. Commissioner, T.C. Memo. 1979-
154 (finding properties within close proximity to subject
property more persuasive of value).
     20
        Location is said to have been the motto of the hotelier
Conrad Hilton:

     The late Conrad Hilton who built a chain of hotels
     across the world, was firmly of the belief that if he
     built a hotel in the right location it would make
     money. Location, Location, Location was his motto.
     Never build a hotel where there is no traffic.
     [Ferrers, “In a Town Called Google, the Keyword is Real
     Estate”, Smart News Direct,
     http://www.smartnewsdirect.com/realestate/inatown.html
     (last visited Oct. 25, 2008).]
                              - 70 -

significantly higher than the adjusted values he determined for

his local sales: 64 percent higher on a square footage basis and

at least double on a per-room basis.21   Those large disparities in

values convince us that the risk of using nonlocal sales is

significant.   Moreover, Mr. Roddewig did not claim that there

were no local sales of comparable properties available; he

identified five, and Mr. Argote was of the opinion that there

were nine that he should have considered.   Nor are we convinced

that it was appropriate to take nonlocal sales into account

because of his claim that buildings purchased for rehabilitation

into first class luxury hotels trade in a national marketplace.

He had no statistics supporting that claim, nor did he have

evidence of any competition for the Maison Blanche Building,

which, 2 years before the valuation date, was purchased for the

relatively moderate price of $6.625 million.22

     Mr. Roddewig has failed to convince us that we should give

weight to his nonlocal sales, and we shall not.

     21
         He reports an approximate mean per square foot value for
local comparables of $53 and an approximate mean per square foot
value for nonlocal comparables, after excluding outliers, of $87
a square foot. He reports an approximate mean per hotel room for
local comparables of $31,000 and, after eliminating outliers, a
range of per-room values for nonlocal comparables from $66,000 to
$90,000.
     22
        On brief, in support of Mr. Roddewig’s use of nonlocal
sales, petitioner cites several publications that are not in
evidence and State court authority. At most, the conclusion that
can be drawn from those materials is that there is no absolute
bar to considering sales of comparable nonlocal property
transactions, a point with which we agree.
                              - 71 -

               c.   His Use of Price Per Room

     For each of his comparable sales, Mr. Roddewig determined an

adjusted sales price on the basis of both dollars paid per square

foot and dollars paid per hotel room.    On the valuation date, the

Maison Blanche Building was a partially vacant building that the

partnership planned to rehabilitate and operate as, among other

things, two hotels with 720 rooms.     Because those rooms had not

yet been constructed, that quantity is somewhat speculative.    The

square footage of the building was a determinable quantity.    All

other things being equal Mr. Roddewig’s determination of the

value of the Maison Blanche Building on the basis of a per hotel

room basis is less certain than his determination of that value

on the basis of a per square foot basis.    The parties disagree on

whether it is appropriate to use sales of existing hotel

properties in valuing a vacant retail and office building only

intended for hotel use and whether petitioner has established

that price per room is a method of valuation employed by buyers

and sellers in New Orleans or any other relevant market.    We are

inclined to agree with respondent that Mr. Roddewig’s price-per-

room analysis should be rejected, but, because we shall consider

only Mr. Roddewig’s analysis based on local sales, and, on that

basis, his per-room analysis produces a lower value for the

Maison Blanche Building than does his per square foot analysis,
                                 - 72 -

we shall assume that petitioner would abandon his per-room

analysis.23   In any event, we shall disregard it.

                  d.   The Experts’ Adjustments
     Both Messrs. Roddewig and Argote adjusted the sales prices

of their comparables for conditions of sale, time of sale, size

of the comparable, and configuration of the property.    Mr.

Roddewig also made substantial adjustments for the higher room

rates expected at a Ritz-Carlton Hotel (hotel price point

adjustment), the lack of retail potential in each comparable

(retail-potential adjustment), and zoning and historic

designation differences (zoning/historic district adjustment).

He offered the following explanation for the hotel price point

adjustments (a positive adjustment in each case, ranging from 15

to 60 percent):    “Luxury hotel development projects generate the

highest room rates and typically pay more per square foot or per

room to acquire buildings for luxury hotel development projects.”

When asked by the Court if a luxury hotel developer would pay

more for a piece of property than the local market would demand,

Mr. Roddewig answered in the affirmative:

     There are particular types of buyers that will pay a
     premium without trying to think about what the local

     23
        Mr. Roddewig reports a mean average adjusted price per
square foot of $53.44 for his local comparables and 530,646
square feet in the Maison Blanche-Kress parcel, which indicates a
before restriction value, on a square foot basis, of $28,124,238.
He also reports a mean average adjusted price per room of $31,263
for his local comparables and 720 planned rooms, which indicates
a before restriction value, on a per-hotel-room basis, of
$22,509,360.
                              - 73 -

     buyers will pay. They have their own criteria for
     rates of return, and they don’t price it based on what
     their competition in the local market is willing to pay
     and go a dollar more.

The hotel price point adjustments Mr. Roddewig made are not of

little consequence.   If we eliminate them from his calculations,

the average price per square foot that he calculated for the

local comparables drops from $53.44 to $44.03 per square foot (a

difference of $9.41).   Given his estimate of 530,646 square feet

in the Maison Blanche-Kress parcel, that means that the indicated

value of the parcel based on the local comparables would be

$23,371,242 rather than $28,357,722, a difference of $4,986,480.

That is a large amount of money for a luxury hotel developer to

leave on the table by ignoring local market conditions in buying

a parcel like the Maison Blanche-Kress parcel.    Without evidence

of the phenomenon more convincing than Mr. Roddewig’s testimony,

we will not take the risk of inaccuracy that those adjustments

carry.

     Mr. Roddewig also made retail-potential adjustments of 25

percent to four of his local comparables and 35 percent to the

fifth (the additional 10 percent to account for an interior lot

with limited visibility).   All of the adjustments were positive.

He explained the 25-percent adjustments as being necessary

because about 25 percent of the Maison Blanche-Kress Complex was

to be devoted to “a retail department store”.    Mr. Argote

testified that, since retail use is only 25 percent of the

intended use of the Maison Blanche-Kress parcel, making a 25-
                                - 74 -

percent positive adjustment to the sales prices of the

comparables is the equivalent of saying that space devoted to

retail is worth twice the space devoted to other uses.    He

further testified that putting a premium on the value of retail

space was unjustified because of the poor climate for retail

operations in the downtown area.    He testified that the major

retailers had left or were in the process of leaving the downtown

New Orleans area.   He is of the opinion that, in late 1997, an

attempt to combine a retail operation with a hotel would have

been risky, and the combined operation would have been worth less

than a hotel operation alone.    Indeed, on cross-examination, Mr.

Roddewig agreed that, for most buildings on Canal Street in 1997,

the retail market “was probably not good.”    Mr. Argote is more

familiar with the New Orleans real estate market than is Mr.

Roddewig, and his superior knowledge of the market and his

demeanor give us confidence in his testimony.    We accept his

opinions that no premium should attach to the value of retail

space and no positive adjustment is required.    We shall make no

retail-potential adjustments.

     Mr. Roddewig also made zoning/historic district adjustments.

