                                                WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR
                                                 HOLDINGS—NEW ORLEANS, LTD., TAX MATTERS
                                                    PARTNER, PETITIONER v. COMMISSIONER
                                                     OF INTERNAL REVENUE, RESPONDENT*

                                                    Docket No. 12104–03.                      Filed October 23, 2012.

                                                  On remand from the U.S. Court of Appeals for the Fifth
                                               Circuit for further proceedings in accordance with its opinion
                                               in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615 F.3d
                                               321 (5th Cir. 2010), vacating and remanding 131 T.C. 112
                                               (2008), we reconsider the value of the qualified conservation
                                               contribution made by W and whether, on account of that con-
                                               tribution, W is subject to an accuracy-related penalty on
                                               account of a substantial or gross valuation misstatement.
                                                  1. Held: Value of contribution determined: deduction over-
                                               stated.

                                       * This Opinion supplements our Opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 131
                                     T.C. 112 (2008), vacated and remanded, 615 F.3d 321 (5th Cir. 2010).


                                     304




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                                     (304)           WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                                  305


                                                     2. Held, further, overstatement is gross valuation
                                                   misstatement.
                                                     3. Held, further, accuracy-related penalty applicable
                                                   because reasonable cause for underpayment of tax not shown.

                                       Gary J. Elkins, Yvonne Chalker, and Thomas M. Beh, for
                                     petitioner.
                                       Jeffrey S. Luechtefeld, for respondent.

                                                                                        CONTENTS

                                     SUPPLEMENTAL OPINION ................................................................ 306
                                     Discussion ................................................................................................ 314
                                     I.      Introduction ....................................................................................... 314
                                     II.        Approaches to Valuation ................................................................. 315
                                           A.  Cost Approach ..............................................................................      315
                                              1.In General .................................................................................     315
                                              2.Comparing Petitioner’s Historic Cost to Mr. Roddewig’s
                                                   Cost Estimate ........................................................................        318
                                             3. Terra Cotta Reproduction Cost ................................................                   318
                                             4. External Obsolescence ..............................................................             319
                                             5. Land Value ................................................................................      320
                                             6. Conclusion .................................................................................     321
                                           B. Income Approach .........................................................................          321
                                             1. Introduction ...............................................................................     321
                                             2. In General .................................................................................     321
                                             3. Conclusion .................................................................................     326
                                           C. Comparable-Sales Approach .......................................................                  328
                                             1. Introduction ...............................................................................     328
                                             2. Disregard of Sales of Nonlocal Comparable Properties .........                                   329
                                             3. Highest and Best Use ...............................................................             330
                                             4. Second-Best Use ........................................................................         332
                                             5. Conclusion .................................................................................     336
                                     III.        Effect of the Servitude ................................................................... 337
                                           A.  Introduction ..................................................................................   337
                                           B.  The Conveyance ...........................................................................        340
                                             1. Introduction ...............................................................................     340
                                             2. Parties’ Arguments ...................................................................           342
                                             3. Discussion ..................................................................................    342
                                           C. Conclusion ....................................................................................    347
                                     IV.        Valuation of the Servitude ............................................................ 347
                                     V.       Valuation Misstatement Penalty .................................................... 348
                                           A.      Introduction .................................................................................. 348
                                           B.      Discussion ..................................................................................... 350




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                                     306                     139 UNITED STATES TAX COURT REPORTS                                                    (304)


                                             1.    Testimony of Mr. Drawbridge ..................................................                   350
                                             2.    Court of Appeals’ Counsel ........................................................               351
                                             3.    Petitioner’s Burden ...................................................................          352
                                             4.    The Revac Appraisal .................................................................            355
                                             5.    Form 8283 .................................................................................      356
                                             6.    Investigation ..............................................................................     357
                                             7.    Reliance on Advice and Counsel ..............................................                    359
                                             8.    Conclusion .................................................................................     361
                                           C.     Conclusion ....................................................................................   362
                                     VI.        Conclusion ...................................................................................... 362
                                     APPENDIX .............................................................................................. 362


                                                                           SUPPLEMENTAL OPINION

                                        HALPERN, Judge: This case is before us on remand from
                                     the U.S. Court of Appeals for the Fifth Circuit (Court of
                                     Appeals) for further proceedings in accordance with its
                                     opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615
                                     F.3d 321 (5th Cir. 2010) (Whitehouse II), vacating and
                                     remanding 131 T.C. 112 (2008) (Whitehouse I). The case
                                     arose on account of the parties’ disagreement as to the value
                                     of the qualified conservation contribution made by
                                     Whitehouse Hotel Limited Partnership (partnership) when,
                                     in 1997, it conveyed a qualified real property interest, viz, a
                                     perpetual conservation restriction, to Preservation Alliance of
                                     New Orleans, Inc., d.b.a. Preservation Resource Center of
                                     New Orleans (PRC), a Louisiana nonprofit corporation. The
                                     Court of Appeals instructed us to reconsider (1) our finding
                                     as to the value of the contribution and (2) our determination
                                     sustaining an accuracy-related penalty.
                                        At our request, the parties filed supplemental briefs in
                                     which they were to address both issues that we had identi-
                                     fied and issues that they might identify.
                                        Unless otherwise indicated, all section references are to the
                                     Internal Revenue Code in effect for 1997, and all Rule ref-
                                     erences are to the Tax Court Rules of Practice and Proce-
                                     dure.

                                                                                      Background
                                        We incorporate herein by this reference the facts that,
                                     under the heading FINDINGS OF FACT, we found in Whitehouse
                                     I, 131 T.C. at 115–120 (including the stipulation of facts,




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                                     supplemental stipulation of facts, and second supplemental
                                     stipulation of facts), which we do not believe the Court of
                                     Appeals disturbed. We summarize pertinent facts and por-
                                     tions of our Opinion in Whitehouse I for the benefit of the
                                     reader.
                                     The Partnership, the Maison Blanche and Kress Buildings,
                                     the Ritz-Carlton Agreement
                                        The partnership is a Louisiana limited partnership formed
                                     in 1995. On December 21, 1995, the partnership acquired a
                                     parcel of improved real property in New Orleans, Louisiana,
                                     on the square (block) bordered by Canal, Burgundy, Iberville,
                                     and Dauphine Streets. Principally, the parcel consisted of a
                                     historic building, the Maison Blanche Building, built between
                                     1907 and 1909, two annexes, one built in the 1920s and the
                                     other built in the 1950s, and the land under all. At the time
                                     the partnership acquired the parcel, the first through third
                                     floors of the Maison Blanche Building were under lease to
                                     Maison Blanche, Inc., for use as a department store. The les-
                                     see had previously prepaid rent for a term ending in 2004.
                                     The upper floors of the building were vacant. The partner-
                                     ship 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. In Sep-
                                     tember 1996, the partnership bought out the remaining term
                                     of the lease for $3,375,938 and obtained the right to use the
                                     Maison Blanche name.
                                        The Maison Blanche Building consists of a base level and
                                     an eight-level U-shaped tower. Exterior street facades of the
                                     Maison Blanche Building consist almost entirely of glazed
                                     terra cotta; some interior portions of the building (e.g.,
                                     interior courtyard areas) are primarily constructed of white
                                     glazed brick with less extensive terra cotta ornamentation.
                                     The Maison Blanche Building fronts on Canal Street.
                                        The Maison Blanche Building is adjacent to the Vieux
                                     Carre´ (French Quarter) neighborhood of New Orleans. It is
                                     in both the Vieux Carre´ National Historic District and the
                                     Canal Street Historic District, which is part of the Central
                                     Business District. The Central Business District Historic Dis-




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                                     trict Landmark Commission determined that the Maison
                                     Blanche Building is a building of major architectural impor-
                                     tance.
                                        On February 19, 1997, the partnership and the Ritz-
                                     Carlton Hotel Co., L.L.C. (Ritz-Carlton), entered into agree-
                                     ments under which the partnership agreed to renovate the
                                     Maison Blanche Building and the as-yet-unacquired neigh-
                                     boring Kress Building and Ritz-Carlton agreed to operate a
                                     Ritz-Carlton Hotel in the renovated buildings. Ritz-Carlton
                                     was to receive certain fees and expense reimbursements in
                                     exchange for its services.
                                        On or about October 30, 1997, the partnership purchased
                                     additional property in the same block as the Maison Blanche
                                     Building, including the Kress Building, which is adjacent to
                                     the Maison Blanche Building, and the Kress parking garage.
                                     The Kress Building was built in 1910, consists of six levels,
                                     and fronts on Canal Street. The partnership paid $3.4 mil-
                                     lion for the additional property, $1 million allocable to the
                                     Kress Building.
                                        Treating all of the partnership’s expenditures to assemble
                                     the Maison Blanche-Kress parcel as having been made in
                                     December 1995, the partnership paid $11,000,938
                                     ($6,625,000 + $1,000,000 + $3,375,938) to assemble the
                                     parcel.
                                        The Maison Blanche Building, its annexes, the Kress
                                     Building, and the Kress parking garage were ultimately
                                     developed into a 452-room Ritz-Carlton Hotel and into other
                                     hotel facilities. The Ritz-Carlton Hotel, and associated facili-
                                     ties, commenced operations on October 6, 2000.
                                     The Servitude
                                       On December 29, 1997 (valuation date), the partnership
                                     conveyed certain of its rights in the Maison Blanche Building
                                     to PRC. The conveyance was by ‘‘Act of Donation of Perpetual
                                     Real Rights’’ (conveyance). A copy of the conveyance,
                                     excluding exhibits, is appended hereto. In summary, the
                                     conveyance provides that: (1) the owner (i.e., the partnership)
                                     intends to convert the Maison Blanche Building (described as
                                     the ‘‘Improvement’’ (improvement), to distinguish it from the
                                     underlying land) into a hotel; (2) there is no servitude or
                                     other encumbrance that would limit the rights conveyed; (3)




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                                     (304)            WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                    309


                                     the rights conveyed (described as the ‘‘Servitude’’ (servitude))
                                     are conveyed in perpetuity; (4) the servitude relates to cer-
                                     tain exterior surfaces of the improvement (referred to as the
                                     ‘‘Facade’’ (facade)); (5) the owner will maintain the facade in
                                     a good and sound state of repair; (6) without permission, the
                                     owner will do nothing in or to the facade that would alter its
                                     appearance; and (7) PRC has the right to require the owner
                                     to maintain the facade. On December 29, 1997, the convey-
                                     ance was filed for registry in the conveyance records of the
                                     parish of Orleans.
                                     La. Rev. Stat. Ann. sec. 9:1252 (2008)
                                        Petitioner tax matters partner claims that the servitude
                                     was created in accordance with the express statutory provi-
                                     sions of La. Rev. Stat. Ann. sec. 9:1252. La. Rev. Stat. Ann.
                                     sec. 9:1252 provides for the creation of a perpetual real right
                                     burdening the whole or any part of immovable property,
                                     including but not limited to its facade, in favor of an entity
                                     formed exclusively for certain public purposes. Pertinent por-
                                     tions of that section are set out in the margin. 1
                                     The Charitable Contribution and Respondent’s Examination
                                       On account of the conveyance of the servitude to PRC, the
                                     partnership claimed a charitable contribution deduction of
                                           1 La.   Rev. Stat. Ann. sec. 9:1252 (2008) provides in part:
                                     Creation of real right for educational, charitable, or historic purposes
                                        A. The owner of immovable property may create a perpetual real right burdening the whole
                                     or any part thereof of that immovable property, including, but not limited to, the facade, exte-
                                     rior, roof, or front of any improvements thereon to any corporation, trust, community chest,
                                     fund, or foundation, organized and operated exclusively for religious, scientific, literary, chari-
                                     table, educational, or historical purposes, no part of the net earnings of which inure to the ben-
                                     efit of any private shareholder or individual, or to the United States, the state of Louisiana,
                                     or any political subdivision of any of the foregoing. A real right established pursuant hereto may
                                     additionally obligate the owner of the immovable property as is necessary to fully execute the
                                     rights granted herein.
                                        B. A real right created pursuant to this Section shall be binding on the grantor, his heirs,
                                     successors, assigns, and all subsequent owners of the immovable property, regardless of the fact
                                     that the grantee does not own or possess any interest in a neighboring estate or the fact that
                                     the real right is granted to the grantee and not to the estate of the grantee, the fact that the
                                     real right was not created as a part of a common development or building plan, devised by an
                                     ancestor in title of the grantor.
                                        C. A real right created under the authority of this Section shall be granted by authentic act
                                     and shall be effective against third 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 af-
                                     firmative obligation established therein, shall be enforceable by the grantee through judicial pro-
                                     ceeding by actions for injunctions or damages brought by the grantee.




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                                     $7.445 million on its 1997 Form 1065, U.S. Partnership
                                     Return of Income (1997 Form 1065). Respondent examined
                                     the 1997 Form 1065 and determined that the $7.445 million
                                     charitable contribution deduction should be reduced by
                                     $6.295 million since the partnership had not established that
                                     the loss of value on account of the conveyance of the ser-
                                     vitude exceeded $1.15 million. On account of the size of his
                                     reduction in value, respondent determined that an accuracy-
                                     related penalty under section 6662(a) is applicable. This pro-
                                     ceeding, in which petitioner challenges both respondent’s
                                     reduction in value of the charitable contribution deduction
                                     and the accuracy-related penalty, followed.
                                     Expert Testimony as to the Value of the Servitude
                                        The parties agree that the partnership is entitled to a
                                     charitable contribution deduction for 1997 on account of its
                                     conveying the servitude to PRC. They disagree as to the
                                     amount of the deduction because they disagree as to
                                     the value of the servitude. The parties relied exclusively on
                                     expert testimony to establish the value of the servitude.
                                        Petitioner called as its expert witness Richard J. Roddewig,
                                     whom we accepted as an expert with respect to (1) the valu-
                                     ation of conservation easements and (2) the site selection,
                                     feasibility, and valuation of hotels. Mr. Roddewig is a real
                                     estate appraiser and attorney. He is a member of the
                                     Appraisal Institute, and he holds its MAI designation. He con-
                                     ducts his appraisal business from Chicago, Illinois. He
                                     obtained a temporary license from the State of Louisiana as
                                     a certified general real estate appraiser for the purpose of
                                     making his appraisal here under consideration. Before
                                     reaching his conclusion as to the loss in value occasioned by
                                     the partnership’s conveyance of the servitude to PRC (some-
                                     times, value of the servitude) he spent four to six days in
                                     New Orleans. His staff made additional visits. Mr.
                                     Roddewig’s previous appraisal experience in Louisiana con-
                                     sisted 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, Lou-
                                     isiana. We received his written report, dated August 9, 2005,
                                     as his direct testimony.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                        311


                                        Respondent called as his expert witness Richard Dunbar
                                     Argote, whom we accepted as an expert with respect to
                                     commercial real estate appraisal. Mr. Argote is licensed by
                                     the State of Louisiana as a certified general real estate
                                     appraiser and as a real estate broker. Like Mr. Roddewig, he
                                     is a member of the Appraisal Institute and holds its MAI des-
                                     ignation. Mr. Argote has been appraising real estate in Lou-
                                     isiana for over 25 years. From 1990 to 2000, he appraised
                                     between 50 and 70 buildings in and around New Orleans
                                     that were to be used as or converted into hotels. About 85%
                                     of those appraisals were of buildings located within the Cen-
                                     tral Business District or the Vieux Carre´. Over the years,
                                     Mr. Argote has appraised every building within the same
                                     square as the Maison Blanche Building. He has appraised
                                     the Maison Blanche Building on three prior occasions. After
                                     addressing objections, we received his written report, dated
                                     October 31, 2006, as his direct testimony.
                                        Each expert arrived at an opinion as to the fair market
                                     value of the servitude by making the before and after
                                     comparison contemplated by the applicable regulations. See
                                     sec. 1.170A–14(h)(3)(i), Income Tax Regs. Petitioner’s expert,
                                     Mr. Roddewig, determined the requisite before and after
                                     values in three different ways. He relied primarily on a
                                     reproduction cost approach and an income approach, but he
                                     also used, in part, a comparable-sales approach. He deter-
                                     mined that the appropriate parcel of property to value was
                                     the Maison Blanche Building, the 1920s and 1950s annexes,
                                     and the Kress Building (Maison Blanche-Kress parcel). He
                                     determined the following before- and after-restriction values:

                                                                      Before-restriction values

                                              Cost approach ........................................................   $43,000,000
                                              Adjusted income approach ....................................             41,000,000
                                              Comparable-sales approach ..................................              40,000,000



                                                                        After-restriction values

                                             Cost approach ................................................            $35,500,000
                                             Adjusted income approach ............................                      28,000,000
                                             Comparable-sales approach ..........................                          ---




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                                     He determined no after-restriction comparable-sales-
                                     approach value because he found no directly relevant after-
                                     restriction sales. Taking into account his three approaches,
                                     but giving significant weight to the adjusted income
                                     approach because of the purported uniqueness in New
                                     Orleans of the Maison Blanche-Kress parcel, he reached the
                                     following ultimate determinations as to the before- and after-
                                     restriction values of the Maison Blanche-Kress parcel and
                                     the value of the servitude:

                                                                       Value of the servitude

                                             Before-restriction value ................................           $41,000,000
                                             After-restriction value ...................................          31,000,000

                                             Difference; i.e., fair market value of the
                                               servitude .....................................................     10,000,000
                                       Respondent’s expert, Mr. Argote, relied exclusively on a
                                     comparable-sales approach. He concluded that the before-
                                     restriction value of the Maison Blanche Building was $10.3
                                     million and the after-restriction value was $10.3 million. He
                                     determined that the value of the servitude was zero. Not-
                                     withstanding Mr. Argote’s opinion that the value of the ser-
                                     vitude was zero, respondent did not ask that we find that the
                                     value was any less than the $1.15 million he determined in
                                     his examination.
                                     Highest and Best Use
                                       In Whitehouse I, we acknowledged that the fair market
                                     value of property is determined by taking into account the
                                     highest and best use of that property on the valuation date.
                                     Whitehouse I, 131 T.C. at 130 (citing Stanley Works v.
                                     Commissioner, 87 T.C. 389, 400 (1986)). We explained that
                                     the experts differed on whether the conveyance changed the
                                     highest and best use of the property each valued. We stated:
                                     Mr. Roddewig determined the highest and best use of the Maison Blanche-
                                     Kress parcel before the conveyance was a mixed use development,
                                     including a Ritz-Carlton Hotel with 512 rooms (60 of them above the Kress
                                     Building), an additional all-suites hotel with approximately 268 rooms, and
                                     retail use on the first two floors and mezzanine of the Maison Blanche
                                     Building. He determined that the highest and best use of the Maison
                                     Blanche-Kress parcel after the conveyance was different in that: ‘‘The




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     313


                                     opportunity to add up to 60 additional hotel rooms [above the Kress
                                     Building] * * * [had] been eliminated.’’ That difference contributed to his
                                     conclusion that, under both the cost and income approaches, the fair
                                     market value of the Maison Blanche-Kress parcel was reduced on account
                                     of the conveyance. Mr. Argote believes the highest and best use of the
                                     Maison Blanche Building both before and after the conveyance was use as
                                     a hotel (not necessarily a Ritz-Carlton Hotel) with retail space.
                                     [Whitehouse I, 131 T.C. at 130–131.]

