Appraisal Institute Annual Meeting IRS Valuation Topics August

Appraisal Institute Annual Meeting IRS Valuation Topics August 15, 2013

Presenters: Joseph C. Magdziarz, MAI, SRA Appraisal Research, Inc. – Rockford, Illinois § 2011 president of the Appraisal Institute § Past president of the Chicago Chapter of the Appraisal Institute § Past National Chair of Education Committee of the Appraisal Institute § Past National Chair of the Audit Committee of the Appraisal Institute § Approved Appraisal Institute instructor for 26 courses in the Appraisal Institute’s QE, AE, CE, and USPAP curriculums. Includes courses prepared for IRS issues such as Conservation Easements.

Presenters: Terry Dunkin, MAI Dunkin Real Estate Advisors ‐ Lutherville, Maryland § 2007 president of the Appraisal Institute § National Chair of International Relations Committee of the Appraisal Institute § He also holds the CCIM designation from the CCIM Institute. § He served on the American Real Estate Society Board from 2007 through 2012, and was recently re‐elected to serve a term expiring in 2017.

Presenters: Eric Garfield, MAI WTAS – Los Angeles, CA • • Co‐Chair 2010 – 2013 IRS Valuation Summit in Los Angeles, California 2011 President of the Beverly Hills Estate Planning Council 2012 LDAC Discussion Leader Active as Southern California Chapter Board Member, Committee Chair, and Regional Representative

Presenters: Chase Magnuson, CCIM, CIPS, SRES Real Estate for Charities – Washington, DC • • More than 30 years experience as a commercial real estate broker. He is a good client for appraisers and retains hundreds of appraisers each year to prepare valuations for IRS‐related transactions. Frequent lecturer to appraisal groups, non‐profits, universities, and others. Previously a columnist for the San Diego Daily Transcript where he reported on trends in real estate donations.

AGENDA: • • • Organization of IRS Valuation Section ‐ Dunkin Appraiser Penalties – Garfield What are issues for donations ‐ Magnuson Do’s and Don'ts in Conservation Easements ‐ Magdziarz Common Problems with Valuations for IRS – Dunkin & Magdziarz Tax Court Decisions – Garfield ‐ Mitchell ‐ Boltar ‐ Mohammed

Overview of IRS Valuation Division 1. 2. 3. 4. Engineering and Valuation Appraisal Standards What they do Standards 8

Engineering and Valuation Specialists Territory Map 9

Engineering and Valuation The primary function of the Engineering Program: • Provide specialists with expertise and specialized training in technical or industry‐specific issues. • Provides valuation services for a variety of purposes. • Coordinate the use of outside fee or contract appraisers and experts. 10

Appraisal Valuation Standards The IRS Appraisers, Business Valuation Specialists, engineers and foresters adhere to Generally Accepted Appraisal Standards which include: – USPAP – IRS Valuation Standards 11

Where does IRS Valuation Team get its work? Referrals from: • Estate and Gift Tax Program • SBSE (Small Business – Self‐Employed Division • LB&I (Large Business and International Division) • TEGE (Tax Exempt and Government Entities Division) • Collection • Counsel (Office of IRS Chief Counsel) 12

What Does IRS Valuation Group Do? Appraisers mostly involved with income tax and estate and gift tax issues. Work includes: • • • Write Appraisals Review of appraisals (Reasonableness) Experts in litigation (sometimes testifying expert) Appraiser penalty investigations Outreach (seminars and meetings) Contact representatives (COTR) 13

Typical Internal Referral for Appraisal Assistance • When the appraiser or BV Specialist gets a valuation assignment, the first thing they will do is ask for the appraisal. • Assigned appraiser then reads the report. Addresses following: o Does the report read well—is it easy to follow? o Does the report logically leads the reader from the initial presentation of the data to the value conclusion? o Are conclusions supported by facts and the analysis of the facts? o Is there a good market analysis? o Does H&BU make sense? o Is the issue worth pursuing? • Assigned appraiser then makes report to referring department. 14

Appraiser Penalties 15

6695 A Appraiser Penalty ü Prior to PPA penalties subject to IRC 6700 or IRC 6701 ü IRC 6695 A Originated with the Pension Protection Act of 2006 ü Not intended for minor differences of opinion ü Treated as a separate case from originating tax case ü Practitioner has opportunity to support their work 17

