UNITED STATES TAX COURT

Transcription

1 UNITED STATES TAX COURT In the Matter of: ) ) GEORGE and LEILA GORRA, ) ) Petitioners, ) ) v. )Docket No.: ) COMMISSIONER OF INTERNAL REVENUE,) ) Respondent. ) Volume: 1 Pages: 1 through 100 Place: New York, New York Date: October 25, 2012

2 1 IN THE UNITED STATES TAX COURT 1 2 In the Matter of: ) 3 ) GEORGE and LEILA GORRA, ) 4 ) Petitioners, ) 5 ) v. )Docket No.: ) COMMISSIONER OF INTERNAL REVENUE,) 7 ) Respondent. ) 8 Courtroom Jacob K. Javits Federal Building 26 Federal Plaza 10 New York, New York Thursday October 25, The above-entitled matter came on for 13 trial, pursuant to notice, at 9:05 a.m. 14 BEFORE: KATHLEEN KERRIGAN, Judge 15 A P P E A R A N C E S: 16 For the Petitioner: 17 FRANK AGOSTINO, Esquire REUBEN G. MULLER, Esquire 18 JAIRO G. CANO, Esquire JEFFREY M. DIRMANN, Esquire Washington Place Hackensack, New Jersey (201) For the Respondent: MARC L. CAINE, Esquire 22 MARISSA SAVIT, Esquire Office of the General Counsel 23 Internal Revenue Service 1600 Stewart Avenue, Suite Westbury, New York (516)

3 1 C O N T E N T S VOIR 2 WITNESSES: DIRECT CROSS REDIRECT RECROSS DIRE 2 3 John Weiss Heather Bracland Victoria McCormick Peter Anzelone George Gorra

4 1 E X H I B I T S 3 2 NUMBERS: MARKED RECEIVED REJECTED 3 Stipulation of Facts Exhibits 1-J thru 47-J 4 No. 48-P thru 59-P No. 60-P

5 1 P R O C E E D I N G S 4 2 (9:05 a.m.) 3 THE CLERK: All rise. Please be seated. 4 Recalling from the calendar Docket Number , 5 George and Leila Gorra. Please state your 6 appearances. 7 MR. AGOSTINO: Frank Agostino, Reuben 8 Muller, and Jairo Cano for Petitioners. 9 MR. CAINE: Good morning, Your Honor. Marc 10 Caine for the Respondent. 11 MS. SAVIT: Good morning, Your Honor. 12 Marissa Savit for Respondent. 13 THE COURT: Good morning. You may be 14 seated. 15 MR. AGOSTINO: Thank you, Your Honor. 16 THE COURT: Before we begin with the trial, 17 are there any preliminary matters for the Court? 18 MR. CAINE: Yes, Your Honor. I think it 19 would be a good time to go through the objections to 20 the stipulation of facts so we can have them lodged 21 and discuss any relevancy objections or anything. 22 MR. AGOSTINO: We agree. I think we should the parties have already lodged with the Court the 24 first stipulation of facts with exhibits -- with 25 paragraphs 1 through 43 and Exhibits 1-J through 9-J.

6 1 The parties have also lodged with the Court a second 5 2 stipulation of facts with paragraphs 44 through 112, 3 with Exhibits 10-J through 47-J. I think the parties 4 would jointly move to file these stipulations of fact 5 at this point and then deal with the objections to 6 certain exhibits within the stipulation of fact. 7 THE COURT: You may proceed. 8 MR. AGOSTINO: So, Your Honor, we would 9 move these stipulations of fact into evidence. 10 MR. CAINE: Well, if they're subject to MR. AGOSTINO: Subject to the objections. 12 THE COURT: The first stipulation of facts, 13 the one filed on January 20, 2012, has already been 14 filed; and Exhibits 1 through 9-J are submitted into 15 evidence. 16 MR. AGOSTINO: Thank you, Your Honor. 17 (Whereupon, Exhibit Numbers 1-J through 9-18 J were received into evidence.) 19 THE COURT: The second stipulation of facts 20 that was lodged is now filed and Exhibits 10-J 21 through 43-J are submitted into evidence. 22 (Whereupon, Exhibit Numbers 10-J through J were received into evidence.) 24 MR. AGOSTINO: Thank you, Your Honor. Do 25 you want to deal with your objections first or --

7 1 MR. CAINE: The last Exhibit is 47-J. 6 2 MR. AGOSTINO: The last Exhibit is 47-J. 3 THE COURT: Right, Exhibits 10-J through 4 47-J are submitted into evidence. 5 MR. AGOSTINO: Thank you, Your Honor. 6 MR. CAINE: Thank you. Respondent reserved 7 a relevancy objection to 37-J and 38-J. 8 MR. AGOSTINO: 37-J is a brochure published 9 by the National Park Service that describes the 10 federal historic tax incentive program. The brochure 11 describes the program. The brochure refers to the 12 Trust for Architectural Easements, the entity here at 13 issue, as a 501(c)(3) organization that is authorized 14 to accept easements. The brochure explains the 15 government's understanding of the program. It should 16 come in as an admission of a party opponent without 17 the necessity of having to introduce it through a 18 witness. 19 Alternatively, Your Honor, if the Court 20 denies the admission as the admission of a party 21 opponent, we would then propose to put it in through 22 the Trust for Architectural Easement witness. We 23 would note that the Court in Kaufman has already with respect to this same objection, had admitted in I mean, Exhibit 37 as relevant to these

8 1 issues in the case called Kaufman versus 7 2 Commissioner. 3 MR. CAINE: I was going to start off by 4 saying Respondent waives their objection to 37 and 5 38-J. 6 MR. AGOSTINO: You should have told me. 7 MR. CAINE: I didn't want to interrupt. 8 THE COURT: So there's no further objection 9 to 37-J and 38-J? 10 MR. CAINE: Correct. 11 Your Honor, I just wanted to make note that 12 on the first stipulation, 8-J contained an objection 13 for the use or how the document could be used in 14 evidence. If Your Honor turns to paragraphs 39 and of the first stipulation -- I'm sorry, 8-J, I 16 apologize. This is paragraph THE COURT: What page are you on? 18 MR. CAINE: 4 of 7, paragraph THE COURT: 8-J is the Haims Realty MR. CAINE: Yes, Your Honor. 21 THE COURT: The exhibit I have in front of 22 me is page 1 of MR. CAINE: Yes. 24 THE COURT: So if you could give the page 25 number again, please. Thank you.

