A Court of Appeals reversed and remanded a Tax Court ruling that was favorable to the IRS. In the case, the taxpayer donated a façade conservation easement to The National Architectural Trust. In order to get the deduction, she had to have a qualified appraisal of the property. The appraisal rules are quite clear on their requirements. First, the appraisal must specify its method to be used to determine fair market value. Second, the appraisal must provide the basis for the valuation such as comparables, statistical sampling, or other.
In this case, the market data was sketchy at best, so the “before and after method” was used. The Tax Court originally ruled against the taxpayer stating that the appraisal qualified on the first test, but disqualified on the second test. The before and after method did not have comparable and reliable statistical samples. Therefore the taxpayer lost at Tax Court. On appeal she won, because the Appellate Court reasoned that the lack of data went to the persuasiveness of the data, not the qualification or basis of the appraisal overall. Therefore, the taxpayer won.
I don’t expect the reader to understand the full complexity of this case. The point of this case is to demonstrate to the reader that not all valuations are straight forward. All valuations and appraisals present challenges. This one was pretty tough. In its market, it had no reasonable comparables and no hard and fast statistics to go on. Under these conditions, the IRS would argue that no appraisal could ever be qualified. Recognizing the intent of the law, the Appellate Court recognized the impossibility of the situation and allowed the report to go through. Score one for the taxpayer!
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors