     Case: 13-60131   Document: 00512659669   Page: 1   Date Filed: 06/11/2014




          IN THE UNITED STATES COURT OF APPEALS
                   FOR THE FIFTH CIRCUIT     United States Court of Appeals
                                                      Fifth Circuit

                                                                      FILED
                                                                    June 11, 2014
                               No. 13-60131
                                                                    Lyle W. Cayce
                                                                         Clerk
WHITEHOUSE HOTEL LIMITED PARTNERSHIP; QHR HOLDINGS –
NEW ORLEANS LIMITED, Tax Matters Partner,

                                         Petitioners – Appellants
v.

COMMISSIONER OF INTERNAL REVENUE,

                                         Respondent – Appellee




                           Appeal from the Decision
                       of the United States Tax Court


Before STEWART, Chief Judge, and GARZA and SOUTHWICK, Circuit
Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
      This appeal marks the second time Whitehouse Hotel Limited
Partnership appeals from a ruling of the United States Tax Court disallowing
a significant portion of a tax deduction claimed for a historic conservation
easement. Whitehouse also appeals the tax court’s enforcement of a 40 percent
gross overstatement penalty. We AFFIRM the determination of the amount of
the deduction but VACATE the penalty.
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                                 No. 13-60131
              FACTUAL AND PROCEDURAL BACKGROUND
      Whitehouse was formed in 1995 to purchase the Maison Blanche
building in New Orleans, renovate it, and reopen it as a Ritz-Carlton hotel and
condominium complex with retail space. Built between 1907 and 1909, the
Maison Blanche is located on Canal Street in the city’s Central Business
District. The building was listed on the National Register of Historic Places in
1966 and designated a City of New Orleans landmark in 1980. Whitehouse’s
development plan included combining the Maison Blanche with the contiguous
Kress building. Whitehouse also owned a parking garage in the immediate
vicinity which would be utilized in the new complex.
      On December 29, 1997, Whitehouse conveyed a conservation easement
to the Preservation Alliance of New Orleans, d/b/a Preservation Resource
Center (PRC), a Louisiana nonprofit corporation dedicated to historical
preservation. The easement burdens the Maison Blanche with a number of
restrictions and affirmative obligations, all revolving around maintaining the
appearance of the ornate terracotta façade.
      In its 1997 tax return, Whitehouse claimed a $7.445 million charitable
contribution deduction for the easement. In 2003, the Commissioner issued
Whitehouse a Notice of Final Partnership Administrative Adjustment, which
allowed a deduction of only $1.15 million for the easement. The Commissioner
further assessed a gross undervaluation penalty of 40% of the portion of
underpayment of tax that year. See 26 U.S.C. § 6662(h)(2).
      Whitehouse challenged both the valuation of the easement as well as the
gross undervaluation penalty in the tax court. See Whitehouse Hotel Ltd.
P’ship v. Comm’r, 131 T.C. 112 (2008). The 2006 trial focused on the pre- and




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post-easement valuation of the Maison Blanche building. 1 The difference in
value represents the value of the conservation easement and therefore the
amount of the permissible deduction in the year of conveyance. See 26 C.F.R.
1.170A–14(h)(3).
       At trial, Whitehouse presented the expert testimony of Richard
Roddewig, 2 while the Commissioner proffered that of Dunbar Argote. As we
held in our 2010 decision reviewing that decision, both Roddewig and Argote
were well-qualified to evaluate, appraise, and testify about commercial real
estate. Whitehouse Hotel Ltd. P’ship v. Comm’r, 615 F.3d 321, 326 (5th Cir.
2010). The expert reports, testimony, and cross-examination of Roddewig and
Argote are at the center of this controversy. The two appraisers reached widely
varying conclusions regarding the proper parameters and valuation methods
to use in their valuations. They arrived at vastly different pre- and post-
easement valuations.
       The two appraisers did not agree even on what property they were to
evaluate. Roddewig included the adjacent Kress building in his valuation
because it was to be brought under common ownership the day after creation
of the easement. Argote determined the relevant property was the Maison
Blanche by itself. 3 The two appraisers further disagreed over the “highest and
best use” 4 of the Maison Blanche building and complex, even to the point of
disagreement over how the easement itself would affect the highest and best


