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Valuation of preservation easements after Whitehouse Hotel Limited Partnership.


This article looks at valuation of preservation easements within the context of the Internal Revenue Code and the U.S. Tax Court's interpretation of the law and its regulations in the recent court decision, Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue.


Under Section 170(h) of the Internal Revenue Code, a taxpayer who makes a "qualified conservation contribution" is entitled to a charitable contribution deduction for income tax purposes. (1) A qualified conservation contribution is a donation of a "qualified real property interest" to a charity exclusively for conservation purposes. (2) The qualified real property interest donated most frequently is probably the conservation easement. The donation of a conservation easement entities the donor to a charitable contribution deduction equal to the fair market value of the easement. (3) The donor-taxpayer must substantiate the amount of the deduction with a "qualified appraisal" conducted by a "qualified appraiser." (4)

A conservation easement is a perpetual restriction granted with respect to the use that may be made of the encumbered property. (5) A conservation easement is, essentially, an agreement between the donor and the charity that gives the charity the right to control various stated actions that may be taken with respect to the encumbered property. Except for certain restrictions imposed by Section 170(h) and the Treasury Regulations (Regulations) interpreting it, the extent and nature of the charity's control depends on the terms of the conservation easement. (6) A conservation easement gives the charity an interest in the encumbered property and runs with the land, which means that its restrictions are binding not only on the landowner who grants the easement but on all future owners of the property. (7)

The term conservation easement is really an umbrella term describing easements granted for environmental, open space, or preservation purposes. Environmental easements preserve the natural habitat offish, wildlife, or plants. (8) Open space easements prevent development of land and are generally granted for the preservation of land for recreational or educational use by the general public (9) or for the preservation of farmland, forest land, or other open space for the scenic enjoyment of the public or in accordance with a governmental conservation policy. (10) Preservation easements protect the architectural features of a historic building, which is defined as a building listed on the National Register of Historic Places (National Register) or located in a registered historic district. (11) A preservation easement may also protect other structures or land individually listed on the National Register. (12)

Conservation easements are frequently referred to by the type of restrictions they impose on the encumbered property. A development rights easement curtails development of property by prohibiting, or limiting, subdivision of the property or the construction of additional buildings. An air rights easement, a subcategory of development rights easements, restricts expansion of existing buildings by limiting, or prohibiting, building into the air space appurtenant to the building. A facade easement gives the charity the right to control any changes made to the shell, and typically, only the exterior shell, of the historic building. Conservation easements granted to preserve land, such as open space easements or easements granted to preserve an ecosystem, are structured as development rights easements. (13) Preservation easements may consist of a facade easement granted alone or in conjunction with a developments rights easement, usually an air rights easement prohibiting the addition of floors, wings or other additions to the historic building. (14)

General Rules for Valuing Conservation Easements

Sales Comparison Approach

As a general rule, the Regulations define fair market value as the price at which property would change hands in an arm's-length sale, one that occurs in the marketplace between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. (15) The preferred method for valuing a conservation easement is to determine the price it would bring in an arm's-length sale, which requires comparing the conservation easement to sales of comparable easements in the market. (16) The Regulations require that comparable sales be used to value an easement whenever there is an established market for the type of conservation easement being appraised. (17)

The problem is that established markets for conservation easements are rare. The Regulations require a "substantial record" of sales of comparable easements, but a substantial record exists only if there are sufficient sales to provide a "meaningful or valid comparison." (18) Additionally, the sales must occur in an uninhibited market. (19) An inhibited market is one in which the circumstances surrounding the sales prevent the price from reflecting fair market value. (20) An example of an inhibited market is the purchase of agricultural easements by a county at a price established by the county without negotiation or regard to actual fair market value-although there may be numerous transactions, there is only one buyer and the price does not reflect fair market value. (21)

Before and After Method

While sporadic sales of conservation easements may be found, most conservation easements are donated or sold at a bargain price. Therefore, most conservation easements are not valued by reference to the sale price of other easements but by an alternative method authorized by the Treasury Regulations. This method-the before and after method-is used whenever an established market does not exist. (22)

The before and after method values an easement indirectly by determining its impact on the value of the affected property; the value of the easement equals any diminution in value suffered by the encumbered property as a result of granting the easement. (23) The before and after method requires two appraisals of the encumbered property: an appraisal of the property's fair market value immediately before the easement is granted, the before value, and an appraisal of the property's fair market value immediately after the easement is granted, the after value of the property. The fair market value of the easement is the difference between the two values. (24)

Highest and Best Use

Under the Regulations, the before value of property is determined by its highest and best use, as of the date of the donation, unencumbered by the conservation easement. (25) The before value must take into account the property's current use and the appraiser's objective assessment of the likelihood of development of the property absent restriction by the easement. (26) In addition to assessing the likelihood of development, the appraiser must consider how immediate or remote such possible development may be. The before value must also take into account any preexisting restrictions on the property that limit its development potential. These restrictions may come from zoning laws, conservation or environmental laws, historic preservation laws, prior easements, or other contractual arrangements that limit the property's development potential. If the conservation easement is granted to protect a historic building, the appraisal must take into account the amount of access the public has to the protected features and the impact of that access on the value of the easement. (27)

The property's after value is based on the highest and best use permitted by the easement, (28) and must take into account any development of the encumbered property permitted by the easement. (29) A conservation easement will reduce the value of the encumbered property only to the extent it imposes greater restrictions on the property than those already in effect. Most conservation easements restrict the use of the encumbered property to its actual pre-easement use or, possibly, its actual pre-easement use plus certain limited development rights. Consequently, the Tax Court has indicated that a development rights easement will reduce the value of the encumbered property only if the actual pre-easement use of the property is not its highest and best use. (30)

The courts have defined highest and best use as the highest and most profitable, legally permissible use to which a property is adaptable. (31) The highest and best use is not limited to the property's actual current use, but includes any possible use that is reasonable, probable, and economically feasible. A use that differs from the property's current actual use is reasonable and probable if it "is the most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future." (32) As long as a use is legally permissible, community opposition will not prevent that use from constituting the highest and best Use. (33)

Because highest and best use is not limited to current actual use, appraisers often build-out property, particularly developed property such as a historic building or undeveloped property that is ripe for subdivision or other development. The build-out approach determines the highest and best use of the affected property before the easement is granted by assuming it is fully developed to its maximum, pre-easement potential. The value of the easement is determined by comparing the value of the build-out with the property's after value, which takes into account only that development, if any, permitted by the easement. The more the easement restricts future possible development of the property, the greater the easement's value.

If the build-out method is used, the build-out use must be feasible-legally, physically, and financially. Determining whether the build-out use is legally permissible requires consideration of any public or private restrictions on the property, such as zoning, environmental laws, and restrictive covenants. The possibility that a restriction might be waived should be documented. (34) To determine if the build-out use is physically permissible, the appraiser must consider the physical attributes of the property and any impact they might have on the proposed development. Financial feasibility requires taking into account the cost of developing the property to the build-out use. (35)

Impact of Easement on Neighboring Property Owned by Donor

An appraiser must determine the impact, if any, that the grant of the easement has on the value of neighboring property owned by the donor. (36) This requirement, sometimes called the enhancement rule, derives from the general rule that a taxpayer is not permitted to claim a charitable contribution to the extent that the taxpayer derives a benefit from the donation. (37) The concern from the government's perspective is that the easement, while decreasing the value of the encumbered property, may be simultaneously increasing the value of other property to the benefit of the donor.

For purposes of the enhancement rule, an appraiser must distinguish between property that is contiguous to the encumbered property and property that is noncontiguous but located within the vicinity of the encumbered property. Contiguous property includes property that is legally part of the parcel with respect to which the easement is granted, as well as property that is not. (38) If the donor or a member of the donor's family owns property that is contiguous to the encumbered property, the appraiser must aggregate the contiguous property with the encumbered property for purposes of the before and after computation. (39) A donor's family is defined as including the donor's spouse, ancestors, descendants, and siblings of the whole- or half-blood. (40)

The appraiser is required to value the "entire property," the encumbered property and any contiguous property, to determine both the before value and the after value of the property. This ensures that any decrease in the value of the encumbered property is offset by any increase in the value of the contiguous property.