9 1 MR. CAINE: It was an objection to the 8 2 overall document. 3 THE COURT: Okay. 4 MR. CAINE: I just wanted to be clear that 5 Respondent is just stipulating to the document 6 itself, not that the -- we're not stipulating to the 7 value conclusions or any representations or 8 methodology descriptions that's stated in paragraph But that by stipulating to the document, we're 10 not stipulating that this satisfied a qualified 11 appraisal under MR. AGOSTINO: We agree that the Court is 13 the ultimate arbiter of whether or not the Haims 14 appraisal is a qualified appraisal. We further 15 submit that if the Court deems it to be a qualified 16 appraisal, then it is in evidence for all purposes; 17 and the Court will decide the weight which it gives 18 the document. 19 THE COURT: It's exempted MR. AGOSTINO: Right. And the Petitioners 21 have moved to exclude the exhibits -- well, reserved 22 relevancy objections to income tax returns on Form of the Trust for Architectural Easement, formally 24 known as the National Architectural Trust, for the 25 years prior to the year at issue. So those would be

10 1 42, 43, 44, 45 and 46-J. 41 through 46-J, Petitioner 9 2 contends that the tax returns of the party -- of a 3 taxpayer that is not a party to this proceeding are 4 irrelevant to any of the issues in this proceeding, 5 valuation, whether the deed serves a conservation 6 purpose or whether the Haims appraisal is a qualified 7 appraisal. 8 We would also submit since the Trust for 9 Architectural Easement will be sending a witness to 10 this trial, anything that you would try to glean from 11 their tax return is better asked by questioning the 12 representative of the trust. So the Petitioners 13 respectfully submit that the trust tax returns are 14 irrelevant to any issue before this Court. 15 MR. CAINE: I just wanted to clarify, so 16 there's no objection to 47-J then, I guess, because 17 that's for the 2007 tax year. 18 MR. AGOSTINO: Correct, that is correct. 19 MR. CAINE: And 46-J is for the 2006 tax 20 year. Petitioners claim that the year at issue is MR. AGOSTINO: 2006 and 2007 are the years 23 before this Court, Your Honor. 24 MR. CAINE: So I would assume there's no 25 objection to those two then, Your Honor.

11 1 MR. AGOSTINO: That is correct MR. CAINE: So with regard to 47-J through 3 45-J remains Petitioners' relevancy argument, and I 4 would reiterate where Mr. Agostino started today, 5 that the Court in Kaufman looked to certain 6 documents, 37-J and 38-J; the Court in Dunlap 7 specifically looked at 41-J through 45-J in its 8 opinion. And there was quite a lengthy discussion 9 about expenses claimed on those tax returns by the 10 NAT with regard to enforcement, which is a critical 11 issue in this case, meaning is the NAT's enforcement 12 greater than what local law already provides. 13 The Court in Dunlap found that really 14 relevant because it was somewhere between four and 15 five pages of discussion about the expenses and about 16 those returns and about the admissions on those 17 returns. And I submit that they are relevant to this 18 case. 19 MR. AGOSTINO: Your Honor, the Court in 20 Dunlap had the years 2003 and 2004 before it. So in 21 Dunlap, the 990s for 2003 and 2004 would have been 22 relevant. Here, we have the years 2006 and before the Court. Therefore, we would argue that the 24 returns for 2003 and '4 are not the relevant returns, 25 and the relevant returns are the years -- for the

12 1 years before this Court, 2006 and Therefore, 11 2 that's why we've agreed with the government to 3 stipulate the trust returns for the years before the 4 Court. But the trust returns for the years that are 5 not before this Court, we believe are irrelevant to 6 the issues before this Court and is an invasion of 7 the trust privacy to publish these returns -- well, 8 they're a 501(c)(3); but for how they operate for the 9 years other than these years, we would argue is 10 irrelevant to the issues before Your Honor. 11 THE COURT: Mr. Agostino, I just want to be 12 clear. You are no longer objecting to 46-J. It's 13 just 41 through 45-J? 14 MR. AGOSTINO: Yes, for the -- yes, Your 15 Honor. 16 THE COURT: Mr. Caine, anything further? 17 MR. CAINE: I just wanted to note, the 18 Court in Dunlap had tax returns from 2001, I believe 19 through 2006 or '7. So they looked at returns that 20 exceeded the years at issue. And the Court, 21 specifically the Honorable Judge Goeke, went through 22 the historical expenses and showed where the expenses 23 were lacking in some years and where they transformed 24 or were increased in later years. So the Court in 25 Dunlap had a full spectrum of about six or seven

13 1 years that it looked at, not only confined to the 12 2 direct years at issue for the taxpayer's deduction. 3 They looked at a larger field of tax returns in that 4 case. 5 MR. AGOSTINO: To the extent they did, we 6 don't know -- I don't remember that there was the 7 same objection. And again, in this trial we will 8 have a witness from the trust. To the extent they 9 want to ask the trust about its monitoring and its 10 efforts, the trust witness is better than trying to 11 decipher what is in what box of the return without 12 the preparer of the return. Respondent wants to draw 13 an inference from a box on the return as to what the 14 trust spent or didn't spend on monitoring. Unless we 15 know how the accountant who prepared the return 16 allocated to costs, the way the return was prepared 17 isn't relevant to what the actual monitoring 18 activities are. And that's why we're proposing that 19 the best evidence of what the monitoring was was to 20 ask the witness that will be on the stand. 21 MR. CAINE: I apologize for belaboring the 22 point. One, the Form 990 that's part of the 23 stipulation of the 41-J through 45-J are public 24 documents. So that's the first thing. And that was 25 in rebuttal to the invasion of the trust privacy.

