Whitehouse Hotel, et al v. CIR

Filing

Case: 09-60085

Document: 00511199847

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Date Filed: 08/10/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
August 10, 2010 N o . 09-60085 Lyle W. Cayce Clerk

W H I T E H O U S E HOTEL LIMITED PARTNERSHIP; QHR HOLDINGS N E W ORLEANS LIMITED, Tax Matters Partner, P e t it io n e r s - Appellants v. C O M M IS S I O N E R OF INTERNAL REVENUE, R e s p o n d e n t -A p p e lle e

A p p e a l from the United States Tax Court N o . 12104-03

B e fo r e BARKSDALE, GARZA, and DENNIS, Circuit Judges. R H E S A HAWKINS BARKSDALE, Circuit Judge: T h is appeal by Whitehouse Hotel Limited Partnership, a Louisiana limited p a r tn e r s h ip , concerns the allowable amount for its claimed $7.445 million c h a r it a b le -c o n t r ib u t io n deduction for its donation, in 1997, of a historicp r e s e r v a t io n facade easement. The easement burdens the Maison Blanche b u ild in g , owned by Whitehouse and located in New Orleans. In tax court, W h it e h o u s e challenged the Commissioner of Internal Revenue's decision, in 2 0 0 3 , which disallowed $6.295 million of the amount claimed for the undisputed q u a lifie d conservation easement and imposed an underreporting penalty for 40% o f the portion of underpayment of taxes due for tax-year 1997.

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No. 09-60085 H e r e , Whitehouse challenges the tax court's agreeing both with most of t h a t disallowance and with the penalty. Primarily at issue is whether the tax c o u r t properly considered the easement's effect on Whitehouse's opportunity to b u ild on top of a building also owned by Whitehouse and contiguous to the M a is o n Blanche building. VACATED and REMANDED. I. W h it e h o u s e was formed in 1995 for the purpose of purchasing and r e n o v a t in g a parcel of New Orleans property. The parcel is contained within b o th the Vieux Carré Historic District, as listed in 1966 in the National Register o f Historic Places, and the Canal Street Historic District (part of the Central B u s in e s s District). T h is property included the Maison Blanche building (constructed between 1 9 0 6 and 1908), which consists of a base level with six floors, a U-shaped tower w it h eight floors, and two subsequently constructed annexes with five and six flo o r s , respectively. In 1980, the Maison Blanche building was designated as a C it y of New Orleans landmark. T h e property also included the six-story Kress building (constructed in 1 9 1 0 ) that is contiguous to the Maison Blanche building on Canal Street; and a p a r k in g garage contiguous to the Kress building (Kress garage). Whitehouse a ls o owned a second parking garage located across Iberville Street from the block c o n t a in in g the above-described Maison Blanche and Kress buildings and the K r e s s garage. W h it e h o u s e purchased the underlying land and these buildings, with p la n s to renovate the buildings into, inter alia, a Ritz-Carlton hotel. Subsequent t o the donation of the historic-preservation facade easement, the property within t h e 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 O r le a n s Hotel; and retail space. 2

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No. 09-60085 O n 29 December 1997, Whitehouse conveyed the easement to the P r e s e r v a t io n Alliance of New Orleans d/b/a Preservation Resource Center (PRC), a nonprofit corporation. As noted, the Maison Blanche and Kress buildings were u n d e r common ownership when the easement was granted. T h e easement prohibits alterations to the Maison Blanche building's fa c a d e , made primarily of terra-cotta. The white-glazed terra-cotta facade is c o v e r e d with ornate baroque-inspired decorations, including two-story columns t o p p e d by an elaborate string course with garlands and lions' heads. T h e easement requires Whitehouse to maintain the terra-cotta facade in a "good and sound state of repair". And, regarding the prohibition against a l t e r in g the facade, the easement prohibits, inter alia, any construction or a lt e r a tio n that would affect the appearance of the exterior walls of the Lower Stories which are visible fr o m Canal and Dauphine Streets, the exterior portion o f the Improvement above the Lower Stories which is n o t covered by the Upper Stories, [and] the exterior w a lls of the Upper Stories which are visible from Canal, B u r g u n d y , Iberville, and Dauphine Streets. M o r e o v e r , pursuant to the easement, PRC approved specific development p l a n s for the contiguous Maison Blanche and Kress buildings. For a point c r it ic a l to this appeal, those plans did not include construction on top of the K r e s s building. C o n c e r n in g the requirement to maintain the Maison Blanche building's fa c a d e in a "good and sound state of repair", the easement obligates the Maison B la n c h e building's owner to, inter alia: "make certain improvements to the F a c a d e which shall have a cost of at least $350,000"; perform and pay for work d e e m e d necessary by PRC in order to preserve, maintain, or repair the facade a n d the building's structural elements; provide and pay for periodic inspections; a n d , "in the event of a change in conditions which would give rise to the judicial

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No. 09-60085 e x t in g u is h m e n t" of the facade restrictions, provide PRC at least ten percent of t h e proceeds of a subsequent transfer of the building. Testimony at the trial in t a x court in 2006 established that, since conveying the easement, Whitehouse h a d spent $7.792 million repairing and restoring the terra-cotta facade, not in c lu d in g $421,000 to repair damage from Hurricane Katrina. T h e day after Whitehouse executed and donated the easement, W h it e h o u s e converted the Maison Blanche and Kress buildings into a single, in d iv is ib le condominium unit: Unit RC. That same day, Unit RC was conveyed t o RC Hotel, L.L.C. I n its tax return for 1997, Whitehouse claimed a $7.445 million charitablec o n t r i b u t i o n deduction for the conservation easement. See 26 U.S.C. § 170 (a llo w in g deductions for charitable contributions, including "qualified

c o n s e r v a t io n contributions"). For doing so, and consistent with IRS regulations, W h it e h o u s e 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 s u b s t a n t ia t e value of deduction). Richard Cohen performed this appraisal, w h ic h valued the easement at the above-referenced $7.445 million. u n d is p u t e d that this easement constitutes a "qualified It is

conservation

c o n t r ib u t io n " under 26 U.S.C. § 170(f)(3)(B)(iii) and 26 C.F.R. § 1.170A-14; only t h e allowable amount of the deduction is at issue. I n 2003, through a Notice of Final Partnership Administrative A d ju s tm e n t, Commissioner allowed $1.15 million for the easement,

a p p r o x im a t e ly $6.3 million less than claimed.