                                       Essential to Mr. Roddewig’s opinion was his belief that the
                                     conveyance eliminated the possibility of constructing 60 hotel
                                     rooms above the Kress Building. Considering the question to
                                     be one of local (Louisiana) law, we found that, on the evi-
                                     dence before us, the conveyance created no charge on the
                                     Kress Building in favor of PRC. Id. at 134. Therefore, we
                                     stated: ‘‘Petitioner has failed to show that the highest and
                                     best use of the Maison Blanche-Kress parcel after the
                                     conveyance differed from its highest and best use before the
                                     conveyance on account of the conveyance’s depriving
                                     the partnership of the ability to add 60 hotel rooms above the
                                     Kress Building.’’ Id. at 135. We concluded: ‘‘Mr. Roddewig
                                     erred in his opinion that the highest and best use of the
                                     Maison Blanche-Kress parcel differed after the conveyance on
                                     account of the partnership’s disability to add 60 hotel rooms
                                     above the Kress Building.’’ Id. We stated that we would take
                                     that error into account in considering his valuation conclu-
                                     sions. Id.
                                     Our Analysis of Value
                                       Mr. Roddewig failed to persuade us that $43 million and
                                     $35.5 million are reliable estimates of the before- and after-
                                     restriction reproduction costs, respectively, of the Maison
                                     Blanche-Kress parcel, or that the resulting value of the ser-
                                     vitude is $7.5 million. We therefore disregarded petitioner’s
                                     cost approach in determining the value of the servitude. Id.
                                     at 152. Because we believed that (1) that there was a risk
                                     of error inherent in the income approach as applied by Mr.
                                     Roddewig and (2) we had reliable alternative evidence of
                                     value arrived at by the comparable-sales approach, we also
                                     rejected petitioner’s income approach in determining the
                                     value of the servitude. Id. at 156. We relied exclusively on
                                     the comparable-sales approach to determine the value of the
                                     servitude. Id. at 171–172. Of note, we rejected Mr.




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                                     Roddewig’s use of nonlocal comparables, id. at 158, and his
                                     adjustment for the higher room rates expected at a Ritz-
                                     Carlton Hotel (price point adjustment), id. at 159. We found
                                     a before-restriction value for the Maison Blanche Building
                                     under the comparable-sales approach of $12,092,301. Id. at
                                     168. We accepted Mr. Argote’s determination that the after-
                                     restriction value of the Maison Blanche Building under the
                                     comparable-sales approach is $10.3 million, and found
                                     accordingly. Id. at 171. We found the difference, $1,792,301,
                                     to be the fair market value of the servitude on the valuation
                                     date. Id. at 172.
                                     Valuation-Misstatement Penalty
                                       On the basis of our determination of the value of the ser-
                                     vitude, we concluded that the partnership had overstated the
                                     value of the servitude on the 1997 Form 1065 by more than
                                     400%, and, therefore, it had made a gross valuation
                                     misstatement. Id. at 176. We found no reasonable cause for
                                     the misstatement. Id. We therefore sustained application of
                                     an accuracy-related penalty under section 6662(a) on the
                                     basis of a gross valuation misstatement. Id.

                                                                                Discussion
                                     I. Introduction
                                           ‘‘In sum’’, the Court of Appeals stated, we
                                     erred in declining to consider the Maison Blanche and Kress buildings’
                                     highest and best use in the light of both the reasonable and probable con-
                                     dominium regime and the reasonable and probable combination of those
                                     buildings into a single functional unit, both of which foreclosed the real-
                                     istic possibility, for valuation purposes, that the Kress and Maison Blanche
                                     buildings could come under separate ownership. This combination affected
                                     the buildings’ fair market value. [Whitehouse II, 615 F.3d at 340.]

                                     It instructed us as follows as to our tasks on remand:
                                       The effect of the easement’s impact on the property’s fair market value,
                                     such as prohibiting building 60 additional rooms on top of the Kress
                                     building, is a question of fact for the tax court to decide on remand. There-
                                     fore, we vacate its valuation and remand for reconsideration of the ease-
                                     ment’s value. As discussed supra, in making this valuation on remand, the
                                     tax court should, among other things, reconsider the experts’ reports and
                                     valuation methods (including, inter alia, using non-local comparables) and




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                                     their conclusions regarding highest and best use as a luxury or non-luxury
                                     hotel. [Id.]

                                     It also included among our tasks reconsideration, if nec-
                                     essary, of our penalty determination. Id. at 341.
                                       We shall undertake our tasks as follows. First, we shall
                                     reconsider whether the before and after values of the encum-
                                     bered property are best arrived at under the comparable-
                                     sales approach to valuation rather than the cost approach or
                                     the income approach. In doing so, we shall explain our reli-
                                     ance in applying the comparable-sales approach on properties
                                     in the Vieux Carre´ and the Central Business District, which
                                     implicates our consideration of the highest and best use of
                                     the Maison Blanche Building. Second, we shall explain our
                                     conclusion that the servitude did not deprive the partnership
                                     of the ability to add stories above the Kress Building. We
                                     shall, however, make an additional finding on the bases that,
                                     (1) the servitude did so deprive the partnership and, (2) the
                                     pending combination of the Maison Blanche and Kress
                                     Buildings made unlikely separate ownership of the two
                                     buildings. Finally, we shall revisit the penalty.
                                     II. Approaches to Valuation
                                           A. Cost Approach
                                           1. In General
                                        We have reconsidered Mr. Roddewig’s testimony regarding
                                     the value of the servitude under the reproduction cost
                                     approach and, because we find it unreliable, continue to
                                     accord it no weight.
                                        In its supplemental brief, petitioner suggests that in
                                     Whitehouse I we may have implied that the reproduction cost
                                     ‘‘approach should never be used to value historic properties’’.
                                     That is not our position. In Whitehouse I, 131 T.C. at 147,
                                     we stated:
                                        We have in the past questioned the suitability of the reproduction cost
                                     approach when applied to value older, historic structures. Dorsey v.
                                     Commissioner, T.C. Memo. 1990–242; Losch v. Commissioner, T.C. Memo.
                                     1988–230. For example, reproduction cost is of little assistance if no one
                                     would think of reproducing the property. United States v. Toronto, Ham-
                                     ilton & Buffalo Navigation Co., 338 U.S. 396, 403 (1949). * * *

                                     With respect to the Maison Blanche Building, we continued:




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                                     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 con-
                                     sent to any construction or reconstruction of * * * [the Maison Blanche
                                     Building], as provided herein. * * * [Whitehouse I, 131 T.C. at 147.]

                                     We concluded: ‘‘Petitioner has failed to convince us that, not-
                                     withstanding the historic significance of the Maison Blanche
                                     Building, the owners of the building would want to, or would
                                     be required to, reconstruct that 100-year-old structure if it
                                     were destroyed.’’ Id.
                                       The simple explanation for petitioner’s failure of proof on
                                     that score is that it cannot show that it would be a reason-
                                     able business venture to reproduce so old a building. Indeed,
                                     the reproduction cost approach is in general problematic for
                                     determining the value of a historic structure. The problem is
                                     described thus in the section of the Powell treatise on real
                                     property dealing with how valuation and appraisal methods
                                     vary for conservation easements:
                                     The cost approach to valuation encounters substantial difficulties when
                                     applied to historic structures (virtually its only application in the conserva-
                                     tion easement context). The reproduction cost of an historic building usu-
                                     ally bears little relationship to its present economic value. Such cost is
                                     usually far in excess of the cost of construction of a similarly sized modern
                                     structure, and may reflect the price of materials and workmanship that
                                     are no longer readily available. * * * [Richard R. Powell, Powell on Real
                                     Property, sec. 34A.06, at 34A–54 (M. Wolf ed. 2012).]

                                     The treatise concludes its discussion of the appropriateness
                                     of the reproduction cost approach to valuing historic improve-
                                     ments to land as follows:
                                     [T]his method of valuation has substantial disadvantages in the best of cir-
                                     cumstances. Its utility has been questioned and it should be used with
                                     care, if it is used at all, in connection with the appraisal of structures sub-
                                     ject to conservation easements.19
                                       Footnote 19. One authority has concluded, ‘‘The assumption, often
                                     reflected in the opinions of the highest courts, that replaceable property is
                                     usually worth its replacement cost, minus conventional deductions for
                                     depreciation, is utterly unwarranted and is constantly belied by business
                                     experience.’’ Bonbright, The Valuation of Property 176 (1937) (emphasis in
                                     original). As a general proposition, ‘‘[R]eproduction cost should be utilized
                                     only in those limited instances in which no other method of valuation will




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     317


                                     yield a legally and economically realistic value for the property.’’ (Great
                                     Atlantic and Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 242, 397 N.Y.S.2d
                                     718, 723, 366 N.E.2d 808, 812 (1977)).
                                       [Id.]

                                        In accord with the authority cited by the Powell treatise,
                                     the Court of Appeals has said that, for the reproduction cost
                                     approach to be appropriate, ‘‘there must be a showing that
                                     substantial reproduction would be a reasonable business ven-
                                     ture’’. United States v. Benning Housing Corp., 276 F.2d 248,
                                     250 (5th Cir. 1960). The Court of Appeals further observed
                                     that, where the reproduction cost approach is inapposite,
                                     reproduction cost evidence generally should be excluded from
                                     jury trials (such as in condemnation proceedings) because
                                     such evidence ‘‘almost invariably tends to inflate valuation.’’
                                     Id. (fn. ref. omitted). ‘‘This is so’’, the court continued,
                                     ‘‘because the reproduction cost of a structure sets an absolute
                                     ceiling on the market price of that structure, a ceiling which
                                     may not be, and most frequently is not, even approached in
                                     actual market negotiations.’’ Id. (fn. ref. omitted).
                                        Following that line of reasoning, the Court of Appeals for
                                     the Eighth Circuit has stated the rule more generally: ‘‘For
                                     the reproduction cost appropriately to have an impact on the
                                     value equation, the taxpayer must establish ‘a probative cor-
                                     relation between [it] and fair market value.’ ’’ Estate of
                                     Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir. 1988)
                                     (quoting Rainier Cos. v. Commissioner, T.C. Memo. 1977–
                                     351), rev’g and remanding 86 T.C. 66 (1986); see also Crocker
                                     v. Commissioner, T.C. Memo. 1998–204 (same with respect to
                                     replacement cost, citing Estate of Palmer).
                                        Thus, without a showing by petitioner that reconstruction
                                     of the Maison Blanche Building, if destroyed, would be a
                                     reasonable business venture, petitioner has failed to convince
                                     us that there is a probative correlation between Mr.
                                     Roddewig’s estimate of the reproduction cost of the Maison
                                     Blanche Building and the fair market value of that property.
                                     And while that might be a sufficient basis to disregard Mr.
                                     Roddewig’s testimony concerning cost, we believe that there
                                     are additional reasons for doing so, which we discussed in
                                     Whitehouse I, and which we summarize here.




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                                           2. Comparing Petitioner’s Historic Cost to Mr. Roddewig’s
                                              Cost Estimate
                                        In Whitehouse I, 131 T.C. at 148–150, we questioned
                                     whether Mr. Roddewig’s estimate of a before-restriction value
                                     of $43 million for the Maison Blanche-Kress parcel correlated
                                     with its market value because of the huge difference between
                                     his estimate of its before-restriction reproduction cost—$43
                                     million—and what the partnership actually paid for the
                                     parcel no more than two years earlier—slightly more than
                                     $11 million. After reviewing his list of reasons for the
                                     increase in value of the Maison Blanche Building, we stated:
                                     ‘‘Simply put, we cannot reconcile Mr. Roddewig’s report of a
                                     New Orleans real estate market enjoying, at best, stable
                                     growth with his explanation of 291-percent appreciation in
                                     the value of the Maison Blanche-Kress parcel.’’ Id. at 149–
                                     150. We are still of that conclusion. 2
                                           3. Terra Cotta Reproduction Cost
                                        Mr. Roddewig was of the opinion that the reproduction cost
                                     of the Maison Blanche Building shell and the Kress Building
                                     on the valuation date, before depreciation and obsolescence,
                                     was $54.3 million. Of that total estimated cost of reproduc-
                                     tion, he attributed $42.025 million to reproducing the terra
                                     cotta facade on the Maison Blanche Building. Because we
                                     found that he insufficiently supported his terra cotta repro-
                                     duction cost estimate (his testimony as to that cost being the
                                     only evidence of it in the record), and because that estimate
                                     was the major element of his reproduction cost estimate, we
                                     gave no weight to his conclusion that the total cost to
                                     reproduce the Maison Blanche Building shell and the Kress
                                     Building is $54.3 million. Mindful of the fact that, since the
                                     conveyance, the partnership has spent $7.792 million
                                     repairing and restoring the terra cotta facade, plus $421,000
                                     to repair damage from Hurricane Katrina, we still accord Mr.
                                     Roddewig’s testimony as to the reproduction cost of the
                                     Maison Blanche Building shell and the Kress Building no
                                       2 In passing, we note that, in considering the correlation, we did not take into account either

                                     expert’s opinion as to the highest and best use of the Maison Blanche-Kress parcel; we merely
                                     considered the relative prices as evidence of the correlation (or lack thereof) between the time-
                                     adjusted cost of acquiring the parcel and Mr. Roddewig’s estimate of the cost of reproducing it.




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                                     (304)           WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                   319


                                     weight because of the inadequacy of his testimony as to the
                                     terra cotta reproduction cost. 3
                                            4. External Obsolescence
                                        In both his before- and after-restriction calculations of
                                     reproduction cost, Mr. Roddewig deducted an amount to
                                     reflect external obsolescence: 15% of the before-restriction
                                     depreciated reproduction cost and 30% of the after-restriction
                                     depreciated reproduction cost ($6,516,000 and $13,846,500,
                                     respectively). He described the before-restriction external
                                     obsolescence as resulting from the designation of the Maison
                                     Blanche-Kress parcel as part of the Canal Street Historic
                                     District. He described his doubling of that figure to reflect
                                     after-restriction external obsolescence as resulting from his
                                     judgment of the added burden imposed on the owner of the
                                     parcel by the servitude. We refused to rely on his judgment
                                     alone that the enforcement of the provisions of the servitude
                                     double the cost of external obsolescence. We explained that
                                     our lack of confidence in his judgment was based on our
                                     impression that his $43 million estimate of the before-restric-
                                     tion value of the Maison Blanche-Kress parcel defied reason.
                                       3 For convenience, we set forth the analysis of his testimony that we made in Whitehouse Hotel

                                     Ltd. P’ship v. Commissioner, 131 T.C. 112, 150 (2008) (Whitehouse I), vacated and remanded,
                                     615 F.3d 321 (5th Cir. 2010):
                                     His testimony is based upon estimates which he obtained from terra cotta industry specialists,
                                     rather than from his own experience.14 The estimated cost is not detailed or broken down, mak-
                                     ing it impossible for us to know what is and is not included and how the cost was determined.
                                     While the terra cotta specialists he relied on may be highly qualified, he has not articulated
                                     the facts relied on by, and the reasoning of, those specialists, which prevents us from properly
                                     evaluating both their and his conclusions. See Estate of Palmer v. Commissioner, T.C. Memo.
                                     1992–48 (quoting 15 Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989)).15
                                       14Mr. Roddewig’s testimony with respect to how many specialists he relied on is inconsistent.

                                     Note 5 to the table in his written report labeled ‘‘Segregated Cost Analysis: Before Preservation
                                     Easement Maison Blanche Hotel Complex (Ritz-Carlton Hotel)—Building Shell Only—As of De-
                                     cember 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 Feb-
                                     ruary 23 and March 4, 2005.’’ We cannot determine how many terra cotta specialists Mr.
                                     Roddewig consulted. We shall continue to use the term ‘‘specialists’’ although we are uncertain
                                     as to whether there was one or more.
                                           1515   Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989):
                                        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 quali-
                                     fied 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.]




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                                     Whitehouse I, 131 T.C. at 151–152. We added: ‘‘We need not
                                     rely on the unsupported opinion of an expert witness’’, citing
                                     Holman v. Commissioner, 130 T.C. 170, 213 (2008), aff ’d, 601
                                     F.3d 763 (8th Cir. 2010). Id. at 152. The relevant authority
                                     of the Court of Appeals is in accord. E.g., Guile v. United
                                     States, 422 F.3d 221, 227 (5th Cir. 2005) (‘‘An expert’s
                                     opinion must be supported to provide substantial evidence;
                                     * * * ‘A claim cannot stand or fall on the mere ipse dixit of
                                     a credentialed witness.’ ’’ (quoting Archer v. Warren, 118
                                     S.W.3d 779, 782 (Tex. Ct. App. 2003))). We have reconsidered
                                     and do not believe we erred in questioning, and refusing to
                                     rely on, Mr. Roddewig’s judgment that the enforcement of the
                                     provisions of the servitude doubles the cost of external
                                     obsolescence.
                                           5. Land Value
                                       In moving from his before- to his after-restriction value,
                                     Mr. Roddewig reduced his estimate of the cost of land by $2.5
                                     million because the conveyance had reduced the partner-
                                     ship’s interest in the Maison Blanche-Kress parcel to less
                                     than a fee simple interest and, he believed, the partnership
                                     had lost the right to construct 60 rooms above the Kress
                                     Building. We shall address his second reason infra. In
                                     Whitehouse I, 131 T.C. at 152, we conceded for the sake of
                                     argument that a servitude requiring maintenance of a
                                     building’s facade would survive and affect the value of the
                                     underlying land if that land were wiped clean of the building.
                                     Id. His testimony that the price of each comparable should
                                     be adjusted down by 10% to reflect the effect of the servitude
                                     was supported only by his opinion, which we did not find
                                     persuasive and did not accept. Id. Here, we again cited Hol-
                                     man v. Commissioner, 130 T.C. at 213, signifying that we
                                     need not rely on the unsupported testimony of an expert wit-
                                     ness. Accord Guile, 422 F.3d at 227. Additionally, as with our
                                     consideration of his testimony with respect to external
                                     obsolescence, we lack confidence in his judgment on account
                                     of what we consider to be his overvaluation of the before-
                                     restriction value of the Maison Blanche-Kress parcel. We con-
                                     tinue not to accept his 10% downward adjustments.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     321


                                           6. Conclusion
                                        We reject Mr. Roddewig’s testimony regarding the value of
                                     the servitude under the reproduction cost approach not only
                                     because that approach is in general problematic for deter-
                                     mining the value of a historic structure (and, in particular,
                                     problematic here, where petitioner has failed to show that
                                     reconstruction, if the Maison Blanche Building were
                                     destroyed, would be a reasonable business venture) but also
                                     because we lack confidence in some of Mr. Roddewig’s unsup-
                                     ported conclusions.
                                        Moreover, we need not (and should not) rely on a substan-
                                     tially flawed and inappropriate valuation method where we
                                     have another method that provides a more accurate valu-
                                     ation of the servitude, as discussed infra.
                                           B. Income Approach
                                           1. Introduction
                                       In Whitehouse I, 131 T.C. at 156, we summed up our
                                     grounds for rejecting petitioner’s income approach to valuing
                                     the servitude as follows: ‘‘The risk of error inherent in the
                                     income approach as applied by Mr. Roddewig in this case,
                                     together with the fact that we have reliable alternative evi-
                                     dence of value arrived at by the comparable sales approach,
                                     is sufficient grounds for us to reject the income approach,
                                     and we do.’’ We have reconsidered and come to the same
                                     conclusion.
                                           2. In General
                                       While on the valuation date the partnership and Ritz-
                                     Carlton had entered into agreements under which (1) the
                                     partnership agreed to renovate the Maison Blanche and
                                     Kress Buildings and (2) Ritz-Carlton agreed to operate a
                                     hotel therein, on that date there had been no renovation and
                                     there was no hotel. Indeed, all that was valuable with
                                     respect to the Maison Blanche Building was its shell, since
                                     the rehabilitation plan for the building was to remove all
                                     interior partitions as well as mechanical and electrical sys-
                                     tems. Id. at 136 n.11. The income approach to valuation is
                                     based on the premise that the subject property’s market
                                     value is measured by the present value of the future income




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                                     its owners can expect to realize. E.g., Marine v. Commis-
                                     sioner, 92 T.C. 958, 983 (1989), aff ’d without published
                                     opinion, 921 F.2d 280 (9th Cir. 1991). The subject property’s
                                     future cashflows are estimated, and the present value of
                                     those cashflows is determined on the basis of an appropriate
                                     risk-adjusted rate of return. See, e.g., Estate of Heck v.
                                     Commissioner, T.C. Memo. 2002–34. Mr. Roddewig described
                                     the process as follows:
                                     In our Income Approach ‘‘before’’ considering the preservation and con-
                                     servation easement, the rehabilitation costs have been based upon the
                                     actual proposed rehabilitation costs as of December of 1997. Operating
                                     revenues, operating costs and expenses, and profits associated with the
                                     proposed Ritz-Carlton Hotel project have been determined based upon
                                     analysis of the actual real estate marketplace in the New Orleans CBD
                                     [Central Business District], and elsewhere, and then inserted into a
                                     computerized discounted cash flow model. The resulting discounted present
                                     value is the price that could be paid for the Maison Blanche Building, the
                                     1950s Addition, and the Kress Building in their deteriorated condition
                                     prior to rehabilitation as of December of 1997, and before considering the
                                     preservation and conservation easement. The result is the most probable
                                     price that a purchaser would be willing to pay for the unrehabilitated
                                     Maison Blanche complex prior to considering the impact of the preserva-
                                     tion easement.

