Philanthropy Tax E-Letter

Appraisal “Attachment” Requirement Not Met

For information about Conrad Teitell’s publications and lectures visit: taxwisegiving.com. For information about Cummings & Lockwood visit: cl-law.com.

Prologue. I’ll spare you the minute details of a 40-page Tax Court Memorandum decision that deals with factual as well as legal issues. In short, the Internal Revenue Service denied a charitable deduction maintaining that the donor failed to comply with the appraisal requirements and he didn’t attach a qualified appraisal to his tax return.

Background—the appraisal itself, not just an appraisal summary, must be attached to a donor’s income tax return in these situations: 

Special rule for art gifts. If artworks with a total value of $20,000 or more are donated, the return must include a copy of the signed appraisal itself, not just Section B of Form 8283. If any single artwork is worth $20,000 or more, the IRS may ask for an 8 in. by 10 in. color photo (or a 4 in. by 5 in. color slide) of the donated property. You don’t have to send the photo (or slide) with the tax return, just have it ready.

Special rule for very large gifts other than art. For gifts valued at over $500,000, the donor must attach the qualified appraisal—as well as Section B of Form 8283—to his tax return. For purposes of the dollar thresholds, property and all similar items of property donated to one or more charitable donees are treated as one property. As noted above, a copy of the appraisal must be attached to the tax return when an artwork is worth $20,000 or more.

Tax Court case—what happened. A donor transferred New Jersey land to the county in a “part-sale, part-gift transaction” (a bargain sale).

The IRS disallowed the charitable deduction maintaining: (1) the consideration received from the county exceeded the land’s value, and (2) the donor’s gift was not properly substantiated.

On the valuation issue. After many pages of reviewing the reports of appraisers and the methods of determining fair market value, the court found that the property had the value determined by the IRS’s appraisers (lower than the value determined by donor’s appraiser). At the trial, the IRS changed its zero-value audit position and agreed that there was indeed a charitable gift. Nevertheless, no deduction is allowable, the IRS maintained, because a copy of the appraisal was not attached to Donor’s return.

Donor maintained. The deduction is allowable because he had reasonable cause for non-compliance with the technical rules.

Why is the IRS such a stickler? Valuation of gifts of land and conservation easements almost always result in disputes between the IRS and taxpayers. Whenever  possible, the IRS tries to avoid valuation issues by faulting the taxpayer’s compliance with the appraisal and substantiation rules.

A maxim holds that close only counts in horseshoes and hand grenades. In this case, the IRS said, in effect, you aren’t even close.

The Tax Court pulled an exception out of the legal-rule book.

[Donor is] entitled to a deduction for the charitable contribution of the subject property even if [he] did not attach a qualified appraisal required under the Code and the regulations, because any failure to comply with the requirement is excused on the ground of reasonable cause.

The Tax Court’s language could be helpful in future situations where the reasonable-cause-for-non-compliance excuse is given.

If a taxpayer donor claimed a deduction for a charitable gift of property worth more than $500,000 but failed to attach a qualified appraisal required by section 170(f)(11)(D) to his return, the deduction would not be disallowed if the taxpayer could show the failure was “due to reasonable cause and not willful neglect.” Sec. 170(f)(11)(A)(ii)(II). Neither the statute nor the regulations tell us what constitutes reasonable cause in the context of a failure to obtain a qualified appraisal. However, the concept of “reasonable cause” pervades the part of the Code relating to the imposition of additions to tax and penalties for failures to comply with certain sections of the Code. See, e.g., secs. 6651 (failure to file Federal income tax returns and to pay amount shown or required to be shown on tax returns), 6652 (failure to file certain information returns and registration statements), 6664(c) (accuracy-related and fraud penalties may not be imposed if reasonable cause found). So it is instructive to look at our other cases interpreting “reasonable cause.”

Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the challenged item. See United States v. Boyle, 469 U.S. 241 (1985). Thus, the inquiry is inherently a fact-intensive one, and facts and circumstances must be judged on a case-by-case basis. See id.; Rothman v. Commissioner, 103 T.C.M. (CCH) at 1874. A taxpayer’s reliance on the advice of a professional, such as a certified public accountant, would constitute reasonable cause and good faith if the taxpayer could prove by a preponderance of the evidence that: (1) the taxpayer reasonably believed the professional was a competent tax adviser with sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the advising professional; (3) the taxpayer actually relied in good faith on the professional’s advice. See  Rovakat,  LLC  v.  Commissioner, 102 T.C.M.  (CCH)  at  279  (citing Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98-99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002)); see also sec. 1.6664-4(c)(1), Income Tax Regs. [In this case,] Mr. Crimi had relied on Mr. LaForge and Sobel as competent tax advisers for over 20 years. Upon the filing of the returns at issue, Mr. LaForge had been a certified public accountant for over 20 years and had expertise in preparing tax returns claiming deductions for charitable contributions. Sobel was an established regional accounting firm staffed with accountants, some of whom had law degrees. During the 24 years of engagement, Mr. LaForge had become intimately familiar with Mr. Crimi’s and Concrete’s financial affairs. The record reveals no prior history of mishaps by Mr. LaForge or Sobel. There had also been no indication to Mr. Crimi, at least up until the instant controversy, that Mr. LaForge or Sobel had acted incompetently in his or its provision of services to Mr. Crimi and Concrete. Thus, Mr. Crimi had no reason to doubt or second guess Mr. LaForge’s or Sobel’s competence, or to question Mr. LaForge’s request for only a dated appraisal as inadequate. See Estate of Lee v. Commissioner, T.C. Memo. 2009-84, 97 T.C.M. (CCH) 1435, 1438 (2009) (taxpayer may conclude on the basis of adequate due diligence that his tax adviser was competent estate tax attorney).

Crimi, T.C. Memo. 2013-51

Caveat Advisor. This isn’t a regular Tax Court decision, but a memorandum decision — not having great weight for future conflicts with the IRS. Nevertheless, it could be your hail-Mary pass.

Another Caveat Advisor.  Accountants, lawyers and other professionals can be liable to clients for their financial losses resulting from the advisor’s not complying with the substantiation and other rules.

Is there a hail-Mary pass for the advisor when he doesn’t understand the rules? California’s highest court said that the rule against perpetuities is so complicated that even attorneys can’t be expected to understand it. You could look it up: Lucas v. Hamm, 364 P.2d 685 (Cal.1961). However, it doesn’t take a Philadelphia lawyer to tell you not to rely on Lucas v. Hamm.

© Conrad Teitell 2013. This is not intended as legal, tax, financial or other advice. So, check with your advisor on how the rules apply to you.

 

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Conrad Teitell

Conrad Teitell, A.B., LL.B., LL.M., 98.6. Chairman, National Charitable Planning Group, Cummings & Lockwood, Stamford Conn. cl-law.com. For information about Conrad Teitell's publications...
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