       1    No one disputes that the conservation easement is valid under
I.R.C. § 170(f)(3)(B)(iii) and 26 C.F.R. § 1.170A–14.
        2 Richard Cohen, who prepared the appraisal upon which the deduction was based,

could not testify due to a serious illness. Richard Roddewig prepared an appraisal for the
trial. We discuss Roddewig’s appraisal in our analysis of the tax court’s valuation. Below,
we discuss the Cohen appraisal in the context of whether or not Whitehouse should have
relied on it for the purposes of I.R.C. § 6664(c)(3)(A).
        3 Neither appraiser included the parking garage.
        4 For a general discussion of this somewhat tax-specific term-of-art, see Stanley Works

and Subsidiaries v. Comm’r, 87 T.C. 389, 400 (1986).
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use of the parcel. Roddewig concluded the highest and best use of the complex
would be a 780-room, all-suite luxury hotel, 60 of those rooms being in a nine-
story addition that would be constructed atop the Kress to bring its height
nearer to that of the taller Maison Blanche, and ground-level retail space. As
discussed more thoroughly later, Roddewig believed the conservation
easement prohibited the 60-room addition to the Kress because the new floors
would impair sightlines for the façade. Therefore, the post-easement highest
and best use would be limited to 720 rooms. Conversely, Argote found that the
easement did not limit an addition to the Kress building. He also determined
the building’s highest and best use was as a mixed-room, non-luxury hotel.
      Roddewig’s appraisal considered three methods to evaluate the pre- and
post-easement value of the Maison Blanche: replacement cost, income, and
comparable sales. These methods yielded pre-easement values of $43 million,
$29.5 million, and $40 million, respectively. Post-easement, the values were
$35 million and $18 million for the first two methods, and, after deciding there
were no comparable sales of encumbered historic buildings, he made no
valuation under that method. Roddewig estimated a value pre-easement of
$41 million and post-easement of $31 million, leaving an easement value of $10
million. Argote used only the comparable sales method in his valuation. He
concluded the Maison Blanche was worth $10.3 million pre- and post-
easement. Consequently, he valued the easement at zero dollars, a conclusion
which we in 2010 labeled “rather extraordinar[y].” Id. at 327.
      In a 94-page opinion issued on October 30, 2008, a little over two years
after the trial, the tax court blended analysis from the expert reports. In
weighing the two reports, it reached several conclusions regarding the
parameters, assumptions, and valuation methods used by the two appraisers.
      First, the tax court concluded there was no difference in the highest and
best use before and after the conveyance of the easement because the easement
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did not prevent building rooms atop the Kress. Whitehouse Hotel, 131 T.C. at
133-35.     Second, it held that use of the reproduction cost approach was
inappropriate because the building or façade would not be rebuilt if destroyed.
Id. at 147-48, 52. Third, it concluded the income approach was inappropriate
because it rested upon a number of assumptions about income and expenses
and did not contain any measure of overall risk of error in his income model.
Id. at 154-55. Ultimately, the tax court determined a pre-easement value of
$12,092,301 5 and a post-easement value of $10.3 million. 6 The value of the
easement, then, was $1,792,301.             That valuation meant that Whitehouse
overstated its deduction by $5,652,699, the difference between $7,445,000 and
$1,792,301. The overstated deduction meant that Whitehouse had claimed a
deduction roughly 415% higher than its proper value ($7,445,000 / $1,792,301
= 4.15). Id. at 172. If a taxpayer misstates a deduction by 400% or more, a
penalty of 40% of the underpayment may be charged as a penalty for a “gross
valuation misstatement.” I.R.C. § 6662(h)(2)(A)(i). A taxpayer may be relieved
of this penalty if the taxpayer shows the misstatement falls into the
“reasonable cause exception.” I.R.C. § 6664(c)(1). To qualify for this exception,
the taxpayer must show the claimed value was based on a qualified appraisal
by a qualified appraiser and that the taxpayer made a good faith investigation
of the value of the property. I.R.C. § 6664(c)(3). 7 Concluding Whitehouse had
presented no evidence to show it had undertaken the steps required in Section




       5 The tax court reached this conclusion by averaging the adjusted price per square foot
of three comparable sales and multiplying it by the square footage of the Maison Blanche-
Kress parcel. See Whitehouse Hotel, 131 T.C. at 168.
       6 The tax court merely accepted this conclusion from the Commissioner’s expert,

Argote.
       7 In our 2010 opinion, we refer to I.R.C. § 6664(c)(2) as containing the reasonable cause