                                     In short, Mr. Roddewig input data to his computer model,
                                     and the output, he represents, is the ‘‘most probable price’’
                                     that a willing buyer would be willing to pay for the Maison
                                     Blanche-Kress parcel sans the servitude. 4
                                        The seemingly mechanical nature of the process should not
                                     obscure the fact that Mr. Roddewig’s estimate of ‘‘the most
                                     probable price’’ is a probabilistic expression (a point estimate)
                                     of value resulting from an analysis of a considerable number
                                     of underlying data. Even if we accept that, according to his
                                     analysis of the data, the model has generated the most prob-
                                     able price that a willing buyer would pay, how much con-
                                     fidence should we place in that estimate? How confident
                                     should we be that the most probable price that a willing
                                     buyer would pay is not substantially less (or more) than the
                                     price indicated by Mr. Roddewig’s model? Many of the data
                                        4 The after-restriction approach is similar, but, as Mr. Roddewig testified, inputting to the

                                     model additional costs and delays due to the burden of the servitude and adjusting capitaliza-
                                     tion and discount rates to reflect new risks associated with imposition of the servitude. The indi-
                                     cated value of the servitude is, of course, the difference between the before- and after-restriction
                                     approaches.




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                                     Mr. Roddewig relied on (e.g., occupancy rates) were as yet
                                     unknown. He relied on industry data for many of his inputs
                                     (e.g., room revenues, food and beverage revenue, telephone
                                     revenue). Some risks are obvious: e.g., the hotel might not be
                                     finished on schedule; 5 occupancy might be less than
                                     expected; the hotel might not fetch $123,942,500 at the end
                                     of 2002 (ignoring the servitude). Moreover, in estimating
                                     construction costs and hotel receipts and expenses alone, Mr.
                                     Roddewig made hundreds of assumptions, involving amounts
                                     both large ($9,904,936 in construction period interest) and
                                     small ($4.50-a-night telephone revenue from occupied rooms),
                                     each carrying with it some risk of error. He has provided us
                                     with no measure of the overall risk of error in his conclusion
                                     of the most probable price that a willing buyer would pay.
                                     Our own calculations, see Whitehouse I, 131 T.C. at 154–156,
                                     show that relatively minor changes in only a few of his
                                     assumptions would have large bottom-line effects. Without
                                     some measure of the overall risk attendant to his model’s
                                     output that we might examine, and with our own conclusions
                                     as to the sensitivity of his model’s output to relatively minor
                                     changes, we were (and remain) hesitant to attach any weight
                                     to that output (i.e., most probable price that a willing buyer
                                     would pay), especially in the light of the availability of com-
                                     parable-sales data as to value. 6
                                        Mr. Argote did not use the income approach. He testified
                                     that, as applied to the Maison Blanche Building, the income
                                     approach relied upon too many assumptions, thus making it
                                     prone to error. He believes (as we determined) that even a
                                     small change in estimated construction costs, the timing of
                                     those costs, the length of time to complete construction, esti-
                                     mated income, estimated expenses, capitalization rate, or dis-
                                     count rate could substantially affect the present value
                                     arrived at using a discounted cashflow analysis.
                                        Petitioner in its supplemental brief points us to cases in
                                     which we approved the income approach to valuing income-
                                        5 And apparently it was not finished on schedule. Mr. Roddewig assumed that construction

                                     would end on December 31, 1999, and the hotel would open the next day, January 1, 2000. Peti-
                                     tioner makes no objection to respondent’s proposed finding of fact that the hotel commenced op-
                                     erations on October 6, 2000, and we have so found.
                                        6 See Institute of Business Appraisers, ‘‘A Deep, Dark Secret’’, May 15, 2009, by Rand Curtiss,

                                     http://67.199.106.48/index/2009/05/15/a-deep-dark-secret/ (last visited October 15, 2012) (sug-
                                     gesting that, when the number of variables in a business valuation increases, the uncertainty
                                     of the value of the business as a whole increases because of the interrelationship of the vari-
                                     ables).




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                                     generating properties. E.g., Gross v. Commissioner, T.C.
                                     Memo. 1999–254 (‘‘When properly applied, a discounted cash-
                                     flow analysis is a reliable tool for financial analysis.’’), aff ’d,
                                     272 F.3d 333 (6th Cir. 2001). Two of the cases that petitioner
                                     refers us to are cases in which we actually ignored the
                                     income approach (applied by at least one appraiser in each
                                     case) in determining the fair market value of an encum-
                                     brance: Dorsey v. Commissioner, T.C. Memo. 1990–242
                                     (preferring acquisition cost to establish the pre-encumbrance
                                     value of the building and reducing it by 10% to reflect the
                                     loss in value attributable to the encumbrance; illustrating in
                                     an appendix how our result was approximately the same as
                                     under the taxpayer’s expert’s income approach), and Hilborn
                                     v. Commissioner, 85 T.C. 677, 698–700 (1985) (relying, in
                                     part, on each expert’s testimony but not placing any weight
                                     on the value arrived at under the income method).
                                        It is true that we have used the income approach (the sub-
                                     division method) to account for the loss of development
                                     potential resulting from the restrictions imposed by a con-
                                     servation easement. E.g., Symington v. Commissioner, 87
                                     T.C. 892 (1986); Trout Ranch, LLC v. Commissioner, T.C.
                                     Memo. 2010–283, aff ’d, 493 Fed. Appx. 944 (10th Cir. 2012);
                                     Clemens v. Commissioner, T.C. Memo. 1992–436. In those
                                     instances, we found that the loss in value due to imposition
                                     of the conservation restriction stemmed from the change in
                                     the number of lots that could be sold, with the number and
                                     value of those lots (determined by the comparable-sales
                                     approach) being the principal points of disagreement. We had
                                     sufficient information from the experts that we were com-
                                     fortable in evaluating and adjusting their analyses to
                                     produce valuations in which we had confidence. See, e.g.,
                                     Symington v. Commissioner, 87 T.C. at 903–904.
                                        Certainly, we are not hostile to the income approach to
                                     determining value, and we have accepted (and applied) it in
                                     determining the value of conservation easements, see, e.g., id.
                                     (subdivision method), although it is not favored if com-
                                     parable-sales data are available, see, e.g., Chertkof v.
                                     Commissioner, 72 T.C. 1113, 1122 (1979), aff ’d, 649 F.2d 264
                                     (4th Cir. 1981). As we said in Whitehouse I, 131 T.C. at 153:
                                     ‘‘The usefulness of the income approach diminishes * * * as
                                     the quality of the evidence of the income-producing potential
                                     of the property (usually evidence of its past performance)




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                                     diminishes. It has been judged an unsatisfactory valuation
                                     method for property that does not have a track record of
                                     earnings.’’ See Duncan Indus., Inc. v. Commissioner, 73 T.C.
                                     266, 280 n.13 (1979) (rejecting capitalization-of-income
                                     approach where corporation had just come into existence);
                                     Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80, 89
                                     (1973) (rejecting capitalization-of-income approach where coal
                                     fields were not yet developed and operational on date for
                                     valuation), aff ’d without published opinion, 500 F.2d 1400
                                     (3d Cir. 1974); Ambassador Apartments, Inc. v. Commis-
                                     sioner, 50 T.C. 236, 243–244 (1968) (rejecting real estate
                                     valuation based on capitalization-of-income approach in favor
                                     of market value established by recent sales), aff ’d, 406 F.2d
                                     288 (2d Cir. 1969); see also, e.g., Allison v. Ticor Title Ins.
                                     Co., 979 F.2d 1187, 1200 (7th Cir. 1992) (‘‘[T]he law is clear
                                     in Wisconsin that when comparable-sales evidence is avail-
                                     able, income evidence should not be admitted. * * * Income
                                     evidence is generally considered too speculative as it depends
                                     upon too many contingencies to be reliable for determining
                                     fair market value.’’); Winooski Hydroelectric Co. v. Five Acres
                                     of Land, 769 F.2d 79, 82 (2d Cir. 1985) (‘‘On the most basic
                                     level, the future income calculations were too speculative,
                                     since Green Mountain had not operated any business at
                                     Montpelier #4 for over a decade.’’). The Court of Appeals has
                                     also approved a trial court’s excluding income-generating pro-
                                     posals from the consideration of value where the evidence
                                     showed that the proposals were too speculative to contribute
                                     to market value. United States v. Land, 62.50 Acres of Land
                                     More or Less, 953 F.2d 886, 891, 893 (5th Cir. 1992).
                                        What these cases establish is that the reliability of the
                                     income approach depends on the underlying facts (e.g.,
                                     whether there is an ongoing business on the valuation date),
                                     the quality of the evidence, and whether evidence of com-
                                     parable sales was available. We have explained our general
                                     hesitancy with respect to Mr. Roddewig’s model on the basis
                                     of his failure to quantify the risk inherent in the conclusion
                                     he draws from it. Moreover, he did not capitalize the income
                                     of an ongoing business. 7 He identified the property that he
                                     was to value as the shell of the Maison Blanche Building,
                                       7 The Maison Blanche Building did have an income history on the valuation date; Mr.

                                     Roddewig disregarded that history in applying his model to value of the building.




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                                     and, for that property, comparable-sales data were available.
                                     We felt, and still do, that there is simply too much
                                     uncertainty and unquantified risk associated with Mr.
                                     Roddewig’s application of the income approach for us to
                                     accept at face value his value conclusions resulting from that
                                     approach. We do not intend to write a rule for facade cases
                                     in general, nor do we rule out the income approach in some
                                     of those cases; we deal here only with the facts (testimony)
                                     before us.
                                        One significant problem with respect to Mr. Roddewig’s
                                     income approach that is specific to the facts before us is that
                                     a large portion of the change in annual operating costs that
                                     he projected is attributable to annual additions to a ‘‘facade
                                     replacement reserve’’ on the basis of an estimate of terra
                                     cotta replacement costs that we found to be unreliable.
                                     Whitehouse I, 131 T.C. at 150–151, 155. 8 We also faulted Mr.
                                     Roddewig for inadequately explaining, among other costs, an
                                     almost $3 million architect’s fee, approximately $4 million for
                                     a development fee, interest, real estate taxes, ‘‘Etc.’’, a project
                                     management fee of approximately $2.6 million, and a
                                     financing fee of approximately $4.7 million. Finally, we had
                                     a major problem with his failure adequately to explain the
                                     change in his assumed capitalization and discount rates. Id.
                                     at 155. We pointed out that, if we reduce his 0.5% increase
                                     in both his capitalization and discount rates by 0.1% (a 20%
                                     reduction), the value he calculated for the servitude would be
                                     reduced by close to $1 million. Id.
                                           3. Conclusion
                                       To sum up, Mr. Roddewig used a computer model
                                     employing a discounted cashflow analysis to arrive at both
                                     before- and after-restriction present values for the Maison
                                     Blanche-Kress parcel (the difference being his estimate under
                                     the income approach of the value of the servitude). We have
                                     no difficulty with the process. Where we have difficulty is
                                     with petitioner’s call to trust on their face Mr. Roddewig’s
                                     judgments as to values to be input to his model. Certainly
                                     there are risks associated with those values, but we are not
                                     informed as to the magnitude of those risks, either individ-
                                        8 ‘‘Mr. Roddewig estimated the cost of replacing the facade to be $46,719,755, of which the cost

                                     of terra cotta would be $42,025,000.’’ Whitehouse I, 131 T.C. at 155.




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                                     ually or in total. We have also described specific concerns
                                     that we have with certain of the values Mr. Roddewig input
                                     to his model. Together, we think those factors are sufficient
                                     that we need give no weight to his income approach in deter-
                                     mining the value of the servitude.
                                        Finally, there is the fact that, during the trial, petitioner
                                     asked us to take judicial notice of the pending bankruptcy of
                                     the partnership on July 25, 2003, the date the petition was
                                     filed. The bankruptcy proceeding commenced on January 3,
                                     2002, and it was brought under chapter 11 of the U.S. Bank-
                                     ruptcy Code in the U.S. Bankruptcy Court for the Eastern
                                     District of Louisiana (case No. 02–10061). Petitioner ref-
                                     erenced the bankruptcy in support of its claim that, pursuant
                                     to section 7491, the partnership lacked sufficient net worth
                                     such that petitioner was not excluded from shifting the bur-
                                     den of proof to respondent. See sec. 7491(a)(2)(C). And while
                                     subsequent events generally are not considered in fixing fair
                                     market value, they may be considered to the extent that they
                                     were reasonably foreseeable on the date as of which the
                                     value is fixed. E.g., Estate of Gifford v. Commissioner, 88
                                     T.C. 38, 52 (1987). Mr. Argote testified that, ‘‘based upon
                                     what * * * [he] knew in 1997 * * * [,] * * * development of
                                     the Ritz-Carlton was not feasible.’’ 9 That opinion, he added,
                                     was borne out by the fact that full-service hotel projects that
                                     went ahead in the 1990s and up to the mid-2000s ‘‘have gen-
                                     erally gone into bankruptcy’’. While we have no additional
                                     information concerning the partnership’s bankruptcy, the
                                     risk inherent in the Maison Blanche development was, on the
                                     valuation date, apparent to Mr. Argote. The partnership’s
                                     bankruptcy and Mr. Argote’s testimony stand in sharp con-
                                     trast to the rosy pictures generated by Mr. Roddewig’s model,
                                     which showed a positive worth for the Maison Blanche-Kress
                                     parcel both before and after conveyance of the servitude (and
                                     a terminal value of over $100 million on the hypothetical sale
                                     of the parcel after conveyance of the servitude, in 2003). As
                                           9 More   fully, he testified:
                                        I had the opportunity in the early 1990’s to do counseling with the Windsor Court Hotel. And
                                     I had been doing appraisals of multiple hotel operations in the * * * [Central Business District],
                                     in Vieux Carre´, from the early 1990s through the 1997 date.
                                        And based upon the costs that had been related to be—that would be incurred in the construc-
                                     tion of the Ritz-Carlton, and the opportunity for them to lease the hotel out at a particular aver-
                                     aged daily rate, it was fairly easy to conclude that at that point in time, the project simply didn’t
                                     make sense.




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                                     stated, we reject Mr. Roddewig’s testimony valuing the
                                     Maison Blanche-Kress parcel under the income approach
                                     because we judge that testimony to be unreliable.
                                           C. Comparable-Sales Approach
                                           1. Introduction
                                       In Whitehouse I, relying exclusively on the comparable-
                                     sales approach, we found the value of the servitude to be
                                     $1,792,301, calculated as follows:

                                                   Value of the servitude under comparable-sales
                                                                      approach

                                             Before-restriction value ................................           $12,092,301
                                             Less after-restriction value ...........................             10,300,000

                                             Value of the servitude ...................................             1,792,301

                                        Putting aside for the moment the question of the effect of
                                     the servitude on the value of the Kress Building, we discern
                                     from petitioner’s supplemental brief two principal concerns
                                     with our application of the comparable-sales approach; viz,
                                     that we rejected Mr. Roddewig’s sales of nonlocal comparable
                                     properties and that we disregarded his determination of the
                                     value of the Maison Blanche-Kress parcel based on dollars
                                     paid per hotel guest room for comparable properties. The
                                     more important of those concerns is the first, because, if we
                                     are right on the first, the second is of no consequence to peti-
                                     tioner, since, considering only local sales, Mr. Roddewig’s
                                     per-room analysis produces a lower value for the Maison
                                     Blanche Building than does his per-square-foot analysis. 10



                                       10 Mr. Roddewig reports a mean adjusted price per square foot of $53.44 for his local

                                     comparables and 530,646 square feet in the Maison Blanche-Kress parcel (not including the po-
                                     tential of any addition to the Kress Building), which indicates a before-restriction value, on a
                                     per-square-foot basis, of $28,357,722. He also reports a mean adjusted price per room of $31,263
                                     for his local comparables and 720 planned rooms (without regard to any rooms to be built above
                                     the Kress Building), which indicates a before-restriction value, on a per-hotel-room basis, of
                                     $22,509,360. He adds that consideration should be given to the addition of 60 rooms to the Kress
                                     Building, which, keeping the price per room at $31,263 but changing the number of planned
                                     rooms to 780, indicates a before-restriction value, on a per-room basis, of $24,385,140. The per-
                                     square-foot analysis still produces a higher value for the Maison Blanche-Kress parcel.




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                                           2. Disregard of Sales of Nonlocal Comparable Properties
                                        Mr. Roddewig testified that he included nonlocal
                                     comparables because none of the buildings that he found in
                                     downtown New Orleans were similar to the Maison Blanche-
                                     Kress parcel in size or luxury hotel market orientation. He
                                     added: ‘‘ ‘Buildings purchased for rehabilitation into first
                                     class luxury hotels trade in a national marketplace, so it is
                                     appropriate to analyze sales in other cities for purposes of
                                     establishing the value of the Maison Blanche Hotel Complex
                                     by the Sales Comparison Approach.’ ’’ Whitehouse I, 131 T.C.
                                     at 157.
                                        Mr. Argote saw no need for nonlocal comparables. While he
                                     agreed that, occasionally, if there are insufficient local sales,
                                     an appraiser has to look outside the location of the subject
                                     property for comparables, he thought there was an adequate
                                     number of local comparable properties. Id. And, indeed, Mr.
                                     Roddewig did identify five local sales of comparable prop-
                                     erties; Mr. Argote believed that there were nine that Mr.
                                     Roddewig should have considered. Id. at 158.
                                        We rejected Mr. Roddewig’s nonlocal comparables for a
                                     number of reasons. First, we expressed our preference for
                                     local comparables, stating: ‘‘The reason is simply that loca-
                                     tion plays a huge role in determining the desirability, and,
                                     thus, the value of real estate. We reduce substantially the
                                     risk of error in employing the comparable-sales approach if,
                                     on account of proximity, we can eliminate (or reduce the
                                     significance of) location as a distinguishing factor.’’ Id. at
                                     157–158. The Court of Appeals has also recognized the link
                                     between proximity and probative value: ‘‘The more com-
                                     parable a sale is in characteristics, proximity, and time, the
                                     more probative it is of value.’’ Estate of Jameson v. Commis-
                                     sioner, 267 F.3d 366, 373 (5th Cir. 2001) (emphasis added),
                                     vacating and remanding T.C. Memo. 1999–43. We found the
                                     risk of relying on Mr. Roddewig’s nonlocal comparables to be
                                     significant because the adjusted values he determined for his
                                     nonlocal properties were significantly higher than the
                                     adjusted values he determined for his local properties, ‘‘64
                                     percent higher on a square footage basis and at least double
                                     on a per room basis’’. Whitehouse I, 131 T.C. at 158. Those
                                     large variances from the local real estate market underscore
                                     the lack of comparability of the nonlocal properties that Mr.