14 1 These documents are made public. These are the 13 2 public versions of the Form And two, I'm not really sure what 4 Petitioner was saying about the accuracy of the 5 return. Assumingly, the returns are accurate because 6 they're subscribed and signed to be accurate. So the 7 representations on the return we can assume are 8 correct. We don't need return preparers to come in 9 and explain to us that numbers may not be correct and 10 they are somewhere else on the return or not on this 11 return. I think we're past that. We can accept the 12 public document for what it says -- for what's on the 13 public document. 14 MR. AGOSTINO: Again, I would offer that 15 that's absolutely improper, I mean how they allocate 16 salaries. Do they allocate salaries as a monitoring 17 cost or an overhead cost? That's a question for the 18 cost accountant who prepared the tax return. What 19 would be considered a direct monitoring expense or an 20 overhead expense or overall monitoring is a question 21 for the people who prepared the return. What efforts 22 were extended to monitor the properties and whether 23 those efforts served a conservation purpose is better 24 with direct testimony of the people who actually do 25 the monitoring, who will be here.

15 1 THE COURT: Okay, the Court notes the 14 2 objections to Exhibits 41 through 45-J and is going 3 to reserve ruling on these at this time. 4 MR. AGOSTINO: Thank you, Your Honor. 5 MR. CAINE: Thank you, Your Honor. You 6 mentioned on Monday evening to bring the conservation 7 easement with regard to 1982 East and Dunlap here 8 this morning. And so I didn't know if you wanted to 9 bring them into evidence as joint exhibits -- I 10 didn't know whether you -- what your intentions were. 11 I have them here this morning. 12 THE COURT: I think they can come in during 13 the course of the trial when they are discussed, they 14 can be offered into evidence at that time. 15 MR. CAINE: There's no -- okay. 16 MR. AGOSTINO: Your Honor, I know we filed 17 trial memos but would you entertain brief opening 18 statements? 19 THE COURT: Brief opening statements, less 20 than 10 minutes; and if they could, focus on the 21 issues that are remaining in the case. 22 MR. AGOSTINO: Yes, Your Honor. It's my 23 privilege to represent Mr. and Mrs. Gorra. The 24 Gorras contributed an easement on their home to a (c)(3) organization known originally as the

16 15 1 National Architectural Trust and now as the Trust for 2 Architectural Easement. On their tax returns the 3 Gorras claimed a charitable contribution equal to the 4 appraised value of the easement donated. 5 The Respondent has disallowed the 6 charitable contribution, which has resulted in 7 deficiencies in income tax for the years 2006 and Additionally, Respondent has asserted 9 penalties for the misstatement of the value of the 10 donation. 11 At this trial there will be the witnesses 12 that will deal with all of the issues. And the first 13 of the issues is the government will contend or has 14 contended that the conservation deed of easement, the 15 donation, does not serve a conservation purpose. 16 Here again we would ask the Court to listen to the 17 witnesses and look at context. The contribution was 18 made as part of what is being called the Natural 19 Historic Tax Assessment Program. The program and 20 Section 170 is limited to properties that are already 21 protected. So the Respondent's argument that all 22 donations of faeasements in landmark districts have 23 no conservation purpose would be at odds with the 24 statutory scheme of limiting contributions to only 25 properties that are already in protected districts.

17 1 I mean, essentially the government's 16 2 argument is that Congress enacted the biggest bait- 3 and-switch scheme for conservation easements. There 4 will be witnesses from the Landmark Preservation 5 Commission and witnesses from the Trust for 6 Architectural Easement who will testify that both 7 organizations are there to protect historic 8 neighborhoods and historic properties, that they both 9 serve a different function so that the deed, which is 10 a private agreement, as opposed to designation as a 11 landmark which is a public process, are not the same. 12 So that the deed itself serves a conservation 13 purpose. That's going to be the first issue. 14 One, does the deed meet the threshold. 15 Once we get the contribution made with the deed, the 16 second question will be did the taxpayers adequately 17 substantiate their deduction. The code requires the 18 taxpayers to substantiate their deduction by 19 providing a qualified appraisal. The parties have 20 stipulated that Eric Haims, the preparer of the 21 qualified appraisal, is a qualified appraiser. So 22 the issue isn't whether or not they selected the 23 right person to do the appraisal. Mr. Haims is a 24 qualified appraiser. 25 The issue, therefore, for the Court is,

18 1 one, did Mr. Haims' work product represent the 17 2 qualified appraisal; or, two, if it didn't, does the 3 reasonable cause exception to the qualified appraisal 4 rules excuse any of Mr. Haims' noncompliance. 5 And again, context, common sense. This is 6 one of the few areas where our voluntary self- 7 assessment system requires a taxpayer to hire someone 8 to prepare a portion of their return. Most of us are 9 free to prepare our own returns and every line on 10 that return. And there's no requirement that we hire 11 an accountant. But here, in the code, you are 12 required to hire a qualified appraiser to prepare the 13 qualified appraisal. Once the taxpayer hires the 14 expert, it's not for the expert to second-guess 15 whether or not the document prepared by the qualified 16 appraiser, specifically for the tax return, 17 constitutes a qualified appraisal. Here we will 18 demonstrate that Mr. Haims is a qualified appraiser. 19 That in addition to hiring Mr. Haims, the taxpayer 20 gave the appraisal to his return preparer, asked him 21 to research whether or not it was a qualified 22 appraisal. 23 The return preparer will testify it was, 24 that he advised the taxpayer that it was. 25 So either Mr. Haims' part is a qualified

