Serving as a vivid reminder that it is vital that a taxpayer comply strictly and completely with the charitable deduction regulations, the Tax Court recently denied a $33 million charitable deduction in its entirety and imposed a gross valuation misstatement penalty because the taxpayer did not properly fill out Form 8283.
In Reri Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), a partnership donated an interest in a piece of property to the University of Michigan. The donor retained an appraiser who assigned a fair market value of $33 million to the donation. The taxpayer prepared a Form 8283 appraisal summary and included the form with its return. The form indicated that the donor had acquired the donated interest through a purchase but did not include an amount for the donor’s “cost or other adjusted basis.” Importantly, the Court does not state whether the taxpayer also attached the appraisal report prepared by the appraiser.
The Tax Court denied the entire deduction solely because the Form 8283 did not list the donor’s cost basis. According to the court, Congress prescribed strict substantiation requirements when claiming a charitable deduction over certain amounts in order “to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions.” A failure to comply with these requirements will result in a denial of the deduction, even if the amount of the deduction is correct.
A taxpayer can sometimes avoid this draconian result if it substantially complies with the regulations. Critically, a taxpayer does not do so if it fails to provide sufficient information to alert the IRS to a potential overvaluation.
That is precisely what the court determined happen here. By failing to list the adjusted cost basis of the property, as required by Treas. Reg. § 170A-13(c)(4)(ii)(E), the taxpayer did not comply with the regulations. Omitting the cost basis “prevented the appraisal summary from achieving its intended purpose,” as “[t]he significant disparity between the claimed fair market value and the price [the taxpayer] paid to acquire [the property] just 17 months before it assigned [the property] to the University, had it been disclosed, would have alerted [the IRS] to a potential overvaluation of [the property].” As such, the taxpayer did not substantially comply with the regulations and justified denying the entire deduction ab initio.
The Tax Court also imposed a 40% gross overvaluation penalty on the taxpayer. After finding the fair market value of the donation was only approximately $3 million, subjecting the taxpayer to the penalty, the court rejected the taxpayer’s reasonable cause defense. Even though it had an appraisal, the court held that “a taxpayer must do more than simply accept the result of a qualified appraisal” and rejected, as immaterial, the taxpayer’s evidence of a second earlier appraisal that appeared to conform to the one prepared for the return.
Though not the subject of this litigation, it is important to note that there may be consequences to the appraiser, as well. With a judicial determination that the value claimed was grossly overstated, the appraiser may be subject to, among other things, a penalty pursuant to I.R.C. § 6695A. If the IRS imposes a penalty on the appraiser, the IRS’s Office of Professional Responsibility (OPR) may also take action, see Circular 230 § 10.60, and can reprimand or even disqualify the appraiser.
If you have any questions about this post or about how to ensure that you comply with the substantiation requirements before donating property, please contact Jeff Erney at Jeffry.Erney@dentons.com or Peter Anthony at firstname.lastname@example.org