IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT NO

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1 Case: Document: Page: 1 Date Filed: 06/12/2013 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT NO WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR HOLDINGS-NEW ORLEANS, LTD., Tax Matters Partner, VERSUS Petitioners - Appellants, COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee. ON APPEAL FROM THE UNITED STATES TAX COURT DOCKET NO APPELLANTS ORIGINAL BRIEF Gary J. Elkins (La. Bar No. 5316) Yvonne Chalker (La. Bar No ) Thomas M. Beh (La. Bar No ) ELKINS, P.L.C. 201 St. Charles Avenue, Suite 4400 New Orleans, LA Phone: (504) Fax: (504) Attorneys for Petitioners/Appellants 1 of 111

2 Case: Document: Page: 2 Date Filed: 06/12/2013 NO WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR HOLDINGS- NEW ORLEANS, LTD., Tax Matters Partner, v. Petitioners - Appellants, COMMISSIONER OF INTERNAL REVENUE Respondent - Appellee. CERTIFICATE OF INTERESTED PERSONS The undersigned counsel of record certifies that the following listed persons and entities as described in the fourth sentence of Fifth Circuit Rule have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal. 1. Whitehouse Hotel Limited Partnership, Petitioner-Appellant; 2. QHR Holdings-New Orleans, Ltd., Petitioner-Appellant; 3. Commissioner of Internal Revenue, Respondent-Appellee; 4. Gary J. Elkins, Yvonne Chalker, and Thomas M. Beh of Elkins, P.L.C., Counsel for Petitioners-Appellants; 5. Donald L. Korb, Thomas R. Thomas, Ellen T. Friberg, Robert W. West, III, and Linda J. Wise, Internal Revenue Service, Trial Counsel for Respondent-Appellee; and ii 2 of 111

3 Case: Document: Page: 3 Date Filed: 06/12/ Bethany B. Hauser, Clarissa C. Potter, Robert. R. Di Trolio, and Nathan J. Hochman, U.S. Department of Justice, Tax Division, Appellate Section, Appeal Counsel for Respondent-Appellee. /s/ Yvonne Chalker YVONNE CHALKER iii 3 of 111

4 Case: Document: Page: 4 Date Filed: 06/12/2013 STATEMENT REGARDING ORAL ARGUMENT Petitioners-Appellants, Whitehouse Hotel Limited Partnership and QHR Holdings-New Orleans, Ltd., Tax Matters Partner ( Whitehouse ), 1 respectfully request oral argument in this case. This is the second time that this case, which involves important issues relating to the valuation, for federal income tax purposes, of a conservation easement in the form of a facade donation (the Easement ), has been before this Court. The first time that this case was decided by this Court, the Tax Court s decision was vacated and remanded, with a very clear and specific mandate to the Tax Court. See Whitehouse Hotel Limited Partnership, QHR Holdings-New Orleans, Ltd., Tax Matters Partner v. Commissioner of Internal Revenue, 615 F.3d 321 (5 th Cir. 2010) (hereinafter, Whitehouse I ). 2 Rather than complying with this Court s clear and unambiguous mandate and rendering an opinion guided by this Court s reasoning in Whitehouse I, the Tax Court blatantly ignored this Court s findings and embarked upon a quest for daylight in this Court s mandate and instructions that would allow it to render exactly the same 1 In this Court s original decision, it referred to Petitioner-Appellant as, Whitehouse, and to Respondent-Appellee as, Commissioner. Accordingly, those labels will be maintained in this Brief. 2 The Tax Court s original opinion (Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue, 131 T.C. 112 (2008)) will be referred to herein as the Original Opinion, and its opinion on remand (139 T.C. No. 13, 2012 WL ) will be referred to as the Remand Opinion. iv 4 of 111

5 Case: Document: Page: 5 Date Filed: 06/12/2013 opinion, for exactly the same reasons stated in its Original Opinion which this Court reversed in Whitehouse I. The Tax Court committed the same, numerous, reversible errors on remand that it did on its initial consideration. Whitehouse submits that if the Tax Court s opinion is left to stand, it will establish a dangerous precedent for lower courts to simply ignore decisions of this Court with which they disagree and will result in a greater workload for this and the other appellate courts. The Tax Court s decision on remand again seriously undermines valuation methodology, not only in Tax Court, but in all federal courts dealing with issues of valuation of conservation and historic preservation easements. The Tax Court also again misinterpreted important issues of Louisiana law bearing on the valuation issues in this case, even though those issues had been conclusively determined by this Court, and the Tax Court was not free to revisit them. As a result of the foregoing, Whitehouse suggests that oral argument will assist this Court by further illuminating these important issues. v 5 of 111

6 Case: Document: Page: 6 Date Filed: 06/12/2013 TABLE OF CONTENTS CERTIFICATE OF INTERESTED PERSONS ii STATEMENT REGARDING ORAL ARGUMENT iv TABLE OF CONTENTS vi TABLE OF AUTHORITIES ix STATEMENT OF JURISDICTION STATEMENT OF THE ISSUES ON APPEAL TAX COURT S FAILURE TO FOLLOW THE MANDATE STATEMENT OF THE CASE A. Course of Proceedings and Disposition in the Court Below B. Statement of Facts SUMMARY OF THE ARGUMENT STANDARD OF REVIEW ARGUMENT A. IN LIGHT OF THIS COURT S RULING IN WHITEHOUSE I, THE TAX COURT ERRED BY FINDING THAT THE EASEMENT DID NOT AFFECT DEVELOPMENT RIGHTS OVER THE KRESS BUILDING vi 6 of 111