19 1 appraisal, or the reasonable cause exception in excuses compliance with the qualified appraisal 3 rules. Once we get past conservation purpose and 4 past substantiating the deduction with a qualified 5 appraisal, we turn to what is probably the only real 6 hotly contested issue in all of these easement cases. 7 And that's how do you value a conservation easement. 8 Now, this case is original, I believe the 9 first of the cases that will be litigated in the 10 post-2006 envelope easement era. Prior to 2006 the 11 code allowed faonly easements. The easement here in 12 this case is a post-2006 easement which is required 13 to be a full envelope easement. A full envelope 14 easement requires an easement holding organization to 15 be able to prevent changes to any of the facades and 16 the roof of the property. That's why they use the 17 term envelope. 18 So the easement holding organization, a co- 19 owner of the property because an easement is an 20 interest in the property, has the absolute right to 21 deny the owner the opportunity to expand or otherwise 22 change the property or to condition changes on 23 satisfying the conditions made by the trust. 24 Now, this is where I say common sense and 25 contents. If we have two identical pieces of

20 1 property and we know their value is the same and then 19 2 we encumber one of the properties with a conservation 3 easement where the owner of the property needs to go 4 to someone else to get approval to build, the second 5 property, the encumbered property, where common sense 6 tells you sell at a discount to the unencumbered 7 property. The same applies to properties encumbered 8 by conservation easements. 9 The conservation easement prevents you from 10 making your smaller house into a bigger house. The 11 experts are all going to tell you the ability to make 12 a house bigger -- and bigger houses were more 13 valuable in New York City during these years. So 14 this easement, if Your Honor interprets it as we do, 15 will prevent the owners from doing that. 16 So now it's a question of not whether or 17 not the easement reduces the value or restricts the 18 property owner's value, but how do we measure it. 19 How to put it into context. And for that you're 20 going to hear experts battle it out. And what I ask 21 you to think about when you're listening to the 22 experts is they're all making subjective adjustments 23 and they're all using -- well, at least the 24 government's experts, use properties that are much, 25 much bigger and more valuable than the taxpayers'

21 1 property as the comparatives. So their margin of 20 2 error from their subjective adjustments is enough to 3 mask the value of the easement that's already been 4 claimed. 5 So when we listen to the experts, Your 6 Honor, I would ask you to look at common sense, look 7 at their adjustments and just look at their numbers 8 and their conclusions. They do not make sense. The 9 easement has to have some reduction in the value of 10 the property. 11 Finally, if the Court finds that the 12 easement doesn't have value, we turn to penalties. 13 And this is again -- this case is a first impression 14 on this penalty and whether or not there can be 15 almost a strict liability penalty. 16 Again, this area of the law is absolutely 17 unique in the code. You and I can prepare our own 18 tax returns. We don't have to go anywhere else. We 19 can go to the code, we can study the rules, prepare 20 our returns. But when you make a charitable 21 contribution donation, you have to go out and hire a 22 qualified appraiser. 23 In this case, the evidence is going to 24 establish that the taxpayers hired a very well-known, 25 reputable appraiser to prepare what he represented to

22 1 them was a qualified appraisal. The taxpayers took 21 2 the appraisal to their return preparer, and the 3 return preparer will testify that he opined it's a 4 qualified appraisal. To the extent that the Court 5 finds that the taxpayers acted in good faith and were 6 reasonable and there was a reasonable cause and the 7 code provides that there are penalties for qualified 8 appraisers that misstate the value of the appraisals, 9 that the Court should excuse the Gorras from any 10 penalties if there is a mistake. 11 If there are no questions from the bench THE COURT: Thank you, Mr. Agostino. 13 MR. AGOSTINO: -- I defer to Mr. Caine. 14 MR. CAINE: Thank you, Your Honor. Marc 15 Caine for Respondent again. Mr. Agostino and I have 16 been down this road at least three times now. And 17 very simply stated from where Your Honor wanted to wanted the openings to be directed toward is the 19 remaining issues for trial. 20 Conservation purpose -- and this is in no 21 particular order, but conservation purpose, 22 perpetuity, qualified appraisal, valuation, and 23 penalty. Five issues which could be presented rather 24 quickly to Your Honor. 25 First, conservation purpose. And let me

23 1 just start by saying, this is not an attack on global 22 2 easements everywhere and every type. This is the 3 IRS's questioning of the terminology of this 4 easement, this particular easement and what this 5 particular easement does or does not do with regard 6 to this particular property. This is not an assault 7 on conservation everywhere. But I can tell you that 8 some rallies all across the country for conservation 9 purpose, and this particularly is not an attack, when 10 you look at conservation purpose and you look at what 11 the restrictions already in existence are as compared 12 to the unique restrictions that this taxpayer put on 13 his property, or their property, and whether there is 14 any meaningful difference, however you want to term 15 it, slightly less rigorous, slightly more rigorous; 16 but the question is does this easement do anything 17 more than what's already in place. And if it 18 doesn't, and there's no real way to measure whether 19 it does or doesn't, the easement in this case would 20 serve no purpose. And that could be accomplished by 21 looking at the easement itself, which is 4-J, as 22 compared to local law in New York City for this 23 historic district. 24 The next question is perpetuity. Whether 25 this document was in perpetuity in the year that the

24 1 deduction was claimed. The deduction in this case 23 2 was claimed in It was a $605,000 deduction. 3 However, the easement, the conservation deed of 4 easement was not recorded until So there's a 5 disconnect between perpetuity, which is a requirement 6 of 170 in order to get a deduction, and the year that 7 the deduction was claimed on the tax return. 8 Next is qualified appraisal and whether the 9 Haims report or the document we discussed earlier, 8-10 J, satisfies the regulatory and statutory 11 requirements under Petitioner's point of view is Your Honor 13 can just read the report yourself and come to that 14 determination. But with regard to the specific 15 effect in this report is whether it was done pursuant 16 to the uniform appraisal standard, otherwise known as 17 USAP. For that, Your Honor, there's an expert who 18 will be offered into evidence to discuss why this 19 report would not satisfy USAP requirements. 20 Next is the question of valuation. I think 21 Petitioners' point was that the easement has value 22 because it took away a bundle of right and that it's 23 something Petitioners' counsel said common sense 24 would tell you. But common sense is not how the real 25 estate market works. If that was the case,

