# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

139 T.C. No. 13

UNITED STATES TAX COURT

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 fuïther 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 contribution, W is subject to an accuracy-related
penalty on account of a substantial or gross valuation misstatement.
1. Held: Value of contribution determined: deduction
overstated.

*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).

RVED OCT 2 3 2012

-2 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . 4
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
I.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ; . . . . . . . . . . . . . . . 17

II.

Approaches to Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
A.
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2:

Comparing Petitioner's Historic Cost to Mr. Roddewig's Cost

3.

Estimate . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . 23
Terra Cotta Reproduction Cost . . . . . . . . . . . . . . . . . . . . . . . 24

4.
B.

C.

External Obsolescence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5. . . Land Value . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . 27
6.
Conclusion . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Comparable-Sales Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.

Disregard of Sales of Nonlocal Comparable Properties . . . . . 42

3.
4.

Highest and Best Use . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . 44
Second-Best Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

-35.

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

III.

Effect of the Servitude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
B.
The Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
1.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.
Parties' Arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
C.
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

IV.

Valuation of the Servitude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

V.

Valuation Misstatement Penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
B.
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
1.
Testimony of Mr. Drawbridge . . . . . . . . . . . . . . . . . . . . . . . . 78
2.
Court of Appeals' Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3.
Petitioner's Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.
The Revac Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
5.
Form 8283 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.
Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
7.

C.
VI.

Reliance on Advice and Counsel . . . . . . . . . . . . . . . . . . . . . . 92

8.
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

-4SUPPLEMENTAL OPINION
HALPERN, Judae: 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 identified 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 references are to the Tax Court Rules of
Practice and Procedure.

-5Backaround

We incorporate herein by this reference the facts that, undér the heading

FINDINGS OF FACT, we found in Whitehouse I, 131 T.C. at 115-120 (including
the stipulation of facts, 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 portions 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 lessee had previously prepaid rent for a term ending in
2004. The upper floors of the building were vacant. The partnership agreed to

-6pay $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 September 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 Carré (French Quarter)
neighborhood of New Orleans. It is in both the Vieux Carré National Historic
District and the Canal Street Historic District, which is part of the Central Business
District. The Central Business District Historic District Landmark Commission
determined that the Maison Blanche Building is a building of major architectural
importance.

On February 19, 1997, the partnership and the Ritz-Carlton Hotel Co., L.L.C.
(Ritz-Carlton), entered into agreements under which the partnership agreed to
renovate the Maison Blanche Building and the as-yet-unacquired neighboring 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 million 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 facilities,
commenced operations on October 6, 2000.

-8The 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).the rights conveyed (described as the

"Servitude" (servitude)) are conveyed in perpetuity; (4) the servitude relates to
certain 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 conveyance was filed for registry in the conveyance
records of the parish of Orleans.
L.A. Rev. Stat. Ann. sec. 9:1252 (2008)
Petitioner tax matters partner claims that the servitude was created in
accordance with the express statutory provisions of La. Rev. Stat. Ann. sec.

-99:1252. 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 portions of that section are set out in the margin.'

iLa. 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, exterior, roof, or
front of any improvements thereon to any corporation, trust,
community chest, fund, or foundation, organized and operated
exclusively for religious, scientific, literary, charitable, educational, or
historical purposes, no part of the net earnings of which inure to the
benefit 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
(continued...)

- 10 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 $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 servitude
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 proceeding, in which petitioner challenges both respondent's
reduction in value of the charitable contribution deduction and the accuracy-related
penalty, followed.

1(...continued)
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 affirmative obligation
established therein, shall be enforceable by the grantee through judicial
proceeding by actions for injunctions or damages brought by the
grantee.

- 11 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 valuation 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 conducts 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 (sometimes, 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 consisted 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

- 12 Lafayette, Louisiana. We received his written report, dated August 9, 2005, as his
direct testimony.
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 designation. Mr. Argote has been appraising real estate
in Louisiana 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 Central

Business District or the Vieux Carré. 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.

- 13 He relied primarily on a reproduction cost approach and an income approach, but he
also used, in part, a comparable-sales approach. He determined 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
Adjusted income approach
Comparable-sales approach

.

$43,000,000
41,000,000
40,000,000

After-restriction values
Cost approach
Adjusted income approach
Comparable-sales approach

$35,500,000
28,000,000
--

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:

- 14 -

Value of the Servitude
Before-restriction value
After-restriction value
Difference; i.e., fair market

$41,000,000
31,000,000

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. Notwithstanding Mr. Argote's
opinion that the value of the servitude was zero, respondent did not ask that we fimd
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

- 15 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 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.

Id. at 130-131.
Essential to Mr. Roddewig's opinion was his belief that the conveyance
eliminated the pos ibility of constructing 60 hotel rooms above the Kress
Building. Considering the question to be one of local (Louisiana) law, we found

that, on the evidence 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

- 16 add 60 hotel rooms above the Kress Building." Whitehouse I, 131 T.C. at 135. We
stated that we would take that error into account in considering his valuation
conclusions. 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
servitude 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. Roddewig's use of nonlocal comparables, idL 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

- 17 -

e

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 servitude, 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. E
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
condominium regime and the reasonable and probable combination of
those buildings into a single functional unit, both of which foreclosed
the realistic possibility, for valuation purposes, that the Kress and
Maison Blanche buildings could come under separate ownership. This
combination affected the buildings' fair market value.