In addition, Commissioner

a s s e s s e d a gross undervaluation penalty of 40% of the portion of underpayment o f taxes for that year. See 26 U.S.C. § 6662 ("Imposition of accuracy-related p e n a lt y on underpayments"). Whitehouse challenged both assessments in tax court. W h ite h o u s e Hotel Ltd. P'ship v. Comm'r, 131 T.C. 112 (2008). 4 See generally There, both

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No. 09-60085 W h it e h o u s e and Commissioner presented expert testimony on both the e a s e m e n t 's fair market value and the difference in the property's before- and a ft e r -e a s e m e n t values, see 26 C.F.R. § 1.170A-14(h)(3)(i). A serious illness

p r e v e n t e d Cohen, who prepared the underlying appraisal for the deduction, from p a rticip a tin g at trial; therefore, Richard Roddewig provided the expert testimony fo r Whitehouse. Dunbar Argote did so for Commissioner. Both Roddewig and Argote have extensive experience in valuing real e s t a t e . Roddewig is a lawyer as well as a real-estate consultant and appraiser; a m o n g other relevant experience, he had authored published works on p r e s e r v a t io n easements and contributed to The Conservation Easement H a n d b o o k . Argote had valued between 50 and 70 buildings intended for use as h o te ls in New Orleans, including this being his fourth appraisal of the Maison B la n c h e building. B o t h experts' written reports constituted their direct testimony at trial, on w h ic h they were cross-examined. The outcome before the tax court largely t u r n e d on the these expert opinions, which the tax court discussed at length. See W h ite h o u s e Hotel, 131 T.C. at 121-46. A m o n g other things, the experts disagreed on two threshold issues: which p r o p e r t y 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 W o r k s & Subsidiaries v. Comm'r, 87 T.C. 389, 400 (1986) ("The fair market value o f property reflects the highest and best use of the property on the relevant v a lu a t io n date."). Roddewig, for Whitehouse, determined the relevant property t o consist of the Maison Blanche building (including annexes) and the contiguous K r e s s building, but not the Kress parking garage. Argote, for Commissioner, v a lu e d only the Maison Blanche building (including annexes); Commissioner did n o t 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 5

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No. 09-60085 r e q u ir e m e n t s , discussed infra, he did not consider the easement's impact on the c o n t ig u o u s and commonly owned Kress building. 1 4 (h )(3 )(i). R o d d e w ig also determined that the before-donation highest and best use o f this property, at the time the easement was conveyed, was as a Ritz-Carlton h o te l with 512 hotel rooms, an all-suites hotel with 268 rooms (for a total of 780 h o te l rooms), and retail on the bottom floors. He found the after-donation h ig h e s t and best use to be the same, but with only 720 hotel rooms. The 60-room d iffe r e n c e (reduction) was pursuant to Roddewig's understanding that the e a s e m e n t precluded the possibility of building those rooms on top of the Kress b u ild in g . O n the other hand, Argote concluded that the highest and best use of the M a is o n Blanche building (including its annexes) was as a mixed non-luxury h o te l and retail complex, not a luxury hotel like the Ritz-Carlton. He also c o n c lu d e d that the easement did not limit the potential number of rooms. In o t h e r words, Argote opined the easement had no effect on Whitehouse's rights t o construct additional rooms on top of the Kress building. In the light of this o p in io n , it is notable that Argote admitted to not having read the applicable t r e a s u r y regulation (26 C.F.R. § 1.170A-14). Again, that regulation, discussed in fr a , requires, inter alia, considering the easement's effect on the fair market v a lu e of applicable contiguous property. E a c h expert determined a value of the property he appraised for before a n d after the easement was donated, then subtracted the latter from the former. Roddewig's report used three recognized methods to reach a before-donation v a lu e : replacement-cost, income, and comparable-sales. These yielded the See 26 C.F.R. § 1.170A-

fo llo w in g before-donation values for the appraised property: $43 million for the r e p la c e m e n t -c o s t method; $29.5 million for the income; and $40 million for the c o m p a r a b le -s a le s . Roddewig only reached an after-deduction figure under the 6

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No. 09-60085 fir s t two methods: $35 million for replacement-cost; and $18 million for income. He did not include an after-donation comparable-sales valuation because he did n o t find any sales of easement-encumbered properties in New Orleans that he c o n s id e r e d comparable. Reconciling these values, Roddewig's final valuation set t h e before-donation value at $41 million and the after-donation value at $31 m illio n , resulting in an easement value of $10 million. I n contrast, Argote used only the comparable-sales method. He concluded t h e r e was no difference in the before and after values of the property he a p p r a is e d : each was $10.3 million. Accordingly, and rather extraordinarily, he a s s ig n e d the easement a value of zero. See, e.g., Schwab v. Comm'r, T.C. Memo 1 9 9 4 -2 3 2 , 1994 WL 223175, at *11 (25 May 1994) ("We find it hard to imagine a prospective purchaser of a [tract of] land who would not have considered the r e s t r ic t io n s of the open-space easement in determining the price."), cited with a p p r o v a l in Hughes v. Comm'r, T.C. Memo 2009-94, 2009 WL 1227938, at *15 (6 May 2009) ("[W]e disagree with [Commissioner's expert's] conclusion that the c o n s e r v a t io n easement may have had no, or only a nominal, impact on the fair m a r k e t values of the [encumbered land]."). Notwithstanding Commissioner's e x p e r t 's having valued the easement at zero, Commissioner continued to urge a s the proper deductible amount the $1.15 million allowed in the abover e fe r e n c e d 2003 Notice of Final Partnership Administrative Adjustment. A four-day trial was held in December 2006. The tax court's 64-page o p in io n was rendered almost two years later, with the final decision being e n te r e d in January 2009. See Whitehouse Hotel, 131 T.C. 112. T h e tax court did not credit all of either expert's report and testimony, but u n d e r t o o k its own analysis, based on parts of each expert's evaluation. It d is r e g a r d e d as unreliable Roddewig's valuations under the replacement-cost and

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No. 09-60085 in c o m e methods. Whitehouse Hotel, 131 T.C. at 152, 154-56 (explaining basis for fin d in g replacement-cost and income methods unreliable). U t iliz in g only the comparable-sales method, the tax court found a befored o n a t io n value of $12,092,301 and an after-donation value of $10.3 million, r e s u lt in g in a charitable-contribution deduction of $1,792,301; accordingly, it r u le d Whitehouse overstated the deductible amount by $5,652,699. Whitehouse H otel, 131 T.C. at 171-72. The tax court's accepting Argote's exact after-donation v a lu e of $10.3 million resulted, at least in part, from its use of only the c o m p a r a b l e -s a le s method. Because Roddewig did not engage in an after-

d o n a t io n comparable-sales valuation, the tax court relied on Argote's afterd o n a t io n valuation (after rejecting Whitehouse's challenges to it). See id. at 16871. T h is gave rise to a potential penalty for gross valuation misstatement, w it h Whitehouse having had the opportunity at trial to show it satisfied the r e a s o n a b le -c a u s e exception. See 26 U.S.C. § 6664(c). As discussed supra, when it claimed the deduction, Whitehouse had relied on the contemporary appraisal p r e p a r e d by Cohen. Whitehouse also presented testimony from Robert

D r a w b r id g e , the hotel's asset manager and an executive vice president of assets a t Whitehouse's general partner and tax-matters partner. He testified that, in c la im in g the deduction, Whitehouse also relied on both another contemporary a p p r a is a l performed by Revac, Inc., and the professional advice of its lawyers a n d accountants. T h e tax court ruled any reliance on the Revac appraisal was misplaced b e c a u s e it did not determine a value for the easement specifically. Further, b e c a u s e Drawbridge was not associated with Whitehouse until several years a ft e r the deduction was claimed, the tax court rejected as not credible his t e s t im o n y regarding Whitehouse's efforts at the time it claimed the deduction. It therefore assessed a gross valuation misstatement penalty of 40% of the 8

