Penalty on NOLA Historic Building Deemed Unfair

     (CN) – The owners of the historic New Orleans building Maison Blanche were wrongfully fined for overstating a tax deduction nearly 20 years ago, the 5th Circuit ruled.
     Whitehouse Hotel Limited Partnership bought New Orleans’s Maison Blanche building in 1995 with the intent to reopen it as a Ritz-Carlton hotel and condominium with retail space. The building was placed on the National Register of Historical Places in 1966 and named a New Orleans landmark in 1980. [pg. 2 graf 1]
     Whitehouse conveyed a conservation easement, which includes restrictions and obligations related to maintaining Maison Blanche’s ornate terracotta facade, to a Louisiana historical preservation nonprofit in 1997.
     The partnership claimed a $7.4 million charitable deduction for the easement in its 1997 tax return but the Internal Revenue Service assessed a penalty after finding that the easement qualified only for a $1.1 million deduction.
     Whitehouse appealed and two appraisers arrived at “vastly different” valuations of the property during the trial. The U.S. Tax Court ultimately valued the easement at $1.7 million in a 2008 report and said Whitehouse overstated its tax deduction by $5.6 million.
     Whitehouse’s subsequent appeal led the 5th Circuit to vacate both the valuation and the penalty. On remand, the tax court then valued the easement at $1.8 million and said Whitehouse overstated its deduction by $5.5 million, resulting in a penalty equal to 40 percent of the portion of underpaid taxes.
     In their latest review of the case Wednesday, the New Orleans-based federal appeals court affirmed the valuation amount but vacated the penalty, ruling that Whitehouse qualifies for a good-faith exception because it obtained multiple appraisals of the property and did not necessarily know the true value of the property.
     “We conclude that the tax court imposed an excessively high stand of proof for actual reliance on the advice of competent tax professionals,” Judge Leslie Southwick wrote for a three-judge panel. “Valuation of assets is a difficult task, even with the advice and counsel of accountants, consultants, and tax attorneys. It is even more complicated when, as here, the valuation is divorced from a negotiated transaction between buyer and seller.”
     Southwick added; “The tax court’s enforcement of the gross undervaluation penalty was clearly erroneous.”

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