.

- 18 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. Therefore, we vacate its valuation and remand for
reconsideration of the easement'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 their conclusions regarding
highest and best use as a luxury or non-luxury hotel.
Id. It also included among our tasks reconsideration, if necessary, 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 encumbered 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 reliance in applying the
comparable-sales approach on properties in the Vieux Carré 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,

- 19 (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, Hamilton & Buffalo Navigation Co., 338

U.S. 396, 403 (1949). * * *
With respect to the Maison Blanche Building, we continued:

- 20 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 consent 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, notwithstanding 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 reasonable 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 conservation easement context). The reproduction cost of an
historic building usually 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

- 21 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 improvements to land as follows:
[T]his method of valuation has substantial disadvantages in the best of
circumstances. 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 subject 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 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
venture". 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

- 22 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 correlation
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. 1977351), 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

- 23 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.
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

2In 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
(continued...)

- 24 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
reproduction, 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 reproduction 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

2(...continued)
correlation (or lack thereof) between the time-adjusted cost of acquiring the parcel
and Mr. Roddewig's estimate of the cost of reproducing it.

- 25 Blanche Building shell and the Kress Building no weight because of the inadequacy
of his testimony as to the terra cotta reproduction cost.3

3For 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." The
estimated cost is not detailed or broken down, making 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, ät 26 (1989)).15
"Mr. 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)-Büilding Shell Only-As of December 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 February 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):
(continued...)

- 26 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 beforerestriction 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-restriction value of the

3(...continued)
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 qualified 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.]

- 27 Maison Blanche-Kress parcel defied reason. 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), affd, 601 F.3d 763 (8th
Cir. 2010). Id. at 152. The relevant authority of the Court of Appeals is in accord.

E3, 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 partnership'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

- 28 value of the underlying land if that land were wiped clean of the building. E 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 Holman v.
Commissioner, 130 T.C. at 213, signifying that we need not rely on the unsupported
testimony of an expert witness. 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 continue not to accept his 10% downward adjustments.
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 determining 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 unsupported
conclusions.

- 29 Moreover, we need'not (and should not) rely on a substantially flawed and
inappropriate valuation method where we have another method that provides a more
accurate valuation ofthe servitude, as discus'sed 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 evidence of value arrived at by the
comparable sales approach, is sufficient grounds for us to reject the income
approach, and we do." We have réconsidered and come to the sameiconclusion.
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 systems. Id. at 136 n.11. The income approach to

- 30 valuation is based on the premise that the subject property's market value is
measured by the present value of the future income its owners can expect to realize.

Eg, Marine v. Commissioner, 92 T.C. 958, 983 (1989), affd 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.a., 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
conservation 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 preservation easement.

- 31 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 ifwe accept that, according to his analysis of the
data, the model has generated the most probable price that a willing buyer would
pay, how much confidence 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 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

4The 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 capitalization and discount rates to reflect new risks associated with
imposition of the servitude. The indicated value of the servitude is, of course, the
difference between the before- and after-restriction approaches.

- 32 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 consti11ction 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

5And 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. Petitioner makes no objection to respondent's proposed
fmding of fact that the hotel commenced operations on October 6, 2000, and we
have so found.

- 33 (i.e., most probable price that a willing buyer would pay), especially in the light of
the availability of comparable-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, estimated income, estimated expenses,
capitalization rate, or discount 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-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."), affd, 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 encumbrance: Dorsey v.

6See 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) (suggesting 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 variables).

- 34 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 subdivision method) to
account for the loss of development potential resulting from the restrictions imposed
by a conservation easement. Eg, Symington v. Commissioner, 87 T.C. 892 (1986);

Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283, affd, _ Fed. Appx. __
(10th Cir. Aug. 16, 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 comfortable 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.

- 35 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

-

· '

comparable-sales data are available, see, e.g., Chertkof v. Commissioner, 72 T.C.

1113, 1122 (1979), affd, 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) 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), affd without published opinion, 500 F.2d 1400
(3d Cir. 1974); Ambassador Apartments, Inc. v. Commissioner, 50 T.C. 236, 243244 (1968) (rejecting real estate valuation based on capitalization-of-income

approach in favor of market value established by recent sales), affd, 406 F.2d 288

(2d Cir. 1969); see also, e.a., Allison v. Ticor Title Ins. Co., 979 F.2d 1187, 1200
(7th Cir. 1992) ("the law is clear in Wisconsin that when comparable-sales evidence

- 36 is available, 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 proposals 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 comparable
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

- 37 ongoing business.7 He identified the property that he was to value as the shell of the
Maison Blanche Building, 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

7The MaÍsOn 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.
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.

- 38 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 individually 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 determining the value of the servitude.

- 39 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. Bankruptcy Code in the U.S.
Bankruptcy Court for the Eastern District of Louisiana (case No. 02-10061).
Petitioner referenced 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 burden 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. Eg, 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

9More 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

Carré, from the early 1990s through the 1997 date.

