Friedberg v. Commissioner

In 2003, Barry Friedberg and Charlotte Moss (the Friedbergs) (plaintiffs) donated a facade easement and development rights relating to their townhouse to a charity. Barry hired Michael Ehrmann to appraise the donations. The Friedbergs attached Ehrmann’s appraisal report, in which Ehrmann declared that he was qualified to appraise the donations, to their 2003 tax return. In January 2009, the Internal Revenue Service (IRS) issued a deficiency notice, which the Friedbergs challenged by suing the IRS commissioner (defendant) in the United States Tax Court. In December 2010, the parties cross-moved for partial summary judgment regarding whether Ehrmann’s appraisal included his valuation method and the specific valuation basis, as the IRS’s regulations required for a qualified appraisal. In October 2011, relying in part on its ruling in Schneidelman v. Commissioner, the Tax Court (1) rejected the facade donation, concluding that Ehrmann’s appraisal was of dubious reliability despite Ehrmann’s methodology disclosure, and (2) ruled that disputed material facts precluded summary judgment regarding the development rights. In June 2012, the United States Court of Appeals for the Second Circuit reversed the Tax Court’s Schneidelman decision. In July, the commissioner deposed Ehrmann, who testified that he had never previously appraised transferred development rights and that Barry knew this when retaining Ehrmann. In August, the Friedbergs asked the Tax Court to reconsider its summary-judgment rulings based on the Second Circuit’s decision. The Friedbergs contended that the Second Circuit, which presumptively would hear any appeal in this case, held that (1) a qualified appraisal need only identify the valuation method used and (2) it was irrelevant whether the IRS agreed with the method or its application. Per the Friedbergs, Ehrmann’s appraisal met this standard. Regarding the facade, the commissioner responded that the Tax Court had to determine whether Ehrmann really used the stated valuation method and that Ehrmann’s report did not (1) permit a methodological evaluation or (2) provide a specific valuation basis due to a lack of reasoned analysis. Regarding development rights, the commissioner attacked Ehrmann’s lack of relevant experience and Barry’s knowledge thereof.