6695 A Appraiser Penalty 6695 A. Substantial and gross valuation misstatements attributable to incorrect appraisals. 6695 A(a) Imposition of penalty. – if – 6695 A(a)(1) a person prepares an appraisal of the value of property and such person knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund, and 18

6695 A Appraiser Penalty 6695 A(a)(2) the claimed value of the property on a return or a claim for refund which is based on such appraisal results in a substantial valuation misstatement under chapter 1, a substantial estate or gift tax valuation understatement, or a gross valuation misstatement , with respect to such property, then such person shall pay a penalty in the amount determined under section (b). 19

6695 A Appraiser Penalty 6695 A(b) Amount of Penalty. – The amount of the penalty imposed under subsection (a) on any person with respect to an appraisal shall be equal to the LESSER of – 6695 A(b)(1) the greater of – 6695 A(b)(1)(A) 10 percent of the amount of the underpayment attributable to the misstatement described in subsection (a)(2), or 20

6695 A Appraiser Penalty 6695 A(b)(1)(B) $1, 000, or 6695 A(b)(2) 125 percent of the gross income received by the person described in subsection (a)(1) from the preparation of the appraisal. 6695 A(c) Exception. ‐‐ No penalty shall be imposed under subsection (a) if the person establishes to the satisfaction of the Secretary that the value established in the appraisal was more likely than not the proper value. 21

6695 A Penalty Summary • Should the practitioner be afraid or worried about performing work for the taxpayer or the IRS? • At the end of the day, no, if the work performed is a reflection of the market’s perception of value as of the date of valuation, analysis and conclusions are well prepared, issues disclosed, and fully presented! 22

DONATIONS 1. Use of appraisals 2. Methods and reporting requirements. 3. Form 8285 23

CONSERVATION EASEMENTS 1. What are conservation and historic preservation easements & why are they donated 2. Methodology 3. Problems with easement appraisals ‐ Highest and best use ‐ Incorrect methods 24

COMMON PROBLEMS IN APPRAISALS FOR THE IRS 1. 2. 3. 4. 5. 6. Writing Grammar Clarity Highest and Best Use Case Studies Valuation Red Flags 25

Writing • It is important that appraisals written by IRS appraisers and taxpayers’ appraisers are well written. A well written appraisal is easy to follow and will hold the reader’s interest. It is easier to understand the analysis and the conclusions reached. 26

Grammar • “The residence was a merely composed of homesteaders, miners, loggers and cattle and sheep ranchers. ” 27

Grammar • “As mentioned several times throughout this review, the valuation of the subject property consisting of 40 acres and should have concluded from the fee simple valuation on page 155 at a value of $110, 000 based on the appraiser’s calculations. ” 28

Is this the word you want to use? • “The subject property consists of two contiguous tracts which contain 41 acres and 76 acres, respectfully. ” 29

What are you saying? • “The appraisers’ approach, which is labeled as Scenario “B, ” the foregone development opportunity, is the before value, and that the after value, Scenario “A, ” value of the raw land less the cost to remove the land from the flood plain, is the after value. In fact, Scenario “B” is not applicable, Scenario “A”, without deducting the cost to remove the land from the flood plain, is the before value, and there is no after value calculated. ” 30

Highest and best use Is highest and best use explained and supported? v. Legally permissible v. Physically possible v. Financially feasible v. Maximally productive (use that generates highest land value) • Not the best three out of four! 31

Some H&BU Problems • Estate Gift- House and land appraised as apple orchards. • House on 10 -acres w/direct ocean view in area of million dollar homes. Brand new mansion next to the subject as of appraisal date. • Subject- appraised as “old” barely producing apple orchard. Lower value- Did not use residential acreage that had direct ocean views. Used other orchards- bottom line- Highest & Best Use-high end estate land more valuable. • Adjustment $5, 000 higher 32

Case #2 • 1 - acre oceanfront residential site- donated to a municipality. • Appraised as buildable-with incorrect legal description offered by owner. One week before the owner donated piece of subject reducing size, never told appraiser. Appraiser never checked with municipality to verify property. • Consequences-Highest and Best Use reduced to open space, non-buildable land- large adjustment-lower value. 33