   Betty owns Blackacre, a 20-acre tract of undeveloped
   land with a pond that is the natural habitat of several
   endangered species. Betty grants a development rights
   easement that prevents development of the five acres
   surrounding the pond. Betty also owns Greenacre, a
   second piece of property contiguous to Blackacre and
   having an unobstructed view of the pond. Due to the
   enhancement rule, the before value of the property is
   the aggregate value of Blackacre and Greenacre before
   the easement is granted, and the after value is the aggregate
   value of Blackacre and Greenacre after the
   easement is granted. This ensures that any decrease in
   the value of Blackacre is offset by any increase in the
   value of Greenacre.

The impact of a conservation easement on neighboring but noncontiguous property owned by the donor, or by a related party, is relevant only if the value of the noncontiguous property is enhanced as a result of the grant of the easement. (41) Furthermore, any increase in the value of noncontiguous property does not impact the value of the conservation easement; it only affects the amount of the charitable contribution deduction the donor can claim. (42) Consequently, an appraiser does not aggregate noncontiguous property with the encumbered property when performing the before and after valuation of the encumbered property. Instead, the appraiser must perform two before and after valuations-one with respect to the encumbered property and one with respect to the noncontiguous property-and report the two values separately.

The enhancement rule applies to noncontiguous property if the noncontiguous property is owned by the donor or by a related party. The definition of related party is broader than the definition of family. In addition to the donor's family, a related party may include a corporation, a partnership, a trust, or an estate if the donor owns a sufficient interest. (43)

   Cary owns Blackacre, 200 acres of undeveloped land
   located in an area of outstanding natural beauty. Cary
   grants an open space easement that prevents development
   of Blackacre. Cary also owns Greenacre, a
   second piece of property a mile away from Blackacre.
   Greenacre is located on a hill and has an unobstructed
   view of Blackacre. Due to the grant of the easement, the
   value of Greenacre is increased because it now has a
   protected view of Blackacre. The value of the easement
   encumbering Blackacre equals the difference between
   the before and the after value of Blackacre; however, the
   charitable deduction that Cary may claim is reduced by
   the increase in the value of Greenacre. This requires the
   appraiser to make a second appraisal that determines
   the difference between the value of Greenacre before
   Blackacre was encumbered by the easement and the
   value of Greenacre after the easement is granted with
   respect to Blackacre.

Whitehouse Hotel Limited Partnership and Valuing Preservation Easements

Historically, the Tax Court has distinguished preservation easements from other conservation easements for purposes of applying the before and after method of valuation. This distinction goes back to two cases decided during the nascence of the preservation movement-Hilborn v. Commissioner (44) and Dorsey v. Commissioner. (45) The approach adopted by the Tax Court in Hilborn and Dorsey distinguishes between the methodology used to value a preservation easement and that used to value other conservation easements and, if the preservation easement combines a facade easement with a development rights easement, between the facade easement component of a preservation easement and the development rights component.

With respect to the valuation of facade easements, the Hilborn court took the position that the before and after method should not be applied "mechanically" and determined that using the two-appraisal approach discussed in the Regulations to value a facade easement constituted such a mechanical use. (46) Instead of determining an after value for the property, the court examined the restrictions imposed by the facade easement to determine their impact on the value of the building and then calculated a diminution percentage. (47) The court multiplied the before value of the property by the diminution percentage to determine the value of the easement. (48)

The Dorsey court refined the Hilborn approach and applied it to value a preservation easement that combined a facade easement with a development rights easement. The Dorseycourt concluded that the charity had been given two property interests, that each property interest was to be valued separately, and that the two values should be aggregated to determine the value of the preservation easement. (49) The court set forth a three-step process to value a preservation easement combining a facade easement with a development rights easement: (1) use appraisals to determine the before value of the property, (2) determine the value of the facade easement by applying the diminution percentage to the before value of the building, and (3) determine the value of the development rights easement. (50)

