Scheidelman v. Commissioner (Scheidelman III)

U.S. Tax Court, T.C. Memo. 2013-18, January 16, 2013: Finds historic preservation façade easement in historic district did not diminish value of property.

The IRS denied Scheidelman a charitable deduction for a façade easement on a property in a New York City historic district. The Tax Court sided with the IRS in Scheidelman v. Commissioner, T.C. Memo. 2010-151 (Scheidelman I), saying that Scheidelman’s appraisal was not a “qualified appraisal”.  On appeal in the Second Circuit the Appeals Court vacated the Tax Court decision as to the qualification of the appraisal and remanded the case for further proceeding as to the fair market value of the easement for deduction purposes. Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II).  On remand the Tax Court agreed with the IRS that the easement did not diminish the value of Scheidelman’s property and therefore no deduction could be taken.

The burden of proof standard the Tax Court used, citing Evans v. Commissioner, T.C. Memo. 2010-207, slip op. at 15, was that the taxpayer had to provide “sufficient credible evidence to shift the burden of proof to the Commissioner”.

The appraisal Scheidelmans submitted at the time of claiming the deduction said, “In the subject’s market area, the appraiser cannot precisely estimate the extent to which this ‘loss in value’ will result from the facade easement due to the lack of market data. In this situation it is the appraiser’s conclusion that the value of the facade conservation easement … on the subject property would be estimated at $115,000, which is approximately 11.33% of the fee simple value of $1,015,000. This conclusion is based on consideration of range of value that the I.R.S. has historically found to be acceptable as well as historical precedents.”

The IRS presented evidence that ninety-one appraisals prepared by the same company as employed Scheidelman’s appraiser used “almost identical language and percentages without regard to specific facts and circumstances regarding the property subject to the easement and preexisting restraints on changes to the property.”

The Tax Court found Scheidelman’s appraisal “was not based on sufficient facts or data and was not the product of a reliable methodology, and [the] methodology was not reliably applied to the facts of the case. For those reasons, it was not credible.”

The Court also found less than reliable the testimony of another appraiser whose testimony Scheidelman presented at trial, due to “factual and calculation mistakes”. Among other shortcomings, this second appraiser testified his valuation was not based on Scheidelman’s actual easement but on “a summary of my knowledge about the easement program that I’ve gotten over the years,” relied on outdated information, and used “comparables from outside the geographical area of petitioner’s property”.

With these evaluations of Scheidelman’s evidence, the Court said that the burden of proof did not shift to the IRS, so the Court looked to the preponderance of the evidence, but the Court also said it found the IRS’s expert testimony that the easement had no value as a charitable contribution more persuasive regardless of the burden of proof.

One aspect of the IRS’s expert testimony that the Court particularly noted had to do with the comparison of, on the one hand, restrictions imposed by the easement and their enforcement by the holder, National Architectural Trust (NAT), and on the other hand, the restrictions imposed in this historic district by the New York City Landmarks Preservation Commission (LPC) and its enforcement.  The IRS argued that the easement had “no material effect”. Their expert also said that enforcement of the LPC controls was better than easement enforcement generally because the LPC controls require, “the homeowner to go to court and seek an exception, in the first instance” while the private easement put the burden on the holder to go to court to enforce its restriction. Scheidelman argued that NAT enforces its restrictions more effectively than the LPC enforces the law but the Court did not find that assertion supported by evidence. (Editorial note: the Court’s view of NAT’s enforcement record may have been influenced by its reputation as evidenced by the facts that lead it to be barred from certain activities regarding the valuation of historic preservation easements in a civil suit brought by the Justice Department on behalf of the IRS.)

Decision available at http://www.ustaxcourt.gov/InOpHistoric/ScheidelmanMemo.TCM.WPD.pdf.

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