UNITED STATES TAX COURT

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131 T.C. No.

UNITED STATES TAX COURT

WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR HOLDINGS-NEW ORLEANS,

LTD., TAX MATTERS PARTNER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE,

Docket No. 12104-03.

Respondent

Filed October 30, 2008.

The parties agree that W, a partnership, is

entitled to a charitable contribution deduction on

account of its having made a qualified conservation

contribution to a qualified organization.

They

disagree as to the amount of the contribution.

They

further disagree as to whether, if W overstated the

amount of the deduction, the overstatement amounted to

a substantial valuation misstatement or a gross

valuation misstatement and, if either, whether any

resulting accuracy-related penalty is excused on

account of reasonable cause.

P also objects to the

appraisal testimony of R's expert witness, A, on the

grounds that (1) he is not qualified to testify as an

expert as to "facade donations" and (2) even if he is

so qualified, his written report is per se unreliable

since it is not in conformance with the Uniform

Standards of Professional Appraisal Practice (USPAP),

and it cannot, for that reason, be received into

evidence by the Court pursuant to our duty imposed by

Daubert v. Merrell Dow Pharmas., Inc., 509 U.S. 579

(1993), Kumho Tire Co. v. Carmichael, 526 U.S. 137

(1999), and Fed. R. Evid. 702 to exclude unreliable

testimony.

SERVED OCT 30 2008

- 2 1.

Held:

A is qualified to testify as an expert.

2. Held, further, Fed. R. Evid. 702 requires that

expert testimony be based on "reliable principles and

methods", and we will not supplant our responsibility

to assess an expert appraiser's reliability by

accepting USPAP as the defining standard of

reliability; failure to adhere to USPAP may affect the

weight we accord to an expert appraiser's testimony;

that failure does not, however, necessarily preclude

our receiving the expert's testimony into evidence; A's

testimony is the product of the application of reliable

principles and methods of valuation to sufficient facts

and data; it is admissible as expert testimony pursuant

to Fed. R. Evid. 702.

3. Held, further, value of qualified contribution

determined: deduction overstated.

Held, further, overstatement 1s a gross

valuation misstatement.

5. Held, further, accuracy-related penalty

applicable because failure to make good faith

investigation of value of contribution precluded

reasonable cause exception.

Gary J. Elkins and Andrew L. Kramer, for petitioner.

Linda J. Wise, Robert W. West, III, and Susan S. Canavello,

for respondent.

- 3 Contents

FINDINGS OF FACT ..........................................

OPINION ...................................................

Introduction .........................................

II.

Objection to Mr. Argote's Testimony ..................

Introduction .....................................

Reliability ......................................

1. Introduction .................................

2. Qualified Appraisal ..........................

Qualification as an Expert Witness ...............

Exclusion of the Kress Building ..............

Uniform Standards of Professional

Appraisal Practice ...........................

5. Conclusion ...................................

Conclusion .......................................

III. Expert Testimony as to the Value of the Servitude ....

Introduction .....................................

Highest and Best Use Considerations ..............

2. Discussion ...................................

3. Conclusion ...................................

Cost Approach ....................................

Introduction .................................

Before Restriction Reproduction Cost .........

After Restriction Reproduction Cost ..........

4. Cost Approach Value ..........................

Income Approach ..................................

1. Introduction .................................

Before Restriction Income Approach ...........

After Restriction Income Approach ............

Comparable Sales Approach ........................

Introduction .................................

Income Approach Value ........................

Introduction .................................

Before Restriction Comparable

Sales Approach ...............................

Mr. Roddewig's Approach ..................

Mr. Argote's Approach ....................

After Restriction Comparable

Sales Approach ...............................

Comparable Sales Approach Value ..............

- 4 -

IV.

Value of the Servitude ...............................

Introduction .....................................

Cost Approach ....................................

1. Introduction .................................

First Impression .............................

Terra Cotta Cost .............................

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

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

6. Conclusion ...................................

Income Approach ..................................

1. Introduction .................................

2. Mr. Argote's Opinion .........................

3. Discussion and Conclusion ....................

Comparable Sales Approach ........................

1. Introduction .................................

2. Discussion ...................................

a. Introduction .............................

Mr. Roddewig's Use of Nonlocal

His Use of Price Per Room ................

The Expert's Adjustments .................

Comparables ..............................

Before Restriction Value .................

(i)

Introduction .......................

(ii)

The Pere Marquette Building ........

(iii) Bell South Building ................

(iv) Magazine Street and Board of

(v)

Conclusion .........................

f. After Restriction Value ..................

3. Conclusion ...................................

E. Conclusion .......................................

Valuation Misstatement Penalty .......................

Introduction .....................................

Gross Valuation Misstatement .....................

Reasonable Cause Exception .......................

3. Conclusion ...................................

Conclusion .......................................

Conclusion ...........................................

APPENDIX ..................................................

Trade Place ........................

VI.

Introduction .................................

Discussion ...................................

HALPERN, Judge:

By notice of final partnership

administrative adjustment (the notice), respondent proposed a

reduction of $6,295,000 in the amount of the charitable

contribution deduction claimed by Whitehouse Hotel Limited

Partnership (the partnership) on its 1997 Form 1065, U.S.

Partnership Return of Income (1997 Form 1065).

Respondent also

determined that an accuracy-related penalty is applicable.

Unless otherwise noted, 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.

The parties agree that the partnership is entitled to a

charitable contribution deduction for 1997 on account of its

having made a qualified conservation contribution to a qualified

organization.

They disagree as to the amount of that

contribution.

If we find that the partnership overstated the

value of the property constituting the qualified conservation

contribution, we must then determine whether that overstatement

amounted to a substantial valuation misstatement or a gross

valuation misstatement and, if either, whether any resulting

penalty is excused on account of reasonable cause.

FINDINGS OF FACT

Introduction

Some facts have been stipulated and are so found.

The

stipulation of facts, supplemental stipulation of facts, and

second supplemental stipulation of facts, with accompanying

exhibits, are incorporated herein by this reference.

At the time the petition was filed, the partnership's

principal place of business was in New Orleans, Loulslana.

Background

The partnership is a Louisiana limited partnership formed on

December 15, 1995.

Its taxable year is a calendar year.

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.

The Maison Blanche Building is on the

corner of Canal and Dauphine Streets, while the 1920s annex faces

Dauphine Street, and the 1950s annex is on the corner of Dauphine

and Iberville Streets.

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.

vacant.

The upper floors of the building were

The partnership agreed to pay $6 million for the parcel

plus additional amounts based on the partnership's "Net Cash

Flow" and "Net Capital Proceeds".

In September 1996, the

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

obligation to pay those additional amounts and for other things.

- 7 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.

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 on Canal Street, and the Kress parking

garage, on the corner of Burgundy and Iberville Streets.

Kress Building was built in 1910.

The

The partnership paid $3.4

million for the additional property.

The Maison Blanche Building consists of a base level and a

U-shaped tower.

The base level includes a basement and five

floors, with a mezzanine level between the first and second

floors.

The tower portion of the building has eight floors.

The

1920s annex has five floors, and the 1950s annex has six floors.

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 Kress Building has six floors.

The Maison Blanche Building is located adjacent to the Vieux

Carre (French Quarter) neighborhood of New Orleans.

It is in the

Vieux Carre National Historic District but not in the locally

designated Vieux Carre Historic. District.

It is also located

within the Canal Street Historic District, which is part of the

Central Business District.

The Central Business District

Historic District Landmark Commission (the commission) is the

municipal body with oversight authority over the Canal Street

Historic District.

The commission is charged with preserving,

protecting, and regulating historic districts in the Central

Business District.

The New Orleans City Council may review,

approve, reject, or modify the commission's actions, and the

Council's decisions are subject to review by the State's courts.

The commission assigns ratings to buildings according to their

architectural and historic significance.

It designated the

Maison Blanche Building as a "Category B" building.

That rating

means the commission determined that the Maison Blanche Building

is a building of major architectural importance.

The commission

does not permit alterations to the exterior of buildings located

in the Central Business District until the work is approved by

the commission.

On June 24, 1996, the U.S. National Park Service

determined that the Maison Blanche Building is a certified

historical structure.

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

Hotel Company, L.L.C.

(Ritz-Carlton), a Delaware limited

liability company, entered into agreements under which the

partnership agreed to renovate the Maison Blanche and Kress

Buildings, 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

serv1ces.

The Maison Blanche Building, its annexes, the Kress

Building, and the Kress parking garage were ultimately developed

into a 452-room Ritz-Carlton Hotel, a 230-room Iberville Suites

Hotel, a 75-room Maison Orleans Hotel, the Ritz-Carlton Spa,

approximately 20,000 square feet of retail space, and a parking

garage for approximately 290 cars.

The Ritz-Carlton Hotel, the

spa, and the garage commenced operations on October 6, 2000.

The

remaining facilities commenced operations thereafter.

Creation of the Servitude

On December 29, 1997

(the valuation date), the partnership

conveyed certain of its rights in the Maison Blanche Building to

a Louisiana nonprofit corporation, Preservation Alliance of New

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

(PRC).

The conveyance was by "Act of Donation of Perpetual Real

Rights"

(the conveyance).

A copy of the conveyance, excluding

exhibits, is appended hereto.

provides that:

In summary, the conveyance

(1) The owner intends to convert the Maison

Blanche Building (described as the "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"

(the 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

- 10 would alter its appearance; and (7) PRC has the right to require

the owner to maintain the facade.

The 1997 Form 1065

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

partnership claimed a charitable contribution deduction of $7.445

million on the 1997 Form 1065.

In making that claim, the

partnership relied on an appraisal made as of September 1, 1998,

by M. Richard Cohen (Mr. Cohen), an appraiser, who was of the

opinion that, taking into account the value of the Maison Blanche

Building both before and after conveyance of the servitude, the

diminution of the value of the Maison Blanche Building on account

of the conveyance was $7.445 million.

The partnership showed

that amount as the value of the servitude on a Form 8283, Noncash

Charitable Contributions, attached to the 1997 Form 1065.

Mr.

Cohen signed the "Declaration of Appraiser", constituting part of

the Form 8283.

The 1997 Form 1065 is dated October 14,

1998.

Examination of the 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.

The notice, described previously, followed.

- 11 -

Petitioner's Expert Witness

Petitioner offered, and the Court accepted, Richard J.

Roddewig (Mr. Roddewig) as an expert witness with respect to (1)

the valuation of conservation easements and (2) the site

selection, feasibility, and valuation of hotels.

The Court

received Mr. Roddewig's written report as his direct testimony.1

Mr. Roddewig is of the opinion that the conveyance of the

servitude to PRC by the partnership reduced the value of the

Maison Blanche Building and associated properties by $10 million.

Mr. Roddewig is a real estate appraiser and attorney.

He is

a member of the Appraisal Institute and he holds its MAI

designation.2

He is also a member of the Counselors of Real

Estate, a professional organization for real estate appraisers

and development feasibility analysts.

business from Chicago.

He conducts his appraisal

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

(hereafter, sometimes, the value of the servitude) he spent 4 to

6 days in New Orleans.

His staff made additional visits.

Mr.

1 Generally, we receive an expert's written report into

evidence as his direct testimony. Rule 143(f) (1).

2 Recently, in Schwartz v. Commissioner, T.C. Memo. 2008117 n.8, we said:

"MAI is a designation awarded to qualifying

members of the Appraisal Institute * * * . Within the real

estate appraisal community MAI is viewed as the highest regarded

appraisal designation."

- 12 -

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 Lafayette, Louisiana.

Mr.

Roddewig determined the value of the servitude by estimating the

value of the Maison Blanche Building and associated properties

both before and after the conveyance of the servitude.

He used

three approaches: a cost approach, a comparable sales approach,

and a modified income approach.

Respondent's Expert Witness

Respondent offered Richard Dunbar Argote (Mr. Argote) as an

expert witness with respect to commercial real estate appraisal.

Petitioner objected to Mr. Argote's qualification to appraise the

value of the servitude.

Petitioner also objected to the

admission of Mr. Argote'·s report as his direct testimony on the

value of the servitude on the ground that the testimony was

unreliable.

We reserved ruling on both objections, conditionally

accepting Mr. Argote as an expert and conditionally receiving his

written report as his direct testimony.

We instructed the

parties to address petitioner's objections on brief.

Mr. Argote

is of the opinion that the conveyance of the servitude to PRC by

the partnership did not reduce the value of the Maison Blanche

Building by any amount.

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

- 13 Institute and holds its MAI designation.

He has completed

several appraisal courses offered by the American Institute of

Real Estate Appraisers.

He has attended many other seminars and

symposia on a variety of appraisal topics, including hotel and

motel feasibility and valuation, partial interest valuation, and

determining the highest and best use of commercial properties.

From 1986 to 1989, he was a member of the Board of Examiners of

the American Institute of Real Estate Appraisers.

He has

presented several seminars on various appraisal topics relating

primarily to commercial real estate.

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

to be converted into, hotels.

About 85 percent of those

appraisals were of buildings located within the Central Business

District or the Vieux Carre.

Over the years, Mr. Argote has

appraised the value of every building within the same square as

the Maison Blanche Building.

He has appraised the value of the

Maison Blanche Building on three prior occasions.

He has valued

easements of various types, including one facade easement and one

conservation easement.

On July 27, 2006, Mr. Argote inspected the Maison Blanche

Building for purposes of determining the value of the servitude.

He produced a report (his direct testimony) valuing the servitude

as of the valuation date.

To prepare his report, he used legal

descriptions and city maps to identify the Maison Blanche

- 14 -

Building.

He relied on an engineer's report to confirm the size

of improvements made to the building.

He searched the multiple

listing service and courthouse records to locate property sales

and leases comparable to the building.

He identified comparable

property sales based on date of sale, proximity to the Maison

Blanche Building, physical characteristics, and any special

conditions of the sale.

To determine the value of the servitude

he determined the difference between the value of the Maison

Blanche Building both before and after the conveyance of the

servitude, employing a comparable sales approach.

His report

states that it was produced in conformity with the Uniform

Standards of Professional Appraisal Practice.

OPINION

Introduction

The principal questions before us are whether the

partnership overstated the charitable contribution deduction to

which it was entitled for 1997 on account of its making a

qualified conservation contribution of the servitude to PRC, a

qualified organization, and, if so, the amount, if any, of any

resulting accuracy-related penalty.

Before we address those

questions, however, we must dispose of petitioner's objections to

respondent's expert witness

testimony.

(Mr. Argote) and his direct

- 15 -

II.

Obiection to Mr. Argote's Testimony

Introduction

Petitioner objects to Mr. Argote's direct testimony on the

grounds that (1) he is not qualified to testify as an expert

witness with respect to "facade donations", and (2) even if he is

so qualified, his direct testimony is inadmissible because it is

not reliable.

Qualification as an Expert Witness

Proceedings in this Court are conducted in accordance with

the Federal Rules of Evidence.

See sec. 7453; Rule 143(a).

Fed.

R. Evid. 702 states that one is qualified as an expert witness

"by knowledge, skill, experience, training, or education".

Respondent offered Mr. Argote as an expert with respect to

commercial real estate appraisal, qualified on that basis to

testify as to the value of the servitude.

whether he is so qualified.