Such adjustments are proper.    See, e.g., Mathis v. Commissioner,

T.C. Memo. 1989-254 (taxpayer’s expert erred in not making a

downward adjustment to reflect the zoning of the subject

property).   We accept his inclusion of zoning adjustments, which

varied depending on the zoning classification of the building
                               - 75 -

compared to the zoning classification of the Maison Blanche

Building.   We also accept his argument that historic districts

and landmark designations, like zoning restrictions, limit the

ability to develop property; thereby, decreasing its value.    He

made negative adjustments of 5 percent to two of his local

comparable sales to reflect that they are not landmark properties

or within New Orleans historic districts.   Under his cost

approach, he made a negative adjustment of 15 percent to account

for external obsolescence resulting from the designation of the

Maison Blanche Building as part of the Canal Street Historic

District.   We think he has been inconsistent.   We will use 10

percent.

                e.   Before Restriction Value
                (i) Introduction

     Mr. Roddewig relies on five local comparables; Mr. Argote

relies on nine; four are common to both appraisers.    We shall

rely on those four to determine the before restriction value of

the Maison Blanche Building under the comparable sales approach.
We shall first determine the average adjusted price per square

foot for those four comparables.    We shall then extrapolate from

that price to determine the before restriction value of the

Maison Blanche Building.   We shall disregard the Kress Building

in our calculations because Mr. Roddewig erred in believing that

it was burdened by the servitude.   We shall average Messrs.

Roddewig’s and Argote’s estimates of the area of the Maison
                                - 76 -

Blanche Building, 514,436 and 514,697 square feet, respectively,

and assume that the result, 514,566 square feet, is the area of

the Maison Blanche Building.

                (ii)    The Pere Marquette Building

     One common property is the Pere Marquette Building, 150

Baronne Street, New Orleans, Louisiana.     It is located about one

block from the Maison Blanche Building.     Messrs. Roddewig and

Argote agree that the Maison Blanche Building is in a superior

location due to its proximity to the French Quarter.     Each made a

positive adjustment to the sales price of the Pere Marquette

Building of 20 percent to account for the Maison Blanche

Building’s superior location.    We agree with that adjustment.

     The experts differ by a few dollars on the sales price of

the Pere Marquette Building, which we find to be $5.5 million.

As to the time of the sale, Mr. Roddewig says on one page of his

report that the building sold in January 1996 and on another that

it sold in June 1992.    Mr. Argote says that it sold on January

26, 1996.   We accept Mr. Argote’s date and his positive

adjustment of 10 percent for the time difference from the sale to

the valuation date.

     Both appraisers made a negative adjustment of 5 percent on

account of the size of the Pere Marquette Building.     Mr. Roddewig

offered the following general rule:      “Larger buildings often sell

for less per square foot than do smaller buildings.     Typically,

this is caused by the fact that larger buildings, like larger
                                - 77 -

sites, may take longer to develop, and therefore involve more

risk than smaller buildings or sites.”    We agree that, on the

record before us, a 5-percent size adjustment is appropriate.

     Mr. Roddewig made a negative adjustment of 10 percent to

account for the more favorable zoning classification of the Pere

Marquette Building compared to the Maison Blanche Building and

its lack of local landmark designation.    We adjust that negative

adjustment to 15 percent to account for a 10-percent (not 5-

percent) adjustment for lack of local landmark status.

     Lastly, Mr. Roddewig made a negative adjustment of 10

percent under the heading “Adjustment for Property Interest

Conveyed and Conditions of Sale”, which adjustment he explained

was due to seller financing.    Because Mr. Argote makes no similar

adjustment, and Mr. Roddewig failed to set forth sufficient facts

about the financing for us to determine whether any adjustment is

warranted, we will make none.

     Mr. Roddewig makes no mention of a garage attached to the

Pere Marquette Building.   Mr. Argote testified that, along with

the building, the purchasers of the property acquired a six-

story, 60,574-square-foot parking garage attached to the

building.   Given Mr. Argote’s greater experience in the New

Orleans real estate market, we shall assume that a parking garage

did come with the Pere Marquette Building.    Mr. Argote allocated

a $2 million portion of the $5.5 million purchase price to the

parking garage and took account only of the remaining portion
                               - 78 -

($3.5 million) in determining the price per square foot of the

Pere Marquette Building.   Mr. Argote was right to disregard the

portion of the purchase price allocable to the garage since the

subject property, the Maison Blanche Building, was being valued

without regard to any garage space.     We have no basis to

challenge his allocation of $2 million to the parking garage and,

based on our confidence in him, we shall accept it.     The parties

agree that the size of the Pere Marquette Building is 202,000

square feet.   Assuming the cost of the building to be $3.5

million, that results in an unadjusted price per square foot of

$17.33 for the Pere Marquette Building, which we accept.

     We determine an adjusted price per square foot for the Pere

Marquette Building, as follows:

     Adjusted Price per Square Foot: Pere Marquette Building
     Unadjusted price per square foot                $17.33
     Adjustments:
       Location                            +20%
       Time                                +10%
       Size                                - 5%
       Zoning/historic                     -15%
     Total adjustments                     +10%
     Multiplier (100% + 10% = 110%)                  x 110%
     Adjusted price per square foot                   19.06

                (iii)   The Bell South Building

     A second common property is the Bell South Building, 820

Poydras Street, New Orleans, Louisiana.     The experts agree that

it sold for $2.657 million in 1997.     Mr. Roddewig testified that

it sold in May 1997 and Mr. Argote testified that it sold on

December 18, 1997.   Mr. Argote provided more details surrounding
                               - 79 -

the sale, so we accept his date of sale, and we will not adjust

for time.

     Both appraisers made negative adjustments for the building’s

size, 15 percent by Mr. Argote and 10 percent by Mr. Roddewig.

Mr. Argote is of the opinion that the building includes “+/-

77,000 square feet”, while Mr. Roddewig is of the opinion that it

includes 73,347 square feet.   We shall accept Mr. Roddewig’s more

exact figure.   Neither appraiser gave a reason for the level of

adjustment he chose to apply on account of size.    In reviewing

the adjustments that Mr. Roddewig applied to his comparable

sales, no pattern emerges as to his adjustment for building size.

There is a pattern to Mr. Argote’s adjustments that reflects the

size of each comparable property sale he chose.    That pattern

gives us confidence in Mr. Argote’s adjustments, and we shall

accept his negative adjustment of 15 percent for the size of the

building.24

     The Bell South Building has the same zoning classification

as the Pere Marquette Building and, like that building, has not

been designated a local landmark.   Mr. Roddewig increased his

negative adjustment to account for zoning/historic designation

differences from the Maison Blanche Building by 10 percentage

points (-20 percent for the Bell South Building compared to -10

     24
        We do so notwithstanding that we accept Mr. Roddewig’s
smaller estimate of the size of the building. That is because
Mr. Argote applied the same negative 15-percent size adjustment
to two smaller buildings that comprised 61,000 and 61,130 square
feet, respectively.
                              - 80 -

percent for the Pere Marquette Building), however, to account for

his opinion that the site of the Bell South Building was not

developed to its full potential.    While that may be so (although

Mr. Roddewig fails to mention a 17,600-square-foot parking lot

adjacent to the Bell South Building that Mr. Argote testified was

part of the sale), he has not explained how he arrived at that

10-percentage-point adjustment.    We shall make a negative

adjustment of 15 percent on account of zoning/historic

designation, equal to the adjustment we make with respect to the

Pere Marquette Building.