exception. In the interim, that provision was moved to Section 6664(c)(3).
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6664(c)(3), the tax court determined that the requirements of the good faith
exception had not been met. Whitehouse Hotel, 131 T.C. at 175.
      Whitehouse appealed to this court. We rejected several arguments but
remanded for further consideration on three valuation issues and the denial of
the good faith exception. Whitehouse Hotel, 615 F.3d at 330-31.           We were
concerned that the tax court did not make an explicit determination of the
parcel’s highest and best use, id. 336-37, and that it failed to consider the effect
of the easement on the Kress. Id. at 339-40. Thus, our instructions on remand
were these: (1) reconsider all valuation methods, not just the comparable sales
method; (2) determine the parcel’s “highest and best use” for the purposes of
its valuation; and (3) consider the effect of the easement on the Kress building,
even if the easement itself did not specifically burden that building under
relevant Louisiana law.      Having vacated the tax court’s valuation of the
easement, we also vacated the gross undervaluation penalty. Id. at 343. We
discussed relevant legal principles to guide the tax court on imposing a penalty
should it decide again the incorrect valuation of the easement gave rise to one.
Id. at 340-41. Though we did not hold that the proper frame of valuation was
to be what the property would be following its renovation, we did direct the tax
court to determine whether the highest and best use would be as the luxury
hotel actually being built or instead as a non-luxury hotel. Id. at 336-37.
      On remand, the tax court again analyzed the easement’s effect on the
Kress building.      It quoted our decision that “because of the easement,
Whitehouse could not build on top of the Kress building.” Id. at 337. That
conclusion had rejected the 2008 tax court determination on the effect of the
easement on the Kress. Nonetheless, the tax court judge (the same judge wrote
both the 2008 and 2012 opinions) discussed Louisiana’s law of servitudes at
length and concluded we had been in error: any restriction on development
that is not expressly contained in an easement cannot be used in valuation of
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                                       No. 13-60131
that easement. Whitehouse Hotel Ltd. P’ship v. Comm’r, 139 T.C. 304, 339-40
(2012). Having confirmed its continuing disagreement, the court then enforced
our contrary holding that some effect on the valuation of the entire parcel must
occur as a result of the easement. The tax court “reconsider[ed] the value of
the servitude on the assumption[] that . . . [the easement] restricts the
partnership from building atop” the Kress. Id. at 347.
       The tax court responded to our directive to reconsider the highest and
best use of the parcel by saying it was unnecessary “to choose between the two
experts’ opinions of highest and best use.” Id. at 337. The tax court concluded
that, at the date of the easement, the proper valuation was not of the under-
development luxury hotel, but rather a “shell building[] . . . suitable for
conversion to [a] hotel.” Id. The tax court would therefore only undertake a
comparable sales analysis of comparable “shells,” which could be converted into
any type of hotel. Having once again rejected the reproduction cost and income
methods, 8 it proceeded to reapply its price-per-square-foot version of the
comparable sales calculation, except that it added the square footage of the
Kress to that of the Maison Blanche. Id. at 347-48. The tax court ultimately
concluded that the before-restriction value was $12,473,236, 9 it adjusted its
after-restriction value to $10,615,520, 10 and thus valued the easement at
merely $1,857,716. Consequently, the tax court determined that Whitehouse
had overstated its claimed deduction by the difference between $7,445,000 and
$1,857,716, or $5,587,284. That difference amounted to a 401% overstatement:
$7,445,000 / $1,857,716 = 4.01.




       8 This rejection is discussed below.
       9 $23.50/sq. ft. multiplied by a new square footage of 530,776 following the addition of
the Kress’s 16,210 square feet.
       10 Again following Argote’s determination of $20/sq. ft. using the comparable sales

method, $20 multiplied by 530,776.
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      Because the new valuation still resulted in application of the gross
undervaluation penalty, the tax court reconsidered whether Whitehouse
qualified for the good faith exception. As mentioned above, the exception
requires a showing that the claimed deduction was based on a qualified
appraisal and, in addition, making a good faith investigation of the easement’s
value. I.R.C. § 6664(c)(3)(A)-(B). While the Commissioner concedes that the
Cohen appraisal was qualified, it held that Whitehouse presented no evidence
tending to show anyone had undertaken a good faith investigation. Because it
so found, it could only hold that no good faith investigation was made into the
valuation of the easement. Once again, Whitehouse appeals the valuation of
the easement and the enforcement of the penalty.


                                 DISCUSSION
      Decisions of the tax court are reviewed in the same manner as decisions
of a district court following trials of cases without a jury. 26 U.S.C. § 7482(a);
Green v. Comm’r, 507 F.3d 857, 866 (5th Cir. 2007). “Findings of fact are
reviewed for clear error and conclusions of law are reviewed de novo.” Id.
Valuation is a mixed question of law and fact and valuations flowing from legal
conclusions about “rights inherent in the property” are reviewed de novo.
Whitehouse Hotel, 615 F.3d at 333.
      Whitehouse argues four points of error in the tax court’s analysis on
remand. First, Whitehouse urges that the tax court erred by concluding the
easement did not affect the Kress Building. Second, Whitehouse argues that
the tax court failed to comply with our instruction to find the highest and best
use of the parcel, before and after the easement. Third, Whitehouse argues
that the tax court erred by rejecting the cost and income approaches and by
rejecting Roddewig’s use of non-local comparable sales. Finally, Whitehouse


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argues it is entitled to the good faith defense to the gross undervaluation
penalty. We address each argument in turn.