We must determine

"[T]he essential elements of the

real estate expert's competency include his knowledge of the

property and of the real estate market in which it is situated,

as well as his evaluating skill and experience as an appraiser."

Hidden Oaks, Ltd. v. City of Austin,

Cir. 1998)

(emphasis omitted)

Acres of Land,

362 F.2d 660,

138 F.3d 1036,

1050

(5th

(quoting United States v. 60.14

668

(3d Cir. 1966)).

Mr. Argote is a licensed real estate appraiser in Louisiana

with over 25 years of experience appraising real estate in the

New Orleans area.

He is a member of the Appraisal Institute and

possesses its MAI designation.

He has taken many appraisal

- 16 courses, and he has presented seminars on commercial real estate

appraising.

He has extensive experience appraising buildings

used as or to be used as hotels in the New Orleans area.

Specifically, he appraised 50 to 70 of those buildings between

1990 and 2000, about 85 percent of which were located in the

Vieux Carre or the Central Business District of New Orleans, the

neighborhood in which the Maison Blanche Building is located.

has appraised commercial properties neighboring the Maison

Blanche Building.

Moreover, he has appraised the Maison Blanche

Building on three prior occasions.

In carrying out his appraisal

assignment for respondent, he used information gathered from

public records.

Mr. Argote inspected the property and studied

the zoning restrictions, plat maps, and an engineer's report to

determine a value for the servitude.

He estimated the value of

the servitude by employing a comparable sales approach, an

approach that Mr. Roddewig also employed and that generally is

accepted by courts as the best evidence of value (if

comparability can be shown).

Commissioner,

267 F.3d 366,

E.g., Estate of Jameson v.

373

(5th Cir. 2001), vacating T.C.

Memo. 1993-43; Terrene Inys., Ltd. v. Commissioner, T.C. Memo.

2007-218.

Mr. Argote's experience, skills, approach, and the effort he

took to value the Maison Blanche Building place him squarely

within the definition of an individual qualified to provide

expert appraisal testimony on the value of commercial real

estate.

Petitioner argues, however, that Mr. Argote has

- 17 -

insufficient experience with conservation restrictions to be

accepted as an expert qualified to testify with respect to the

value of the servitude.

We do not agree.

A taxpayer may be entitled to a charitable contribution

deduction on account of its contribution of a qualified

conservation contribution to a qualified organization.

170(f) (3) (B) (iii).

See sec.

"A qualified conservation contribution is the

contribution of a qualified real property interest to a qualified

organization exclusively for conservation purposes."

1.170A-14 (a), Income Tax Regs.

"A perpetual conservation

restriction is a qualified real property interest."

14 (b) (2), Income Tax Regs.

Sec.

Sec. 1.170A-

"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.3

3 The regulations continue:

"For purposes of this section,

the terms 'easement', 'conservation restriction', and 'perpetual

conservation restriction' have the same meaning." Sec. 1.170A14 (b) (2), Income Tax Regs.

We shall use the term "conservation

restriction" to describe that common meaning. The servitude is a

(continued...)

- 18 -

A qualified conservation contribution resulting from the

creation of a conservation restriction in favor of a qualified

organization may give rise to a charitable contribution deduction

if the value of the property burdened by the restriction is

diminished on account of the creation of the restriction.

The

fair market value of a conservation restriction generally cannot

be determined by looking to sales of comparable property since a

market for the purchase and sale of conservation restrictions

rarely exists.

(1986).

Symington v. Commissioner, 87 T.C. 892, 895

Therefore, a conservation restriction's value is

determined by measuring the impact of the restriction on the

value of the property affected by the restriction; i.e., the

diminution (or enhancement)

in value of that property resulting

from the creation of the restriction.

See sec. 1.170A-

14 (h) (3) (i) and (ii), Income Tax Regs.

The procedure involves

determining the difference between the fair market value of the

affected property before and after the restriction is imposed.

Sec.

1.170A-14 (h) (3) (i),

Income Tax Regs.; e.g., Thayer v.

Commissioner, T.C. Memo. 1977-370.

said:

Of that procedure, we have

"This valuation procedure involves traditional real estate

valuation principles, except it is necessary to derive two

valuations rather than one."

Thayer v. Commissioner, supra.

The

second valuation may be more difficult than the first because the

property is then encumbered by the conservation restriction,

3(...continued)

conservation restriction within that meaning of the term

"conservation restriction".

- 19 -

whose effect on the value of the property may be difficult to

judge.

Nevertheless, it is common that real estate appraisers

value encumbered property (e.g., improved or unimproved realty

subject to a easement).

By definition, a conservation

restriction is an encumbrance on real property.

Petitioner has

failed to show a categorical difference in the skills necessary

to value property encumbered by a conservation restriction as

opposed to the skills necessary to value property encumbered by

some other restriction or burden.

Indeed, petitioner admits on

brief that, within the field of real estate appraisal,

not be a formal subspeciality of facade donations".

"there may

Moreover, on

past occasions, in determining the value of a conservation

restriction, we have accepted the testimony of a real estate

appraiser with no prior experience in valuing that type of

restriction.

Johnston v. Commissioner, T.C. Memo. 1997-475;

Losch v. Commissioner, T.C. Memo. 1988-230.

Besides, Mr. Argote

has valued easements of various types, including one facade

easement and one conservation easement.

Neither this Court nor

the Court of Appeals for the Fifth Circuit, the court to which,

barring a stipulation to the contrary, an appeal would lie, see

sec. 7482(b) (1) (E), has ever denied expert testimony from an

appraiser based on his lack of specific experience with

conservation restrictions.

As stated, Mr. Argote is qualified to provide expert

appraisal testimony on the value of commercial real estate.

The

specific subject matter of his direct testimony in this case is

- 20 -

the before restriction and after restriction values of the Maison

Blanche Building.

It is within his qualifications to so testify.

Indeed, considering Mr. Argote's history of valuing hotels in the

Central Business District, and the fact that he has valued the

Maison Blanche Building on three prior occasions, he is perhaps

more familiar with that subject matter than petitioner's expert

witness.

We find respondent's witness, Mr. Argote, eminently well

qualified to give expert testimony as to the value of the

servitude.

Petitioner's objection to the contrary is overruled.

Reliability

Introduction

Petitioner argues that Mr. Argote's direct testimony (i.e.,

his written report)

* * *

"has numerous and significant deficiencies

[that] render it unreliable and appropriate for exclusion".

Specifically, petitioner criticizes Mr. Argote's direct testimony

for failing to (1) comply with certain provisions of the

Secretary's regulations governing charitable contribution

deductions and (2) conform to Uniform Standards of Professional

Appraisal Practice.

Reliability is made a prerequisite to expert

testimony by Rule 702 of the Federal Rules of Evidence, which, in

pertinent part, provides that a witness qualified as an expert

with respect to scientific, technical, or other specialized

knowledge may provide testimony thereto: "if (1) the testimony is

based upon sufficient facts or data,

(2) the testimony is the

product of reliable principles and methods, and (3) the witness

- 21 has applied the principles and methods reliably to the facts of

the case."

Mr. Argote arrived at his opinion as to the value of

the servitude by a three-step comparable sales approach:

first determined the value of the Maison Blanche Building

unencumbered by the servitude; he then determined its value

encumbered by the servitude; lastly, he determined the value of

the servitude by calculating the difference (which he found to be

zero).

Mr. Argote's direct testimony was of a technical nature.

See Gross v. Commissioner, T.C. Memo. 1999-254 (finding a

discounted cash flow analysis to be a reliable tool to determine

the value of a minority stock interest), affd. 272 F.3d 333

Cir. 2001).

We therefore must determine the reliability of Mr.

Argote's proffered direct testimony.

(6th

Fed. R. Evid. 104 (a).

Qualified Appraisal

Petitioner's first claim is that Mr. Argote's direct

testimony is unreliable because it is not a qualified appraisal

as defined by section 1.170A-13(c) (3), Income Tax Regs.

summarily dispose of that claim.

We can

Petitioner fails to understand

that the requirements of section 1.170A-13(c) (3), Income Tax

Regs., are applicable to taxpayers in connection with certain

charitable contributions of property.

The regulation has no

application to an appraisal obtained by respondent in support of

litigation.

- 22 -

Exclusion of the Kress Building

Petitioner argues that Mr. Argote's direct testimony is

unreliable because, in valuing the servitude, he failed to take

account of the detriment in value to the Kress Building on

account of the conveyance of the servitude to PRC, as required by

section 1.170A-14 (h) (3) (i), Income Tax Regs.

In pertinent part,

that regulation specifies that the amount of the deduction in the

case of a charitable contribution of a conservation restriction

covering a portion of contiguous property owned by the donor is

the difference between the before and after values of the entire

contiguous parcel.

The Maison Blanche and Kress Buildings are

contiguous, and petitioner believes that the conveyance of the

servitude reduced not only the value of the Maison Blanche

Building but also the value of the Kress Building.

It is

respondent's position that the servitude does not burden or

affect the Kress Building.

Moreover, as evidenced by his direct

testimony, the appraisal assignment given Mr. Argote was "[t]o

estimate the market value of the facade donation on the subject

improvements", which he identifies as "a 13-story retail/office

building known as the Maison Blanche Building".

Petitioner

criticizes Mr. Argote for, in effect, misidentifying the parcel

giving r1se to petitioner's charitable contribution deduction.

Petitioner does not, however, bring into question the reliability

of what Mr. Argote did, which was to estimate the change in value

of the Maison Blanche Building to the partnership on account of

its conveyance of the servitude to PRC.

Petitioner may argue

- 23 -

that Mr. Argote's direct testimony provides no basis to support

respondent's adjustment to the partnership's charitable

contribution deduction, but we shall not exclude that direct

testimony as unreliable for failing to take account of any value

reduction to the Kress Building.

Mr. Argote was not asked by

respondent to opine on that issue.

Uniform Standards of Professional Appraisal

Practice

Uniform Standards of Professional Appraisal Practice (USPAP)

are promulgated by the Appraisal Standards Board of The Appraisal

Foundation, a nonprofit organization comprised of other

non-profit organizations that represent appraisers and users of

appraisal services.4

Petitioner argues that Mr. Argote's direct

testimony is unreliable because in various respects it is not in

conformance with USPAP.

The premise underlying petitioner's

argument is that USPAP is the defining standard for an

appraiser's reliability.

Merrell Dow Pharmas.,

Petitioner claims:

Inc.,

509 U.S. 579

"Daubert [v.

(1993)]

and its progeny

mandate that the Argote Appraisal be tested for its compliance

with USPAP."'

4 The Appraisal Foundation, Frequently Asked Questions:

http://www.appraisalfoundation.org/s_appraisal/doc.asp?CID=9&DID=

172 (last visited Oct. 25, 2008).

5 In Daubert v. Merrell Dow Pharmas., Inc., 509 U.S. 579

(1993), the Supreme Court charged trial judges with the

responsibility of acting as gatekeepers to exclude unreliable

expert testimony, and the Court in Kumho Tire Co. v. Carmichael,

526 U.S. 137 (1999), clarified that that gatekeeper function

applies to all expert testimony, not just testimony based in

science.

Fed. R. Evid. 702 was amended in 2000 in response to

(continued...)

- 24 USPAP is widely-recognized and accepted as containing

standards applicable to the appraisal profession.6

Adherence to

those standards is evidence that the appraiser is applying

methods that are generally accepted within the appraisal

profession.

Therefore, at a minimum, compliance with USPAP is an

indication that the appraiser's valuation report is reliable.

However, a noncompliant valuation report is not per se

unreliable.

Full compliance with professional standards is not

the sole measure of an expert's reliability.7

Petitioner has not cited any authority, nor do we know of

any, for the proposition that an appraiser's compliance with

USPAP is the sole determining factor as to whether an appraiser's

valuation report is reliable.

This and other courts have found

that an expert's valuation opinion that does not fully comport

with USPAP is still admissible although it may or may not be

helpful.

See Kohler v. Commissioner, T.C. Memo. 2006-152

(expert

report not conforming to USPAP considered but given no weight);

s(...continued)

Daubert and the many cases applying it, including Kumho.

See

Fed. R. Evid. 702 advisory committee's note (2000 amendment), 28

U.S.C. app. at 893-896

(2000).

Many States have incorporated compliance with Uniform

Standards of Professional Appraisal Practice into their appralser

licensing requirements.

See, e.g., Ill. Admin. Code tit. 68,

sec. 1455.240 (2007); Tit. 876 Ind. Admin. Code sec. 3-6-2

(2008); Tit. 22 Tex. Admin. Code Pt. 8, sec. 155.1 (2001).

7 As professors Saltzburg, Martin, and Capra state:

Expert

witness testimony can be "reliable even though the expert's

methodology is not generally accepted in her field." 3 Saltzburg

et al., Federal Rules of Evidence Manual, sec. 702.02[5], at 702718

(9th ed.

2006).

EPCO, Inc. v. Commissioner, T.C. Memo. 1999-103

(report of expert

not familiar with USPAP received into evidence but of little use

to Court); Cheatle v. Katz,

2004 WL 906249

(E.D. Pa. 2004)

(report of "highly qualified and credible" expert considered

although a portion in contravention of USPAP); McKesson Corp. v.

Islamic Republic of Iran,

2000)

116 F. Supp. 2d 13,

23 n.6

(D.D.C.

(expert's valuation testimony admissible although he

conceded that, in performing his valuation, he had violated the

ethics rules established in USPAP), affd. in part, revd. in part

(on other issues) and remanded sub nom. McKesson HBOC, Inc. v.

Islamic Republic of Iran, 271 F.3d 1101 (D.C. Cir. 2001), vacated

in part 320 F.3d 280

(D.C. Cir. 2003).

Petitioner essentially

asks the Court to supplant its responsibility to assess an

expert's reliability with a rigid standard of reliability.

Sole

reliance on USPAP is a far more inflexible definition of

reliability than the definition (depending on "reliable

principles and methods") incorporated into Rule 702 of the

Federal Rules of Evidence.

Therefore, we decline to adopt USPAP

as the sole standard for reliability of an expert appraiser under

Rule 702 of the Federal Rules of Evidence.

Mr. Argote arrived at his conclusion as to the value of the

servitude by rejecting two approaches to determining that value

accepted by Mr. Roddewig, the cost approach and the income

approach.

He relied exclusively on a comparable sales approach,

an approach on which Mr. Roddewig also relied.

Like Mr.

Roddewig, Mr. Argote relied on a comparison of the before

- 26 restriction and after restriction values of the building.

Petitioner's catalog of the alleged deficiencies under USPAP in

Mr. Argote's direct testimony goes to the "bases and sources" of

that testimony, see United States v. 14.38 Acres of Land, 80 F.3d

1074,

1077

(5th Cir.

F.2d 420, 422

1996)

(quoting Viterbo v. Dow Chem. Co.,

826

(5th Cir. 1987)), and accordingly, if of any

consequence, those alleged deficiencies affect the weight we

accord that testimony, id., not the threshold question of its

reliability.

Conclusion

Mr. Argote's direct testimony is the product of the

application of reliable principles and methods of valuation to

sufficient facts and data (as we shall discuss).

It is

admissible as expert testimony pursuant to Rule 702 of the

Federal Rules of Evidence.

Petitioner's objection to the

contrary is overruled.