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                                     Roddewig chose. Moreover, there were at least five (in Mr.
                                     Roddewig’s opinion) and as many as nine (in Mr. Argote’s
                                     opinion) local sales of comparable properties for which the
                                     risk of proximity disparity was low, and the addition of Mr.
                                     Roddewig’s nonlocal comparables would, by increasing the
                                     risk of proximity disparity, only decrease the probability of
                                     an accurate valuation of the Maison Blanche Building, unless
                                     some characteristic of those nonlocal sales sufficiently
                                     increased that probability. We did not believe that it did,
                                     adding:
                                     Nor are we convinced that it was appropriate to take nonlocal sales into
                                     account because of his claim that buildings purchased for rehabilitation
                                     into first class luxury hotels trade in a national marketplace. He [Mr.
                                     Roddewig] had no statistics supporting that claim, nor did he have evi-
                                     dence of any competition for the Maison Blanche Building, which, 2 years
                                     before the valuation date, was purchased for the relatively moderate price
                                     of $6.625 million. [Id.; fn. ref. omitted.]

                                           3. Highest and Best Use
                                        Mr. Roddewig looked to nonlocal comparables, and he
                                     made price point adjustments for his comparables (adjusting
                                     for the higher room rates expected at a Ritz-Carlton Hotel),
                                     because he determined that the highest and best use of the
                                     Maison Blanche-Kress parcel before the conveyance was a
                                     mixed use development, including a Ritz-Carlton Hotel with
                                     512 rooms (60 of them above the Kress Building), an addi-
                                     tional all-suites hotel with approximately 268 rooms, and
                                     retail use on the first two floors and mezzanine of the Maison
                                     Blanche Building (for short, luxury hotel development). Id. at
                                     130–131. Mr. Argote determined that the highest and best
                                     use of the Maison Blanche Building both before and after the
                                     conveyance was as a hotel (not necessarily a Ritz-Carlton
                                     Hotel) with retail space (for short, a nonluxury hotel develop-
                                     ment). Id.
                                        The Court of Appeals found inadequate our findings with
                                     respect to highest and best use:
                                       As stated, Whitehouse contends the highest and best use of the Maison
                                     Blanche and Kress buildings was as a Ritz-Carlton (per Roddewig’s
                                     opinion), not as a non-luxury hotel (per Argote’s opinion). The tax court did
                                     not explicitly rule on this issue, but it did not accept Roddewig’s opinion
                                     on highest and best use. Accordingly, on this issue, the tax court’s decision
                                     can be construed in two ways: even if the highest and best use was as a




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                      331


                                     Ritz-Carlton, that had no effect on the property’s value; or, a non-luxury
                                     hotel was the highest and best use. * * * [Whitehouse II, 615 F.3d at 335–
                                     336.]

                                        The Court of Appeals is correct that we did not explicitly
                                     decide whether the highest and best use of the Maison
                                     Blanche-Kress parcel was as a luxury hotel or as a nonluxury
                                     hotel. What we did decide was that Mr. Roddewig erred in
                                     his opinion that the highest and best use of the Maison
                                     Blanche-Kress parcel differed after the conveyance because
                                     the servitude prevented the partnership from adding stories
                                     to the Kress Building. Whitehouse I, 131 T.C. at 135. We
                                     address that conclusion infra in section III. of this report.
                                        We of course agree with the Court of Appeals that finding
                                     a property’s highest and best use is critical for determining
                                     its fair market value. Whitehouse II, 615 F.3d at 335 (citing
                                     Olson v. United States, 292 U.S. 246, 255 (1934)). Indeed, we
                                     have said: ‘‘The realistic, objective potential uses for property
                                     control the valuation thereof.’’ Stanley Works v. Commis-
                                     sioner, 87 T.C. at 400. Nevertheless, we are not compelled to
                                     choose between Messrs. Roddewig’s and Argote’s competing
                                     opinions as to highest and best use of the Maison Blanche
                                     Building either as a luxury or as a nonluxury hotel. The term
                                     ‘‘highest and best use’’ may be defined as ‘‘[t]he reasonably
                                     probable and legal use of vacant land or an improved prop-
                                     erty that is physically possible, appropriately supported, and
                                     financially feasible and that results in the highest value.’’
                                     Appraisal Institute, The Appraisal of Real Estate 277–278
                                     (13th ed. 2008). But, and this is very important, the highest
                                     and best use of property does not itself identify the fair
                                     market value of the property: It ‘‘forms the foundation for the
                                     opinion of value.’’ Id. at 295. 11 As the Supreme Court
                                     explained, the determination of fair market value incor-
                                     porates the highest and best use of a piece of property only
                                     if the demand for that use will affect the market price:
                                     [M]arket value fairly determined * * * does not depend upon the uses to
                                     which * * * [the owner] has devoted his land but is to be arrived at upon
                                     just consideration of all the uses for which it is suitable. The highest and
                                     most profitable use for which the property is adaptable and needed or
                                       11 More extensively: ‘‘The highest and best use is shaped by the competitive forces within the

                                     market where the property is located and provides the foundation for a thorough investigation
                                     of the competitive position of the property in the minds of market participants.’’ Appraisal Insti-
                                     tute, The Appraisal of Real Estate 277 (13th ed. 2008).




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                                     likely to be needed in the reasonably near future is to be considered, not
                                     necessarily as the measure of value, but to the full extent that the prospect
                                     of demand for such use affects the market value * * * [Olson, 292 U.S. at
                                     255; emphasis added.]

                                     Accordingly, as the Court of Appeals has explained: ‘‘Even if
                                     * * * a potential use is profitable and * * * the property is
                                     adaptable for that use, that use is not necessarily the
                                     measure of the value of the property. Instead, it is to be
                                     considered to the extent the prospect of demand for the use
                                     affects market value.’’ Land, 62.50 Acres of Land More or
                                     Less, 953 F.2d at 890 (citing Olson, 292 U.S. at 255); see also
                                     Boltar, LLC v. Commissioner, 136 T.C. 326, 336 (2011) (‘‘The
                                     concept of ‘highest and best use’ is an element in the deter-
                                     mination of fair market value, but it does not eliminate the
                                     requirement that a hypothetical willing buyer would pur-
                                     chase the subject property for this indicated value.’’).
                                           4. Second-Best Use
                                        The point to be taken is that, although the highest and
                                     best use of property may determine a ceiling on how much
                                     a willing buyer would pay for the property, it does not nec-
                                     essarily determine a floor on how little a willing seller would
                                     accept. In other words, the hypothetical willing buyer and
                                     the hypothetical willing seller who populate our standard
                                     definition of fair market value 12 will not invariably conclude
                                     their negotiation over price at a price reflecting the value of
                                     the property at its highest and best use. In Van Zelst v.
                                     Commissioner, 100 F.3d 1259 (7th Cir. 1996), aff ’g T.C.
                                     Memo. 1995–396, Judge Easterbrook, writing for the court,
                                     explained this commonsense point by reference to auction
                                     theory. 13 He rejected as ‘‘nonsense on its own terms’’ an
                                     appraisal, used to support a substantial charitable contribu-
                                     tion deduction for the contribution to the United States of
                                     lands in the Alaskan wilderness, that was based on the
                                     theory that the property might be developed as a luxury
                                     resort lodge. Id. at 1262. He explained: ‘‘It should not have
                                     required the award of the 1996 Nobel Prize in Economics to
                                        12 ‘‘The fair market value is the price at which the property would change hands between a

                                     willing buyer and a willing seller, neither being under any compulsion to buy or sell and both
                                     having reasonable knowledge of relevant facts.’’ Sec. 1.170A–1(c)(2), Income Tax Regs.
                                        13 We borrow here (and in other places) from the appellee’s brief in this case before the Court

                                     of Appeals.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     333


                                     William Vickrey, a pioneer of auction theory, to remind
                                     people that the market price of an asset depends on the
                                     second-most-productive use to which it can be put.’’ Id. (citing
                                     R. Preston McFee & John McMillan, ‘‘Auctions and Bidding’’,
                                     25 J. Econ. Lit. 699 (1987)). He further explained that the
                                     equilibrium price at which the willing buyer and the willing
                                     seller would meet would be somewhere between the value of
                                     the property taking into account its most productive use (i.e.,
                                     its highest and best use) and the value of the property taking
                                     into account its second most profitable use. Id. at 1262–1263.
                                     If there are many potential buyers in the market for the
                                     property, the equilibrium price would be closer to the price
                                     determined by taking into account its most productive use,
                                     and, if there are few potential buyers in the market for the
                                     property, it would be closer to the price determined by taking
                                     into account its second most productive use. Id. Judge
                                     Easterbrook’s discussion of the value of land in Alaska—
                                     which, as here, the taxpayer claimed, could be used for the
                                     development of a luxury hotel—is helpful in resolving the
                                     problem before us; viz, the value of a property in New
                                     Orleans that might be used to develop a luxury hotel:
                                     Suppose three parcels of private land in the Park are equally suitable to
                                     be the site of a resort that will bring its developer $2 million after costs
                                     of construction and operation. How much will the developer pay for the
                                     land? That depends on what else the owners can do with their land, as the
                                     developer will shop for the lowest price. Suppose Parcel A has a vein of
                                     ore with a present value of $650,000, and Parcels B and C, which lack
                                     minerals, are suitable only for subsistence hunting and fishing (value
                                     $10,000). The owner of Parcel A will not sell for less than $650,000, but
                                     the owners of Parcels B and C will sell for anything over $10,000. The
                                     developer will not pay $650,000 to the owner of Parcel A, when he can get
                                     land for so much less elsewhere, so Parcel A is worth only $650,000 as the
                                     value of its second-best-use, a mine. If there were no Parcel C, the devel-
                                     oper and the owner of Parcel B would reach a deal in the range between
                                     $10,000 and $650,000: the developer never pays more than $650,000 (for
                                     he can turn to Parcel A), and the owner never takes less than $10,000 (for
                                     he can keep the land in its current use). When there is a Parcel C, a threat
                                     to buy it instead of Parcel B helps the developer chisel the price down,
                                     unless the owners collude. As the number of available sites rises, the possi-
                                     bility of collusion declines. When there are hundreds of potential sites (as
                                     there are in the Park and Preserve), the price the developer must pay falls
                                     to the competitive level. To put this otherwise, land is not a scarce
                                     resource in these mountains; financing and entrepreneurship are the
                                     scarce ingredients, so they will capture the economic return of resort
                                     development. Yet the Hawley Group’s appraisal attributed to the Nelson




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                                     Mine 100 percent of the (potential) economic profit of a resort development.
                                     It did not offer a rationale for that allocation. At oral argument Van Zelst’s
                                     lawyer tried to supply one by saying that the number of potential resort-
                                     mine combinations in the vicinity is small, but for reasons we have already
                                     explained even a ‘‘small’’ number of rivals allows the developer to capture
                                     the returns * * *. [Van Zelst v. Commissioner, 100 F.3d at 1262–1263.]

                                     See also Caracci v. Commissioner, 456 F.3d 444, 459 (5th Cir.
                                     2006) (citing with approval that discussion of comparable
                                     properties), rev’g 118 T.C. 379 (2002).
                                        Even if Mr. Roddewig is right that the highest and best
                                     use of the Maison Blanche-Kress parcel before the convey-
                                     ance to PRC was a luxury hotel development and that
                                     ‘‘[b]uildings purchased for rehabilitation into first class
                                     luxury hotels trade in a national marketplace’’, that does not
                                     necessarily lead to the conclusion that the fair market value
                                     of the parcel is much (if indeed any) greater than the price
                                     that would be predicted for the parcel taking into account its
                                     second best use; i.e., development as a nonluxury hotel. By
                                     his own admission, what Mr. Roddewig valued was the shell
                                     of a building, which he thought could profitably be developed
                                     into a hotel: ‘‘We have concluded that the highest and best
                                     use of the Maison Blanche Building * * * [before convey-
                                     ance] is rehabilitation of the ‘shell’ structure for hotel use
                                     with retailing on the first and second floor[s]’’. He identified
                                     as comparables five local buildings which he described as
                                     ‘‘downtown New Orleans buildings purchased as shells for
                                     adaptive reuse as hotels.’’ He cautioned, however, that ‘‘none
                                     were similar to the Maison Blanche hotel complex in size and
                                     luxury hotel market orientation.’’ The size dissimilarity is
                                     easily adjusted for. The second dissimilarity appears inappro-
                                     priate, however, since, admittedly, he was comparing
                                     building shells, and, for the shell of a building, similarity is
                                     determined by development potential, not by actual develop-
                                     ment. To reflect an after-development dissimilarity between
                                     the Maison Blanche-Kress parcel and the comparables, he
                                     made his so-called hotel price point adjustments, whereby he
                                     adjusted (upward) the reported sale price of each comparable
                                     building to reflect the higher room rates expected at a Ritz-
                                     Carlton Hotel over the actual rates quoted for rooms at the
                                     comparable buildings, after their development into hotels.
                                     While apparently none of the comparables was developed
                                     into a luxury hotel, petitioner makes no argument that, when




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     335


                                     considered in their shell-state condition, luxury hotel
                                     development was precluded for any of the comparables. The
                                     hotel price point adjustments therefore are beside the point.
                                     So long as the comparables when considered as shell
                                     buildings had a potential for hotel development (luxury or
                                     not) similar to that of the Maison Blanche Building when
                                     considered as a shell building, the comparables’ actual
                                     development as nonluxury hotels is irrelevant. Petitioner
                                     wants to ascribe to the shell of the Maison Blanche Building
                                     some difference (‘‘luxury hotel market orientation’’) that it
                                     has not shown exists. Luxury versus nonluxury might be a
                                     relevant distinction when applying the comparable-sales
                                     approach to valuing renovated properties (or when applying
                                     the income approach to valuing improved or unimproved real
                                     property), but even in those circumstances there is a hotel
                                     business whose value must be differentiated from the value
                                     of the real property.
                                        Moreover, petitioner has failed to show that, on the valu-
                                     ation date, there was any scarcity of buildings in New
                                     Orleans suitable for development as luxury hotels. Only if
                                     there were sufficient scarcity would the partnership, consid-
                                     ering it as the landlord of the Maison Blanche Building, cap-
                                     ture a piece of the economic return to luxury hotel develop-
                                     ment of the building’s shell. But, as Judge Easterbrook
                                     points out, even a small number of rivals allows the devel-
                                     oper (and not the property owner) to capture the return. Van
                                     Zelst v. Commissioner, 100 F.3d at 1263. Mr. Roddewig
                                     identified five local comparables, while Mr. Argote believed
                                     that there were nine. Local rivals, therefore, were not scarce,
                                     and, as to the intensity of demand, Mr. Roddewig had no
                                     ‘‘evidence of any competition for the Maison Blanche
                                     Building, which, 2 years before the valuation date, was pur-
                                     chased for the relatively moderate price of $6.625 million.’’
                                     Whitehouse I, 131 T.C. at 158. Since it was petitioner’s bur-
                                     den to establish otherwise, and since petitioner did not do so,
                                     we assume that, on the valuation date, demand also was
                                     weak.
                                        Finally, Mr. Roddewig did not justify his use of nonlocal
                                     comparables and his price point adjustments on competitive
                                     grounds (i.e., that, on the valuation date, it was a seller’s
                                     market for properties comparable to the Maison Blanche
                                     Building) but on the ground that buyers in the marketplace




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                                     336                 139 UNITED STATES TAX COURT REPORTS                                         (304)


                                     for shell buildings suitable for development into luxury
                                     hotels ‘‘will pay a premium without trying to think about
                                     what the local buyers will pay.’’ Whitehouse I, 131 T.C. at
                                     160. Even in the absence of competing bids, that is, he testi-
                                     fied that developers of luxury hotels will leave money on the
                                     table by paying more than the local market would demand
                                     for the property. Id. Put simply, that defies common sense.
                                     Moreover, it contradicts a basic tenet of the fair market
                                     value paradigm; viz, that, with respect to both the hypo-
                                     thetical buyer and the hypothetical seller, ‘‘each is a rational
                                     economic actor, that is, each seeks to maximize his advan-
                                     tage in the context of the market that exists at the date of
                                     valuation.’’ Estate of Jameson v. Commissioner, 267 F.3d at
                                     370; see also Estate of Newhouse v. Commissioner, 94 T.C.
                                     193, 217–218 (1990). The rational economic buyer’s advan-
                                     tage is that the sellers’ properties are worth more to him
                                     than they are to the sellers, and he maximizes that advan-
                                     tage by acquiring a seller’s property at the lowest cost that
                                     seller will accept. 14
                                           5. Conclusion
                                       The highest and best use of the Maison Blanche-Kress
                                     parcel on the valuation date may have been luxury hotel
                                     development; but even if we were to accept that as a fact, it
                                     does not rule out the possibility that the value of the parcel
                                     on that date was dictated by its second best use (which, we
                                     assume, is as a nonluxury hotel). We have Mr. Roddewig’s
                                     testimony that, on the valuation date, the market for the
                                     parcel was national and that luxury hotel developers have
                                     deep pockets and do not stoop to bargain, but we have
                                     rejected that. While the fair market value of the parcel may
                                     have fallen somewhere between its value determined by its
                                     highest and best use and its value determined by its second
                                     best use, we have no evidence, or the tools, to determine
                                     what that might be. In Whitehouse I, 131 T.C. at 158–160,
                                     we disregarded Mr. Roddewig’s nonlocal comparables and his
                                     price point adjustments, and we determined the value of the
                                       14 That the partnership itself might have been unwilling to sell the Maison Blanche Building

                                     shell for less than a price reflecting its highest and best use is beside the point, for the definition
                                     of fair market value assumes a hypothetical seller as well as a hypothetical buyer. Caracci v.
                                     Commissioner, 456 F.3d 444, 456 (5th Cir. 2006), rev’g 118 T.C. 379 (2002); sec. 1.170A–1(c)(2),
                                     Income Tax Regs.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     337


                                     Maison Blanche Building on the basis of only local
                                     comparables, without any price point adjustments. We con-
                                     tinue to believe that that was the proper course. In effect,
                                     then, we are accepting Mr. Argote’s methodology and his
                                     view that the value of the subject property under the com-
                                     parable-sales approach is to be determined on the basis of
                                     sales of buildings suitable for conversion into hotels—luxury
                                     or not. The properties that both expert witnesses chose rep-
                                     resent the market value of shell buildings of comparable age,
                                     character, and quality that were suitable for conversion to
                                     hotels. They are, therefore, representative of how the market
                                     would have valued the Maison Blanche Building at the time
                                     of the donation. We do not need to choose between the two
                                     experts’ opinions of highest and best use, since, even if we
                                     were to agree with Mr. Roddewig, it would make no dif-
                                     ference. 15
                                     III. Effect of the Servitude
                                           A. Introduction
                                       We have summarized the terms of the conveyance above
                                     and have set it out in full (excluding exhibits) in the
                                        15 Mr. Roddewig also believed that the highest and best use of the Maison Blanche-Kress par-

                                     cel would involve the addition of 60 rooms above the Kress Building. Since we reject his repro-
                                     duction cost and income approaches to valuing the servitude for reasons not directly implicating
                                     the addition of those 60 rooms, we do not consider in connection with those approaches whether
                                     the parcel’s highest and best use involved that addition. Nor for the reason set forth supra note
                                     10 do we need to consider it in connection with the comparable-sales approach. In any event,
                                     petitioner has failed to convince us that a nine-story, 60-room addition above the Kress Building
                                     would have been the highest and best use of the property. All we have is Mr. Roddewig’s ‘‘anal-
                                     ysis’’, made in conjunction with the architects, ‘‘indicat[ing] that up to nine additional floors
                                     could be built atop the Kress Building.’’ Petitioner has not translated that unquantified possi-
                                     bility into a quantified probability. There is more to determining whether something is prac-
                                     ticable than determining that it is possible. See, e.g., Olson v. United States, 292 U.S. 246, 257
                                     (1934) (‘‘Elements affecting value that depend upon events or combinations of occurrences which,
                                     while within the realm of possibility, are not fairly shown to be reasonably probable, should be
                                     excluded from consideration, for that would be to allow mere speculation and conjecture to be-
                                     come a guide for the ascertainment of value—a thing to be condemned * * * in judicial ascer-
                                     tainment of truth.’’). Petitioner has failed to provide convincing evidence that an addition atop
                                     the Kress Building as part of the development of the Maison Blanche-Kress parcel was part of
                                     the highest and best use of the parcel. It is Mr. Roddewig’s conjecture, based upon anecdotal
                                     information, that the City would have permitted the floor area ratio to increase even more than
                                     the City had already specially excepted. Even if the City had approved additional density, the
                                     record contains only rough architectural drawings. Beyond that there is nothing that shows this
                                     nine-story addition would have been physically possible, or that it would not have been cost pro-
                                     hibitive. Or, indeed, that Ritz-Carlton would have welcomed such an addition. The partnership
                                     and Ritz-Carlton agreed in a Pre-Commencement Agreement to construct and operate a 437-
                                     room hotel. We do not know whether Ritz-Carlton would have approved the additional rooms
                                     considering that they would have been restricted to light wells.




