Scheidelman v. Comm'r

• Decision Date: 15 June 2012
• Docket Number: Docket Nos. 10–3587–ag(L), 10–5316–ag(XAP).
• Parties: Huda T. SCHEIDELMAN, Petitioner–Appellant–Cross Appellee, v. COMMISSIONER of INTERNAL REVENUE, Respondent–Appellee–Cross Appellant.
• Court: U.S. Court of Appeals — Second Circuit

682 F.3d 189

109 A.F.T.R.2d 2012-2536

Huda T. SCHEIDELMAN, Petitioner–Appellant–Cross Appellee,

v.COMMISSIONER of INTERNAL REVENUE, Respondent–Appellee–Cross Appellant.^*

Docket Nos. 10–3587–ag(L), 10–5316–ag(XAP).

United States Court of Appeals, Second Circuit.

Argued: Dec. 15, 2011.

Decided: June 15, 2012.

Frank Agostino (Eduardo S. Chung, on the brief), Agostino & Associates, P.C., Hackensack, N.J., for Petitioner–Appellant–Cross Appellee.

Patrick J. Urda (Kenneth L. Greene, on the briefs), for Gilbert Rothenberg, Acting Deputy Assistant Attorney General, U.S. Department of Justice, Washington, D.C., for Respondent–Appellee–Cross Appellant.

Before: JACOBS, Chief Judge, LEVAL and LIVINGSTON, Circuit Judges.

DENNIS JACOBS, Chief Judge:

Taxpayer Huda Scheidelman appeals a decision of the Tax Court disallowing her deduction for the value of a “facade conservation easement” that she donated to the National Architectural Trust (the “Trust”). The Tax Court ruled that the appraisal she obtained insufficiently explained the method and basis of valuation, and thereby failed to comply with the Treasury Regulation defining a qualified appraisal. SeeTreas. Reg. § 1.170A–13(c)(3). We conclude that the appraisal sufficiently detailed the method and basis of valuation. The Tax Court also disallowed her deduction for a cash contribution she made to the Trust on the ground that it was quid pro quo for the Trust's acceptance of the easement. We disagree because the Trust's agreement to accept the gift of the easement was not a transfer of anything of value to the taxpayer and thus did not constitute a quid pro quo for the gift of the cash.

Accordingly, we vacate the decision of the Tax Court and remand the case for further consideration consistent with this opinion.

BACKGROUND

A facade conservation easement is an undertaking by a property owner, granted to an organization, that a building's facade will be maintained unchanged in perpetuity. Such an easement is designed to protect the historical integrity of properties and communities. Congress has created a tax benefit for taxpayers willing to donate property rights for conservation purposes, including the right to alter a property's facade. See26 U.S.C. § 170(f)(3)(B)(iii).

In early 2003, Scheidelman submitted an application to the Trust to donate a facade conservation easement for her brownstone row house in Brooklyn's historic Fort Greene neighborhood. The easement would prohibit Scheidelman from altering the facade without permission of the Trust and would require her to maintain the facade and the rest of the structure. The easement would give the Trust the right to inspect the facade and to require Scheidelman to cure any violation of her easement obligation. It would run with the land in perpetuity.

In order to complete the donation process (and obtain the associated tax benefit), Scheidelman needed to have the easement appraised. She hired Michael Drazner, a qualified real estate appraiser. Drazner valued the easement at $115,000. He employed the “before-and-after method,” which, as the name suggests, subtracts the value of a house burdened with an easement from the value of the house without one. Drazner estimated the unencumbered value of Scheidelman's property at $1,015,000, a figure the parties do not dispute. He estimated the value of the property after the granting of the easement at $900,000, yielding an easement value of $115,000. This appeal concerns primarily the bases for the $900,000 after valuation, which he arrived at by applying an 11.33 percent reduction to the pre-easement value.

After receiving Drazner's appraisal, the Trust notified Scheidelman that each of the Trust's easement donors must make a cash contribution toward operating costs equivalent to ten percent of the value of the easement. Scheidelman remitted a check for $9,275, which represented ten percent of the value of the easement less adjustments irrelevant to this appeal. The Trust then sent Scheidelman an IRS form for noncash charitable contributions (Form 8283), signed by Drazner and the Trust, reflecting a fair market value for the easement of $115,000.

Scheidelman claimed a $115,000 deduction on her federal tax return for the 2004 tax year. Pursuant to IRS rules, Scheidelman had to carry over $63,083 to future years ($59,959 in 2005 and $3,124 in 2006). After an audit, the IRS decided that she failed to establish a fair market value for the easement; notified her of resulting deficiencies in her taxes of $16,873, $17,537, and $1,015 for the years 2004 through 2006, respectively; and imposed a statutory penalty of $3,374.60, $3,507.40, and $203.00 for each year, respectively.

