Whitehouse Hotel Limited Partnership, QHR Holdings-New Orleans, Ltd., Tax Matters Partner v. Commissioner

WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR

HOLDINGS—NEW ORLEANS, LTD., TAX MATTERS

PARTNER, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT*

Docket No. 12104–03. Filed October 23, 2012.

On remand from the U.S. Court of Appeals for the Fifth

Circuit for further proceedings in accordance with its opinion

in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615 F.3d

321 (5th Cir. 2010), vacating and remanding 131 T.C. 112

(2008), we reconsider the value of the qualified conservation

contribution made by W and whether, on account of that con-

tribution, W is subject to an accuracy-related penalty on

account of a substantial or gross valuation misstatement.

1. Held: Value of contribution determined: deduction over-

stated.

* This Opinion supplements our Opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 131

T.C. 112 (2008), vacated and remanded, 615 F.3d 321 (5th Cir. 2010).

304

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 305

2. Held, further, overstatement is gross valuation

misstatement.

3. Held, further, accuracy-related penalty applicable

because reasonable cause for underpayment of tax not shown.

Gary J. Elkins, Yvonne Chalker, and Thomas M. Beh, for

petitioner.

Jeffrey S. Luechtefeld, for respondent.

CONTENTS

SUPPLEMENTAL OPINION ................................................................ 306

Discussion ................................................................................................ 314

I. Introduction ....................................................................................... 314

II. Approaches to Valuation ................................................................. 315

A. Cost Approach .............................................................................. 315

1.In General ................................................................................. 315

2.Comparing Petitioner’s Historic Cost to Mr. Roddewig’s

Cost Estimate ........................................................................ 318

3. Terra Cotta Reproduction Cost ................................................ 318

4. External Obsolescence .............................................................. 319

5. Land Value ................................................................................ 320

6. Conclusion ................................................................................. 321

B. Income Approach ......................................................................... 321

1. Introduction ............................................................................... 321

2. In General ................................................................................. 321

3. Conclusion ................................................................................. 326

C. Comparable-Sales Approach ....................................................... 328

1. Introduction ............................................................................... 328

2. Disregard of Sales of Nonlocal Comparable Properties ......... 329

3. Highest and Best Use ............................................................... 330

4. Second-Best Use ........................................................................ 332

5. Conclusion ................................................................................. 336

III. Effect of the Servitude ................................................................... 337

A. Introduction .................................................................................. 337

B. The Conveyance ........................................................................... 340

1. Introduction ............................................................................... 340

2. Parties’ Arguments ................................................................... 342

3. Discussion .................................................................................. 342

C. Conclusion .................................................................................... 347

IV. Valuation of the Servitude ............................................................ 347

V. Valuation Misstatement Penalty .................................................... 348

A. Introduction .................................................................................. 348

B. Discussion ..................................................................................... 350

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306 139 UNITED STATES TAX COURT REPORTS (304)

1. Testimony of Mr. Drawbridge .................................................. 350

2. Court of Appeals’ Counsel ........................................................ 351

3. Petitioner’s Burden ................................................................... 352

4. The Revac Appraisal ................................................................. 355

5. Form 8283 ................................................................................. 356

6. Investigation .............................................................................. 357

7. Reliance on Advice and Counsel .............................................. 359

8. Conclusion ................................................................................. 361

C. Conclusion .................................................................................... 362

VI. Conclusion ...................................................................................... 362

APPENDIX .............................................................................................. 362

SUPPLEMENTAL OPINION

HALPERN, Judge: This case is before us on remand from

the U.S. Court of Appeals for the Fifth Circuit (Court of

Appeals) for further proceedings in accordance with its

opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615

F.3d 321 (5th Cir. 2010) (Whitehouse II), vacating and

remanding 131 T.C. 112 (2008) (Whitehouse I). The case

arose on account of the parties’ disagreement as to the value

of the qualified conservation contribution made by

Whitehouse Hotel Limited Partnership (partnership) when,

in 1997, it conveyed a qualified real property interest, viz, a

perpetual conservation restriction, to Preservation Alliance of

New Orleans, Inc., d.b.a. Preservation Resource Center of

New Orleans (PRC), a Louisiana nonprofit corporation. The

Court of Appeals instructed us to reconsider (1) our finding

as to the value of the contribution and (2) our determination

sustaining an accuracy-related penalty.

At our request, the parties filed supplemental briefs in

which they were to address both issues that we had identi-

fied and issues that they might identify.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for 1997, and all Rule ref-

erences are to the Tax Court Rules of Practice and Proce-

dure.

Background

We incorporate herein by this reference the facts that,

under the heading FINDINGS OF FACT, we found in Whitehouse

I, 131 T.C. at 115–120 (including the stipulation of facts,

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 307

supplemental stipulation of facts, and second supplemental

stipulation of facts), which we do not believe the Court of

Appeals disturbed. We summarize pertinent facts and por-

tions of our Opinion in Whitehouse I for the benefit of the

reader.

The Partnership, the Maison Blanche and Kress Buildings,

the Ritz-Carlton Agreement

The partnership is a Louisiana limited partnership formed

in 1995. On December 21, 1995, the partnership acquired a

parcel of improved real property in New Orleans, Louisiana,

on the square (block) bordered by Canal, Burgundy, Iberville,

and Dauphine Streets. Principally, the parcel consisted of a

historic building, the Maison Blanche Building, built between

1907 and 1909, two annexes, one built in the 1920s and the

other built in the 1950s, and the land under all. At the time

the partnership acquired the parcel, the first through third

floors of the Maison Blanche Building were under lease to

Maison Blanche, Inc., for use as a department store. The les-

see had previously prepaid rent for a term ending in 2004.

The upper floors of the building were vacant. The partner-

ship agreed to pay $6 million for the parcel plus additional

amounts based on the partnership’s ‘‘Net Cash Flow’’ and

‘‘Net Capital Proceeds’’. In September 1996, the partnership

paid an additional $625,000 in cancellation of its obligation

to pay those additional amounts and for other things. In Sep-

tember 1996, the partnership bought out the remaining term

of the lease for $3,375,938 and obtained the right to use the

Maison Blanche name.

The Maison Blanche Building consists of a base level and

an eight-level U-shaped tower. Exterior street facades of the

Maison Blanche Building consist almost entirely of glazed

terra cotta; some interior portions of the building (e.g.,

interior courtyard areas) are primarily constructed of white

glazed brick with less extensive terra cotta ornamentation.

The Maison Blanche Building fronts on Canal Street.

The Maison Blanche Building is adjacent to the Vieux

Carre´ (French Quarter) neighborhood of New Orleans. It is

in both the Vieux Carre´ National Historic District and the

Canal Street Historic District, which is part of the Central

Business District. The Central Business District Historic Dis-

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308 139 UNITED STATES TAX COURT REPORTS (304)

trict Landmark Commission determined that the Maison

Blanche Building is a building of major architectural impor-

tance.

On February 19, 1997, the partnership and the Ritz-

Carlton Hotel Co., L.L.C. (Ritz-Carlton), entered into agree-

ments under which the partnership agreed to renovate the

Maison Blanche Building and the as-yet-unacquired neigh-

boring Kress Building and Ritz-Carlton agreed to operate a

Ritz-Carlton Hotel in the renovated buildings. Ritz-Carlton

was to receive certain fees and expense reimbursements in

exchange for its services.

On or about October 30, 1997, the partnership purchased

additional property in the same block as the Maison Blanche

Building, including the Kress Building, which is adjacent to

the Maison Blanche Building, and the Kress parking garage.

The Kress Building was built in 1910, consists of six levels,

and fronts on Canal Street. The partnership paid $3.4 mil-

lion for the additional property, $1 million allocable to the

Kress Building.

Treating all of the partnership’s expenditures to assemble

the Maison Blanche-Kress parcel as having been made in

December 1995, the partnership paid $11,000,938

($6,625,000 + $1,000,000 + $3,375,938) to assemble the

parcel.

The Maison Blanche Building, its annexes, the Kress

Building, and the Kress parking garage were ultimately

developed into a 452-room Ritz-Carlton Hotel and into other

hotel facilities. The Ritz-Carlton Hotel, and associated facili-

ties, commenced operations on October 6, 2000.

The Servitude

On December 29, 1997 (valuation date), the partnership

conveyed certain of its rights in the Maison Blanche Building

to PRC. The conveyance was by ‘‘Act of Donation of Perpetual

Real Rights’’ (conveyance). A copy of the conveyance,

excluding exhibits, is appended hereto. In summary, the

conveyance provides that: (1) the owner (i.e., the partnership)

intends to convert the Maison Blanche Building (described as

the ‘‘Improvement’’ (improvement), to distinguish it from the

underlying land) into a hotel; (2) there is no servitude or

other encumbrance that would limit the rights conveyed; (3)

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 309

the rights conveyed (described as the ‘‘Servitude’’ (servitude))

are conveyed in perpetuity; (4) the servitude relates to cer-

tain exterior surfaces of the improvement (referred to as the

‘‘Facade’’ (facade)); (5) the owner will maintain the facade in

a good and sound state of repair; (6) without permission, the

owner will do nothing in or to the facade that would alter its

appearance; and (7) PRC has the right to require the owner

to maintain the facade. On December 29, 1997, the convey-

ance was filed for registry in the conveyance records of the

parish of Orleans.

La. Rev. Stat. Ann. sec. 9:1252 (2008)

Petitioner tax matters partner claims that the servitude

was created in accordance with the express statutory provi-

sions of La. Rev. Stat. Ann. sec. 9:1252. La. Rev. Stat. Ann.

sec. 9:1252 provides for the creation of a perpetual real right

burdening the whole or any part of immovable property,

including but not limited to its facade, in favor of an entity

formed exclusively for certain public purposes. Pertinent por-

tions of that section are set out in the margin. 1

The Charitable Contribution and Respondent’s Examination

On account of the conveyance of the servitude to PRC, the

partnership claimed a charitable contribution deduction of

1 La. Rev. Stat. Ann. sec. 9:1252 (2008) provides in part:

Creation of real right for educational, charitable, or historic purposes

A. The owner of immovable property may create a perpetual real right burdening the whole

or any part thereof of that immovable property, including, but not limited to, the facade, exte-

rior, roof, or front of any improvements thereon to any corporation, trust, community chest,

fund, or foundation, organized and operated exclusively for religious, scientific, literary, chari-

table, educational, or historical purposes, no part of the net earnings of which inure to the ben-

efit of any private shareholder or individual, or to the United States, the state of Louisiana,

or any political subdivision of any of the foregoing. A real right established pursuant hereto may

additionally obligate the owner of the immovable property as is necessary to fully execute the

rights granted herein.