7 Case: Document: Page: 7 Date Filed: 06/12/2013 B. THE TAX COURT FAILED TO COMPLY WITH THIS COURT S MANDATE TO MAKE A DETERMINATION OF HIGHEST AND BEST USE BEFORE AND AFTER AND THIS COURT SHOULD MAKE ITS OWN DETERMINATION C. VALUATION The Tax Court Erred in Again Rejecting the Cost Approach a. The Cost Approach is a Reliable Method for Valuing the Easement in this Case b. Roddewig Properly Applied the Cost Approach i. Before Easement Value ii. After Easement Value The Tax Court Erred in Again Rejecting the Income Approach a. The Income Approach is a Reliable and Appropriate Method for Valuing the Easement in this Case b. Roddewig s Methodology and Assumptions Under the Income (DCF) Approach are Not Speculative c. Roddewig s Valuation Under the Income (DCF) Approach i. Before Easement Value ii. After Easement Value d. Roddewig s Reconciliation Under the Income (DCF) Approach vii 7 of 111

8 Case: Document: Page: 8 Date Filed: 06/12/ The Tax Court Erred in Valuing the Property Under Comparable Sales Approach a. Roddewig s Use of Non-Local Comparables is Supported by Generally Accepted Appraisal Methodology b. Property Value Based on Value Per Hotel Room is a Proper Unit of Comparison c. Roddewig s Before Valuation Under the Sales Approach Roddewig s Reconciliation of the Three Approaches This Court Should Undertake its Own Valuation D. WHITEHOUSE QUALIFIES FOR THE GOOD FAITH DEFENSE TO THE ASSESSMENT OF PENALTIES CONCLUSION CERTIFICATE OF SERVICE CERTIFICATE OF COMPLIANCE viii 8 of 111

9 Case: Document: Page: 9 Date Filed: 06/12/2013 TABLE OF AUTHORITIES Statutes, Codes, Rules Federal: 26 U.S.C. 170(f)(3)(B)(iii) U.S.C , 85, U.S.C , U.S.C C.F.R , C.F.R A-14(b)(2) C.F.R A-14(d)(1)(iii) C.F.R A-14(d)(4)(ii) C.F.R A-14(g)(3) C.F.R A-14(h)(3)(i) n C.F.R A-14(h)(3)(ii) , 53, 54 Federal Rules of Appellate Procedure 4(b) Local Rule of U.S. Fifth Circuit Court of Appeals ii State: La. R.S. 9: Cases: Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue, 139 T.C. No. 13, 2012 WL iv n. 2, 6, 7, 8, 23, 25, 27, 30, 33, , 60, 73, 74, 89 Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue, 615 F.3d 321 (5 th Cir. 2010) iv, 2, 3, 4, 5, 6, 7, 9, 10, 13, 14, 16, 17, , 23, 24, 26, 28, 29, 30, 31, 32, 39, 43, 51, 52, 85, 88 Whitehouse Hotel Limited Partnership v. Comm r, 131 T.C. 112 (2008) vi n.2, 30, 33, 38, 74 ix 9 of 111

10 Case: Document: Page: 10 Date Filed: 06/12/2013 Adams v. United States, 218 F.3d 383 (5 th Cir. 2000) Boyd v. Driver, 2012 WL (5 th Cir. 2012) , 20, 22 n.36 Brown v. East Mississippi Power Association, 989 F.2d 858 (5 th Cir. 1993) Clemens v. Comm r, T.C. Memo (1992) n. 114, 59 Caracci v. Commissioner, 456 F.3d 444 (5 th Cir. 2006) Chase Manhattan Bank v. American National Bank, 93 F.3d 1064 (2 nd Cir. 2010) Crimi v. Comm r, T.C. Memo (2013) Crow Plymouth Hotel, LP v. Hennepin, 1990 Minn. Tax Lexis , 80 Demahy v. Schwarz Pharma, Incorporated, 702 F.3d 177 (5 th Cir. 2012).. 7 n.14, 19 Dorsey v. Commissioner, T.C. Memo (1990) n. 50, 57, 58, 92 Dunn v. Commissioner, 301 F.3d 339 (5 th Cir. 2002) Estate of Bonner v. United States, 281 F.3d 383 (5 th Cir. 2000) Estate of Giovacchini. v. Comm r, , 2013 WL (2013) , 88 Estate of Palmer v. Comm r, 839 F.3d 420 (8 th Cir. 1988) , 36 EWH 1979 Development Corp., L.P. v. Bridgewater Township, 9 N.J. Tax 582 (1988) , 80 General Universal Systems v. HAL, Inc., 500 F.3d 444 (5 th Cir. 2007). 7 n.14, 19, 20 Glenpointe Associates, et als. v. Township of Teaneck, 10 N.J. Tax 380 (N.J. Tax 1989),aff d, 12 N.J. Tax 118 (N.J. Super. Ct. 1990) x 10 of 111