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No. 09-60085 p o r t io n of underpayment of 1997 taxes. See Whitehouse Hotel, 131 T.C. at 17276. II. O n numerous bases, Whitehouse challenges the tax court's valuation of the c o n s e r v a t io n (facade) easement. Whitehouse also maintains the tax court erred b y imposing the underreporting penalty. In claiming the tax court undervalued the easement, Whitehouse contends: the court erred in admitting Argote's report based on his qualifications and his r e p o r t 's reliability; had the report been excluded, the court's failure to shift the b u r d e n of proof would constitute reversible error; and, even if Argote's report w a s admissible, it lacked such credibility that the tax court's placing any weight o n it constituted an abuse of discretion and contributed to the tax court's e r r o n e o u s valuation of the easement. Whitehouse's contention regarding

A r g o t e 's report's credibility revolves largely around his failure to consider the e ffe c t the easement had on the right to construct additional rooms on top of the c o n t ig u o u s Kress building. Similarly, its challenge to the tax court's decision t u r n s primarily on the tax court's failure to properly account for the easement's p r e c lu d in g building on top of that building. T h e National Trust for Historic Preservation in the United States filed an a m ic u s brief, pointing out that valuation of preservation easements is a fu n d a m e n t a lly important issue to National Trust because, if such easements are d e e m e d to have little or no value, the tax incentives Congress has established to e n c o u r a g e preservation would be severely weakened. National Trust also

c h a lle n g e s Argote's appraisal and the court's conclusions, and asserts that the c o u r t's decision, if allowed to stand, will obscure the proper method for easement a p p r a is a ls . A s a general rule, for charitable gifts of property, a taxpayer is "not a llo w e d to take a deduction if the charitable gift consists of less than the 9

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No. 09-60085 t a x p a y e r 's entire interest in that property". Glass v. Comm'r, 471 F.3d 698, 706 ( 6 t h Cir. 2006). An exception to this rule is for a "qualified conservation

c o n t r ib u t io n " . Id. (citing 26 U.S.C. § 170(f)(3)(B)(iii)); see also Stephen J. Small, T h e Tax Benefits of Donating Easements in Scenic and Historic Property, 7 REAL E ST. L.J. 304, 305 (1979) (noting Congress "made the basic policy decision that t h e preservation of historic property is a worthy goal and one that is appropriate t o encourage through the medium of the tax code"). This exception has existed in its current form since 1980. See Pub. L. No. 96-541, § 6 (1980). T o constitute a "qualified conservation easement", the contribution must b e "(A) of a qualified real property interest, (B) to a qualified organization, [and] (C ) exclusively for conservation purposes". 26 U.S.C. § 170(h)(1). These

r e q u ir e m e n t s are defined in the statute's subsequent subsections. See 26 U.S.C. § 170(h)(2), (3), (4). Such an easement must "be based upon legally enforceable r e s t r ic t io n s that will prevent uses of the retained interest in the property that a r e inconsistent with the conservation purposes of the contribution". Simmons v . Comm'r, T.C. Memo 2009-208, 2009 WL 1950610, at * 4 (15 Sept. 2009). As noted supra, Commissioner agrees that the easement is a qualified c o n s e r v a t io n easement--only its value is at issue. In that regard, the Internal R e v e n u e Service has provided regulatory guidance for valuing qualified c o n s e r v a t io n easements. See 26 C.F.R. § 1.170A-14(h). The "before and after" v a lu a t io n approach is to be employed where, as here, there is no "substantial r e c o r d of sales of easements comparable to the donated easement". Id.; see also, e .g ., Richmond v. United States, 699 F. Supp. 578, 581-84 (E.D. La. 1988) (v a lu in g facade easement in Vieux Carré); Hilborn v. Comm'r, 85 T.C. 677, 6887 0 0 (1985) (discussing background of before-and-after valuation method and a p p ly in g it to value facade easement in Vieux Carré); Simmons, 2009 WL 1 9 5 0 6 1 0 , at *8-11 (valuing facade easement); Browning v. Comm'r, 109 T.C. 303,

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No. 09-60085 3 2 0 -3 2 5 (1997) (discussing and applying before-and-after valuation method in c o n t e x t of easement restricting development of land). N otw ith sta n d in g this regulatory guidance, valuing preservation easements r e m a in s , most understandably, a complex and difficult undertaking that c o n t in u e s to challenge appraisers and the IRS. See, e.g., Bruzewicz v. United S ta te s , 604 F. Supp. 2d 1197, 1205 (N.D. Ill. 2009) (referring to valuation of reale s t a t e easements as an "esoteric and specialized" subject). This complexity is r e fle c t e d , for example, by a guidebook devoted to appraising land-conservation a n d historic-preservation easements. See LAND TRUST ALLIANCE & NATIONAL T RUST FOR HISTORIC PRESERVATION, APPRAISING EASEMENTS (3d ed. 1999). L o u is ia n a law is applied for determining the rights transferred by the e a s e m e n t at issue. See Adams v. United States, 218 F.3d 383, 386 (5th Cir. 2 0 0 0 ) ("To arrive at a reasonable conclusion regarding the value of the property a t issue . . . , one must first determine the rights afforded to the owner of such p r o p e r t y by the applicable state law."). Valuation is generally reviewed for clear e r r o r ; but, of course, to the extent such valuation is predicated on "a legal c o n c lu s io n regarding the rights inherent in the property", that conclusion is s u b je c t to de novo review. Id.; see also Succession of McCord v. Comm'r, 461 F.3d 6 1 4 , 623 (5th Cir. 2006) ("The determination of the nature of the property rights t r a n s fe r r e d is a question of state law that this Court reviews de novo." (citing A d a m s , 218 F.3d at 386)). Pursuant to Tax Court Rule 143(a), the Federal Rules of Evidence apply t o trials in tax court. Similarly, its decisions are reviewed "in the same manner a n d to the same extent as decisions of the district courts in civil actions tried w it h o u t a jury". 26 U.S.C. § 7482(a); Houston Oil & Minerals Corp. v. Comm'r, 9 2 2 F.2d 283, 285 (5th Cir. 1991); see also Green v. Comm'r, 507 F.3d 857, 866 (5 t h Cir. 2007) ("We apply the same standard of review to decisions of the Tax

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No. 09-60085 C o u r t that we apply to district court decisions." (citing Arevalo v. Comm'r, 469 F .3 d 436, 438 (5th Cir. 2006))). A. 1. W h it e h o u s e claims the tax court erred by admitting Argote's expert o p in io n . In doing so, Whitehouse challenges both Argote's qualifications and the r e lia b ilit y of his report and testimony. See generally FED. R. EVID. 702 (stating w it n e s s may qualify as expert through "knowledge, skill, experience, training, o r education"); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1 9 9 3 ) (establishing district court as "gatekeeper" for admitting scientific expert t e s t im o n y under Rule 702's five factors); Kumho Tire Co. v. Carmichael, 526 U.S. 1 3 7 (1999) (extending Daubert to apply to non-scientific experts). In Gibbs v. G ib b s , 210 F.3d 491, 500 (5th Cir. 2000), our court noted that the importance of t h e trial court's gatekeeper role is significantly diminished in bench trials, as in t h is instance, because, there being no jury, there is no risk of tainting the trial b y exposing a jury to unreliable evidence. A tax court's admissibility determination for expert evidence is reviewed fo r abuse of discretion. E.g., Kumho Tire, 526 U.S. at 142; Knight v. Kirby I n la n d Marine Inc., 482 F.3d 347, 351 (5th Cir. 2007). "[A trial judge has] wide la t itu d e in determining the admissibility of expert testimony, and `the discretion o f the trial judge and his or her decision will not be disturbed on appeal unless `m a n ife s t ly erroneous'". Watkins v. Telsmith, Inc., 121 F.3d 984, 988 (5th Cir. 1 9 9 7 ) (quoting Eiland v. Westinghouse Elec., 58 F.3d 176, 180 (5th Cir. 1995)). The same standard applies both for assessment of the witness' qualifications and fo r reliability determinations. E.g., Hidden Oaks Ltd. v. City of Austin, 138 F.3d 1 0 3 6 , 1050 (5th Cir. 1998) (qualifications); Hodges v. Mack Trucks, Inc., 474 F.3d 1 8 8 , 194-95 (5th Cir. 2006) (reliability). Accordingly, the tax court has broad