B. A real right created pursuant to this Section shall be binding on the grantor, his heirs,

successors, assigns, and all subsequent owners of the immovable property, regardless of the fact

that the grantee does not own or possess any interest in a neighboring estate or the fact that

the real right is granted to the grantee and not to the estate of the grantee, the fact that the

real right was not created as a part of a common development or building plan, devised by an

ancestor in title of the grantor.

C. A real right created under the authority of this Section shall be granted by authentic act

and shall be effective against third parties when filed for registry in the conveyance records of

the parish in which the immovable property is located. Any right or obligation imposed on the

owner of the immovable property by the real right created pursuant hereto, including any af-

firmative obligation established therein, shall be enforceable by the grantee through judicial pro-

ceeding by actions for injunctions or damages brought by the grantee.

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310 139 UNITED STATES TAX COURT REPORTS (304)

$7.445 million on its 1997 Form 1065, U.S. Partnership

Return of Income (1997 Form 1065). Respondent examined

the 1997 Form 1065 and determined that the $7.445 million

charitable contribution deduction should be reduced by

$6.295 million since the partnership had not established that

the loss of value on account of the conveyance of the ser-

vitude exceeded $1.15 million. On account of the size of his

reduction in value, respondent determined that an accuracy-

related penalty under section 6662(a) is applicable. This pro-

ceeding, in which petitioner challenges both respondent’s

reduction in value of the charitable contribution deduction

and the accuracy-related penalty, followed.

Expert Testimony as to the Value of the Servitude

The parties agree that the partnership is entitled to a

charitable contribution deduction for 1997 on account of its

conveying the servitude to PRC. They disagree as to the

amount of the deduction because they disagree as to

the value of the servitude. The parties relied exclusively on

expert testimony to establish the value of the servitude.

Petitioner called as its expert witness Richard J. Roddewig,

whom we accepted as an expert with respect to (1) the valu-

ation of conservation easements and (2) the site selection,

feasibility, and valuation of hotels. Mr. Roddewig is a real

estate appraiser and attorney. He is a member of the

Appraisal Institute, and he holds its MAI designation. He con-

ducts his appraisal business from Chicago, Illinois. He

obtained a temporary license from the State of Louisiana as

a certified general real estate appraiser for the purpose of

making his appraisal here under consideration. Before

reaching his conclusion as to the loss in value occasioned by

the partnership’s conveyance of the servitude to PRC (some-

times, value of the servitude) he spent four to six days in

New Orleans. His staff made additional visits. Mr.

Roddewig’s previous appraisal experience in Louisiana con-

sisted of two or three preliminary appraisals made in the

early 1980s of preservation easement grants in New Orleans

and a market feasibility study for a site in Lafayette, Lou-

isiana. We received his written report, dated August 9, 2005,

as his direct testimony.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 311

Respondent called as his expert witness Richard Dunbar

Argote, whom we accepted as an expert with respect to

commercial real estate appraisal. Mr. Argote is licensed by

the State of Louisiana as a certified general real estate

appraiser and as a real estate broker. Like Mr. Roddewig, he

is a member of the Appraisal Institute and holds its MAI des-

ignation. Mr. Argote has been appraising real estate in Lou-

isiana for over 25 years. From 1990 to 2000, he appraised

between 50 and 70 buildings in and around New Orleans

that were to be used as or converted into hotels. About 85%

of those appraisals were of buildings located within the Cen-

tral Business District or the Vieux Carre´. Over the years,

Mr. Argote has appraised every building within the same

square as the Maison Blanche Building. He has appraised

the Maison Blanche Building on three prior occasions. After

addressing objections, we received his written report, dated

October 31, 2006, as his direct testimony.

Each expert arrived at an opinion as to the fair market

value of the servitude by making the before and after

comparison contemplated by the applicable regulations. See

sec. 1.170A–14(h)(3)(i), Income Tax Regs. Petitioner’s expert,

Mr. Roddewig, determined the requisite before and after

values in three different ways. He relied primarily on a

reproduction cost approach and an income approach, but he

also used, in part, a comparable-sales approach. He deter-

mined that the appropriate parcel of property to value was

the Maison Blanche Building, the 1920s and 1950s annexes,

and the Kress Building (Maison Blanche-Kress parcel). He

determined the following before- and after-restriction values:

Before-restriction values

Cost approach ........................................................ $43,000,000

Adjusted income approach .................................... 41,000,000

Comparable-sales approach .................................. 40,000,000

After-restriction values

Cost approach ................................................ $35,500,000

Adjusted income approach ............................ 28,000,000

Comparable-sales approach .......................... ---

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312 139 UNITED STATES TAX COURT REPORTS (304)

He determined no after-restriction comparable-sales-

approach value because he found no directly relevant after-

restriction sales. Taking into account his three approaches,

but giving significant weight to the adjusted income

approach because of the purported uniqueness in New

Orleans of the Maison Blanche-Kress parcel, he reached the

following ultimate determinations as to the before- and after-

restriction values of the Maison Blanche-Kress parcel and

the value of the servitude:

Value of the servitude

Before-restriction value ................................ $41,000,000

After-restriction value ................................... 31,000,000

Difference; i.e., fair market value of the

servitude ..................................................... 10,000,000

Respondent’s expert, Mr. Argote, relied exclusively on a

comparable-sales approach. He concluded that the before-

restriction value of the Maison Blanche Building was $10.3

million and the after-restriction value was $10.3 million. He

determined that the value of the servitude was zero. Not-

withstanding Mr. Argote’s opinion that the value of the ser-

vitude was zero, respondent did not ask that we find that the

value was any less than the $1.15 million he determined in

his examination.

Highest and Best Use

In Whitehouse I, we acknowledged that the fair market

value of property is determined by taking into account the

highest and best use of that property on the valuation date.

Whitehouse I, 131 T.C. at 130 (citing Stanley Works v.

Commissioner, 87 T.C. 389, 400 (1986)). We explained that

the experts differed on whether the conveyance changed the

highest and best use of the property each valued. We stated:

Mr. Roddewig determined the highest and best use of the Maison Blanche-

Kress parcel before the conveyance was a mixed use development,

including a Ritz-Carlton Hotel with 512 rooms (60 of them above the Kress

Building), an additional all-suites hotel with approximately 268 rooms, and

retail use on the first two floors and mezzanine of the Maison Blanche

Building. He determined that the highest and best use of the Maison

Blanche-Kress parcel after the conveyance was different in that: ‘‘The

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 313

opportunity to add up to 60 additional hotel rooms [above the Kress

Building] * * * [had] been eliminated.’’ That difference contributed to his

conclusion that, under both the cost and income approaches, the fair

market value of the Maison Blanche-Kress parcel was reduced on account

of the conveyance. Mr. Argote believes the highest and best use of the

Maison Blanche Building both before and after the conveyance was use as

a hotel (not necessarily a Ritz-Carlton Hotel) with retail space.

[Whitehouse I, 131 T.C. at 130–131.]

Essential to Mr. Roddewig’s opinion was his belief that the

conveyance eliminated the possibility of constructing 60 hotel

rooms above the Kress Building. Considering the question to

be one of local (Louisiana) law, we found that, on the evi-

dence before us, the conveyance created no charge on the

Kress Building in favor of PRC. Id. at 134. Therefore, we

stated: ‘‘Petitioner has failed to show that the highest and

best use of the Maison Blanche-Kress parcel after the

conveyance differed from its highest and best use before the

conveyance on account of the conveyance’s depriving

the partnership of the ability to add 60 hotel rooms above the

Kress Building.’’ Id. at 135. We concluded: ‘‘Mr. Roddewig

erred in his opinion that the highest and best use of the

Maison Blanche-Kress parcel differed after the conveyance on

account of the partnership’s disability to add 60 hotel rooms

above the Kress Building.’’ Id. We stated that we would take

that error into account in considering his valuation conclu-

sions. Id.

Our Analysis of Value

Mr. Roddewig failed to persuade us that $43 million and

$35.5 million are reliable estimates of the before- and after-

restriction reproduction costs, respectively, of the Maison

Blanche-Kress parcel, or that the resulting value of the ser-

vitude is $7.5 million. We therefore disregarded petitioner’s

cost approach in determining the value of the servitude. Id.

at 152. Because we believed that (1) that there was a risk

of error inherent in the income approach as applied by Mr.

Roddewig and (2) we had reliable alternative evidence of

value arrived at by the comparable-sales approach, we also

rejected petitioner’s income approach in determining the

value of the servitude. Id. at 156. We relied exclusively on

the comparable-sales approach to determine the value of the

servitude. Id. at 171–172. Of note, we rejected Mr.

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314 139 UNITED STATES TAX COURT REPORTS (304)

Roddewig’s use of nonlocal comparables, id. at 158, and his

adjustment for the higher room rates expected at a Ritz-

Carlton Hotel (price point adjustment), id. at 159. We found

a before-restriction value for the Maison Blanche Building

under the comparable-sales approach of $12,092,301. Id. at

168. We accepted Mr. Argote’s determination that the after-

restriction value of the Maison Blanche Building under the

comparable-sales approach is $10.3 million, and found

accordingly. Id. at 171. We found the difference, $1,792,301,

to be the fair market value of the servitude on the valuation

date. Id. at 172.