The Internal Revenue Service (IRS) recognized the approach used in Hilborn and Dorsey as the appropriate way to substantiate the value of a facade easement until 2007, when it issued Chief Counsel Advice Memoranda (CCAM) 200738013. (51) In CCAM 200738013, the IRS explained that appraisers were not evaluating the restrictions in the easement but simply assuming a diminution percentage often percent. Consequently, the IRS said it would no longer accept the use of the diminution percentage method set forth in Hilborn and Dorseyas substantiation for the value of a facade easement. (52)

In October 2008, the Tax Court decided Whitehouse Hotel Limited Partnership v. Commissioner, which concerned the valuation of a preservation easement granted with respect to the Maison Blanche Building in New Orleans. (53) Whitehouse Hotel Limited Partnership (Partnership) owned the Maison Blanche Building and the Kress Building. The Maison Blanche Building is an exquisite beauxarts building located next to the French Quarter in New Orleans; it is listed on the National Register of Historic Places as part of the Vieux Carre National Historic District and included in the Canal Street Historic District, a local historic district. The Maison Blanche Building and the Kress Building share a common wall; however, the Maison Blanche Building is approximately seven stories taller than the Kress Building. (54) In December 1997, the Partnership, which had entered into an agreement to have the Ritz-Carlton Hotel Company operate a hotel in the Maison Blanche and Kress Buildings once they were renovated, donated a "scenic, open space and architectural facade" easement with respect to the Maison Blanche Building. (55)

Although the government and the Partnership agreed that the donation of the easement constituted a qualified conservation contribution, the parties disagreed as to the amount of the contribution and the value of the preservation easement. Each party's expert witness used a different approach to value the easement. Therefore, the Whitehouse case offered the Tax Court an opportunity to answer the various questions regarding the valuation of a preservation easement caused by the conflict between the approach articulated in Hilborn and Dorseyand the approach taken by the IRS in CCAM 200738013. Whether Whitehouse takes advantage of that opportunity is debatable; the court's opinion appears to raise as many questions as it answers.

Approaches to Value

One question Whitehouse raises is whether the Tax Court has completely abandoned the diminution percentage approach to valuing preservation easements in favor of the "mechanical" application of the before and after method that the Hilborn court had eschewed. The Whitehouse court mechanically applied the before and after method, valuing the preservation easement by reference to the difference between the unencumbered and the encumbered value of the property. (56) In addition, the court relied solely on the "comparable sales approach" to determine the encumbered and unencumbered values, stating that "the comparable sales approach" is "the most reliable indicator of value when there is sufficient data about sales of properties similar to the subject property." (57) It is unclear, however, whether the Whitehouse court is completely rejecting its previous diminution percentage approach (which it fails to even refer to) or rejecting it only when there are comparable sales available to determine the after value as well as the before value of the property. It is unclear from the opinion whether the taxpayer's expert tried to follow Hilborn and calculate the easement's value by multiplying the before value of the property by a diminution percentage. Consequently, the question of whether the diminution percentage method is still viable may not have even been before the court.

Whitehouse also raises a question as to whether the Tax Court, when asked to value a preservation easement that combines a facade easement with a development rights easement, will continue to value the facade component separately from the development rights component. The court does not appear to distinguish between these two property interests, but it is unclear whether the court does not distinguish between the interests because it believes that separate appraisals are unnecessary when the comparable sales approach is used, or because it believes that no development rights easement is present or, if there is one, its value is insignificant. The taxpayer's argument regarding loss of development rights appears to hinge primarily on a claim that the easement encumbering the Maison Blanche Building prevents expansion of the Kress Building, (58) an argument rejected by the court because the easement does not encumber the Kress Building, only the Maison Blanche. (59)

In addition, the court's statement in Whitehouse regarding the reliability of the comparable sales approach combined with its rejection of the taxpayer's attempts to use other methods of valuation raises the question of, when comparable sales exist, must the comparable sales approach be used to the exclusion of other methods. The Regulations do not require this, nor do prior pronouncements by the Tax Court.