Conclusion

Mr. Argote is accepted as an expert witness with respect to

commercial real estate appraisal qualified to testify as to the

value of the servitude, and his written report, received into

evidence conditionally, is received absolutely.

III.

Expert Testimony as to the Value of the Servitude

Introduction

The parties agree that the partnership is entitled to a

charitable contribution deduction for 1997 on account of its

making a qualified conservation contribution of the servitude (a

- 27 conservation restriction) to PRC.

They disagree as to the amount

of that deduction because they disagree as to the value of the

servitude.

Notwithstanding respondent's expert's (Mr. Argote's)

opinion that the value of the servitude was zero, respondent does

not ask that we find that its value was any less than determined

by respondent in his examination and set forth in the notice;

viz, $1.15 million.

Section 170 allows for a charitable contribution deduction.

In pertinent part, the Secretary's regulations interpreting

section 170 provide:

"If a charitable contribution is made in

property other than money, the amount of the contribution is the

fair market value of the property at the time of the

contribution".

Sec. 1.170A-1(c) (1), Income Tax Regs.

"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."

Regs.

Sec. 1.170A-1(c) (2),

Income Tax

As noted supra in section II.B. of this report, a market

for the purchase and sale of conservation restrictions rarely

exists, and a conservation restriction's value is determined by

measuring the impact of the restriction on the fair market value

of the donor's property affected by the restriction; 1.e., any

diminution in that fair market value resulting from the creation

of the restriction.

The parties rely exclusively on their experts to establish

the value of the servitude.

Each expert arrived at an opinion as

- 28 -

to the fair market value of the servitude by making the before

and after comparison contemplated by the regulations.

1.170A-14 (h) (3) (i), Income Tax Regs.

See sec.

Mr. Roddewig (petitioner's

expert) determined the requisite before and after values in three

different ways.

He relied primarily.on a 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 (the Maison Blanche-Kress

parcel).

He determined the following before and after

restriction values:

Before Restriction Values

Cost approach

$43,000,000

Adjusted income approach

Comparable sales approach

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, although he had found "[a]

few sales in New

Orleans that were precisely comparable to the * * *

[Maison

Blanche-Kress parcel] in * * * [its before restriction]*

condition", he could find no "directly relevant" post restriction

sales.

With respect to the relevant weights to be given to the

adjusted income and cost approaches, he concluded that, because

on the valuation date the Maison Blanche-Kress parcel "was a

truly unique property in New Orleans",

"significant weight"

- 29 should be given to the greater difference between before and

after restriction values determined under the adjusted income

approach.

Taking into account his three approaches, he reached

the following ultimate determinations as to the before and after

restriction values of the Maison Blanche-Kress parcel and the

value of the servitude:

Value of the Servitude

Before restriction value

After restriction value

Difference; i.e., fair market

value of the servitude

$41,000,000

31,000,000

10,000,000

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.

The fair market value of property is determined by taking

into account the highest and best use of that property on the

relevant valuation date.

T.C. 389, 400 (1986).

E.g., Stanley Works v. Commissioner, 87

The experts differ on whether the

conveyance changed the highest and best use of the property each

valued.

Mr. Roddewig determined the highest and best use of the

Maison Blanche-Kress parcel before the conveyance was a mixed use

development, including a Ritz-Carlton Hotel with 512 rooms (60 of

them above the Kress Building), an additional all-suites hotel

with approximately 268 rooms, and retail usage on the first two

floors and mezzanine of the Maison Blanche Building.

determined that the highest and best use of the Maison Blanche-

- 30 -

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 BlancheKress 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.

We begin with a discussion of the parties' differences as to

whether, on account of the conveyance, the highest and best use

of the Maison Blanche-Kress parcel changed.

We then explain each

expert's valuation methods, and we follow with our conclusions as

to the persuasiveness of each expert's opinion.

Highest and Best Use Considerations

Introduction

"The realistic, objective potential uses for property

control the valuation thereof."

supra.

Stanley Works v. Commissioner,

The potential uses of the property must have a

"reasonable probability", however.

Id. at 401.

While respondent

believes that the possibility that the partnership would add 60

rooms above the Kress Building was too remote and speculative to

be taken into account in determining the highest and best use of

the Maison Blanche-Kress parcel, respondent's principal argument

is that Mr. Roddewig erred in his belief that the conveyance

eliminated the possibility of constructing 60 hotel rooms above

- 31 the Kress Building.

Whether Mr. Roddewig erred in that belief

presents a question of local law.

Discussion

We have summarized the terms of the conveyance supra, and

set it out in full (excluding exhibits) in an appendix.

Petitioner contends that the conveyance "prevents * * *

partnership]

[the

from constructing additional floors above the Kress

Building and from selling the Kress Building unencumbered".

Petitioner describes the conveyance as granting PRC a "servitude

of view", which petitioner further describes as "a servitude of

the view of

[the] Facade, including that visible from and above

the former Kress Building side of the Facade."

Petitioner

describes the partnership's risk from building above the Kress

Building or selling the Kress Building "unencumbered" as the

"risk of being sued by the PRC for breach of contract."

Petitioner concedes:

"No portion of the protected Facade is

actually located on the * * * Kress building, and the definition

of 'Improvement' in the * * *

* * * Kress building."

[conveyance] does not include the

Petitioner maintains, however, that the

Maison Blanche and Kress Buildings share a common wall, which is

a part of the facade and is included in the term "improvement".

Petitioner claims that the servitude "was created in accordance

with the express statutory provisions of * * *

Ann.

sec.

9:1252

[La. Rev. Stat.

(1991)]".

La. Rev. Stat. Ann. sec.

9:1252

(1991) provides for the

creation of a perpetual real right burdening the whole or any

- 32 part of immovable property, including but not limited to its

facade, in favor of an entity formed exclusively for certain

public purposes.

in the margin.8

Pertinent portions of that section are set out

A commentator has observed:

"Since facade

servitudes and conservation servitudes are usually in favor of an

entity rather than an estate, they are properly classified as

rights of use rather than predial servitudes."

1 Title, La.

creation of real right for educational, charitable, or

historic purposes

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.

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.

A real right created under the authority of this

Section shall be granted by authentic act and shall be effective

against third parties when filed for registry in the conveyance

records of the parish in which the immovable property is located.

Any right or obligation imposed on the owner of the immovable

property by the real right created pursuant hereto, including any

affirmative obligation established therein, shall be enforceable

by the grantee through judicial proceeding by actions for

injunctions or damages brought by the grantee.

La. Rev. Stat. Ann.

sec.

9:1252

(1991).

- 33 -

Prac. Real Est.,

sec. 3:47

(2d ed. 2007).

The Louisiana Civil

Code explains with respect to servitudes:

"There are two kinds

of servitudes: personal servitudes and predial servitudes."

Civ. Code Ann. art. 533

(1980).

La.

"A personal servitude is a

charge on a thing for the benefit of a person."

Id. art. 534.

"A predial servitude is a charge on a servient estate for the

benefit of a dominant estate."

(2008).

La. Civ. Code Ann. art. 646

A right of use is a type of personal servitude.

Civ. Code Ann. art. 534

(1980).

See La.

It "confers in favor of a person

a specified use of an estate less than full enjoyment."

Id. art.

639.

The point to be taken from this recitation of local law is

that La. Rev. Stat. Ann. sec. 9:1252 (1991) allows the owner of

immovable property to create a right burdening the property in

favor of another person.

The difficulty with respect to

petitioner's argument relying on La. Rev. Stat. Ann. sec. 9:1252

is his concession that the servitude created by the conveyance

does not burden the Kress Building, except, perhaps, for the

common wall it shares with the Maison Blanche Building.

appreciate that difficulty, we need to understand something more

of local law.

Except where the rule is incompatible, a right of use is

regulated by application of the rules governing usufruct and

predial servitudes.

La. Civ. Code Ann. art. 645

(1980).

With

respect to predial·servitudes, La. Civ. Code Ann. art. 730

provides:

"Doubt as to the existence, extent, or manner of

(2008)

- 34 exercise of a predial servitude shall be resolved in favor of the

servient estate."

Comment (b) accompanying that article

observes:

(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 into 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).

Id.

(Revision Comments-1977).

The Court of Appeal of Louisiana

has held that an agreement to establish a servitude that is

ambiguous is unenforceable.

Exxon Corp. v. Barry, 384 So. 2d 826

(La. Ct. App. 1980).

There is no language in the conveyance that identifies the

partnership as the owner of the Kress Building and obligates it,

as owner of that building, to preserve a view of the Maison

Blanche Building.'

There is no language in the conveyance that

Petitioner has asked us to find that, on Dec. 30, 1997,

(continued...)

- 35 '-

grants PRC (or anyone else) any use whatsoever of the Kress

Building.

Indeed, there is no mention whatsoever of the Kress

Building in the conveyance.

Moreover, as we have discussed, in

determining whether an estate is burdened by a servitude, we must

resolve doubt in favor of the negative.

art. 730

See La. Civ. Code Ann.

(2008) and discussion of that article supra.

On the

evidence before us, we find that the conveyance creates no charge

on the Kress Building in favor of PRC.1°

Petitioner has therefore

failed to prove that, by the conveyance, and pursuant to La. Rev.

9(...COntinued)

petitioner established a condominium regime by which the Maison

Blanche Building and the Kress Building were established as one

condominium unit. We have not made that finding in part because

petitioner concedes that the condominium declaration was recorded

on the day following the conveyance. Petitioner's proposed

finding, even if supportable, would have little, if any

relevance, to the valuation date questions before us.

1° We note in passing that petitioner's claim that the

Maison Blanche and Kress Buildings share a common wall that is a

part of the facade and that is included in the term "improvement"

may not be to petitioner's advantage. Where a common wall is

between two properties, and the owner opens the wall for the

admission of light, he may by acquisitive prescription burden the

neighboring estate with a servitude of light that includes the

right to prevent the neighbor from obstructing the opening.

Palomeque v. Prudhomme,

664 So. 2d 88,

(La.

1995); see La.

Civ. Code Ann. art. 703 (2008). Blueprints of the Maison Blanche

Building depict about 120 windows on the common wall that rises

above the Kress Building. We assume that they are old and, by

acquisitive prescription or otherwise, their existence may, on

the valuation date, the date of the conveyance, have burdened the

Kress Building with a servitude of light in favor of the Maison

Blanche Building.

Such a servitude would likely have a negative

affect on the highest and best use of the Maison Blanche-Kress

parcel since it would appear to deprive the owner of the Kress

Building of some freedom to add to the height of that building.

Mr. Roddewig did not consider the possibility of a pre-existing

servitude that limited the addition of height to the Kress

Building, thus, he may have erred in determining that the highest

and best use of the Maison Blanche-Kress parcel before the

conveyance included 60 hotel rooms above the Kress Building.

- 36 -

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; e.g., a person acquiring ownership of the

Kress Building by eminent domain or as a result of the owner of

the building's bankruptcy.

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 depriving the partnership

of the ability to add 60 hotel rooms above the Kress Building.

Conclusion

Mr. Roddewig erred in his opinion that the highest and best

use of the Maison Blanche-Kress parcel differed after the

conveyance on account of the partnership's disability to add 60

hotel rooms above the Kress Building.

We shall take that error

into account in considering his valuation conclusions.

Cost Approach

Introduction

The cost approach to valuing improved real property is based

on the principle of substitution.

Commissioner, T.C. Memo.

E.g., Talkington v.

1998-412:

The cost approach derives the value of a property by

estimating the reproduction or replacement cost of the

improvements, deducting therefrom the estimated

depreciation, and then adding the market value of the

land.

This approach estimates value based on the

assumption that a prudent person will not pay more for

- 37 a property than it would cost to acquire a site and

erect a comparable structure (less accrued

depreciation) * * *.

Before Restriction Reproduction Cost

Mr. Roddewig calculated the before restriction cost to

reproduce the Maison Blanche Building shell,11 the building's

annexes, and the Kress Building.

He used the Marshall Valuation

Service manual, which he described as a commonly used

construction cost manual published by Marshall and Swift, for

estimating construction costs for excavation and site

preparation, the foundation, the frame, the floors, portions of

the exterior walls, the basement walls, and the roof structure.

For the terra cotta portions of the exterior walls of the Maison

Blanche Building, he relied on reproduction cost estimates that

he obtained from one or more companies specializing in the

manufacture of terra cotta.

He estimated those terra cotta

portions to cost $42.025 million.

Finally, he added other

development costs, such as architect and project management fees.

He arrived at a total reproduction cost of $54.3 million before

depreciation and obsolescence.

To the $54.3 million so determined, he first applied a

discount of 20 percent for physical depreciation to arrive at a

tentative depreciated reproduction cost.

He then applied

discounts of 10 and 15 percent for functional obsolescence (due

11 Mr. Roddewig believed that only the basic shell

structure of the Maison Blanche Building contributed to its

market value on the valuation date since the rehabilitation plan

for the building was to remove all interior partitions as well as

mechanical and electrical systems.

- 38 -

to the antiquated design of the Maison Blanche Building), and

external obsolescence (due to local preservation restrictions),

respectively, to arrive at a depreciated reproduction cost of

$32.58 million.

His last step was to add the value of the land.

identified six land sales in New Orleans that he considered sales

of comparable properties (all involving land sales for hotel

construction).

He made adjustments for the type of interest

conveyed, market conditions, an adjacent purchaser premium in one

case, locality, zoning, size, hotel price point, demolition

costs, and retail space.

The range of adjusted prices he

determined for those sales, on a square foot basis, was $65 to

$126, and he decided to use $95 per square foot in valuing the

land under the Maison Blanche-Kress parcel. . Applying that to the

parcel's land area of 68,105 square feet, he arrived at a value

of $6,469,975 for the land.

He also derived a value for the cost of the land based on

the land cost per hotel room constructed (room cost) for his six

comparable parcels.

He made adjustments for the same factors

that he considered in his price per square foot calculations.

The range of the room costs was $9,212 to $19,340.

He determined

that the Maison Blanche-Kress parcel land should be valued on the

basis of a room cost of $15,000.

He applied that cost to 780

rooms (which included 60 rooms above the Kress Building), and

that indicated to him a land value of $11.7 million.

Giving more

weight to his room cost analysis than his square footage

- 39 -

analysis, he determined a before restriction value for the Maison

Blanche-Kress parcel land of $10.5 million.

The following table summarizes the results of Mr. Roddewig's

before restriction approach:

Before Restriction Reproduction Cost

Reproduction cost before depreciation

and obsolescence

Less: Physi.cal depreciation (20%)

Depreciated reproduction cost

Less: Functional obsolescence

(10%)

External obsolescence (15%)

Depreciated reproduction cost

Plus: Value of land

Total before restriction reproduction

cost

(rounded)

$54,300,000

10,860,000

43,440,000

4,344,000

6,516,000

32,580,000

10,500,000

43,000,000

After Restriction Reproduction Cost

Mr. Roddewig assumed that the cost to reproduce the Maison

Blanche Building shell, the building's annexes, and the Kress

Building, before depreciation and obsolescence, did not change on

account of the conveyance.

He reduced his estimate of physical

depreciation from 20 percent to 15 percent because he believed

the useful life of the buildings would be greater by 5 years

after the conveyance on account of PRC's monitoring and

enforcement of the servitude.

functional obsolescence.