Valuation-Misstatement Penalty

On the basis of our determination of the value of the ser-

vitude, we concluded that the partnership had overstated the

value of the servitude on the 1997 Form 1065 by more than

400%, and, therefore, it had made a gross valuation

misstatement. Id. at 176. We found no reasonable cause for

the misstatement. Id. We therefore sustained application of

an accuracy-related penalty under section 6662(a) on the

basis of a gross valuation misstatement. Id.

Discussion

I. Introduction

‘‘In sum’’, the Court of Appeals stated, we

erred in declining to consider the Maison Blanche and Kress buildings’

highest and best use in the light of both the reasonable and probable con-

dominium regime and the reasonable and probable combination of those

buildings into a single functional unit, both of which foreclosed the real-

istic possibility, for valuation purposes, that the Kress and Maison Blanche

buildings could come under separate ownership. This combination affected

the buildings’ fair market value. [Whitehouse II, 615 F.3d at 340.]

It instructed us as follows as to our tasks on remand:

The effect of the easement’s impact on the property’s fair market value,

such 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. There-

fore, we vacate its valuation and remand for reconsideration of the ease-

ment’s value. As discussed supra, in making this valuation on remand, the

tax court should, among other things, reconsider the experts’ reports and

valuation methods (including, inter alia, using non-local comparables) and

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 315

their conclusions regarding highest and best use as a luxury or non-luxury

hotel. [Id.]

It also included among our tasks reconsideration, if nec-

essary, of our penalty determination. Id. at 341.

We shall undertake our tasks as follows. First, we shall

reconsider whether the before and after values of the encum-

bered property are best arrived at under the comparable-

sales approach to valuation rather than the cost approach or

the income approach. In doing so, we shall explain our reli-

ance in applying the comparable-sales approach on properties

in the Vieux Carre´ and the Central Business District, which

implicates our consideration of the highest and best use of

the Maison Blanche Building. Second, we shall explain our

conclusion that the servitude did not deprive the partnership

of the ability to add stories above the Kress Building. We

shall, however, make an additional finding on the bases that,

(1) the servitude did so deprive the partnership and, (2) the

pending combination of the Maison Blanche and Kress

Buildings made unlikely separate ownership of the two

buildings. Finally, we shall revisit the penalty.

II. Approaches to Valuation

A. Cost Approach

1. In General

We have reconsidered Mr. Roddewig’s testimony regarding

the value of the servitude under the reproduction cost

approach and, because we find it unreliable, continue to

accord it no weight.

In its supplemental brief, petitioner suggests that in

Whitehouse I we may have implied that the reproduction cost

‘‘approach should never be used to value historic properties’’.

That is not our position. In Whitehouse I, 131 T.C. at 147,

we stated:

We have in the past questioned the suitability of the reproduction cost

approach when applied to value older, historic structures. Dorsey v.

Commissioner, T.C. Memo. 1990–242; Losch v. Commissioner, T.C. Memo.

1988–230. For example, reproduction cost is of little assistance if no one

would think of reproducing the property. United States v. Toronto, Ham-

ilton & Buffalo Navigation Co., 338 U.S. 396, 403 (1949). * * *

With respect to the Maison Blanche Building, we continued:

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316 139 UNITED STATES TAX COURT REPORTS (304)

The Maison Blanche Building was built between 1907 and 1909. It is true

that the servitude obligates the building’s owner to repair the facade and

structural elements of the building if they are damaged. In the case of a

total loss or destruction of the building, however, the servitude provides:

‘‘Owner shall promptly remove all debris and trash and properly maintain

the Land. Owner must obtain Donee’s written approval of and prior con-

sent to any construction or reconstruction of * * * [the Maison Blanche

Building], as provided herein. * * * [Whitehouse I, 131 T.C. at 147.]

We concluded: ‘‘Petitioner has failed to convince us that, not-

withstanding the historic significance of the Maison Blanche

Building, the owners of the building would want to, or would

be required to, reconstruct that 100-year-old structure if it

were destroyed.’’ Id.

The simple explanation for petitioner’s failure of proof on

that score is that it cannot show that it would be a reason-

able business venture to reproduce so old a building. Indeed,

the reproduction cost approach is in general problematic for

determining the value of a historic structure. The problem is

described thus in the section of the Powell treatise on real

property dealing with how valuation and appraisal methods

vary for conservation easements:

The cost approach to valuation encounters substantial difficulties when

applied to historic structures (virtually its only application in the conserva-

tion easement context). The reproduction cost of an historic building usu-

ally bears little relationship to its present economic value. Such cost is

usually far in excess of the cost of construction of a similarly sized modern

structure, and may reflect the price of materials and workmanship that

are no longer readily available. * * * [Richard R. Powell, Powell on Real

Property, sec. 34A.06, at 34A–54 (M. Wolf ed. 2012).]

The treatise concludes its discussion of the appropriateness

of the reproduction cost approach to valuing historic improve-

ments to land as follows:

[T]his method of valuation has substantial disadvantages in the best of cir-

cumstances. Its utility has been questioned and it should be used with

care, if it is used at all, in connection with the appraisal of structures sub-

ject to conservation easements.19

Footnote 19. One authority has concluded, ‘‘The assumption, often

reflected in the opinions of the highest courts, that replaceable property is

usually worth its replacement cost, minus conventional deductions for

depreciation, is utterly unwarranted and is constantly belied by business

experience.’’ Bonbright, The Valuation of Property 176 (1937) (emphasis in

original). As a general proposition, ‘‘[R]eproduction cost should be utilized

only in those limited instances in which no other method of valuation will

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 317

yield a legally and economically realistic value for the property.’’ (Great

Atlantic and Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 242, 397 N.Y.S.2d

718, 723, 366 N.E.2d 808, 812 (1977)).

[Id.]

In accord with the authority cited by the Powell treatise,

the Court of Appeals has said that, for the reproduction cost

approach to be appropriate, ‘‘there must be a showing that

substantial reproduction would be a reasonable business ven-

ture’’. United States v. Benning Housing Corp., 276 F.2d 248,

250 (5th Cir. 1960). The Court of Appeals further observed

that, where the reproduction cost approach is inapposite,

reproduction cost evidence generally should be excluded from

jury trials (such as in condemnation proceedings) because

such evidence ‘‘almost invariably tends to inflate valuation.’’

Id. (fn. ref. omitted). ‘‘This is so’’, the court continued,

‘‘because the reproduction cost of a structure sets an absolute

ceiling on the market price of that structure, a ceiling which

may not be, and most frequently is not, even approached in

actual market negotiations.’’ Id. (fn. ref. omitted).

Following that line of reasoning, the Court of Appeals for

the Eighth Circuit has stated the rule more generally: ‘‘For

the reproduction cost appropriately to have an impact on the

value equation, the taxpayer must establish ‘a probative cor-

relation between [it] and fair market value.’ ’’ Estate of

Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir. 1988)

(quoting Rainier Cos. v. Commissioner, T.C. Memo. 1977–

351), rev’g and remanding 86 T.C. 66 (1986); see also Crocker

v. Commissioner, T.C. Memo. 1998–204 (same with respect to

replacement cost, citing Estate of Palmer).

Thus, without a showing by petitioner that reconstruction

of the Maison Blanche Building, if destroyed, would be a

reasonable business venture, petitioner has failed to convince

us that there is a probative correlation between Mr.

Roddewig’s estimate of the reproduction cost of the Maison

Blanche Building and the fair market value of that property.

And while that might be a sufficient basis to disregard Mr.

Roddewig’s testimony concerning cost, we believe that there

are additional reasons for doing so, which we discussed in

Whitehouse I, and which we summarize here.

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318 139 UNITED STATES TAX COURT REPORTS (304)

2. Comparing Petitioner’s Historic Cost to Mr. Roddewig’s

Cost Estimate

In Whitehouse I, 131 T.C. at 148–150, we questioned

whether Mr. Roddewig’s estimate of a before-restriction value

of $43 million for the Maison Blanche-Kress parcel correlated

with its market value because of the huge difference between

his estimate of its before-restriction reproduction cost—$43

million—and what the partnership actually paid for the

parcel no more than two years earlier—slightly more than

$11 million. After reviewing his list of reasons for the

increase in value of the Maison Blanche Building, we stated:

‘‘Simply put, we cannot reconcile Mr. Roddewig’s report of a

New Orleans real estate market enjoying, at best, stable

growth with his explanation of 291-percent appreciation in

the value of the Maison Blanche-Kress parcel.’’ Id. at 149–

150. We are still of that conclusion. 2

3. Terra Cotta Reproduction Cost

Mr. Roddewig was of the opinion that the reproduction cost

of the Maison Blanche Building shell and the Kress Building

on the valuation date, before depreciation and obsolescence,

was $54.3 million. Of that total estimated cost of reproduc-

tion, he attributed $42.025 million to reproducing the terra

cotta facade on the Maison Blanche Building. Because we

found that he insufficiently supported his terra cotta repro-

duction cost estimate (his testimony as to that cost being the

only evidence of it in the record), and because that estimate

was the major element of his reproduction cost estimate, we

gave no weight to his conclusion that the total cost to

reproduce the Maison Blanche Building shell and the Kress

Building is $54.3 million. Mindful of the fact that, since the

conveyance, the partnership has spent $7.792 million

repairing and restoring the terra cotta facade, plus $421,000

to repair damage from Hurricane Katrina, we still accord Mr.

Roddewig’s testimony as to the reproduction cost of the

Maison Blanche Building shell and the Kress Building no

2 In passing, we note that, in considering the correlation, we did not take into account either

expert’s opinion as to the highest and best use of the Maison Blanche-Kress parcel; we merely

considered the relative prices as evidence of the correlation (or lack thereof) between the time-

adjusted cost of acquiring the parcel and Mr. Roddewig’s estimate of the cost of reproducing it.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 319

weight because of the inadequacy of his testimony as to the

terra cotta reproduction cost. 3

4. External Obsolescence

In both his before- and after-restriction calculations of

reproduction cost, Mr. Roddewig deducted an amount to

reflect external obsolescence: 15% of the before-restriction

depreciated reproduction cost and 30% of the after-restriction

depreciated reproduction cost ($6,516,000 and $13,846,500,

respectively). He described the before-restriction external

obsolescence as resulting from the designation of the Maison

Blanche-Kress parcel as part of the Canal Street Historic

District. He described his doubling of that figure to reflect

after-restriction external obsolescence as resulting from his

judgment of the added burden imposed on the owner of the

parcel by the servitude. We refused to rely on his judgment

alone that the enforcement of the provisions of the servitude

double the cost of external obsolescence. We explained that

our lack of confidence in his judgment was based on our

impression that his $43 million estimate of the before-restric-

tion value of the Maison Blanche-Kress parcel defied reason.

