If there’s one lesson to be learned from the plethora of charitable income tax deduction cases so far in 2012, it’s that taxpayers are losing their charitable deductions due to defective paperwork more often than they are from valuation issues.1 So far, taxpayers have lost all of their paperwork cases (every dollar of charitable deduction), although most taxpayers were able to retain some portion of their charitable deduction in the valuations cases.
Although very few tax audits, probably less than one in 100, make their way to tax court, donors and their advisors may still learn from those cases. When the Internal Revenue Service questions a charitable deduction in an audit situation, it’s often too late to correct errors or omissions, as both an acknowledgment letter and a qualified appraisal must be obtained before the return is filed.2 So, donors should be sure that the paperwork is in order at the time of the donation or, at the latest, at the time the tax return is prepared.
Donors and their advisors should be ready for the IRS’ approach, as discussed in the Mohamed3 case, on the value of real estate donated to a charitable remainder unitrust:
. . . the Commissioner thought the Mohameds had overstated the values of the properties, and these cases seemed set to become valuation battles. But then the Commissioner realized that the Mohameds had made several mistakes in filing their Forms 8283 for 2003 and 2004, and amended his answer to assert that these mistakes compel denying the Mohameds any charitable deductions for their CRUT at all.
According to the taxpayer’s testimony, he had completed the Forms 8283 himself, without reading the instructions. As a result, he was unaware of the need for a qualified appraisal by a qualified appraiser, so he prepared the property valuations himself. The court upheld the IRS’ position and denied the Mohameds’ charitable deduction for $18.5 million in real estate donated to the trust.
In the interest of preserving the income tax benefit of a donor’s’ charitable donation, an advisor should first review the filing instructions for Form 8283
before completing a return that includes a non-cash charitable donation in excess of $500. We all know that the IRS forms and instructions aren’t law,4 but they’re still a good place to start. The next stop is to review the regulations, which list all the required items for acknowledgment letters, qualified appraisals and appraisal summaries (Form 8283). By my count, the regulations list 26 specific items that must be included in a qualified appraisal and appraisal summary. Overlooking one of the minor ones may not preclude the deduction, because the courts have been lenient on a few of them under the doctrine of substantial compliance.5 But, it’s worth re-checking the appraisal, the acknowledgment letter and the completed Form 8283 before filing, to avoid potential disputes. Whenever possible, it’s better to avoid an IRS controversy than to have to resolve it.
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1. Defective appraisals, acknowledgments or other paperwork:
• Marshall Cohan, et ux., et al. v. Commissioner, T.C. Memo. 2012-8.
• Judith Gaerttner, et vir. v. Comm’r, T.C. Memo. 2012-43.
• David A. Olagunju, et ux. v. Comm’r, T.C. Memo. 2012-119.
• David P. Durden, et ux. v. Comm’r, T.C. Memo. 2012-140.
• Joseph Mohamed, Sr., et ux. v. Comm’r, T.C. Memo. 2012-152.
• Ramona L. Mitchell v. Comm’r, 138 T.C. No. 16.
• Steven Rothman et ux. v. Comm’r, T.C. Memo. 2012-163.
• Esgar Corporation, et al. v. Comm’r, T.C. Memo. 2012-35.
• James E. Butler, Jr., et ux. v. Comm’r, T.C. Memo. 2012-72.
• Loren Dunlap, et ux., et al. v. Comm’r, T.C. Memo. 2012-126.
• Comm’r. v. Simmons, 107 A.F.T.R.2d 2011-2632.
• Rolfs, et al. v. Comm’r, 109 A.F.T.R.2d 2012-828.
2. Treasury Regulations Section 1.170A-13(c)(3)(iv)(B) for the appraisal; Treas. Regs. Section 1.170A-13(f)(3) for the acknowledgment letter.
3. Mohamed v. Comm’r, T.C. Memo. 2012-152 (May 29, 2012).
5. Simmons v. Comm’r, T.C. Memo. 2009-208; Consol. Investors Grp. v. Comm’r, T.C. Memo. 2009-290.