(continued...)

- 40 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 generally 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 contrast 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 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.

9(...COntinued)
And based upon the costs that had been related to be--that would
be incurred in the construction of the Ritz-Carlton, and the opportunity
for them to lease the hotel out at a particular averaged daily rate, it was
fairly easy to conclude that at that point in time, the project simply
didn't make sense.

- 41 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
Less: after-restriction value
Value of the servitude

$12,092,301
10,300,000
.
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 petitioner, 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.1°
1°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
(continued...)

- 42 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

'°(...continued)
(not including the potential 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.

- 43 identify five local sales of comparable properties; Mr. Argote believed that there
were nine that Mr. Roddewig should have considered. IÅ 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 location 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 comparable a sale is in characteristics, proximity, and time, the more
probative it is of value." Estate of Jameson v. Commissioner, 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. Roddewig chose. Moreover, there were at least five (in Mr. Roddewig's

- 44 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 evidence 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 additional all-suites hotel with approximately 268 rooms, and retail use
on the first two floors and mezzanine of the Maison Blanche Building (for short,

- 45 luxury hotel development). IÅ 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 development). 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 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.

- 46 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. Commissioner, 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 property
that is physically possible, appropriately supported, and financially feasible and that
results in the highest value." Appraisal Institute, The Appraisal of Real Estate 277278 (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." I_dm at 295." As the Supreme Court explained,

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

- 47 the determination of fair market value incorporates 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 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
determination of fair market value, but it does not eliminate the requirement that a
hypothetical willing buyer would purchase 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

- 48 does not necessarily 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" 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),
affg T.C. Memo. 1995-396, Judge Easterbrook, writing for the court, explained this

commonsense point by reference to auction theory." He rejected as "nonsense on
its own terms" an appraisal, used to support a substantial charitable contribution
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 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." E (citing R. Preston McFee &

John McMillan, "Auctions and Bidding", 25 J. Econ. Lit. 699 (1987)). He further

""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.
"We borrow here (and in other places) from the appellee's brief in this case
before the Court of Appeals.

- 49 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.
E 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 developer and the owner of Parcel B would
reach a deal in the range between $10,000 and $650,000: the

- 50 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 possibility
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 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 conveyance 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.

- 51 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 conveyance]. 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 inappropriate, however, since, admittedly, he was comparing
building shells, and, for the shell of a building, similarity is determined by
development potential, not by actual development. 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 considered in their shell-state condition, luxury hotel development was
precluded for any of the comparables. The hotel price point adjustments therefore

- 52 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 valuation 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, considering it as the
landlord of the Maison Blanche Building, capture a piece of the economic return to
luxury hotel development of the building's shell. But, as Judge Easterbrook points
out, even a small number of rivals allows the developer (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.

- 53 Roddewig had no "evidence 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." Whitehouse I, 131 T.C. at 158. Since it was petitioner's
burden 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 márket for properties comparable to the Maison Blanche Building) but
on the ground that buyers in the marketplace 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 testified that developers of luxury hotels will
leave money on the tablë by paying more than the local market would demand for
the property. E 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
hypothetical buyer and the hypothetical seller, "each is a rational economic actor,
that is, each seeks to maximize his advantage in the context of the market that exists

- 54 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 advantage is that the sellers' properties are worth more to
him than they are to the sellers, and he maximizes that advantage by acquiring a
seller's property at the lowest cost that seller will accept."

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 .

"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), mv'g 118 T.C. 379 (2002); sec. 1.170A-1(c)(2), Income Tax Regs.

- 55 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 Maison Blanche Building on the basis of only
local comparables, without any price point adjustments. We continue 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

comparable-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 represent 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 difference."

15Mr. Roddewig also believed that the highest and best use of the Maison
Blanche-Kress parcel would involve the addition of 60 rooms above the Kress
Building. Since we reject his reproduction cost and income approaches to valuing
the servitude for reasons not directly implicating the addition of those 60 rooms, we

(continued...)

- 56 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 appendix. The six-story Kress Building is adjacent

15(...continued)
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 "analysis", 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 possibility into a quantified
probability. There is more to determining whether something is practicable than
determining that it is possible. See, e.a., 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 become a guide for the ascertainment of
value-a thing to be condemned * * * in judicial ascertainment 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 prohibitive. Or, indeed, that RitzCarlton 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.

- 57 to the Maison Blanche Building on Canal Street. According to petitioner, 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. Petitioner 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 burden) 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 continued:
Petitioner has therefore failed to prove that, by the conveyance, and
pursuant 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)..

- 58 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 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

16While 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 contribution. Sec. 170(f)(3)(B)(iii). "A qualified
conservation coñtribution is the contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes." 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
restriction' 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.

- 59 pertinent regulations recognize, is sufficient to conclude that the servitude is
enforceable 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 subject 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,"

then, unless petitioner can otherwise show us that the obligation is enforceable in
perpetuity,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
"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.
18Petitioner has not done so.