The Regulations say if there is a substantial record of sales of comparable easements, the value of the conservation easement must be based on the sale prices of such comparable easements. (60) The Regulations are silent, however, regarding the particular type of methodology to be used when a conservation easement is valued using the before and after method. (61)

The Tax Court has a history of equivocating with respect to which valuation methods are appropriate under the before and after method. In Hilborn, it indicated that all three of the most common valuation methods-the comparable sales or "market data" approach, (62) the income approach, (63) and the cost approach (64)-are acceptable but indicated that the "peculiarities of the property" might impact the weight afforded to each method. (65) In other cases, the court has said that the cost approach is inappropriate for valuing historical buildings, due to the unlikelihood that anyone would try to replicate them, (66) and it has indicated that the income approach is most appropriate when valuing a development rights easement on income-producing property. (67)

The taxpayer's expert in Whitehouse clearly adopted the approach articulated in Hilborn, using all three valuation methods and weighing the results to arrive at a value for the easement. The court, however, relies solely on the comparable sales approach, (68) citing various reasons for its rejection of the cost and income approaches of valuation.

With respect to the cost approach, the court reiterated its position that the cost approach is generally inappropriate for valuing historic buildings. (69) The court also said that a prerequisite to using it was establishing the unusual nature of the property and the unavailability of other valuation methods. (70) Furthermore, it found the expert's testimony more than merely "unpersuasive." (71) According to the court, the expert's estimated value of $43 million dollars, using the cost approach, for a building that the Partnership had purchased two years earlier for approximately $11 million "defie[d] reason," especially since the rest of the real estate market in New Orleans did not experience a comparable increase in value. Lastly, the court was bothered by the expert's testimony regarding the replacement cost for the terra cotta facade of the Maison Blanche Building, which was based on information derived from specialists. The court said it was unable to evaluate the testimony because the expert failed to articulate the facts on which the specialists relied and the reasoning they employed to reach their conclusions. (72)

With respect to the income approach, the taxpayer's expert did not rely on the net operating income generated by the Maison Blanche in the past, but rather, made assumptions about the net income that would be generated once it was renovated into a Ritz Carlton Hotel. (73) The court had two primary problems with this approach. First, it determined that the risk of error was increased by the numerous assumptions necessary to predict post-renovation net operating income. Second, the court refused to accept the expert's conclusions without an indication of the risk of error created by the expert's assumptions. (74)

As for the comparable sales approach, the taxpayer's expert only used the comparable sales approach to determine the before value of the property. (75) The expert tried to use both local and nonlocal comparables, but the court rejected the nonlocal comparables. (76) The court rejected the expert's testimony that nonlocal comparables were appropriate because "first class luxury hotels trade in a national marketplace," finding that this claim was not supported by statistics or by evidence of national competition for the Maison Blanche when it was purchased two years prior to the grant of the easement. The expert also calculated his comparable sales price based on a per-room price as well as a per-square-foot price, but the court rejected the per-room price. Because the renovation was incomplete at the time of the donation of the facade, the court concluded that the per-room price was more speculative than the per-square-foot price. (77)

Lessons from the Whitehouse Decision

What conclusions can be drawn from Whitehouse? First, as far as using a "diminution percentage," although CCAM 200758015 does not constitute binding authority, an appraiser cannot disregard its message: any qualified appraisal valuing a preservation easement should do so by calculating the value of the affected property before and after the easement is granted and determining the difference. However, an appraiser acting as an expert witness may have more leeway. The district court opinion in Bruzewicz v. United States includes dicta indicating that the diminution percentage method might still be an acceptable method for valuing facade easements in certain circumstances. (78)

Second, in light of the approach taken by the Whitehouse court, appraisals (whether performed as part of a qualified appraisal or by an expert witness) should include, if at all possible, a before and after valuation based on the comparable sales approach. Whether the existence of comparable sales precludes the use of other valuation methods is unclear. The reasons cited for rejecting the taxpayer's expert's use of other valuation methods create an argument that Whitehouse should not be read to preclude other methods of valuation just because there are comparable sales. Until more definitive guidance is given, an appraiser will have to be guided by professional judgment.