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                                     338                 139 UNITED STATES TAX COURT REPORTS                                      (304)


                                     appendix. The six-story Kress Building is adjacent to the
                                     Maison Blanche Building on Canal Street. According to peti-
                                     tioner, in order to protect that portion of a common wall
                                     rising above the Kress Building, the conveyance prevents the
                                     partnership ‘‘from building additional stories atop the Kress
                                     Building     and    from    selling   the   Kress      Building
                                     unencumbered.’’ In Whitehouse I, 131 T.C. at 132, we began
                                     our discussion of the conveyance by noting that petitioner
                                     described the partnership’s risk from building above the
                                     Kress Building or selling the Kress Building ‘‘unencumbered’’
                                     as the risk of being sued by PRC for breach of contract. Peti-
                                     tioner conceded that no portion of the protected facade is
                                     actually located on the Kress Building. Moreover, neither the
                                     definition of ‘‘improvement’’ nor the definition of ‘‘property’’
                                     in the conveyance includes the Kress Building. Id. We found
                                     that the conveyance creates no charge on (i.e., does not bur-
                                     den) the Kress Building, id. at 134, and the Court of Appeals
                                     agreed with us that the conveyance does not burden the
                                     Kress Building, Whitehouse II, 615 F.3d at 337. We contin-
                                     ued:
                                     Petitioner has therefore failed to prove that, by the conveyance, and pursu-
                                     ant to La. Rev. Stat. Ann. sec. 9:1252 (1991), the partnership granted PRC
                                     a perpetual real right (servitude) of any extent in the Kress Building.
                                     While the partnership may have obligated itself personally to maintain a
                                     view of the Maison Blanche Building, petitioner has failed to show how
                                     that promise binds anyone who does not undertake it * * * [Whitehouse I,
                                     131 T.C. at 134–135; emphasis added.]

                                        Implicit in the emphasized language is our conclusion that,
                                     not only did the servitude not burden the Kress Building, but
                                     it did not impose any obligation on the partnership not to
                                     build atop it so as to block views of the Maison Blanche
                                     Building’s facade. That is not to say that the partnership had
                                     not personally obligated itself not to do so, but we did not
                                     read the servitude to include that obligation. And that is an
                                     important distinction. All agree that the servitude constitutes
                                     a perpetual conservation restriction. 16 The Louisiana statute
                                        16 While sec. 170(a) allows a deduction for any charitable contribution, sec. 170(f) denies a

                                     charitable contribution deduction for certain contributions of partial interests in property unless,
                                     among other exceptions, the contribution of the partial interest is a qualified conservation con-
                                     tribution. Sec. 170(f)(3)(B)(iii). ‘‘A qualified conservation contribution is the contribution of a
                                     qualified real property interest to a qualified organization exclusively for conservation pur-
                                     poses.’’ Sec. 1.170A–14(a), Income Tax Regs. ‘‘A ‘perpetual conservation restriction’ is a qualified
                                     real property interest.’’ Sec. 1.170A–14(b)(2), Income Tax Regs. ‘‘A ‘perpetual conservation re-




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     339


                                     pursuant to which the servitude was created, La. Rev. Stat.
                                     Ann. sec. 9:1252, specifies that a real right created pursuant
                                     to the section ‘‘shall be effective against third parties when
                                     filed for registry in the conveyance records of the parish in
                                     which the immovable property is located.’’ La. Rev. Stat.
                                     Ann. sec. 9:1252, C. That, the pertinent regulations recog-
                                     nize, is sufficient to conclude that the servitude is enforce-
                                     able in perpetuity:
                                     In the case of any donation under this section, any interest in the property
                                     retained by the donor (and the donor’s successors in interest) must be sub-
                                     ject to legally enforceable restrictions (for example, by recordation in the
                                     land records of the jurisdiction in which the property is located) that will
                                     prevent uses of the retained interest inconsistent with the conservation
                                     purposes of the donation. * * * [Sec. 1.170A–14(g)(1), Income Tax Regs.
                                     (general rule under heading ‘‘Enforceable in perpetuity’’).]

                                     Thus, if the partnership’s supposed obligation with respect to
                                     the Kress Building is not within the burdens or obligations
                                     constituting the servitude, 17 then, unless petitioner can
                                     otherwise show us that the obligation is enforceable in per-
                                     petuity, 18 it fails as a perpetual conservation restriction, and
                                     it cannot be taken into account in determining the amount
                                     of the partnership’s charitable contribution deduction on
                                     account of its December 29, 1997, conveyance of certain
                                     rights in the Maison Blanche Building to PRC. That is not to
                                     say, of course, that the burden of the supposed obligation,
                                     which has no apparent enforceability against successors in
                                     ownership to the building, did not reduce the value of the
                                     contiguous Maison Blanche and Kress Buildings; but unless
                                     the obligation is, or constitutes part of, a perpetual conserva-
                                     tion restriction, that reduction in value cannot be counted as
                                     part of qualified conservation contribution. See sec. 1.170A–
                                     14(h)(3), Income Tax Regs. Because petitioner failed to show
                                     us that the partnership’s supposed obligation not to build
                                     atop the Kress Building is enforceable against any successor
                                     in interest, we concluded in Whitehouse I that the supposed
                                     obligation, if enforceable, is not enforceable in perpetuity. See
                                     striction’ 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.
                                       17 The real right established pursuant to La. Rev. Stat. Ann. sec. 9:1252 may not only burden

                                     property, but it ‘‘may additionally obligate the owner of the * * * property as is necessary to
                                     fully execute the rights granted herein.’’ La. Rev. Stat. Ann. sec. 9:1252, A.
                                       18 Petitioner has not done so.




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                                     340                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     sec. 1.170A–14(g)(1), Income Tax Regs. Therefore, we dis-
                                     regarded it in determining the value of the servitude and,
                                     consequently, the amount of the partnership’s charitable con-
                                     tribution deduction.
                                        We are aware that, in Whitehouse II, 615 F.3d at 337, the
                                     Court of Appeals stated: ‘‘[B]ecause of the easement,
                                     Whitehouse could not build on top of the Kress building’’. We
                                     are also mindful that, once a case has been decided on appeal
                                     and a mandate issued, a lower court is not free to alter the
                                     mandate of the appellate court, although it is free to decide
                                     matters that are left open by the mandate. Barrett v.
                                     Thomas, 809 F.2d 1151, 1154 (5th Cir. 1987) (citing In re
                                     Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895)). Because
                                     the distinction we have drawn between the partnership’s per-
                                     sonal obligation not to block views of the Maison Blanche
                                     Building and its burdens and obligations undertaken pursu-
                                     ant to the real right created by the servitude was not consid-
                                     ered by the Court of Appeals, we see some daylight to again
                                     examine the conveyance to see whether it imposes an obliga-
                                     tion on the partnership not to block views of the Maison
                                     Blanche Building. We believe that type of analysis is what
                                     the Court of Appeals intended when it directed this Court to
                                     reconsider the effect of the servitude on the fair market
                                     value. Whitehouse II, 615 F.3d at 340. If we overstep our
                                     authority, we apologize. We shall recalculate the value of the
                                     servitude on the assumptions that, in fact, it does obligate
                                     the partnership not to build atop the Kress Building and that
                                     separate ownership of the Maison Blanche and Kress
                                     Buildings is unlikely.
                                           B. The Conveyance
                                           1. Introduction
                                        We look to Louisiana law in interpreting the conveyance.
                                     Id. at 329 (citing Adams v. United States, 218 F.3d 383, 386
                                     (5th Cir. 2000) (‘‘To arrive at a reasonable conclusion
                                     regarding the value of the property at issue * * *, one must
                                     first determine the rights afforded to the owner of such prop-
                                     erty by the applicable state law.’’)). By its terms, and pursu-
                                     ant to La. Rev. Stat. Ann. sec. 9:1252, the conveyance pur-
                                     ports to transfer a perpetual real right ‘‘in and to certain
                                     exterior surfaces of the * * * [Maison Blanche Building]’’ to




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     341


                                     PRC.  La. Rev. Stat. Ann. sec. 9:1252, A. provides for the cre-
                                     ation of a perpetual real right burdening the whole or any
                                     part of immovable property, including its facade, in favor of
                                     an entity formed exclusively for certain public purposes.
                                     While the provision is found in the statute among provisions
                                     headed ‘‘Predial Servitudes’’ (La. Rev. Stat. Ann. title 9, code
                                     book II, code title IV), the perpetual real right created by the
                                     provision has aspects of a right of use, a form of personal ser-
                                     vitude. See Whitehouse I, 131 T.C. at 132–133. Petitioner
                                     argues that, in enacting La. Rev. Stat. Ann. sec. 9:1252, the
                                     legislature intended to create a special type of predial ser-
                                     vitude, one that has characteristics of both predial and per-
                                     sonal servitudes. As we discussed in Whitehouse I, 131 T.C.
                                     at 133–134, whether most resembling a right of use or a
                                     predial servitude, the perpetual real right created by the
                                     provision is subject to the interpretive rules applicable to
                                     predial servitudes. Thus, for instance: ‘‘Doubt as to the exist-
                                     ence, extent, or manner of exercise of a predial servitude
                                     shall be resolved in favor of the servient estate.’’ La. Civ.
                                     Code Ann. art. 730 (2008). ‘‘[T]he proper interpretation of an
                                     ambiguous instrument is that which least restricts the
                                     ownership of the land’’. Id. cmt. b. (Revision Comments—
                                     1977) (noting that Louisiana courts have applied this rule ‘‘in
                                     a variety of contexts’’). One illustrative case cited in the com-
                                     ment is Whitehall Oil Co. v. Heard, 197 So. 2d 672 (La. Ct.
                                     App. 1967). There, the court was faced with construing a
                                     partition agreement to determine whether it created separate
                                     servitudes over each of several contiguous tracts or whether
                                     it created a single servitude over all of them. Id. at 676. The
                                     court stated that the answer depended on the intent of the
                                     parties to the agreement determined under principles of con-
                                     tract construction. Id. The court apparently found no role for
                                     parol evidence, stating: ‘‘[T]his determinative question is to
                                     be decided by the intention of the parties as reflected by the
                                     partition agreement.’’ Id.; see also Robert Inv. Co., Inc. v.
                                     Eastbank, Inc., 496 So. 2d 465, 472 (La. Ct. App. 1986)
                                     (‘‘Parol evidence is not admissible to modify a written
                                     instrument pertaining to the establishment of a predial ser-
                                     vitude.’’).
                                        With these rules in mind, we approach the conveyance.




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                                     342                 139 UNITED STATES TAX COURT REPORTS                                     (304)


                                           2. Parties’ Arguments
                                       Because language prohibiting the partnership from
                                     building atop the Kress Building is not apparent to us, we
                                     asked the parties to identify language in the conveyance
                                     either prohibiting the owner of the Maison Blanche Building
                                     from building atop the Kress Building or otherwise obscuring
                                     a view of the Maison Blanche Building. Respondent could
                                     identify no such language. Petitioner did not directly answer
                                     our request. 19 Rather, petitioner first references language in
                                     the first numbered paragraph of the conveyance identifying
                                     a portion of the facade:
                                     exterior walls of the Lower Stories which are visible from Canal and Dau-
                                     phine 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 Dau-
                                     phine Streets[.] * * *

                                     Petitioner then references the eleventh ‘‘whereas’’ clause in
                                     the preamble of the conveyance, in which the partnership
                                     states its ‘‘desire[ ] to donate, grant, transfer and convey to
                                     * * * [PRC] * * * a scenic, open space and architectural
                                     facade servitude’’. Conflating those two provisions, petitioner
                                     argues that the combined language ‘‘creates a servitude of
                                     view.’’ Petitioner then refers us to La. Civ. Code Ann. art.
                                     701, Servitude of view (2008), which provides: ‘‘The servitude
                                     of view is the right by which the owner of the dominant
                                     estate enjoys a view; this includes the right to prevent the
                                     raising of constructions on the servient estate that would
                                     obstruct the view.’’
                                           3. Discussion
                                       Petitioner’s reliance on the preamble of the conveyance is
                                     misplaced. ‘‘Generally, a preamble does not create rights
                                     beyond those conveyed by the contract’s operative terms.’’
                                     Chevron U.S.A., Inc. v. Santa Fe Snyder Corp., 69 Fed. Appx.
                                     658 (5th Cir. 2003) (citing Grynberg v. FERC, 71 F.3d 413,
                                     416 (D.C. Cir. 1995) (‘‘[I]t is standard contract law that a
                                     Whereas clause, while sometimes useful as an aid to
                                       19 Although, in the introduction to its supplemental brief, petitioner assures us that it has re-

                                     sponded ‘‘to each and every one of the matters as to which * * * [the] Court has requested sup-
                                     plemental briefing.’’




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     343


                                     interpretation, ‘cannot create any right beyond those arising
                                     from the operative terms of the document.’ ’’)); see also
                                     Succession of Ramp, 212 So. 2d 419, 423 (La. 1968). We
                                     shall, therefore, first set aside the portion of the preamble
                                     that petitioner relies on and consider the operative terms of
                                     the conveyance.
                                       The conveyance (set out in the appendix) establishes in PRC
                                     a real right (i.e., the servitude) ‘‘in and to certain exterior
                                     surfaces of the Improvement [i.e., the improvement being the
                                     Maison Blanche Building and referenced exterior surfaces
                                     constituting the building’s facade]’’. In furtherance of the ser-
                                     vitude, the partnership agrees ‘‘to do (and refrain from
                                     doing)’’ each of certain listed things. The first paragraph fol-
                                     lowing that prefatory language describes the facade and, as
                                     highlighted, is the object of petitioner’s claimed servitude of
                                     view:
                                       1. The exterior surfaces of the Improvement subject to this Servitude are
                                     the exterior walls of the Lower Stories which are visible from Canal and
                                     Dauphine Streets, the exterior portion of the Improvement above the Lower
                                     Stories which is not covered by the Upper Stories, the exterior walls of the
                                     Upper Stories which are visible from Canal, Burgundy, Iberville, and Dau-
                                     phine Streets, and the roof of the Upper Stories * * * (the ‘‘Facade’’). In
                                     the event of uncertainty, the exterior surfaces of the Improvement visible
                                     in the photographs in Exhibit C shall control.

                                     Other operative provisions of the conveyance referenced by
                                     petitioner in passing that may be relevant to establishing the
                                     partnership’s claimed duty not to build atop the Kress
                                     Building are as follows:
                                       2. Donee acknowledges that Owner has provided to Donee Plans dated
                                     August 7, 1997, (the ‘‘Plans’’) pursuant to which Owner intends to renovate
                                     the Improvement, including the Facade, and that such renovation and
                                     rehabilitation have been approved by Donee, provided such work is in
                                     compliance with the Plans. * * * Owner further acknowledges and agrees
                                     that in the event any changes or modifications are made to the Plans
                                     which affect the Facade, Owner shall first obtain the prior written
                                     approval of Donee before any such changes or modifications are made.
                                       3. Owner agrees at all times to preserve and maintain the Facade in a
                                     good and sound state of repair.
                                       4. Without the express written permission of the Donee, its successors
                                     or assigns, signed by a duly authorized representative thereof, based upon
                                     written plans submitted by Owner to Donee, no construction, change,
                                     alteration, remodeling, renovation, or any other thing shall be undertaken
                                     by Owner or permitted to be undertaken in or to the Facade, which would




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                                     affect either the height, or alter the exterior of the Facade or the appear-
                                     ance of the Facade, other than as shown on the Plans * * *

                                        The three paragraphs address the partnership’s then-
                                     existing plans to renovate the Maison Blanche Building, its
                                     obligation to preserve and maintain the facade, and its rights
                                     to alter the facade. Nowhere in these three paragraphs is
                                     there any specific prohibition on building atop the Kress
                                     Building. The first of the three paragraphs addresses the
                                     partnership’s plans (plans) to renovate ‘‘the Improvement’’,
                                     which, it must be remembered, is a defined term encom-
                                     passing only the Maison Blanche Building (and not the Kress
                                     Building). Indeed, the partnership had not as of the date of
                                     the plans (August 7, 1997) acquired the Kress Building; and,
                                     while the Kress Building is shown on some sheets of the
                                     plans, it is labeled ‘‘Future Donation’’ and ‘‘To Be Acquired
                                     at a Later Date’’. The paragraph requires the partnership to
                                     secure PRC’s approval if the partnership wished to change or
                                     modify the plans; but, since the plans involved only renova-
                                     tion of the Maison Blanche Building, the requirement in the
                                     paragraph to obtain approval for a change in plans would
                                     have no consequence for any plan by the partnership with
                                     respect to the Kress Building.
                                        The second of the three paragraphs, whereby the partner-
                                     ship agrees to preserve and maintain the facade, does not
                                     bar the partnership from building atop the Kress building.
                                        The third of the three paragraphs, establishing generally
                                     PRC’s right to approve changes to the facade, is the most
                                     likely paragraph in which to look for such restrictions. The
                                     paragraph does condition a broad range of activities on
                                     obtaining PRC’s written permission; viz, ‘‘construction,
                                     change, alteration, remodeling, renovation, or any other
                                     thing’’. But PRC’s written permission must be obtained for
                                     any such activity only if (1) the activity is undertaken ‘‘in or
                                     to’’ the facade and (2) as pertinent, the activity would affect
                                     the height of the facade or alter either its exterior or appear-
                                     ance. And while it might be argued that constructing addi-
                                     tional stories atop the Kress Building could change (block)
                                     the appearance of the facade to a person looking up at the
                                     facade from the street in front of, or on the side of, the
                                     heightened Kress Building, such construction would not in