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No. 09-60085 d is c r e t io n to accept or reject all or part of an expert's opinion. Helvering v. Nat'l G r o c e r y Co., 304 U.S. 282, 294-95 (1938). a. W h it e h o u s e claims Argote's general qualifications as a real-estate a p p r a is e r do not give him the requisite "knowledge, skill, expertise, training, or e d u c a t io n " to value historic-preservation facade easements. See FED. R. EVID. 7 0 2 . "[T]he essential elements of the real estate expert's competency include his k n o w le d g e of the property and of the real estate market in which it is situated, a s well as his evaluating skill and experience as an appraiser". United States v. 6 0 .1 4 Acres of Land, 362 F.2d 660, 668 (3d Cir. 1966), quoted with approval in H id d e n Oaks, 138 F.3d at 1050. In this light, Argote is qualified to offer expert o p in io n on the value of real estate in New Orleans. He is a licensed appraiser in Louisiana with over 25 years' appraisal experience, and he has appraised: 50 t o 70 hotels between 1990 and 2000; commercial properties neighboring the M a is o n Blanche building; and the Maison Blanche building itself three times p r io r to the present case. W h it e h o u s e maintains, however, that a conservation-easement appraisal r e q u ir e s additional or different qualifications. In doing so, Whitehouse relies h e a v i l y on Bruzewicz, 604 F. Supp. 2d 1197. There, plaintiffs challenged

C om m ission er's disallowance of their claimed charitable-contribution deduction. See id. at 1199. The Bruzewicz district court held plaintiffs' failure to provide a "contemporaneous written acknowledgment" of the donation (as required by s t a t u t e ) was "alone fatal to their claimed deduction", but also noted that mere in c lu s io n of the appraisers' license numbers in the appraisal did not constitute s u b s ta n t ia l compliance with the regulatory requirement that the appraisal p r o v id e the appraisers' qualifications. Id. at 1204-05. Whitehouse incorrectly construes Bruzewicz as holding an appraisal lic e n s e alone does not qualify a witness to offer expert testimony on conservation 13

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No. 09-60085 ea sem en ts. Bruzewicz centers on appraisers' failure to include their

q u a lific a t io n s in their report, not their substantive qualifications as appraisers. See id. at 1205. W h it e h o u s e also cites two decisions by our court that discuss excluded e x p e r t opinions: Smith v. Goodyear Tire & Rubber Co., 495 F.3d 224, 226 (5th C ir . 2007); and Caracci v. Comm'r, 456 F.3d 444, 451-52 (5th Cir. 2006). Argote is , however, distinctly more qualified than the witnesses who offered those e x c lu d e d opinions. Smith affirmed the exclusion of a polymer scientist's opinion on whether a tire was defective. 495 F.3d at 226. Smith held it was "the science's

a p p lic a t io n to tires that concerns us here, and [the scientist] has absolutely no e x p e r ie n c e applying polymer science to tires". Id. at 227. Whitehouse's attempts t o analogize a polymer scientist's qualifications to opine on tires to a real estate a p p r a is e r 's qualifications to opine on an easement's effect on real estate's value a r e unpersuasive, especially in the light of Argote's noted qualifications. Likewise, Caracci is inapposite: there, although critical of an expert, our court d id not rule on his qualifications or even consider his opinion's admissibility. See 4 5 6 F.3d at 451-54, 58. In sum, Whitehouse's contention that Argote was not sufficiently qualified t o offer expert testimony on the easement's value fails. A real-estate appraiser w it h his background is sufficiently qualified to value a specific type of property in t e r e s t -- e v e n one as "esoteric and specialized" as a conservation easement, B r u z e w ic z , 604 F. Supp. 2d at 1205. Finding Argote qualified was not a

" m a n ife s t ly erroneous" abuse of discretion, especially because of the diminished im p o r t a n c e of the tax court's role, sitting without a jury, as a gatekeeper. See G ib b s , 210 F.3d at 500.

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No. 09-60085 b. W h ite h o u se also contends Argote's report should have been held unreliable (a n d , therefore, inadmissible) because it failed to comply with the Uniform S t a n d a r d s of Professional Appraisal Practice (USPAP). In other words,

W h it e h o u s e casts USPAP compliance vel non as an issue of reliability (and thus a d m is s ib ilit y ), not credibility. Whitehouse claims: both experts acknowledged they were bound by

U S P A P ; Louisiana law requires that all licensed appraisers shall comply with U S P A P ; such compliance is required for all federally related transactions; and t h e IRS treats USPAP as providing the applicable appraisal standards. Further, W h it e h o u s e claims Argote's valuation is merely ipse dixit, an insufficient basis u p o n which to admit opinion testimony. See Gen. Elec. Co. v. Joiner, 522 U.S. 1 3 6 , 146 (1997) (holding district court is not required "to admit opinion evidence t h a t is connected to existing data only by the ipse dixit of the expert"). W h it e h o u s e points to several instances where Argote's report allegedly fa ils to comply with USPAP standards. It is unnecessary, of course, to analyze e a c h instance unless strict compliance with USPAP is required for the report to b e admissible. Otherwise, the nature and extent of the deviations concern only t h e report's credibility (i.e., the weight it should be given). Therefore, the

t h r e s h o l d question is a legal one: whether strict compliance with USPAP is a p r e -r e q u is it e for admissibility. A s the tax court noted, Whitehouse "has not cited any authority, nor do we k n o w of any, for the proposition that an appraiser's compliance with USPAP is t h e sole determining factor as to whether an appraiser's valuation report is r e lia b le " . Whitehouse, 131 T.C. at 127. Especially in the light of the tax court's s e r v in g as the factfinder as well as the expert-testimony gatekeeper, Whitehouse h a s failed to show the court abused its discretion in treating the alleged USPAP v io la t i o n s as concerning credibility rather than admissibility. See Gibbs, 210 15

