IRS Does Not Have to Approve Valuation Method for Qualified Appraisal

by Kenneth Hoffman in ,

Although the Internal Revenue Code expressly provides for tax benefits for the donation of historic preservation easements that are made in the manner set out in the Code and Treasury Regulations, the Internal Revenue Service (the “IRS”) has identified easement donations as an area in which taxpayers may act in a manner that is abusive. In recent years, the IRS has increased its enforcement efforts associated with the donation of historic preservation easements. As a result, the IRS has conducted, and is continuing to conduct, examinations of a number of taxpayers who have made historic preservation easement donations to the Trust and to other easement-holding organizations throughout the country.

In general, the IRS has been challenging the value of the easement as determined by the taxpayer’s appraiser, and has frequently focused on whether the appraiser adequately considered the impact of local preservation ordinances restricting the property. Other issues that have been raised by the IRS have included whether the supporting appraisal is a “qualified appraisal” as defined by the Treasury Regulations, and whether the language of the specific easement properly preserves the property for conservation purposes in perpetuity.

Some taxpayers have elected to challenge unfavorable determinations by the IRS. Some cases have been tried in the Tax Court and are awaiting a decision, others will be heard in the coming months, and others have not yet received a trial date. Below are links to court decisions and publicly available documents in pending cases before the Tax Court, which the Trust is including on this site by permission of the donor.

In Scheidelman v. Commissioner of Internal Revenue, 2nd Circuit Court of Appeals (6/15/12) the Court ruled:

For the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied—it remains a method, and Drazner described it. The regulation requires only that the appraiser identify the valuation method “used”; it does not require that the method adopted be reliable.

The taxpayers appealed the 2010 Tax Court decision regarding tax deficiencies, and the IRS filed a cross-appeal on penalties. Oral argument was held on December 15, 2011, in New York.  On June 15, 2012, the Second Circuit issued an opinion vacating the Tax Court decision and remanding the case for further proceedings.

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