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                                     normal speech be ‘‘in or to’’ the facade and, thus, would not
                                     require permission from PRC.
                                        We do not find in the operative terms of the conveyance
                                     any prohibition restricting the partnership from building
                                     atop the Kress Building. Put another way, the operative
                                     terms of the conveyance do not convey to PRC a real right
                                     enforceable through a judicial proceeding by an action for
                                     injunction or damages if the partnership or any successor in
                                     interest were to build atop the Kress Building. See La. Rev.
                                     Stat. Ann. sec. 9:1252, C.
                                        While we do not believe that the operative terms of the
                                     conveyance are in need of interpretation, we shall for the
                                     sake of argument assume that they are in such need and
                                     consider them in the light of the portion of the preamble to
                                     the conveyance identified by petitioner, which states the
                                     partnership’s desire to grant to PRC ‘‘a scenic, open space’’
                                     servitude as a perpetual real right. On the basis of that lan-
                                     guage, petitioner would have us find a servitude of view,
                                     which the Louisiana Civil Code describes as ‘‘the right by
                                     which the owner of the dominant estate enjoys a view; this
                                     includes the right to prevent the raising of constructions on
                                     the servient estate that would obstruct the view.’’ La. Civ.
                                     Code Ann. art. 701 (2008).
                                        A servitude of view, thus defined, is a rough fit, since,
                                     while the Maison Blanche Building and the land thereunder
                                     may conveniently be considered a servient estate, there is no
                                     dominant estate. A real right created pursuant to La. Rev.
                                     Stat. Ann. sec. 9:1252 does not run in favor of another estate
                                     but, rather, it runs in favor of an organization (here PRC).
                                     Nevertheless, since the Louisiana legislature classified the
                                     real right as a special type of predial servitude, we assume
                                     that, to the extent compatible, rules relating to servitudes of
                                     view, a type of predial servitude, would apply to any similar
                                     real right created pursuant to La. Rev. Stat. Ann. sec.
                                     9:1252. See La. Civ. Code Ann. art. 645 (2010); Whitehouse
                                     I, 131 T.C. at 133.
                                        A predial servitude is established by title; i.e., by juridical
                                     act. See La. Civ. Code Ann. art. 708 (2008). The Supreme
                                     Court of Louisiana has stated: ‘‘For a servitude to be created
                                     by title, the instrument must be express as to the nature and
                                     extent of the servitude.’’ Palomeque v. Prudhomme, 664 So.
                                     2d 88, 93 (1995). The court cautioned: ‘‘Because servitudes




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                                     are so disfavored, an ambiguous agreement to establish a
                                     servitude is unenforceable.’’ Id. at 93–94. The court explained
                                     the reason for disfavoring predial servitudes: ‘‘Predial ser-
                                     vitudes are in derogation of public policy because they form
                                     restraints on the free disposal and use of property.’’ Id. at 93.
                                     It added: ‘‘Therefore, servitudes are not entitled to be viewed
                                     with favor by the law and can never be sustained by implica-
                                     tion.’’ Id. (emphasis added).
                                        The operative terms of the conveyance do not establish a
                                     servitude of view. If the preamble of the conveyance is to be
                                     considered an interpretive aid in understanding that the
                                     operative terms of the conveyance do indeed establish a ser-
                                     vitude of view, it must be that the preamble does so by
                                     implication, since neither the term ‘‘servitude of view’’ nor
                                     any description of a servitude of view appears in the pre-
                                     amble. To accept that a servitude of view (a predial ser-
                                     vitude) is established by implication, however, is prohibited.
                                     See Palomeque, 664 So. 2d at 93–94. The Louisiana Civil
                                     Code provides to similar effect: ‘‘Doubt as to the existence,
                                     extent, or manner of exercise of a predial servitude shall be
                                     resolved in favor of the servient estate.’’ La. Civ. Code Ann.
                                     art. 730. 20 And while because of expected income tax advan-
                                     tage the partnership might not complain about an implied
                                     servitude of view prohibiting it from building on neighboring
                                     property, we have no assurance that a successor owner of the
                                     Maison Blanche Building (whether united with the Kress
                                     Building or not) would be as agreeable.
                                        The Louisiana Civil Code has provided specifically for a
                                     servitude of view for many years. See La. Civ. Code Ann. art.
                                      20 In Whitehouse I, 131 T.C. at 133–134, we set forth cmt. (b) accompanying La. Civ. Code

                                     Ann. art. 730 (2008) (Revision Comments—1977). For convenience, we reproduce it here:
                                       (b) It is a cardinal rule of interpretation that, in case of doubt, instruments purporting to es-
                                     tablish predial servitudes are always interpreted in favor of the owner of the property to be af-
                                     fected. 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 Su-
                                     preme 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.’’ Par-
                                     ish 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). * * *




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                                     701 (source: 1977 La. Acts, No. 514, sec. 1, eff. Jan. 1, 1978
                                     (reproducing Art. 716 of the La. Civ. Code of 1870)). If the
                                     drafters of the conveyance had by its terms intended it to
                                     restrict the partnership and any successor-owner of the
                                     Maison Blanche Building from building stories above the
                                     Kress Building or from otherwise blocking views of it, no
                                     doubt they would, in clear terms, have done so. They did not.
                                     No one coming across the conveyance in the conveyance
                                     records of the parish of Orleans could determine from its
                                     terms that they were prohibited (if they owned the Maison
                                     Blanche Building) from building atop the Kress Building or,
                                     say, from putting up a billboard across the street from the
                                     Maison Blanche Building but in direct line of sight of its
                                     facade from some location further away.
                                           C. Conclusion
                                       The conveyance does not create in PRC a real right enforce-
                                     able against the partnership or any successor owner of the
                                     Maison Blanche Building to enjoin (or seek damages from)
                                     any such owner building atop the Kress Building or other-
                                     wise blocking views of the facade.
                                     IV. Valuation of the Servitude
                                       Notwithstanding our conclusion about the terms of the
                                     conveyance, we shall, consistent with the instruction of the
                                     Court of Appeals, reconsider the value of the servitude on the
                                     assumptions that, while it does not burden the Kress
                                     Building, it restricts the partnership from building atop it
                                     and that separate ownership of the Maison Blanche and
                                     Kress Buildings is unlikely (thus, in effect, making that
                                     restriction perpetual).
                                       We have reconsidered the applicability of the reproduction
                                     cost and income approaches for valuing this servitude and,
                                     again, finding them unreliable, have rejected both methods.
                                     We have found the comparable-sales approach to be a reli-
                                     able method of valuation, and we shall again apply it.
                                       Mr. Roddewig testified that the area of the Kress Building
                                     is 16,210 square feet. We accept that measurement. When
                                     that area is added to the 514,566 square feet of area of the
                                     Maison Blanche Building, the area of the Maison Blanche-
                                     Kress parcel is 530,776 square feet. We acknowledged in




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                                     Whitehouse I that both experts agreed that larger properties
                                     tend to sell for less per square foot. We accordingly adjusted
                                     the comparable-sale prices for size in Whitehouse I. The addi-
                                     tion of the Kress Building does not warrant any further
                                     adjustment for size.
                                        Neither party asserts that in Whitehouse I we made erro-
                                     neous adjustments to the four comparable-sale prices we
                                     relied on to reach a price per square foot of $23.50 before
                                     imposition of the servitude. We apply that value to the
                                     530,776-square-foot area of the combined buildings. Applying
                                     the price per square foot of $23.50 to the area results in a
                                     total before-restriction value of $12,473,236, which we find is
                                     the before-restriction value of the Maison Blanche-Kress
                                     parcel.
                                        In Whitehouse I, we accepted Mr. Argote’s valuation of the
                                     after-restriction value of the Maison Blanche Building of
                                     $10.3 million. His valuation was based on comparable sales
                                     with an average price per square foot of $20. Applying the
                                     $20-per-square-foot price to the 530,776-square-foot area of
                                     the combined property results in a total after-restriction
                                     value of $10,615,520, which we find is the after-restriction
                                     value of the Maison Blanche-Kress parcel.
                                        On the basis of our findings as to the before- and after-
                                     restriction values of the combined Maison Blanche and Kress
                                     Building property, we find that the value of the servitude on
                                     the valuation date was $1,857,716, calculated as follows:

                                                   Value of the servitude under comparable-sales
                                                                      approach

                                             Before-restriction value ................................           $12,473,236
                                             Less after-restriction value ...........................             10,615,520

                                             Value of the servitude ...................................             1,857,716

                                     V. Valuation Misstatement Penalty
                                           A. Introduction
                                        In Whitehouse I, we explained that section 6662(a) imposes
                                     an accuracy-related penalty in the amount of 20% of the por-
                                     tion of any underpayment of tax required to be shown on a
                                     return in the case of, among other things, any substantial




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                                     valuation misstatement. See sec. 6662(b)(3). Section 6662(h)
                                     increases the penalty to 40% in the case of a gross valuation
                                     misstatement. There is a substantial valuation misstatement
                                     if the value of any property claimed on the return is 200%
                                     or more of the amount determined to be the correct amount.
                                     Sec. 6662(e)(1)(A). There is a gross valuation misstatement if
                                     the value is 400% or more of the value determined to be the
                                     correct amount. Sec. 6662(h)(2)(A)(i). On the 1997 Form
                                     1065, the partnership claimed a $7.445 million charitable
                                     contribution deduction for the fair market value of the ser-
                                     vitude conveyed to PRC. The actual fair market value of the
                                     servitude, as we determine supra, was $1,857,716. Therefore,
                                     the partnership claimed a value that was approximately
                                     401% of the actual value. Nevertheless, petitioner argues
                                     that the penalty should not be imposed, under the reasonable
                                     cause exception found in section 6664(c).
                                        Generally, the section 6662 accuracy-related penalty will
                                     not be imposed with respect to any portion of an under-
                                     payment if the taxpayer can show that there was reasonable
                                     cause for that portion and that he acted with good faith with
                                     respect to that portion. Sec. 6664(c)(1); see Stanford v.
                                     Commissioner, 152 F.3d 450 (5th Cir. 1998), aff ’g in part and
                                     vacating in part 108 T.C. 344 (1997). Under the regulations,
                                     ‘‘the most important factor’’ in determining whether the tax-
                                     payer had reasonable cause for his tax treatment and
                                     whether he acted in good faith ‘‘is the extent of the tax-
                                     payer’s effort to assess the taxpayer’s proper tax liability.’’
                                     Sec. 1.6664–4(b)(1), Income Tax Regs.; see also Stanford v.
                                     Commissioner, 152 F.3d at 460; sec. 1.6662–4(g)(4)(i), Income
                                     Tax Regs.
                                        In the case of a substantial or gross valuation
                                     misstatement with respect to charitable deduction property,
                                     however, the reasonable-cause-and-good-faith exception does
                                     not apply unless the taxpayer can show that (1) ‘‘the claimed
                                     value of the property was based on a qualified appraisal
                                     made by a qualified appraiser’’, sec. 6664(c)(2)(A); and (2) ‘‘in
                                     addition to obtaining such appraisal, the taxpayer made a
                                     good-faith investigation of the value of the contributed prop-
                                     erty’’, sec. 6664(c)(2)(B). The pertinent regulations, section




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                                     1.6664–4(g)(1), Income Tax Regs. (1977), 21 make clear that
                                     the qualified-appraisal and good-faith-investigation require-
                                     ments imposed by section 6664(c)(2) ‘‘apply in addition to the
                                     generally applicable rules concerning reasonable cause and
                                     good faith’’. 22 Although neither the statute nor the regula-
                                     tions clarify the relationship between the section 6664(c)(1)
                                     good faith requirement and the section 6664(c)(2)(B) good-
                                     faith-investigation requirement, it is clear that, with respect
                                     to any valuation misstatement of charitable deduction prop-
                                     erty, a taxpayer must act in good faith generally. While
                                     respondent concedes that the partnership satisfied the quali-
                                     fied-appraisal requirement, he argues that petitioner failed
                                     to show that, in addition, the partnership made a good-faith
                                     investigation of the value of the servitude.
                                            B. Discussion
                                            1. Testimony of Mr. Drawbridge
                                       Petitioner relies principally on the testimony of Robert
                                     Drawbridge, the asset manager for the partnership, to show
                                     that the section 6662 accuracy-related penalty does not apply
                                     because the partnership qualifies for the section 6664(c)
                                     reasonable cause exception.
                                       Mr. Drawbridge became asset manager for the partnership
                                     sometime in 2000, well after the 1997 Form 1065 was filed.
                                     He did not testify as to any personal knowledge of the oper-
                                     ations of the partnership before his arrival, nor did he iden-
                                           21 Today
                                                in sec. 1.6664–4(h)(3), Income Tax Regs.
                                           22 This
                                               point was made, before promulgation of sec. 1.6664–4(g)(1), Income Tax Regs. (1997),
                                     by the Court of Appeals for the First Circuit in McMurray v. Commissioner, 985 F.2d 36, 43–
                                     44 (1st Cir. 1993), aff ’g in part, rev’g in part T.C. Memo. 1992–27. In McMurray, the court ad-
                                     dressed a precursor of sec. 6664(c)(2); viz, sec. 6659(f)(2), as added by the Deficit Reduction Act
                                     of 1984 (DEFRA), Pub. L. No. 98–369, sec. 155(c)(1), 98 Stat. at 693. The court held that the
                                     qualified-appraisal and good-faith-investigation requirements in sec. 6659(f)(2) (as added by
                                     DEFRA) were in addition to the reasonable basis and good faith requirements found in then
                                     sec. 6659(e):
                                       The McMurrays seek relief under section 6659(e), which allows for a waiver of ‘‘all or any part
                                     of the addition to tax provided by this section on a showing by the taxpayer that there was a
                                     reasonable basis for the valuation or adjusted basis claimed on the return and that such claim
                                     was made in good faith.’’ While we have already concluded that the McMurrays acted in reason-
                                     able reliance on the Donovan appraisal, the inquiry does not end there, because section
                                     6659(f)(2) prohibits a penalty waiver unless ‘‘the claimed value of the property was based on
                                     a qualified appraisal made by a qualified appraiser,’’ and, ‘‘in addition to obtaining such an ap-
                                     praisal, the taxpayer made a good faith investigation of the value of the contributed property.’’
                                     On appeal, the McMurrays do not address section 6659(f)(2), nor does our review of the record
                                     indicate any additional investigation by the McMurrays into the value of the property. Thus,
                                     we affirm the imposition of penalties under section 6659.




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                                     tify anyone who informed him about partnership operations
                                     before that time. He testified that, in preparation for his
                                     testimony, he did review the books and records the partner-
                                     ship maintained in the ordinary course of its business. He
                                     testified that, in filing the 1997 Form 1065, the partnership
                                     relied on an appraisal made by M. Richard Cohen (Cohen
                                     appraisal) for the value of the donation. He testified that, to
                                     the best of his knowledge, the partnership reviewed and
                                     relied on a second appraisal, dated January 1, 1998, obtained
                                     by the then limited partner of the partnership from Revac,
                                     Inc., of Houston, Texas (Revac appraisal). (The Revac
                                     appraisal, among other things, estimates the market value of
                                     the Maison Blanche Building (1) before rehabilitation, (2)
                                     just after rehabilitation, and (3) upon achieving stabilized
                                     occupancy.) He testified that Reznick, Fedder & Silverman
                                     (Reznick firm) prepared the 1997 Form 1065 and provided
                                     tax advice to the partnership with respect to its tax-reporting
                                     positions. He testified that, in filing the 1997 Form 1065, the
                                     partnership relied on the professional tax advice it received
                                     from the Reznick firm and from the Elkins law firm (Elkins
                                     firm). He testified that a PRC representative signed the Form
                                     8283, Noncash Charitable Contributions, attached to the
                                     1997 Form 1065, acknowledging receipt of the servitude.
                                        In Whitehouse I, 131 T.C. at 174, we stated: ‘‘The 1997
                                     Form 1065 was signed on October 14, 1998, and the question
                                     before us is whether, before it was signed, disregarding the
                                     Cohen appraisal, someone acting on behalf of the partnership
                                     made a good faith investigation of the value of the servitude.
                                     Mr. Drawbridge gave no convincing testimony on that score.’’
                                     We adhere to that conclusion.
                                           2. Court of Appeals’ Counsel
                                        In reaching that conclusion, we are mindful of the Court
                                     of Appeals’ counsel that, where a witness acts as the agent
                                     of an entity, he should be able to present the entity’s subjec-
                                     tive beliefs so long as those beliefs are based on the collective
                                     knowledge of the entity’s personnel. See Whitehouse II, 615
                                     F.3d at 342 (citing Brazos River Authority v. GE Ionics, Inc.,
                                     469 F.3d 416, 434 (5th Cir. 2006)). We are also mindful of the
                                     Court of Appeals’ observation that, in establishing that it has
                                     met its burden of proof for reasonable cause, the taxpayer




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                                     must show that it exercised ordinary business care and pru-
                                     dence; also, it is reasonable for a taxpayer to rely on an
                                     accountant or attorney for advice as to a matter of tax law,
                                     such as whether a liability exists. Id. at 342–343. In par-
                                     ticular, the Court of Appeals said: ‘‘Given that Whitehouse
                                     offered proof that it relied on its accountants’ and attorneys’
                                     opinions of Cohen’s appraisal, a possible issue on remand is
                                     whether Whitehouse needed to prove more to show reason-
                                     able cause.’’ Id. at 343. Finally, we are also mindful of the
                                     Court of Appeals’ observation that, when Mr. Drawbridge
                                     testified, he had in front of him the 1997 Form 1065, which
                                     had been prepared by the Reznick firm: ‘‘It may be that this
                                     is direct evidence Whitehouse relied on professional advice in
                                     the preparation of the tax form, and such preparation
                                     required evaluation of the reasonableness of the stated value
                                     of the easement.’’ Id. at 342.
                                           3. Petitioner’s Burden
                                       Since respondent concedes the qualified-appraisal require-
                                     ment, 23 for the partnership to qualify for the section 6664(c)
                                     reasonable-cause-and-good-faith exception, petitioner must
                                     prove both that (1) before claiming a $7.445 million chari-
                                     table contribution deduction on the 1997 Form 1065, the
                                     partnership in good faith investigated the value of the ser-
                                     vitude and (2) it had reasonable cause for, and it acted in
                                     good faith with respect to, the resulting underpayment in
                                     tax. See section 6664(c)(2)(B) and (1), respectively.
                                       The term ‘‘good faith’’ appears in both section 6664(c)(1)
                                     and (2)(B). Although the term has no precise definition, it
                                     means, among other things, ‘‘honesty in belief ’’. Black’s Law
                                     Dictionary 762 (9th ed. 2009); see also Southmark Props. v.
                                     Charles House Corp., 742 F.2d 862 (5th Cir. 1984). And while
                                     section 6664(c)(2)(B) requires a good-faith investigation of the
                                     value of the contributed property, neither the Internal Rev-
                                     enue Code nor the pertinent regulations specify what, for
                                       23 The $7.445 million value of the servitude claimed as a charitable contribution deduction on

                                     the 1997 Form 1065 was based on the Cohen appraisal, which respondent concedes is a qualified
                                     appraisal by a qualified appraiser. As stated infra in the text, the Cohen appraisal was con-
                                     cerned only with the Maison Blanche Building, and it did not explicitly take into account any
                                     diminution in value of the Kress Building. Since we otherwise conclude that the partnership
                                     does not qualify for the sec. 6664(c)(1) reasonable cause exception, we need not concern ourselves
                                     with the absence of any qualified appraisal by a qualified appraiser of the Kress Building (or
                                     prefiling good-faith investigation of its value). See sec. 6664(c)(2).