11 Case: Document: Page: 11 Date Filed: 06/12/2013 Great Atlantic & Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 397 N.Y.S.2d 718, 366 N.E.2d 808 (N.Y. 1977) , 34, 77 Griffin v. Comm r, T.C. Memo (1989), aff d., 911 F.2d 1124 (5 th Cir. 1990) n. 50 Goat Island Realty Corp. v. Booth, 1991 R.I. Supr. LEXIS 86 (Super. Ct. R.I. 1991) Hilborn v. Comm r, 85 T.C. 677 (1985) n. 50, 50 n. 98, 57, 58 In re Stembridge, 394 F.3d 383 (5 th Cir. 2004) Klamath Strategic Investment Fund, LLC v. U.S., 472 F.Supp.2d Losch v. Comm r, T.C. Memo (1988) n. 114, 56, 65, 66, 67, 92 McNeilus Truck and Manufacturing, Inc. v. County of Dodge, 705 N.W.2d 410 (Minn. 2005) New York Guangdong Finance, Inc. v. Comm r, 588 F.3d 889 (5 th Cir. 2009) , 88 n. 209 Nikoladis v. Comm r T.C. Memo (1988) , 92 Olsen v. United States, 292 U.S. 246 (1934) n. 37 OMP et al, v. Security Pacific Business Finance, Inc., 716 F. Supp. 251 (N.E. Miss. 1989) , 81 Reynolds v. Coleman, 527 N.E.2d 897 (Ill. App. 1988) , 80 Schwab v. Comm r, T.C. Memo n. 55 Smith v. Comm r, T.C. Memo (2007) n. 209 Stanley Works and Subsidiaries v. Comm r, 87 T.C n. 38 xi 11 of 111

12 Case: Document: Page: 12 Date Filed: 06/12/2013 Stetson v. Howard D. Wolf & Assoc., 955 F.3d 847 (2 nd Cir. 1992) Symington v. Comm r, 87 T.C. 892 (1986) Trout Ranch v. Comm r, T.C. Memo (1992), aff d 944 F.3d. Appx. 944 (10 th Cir. 2012) , 60 United States v Acres of Land, 409 F.3d 139 (3 rd Cir. 2005) n. 104 United States v. Benning Housing, 276 F.3d 248 (5 th Cir. 1960) , 35 United States v. Carales-Villalta, 617 F.3d 342 (5 th Cir. 2010) United States v. Elizondo, 475 F.3d 692 (5 th Cir. 2007) , 20 United States v. Matthews, 312 F.3d 652 (5 th Cir. 2012) n. 14 Van Zelst v. Commissioner, 100 F.2d 1259 (7 th Cir. 1996) , 25, 31 Other Authorities: The Appraisal of Real Estate (12 th Ed) , 56, 60, 70, 111, 115 The Appraisal of Real Estate (13 th Ed) n. 41 The Dictionary of Real Estate Appraisal (4 th Ed. 2002) , 112 The Dictionary of Real Estate Appraisal (5 th Ed. 2008) Appraising Easements: Guidelines for Valuation of Land Conservation and Historic Preservation Easements (3 rd Ed. 1999) Hall and Benton, Hotel and Motel Valuation, Encyclopedia of Real Estate Appraising (3 rd Ed. 1978) n. 115 xii 12 of 111

13 Case: Document: Page: 13 Date Filed: 06/12/2013 USPAP Standards Rule , 55 Steven Rushmore and Rubin, The Valuation of Hotels and Motels for Assessment Purposes, The Appraisal Journal (April 1984) n. 115 Richard J. Roddewig and Jared Shales, MAI Preservation Easements Reconsidered: An Alternative Approach to Value, The Appraisal Journal, Vol. LII, Number 3, July Richard J. Roddewig, MAI, CRE, Appraising Conservation and Historic Preservation Easements, Appraisal Institute (2011) n. 30, 36, 40, 41 Stephen Rushmore, MAI and Erich Baum, Hotels & Motels: Valuations and Market Studies(The Appraisal Institute 2001) , 79, 80 xiii 13 of 111

14 Case: Document: Page: 14 Date Filed: 06/12/2013 STATEMENT OF JURISDICTION This Court s jurisdiction is invoked under 26 U.S.C as an appeal from a final judgment of the United States Tax Court. A Notice of Appeal 3 was timely filed on February 25, 2013, in accordance with Rule 4(b) of the Federal Rules of Appellate Procedure. 3 Rec., Vol. 1, Doc. 75 (Record Excerpt 8) of 111

15 Case: Document: Page: 15 Date Filed: 06/12/2013 STATEMENT OF THE ISSUES ON APPEAL The ultimate issue on appeal is the fair market value, for federal tax purposes, of Whitehouse s the donation of the Easement, as defined above. Related to the ultimate issue of valuation are the following issues: 1. Whether the Tax Court erred by relying upon the Commissioner s expert, and again utilizing his after Easement value, despite the fact that, in Whitehouse I, this Court found that he failed to comply with the applicable Treasury Regulations in making his valuation, and as a result, failed to account for the lost opportunity to construct 60 additional hotel rooms above the former Kress building and, further, that his conclusion of highest and best use was implausible and conjecture, and his conclusion that the Easement had a zero impact value was incredible. 2. Whether the Tax Court erred in disregarding and discrediting Whitehouse s expert, because he concluded that (i) the Easement affected the value of the former Kress building; (ii) the use of the cost and income approaches were appropriate valuation methodologies in this case; and (iii) it was appropriate in this case to use of out-of-town-comparables in the national market for similar properties, when Whitehouse s expert has been correct on all of those issues. 3. Whether the Tax Court erred in finding that the second highest and best use is controlling of 111

16 Case: Document: Page: 16 Date Filed: 06/12/ Whether the Tax Court erred in relying exclusively on the comparable sales valuation method, in the absence of an established market of after Easement comparable properties. 5. Whether the Tax Court erred by again concluding, contrary to this Court s ruling in Whitehouse I, that the Easement did not prevent the construction of additional hotel rooms above the contiguous commonly owned former Kress building. 6. Whether the Tax Court erred in again rejecting the cost and income approaches to value. 7. Whether the Tax Court erred in concluding that value of the contribution of the Easement was $1,857, Whether the Tax Court erred by ruling that Whitehouse is liable for gross understatement penalties. 9. Whether this Court should undertake its own valuation based on the evidence in the record of 111