- 60 Blanche and Kress Buildings; but unless the obligation is, or constitutes part of, a
perpetual conservation 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 sec. 1.170A-14(g)(1), Income Tax Regs. Therefore,
we disregarded it in determining the value of the servitude and, consequently, the
amount of the partnership's charitable contribution 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 þersonal obligation not to block views of the Maison Blanche
Building and its burdens and obligations undertaken pursuant to the real right

- 61 created by the servitude was not considered.by the Court of Appeals, we see some
daylight to again examine the conveyance to see whether it imposes an obligation 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 Convevance
1.

Introduction

We look to Louisiana law in interpreting the conveyance. Id. at 329 (citing

Adams v. United States, 218 F.3d 383, 386 (5th Cir. 2000) ("To arrive at a
reasonable conclusion regarding the value of the property at issue * * *, one must
first determine the rights afforded to the owner of such property by the applicable
state law.")). By its terms, and pursuant to La. Rev. Stat. Ann. sec. 9:1252, the
conveyance purports to transfer a perpetual real right "in and to certain exterior
surfaces of the * * * [Maison Blanche Building]" to PRC. La. Rev. Stat. Ann. sec.
9:1252, A. provides for the creation of a perpetual real right burdening the whole or

- 62 any part of immovable property, including its facade, in favor of an entity formed
exclusively for certain public purposes. While the provision is found in the statute
among provisions headed "Predial Servitudes" (La. Rev. Stat. Ann. title 9, code
book II, code title IV), the perpetual real right created by the provision has aspects
of a right of use, a form ofpersonal servitude. See Whitehouse I, 131 T.C. at 132133. Petitioner argues that, in enacting La. Rev. Stat. Ann. sec. 9:1252, the

legislature intended to create a special type of predial servitude, one that has

.

characteristics of both predial and personal servitudes. As we discussed in
Whitehouse I, 131 T.C. at 133-134, whether most resembling a right of use or a
predial servitude, the perpetual real right created by the provision is subject to the
interpretive rules applicable to predial servitudes. Thus, for instance: '.'Doubt as to
the existence, extent, or manner of exercise of a predial servitude shall be resolved
in favor of the servient estate." La. Civ. Code Ann. art. 730 (2008). "[T]he proper
interpretation of an ambiguous instrument is that which least restricts the ownership

of the'land". Id. emt. b. (Revision. Comments--1977) (noting that Louisiana courts
have applied this rule "in a variety of contexts"). One illustrative case cited in the

comment is Whitehall Oil Co. v. Heard, 197 So, 2d 672 (La. Ct. App. 1967).
There, the court was faced with construing a partition agreement to determine
whether it created separate servitudes over each of several contiguous tracts or

- 63 whether it created a single servitude over all of them. Id. at 676. The court stated
that the answer depended on the intent of the parties to the agreement determined
under principles of contract construction. IA The court apparently found no role
for parol evidence, stating: "[T]his determinative question is to be decided by the
intention of the parties as reflected by the partition agreement." Id.; see also Robert

Inv. Co., Inc. v. Eastbank, Inc., 496 So. 2d 465, 472 (La. Ct. App. 1986) ("Parol
evidence is not admissible to modify a written instrument pertaining to the
establishment of a predial servitude.").
With these rules in mind, we approach the conveyance.
2.

Parties' Arguments

Because language prohibiting the partnership from building atop the Kress
Building is not apparent to us, we asked the parties to identify language in the
conveyance either prohibiting the owner of the Maison Blanche Building from
building atop the Kress Building or otherwise obscuring a view of the Maison
Blanche Building. Respondent could identify no such language. Petitioner did not
directly answer our request.19 Rather, petitioner first references language in

19Although, in the introduction to its supplemental brief, petitioner assures us
that it has responded "to each and every one of the matters as to which * * * [the]
Court has requested supplemental briefing."

- 64 the first numbered paragraph of the conveyance identifying a portion of the
facade:
exterior walls of the Lower Stories which are visible from Canal and
Dauphine Streets, the exterior portion of the Improvement above the
Lower Stories which.is not covered by the Upper Stories, the exterior
walls of the Upper Stories which are visible from Canal, Burgundy,
Iberville, and Dauphine Streets[.] * * *
Petitioner then references the eleventh "whereas" clause in the preamble of the
conveyance, in which the partnership states its "desire[] to donate, grant, transfer
and convey to * * * [PRC] * * * a scenic, open space and architectural facade

servitude". Conflating those two provisions, petitioner argues that the combined
language "creates a servitude of view." Petitioner then refers us to La. Civ. Code
Ann. art.^70 1, Servitude of view (2008); which provides: "The servitude of view is
the right by which the owner of the dominant estate enjoys a view; this includes the
right to prevent the raising of constructions on the servient estate that would
obstruct the view."

3.

Discussion

Petitioner's reliance on the preamble of the conveyance is misplaced.
"Generally, a preamble does not create rights beyond those conveyed by the
contract's operative terms." Chevron U.S.A., Inc. v. Santa Fe Snyder Corp., 69 Fed.

Appx. 658 (5th Cir. 2003) (citing Grynbera v. FERC, 71 F.3d 413, 416 (D.C. Cir.