I.    The Effect of the Easement on the Use of the Kress Building
      Whitehouse argues that the tax court’s painstaking reinterpretation on
remand of Louisiana law regarding servitudes, coupled with its announcement
that it saw “daylight” in this court’s mandate, amount to ignoring that
mandate. See Whitehouse Hotel, 139 T.C. at 338-40. We agree the tax court
went out of its way to state its continuing disagreement with parts of our
analysis, but we do not find that it ignored our directives.
      In our opinion remanding the case, we held that “the tax court erred in
not determining [the] effect” of the easement on the “fair market value of the
Maison Blanche and Kress buildings.” Whitehouse Hotel, 615 F.3d at 339. We
held that the easement effectively prohibited building 60 additional rooms on
top of the Kress building, and it was for the tax court to decide on remand how
that affected the property’s fair market value. Id. at 340. On remand, the tax
court gratuitously reviewed Louisiana law and restated its conclusion that the
easement did not affect the right to build on top of the Kress building.
Whitehouse Hotel, 139 T.C. at 342-47. Despite that statement of continuing
disagreement, the tax court stated: “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” assuming Whitehouse cannot
build on top of the Kress and that the two buildings are unlikely to be
separately owned in the future. Id. at 347.
      Whitehouse interprets the tax court’s rehearsal of its easement analysis,
as well as its proclamation that it saw “daylight” in our mandate to re-examine
the conveyance, as evidence of judicial insubordination which “infects the
entire Remand Opinion.” Our question is not whether the tax court was
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                                   No. 13-60131
unenthusiastic about our directives. We only need to answer whether they
were followed. Even though the tax court determined that our conclusion
about the effect of the easement on the Kress building was error, it did not
ignore our instruction to include the Kress in its valuation. To the contrary,
the tax court explicitly stated it would reconsider the valuation of the easement
on the assumptions we articulated. Id. Begrudging compliance with our
mandate is nonetheless compliance.           Because we only directed that the
valuation be reconsidered and did not state a range of acceptable outcomes
following reconsideration, the mandate was not ignored.


II.     Highest and Best Use
        In our 2010 opinion, we noted the importance of determining a property’s
highest and best use for valuation purposes. Whitehouse Hotel, 615 F.3d at
335. “A property’s highest and best use is the reasonable and probable use that
supports the highest present value.”         Id. (quotation marks and citation
omitted). “The key inquiry,” we continued, “is what a hypothetical willing
buyer would consider in deciding how much to pay for the property.” Id. We
cautioned that uses that a hypothetical buyer would not reasonably consider
should not be considered. Id. (citing Stanley Works, 87 T.C. at 402).
        In our 2010 opinion, we noted that the tax court “did not explicitly rule”
on the highest and best use of the Maison Blanche. Id. From the record before
us and the tax court’s 2008 opinion, we could not decipher the tax court’s
finding on the Maison Blanche’s highest and best use. Id. at 335-36. “[T]he
tax court’s decision can be construed in two ways: if the highest and best use
was a Ritz-Carlton, that had no effect on the property’s value; or, a non-luxury
hotel was the highest and best use.” Id. at 336. Either outcome, we held, would
require further consideration by the tax court on remand. Id. at 336-37. If
the tax court determined the highest and best use to be a Ritz-Carlton, we
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opined, such would require reconsideration of its rejection of Roddewig’s non-
local comparable sales. Id. at 336. If the tax court determined the highest and
best use to be a non-luxury hotel, then it would be required to justify such a
decision in light of the “highly unlikely . . . conjecture” that this particular
project would not come to fruition. Id. at 337.
      On remand, the tax court accepted that “finding a property’s highest and
best use is critical for determining its fair market value.” Whitehouse Hotel,
139 T.C. at 331. Nonetheless, it held “the highest and best use of property does
not itself identify the fair market value.” Id. In support of this position, the
tax court cited a Supreme Court decision that held “the highest and most
profitable use . . . is to be considered, not necessarily as the measure of value,
but to the full extent [it] affects the market value” of the property. Olson v.
United States, 292 U.S. 246, 255 (1934). The tax court concluded that it did
“not need to choose between the two experts’ opinions of the highest and best
use” of the Maison Blanche. Whitehouse Hotel, 139 T.C. at 337. Even if the
highest and best use of the property at the time of the conveyance was as a
Ritz-Carlton hotel, that use would not control the valuation. Id. The tax court
rejected Roddewig’s conclusion that luxury hotel developers would pay more
for buildings than non-luxury hotel developers. Id. at 336. It also “accept[ed]
Mr. Argote’s methodology and his view that the value of the subject property”
is to be determined as a shell capable of conversion into any type of hotel, not
as a particular type. Id. at 337.
      Once again, Whitehouse contends we foreclosed such a holding in our
prior opinion. For the tax court to reject Roddewig’s appraisal a second time
and accept Argote’s, according to Whitehouse, ignored our mandate. Not so.
We remanded for the tax court to establish explicitly the highest and best use
of the parcel for valuation purposes. Though the tax court’s opinion on remand
contained many observations discounting the need for such a finding, it did
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                                  No. 13-60131
make the finding we requested. Whitehouse read our prior opinion as implying
that accepting Argote’s opinion that the highest and best use of the parcel was
as a non-luxury hotel would be error. Though we did call Argote’s opinion
“implausible,” we did not instruct the tax court that it was forbidden to accept
it. Whitehouse Hotel, 615 F.3d at 337. The tax court on remand concluded that
the highest and best use of the property could be either a luxury hotel or non-
luxury hotel, and that the Maison Blanche’s value would not be increased by
which one it ultimately became. Whitehouse Hotel, 139 T.C. at 334.
         We left the determination of the parcel’s highest and best use open on
remand. The tax court gave the highest and best use of the Maison Blanche
parcel all the weight it thought necessary. See Olson, 292 U.S. at 255. We
again conclude that the tax court did not ignore our 2010 mandate.


