Ney v. Commissioner, T.C. Summary Opinion 2006-154
Background. The tax code imposes strict substantiation requirements on charitable contributions of noncash property that are valued by a donor at more than $5,000. A recent Tax Court case demonstrates that failure to comply with these requirements can lead to a loss of a charitable contribution deduction.
A recent case. A married couple (the “donors”) owned two farms. In 1999 and 2000 they had the farms appraised, and in 2001 they sold a partial interest in both farms to a charity in a “bargain sale” transaction. In such a transaction, property is sold to a charity at less than market value, and the donor generally is able to claim a charitable contribution deduction for the difference between the sales price and market price.
The donors claimed a noncash charitable contribution deduction of $210,000 on their 2001 tax return. Attached to their return was a Form 8283 (qualified appraisal summary). Form 8283 instructs the taxpayer to provide a description of the donated property, the date of its acquisition, and, if the property was sold in a bargain sale, the amount the taxpayer received from the charity. The donors’ Form 8283 described the donated property as “farmland” but did not identify the contribution as a bargain sale or indicate that the donors received payment from the charity.
Form 8283 includes a section titled “Donee Acknowledgment”. This section instructs the donee charity to acknowledge that it is a qualified charity and that it received the property in question. The donors’ Form 8283 was not signed by a representative of the charity.
Form 8283 also includes a section titled “Declaration of Appraiser”. This section instructs the appraiser of the donated property to sign the following statement:
I declare that I hold myself out to the public as an appraiser or perform appraisals on a regular basis; and that because of my qualifications as described in the appraisal, I am qualified to make appraisals of the type of property being valued …. Furthermore, I understand that a false or fraudulent overstatement of the property value as described in the qualified appraisal or this [Form 8283] may subject me to the penalty [for] aiding and abetting the understatement of tax liability.
The Form 8283 attached to donors’ tax return was not signed by an appraiser.
The IRS audited the donors’ 2001 tax return, and requested a Form 8283 signed by the appraiser and the charity for each farm, as well as copies of the qualified appraisals for the farms. The donors submitted a new Form 8283 for each farm in 2004 that contained a signature by a representative of the charity, but failed to contain the appraiser’s signature since the appraiser was not willing to sign the forms. In 2005, the donors obtained new appraisals and submitted yet another Form 8283 for each farm. This time, the forms contained signatures of both the charity and the appraiser.
The IRS denied the $210,000 charitable contribution deduction as a result the donors’ failure to comply with the substantiation requirements. The donors appealed to the Tax Court.
The Tax Court’s ruling. The court began its ruling by noting that a taxpayer who sells property for less than fair market value (i.e., makes a bargain sale) to a charity is generally entitled to a charitable contribution deduction equal to the difference between the fair market value of the property interest and the amount realized from the sale. However, the court stressed that “a charitable contribution is allowed as a deduction only if verified” according to IRS regulations.
For most contributions of noncash property valued by the donor at more than $5,000, the tax code and regulations impose the following substantiation requirements:
(1) The donor must obtain a qualified appraisal of the donated property that: (1) is made not earlier than 60 days before the date of contribution of the appraised property nor later than the due date of the return on which a deduction is first claimed; (2) is prepared, signed, and dated by a qualified appraiser; (3) includes a statement that the appraisal was prepared for income tax purposes; and (4) includes the appraised fair market value of the property on the date (or expected date) of the contribution. The regulations contain a detailed definition of a qualified appraiser.
(2) The donor must attach a completed “qualified appraisal summary” (IRS Form 8283) to the tax return on which the charitable contribution deduction is claimed. The appraisal summary must be signed and dated by both the qualified appraiser who prepared the qualified appraisal and a representative of the donee charity. It also must include several items of information, including a description of the donated property; the date the donor acquired the donated property and the manner of acquisition; a statement as to whether the contribution was made by means of a bargain sale and the amount of any consideration received from the donee for the contribution; the name, address, and taxpayer identification number of the qualified appraiser; and the appraised fair market value of the property on the date of contribution.
Key point. The definitions of “qualified appraisal” and “qualified appraiser” were tightened by the Pension Protection Act of 2006. Be sure that prospective donors are aware of these changes. They are explained fully in Chapter 8 of Richard Hammar’s 2007 Church & Clergy Tax Guide.
Is “substantial compliance” sufficient?
The donors conceded that their appraisals did not “strictly comply” with these substantiation requirements. Indeed, the initial appraisals were made more than 60 days before the date of contribution; they did not state that they were prepared for income tax purposes; and they did not appraise the farms on the date of contribution. In addition, the donors conceded that the appraiser did not meet the regulations’ definition of a qualified appraiser. Finally, the 2005 appraisals were made more than three years after the due date of donors’ tax return and therefore were not timely.
