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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.
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