25 1 everyone's home would be worth a fortune and common 24 2 sense would tell you. But the real estate market 3 recognizes differences in common sense, different 4 rights; and they look to the market and the 5 marketplace to tell us the effect, not common sense. 6 So the experts will show you that although 7 there is the easement on the property, the market did 8 not recognize that the easement has any diminution in 9 value. And to add to that, there's two recent Tax 10 Court cases, the Dunlap case and the Evans case, or 11 TC memo opinions, in which the judge was faced with 12 the question of whether there is value or not. And 13 based on what the Petitioners offered into evidence 14 through expert testimony, the judge was not persuaded 15 that there was any value because the judge rejected 16 the expert reports. There is precedence for the fact 17 that you can't prove that these things have value, 18 otherwise the Dunlap and the Evans' opinion would 19 come out differently. 20 The other thing I wanted to touch on with 21 valuation is the Petitioners claimed a $605, deduction, that they're asking the taxpayers of this 23 entire country to pay for. But then for trial, they 24 walk in with a deduction amount -- or a value amount 25 of $465,000. That's a 23 percent less value than

26 1 Petitioners' expert. So in other words, the 25 2 Petitioners' expert is saying that Eric Haims 3 overvalued this by 23 percent. 4 So after we go through the legal issues and 5 the value issues, we come down to penalty. And 6 Petitioners' counsel is correct that this is probably 7 one of the first cases, at least in this area, that 8 deals with post act penalties under 6662(h) for a 9 conservation easement. 10 And what Petitioner is asking is that 11 although the law imposes a strict liability penalty 12 on gross valuation misstatements, the Petitioner is 13 actually asking that this Court ignore the law and 14 waive any penalties if gross mis-valuation applies. 15 If gross mis-valuation doesn't apply, there is a 16 clause that says there's substantial -- a substantial 17 mis-valuation clause. And what Petitioners point out 18 is that they went to an appraiser. They got an 19 appraisal. The return preparer said fine and put it 20 on their tax return and that's enough. 21 But we know that not to be true. The other 22 day this Court issued a case in White House Hotel 23 which is a remand after the 5th Circuit and Judge 24 Halpern looked to the duty to investigate. What did 25 this taxpayer do to investigate the value that was

27 1 claimed on the tax return and the values that were 26 2 put on to the appraisal? 3 And what we see is Eric Haims at the time 4 of the deduction attributed of $5.5 million value to 5 their property and said that the easement is worth a 6 percent of that, meaning the higher the value, the 7 higher the ultimate deduction will be if the 8 deduction is based on a percent of that value. 9 But for some reason, the Gorras didn't say 10 anything or didn't question when they knew they had a 11 contract to sell their house at that time for $ million. So the Haims' number comes in $300,000 more 13 than what their contract -- then the outstanding 14 contract on their house. And they're going to say 15 they had no duty to investigate or question Mr. Haims 16 and we disagree. And that's all for Respondent, Your 17 Honor. 18 THE COURT: Thank you. 19 MR. AGOSTINO: May we call my first 20 witness, Your Honor? 21 THE COURT: Yes, Mr. Agostino. 22 MR. AGOSTINO: A matter of housekeeping, do 23 we want to exclude all of the witnesses? 24 MR. CAINE: Yes, Your Honor, except the 25 experts.

28 1 MR. AGOSTINO: Except for the expert 27 2 witnesses and Petitioners, the parties would jointly 3 move to exclude all the witnesses from the courtroom. 4 MR. CAINE: Yes, Your Honor. 5 THE COURT: Thank you. 6 (The witnesses were sequestered.) 7 MR. AGOSTINO: The witnesses have been 8 excused, Your Honor. I would ask the Court's 9 permission to call our first witness, and that first 10 witness would be John Weiss. 11 THE COURT: At this time I'll ask the Trial 12 Clerk to swear the witness in. Whereupon, 13 JOHN WEISS, having been first duly sworn, 14 was called as a witness herein, was examined and 15 testified as follows: 16 THE CLERK: You may be seated. Please 17 state your name and address for the record. 18 THE WITNESS: John Weiss, One Centre 19 Street, New York, New York DIRECT EXAMINATION 21 BY MR. AGOSTINO: 22 Q Good morning, Mr. Weiss? 23 A Good morning. 24 Q Mr. Weiss, are you currently employed? 25 A Yes, I am.

29 1 Q And who are you employed by? 28 2 A The New York City Landmarks Preservation 3 Commission. 4 Q And do you have a title? 5 A Yes. I'm the deputy counsel. 6 Q And how long have you been employed by the 7 Landmarks Preservation Commission? 8 A Eleven years. 9 Q If I use the acronym LPC, would you 10 understand that to be the Landmarks Preservation 11 Commission? 12 A Yes. 13 Q Thank you. Now, what are your 14 responsibilities with the LPC? 15 A I oversee many of our regulatory matters or 16 enforcement issues, in general, legal issues such as 17 contracts and personnel matters. 18 Q Now, can you tell me a little bit about 19 your education? 20 A Yes. I have an undergraduate degree from 21 Hampshire College in Massachusetts and a JD from 22 Columbia University Law School. 23 Q And are you admitted to practice as an 24 attorney? 25 A Yes.

