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CASE NAME

Boltar, LLC, Joseph Calabria, Jr., Tax Matters Partner (Petitioner) vs. The Commissioner of Internal Revenue (Respondent), 136 T.C. No. 14, Docket No. 25954-08, April 5, 2011

SYNOPSIS

This particular case involved a charitable tax deduction along with the conservation easement it was associated with.  The case was tried in a tax court, which ruled that non jury trials must still adhere to the standards of reliability and evidence.  Using precedence cited in the 1993 case ‘Daubert v. Merrell Dow Firm’ and presented to the court by the Respondent the court dismissed the Petitioner’s expert’s report.

Four key issues led to the overall failure of the petitioner’s expert’s report, including the failure of a Daubert criteria.

1. The report failed to apply common methodology (one of the four Daubert criteria).
2. The expert made the assumption that the city had annexed the property, which was incorrect.
3. The value assigned to the easement was based upon a draft proposal of the easement instead of the final version.
4. The expert valued the property based upon a development plan that was impossible to implement on the property due to the inadequate size of the parcel.

CASE SPECIFICS

Two parcels of real estate (herein referred to as ‘Northern Parcel’ and ‘Southern Parcel’) were acquired by the petitioner through a quitclaim deed on October 1, 1999.  A third parcel (‘Eastern Parcel’) was later obtained through another quitclaim deed on November 8, 2002.  This Eastern Parcel’s deed was never recorded.  At the time the parcels were all under the jurisdiction of Hobart, Indiana.  The Eastern Parcel was zoned as a part of a Planned Urban Development project known as the ‘Deep River Pointe’, a project that lacked a final plat for its second phase and whose third phase had yet to be annexed.  The Northern and Southern Parcels were both zoned as single family residential properties.

Each parcel held a size of approximately ten acres, for a total of approximately thirty acres of land.  All of the Eastern Parcel, 8.5 acres of the Northern Parcel, and a portion of the Southern Parcel were all considered to be forested wetlands, meaning that in order for development to occur the Indiana Department of Environmental Management and the US Army Corps of Engineers would have to be consulted and issue permits.

The Northern and Southern Parcels each had golf cart easements included on the deeds and a pipeline utility easement ran through a substantial portion of the Southern Parcel.  The Shirley Heinze Land Trust, LLC was granted an eight acre easement on a portion of the Southern Parcel by the Petitioner on December 29, 2003.  This easement forbade any activities or uses that would impede upon the property’s conservation value.

Boltar claimed a $3,270,000 deduction on its 2003 1065 form, a deduction taken for the donation of the conservation easement.  This deduction was attached to an appraisal report as well as an 8283 form, both issued by a real estate appraisal firm.  This appraisal was based not on a final copy of the easement but upon a draft, which assumed that the easement was a part of the Deep River Pointe development and was under Hobart jurisdiction.

Upon receiving this claim, the IRS found that they disagreed with the appraisal firm and the value they assigned the property.  The valuation engineer’s main disagreement was that the Petitioner’s expert did not use the before and after method of determining values for real estate.  With no access to public roads, the easement was effectively land locked.  Development upon the eased area would be almost impossible.  It also found that the project detailed would be impossible, and that the Petitioner’s expert ignored several key details including property size and the gas line easement on the property in question.  For these reasons and others, the IRS engineer found a value of just $42,400, well below the original estimation noted on the deduction form.

The Respondent stated that the expert’s claim was neither relevant nor reliable and that they failed to use the legal standard when determining the easement’s value, failing to value the nearby parcels and applying a valuation upon the parcel that was physically impossible.  The Petitioner’s argument stated that the Daubert precedence was irrelevant to the case as it was not a jury case and claimed that the IRS had already accepted the methodology used in their expert’s report.  They also claimed that the appraisal was indeed qualified and relevant and that the Respondent’s issues did not negate the report’s admissibility due to the qualifications and credentials of their expert.

COURT FINDINGS

Basing much of their findings upon the standards of reliability concerning evidence presented in a trial that are laid out in the Federal Rules of Evidence, the court ruled entirely in favor with the Respondent, stating first and foremost that the Daubert precedence also applies to all trials, bench or jury.

The court made special mention of the growing problem of experts using their credentials to advocate their employing party’s position regardless of objective and relevant facts, and stated that it hoped to discourage such tax benefit practices in the future.  The court stated that the assessment in question “defies reason and common sense”.

The court stated that the Petitioner’s expert failed to determine the highest and best use of the property after the easement was granted and that they additionally failed to note the effects the easement would have on contiguous properties.  Also, the court found that the Petitioner’s expert based their valuation on a ten acre parcel when the property was found to be much closer to eight acres.  The appraisal company also ignored the gas line easement and the effect it would play on the property and any future development in their assessment.  The Petitioner’s expert’s response was that the project would fit upon the property but not as drawn on the site plan in consideration.

The assumption that the property in question was in the Hubert jurisdiction and had already been zoned for PUD was a major issue as well.  The court placed heavy emphasis on the expert’s failure to correct factual errors as they arose, their lack of appropriate analysis of the property and easement and all aspects of it, their failure to adjust their calculations as new evidence was found, and also their stubborn unwillingness to abandon their position on the report even when it became obviously unreasonable.  The court stated that the expert’s report was “so far beyond the realm of usefulness that admission is inappropriate”.

DETERMINATION

The results of this case made it obvious that the Petitioner’s expert had failed their client on numerous levels.  Not only did they base their assessment and valuation of the easement upon erroneous data built upon assumptions rather than facts that were easily obtainable, it also failed to alter data or methodological errors when presented with correct information.  Their refusal to change their findings even when faced with unquestionable data led not only to this case reaching the courts, but also to the findings against them.

In short, unrealistic or unreasonable reports of property value will be rejected based upon the data that they contain.  An individual’s qualifications are not grounds for acceptance outright, and any reports of value must utilize the industry standards of value assessment and rely on hard facts and data instead of assumptions and impossibilities.  The Daubert precedence applies to all trials, bench or jury, and the Petitioner’s notice of delinquency was maintained.