3 For convenience, we set forth the analysis of his testimony that we made in Whitehouse Hotel

Ltd. P’ship v. Commissioner, 131 T.C. 112, 150 (2008) (Whitehouse I), vacated and remanded,

615 F.3d 321 (5th Cir. 2010):

His testimony is based upon estimates which he obtained from terra cotta industry specialists,

rather than from his own experience.14 The estimated cost is not detailed or broken down, mak-

ing it impossible for us to know what is and is not included and how the cost was determined.

While the terra cotta specialists he relied on may be highly qualified, he has not articulated

the facts relied on by, and the reasoning of, those specialists, which prevents us from properly

evaluating both their and his conclusions. See Estate of Palmer v. Commissioner, T.C. Memo.

1992–48 (quoting 15 Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989)).15

14Mr. Roddewig’s testimony with respect to how many specialists he relied on is inconsistent.

Note 5 to the table in his written report labeled ‘‘Segregated Cost Analysis: Before Preservation

Easement Maison Blanche Hotel Complex (Ritz-Carlton Hotel)—Building Shell Only—As of De-

cember 29, 1997’’ explains that the terra cotta reproduction cost ‘‘has been estimated based on

calculations from terra cotta specialists.’’ Note 40 to that written report explains: ‘‘The costs

used by us to calculate the reproduction cost of the Maison Blanche exterior were determined

based upon multiple calls with Mr. Pete Pederson of Gladding McBean terra cotta between Feb-

ruary 23 and March 4, 2005.’’ We cannot determine how many terra cotta specialists Mr.

Roddewig consulted. We shall continue to use the term ‘‘specialists’’ although we are uncertain

as to whether there was one or more.

1515 Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989):

A common fallacy in offering opinion evidence is to assume that the opinion is more important

than the facts. To have any persuasive force, the opinion should be expressed by a person quali-

fied in background, experience, and intelligence, and having familiarity with the property and

the valuation problem involved. It should also refer to all the underlying facts upon which an

intelligent judgment of valuation should be based. The facts must corroborate the opinion, or

the opinion will be discounted. [Fn. refs. omitted.]

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320 139 UNITED STATES TAX COURT REPORTS (304)

Whitehouse I, 131 T.C. at 151–152. We added: ‘‘We need not

rely on the unsupported opinion of an expert witness’’, citing

Holman v. Commissioner, 130 T.C. 170, 213 (2008), aff ’d, 601

F.3d 763 (8th Cir. 2010). Id. at 152. The relevant authority

of the Court of Appeals is in accord. E.g., Guile v. United

States, 422 F.3d 221, 227 (5th Cir. 2005) (‘‘An expert’s

opinion must be supported to provide substantial evidence;

* * * ‘A claim cannot stand or fall on the mere ipse dixit of

a credentialed witness.’ ’’ (quoting Archer v. Warren, 118

S.W.3d 779, 782 (Tex. Ct. App. 2003))). We have reconsidered

and do not believe we erred in questioning, and refusing to

rely on, Mr. Roddewig’s judgment that the enforcement of the

provisions of the servitude doubles the cost of external

obsolescence.

5. Land Value

In moving from his before- to his after-restriction value,

Mr. Roddewig reduced his estimate of the cost of land by $2.5

million because the conveyance had reduced the partner-

ship’s interest in the Maison Blanche-Kress parcel to less

than a fee simple interest and, he believed, the partnership

had lost the right to construct 60 rooms above the Kress

Building. We shall address his second reason infra. In

Whitehouse I, 131 T.C. at 152, we conceded for the sake of

argument that a servitude requiring maintenance of a

building’s facade would survive and affect the value of the

underlying land if that land were wiped clean of the building.

Id. His testimony that the price of each comparable should

be adjusted down by 10% to reflect the effect of the servitude

was supported only by his opinion, which we did not find

persuasive and did not accept. Id. Here, we again cited Hol-

man v. Commissioner, 130 T.C. at 213, signifying that we

need not rely on the unsupported testimony of an expert wit-

ness. Accord Guile, 422 F.3d at 227. Additionally, as with our

consideration of his testimony with respect to external

obsolescence, we lack confidence in his judgment on account

of what we consider to be his overvaluation of the before-

restriction value of the Maison Blanche-Kress parcel. We con-

tinue not to accept his 10% downward adjustments.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 321

6. Conclusion

We reject Mr. Roddewig’s testimony regarding the value of

the servitude under the reproduction cost approach not only

because that approach is in general problematic for deter-

mining the value of a historic structure (and, in particular,

problematic here, where petitioner has failed to show that

reconstruction, if the Maison Blanche Building were

destroyed, would be a reasonable business venture) but also

because we lack confidence in some of Mr. Roddewig’s unsup-

ported conclusions.

Moreover, we need not (and should not) rely on a substan-

tially flawed and inappropriate valuation method where we

have another method that provides a more accurate valu-

ation of the servitude, as discussed infra.

B. Income Approach

1. Introduction

In Whitehouse I, 131 T.C. at 156, we summed up our

grounds for rejecting petitioner’s income approach to valuing

the servitude as follows: ‘‘The risk of error inherent in the

income approach as applied by Mr. Roddewig in this case,

together with the fact that we have reliable alternative evi-

dence of value arrived at by the comparable sales approach,

is sufficient grounds for us to reject the income approach,

and we do.’’ We have reconsidered and come to the same

conclusion.

2. In General

While on the valuation date the partnership and Ritz-

Carlton had entered into agreements under which (1) the

partnership agreed to renovate the Maison Blanche and

Kress Buildings and (2) Ritz-Carlton agreed to operate a

hotel therein, on that date there had been no renovation and

there was no hotel. Indeed, all that was valuable with

respect to the Maison Blanche Building was its shell, since

the rehabilitation plan for the building was to remove all

interior partitions as well as mechanical and electrical sys-

tems. Id. at 136 n.11. The income approach to valuation is

based on the premise that the subject property’s market

value is measured by the present value of the future income

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322 139 UNITED STATES TAX COURT REPORTS (304)

its owners can expect to realize. E.g., Marine v. Commis-

sioner, 92 T.C. 958, 983 (1989), aff ’d without published

opinion, 921 F.2d 280 (9th Cir. 1991). The subject property’s

future cashflows are estimated, and the present value of

those cashflows is determined on the basis of an appropriate

risk-adjusted rate of return. See, e.g., Estate of Heck v.

Commissioner, T.C. Memo. 2002–34. Mr. Roddewig described

the process as follows:

In our Income Approach ‘‘before’’ considering the preservation and con-

servation easement, the rehabilitation costs have been based upon the

actual proposed rehabilitation costs as of December of 1997. Operating

revenues, operating costs and expenses, and profits associated with the

proposed Ritz-Carlton Hotel project have been determined based upon

analysis of the actual real estate marketplace in the New Orleans CBD

[Central Business District], and elsewhere, and then inserted into a

computerized discounted cash flow model. The resulting discounted present

value is the price that could be paid for the Maison Blanche Building, the

1950s Addition, and the Kress Building in their deteriorated condition

prior to rehabilitation as of December of 1997, and before considering the

preservation and conservation easement. The result is the most probable

price that a purchaser would be willing to pay for the unrehabilitated

Maison Blanche complex prior to considering the impact of the preserva-

tion easement.

In short, Mr. Roddewig input data to his computer model,

and the output, he represents, is the ‘‘most probable price’’

that a willing buyer would be willing to pay for the Maison

Blanche-Kress parcel sans the servitude. 4

The seemingly mechanical nature of the process should not

obscure the fact that Mr. Roddewig’s estimate of ‘‘the most

probable price’’ is a probabilistic expression (a point estimate)

of value resulting from an analysis of a considerable number

of underlying data. Even if we accept that, according to his

analysis of the data, the model has generated the most prob-

able price that a willing buyer would pay, how much con-

fidence should we place in that estimate? How confident

should we be that the most probable price that a willing

buyer would pay is not substantially less (or more) than the

price indicated by Mr. Roddewig’s model? Many of the data

4 The after-restriction approach is similar, but, as Mr. Roddewig testified, inputting to the

model additional costs and delays due to the burden of the servitude and adjusting capitaliza-

tion and discount rates to reflect new risks associated with imposition of the servitude. The indi-

cated value of the servitude is, of course, the difference between the before- and after-restriction

approaches.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 323

Mr. Roddewig relied on (e.g., occupancy rates) were as yet

unknown. He relied on industry data for many of his inputs

(e.g., room revenues, food and beverage revenue, telephone

revenue). Some risks are obvious: e.g., the hotel might not be

finished on schedule; 5 occupancy might be less than

expected; the hotel might not fetch $123,942,500 at the end

of 2002 (ignoring the servitude). Moreover, in estimating

construction costs and hotel receipts and expenses alone, Mr.

Roddewig made hundreds of assumptions, involving amounts

both large ($9,904,936 in construction period interest) and

small ($4.50-a-night telephone revenue from occupied rooms),

each carrying with it some risk of error. He has provided us

with no measure of the overall risk of error in his conclusion

of the most probable price that a willing buyer would pay.