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No. 09-60085 F .3 d at 500 ("Most of the safeguards provided for in Daubert are not as essential . . . where a district judge sits as the trier of fact in place of a jury."). In other w o r d s , the tax court acted within its ample discretion in considering USPAP c o m p lia n c e as relevant to the weight Argote's report should be given, instead of w h e t h e r it should be admitted. c. W h it e h o u s e also contends the tax court erred in failing to shift the burden o f proof from Whitehouse to Commissioner. Whitehouse asserts: the burden s h o u ld have shifted because Whitehouse introduced credible evidence with r e s p e c t to a factual issue, see 26 U.S.C. § 7491 ("Burden shifts where taxpayer p r o d u c e s credible evidence."); and, alternatively, Commissioner's assertion both a t trial and in the post-trial brief that the donation value was zero (in contrast t o the earlier Notice of Final Partnership Administrative Adjustment, which s t a t e d the deductible amount was $1.15 million) triggered the "new matter rule", s e e T.C. RULE 142(a)(1) (placing burden on petitioner with several exceptions, in c lu d in g one for "any new matter", for which it is on respondent). The tax court d id not explicitly rule on the burden-shifting issue, and Whitehouse notes the c o u r t likely considered it moot because two experts' reports were weighed a g a in s t one another. " T h e allocation of the burden of proof is a legal issue reviewed de novo." E.g., Marathon Fin. Ins., Inc., RRG v. Ford Motor Co., 591 F.3d 458, 464 (5th C ir . 2009) (citing Grilletta v. Lexington Ins. Co., 558 F.3d 359, 364 (5th Cir. 2 0 0 9 )). The tax court need not decide whether the burden shifted where, as h e r e , both parties offered some admissible evidence. Blodgett v. Comm'r, 394 F .3 d 1030, 1039 (8th Cir. 2005). "In a situation in which both parties have s a t is fie d their burden of production by offering some evidence, then the party s u p p o r t e d by the weight of the evidence will prevail regardless of which party b o r e the burden of persuasion, proof or preponderance." 16 Id.; see also, e.g.,

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No. 09-60085 K n u d s e n v. Comm'r, 131 T.C. 185, 189 (2008) ("[A]n allocation of the burden of p r o o f is relevant only when there is equal evidence on both sides. . . . In a case w h e r e the standard of proof is preponderance of the evidence and the p r e p o n d e r a n c e of the evidence favors one party, we may decide the case on the w e ig h t of the evidence and not on an allocation of the burden of proof."). A c c o r d in g ly , Whitehouse's contention that the tax court erred in failing to s h ift the burden of proof is inextricable from its contention that Argote's opinion w a s inadmissible. Because Argote's opinion was admissible, as discussed supra, a n d because there is no indication that the tax court's decision turned on the a llo c a t io n of the burden, there was no error in the tax court's not addressing the b u r d e n of proof. Therefore, it is unnecessary to analyze Whitehouse's

c o n t e n t io n s regarding how the burden shifted. (Along that line, as discussed, C o m m is s io n e r at trial did not seek a lower donation value than the $1.15 million a llo w e d in the notice in 2003.) 2. W h it e h o u s e next maintains the tax court erred by ignoring the income and r e p la c e m e n t -c o s t valuation methods in favor of relying solely on the comparables a le s method. Again, "[v]aluation is a mixed question of law and fact, the factual p r e m is e s being subject to review on a clearly erroneous standard, and the legal c o n c lu s io n being subject to de novo review". In re Stembridge, 394 F.3d 383, 385 (5 t h Cir. 2004) (quoting In re T-H New Orleans Ltd. P'ship, 116 F.3d 790, 799 ( 5 t h Cir. 1997)). The tax court's determination of the proper fair-market-

v a lu a t io n method is a conclusion of law; thus, our review is de novo. Cook v. C o m m 'r , 349 F.3d 850, 853 (5th Cir. 2003) (citing Estate of Dunn v. Comm'r, 301 F .3 d 339, 348 (5th Cir. 2002)). W h e r e , as here, there is no "substantial record of sales of easements c o m p a r a b le to the donated easement", see 26 C.F.R § 1.170A-14(h)(3)(i), there a r e three commonly recognized methods for valuing real property: comparable17

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No. 09-60085 s a le s , income, and replacement-cost. Hilborn, 85 T.C. at 689; see also USPAP S t a n d a r d s Rule 1-4 (identifying three methods and noting each is to be used " w h e n . . . necessary"). A description of the three methods follows. C o m p a r a b le sales are defined as "sales from a willing seller to a willing b u y e r of similar property in the vicinity at or about the same time" as the p r o p e r t y being valued. United States v. 320.0 Acres of Land, 605 F.2d 762, 798 (5 t h Cir. 1979) (quoting United States v. Trout, 386 F.2d 216, 223 (5th Cir. 1 9 6 7 )). Our court has explained: As the definition indicates, comparability is largely a fu n c t io n of three variables: characteristics of the p r o p e r t ie s , their geographic proximity to one another, a n d the time differential. For any particular [valued] p r o p e r t y , there may be an entire spectrum of c o m p a r a b le open market sales: from almost s im u lt a n e o u s sales of adjoining, virtually identical p r o p e r t y to sales of such dissimilar and distant p r o p e r t ie s occurring so long ago that they are not in any s e n s e of the term "comparable" sales. Generally, the m o r e comparable a sale is, the more probative it will be o f the fair market value of the . . . property [at issue]. In most cases, of course, there are no open market sales " i d e a l l y " comparable (i.e., virtually identical c h a r a c t e r is t ic s , immediate vicinity, and within a short t im e of the [date on which property at issue was v a lu e d ]), but instead an assortment of sales that are o n ly reasonably comparable in all or several respects. Sound and just trial practice is to admit as many of the " m o s t comparable" sales available as is necessary to fa ir ly permit each side to present its argument of fair m a r k e t value for the [fact-finder's] consideration. Id. (footnotes omitted). The income method involves analyzing data from comparable properties t o determine the property's earnings capacity, operating expenses, and rates of c a p it a liz a t io n and discount. This information is combined with any "reasonably c le a r and appropriate evidence" of future income potential and expenses to 18

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No. 09-60085 e s t im a t e the property's value. USPAP Standards Rule 1-4(c); see also United S ta te s v. 6.45 Acres of Land, 409 F.3d 139, 143 n.6 (3d Cir. 2005) (explaining that t h e "income capitalization approach" determines fair market value by dividing t h e "net income that a tract of land can produce in a typical year" by "a factor c a lle d a `capitalization rate'", which is a "ratio representing the relationship b e tw e e n the land's annual net income and its value"). F in a lly , for the replacement-cost method, the appraiser first determines t h e underlying property's value, as if there were no improvements on it. He then e s t im a t e s the amount it would cost to construct the property's improvements as n e w . Next, he determines the present worth of the improvements, as currently d e p r e c ia t e d . Finally, to reach a replacement-cost valuation, he subtracts that p r e s e n t worth from the as-new cost of the improvements. The resulting figure is the replacement-cost value. USPAP Standards Rule 1-4(b); see also N.

N a tu r a l Gas v. United States, 470 F.2d 1107, 1110-11 (8th Cir. 1973) (explaining r e p la c e m e n t -c o s t method and approving its use). T h e tax court explained why it rejected Roddewig's use of the replacementc o s t and income methods. It ruled the replacement-cost method is of little use w h e n reproduction of the property is unlikely. Whitehouse Hotel, 131 T.C. at 147 (c it in g United States v. Toronto, Hamilton & Buffalo Navigation Co., 338 U.S. 3 9 6 , 403 (1949)). The court stated it was unconvinced by Whitehouse that "the o w n e r s of the building would want to, or would be required to, reconstruct that 1 0 0 -y e a r -o ld structure if it were destroyed". Id. Further, the court explained t h a t , even if the building would be replaced if destroyed, reliance on the r e p la c e m e n t -c o s t method would still be inappropriate because it "is a poor in d ic a to r of value when estimating the value of older, special purpose buildings, s in c e any estimate of obsolescence . . . is subjective". Id. (citing Crocker v. C o m m 'r , T.C. Memo 1998-204, 1998 WL 294052 (8 June 1998)).

