Tuesday, January 22, 2013

Scheidelman v. Commissioner – A Long Journey to the Denial of a Deduction for a Facade Easement Donation

Scheidelman granted a façade easement encumbering a building located in a historic district in Brooklyn, New York, to the National Architectural Trust in 2004 and claimed a charitable deduction with regard to the grant on her 2004, 2005, and 2006 income tax returns. The IRS disallowed the deductions and, in Scheidelman v. Commissioner, T.C. Memo. 2010-151 (July 14, 2010), Tax Court sustained the disallowances. The Tax Court determined that the appraisal Scheidelman obtained to substantiate the deductions was not a “qualified appraisal” because it failed to state the method and basis of valuation as required by Treasury Regulation § 1.170A–13(c)(3)(ii)(J) and (K).

Two years later, in Scheidelman v. Commissioner, 682 F.3d 189 (2nd Cir., June 15, 2012), the Second Circuit vacated and remanded the case, holding that the appraisal sufficiently detailed the method and basis of valuation. The Second Circuit explained

[f]or the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied—it remains a method, and [the appraiser] described it. The regulation requires only that the appraiser identify the valuation method “used”; it does not require that the method adopted be reliable.

However, the Second Circuit also noted that its conclusion that the appraisal met the minimal "qualified appraisal" requirements mandated neither that the Tax Court find the appraisal persuasive nor that Scheidelman be entitled to a deduction for the donation of the easement.

On January 16, 2013, the Tax Court issued its opinion on remand: Scheidelman v. Comm’r, T.C. Memo. 2013-18. The Tax Court acknowledged that “’ordinarily any encumbrance on real property, howsoever slight, would tend to have some negative effect on that property’s fair market value.’” The court concluded, however, that the preponderance of the evidence supported the IRS’s position that the easement had no value, and the IRS’s position was “the more persuasive, regardless of the burden of proof.” The court also had harsh words for the taxpayer’s expert at trial, stating

Ehrmann ignored studies suggesting a contrary result and adopted those supporting his client’s desired value. Ehrmann’s testimony had all of the earmarks of overzealous advocacy in support of NAT’s marketing program and, indirectly, [the taxpayer’s] tax reporting. His conclusion that the easement should be valued at $150,000 is unpersuasive and not credible.

Expert opinions that disregard relevant facts affecting valuation or exaggerate value to incredible levels are rejected. . . . An expert loses usefulness to the Court and loses credibility when giving testimony tainted by overzealous advocacy.



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