Our own calculations, see Whitehouse I, 131 T.C. at 154–156,

show that relatively minor changes in only a few of his

assumptions would have large bottom-line effects. Without

some measure of the overall risk attendant to his model’s

output that we might examine, and with our own conclusions

as to the sensitivity of his model’s output to relatively minor

changes, we were (and remain) hesitant to attach any weight

to that output (i.e., most probable price that a willing buyer

would pay), especially in the light of the availability of com-

parable-sales data as to value. 6

Mr. Argote did not use the income approach. He testified

that, as applied to the Maison Blanche Building, the income

approach relied upon too many assumptions, thus making it

prone to error. He believes (as we determined) that even a

small change in estimated construction costs, the timing of

those costs, the length of time to complete construction, esti-

mated income, estimated expenses, capitalization rate, or dis-

count rate could substantially affect the present value

arrived at using a discounted cashflow analysis.

Petitioner in its supplemental brief points us to cases in

which we approved the income approach to valuing income-

5 And apparently it was not finished on schedule. Mr. Roddewig assumed that construction

would end on December 31, 1999, and the hotel would open the next day, January 1, 2000. Peti-

tioner makes no objection to respondent’s proposed finding of fact that the hotel commenced op-

erations on October 6, 2000, and we have so found.

6 See Institute of Business Appraisers, ‘‘A Deep, Dark Secret’’, May 15, 2009, by Rand Curtiss,

http://67.199.106.48/index/2009/05/15/a-deep-dark-secret/ (last visited October 15, 2012) (sug-

gesting that, when the number of variables in a business valuation increases, the uncertainty

of the value of the business as a whole increases because of the interrelationship of the vari-

ables).

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324 139 UNITED STATES TAX COURT REPORTS (304)

generating properties. E.g., Gross v. Commissioner, T.C.

Memo. 1999–254 (‘‘When properly applied, a discounted cash-

flow analysis is a reliable tool for financial analysis.’’), aff ’d,

272 F.3d 333 (6th Cir. 2001). Two of the cases that petitioner

refers us to are cases in which we actually ignored the

income approach (applied by at least one appraiser in each

case) in determining the fair market value of an encum-

brance: Dorsey v. Commissioner, T.C. Memo. 1990–242

(preferring acquisition cost to establish the pre-encumbrance

value of the building and reducing it by 10% to reflect the

loss in value attributable to the encumbrance; illustrating in

an appendix how our result was approximately the same as

under the taxpayer’s expert’s income approach), and Hilborn

v. Commissioner, 85 T.C. 677, 698–700 (1985) (relying, in

part, on each expert’s testimony but not placing any weight

on the value arrived at under the income method).

It is true that we have used the income approach (the sub-

division method) to account for the loss of development

potential resulting from the restrictions imposed by a con-

servation easement. E.g., Symington v. Commissioner, 87

T.C. 892 (1986); Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010–283, aff ’d, 493 Fed. Appx. 944 (10th Cir. 2012);

Clemens v. Commissioner, T.C. Memo. 1992–436. In those

instances, we found that the loss in value due to imposition

of the conservation restriction stemmed from the change in

the number of lots that could be sold, with the number and

value of those lots (determined by the comparable-sales

approach) being the principal points of disagreement. We had

sufficient information from the experts that we were com-

fortable in evaluating and adjusting their analyses to

produce valuations in which we had confidence. See, e.g.,

Symington v. Commissioner, 87 T.C. at 903–904.

Certainly, we are not hostile to the income approach to

determining value, and we have accepted (and applied) it in

determining the value of conservation easements, see, e.g., id.

(subdivision method), although it is not favored if com-

parable-sales data are available, see, e.g., Chertkof v.

Commissioner, 72 T.C. 1113, 1122 (1979), aff ’d, 649 F.2d 264

(4th Cir. 1981). As we said in Whitehouse I, 131 T.C. at 153:

‘‘The usefulness of the income approach diminishes * * * as

the quality of the evidence of the income-producing potential

of the property (usually evidence of its past performance)

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 325

diminishes. It has been judged an unsatisfactory valuation

method for property that does not have a track record of

earnings.’’ See Duncan Indus., Inc. v. Commissioner, 73 T.C.

266, 280 n.13 (1979) (rejecting capitalization-of-income

approach where corporation had just come into existence);

Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80, 89

(1973) (rejecting capitalization-of-income approach where coal

fields were not yet developed and operational on date for

valuation), aff ’d without published opinion, 500 F.2d 1400

(3d Cir. 1974); Ambassador Apartments, Inc. v. Commis-

sioner, 50 T.C. 236, 243–244 (1968) (rejecting real estate

valuation based on capitalization-of-income approach in favor

of market value established by recent sales), aff ’d, 406 F.2d

288 (2d Cir. 1969); see also, e.g., Allison v. Ticor Title Ins.

Co., 979 F.2d 1187, 1200 (7th Cir. 1992) (‘‘[T]he law is clear

in Wisconsin that when comparable-sales evidence is avail-

able, income evidence should not be admitted. * * * Income

evidence is generally considered too speculative as it depends

upon too many contingencies to be reliable for determining

fair market value.’’); Winooski Hydroelectric Co. v. Five Acres

of Land, 769 F.2d 79, 82 (2d Cir. 1985) (‘‘On the most basic

level, the future income calculations were too speculative,

since Green Mountain had not operated any business at

Montpelier #4 for over a decade.’’). The Court of Appeals has

also approved a trial court’s excluding income-generating pro-

posals from the consideration of value where the evidence

showed that the proposals were too speculative to contribute

to market value. United States v. Land, 62.50 Acres of Land

More or Less, 953 F.2d 886, 891, 893 (5th Cir. 1992).

What these cases establish is that the reliability of the

income approach depends on the underlying facts (e.g.,

whether there is an ongoing business on the valuation date),

the quality of the evidence, and whether evidence of com-

parable sales was available. We have explained our general

hesitancy with respect to Mr. Roddewig’s model on the basis

of his failure to quantify the risk inherent in the conclusion

he draws from it. Moreover, he did not capitalize the income

of an ongoing business. 7 He identified the property that he

was to value as the shell of the Maison Blanche Building,

7 The Maison Blanche Building did have an income history on the valuation date; Mr.

Roddewig disregarded that history in applying his model to value of the building.

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326 139 UNITED STATES TAX COURT REPORTS (304)

and, for that property, comparable-sales data were available.

We felt, and still do, that there is simply too much

uncertainty and unquantified risk associated with Mr.

Roddewig’s application of the income approach for us to

accept at face value his value conclusions resulting from that

approach. We do not intend to write a rule for facade cases

in general, nor do we rule out the income approach in some

of those cases; we deal here only with the facts (testimony)

before us.

One significant problem with respect to Mr. Roddewig’s

income approach that is specific to the facts before us is that

a large portion of the change in annual operating costs that

he projected is attributable to annual additions to a ‘‘facade

replacement reserve’’ on the basis of an estimate of terra

cotta replacement costs that we found to be unreliable.

Whitehouse I, 131 T.C. at 150–151, 155. 8 We also faulted Mr.

Roddewig for inadequately explaining, among other costs, an

almost $3 million architect’s fee, approximately $4 million for

a development fee, interest, real estate taxes, ‘‘Etc.’’, a project

management fee of approximately $2.6 million, and a

financing fee of approximately $4.7 million. Finally, we had

a major problem with his failure adequately to explain the

change in his assumed capitalization and discount rates. Id.

at 155. We pointed out that, if we reduce his 0.5% increase

in both his capitalization and discount rates by 0.1% (a 20%

reduction), the value he calculated for the servitude would be

reduced by close to $1 million. Id.

3. Conclusion

To sum up, Mr. Roddewig used a computer model

employing a discounted cashflow analysis to arrive at both

before- and after-restriction present values for the Maison

Blanche-Kress parcel (the difference being his estimate under

the income approach of the value of the servitude). We have

no difficulty with the process. Where we have difficulty is

with petitioner’s call to trust on their face Mr. Roddewig’s

judgments as to values to be input to his model. Certainly

there are risks associated with those values, but we are not

informed as to the magnitude of those risks, either individ-

8 ‘‘Mr. Roddewig estimated the cost of replacing the facade to be $46,719,755, of which the cost

of terra cotta would be $42,025,000.’’ Whitehouse I, 131 T.C. at 155.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 327

ually or in total. We have also described specific concerns

that we have with certain of the values Mr. Roddewig input

to his model. Together, we think those factors are sufficient

that we need give no weight to his income approach in deter-

mining the value of the servitude.

Finally, there is the fact that, during the trial, petitioner

asked us to take judicial notice of the pending bankruptcy of

the partnership on July 25, 2003, the date the petition was

filed. The bankruptcy proceeding commenced on January 3,

2002, and it was brought under chapter 11 of the U.S. Bank-

ruptcy Code in the U.S. Bankruptcy Court for the Eastern

District of Louisiana (case No. 02–10061). Petitioner ref-

erenced the bankruptcy in support of its claim that, pursuant

to section 7491, the partnership lacked sufficient net worth

such that petitioner was not excluded from shifting the bur-

den of proof to respondent. See sec. 7491(a)(2)(C). And while

subsequent events generally are not considered in fixing fair

market value, they may be considered to the extent that they

were reasonably foreseeable on the date as of which the

value is fixed. E.g., Estate of Gifford v. Commissioner, 88

T.C. 38, 52 (1987). Mr. Argote testified that, ‘‘based upon

what * * * [he] knew in 1997 * * * [,] * * * development of

the Ritz-Carlton was not feasible.’’ 9 That opinion, he added,

was borne out by the fact that full-service hotel projects that

went ahead in the 1990s and up to the mid-2000s ‘‘have gen-

erally gone into bankruptcy’’. While we have no additional

information concerning the partnership’s bankruptcy, the

risk inherent in the Maison Blanche development was, on the

valuation date, apparent to Mr. Argote. The partnership’s

bankruptcy and Mr. Argote’s testimony stand in sharp con-

trast to the rosy pictures generated by Mr. Roddewig’s model,

which showed a positive worth for the Maison Blanche-Kress

parcel both before and after conveyance of the servitude (and

a terminal value of over $100 million on the hypothetical sale

of the parcel after conveyance of the servitude, in 2003). As

9 More fully, he testified:

I had the opportunity in the early 1990’s to do counseling with the Windsor Court Hotel. And

I had been doing appraisals of multiple hotel operations in the * * * [Central Business District],

in Vieux Carre´, from the early 1990s through the 1997 date.

