The Tax Court held that the Uniform Standards of Professional Appraisal Practice (USPAP) are not the sole measure of an expert witness’s reliability. The witness had been called upon to provide a value of a conservation easement restricting the use of real property, or “servitude.” Based on that testimony, the court upheld the Service’s denial of the full claimed value of the servitude as a deduction for a charitable contribution.
Whitehouse Hotel, a limited partnership, purchased Maison Blanche, a historic building near the French Quarter of New Orleans, and adjoining property Whitehouse developed the parcel into a hotel operated by Ritz-Carlton. It also transferred to the Preservation Alliance of New Orleans a conservation servitude guaranteeing to maintain the historic appearance of the building’s facade in good condition. Whitehouse claimed on its 1997 federal income tax return a charitable contribution deduction for $7.44 million, the amount an appraiser determined as reflecting the property’s reduction in value by the servitude. The IRS determined that the allowable deduction should have been $1.15 million.
Both Whitehouse and the IRS used expert witnesses at trial. Whitehouse argued that the government’s expert was disqualified because (1) he was not experienced with this type of transfer and (2) his report did not conform with USPAP, since he used only the sales approach, rejecting the cost and income approaches.
In answer to the taxpayer’s first objection, the court held that the government’s expert, while having limited experience with this type of transfer, did have experience valuing property encumbered with a restriction. Furthermore, Whitehouse failed to distinguish between various types of property restrictions, the court said. On the second objection, the court held that while compliance with USPAP is an indicator of reliability, trial judges bear the responsibility of determining the reliability of an expert witness’s testimony. Whitehouse argued that USPAP should be the sole indicator of reliability. The court held that an expert’s opinion that does not fully comport with USPAP may still be admissible, even if it might not prove helpful.
The court found the report by the government’s expert to be the more reliable and held for the IRS. Furthermore, the court imposed the 40% penalty for gross valuation misstatement (greater than 400% difference) and held that Whitehouse did not qualify for the reasonable-cause exception. The taxpayer appealed the decision to the Fifth Circuit on Jan. 27.
Whitehouse Limited Partnership v. Commissioner, 131 TC no. 10
By Michael H. Brown, associate professor of accounting, Millikin University, Decatur, Ill.