The biggest question unanswered by Whitehouse is what an appraiser should do if comparables are not available. The Tax Court once noted that, when applying the comparable sales approach to compute the after value of property encumbered by a conservation easement, the appraiser frequently winds up comparing "what are essentially noncomparable sales of property." (79)

One thing Whitehouse teaches is that it is better in close calls to treat "noncomparable sales" as comparable sales, making adjustments for all of the differences, than to make no comparison. The case law makes clear that the court will examine the methodology and the conclusions of each expert to derive its before value and its after value. Consequently, the court's value for the preservation easement generally winds up somewhere between the two values offered by the experts. The taxpayer's expert in Whitehouse used the comparable sales approach to determine a before value for the property but not to determine an after value because he concluded the property was unique and there were no comparables. (80) When the Tax Court determined the before value, it picked among the findings of the taxpayer's expert and the government's expert, (81) adopting some conclusions of each expert and rejecting others, but when it came time to determine the after value, the court simply accepted the value recommended by the government's expert. (82)

Most importantly, Whitehouse emphasizes the critical role that substantiating and explaining an appraiser's conclusions plays in valuing a facade easement. The court rejected several of the taxpayer's expert's conclusions because the court was not provided with the facts or methodology underlying the conclusions and it was unwilling to rely on the expert's unsupported testimony. At the same time, Whitehouse shows that an expert who has gained the court's confidence might be given some leeway with one or two unsupported opinions, as the government's expert appears to have been given. (83)

Lastly, Whitehouse emphasizes that the court will reach its own conclusion as to the value of the easement. Notwithstanding what appears to be its greater confidence in the government's expert, the Whitehouse court did not adopt either expert's valuation in total. Instead, it weighed and evaluated the testimony of each and arrived at a value somewhere between those proposed by the experts. In doing so, Whitehouse proves that a facade easement is still valuable even though it is granted on a historic building subject to substantial preexisting restrictions, such as those imposed by the local historic district in which the Maison Blanche is located. Despite those restrictions and the fact that the easement allowed the taxpayers to make some rather substantial changes to the facade, such as adding a penthouse on the roof, (84) the court valued the preservation easement at $1,792,301. (85)

As the preceding discussion shows, Whitehouse does not answer all of the questions regarding valuation of preservation easements. If anything, it creates more questions than it answers. One thing is certain: the approach to appraising preservation easements articulated by CCAM 200758015 and Whitehouse is more difficult, and probably more expensive, than that articulated by Hilborn and Dorsey. Whether it is more accurate remains to be seen.

Definition of Qualified Appraiser and Qualified Appraisal

The Whitehouse court also reviewed the taxpayer's objection to the testimony and qualifications of the government's expert witness.

In 2006, Congress codified the definitions of qualified appraiser and qualified appraisal in order to impose stricter standards and greater oversight. (86) Regulations interpreting these new definitions have been proposed but not finalized. (87) In the interim, guidance is provided by IRS Notice 2006-96. (88)

A qualified appraiser must possess the following credentials: (1) educational expertise, such as an appraisal designation from a recognized professional organization; (2) practical expertise; (3) professional experience, in that the appraiser must regularly perform appraisals for compensation; and (4) any other credentials to be prescribed in future Regulations. (89) Practical expertise means that the appraiser must be qualified to appraise the specific type of property that is the subject of the appraisal; the appraiser must be licensed or certified by the state where the property is located as competent to appraise the type of property being appraised; (90) and the appraiser must demonstrate verifiable education and experience with respect to valuing the type of property that is the subject of the particular appraisal. (91) In addition to the foregoing, an appraiser who has been prohibited from practicing before the Internal Revenue Service at any time during the prior three years is not a qualified appraiser. (92)

A qualified appraisal must satisfy the requirements for a qualified appraisal under the Regulations or other guidance to be prescribed by the Secretary of the Treasury. (93) In addition, a qualified appraisal must be conducted in accordance with generally accepted appraisal standards and any Regulations or other guidance prescribed by the Secretary. (94) Until Regulations are promulgated, this requirement is satisfied if the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP). (95)