III.     Valuation Methods
         In our prior opinion, we required that the tax court reconsider three
valuation methods: reproduction cost, income, and comparable sales.
Whitehouse Hotel, 615 F.3d at 335. We declined to state whether the tax court’s
2008 rejection of the reproduction cost and income methods was error. Id. We
did not find error in any considerations the tax court expressed when it
addressed the experts’ valuation method choices in its 2008 decision. On
remand, the tax court once again rejected the reproduction cost approach
because reproducing the historic façade after complete destruction would make
no business sense. It again rejected the income approach because the evidence
upon which Roddewig’s income calculations were based was found to be
unreliable. Finally, it concluded that there were enough local comparable sales
to make consideration of non-local comparable sales unnecessary. Whitehouse
ascribes error to each of these restated conclusions.


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                                No. 13-60131
      A. The Reproduction Cost Approach
      We find scarce precedent as to the suitability of the reproduction-cost
method in the conservation easement context. The tax court in both of its
decisions in this case rejected the reproduction cost method because there
would be little business reason to restore a historic structure to its historic
form were it to be completely destroyed. See Whitehouse Hotel, 139 T.C. 315-
16. The one Supreme Court precedent cited by the tax court suggested that
reproduction cost was unhelpful when “no one would think of reproducing the
property.” United States v. Toronto, Hamilton, & Buffalo Nav. Co., 338 U.S.
396, 403 (1949).    In a 1960 decision, we held that reproduction cost is
inappropriate absent “a showing that substantial reproduction would be a
reasonable business venture.” United States v. Benning Hous. Corp., 276 F.2d
248, 250 (5th Cir. 1960).
      Whitehouse’s argument rests mostly upon the language of the easement
requiring it to “repair, renovate, or reconstruct the damaged or destroyed
parts” of the façade. The Commissioner responds simply by pointing out that
rebuilding the parcel or façade were it completely destroyed would be highly
unlikely. The easement itself distinguishes between partial and total loss:
            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 [Whitehouse]
      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 [PRC]
      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.


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                                    No. 13-60131
The parties have not focused on these provisions, but Whitehouse’s clear
obligation to rebuild is for loss or destruction of a part of the façade; destruction
of the entire building does not have such clear language.
      Whitehouse seeks to distinguish the cases the tax court used to explain
the unlikelihood of rebuilding because they did not involve historic buildings
or conservation easements for historic property.               Regardless of such
distinctions, the tax court made the relevant finding in this case when it said
that Whitehouse “cannot show that it would be a reasonable business venture
to reproduce so old a building.” Whitehouse Hotel, 139 T.C. at 316. We see no
error in that finding.
      The tax court did not err in determining it would make no business sense
to reproduce the building and façade were they to be completely destroyed.
Furthermore, our 2010 opinion neither analyzed nor rejected such a
conclusion. The tax court’s restating the conclusion was not erroneous.
      We recognize Whitehouse’s argument that reproduction cost of the
façade, as opposed to the entire building, might be relevant in valuing the
easement. The tax court’s analysis appeared to reject the reproduction cost
valuation method, at least in part, because it did not think anyone would
reproduce an old building in its original form. Even though rebuilding the
entire façade might raise the same business-value questions as rebuilding the
entire building, reproducing or repairing some substantial portion of the façade
might be a significant burden that arises only because of the existence of the
easement. The more limited repairs, though, might make business sense.
Such obligations could diminish the value of the building to a potential owner,
since the later owner would bear that cost. 11 Nonetheless, we do not believe