     Both appraisers made positive adjustments on account of

location, but those adjustments differed substantially in size,

25 percent for Mr. Roddewig and 5 percent for Mr. Argote.      We

find neither wholly persuasive.    Mr. Roddewig’s 25-percent

adjustment is the largest location adjustment that either

appraiser used for any local property, and Mr. Argote’s 5-percent

adjustment is the smallest.   Mr. Argote adjusted all but one of

his other comparables upward by 20 percent for location

differences.   He did not explain why the Bell South Building

warrants a much smaller adjustment.    Mr. Roddewig described the

Bell South Building’s location as “closer to [the] convention

center, but considerably further from [the] French Quarter”.        He

used the same language to describe another comparable’s location,

but he adjusted that property by 20 percent for location.      We

shall make a positive adjustment of 20 percent for location.
                               - 81 -

     Finally, we must address Mr. Argote’s 20-percent negative

adjustment under the heading “Configuration/Layout” to account

for a 17,600-square-foot parking lot that he believes the

purchasers of the Bell South Building acquired along with the

building.   Mr. Roddewig recognized that the building does not

cover the entire lot, but he mentions no parking lot.

Petitioners make no objection to Mr. Argote’s inclusion of the

parking lot in the purchase, and we shall accept it, along with

Mr. Argote’s adjustment.   We shall make a negative adjustment of

20 percent for configuration/layout.

     Assuming the cost of the building to be $2.675 million and

it to include 73,347 square feet, the unadjusted price per square

foot for the Bell South Building is $36.47, which we accept.

     We determine an adjusted price per square foot for the Bell

South Building, as follows:

       Adjusted Price per Square Foot: Bell South Building
     Unadjusted price per square foot               $36.47
     Adjustments:
       Size                               -15%
       Zoning/historic                    -15%
       Location                           +20%
       Configuration/layout               -20%
     Total adjustments                    -30%
     Multiplier (100% - 30% = 70%)                  x   70%
     Adjusted price per square foot                  25.53

                (iv)   Magazine Street and Board of Trade Place

     The last two properties that both appraisers relied upon are

actually two neighboring properties that were purchased by the

same buyer and combined to form one hotel.   The properties are
                              - 82 -

located at 332-36 Magazine Street (Magazine Street) and 320 Board

of Trade Place (BT Place), New Orleans, Louisiana.   Magazine

Street was purchased on July 2, 1997, and BT Place was purchased

on October 24, 1997.   Otherwise, the properties have very similar

characteristics.   Therefore, we will consider them together.

     Taking account of the testimony of both experts, the two

buildings comprise 43,500 square feet, and they sold for a

combined price of $1.235 million.   The unadjusted price per

square foot of the combined buildings is $28.39.   Mr. Roddewig

made no adjustment for size; Mr. Argote made a negative

adjustment of 25 percent.   Mr. Roddewig justified an exception

from the general rule that small buildings often sell for more

per square foot than larger on the basis that the small number of

rooms, 86, in the combined buildings and their inefficient layout

offset the potentially higher price that otherwise would be paid

for a smaller building.   He did not explain why a zero-percent

adjustment as opposed, say, to a negative adjustment of 10

percent is appropriate.   We have no independent basis to

determine the appropriate size adjustment for this comparable.

We shall rely on our general confidence in Mr. Argote and the

pattern we discern in his size adjustments to accept his negative

adjustment of 25 percent.

     Mr. Roddewig made a positive adjustment of 15 percent to

account for zoning and historic designation factors.   He

described the adjustment of consisting of a slight positive
                                - 83 -

adjustment to account for the more favorable zoning of the

properties and a negative adjustment to account for expansion

opportunities, but, he cautioned, “[t]he opportunity to add

additional floors * * * is limited by the location of the

buildings in a * * * historic district.”    He did not quantify the

components of his adjustment.    He adjusted the Pere Marquette

Building down by 5 percent to account for more favorable zoning,

so we will make a positive adjustment of 5 percent to account for

less favorable zoning.

     Both appraisers made positive adjustments on account of

location, Mr. Roddewig making an adjustment of 10 percent and Mr.

Argote making an adjustment of 20 percent.    Mr. Roddewig

described the properties’ location as “closer to convention

center, but slightly further from French Quarter.    Closer to

office core.”   That is similar to his description for the Pere

Marquette Building, for which he made a positive adjustment for

location of 20 percent.   We shall make a positive adjustment for

location of 20 percent.

     We shall make a positive time adjustment of 1.25 percent to

account for the small amount of time that elapsed between the

purchase of the two properties and the valuation date.

     Mr. Argote has persuaded us that a negative adjustment of 10

percent under the heading “Configuration/Layout” is appropriate

to account for the properties’ traditional New Orleans balconies

and courtyards.
                                - 84 -

     We determine an adjusted price per square foot for the

Magazine Street and BT Place, as follows:

  Adjusted Price Per Square Foot: Magazine Street and BT Place

     Unadjusted price per square foot                    $28.39
     Adjustments:
       Size                                  -25.00%
       Zoning/historic                       + 5.00%
       Location                              +20.00%
       Time                                  + 1.25%
       Configuration/layout                  -10.00%
     Total adjustments                       - 8.75%
     Multiplier (100% - 8.75% = 91.25%)                 x 91.25%
     Adjusted price per square foot                       25.91

                (v)    Conclusion
     The average adjusted price per square foot of the Pere

Marquette Building, Bell South Building, and Magazine Street and

BT Place buildings is $23.50.       The Maison Blanche Building

comprises 514,566 square feet.       Applying the average price under

the comparable sales approach to the Maison Blanche Building’s

total square footage results in a total before restriction value

of $12,092,301, which value we find to be its before restriction

value under the comparable sales approach.
                f.    After Restriction Value

     Mr. Roddewig did not determine an after restriction value

for the Maison Blanche-Kress parcel under the comparable sales

approach because, he testified:       “There are no comparable sales

of easement encumbered properties in New Orleans that can be used

to value the Maison Blanche Hotel Complex ‘after’ considering the

easement.”   Apparently, he limited his research to a set of

properties burdened by servitudes benefiting PRC, the
                               - 85 -

organization to which the servitude was conveyed, and, in that

set, he could identify only one postconveyance sale.25

Nevertheless, his consideration of market data on easement-

encumbered properties in Washington, D.C., and Philadelphia led

him to conclude that, taking into account that none of that data

“involved major rehabilitation projects and a change in use”, “an

impact from facade restrictions only of 15% is supportable.”

From a consideration of direct acquisitions of preservation

easements in Philadelphia, he concluded that “an impact * * * in

the range of 12% to 15%” of the stabilized value of property

after rehabilitation and before conveyance is supportable.26

     Mr. Argote identified five sales of New Orleans buildings

that he thought comparable to the Maison Blanche Building and

that were encumbered by servitudes at the time of sale.    He made

     25
        Summarizing his research in New Orleans, Mr. Roddewig
testified: “In the one sale of a building ‘after’ imposition of
the easement, the purchaser learned of the easement only on the
date of closing. He could not renegotiate at such a late date,
but wished he had known about the easement before making his
offer to purchase.”
     26
          His full testimony on the point is as follows:

          Given the similarity in the content of the
     Philadelphia and New Orleans easements, but given the
     substantially larger size of the Maison Blanche
     Building and the proposed conversion to a hotel, the
     interference of the easement with signage and
     window/door openings for retail use, and the fact that
     the subject property has three street facades that are
     protected by the easement, an impact from the easement
     in the range of 12% to 15% when measured against
     stabilized value following rehabilitation is
     supportable.
                                - 86 -

adjustments similar to those he made to his before transaction

comparables and determined mean and median values per square foot

for the comparables.   Based on those values, he determined that,

on the valuation date, after the restriction, the Maison Blanche

Building was worth $20 per square foot, for a total value of

$10,293,940, which he rounded to $10.3 million.