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No. 09-60085 I n rejecting the income method, the court noted: while that method is fa v o r e d when comparable sales are unavailable, it is an unsatisfactory valuation m e t h o d where the property has no track record of earnings that provides past in c o m e data to evaluate. Id. at 153 (citing Duncan Indus., Inc. v. Comm'r, 73 T .C . 266, 280 n.13 (1979); Pittsburgh Terminal Corp. v. Comm'r, 60 T.C. 80, 89 (1 9 7 3 )). Without such information, the appraiser must rely on data from similar p r o p e r t ie s , which reduces the appraisal's reliability. Id. (citing Ambassador A p a r tm e n ts , Inc. v. Comm'r, 50 T.C. 236, 243 (1968)). Here, there was no track record of earnings because, at the time of the d o n a t io n , the hotel had yet to be constructed. Any post-construction earnings d a t a had no bearing on Roddewig's income-method valuation, which limited it s e lf to information available at the valuation date, 29 December 1997. Therefore, it relied on income as projected on that date. B a s e d on these findings, the tax court found the comparable-sales method t o be "the most reliable indicator of value". Id. at 147-56. Because, as discussed in fr a , we must remand for re-valuation, we do not reach whether the tax court e r r e d in rejecting the income and replacement-cost methods. On remand, the t a x court should reconsider all three methods, including which may be a p p lic a b le , in determining the easement's value. 3. A c c o r d in g to Whitehouse, the tax court miscomprehended the highest and b e s t use of the Maison Blanche and Kress buildings, both owned by Whitehouse o n the date of donation of the easement. Whitehouse contends: such use is as a Ritz-Carlton, instead of as a non-luxury, hotel; and, the easement prohibited c o n s t r u c t io n on top of the Kress building, thereby eliminating the possibility of c o n s t r u c t in g 60 additional hotel rooms. " A s a general rule, [as noted,] valuation of property for federal tax p u r p o s e s is a question of fact that we review for clear error." Adams, 218 F.3d 20

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No. 09-60085 a t 385-86 (citing Estate of Bonner v. United States, 84 F.3d 196 (5th Cir. 1996)). As discussed supra, to the extent, however, the finding is "predicated on a legal c o n c lu s io n regarding the rights inherent in the property, its valuation is subject t o de novo review". Id. at 386 (citing Fuji Photo Film Co. v. Shinohara Shoji K a b u s h ik i Kaisha, 754 F.2d 591, 595 & n.4 (5th Cir. 1985)) (emphasis added). A property's highest and best use is the "reasonable and probable use that s u p p o r t s the highest present value". Frazee v. Comm'r, 98 T.C. 554, 563 (1992) (q u o tin g Symington v. Comm'r, 87 T.C. 892, 897 (1986)). "To determine what u s e s are reasonable and probable, we focus on `[t]he highest and most profitable u s e for which the property is adaptable and needed or likely to be needed in the r e a s o n a b ly near future.'" Id. (quoting Olson v. United States, 292 U.S. 246, 255 (1 9 3 4 )) (alteration in Frazee); see also 26 C.F.R. § 1.170A-14(h)(3)(ii) (noting: where, as here, the tax court employs before-and-after valuation, "the fair m a r k e t value of the property before contribution of the conservation restriction m u s t take into account not only the current use of the property but also an o b je c t iv e assessment of how immediate or remote the likelihood is that the p r o p e r t y , absent the restriction, would in fact be developed"). N e e d le s s to say, finding a property's highest and best use is a critical a s p e c t for determining its fair market value. Olson, 292 U.S. at 255 (holding h ig h e s t and best use is to be considered "to the full extent that the prospect of d e m a n d for such use affects the market value"); Frazee, 98 T.C. at 563 ("Property s h o u ld be valued to reflect the highest and best use of the property on the date o f the valuation." (citing Symington, 87 T.C. at 896; Stanley Works, 87 T.C. at 4 0 0 )). The key inquiry is what a hypothetical willing buyer would consider in d e c id in g how much to pay for the property. 320.0 Acres, 605 F.2d at 781. In o t h e r words, "[i]f a hypothetical buyer would not reasonably have taken into a c c o u n t that potential use in agreeing to purchase the property, such potential

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No. 09-60085 u s e should not be considered in valuing the property". Stanley Works, 87 T.C. a t 402 (citing 320.0 Acres, 605 F.2d at 781). a. A s stated, Whitehouse contends the highest and best use of the Maison B la n c h e and Kress buildings was as a Ritz-Carlton (per Roddewig's opinion), not a s a non-luxury hotel (per Argote's opinion). The tax court did not explicitly rule o n this issue, but it did not accept Roddewig's opinion on highest and best use. Accordingly, on this issue, the tax court's decision can be construed in two ways: even if the highest and best use was as a Ritz-Carlton, that had no effect on the p r o p e r t y 's value; or, a non-luxury hotel was the highest and best use. See W h ite h o u s e Hotel, 131 T.C. at 159-60. T h e tax court is required to "aid the appellate court by affording it a clear u n d e r s t a n d in g of the ground or basis of [its] decision". Curtis v. Comm'r, 623 F .2 d 1047, 1050 (5th Cir. 1980) (quoting Golf City, Inc. v. Wilson Sporting Goods C o ., 555 F.2d 426, 432 (5th Cir. 1977)); see also Copeland v. Wasserstein, Perella & Co., 278 F.3d 472, 485 (5th Cir. 2002) (remanding for "more detailed findings . . . including a fuller explication of the court's ruling"); Barrientes v. Johnson, 2 2 1 F.3d 741, 763 (5th Cir. 2000) (noting: "where a district court fails to make n e c e s s a r y findings, a remand for entry of such findings is the usual recourse for a n appellate court" (alteration omitted)); Bell v. City of Dallas, Tex., 81 F. App'x 4 9 0 , 491 (5th Cir. 2003) (unpublished) ("If we are unable to determine the basis fo r a district court's ruling, we cannot review it and must remand for a more s p e c ific determination." (citing Curtis, 623 F.3d at 1053)). Because the tax c o u r t's opinion can be read in either of the two above-described ways, we are left w it h findings that are "inadequate to permit us to fairly review [the tax court's] u lt im a te conclusions". Curtis, 623 F.2d at 1053. Moreover, because we must r e m a n d for re-valuation, this highest-and-best-use issue necessarily comes back in t o play and must be reconsidered. 22

