374 Vanderbilt Ave. (NYLJ/Rick Kopstein)
A U.S. Tax Court’s rejection of a $115,000 deduction for a woman who donated a facade conservation easement on her Fort Greene townhouse to the National Architectural Trust has been upheld by a federal appeals court.
The U.S. Court of Appeals for the Second Circuit said the Tax Court applied the right legal standard, and its factual findings were supported by substantial evidence when it denied the deduction that Huda Scheidelman sought in 2013.
Scheidelman bought the townhouse at 374 Vanderbilt Ave. in Fort Greene’s Historic District for $255,000 in 1997. In 2003, she successfully applied to the National Architectural Trust for her home to be considered for a facade conservation easement and hired real estate appraiser Michael Drazner, who valued the easement at $115,000.
Scheidelman claimed the deduction on her 2004 federal tax return, but an audit by the Internal Revenue Service found she had failed to establish a fair market value for the easement. Scheidelman sought a redetermination in the Tax Court, but the court found in 2010 Drazner’s appraisal was not a “qualified appraisal” needed before a taxpayer deducts a non-cash charitable deduction.
She appealed to the Second Circuit, which remanded the case in 2012 for a determination of the fair market value of the easement, telling the Tax Court its own opinion that Drazner’s appraisal meets the minimum requirements of a qualified appraisal did not require the Tax Court to agree.
On remand, Scheidelman relied on the Drazner appraisal as well as the appraisal and expert testimony of appraiser Michael Ehrmann.
However, the Tax Court held the easement did not diminish the fair market value of Scheidelman’s property. She headed back to the circuit, where Judges Jon Newman (See Profile), Dennis Jacobs (See Profile) and Jose Cabranes (See Profile) heard oral argument on May 22 and then affirmed the Tax Court by per curium opinion Wednesday in Scheidelman v. Commissioner of Internal Revenue, 13-2650.
The Drazner report, the court said, “made no serious attempt to determine the ‘after’ value of Scheidelman’s property based on any factors actually related to the property.” Drazner simply chose “a percentage decrease in value based on a range compiled from cases in which the IRS had allowed the deduction.”
The Ehrmann report, the court said, was also “inherently flawed” because Ehrmann conceded his report did not contain an accurate description of the easement. He relied on outdated information and included comparable properties from other geographic areas, which were of little use.
The IRS, however, relied on a valuation expert, Timothy Barnes, who analyzed the terms of the easement, relevant zoning laws, regulations of New York City’s Landmarks Preservation Commission and broker and buyer surveys of the Fort Greene neighborhood.
Barnes concluded that “in highly desirable, sophisticated home markets like historic brownstone Brooklyn, the imposition of an easement, such as the one granted on June 23, 2004, is not a deterrent to the free trade of such properties at fully competitive prices and does not materially affect the value of the subject properties.”
The IRS commissioner had also presented another expert: an IRS engineer who relied on condemnation techniques to conclude the easement had no negative effect on market values.
“Moreover,” the circuit said, “the chairman of the Fort Greene Association (a witness for Scheidelman) explained that the Fort Greene Historic District, which provides guidelines to maintain the historic integrity of the district’s facades, ‘actually has created Fort Greene to what it is today. It’s created an economic engine for Fort Greene .’”
Finding no indication that the easement was more restrictive than the existing Landmarks Commission regulations, the Second Circuit said the Tax Court had drawn “the fair inference that ‘preservation of historic facades is a benefit, not a detriment, to the value of Fort Greene property,’” and thus it rightly found that easement had no value for tax deduction purposes.
Frank Agostino and Tara Krieger of Agostino & Associates in Hackensack represented Scheidelman
Agostino said Thursday Scheidelman was one of the first donors to make the claim for the deduction based on a facade.
“If you are the first and you haven’t sold the property, how do you value the reduction? ” Agostino said. “ There are no comparables.”
When Scheidelman and others make this kind of donation, he said, they are agreeing that their buildings can never be sold to be replaced by a high-rise sliver on the footprint, and there has to be a way to measure that diminution in value. He said the circuit was correct on the issue of comparables, for the moment and, with Agostino pursuing other, similar cases, he said this case was instructive.
“This case taught me what I did wrong,” he said. “And that’s the first step on the way to doing it right.”
Francesco Ugolini, with Tamara W. Ashford and Patrick J. Urda on the brief, from the tax division of the U.S. Department of Justice, in Washington, represented the IRS.