I missed this one, and it shouldn’t go unblogged, especially as it received some interest in specialist circles. I’m referring to Huda T. Scheidelman and Ethan W. Perry, 2013 T. C. Memo. 18, filed 1/16/13, another façade easement deduction case.

You’ll remember Huda from my blogpost “Method to His Madness”, 6/18/12, where I reported on Second Circuit’s finding that, although IRS might not like Huda’s expert’s appraisal, it was an appraisal, and facially comported with IRS’ regulatory provisions. So Second Circuit sent Huda and the IRS back to Tax Court, so that Tax Court might assess the credibility of the appraisal and its evidentiary worth.

Judge Cohen sets out the parameters of the remand: “The case was remanded for a determination of the fair market value of the easement if we do not accept respondent’s other statutory and regulatory arguments, which relied on section 170(h)(5)(A) (a contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity) and section 1.170A-14(g), Income Tax Regs. (requirements which must be met for the perpetuity requirement to be satisfied). See Kaufman v. Commissioner, 136 T.C. 294 (2011), aff’d in part, vacated in part and remanded in part, 687 F.3d 21 (1st Cir. 2012). Respondent no longer contends that the conservation deed and the annexed lender agreement failed the requirements of section 1.170A-14(g)(6), Income Tax Regs., that the contribution be protected in perpetuity.” 2013 T.C. Memo. 18, at p. 2.

So a thing of beauty need not necessarily be a joy forever, Mr. Keats. But it has to be worth something, at least in the negative sense that restricting the owner thereof from tampering therewith decreases the worth of the owner’s property whereon the thing of beauty rests.

And it isn’t worth anything, finds Judge Cohen. But even so, Judge Cohen will not revisit Tax Court’s earlier holding to let Huda and Ethan off the penalty hook. Likewise no new trial, as the parties agree to let the previous trial record stand and not add to it.

Once again, Tax Court disputes not the qualifications of Huda’s appraiser, Michael “Iron Mike” Drazner, but his conclusions. “There is no material dispute between the parties with respect to the value of petitioner’s property before the easement. Respondent’s criticism of the Drazner report, with which we agree, focuses on Drazner’s purported determination of the value of petitioner’s property after the easement was granted. Drazner determined the value of the easement by applying an 11.33% discount to the value of the property. His derivation of that percentage was not based on reliable market data or specific attributes of petitioner’s property, but rather on his analysis of what the courts and the IRS had allowed in prior cases.” 2013 T. C. Memo. 18, at p. 14.

This is an echo of the “Primoli memo”, the 10%-15% diminution that was a throwaway in an IRS training memo, long since superseded. See my blogpost abovecited. Or put another way, this appraisal was based on what would get by, not what was true.

But on the trial Huda didn’t call “Iron Mike”, although she referred to his report in her brief. She went with Michael Ehrmann, also qualified but a protegé of NAT, sponsor-seller of easement deductions. His testimony was even more flawed than Iron Mike’s appraisal. “He relied on outdated information rather than contemporaneous inspection, used alleged comparables from outside the geographical area of petitioner’s property, and applied an unsupported and unrealistic adjustment to petitioner’s Brooklyn townhouse as compared to a detached house in Evanston, Illinois. His methodology is undermined by these errors.” 2013 T. C. Memo. 18, at pp. 15-16.

Having compared apples to stale Fig Newtons, Mr Ehrmann’s credibility was gone.

Of course, IRS’ experts show that the property was rendered more valuable by being historic, and that New York City’s Landmarks Preservation Commission serves as fierce watchdog of historic strictures.

Finally, IRS had the local neighborhood preservationist guru testify that NYCLPC was good people, and that preservationism made the neighborhood what it was (desirable–and pricey).

So Iron Mike and Mr Ehrmann are discarded, along with Huda’s deduction.