      11The tax court noted Whitehouse has already spent more than $8,000,000 on repair
and maintenance of the façade between 1998 and 2012. Whitehouse Hotel, 139 T.C. at 318.
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                                  No. 13-60131
this argument is enough to overcome the tax court’s conclusion with regard to
the reproduction cost method. There was no error when the tax court rejected
the reproduction cost method for valuation of the easement.
      B. Income Approach
      As with the reproduction cost approach, there is little precedent
discussing when the use of the income approach is appropriate. The tax court
cited several of its own prior opinions which allow the use of the income method
in the conservation easement context; those cases did not employ a discounted
cash flow method but instead used a profit-based method. See Symington v.
Comm’r, 87 T.C. 892 (1986). The tax court on remand also cited a long line of
cases, often affirmed by other circuits, rejecting the income method as not
useful if ample comparable sales were available for valuation. See Whitehouse
Hotel, 139 T.C. at 324-25. These authorities indicate the income or earnings
methods in valuation of real estate are less favored than comparable sales
data. See, e.g., Pittsburgh Terminal Corp. v. Comm’r, 60 T.C. 80, 89 (1973)
(“[E]xpert witness demonstrated the folly of trying to estimate the value of
undeveloped property by looking to its anticipated earnings.”). Nonetheless,
the tax court stated it was “not hostile to the income approach to determining
value.” Whitehouse Hotel, 139 T.C. at 324. The tax court’s rejections, in both
of its opinions in this case, flowed primarily from its conclusion that Roddewig’s
income model was prone to error and based on too many unverifiable
assumptions. Id. at 326-27. We did not in our 2010 opinion limit the tax court’s
reconsideration of the income method, and certainly did not require its use.
      Whitehouse argues the income method is appropriate because hotels are
income properties. Valuing a property based on the income it is expected to
produce is common practice among investors in hotel properties. Whitehouse
suggests that our previous opinion impliedly directs the tax court to analyze
future potential earnings of the completed project. We stated:
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                                 No. 13-60131
      The income method involves analyzing data from comparable
      properties to determine the property’s earnings capacity, operating
      expenses, and rates of capitalization and discount.            This
      information is combined with any reasonably clear and
      appropriate evidence of future income potential and expenses to
      estimate the property’s value.

Whitehouse Hotel, 615 F.3d at 334 (quotation marks omitted).

      From this language, Whitehouse asserts that the absence of an earnings
history for the Maison Blanche should not have weighed heavily on remand.
The Commissioner counters that the tax court’s primary disagreement with
Roddewig’s analysis was not necessarily that he was making assumptions and
projections, but that the model he created from his estimates and assumptions
had no stated provision for risk of error. That is, the model itself had not been
tested for its sensitivity to small changes. The tax court reiterated this in its
opinion on remand. Whitehouse Hotel, 139 T.C. 326-27.
      While the use of the income method, as noted by the tax court, is not a
priori unacceptable for any valuation purpose, no precedent ascribes error to
the tax court’s rejection of it in these circumstances. Whitehouse’s contention
that the tax court erroneously rejected the income approach fails.
      C. Comparable Sales Only Determination
      As a consequence of its rejecting both the reproduction cost and income
methods of valuation, the tax court used only the comparable sales method, as
it also had in 2008, to determine the value of Whitehouse’s conservation
easement.    As discussed above, this valuation was modified only by the
inclusion of the Kress’s square footage with the square footage of the Maison
Blanche. In its comparable sales analysis, the tax court accepted Argote’s
comparable sales while rejecting certain non-local comparable sales submitted
by Roddewig. Roddewig concluded that the luxury hotel market is national,
rather than local, and thus included sales of comparable properties in other
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                                  No. 13-60131
American cities. See Whitehouse Hotel, 615 F.3d at 336. As discussed briefly
above, the tax court once again rejected this theory on remand. Whitehouse
Hotel, 139 T.C. at 329-30. The tax court did not simply reject the use of non-
local comparable sales out-of-hand.            It indicated that Argote, the
Commissioner’s expert, agreed with the concept of “look[ing] outside the
location of the subject property for comparables.” Id. at 329.       The tax court
did suggest that, in general, “proximity” to the subject property is “more
probative of its value.” Id. (quoting Estate of Jameson v. Comm’r, 267 F.3d
366, 373 (5th Cir. 2001)).       The tax court specifically determined that
Roddewig’s adjusted values varied widely between local and non-local
comparable sales. Id. at 329-30. Though our remand raised questions about
the tax court’s dismissal of Roddewig’s non-local comparable sales, especially
in light of the tax court’s original lack of sufficient clarity about the highest
and best use of the Maison Blanche, we did not preclude a finding that the use
of non-local comparable sales was unnecessary here. The tax court did not err
in rejecting the reproduction cost and income valuation methods, nor did it
when rejecting Roddewig’s non-local comparable sales.