17 Case: Document: Page: 17 Date Filed: 06/12/2013 TAX COURT S FAILURE TO FOLLOW THE MANDATE The valuation and penalty issues presented in this appeal are virtually identical to those presented in Whitehouse I. That is because, in a colossal waste of judicial resources, the Tax Court disregarded the mandate of this Court set out in Whitehouse I in nearly every respect and, as a result, merely perpetuated the same errors that led this Court to vacate and remand the Tax Court s Original Opinion. 4 In Whitehouse I, this Court ordered the Tax Court to revalue the easement at issue, assuming the following facts and legal conclusions: 1. [T]he wall of the Maison Blanche building that rises above the Kress building...is unambiguously included in the [E]asement s definition of the covered exterior surfaces of the Maison Blanche building Because of the [E]asement, Whitehouse could not build on top of the Kress building [T]he [E]asement prohibits any future owner of the Maison Blanche building from obscuring its wall adjacent to the Kress building and, therefore, 4 The only issues raised in Whitehouse I not raised in this appeal are the Daubert issues relative to the qualifications, testimony and report of the Commissioner s expert witness, Dunbar Argote, MAI ( Argote ) F.3d at 340. (Emphasis added). 6 Id. at 337. (Emphasis added) of 111

18 Case: Document: Page: 18 Date Filed: 06/12/2013 any successor who, like Whitehouse owned both the Maison Blanche and Kress buildings could not build on top of the Kress building [T]he condominium regime, established the day after conveyance of the easement, combined the Maison Blanche and Kress buildings into a single, indivisible unit of property [B]ecause, from the perspective of the hypothetical buyer, any future owner of the Kress building would also own the Maison Blanche building, that future owner would be precluded from constructing rooms that obscured the Maison Blanche building s facade. 9 Thus, the Tax Court was instructed to take into account the Easement s effect on the on the Kress building, including the lost opportunity to construct 60 additional hotel rooms above that building, 10 an element of value which neither the Tax Court nor Argote had considered in the first instance. In discharging its task, the Tax Court was instructed to identify a highest and best use of the property immediately before and 7 Id. (Emphasis added). 8 Id. at 337. (Italics in original). 9 Id. (Emphasis added). 10 See Id. at of 111

19 Case: Document: Page: 19 Date Filed: 06/12/2013 after the donation, 11 to reconsider its rejection of the income and cost approaches utilized by Whitehouse s expert, Richard J. Roddewig, MAI, CRE ( Roddewig ), 12 and to reconsider its rejection of Roddewig s use of nonlocal comparables in his comparable sales approach to value. 13 The Tax Court did not follow this Court s mandate, as it was bound to do; rather, it approached the mandate searching for daylight to conduct a de novo review of this Court s rulings, after which it reached contrary conclusions, based on the same flawed interpretations of the Easement document and Louisiana law that led this Court to vacate its Original Opinion. Its justification for flouting this Court s mandate was as follows: We are aware that in Whitehouse I[]...the Court of Appeals stated: [B]ecause of the easement, Whitehouse could not build on top of the Kress building....because the distinction we have drawn between the partnership s personal obligation not to block views of the Maison Blanche Building and its burdens and obligations undertaken pursuant to the real right created by the servitude was not considered by the Court of Appeals, we see some daylight to again examine the conveyance to see whether it imposes an obligation on the partnership not to block the views of the Maison Blanche Building. 11 Id. at , Id. at Id. at of 111

20 Case: Document: Page: 20 Date Filed: 06/12/2013 Id. at *21. (Emphasis added). It is simply beyond comprehension what daylight could conceivably have been left by this Court s succinct findings. It was inappropriate for the Tax Court to even approach this Court s mandate searching for daylight so that it could skirt this Court s rulings in Whitehouse I and justify what was, obviously, a pre-determined outcome. 14 This Court did not leave the Tax Court any daylight to reexamine the issue of whether Whitehouse and any successor had lost the opportunity to construct additional hotel rooms above the Kress building. Even though this Court in Whitehouse I did not specifically address the Tax Court s erroneous contention that the Easement created only a personal obligation in the partnership to refrain from blocking the view of the donated facade, it foreclosed any such notion when it ruled that because of the Easement, neither Whitehouse nor any successor, could take any action that would block the open space view of the donated facade. Nevertheless, after reiterating its vacated interpretation on the Easement document under Louisiana law, 14 See Demahy v. Schwarz Pharma, Incorporated, 702 F.3d 177, 184 (5 th Cir. 2012) (An issue of law determined by an appellate court may not be reexamined on remand; instead, a lower court on remand must implement both the letter and the spirit of the appellate court s mandate... ). Accord, United States v. Matthews, 312 F.3d 652, 657 (5 th Cir. 2002); General Universal Systems, Inc. v. HAL, Inc., 500 F.3d 444, 453 (5 th Cir. 2007) of 111

21 Case: Document: Page: 21 Date Filed: 06/12/2013 the Tax Court once more opined that the [Easement] did not deprive the partnership of the ability to add stories above the Kress building. 15 Astounding! The Tax Court then proceeded to give lip service to the mandate by purporting to, nevertheless, revalue the Easement taking the lost development opportunity (that the Tax Court did not believe existed) into account. 1 6 Utilizing only the erroneous comparable sales methodology advocated by Argote and adjusted by itself, the Tax Court found that the additional value attributable to the loss of the opportunity to construct 60 additional hotel rooms above the Kress building was a paltry $65, The Tax Court s methodology, even if correctly applied, which it was not, would not have complied with this Court s mandate to take into account the lost opportunity after the Easement to construct 60 additional hotel rooms above the Kress building. It is telling that the Tax Court s after valuation in the Remand Opinion relied exclusively on Argote s flawed valuation, which reflected a zero effect of the Easement on the Property s value. Under the circumstances, it is disingenuous for the WL at *7. (Emphasis added) WL at * Id. $65, is the difference between the Tax Court s original valuation of $1,792,301 and its valuation on remand of $1,857, of 111