     Petitioner objects to respondent’s proposed findings of fact

concerning Mr. Argote’s identification of his five after

restriction comparables and his determination of an after

restriction value of $10.3 million principally on the ground that

Mr. Argote’s direct testimony should be excluded from evidence.

We have rejected that ground.    See supra section II of this
report.

     Petitioner also objects to respondent’s proposed finding

that Mr. Argote identified five comparables to the Maison Blanche

Building on the ground that, in his direct testimony, Mr. Argote

failed to show that three of those properties were comparable to

the Maison Blanche Building because he did not show that they had
the same highest and best use as the Maison Blanche Building.    In

his direct testimony, Mr. Argote stated only that the intended

uses of those three properties were “Speculative”,

“Office/Retail”, and “Office”, respectively.   On cross-

examination, however, in response to petitioner’s counsel’s

question as to where in his direct testimony (“page, line, and

paragraph”) he states the highest and best use of the three
                                - 87 -

properties, he answered:    “We’re on a really wrong track here.

The highest and best use of those properties was to develop a

hotel, even though they were being used for an alternative use.”

Petitioner asks that we disregard that answer on the ground that

Rule 143(f) prohibits Mr. Argote from expanding or supplementing

his direct testimony by anything he says on cross-examination.

Rule 143(f) deals with expert witness reports and subparagraph

(1) thereof establishes the general rule that an expert’s direct

testimony shall be by written report.    That subparagraph allows

additional direct testimony to, among other things “clarify or

emphasize matters in the report” or “otherwise at the discretion

of the Court.”   Id.    Petitioner cites no Tax Court case, and we

can find none, interpreting Rule 143(f) to the effect that the

Court may not consider testimony elicited from an expert on

cross-examination.     We do find cases where testimony of an expert

on cross-examination is reported by the Court.    E.g., Sears,

Roebuck & Co. v. Commissioner, 96 T.C. 61, 111 (1991), modified

96 T.C. 671 (1991), affd. in part and revd. in part on other
grounds 972 F.2d 858 (7th Cir. 1992); Hunt & Sons, Inc. v.

Commissioner, T.C. Memo. 2002-65; Van Duzer v. Commissioner, T.C.

Memo. 1992-62, affd. without published opinion 9 F.3d 1555 (9th

Cir. 1993).   Mr. Argote was of the opinion that highest and best

use of the Maison Blanche Building was “for conversion to a

hotel/retail complex”, and his direct testimony makes clear that

he understood the comparable sales approach to involve “a direct
                              - 88 -

comparison of the property being appraised to similar properties

that have sold in the same or in a similar market”.    (Emphasis

added.)   Whether he said so specifically or not in his direct

testimony, it is clear to us that he understood that the

comparables he chose had to have the same highest and best use as

the Maison Blanche Building, irrespective of the comparables

current or intended use.   We think that his testimony on cross-

examination clarified his written report, and we shall allow it

either as a clarification of his report or as a matter given over

to our discretion.   See Rule 143(f)(1).

     While the servitudes burdening the five properties he chose

as comparables were not identical to the servitude, for the most

part, all of the servitudes imposed similar burdens: e.g.,

perpetual restrictions; restrictions on successors and assigns;

servitudes covering exteriors and roofs; maintenance

requirements; insurance requirements; inspection rights;

restrictions on changes; and rights to inspect.   We do not think

that the differences between the servitudes burdening the five

comparables and the servitude were significant.   Indeed, the

servitude, in allowing the partnership to alter the Maison

Blanche Building according to plans to rehabilitate the building

for use as a Ritz-Carlton Hotel, including the right to build

penthouses on the roof and to install telecommunication devices

on the sides of the penthouses, is remarkable in its seeming

inconsistency with the goal of preserving the building’s historic
                              - 89 -

facade, and, if anything, would seem to require a positive

adjustment with respect to each of the comparables.

     Also, while unlike the servitudes burdening all but one of

the comparables, the servitude calls for payment of 10 percent of

the sales proceeds if the building is sold following a judicial

extinguishment of the easement, we agree with respondent that Mr.

Argote made no error in ignoring that fact since petitioner has

failed to show the risk of judicial extinguishment to be anything

but insignificant.   Nor do we think that Mr. Argote erred in

ignoring a requirement in the servitude that the partnership

expend a minimum of $350,000 in improvements to the facade.     His

uncontradicted testimony was that Gary J. Elkins, one of

petitioner’s counsel, in a letter to Linda J. Wise, one of

respondent’s counsel, had written that the obligation was not a

contractual obligation.   Petitioner has failed to resolve the

conflict between that report and the language of the servitude.

     We accept Mr. Argote’s determination that the after

restriction value of the Maison Blanche Building under the

comparable sales approach is $10.3 million, and find accordingly.

We note that, having found that the before restriction value

under that approach is $12,092,301, the after restriction value,

$10.3 million, represents a 14.82-percent discount to the before

restriction value, a discount about the same as Mr. Roddewig

determined from his market studies.
                                 - 90 -

            3.    Conclusion

      Based on our findings as to the before and after restriction

values of the Maison Blanche Building under the comparable sales

approach, we find that, on the valuation date, the value of the

servitude under that method was $1,792,301, calculated as

follows:

      Value of the Servitude Under Comparable Sales Approach

      Before restriction value                        $12,092,301
      Less: After restriction value                    10,300,000
      Value of the Servitude                            1,792,301

      E.   Conclusion

      We have rejected the cost and income approaches to valuing

the servitude.     We have found that under the comparable sales

approach the value of the servitude on the valuation date was

$1,792,301.      We accept and find that the fair market value of the

servitude on the valuation date was $1,792,301.

V.   Valuation Misstatement Penalty

      A.   Introduction

      On the 1997 Form 1065, the partnership claimed that the fair
market value of the servitude was $7.445 million.     We have found

that the fair market value of the servitude on the valuation date

was $1,792,301.     Therefore, on the 1997 Form 1065, the

partnership claimed an amount for the value of the servitude

slightly more than 415 percent of its correct value.
                               - 91 -

     B.   Gross Valuation Misstatement
     Section 6662(a) imposes an accuracy-related penalty in the

amount of 20 percent of the portion of any underpayment of tax

required to be shown on a return in the case of, among other

things, any substantial valuation misstatement under subtitle A,

chapter 1, of the Internal Revenue Code (a substantial valuation

misstatement).   See sec. 6662(b)(3).    Section 6662(h) increases

the penalty to 40 percent in the case of a gross valuation

misstatement under that chapter (a gross valuation misstatement).

There is a substantial valuation misstatement if the value of any

property claimed on the return is 200 percent or more of the

amount determined to be the correct amount.    Sec. 6662(e)(1)(A).

There is a gross valuation misstatement if the value is 400

percent or more of the value determined to be the correct amount.

