Attorney-at-Law

METHOD TO HIS MADNESS?

In Uncategorized on 06/18/2012 at 16:38

And basis for his conclusion? If he says so, Tax Court must consider whether it’s persuasive, but cannot disregard it entirely. Thus spake the Second Circuit, in Scheidelman v. Com’r, No. 10-3587, decided 6/15/12.

Thanks to Joel Miller, Esq., for sending this along.

Huda Scheidelman owns another one of those precious facades. She’s in a historic district and grants a historic structure preservation facade easement, enabled by our old acquaintance the National Architectural Trust, and gets one Michael (“Iron Mike”) Drazner, a qualified appraiser, to give her the magic number, the diminution of value caused by the easement, so she can take a whopping charitable deduction.

Are you paralyzed with shock when Iron Mike comes in at 11.33% of the building’s free-and-clear value? If so, you haven’t been paying attention. Huda’s easement was granted in the heyday of the famous “Primoli Article”. See footnote 6 in Scheidelman,  where Ch. J. Jacobs states: “‘Facade Easement Contributions’ by Mark Primoli, was written as part of an IRS program focusing on specialized areas of tax law. The Primoli article, in turn, had relied upon a 1994 IRS ‘Audit Technique Guide,’ used to train tax examiners but not intended to set IRS policy. In 2003 both the Audit Technique Guide and a revised version of Primoli’s article omitted any reference to the ten to fifteen percent range for fear the numbers were being misconstrued.” Scheidelman, at p. 14, footnote 6.

Poor old Primoli opened the floodgates, and everyone assumed ten to fifteen percent was an unchallengeable safe harbor, until IRS played Admiral Farragut, damned the Primoli torpedoes, and torpedoed every easement they could find (I’ve done about five blogposts based upon the torpedoing). I expect poor Mark Primoli is now auditing 1040-EZs in Point Barrow, AK.

So Iron Mike does his thing, which Ch. J. Jacobs and colleagues finds complies with the Regulations as then in effect. “The Tax Court concluded that there was no method of valuation because ‘the application of a percentage to the fair market value before conveyance of the facade easement, without explanation, cannot constitute a method of valuation.’ We disagree. Drazner did in fact explain at some length how he arrived at his numbers. For the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied — it remains a method, and Drazner described it. The regulation requires only that the appraiser identify the valuation method ‘used’; it does not require that the method adopted be reliable. By providing the information required by the regulation, Drazner enabled the IRS to evaluate his methodology.” Scheidelman at pp. 15-16 (Citation and footnote omitted).

Anyway, also in compliance with the Regulations as in effect when Huda filed her 8283s (two of them, and one of them she didn’t sign), she provided what information was required. It might have been nice if Huda put it all in one neat package, but anyway: “Scheidelman submitted two Form 8283s, which together contained the information required. In support of her deduction, Scheidelman submitted the Form 8283 completed by Drazner and the Trust as well as a supplemental Form 8283 filled out (but not signed) by her tax preparer, John Samoza. The second Form 8283 contained the information omitted from the Form 8283 completed by the Trust and signed by Drazner and the Trust.

“The second Form 8283 was not signed by Drazner or the Trust. But the two forms were both attached to Scheidelman’s tax return and together contained all of the information and signatures required by Treasury Regulations. The required information and signatures were thus dispersed in two forms submitted together, rather than gathered in a single form; but that is the most technical of deficiencies, which is properly excused on two grounds: ‘reasonable cause,’ see 26 U.S.C. § 170(f)(11)(A)(ii)(II); and the doctrine of substantial compliance, see Bond v. Comm’r, 100 T.C. 32, 42 (1993).”Scheidelman, at pp. 20-21.

So when IRS claims the appraisal is useless, because lacking method and basis, that’s not the point. Ch. J. Jacobs: “The Commissioner [IRS] may deem Drazner’s ‘reasoned analysis’ unconvincing, but it is incontestably there. Treasury Regulations do provide substantive requirements for what a qualified appraisal must contain. Some would seem to be inapplicable, and others are expressly considered by Drazner. And of course, the Treasury Department can use the broad regulatory authority granted to it by the Internal Revenue Code to set stricter requirements for a qualified appraisal. Moreover, the Commissioner could review the Drazner appraisal in the context of a considerable body of data. Around the time Scheidelman was audited, the IRS had undertaken a project in which it reviewed about 700 facade conservation easements, about one-third of them all. See Internal Revenue Service Advisory Council 2009 General Report, available at http://www.irs.gov/taxpros/article/0,,id=215543,00.html.

“In sum, the Drazner appraisal accomplishes the purpose of the reporting regulation: It provides the IRS with sufficient information to evaluate the claimed deduction and ‘deal more effectively with the prevalent use of overvaluations.’ Hewitt v. Comm’r, 109 T.C. 258, 265 (1997), aff’d, 166 F.3d 332 (4th Cir. 1998) (per curium)[sic]. And since the Commissioner’s bottom line is that the donation had no value at all, it is hard to see how any defect in the appraisal would matter.” Scheidelman, at pp. 18-20 (Footnote omitted; but read it, it’s got some items from the IRS shopping list for appraisals.)

So Iron Mike’s appraisal must be reconsidered by Tax Court, although they can throw it out. And Huda’s cash deduction for what she paid National Architectural Trust wasn’t payment for services, because the services were performed and the easement benefited NAT, so no quid pro quo, and her deduction is allowed.

Gotta love that unguided Congressional largesse. Oh, and by the way, the correct spelling is “per curiam”.

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