Valuation Update from Miller Cooper & Co.

Summer 2010

Tax Court Focuses on Faulty Appraisal

 Careful selection of an Appraiser has become more important following a recent Tax Court decision based on the quality of the appraisal rather than the merits of the case. Miller Cooper professionals have decades of experience delivering quality reports that have withstood IRS and Court scrutiny for our clients.

In mid-July the U.S. Tax Court decided a case in favor of the IRS based on an incomplete appraisal. In the case of Huda T. Schneidelman et. al. v. Commissioner, Ms. Schneidelman claimed a charitable deduction for the donation of a “façade easement” in her historical Brooklyn neighborhood to the National Architectural Trust. The donation of a façade easement will preserve the front façade of an historic building into perpetuity.

 She hired an appraiser to determine the value of the donation. The appraiser first determined the value of the house prior to the donation of the easement was $1,015,000 based on its fair market value. The appraiser then applied an 11.33% discount to determine that the value of the donation was $115,000. His report stated the reason thusly:

“For most attached row properties in New York City, where there are many municipal regulations restricting changes to properties located in historic districts, the façade easement value tends to be about 11-11.5% of the total value of the property. That figure is based on the appraiser’s experience as to what the Internal Revenue Service has found acceptable . . .”

In its ruling, the Tax Court denied the charitable deduction, stating that the report failed to comply with substantiation requirements under tax regulations and noting that multiplying value by a specific percentage is not a method.

Among the substantiation requirements the Tax Court stated were missing from the Schneidelman report were:

• “Before and after” valuation methodology

• Specific basis for valuation

• Description of the property

• Easement terms

• Statement for income tax purposes

Because the Tax Court concluded the report was not a qualified appraisal, it refused to consider the evidence or reach a conclusion as to the value of the easement. However, while it did deny Ms. Schneidelman the charitable deduction, the court did recognize that she was entitled to rely on her advisors. Therefore the Tax Court denied the assessment of the accuracy-related IRS penalty.

For more information, please contact Mike Dorman, Director of Valuation Services or Deborah Adasiak, Senior Manager, Valuation Services, at 847-205-5000

Miller, Cooper & Co., Ltd.

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