22 Case: Document: Page: 22 Date Filed: 06/12/2013 Tax Court to suggest that it even attempted to comply with the mandate in any meaningful way. Whitehouse contends that the Tax Court impermissibly ignored the both the letter and spirit of this Court s mandate and that its Remand Opinion should be reversed. Whitehouse further suggests that, in the interest of judicial economy, this Court should render its own opinion based on the record before it. The Tax Court has demonstrated that it cannot accept this Court s view of the law and evidence, and will continue to reject any evidence of value offered by Whitehouse. STATEMENT OF THE CASE A. COURSE OF PROCEEDINGS AND DISPOSITION OF THE CASE BELOW Following Whitehouse I, the parties, at the direction of the Tax Court, filed supplemental briefs addressing the issues remanded by this Court. 18 Thereafter, the Tax Court issued the Remand Opinion, which was, in virtually all respects, exactly like the Original Opinion, except that it disallowed $65, less of the claimed deduction (i.e., it allowed $1,857,716.00) and again imposed the 40% gross 18 See the Tax Court s Order identifying the issues for supplemental briefing on remand, appearing at Tab 4 of the Record Excerpts. This briefing order foreshadowed the Tax Court s approach to this Court s mandate, and indeed, its opinion on remand. The Tax Court framed the issues for reconsideration in such a manner as to leave little doubt that it intended to conduct a de novo review of the facts and law, with the aim of rehabilitating and reinstating its Original Opinion of 111

23 Case: Document: Page: 23 Date Filed: 06/12/2013 undervaluation penalty. No additional evidence was introduced on remand and, as qualified above, the record is exactly as it stood when this case came before this Court in Accordingly, this Court is referred to its statement of the course of the prior proceedings, which is set forth at page 324 of Whitehouse I. This appeal follows. B. STATEMENT OF FACTS The facts relevant to the issues presented in this appeal, which are not in dispute, are as set forth in Whitehouse I. To briefly summarize: Whitehouse was formed in 1995 for the purpose of purchasing and renovating property in downtown New Orleans, Louisiana, which included the historic Maison Blanche building, the contiguous six-story Kress building, and a parking garage adjacent to the Kress building (the Property ). The Maison Blanche building is designated as an historic landmark by the City of New Orleans and registered as a National Historic Landmark by federal, state and local governments. Whitehouse purchased the Property for the purpose of renovating and redeveloping it into a Ritz-Carlton Hotel. In February, 1997, Whitehouse and the Ritz-Carlton Hotel Company, L.L.C. ( Ritz-Carlton ) entered into the Ritz-Carlton Operating Agreement, pursuant to which Whitehouse obligated itself to redevelop the Property into the Hotel, and Ritz-Carlton obligated itself to operate the Hotel for 20 years. Whitehouse and Ritz-Carlton also entered into a Pre-Commencement of 111

24 Case: Document: Page: 24 Date Filed: 06/12/2013 Agreement pursuant to which Ritz-Carlton committed to make a $3,000,000 loan to Whitehouse to fund pre-opening expenses for the Hotel. By the summer of 1997, Whitehouse had procured architectural plans for conversion of the Property into the Ritz-Carlton Hotel. In July, 1997, the New Orleans City Council approved a conditional use permit for the construction of the Hotel. In October 1997, Petitioner purchased the Kress building and an adjacent parking garage, in order to complete the property assemblage for the Ritz-Carlton development. On December 29, 1997, Whitehouse made a qualified conservation contribution, 19 in the form of the Easement to the Preservation Alliance of New Orleans d/b/a Preservation Resource Center (the PRC ), a qualified organization under applicable federal tax law. At the time, the contiguous Maison Blanche and Kress buildings were under common ownership. A condominium declaration combining the two properties as a single unit had been prepared and was waiting to be filed. The Easement conveyed to the PRC a binding scenic, open space and architectural facade servitude as a perpetual real right in and to the exterior surfaces 19 See 26 U.S.C. 170(f)(2)(B)(iii) and 26 C.F.R. 1,170A of 111

25 Case: Document: Page: 25 Date Filed: 06/12/2013 of the Improvement, 20 including the facade of the Maison Blanche building, pursuant to Louisiana Revised Statutes 9:1252, 26 C.F.R A-14(b)(2), 26 C.F.R A-14(d)(1)(iii), and 26 C.F.R A-14(d)(4)(ii). The Easement is binding in perpetuity upon the Owner and Owner s heirs, successors, and assigns, and all subsequent owners of the Improvement The Easement prohibits alterations to the Maison Blanche building s facade, made primarily of white-glazed terra cotta, covered with ornate baroque-inspired decorations. The Easement requires Whitehouse to (i) maintain the facade in a good and sound state of repair; (ii) make certain improvements to the facade which shall have a cost of at least $350,000; (iii) perform and pay for work deemed necessary by the PRC in order to preserve, maintain, or repair the facade and the building s structural elements; provide and pay for periodic inspections; and (iv) in the event of a change in conditions which would give rise to the judicial extinguishment of the facade restrictions, to provide the PRC at least ten (10%) percent of the proceeds of a subsequent transfer of the building. As of the trial in December, 2006, Whitehouse had spent $7.792 million (i.e., more than the amount Whitehouse claimed as the donation value) discharging its obligations under the Easement to repair and restore 20 See Exhibit 35. (Emphasis added). 21 Id. (Emphasis added) of 111