Case #3 • Estate Gift- 10 -acre marina on the ocean • Highest and Best Use- Marina on the Ocean • Problem areas-land value too low- zoning allows for residential development. • Oceanfront land in demand for residential development. Value higher if appraised as vacant for residential development • Problem- appraiser states in the report : 34

Case #3 continued • "However when a comparison of the Income Approach for the marina operation with the Market Data Comparison Approach for the land in the Cost Approach, it is concluded that the total site is under utilized. There is a strong potential for a combination residential/tourist accommodation/commercial use in conjunction with the marina operation, which is considered to the Highest and Best Use. A specific redevelopment plan needs to be defined and is beyond the scope of this appraisal assignment. ” 35

Some Valuation Red Flags • Conclusions based on opinion and not facts Facts Trump Opinion • Reliance on unconventional analysis (not widely used or accepted) will raise a red flag. • Extreme discounts for marketability, fractional (minority) interest, blockage, undivided interest, that are not well supported by data and analysis. 36

continued • If analysis is thorough and explained and consistent with the conclusions reached, we are more likely to accept. If not, we will spend the time to look into the issues. • If analysis explains why some potential comparables were not used rather than simply not commenting on those potential comparables, we may conclude that the rationale makes sense. • If all comparables are adjusted in one direction, we will get curious. • Are assumptions reasonable? • Does it make sense that past earnings growth will continue? 37

So, What’s my Point? • If an Appraisal is well written and easy to follow, • If it logically leads the reader from the initial presentation of the data to the value conclusion. • if conclusions are supported by facts and the analysis of the facts • If H&BU makes sense The appraisal will probably not be challenged 38

COURT CASES 1. Mitchell 2. Boltar 3. Mohammed 4. Astleford 39

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) Summary: • Two Properties – An Ocean‐front house in Montecito, CA and a 4, 000 acre ranch property in Santa Ynez, CA • Both Properties were subject to long‐term leases. • IRS claimed leases were not at market and should be ignored. • Issues were: Treatment of leases. Use of sales and adjustments Methodology 40

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) Properties: Ø Beachfront property – 2 acre lot with 4, 000 s. f. house in Montecito. 167 feet of ocean frontage. Leased for 5 years with three 5‐year options. First year rent was $190, 000 with 3. 5% adjustments annually. Ø Ranch – 4, 000 acres in Santa Ynez Valley. Leased for $32, 000 per year. Lease was 5 years with four options to renew. Rent increased $1, 000 per year. 41

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) Appraisals and Valuation Method – Beachfront Property: Ø Taxpayer appraiser valued the Beachfront property at $14. 5 million in fee simple assuming the lease did not exist. He then increased the fee simple value at 3. 5% annually to the end of lease term and options. As the rent was below market, he assumed the lease would continue through all the option periods. The PV of the reversion was $4. 6 million at a 9. 5% discount rate. PV of income was $1. 4 million. Total value of leased fee was $6. 0 million. This was a very tradition discounted cash flow analysis. Ø IRS appraiser valued Beachfront property at $12. 5 million using a lease buyout analysis. He indicated that a $250, 000 payment would be adequate make the tenants terminate. He essentially ignored the lease because he noted that the lease was not really valid as expenses exceeded income. 42

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) Appraisals and Valuation Method – Ranch Property: Ø Taxpayer appraiser valued the ranch using a similar method and valued the leased fee interest in the ranch at $3. 5 million. He estimated fee value at $13. 0 million. Ø The IRS Appraiser valued the leased fee interest in the ranch at $20. 0 million. He used the same type of lease buyout analysis. Court Value Decision: The Court adopted both of the Taxpayers conclusions which relied on the traditional DCF analysis. The IRS reports were disregarded due primarily to flawed methodology. 43

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) What are lessons learned? • Do not try to use unusual methods (like a lease buy‐out analysis) unless you have a very strong case for using it. The Court cited the Appraisal of Real Estate repeatedly as a reference for proper methodology. • The Court looked at the leases and the interactions historically with the parties and found that the leases would be considered by any buyer. Based on the actions of the tenant and the owner, the Court determined that there was a low probability that the leases would be terminated voluntarily or even with relatively small consideration. • Ranch had been used by the tenant for many years and was negotiated at arms length • The tenants at the Beachfront property had attempted to buy the house on several occasions and the owner had rejected all offers. They finally offered to lease the property and the owner accepted. 44