- 65 1995) ("[I]t is standard contract law that a Whereas clause, while sometimes useful
as an aid to interpretation, 'cannot create any right beyond those arising from the .
operative terms of the document.'")); see also Succession of Ramp, 212 So. 2d 419,
423 (La. 1968). We shall, therefore, first set aside the portion of the preamble that
petitioner relies on and consider the operative terms of the conveyance.
The conveyance (set out in the appendix) establishes in PRC a real right (i.e.,
the servitude) "in and to certain exterior surfaces of the Improvement [i.e., the

improvement being the Maison Blanche Building and referenced exterior surfaces
constituting the building's facade]". In furtherance of the servitude, the partnership
agrees "to do (and refrain from doing)" each of certain listed things. The first

paragraph following that prefatory language describes the facade and, as
highlighted, is the object of petitioner's claimed servitude of view:
1. The exterior surfaces of the Improvement subject to this
Servitude are the exterior walls of the Lower Stories which are visible
from Canal and Dauphine Streets, the exterior portion of the
Improvement above the Lower Stories which is not covered by the
.Upper Stories, the exterior walls of the Upper Stories which are visible
from Canal, Burgundy, Iberville, and Dauphine Streets, and the roof of
the Upper Stories * * * (the "Facade"). In the event of uncertainty, the
exterior surfaces of the Improvement visible in the photographs in

Exhibit C shall control.

- 66 Other operative provisions of the conveyance referenced by petitioner in passing
that may be relevant to establishing the partnership's claimed duty not to build atop
the Kress Building are as follows:
2. Donee acknowledges that Owner has provided to Donee
Plans dated August 7, 1997, (the "Plans") pursuant to which Owner
intends to renovate the Improvement, including the Facade, and that
such renovation and rehabilitation have been approved by Donee,
provided such work is in compliance with the Plans. * * * Owner
further acknowledges and agrees that in the event any changes or
modifications are made to the Plans which affect the Facade, Owner
shall first obtain the prior written approval of Donee before any such
changes or modifications are made.
3. Owner agrees at all times to preserve and maintain the
Facade in a good and sound state of repair.

4. Without the express written permission of the Donee, its
successors or assigns, signed by a duly authorized representative
thereof, based upon written plans submitted by Owner to Donee, no
construction, change, alteration, remodeling, renovation, or any other
thing shall be undertaken by Owner or permitted to be undertaken in or
to the Facade, which would affect either the height, or alter the exterior
of the Facade or the appearance of the Facade, other than as shown on

,

the Plans * * *
The three paragraphs address the partnership's then-existing plans to renovate
the Maison Blanche Building, its obligation to preserve and maintain the facade, and
its rights to alter the facade. Nowhere in these three paragraphs is there any specific
prohibition on building atop the Kress Building. The first of the three paragraphs
addresses the partnership's plans (plans) to renovate "the Improvement", which, it

- 67 must be remembered, is a defined term encompassing only the Maison Blanche
Building (and not the Kress Building). Indeed, the partnership had not as of the date

of the plans (August 7, 1997) acquired the Kress Building; and, while the Kress
Building is shown on some sheets of the plans, it is labeled "Future Donation" and
"To Be Acquired at a Later Date". The paragraph requires the partnership to secure

PRC's approval if the partnership wished to change or modify the plans; but, since
the plans involved only renovation of the Maison Blanche Building, the requirement
in the paragraph to obtain approval for a change in plans would have no
consequence for any plan by the partnership with respect to the Kress Building.
The second of the three paragraphs, whereby the partnership agrees to

preserve and maintain the facade, does not bar the partnership from building atop
the Kress building.
The third of the three paragraphs, establishing generally PRC's right to
approve changes to the facade, is the most likely paragraph in which to look for
such restrictions. The paragraph does condition a broad range of activities on
obtaining PRC's written permission; viz, "construction, change, alteration,
remodeling, renovation, or any other thing". But PRC's written permission must be
obtained for any such activity only if (1) the activity is undertaken "in or to" the

- 68 facade and (2) as pertinent, the activity would affect the height of the facade or alter
either its exterior or appearance. . And while it might be argued that constructing
additional stories atop the Kress Building could change (block) the appearance of
the facade to a person looking up at the facade from the street in front of, or on the
side of, the heightened Kress Building, such construction would not in normal

speech be "in or to" the facade and, thus, would not require permission from PRC.
We do not find in the operative terms of the conveyance any prohibition
restricting the partnership from building atop the Kress Building. Put another way,

the operative terms of the conveyance do not convey to PRC a real right enforceable
through a judicial proceeding by an action for injunction or damages if the
partnership or any successor in interest were to build atop the Kress Building. See
La. Rev. Stat. Ann. sec. 9:1252, C.
While we do not believe that the operative terms of the conveyance are in

need of interpretation, we shall for the sake of argument assume that they are in
such need and consider them in the light of the portion of the preamble to the
conveyance identified by petitioner, which states the partnership's desire to grant to
PRC "a scenic, open space" servitude as a perpetual real right. On the basis of that
language, petitioner would have us find a servitude of view, which the

- 69 Louisiana Civil Code describes as "the right by which the owner of the dominant
estate enjoys a view; this includes the right to prevent the raising of constructions on
the servient estate that would obstruct the view." La. Civ. Code Ann. art. 701

(2008).
A servitude of view, thus defined, is a rough fit, since, while the Maison
Blanche Building and the land thereunder may conveniently be considered a servient
estate, there is no dominant estate. A real right created pursuant to La. Rev. Stat.
Ann. sec. 9:1252 does not run in favor of another estate but, rather, it runs in favor

of an organization (here PRC). .Nevertheless, since the Louisiana legislature
classified the real right as a special type of predial servitude, we assume that, to the
extent compatible, rules relating to servitudes of view, a type of predial servitude,

would apply to any similar real right created pursuant to La. Rev. Stat. Ann. sec.