And based upon the costs that had been related to be—that would be incurred in the construc-

tion of the Ritz-Carlton, and the opportunity for them to lease the hotel out at a particular aver-

aged daily rate, it was fairly easy to conclude that at that point in time, the project simply didn’t

make sense.

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328 139 UNITED STATES TAX COURT REPORTS (304)

stated, we reject Mr. Roddewig’s testimony valuing the

Maison Blanche-Kress parcel under the income approach

because we judge that testimony to be unreliable.

C. Comparable-Sales Approach

1. Introduction

In Whitehouse I, relying exclusively on the comparable-

sales approach, we found the value of the servitude to be

$1,792,301, calculated as follows:

Value of the servitude under comparable-sales

approach

Before-restriction value ................................ $12,092,301

Less after-restriction value ........................... 10,300,000

Value of the servitude ................................... 1,792,301

Putting aside for the moment the question of the effect of

the servitude on the value of the Kress Building, we discern

from petitioner’s supplemental brief two principal concerns

with our application of the comparable-sales approach; viz,

that we rejected Mr. Roddewig’s sales of nonlocal comparable

properties and that we disregarded his determination of the

value of the Maison Blanche-Kress parcel based on dollars

paid per hotel guest room for comparable properties. The

more important of those concerns is the first, because, if we

are right on the first, the second is of no consequence to peti-

tioner, since, considering only local sales, Mr. Roddewig’s

per-room analysis produces a lower value for the Maison

Blanche Building than does his per-square-foot analysis. 10

10 Mr. Roddewig reports a mean adjusted price per square foot of $53.44 for his local

comparables and 530,646 square feet in the Maison Blanche-Kress parcel (not including the po-

tential of any addition to the Kress Building), which indicates a before-restriction value, on a

per-square-foot basis, of $28,357,722. He also reports a mean adjusted price per room of $31,263

for his local comparables and 720 planned rooms (without regard to any rooms to be built above

the Kress Building), which indicates a before-restriction value, on a per-hotel-room basis, of

$22,509,360. He adds that consideration should be given to the addition of 60 rooms to the Kress

Building, which, keeping the price per room at $31,263 but changing the number of planned

rooms to 780, indicates a before-restriction value, on a per-room basis, of $24,385,140. The per-

square-foot analysis still produces a higher value for the Maison Blanche-Kress parcel.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 329

2. Disregard of Sales of Nonlocal Comparable Properties

Mr. Roddewig testified that he included nonlocal

comparables because none of the buildings that he found in

downtown New Orleans were similar to the Maison Blanche-

Kress parcel in size or luxury hotel market orientation. He

added: ‘‘ ‘Buildings purchased for rehabilitation into first

class luxury hotels trade in a national marketplace, so it is

appropriate to analyze sales in other cities for purposes of

establishing the value of the Maison Blanche Hotel Complex

by the Sales Comparison Approach.’ ’’ Whitehouse I, 131 T.C.

at 157.

Mr. Argote saw no need for nonlocal comparables. While he

agreed that, occasionally, if there are insufficient local sales,

an appraiser has to look outside the location of the subject

property for comparables, he thought there was an adequate

number of local comparable properties. Id. And, indeed, Mr.

Roddewig did identify five local sales of comparable prop-

erties; Mr. Argote believed that there were nine that Mr.

Roddewig should have considered. Id. at 158.

We rejected Mr. Roddewig’s nonlocal comparables for a

number of reasons. First, we expressed our preference for

local comparables, stating: ‘‘The reason is simply that loca-

tion plays a huge role in determining the desirability, and,

thus, the value of real estate. We reduce substantially the

risk of error in employing the comparable-sales approach if,

on account of proximity, we can eliminate (or reduce the

significance of) location as a distinguishing factor.’’ Id. at

157–158. The Court of Appeals has also recognized the link

between proximity and probative value: ‘‘The more com-

parable a sale is in characteristics, proximity, and time, the

more probative it is of value.’’ Estate of Jameson v. Commis-

sioner, 267 F.3d 366, 373 (5th Cir. 2001) (emphasis added),

vacating and remanding T.C. Memo. 1999–43. We found the

risk of relying on Mr. Roddewig’s nonlocal comparables to be

significant because the adjusted values he determined for his

nonlocal properties were significantly higher than the

adjusted values he determined for his local properties, ‘‘64

percent higher on a square footage basis and at least double

on a per room basis’’. Whitehouse I, 131 T.C. at 158. Those

large variances from the local real estate market underscore

the lack of comparability of the nonlocal properties that Mr.

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330 139 UNITED STATES TAX COURT REPORTS (304)

Roddewig chose. Moreover, there were at least five (in Mr.

Roddewig’s opinion) and as many as nine (in Mr. Argote’s

opinion) local sales of comparable properties for which the

risk of proximity disparity was low, and the addition of Mr.

Roddewig’s nonlocal comparables would, by increasing the

risk of proximity disparity, only decrease the probability of

an accurate valuation of the Maison Blanche Building, unless

some characteristic of those nonlocal sales sufficiently

increased that probability. We did not believe that it did,

adding:

Nor are we convinced that it was appropriate to take nonlocal sales into

account because of his claim that buildings purchased for rehabilitation

into first class luxury hotels trade in a national marketplace. He [Mr.

Roddewig] had no statistics supporting that claim, nor did he have evi-

dence of any competition for the Maison Blanche Building, which, 2 years

before the valuation date, was purchased for the relatively moderate price

of $6.625 million. [Id.; fn. ref. omitted.]

3. Highest and Best Use

Mr. Roddewig looked to nonlocal comparables, and he

made price point adjustments for his comparables (adjusting

for the higher room rates expected at a Ritz-Carlton Hotel),

because he determined that the highest and best use of the

Maison Blanche-Kress parcel before the conveyance was a

mixed use development, including a Ritz-Carlton Hotel with

512 rooms (60 of them above the Kress Building), an addi-

tional all-suites hotel with approximately 268 rooms, and

retail use on the first two floors and mezzanine of the Maison

Blanche Building (for short, luxury hotel development). Id. at

130–131. Mr. Argote determined that the highest and best

use of the Maison Blanche Building both before and after the

conveyance was as a hotel (not necessarily a Ritz-Carlton

Hotel) with retail space (for short, a nonluxury hotel develop-

ment). Id.

The Court of Appeals found inadequate our findings with

respect to highest and best use:

As stated, Whitehouse contends the highest and best use of the Maison

Blanche and Kress buildings was as a Ritz-Carlton (per Roddewig’s

opinion), not as a non-luxury hotel (per Argote’s opinion). The tax court did

not explicitly rule on 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

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 331

Ritz-Carlton, that had no effect on the property’s value; or, a non-luxury

hotel was the highest and best use. * * * [Whitehouse II, 615 F.3d at 335–

336.]

The Court of Appeals is correct that we did not explicitly

decide whether the highest and best use of the Maison

Blanche-Kress parcel was as a luxury hotel or as a nonluxury

hotel. What we did decide was that Mr. Roddewig erred in

his opinion that the highest and best use of the Maison

Blanche-Kress parcel differed after the conveyance because

the servitude prevented the partnership from adding stories

to the Kress Building. Whitehouse I, 131 T.C. at 135. We

address that conclusion infra in section III. of this report.

We of course agree with the Court of Appeals that finding

a property’s highest and best use is critical for determining

its fair market value. Whitehouse II, 615 F.3d at 335 (citing

Olson v. United States, 292 U.S. 246, 255 (1934)). Indeed, we

have said: ‘‘The realistic, objective potential uses for property

control the valuation thereof.’’ Stanley Works v. Commis-

sioner, 87 T.C. at 400. Nevertheless, we are not compelled to

choose between Messrs. Roddewig’s and Argote’s competing

opinions as to highest and best use of the Maison Blanche

Building either as a luxury or as a nonluxury hotel. The term

‘‘highest and best use’’ may be defined as ‘‘[t]he reasonably

probable and legal use of vacant land or an improved prop-

erty that is physically possible, appropriately supported, and

financially feasible and that results in the highest value.’’

Appraisal Institute, The Appraisal of Real Estate 277–278

(13th ed. 2008). But, and this is very important, the highest

and best use of property does not itself identify the fair

market value of the property: It ‘‘forms the foundation for the

opinion of value.’’ Id. at 295. 11 As the Supreme Court

explained, the determination of fair market value incor-

porates the highest and best use of a piece of property only

if the demand for that use will affect the market price:

[M]arket value fairly determined * * * does not depend upon the uses to

which * * * [the owner] has devoted his land but is to be arrived at upon

just consideration of all the uses for which it is suitable. The highest and

most profitable use for which the property is adaptable and needed or

11 More extensively: ‘‘The highest and best use is shaped by the competitive forces within the

market where the property is located and provides the foundation for a thorough investigation

of the competitive position of the property in the minds of market participants.’’ Appraisal Insti-

tute, The Appraisal of Real Estate 277 (13th ed. 2008).

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332 139 UNITED STATES TAX COURT REPORTS (304)

likely to be needed in the reasonably near future is to be considered, not

necessarily as the measure of value, but to the full extent that the prospect

of demand for such use affects the market value * * * [Olson, 292 U.S. at

255; emphasis added.]

Accordingly, as the Court of Appeals has explained: ‘‘Even if

* * * a potential use is profitable and * * * the property is

adaptable for that use, that use is not necessarily the

measure of the value of the property. Instead, it is to be

considered to the extent the prospect of demand for the use

affects market value.’’ Land, 62.50 Acres of Land More or

Less, 953 F.2d at 890 (citing Olson, 292 U.S. at 255); see also

Boltar, LLC v. Commissioner, 136 T.C. 326, 336 (2011) (‘‘The

concept of ‘highest and best use’ is an element in the deter-

mination of fair market value, but it does not eliminate the

requirement that a hypothetical willing buyer would pur-

chase the subject property for this indicated value.’’).