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No. 09-60085 A lo n g this line, to be reconsidered on remand is the tax court's rejecting t h e idea that luxury-hotel developers operate in a national marketplace--this is t h e theory upon which Roddewig relied to justify his price-point adjustments. See Whitehouse Hotel, 131 T.C. at 160. Roddewig explained: because luxuryh o te l developers "have their own criteria for rates of return, and they don't price [a property] based on what their competition in the local market is willing to pay a n d go a dollar more", luxury-hotel developers are willing to pay more than the lo c a l market demands. In the light of this theory, Roddewig relied, in part, on c o m p a r a b le sales from properties located in other cities, including hotels in New Y o r k City, Washington, D.C., Boston, and Cleveland. T h e tax court disagreed that luxury-hotel developers would pay more than lo c a l market price: "Without evidence of th[is] phenomenon more convincing t h a n Mr. Roddewig's testimony, we will not take the risk of inaccuracy that t h o s e adjustments carry". Id. The tax court's reasoning for rejecting this

n a t io n a l-m a r k e t p la c e basis would seem to extend to its decision not to consider t h e nonlocal comparables utilized by Roddewig, any use of which also represents d im in is h e d reliance on the local market in favor of data from the national m a r k e t . Again, this point is to be reconsidered on remand. A s discussed, it is also possible to interpret the tax court's rejection of R o d d e w ig 's adjustments in a second way: as an implicit agreement with Argote's o p in io n that the Maison Blanche and Kress buildings' highest and best use was a s a non-luxury, not a Ritz-Carlton, hotel. In that case, the relevant question w o u ld be whether there was a "reasonable possibility" that the property would b e developed into a non-luxury hotel. See Olson, 292 U.S. at 256-57. A lo n g that line, plans for financing redevelopment into a Ritz-Carlton w e r e already in place before the easement was granted on 29 December 1997. For example, Whitehouse's contract to build the Ritz-Carlton hotel was signed o n 19 February 1997. In addition, Whitehouse procured architectural plans for 23

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No. 09-60085 c o n v e r s io n into the Ritz-Carlton in the summer of that year. The agreement w it h Ritz-Carlton and the architectural plans contemplated converting both the M a is o n Blanche and Kress buildings into the hotel. O n the other hand, Argote testified that he had seen hotel projects in s im ila r degrees of development never come to fruition. As stated, he opined that a higher and better use for the property would be as a non-luxury hotel. A lt h o u g h Argote's opinion seems implausible--the extent to which r e d e v e lo p m e n t was underway renders highly unlikely his conjecture that the p r o je c t might never come to fruition--we are not faced with the task of reviewing t h e tax court's ruling on this point (if indeed it made one). Rather, on remand, t h e tax court will have the opportunity to "make the subsidiary findings n e c e s s a r y to render its ultimate conclusions comprehensible, or, if necessary, to m o d ify its conclusions to conform to the evidence". Curtis, 623 F.2d at 1054. b. W h it e h o u s e next contends the tax court erred in failing to consider the e ffe c t of the historic-preservation facade easement on the contiguous Kress b u ild in g . The tax court considered only whether the easement burdened the K r e s s building; concluding it did not, the court found there was no difference b e tw e e n the potential use of the building before and after the conveyance of the e a s e m e n t . See Whitehouse Hotel, 131 T.C. at 131-35; see also id. at 161 ("We s h a ll disregard the Kress Building in our calculations because Mr. Roddewig e r r e d in believing that it was burdened by the servitude."). A s noted, for valuation, factual findings are reviewed for clear error; legal c o n c lu s io n s , de novo. In re Stembridge, 394 F.3d at 385. The easement's effect o n property rights in the Kress building is, of course, a legal question, reviewed d e novo and with applicable state law--in this instance, Louisiana--being a p p lie d . Succession of McCord, 461 F.3d at 623 ("Where a question of fact, such a s valuation, requires legal conclusions, this Court reviews those underlying 24

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No. 09-60085 le g a l conclusions de novo. . . . The determination of the nature of the property r ig h t s transferred is a question of state law that this Court reviews de novo." (c it in g Adams, 218 F.3d at 386)). Several threshold matters are clear: Whitehouse owned both the Maison B la n c h e and Kress buildings on the day the easement was conveyed; because of t h e easement, Whitehouse could not build on top of the Kress building; the e a s e m e n t prohibits any future owner of the Maison Blanche building from o b s c u r in g its wall adjacent to the Kress building and, therefore, any successor w h o , like Whitehouse, owned both the Maison Blanche and Kress buildings could n o t build on top of the Kress building; any successor who separately owned the K r e s s building would not be bound by the easement; and, the condominium r e g im e , established the day after conveyance of the easement, combined the M a is o n Blanche and Kress buildings into a single, indivisible unit of property. I n other words, the easement conveys a perpetual real right that burdens t h e Maison Blanche building. See LA. REV. STAT. ANN. § 9:1252 (allowing "owner o f immovable property [to] create a perpetual real right burdening the whole or a n y part thereof of that immovable property, including . . . the facade" for " c h a r ita b le [] or historic purposes"). The tax court was correct in ruling that the e a s e m e n t does not burden the Kress building in the same manner because the e a s e m e n t does not mention the Kress building. See Whitehouse Hotel, 131 T.C. a t 131-35. The tax court's analysis ended there. T h e easement's not burdening the Kress building does not, however, r e n d e r that building irrelevant for easement-valuation purposes, because the r e le v a n t determination is the effect of the easement on the fair market value of t h e entire contiguous property owned by Whitehouse: T h e amount of the deduction in the case of a charitable c o n t r ib u t io n of a perpetual conservation restriction c o v e r in g a portion of the contiguous property owned by a donor . . . is the difference between the fair market 25

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No. 09-60085 v a lu e of the entire contiguous parcel of property before a n d after the granting of the restriction. 2 6 C.F.R. § 1.170A-14(h)(3)(i) (emphasis added); see also Browning, 109 T.C. at 3 1 6 ("[For] a charitable contribution of a perpetual conservation restriction c o v e r in g a portion of the contiguous property owned by a donor, . . . the amount o f the deduction . . . is the difference between the fair market value of the entire c o n t i g u o u s parcel of property before and after the granting of the restriction." (e m p h a s is added)). Accordingly, determining the easement's effect on the fair m a r k e t value of the Kress building--contiguous property owned by Whitehouse a t the time of the donation--is crucial for determining the fair market value of t h e easement. This is true regardless of the easement's not burdening the Kress b u ild in g in the same way it burdens the Maison Blanche building, via the e a r lie r -c it e d Louisiana law, § 9:1252. T o determine the easement's effect on the fair market value of the c o n tig u o u s Kress building, owned by Whitehouse, the relevant inquiry is w h e t h e r , when the easement was conveyed, it was reasonable and probable that a hypothetical buyer would determine the amount he would pay for the Maison B la n c h e and Kress buildings, including in the light both of the pending c o n d o m in iu m agreement's combining the two properties into one legal unit and o f the pending development's combining the two properties into one functional u n it . See Frazee, 98 T.C. at 563 (stating highest and best use is the "reasonable a n d probable use that supports the highest present value" (quoting Symington, 8 7 T.C. at 897)); 320.0 Acres, 605 F.2d at 781 (noting fair market value depends o n the potential uses that a hypothetical purchaser will consider when e v a lu a tin g how much to pay for the property). T h is is important because, if the hypothetical buyer would not have c o n t e m p la t e d the legal and functional combination of the two buildings--based