He did not change his estimate of

He increased his estimate of external

obsolescence from 15 percent to 30 percent.

He reduced his estimate of the cost of land from $10.5

million, before restriction, to $8 million, after restriction,

because the conveyance had reduced the partnership's interest in

the Maison Blanche-Kress parcel to less than a fee simple

- 40 -

interest and, he believed, the partnership had lost the right to

construct 60 rooms above the Kress Building.

The following table summarizes the results of Mr. Roddewig's

after restriction approach:

After Restriction Reproduction Cost

Reproduction cost before depreciation

and obsolescence

$54,300,000

Less: Physical depreciation (15%)

Depreciated reproduction cost

Less: Functional obsolescence (10%)

External obsolescence

8,145,000

46,155,000

4,615,500

(30%)

13,846,500

Depreciated reproduction cost

Plus: Value of land

27,693,000

8,000,000

Total after restriction reproduction

cost

(rounded)

Cost Approach Value

35,500,000

Mr. Roddewig determined the value of the servitude using the

cost approach to be $7.5 million, calculated as follows:

Value of Servitude Determined Using Cost Approach

Before restriction reproduction cost

Less: After restriction reproduction cost

Value of servitude

$43,000,000

35,500,000

7,500,000

Income Approach

Introduction

The income approach to valuing real property involves

discounting to present value the expected cash flows from the

property.

E.g., Marine v. Commissioner,

92 T.C.

affd. without published opinion 921 F.2d 280

958,

(9th Cir.

983

(1989),

1991).

The theory behind the approach is that an investor would be

willing to pay no more than the present value of a property's

anticipated net income.

- 41 2.

Before Restriction Income Approach

Mr. Roddewig calculated a before restriction value for the

Maison Blanche Building as of December 29, 1997, using the income

approach.

He made various assumptions, among which were the

following.

The building would be rehabilitated to house a 452-

room Ritz-Carlton Hotel.

Construction would commence on January

1, 1998; it would be completed on December 31, 1999,.and the

hotel would open on January 1, 2000.

The building would be held

until the end of 2002 and would then be sold.

Development costs

to rehabilitate the building for the operation of the hotel would

be $887,938,

$22,549,691, and $47,689,058 for 1997,

1999, respectively.

1998, and

Net operating income from operation of the

hotel would be $9,262,297,

$10,825,659, and $13,149,400 for 2000,

2001, and 2002, respectively.

The selling price of the building

at the end of 2002, determined by applying a capitalization rate

of 9.5 percent to expected net operating income for 2003 of

$12,947,254, would be, rounded, $136.3 million, which, after

deducting selling expenses of $3,407,500

(2.5 percent of the

selling price), would produce a net selling price of

$132,892,500, which, after payment of a $8.95 million developer's

note, would leave net sales proceeds of $123,942,500.

All cash

flows were discounted at 13 percent, to produce a before

restriction net present value of $29,275,863, which he rounded to

$29.5 million.

- 42 3.

After Restriction Income Approach

Mr. Roddewig's calculation of an after restriction value

using the income approach differed in important particulars from

his before restriction approach.

He explained those differences

as being due to the burden of the servitude.

He reduced his

estimates of net operating income from operation of the hotel for

each of the years 2000 through 2003 on account of increased

administrative and general expenses, operations and maintenance

expenses, and insurance expenses.

The average increase in each

of those categories was $197,500,

$201,500, and $99,250 for 2000

through 2003, respectively.

For each of those years, he further

reduced his estimate of net operating income by $370,000 on

account of an annual addition to an accounting reserve for the

purpose of replacing the Maison Blanche Building's terra cotta

facade.

He increased from 2.5 to 2.75 percent his estimate of the

cost to sell the building at the end of 2002, which increase he

attributed to additional marketing, legal, and administrative

expenses.

He increased from 9.5 to 10 percent the capitalization

rate that he used to determine the selling price of the building,

and he increased from 13 to 13.5 percent the rate he used to

discount all cash flows, which increases he attributed to the

additional risks and uncertainties he believed attended the

servitude.

He determined an after restriction net present value of

$17,868,456, which he rounded to $18 million.

- 43 -

Income Approach Value

Using the income approach, Mr. Roddewig determined the value

of the servitude to be $11.5 million, calculated as follows:

Value of the Servitude Determined Using Income Approach

Before restriction net present value

Less: After restriction net present value

Value of the servitude

$29,500,000

18,000,000

11,500,000

Mr. Roddewig explained that that determination of value was

incomplete, however, because it ignored the portions of the

Maison Blanche-Kress parcel devoted to retail department store

use and to the planned 268-room all-suites hotel (including 41

rooms to be constructed above the existing building).

Because he

lacked data as to income and expenses with respect to those uses

and therefore could not pursue an income approach with respect to

them, he made adjustments to his preliminary calculations using

information developed under the cost approach.

That hybrid

approach produced the following results:

Before Restriction Hybrid Approach

Preliminary determination of value

$29,500,000

Plus: Adjustment for department store space

(128,463 sq. ft. x $62.65 per sq. ft.)

8,048,207

Plus: Adjustment for portion of building devoted

to all-suites hotel (48,325 sq. ft. x $62.65 per

sq. ft.)

3,027,561

Plus: Adjustment for additional rooms constructed

above building (41 rooms x $14,000 per room)

574,000

Total adjusted value by income approach (rounded) 41,000,000

After Restriction Hybrid Approach

Preliminary determination of value

Plus: Adjustment for department store space

(128,463 sq.

ft. x $53.25 per sq.

ft.)

$18,000,000

6,840,655

Plus: Adjustment for portion of building devoted

to all-suites hotel (48,325 sq. ft. x $53.25 per

sq.

ft.)

2,573,306

Plus: Adjustment for additional rooms constructed

above building (41 rooms x $12,000 per room)

492,000

Total adjusted value by income approach (rounded) 28,000,000

Mr. Roddewig determined the value of the servitude using the

hybrid income approach to be $7.5 million, calculated as follows:

Value of Servitude Determined Using Hybrid Income Approach

Before restriction reproduction cost

Less: After restriction reproduction cost

Value of servitude

$41,000,000

28,000,000

13,000,000

Comparable Sales Approach

Introduction

Messrs. Roddewig and Argote both employed the comparable

sales approach.

Mr. Roddewig employed it only in aid of

determining a before restriction value for the Maison Blanche-

Kress parcel.

He did not employ it in aid of determining an

after restriction value for the parcel because he could find no

sales "that were directly comparable."

Mr. Argote employed the

comparable sales approach exclusively to determine both the

before and after restriction values of the Maison Blanche

Building.

The "comparable sales"

(or "market data") approach to

valuing real property involves gathering information on sales of

property similar to the subject property and then comparing and

weighing that information to determine a value for the subject

- 45 -

property.

E.g., Estate of Spruill v. Commissioner, 88 T.C. 1197,

1229 n.24

(1987); Estate of Rabe v. Commissioner, T.C. Memo.

1975-26, affd. without published opinion 566 F.2d 1183

1977).

(9th Cir.

The rationale is that the marketplace is the best

indicator of value, based on the conflicting interests of many

buyers and sellers.

Estate of Rabe v. Commissioner, supra.

That

in turn is based on the principle of substitution; i.e., that a

prudent man will pay no more for a given property than he would

for a similar property.

Id.

One using the comparable sales

approach makes adjustments to the sales prices of the comparable

properties to reflect differences between the comparables and the

subject property being valued.

T.C. Memo. 1998-412.

E.g., Talkington v. Commissioner,

"Positive adjustments are made to

comparable properties that are inferior in some fashion to the

subject property; negative adjustments are made to comparable

properties that are superior in some fashion to the subject

property."

Id. n.8.

Before Restriction Comparable Sales Approach

Mr. Roddewig's Approach

Mr. Roddewig identified two sets of buildings suitable for

his comparable sales approach.

The first set included downtown

New Orleans buildings purchased as shells for adaptive reuse as

hotels.

He identified five purchases, two of which involved

properties that the purchaser combined to form one hotel.

determined the sales price per square foot of each building and

made adjustments to those prices for several major and a.few

minor differences to arrive at an adjusted price per square foot

for each building.12

He made positive adjustments at the rate of

7.5 percent a year to account for appreciation in the New Orleans

hotel market from the date of purchase of each comparable to

December 1, 1997.

He believed that the location of each of the

comparables was inferior to that of the Maison Blanche Building,

so he made a positive adjustment to each, ranging from 10 to 25

percent, to account for that difference.

He made positive or

negative adjustments to each comparable to reflect the relative

burden of zoning and historic designation differences.

He made

negative adjustments to several of the comparables for size and

configuration differences.

He made a positive adjustment to each

comparable ranging from 15 to 60 percent to reflect the higher

room rates expected for a Ritz-Carlton Hotel.

Finally, he made a

positive adjustment to each comparable of 25 percent to reflect

each's lack of retail space.

He calculated the average adjusted

price per square foot to be $53.44.

He also determined the sales price per room for each

building in the first set and made the same adjustments he made

in determining the adjusted price per room, although, without

explanation, some of his percentages differed slightly.

calculated the average adjusted price per room to be $31,263.

12 The minor adjustments were relatively small and affected

only two of the properties.

One is a 10-percent reduction for a

sale that involved seller financing and the other is a 10percent reduction for the property being purchased by the owner

of the adjacent property.

- 47 The second set of buildings consisted of office buildings

outside of New Orleans purchased for conversion to hotel use.

He identified seven buildings, four of which were located in

Manhattan, one in Boston, another in Washington, D.C., and a

final one in Cleveland.

He used those sales to calculate an

average adjusted price per square foot and per room.

He made

adjustments with respect to the members of the second set similar

to the adjustments he made with respect to the members of the

first set; however, he applied different percentages.

For the

location adjustment, he made negative adjustments to six of the

comparables, ranging from 25 to 40 percent, and he made a

positive adjustment to one of 45 percent.

He calculated the

average price per square foot for the non-New Orleans properties

to be $75.42 and the adjusted price per room to be $60,886.

The following table summarizes the average adjusted prices

Mr. Roddewig calculated.

Average Adiusted Prices Per Square Foot and Per Room

Set one: (New Orleans' buildings)

Adjusted price per sq. ft.

Adjusted price per hotel room

Set two: (buildings in other cities)

Adjusted price per sq. ft.

Adjusted price per hotel room

$53.44

31,263.00

75.42

60,886.00

Based on.those average adjusted prices, he determined that the

value of the Maison Blanche-Kress parcel could be determined by

assuming a value of $70 per square foot for the existing

improvements and $55,000 for each hotel room to be built.

On a

square footage basis, assuming that the existing improvements

(including the Kress Building) comprised 530,646 square feet, he

- 48 determined a value of $37,145,220, and, on a hotel room basis he

determined a value of $39.6 million if only 720 rooms were to be

built and $42.9 million if 780 rooms were to be built (i.e.,

including 60 rooms above the Kress Building).

Determining that

"[a]nalyzing the comparables based upon a price paid per room

results in a more accurate way of comparing the hotel potential"

of the comparables to the Maison Blanche-Kress parcel, he

concluded the value of the parcel under the comparable sales

approach as of December 1997 was $40 million.

Mr. Argote's Approach

Mr. Argote identified nine buildings in New Orleans that he

thought comparable to the Maison Blanche Building and that were

sold between January 1995 and December 1997.

He determined the

sales price per square foot of each building and made adjustments

for differences in conditions of sale, time of sale, location,

size, and configuration.

He made positive adjustments at the

rate of 5 percent a year to account for appreciation in prices

paid for New Orleans buildings suitable for conversion to hotels.

He made positive adjustments to eight of the buildings, ranging

from 5 to 20 percent, to account for what he thought were the

inferior locations of those buildings.

He made negative

adjustments to all of the buildings, ranging from 5 to 30

percent, to account for the greater size of the Maison Blanche

Building (which he viewed as a detriment).

He made positive or

negative adjustments to four of the buildings to account for

configuration and layout differences.

He calculated the average adjusted price per square foot to

be $20.12.

He decided that the value of the Maison Blanche

Building should be calculated assuming a value of $20 per square

foot.

He assumed the gross building area of the Maison Blanche

Building to be 514,697 square feet, which led to his conclusion

that the value of the building before the restriction was

(rounded) $10.3 million."

After Restriction Comparable Sales Approach

Only Mr. Argote used the comparable sales approach to

determine an after restriction value.

He identified five

buildings in New Orleans that he thought comparable to the Maison

Blanche Building, were encumbered by facade restrictions, and

were sold between December 1991 and December 1997.

He determined

the sales price per square foot of each building and made

adjustments for differences in conditions of sale, time of sale,

location, size, and configuration.

One building was sold by a

lender who obtained the property by foreclosure and might have

had a strong motivation to sell; on that account, Mr. Argote made

a positive adjustment of 30 percent.

He made positive

adjustments at the rate of 5 percent a year to account for

appreciation in prices paid for New Orleans building suitable for

Messrs. Roddewig's and Argote's square footage

calculations differ in substantial part because Mr. Roddewig

included the area of the Kress Building in the area of the

property he was valuing and Mr. Argote did not.

If the area of

the Kress Building is eliminated from Mr. Roddewig's calculation

of the area of the property he was valuing, the resulting area

equals 514,436 square feet, not substantially different from the

area assumed by Mr. Argote; i.e., 514,697 square feet.

- 50 -

conversion to hotels.

He made positive adjustments to four of

the buildings, ranging from 20 to 30 percent, to account for what

he thought were the inferior locations of those buildings.

made negative adjustments to all of the buildings, ranging from

15 to 30 percent, to account for the greater size of the Maison

Blanche Building.

He made positive adjustments to two of the

buildings, one by 30 percent and the other by 10 percent, to

account for configuration and layout differences.

He calculated the average adjusted price per square foot to

be $20.75.

He decided that the value of the Maison Blanche

Building after the restriction should be calculated assuming a

value of $20 per square foot.

He therefore concluded that the

value of the Maison Blanche Building after the restriction was

the same as its value before the restriction; viz,

(rounded)

$10.3 million.

Comparable Sales Approach Value

Mr. Roddewig did not determine the value of the servitude

using the comparable sales approach because he was unable to

determine an after restriction value for the property under that

approach.

Mr. Argote determined the value of the servitude using

the comparable sales approach to be zero because he determined

the value of the Maison Blanche Building both before and after

the restriction was the same.

- 51 IV.

Value of the Servitude

Introduction

Valuation is not a precise science, and determining the fair

market value of property on a given date is a question of fact to

be resolved on the basis of the entire record.

Commissioner,

43 T.C.

T.C. Memo. 2001-141.

663,

665

E.g., Kaplan v.

(1965); Arbini v. Commissioner,

Expert testimony may assist the Court to

understand areas regulring scientific, technical, or other

specialized knowledge.

Evidence.

See Rule 702 of the Federal Rules of

Of course, we are not bound by the opinion of any

expert witness, and we may accept or reject expert testimony in

the exercise of our sound judgment. Helvering v. Natl. Grocery

Co.,

304 U.S. 282

(1938); Estate of Newhouse v. Commissioner,

T.C. 193, 217 (1990).

Although we may largely accept the opinion

of one party's expert over that of the other party's expert, see

Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C.

