Whitehouse Hotels Tax Court Decision Vacated and Remanded
A recent U.S. Court of Appeals decision in the case of Whitehouse Hotels sharply criticized IRS appraisal methods and its frequent assertion that conservation easements have no value—a claim the court called “rather extraordinary.” The Tax Court must now review and rewrite its original ruling, that the donors of a New Orleans façade easement overstated its value by 75 percent.
The US Court of Appeals for the Fifth Circuit vacated the Tax Court’s decision for the IRS in the Whitehouse Hotel Limited Partnership case and returned it to Tax Court to try again last month. Whitehouse donated a historic preservation easement on the Maison Blanche building in New Orleans during redevelopment into a luxury hotel.
The Tax Court had ruled on October 30, 2008, that Whitehouse Hotel Limited Partnership had overstated a charitable contribution donation for an historic preservation easement by $5,652,669. Whitehouse had claimed a charitable contribution deduction of $7,445,000 for its 1997 donation. The Tax Court also upheld a gross valuation misstatement penalty of 40% of the underpayment of taxes.
Central to the case was that the IRS appraiser ignored the possibility that the historic preservation easement diminished the fair market value of an adjoining building owned by Whitehouse by prohibiting the upward expansion of the adjoining building for construction of additional hotel rooms. The Court of Appeals also commented that Whitehouse may have satisfied the requirements of the reasonable-cause exception to the undervaluation penalty and directed the Tax Court to determine whether Whitehouse obtained a qualified appraisal made by a qualified appraiser, and in addition to obtaining such appraisal, whether they made a good faith investigation of the value of the contributed property.
Finally the Court of Appeals noted that the zero valuation by the IRS expert was "rather extraordinary" citing prior cases where the court took a common sense approach that any reasonable buyer would consider the restrictions in making a purchase offer.
The author of an analysis of the Fifth Circuit decision summarized the case and the background in the following article: “Recognizing abuse in this area, the IRS is vigorously attacking almost all conservation easement donations with significant success. Façade easement cases are especially difficult. As the Fifth Circuit noted, “Notwithstanding ... regulatory guidance, valuing preservation easements remains, most understandably, a complex and difficult undertaking that continues to challenge appraisers and the IRS.” In Whitehouse, we see an expansive Fifth Circuit providing advice to the Tax Court on issues not directly at issue (given the remand for revaluation) in order to bring order to the chaos currently surrounding conservation easement valuation. While, at the end of the day, Whitehouse may ultimately be a victory for the Taxpayer, practitioners can rely on the fact that the IRS will continue to vigorously attack conservation easement contributions for the foreseeable future.”
As evidence of this last, tax attorneys report that IRS field and audit agents were unmoved by the Whitehouse remand when cited on behalf of other taxpayers facing similar appraisal issues and zero valuation by the IRS of an easement donation. Some experts believe it is not surprising that IRS litigators have concluded that they won’t be held to any particular standard in Tax Court given recent decisions, and that the point of presenting expert testimony is not to establish value, but to merely to discredit the value proposed by the taxpayer. So the bigger the discrepancy between the IRS valuation and the taxpayer valuation, the better.