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                                     that purpose, constitutes a good-faith investigation. See sec.
                                     1.6664–4(g)(1), Income Tax Regs. (1997) (merely para-
                                     phrasing the statute). 24 In discussing the facts and cir-
                                     cumstances that may or may not indicate that a taxpayer
                                     acted with reasonable cause and good faith, the regulations
                                     say this with respect to reliance on appraisals:
                                     Reasonable cause and good faith ordinarily is not indicated by the mere
                                     fact that there is an appraisal of the value of property. Other factors to
                                     consider include the methodology and assumptions underlying the
                                     appraisal, the appraised value, the relationship between the appraised
                                     value and purchase price, the circumstances under which the appraisal
                                     was obtained, and the appraiser’s relationship to the taxpayer or to the
                                     activity in which the property is used. * * * [Sec. 1.6664–4(b)(1), Income
                                     Tax Regs. (1997). 25]

                                       Mr. Drawbridge testified that the partnership relied on the
                                     Cohen appraisal in filing out the 1997 Form 1065. By its
                                     terms, the Cohen appraisal ‘‘is only concerned with the
                                     Maison Blanche Building.’’ 26 Mr. Cohen concluded that, as of
                                     September 1, 1998, the diminution in value of the Maison
                                     Blanche Building caused by the conveyance of the servitude
                                     to PRC was $7.445 million. He determined that amount by a
                                     before-and-after valuation of the building, as follows:
                                                Value before donation of easement ......................            $96,000,000
                                                Value after donation of easement ........................            88,555,000

                                                Diminution caused by easement ..........................               7,445,000

                                     He stated that, in December 1995, the partnership purchased
                                     the Maison Blanche Building for $6.625 million and, in early
                                     1998, it purchased a lease from the Maison Blanche Depart-
                                     ment Store for $2,353,813. Together, those sums indicate
                                     that the partnership paid $8,978,813 for the Maison Blanche
                                     Building. And while Mr. Cohen’s estimate of the diminution
                                     in value of the building on account of the conveyance of the
                                     servitude—$7.445 million—must have struck the partners as
                                     huge, when compared to what, less than three years earlier,
                                     the partnership had paid for the building—$8,978,813 (a
                                     diminution in value of approximately 83%)—his estimate of
                                           24 Currently
                                                     in sec. 1.6664–4(h)(3), Income Tax Regs.
                                           25 Same
                                                 under sec. 1.6664–4(b)(1), Income Tax Regs. (except that the cross-reference is, erro-
                                     neously, to para. (g) and not to para. (h)).
                                       26 The Cohen appraisal further states: ‘‘Only the historic Maison Blanche Building is the sub-

                                     ject of this report.’’




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                                     354                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     the before-donation value of the building—$96 million—must
                                     have left them thunderstruck when compared to the approxi-
                                     mately $9 million that the partnership had so recently paid
                                     for the building, indicating that, over less than three years,
                                     the building had enjoyed an approximately 970% apprecia-
                                     tion. While the Cohen appraisal states that Mr. Cohen was
                                     valuing the Maison Blanche Building in an ‘‘as improved’’
                                     condition (‘‘subject to completion of the conversion of the
                                     ‘shell’ buildings into a 452-room Ritz-Carlton Hotel’’), it is
                                     specific in identifying July 1, 1998, as the date on which he
                                     inspected ‘‘the vacant building ‘shell’ ’’ and as the date on
                                     which his ‘‘As Is value estimate shall apply’’. (Emphasis
                                     added.) He does not, however, set forth any ‘‘as is’’ (i.e.,
                                     unimproved) value for the shell building.
                                        As quoted above, section 1.6664–4(b)(1), Income Tax Regs.
                                     (1997), states that reasonable cause and good faith ordinarily
                                     are not indicated by the mere fact that there is an appraisal.
                                     Among other factors to consider are ‘‘the methodology and
                                     assumptions underlying the appraisal, the appraised value,
                                     the relationship between the appraised value and purchase
                                     price’’. Id. When compared to the approximately $9 million
                                     that the partnership paid for the Maison Blanche Building in
                                     December 1995, Mr. Cohen’s opinion that, less than three
                                     years later, conveyance of the servitude to PRC reduced the
                                     value of the building by $7.445 million would likely suggest
                                     to a reasonably prudent taxpayer intending to claim a chari-
                                     table contribution deduction on account of the conveyance
                                     that further investigation of the servitude’s value was war-
                                     ranted. And considering Mr. Cohen’s failure to set forth a
                                     value for the building as an unimproved shell, and his
                                     opinion that the value of the building was over tenfold what
                                     the partnership had recently paid for it, a reasonably pru-
                                     dent taxpayer attempting to assess its proper tax liability
                                     would no doubt have further investigated Mr. Cohen’s meth-
                                     odology and conclusions. Lack of further investigation would
                                     be counterindicative that the partnership acted with reason-
                                     able cause and in good faith in the face of the facts before
                                     it. But petitioner does not rely solely on the Cohen appraisal
                                     and does claim that the partnership further investigated the
                                     value of the servitude, which is necessary not only for the
                                     partnership to satisfy the section 6664(c)(2)(B) good-faith-
                                     investigation requirement but also, on the facts before us, as




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                      355


                                     evidence that there was reasonable cause for, and it acted in
                                     good faith with respect to, the underpayment in tax resulting
                                     from its gross misstatement of the value of the servitude.
                                       We shall now consider petitioner’s evidence that, besides
                                     the Cohen appraisal, the partnership made a good-faith
                                     investigation of the value of the servitude. 27
                                           4. The Revac Appraisal
                                       We accept Mr. Drawbridge’s testimony that the partner-
                                     ship reviewed and relied on the Revac appraisal. Petitioner
                                     concedes in its supplemental brief, however: (1) ‘‘the REVAC
                                     appraisal did not appraise the [servitude]’’ and (2) ‘‘[the part-
                                     nership] did not rely on the REVAC appraisal as a measure
                                     of the value of the servitude’’. Nevertheless, petitioner argues
                                     that 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 supporting the Cohen appraisal,
                                     which concluded that the before-donation value of the
                                     building was $96 million:
                                     Any reasonable person making ‘‘a good faith investigation of the value of
                                     the contributed property’’ would have viewed the Cohen appraisal, when
                                     compared to the earlier REVAC appraisal with respect to a common deter-
                                     mination of value—i.e., the unimpaired highest and best use ‘‘before’’ value
                                     of the subject property—as expressing a significantly more conservative
                                        27 Petitioner suggests that, if to satisfy the good-faith-investigation requirement of sec.

                                     6662(c)(2)(B), the partnership should have obtained a second appraisal of the servitude, ‘‘that
                                     is clearly not what Congress intended when it established the rule.’’ Neither we nor respondent
                                     has suggested that, to meet the good-faith-investigation requirement of sec. 6662(c)(2)(B), the
                                     partnership had to obtain a second appraisal. What a taxpayer must do to meet the good-faith-
                                     investigation requirement undoubtedly depends on the sophistication of the taxpayer and the
                                     complexity and magnitude of the claimed deduction. See sec. 1.6664–4(b)(1), Income Tax Regs.
                                     Generally, an owner is competent to give his opinion on the value of his property. E.g., King
                                     v. Ames, 179 F.3d 370, 376 (5th Cir. 1999); Babin v. Commissioner, T.C. Memo. 1992–673, 1992
                                     WL 340738, at *13, aff ’d, 23 F.3d 1032 (6th Cir. 1994). To carry weight, an owner’s opinion
                                     cannot be based on naked conjecture or solely speculative factors. E.g., King, 179 F.3d at 376.
                                     Relying exclusively on his own knowledge, or combining what he knows with verifiable data
                                     from a qualified appraisal (such as the appraiser’s data about the value of comparables), a donor
                                     seeking to satisfy the good-faith-investigation requirement of sec. 6662(c)(2)(B) before he files
                                     his tax return might form an opinion as to the value of the contributed property that, on review
                                     by the Commissioner or a court, is found to be satisfactory. While determining the value of less
                                     than the donor’s entire interest in property (e.g., the servitude) may be difficult, the standard
                                     to be met is not certainty but only that the value determined be based on a good-faith investiga-
                                     tion. And while a second appraisal is not necessary, nor would the mere fact of a second ap-
                                     praisal necessarily constitute a good-faith investigation of the value of the contributed property,
                                     given the magnitude of the charitable contribution deduction at stake here relative to the cost
                                     of a second appraisal, a second appraisal undertaken in good faith might have been a prudent
                                     investment.




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                                     356                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     conclusion of value and, accordingly, would have no reasonable basis to
                                     question the ‘‘after’’ value, or the resultant value of the Easement as
                                     expressed in the Cohen appraisal.

                                       The Revac appraisal valued the Maison Blanche Building,
                                     not the reduction in value (if any) of that building on account
                                     of the conveyance of the servitude to PRC. As we stated in
                                     Whitehouse I, 131 T.C. at 175:
                                     The flaw in petitioner’s argument is that the good faith investigation that
                                     * * * [the partnership] 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
                                     postrehabilitation value determined in the Revac appraisal exceeds by
                                     slightly more than 30 percent the $96 million postrehabilitation and before
                                     restriction value determined by Mr. Cohen, which discrepancy, without
                                     more, equally brings into question both appraisals.

                                       Moreover, a more conservative before-conveyance value
                                     does not necessarily signify a reasonable value for the ser-
                                     vitude itself. Indeed, the Cohen appraisal found a before-
                                     conveyance value, based on the income-approach value of $96
                                     million, but a final easement value of $7.445 million,
                                     whereas Mr. Roddewig’s appraisal started from a lower
                                     before-conveyance value ($43 million) but determined a
                                     larger easement value ($10 million).
                                       Petitioner begins its discussion of the Revac appraisal by
                                     conceding that it was not an appraisal of the servitude and
                                     that the partnership did not rely on it to value the servitude.
                                     Those are the basic points on which we rely. The Revac
                                     appraisal does not constitute an investigation, in good faith
                                     or otherwise, of the value of the servitude.
                                           5. Form 8283
                                        We also accept Mr. Drawbridge’s testimony that a PRC rep-
                                     resentative signed the Form 8283, acknowledging receipt of
                                     the servitude. Petitioner claims that the representative
                                     ‘‘acknowledg[ed] the charitable donation in the claimed
                                     amount’’. Suffice it to say that the Form 8283 contains the




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     357


                                     following disclaimer as part of the donee acknowledgment:
                                     ‘‘This acknowledgment does not represent agreement with
                                     the claimed fair market value.’’
                                           6. Investigation
                                        Other than his testimony that the partnership relied on
                                     the Cohen and Revac appraisals, Mr. Drawbridge did not tes-
                                     tify to any action by either the partnership or its advisers,
                                     the Reznick and Elkins firms, that could be characterized as
                                     an investigation of the value of the servitude. He did testify
                                     that the Reznick firm prepared the 1997 Form 1065 and
                                     that, in filing it, the partnership relied on professional tax
                                     advice from both the Reznick and Elkins firms. That much
                                     is clear, and we accept it. What is unclear is the substance
                                     of that advice and whether, in preparing the 1997 Form
                                     1065, the Reznick firm was duty bound either (1) to ensure
                                     that the partnership had made a good-faith investigation of
                                     the value of the servitude or (2) to make that investigation
                                     itself. To assist us in carrying out the Court of Appeals’ man-
                                     date, we asked the parties a series of questions. We asked
                                     them to identify anything in the record that establishes the
                                     content of the professional advice that the partnership relied
                                     on in filing the 1997 Form 1065. We asked them to identify
                                     authority establishing the duty of an auditor preparing a tax
                                     return to evaluate the reasonableness of the stated value of
                                     a charitable contribution (and, if there is such a duty, to
                                     identify how the duty is to be executed). We asked them to
                                     provide us with specific references to the record of testimony
                                     (or other evidence) demonstrating a good-faith investigation
                                     of the value of the servitude. In particular, we asked them
                                     to identify evidence that the partnership’s professional
                                     advisers made such a good-faith investigation (and conveyed
                                     the results of the investigation to the partnership).
                                        Neither party identified any such authority or evidence.
                                     The business record rule certainly would have been sufficient
                                     to permit Mr. Drawbridge to produce written records pre-
                                     pared by the partnership at the time it filed the 1997 Form
                                     1065 and evidencing the necessary good-faith investigation.
                                     See FDIC v. Massingill, 24 F.3d 768, 779 n.15 (5th Cir. 1994)
                                     (admitting testimony regarding files of which the witness
                                     was the subsequent custodian). And, if the Reznick firm or




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                                     358                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     Elkins firm carried out the investigation on the partnership’s
                                     behalf, petitioner could have called someone from either or
                                     both firms to testify as to the steps taken to investigate the
                                     value of the servitude. Indeed, Gary J. Elkins (who we
                                     assume was a member of the Elkins firm in 1997 and 1998)
                                     is one of petitioner’s counsel in this case. The Court of
                                     Appeals has said: ‘‘In general, a court may draw a negative
                                     inference from a party’s failure to produce a witness ‘whose
                                     testimony would elucidate the transaction.’ ’’ Streber v.
                                     Commissioner, 138 F.3d 216, 221 (5th Cir. 1998) (quoting
                                     Graves v. United States, 150 U.S. 118, 121 (1893)), rev’g on
                                     other grounds T.C. Memo. 1995–601. We find that, aside
                                     from obtaining the Cohen and Revac appraisals, no one from
                                     the partnership did anything else to investigate the value of
                                     the servitude. We also find that no one from either the
                                     Reznick firm or the Elkins firm did anything to investigate
                                     the value of the servitude.
                                       Petitioner attempts to excuse its failure to produce evi-
                                     dence of any investigation of the value of the servitude by
                                     arguing that such an investigation was unnecessary:
                                       Whitehouse suggests that the fact that it retained eminently qualified
                                     professionals, and relied on their advice and counsel, demonstrates that it
                                     exercised ‘‘ordinary business care and prudence’’ in attempting to value the
                                     charitable donation and should, without any further showing, constitute
                                     sufficient evidence that Whitehouse satisfied the requirements of Section
                                     6664(c)(2)(B).

                                        We cannot agree. The requirement of the statute is plain.
                                     Besides obtaining and relying on a qualified appraisal by a
                                     qualified appraiser, ‘‘the taxpayer * * * [must make] a good
                                     faith investigation of the value of the contributed property.’’
                                     Sec. 6664(c)(2). For the good-faith-investigation requirement
                                     to have any meaning, petitioner was required to demonstrate
                                     how, in good faith, the partnership’s partners or its advisers
                                     could have believed that a $7.445 million charitable contribu-
                                     tion deduction was reasonable beyond simply being the
                                     amount determined in the Cohen appraisal. There was, how-
                                     ever, no testimony regarding how, if at all, anyone reconciled
                                     the $7.445 million amount of the deduction (i.e., the value of
                                     the servitude) with the approximately $9 million that, less
                                     than three years earlier, the partnership paid for the
                                     building (an 83% reduction in value). Nor was there testi-




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     359


                                     mony regarding any inquiry as to Mr. Cohen’s assumption in
                                     valuing the servitude that, over less than three years, the
                                     building had appreciated in value by approximately 970%.
                                     Petitioner’s failure to provide evidence that anyone consid-
                                     ered those points is indicative that, aside from obtaining the
                                     Cohen appraisal, no one made a good-faith investigation of
                                     the value of the servitude. That additional step was required
                                     here. See McMurray v. Commissioner, 985 F.2d 36, 43–44
                                     (1st Cir. 1993), aff ’g in part, rev’g in part T.C. Memo. 1992–
                                     27; sec. 1.6664–4(g), Income Tax Regs. (1997).
                                           7. Reliance on Advice and Counsel
                                        Nor has petitioner identified, as requested, the content of
                                     the professional advice that the partnership relied on in
                                     filing the 1997 Form 1065. And petitioner has not shown
                                     that, in preparing the 1997 Form 1065, the Reznick firm had
                                     either the duty to make an investigation of the value of the
                                     servitude or the duty to ensure that the partnership had
                                     done so. Finally, petitioner has not identified authority estab-
                                     lishing the duty of an auditor preparing a tax return to
                                     evaluate the reasonableness of the stated value of a chari-
                                     table contribution.
                                        We have consulted the American Institute of CPAs State-
                                     ments on Responsibilities in Tax Practice, AICPA Professional
                                     Standards (as of June 1, 1997). TX Section 132 thereof, Cer-
                                     tain Procedural Aspects of Preparing Returns, concerns, in
                                     part, the applicable standards for CPAs concerning the obliga-
                                     tion to verify certain supporting data. In pertinent part, TX
                                     Section 132 states:
                                        .02 In preparing or signing a return, the CPA may in good faith rely
                                     without verification upon information furnished by the client or by third
                                     parties. However, the CPA should not ignore the implications of informa-
                                     tion furnished and should make reasonable inquiries if the information
                                     furnished appears to be incorrect, incomplete, or inconsistent either on its
                                     face or on the basis of other facts known to the CPA. * * *
                                        .03 Where the Internal Revenue Code or income tax regulations impose
                                     a condition to deductibility or other tax treatment of an item (such as the
                                     taxpayer maintenance of books and records or substantiating documenta-
                                     tion to support the reported deduction or tax treatment), the CPA should
                                     make appropriate inquiries to determine to his or her satisfaction whether
                                     such condition has been met.




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                                     360                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     Rules governing the practice of professionals before the
                                     Internal Revenue Service are found in Treasury Dept. Cir-
                                     cular 230 (31 CFR sec. 10). Title 31 C.F.R. sec. 10.34(a)(3)
                                     (‘‘Relying on information furnished by clients’’) (1994) is vir-
                                     tually the same as TX Section 132.02.
                                        It does not, therefore, appear that under either profes-
                                     sional standards or Circular 230 the Reznick firm was
                                     required to evaluate the reasonableness of the claimed value
                                     of the servitude unless the information furnished it appeared
                                     incorrect, incomplete, or inconsistent. There is no evidence of
                                     the information provided to the Reznick firm to prepare the
                                     1997 Form 1065, nor does petitioner claim that the informa-
                                     tion provided to the Reznick firm appeared either incorrect,
                                     incomplete, or inconsistent. We shall assume that the
                                     information provided to the Reznick firm did not appear to
                                     it incorrect, incomplete, or inconsistent. The firm, therefore,
                                     was not required, under TX Section 132 or Circular 230, to
                                     evaluate the reasonableness of the claimed value of the ser-
                                     vitude. And while it may have been required to determine
                                     that the Cohen appraisal was a qualified appraisal in order
                                     for the partnership to claim a charitable contribution deduc-
                                     tion on account of its conveyance of the servitude to PRC, see
                                     sec. 1.170A–13(c)(2), Income Tax Regs. (1997), the additional
                                     investigation of value called for by section 6664(c)(2)(B) was
                                     not a condition of the deductibility or tax treatment of the
                                     contribution. It was necessary only as an element of any
                                     defense based on the section 6664(c)(1) reasonable-cause
                                     exception if respondent determined a section 6662 accuracy-
                                     related penalty on account of a substantial or gross valuation
                                     misstatement. We are not convinced (and petitioner does not
                                     argue) that contingency triggers a duty of the Reznick firm
                                     to make inquiries to ensure that the condition has been met.
                                     A taxpayer may be confident enough in the value of his con-
                                     tribution of charitable deduction property that the risk he
                                     attaches to a substantial or gross valuation misstatement is
                                     too small to justify the cost of the additional good-faith inves-
                                     tigation of value.
                                        The Court of Appeals questioned whether, since the part-
                                     nership relied on professional advice in the preparation of
                                     the 1997 Form 1065, someone had the duty in connection
                                     with that preparation to evaluate the reasonableness of the
                                     value claimed for the servitude. Whitehouse II, 615 F.3d at




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     361


                                     342. Except as described, we see no duty, and, on the facts
                                     before us, there was no such duty. Petitioner does not argue
                                     to the contrary.
                                        Finally, the Court of Appeals asked whether, to show
                                     reasonable cause, petitioner needed to prove more than that
                                     the partnership relied on its accountants’ and attorneys’
                                     opinions of the Cohen appraisal. Id. at 343. As stated, peti-
                                     tioner has not identified the content of the advice that the
                                     partnership relied on in filing the 1997 Form 1065. What
                                     were the opinions upon which it relied with respect to the
                                     Cohen appraisal? The particular requirement of section
                                     6664(c) at issue here is the requirement of paragraph (2)(B)
                                     thereof that, in addition to obtaining a qualified appraisal of
                                     the servitude by a qualified appraiser, the partnership made
                                     a good-faith investigation of the value of the servitude. Pos-
                                     sibly, the Reznick firm or the Elkins firm provided the part-
                                     nership with an opinion or advice that constituted either part
                                     or all of a good-faith investigation of the value of the ser-
                                     vitude, but the record is bare of any evidence supporting that
                                     conclusion. We are left with petitioner’s argument, stated
                                     supra section V.B.6., that the partnership ‘‘retained emi-
                                     nently qualified professionals’’, on whom it relied, and, ‘‘with-
                                     out any further showing’’, that should be sufficient to show
                                     it made a good-faith investigation of the value of the ser-
                                     vitude. We do not believe that it is sufficient. 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 investiga-
                                     tion.
                                           8. Conclusion
                                       Petitioner has failed to prove that, in addition to obtaining
                                     and relying on 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
                                     requisite for the application of the reasonable-cause-and-
                                     good-faith exception found in section 6664(c)(1). Nor, for that
                                     matter, has it shown that, in relying on the Cohen appraisal,
                                     the partnership had reasonable cause for, and it acted in
                                     good faith with respect to, the underpayment in tax resulting




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                                     362                  139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     from its gross misstatement of the value of the servitude. See
                                     sec. 1.6664–4(b), Income Tax Regs. (1997).
                                           C. Conclusion
                                       The partnership overstated the value of the servitude on
                                     the 1997 Form 1065 by an amount that was more than 400%
                                     of the correct value, and, therefore, it made a gross valuation
                                     misstatement. 28 The reasonable cause exception provided for
                                     in section 6664(c)(1) is inapplicable. 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.