Mitchell v. Commissioner – T. C. Memo. 2011‐ 94 (April 2011) What are lessons learned? (Continued) • Be careful of comparable sale selection. The Court found that sales that were not current were less reliable and gave more credence to report with the most recent sales. Also, sales from the immediate market area were more weighted than sales from outside the area. • Be careful of adjustments that are not reasonable. One reason IRS appraiser’s opinion on the ranch was rejected was an adjustment of a sale 6 years prior using a 2% per month (24% per year) increase from 1999 to 2005. The Court’s analysis suggested 4% per year more reasonable. • When dealing with leased properties, you have to look at the leases carefully unless they are obviously arm’s length. For example, a Walgreens leased property would not require a lot of due diligence. However, what if the leased property included some parties in a family on both sides of the lease? These are important facts that should be discussed with the appraiser. 45

Boltar LLC v. Commissioner » Excluded Expert’s Report under Federal Rules of Evidence and Daubert » Emphasized “Gatekeeper Role”

Boltar LLC v. Commissioner » The Boltar case resulted in the taxpayer’s report being excluded by the Court. » The property was a Conservation Easement. However, the lessons learned here are valid in all types of work when dealing with the IRS. Careful adherence to IRS rules and regulations are important. However, following proper methodology and avoiding mistakes is also important. » In the Boltar case, the IRS challenged the report of the Taxpayer. The IRS “filed a motion in limine to exclude the petitioner's expert report and testimony as neither reliable nor relevant under the Federal Rules of Evidence and Daubert. » The Tax Court determined that the Taxpayer’s expert’s report was “so far beyond the realm of usefulness that admission is inappropriate and exclusion” is proper. The Taxpayer had no other expert report, and the Court relied only on the IRS valuation. The result was the Taxpayer lost a $3. 0 million dollar deduction from the donation.

Boltar LLC v. Commissioner The Property: » The property was 8. 5 acres in Lake County, Indiana. Part of the land was wetlands. Part was in the City of Hobart and part was in Lake County. The County portion was zoned for low density single family development. The City portion was zoned PUD. There were no utilities available to the property and it was land locked with no legal access.

Boltar LLC v. Commissioner The Appraisals: • The Taxpayer appraiser valued the property at $3, 340, 000 under the highest and best use for development of 174 condominiums. This was based on a site plan for a ten acre parcel (Scenario A). Scenario B valued the property as vacant development land at $68, 000. The Taxpayer appraiser stated that the value of the easement was the difference between the Scenario A and B values. It was not defined as a “Before and After” analysis as required by the regulations. The value estimated for the easement was $3, 245, 000 and also reflected mitigation costs. • The IRS appraiser concluded that the highest and best use was for low density single family development. The easement was valued by the IRS appraiser at approximately $30, 000. This was based on a “before” value of approximately $400, 000 and an “after” value of about $70, 000.

Boltar LLC v. Commissioner Problems: » Appraiser assumed that all property was in City of Hobart which it was not. » The Court indicated that the highest and best use established by the taxpayer Report was not reasonable. The Court cited other court cases noting that highest and best use must be “realistic” and reflect “objective potential uses, ” and such uses must be “reasonable and probable. ” » In establishing the highest and best use, the Taxpayer appraiser relied on a ten ‐acre site plan even though the subject property was only 8. 5 acres. » The site plan ignored a 50 foot gas pipeline which crossed the property. The plat map showed that 6 of 29 proposed buildings could not be built. » The Taxpayer appraiser valued the property before the easement at $400, 000 per acre. The Court noted that nearby land for similar development was selling for $12, 000 per acre. According to the Court, such “factual errors” defy “reason and common sense” and “demonstrated [a] lack of sanity in their result. ”

Boltar LLC v. Commissioner Problems: (Continued) • The Court determined that the Taxpayer appraiser’s methodology was flawed. Rather that stating the analysis was a “Before and After” analysis, he stated the value was based on the “difference in two scenarios” defined as Scenario A and B. While the actual process was correct, the report used the wrong terminology. • Finally, before trial, the Taxpayer’s appraiser was given the chance to revisit some of the issues like ignoring the easement, or correcting the proper jurisdiction. The appraiser chose not to make any corrections and stood by the faulty report. The Court noted that the Taxpayer Appraiser “did not suggest any adjustments or corrections to their calculations but persisted in their position that the original appraisal was correct, even when admitting factual errors. ”