441, 452

(1980), we may be selective in determining what portions

of each expert's opinion, if any, to accept, Parker v.

Commissioner, 86 T.C. 547, 562

(1986).

Finally, because

valuation necessarily involves an approximation, the figure at

which we arrive need not be directly traceable to specific

testimony if it is within the range of values that may be

properly derived from consideration of all the evidence.

E.g.,

Peracchio v. Commissioner, T.C. Memo. 2003-280.

With those principles in mind, we address the question of

the value of the servitude.

- 52 -

Cost Approach

Introduction

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.

Navigation Co.,

United States v. Toronto, Hamilton & Buffalo

338 U.S. 396,

403

(1949).

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 * * *

provided herein."

[the Maison Blanche Building], as

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.

Moreover, even if an older building would be

reconstructed if destroyed, there are reasons why the cost

approach is an inappropriate method for valuing older buildings.

In Crocker v. Commissioner, T.C. Memo. 1998-204, we said that the

cost method is a poor indicator of value when estimating the

- 53 -

value of older, special purpose buildings, since any estimate of

obsolescence (a necessary component of the valuation process) is

subjective.

In Losch v. Commissioner, supra, we said:

"[I]n

dealing with an older, historic structure, it is highly

questionable whether the replacement cost method can be used to

provide meaningful results."

Finally, the Court of Appeals for

the Fifth Circuit has also raised a cautionary flag with respect

to the admissibility of reproduction cost evidence.

States v. Benning Housing Corp.,

1960)

276 F.2d 248,

250

United

(5th Cir.

("absent some special showing, reproduction cost evidence

is not admissible in a condemnation proceeding.").

While our jurisprudence does not reject the reproduction

cost approach altogether, we have considered it an appropriate

measure of value only where the taxpayer establishes a probative

correlation between such cost and the fair market value of the

property.

See Crocker v. Commissioner, supra.

Generally, as a

precondition to using the approach, the taxpayer must show that

the property is unusual in nature and other methods of valuation,

such as comparable sales or income capitalization, are not

applicable.

Id.

Whether the Maison Blanche Building is unusual

or not, petitioner's application of the income approach and

comparable sales approach (at least with respect to the before

restriction value of the building) would seem to rule out our

consideration of the cost approach in this case.

While that is a

sufficient basis for us to give no weight to Mr. Roddewig's cost

approach testimony, we shall continue our analysis because, in

- 54 -

addition, we find his testimony on that subject to be

unpersuasive.

Therefore, even if there were no other applicable

methods of valuation, we would find that petitioner has failed to

establish a probative correlation between Mr. Roddewig's estimate

of reproduction cost and the fair market value of the Maison

Blanche-Kress parcel.

First Impression

Our first impression of Mr. Roddewig's estimate of a before

restriction value of $43 million for the Maison Blanche-Kress

parcel is that it defies reason.

The partnership paid $6,625,000

for the Maison Blanche Building, $6 million in December 1995 and

an additional $625,000 in September 1996

(all of which, for ease

of analysis, we shall consider as having been paid in December

1995).

It paid $3.4 million for both the Kress Building and the

Kress Parking Garage in October 1997.

Petitioner proposes that

we find as a fact that the cost of the Kress Building was $1

million, which amount we shall accept for purposes of this

analysis.

Mr. Roddewig testified that, in September 1999, the

partnership paid $3,375,938 to buy out the remaining term of the

Maison Blanche Building retail lessee.

We shall for this

analysis accept that amount as an estimate of the value of the

lease to the partnership in September 1999.

assume that

(1)

We shall further

the $1 million that the partnership paid for the

Kress Building in 1997 is what it would have paid in December

1995

(although that is contradictory to Mr. Roddewig's testimony

about the direction of real estate prices during that time

- 55 -

period); and (2) the $3,375,938 it paid to buy out the lease is

what it would have paid in December 1995 (although, at that time,

it may have been willing to pay more because of the longer

remaining term of the lease).

Thus, altogether, the partnership

can be deemed to have paid $11,000,938

$3,375,938)

($6,625,000 + $1,000,000 +

for the Maison Blanche-Kress parcel in December 1995.

If Mr. Roddewig is correct that, on the valuation date (before

the conveyance), the parcel was worth $43 million, then the

parcel had appreciated in value by 291 percent during the 2 years

between December 1995 and December 1997.

While he recites a list

of reasons for the "significant increase in the market value of

the * * *

[Maison Blanche Building]", including improvement of

the hotel market in New Orleans and the agreements entered into

by the partnership and Ritz-Carlton Hotel chain, his evaluation

of the real estate market in and around New Orleans indicates no

comparable increase.

He describes the single-family housing

market as "growing at a relatively stable pace as of the end of

1997."

He describes office market conditions during the 1991

through 1997 period as "generally not good", and he describes the

industrial market as being "in a condition similar to the office

market."

He describes the retail vacancy rate as stable between

1994 and 1997, although he reports Rosen Consulting Group as

saying that the downtown retail market "had fared relatively

well."

He adds:

"The retail market as of December of 1997 was

expected to remain stable over the next few years".

With respect

to the hotel market, and in particular with respect to what he

describes as the "New Orleans Upscale and Luxury Lodging Market",

in which the planned Ritz-Carlton Hotel would compete, he

testified:

"Overall market supply and demand increased at

compound annual rates of 1.9 and 1.8 percent, respectively, from

1995 to 1997."

In response to a question from the Court, Mr.

Roddewig ascribed some increase in value due to the common

ownership of the Maison Blanche and Kress Buildings, but he did

not quantify that increase.

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.

shall continue by examining particular aspects of his cost

approach.

Terra Cotta Cost

Mr. Roddewig has failed to convince us 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,

$42.025 million is attributable to reproducing the terra cotta

facade on the Maison Blanche Building.

Mr. Roddewig's testimony

as to that cost is the only evidence of it in the record.

His

testimony is based upon estimates which he obtained from terra

cotta industry specialists, rather than from his own experience."

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

(continued...)

- 57 -

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.

1992-48

See Estate of Palmer v. Commissioner, T.C. Memo.

(quoting 15 Mertens, Law of Federal Income Taxation, sec.

59.08, at 26

(1989))."

The estimated cost of $42.025 million to

reproduce the terra cotta portion of the facade is the major

element of his reproduction cost estimate.

Without adequate

support for a terra cotta cost of $42.025 million, we give no

"(...continued)

Hotel)--Building 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.

15 Mertens, Law of Federal Income Taxation, sec. 59.08,

at 26

(1989):

A common fallacy in offering opinion evidence is

to assume that the opinion is more important than the

facts. To have any persuasive force, the opinion

should be expressed by a person 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.]

- 58 -

weight to his conclusion that the total cost to reproduce the

Maison Blanche Building shell and the Kress Building is $54.3

million.

External Obsolescence

In both his before and after restriction calculations of

reproduction cost, Mr. Roddewig deducted an amount to reflect

external obsolescence: 15 percent of the before restriction

depreciated reproduction cost and 30 percent 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 justified the after transaction increase as follow:

We concluded earlier that the regulations enforced

by the * * * [Central Business District Historic

District Landmarks Commission] resulted in external

obsolescence of 15%. Our analysis indicates that the

additional restrictions resulting from the operation of

the preservation and conservation easement add an

additional layer of restriction at least as severe as

those imposed by the New Orleans historic district

regulations.

It is appropriate, therefore, to deduct

an additional 15% for the external obsolescence created

by the easement, an amount of external obsolescence

equal to that also created by regulation of the Maison

Blanche and Kress buildings by the * * * [Central

Business District Historic District Landmarks

Commission). The result is total external obsolescence

"after" considering the easement of 30% compared to

only 15% "before" the easement was imposed.

In his oral testimony, Mr. Roddewig explained his adjustments for

external obsolescence as being based on his experience and on

market data indicating that some buyers reject buildings burdened

by preservation easements.

Some adjustment is plausible.

- 59 -

further testified that he arrived at his percentage adjustments

as a matter of judgment.

What is important here is not Mr.

Roddewig's application of a 15-percent adjustment both before and

after the restriction for external obsolescence on account of

historic district regulations.

By itself, that adjustment does

not contribute to the value of the servitude.

What is important

is his failure to provide us with anything beyond a request to

trust in his judgment that the enforcement of the provisions of

the servitude doubles the cost of external obsolescence.

illustrated by our discussion supra of our first impression, Mr.

Roddewig has failed to engender in us full confidence in his

judgement.

Moreover:

"We need not rely on the unsupported

opinion of an expert witness."

__, __ (2008)

Holman v. Commissioner, 130 T.C.

(slip op. at 63).

Land Value

In moving from his before to 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 have already,

supra, in section III.B.2. of this report, described our reasons

for disagreeing with his second conclusion.

While Mr. Roddewig

may be right that, after the conveyance, the partnership held

less than a fee simple interest in the Maison Blanche-Kress

parcel, we reject the translation of that conclusion into a 10-

percent negative adjustment to the prices of his six comparable

parcels.

Mr. Roddewig testified that he was unable to find any

sale of land in New Orleans encumbered by a preservation

easement.

As a result, to determine the after restriction land

cost component of his reproduction cost analysis, he considered

the same six sales he utilized earlier but he "adjust[ed] each

comparable downward by 10% to account for the decrease in the

property interest resulting from the imposition of the * * *

[servitude]."

The question before us is whether a servitude

requiring maintenance of a building's facade would survive and

affect the value of the underlying land·if that land were wiped

clean of the building.

While for the sake of argument we will

concede that possibility, Mr. Roddewig's conclusion of a 10percent reduction in value as a general rule is not persuasive,

and we do not accept it.

See Holman v. Commissioner, supra

at (slip op. at 63).

Conclusion

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

$35.5 million are reliable estimates of the before and after

restriction reproduction costs of the Maison Blanche-Kress parcel

or that the resulting value of the servitude is $7.5 million.

shall disregard petitioner's cost approach in determining the

value of the servitude.

- 61 -

Income Approach

Introduction

The income approach to valuation is a recognized method that

has been favored where comparable market sales were lacking.

Chertkof v. Commissioner, 72 T.C.

1113,

1122

See

(1979), affd. 649

F.2d 264

(4th Cir. 1981); Gottlieb v. Commissioner, T.C. Memo.

1974-178.

The usefulness of the income approach diminishes,

however, 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); Pittsburgh Terminal Corp. v. Commissioner,

60 T.C.

(1973),

80,

affd. without published opinion 500 F.2d

1400

(3d Cir. 1974); Sec. Mortgage Co. v. Commissioner,

58 T.C.

667,

675

the

(1972).

In the absence of that track record,

appraiser has no alternative to using data from similar

properties or estimates of the property's income- producing

potential, which may reduce the reliability of his conclusions.

See Ambassador Apartments,

(1968)

Inc. v. Commissioner, 50 T.C. 236, 243

("a computation based on the actual income and expenses of

the property to be valued [2u1 apartment building]

is more

reliable" than a computation based on "income and expense figures

ascertained from comparable apartments in the * * * vicinity"),

affd. 406 F.2d 288

(2d Cir. 1969).

The weakness of the income

approach is the many judgement calls often required in its

- 62 -

application.

See Estate of Berg v. Commissioner, T.C. Memo.

1991-279 ("The principal weakness of the Income Approach is that

the value estimate can be easily distorted by the use of

inappropriate or incorrect income figures, expense figures, and

capitalization rates."), affd. in part, revd. in part on another

issue and remanded 976 F.2d 1163

(8th Cir. 1992).

Mr. Argote's Opinion

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 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 cash flow

analysis.

Discussion and Conclusion

Mr. Roddewig did use the income approach, but he did not

rely on the Maison Blanche Building's track record because he

took it as a fact that the building would be rehabilitated to

house a 452-room Ritz-Carlton Hotel.

He assumed a construction

period from 1997 through 1999, and he further assumed the

development costs incurred in each of those years.

He assumed

what the net operating income of the hotel would be for 2000 thru

2002, and he assumed the amount that the building would fetch if

sold at the end of 2002.

Based on those assumptions and an

- 63 -

assumption as to an appropriate discount rate, he determined that

"the most probable price that a purchaser would be willing to pay

for the unrehabilitated * * * [Maison Blanche-Kress parcel] prior

to considering the impact of the * * * [servitude]" was $29.5

million.

Making some adjustments to his assumptions, he

determined an after restriction value of approximately $18

million, which led to his assigning to the servitude a value of

$11.5 million.

There are obvious risks of error in the assumptions Mr.

Roddewig made: e.g., the hotel might not be finished on

schedule;" occupancy might be less than expected; the hotel might

not fetch $123,942,500 at the end of 2002

servitude).

(ignoring the

Moreover, in estimating construction costs and hotel

receipts and costs 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 assumptions.

Our own calculations, set forth infra,

show that relatively minor changes in only a few of his

assumptions would have large bottom-line effects.

We agree with

Mr. Argote that the many assumptions made by Mr. Roddewig make

And apparently it was not finished on schedule. Mr.

Roddewig assumed that construction would end on Dec. 31, 1999,

and the hotel would open the next day, Jan. 1, 2000.

Petitioner

makes no objection to respondent's proposed finding of fact that

the hotel commenced operations on Oct. 6, 2000, and we have so

found.

- 64 -

his conclusions prone to error, and, without some estimate of the

risk of error in his assumptions, we are reluctant to accept

those conclusions at face value.

Moreover, an important reason

for his income analysis is to show the loss in value brought

about by the conveyance of the servitude.

We have specific

concerns about some of the assumptions he made in determining a

lower value for the Maison Blanche-Kress parcel after the

conveyance of the servitude.

Mr. Roddewig increased his estimate of operating expenses to

reflect (1) increased administrative costs on account of dealing

with PRC,

(2) increased maintenance costs for the protected part

of the Maison Blanche Building,

(3) increased insurance costs for

"reproduction insurance", and (4) annual additions of $370,000 to

a "facade replacement reserve".

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.

We have already expressed our

doubts as to that latter amount.

See supra section IV.B.3. of

this report.

We express further doubt as to other components of

the facade replacement cost that are not adequately explained,

including an almost $3 million architect's fee, approximately $4

million for a development fee, interest, real estate taxes,

"Etc.", a project management fee of approximately $2.6 million,

and a financing fee of approximately $4.7 million.

Mr. Roddewig

also offers little support for the amounts he estimates as

increased administrative, maintenance, and insurance costs.

In determining an after restriction value, Mr. Roddewig also

increased the capitalization rate he used in determining the

selling price of the building in 2002 from 9.5 to 10 percent, and

he increased the interest rate used to discount all cash flows

from 13 to 13.5 percent.

He explained those adjustments as

resulting from the additional risks and uncertainties attendant

on owing a building subject to a preservation easement.

examples of those risks he identified the risk that, on account

of the servitude, the rehabilitation cost of the Maison Blanche

Building for hotel use would increase and, in particular, that

the reproduction cost of the terra cotta facade would increase.

He made no attempt to quantify the influence of the various risks

he identified on the two rates, nor did he explain why overall

rehabilitation costs and terra cotta costs were risky enough to

contribute to rate changes but safe enough to accept without

reservation in calculating the development costs and the

additions to the facade replacement reserve included in his after

restriction analysis.

