Fifth Circuit affirms Tax Court's valuation of facade easement.

The Fifth Circuit affirmed the Tax Court's determination of the value of a facade easement, finding that the Tax Court had properly followed its instructions on remand.

Background

Whitehouse Hotel LLP (Whitehouse) was formed in 1995 to purchase the Maison Blanche building in New Orleans, renovate it, and reopen it as a Ritz-Carlton hotel and condominium complex with retail space. Built between 1907 and 1909, the building was listed on the National Register of Historic Places in 1966 and designated a City of New Orleans landmark in 1980. White-house's development plan included combining the Maison Blanche with the contiguous Kress building.

In 1997, Whitehouse conveyed a conservation easement to a Louisiana nonprofit corporation dedicated to historical preservation. The easement burdens the Maison Blanche with a number of restrictions and affirmative obligations, all revolving around maintaining the appearance of the ornate terracotta facade. On its 1997 tax return, Whitehouse claimed a $7.445 million charitable contribution deduction for the easement. On audit, the IRS determined that Whitehouse was entitled to a deduction of only $1.15 million for the easement and assessed a gross-undervaluation penalty of 40% for the underpayment related to the overstated deduction.

Whitehouse challenged the easement valuation and the penalty in the Tax Court. The 2006 trial focused on the pre- and post-easement valuation of the Maison Blanche building. The difference in value represented the value of the conservation easement and therefore the amount of the permissible deduction in the year of conveyance. Whitehouse and the IRS each presented the testimony and report of a qualified appraisal expert on the value of the easement. Whitehouse's expert considered the replacement-cost, income, and comparable-sales methods in determining the easement's value. The IRS's expert considered only the comparable-sales method. The experts also disagreed about whether the relevant property was the Maison Blanche building and the Kress building or just the Maison Blanche building and whether the easement had an effect on the Kress building. The Tax Court for the most part agreed with the IRS's expert, finding that the replacement-cost and income methods were not suitable for valuing the easement and that the easement did not affect the Kress building. Ultimately, it determined the easement was worth approximately $1.79 million and approved the imposition of the...