30 1 Q Now, what exactly is the LPC? 29 2 A The LPC is the New York City agency that is 3 responsible for identifying and regulating and 4 protecting historic and cultural landmarks in New 5 York City. 6 Q Would you describe the LPC as a government 7 agency or a private -- a private entity? 8 A It's a government agency. 9 Q It's a government agency, okay. Does the 10 LPC have a mission? 11 A Yes, we do. 12 Q Okay, and the mission of the LPC? 13 A That is to identify and locate historic and 14 cultural structures of significance to New York City 15 and the nation and then to designate them, if 16 appropriate, as landmarks. There are two different 17 types of landmarks. There are historic districts and 18 individual landmarks. And then regulate them and 19 protect them. 20 Q What's the difference between an individual 21 landmark and a historic district? 22 A Historic district is usually a neighborhood 23 that has a sense of place, such as Soho or Greenwich 24 Village in New York, in Manhattan, or the Boone 25 Heights historic district. The individual landmarks

31 1 tend to be individual structures such as the Brooklyn 30 2 Bridge, City Hall, or Empire State Building that have 3 certain criteria that meet our standards. 4 Q And how do you regulate historic districts? 5 A We require permits from the owners for 6 almost any type of change to these structures in 7 historic districts except for ordinary maintenance. 8 Q And could you give me an order of 9 magnitude? How many employees are there at the LPC? 10 A Sixty-five. 11 Q Okay. And how many of them are in 12 research? How many are in preservation? 13 Enforcement? 14 A We have about 17 or 18 staff members in the 15 research department. They're the people who identify 16 the landmarks and research them prior to designation. 17 We have about 25 staff members, including 18 supervisors, in the preservation department. We have 19 a number of administrative staff and executive staff, 20 and we have an enforcement department with four staff 21 members. 22 Q Okay. 23 A But it actually varies between three and 24 four staff members. 25 Q So let's focus, if we can, first on

32 1 enforcement How many structures does the LPC cover? 3 A Approximately 29,000 in all five boroughs 4 of New York City. 5 Q Okay. And has that number been increasing 6 or decreasing over time? 7 A Increasing. 8 Q And you said at times you have three to 9 four people involved in enforcement for those -- for 10 the 29,000 structures? 11 A Yes. 12 Q Now, are you familiar with the landmark 13 district known as Carnegie Hill? 14 A Yes, I am. 15 Q Are any of the three to four people 16 specifically dedicated to Carnegie Hill? 17 A No. That's not how we assign our staff. 18 We're more an enforcement department that responds to 19 complaints or reports of work without permits. 20 Q How would you contrast that to a monitoring 21 function? The LPC has an enforcement function? Does 22 the LPC have a monitoring function? 23 A Well, yes, I mean, I consider -- our 24 enforcement department, actually our entire agency, 25 is monitoring what is happening. Do we go out and

33 1 patrol the streets? No, we don't do that. But when 32 2 a neighbor or an elected official or one of the many 3 preservation organizations calls us or sends us an 4 and says someone has changed the windows on the 5 building at 112th Street, we will log that into our 6 complaint log; and one of our enforcement staff will 7 go out and investigate the complaint. 8 Q So in other words, you're more reactive 9 than proactive? 10 A That's correct, yes. 11 Q And would it be fair to say that you don't 12 have regularly scheduled visits to properties in 13 historic districts? 14 A That's correct. 15 Q You say you react to reports. How many 16 reports do you get a year of violations on your 17 structures? 18 A Between 800 and 1,000 a year. 19 Q That's for the 29,000 structures that you 20 cover? 21 A Yes. 22 Q Are you familiar with the term row house? 23 A Yes, I am. 24 Q How often, if ever, do you do inspections 25 of the rear of row houses?

34 1 A Well, we receive complaints about work at 33 2 the rear of row houses; and when we do, we then 3 investigate. 4 Q But again, there's no scheduled monitoring 5 of the rear of row houses? 6 A That's correct. 7 Q Would you have the same answer when it 8 talks about roofs of row houses? 9 A That's correct. 10 Q You generally don't walk the roofs of the 11 row houses? 12 A No. If we got a complaint, I personally 13 would go up on a roof of a neighboring building to 14 see what's happening. But it's all in response to 15 complaints. 16 Q Okay. And do you have a file for 117 East 17 91st Street? 18 A You mean does the agency have a file or do 19 I personally? 20 Q Yes. 21 A Yes, we do. 22 Q Okay. How many inspections of that 23 property have you had? 24 A We received -- I can't say how many 25 inspections have been made, but I do know they have

35 1 never filed for a permit from Landmarks as far as I 34 2 can see; and they have not received any violations 3 from Landmarks. 4 Q Okay. Now, are some properties required to 5 be in sound first-class condition? 6 A Yes. 7 Q First, can you tell us what that term 8 means? 9 A Yes. Well, let me back up a little bit. 10 All landmarks, whether they are an individual 11 landmark or in a historic district, need to be kept 12 in a condition of good repair. That's our basic 13 standard, and that's in the landmarks law. There's a 14 higher standard for a small group of buildings, sound 15 first-class condition standard, when the property 16 owner is seeking a special permit or some other 17 dispensation from the zoning resolution. There are 18 about 150 of those buildings in New York City. They 19 need to go through a public hearing, and there are 20 certain requirements for those buildings that obtain 21 a special permit from the commission, and one of them 22 is to be maintained in sound first-class condition in 23 perpetuity. 24 Q Now, the requirements of the sound first- 25 class condition would be memorialized in an agreement

36 1 between the building owner and the LPC? 35 2 A Yes. There's actually a restrictive 3 declaration that the building owner entered into and 4 is filed against the property. 5 Q I think you indicated a number of 100, 6 maybe 100 and -- 7 A About 150 buildings. 8 Q buildings. And that's of the 29,000 9 structures? 10 A Yes. 11 Q So about 150 of the 29,000 structures have 12 this private deed restriction? 13 A I wouldn't call it private, but it's a 14 legal obligation, yes. And again, that's in exchange 15 for some kind of zoning waiver. 16 Q So would you say -- would you agree or 17 disagree that the majority of your structures do not 18 have this sound first-class condition agreement? 19 A I agree with that statement, yes. 20 Q And therefore, there would be nothing in 21 their deed or their title that required them to keep 22 the properties in sound first-class condition? 23 A That's correct. 24 Q Now, have you checked the property at East 91st Street? Does it have such an agreement to

