Key point. Charitable contributions are subject to several substantiation requirements. A failure to comply with these requirements may lead to a denial of a charitable contribution deduction.
The United States Tax Court ruled that a taxpayer was not entitled to a charitable contribution deduction for the donation of property to a religious charity since he failed to comply with the strict substantiation requirements set forth in the tax code.
A taxpayer made several donations to a religious charity, including a conference center. To determine the center’s value, he contracted with a certified general appraiser for his help.
After viewing the property, however, the appraiser felt uncomfortable providing an appraised value. He believed the property was a very elaborate complex, and he had never seen a similar building in his appraisal career. He felt he couldn’t complete the appraisal according to the Uniform Standards of Professional Appraisal Practice (USPAP).
However, the appraiser did describe the three traditional valuation methods—comparable sales, income, and replacement cost—that appraisers use, and then explained why he felt uncomfortable using any of them. He told the taxpayer that of the three methods, the replacement cost approach had “the most solid evidence.”
The taxpayer did not try to get another appraisal, but instead totaled up the cost of the conference center and claimed that amount as a deduction. The IRS denied a charitable contribution deduction for the conference center, and the taxpayer appealed to the United States Tax Court.
Tax Court: Taxpayer failed to provide a Form 8283
The Court affirmed the IRS denial of any contribution deduction. It noted that for any noncash contribution exceeding $5,000 (with some exceptions) the income tax regulations require the donor to: (1) obtain a qualified appraisal for the contributed property, (2) attach a fully completed appraisal summary (Form 8283) to the tax return on which the deduction is claimed, and (3) maintain records pertaining to the claimed deduction.
A qualified appraisal must include, among other things:
- a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed;
- a description of the property’s physical condition;
- the valuation method used to determine the fair market value; and
- the specific basis for the valuation.
A qualified appraisal must be made no earlier than 60 days before the date of the contribution and no later than the due date of the return, including extensions. Additionally, it must be prepared by a qualified appraiser.
The definition of a qualified appraiser includes the following:
- It is a person with verifiable education and experience in valuing the type of property for which the appraisal is performed. In addition, the individual: (a) has earned an appraisal designation from a generally recognized professional appraiser organization, or (b) has met certain minimum education requirements and has two or more years of experience.
To meet the minimum education requirement, a qualified appraiser must have successfully completed professional or college-level coursework obtained from: (i) a professional or college-level educational organization, (ii) a professional trade or appraiser organization that regularly offers educational programs in valuing the type of property, or (iii) an employer as part of an employee apprenticeship or education program similar to professional or college-level courses.
- The person regularly prepares appraisals for compensation.
- The person is not an “excluded individual” (i.e., the donor or donee, a relative of the donor, and so on).
In addition, the taxpayer must obtain a contemporaneous written acknowledgment from the donee organization for any contribution of $250 or more. The contemporaneous written acknowledgment must include a description of any property contributed, a statement as to whether the donee provided any goods or services in exchange, and a description and good faith estimate of the value of such goods or services.
The Tax Court concluded that no deduction was allowable because the taxpayer failed to attach a copy of Form 8283 to his tax return, and the donated property was never appraised by a qualified appraiser.
The taxpayer conceded that he did not attach a qualified appraisal of the donated property to his returns.
The Court concluded:
The complete denial of a deduction can be harsh, but this failure alone might be enough for us to deny the contested deductions. There is but one hope for the taxpayer—section 170(f)(11)(A)(ii)(II). Congress … added an escape hatch from nondeductibility for well-intentioned taxpayers. Section 170(f)(11)(A)(ii)(II) tells us not to deny a deduction for failure to comply with [the substantiation requirements pertaining to gifts of noncash property exceeding $5,000] “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.”
The Court determined that this exception did not apply since the taxpayer had considerable business experience and should have understood the substantiation requirements from a cursory review of Form 8283 and its instructions.
What this means for churches
Churches should note the following guidelines for certain noncash donations.
1. Don’t assume donors understand rules for noncash gifts
Do not assume that donors are familiar with the substantiation rules that apply to gifts of noncash property. Church treasurers should obtain copies of Form 8283 each year to give to persons who donate noncash property to the church during the year. You can download copies of Form 8283 on the IRS website. Be sure to get the form and the instructions (two separate, downloadable documents).
2. Ask for a qualified appraisal for large gifts
Ask donors of noncash property to be sure that they obtain a qualified appraisal if you believe they may claim a charitable contribution deduction of more than $5,000.
3. Know that donations of stock are handled differently
No qualified appraisal is required for donations of publicly traded stock. However, a qualified appraisal is required for donations of privately held stock when the claimed value exceeds $10,000.
Pankratz v. Commissioner, T.C. Memo. 2021-26 (2021).