Sec. 6662(h)(2)(A)(i).   The applicability of the penalty (except

for partner-level defenses) is determined at the partnership

level.    Sec. 301.6221-1T(c), Temporary Proced. & Admin. Regs., 64

Fed. Reg. 3838 (Jan. 26, 1999); see sec. 6221.    Since the

partnership overstated the value of the servitude on the 1997

Form 1065 by slightly more than 415 percent, it made a gross

valuation misstatement.27

     27
        No penalty is imposed unless the portion of the
underpayment attributable to the misstatement exceeds $5,000.
Sec. 6662(e)(2). In the case of a misstatement by a partnership,
however, that limitation is applied at the level of the taxpayer
who bears the burden of the tax on the partnership income. See
sec. 1.6662-5(h), Income Tax Regs. Application of the limitation
                                                    (continued...)
                                 - 92 -

     C.    Reasonable Cause Exception
            1.    Introduction

     Petitioner argues, however, that the penalty should be

excused under the reasonable cause exception found in section

6664(c)(1).      To qualify for that exception, petitioner must show

(1) that “the claimed value of the property was based on a

qualified appraisal made by a qualified appraiser,” and (2) “in

addition to obtaining such appraisal, the taxpayer made a good

faith investigation of the value of the contributed property.”

Sec. 6664(c)(2).     Those are partnership-level determinations.

Sec. 301.6221-1T(d), Temporary Proced. & Admin. Regs., 64 Fed.

Reg. 3838 (Jan. 26, 1999).28     Petitioner bears the burden of

proof.    See Santa Monica Pictures, L.L.C. v. Commissioner, T.C.
Memo. 2005-104.     Respondent concedes the first requirement.    To

satisfy the second requirement, petitioner must establish the

fact that, in addition to obtaining a qualified appraisal, it

made a good faith investigation of the value of the servitude.

Petitioner offers a hotch-pot of arguments that, either together
or separately, are not convincing.

     27
      (...continued)
is not an issue in this proceeding.
     28
        While the validity of sec. 301.6221-1T(c) and (d),
Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26,
1999), is being challenged in other cases before the Court, see
7050, Ltd. v. Commissioner, T.C. Memo. 2008-112 n.13 (and
accompanying text), the claim of invalidity does not extend to
the portion of the regulation stating that the applicability of
sec. 6664(c)(2) is a partnership-level determination.
                              - 93 -

     Principally, petitioner relies on the testimony of Robert

Drawbridge.   Mr. Drawbridge is an employee of an affiliate of

petitioner.   Petitioner is not only the tax matters partner of

the partnership, but it is also the partnership’s sole general

partner.   Mr. Drawbridge serves petitioner as “asset manager” for

the partnership.   He testified, mostly to the best of his

knowledge, as follows.   The partnership relied on the appraisal

made by Mr. Cohen (the Cohen appraisal) in filing the 1997 Form

1065.   The partnership reviewed a second appraisal, dated January

1, 1998, obtained by the then limited partner of the partnership

from Revac, Inc., of Houston, Texas (the Revac appraisal), which,

among other things, estimated the market value of the Maison

Blanche Building (1) before rehabilitation, (2) just after

rehabilitation, and (3) upon achieving stabilized occupancy.     The

partnership relied on professional tax advice it received from

its auditors and legal counsel in filing the 1997 Form 1065.     A

PRC representative signed the Form 8283 attached to the 1997 Form

1065, acknowledging receipt of the servitude.

     Following its recounting of that testimony, petitioner

concludes in its answering brief:   “Clearly, there was sufficient

investigation and good faith reliance on the professional

valuation that resulted in the charitable donation deduction.”

To bolster that conclusion, petitioner adds:

     Additionally, the Cohen Appraisal concluded that the
     diminution percentage in the property’s ‘before’ and
     ‘after’ values was only 7.8%, which is significantly
     lower than those value percentages previously affirmed
                              - 94 -

     by the Tax Court in Nikoladis [sic Nicoladis] v.
     Commissioner, T.C. Memo. 1988-163 * * * (14.0%), Losch
     v. Commissioner, T.C. Memo. 1988-230 * * * (16.8%), and
     Dorsey * * * [v. Commissioner, T.C. Memo. 1990-242]
     (33.41%).

          2.   Discussion

     Preliminarily, we note that Mr. Drawbridge also testified

that petitioner became the partnership’s general partner on

September 15, 2000.   We assume that his responsibilities as asset

manager commenced no earlier than that date.    He did not testify

as to any personal knowledge of the operations of the partnership

before that date, nor did he identify anyone who had informed him

about partnership operations before that date.    The 1997 Form

1065 was signed on October 14, 1998, and the question before us

is whether, before it was signed, disregarding the Cohen

appraisal, someone acting on behalf of the partnership made a

good faith investigation of the value of the servitude.    Mr.

Drawbridge gave no convincing testimony on that score.

     Even were we to credit his testimony, however, petitioner

has failed to make a convincing argument that the partnership

made the necessary investigation.    Petitioner considers the Revac

appraisal, which estimates that the fair market value of the

Maison Blanche Building would be $125 million upon rehabilitation

and $135 million upon achieving stabilized occupancy, as

supporting the Cohen appraisal, which concluded that the after

rehabilitation and before transaction value of the building was

$96 million.   Petitioner argues:   “The value reflected in the
                              - 95 -

Cohen Appraisal, at $96,000,000, to any reasonable person, acting

in good faith, would have appeared to be a conservative valuation

when compared to the conclusion in the REVAC Appraisal.”29    The

flaw in petitioner’s argument is that the good faith

investigation that petitioner was required to make was not an

investigation of the value of the Maison Blanche Building but an

investigation of the value of the servitude.   The before

restriction value of a rehabilitated Maison Blanche Building,

which Mr. Cohen relied on in his calculation of the diminution in

value occasioned by the conveyance of the servitude, is only half

the story.   Since the Revac appraisal tells us nothing of the

other half of the story, i.e., the value of the Maison Blanche

Building after the conveyance of the servitude, it does not

confirm the $7.455 million value of the servitude arrived at by

Mr. Cohen.   Indeed, the $125 million postrehabilitation value

determined in the Revac appraisal exceeds by slightly more than

30 percent the $96 million postrehabilitation and before

restriction value determined by Mr. Cohen, which discrepancy,

without more, equally brings into question both appraisals.

     We know nothing about any professional tax advice the

partnership received from its auditors and legal counsel in

     29
        At trial, respondent objected to the admission of Exh.
45-P, which is the Revac appraisal. We overruled respondent’s
objection and admitted the appraisal. After trial, respondent
moved the Court to reconsider that ruling. We shall deny the
motion since we are not relying upon the Revac appraisal to value
the servitude and respondent does not object to its admission for
purposes of determinations under sec. 6664.
                                - 96 -

filing the 1997 Form 1065, so we cannot say that such advice

constituted part of a good faith investigation of the value of

the servitude.     Also, we fail to see how petitioner’s recitation

of results in Tax Court cases helps carry its burden of proving

that someone on behalf of the partnership carried out the

required investigation.

            3.   Conclusion

      Petitioner has failed to prove that, in addition to

obtaining the necessary appraisal, it made a good faith

investigation of the value of the servitude.    It has, therefore

failed to satisfy the conditions of section 6664(c)(2), which are

a prerequisite for the application of the reasonable cause

exception found in section 6664(c)(1).

      D.   Conclusion
      The partnership overstated the value of the servitude on the

1997 Form 1065 by more than 400 percent, and, therefore, it made

a gross valuation misstatement.    There is no reasonable cause for

the misstatement.    We sustain application of an accuracy-related
penalty under section 6662(a) on the basis of a gross valuation

misstatement.