37 1 keep the property in sound first-class condition? 36 2 A It does not. 3 MS. SAVIT: Objection, asked and answered. 4 THE COURT: Overruled. 5 BY MR. AGOSTINO: 6 Q Now, we've agreed that the majority of the 7 structures in landmark districts do not have anything 8 in the deed or the title that has restrictions. So A Well, I mean the landmark designation would 11 designate an individual landmark or historic district 12 that is recorded in the title. 13 Q So that would be for the landmark 14 structure? 15 A Yes. 16 Q With respect to a district, do all -- is 17 there anything that memorializes the landmarks rules 18 in their chain of title? 19 A Yes. There should be a filing saying this 20 is part of a historic district. 21 Q And then be subject to the rules of the 22 LPC? 23 A Yes. 24 Q And how are those rules made? 25 A How are they made?

38 1 Q Yes A Well, some are through the administrative 3 code of the city of New York, and others are the 4 rules of the city of New York. They're two different 5 processes. One is through the City Council, the 6 administrative code; and the rules would go through 7 what's called the CAPA process for promulgating 8 rules. 9 Q And do those rules change at any regular 10 interim? 11 A Yes. They are modified periodically. I 12 mean, we just modified them earlier this year, in 13 fact. 14 Q And that would change -- changing the rule 15 would change the review process? 16 A Possibly, yes. 17 Q Now, let's look at the review process. If 18 an owner of a structure in the landmark district 19 wanted to make a significant change to their 20 property, what would they need to do? 21 A It depends on the nature of the change. 22 But they would need to file an application with the 23 Landmarks Preservation Commission. And you need to 24 understand there are two different types of 25 approvals. We have a staff level approval and 95

39 38 1 percent of the 10,000 applications that come in every 2 year are approved by the staff. And those approvals 3 meet certain criteria in our rules. They spell out 4 what the criteria are, for instance, for new windows 5 or for a rooftop addition or a rear yard addition. 6 If those criteria are met, the staff would issue a 7 staff level permit. If those criteria are not met, 8 then the applicant can file for what's called a 9 certificate of appropriateness; and about 5 percent 10 of our applications end up requiring that. And that 11 requires a public hearing before the local community 12 board and then the board of commissioners, the 13 Landmark Preservation Commissioners at a public 14 hearing. 15 Q Is there a process if an application is 16 denied? 17 A We usually -- well, yes. I mean, it is you can always bring an Article 78 proceeding, but 19 there's no appeal for a denial. What happens much 20 more often is an applicant will, let's say, file for 21 a large rooftop addition. It's highly visible. It 22 doesn't meet the staff rules. They go before the 23 commissioners. The commissioners say it's an 24 inappropriate highly visible rooftop addition. You 25 need to make it smaller and less visible, and the

40 39 1 applicant decides not to do that; and the application 2 then just sort of dies and ends up being withdrawn. 3 So it's not necessarily denied. And I guess you 4 could say that particular proposal might be denied, 5 but the applicant can always come back with a revised 6 proposal that is responsive to the commissioners' 7 concerns. 8 Q Now, you're familiar with, generally, 9 conservation easements? 10 A Yes. 11 Q And what is your understanding of what a 12 conservation easement is? 13 A Well, I think as the name implies, it's an 14 easement, a legal restriction, intended to conserve 15 some property, whether it's a building or land. 16 Q Can you explain what you would require of a 17 property that was encumbered by a conservation 18 easement? 19 A Yes. We normally require for all 20 applications, the application has to be signed by the 21 owner of the property. And it might be an officer of 22 the co-op or if it's a cooperative or it's the 23 homeowner, the actual owner of the home. When there 24 is an easement, we also require the easement holder 25 to sign the application or submit documentation that

41 1 the holder has reviewed the proposal and agrees with 40 2 what is being submitted. 3 Q So would it be fair to say, if the easement 4 holder refused to sign the application, the 5 application could not be approved? 6 A That's correct. You would not process that 7 application. 8 Q So essentially, would you agree that an 9 easement holder could veto any change before it got 10 to you? 11 MS. SAVIT: Objection. Leading. 12 THE WITNESS: I'm not sure I would say 13 veto, but, yes. I mean it MS. SAVIT: My objection hasn't been ruled 15 upon. 16 THE WITNESS: I'm sorry. 17 THE COURT: Would you please rephrase the 18 question. 19 BY MR. AGOSTINO: 20 Q What effect, if any, would the easement 21 holder's refusal to sign the application have on the 22 agency? 23 A Well, if we knew there was an easement and unfortunately we don't always know whether 25 there's an easement or not -- but if we knew there

42 1 was an easement, I would direct the staff person not 41 2 to proceed with that application until the easement 3 holder indicates that they are in agreement with the 4 proposal. 5 Q Now, again, do you have any -- you have 6 some familiarity with the conservation easements held 7 by the Trust for Architectural Easement in New York 8 City? 9 A Some, yes. 10 Q Are you aware if they have a review process 11 of changes to easement encumbered properties? 12 A I believe so, yes. 13 Q Have there ever been occasions where the 14 LPC has granted or authorized a change but the LPC the LPC has authorized a change but the Trust for 16 Architectural Easement has denied permission for the 17 change? 18 A I think it's gone both ways actually. We 19 had one case where -- I might have the order wrong, 20 but we approved some change to windows into a fa We 21 then found out that there was an easement on it, so at the time it was the National Architectural 23 Trust, we contacted them. They said they did not 24 approve it and they instructed the applicant to make 25 some changes. And then when it came back to us, the

