Attorney-at-Law

CHIPPING AWAY THE FACADE – PART DEUX

In Uncategorized on 10/24/2012 at 01:17

While the Cobblestoners avoided penalties when their facade easement got blown up (see my blogpost “Chipping Away the Facade”, 5/2/2012), the Whitehousers weren’t so lucky when Fifth Circuit sent them back to Tax Court. The case is Whitehouse Hotel Limited Partnership, QHR Holdings–New Orleans, Ltd., Tax Matters Partner, 139 T.C. 13, filed 10/23/12.

The Whitehousers claimed a $7 million facade easement on the Maison Blanche in the Big Easy. They were beaten in Tax Court first time around (131 T. C. 112 (2008)), but Fifth Circuit vacated that decision and sent them back to determine the value of the easement and whether the Section 6662(h) gross overstatement of value 40% penalty should apply. And again the Whitehousers collapse, both as to the value and the double whammy on the penalty.

The Whitehousers’ expert witness does them no good. He tries the replacement cost method of valuation but that doesn’t work for historic structures, because it is usually uneconomic to try to reproduce them. The income method doesn’t work here, because the building is a shell when the donation takes place, and there are just too many variables for the expert’s income projections to be accurate. And on comparables, Whitehousers’ expert wants to use comparables from other locales, claiming a national market for historic structures waiting to be turned into luxury hotels, but IRS’ expert finds enough local comparables to establish IRS’ figures. Remember, in real estate it’s location, location and location.

And the Whitehousers’ initial appraisal (prepared by someone else, but acknowledged by IRS to be an appraisal by a qualified expert) is too good to be true; their property did not appreciate 970% in three years.

And thereby hangs this tale.

Although there was an appraisal prepared by a qualified expert, the taxpayer must do more than rely upon it to avoid the Section 6662(h) gross overstatement of value. “In the case of a substantial or gross valuation misstatement with respect to charitable deduction property, however, the reasonable-cause-and-good-faith exception does not apply unless the taxpayer can show that (1) ‘the claimed value of the property was based on a qualified appraisal made by a qualified appraiser’, sec. 6664(c)(2)(A); 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) (B). The pertinent regulations, section 1.6664-4(g)(1), Income Tax Regs. (1977), make clear that the qualified-appraisal and good-faith-investigation requirements imposed by section 6664(c)(2) ‘apply in addition to the generally applicable rules concerning reasonable cause and good faith’.” 139 T.C.13, at p. 76. (Footnotes omitted).

Well, the appraisal they got was a qualified appraisal made by a qualified appraiser, even though IRS disagrees with the appraiser’s conclusion. See my blogpost “Method to His Madness”, 6/18/12.

But that’s not enough. The taxpayer must make a reasonable good-faith investigation to determine the value of the easement, even though the IRS concedes the Whitehousers got a qualified appraisal from a qualified appraiser.

The Whitehousers did nothing but attach the appraisal to their Form 8283. They didn’t ask how their appraiser determined that what they’d paid $9 million for could appraise for $96 million, or how the donated facade easement could reduce the worth of what they paid for by $7.45 million. They didn’t produce any evidence about what they discussed with their accountants and attorneys in preparing the Form 1065 with the huge deduction.

Thus the 40% penalty.

Takeaway– If it seems too good to be true, it usually is.

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