VI.   Conclusion

      To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
                                - 97 -

                               APPENDIX

     ACT OF DONATION             *            UNITED STATES OF AMERICA
  OF PERPETUAL REAL RIGHTS       *
                                 *
            BY                   *               STATE OF LOUISIANA
                                 *
      WHITEHOUSE HOTEL           *
    LIMITED PARTNERSHIP          *      PARISH OF ORLEANS [LIVINGSTON]
                                 *
            TO                   *
                                 *
   PRESERVATION ALLIANCE         *
OF NEW ORLEANS, INCORPORATED     *
d/b/a PRESERVATION RESOURCE      *
   CENTER OF NEW ORLEANS         *

     BE IT KNOWN, that on this       29th   day of   December   , 1997,

     BEFORE ME, undersigned Notary Public, duly commissioned and
qualified in and for the Parish of Orleans [Livingston], State of
Louisiana, therein residing, and in the presence of the
hereinafter named and undersigned witnesses:

     PERSONALLY CAME AND APPEARED:

     WHITEHOUSE HOTEL LIMITED PARTNERSHIP, (hereinafter
     referred to as "Owner"), Taxpayer Identification No.
     XX-XXXXXXX, a Louisiana partnership in commendam,
     appearing herein through its duly authorized General
     Partner, Whitehouse Hotel, L.L.C., a Louisiana limited
     liability company, represented herein by its duly
     authorized Manager, Housing Developers II, L.L.C.,
     represented herein by its duly authorized Manager,
     J.K.R. Family, L.L.C., represented herein by its duly
     authorized Manager, Stewart Juneau;

     AND

     BE IT KNOWN, that on this       23rd   day of   December   , 1997,

     BEFORE ME, the undersigned Notary Public, a Notary Public,
duly commissioned and qualified in and for the Parish of Orleans,
State of Louisiana, therein residing, and in the presence of the
hereinafter named and undersigned witnesses:
                             - 98 -

        PERSONALLY CAME AND APPEARED:
        PRESERVATION ALLIANCE OF NEW ORLEANS,
        INCORPORATED d/b/a PRESERVATION RESOURCE CENTER
        OF NEW ORLEANS (hereinafter referred to as
        "Donee"), a Louisiana non-profit corporation
        organized under §1950, Title 12, Chapter II of
        the Louisiana Revised Statutes (R.S. 12:1950),
        before Patrick D. Breeden, Notary Public, May
        31, 1974, and recorded in the Office of the
        Louisiana Secretary of State on June 20, 1974,
        the date that corporate existence began, herein
        represented by Patricia H. Gay, its Executive
        Director, duly authorized to act for said Donee;

        WHO HEREBY DECLARE, stipulate, covenant, and
        agree as follows:

                      W I T N E S S E T H:
     WHEREAS, Owner possesses full and complete ownership of that
certain land ("Land") and the improvement thereon ("Improvement")
located in Square 94 of the Second District of the City of New
Orleans, Louisiana, which square is bounded by Canal, Burgundy,
Iberville, and Dauphine Streets, and more particularly described
on Exhibit A attached hereto and made a part hereof (the Land and
Improvement are collectively referred to as the "Property"); and

     WHEREAS, the Property is shown on that certain survey dated
March 17, 1997, prepared by Gandolfo, Kuhn & Associates, Inc.
(the "Survey"), a copy of which is attached hereto as Exhibit B
and made a part hereof; and

     WHEREAS, the Improvement as shown on the Survey consists of
a thirteen-story building with the upper seven stories being
constructed around a light well facing Dauphine Street;

     WHEREAS, the first five stories of the Improvement are
referred to herein as the "Lower Stories", and the upper eight
stories of the Improvement are referred to herein as the "Upper
Stories"; and

     WHEREAS, Owner intends to rehabilitate the Improvement and
convert it into a luxury hotel and to construct penthouses on the
roof of the Improvement (the construction of penthouses on the
roof of the Improvement shall be referred to herein as the
"Penthouse Addition"); and

     WHEREAS, the Penthouse Addition will be constructed in
accordance with the approval of the National Park Service of the
United States Department of the Interior and in compliance with
the Comprehensive Zoning Ordinance of the City of New Orleans,
                             - 99 -

and in any event shall not exceed thirty (30) feet in height
above the roof of the Improvement and shall not be closer than
twenty (20) feet to the roof parapet nearest to Dauphine Street;
and

     WHEREAS, Donee is a non-profit corporation, duly established
under the laws of Louisiana, operated exclusively for charitable,
educational, and historical purposes in order to facilitate
public participation in the preservation of sites, buildings, and
objects significant in the history and culture of the City of New
Orleans, and in furtherance of such purposes is authorized under
Section 1252 of Title 9 of the Louisiana Revised Statutes (R.S.
9:1252(A)) to accept grants of perpetual real rights burdening
whole or any part of immovable property, including, but not
limited to, the facade, exterior, roof or front of any
improvements thereof, in order to protect property significant to
such history and culture; and

     WHEREAS, Owner warrants that there exists no servitude,
lease, mortgage, lien or other interest affecting or encumbering
the Property which would prohibit, prime, interfere or otherwise
limit the effectiveness of any of the rights and benefits herein
created by this Act of Donation of Perpetual Real Rights and
granted to Donee except as may be disclosed on the public record;
and

     WHEREAS, the Property has historical and/or architectural
merit and contributes significantly to the architectural and
cultural heritage and visual beauty of the City of New Orleans
and should be preserved; and

     WHEREAS, the scenic and architectural facade servitude
donated by the Owner to Donee by this Act of Donation of
Perpetual Real Rights is created herein for charitable,
educational and historical purposes and will assist in preserving
and maintaining the Property and the architectural ensemble of
the City of New Orleans; and

     WHEREAS, to this end, Owner desires to donate, grant,
transfer and convey to Donee, and Donee desires to accept, a
scenic, open space and architectural facade servitude as a
perpetual real right in and to the exterior surfaces of the
Improvement.

     NOW, THEREFORE, pursuant to R.S.9:1252, as amended, and in
accordance with applicable provisions of the Internal Revenue
Code of 1986, as amended, Owner does hereby create, establish,
grant, donate, convey and transfer to Donee a perpetual real
right (which perpetual real right is more particularly described
below) in and to certain exterior surfaces of the Improvement,
all of which are owned by Owner (the "Servitude") subject to the
right of the Owner to construct the Penthouse Addition on the
                             - 100 -

roof of the Upper Stories and to those rights reserved to Owner
in Paragraph 4 hereof.

     This Servitude shall constitute a binding servitude, in
perpetuity, upon the exterior surfaces of the Improvement; and to
that end, Owner covenants on behalf of Owner and Owner’s heirs,
successors, and assigns, and all subsequent owners of the
Improvement with Donee, its successors and assigns, such
covenants being deemed to run as a binding servitude, in
perpetuity, with the Land, to do (and refrain from doing), each
of the following terms and stipulations, which contribute to the
public purpose in that they aid significantly in the preservation
of historic property:

     1. The exterior surfaces of the Improvement subject to this
Servitude are 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, the exterior walls of the Upper Stories which
are visible from Canal, Burgundy, Iberville, and Dauphine
Streets, and the roof of the Upper Stories subject to Owner’s
right to construct the Penthouse Addition thereon (the “Facade”).
In the event of uncertainty, the exterior surfaces of the
Improvement visible in the photographs in Exhibit C shall
control.