Scheidelman sought a redetermination of her tax liability from the Tax Court. The Tax Court found that Scheidelman was ineligible for the deduction because the Drazner appraisal was not a “qualified appraisal”—a prerequisite for deducting a noncash charitable contribution—because it failed to state the method of valuation and the basis of valuation, as required by Treasury Regulation § 1.170A–13(c)(3)(ii)(J) & (K). Scheidelman v. Comm'r, 100 T.C.M (CCH) 24, 2010 WL 2788205, at *8–9 (2010); see26 U.S.C. § 170(f)(11)(A) & (C). The Tax Court therefore did not go on to determine the value of the easement de novo, which it would have done had it found that Scheidelman satisfied the prerequisites for claiming the deduction.

The Tax Court also rejected Scheidelman's attempt to deduct her cash contribution to the Trust.¹ Citing the principle that “a charitable gift or contribution must be a payment made for detached and disinterested motives,” Graham v. Comm'r, 822 F.2d 844, 848 (9th Cir.1987), aff'd sub nom., Hernandez v. Comm'r, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989), it reasoned that Scheidelman had made the donation for the purpose of inducing the Trust to accept her easement so that she could enjoy a tax benefit. Scheidelman, 2010 WL 2788205, at *13.

DISCUSSION

We review the legal rulings of the Tax Court de novo and its factual determinations for clear error. See26 U.S.C. § 7482(a)(1) ( “The United States Court of Appeals ... shall ... review the decisions of the Tax Court ... in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.”). “[W]e owe no deference to the Tax Court's statutory interpretations, its relationship to us being that of a district court to a court of appeals, not that of an administrative agency to a court of appeals.” Madison Recycling Assocs. v. Comm'r, 295 F.3d 280, 285 (2d Cir.2002) (internal quotation marks omitted). Mixed questions of law and fact are reviewed for clear error.² See Wright v. Comm'r, 571 F.3d 215, 219 (2d Cir.2009); Merrill Lynch & Co. v. Comm'r, 386 F.3d 464, 469 (2d Cir.2004); Bausch & Lomb Inc. v. Comm'r, 933 F.2d 1084, 1088 (2d Cir.1991).

I

A

Normally a taxpayer may not take a deduction for the contribution of a partial interest in property. See26 U.S.C. § 170(f)(3)(A). However, there is an exception for, inter alia, “a qualified conservation contribution,” id. § 170(f)(3)(B)(iii), which is a contribution “(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes,” id. § 170(h)(1). One such conservation purpose, “the preservation of an historically important land area or a certified historic structure,” id. § 170(h)(4)(A)(iv), encompasses facade conservation easements, see Simmons v. Comm'r, 98 T.C.M. (CCH) 211, 2009 WL 2950610, at *3–4 (2009).

A taxpayer deducting the value of a donated facade conservation easement must first obtain a “qualified appraisal” of the partial interest donated—a requirement left to the Secretary of the Treasury for further explication. See26 U.S.C. § 170(f)(11)(C); Treas. Reg. § 1.170A–13(c)(2)(i)(A). The regulatory requirements of a qualified appraisal are many, as set forth in the margin,³ but generally require information about the property, terms of the donation, identity of the appraiser, and fair market value of the donation. We are concerned here only with clauses (J) and (K), which require that the appraisal specify the method and basis:

(J) The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and (K) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.

Treas. Reg. § 1.170A–13(c)(3)(ii)(J) & (K).

Scheidelman was required to obtain an appraisal before claiming the deduction, but at the time it was sufficient to submit a summary of the appraisal (Form 8283) with her tax return, not the appraisal itself. SeeTreas. Reg. § 1.170A–13(c)(2)(i) (requiring taxpayers to “[o]btain a qualified appraisal” but “[a]ttach a fully completed appraisal summary” to their tax returns); Instructions to Form 8283 (Revised Oct. 1998), at 3 (“Generally, you do not need to attach the appraisals but you should keep them for your records.”). The IRS has since changed this practice and now requires appraisals to be submitted with tax returns. See Instructions to Form 8283 (Revised Dec. 2006), at 5. Unlike a qualified appraisal itself, the summary Form 8283 requires no information about how the fair market value of the donated property was determined, only a description of the property, the estimated fair market value, and information about the appraiser's qualifications and compensation. SeeTreas. Reg. § 1.170A–13(c)(4)(ii).

B

The first defect identified by the Tax Court was that Drazner omitted “[t]he method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach.” Treas. Reg. § 1.170A–13(c)(3)(ii)(J).

The before-and-after method used by...