26 Case: Document: Page: 26 Date Filed: 06/12/2013 the terra-cotta facade, not including $421,000 to repair damage from Hurricane Katrina. 22 The Easement also granted all development rights and all privileges to sell or otherwise trade or transfer the development rights applicable to the Donated Property to the PRC. Pursuant to the Easement, the PRC approved specific development plans for the contiguous Maison Blanche and Kress buildings, which did not include construction on top of the Kress building. 23 [T]he wall of the Maison Blanche building that rises above the Kress building...is unambiguously included in the [E]asement s definition of the covered exterior surfaces of the Maison Blanche building; the exterior walls of the lower stories which are visible from Canal and Dauphine Streets...[and] the exterior walls of the Upper Stories which are visible from Canal, Burgundy, Iberville, and Dauphine Streets. 24 Thus, [b]ecause of the [E]asement, Whitehouse could not build on top of the Kress building. 25 Moreover, the [E]asement prohibits any future owner of the Maison Blanche building from obscuring its wall adjacent to the Kress building and, 22 See 615 F.3d at F.3d at Id. at Id. at of 111

27 Case: Document: Page: 27 Date Filed: 06/12/2013 therefore, any successor who, like Whitehouse owned both the Maison Blanche and Kress buildings could not build on top of the Kress building. 26 The day after Whitehouse donated the Easement, it imposed the condominium regime on the property, thereby legally combining the Maison Blanche and Kress buildings into a single, indivisible unit of property. This functional combination of the Maison Blanche and Kress buildings into a single unit precludes the sale of one building separately from the other. Because any future owner of the Kress building would also own the Maison Blanche building, that future owner would be precluded from constructing rooms that obscured the Maison Blanche building s facade. 27 Regardless of the Easement s not burdening the Kress building, it affected the fair market value of the Maison Blanche and Kress buildings. 28 The loss of opportunity to construct rooms above the Kress building that would obscure the Maison Blanche building s facade would reduce the amount a willing buyer would pay for the parcel, and thereby reduce its fair market value Id. 27 Id. at Id. (Italics in original). 29 Id of 111

28 Case: Document: Page: 28 Date Filed: 06/12/2013 Based on a qualified appraisal performed by M. Richard Cohen, MAI, DRA, ASA, PER, R/W, a Certified General Real Estate Appraiser, Whitehouse claimed a charitable deduction on its 1997 U. S. Partnership Tax Return of $7.445 million. At trial, each of the parties relied on expert appraisal testimony to establish the value of the Easement. Argote, on behalf of the Commissioner, valued the Easement at $0. Roddewig, on behalf of Whitehouse, valued the Easement at $10 million. 30 On remand, the Tax Court valued the Easement at $1,857,716, ostensibly ascribing an additional value of only $1, for each of the 60 rooms of development rights lost as a result of the Easement. 31 The Tax Court also again found 30 Although this Court found both experts who testified at trial qualified and their reports admissible, the Tax Court s attempts to downplay Roddewig s extensive and recognized experience in the field of appraising conservation easements, while exaggerating Argote s, are indeed baffling. Roddewig has conducted hundreds of such appraisals and, over a period spanning some 30 years, has written and lectured extensively on the topic of appraising conservation and historic preservation easements. In fact, in 2011, the Appraisal Institute published Roddewig s book, entitled, Appraising Conservation and Historic Preservation Easements, which has been peer reviewed, and the appraisal methodology discussed therein including the exact methodology utilized by Roddewig in this case has been found to be sound and appropriate. In 2012, Roddewig s book was selected by the Appraisal Institute as the most outstanding Appraisal Institute Publication of 2011, and Roddewig was awarded the George L. Schmutz Publication Award for authoring it. Thus, the Tax Court s impugning of Roddewig s credibility and its condescending description of Roddewig s qualifications to appraise the Easement in this case are an insult to an eminently qualified expert who has devoted the better part of his career to this field of endeavor. 31 Roddewig Whitehouse submits, conservatively found the economic value of a completed Ritz-Carlton Hotel room was $238,965 (Ex. 80, p. 279), and REVAC found that value to be $285,000. (Ex. 45, p. 201) of 111

29 Case: Document: Page: 29 Date Filed: 06/12/2013 Whitehouse liable for a 40% valuation misstatement penalty. Whitehouse challenges the Tax Court s rulings in this appeal after remand. SUMMARY OF THE ARGUMENT The ultimate issues presented in this appeal after remand are: (1) the value of the contribution of the Easement, and (2) whether Whitehouse is liable for a 40% valuation misstatement penalty, or any penalty. In its Original Opinion, the Tax Court, relying solely upon the flawed methodology of Argote, ruled in favor of the Commissioner, finding that the value of the donated Easement was approximately $1.7 million, and assessed a 40% undervaluation penalty. In Whitehouse I, this Court vacated the Tax Court s valuation and remanded the case to the Tax Court for further proceedings consistent with its opinion. Specifically, this Court ruled that the Easement prevented the development of the Property to its highest and best use, in that it prevented Whitehouse and any successor from constructing additional hotel rooms above the former Kress building. Further, this Court determined that Argote s conclusion of highest and best use before and after the Easement, as well as his ultimate conclusion of value ( zero ) were incredible. On remand, the Tax Court essentially ignored this Court s clear mandate and again, ruled in favor of the Commissioner on all issues, including the punitive of 111