If we reduce his 0.5-percent increase in

both the capitalization and discount rates by 0.1 percent (a 20percent reduction), the value that he calculated for the

servitude would be reduced by close to $1 million."

Mr. Roddewig

We illustrate the effects of a 0.1- and a 0.2-percent

change in the capitalization and discount rates:

As assumed by

Mr. Roddewig

Capitalization

Rate After

Restriction

Discount

Rate After

Restriction

10.0%

13.5%

Value of

Servitude

$11,407,407

(continued...)

- 66 -

has offered an inadequate explanation of why any after

restriction increase in risk justifies a rate change of 0.5

percent.

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."

.Comparable Sales Approach

Introduction

We have found the comparable sales approach to be the most

reliable indicator of value when there is sufficient data about

sales of properties similar to the subject property.

See, e.g.,

Estate of Spruill v. Commissioner, 88 T.C. at 1229 n.24; Estate

of Rabe v. Commissioner, T.C. Memo. 1975-26.

Discussion

Introduction

As we reported supra in section III.E.1. of this report, Mr.

Roddewig employed the comparable sales approach only in aid of

determining a before restriction value for the Maison BlancheKress parcel, while Mr. Argote employed it as his exclusive

"(...continued)

0.1 % adjustment

0.2 % adjustment

9.9

9.8

13.4

13.3

10,534,740

9,649,088

Because we give no weight to the income approach, we

need not decide the parties' disagreement over whether it is

appropriate to use the financial results of operating the hotel

in determining the fair market value of the Maison Blanche

Building.

- 67 -

approach to determine both the before and after restriction value

of the Maison Blanche Building.

Mr. Roddewig's Use of Nonlocal Comparables

Mr. Roddewig identified two sets of building sales he

believed were suitable for comparison to the Maison Blanche

Building.

One set comprised downtown New Orleans buildings

purchased as shells for adaptive use as hotels.

The second set

comprised office buildings outside of New Orleans purchased for

the same purpose.

Mr. Roddewig explained that he had a need for

nonlocal comparables because none of the buildings that he found

in downtown New Orleans were similar to the Maison Blanche-Kress

parcel in size, luxury, or 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."

Mr. Argote disagreed on the need for nonlocal comparables.

While he agreed that, on occasion, an appraiser has to look

outside the location of the subject property for comparables,

"particularly when there are no sales available", he was of the

opinion that,

"in the New Orleans market at that point in time,

there were at least nine sales that he

[Mr. Roddewig] could have

used, and he did not do that."

In determining the fair market value of property under the

comparable sales approach, we have preferred evidence of local

- 68 -

sales."

The reason is simply that location plays a huge role in

determining the desirability, and, thus, the value of real

estate.20

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.

Indeed, Mr. Roddewig testified that more

weight should be given to local sales, but that the adjusted

values for those sales should be considered in light of the

higher adjusted values he determined for his nonlocal sales.

The

adjusted values he determined for his nonlocal sales were

19 See, e.g., Garwood Irrigation Co. v. Commissioner, T.C.

Memo. 2004-195 (rejecting use of comparable property located in a

different market than subject property); Borgatello v.

Commissioner, T.C. Memo. 2000-264 (declining to place weight on

comparable properties located in other communities); Eugene D.

Lanier, Inc. v. Commissioner, T.C. Memo. 1998-7 (disregarding

comparable properties located in other cities without evidence

that these markets were similar to subject property market);

Estate of Hillebrandt v. Commissioner, T.C. Memo. 1986-560

(placing little to no weight on appraiser's use of comparable

located farther from subject property where closer comparable

properties existed); Marks v. Commissioner, T.C. Memo. 1985-179

(relying on value of properties in closer proximity to subject

property); Kewaunee Engg. Corp. v. Commissioner, T.C. Memo. 1979154 (finding properties within close proximity to subject

property more persuasive of value).

2° Location is said to have been the motto of the hotelier

Conrad Hilton:

The late Conrad Hilton who built a chain of hotels

across the world, was firmly of the belief that if he

built a hotel in the right location it would make

money. Location, Location, Location was his motto.

Never build a hotel where there is no traffic.

Ferrers, "In a Town Called Google, the Keyword is Real Estate",

Smart News Direct,

http://www.smartnewsdirect.com/realestate/inatown.html (last

visited Oct.

25,

2008).

significantly higher than the adjusted values he determined for

his local sales: 64 percent higher on a square footage basis and

at least double on a per room basis."

Those large disparities in

values convince us that the risk of using nonlocal sales is

significant.

Moreover, Mr. Roddewig did not claim that there

were no local sales of comparable properties available; he

identified five, and Mr. Argote was of the opinion that there

were nine that he should have considered.

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 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."

Mr. Roddewig has failed to convince us that we should give

weight to his nonlocal sales, and we shall not.

He reports an approximate mean per square foot value for

local comparables of $53 and an approximate mean per square foot

value for nonlocal comparables, after excluding outliers, of $87

a square foot.

He reports an approximate mean per hotel room for

local comparables of $31,000 and, after eliminating outliers, a

range of per room values for nonlocal comparables from $66,000 to

$90,000.

On brief, in support of Mr. Roddewig's use of nonlocal

sales, petitioner cites several publications that are not in

evidence and State court authority. At most, the conclusion that

can be drawn from those materials is that there is no absolute

bar to considering sales of comparable nonlocal property

transactions, a point with which we agree.

- 70 c.

His Use of Price Per Room

For each of his comparable sales, Mr. Roddewig determined an

adjusted sales price on the basis of both dollars paid per square

foot and dollars paid per hotel room.

On the valuation date, the

Maison Blanche Building was a partially vacant building that the

partnership planned to rehabilitate and operate as, among other

things, two hotels with 720 rooms.

Because those rooms had not

yet been constructed, that quantity is somewhat speculative.

The

square footage of the building was a determinable quantity.

All

other things being equal Mr. Roddewig's determination of the

value of the Maison Blanche Building on the basis of a per hotel

room basis is less certain than his determination of that value

on the basis of a per square foot basis.

The parties disagree on

whether it is appropriate to use sales of existing hotel

properties in valuing a vacant retail and office building only

intended for hotel use and whether petitioner has established

that price per room is a method of valuation employed by buyers

and sellers in New Orleans or any other relevant market.

We are

inclined to agree with respondent that Mr. Roddewig's price per

room analysis should be rejected, but, because we shall consider

only Mr. Roddewig's analysis based on local sales, and, on that

basis, his per room analysis produces a lower value for the

Maison Blanche Building than does his per square foot analysis,

- 71 -

we shall assume that petitioner would abandon his per room

analysis."

In any event, we shall disregard it.

The Expert's Adjustments

Both Messrs. Roddewig and Argote adjusted the sales prices

of their comparables for conditions of sale, time of sale, size

of the comparable, and configuration of the property.

Mr.

Roddewig also made substantial adjustments for the higher room

rates expected at a Ritz-Carlton Hotel (hotel price point

adjustment), the lack of retail potential in each comparable

(retail-potential adjustment), and zoning and historic

designation differences (zoning/historic district adjustment).

He offered the following explanation for the hotel price point

adjustments (a positive adjustment in each case, ranging from 15

to 60 percent):

"Luxury hotel development projects generate the

highest room rates and typically pay more per square foot or per

room to acquire buildings for luxury hotel development projects."

When asked by the Court if a luxury hotel developer would pay

more for a piece of property than the local market would demand,

Mr. Roddewig answered in the affirmative:

There are particular types of buyers that will pay a

premium without trying to think about what the local

buyers will pay. They have their own criteria for

rates of return, and they don't price it based on what

Mr. Roddewig reports a mean average adjusted price per

square foot of $53.44 for his local comparables and 530,646

square feet in the Maison Blanche-Kress parcel, which indicates a

before restriction value, on a square foot basis, of $28,124,238.

He also reports a mean average adjusted price per room of $31,263

for his local comparables and 720-planned rooms, which indicates

a before restriction value, on a per hotel room basis, of

$22,509,360.

- 72 -

their competition in the local market is willing to pay

and go a dollar more.

The hotel price point adjustments Mr. Roddewig made are not of

little consequence.

If we eliminate them from his calculations,

the average price per square foot that he calculated for the

local comparables drops from $53.44 to $44.03 per square foot (a

difference of $9.41).

Given his estimate of 530,646 square feet

in the Maison Blanche-Kress parcel, that means that the indicated

value of the parcel based on the local comparables would be

$23,371,242 rather than $28,357,722, a difference of $4,986,480.

That is a large amount of money for a luxury hotel developer to

leave on the table by ignoring local market conditions in buying

a parcel like the Maison Blanche-Kress parcel.

Without evidence

of the phenomenon more convincing than Mr. Roddewig's testimony,

we will not take the risk of inaccuracy that those adjustments

carry.

Mr. Roddewig also made retail-potential adjustments of 25

percent to four of his local comparables and 35 percent to the

fifth (the additional 10 percent to account for an interior lot

with limited visibility).

All of the adjustments were positive.

He explained the 25-percent adjustments as being necessary

because about 25 percent of the Maison Blanche-Kress Complex was

to be devoted to "a retail department store".

Mr. Argote

testified that, since retail use is only 25 percent of the

intended use of the Maison Blanche-Kress parcel, making a 25-

percent positive adjustment to the sales prices of the

comparables is the equivalent of saying that space devoted to

- 73 retail is worth twice the space devoted to other uses.

further testified that putting a premium on the value of retail

space was unjustified because of the poor climate for retail

operations in the downtown area.

He testified that the major

retailers had left or were in the process of leaving the downtown

New Orleans area.

He is of the opinion that, in late 1997, an

attempt to combine a retail operation with a hotel would have

been risky, and the combined operation would have been worth less

than a hotel operation alone.

Indeed, on cross-examination, Mr.

Roddewig agreed that, for most buildings on Canal Street in 1997,

the retail market "was probably not good."

Mr. Argote is more

familiar with the New Orleans real estate market than is Mr.

Roddewig, and his superior knowledge of the market and his

demeanor give us confidence in his testimony.

We accept his

opinions that no premium should attach to the value of retail

space and no positive adjustment is required.

We shall make no

retail-potential adjustments.

Mr. Roddewig also made zoning/historic district adjustments.

Such adjustments are proper.

T.C. Memo. 1989-254

See, e.g., Mathis v. Commissioner,

(taxpayer's expert erred in not making a

downward adjustment to reflect the zoning of the subject

property).

We accept his inclusion of zoning adjustments, which

varied depending on the zoning classification of the building

compared to the zoning classification of the Maison Blanche

Building.

We also accept his argument that historic districts

and landmark designations, like zoning restrictions,

limit the

- 74 ability to develop property; thereby, decreasing its value.

made negative adjustments of 5 percent to two of his local

comparable sales to reflect that they are not landmark properties

or within New Orleans historic districts.

Under his cost

approach, he made a negative adjustment of 15 percent to account

for external obsolescence resulting from the designation of the

Maison Blanche Building as part of the Canal Street Historic

District.

We think he has been inconsistent.

We will use 10

percent.

Before Restriction Value

(i) Introduction

Mr. Roddewig relies on five local comparables; Mr. Argote

relies on nine; four are common to both appraisers.

We shall

rely on those four to determine the before restriction value of

the Maison Blanche Building under the comparable sales approach.

We shall first determine the average adjusted price per square

foot for those four comparables.

We shall then extrapolate from

that price to determine the before restriction value of the

Maison Blanche Building.

We shall disregard the Kress Building

in our calculations because Mr. Roddewig erred in believing that

it was burdened by the servitude.

We shall average Messrs.

Roddewig's and Argote's estimates of the area of the Maison

Blanche Building, 514,436 and 514,697 square feet, respectively,

and assume that the result, 514,566 square feet,

the Maison Blanche Building.

is the area of

- 75 -

(ii)

The Pere Marquette Building

One common property is the Pere Marquette Building, 150

Baronne Street, New Orleans, Louisiana.

It is located about one

block from the Maison Blanche Building.

Messrs. Roddewig and

Argote agree that the Maison Blanche Building is in a superior

location due to its proximity to the French Quarter.

Each made a

positive adjustment to the sales price of the Pere Marquette

Building of 20 percent to account for the Maison Blanche

Building's superior location.

We agree with that adjustment.

The experts differ by a few dollars on the sales price of

the Pere Marquette Building, which we find to be $5.5 million.

As to the time of the sale, Mr. Roddewig says on one page of his

report that the building sold in January 1996 and on another that

it sold in June 1992.

26, 1996.

Mr. Argote says that it sold on January

We accept Mr. Argote's date and his positive

adjustment of 10 percent for the time difference from the sale to

the valuation date.

Both appraisers made a negative adjustment of 5 percent on

account of the size of the Pere Marquette Building.

offered the following general rule:

Mr. Roddewig

"Larger buildings often sell

for less per square foot than do smaller buildings.

Typically,

this is caused by the fact that larger buildings, like larger

sites, may take longer to develop, and therefore involve more

risk than smaller buildings or sites."

We agree that, on the

record before us, a 5-percent size adjustment is appropriate.

- 76 -

Mr. Roddewig made a negative adjustment of 10 percent to

account for the more favorable zoning classification of the Pere

Marquette Building compared to the Maison Blanche Building and

its lack of local landmark designation.

We adjust that negative

adjustment to 15 percent to account for a 10-percent (not 5percent) adjustment for lack of local landmark status.

Lastly, Mr. Roddewig made a negative adjustment of 10

percent under the heading "Adjustment for Property Interest

Conveyed and Conditions of Sale", which adjustment he explained

was due to seller financing.

Because Mr. Argote makes no similar

adjustment, and Mr. Roddewig failed to set forth sufficient facts

about the financing for us to determine whether any adjustment is

warranted, we will make none.

Mr. Roddewig makes no mention of a garage attached to the

Pere Marquette Building.

Mr. Argote testified that, along with

the building, the purchasers of the property acquired a six

story, 60,574 square foot parking garage attached to the

building.

Given Mr. Argote's greater experience in the New

Orleans real estate market, we shall assume that a parking garage

did come with the Pere Marquette Building.

Mr. Argote allocated

a $2 million portion of the $5.5 million purchase price to the

parking garage and took account only of the remaining portion

($3.5 million) in determining the price per square foot of the

Pere Marquette Building.

Mr. Argote was right to disregard the

portion of the purchase price allocable to the garage since the

subject property, the Maison Blanche Building, was being valued

- 77 -

without regard to any garage space.

We have no basis to

challenge his allocation of $2 million to the parking garage and,

based on our confidence in him, we shall accept it.

The parties

agree that the size of the Pere Marquette Building is 202,000

square feet.

Assuming the cost of the building to be $3.5

million, that results in an unadjusted price per square foot of

$17.33 for the Pere Marquette Building, which we accept.

We determine an adjusted price per square foot for the Pere

Marquette Building, as follows:

Adiusted Price per Square Foot: Pere Marquette Building

Unadjusted price per square foot

Adjustments:

Location

Time

Size

Zoning/historic

Total adjustments

Multiplier (100% + 10% = 110%)

Adjusted price per square foot

(iii)

$17.33

+20%

+10%

- 5%

-15%

+10%

110%

19.06

Bell South Building

A second common property is the Bell South Building, 820

Poydras Street, New Orleans, Louisiana.

it sold for $2.657 million in 1997.