4. Second-Best Use

The point to be taken is that, although the highest and

best use of property may determine a ceiling on how much

a willing buyer would pay for the property, it does not nec-

essarily determine a floor on how little a willing seller would

accept. In other words, the hypothetical willing buyer and

the hypothetical willing seller who populate our standard

definition of fair market value 12 will not invariably conclude

their negotiation over price at a price reflecting the value of

the property at its highest and best use. In Van Zelst v.

Commissioner, 100 F.3d 1259 (7th Cir. 1996), aff ’g T.C.

Memo. 1995–396, Judge Easterbrook, writing for the court,

explained this commonsense point by reference to auction

theory. 13 He rejected as ‘‘nonsense on its own terms’’ an

appraisal, used to support a substantial charitable contribu-

tion deduction for the contribution to the United States of

lands in the Alaskan wilderness, that was based on the

theory that the property might be developed as a luxury

resort lodge. Id. at 1262. He explained: ‘‘It should not have

required the award of the 1996 Nobel Prize in Economics to

12 ‘‘The fair market value is the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any compulsion to buy or sell and both

having reasonable knowledge of relevant facts.’’ Sec. 1.170A–1(c)(2), Income Tax Regs.

13 We borrow here (and in other places) from the appellee’s brief in this case before the Court

of Appeals.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 333

William Vickrey, a pioneer of auction theory, to remind

people that the market price of an asset depends on the

second-most-productive use to which it can be put.’’ Id. (citing

R. Preston McFee & John McMillan, ‘‘Auctions and Bidding’’,

25 J. Econ. Lit. 699 (1987)). He further explained that the

equilibrium price at which the willing buyer and the willing

seller would meet would be somewhere between the value of

the property taking into account its most productive use (i.e.,

its highest and best use) and the value of the property taking

into account its second most profitable use. Id. at 1262–1263.

If there are many potential buyers in the market for the

property, the equilibrium price would be closer to the price

determined by taking into account its most productive use,

and, if there are few potential buyers in the market for the

property, it would be closer to the price determined by taking

into account its second most productive use. Id. Judge

Easterbrook’s discussion of the value of land in Alaska—

which, as here, the taxpayer claimed, could be used for the

development of a luxury hotel—is helpful in resolving the

problem before us; viz, the value of a property in New

Orleans that might be used to develop a luxury hotel:

Suppose three parcels of private land in the Park are equally suitable to

be the site of a resort that will bring its developer $2 million after costs

of construction and operation. How much will the developer pay for the

land? That depends on what else the owners can do with their land, as the

developer will shop for the lowest price. Suppose Parcel A has a vein of

ore with a present value of $650,000, and Parcels B and C, which lack

minerals, are suitable only for subsistence hunting and fishing (value

$10,000). The owner of Parcel A will not sell for less than $650,000, but

the owners of Parcels B and C will sell for anything over $10,000. The

developer will not pay $650,000 to the owner of Parcel A, when he can get

land for so much less elsewhere, so Parcel A is worth only $650,000 as the

value of its second-best-use, a mine. If there were no Parcel C, the devel-

oper and the owner of Parcel B would reach a deal in the range between

$10,000 and $650,000: the developer never pays more than $650,000 (for

he can turn to Parcel A), and the owner never takes less than $10,000 (for

he can keep the land in its current use). When there is a Parcel C, a threat

to buy it instead of Parcel B helps the developer chisel the price down,

unless the owners collude. As the number of available sites rises, the possi-

bility of collusion declines. When there are hundreds of potential sites (as

there are in the Park and Preserve), the price the developer must pay falls

to the competitive level. To put this otherwise, land is not a scarce

resource in these mountains; financing and entrepreneurship are the

scarce ingredients, so they will capture the economic return of resort

development. Yet the Hawley Group’s appraisal attributed to the Nelson

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334 139 UNITED STATES TAX COURT REPORTS (304)

Mine 100 percent of the (potential) economic profit of a resort development.

It did not offer a rationale for that allocation. At oral argument Van Zelst’s

lawyer tried to supply one by saying that the number of potential resort-

mine combinations in the vicinity is small, but for reasons we have already

explained even a ‘‘small’’ number of rivals allows the developer to capture

the returns * * *. [Van Zelst v. Commissioner, 100 F.3d at 1262–1263.]

See also Caracci v. Commissioner, 456 F.3d 444, 459 (5th Cir.

2006) (citing with approval that discussion of comparable

properties), rev’g 118 T.C. 379 (2002).

Even if Mr. Roddewig is right that the highest and best

use of the Maison Blanche-Kress parcel before the convey-

ance to PRC was a luxury hotel development and that

‘‘[b]uildings purchased for rehabilitation into first class

luxury hotels trade in a national marketplace’’, that does not

necessarily lead to the conclusion that the fair market value

of the parcel is much (if indeed any) greater than the price

that would be predicted for the parcel taking into account its

second best use; i.e., development as a nonluxury hotel. By

his own admission, what Mr. Roddewig valued was the shell

of a building, which he thought could profitably be developed

into a hotel: ‘‘We have concluded that the highest and best

use of the Maison Blanche Building * * * [before convey-

ance] is rehabilitation of the ‘shell’ structure for hotel use

with retailing on the first and second floor[s]’’. He identified

as comparables five local buildings which he described as

‘‘downtown New Orleans buildings purchased as shells for

adaptive reuse as hotels.’’ He cautioned, however, that ‘‘none

were similar to the Maison Blanche hotel complex in size and

luxury hotel market orientation.’’ The size dissimilarity is

easily adjusted for. The second dissimilarity appears inappro-

priate, however, since, admittedly, he was comparing

building shells, and, for the shell of a building, similarity is

determined by development potential, not by actual develop-

ment. To reflect an after-development dissimilarity between

the Maison Blanche-Kress parcel and the comparables, he

made his so-called hotel price point adjustments, whereby he

adjusted (upward) the reported sale price of each comparable

building to reflect the higher room rates expected at a Ritz-

Carlton Hotel over the actual rates quoted for rooms at the

comparable buildings, after their development into hotels.

While apparently none of the comparables was developed

into a luxury hotel, petitioner makes no argument that, when

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 335

considered in their shell-state condition, luxury hotel

development was precluded for any of the comparables. The

hotel price point adjustments therefore are beside the point.

So long as the comparables when considered as shell

buildings had a potential for hotel development (luxury or

not) similar to that of the Maison Blanche Building when

considered as a shell building, the comparables’ actual

development as nonluxury hotels is irrelevant. Petitioner

wants to ascribe to the shell of the Maison Blanche Building

some difference (‘‘luxury hotel market orientation’’) that it

has not shown exists. Luxury versus nonluxury might be a

relevant distinction when applying the comparable-sales

approach to valuing renovated properties (or when applying

the income approach to valuing improved or unimproved real

property), but even in those circumstances there is a hotel

business whose value must be differentiated from the value

of the real property.

Moreover, petitioner has failed to show that, on the valu-

ation date, there was any scarcity of buildings in New

Orleans suitable for development as luxury hotels. Only if

there were sufficient scarcity would the partnership, consid-

ering it as the landlord of the Maison Blanche Building, cap-

ture a piece of the economic return to luxury hotel develop-

ment of the building’s shell. But, as Judge Easterbrook

points out, even a small number of rivals allows the devel-

oper (and not the property owner) to capture the return. Van

Zelst v. Commissioner, 100 F.3d at 1263. Mr. Roddewig

identified five local comparables, while Mr. Argote believed

that there were nine. Local rivals, therefore, were not scarce,

and, as to the intensity of demand, Mr. Roddewig had no

‘‘evidence of any competition for the Maison Blanche

Building, which, 2 years before the valuation date, was pur-

chased for the relatively moderate price of $6.625 million.’’

Whitehouse I, 131 T.C. at 158. Since it was petitioner’s bur-

den to establish otherwise, and since petitioner did not do so,

we assume that, on the valuation date, demand also was

weak.

Finally, Mr. Roddewig did not justify his use of nonlocal

comparables and his price point adjustments on competitive

grounds (i.e., that, on the valuation date, it was a seller’s

market for properties comparable to the Maison Blanche

Building) but on the ground that buyers in the marketplace

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336 139 UNITED STATES TAX COURT REPORTS (304)

for shell buildings suitable for development into luxury

hotels ‘‘will pay a premium without trying to think about

what the local buyers will pay.’’ Whitehouse I, 131 T.C. at

160. Even in the absence of competing bids, that is, he testi-

fied that developers of luxury hotels will leave money on the

table by paying more than the local market would demand

for the property. Id. Put simply, that defies common sense.

Moreover, it contradicts a basic tenet of the fair market

value paradigm; viz, that, with respect to both the hypo-

thetical buyer and the hypothetical seller, ‘‘each is a rational

economic actor, that is, each seeks to maximize his advan-

tage in the context of the market that exists at the date of

valuation.’’ Estate of Jameson v. Commissioner, 267 F.3d at

370; see also Estate of Newhouse v. Commissioner, 94 T.C.

193, 217–218 (1990). The rational economic buyer’s advan-

tage is that the sellers’ properties are worth more to him

than they are to the sellers, and he maximizes that advan-

tage by acquiring a seller’s property at the lowest cost that

seller will accept. 14

5. Conclusion

The highest and best use of the Maison Blanche-Kress

parcel on the valuation date may have been luxury hotel

development; but even if we were to accept that as a fact, it

does not rule out the possibility that the value of the parcel

on that date was dictated by its second best use (which, we

assume, is as a nonluxury hotel). We have Mr. Roddewig’s

testimony that, on the valuation date, the market for the

parcel was national and that luxury hotel developers have

deep pockets and do not stoop to bargain, but we have

rejected that. While the fair market value of the parcel may

have fallen somewhere between its value determined by its

highest and best use and its value determined by its second

best use, we have no evidence, or the tools, to determine

what that might be. In Whitehouse I, 131 T.C. at 158–160,

we disregarded Mr. Roddewig’s nonlocal comparables and his

price point adjustments, and we determined the value of the

14 That the partnership itself might have been unwilling to sell the Maison Blanche Building

shell for less than a price reflecting its highest and best use is beside the point, for the definition

of fair market value assumes a hypothetical seller as well as a hypothetical buyer. Caracci v.

