No Penalty Shot

 Fifth Circuit is Judge Halpern’s nemesis; he can’t please them. Here’s the latest, courtesy of my colleague Joel E. Miller, Esq.

I was off in the Bayou City visiting the grandchildren, so I missed Joel’s presentation to the New York State Bar Association’s Coop/Condo Committee today; too bad, because Joel always has something worth hearing, and today’s gem is Whitehouse Hotel Limited Partnership; QHR Holdings – New Orleans Limited, Tax Matters Partner, No. 13-60131, decided 6/11/14.

For past history, see my blogpost “Chipping Away The Façade – Part Deux”, 10/24/12.

Now getting the remand from Fifth Circuit, Judge Halpern, with misgivings and begrudgingly, re-evaluated the worth of the Whitehousers’ façade easement of its historic hotel, and adjusted down the claimed overvaluation thereof to a mere 401%.

I’ll spare you the appraisal mixology in which Judge Halpern engaged, and Fifth Circuit’s equally begrudging acknowledgement that Judge Halpern stopped a shaved inch short of judicial insubordination in ignoring Fifth Circuit’s mandate on remand.

So the Whitehousers have a tax hit. But what about the 40% overvaluation chop with which Judge Halpern topped them off?

The Whitehousers got two appraisals before they filed the tax return at issue, and had attorneys and CPAs prepare the tax return. IRS concedes there was one valid appraisal, although IRS disagrees with the result.

“Our review of the tax court’s decision starts with the principle that ‘[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for a taxpayer to rely on that advice.’ United States v. Boyle, 469 U.S. 241, 251 (1985). ‘Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney.’ Id. at 251. The Court held, though, that the relevant issue in that case of meeting filing deadlines was not an area in which tax experts were necessary. Id. at 251-52. Our earlier opinion cited Boyle for the tax court to consider on remand. Whitehouse Hotel, 615 F.3d at 343.” Opinion, at pp. 20-21.

Judge Southwick went on: “We conclude that the tax court imposed an excessively high standard of proof for actual reliance on the advice of competent tax professionals with respect to this statutory defense. The tax court concluded in its remand decision that ‘the record is bare of any evidence supporting’ a conclusion that Whitehouse undertook any investigation of the amount of the deduction for the conveyance of the easement and presumed that the tax professionals also did not. Whitehouse Hotel, 139 T.C. at 361. We disagree.

“Valuation of assets is a difficult task, even with the advice and counsel of accountants, consultants, and tax attorneys. It is even more complicated when, as here, the valuation is divorced from a negotiated transaction between buyer and seller. In most transactions, presumably, the final sale price is forged from competing interests. That dynamic makes the sale price a good indicator of the fair market value of a given property. Even then, that price may be altered up or down by idiosyncratic characteristics of the parties. This is not the case here. This easement was a gratuitous transfer; the PRC did not haggle over price and did not pay a final sale price.” Opinion, at pp. 21-22.

And IRS, IRS’ expert, and Judge Halpern all reached different numbers for the worth of the easement. This was a strong factor in Fifth Circuit’s decision to throw out the 40% chop.

“Obtaining a qualified appraisal, analyzing that appraisal, commissioning another appraisal, and submitting a professionally-prepared tax return is sufficient to show a good faith investigation as required by law. See I.R.C. § 6664(c)(3)(B). The tax court’s enforcement of the gross undervaluation penalty was clearly erroneous.” Opinion, at p. 22.

The façade may crumble, but the Whitehousers are penalty-free.