9:1252. See La. Civ. Code Ann. art. 645 (2010); Whitehouse I, 131 T.C. at 133.
A predial servitude is established by title; i.e., by juridical act. See La. Civ.
Code Ann. art. 708 (2008). The Supreme Court of Louisiana has stated: "For a
servitude to be created by title, the instrument must be,express as to the nature and
extent of the servitude." Palomeque v. Prudhomme, 664 So. 2d 88, 93 (1995). The
court cautioned: "Because servitudes are so disfavored, an ambiguous agreement to

- 70 establish a servitude is unenforceable." Id. at 93-94. The court explained the
reason for disfavoring predial servitudes: "Predial servitudes are in derogation of
public policy because they form restraints on the free disposal and use of property."
Id. at 93. It added: "Therefore, servitudes are not entitled to be viewed with

favor by the law and can never be sustained by implication." Id. (emphasis

added).
The operative terms of the conveyance do not establish a servitude of view.
If the preamble of the conveyance is to be considered an interpretive aid in
understanding that the operative.terms of the conveyance do indeed establish a
servitude of view, it must be that the preamble does so by implication, since neither
the term "servitude of view" nor any description of a servitude of view appears in
the preamble. To accept that a servitude of view (a predial servitude) is established
by implication, however, is prohibited. See Palomeque, 664 So. 2d at 93-94. The
Louisiana Civil Code provides to similar effect: "Doubt as to the existence, extent,
or manner of exercise of a predial servitude shall be resolved in favor of the servient
estate." La. Civ. Code Ann. art. 730.20 And while because of expected income tax

20In Whitehouse I, 131 T.C. at 133-134, we set forth emt. (b) accompanying
La. Civ. Code Ann. art. 730 (2008) (Revision Comments--1977). For convenience,
we reproduce it here:
(continued...)

- 71 advantage the partnership might not complain about an implied servitude of view
prohibiting it from building on neighboring property, we have no assurance that a
successor owner of the.Maison Blanche Building (whether united with the Kress
Building or not) would be as agreeable.

The Louisiana Civil Code has provided specifically for a servitude of view for
many years. See La. CivnCode Ann. art. 701 (source: 1977 La. Acts, No. 514, sec.

1, eff. Jan. 1, 1978 (reproducing Art. 716 of the La. Civ. Code of 1870)). If the

20(...continued)
(b) It is a cardinal rule of interpretation that, in case of doubt,
instruments purporting to establish predial servitudes are always
interpreted in favor of the owner of the property to be affected. The
rule incorporates intó Louisiana law the civilian principle that any
doubt as to the free use of immovable property must be resolved _in
favorem libertatis. * * * The Louisiana Supreme Court has repeatedly
declared that "servitudes are restraints on the free disposal and use of
property, and are not, on that account, entitled to be viewed with favor

by the law." Parish v. Municipality No. 2, 8 La. Ann. 145, 147 (1853),
cited with approval in Buras Ice Factory, Inc. v. Department of
Highways, 235 La. 158, 103 So. 2d 74 (1958). See also McGuffy v.
Weil, 240 La. 758, 767, 125 So. 2d 154, 158 (1960): "any doubt as to
the interpretation of a servitude encumbering property must be resolved
in favor of the property owner". The rule that the proper interpretation
of an ambiguous instrument is that which least restricts the ownership
of the land has been applied by Louisiana courts in a variety of
contexts. See, e.g., Whitehall Oil Co. v. Heard, 197 So. 2d 672 (La.

App. 3rd Cir.), writ refused 250 La. 924, 199 So. 2d 923 (1967)
(determination of the question whether a landowner created a single
servitude over contiguous tracts or a series of multiple interests). * * *

- 72 drafters of the conveyance had by its terms intended it to restrict the partnership and
any successor-owner of the Maison Blanche Building from building stories above
the Kress Building or from otherwise blocking views of it, no doubt they would, in
clear terms, have done so. They did not. No one coming across the conveyance in
the conveyance records of the parish of Orleans could determine from its terms that
they were prohibited (if they owned the Maison Blanche Building) from building
atop the Kress Building or, say, from putting up a billboard across the street from
the Maison Blanche Building but in direct line of site of its facade from some
location further away.
C.

Conclusion

The conveyance does not create in PRC a real right enforceable against the
partnership or any successor owner of the Maison Blanche Building to enjoin (or

seek damages from) any such owner building atop the Kress Building or otherwise

blocking views of the facade.
IV.