IV.     Gross Undervaluation Penalty and the Good Faith Defense
        We have earlier noted that the tax court rejected Whitehouse’s claim of
entitlement to a good faith defense and affirmed the Commissioner’s
assessment of a 40% gross undervaluation penalty.           This court in our 2010
opinion declined to rule on Whitehouse’s good faith exception defense because
of our remand for revaluation. Today we uphold the tax court’s valuation. We
are now left with the applicability of Whitehouse’s good faith defense.
        The legal question of “what elements must be present to constitute
reasonable cause” is reviewed de novo. Whitehouse Hotel, 615 F.3d at 341
(quotation marks omitted). We review for clear error whether those elements
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                                      No. 13-60131
were actually proven. Id. Since the tax court’s revised valuation also resulted
in application of the gross undervaluation misstatement, the tax court
reconsidered whether Whitehouse qualified for the good faith exception. The
exception requires basing the claimed deduction on a qualified appraisal and,
in addition, making a good faith investigation of the easement’s value. See
I.R.C. § 6664(c)(3)(A)-(B).
       When Whitehouse filed its 1997 tax return, it had two appraisals of the
Maison Blanche: the Cohen appraisal later relied upon by Roddewig and one
done by REVAC, a company that at the time was a limited partner in the
partnership. Whitehouse presented the testimony of Robert Drawbridge as to
the partnership’s reliance on the appraisals, its legal and accounting advisors,
and its investigation of the value of the easement. It relied upon the Cohen
appraisal generally, but commissioned the REVAC appraisal to use “as a check
against the Cohen appraisal.”            The tax court reconsidered Drawbridge’s
testimony on remand regarding the appraisals and the investigations in
conjunction with the guidance provided by this court.
       The tax court began by apparently rejecting the Cohen appraisal,
suggesting essentially that Cohen’s valuation was so much larger than the
price Whitehouse actually paid for the parcel that “a reasonably prudent
taxpayer . . . [should have concluded] . . . that further investigation of the
servitude’s value was warranted.”            Whitehouse Hotel, 139 T.C. at 354. 12
Nonetheless, the Commissioner concedes in its brief that the appraisal was
qualified for the purposes of the good faith exception. The tax court also
apparently rejected the REVAC appraisal because it was only an appraisal of