     2. Donee acknowledges that Owner has provided to Donee
Plans dated August 7, 1997, (the “Plans”) pursuant to which Owner
intends to renovate the Improvement, including the Facade, and
that such renovation and rehabilitation have been approved by
Donee, provided such work is in compliance with the Plans. Owner
acknowledges and agrees that it shall make certain improvements
to the Facade which shall have a cost of at least $350,000.
Owner further acknowledges and agrees that in the event any
changes or modifications are made to the Plans which affect the
Facade, Owner shall first obtain the prior written approval of
Donee before any such changes or modifications are made.

     3. Owner agrees at all times to preserve and maintain the
Facade in a good and sound state of repair.

     4. Without the express written permission of the Donee, its
successors or assigns, signed by a duly authorized representative
thereof, based upon written plans submitted by Owner to Donee, no
construction, change, alteration, remolding, renovation, or any
other thing shall be undertaken by Owner or permitted to be
undertaken in or to the Facade, which would affect either the
height, or alter the exterior of the Facade or the appearance of
the Facade, other than as shown on the Plans and the Penthouse
Addition, or which would adversely affect the structural
soundness of the Improvement. The repair or replacement or
reconstruction of any subsequent damage to the Facade which has
resulted from casualty loss, deterioration, or wear and tear,
                             - 101 -

shall be permitted without the prior written approval of Donee,
provided that such reconstruction, repair, repainting, or
refinishing is performed in a manner which will not alter the
appearance of the Facade subject to this Servitude as it is as of
even date herewith or as it may subsequently be modified in
accordance with the terms hereof. Anything to the contrary
notwithstanding in this Act of Donation of Perpetual Real Rights,
Owner hereby retains the right (i) to replace any window in the
Improvement with a new window which replicates the window which
is being replaced so long as Owner does not replace more than ten
(10%) percent of the windows in the Improvement and (ii) to affix
to the exterior walls of the Penthouse Addition
telecommunications devices so long as such devices are mounted as
flush to the exterior walls of the Penthouse Addition as possible
and are painted a color which is harmonious with the color of the
Facade.

     5. In all events, Owner, in painting the exterior of the
Facade, agrees to obtain the prior written consent of Donee, its
successors or assigns, signed by a duly authorized representative
thereof, as to the quality and color of paint to be used if
significantly different from that presently existing.

     6. All work for preserving, maintaining, altering, or
renovating the Facade shall be performed and conducted by Owner
at Owner’s sole cost and expense. Should demolition of the
Improvement occur, in whole or in part, other than as provided
for in the Plans, or in the event either reconstruction or
change, alteration or renovation is performed without the prior
written approval of Donee as required herein, Donee shall have
the right to require any changes to such work as Donee, in its
sole discretion, deems proper. All such construction or changes
shall be commenced at Owner’s sole cost and expense within sixty
(60) days of Donee’s written notice to Owner and pursued with
diligence until completion, or Donee may compel curative work to
be performed at Owner’s sole cost and expense, in addition to all
rights and remedies provided herein or by law.

     7. For the purpose of maintaining and preserving the Facade
after it has been renovated and rehabilitated, Donee shall have
the right to require the Owner, at Owner’s expense, to perform
and conduct such repairs and maintenance work reasonably deemed
necessary in order to preserve, maintain, or repair the Facade
and the structural elements of the Improvement. All such work
shall be commenced, at Owner’s sole cost and expense, no later
than sixty (60) days after Owner’s receipt of Donee’s written
notice, and shall be pursued with due diligence until completion.
In the event that said repairs and maintenance work are not
completed by Owner within a reasonable time thereafter, Donee may
(a) proceed against Owner by summary process in a court of
competent jurisdiction to compel such repairs and maintenance,
and/or (b) exercise all other rights and remedies provided herein
or by law.
                             - 102 -

     8. All rights granted to Donee herein, including such
rights which Donee may exercise pursuant to Paragraph 7 above,
shall be exercised in a reasonable and prudent manner and with
least possible cost to Owner, calculated so as not to interfere
with Owner’s reasonable use and enjoyment of the Property while
accomplishing the purposes of this Act of Donation of Perpetual
Real Rights.

     9. Owner hereby consents and agrees that representatives of
Donee, its successors and assigns, shall be permitted to inspect
the Property at all reasonable times upon forty-eight (48) hours
prior notice given to Owner. Inspections will normally take
place from the street; however, Owner consents and agrees that
representatives of Donee, its successors and assigns, shall be
permitted to enter and inspect the interior of the Improvement
for the purpose of verifying the maintenance of the structural
condition and soundness of the Improvement and protecting the
rights of Donee herein. Inspection of the interior will be made
at a time mutually agreed upon by the Owner and Donee, its
successors and assigns, and Owner covenants not to withhold
unreasonably its consent in establishing a date and time for such
inspection. At least once every five (5) years, Owner, at
Owner’s cost, shall provide to Donee an inspection report of the
condition of the Facade and the structural elements of the
Improvement, such inspection report to be prepared by a competent
licensed structural engineer, or competent licensed roofer, or
both, whichever is applicable. Donee shall have the right to
require that the Owner cause an inspection of the Improvement
from time to time, upon Donee’s reasonable belief that a special
inspection is necessary to accomplish the purposes of this Act of
Donation of Perpetual Real Rights, including, but not limited to,
evidence of deterioration to the Improvement. Within forty-five
(45) days after Donee has notified the Owner of the need for a
special inspection, Owner shall deliver to Donee an inspection
report prepared by a competent person as above-described. In the
event that the Owner fails to provide such inspection reports as
are required by this Paragraph 9, Donee may, at the Owner’s sole
cost and expense, employ for the account of Owner the services of
a competent licensed structural engineer and/or a competent
licensed roofer and shall submit to Owner all bills and other
evidence of fees incurred or paid for such services, which shall
be promptly paid by Owner.

     10. In the event of a fire or other casualty which results
in damage to or loss or destruction of a part of the Facade or
the structural elements of the Improvement, Owner agrees promptly
to repair, renovate, or reconstruct the damaged or destroyed
parts of the Facade or the structural elements of the Improvement
with the prior consent and approval of Donee as otherwise
provided herein.

     11. In the event of a total loss or destruction of the
Improvement, Owner shall promptly remove all debris and trash and
                             - 103 -

properly maintain the Land. Owner must obtain Donee’s written
approval of and prior consent to any construction or
reconstruction of the Improvement, as provided herein.

     12. Owner agrees at all times to carry and maintain such
adequate amounts of comprehensive general bodily and property
damage liability insurance, property, fire, vandalism, malicious
mischief, and extended coverage insurance, general construction
liability insurance, and such other standard insurance coverages
as may be reasonably required by Donee. The policies of
insurance required to be obtained pursuant to this Paragraph 12
shall name Donee as a co-insured as its interest appears herein.
If the Improvement is uninsurable, Owner shall provide such other
protection which in the reasonable discretion of Donee is
necessary and advisable for the maintenance and preservation of
the Improvement, at Owner’s sole cost and expense. Donee shall
be provided with copies of said policies. Donee shall have the
right to provide such insurance at Owner’s cost and expense and
lien the Property for the cost of the premiums in the event Owner
fails to obtain the required policies.