                                                                                  APPENDIX


                                                ACT OF DONATION                             *          UNITED STATES OF AMERICA
                                           OF PERPETUAL REAL RIGHTS                         *
                                                                                            *
                                                             BY                             *             STATE OF LOUISIANA
                                                                                            *
                                                WHITEHOUSE HOTEL                            *
                                               LIMITED PARTNERSHIP                          *             PARISH OF ORLEANS
                                                                                            *                [LIVINGSTON]
                                                             TO                             *
                                                                                            *
                                         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 quali-
                                     fied in and for the Parish of Orleans [Livingston], State of Louisiana,
                                     therein residing, and in the presence of the hereinafter named and under-
                                     signed witnesses:
                                         28 In Whitehouse I, 131 T.C. at 176, as reported supra p. 314, we stated our conclusion that

                                     ‘‘[t]he partnership overstated the value of the servitude on the 1997 Form 1065 by more than
                                     400 percent’’. As reflected above, we should have concluded that the partnership overstated the
                                     value of the servitude on the Form 1065 by an amount that was more than 400% of the correct
                                     value. That change in wording would not have affected our conclusion that there was a gross
                                     valuation misstatement. See id. at 172.




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                                     (304)        WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     363


                                     PERSONALLY CAME AND APPEARED:
                                     WHITEHOUSE HOTEL LIMITED PARTNERSHIP, (hereinafter referred
                                     to as ‘‘Owner’’), Taxpayer Identification No. * * *, 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 Lou-
                                     isiana, 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 Stat-
                                     utes (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:


                                                                         WITNESSETH


                                       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 thir-
                                     teen-story building with the upper seven stories being constructed around
                                     a light well facing Dauphine Street;




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                                     364                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                       WHEREAS, the first five stories of the Improvement are referred to
                                     herein as the ‘‘Lower Stories’’, and the upper eight stories of the Improve-
                                     ment 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 Improve-
                                     ment 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, 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 Stat-
                                     utes (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 pro-
                                     tect property significant to such history and culture; and
                                       WHEREAS, Owner warrants that there exists no servitude, lease, mort-
                                     gage, 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 Per-
                                     petual 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 cre-
                                     ated 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 space and
                                     architectural facade servitude as a perpetual real right in and to the exte-
                                     rior 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




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     365


                                     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 sur-
                                     faces of the Improvement, all of which are owned by Owner (the ‘‘Ser-
                                     vitude’’) subject to the right of the Owner to construct the Penthouse Addi-
                                     tion on the 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 cov-
                                     enants 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 fol-
                                     lowing 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.
                                       2. Donee acknowledges that Owner has provided to Donee Plans dated
                                     August 7, 1997, (the ‘‘Plans’’) pursuant to which Owner intends to renovate
                                     the Improvement, including the Facade, and that such renovation and
                                     rehabilitation have been approved by Donee, provided such work is in
                                     compliance with the Plans. Owner 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 first obtain the prior written approval of Donee before
                                     any such changes or modifications are made.
                                       3. Owner agrees at all times to preserve and maintain the Facade in a
                                     good and sound state of repair.
                                       4. Without the express written permission of the Donee, its successors
                                     or assigns, signed by a duly authorized representative thereof, based upon
                                     written plans submitted by Owner to Donee, no construction, change,
                                     alteration, remodeling, renovation, or any other thing shall be undertaken
                                     by Owner or permitted to be undertaken in or to the Facade, which would
                                     affect either the height, or alter the exterior of the Facade or the appear-
                                     ance 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 subse-
                                     quent damage to the Facade which has resulted from casualty loss,
                                     deterioration, or wear and tear, shall be permitted without the prior writ-
                                     ten approval of Donee, provided that such reconstruction, repair,




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                                     366                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     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 rep-
                                     licates the window which is being replaced so long as Owner does not
                                     replace more than ten (10%) percent of the windows in the Improvement
                                     and (ii) to affix to the exterior walls of the Penthouse Addition tele-
                                     communications devices so long as such devices are mounted as flush to
                                     the exterior walls of the Penthouse Addition as possible and are painted
                                     a color which is harmonious with the color of the Facade.
                                        5. In all events, Owner, in painting the exterior of the Facade, agrees
                                     to obtain the prior written consent of Donee, its successors or assigns,
                                     signed by a duly authorized representative thereof, as to the quality and
                                     color of paint to be used if significantly different from that presently
                                     existing.
                                        6. All work for preserving, maintaining, altering, or renovating the
                                     Facade shall be performed and conducted by Owner at Owner’s sole cost
                                     and expense. Should demolition of the Improvement occur, in whole or in
                                     part, other than as provided for in the Plans, or in the event either
                                     reconstruction or change, alteration or renovation is performed without the
                                     prior written approval of Donee as required herein, Donee shall have the
                                     right to require any changes to such work as Donee, in its sole discretion,
                                     deems proper. All such construction or changes shall be commenced at
                                     Owner’s sole cost and expense within sixty (60) days of Donee’s written
                                     notice to Owner and pursued with diligence until completion, or Donee
                                     may compel curative work to be performed at Owner’s sole cost and
                                     expense, in addition to all rights and remedies provided herein or by law.
                                        7. For the purpose of maintaining and preserving the Facade after it has
                                     been renovated and rehabilitated, Donee shall have the right to require
                                     the Owner, at Owner’s expense, to perform and conduct such repairs and
                                     maintenance work reasonably deemed necessary in order to preserve,
                                     maintain, or repair the Facade and the structural elements of the Improve-
                                     ment. All such work shall be commenced, at Owner’s sole cost and
                                     expense, no later than sixty (60) days after Owner’s receipt of Donee’s
                                     written notice, and shall be pursued with due diligence until completion.
                                     In the event that said repairs and maintenance work are not completed
                                     by Owner within a reasonable time thereafter, Donee may (a) proceed
                                     against Owner by summary process in a court of competent jurisdiction to
                                     compel such repairs and maintenance, and/or (b) exercise all other rights
                                     and remedies provided herein or by law.
                                        8. All rights granted to Donee herein, including such rights which Donee
                                     may exercise pursuant to Paragraph 7 above, shall be exercised in a
                                     reasonable and prudent manner and with least possible cost to Owner, cal-
                                     culated so as not to interfere with Owner’s reasonable use and enjoyment
                                     of the Property while accomplishing the purposes of this Act of Donation
                                     of Perpetual Real Rights.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     367


                                        9. Owner hereby consents and agrees that representatives of Donee, its
                                     successors and assigns, shall be permitted to inspect the Property at all
                                     reasonable times upon forty-eight (48) hours prior notice given to Owner.
                                     Inspections will normally take place from the street; however, Owner con-
                                     sents and agrees that representatives of Donee, its successors and assigns,
                                     shall be permitted to enter and inspect the interior of the Improvement for
                                     the purpose of verifying the maintenance of the structural condition and
                                     soundness of the Improvement and protecting the rights of Donee herein.
                                     Inspection of the interior will be made at a time mutually agreed upon by
                                     the Owner and Donee, its successors and assigns, and Owner covenants
                                     not to withhold unreasonably its consent in establishing a date and time
                                     for such inspection. At least once every five (5) years, Owner, at Owner’s
                                     cost, shall provide to Donee an inspection report of the condition of the
                                     Facade and the structural elements of the Improvement, such inspection
                                     report to be prepared by a competent licensed structural engineer, or com-
                                     petent licensed roofer, or both, whichever is applicable. Donee shall have
                                     the right to require that the Owner cause an inspection of the Improve-
                                     ment from time to time, upon Donee’s reasonable belief that a special
                                     inspection is necessary to accomplish the purposes of this Act of Donation
                                     of Perpetual Real Rights, including, but not limited to, evidence of deterio-
                                     ration to the Improvement. Within forty-five (45) days after Donee has
                                     notified the Owner of the need for a special inspection, Owner shall deliver
                                     to Donee an inspection report prepared by a competent person as above-
                                     described. In the event that the Owner fails to provide such inspection
                                     reports as are required by this Paragraph 9, Donee may, at the Owner’s
                                     sole cost and expense, employ for the account of Owner the services of a
                                     competent licensed structural engineer and/or a competent licensed roofer
                                     and shall submit to Owner all bills and other evidence of fees incurred or
                                     paid for such services, which shall be promptly paid by Owner.
                                        10. In the event of a fire or other casualty which results in damage to
                                     or loss or destruction of a part of the Facade or the structural elements
                                     of the Improvement, Owner agrees promptly to repair, renovate, or
                                     reconstruct the damaged or destroyed parts of the Facade or the structural
                                     elements of the Improvement with the prior consent and approval of Donee
                                     as otherwise provided herein.
                                        11. In the event of a total loss or destruction of the Improvement, Owner
                                     shall promptly remove all debris and trash and properly maintain the
                                     Land. Owner must obtain Donee’s written approval of and prior consent
                                     to any construction or reconstruction of the Improvement, as provided
                                     herein.
                                        12. Owner agrees at all times to carry and maintain such adequate
                                     amounts of comprehensive general bodily and property damage liability
                                     insurance, property, fire, vandalism, malicious mischief, and extended cov-
                                     erage insurance, general construction liability insurance, and such other
                                     standard insurance coverages as may be reasonably required by Donee.
                                     The policies of insurance required to be obtained pursuant to this Para-
                                     graph 12 shall name Donee as a co-insured as its interest appears herein.
                                     If the Improvement is uninsurable, Owner shall provide such other protec-
                                     tion which in the reasonable discretion of Donee is necessary and advisable




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                                     368                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     for the maintenance and preservation of the Improvement, at Owner’s sole
                                     cost and expense. Donee shall be provided with copies of said policies.
                                     Donee shall have the right to provide such insurance at Owner’s cost and
                                     expense and lien the Property for the cost of the premiums in the event
                                     Owner fails to obtain the required policies.
                                        13. Owner shall provide to Donee written notice of the Owner’s sale or
                                     other disposition of the Property, or any part thereof, at the time of such
                                     sale or other disposition or as soon as practicable thereafter, but in no
                                     event more than seven (7) days following such sale. Owner shall insert in
                                     any agreement to sell the Property (or any part thereof) or in any act of
                                     sale of the Property (or any part thereof) a provision expressly setting
                                     forth that the Property and the purchaser thereof are subject to and bound
                                     by this Act of Donation of Perpetual Real Rights and all covenants, obliga-
                                     tions, agreements and restrictions herein. The written notice required to
                                     be made by Owner under this Paragraph 13 shall contain the name and
                                     address of any purchaser and the name and address of a local agent and
                                     attorney-in-fact for an absentee purchaser.
                                        14. In the event the Property is subdivided into condominium units,
                                     time-sharing units, or other forms of multiple ownership, Owner and its
                                     heirs, successors, vendees or assigns agree to appoint and maintain a
                                     single agent and attorney-in-fact residing in the Parish of Orleans with
                                     whom Donee shall be authorized to deal exclusively in order to enforce
                                     Donee’s rights under this Act of Donation of Perpetual Real Rights.
                                        15. Owner agrees to and does herewith grant, transfer and convey to
                                     Donee all ‘‘development rights’’ applicable to the Property as provided for
                                     in the City of New Orleans Comprehensive Zoning Ordinance other than
                                     as shown on the Plans and the Penthouse Addition, as well as all privi-
                                     leges to transfer, sell, or otherwise trade or bargain for such ‘‘development
                                     rights,’’ in the name of Owner but for the benefit of Donee. Owner agrees
                                     to cooperate with Donee as necessary in any such transfer, with all costs
                                     of such transfer to be paid by Donee and all benefits therefrom accruing
                                     to Donee.
                                        16. No signs, markers, notices, billboards, advertisements, plaques,
                                     decorations or other items shall be displayed, erected, mounted or placed
                                     on the Facade except as set forth on the Plans or without the prior express
                                     written consent of Donee, which consent Donee may withhold in its reason-
                                     able and sole discretion.
                                        17. The rights, interests, obligations and benefits herein constitute,
                                     individually and collectively, a perpetual real right which vests imme-
                                     diately in Donee upon the execution of this Act of Donation of Perpetual
                                     Real Rights and shall be binding on Owner, its heirs, successors and
                                     assigns, and on all subsequent owners of the Property. Owner agrees and
                                     acknowledges that the Servitude shall have a fair market value at all
                                     times that is at least equal to the proportionate value that the Servitude
                                     as of the date of donation bears to the total value of the Property as of
                                     the date of donation, and that such proportionate value of the Servitude
                                     shall remain constant and recognized henceforth and forevermore. Such
                                     proportionate value is hereby agreed by the parties hereto to be ten (10%)
                                     percent. Owner further agrees and acknowledges that in the event of a




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     369


                                     change in conditions which would give rise to the judicial extinguishment
                                     of the restrictions and obligations imposed hereunder with respect to the
                                     Facade, the Donee, on a subsequent sale, exchange, or involuntary conver-
                                     sion of the Property, shall be entitled to a portion of the proceeds of such
                                     sale, exchange, or involuntary conversion at least equal to the constant
                                     proportionate value of the Servitude.
                                        18. Donee agrees and binds itself to use all of the proceeds it receives
                                     from a sale, exchange, or involuntary conversion of the Property, resulting
                                     from a judicial proceeding which extinguishes Donee’s real rights, in a
                                     manner consistent with the conservation purposes of the original donation.
                                        19. The parties hereto contemplate that the Servitude is a perpetual con-
                                     servation restriction within the meaning of Sections 1.170–13 and 1.170–
                                     14 of the Regulations of the Department of Treasury, and, for federal
                                     income tax purposes, the donation of this perpetual real right is the con-
                                     tribution of a qualified real property interest to a qualified organization
                                     exclusively for conservation purposes.
                                        20. In the event that the Donee shall at any time in the future acquire
                                     full and complete ownership of the Property, Donee for itself, its successors
                                     and assigns, covenants and agrees, in the event of subsequent conveyances
                                     of such Property to another, to create a new perpetual real right con-
                                     taining the same restrictions and provisions as are contained herein, and
                                     either to retain such perpetual real right in itself or to convey such real
                                     right to a similar local or national organization whose purposes, inter alia,
                                     are to promote historic preservation.
                                        21. Any right or obligation imposed upon the Owner of the Property by
                                     the Servitude, including any covenant, restriction or affirmative obligation
                                     herein, shall be enforceable by the Donee, following reasonable notice to
                                     Owner, through judicial proceeding by actions for temporary and/or perma-
                                     nent injunction to enjoin such violations and to require the performance
                                     of all obligations imposed on Owner by this Act of Donation of Perpetual
                                     Real Rights, or, in the alternative, representatives of Donee, its successors
                                     and assigns, may enter upon the Property, correct any violation, and hold
                                     Owner and Owner’s heirs, successors and assigns, responsible for the cost
                                     thereof in an action for damages brought by Donee. Donee, its successors
                                     or assigns, shall have available all other legal and equitable remedies per-
                                     mitted by law to enforce Owner’s obligations hereunder. In the event
                                     Owner is found to have violated any of its obligations arising from this Act
                                     of Donation of Perpetual Real Rights, Owner agrees to indemnify and hold
                                     harmless Donee from all reasonable attorneys’ fees, expert witness
                                     charges, and other charges, fees, and costs paid or incurred by Donee in
                                     the enforcement of any of its rights granted herein.
                                        22. All other rights of ownership that do not conflict with the exercise
                                     of Donee’s rights hereunder shall be and are hereby retained by Owner.
                                     Owner shall have the right to use the Property and the Improvement for
                                     whatever lawful purpose Owner deems necessary, except as to rights
                                     herein granted. Owner agrees not to perform any work or make any use
                                     of the Property which would adversely affect Donee’s full exercise and
                                     enjoyment of the perpetual real rights created herein. Owner agrees to pay




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                                     370                 139 UNITED STATES TAX COURT REPORTS                                    (304)


                                     all real estate taxes and real property assessments on the Property and
                                     agrees to hold Donee harmless in connection therewith.
                                       23. Donee acknowledges that in order to finance the rehabilitation of the
                                     Improvement, Owner may sell the Property to a third party and lease the
                                     Property from such third party for the term of such financing. In such
                                     event, Owner, as lessee of such third party, shall be responsible for all
                                     monetary obligations of Owner under this Act of Donation of Perpetual
                                     Real Rights. Donee agrees that notwithstanding any provision herein to
                                     the contrary, during the term of any such lease from such third party to
                                     Owner, Donee shall enforce such monetary obligations solely against
                                     Owner or, in default thereof, against the Property, in rem.
                                       24. Owner, its successors or assigns, will do and perform at Owner’s cost
                                     all acts necessary to the prompt filing for registry of this Act of Donation
                                     of Perpetual Real Rights in the conveyance records of the Parish of
                                     Orleans wherein the Property is located.

                                       THUS DONE AND PASSED in my office at New–Orleans [Denham
                                     Springs], Louisiana, on the day, month, and year herein first above writ-
                                     ten, in the presence of the two undersigned competent witnesses, who
                                     hereunto sign their names with the said appearers and me, Notary, after
                                     reading of the whole.



                                     WITNESSES:                                             OWNER:

                                                                                            WHITEHOUSE HOTEL LIMITED
                                                                                            PARTNERSHIP
                                                                                            By: Whitehouse Hotel, L.L.C.
                                                                                                Its: General Partner

                                               [signature]                                   By: Housing Developers II, L.L.C.
                                                                                                 Its: Manager

                                               [signature]                                   By: J.K.R. Family, L.L.C.
                                                                                                 Its: Manager

                                                                                             By:           [signature]
                                                                                                        Stewart Juneau
                                                                                                        Its: Manager


                                                                                 [signature]
                                                                           NOTARY PUBLIC

                                       THUS DONE AND PASSED in my office at New Orleans, Louisiana, on
                                     the day, month, and year herein first above written, in the presence of the
                                     two undersigned competent witnesses, who hereunto sign their names with
                                     the said appearer and me, Notary, after reading of the whole.




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                                     (304)       WHITEHOUSE HOTEL LTD. P’SHIP v. COMMISSIONER                                     371


                                                                                   DONEE:

                                     WITNESSES:
                                                                                   PRESERVATION ALLIANCE OF NEW
                                                                                   ORLEANS, INCORPORATED d/b/a
                                                                                   PRESERVATION RESOURCE CENTER

                                               [signature]

                                                                                    By:             [signature]
                                                                                               Patricia H. Gay
                                                                                               Its: Executive Director

                                               [signature]


                                                                                 [signature]
                                                                           NOTARY PUBLIC

                                                                               f




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