US Tax Court, T.C. Memo. 2012-218, July 31, 2012: On reconsideration, appraisal still not “qualified” due to deficient information, despite 2nd Circuit Court of Appeals Scheidelman II decision.
This Tax Court Memo decision is a reconsideration of Rothman v. Commissioner, T.C. Memo. 2012-163 (Rothman I), following the U.S. Court of Appeals Second Circuit’s decision in Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II). Rothman I held that the appraisal submitted to substantiate a deduction for a historic preservation façade easement (the “Rosado appraisal”) was not a Qualified Appraisal because it failed to use a method of valuation contemplated under the Treasury Regulations (sections 1.170A-13(c)(3)(ii)(J) and (K)). The Rosado appraisal, which set a value of the easement by appling a percentage to the fair market value of the property before conveyance of the facade easement, “insufficiently explained the method and basis of valuation” and failed to provide the “specific basis for the valuation”. Virtually the same approach was used in the Scheidelman appraisal, and was disqualified by the Tax Court on the same basis. In Scheidelman II, on appeal the 2nd Circuit held that despite the shortcomings of this approach it nevertheless, by itself, would not disqualify an appraisal. Rothman than asked the Tax Court to reconsider its decision as to the Rosado appraisal.
On reconsideration, the Tax Court had to accept that Scheidelman II required it to vacate the part of its Rothman I decision that relied on the same reasoning as Scheidelman I, but the Tax Court held that the Rosado appraisal was still not Qualified because it also failed to satisfy 8 of 15 Treasury Regulation requirements for a Qualified Appraisal.
The Court concluded that the Rosado appraisal did not comply with the following Treas. Regs. sections:
1.170A-13(c)(3)(i)(A), appraisal made earlier than 60 days before the contribution date;
1.170A-13(c)(3)(ii)(A), contributed property not described;
1.170A-13(c)(3)(ii)(C), actual or expected contribution date not included;
1.170A-13(c)(3)(ii)(D), terms of agreement not disclosed;
1.170A-13(c)(3)(ii)(F), appraisers’ background, experience, and other relevant information not included;
1.170A-13(c)(3)(ii)(G), not clear that appraisal was made for income tax purposes;
1.170A-13(c)(3)(ii) (I), wrong measure of value (market value but not fair market value).
(This list is in footnote 2 of Rothman II, page 11. The list There also includes sec. 1.170A-13(c)(3)(i)(C), which requires the appraisal to include the information required by section 1.170A-13 (c)(3)(ii), i.e., many of the other specific sections cited by the Court.)
The Court wrote, “the cumulative effect of the defects discussed in Rothman, but not at issue in Scheidelman, deprives the Internal Revenue Service of sufficient information to evaluate the deductions claimed.”
The Tax Court said it had no choice but to apply all of the Qualified Appraisal regulations unless it found any to be arbitrary, capricious, or manifestly contrary to the statute (citing Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. ___, 131 S. Ct. 704 (2011) and Chevron, U.S.A., Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984), and that only a few of these requirements are open to interpretation. It also repeated that in Rothman I it held that the substantial compliance doctrine should not be invoked.
The Court still reserved decision on whether the appraisal complied with Treas. Regs. 1.170A-13(c)(3)(i)(B), (prepared, signed, and dated by a qualified appraiser).
The case is proceeding to trial on the issue of valuation and whether the failures were due to reasonable cause and not to willful neglect, Treas. Regs. sec. 170(f)(11)(A)(ii)(II).
Decision available at http://www.ustaxcourt.gov/InOpHistoric/RothmanStevenMemo.TCM.WPD.pdf.