       12 Cohen had appraised the Maison Blanche as having a pre-easement value of
$96,000,000 and a post-easement value of $88,555,000. Whitehouse Hotel, 139 T.C. at 353.
Like the tax court, we find the difference between the amount the partnership originally paid
($8,978,813) and the appraisal rather remarkable after less than three years of appreciation.
Id. at 353-54.
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                                 No. 13-60131
the Maison Blanche and not of the servitude, a fact Whitehouse conceded, and
Whitehouse “did not rely on it to value the servitude.” Id. at 356. We do not
accept the tax court’s analysis, given that all parties seemingly agree that the
easement is valued only by reference to pre- and post-easement appraisals of
the entire parcel. The tax court also relied on Income Tax Reg. 1.6664-4(b)(1)
(1997), which states that there must be more than the existence of an
appraisal, but that the appraisal itself must be reliable. Id. at 354. We will
not discuss any further what the tax court may have been saying about the
appraisal, as the Commissioner does not argue that the appraisal should be
rejected.   As the tax court itself noted, the issue of whether a qualified
appraisal existed had been conceded. Id. at 350.
      The tax court further concluded, in both opinions, that Drawbridge had
no personal knowledge of any investigation the partnership made into the
valuation of the easement beyond reliance on the Cohen appraisal and
consultation with attorneys and accountants.       Id. at 350-51.    We earlier
questioned the tax court’s skepticism of Drawbridge’s testimony.             See
Whitehouse Hotel, 615 F.3d at 342.       Though we described the tax court’s
analysis of the testimony as treating the matter as one of credibility, we stated
that precedent permits a person to “testify to facts within the limited
partnership’s knowledge,” regardless of whether that person had personal
knowledge himself. Id. The tax court on remand, while acknowledging this
instruction and permitting Drawbridge to testify to matters within the
partnership’s knowledge, still rested its conclusion in part on the fact that
Drawbridge and Whitehouse did not present any direct evidence of their
investigation into the value of the easement. Whitehouse Hotel, 139 T.C. at
357. Furthermore, it suggested Drawbridge’s testimony provided no direct
evidence as to what specific advice with respect to the easement Whitehouse
received from its attorneys and accountants. Id. The tax court concluded that
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                                  No. 13-60131
absent such evidence, it could only hold that no good faith investigation was
made into the valuation of the easement. Id. at 361-62.
      Our instructions for the remand on this issue were described as
guidance. Whitehouse Hotel, 615 F.3d at 343. The tax court concluded that
more was required than a mere showing that Whitehouse relied on advice of
attorneys and accountants when submitting the tax form containing the
deduction for the easement. Whitehouse Hotel, 139 T.C. at 359-60. According
to the tax court on remand, Whitehouse did not require the professionals to
investigate the value of the easement and presumably had not done so. Id. at
360. Finally, it suggested that even though the professionals might have
concluded that the Cohen appraisal was qualified for the purposes of the
Section 1.170A-13(c)(2) deduction, the professionals did not investigate the
value of the easement as required by Section 6664(c)(3)(B). Id.
      Our review of the tax court’s decision starts with the principle that
“[w]hen an accountant or attorney advises a taxpayer on a matter of tax law,
such as whether a liability exists, it is reasonable for a taxpayer to rely on that
advice.” United States v. Boyle, 469 U.S. 241, 251 (1985). “Most taxpayers are
not competent to discern error in the substantive advice of an accountant or
attorney.” Id. at 251. The Court held, though, that the relevant issue in that
case of meeting filing deadlines was not an area in which tax experts were
necessary. Id. at 251-52. Our earlier opinion cited Boyle for the tax court to
consider on remand. Whitehouse Hotel, 615 F.3d at 343.
      Different facts in these reliance-on-advice cases certainly can lead to
different results. “We determine whether a taxpayer acted with reasonable
cause on a case-by-case basis, evaluating the totality of the facts and
circumstances.” Southgate Master Fund, L.L.C. ex rel. Montgomery Capital
Advisors, LLC v. United States, 659 F.3d 466, 493 (5th Cir. 2011).              In
Montgomery Capital, we analyzed the general “reasonable cause” defense,
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                                 No. 13-60131
holding that “reliance on the advice of a tax professional can, but does not
necessarily demonstrate reasonable cause.” Id. (quotation marks and citation
omitted). Nonetheless, the statute requires a “good faith investigation” for
donations of charitable property. I.R.C. § 6664(c)(3)(B). In sum, reasonable
reliance on the word of qualified tax professionals suffices for the general
reasonable cause exception. Montgomery Capital, 659 F.3d at 493. We left
open the question of whether Whitehouse’s reliance on tax professionals was
enough. We now answer the question in the affirmative.
      Whitehouse argues the good faith exception should apply because it
sought out and then followed the advice of tax professionals and also sought a
second appraisal of the building.      Whitehouse argues this satisfies the
obligation to make a good faith investigation into the value of the easement
beyond the appraisal under Section 6664(c)(3)(B). The Commissioner responds
that simply having a tax return prepared by accountants and tax advice from
tax lawyers does not suffice either as the taxpayer’s investigation or as one by
professionals on which the taxpayer may rely.
      We conclude that the tax court imposed an excessively high standard of
proof for actual reliance on the advice of competent tax professionals with
respect to this statutory defense.   The tax court concluded in its remand
decision that “the record is bare of any evidence supporting” a conclusion that
Whitehouse undertook any investigation of the amount of the deduction for the
conveyance of the easement and presumed that the tax professionals also did
not. Whitehouse Hotel, 139 T.C. at 361. We disagree.
      Valuation of assets is a difficult task, even with the advice and counsel
of accountants, consultants, and tax attorneys. It is even more complicated
when, as here, the valuation is divorced from a negotiated transaction between
buyer and seller. In most transactions, presumably, the final sale price is
forged from competing interests. That dynamic makes the sale price a good
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                                 No. 13-60131
indicator of the fair market value of a given property. Even then, that price
may be altered up or down by idiosyncratic characteristics of the parties. This
is not the case here. This easement was a gratuitous transfer; the PRC did not
haggle over price and did not pay a final sale price.
      We are particularly persuaded by Whitehouse’s argument that the
Commissioner, the Commissioner’s expert, and the tax court all reached
different conclusions.   The Commissioner originally permitted only $1.15
million as a deduction. Argote valued the easement as worthless. We share
the tax court’s and the Commissioner’s skepticism of the dramatic appreciation
of value between the roughly $8,000,000 purchase price of the Maison Blanche
shell and the Cohen appraisal’s $96,000,000 valuation. What the taxpayer
reasonably considered, though, even if not sustained by the tax court, is that
its contract to transform the building into a Ritz-Carlton hotel had value. As
we were in our 2010 opinion, we are skeptical of the tax court’s conclusion that
following the advice of accountants and tax professionals was insufficient to
meet the requirements of the good faith defense, especially in regard to such a
complex task that involves so many uncertainties.
      As we did in Montgomery Capital for the general reasonable cause
exception, we review the “totality of the facts and circumstances.” 659 F.3d at
493. Whitehouse obtained a second appraisal as a “check” against the first one.
Drawbridge testified and presented the 1997 Form 1065 indicating it had been
prepared by Whitehouse’s financial auditors. Obtaining a qualified appraisal,
analyzing that appraisal, commissioning another appraisal, and submitting a
professionally-prepared tax return is sufficient to show a good faith
investigation as required by law. See I.R.C. § 6664(c)(3)(B).    The tax court’s
enforcement of the gross undervaluation penalty was clearly erroneous.
      We AFFIRM the tax court’s second valuation. We VACATE the tax
court’s enforcement of the gross undervaluation penalty, concluding the tax
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                               No. 13-60131
court clearly erred in applying it.   This case is REMANDED for entry of
judgment consistent with this opinion.




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