The experts agree that

Mr. Roddewig testified that

it sold in May 1997 and Mr. Argote testified that it sold on

December 18, 1997.

Mr. Argote provided more details surrounding

the sale, so we accept his date of sale, and we will not adjust

for time.

Both appraisers made negative adjustments for the building's

size, 15 percent by Mr. Argote and 10 percent by Mr. Roddewig.

Mr. Argote is of the opinion that the building includes "+/-

- 78 77,000 square feet", while Mr. Roddewig is of the opinion that it

includes 73,347 square feet.

exact figure.

We shall accept Mr. Roddewig's more

Neither appraiser gave a reason for the level of

adjustment he chose to apply on account of size.

In reviewing

the adjustments that Mr. Roddewig applied to his comparable

sales, no pattern emerges as to his adjustment for building size.

There is a pattern to Mr. Argote's adjustments that reflects the

size of each comparable property sale he chose.

That pattern

gives us confidence in Mr. Argote's adjustments, and we shall

accept his negative adjustment of 15 percent for the size of the

building."

The Bell South Building has the same zoning classification

as the Pere Marquette Building and, like that building, has not

been designated a local landmark.

Mr. Roddewig increased his

negative adjustment to account for zoning/historic designation

differences from the Maison Blanche Building by 10 percentage

points (-20 percent for the Bell South Building compared to -10

percent for the Pere Marquette Building), however, to account for

his opinion that the site of the Bell South Building was not

developed to its full potential.

While that may be so (although

Mr. Roddewig fails to mention a 17,600 square foot parking lot

adjacent to the Bell South Building that Mr. Argote testified was

part of the sale), he has not explained how he arrived at that 10

We do so notwithstanding that we accept Mr. Roddewig's

smaller estimate of the size of the building.

That is because

Mr. Argote applied the same negative 15-percent size adjustment

to two smaller buildings that comprised 61,000 and 61,130 square

feet, respectively.

percentage point adjustment.

We shall make a negative adjustment

of 15 percent on account of zoning/historic designation, equal to

the adjustment we make with respect to the Pere Marquette

Building.

Both appraisers made positive adjustments on account of

location, but those adjustments differed substantially in size,

25 percent for Mr. Roddewig and 5 percent for Mr. Argote.

find neither wholly persuasive.

Mr. Roddewig's 25-percent

adjustment is the largest location adjustment that either

appraiser used for any local property, and Mr. Argote's 5-percent

adjustment is the smallest.

Mr. Argote adjusted all but one of

his other comparables upward by 20 percent for location

differences.

He did not explain why the Bell South Building

warrants a much smaller adjustment.

Mr. Roddewig described the

Bell South Building's location as "closer to [the] convention

center, but considerably further from [the] French Quarter".

used the same language to describe another comparable's location,

but he adjusted that property by 20 percent for location.

shall make a positive adjustment of 20 percent for location.

Finally, we must address Mr. Argote's 20-percent negative

adjustment under the heading "Configuration/Layout" to account

for a 17,600 square foot parking lot that he believes the

purchasers of the Bell South Building acquired along with the

building.

Mr. Roddewig recognized that the building does not

cover the entire lot, but he mentions no parking lot.

Petitioners make no objection to Mr. Argote's inclusion of the

- 80 parking lot in the purchase, and we shall accept it, along with

Mr. Argote's adjustment.

We shall make a negative adjustment of

20 percent for configuration/layout.

Assuming the cost of the building to be $2.675 million and

it to include 73,347 square feet, the unadjusted price per square

foot for the Bell South Building is $36.47, which we accept.

We determine an adjusted price per square foot for the Bell

South Building, as follows:

Adiusted Price per Square Foot: Bell South Building

Unadjusted price per square foot

Adjustments:

Size

Zoning/historic

Location

Configuration/layout

Total adjustments

Multiplier (100% - 30% = 70%)

Adjusted price per square foot

(iv)

$36.47

-15%

+20%

-20%

-30%

70%

25.53

Magazine Street and Board of Trade Place

The last two properties that both appraisers relied upon are

actually two neighboring properties that were purchased by the

same buyer and combined to form one hotel.

The properties are

located at 332-36 Magazine Street (Magazine Street) and 320 Board

of Trade Place (BT Place), New Orleans, Louisiana.

Magazine

Street was purchased on July 2, 1997, and BT Place was purchased

on October 24, 1997.

characteristics.

Otherwise, the properties have very similar

Therefore, we will consider them together.

Taking account of the testimony of both experts, the two

buildings comprise 43,500 square feet, and they sold for a

combined price of $1.235 million.

The unadjusted price per

- 81 square foot of the combined buildings is $28.39.

Mr. Roddewig

made no adjustment for size; Mr. Argote made a negative

adjustment of 25 percent.

Mr. Roddewig justified an exception

from the general rule that small buildings often sell for more

per square foot than larger on the basis that the small number of

rooms, 86, in the combined buildings and their inefficient layout

offset the potentially higher price that otherwise would be paid

for a smaller building.

He did not explain why a zero-percent

adjustment as opposed, say, to a negative adjustment of 10

percent is appropriate.

We have no independent basis to

determine the appropriate size adjustment for this comparable.

We shall rely on our general confidence in Mr. Argote and the

pattern we discern in his size adjustments to accept his negative

adjustment of 25 percent.

Mr. Roddewig made a positive adjustment of 15 percent to

account for zoning and historic designation factors.

described the adjustment of consisting of a slight positive

adjustment to account for the more favorable zoning of the

properties and a negative adjustment to account for expansion

opportunities, but, he cautioned,

"[t]he opportunity to add

additional floors * * * is limited by the location of the

buildings in a * * * historic district."

components of his adjustment.

He did not quantify the

He adjusted the Pere Marquette

Building down by 5 percent to account for more favorable zoning,

so we will make a positive adjustment of 5 percent to account for

less favorable zoning.

- 82 -

Both appraisers made positive adjustments on account of

location, Mr. Roddewig making an adjustment of 10 percent and Mr.

Argote making an adjustment of 20 percent.

Mr. Roddewig

described the properties location as "closer to convention

center, but slightly further from French Quarter.

office core."

Closer to

That is similar to his description for the Pere

Marquette Building, for which he made a positive adjustment for

location of 20 percent.

We shall make a positive adjustment for

location of 20 percent.

We shall make a positive time adjustment of 1.25 percent to

account for the small amount of time that elapsed between the

purchase of the two properties and the valuation date.

Mr. Argote has persuaded us that a negative adjustment of 10

percent under the heading "Configuration/Layout" is appropriate

to account for the properties' traditional New Orleans balconies

and courtyards.

We determine an adjusted price per square foot for the

Magazine Street and BT Place, as follows:

Adiusted Price Per Square Foot: Magazine Street and BT Place

Unadjusted price per square foot

Adjustments:

Size

$28.39

-25.00%

Zoning/historic

+ 5.00%

Location

Time

+20.00%

+ 1.25%

Configuration/layout

Total adjustments

Multiplier (100% - 8.75% = 91.25%)

Adjusted price per square foot

-10.00%

- 8.75%

x 91.25%

25.91

- 83 -

(v)

Conclusion

The average adjusted price per square foot of the Pere

Marquette Building, Bell South Building, and Magazine Street and

BT Place buildings is $23.50.

The Maison Blanche Building

comprises 514,566 square feet.

Applying the average price under

the comparable sales approach to the Maison Blanche Building's

total square footage results in a total before restriction value

of $12,092,301, which value we find to be its before restriction

value under the comparable sales approach.

After Restriction Value

Mr. Roddewig did not determine an after restriction value

for the Maison Blanche-Kress parcel under the comparable sales

approach because, he testified:

"There are no comparable sales

of easement encumbered properties in New Orleans that can be used

to value the Maison Blanche Hotel Complex 'after' considering the

easement."

Apparently, he limited his research to a set of

properties burdened by servitudes benefitting PRC, the

organization to which the servitude was conveyed, and,

in that

set, he could identify only one post conveyance sale."

Nevertheless, his consideration of market data on easement

encumbered properties in Washington, D.C., and Philadelphia, led

him to conclude that, taking into account that none of that data

Summarizing his research in New Orleans, Mr. Roddewig

testified:

"In the one sale of a building 'after' imposition of

the easement, the purchaser learned of the easement only on the

date of closing.

He could not renegotiate at such a late date,

but wished he had known about the easement before making his

offer to purchase."

- 84 -

"involved major rehabilitation projects and a change in use",

"an

impact from facade restrictions only of 15% is supportable."

From a consideration of direct acquisitions of preservation

easements in Philadelphia, he concluded that "an impact * * * in

the range of 12% to 15%" of the stabilized value of property

after rehabilitation and before conveyance is supportable.2s

Mr. Argote identified five sales of New Orleans buildings

that he thought comparable to the Maison Blanche Building and

that were encumbered by servitudes at the time of sale.

He made

adjustments similar to those he made to his before transaction

comparables and determined mean and median values per square foot

for the comparables.

Based on those values, he determined that,

on the valuation date, after the restriction, the Maison Blanche

Building was worth $20 per square foot, for a total value of

$10,293,940, which he rounded to $10.3 million.

Petitioner objects to respondent's proposed findings of fact

concerning Mr. Argote's identification of his five after

restriction comparables and his determination of an after

restriction value of $10.3 million principally on the ground that

His full testimony on the point is as follows:

Given the similarity in the content of the

Philadelphia and New Orleans easements, but given the

substantially larger size of the Maison Blanche

Building and the proposed conversion to a hotel, the

interference of the easement with signage and

window/door openings for retail use, and the fact that

the subject property·has three street facades that are

protected by the easement, an impact from the easement

in the range of 12% to 15% when measured against

stabilized value following rehabilitation is

supportable.

- 85 -

Mr. Argote's direct testimony should be excluded from evidence.

We have rejected that ground.

See supra section II of this

report.

Petitioner also objects to respondent's proposed finding

that Mr. Argote identified five comparables to the Maison Blanche

Building on the ground that, in his direct testimony, Mr. Argote

failed to show that three of those properties were comparable to

the Maison Blanche Building because he did not show that they had

the same highest and best use as the Maison Blanche Building.

his direct testimony, Mr. Argote stated only that the intended

uses of those three properties were "Speculative",

"Office/Retail", and "Office", respectively.

On cross-

examination, however, ln response to petitioner's counsel's

question as to where in his direct testimony ("page, line, and

paragraph") he states the highest and best use of the three

properties, he answered:

"We're on a really wrong track here.

The highest and best use of those properties was to develop a

hotel, even though they were being used for an alternative use."

Petitioner asks that we disregard that answer on the ground that

Rule 143(f) prohibits Mr. Argote from expanding or supplementing

his direct testimony by anything he says on cross-examination.

Rule 143(f) deals with expert witness reports and subparagraph

(1) thereof establishes the general rule that an expert's direct

testimony shall be by written report.

That subparagraph allows

additional direct testimony to, among other things "clarify or

emphasize matters in the report" or "otherwise at the discretion

- 86 -

of the Court."

Id.

Petitioner cites no Tax Court case, and we

can find none, interpreting Rule 143(f) to the effect that the

Court may not consider testimony elicited from an expert on

cross-examination.

We do find cases where testimony of an expert

on cross-examination is reported by the Court.

E.g., Sears,

Roebuck & Co. v.

(1991), modified

Commissioner,

96 T.C.

61,

111

96 T.C. 671 (1991), affd. in part and revd. in part on other

grounds 972 F.2d 858

(7th Cir. 1992); Hunt & Sons,

Inc. v.

Commissioner, T.C. Memo. 2002-65; Van Duzer v. Commissioner, T.C.

Memo. 1992-62, affd. without published opinion 9 F.3d 1555

Cir. 1993).

(9th

Mr. Argote was of the opinion that highest and best

use of the Maison Blanche Building was "for conversion to a

hotel/retail complex", and his direct testimony makes clear that

he understood the comparable sales approach to involve "a direct

comparison of the property being appraised to similar properties

that have sold in the same or in a similar market".

added.)

(Emphasis

Whether he said so specifically or not in his direct

testimony, it is clear to us that he understood that the

comparables he chose had to have the same highest and best use as

the Maison Blanche Building, irrespective of the comparables

current or intended use.

We think that his testimony on cross-

examination clarified his written report, and we shall allow it

either as a clarification of his report or as a matter given over

to our discretion.

See Rule 143(f) (1).

While the servitudes burdening the five properties he chose

as comparables were not identical to the servitude, for the most

- 87 part, all of the servitudes imposed similar burdens: e.g.,

perpetual restrictions; restrictions on successors and assigns;

servitudes covering exteriors and roofs; maintenance

requirements; insurance requirements; inspection rights;

restrictions on changes; and rights to inspect.

We do not think

that the differences between the servitudes burdening the five

comparables and the servitude were significant.

Indeed, the

servitude, in allowing the partnership to alter the Maison

Blanche Building according to plans to rehabilitate the building

for use as a Ritz-Carlton Hotel, including the right to build

penthouses on the roof and to install telecommunication devices

on the sides of the penthouses, is remarkable in its seeming

inconsistency with the goal of preserving the building's historic

facade, and, if anything, would seem to require a positive

adjustment with respect to each of the comparables.

Also, while unlike the servitudes burdening all but one of

the comparables, the servitude calls for payment of 10 percent of

the sales proceeds if the building is sold following a judicial

extinguishment of the easement, we agree with respondent that Mr.

Argote made no error in ignoring that fact since petitioner has

failed to show the risk of judicial extinguishment to be anything

but insignificant.

Nor do we think that Mr. Argote erred in

1gnoring a requirement in the servitude that the partnership

expend a minimum of $350,000 in improvements to the facade.

uncontradicted testimony was that Gary J. Elkins, one of

petitioner's counsel, in a letter to Linda J. Wise, one of

His

- 88 -

respondent's counsel, had written that the obligation was not a

contractual obligation.

Petitioner has failed to resolve the

conflict between that report and the language of the servitude.

We accept Mr. Argote's determination that the after

restriction value of the Maison Blanche Building under the

comparable sales approach is $10.3 million, and find accordingly.

We note that, having found that the before restriction value

under that approach is $12,092,301, the after restriction value,

$10.3 million, represents a 14.82-percent discount to the before

restriction value, a discount about the same as Mr. Roddewig

determined from his market studies.

Conclusion

Based on our findings as to the before and after restriction

values of the Maison Blanche Building under the comparable sales

approach, we find that, on the valuation date, the value of the

servitude under that method was $1,744,275, 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

Conclusion

We have rejected the cost and income approaches to valuing

the servitude.

We have found that under the comparable sales

approach the value of the servitude on the valuation date was

$1,792,301.

We accept and find that the fair market value of the

servitude on the valuation date was $1,792,301.

- 89 -

Valuation Misstatement Penalty

Introduction

On the 1997 Form 1065, the partnership claimed that the fair

market value of the servitude was $7.445 million.

We have found

that the fair market value of the servitude on the valuation date

was $1,792,301.

Therefore, on the 1997 Form 1065,

the

partnership claimed an amount for the value of the servitude

slightly more than 415 percent of its correct value.

Gross Valuation Misstatement

Section 6662(a) 1mposes an accuracy-related penalty in the

amount of 20 percent 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 under subtitle A,

chapter 1, of the Internal Revenue Code (a substantial valuation

misstatement).