Valuation of the Servitude

Notwithstanding our conclusion about the terms of the conveyance, we shall,
consistent with the instruction of the Court of Appeals, reconsider the value of the
servitude on the assumptions that, while it does not burden the Kress Building, it
restricts the partnership from building atop it and that separate ownership of the

- 73 Maison Blanche and Kress Buildings is unlikely (thus, in effect, making that
restriction perpetual).

.

We have reconsidered the applicability of the reproduction cost and income
approaches for valuing this servitude and, again, finding them unreliable, have

rejected both methods. We have found the comparable-sales approach to be a
reliable method of valuation, and we shall again apply it. ·
Mr. Roddewig testified that the area of the Kress Building is 16,210 square
feet. We accept that measurement. When that area is added to the 514,566 square
feet of area of the Maison Blanche Building, the area of the Maison Blanche-Kress
parcel is 530,776 square feet. We acknowledged in Whitehouse I that both experts
agreed that larger properties tend to sell for less per square foot. We accordingly
adjusted the comparable sale prices for size in Whitehouse I. The addition of the
Kress Building does not warrant any further adjustment for size.
Neither party asserts that in Whitehouse I we made erroneous adjustments to
the four comparable-sale prices we relied on to reach a price per square foot of
$23.50 before imposition of the servitude. We apply that value to the 530,776square-foot area of the combined buildings. Applying the price per square foot of
$23.50 to the area results in a total before-restriction value of $12,473,236, which
we find is the before-restriction value of the Maison Blanche-Kress parcel.

- 74 In Whitehouse I, we accepted Mr. Argote's valuation of the after-restriction
value of the Maison Blanche Building of $10.3 million. His valuation was based on
comparable sales with an,average price per square foot of $20. Applying the $20per-square-foot price to the 530,776-square-foot area of the combined property
results in a total after-restriction value of $10,615,520, which we find is the afterrestriction value of the Maison Blanche-Kress parcel.
On the basis of our findings as to the before- and after-restriction values of
the combined Maison Blanche and Kress Building property, we find that the value

of the servitude on the valuation date was $1,857,716, calculated as follows:
Value of the servitude under comparable-sales approach

Before-restriction.value
Less: after-restriction value
Value of the servitude
V.

$12,473,236
10,615,520
1,857,716

Valuation Misstatement Penalty
A.

Introduction

In Whitehouse I, we explained that section 6662(a) imposes an accuracyrelated penalty in the amount of 20% of the portion of any underpayment of tax
required to be shown on a return in the case of, among other things, any substantial valuation misstatement. See sec. 6662(b)(3). Section 6662(h) increases the penalty
to 40% in the case of a gross.valuation misstatement. There is a substantial

- 75 valuation misstatement if the value of any property claimed on the return is 200% or
more of the amount determined to be the correct amount. Sec. 6662(e)(1)(A).
There is a gross valuation misstatement if the value is 400% or more of the value
determined to be the correct amount. Sec. 6662(h)(2)(A)(i). On the 1997 Form
1065, the partnership claimed a $7.445 million charitable contribution deduction for
the fair market value of the servitude conveyed to PRC. The actual fair market
value of the servitude, as we determine supra, was $1,857,716. Therefore, the
partnership claimed a value that exceeded the actual value by approximately 401%.
Nevertheless, petitioner argues that the penalty should not be imposed, under the

reasonable cause exception found in section 6664(c).
Generally, the section 6662 accuracy-related penalty will not be imposed with
respect to any portion of an underpayment if the taxpayer can show that there was
reasonable cause for that portion and that he acted with good faith with respect to

that portion. Sec. 6664(c)(1); see Stanford v. Commissioner, 152 F.3d 450 (5th Cir.

1998), affg in part and vacating in part 108 T.C. 344 (1997). Under the regulations,
"the most important factor" in determining whether the taxpayer had reasonable
cause for his tax treatment and whether he acted in good faith "is the extent of the
taxpayer's effort to assess the taxpayer's proper tax liability." Sec. 1.6664-4(b)(1),

- 76 Income Tax Regs.; see also Stanford v. Commissioner, 152 F.3d at 460;-sec.

1.6662-4(g)(4)(i), Income Tax Regs.
In the case of a substantial or gross valuation misstatement with respect to
charitable deduction property, however, the reasonable-cause-and-good-faith
exception does not apply unless the taxpayer can show that (1) "the claimed value of
the property was based on a qualified appraisal made by a qualified appraiser", sec.
6664(c)(2)(A); and (2) "in addition to obtaining such appraisal, the taxpayer made a
good-faith investigation of the value of the contributed property", sec. 6664(c)(2)
(B). The pertinent regulations, section 1.6664-4(g)(1), Income Tax Regs. (1977),2i
make clear that the qualified-appraisal and good-faith-investigation requirements

imposed by section 6664(c)(2) "apply*in addition to the generally applicable rules
concerning reasonable cause and good faith".22 Although neither the statute nor the
2iToday in sec. 1.6664-4(h)(3), Income Tax Regs.
22This point was made, before promulgation of sec. 1.6664-4(g)(1), Income
Tax Regs. (1997), by the Court of Appeals for the First Circuit in McMurray v.