30 Case: Document: Page: 30 Date Filed: 06/12/2013 imposition of the 40% undervaluation penalty. The Tax Court, again, adopted Argote s, and its own, flawed methodology and opinions and again, utilized Argote s zero after Easement value. This Court should reverse the Tax Court s Remand Opinion because the Tax Court (i) intentionally disregarded this Court s mandate from Whitehouse I, (ii) stubbornly continued to rely on Argote s methodology, which this Court has already found in Whitehouse I to be fatally flawed, and (iii) rejected the cost and income approaches, and valued the Easement, using only the comparable sales approach, which it failed to properly apply. On the other hand, Roddewig s appraisal was conducted in compliance with both published industry standards and the applicable Treasury Regulations, as this Court found in Whitehouse I. Roddewig s conclusion that, in addition to other significant impacts on value, the Easement prevented the construction of 60 additional hotel rooms above the former Kress building, was also found by this Court in Whitehouse I to be correct. Roddewig properly applied the three accepted methods of valuation, using a before and after approach, to arrive at the value of the donation. Nevertheless, the Tax Court, in both its Original and Remand Opinions, completely and erroneously disregarded Roddewig s opinions, which should have formed the basis of its conclusion of value of 111

31 Case: Document: Page: 31 Date Filed: 06/12/2013 The Remand Opinion should be reversed without a second remand. There is sufficient evidence in the record to permit this Court to render its own conclusion of value. As the Tax Court has demonstrated that it does not consider itself constrained by the instructions of this Court, this Court, in the interest of judicial economy, should review the entire record in this case and make a determination that the value of the Easement is at least $7.455 million, the amount claimed by Whitehouse on its 1997 U.S. partnership tax return. Whitehouse further submits that, in any case, this Court should rule that Whitehouse is not liable for penalties under the facts of this case. STANDARD OF REVIEW As a general rule valuation of property for federal tax purposes is a question of fact that [the appellate court] review[s] for clear error. Id. at 335, citing Adams v. United States, 281 F.3d 383, (5 th Cir. 2000) (citing Estate of Bonner v. United States, 84 F.3d 196 (5 th Cir. 1996). An appellate court reviews the Tax Court s conclusions of law de novo. See Caracci v. Comm=r, 456 F.3d 444, 456 (5th Cir. 2006) (citing Dunn v. Comm'r, 301 F.3d 339, 348 (5th Cir.2002)). [V]aluation is a mixed question of law and fact. Whitehouse I, 615 F.3d at 333, citing In re Stembridge, 394 F.3d 383, 385 (5 th Cir. 2004). [T]o the extent...[that] the finding is predicated on a legal conclusion regarding the rights inherent in the property, its valuation is subject to de novo review. Id., citing Adams, 281 F.3d at 386 (emphasis added by court) of 111

32 Case: Document: Page: 32 Date Filed: 06/12/2013 Although the mathematical computation of fair market value is an issue of fact, the determination of the appropriate valuation method is an issue of law. Id. Where the matter has been previously addressed by an appellate court, that court reviews de novo whether a district court, or here, the Tax Court, accurately interpreted and applied the directives of the appellate court s mandate. See Demahy v. Schwarz Pharma, Incorporated, 702 F.3d 177, 181 (5th Cir. 2012), citing United States v. Lee, 358 F.3d 315, 320 (5th Cir. 2004). Regarding the mandate rule, this Court recently stated: The mandate rule requires a district court on remand to effect our mandate and to do nothing else. Further, on remand the district court must implement both the letter and the spirit of the appellate court s mandate and may not disregard the explicit directives of that court. In implementing the mandate, the district court must take into account the appellate court s opinion and the circumstances it embraces. Because the mandate rule is a corollary of the law of the case doctrine, it compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court. Boyd v. Driver, 2012 WL (5 th Cir. 2012). (Emphasis added; internal quotations omitted), citing General Universal Systems v. HAL, Inc., 500 F.3d 444, 453 (5 th Cir. 2007). The scope of this de novo review includes a determination of whether the law of the case doctrine or mandate rule foreclose any of the trial court s actions of 111

33 Case: Document: Page: 33 Date Filed: 06/12/2013 on remand. See General Universal Systems, Inc. v. HAL, Inc., 500 F.3d 444 (5th Cir. 2007), citing United States v. Elizondo, 475 F.3d 692, 695 (5th Cir. 2007). This same doctrine counsels that an appeals court should likewise abstain from reexamining issues of law or fact that were resolved on the initial appeal. See Boyd, 2012 WL (5 th Cir. 2012), wherein this Court stated as follows at footnote 2: The related law-of-the-case doctrine likewise forecloses us from reaching a different answer to this question than that reached by the prior panel. This court recently reiterated that under the law-of-the-case doctrine, the district court on remand, or the appellate court on a subsequent appeal, abstains from reexamining an issue of fact or law that has already been decided on appeal. Id. (Emphasis added; internal quotations omitted), citing United States v. Teel, 691 F.3d 578, 582 (5 th Cir. 2012) and United States v. Carales-Villalta, 617 F.3d 342, 344 (5 th Cir. 2010). ARGUMENT A. IN LIGHT OF THIS COURT S RULING IN WHITEHOUSE I, THE TAX COURT ERRED BY FINDING THAT THE EASEMENT DID NOT AFFECT DEVELOPMENT RIGHTS OVER THE KRESS BUILDING In its Original Opinion, the Tax Court accepted the report, methodology, findings and testimony of Argote in nearly every respect. As a result, the Tax Court concluded that the Easement did not burden the contiguous co-owned Kress building of 111