In Whitehouse, the taxpayer challenged the admissibility of the report of the government's expert, claiming that it failed to satisfy the requirements of a qualified appraisal (96) and that it failed to conform to the Uniform Standards of Professional Appraisal Practice. The court rejected both arguments. The court determined that the requirements applicable to a qualified appraisal do not apply to an expert witness called by the government. (97) The court also held that the expert's failure to comply with the Uniform Standards of Professional Appraisal Practice affected the weight to be accorded to his testimony but did not render it inadmissible. (98)

The taxpayer in Whitehouse also asserted that the government's expert, who had previously valued one facade easement and one conservation easement, had insufficient experience with respect to conservation easements to qualify as an expert witness. (99) Noting that it had accepted experts with no prior experience appraising conservation easements in the past, the court rejected this challenge based on its conclusion that the government's expert was qualified to value real estate. (100) The court said an appraiser is not required to have experience appraising preservation easements to qualify as an expert because real property appraisers are accustomed to valuing encumbered property and because a preservation easement is simply another encumbrance; an expert qualified to appraise encumbered property is qualified to appraise a conservation easement. (101) Presumably, under the new, codified definition of qualified appraiser, an expert qualified to appraise real property is qualified to appraise a conservation easement.

(1.) I.R.C. [section] 170(a),(h).

(2.) I.R.C. [section] 170(h)(1).

(3.) I.R.C. [section] 170(a)(1),(h)(1),(h)(2).

(4.) I.R.C. [section] 170(f)(11). A charitable contribution deduction for a donation of property must be supported by a qualified appraisal conducted by a qualified appraiser if the value of the property exceeds $5,000. Id. The definitions of qualified appraiser and qualified appraisal are briefly discussed at the end of this article.

(5.) I.R.C. [section] 170(h)(2)(C),(h)(4),(h)(5)(A).

(6.) A donation of a conservation easement will qualify for a charitable deduction only if it satisfies the requirements for a qualified conservation contribution, which include various legal requirements too numerous to mention in this column; see I.R.C. [section] 170(h) and Treas. Reg. [section] 1.170A-14.

(7.) Dorsey v. Comm'r, 59 TCM 592, 601 (1990).

(8.) I.R.C. [section] 170(h)(4)(A)(ii).

(9.) I.R.C. [section] 170(h)(4)(A)(i).

(10.) I.R.C. [section] 170(h)(4)(A)(iii).

(11.) I.R.C. [section] 170(h)(4)(A)(iv),(4)(C).

(12.) I.R.C. [section] 170(h)(4)(C)(i).

(13.) For a more in-depth discussion of conservation easements granted to preserve land, see C. Timothy Lindstrom, A Tax Guide to Conservation Easements (Washington, DC: Island Press, 2008).

(14.) For a more in-depth discussion of preservation easements, see Martha W. Jordan, "Charitable Contributions of Preservation Easements--A Primer," 101 Taxation (October 2004): 236-242.

(15.) Treas. Reg. [section] 1.170A-1(c)(2).

(16.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(17.) Id.

(18.) Id.

(19.) Browning v. Commissioner, 109 T.C. 303,317 (1997).

(20.) Id. at 319.

(21.) Id.

(22.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(23.) Id.

(24.) Id.

(25.) Id.

(26.) Treas. Reg. [section] 1.170A-14(h)(3)(ii).

(27.) Id.

(28.) Id.

(29.) Treas. Reg. [section] 1,170A-14(h)(3)(ii).

(30.) Losch v. Carom'r, TC-Memo 1988-230, *23.

(31.) Darsey at 599 citing Olsen v. United States, 292 U.S. 246,255 (1934).

(32.) Id.

(33.) Symington v. Comm'r, 87 T.C. 892, 897 (1986).

(34.) Dorsey at 600.

(35.) For further discussion of the build-out method, see Lindstrom, 150.

(36.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(37.) See for example, Treas. Reg. [section] 1.170A-1(h)(1).

(38.) Id.

(39.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(40.) Id.; I.R.C. [section] 267(c)(4).

(41.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(42.) Id.

(43.) Id.; I.R.C. [section][section] 267(b), 707(b).

(44.) Hilborn v. Comm'r, 85 T.C. 677 (1985).

(45.) Dorsey.

(46.) Hilbom at 689.

