Partner v. Comm'r Of Internal Revenue

Citation615 F.3d 321
Decision Date10 August 2010
Docket NumberNo. 09-60085.,09-60085.
PartiesWHITEHOUSE HOTEL LIMITED PARTNERSHIP; QHR Holdings-New Orleans Limited, Tax Matters Partner, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

OPINION TEXT STARTS HERE

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Gary J. Elkins (argued), Yvonne Chalker, Elkins, P.L.C., Andrew Lewis Kramer, New Orleans, LA, for Petitioners-Appellants.

Bethany Buck Hauser (argued), Dept. of Justice, Kenneth L. Greene, Nathan J. Hochman, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, Robert R. Di Trolio, John DiCicco, Clarissa C. Potter, Washington, DC, for Respondent-Appellee.

Elizabeth Sherrill Merritt, Washington, DC, for Nat. Trust for Historic Preservation in U.S., Amicus Curiae.

Appeal from the United States Tax Court.

Before BARKSDALE, GARZA and DENNIS, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

This appeal by Whitehouse Hotel Limited Partnership, a Louisiana limited partnership, concerns the allowable amount for its claimed $7.445 million charitable-contribution deduction for its donation, in 1997, of a historic-preservation facade easement. The easement burdens the Maison Blanche building, owned by Whitehouse and located in New Orleans. In tax court, Whitehouse challenged the Commissioner of Internal Revenue's decision, in 2003, which disallowed $6.295 million of the amount claimed for the undisputed qualified conservation easement and imposed an underreporting penalty for 40% of the portion of underpayment of taxes due for tax-year 1997.

Here, Whitehouse challenges the tax court's agreeing both with most of that disallowance and with the penalty. Primarily at issue is whether the tax court properly considered the easement's effect on Whitehouse's opportunity to build on top of a building also owned by Whitehouse and contiguous to the Maison Blanche building. VACATED and REMANDED.

I.

Whitehouse was formed in 1995 for the purpose of purchasing and renovating a parcel of New Orleans property. The parcel is contained within both the Vieux Carré Historic District, as listed in 1966 in the National Register of Historic Places, and the Canal Street Historic District (part of the Central Business District).

This property included the Maison Blanche building (constructed between 1906 and 1908), which consists of a base level with six floors, a U-shaped tower with eight floors, and two subsequently constructed annexes with five and six floors, respectively. In 1980, the Maison Blanche building was designated as a City of New Orleans landmark.

The property also included the six-story Kress building (constructed in 1910) that is contiguous to the Maison Blanche building on Canal Street; and a parking garage contiguous to the Kress building (Kress garage). Whitehouse also owned a second parking garage located across Iberville Street from the block containing the above-described Maison Blanche and Kress buildings and the Kress garage.

Whitehouse purchased the underlying land and these buildings, with plans to renovate the buildings into, inter alia, a Ritz-Carlton hotel. Subsequent to the donation of the historic-preservation facade easement, the property within the above-described block was developed into a 452-room Ritz-Carlton Hotel with a spa and parking garage; a 230-room Iberville Suites Hotel; a 75-room Maison Orleans Hotel; and retail space.

On 29 December 1997, Whitehouse conveyed the easement to the Preservation Alliance of New Orleans d/b/a Preservation Resource Center (PRC), a nonprofit corporation. As noted, the Maison Blanche and Kress buildings were under common ownership when the easement was granted.

The easement prohibits alterations to the Maison Blanche building's facade, made primarily of terra-cotta. The white-glazed terra-cotta facade is covered with ornate baroque-inspired decorations, including two-story columns topped by an elaborate string course with garlands and lions' heads.

The easement requires Whitehouse to maintain the terra-cotta facade in a “good and sound state of repair”. And, regarding the prohibition against altering the facade, the easement prohibits, inter alia, any construction or alteration that would affect the appearance of

the exterior walls of the Lower Stories which are visible from Canal and Dauphine Streets, the exterior portion of the Improvement above the Lower Stories which is not covered by the Upper Stories, [and] the exterior walls of the Upper Stories which are visible from Canal, Burgundy, Iberville, and Dauphine Streets.

Moreover, pursuant to the easement, PRC approved specific development plans for the contiguous Maison Blanche and Kress buildings. For a point critical to this appeal, those plans did not include construction on top of the Kress building.