43 42 1 Landmarks Commission did not approve what the NAT had 2 told the applicant to do. So we ended up actually 3 modifying that proposal several times. 4 Q And would you agree that that's because the 5 standards are not exactly the same? 6 MS. SAVIT: Objection, that's leading. 7 BY MR. AGOSTINO: 8 Q What would cause the difference in your 9 review versus that of the Trust for Architectural 10 Easements? 11 A You really need to ask the trust. But my 12 understanding is the trust tends to follow the 13 Secretary of Interior's standards which the 14 commission does not. 15 Q Now, have you ever heard of the term FAR? 16 A Yes. Floor area ratio. 17 Q Now, what is FAR when it comes to -- how 18 does FAR affect your decision to grant or deny a 19 change to a structure? 20 A It's actually, in many cases, irrelevant. 21 Our only concern is if you're adding on to a 22 building, a rooftop addition, or rear yard addition, 23 we want to make sure you meet the zoning resolution. 24 And so that would require that you meet the setback 25 requirements, the various rear yard requirements, and

44 1 you have enough floor area ratio. So you need to 43 2 meet that minimum threshold to have the application 3 comply with the zoning resolution. 4 Often -- we hear this all the time -- 5 applicants will come in and say I have 10,000 square 6 feet of floor area ratio, and we'll say -- and their 7 application is only to use 2000 square feet; isn't 8 that wonderful? And we say, quite frankly, we don't 9 really care. Because the commission has its 10 standards of appropriateness or the standards in the 11 rules that the staff uses. And often many owners 12 leave a lot of floor area ratio on the table because 13 the building code will allow something and the zoning 14 resolution will allow something, but the Landmarks 15 Commission does not. 16 Q By contrast, if there is excess, if a 17 building is already built up to its FAR, how does 18 that affect your decision-making process? 19 A Well, sometimes quite frankly building 20 owners will remove part of the building to provide 21 additional FAR. So they'll cut in the building and 22 then apply for a rooftop addition; and if they have 23 that FAR available and it meets our requirements, we 24 will approve a rooftop addition. But the applicant 25 obviously has to meet the zoning resolution

45 1 requirements for FAR and other criteria Q So FAR -- is it fair to say that FAR could 3 be important to your decision-making process? 4 A Yes. I mean, it's a threshold requirement 5 that you have enough FAR to build what you're 6 proposing. 7 Q Now, you indicated that for -- there are 8 hearings that sometimes occur when you grant -- or 9 before you make a decision on a change. Can you 10 expand on that? 11 A Yes. Pretty much every Tuesday we're 12 scheduled to meet. We have 11 commissioners 13 appointed by the mayor. They are architects. By 14 statute they need to represent each of the five 15 boroughs. So we have architects. We have real 16 estate agents. We have landscape architects and 17 others on the commission. And they will review the 18 proposals by the applicants pretty much on an 19 everyday basis. 20 Q Now, I think you testified earlier, you're 21 familiar with the Trust for Architectural Easements? 22 A Yes. 23 Q And what is your understanding of what the 24 Trust for Architectural Easements does? 25 A It's a nonprofit entity based in D.C. I

46 1 think they have an office in New York. And they hold 45 2 those easements on historic properties around the 3 country, and then they monitor those properties on an 4 annual basis. 5 Q Okay. Is there any coordination between 6 the LPC and the Trust for Architectural Easement -- 7 MS. SAVIT: Objection, asked and answered. 8 Q -- in the conservation of properties? 9 THE COURT: I'm going to allow the 10 question. 11 THE WITNESS: Somewhat. Yeah, I mean, I 12 will periodically call up the trust in D.C. and ask 13 about a property. I'm unaware of the trust actually 14 reporting violations to us or directing applicants to 15 come to us to file for a permit. I'm not sure 16 whether they do that. 17 MR. AGOSTINO: Your Honor, may I approach 18 the witness? May I approached the witness to show 19 him an exhibit? 20 THE COURT: Yes, you may. 21 MR. AGOSTINO: If it assists Your Honor, I 22 have another copy of exactly what the witness has. 23 It's just the exhibits in the stipulation that I'm 24 going to cover with the witness. But if you would 25 like to follow along and use your own stip- --

47 1 THE COURT: I'll take the copy, thank you MR. AGOSTINO: Thank you, Your Honor. 3 BY MR. AGOSTINO: 4 Q Mr. Weiss, have you seen this document 5 before? 6 A If you're referring to the easement, yes, I 7 have. 8 Q Okay. Now, I'm going to represent to you 9 that the parties have stipulated this as the easement 10 on the property in question. Now, at first glance THE COURT: Mr. Agostino, just so the 12 record can reflect, can you cite which exhibit MR. AGOSTINO: Oh, I'm sorry. 14 THE COURT: For the record, thank you MR. AGOSTINO: 4-J. 17 BY MR. AGOSTINO: 18 Q Now, in the first instance, who are the 19 parties to the conservation easement? 20 A It's the National Architectural Trust and 21 the -- Gorra, George Gorra. 22 Q Okay. So that the LPC wouldn't be a party 23 to the easement document? 24 A That's correct. 25 Q And the easement would be a private

48 47 1 agreement between the Gorras and the easement holding 2 organization? 3 MS. SAVIT: Objection. The document speaks 4 for itself. I don't know why Mr. Weiss is testifying 5 as to this document. There's no relationship and no 6 knowledge. 7 MR. AGOSTINO: Only, Your Honor, to 8 highlight the differences between the LPC and the 9 document or the trust as we discussed -- all of us 10 discussed at opening. 11 MS. SAVIT: The Court can do this on its 12 own. We don't need Mr. Weiss to do that for us. 13 MR. AGOSTINO: Your Honor, we would proffer 14 that Mr. Weiss' experience at the LPC would help 15 guide what are differences between what his 16 organization does MS. SAVIT: There are no differences and 18 it's not in evidence. Respondent's position is that 19 there is no -- this document doesn't do anything 20 different from the THE COURT: Overruled. 22 MS. SAVIT: And he's testifying again. 23 MR. AGOSTINO: I'll ask the witnesses. 24 BY MR. AGOSTINO: 25 Q Mr. Weiss, are there differences between