     13. Owner shall provide to Donee written notice of the
Owner’s sale or other disposition of the Property, or any part
thereof, at the time of such sale or other disposition or as soon
as practicable thereafter, but in no event more than seven (7)
days following such sale. Owner shall insert in any agreement to
sell the Property (or any part thereof) or in any act of sale of
the Property (or any part thereof) a provision expressly setting
forth that the Property and the purchaser thereof are subject to
and bound by this Act of Donation of Perpetual Real Rights and
all covenants, obligations, agreements and restrictions herein.
The written notice required to be made by Owner under this
Paragraph 13 shall contain the name and address of any purchaser
and the name and address of a local agent and attorney-in-fact
for an absentee purchaser.

     14. In the event the Property is subdivided into
condominium units, time-sharing units, or other forms of multiple
ownership, Owner and its heirs, successors, vendees or assigns
agree to appoint and maintain a single agent and attorney-in-fact
residing in the Parish of Orleans with whom Donee shall be
authorized to deal exclusively in order to enforce Donee’ s
rights under this Act of Donation of Perpetual Real Rights.

     15. Owner agrees to and does herewith grant, transfer and
convey to Donee all "development rights" applicable to the
Property as provided for in the City of New Orleans Comprehensive
Zoning Ordinance other than as shown on the Plans and the
Penthouse Addition, as well as all privileges to transfer, sell,
or otherwise trade or bargain for such "development rights," in
the name of Owner but for the benefit of Donee. Owner agrees to
                             - 104 -

cooperate with Donee as necessary in any such transfer, with all
costs of such transfer to be paid by Donee and all benefits
therefrom accruing to Donee.

     16. No signs, markers, notices, billboards, advertisements,
plaques, decorations or other items shall be displayed, erected,
mounted or placed on the Facade except as set forth on the Plans
or without the prior express written consent of Donee, which
consent Donee may withhold in its reasonable and sole discretion.

     17. The rights, interests, obligations and benefits herein
constitute, individually and collectively, a perpetual real right
which vests immediately in Donee upon the execution of this Act
of Donation of Perpetual Real Rights and shall be binding on
Owner, its heirs, successors and assigns, and on all subsequent
owners of the Property. Owner agrees and acknowledges that the
Servitude shall have a fair market value at all times that is at
least equal to the proportionate value that the Servitude as of
the date of donation bears to the total value of the Property as
of the date of donation, and that such proportionate value of the
Servitude shall remain constant and recognized henceforth and
forevermore. Such proportionate value is hereby agreed by the
parties hereto to be ten (10%) percent. Owner further agrees and
acknowledges that in the event of a change in conditions which
would give rise to the judicial extinguishment of the
restrictions and obligations imposed hereunder with respect to
the Facade, the Donee, on a subsequent sale, exchange, or
involuntary conversion of the Property, shall be entitled to a
portion of the proceeds of such sale, exchange, or involuntary
conversion at least equal to the constant proportionate value of
the Servitude.

     18. Donee agrees and binds itself to use all of the
proceeds it receives from a sale, exchange, or involuntary
conversion of the Property, resulting from a judicial proceeding
which extinguishes Donee’s real rights, in a manner consistent
with the conservation purposes of the original donation.

     19. The parties hereto contemplate that the Servitude is a
perpetual conservation restriction within the meaning of Sections
1.170-13 and 1.170-14 of the Regulations of the Department of
Treasury, and, for federal income tax purposes, the donation of
this perpetual real right is the contribution of a qualified real
property interest to a qualified organization exclusively for
conservation purposes.

     20. In the event that the Donee shall at any time in the
future acquire full and complete ownership of the Property, Donee
for itself, its successors and assigns, covenants and agrees, in
the event of subsequent conveyances of such Property to another,
to create a new perpetual real right containing the same
restrictions and provisions as are contained herein, and either
to retain such perpetual real right in itself or to convey such
                             - 105 -

real right to a similar local or national organization whose
purposes, inter alia, are to promote historic preservation.

     21. Any right or obligation imposed upon the Owner of the
Property by the Servitude, including any covenant, restriction or
affirmative obligation herein, shall be enforceable by the Donee,
following reasonable notice to Owner, through judicial proceeding
by actions for temporary and/or permanent injunction to enjoin
such violations and to require the performance of all obligations
imposed on Owner by this Act of Donation of Perpetual Real
Rights, or, in the alternative, representatives of Donee, its
successors and assigns, may enter upon the Property, correct any
violation, and hold Owner and Owner’s heirs, successors and
assigns, responsible for the cost thereof in an action for
damages brought by Donee. Donee, its successors or assigns,
shall have available all other legal and equitable remedies
permitted by law to enforce Owner’s obligations hereunder. In
the event Owner is found to have violated any of its obligations
arising from this Act of Donation of Perpetual Real Rights, Owner
agrees to indemnify and hold harmless Donee from all reasonable
attorneys’ fees, expert witness charges, and other charges, fees,
and costs paid or incurred by Donee in the enforcement of any of
its rights granted herein.

     22. All other rights of ownership that do not conflict with
the exercise of Donee’s rights hereunder shall be and are hereby
retained by Owner. Owner shall have the right to use the
Property and the Improvement for whatever lawful purpose Owner
deems necessary, except as to rights herein granted. Owner
agrees not to perform any work or make any use of the Property
which would adversely affect Donee’s full exercise and enjoyment
of the perpetual real rights created herein. Owner agrees to pay
all real estate taxes and real property assessments on the
Property and agrees to hold Donee harmless in connection
therewith.

     23. Donee acknowledges that in order to finance the
rehabilitation of the Improvement, Owner may sell the Property to
a third party and lease the Property from such third party for
the term of such financing. In such event, Owner, as lessee of
such third party, shall be responsible for all monetary
obligations of Owner under this Act of Donation of Perpetual Real
Rights. Donee agrees that notwithstanding any provision herein
to the contrary, during the term of any such lease from such
third party to Owner, Donee shall enforce such monetary
obligations solely against Owner or, in default thereof, against
the Property, in rem.

     24. Owner, its successors or assigns, will do and perform
at Owner’s cost all acts necessary to the prompt filing for
registry of this Act of Donation of Perpetual Real Rights in the
conveyance records of the Parish of Orleans wherein the Property
is located.
                             - 106 -

     THUS DONE AND PASSED in my office at New Orleans [Denham
Springs], Louisiana, on the day, month, and year herein first
above written, in the presence of the two undersigned competent
witnesses, who hereunto sign their names with the said appearers
and me, Notary, after reading of the whole.

WITNESSES:                    OWNER:

                              WHITEHOUSE HOTEL LIMITED
                              PARTNERSHIP
                              By: Whitehouse Hotel, L.L.C.
                                  Its: General Partner

        [signature]                By: Housing Developers II,
                                   L.L.C.
                                        Its: Manager

         [signature]               By: J.K.R. Family, L.L.C.
                                        Its: Manager

                                   By:     [signature]
                                   Stewart Juneau
                                        Its: Manager

                           [signature]
                           NOTARY PUBLIC
                             - 107 -

     THUS DONE AND PASSED in my office at New Orleans, Louisiana,
on the day, month, and year herein first above written, in the
presence of the two undersigned competent witnesses, who hereunto
sign their names with the said appearer and me, Notary, after
reading of the whole.

                              DONEE:
WITNESSES:
                              PRESERVATION ALLIANCE OF NEW
                              ORLEANS, INCORPORATED d/b/a
                              PRESERVATION RESOURCE CENTER

        [signature]

                              By:        [signature]
                                    Patricia H. Gay
                                    Its: Executive Director

        [signature]

                           [signature]
                           NOTARY PUBLIC