Commissioner, 456 F.3d 444, 456 (5th Cir. 2006), rev’g 118 T.C. 379 (2002); sec. 1.170A–1(c)(2),

Income Tax Regs.

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 337

Maison Blanche Building on the basis of only local

comparables, without any price point adjustments. We con-

tinue to believe that that was the proper course. In effect,

then, we are accepting Mr. Argote’s methodology and his

view that the value of the subject property under the com-

parable-sales approach is to be determined on the basis of

sales of buildings suitable for conversion into hotels—luxury

or not. The properties that both expert witnesses chose rep-

resent the market value of shell buildings of comparable age,

character, and quality that were suitable for conversion to

hotels. They are, therefore, representative of how the market

would have valued the Maison Blanche Building at the time

of the donation. We do not need to choose between the two

experts’ opinions of highest and best use, since, even if we

were to agree with Mr. Roddewig, it would make no dif-

ference. 15

III. Effect of the Servitude

A. Introduction

We have summarized the terms of the conveyance above

and have set it out in full (excluding exhibits) in the

15 Mr. Roddewig also believed that the highest and best use of the Maison Blanche-Kress par-

cel would involve the addition of 60 rooms above the Kress Building. Since we reject his repro-

duction cost and income approaches to valuing the servitude for reasons not directly implicating

the addition of those 60 rooms, we do not consider in connection with those approaches whether

the parcel’s highest and best use involved that addition. Nor for the reason set forth supra note

10 do we need to consider it in connection with the comparable-sales approach. In any event,

petitioner has failed to convince us that a nine-story, 60-room addition above the Kress Building

would have been the highest and best use of the property. All we have is Mr. Roddewig’s ‘‘anal-

ysis’’, made in conjunction with the architects, ‘‘indicat[ing] that up to nine additional floors

could be built atop the Kress Building.’’ Petitioner has not translated that unquantified possi-

bility into a quantified probability. There is more to determining whether something is prac-

ticable than determining that it is possible. See, e.g., Olson v. United States, 292 U.S. 246, 257

(1934) (‘‘Elements affecting value that depend upon events or combinations of occurrences which,

while within the realm of possibility, are not fairly shown to be reasonably probable, should be

excluded from consideration, for that would be to allow mere speculation and conjecture to be-

come a guide for the ascertainment of value—a thing to be condemned * * * in judicial ascer-

tainment of truth.’’). Petitioner has failed to provide convincing evidence that an addition atop

the Kress Building as part of the development of the Maison Blanche-Kress parcel was part of

the highest and best use of the parcel. It is Mr. Roddewig’s conjecture, based upon anecdotal

information, that the City would have permitted the floor area ratio to increase even more than

the City had already specially excepted. Even if the City had approved additional density, the

record contains only rough architectural drawings. Beyond that there is nothing that shows this

nine-story addition would have been physically possible, or that it would not have been cost pro-

hibitive. Or, indeed, that Ritz-Carlton would have welcomed such an addition. The partnership

and Ritz-Carlton agreed in a Pre-Commencement Agreement to construct and operate a 437-

room hotel. We do not know whether Ritz-Carlton would have approved the additional rooms

considering that they would have been restricted to light wells.

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338 139 UNITED STATES TAX COURT REPORTS (304)

appendix. The six-story Kress Building is adjacent to the

Maison Blanche Building on Canal Street. According to peti-

tioner, in order to protect that portion of a common wall

rising above the Kress Building, the conveyance prevents the

partnership ‘‘from building additional stories atop the Kress

Building and from selling the Kress Building

unencumbered.’’ In Whitehouse I, 131 T.C. at 132, we began

our discussion of the conveyance by noting that petitioner

described the partnership’s risk from building above the

Kress Building or selling the Kress Building ‘‘unencumbered’’

as the risk of being sued by PRC for breach of contract. Peti-

tioner conceded that no portion of the protected facade is

actually located on the Kress Building. Moreover, neither the

definition of ‘‘improvement’’ nor the definition of ‘‘property’’

in the conveyance includes the Kress Building. Id. We found

that the conveyance creates no charge on (i.e., does not bur-

den) the Kress Building, id. at 134, and the Court of Appeals

agreed with us that the conveyance does not burden the

Kress Building, Whitehouse II, 615 F.3d at 337. We contin-

ued:

Petitioner has therefore failed to prove that, by the conveyance, and pursu-

ant to La. Rev. Stat. Ann. sec. 9:1252 (1991), the partnership granted PRC

a perpetual real right (servitude) of any extent in the Kress Building.

While the partnership may have obligated itself personally to maintain a

view of the Maison Blanche Building, petitioner has failed to show how

that promise binds anyone who does not undertake it * * * [Whitehouse I,

131 T.C. at 134–135; emphasis added.]

Implicit in the emphasized language is our conclusion that,

not only did the servitude not burden the Kress Building, but

it did not impose any obligation on the partnership not to

build atop it so as to block views of the Maison Blanche

Building’s facade. That is not to say that the partnership had

not personally obligated itself not to do so, but we did not

read the servitude to include that obligation. And that is an

important distinction. All agree that the servitude constitutes

a perpetual conservation restriction. 16 The Louisiana statute

16 While sec. 170(a) allows a deduction for any charitable contribution, sec. 170(f) denies a

charitable contribution deduction for certain contributions of partial interests in property unless,

among other exceptions, the contribution of the partial interest is a qualified conservation con-

tribution. Sec. 170(f)(3)(B)(iii). ‘‘A qualified conservation contribution is the contribution of a

qualified real property interest to a qualified organization exclusively for conservation pur-

poses.’’ Sec. 1.170A–14(a), Income Tax Regs. ‘‘A ‘perpetual conservation restriction’ is a qualified

real property interest.’’ Sec. 1.170A–14(b)(2), Income Tax Regs. ‘‘A ‘perpetual conservation re-

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(304) WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER 339

pursuant to which the servitude was created, La. Rev. Stat.

Ann. sec. 9:1252, specifies that a real right created pursuant

to the section ‘‘shall be effective against third parties when

filed for registry in the conveyance records of the parish in

which the immovable property is located.’’ La. Rev. Stat.

Ann. sec. 9:1252, C. That, the pertinent regulations recog-

nize, is sufficient to conclude that the servitude is enforce-

able in perpetuity:

In the case of any donation under this section, any interest in the property

retained by the donor (and the donor’s successors in interest) must be sub-

ject to legally enforceable restrictions (for example, by recordation in the

land records of the jurisdiction in which the property is located) that will

prevent uses of the retained interest inconsistent with the conservation

purposes of the donation. * * * [Sec. 1.170A–14(g)(1), Income Tax Regs.

(general rule under heading ‘‘Enforceable in perpetuity’’).]

Thus, if the partnership’s supposed obligation with respect to

the Kress Building is not within the burdens or obligations

constituting the servitude, 17 then, unless petitioner can

otherwise show us that the obligation is enforceable in per-

petuity, 18 it fails as a perpetual conservation restriction, and

it cannot be taken into account in determining the amount

of the partnership’s charitable contribution deduction on

account of its December 29, 1997, conveyance of certain

rights in the Maison Blanche Building to PRC. That is not to

say, of course, that the burden of the supposed obligation,

which has no apparent enforceability against successors in

ownership to the building, did not reduce the value of the

contiguous Maison Blanche and Kress Buildings; but unless

the obligation is, or constitutes part of, a perpetual conserva-

tion restriction, that reduction in value cannot be counted as

part of qualified conservation contribution. See sec. 1.170A–

14(h)(3), Income Tax Regs. Because petitioner failed to show

us that the partnership’s supposed obligation not to build

atop the Kress Building is enforceable against any successor

in interest, we concluded in Whitehouse I that the supposed

obligation, if enforceable, is not enforceable in perpetuity. See

striction’ is a restriction granted in perpetuity on the use which may be made of real property—

including, an easement or other interest in real property that under state law has attributes

similar to an easement (e.g., a restrictive covenant or equitable servitude).’’ Id.

17 The real right established pursuant to La. Rev. Stat. Ann. sec. 9:1252 may not only burden

property, but it ‘‘may additionally obligate the owner of the * * * property as is necessary to

fully execute the rights granted herein.’’ La. Rev. Stat. Ann. sec. 9:1252, A.

18 Petitioner has not done so.

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340 139 UNITED STATES TAX COURT REPORTS (304)

sec. 1.170A–14(g)(1), Income Tax Regs. Therefore, we dis-

regarded it in determining the value of the servitude and,

consequently, the amount of the partnership’s charitable con-

tribution deduction.

We are aware that, in Whitehouse II, 615 F.3d at 337, the

Court of Appeals stated: ‘‘[B]ecause of the easement,

Whitehouse could not build on top of the Kress building’’. We

are also mindful that, once a case has been decided on appeal

and a mandate issued, a lower court is not free to alter the

mandate of the appellate court, although it is free to decide

matters that are left open by the mandate. Barrett v.

Thomas, 809 F.2d 1151, 1154 (5th Cir. 1987) (citing In re

Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895)). Because

the distinction we have drawn between the partnership’s per-

sonal obligation not to block views of the Maison Blanche

Building and its burdens and obligations undertaken pursu-

ant to the real right created by the servitude was not consid-

ered by the Court of Appeals, we see some daylight to again

examine the conveyance to see whether it imposes an obliga-

tion on the partnership not to block views of the Maison

Blanche Building. We believe that type of analysis is what

the Court of Appeals intended when it directed this Court to

reconsider the effect of the servitude on the fair market

value. Whitehouse II, 615 F.3d at 340. If we overstep our

authority, we apologize. We shall recalculate the value of the

servitude on the assumptions that, in fact, it does obligate

the partnership not to build atop the Kress Building and that

separate ownership of the Maison Blanche and Kress

Buildings is unlikely.

B. The Conveyance

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