(47.) Hilbom at 699-700.

(48.) Hilborn at 700.

(49.) Dorsey at 602.

(50.) Id.

(51.) Chief Counsel Advice Memoranda 200738013, 2007 IRS CCA LEXIS 47.

(52.) Id.

(53.) Whitehouse Hotel Limited Partnership v. Comm'r, 2008 U.S. Tax Ct. Lexis 28.

(54.) Id. at *5-7.

(55.) Id. at *123-124. Technically, Louisiana law does not recognize easements. Instead, property owners grant servitudes, which are the functional equivalent of an easement. Hilborn at 682.

(56.) Id. at *110.

(57.) Id. at *81-82.

(58.) Id. at *34.

(59.) Id. at *41.

(60.) Treas. Reg. [section] 1.170A-14(h)(3)(i).

(61.) Id.

(62.) The comparable sales (or "market data") approach values real property by examining sales of property similar to the subject property, and adjusting the comparable sales to take into account differences between the comparable properties and the property being appraised, such as time, location, and physical characteristics. Whitehouse Hotel Limited Partnership at *53.

(63.) The income approach values real property by discounting to present value the expected cash flows from the property. Id. at *51.

(64.) The cost approach values real property based on the cost to reproduce, or replicate, any improvements less depreciation plus the market value of the land. Id. at *44.

(65.) Hilborn at 689.

(66.) See for example Dorsey.

(67.) Id.

(68.) Whitehouse Hotel Limited Partnership at *110.

(69.) Id. at *63-64.

(70.) Id. at *64-65.

(71.) Id. at *65.

(72.) Id.

(73.) Id. at *76-77.

(74.) Id. at *78.

(75.) Id. at *82.

(76.) Id. at *84.

(77.) Id.

(78.) Bruzewicz v. United States, 604 F. Supp. 2d 1197, 1207 (N.D. III. 2009).

(79.) Symington at 900.

(80.) Whitehouse Hotel Limited Partnership at *103.

(81.) Id. at *92-103.

(82.) Id. at *109-110.

(83.) Id. at *91.

(84.) Id. at *123.

(85.) Id. at *110.

(86.) I.R.C. [section] 170(f)(11)(E).

(87.) Notice of Proposed Rule Making, 2008-2 C.B. 828. There is insufficient space here to enumerate all the requirements for a qualified appraiser and a qualified appraisal.

(88.) I.R.S. Notice 2006-96, 2006-46 I.R.B. 902.

(89.) I.R.C. [section] 170(f)(11)(E)(ii)(I).

(90.) Id.

(91.) I.R.C. [section] 170(f)(11)(E)(iii)(I).

(92.) I.R.C. [section] 170(f)(11)(E)(iii)(II). The Internal Revenue Service may disqualify appraisers in certain circumstances, including the assessment of a penalty against the appraiser; see 31 U.S.C. [section] 330(c).

(93.) I.R.C. [section] 170(f)(11)(E)(i)(I).

(94.) I.R.C. [section] 170(f)(11)(E)(i)(II).

(95.) I.R.S. Notice 2006-96, 2006-46 I.R.B. 902. Notice 2006-96 says an appraisal conducted by a qualified appraiser in accordance with generally accepted appraisal standards will be treated as a qualified appraisal if it complies with the requirements of Regulation [section]1.170A-13(c), except to the extent such regulation is inconsistent with new Section 170(f)(11).

(96.) The Whitehouse court was concerned with the definition of qualified appraisal that existed prior to the changes made in 2006.

(97.) Whitehouse Hotel Limited Partnership at *21.

(98.) Id. at *26-27, 29.

(99.) Id. at *15-16.

(100.) Id. at *20.

(101.) Id. at *19-20.

Martha W. Jordan, JD, LLM, CPA (inactive), is an associate professor at Duquesne University School of Law. She has a juris doctorate from the University of Arizona and an LL.M. in taxation from the University of Denver. Jordan specializes in federal taxation and property law and writes frequently on matters relating to historic preservation. Contact:
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Author:Jordan, Martha W.
Publication:Appraisal Journal
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Date:Sep 22, 2009
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