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May 22, 2013 The Tax Lawyer

The Façade of Valuation: Why the Whitehouse Hotel Ltd. Partnership v. Commissioner Façade Easement Valuation Method Is Not Working

Vol. 66, No. 2 - Winter 2013

Stephanie S. Jeane


    In Whitehouse Hotel Ltd. Partnership v. Commissioner, the Tax Court determined the taxpayer was entitled to a deduction for a qualified conservation contribution for its donation of a façade easement under section 170(h) of the Code. The court concluded the fair market value of the façade easement was $1,792,301, drastically lower than the $7,445,000 claimed by the taxpayer on its 1997 return. The Fifth Circuit vacated the Tax Court’s decision and remanded the case to the Tax Court to revalue the façade easement.  On remand, the Tax Court maintained the fair market value as previously assessed.

    The Code and regulations currently give little valuation guidance for façade easements, which results in the Service challenging the taxpayer’s valuation and the taxpayer bringing the Service to court to litigate over the value of the easement. Courts commonly employ three “before and after” valuation approaches: replacement cost, capitalization of income, and comparable sales. A value is calculated under each approach, if applicable, and then the court reviews each of these approaches and determines the overall value of the easement based on all available evidence; accordingly, the value arrived at by the court may not be the exact figure determined by any one approach. Due to the subjective nature of the current valuation method, the taxpayer often claims a very large deduction, which the Service is forced to litigate case by case, a time-consuming method of enforcement. Because the current valuation method is too cumbersome to apply to easements and can often yield varying results depending upon the appraisers, this Note proposes the current valuation method be abandoned in favor of a new, more objective method based on a fixed percentage.

    Part II provides an overview of the qualified conservation contribution and current valuation method used to determine the value of façade easements. Part III discusses the facts and initial decision in the Whitehouse case, the Fifth Circuit appellate decision, and the Tax Court’s decision on remand. Part IV analyzes the Tax Court’s reasoning and acknowledges the potential tax abuse problems. Part V proposes a possible solution to the current difficulties with the valuation methods.

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