See sec. 6662(b) (3).

Section 6662(h) increases

the penalty to 40 percent in the case of a gross valuation

misstatement under that chapter (a gross valuation misstatement).

There is a substantial valuation misstatement if the value of any

property claimed on the return is 200 percent 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

percent or more of the value determined to be the correct amount.

Sec. 6662(h) (2) (A) (i).

The applicability of the penalty (except

for partner-level defenses) is determined at the partnership

level.

Sec. 301.6221-1T(c), Temporary Proced. & Admin. Regs., 64

Fed. Reg.

3838

(Jan.

26,

1999); see sec.

6221.

Since the

- 90 partnership overstated the value of the servitude on the 1997

Form 1065 by slightly more than 415 percent, it made a gross

valuation misstatement."

Reasonable Cause Exception

Introduction

042

Petitioner argues, however, that the penalty should be

excused under the reasonable cause exception found in section

6664 (c) (1).

(1)

To qualify for that exception, petitioner must show

that "the claimed value of the property was based on a

qualified appraisal made by a qualified appraiser," 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).

Those are partnership level determinations.

Sec. 301.6221-1T(d), Temporary Proced. & Admin. Regs., 64 Fed.

Reg. 3838

proof.

(Jan. 26,

1999).28

Petitioner bears the burden of

See Santa Monica Pictures, L.L.C. v. Commissioner, T.C.

Memo. 2005-104.

Respondent concedes the first requirement.

satisfy the second requirement, petitioner must establish the

No penalty is imposed unless the portion of the

underpayment attributable to the misstatement exceeds $5,000.

Sec. 6662(e) (2).

In the case of a misstatement by a partnership,

however, that limitation is applied at the level of the taxpayer

who bears the burden of the tax on the partnership income.

See

sec. 1.6662-5(h), Income Tax Regs. Application of the limitation

is not an issue in this proceeding.

2a While the validity of sec. 301.6221-1T(c) and (d),

Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26,

1999), is being challenged in other cases before the Court, see

7050, Ltd. v. Commissioner, T.C. Memo. 2008-112 n.13 (and

accompanying text), the claim of invalidity does not extend to

the portion of the regulation stating that the applicability of

sec. 6664 (c) (2) is a partnership level determination.

- 91 -

fact that, in addition to obtaining a qualified appraisal, it

made a good faith investigation of the value of the servitude.

Petitioner offers a hotch-pot of arguments that, either together

or separately, are not convincing.

Principally, petitioner relies on the testimony of Robert

Drawbridge.

Mr. Drawbridge is an employee of an affiliate of

petitioner.

Petitioner is not only the tax matters partner of

the partnership, but it is also the partnership's sole general

partner.

Mr. Drawbridge serves petitioner as "asset manager" for

the partnership.

He testified, mostly to the best of his

knowledge, as follows.

The partnership relied on the appraisal

made by Mr. Cohen (the Cohen appraisal) in filing the 1997 Form

1065.

The partnership reviewed a second appraisal, dated January

1, 1998, obtained by the then limited partner of the partnership

from Revac, Inc., of Houston, Texas (the Revac appraisal), which,

among other things, estimated the market value of the Maison

Blanche Building (1) before rehabilitation,

(2) just after

rehabilitation, and (3) upon achieving stabilized occupancy.

The

partnership relied on professional tax advice it received from

its auditors and legal counsel in filing the 1997 Form 1065.

PRC representative signed the Form 8283 attached to the 1997 Form

1065, acknowledging receipt of the servitude.

Following its recounting of that testimony, petitioner

concludes in its answering brief:

"Clearly, there was sufficient

investigation and good faith reliance on the professional

- 92 valuation that resulted in the charitable donation deduction."

To bolster that conclusion., petitioner adds:

Additionally, the Cohen Appraisal concluded that the

diminution percentage in the property's 'before' and

'af.ter' values was only 7.8%, which is significantly

lower than those value percentages previously affirmed

by the Tax Court in Nikoladis [sic Nicoladis] v.

Commissioner, T.C. Memo. 1988-163 * * * (14.0%), Losch

v. Commissioner, T.C. Memo. 1988-230 * * * (16.8%), and

Dorsey * * *

[v. Commissioner, T.C. Memo. 1990-242]

(33.41%).

Discussion

Preliminarily, we note that Mr. Drawbridge also testified

that petitioner became the partnership's general partner on

September 15, 2000.

We assume that his responsibilities as asset

manager commenced no earlier than that date.

He did not testify

as to any personal knowledge of the operations of the partnership

before that date, nor did he identify anyone who had informed him

about partnership operations before that date.

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.

Even were we to credit his testimony, however, petitioner

has failed to make a convincing argument that the partnership

made the necessary investigation.

Petitioner considers the Revac

appraisal, which estimates that the fair market value of the

Maison Blanche Building would be $125 million upon rehabilitation

and $135 million upon achieving stabilized occupancy, as

- 93 -

supporting the Cohen appraisal, which concluded that the after

rehabilitation and before transaction value of the building was

$96 million.

Petitioner argues:

"The value reflected in the

Cohen Appraisal, at $96,000,000, to any reasonable person, acting

in good faith, would have appeared to be a conservative valuation

when compared to the conclusion in the REVAC Appraisal.""

The

flaw in petitioner's argument is that the good faith

investigation that petitioner was required to make was not an

investigation of the value of the Maison Blanche Building but an

investigation of the value of the servitude.

The before

restriction value of a rehabilitated Maison Blanche Building,

which Mr. Cohen relied on in his calculation of the diminution in

value occasioned by the conveyance of the servitude, is only half

the story.

Since the Revac appraisal tells us nothing of the

other half of the story, i.e., the value of the Maison Blanche

Building after the conveyance of the servitude, it does not

confirm the $7.455 million value of the servitude arrived at by

Mr. Cohen.

Indeed, the $125 million post rehabilitation value

determined in the Revac appraisal exceeds by slightly more than

30 percent the $96 million post rehabilitation and before

restriction value determined by Mr. Cohen, which discrepancy,

without more, equally brings into question both appraisals.

29 At trial, respondent objected to the admission of Exh.

45-P, which is the Revac appraisal. We overruled respondent's

objection and admitted the appraisal. After trial, respondent

moved the Court to reconsider that ruling. We shall deny the

motion since we are not relying upon the Revac appraisal to value

the servitude and respondent does not object to its admission for

purposes of determinations under sec. 6664.

- 94 -

We know nothing about any professional tax advice the

partnership received from its auditors and legal counsel in

filing the 1997 Form 1065, so we cannot say that such advice

constituted part of a good faith investigation of the value of

the servitude.

Also, we fail to see how petitioner's recitation

of results in Tax Court cases helps carry its burden of proving

that someone on behalf of the partnership carried out the

required investigation.

Conclusion

Petitioner has failed to prove that,

in addition to

obtaining the necessary appraisal, it made a good faith

investigation of the value of the servitude.

It has, therefore

failed to satisfy the conditions of section 6664 (c) (2), which are

a prerequisite for the application of the reasonable cause

exception found in section 6664 (c) (1).

Conclusion

The Partnership overstated the value of the servitude on the

1997 Form 1065 by more than 400 percent, and, therefore, it made

a gross valuation misstatement.. There is no reasonable cause for

the misstatement.

We sustain application of an accuracy-related

penalty under section 6662(a) on the basis of a gross valuation

misstatement.

VI.

Conclusion

To reflect the foregoing,

Decision will be entered

under Rule 155.

- 95 APPENDIX

ACT OF DONATION

OF PERPETUAL REAL RIGHTS

UNITED STATES OF AMERICA

WHITEHOUSE HOTEL

LIMITED PARTNERSHIP

STATE OF LOUISIANA

PARISH OF ORbEANS [LIVINGSTON]

PRESERVATION ALLIANCE

OF NEW ORLEANS, INCORPORATED

d/b/a PRESERVATION RESOURCE

CENTER OF NEW ORLEANS

BE IT KNOWN, that on this

29th

day of

December

1997,

BEFORE ME, undersigned Notary Public, duly commissioned and

qualified in and for the Parish of 011emw [Livingston], State of

Louisiana, therein residing, and in the presence of the

hereinafter named and undersigned witnesses:

PERSONALLY CAME AND APPEARED:

WHITEHOUSE HOTEL LIMITED PARTNERSHIP,

(hereinafter

referred to as "Owner"), Taxpayer Identification No.

72-1311785, a Louisiana partnership in commendam,

appearing herein through its duly authorized General

Partner, Whitehouse Hotel, L.L.C., a Louisiana limited

liability company, represented herein by its duly

authorized Manager, Housing Developers II, L.L.C.,

represented herein by its duly authorized Manager,

J.K.R. Family, L.L.C., represented herein by its duly

authorized Manager, Stewart Juneau;

AND

BE IT KNOWN,

that on this

23rd

day of

December

1997,

BEFORE ME, the undersigned Notary Public, a Notary Public,

duly commissioned and qualified in and for the Parish of Orleans,

State of Louisiana, therein residing, and in the presence of the

hereinafter named and undersigned witnesses:

PERSONALLY CAME AND APPEARED:

PRESERVATION ALLIANCE OF NEW ORLEANS,

INCORPORATED d/b/a PRESERVATION RESOURCE CENTER

OF NEW ORLEANS (hereinafter referred to as

"Donee"), a Louisiana non-profit corporation

organized under §1950, Title 12, Chapter II of

the Louisiana Revised Statutes

(]R.S. 12:1950),

before Patrick D. Breeden, Notary Public, May

31, 1974, and recorded in the Office of the

Louisiana Secretary of State on June 20, 1974,

the date that corporate existence began, herein

represented by Patricia H. Gay, its Executive

Director, duly authorized to act for said Donee;

WHO HEREBY DECLARE, stipulate, covenant, and

agree as follows:

W I T N E S S E T H:

WHEREAS, Owner possesses full and complete ownership of that

certain land ("Land") and the improvement thereon ("Improvement")

located in Square 94 of the Second District of the City of New

Orleans, Louisiana, which square is bounded by Canal, Burgundy,

Iberville, and Dauphine Streets, and more particularly described

on Exhibit A attached hereto and made a part hereof (the Land and

Improvement are collectively referred to as the "Property"); and

WHEREAS, the Property is shown on that certain survey dated

March 17, 1997, prepared by Gandolfo, Kuhn & Associates, Inc.

(the "Survey"), a copy of which is attached hereto as Exhibit B

and made a part hereof; and

WHEREAS, the Improvement as shown on the Survey consists of

a thirteen-story building with the upper seven stories being

constructed around a light well facing Dauphine Street;

WHEREAS, the first five stories of the Improvement are

referred to herein as the "Lower Stories", and the upper eight

stories of the Improvement are referred to herein as the "Upper

Stories"; and

WHEREAS, Owner intends to rehabilitate the Improvement and

convert it into a luxury hotel and to construct penthouses on the

roof of the Improvement (the construction of penthouses on the

roof of the Improvement shall be referred to herein as the

"Penthouse Addition"); and

WHEREAS, the Penthouse Addition will be constructed in

accordance with the approval of the National Park Service of the

United States Department of the Interior and in compliance with

the Comprehensive Zoning Ordinance of the City of New Orleans,

- 97 -

and in any event shall not exceed thirty (30) feet in height

above the roof of the Improvement and shall not be closer than

twenty (20) feet to the roof parapet nearest to Dauphine Street;

and

WHEREAS, Donee is a non-profit corporation, duly established

under the laws of Louisiana, operated exclusively for charitable,

educational, and historical purposes in order to facilitate

public participation in the preservation of sites, buildings, and

objects significant in the history and culture of the City of New

Orleans, and in furtherance of such purposes is authorized under

Section 1252 of Title 9 of the Louisiana Revised Statutes (:R.S.

9:1252(A)) to accept grants of perpetual real rights burdening

whole or any part of immovable property, including, but not

limited to, the facade, exterior, roof or front of any

improvements thereof, in order to protect property significant to

such history and culture; and

WHEREAS, Owner warrants that there exists no servitude,

lease, mortgage, lien or other interest affecting or encumbering

the Property which would prohibit, prime, interfere or otherwise

limit the effectiveness of any of the rights and benefits herein

created by this Act of Donation of Perpetual Real Rights and

granted to Donee except as may be disclosed on the public record;

and

WHEREAS, the Property has historical and/or architectural

merit and contributes significantly to the architectural and

cultural heritage and visual beauty of the City of New Orleans

and should be preserved; and

WHEREAS, the scenic and architectural facade servitude

donated by the Owner to Donee by this Act of Donation of

Perpetual Real Rights is created herein for charitable,

educational and historical purposes and will assist in preserving

and maintaining the Property and the architectural ensemble of

the City of New Orleans; and

WHEREAS, to this end, Owner desires to donate, grant,

transfer and convey to Donee, and Donee desires to accept, a

scenic, open spage and architectural facade servitude as a

perpetual real r1ght in and to the exterior surfaces of the

Improvement.

NOW, THEREFORE, pursuant to R.S.9:1252, as amended, and in

accordance with applicable provisions of the Internal Revenue

Code of 1986, as amended, Owner does hereby create, establish,

grant, donate, convey and transfer to Donee a perpetual real

right (which perpetual real right is more particularly described

below) in and to certain exterior surfaces of the Improvement,

all of which are owned by Owner (the "Servitude") subject to the

right of the Owner to construct the Penthouse Addition on the

- 98 roof of the Upper Stories and to those rights reserved to Owner

in Paragraph 4 hereof.

This Servitude shall constitute a binding servitude, in

perpetuity, upon the exterior surfaces of the Improvement; and to

that end, Owner covenants on behalf of Owner and Owner's heirs,

successors, and assigns, and all subsequent owners of the

Improvement with Donee, its successors and assigns, such

covenants being deemed to run as a binding servitude, in

perpetuity, with the Land, to do (and refrain from doing), each

of the following terms and stipulations, which contribute to the

public purpose in that they aid significantly in the preservation

of historic property:

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 subject to Owner's

right to construct the Penthouse Addition thereon (the "Facade").

In the event of uncertainty, the exterior surfaces of the

Improvement visible in the photographs in Exhibit C shall

control.

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

acknowledges and agrees that it shall make certain improvements

to the Facade which shall have a cost of at least $350,000.

Owner further acknowledges and agrees that in the event any

changes or modifications are made to the Plans which affect the

Facade, Owner shall fir,st obtain the prior written approval of

Donee before any such changes or modifications are made.

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, remolding, 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 and the Penthouse

Addition, or which would adversely affect the structural

soundness of the Improvement.

The repair or replacement or

reconstruction of any subsequent damage to the Facade which has

resulted from casualty loss, deterioration, or wear and tear,

shall be permitted without the prior written approval of Donee,

provided that such reconstruction, repair, repainting, or

refinishing is performed in a manner which will not alter the

appearance of the Facade subject to this Servitude as it is as of

even date herewith or as it may subsequently be modified in

accordance with the terms hereof. Anything to the contrary

notwithstanding in this Act of Donation of Perpetual Real Rights,

Owner hereby retains the right (i) to replace any window in the

Improvement with a new window which replicates the window which

is being replaced so long as owner does not replace more than ten

(10%) percent of the windows in the

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