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No. 09-60085 o n , for example, the fact that the buildings were not legally or functionally c o m b in e d on the date of donation--then the easement would have a different e ffe c t on the Kress building's fair market value. But, if the hypothetical buyer w o u ld have considered the buildings' pending legal and functional combination a n d the easement's resulting effect on the opportunity to build on top of the K r e s s building, then that should have been taken into account in determining fa ir market value. A s noted, the tax court limited its inquiry to whether the easement legally b o u n d the Kress building; it merely considered a snapshot of the property's legal s t a t u s as at the date of the conveyance. Noting that the easement does not m e n tio n the Kress building, the tax court ruled: Whitehouse had "failed to show h o w [its easement contractual] promise binds anyone who does not undertake it ; e.g., a person acquiring ownership of the Kress Building by eminent domain o r as a result of the owner of the building's bankruptcy". Whitehouse Hotel, 131 T .C . at 135 (emphasis added). B u t , the analysis should not have ended here: the tax court should have c o n s id e r e d the easement's effect on fair market value in the light of the im m in e n t legal and functional consolidation of the two buildings. In other w o r d s , the tax court was correct that, because, on the day of donation, the c o n d o m in iu m regime was not yet in effect, a successor could have purchased the K r e s s building separately that day and would not have been bound by the e a s e m e n t ; but, as a matter of valuation, the tax court erred by not considering t h e effect on market value of the buildings' pending combination. T o that end, a hypothetical buyer would have contemplated the pending c o m b in a t io n of the buildings in deciding on a purchase price. Along that line, b o th buildings were then owned by Whitehouse. Regarding the legal

c o m b in a t io n of the buildings (i.e., the condominium regime), it is implausible t h a t a hypothetical buyer of the Kress building on 29 December 1997 would have 27

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No. 09-60085 n o knowledge of the plan to combine the buildings into a single piece of property v ia a condominium regime imposed the next day. (When questioned at oral a r g u m e n t here, counsel for Whitehouse explained the condominium regime was r e c o r d e d after the facade donation to comply with "other provisions in the a p p lic a b le treasury regulations" that required "the facade donation actually be r e c o r d e d in order to prime the construction mortgage".) T h e tax court found that the post-conveyance timing of the condominium d e c la r a tio n rendered it either minimally relevant or irrelevant to the valuation. Whitehouse Hotel, 131 T.C. at 134 n.9 (noting its decision not to consider the c o n d o m in iu m declaration was "in part" because it was recorded the day after the e a s e m e n t conveyance, but not providing any other reasons). The tax court erred in failing to consider the effect on fair market value of the pending condominium r e g i m e 's precluding any future legal separation between ownership of the two b u ild in g s. L ik e w is e , regarding the functional combination of the two buildings, a p r o s p e c t iv e buyer would have been aware that the renovation plans, which were a lr e a d y in place, involved the Kress building's containing, among other things, t h e porte cochere and air-conditioning supply units necessary to operate a hotel in the Maison Blanche building. For example, the porte cochere was required for o p e r a t io n of a Ritz-Carlton (luxury) hotel. T h a t hypothetical buyer would have realized that the effect of this fu n c tio n a l combination of the buildings into a single unit was to preclude sale o f one building separately from the other. It would be clear to him that, as a p r a c t ic a l matter, the buildings only remain functional while under common o w n e r s h ip . Thus, because, from the perspective of the hypothetical buyer, any future o w n e r of the Kress building would also own the Maison Blanche building, that fu t u r e owner would be precluded from constructing rooms that obscured the 28

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No. 09-60085 M a is o n Blanche building's facade. This loss of opportunity would reduce the a m o u n t a willing buyer would pay for the parcel, and thereby reduce its fair m a r k e t value. T h e r e fo r e , regardless of the easement's not burdening the Kress building, it affected the fair market value of the Maison Blanche and Kress buildings. Accordingly, the tax court erred in not determining that effect. Regarding that e ffe c t , Commissioner presents the following two erroneous contentions. F ir s t , Commissioner asserts Roddewig failed to value all contiguous p r o p e r t y because he did not consider either the Kress garage, which is c o n t ig u o u s to the Kress building, or the garage located across Iberville Street, a l s o owned by Whitehouse. On the other hand, at oral argument here,

C o m m is s i o n e r appeared to concede that the tax court erred when it failed to c o n s id e r the easement's effect on all contiguous property. When questioned a b o u t that apparent concession, counsel for Commissioner stated: Whitehouse d id not provide sufficient proof regarding the parking garages; and, therefore, t h e tax court was not presented with sufficient evidence to consider the e a s e m e n t 's effect on all contiguous property. R o d d e w ig testified, however, that neither garage was contiguous to the b u r d e n e d Maison Blanche building. Further, he testified that, even if the Kress g a r a g e were considered contiguous because it is contiguous to the Kress b u ild in g , which is contiguous to the Maison Blanche building, the easement w o u ld not affect that garage's before-and-after value because it was already built t o its highest potential. (Because Argote did not include the garage in his v a lu a t io n , he presumably agreed that it did not affect the easement's value.) In t h e light of this testimony, even if the Kress garage was contiguous, the tax c o u r t's not considering it does not present the same legal concerns as its not c o n s id e r in g the Kress building.

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No. 09-60085 S e c o n d , regardless of the Maison Blanche and Kress buildings' being c o m b in e d , Commissioner contends the wall of the Maison Blanche building that r is e s above the Kress building is not one the easement burdens. Commissioner p o in ts to the omission of this wall from photographs, attached to the easement, t h a t were included to determine the easement's coverage "[i]n the event of u n c e r ta in ty ". Whitehouse Hotel, 131 T.C. at 179 (easement document as

a p p e n d ix to opinion). There is not, however, any uncertainty on this point in the e a s e m e n t 's language. The wall is unambiguously included in the easement's d e fin it io n of the covered "exterior surfaces" of the Maison Blanche building: "the e x t e r io r walls of the Lower Stories which are visible from Canal and Dauphine S t r e e t s . . . [and] the the exterior walls of the Upper Stories which are visible fr o m Canal, Burgundy, Iberville, and Dauphine Streets". Because this language le a v e s no "doubt" regarding which walls are protected, there is no reason to look t o the photographs or invoke the statutory-construction principle of resolving d o u b t in favor of the servient estate. See La. Civ. Code Ann. art 730 ("Doubt as t o the existence, extent, or manner of exercise of a predial servitude shall be r e s o lv e d in favor of the servient estate."). I n sum, the tax court erred in declining to consider the Maison Blanche a n d Kress buildings' highest and best use in the light of both the reasonable and p r o b a b le condominium regime and the reasonable and probable combination of t h o s e buildings into a single functional unit, both of which foreclosed the r e a lis t ic possibility, for valuation purposes, that the Kress and Maison Blanche b u ild in g s could come under separate ownership. This combination affected the b u ild in g s ' fair market value. The effect of the easement's impact on the property's fair market value, s u c h as prohibiting building 60 additional rooms on top of the Kress building, is a question of fact for the tax court to decide on remand. Therefore, we vacate its v a lu a t io n and remand for reconsideration of the easement's value. As discussed 30

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No. 09-60085 s u p r a , in making this valuation on remand, the tax court should, among other t h in g s , reconsider the experts' reports and valuation methods (including, inter a lia , using non-local comparables) and their conclusions regarding highest an