The donors also conceded that their appraisal summary (Form 8283) did not strictly comply with the substantiation requirements, since it was not signed by an appraiser or by the donee charity; it did not list the date of acquisition for either property; and it did not state whether either contribution was made by means of a bargain sale or indicate that the donors received payments.
The donors insisted that they were entitled to a tax deduction because they “substantially complied” with the law. The court disagreed:
None of the appraisals the donors obtained is a qualified appraisal …. The qualified appraisal requirement is mandatory, not merely directory. Our case law is clear that we cannot apply the doctrine of substantial compliance to excuse a taxpayer’s failure to meet this requirement …. We also note that the requirements that the appraiser and the donee sign the Form 8283 also appear to be mandatory. By signing the appraiser’s declaration, the appraiser potentially subjects himself to a penalty …. This requirement … discourages the overvaluation of charitable contributions …. By signing the donee’s acknowledgment, the donee asserts that it is a charitable organization. This requirement thus relates to the substance or essence of whether or not a charitable contribution was actually made.
Two exceptions to the substantiation requirements
The donors claimed that the regulations provide relief for failure to comply with the substantiation requirements. For example, the regulations specify that if it is impossible for a donor to obtain the donee charity’s signature on the appraisal summary, the donor’s deduction will not be disallowed provided he or she attaches a statement to the appraisal summary explaining why it was not possible to obtain the donee’s signature. Treas. Reg. 1.170A-13(c)(4)(iv)(C)(2). The court noted, however, that the donors had not asserted that it was impossible to obtain the charity’s signature, nor did they attach an explanatory statement to the Form 8283.
The regulations also provide that if a donor fails to attach the appraisal summary to the tax return, the IRS may request that the donor submit the appraisal summary within 90 days of the request. Treas. Reg. 1.170A-13(c)(4)(iv)(H). If such a request is made and the donor complies, a deduction will not be disallowed provided that the donor’s failure to attach the appraisal summary was a good faith omission and a qualified appraisal was completed within the specified period. The court noted that since the donors in this case “did not obtain a qualified appraisal within the specified period, this exception does not apply.”
Equitable considerations
The donors asserted that denying them a deduction would be inequitable. After all, they donated something of value to a charity and should not be denied a deduction for failing to comply with an arbitrary deadline. Once again, the court disagreed. It concluded: “Deadlines necessarily operate harshly and arbitrarily with respect to individuals who fall just on the other side of them. Nevertheless, the legal system lives on fixed deadlines; their occasional harshness is redeemed by the clarity which they impart to legal obligation …. Nor did the donors ‘fall just on the other side’ of the deadline. The 2000 appraisals were made more than 9 months before the date of contribution. The 2005 appraisals were made more than 3 years after the due date of the donors’ tax return. Thus, we are not faced with a situation where the taxpayer has done ‘all that can reasonably be expected of him.'”
Relevance to church treasurers. This case provides church treasurers with a useful review of the substantiation requirements that apply to gifts of noncash property. Note the following points in particular.
First, contributions of noncash property for which a donor claims a charitable contribution deduction of more than $5,000 must comply with special substantiation requirements. The donor must obtain a qualified appraisal of the donated property from a qualified appraiser, and attach an appraisal summary to the tax return on which the deduction is claimed (this is done on IRS Form 8283, Section B). As the donors in this case learned, a failure to comply with this requirement may lead to the loss of a charitable contribution deduction.
Second, these substantiation requirements ordinarily will not be excused based on “substantial compliance.”
Third, the regulations recognize two limited exceptions: (1) If it is impossible for a donor to obtain the donee charity’s signature on the appraisal summary, the donor’s deduction will not be disallowed provided he or she attaches a statement to the appraisal summary explaining why it was not possible to obtain the donee’s signature. (2) If a donor fails to attach the appraisal summary to the tax return, the IRS may request that the donor submit the appraisal summary within 90 days of the request. If such a request is made and the donor complies, a deduction will not be disallowed provided that the donor’s failure to attach the appraisal summary was a good faith omission and a qualified appraisal was completed within the specified period.
Tip. Do not assume that donors are familiar with the substantiation rules that apply to gifts of noncash property. Church treasurers should obtain several 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 (www.irs.gov). Or, you can order them by calling the IRS forms hotline at 1-800-TAX-FORM. In either case, be sure to get the form and the instructions (two separate documents).
Tip. 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.
Key point. Stock is a special case. No qualified appraisal is required for donations of publicly-traded stock, and a qualified appraisal is required for privately-held stock only if the claimed value exceeds $10,000.
Resource. For a full explanation of the substantiation requirements that apply to all forms of charitable contributions, see chapter 8 in Richard Hammar’s 2007 Church & Clergy Tax Guide, which can be ordered by calling 1-800-222-1840.
This article first appeared in Church Treasurer Alert, April 2007.