Concerning the requirement to maintain the Maison Blanche building's facade in a “good and sound state of repair”, the easement obligates the Maison Blanche building's owner to, inter alia: “make certain improvements to the Facade which shall have a cost of at least $350,000”; perform and pay for work deemed necessary by PRC in order to preserve, maintain, or repair the facade and the building's structural elements; provide and pay for periodic inspections; and, “in the event of a change in conditions which would give rise to the judicial extinguishment” of the facade restrictions, provide PRC at least ten percent of the proceeds of a subsequent transfer of the building. Testimony at the trial in tax court in 2006 established that, since conveying the easement, Whitehouse had spent $7.792 million repairing and restoring the terra-cotta facade, not including $421,000 to repair damage from Hurricane Katrina.

The day after Whitehouse executed and donated the easement, Whitehouse converted the Maison Blanche and Kress buildings into a single, indivisible condominium unit: Unit RC. That same day, Unit RC was conveyed to RC Hotel, L.L.C.

In its tax return for 1997, Whitehouse claimed a $7.445 million charitable-contribution deduction for the conservation easement. See 26 U.S.C. § 170 (allowing deductions for charitable contributions, including “qualified conservation contributions”). For doing so, and consistent with IRS regulations, Whitehouse obtained a contemporary appraisal of the easement. See 26 C.F.R. § 1.170A-13(c)(2)(i)(A) (requiring donor to obtain “qualified appraisal” to substantiate value of deduction). Richard Cohen performed this appraisal, which valued the easement at the above-referenced $7.445 million. It is undisputed that this easement constitutes a “qualified conservation contribution” under 26 U.S.C. § 170(f)(3)(B)(iii) and 26 C.F.R. § 1.170A-14; only the allowable amount of the deduction is at issue.

In 2003, through a Notice of Final Partnership Administrative Adjustment, Commissioner allowed $1.15 million for the easement, approximately $6.3 million less than claimed. In addition, Commissioner assessed a gross undervaluation penalty of 40% of the portion of underpayment of taxes for that year. See 26 U.S.C. § 6662 (“Imposition of accuracy-related penalty on underpayments”).

Whitehouse challenged both assessments in tax court. See generally Whitehouse Hotel Ltd. P'ship v. Comm'r, 131 T.C. 112, 2008 WL 4757336 (2008). There, both Whitehouse and Commissioner presented expert testimony on both the easement's fair market value and the difference in the property's before- and after-easement values, see 26 C.F.R. § 1.170A-14(h)(3)(i). A serious illness prevented Cohen, who prepared the underlying appraisal for the deduction, from participating at trial; therefore, Richard Roddewig provided the expert testimony for Whitehouse. Dunbar Argote did so for Commissioner.

Both Roddewig and Argote have extensive experience in valuing real estate. Roddewig is a lawyer as well as a real-estate consultant and appraiser; among other relevant experience, he had authored published works on preservation easements and contributed to The Conservation Easement Handbook. Argote had valued between 50 and 70 buildings intended for use as hotels in New Orleans, including this being his fourth appraisal of the Maison Blanche building.

Both experts' written reports constituted their direct testimony at trial, on which they were cross-examined. The outcome before the tax court largely turned on the these expert opinions, which the tax court discussed at length. See Whitehouse Hotel, 131 T.C. at 121-46.

Among other things, the experts disagreed on two threshold issues: which property should be valued; and the nature of its “highest and best use”, which is, of course, a key factor in determining fair market value. See, e.g., Stanley Works & Subsidiaries v. Comm'r, 87 T.C. 389, 400, 1986 WL 22172 (1986) (“The fair market value of property reflects the highest and best use of the property on the relevant valuation date.”). Roddewig, for Whitehouse, determined the relevant property to consist of the Maison Blanche building (including annexes) and the contiguous Kress building, but not the Kress parking garage. Argote, for Commissioner, valued only the Maison Blanche building (including annexes); Commissioner did not ask him to opine on any potential reduction in the Kress building's value. Whitehouse Hotel, 131 T.C. at 126. Restated, contrary to the basic regulatory requirements, discussed infra, he did not consider the easement's impact on the contiguous and commonly owned Kress building. See 26 C.F.R. § 1.170A-14(h)(3)(i).

Roddewig also determined that the before-donation highest and best use of this property, at the time the easement was conveyed, was as a Ritz-Carlton hotel with 512 hotel rooms, an all-suites hotel with 268 rooms (for a total of 780 hotel rooms), and retail on the bottom floors. He found the after-donation highest and best use to be the same, but with only 720 hotel rooms. The 60-room difference (reduction) was pursuant to Roddewig's understanding that the...

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