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Thursday, September 26, 2013
Over the past few years there have been a significant number of
audits and Tax Court cases related to conservation (facade)
easements, and particularly the valuation of these easements for
purposes of the charitable contribution deduction. In 2011, the IRS
even issued a new Conservation Easement Audit Techniques Guide to
give taxpayers a blueprint for how examiners will evaluate these
contributions. Though the level of scrutiny the IRS uses in looking
at these deductions seems to have increased, the Second Circuit
appears to have offered some reprieve.
In Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012), the Second
Circuit overturned a Tax Court ruling that an appraisal obtained by
the taxpayer insufficiently explained the method and basis of
valuation and, therefore, was not a qualified appraisal under Regs.
§1.170A-13(c)(3). The Second Circuit stated that, for the purpose
of gauging compliance with the reporting requirement, it was
irrelevant that the IRS believed the method employed was inaccurate
or haphazardly applied as long as the method was described. The
Second Circuit also stated that the regulation required only that
the appraiser identify the valuation method "used" to enable the
IRS to evaluate it, not that the method adopted be reliable.
Accordingly, the Second Circuit vacated the decision of the Tax
Court and remanded the case for further consideration of the value
consistent with its opinion.
In Friedberg v. Commissioner, T.C. Memo 2013-224, a
matter that is appealable to the Second Circuit, the Tax Court
reversed its prior grant of summary judgment to the IRS and held
that the appraisal of a facade easement on a historic townhouse in
New York City's Upper East Side was a qualified appraisal. The
court previously had held that the sales comparison approach used
by the appraiser was not a proper basis for a qualified appraisal.
But, now applying Scheidelman, the court said it was irrelevant
whether the IRS believed the appraisal method was "sloppy or
inaccurate, or haphazardly applied." The court stated that the
information provided must only enable the IRS to evaluate the
appraiser's methodology. Further, the court noted that the matter
of reliability and accuracy of the methodology and specific basis
of valuation is to be determined at trial.
These cases mark a significant setback for the IRS, which has
been successful in several courts in disallowing a deduction for
facade easements on the basis of faulty appraisals. Though they are
not final determinations on the reliability of the appraisal
methods used, they do indicate that the IRS will not win by simply
disregarding appraisals as unqualified when they disagree with the
method used, at least not in the Second Circuit. We will have to wait and see if other circuits will adopt the Second Circuit's view
on this matter.
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