Commissioner, 985 F.2d 36, 43-44 (1st Cir. 1993), affa in part, rev'a in part T.C.
Memo. 1992-27. In McMurray, the court addressed a precursor of sec. 6664(c)(2);
viz, sec. 6659(f)(2), as added by the Deficit Reduction Act of 1984 (DEFRA), Pub.
L. No. 98-369, sec. 155(c)(1), 98 Stat. at 693. The court held that the qualifiedappraisal and good-faith-investigation requirements in sec. 6659(f)(2) (as added by
DEFRA) were in addition to the reasonable basis and good faith requirements found
in then sec. 6659(e):
(continued...)

- 77 regulations clarify the relationship between the section 6664(c)(1) good faith
requirement and the section 6664(c)(2)(B) good- faith-investigation requirement, it
is clear that, with respect to any valuation misstatement of charitable deduction
property, a taxpayer must act in good faith generally. While respondent concedes

that the partnership satisfied the qualified-appraisal requirement, he argues that
petitioner failed to show that, in addition, the partnership made a good-faith
investigation of the value of the servitude.

22(...continued)
The McMurrays seek relief under section 6659(e), which allows
for a waiver of "all or any part of the addition to tax provided by this
section on a showing by the taxpayer that there was a reasonable basis
for the valuation or adjusted basis claimed on the return and that such
claim was made in good faith." While we have already concluded that
the McMurrays acted in reasonable reliance on the Donovan appraisal,
the inquiry does not end there, because section 6659(f)(2) prohibits a
penalty waiver unless "the claimed value of the property was based on

a qualified appraisal made by a qualified appraiser," and, "in addition
to obtaining such an appraisal, the taxpayer made a good faith
investigation of the value of the contributed property." On appeal, the
McMurrays do not address section 6659(f)(2), nor does our review of
the record indicate any additional investigation by the McMurrays into
the value of the property. Thus, we affirm the imposition of penalties
under section 6659.

-78B.

Discussion
1.

. Testimony of Mr. Drawbridae

Petitioner relies principally on the testimony of Robert Drawbridge, the asset

manager for the partnership, to show that the section 6662 accuracy-related penalty
does not apply because the partnership qualifies for the section 6664(c) reasonable
cause exception.
Mr. Drawbridge became asset manager for the partnership sometime in

2000, well after the 1997 Form 1065 was filed. He did not testify as to any personal
knowledge of the operations of the partnership before his arrival, nor did he identify
anyone who informed him about partnership operations before that time. He

testified that, in preparation for his testimony, he did review the books and records
the partnership maintained in the ordinary course of its business. He testified that,

in filing the 1997 Form 1065, the partnership relied on an appraisal made by M.
Richard Cohen (Cohen appraisal) for the value of the donation. Hé testified that, to

the best of his knowledge, the partnership reviewed and relied on a second
appraisal, dated January 1, 1998, obtained by the then limited partner of the
partnership from Revac, Inc., of Houston, Texas (Revac appraisal). (The Revac
appraisal, among other things, estimates the market value of the Maison Blanche
Building (1) before rehabilitation, (2) just after rehabilitation, and (3) upon achieving

- 79 stabilized occupanöy.) He testified that Reznick, Fedder & Silverman (Reznick
firm) prepared the 1997 Form 1065 and provided tax advice to the partnership with
respect to its tax-reporting positions... He testified that, in filing the 1997 Form 1065,
the partnership relied on the professional tax advice it received from the Reznick
firm and from the Elkins law. firm (Elkins firm). He testified that a PRC

representative signed the Form 8283, Noncash Chafitable Contributions, attached to
the 1997 Form 1065, acknowledging receipt of the servitude.
In Whitehouse I, 131 T.C. at 174, we stated: "The 1997 Form 1065 was
signed on October 14, 1998, and the question before us is whether, before it was
signed, disregarding the Cohen.appraisal, someone acting on behalf of the

partnership made a good faith investigation of the value of the servitude. Mr.
Drawbridge gave no convincing testimony on that score." We adhere to that
conclusion.
2.

Court of Appeals' Counsel

. .

-

.

In reaching that conclusion, we are mindful of the Court of Appeals' counsel
that, where a witness acts as the agent of an entity, he should be able to present the
entity's subjective beliefs so long as those beliefs are based on the collective
knowledge of the entity's personnel. See Whitehouse II, 615 F.3d at 342 (citing

- 80 Brazos River Authority v. GE Ionics, Inc., 469 F.3d 416, 434 (5th Cir. 2006)). We
are also mindful of the Court of Appeals' observation that, in establishing that it has
met its burden of proof for reasonable cause, the taxpayer must show that it

exercised ordinary business care and prudence; also, it is reasonable for a taxpayer
to rely on an accountant or attorney for advice as to a matter of tax law, such as
whether a liability exists. Id. at 342-343. In particular, the Court of Appeals said:
"Given that Whitehouse offered proof that it relied on its accountants' and attorneys'
opinions of Cohen's appraisal, a possible issue on remand is whether Whitehouse
needed to prove more to show reasonable cause." Id. at 343. Finally, we are also
mindful of the Court of Appeals' observation that, when Mr. Drawbridge testified,

he had in front of him the 1997 Form 1065, which had been prepared by the
Reznick firm: "It may be that thi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A042e8278c4c51cf7. Public record. Not legal advice.