Boltar LLC v. Commissioner Lessons Learned: • • • Make sure facts are correct. Court will always look at highest and best use. Make sure it is reasonable and well‐supported. When valuing a property and you are not preparing a Sales Comparison Approach, it is always best to look at sales data in the area anyway. If there is data, explain why it is not comparable and why adjustments can’t reasonably be made. The Court understands a Sales Approach. When sales are not addressed in a report they show up in other evidence (like the IRS appraisal in this case). It could then appear that the appraiser is not being objective. If there are sales nearby that might in any way be considered comparable, they should be disclosed and explained away.

Boltar LLC v. Commissioner Lessons Learned: • • In this case, methodology was again an issue. Make sure you actually state and describe the methodology. The math might be correct, but if it is not described properly, the report may be rejected. Final Note is actually a warning to the appraisal profession by the Tax Court. As a closing comment, the Court explained that a Daubert gate‐ keeping role for the Court is required because “the cottage industry of experts who function primarily in the market for tax benefits should be discouraged. ” The Court notes that all too often, “[t]he problem is created by [expert’s] willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations. ” In this case, the faulty appraisal by a single individual led to a condemnation of all valuation practitioners by a federal judge.

Boltar LLC v. Commissioner 136 T. C. No. 14 (April 5, 2011) Closing Comments from Case: » “[w]e have long recognized that receipt of unreliable evidence is an imposition on the opposing party and on the trial process. We have also frequently stated that an expert loses usefulness to the Court and loses credibility when giving testimony tainted by overzealous advocacy. Expert opinions that disregard relevant facts affecting valuation or exaggerate value to incredible levels are rejected. ” » While “[j]ustice is frequently portrayed as blindfolded to symbolize impartiality, … we need not blindly admit absurd expert opinions. ”

Mohamed v. Commissioner – May 29, 2012 Overview of Facts and Decision: 1. IRS moved for summary judgment to disallow any deduction. The taxpayer sought relief due to substantial compliance with the regulations. 2. In 2003 Mr. & Mrs. Mohamed donated five properties worth several million dollars to a charitable trust for the benefit of the Shriner’s Hospital. 3. Mr. Mohamed was an appraiser and broker. He filled out the donation form using his own estimates and claimed he did not read instructions. 4. Mohamed obtained independent appraisals showing values were actually higher than he claimed ($20 million vs. $18 million claimed) and some of the properties subsequently sold at near the appraised values. 5. Result of the case was a complete denial of all deductions.

Mohamed v. Commissioner – May 29, 2012 Closing Remarks from Judge Holmes: We recognize that this result is harsh‐‐a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions‐‐all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of mis‐valued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

Mohamed v. Commissioner Lessons Learned: 1. Warning to taxpayers – hire experts and come prepared to the tax court or face the wrath of the court. 2. When non‐cash donations are at stake, experts must be Qualified Appraisers who submit Qualified Appraisals as defined by the Treasury Dept. , not USPAP. 3. Self‐Dealing / Representation is inappropriate for tax court matters (“No appraisal, no donation. ”) 4. Petitioner failure to comply with treasury regulations is a recipe for disaster in tax court. 5. Expect strict interpretation of the laws/regs by the tax court. There is no begging for mercy.

Astleford v. Commissioner (May 5, 2008) MARKET ABSORPTION • Market absorption is a recurring issue in appraisals prepared for the IRS in gifts, estates, and other uses. • If there is a concentration of similar properties in a given area, market absorption must be considered. • The Tax Court has addressed market absorption very infrequently. Astleford the most recent in 2008 and addressed market absorption. The prior case on the same issue was the Estate of Auker in 1998.

Astleford v. Commissioner (May 5, 2008) The Property and Appraisals • The Astleford case involves a 1200 acre farm in Minnesota. • The average farm size was 160 acres and that the subject property was extraordinarily large. • Appraiser valued the property if sold in smaller parcels over time. • Valued the property at $3, 100 per acre for a total value of $3. 7 million. He projected values forward to increase at 7% annually and discounted net revenue at 25% IRR over 4 years. He deducted costs of sales and holding. The resulting value was $2. 2 million. • The IRS valued property at $3, 500 per acre for total value of $4. 2 million with no consideration to size or market absorption.