34 Case: Document: Page: 34 Date Filed: 06/12/2013 and did not consider any potential effect of the Easement on that building in reaching its valuation. In Whitehouse I, this Court held that the Tax Court, relying on Argote, committed reversible error as a matter of law in failing to consider the Easement s effect on the Kress building, which was contiguous property under common ownership and further held that the Easement prevented construction of additional hotel rooms above the Kress building. 32 In order to determine the effect of the Easement on the fair market value of the contiguous Maison Blanche and Kress buildings, the Tax Court was required to, but did not, consider the then pending legal and functional combination of the buildings. As noted by this Court, the Tax Court erroneously found that the Kress building was irrelevant to valuation and that the post-conveyance timing of the condominium declaration rendered it either minimally relevant or irrelevant to the valuation. 33 This Court found that in failing to consider the Easement s effect on the former Kress building, the Tax Court merely considered a snapshot of the property s legal status as at (sic) the date of the conveyance, and committed reversible error by failing to F.3d at 338, Id. at of 111

35 Case: Document: Page: 35 Date Filed: 06/12/2013 consider the [E]asement s effect on fair market value in light of the imminent legal and functional consolidation of the two buildings. 34 This Court explicitly found that the then pending condominium regime, pursuant to which the former Maison Blanche and Kress buildings would become a single property, affected value on the date of the donation of the Easement because Whitehouse and any future owner had lost the right, as a result of the Easement, to construct hotel rooms above the Kress building. 35 Only Roddewig s valuation correctly accounted for this factor. Despite this Court s clear ruling to the contrary, the Tax Court again determined, on remand, that the then pending combination of the buildings had no effect on value. The Tax Court s valuation on remand should have been but was not based on this Court s express holdings. The Tax Court was not free to question this Court s findings or to revisit any of those issues. 36 Its error in doing so and reaching conclusions contrary to this Court s rulings in Whitehouse I infects the entire Remand Opinion with error. 34 Id. at Id. 36 See Demahy, supra, and cases cited therein; Boyd, supra, and cases cited therein of 111

36 Case: Document: Page: 36 Date Filed: 06/12/2013 B. THE TAX COURT FAILED TO COMPLY WITH THIS COURT S MANDATE TO MAKE A DETERMINATION OF HIGHEST AND BEST USE BEFORE AND AFTER AND THIS COURT SHOULD MAKE ITS OWN DETERMINATION This Court s mandate instructed the Tax Court to make a determination of highest and best use. The Tax Court, however, saw no need to comply with this instruction, instead, finding that: [W]e are not compelled to choose between Messrs. Roddewig s and Argote s competing opinions as to highest and best use of the Maison Blanche Building either as a luxury or nonluxury hotel WL at *16. Although the Tax Court gave lip service to the principles of appraisal theory that recognize that: finding a property s highest and best use is critical for determining its fair market value; 37 [t]he realistic, objective potential uses for property control the valuation thereof; 38 and the term, highest and best use may be defined as [t]he reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible WL at *16, citing this Court s opinion in Whitehouse I, 615 F.3d at 335, citing Olson v. United States, 292 U.S. 246, 255, 54 S.Ct. 704, 78 L.Ed (1934). 38 Id. citing Stanley Works v. Commissioner, 87 T.C. 389, 400 (1986) of 111

37 Case: Document: Page: 37 Date Filed: 06/12/2013 and that results in the highest value, 39 it followed none of them. Nor did it pay any heed to Treas. Reg A-14(h)(3)(ii), which requires that property subject to an easement be valued taking into account its development potential before and after the easement, rather than according to the existing use on the date of the easement. Instead, ignoring the mandate, the law and accepted appraisal methodology, the Tax Court ruled that it is the second best use of the property that is determinative of value, citing Van Zelst v. Commissioner. 40 In Van Zelst, the taxpayer owned two (2) parcels of undeveloped, raw land located in the wilds of Alaska. Upon finding that commercial development of the property was not feasible, he donated the property to the Department of Interior, claiming a charitable contribution deduction of $2.75 million. The appraisal submitted by the taxpayer/owner in support of the deduction valued one parcel of the property as a copper mine and the other as a resort. Neither use was found to be reasonable, probable or feasible. 41 The evidence showed that the cost to obtain the copper from the property would exceed its value and that several attempts to mine copper from the property had failed. 39 Id. citing Appraisal Institute, Appraisal of Real Estate (13 th ed. 2008). (Emphasis added) F.3d 1259 (7 th Cir. 1996). 41 Id. at of 111

38 Case: Document: Page: 38 Date Filed: 06/12/2013 The evidence further showed that the lack of any access and, indeed, sunshine, made it impractical to develop the land as a resort. Moreover, the evidence showed that there were hundreds of sites in the area around the subject property that were equally or more suitable to the uses proposed by the taxpayer. In stark contrast to the property at issue in Van Zelst, the present case involves property developed with a unique, 500,000-plus square foot historic building, located in a prime location on the edge of the French Quarter of New Orleans, a major tourist and convention destination. In this case, Whitehouse and Ritz-Carlton had committed to the development of the Property as a Ritz-Carlton Hotel, months prior to the date of the donation, thereby precluding the Property s development as some hypothetical second highest and best use. The Tax Court s suggestion that this Property is in any way analogous to raw undeveloped land, located in the remotest regions of Alaska, unsuitable for any type of development, simply defies logic. Presumably, because the Tax Court considered Argote s assessment of highest and best use to represent the second highest and best use, the Tax Court, in effect, adopted that methodology. 4 2 It is simply incredible that the Tax Court would persist in accepting Argote s opinion of highest and best use before and after being as a non-luxury hotel, in the face of this Court s characterization in Whitehouse I of WL at * of 111