Astleford v. Commissioner (May 5, 2008) The Astleford Court built on the decision in the Auker case where the Court laid out the steps to determine a market absorption discount using a process described as a “five part analysis. ” The Court determined the following steps: • “First, we examine the assets to be valued and categorize the assets by type. ” • “Second, we ascertain the market value of each asset in each category, assuming that each asset will be marketed separately. ” – Retail Value • “Third, we compare the number of assets in each category to the number of assets of that type which are traded in the market over a reasonable period of time. ” ‐ Absorption Rate • “Fourth, we ascertain how much longer than this reasonable time period it would take to sell at market value each asset that could not be sold in this reasonable time period. ” • “Fifth, we discount the value of each asset in the category of assets that cannot be sold within a reasonable time period, taking into account the time value of money and the period of time that the category of assets would have to be marketed in order to sell each asset therein. ”

Astleford v. Commissioner (May 5, 2008) The Court’s Opinion Ø In Astleford, the Court agreed with the IRS appraiser’s value per acre. This adoption was based on the credibility of the testimony. However, the Court used a market absorption method. The judge dropped the discount rate from 25% to 10%. Unlike Auker, the court deducted holding costs and sales expenses. The result was a value of $3. 3 million. Ø This is a case where the Court valued the property independently of the appraisers using some data from each appraisal, and using his own opinions where data was not presented such as the discount rate. It was not a complete taxpayer victory, but an important decision none‐the‐less.

Astleford v. Commissioner (May 5, 2008) Lessons Learned: • When you have a portfolio of similar properties, the Court allows or requires that you address market absorption. • Make sure discount rates are reasonable for the highest and best use. Court noted that 25% was a land development rate and that returns for farming would be more in line with 10%. • Make sure that sales data used is reasonable and explained properly. • If you are not from the local area, make sure you go beyond typical due diligence to make sure that your opinions will be given credence. There is a bias toward local knowledge. • Also, don’t forget to use standard methodology. Note that Court allowed deduction of taxes and commissions in DCF. Make sure the methodology has a basis in appraisal literature.

Scheidelman v. Commissioner (July 14, 2010) • Issues: • Façade Easement • Qualified Appraisal • “Before” vs. “After” or Percentage Discount

Scheidelman v. Commissioner (July 14, 2010) • The property is a single‐family row‐house located in a historic preservation district in Brooklyn, New York. • In June 2004, the taxpayer executed the historic conservation easement deed with National Architectural Trust (aka NAT). • The taxpayer claimed a charitable contribution deduction of $115, 000 for the contribution of the façade easement.

Scheidelman v. Commissioner (July 14, 2010) The taxpayer’s application failed to meet the standards set forth for a Qualified Appraisal as defined under Section 170 of IRS regulations. The appraisal failed in several tests including: • It did not have a sufficient description of the property to identify it; • It did not include the terms of the deed of easement; • It did not include a statement that it was prepared for income tax purposes (Intended use); and • It did not provide the method and specific basis for valuing the easement.

Scheidelman v. Commissioner (July 14, 2010) Court Ruling: The Court ruled that the Taxpayer appraisal report did not meet the test of being a Qualified Appraisal Report due to deficiencies including: • Methodology ‐ The report did not provide the method and specific basis for valuing the easement. Taxpayer appraiser stated that the “after” value was “based on consideration of a range of discounts that the IRS has historically found to be acceptable as well as historic precedents” in the range of 10% to 15%. The Court stated that this did not constitute a “Before and After” analysis as required by law. The Court noted that “the appraiser’s report failed to outline and analyze qualitative factors for the taxpayer’s property in support of the value. ” In other words, you have to estimate a separate value “after” the easement is placed, not just a discount from the “Before” value.

Scheidelman v. Commissioner (July 14, 2010) • Terminology – The report did not include a statement that it was prepared for income tax purposes. The intended use was not properly stated. • Descriptions – The Report did not properly describe the property or the easement. • The (Taxpayer’s) report used only estimates based on prior cases and displayed no independent or reliable methodology applied to the subject property as the basis for the valuation reached. Thus, we conclude that petitioners have failed to comply with the substantiation requirements under section 170(f) and section 1. 170 A‐ 13, Income Tax Regs.

Questions & Answers 68