INSIGHT: Planning to Deduct a Large Charitable Contribution? Tread Carefully

Charitable contributions, and the associated deductions, have long been a part of the federal income tax system, and most taxpayers are aware of the deduction available for charitable contributions. Because of this, taxpayers often believe that all charitable contributions are deductible. However, two recent U.S. Tax Court decisions emphasize that improper reporting can be a fatal flaw for large noncash charitable contributions.

The Tax Court’s recent decisions in Oakhill Woods LLC v. Commissioner, and Loube v. Commissioner, highlight that the deduction of large charitable contributions requires compliance with the associated regulatory requirements. The decisions address regulations that were issued because of concerns that taxpayers were overstating charitable deductions. The regulations mandate increased reporting associated with deducting charitable contributions. For deductions of noncash charitable contributions, the regulations generally require certain specified information to be disclosed to the IRS. (Treas Reg 1.170A-13(b)) For noncash charitable contributions of $5,000 or more taxpayers are also required to obtain a qualified appraisal an attach an appraisal summary to their return. (Treas. Reg. 1.170A-13(c)(2))

REGULATORY REQUIREMENTS RELATED TO DEDUCTION OF NONCASH CONTRIBUTIONS

Properly reporting a deductions of noncash contributions involves compliance with Treasury Regulation Section 1.170A-13(c). For noncash contributions of $5,000 or more, the taxpayer generally must (a) satisfy the general requirements for deduction of noncash contribution, (b) obtain a qualifying appraisal, and (c) attach and appraisal summary. (Treas. Reg. 1.170A-13(c)(2))

General Requirements for Deduction of Noncash Contributions

A return claiming a deduction of noncash contribution must attach Form 8283. Form 8283 reports certain information required in connection with noncash contributions. Form 8283 must include the name and taxpayer identification number of both the donee and the donor, the donee’s address, the date and manner (gift, purchase, etc.) the property was acquired by the donor, and cost or other basis in the property. (Treas. Reg. 1.170A-13(b)(2)(ii)) In addition, Form 8283 must include a description of the property sufficient for a person unfamiliar with the type of property to be able to identify it, and in the case of tangible property, it must also contain a description as to the general physical condition of the property at the time of contribution. (Treas. Reg. 1.170A-13(d)(2)(iii)) If the property was created, produced, or manufactured by or for the donor, Form 8283 must include a statement with that information and the approximate date the property was “substantially completed.” (Id.)

Qualified Appraisal Requirement for Noncash Contributions of $5,000 or More

A deduction of a noncash contribution of $5,000 or more generally requires the donor to obtain a “qualified appraisal” of the donated property. To be a qualified appraisal, the appraisal (a) must be prepared, signed, and dated by a qualified appraiser, (b) include a sufficiently detailed description of the property such that a person unfamiliar with the type of property could identify the property, and (c) it cannot be completed more than 60 days prior to the date of contribution of the appraised property. (Treas. Reg. 1.170A-13(c)(3)) Finally, to be a qualified appraisal, the appraisal fee cannot be based on a percentage of the value appraised. (Treas. Reg. 1.170A-13(c)(6))

Required Appraisal Summary

The regulations generally do not require the taxpayer to attach the qualified appraisal to the return, but attachment of a summary of the qualified appraisal is required. The appraisal summary must include the name, address, and identifying number of the qualified appraiser. (Treas. Reg. 1.170A-13(c)(4)) The summary must also contain the appraised fair market value of the property on the date of contribution and a declaration by the appraiser. (Id.) Form 8283 has a section that functions as the qualified appraisal summary and, to be complete, it must be signed and dated by the donee and the qualified appraiser who prepared the appraisal. (Id.)

BACKGROUND ON THE RECENT TAX COURT DECISIONS RELATED TO DEDUCTION OF LARGE NONCASH CONTRIBUTIONS

Both Oakhill and Loube involved deductions in excess of $5,000 arising from noncash charitable contributions. In both cases, the charitable deductions appear to be based on suspect valuations of the underlying contribution. However, the court’s decisions did not analyze the valuations and instead focused on the taxpayers’ failures to file a complete Form 8283.

In Oakhill, the taxpayer LLC claimed a deduction on its 2010 income tax return for its donation of a conservation easement on undeveloped forest property. The valuation is suspect because the conservation easement was valued at $20,975 per acre despite the taxpayer’s purchase of the land a few years earlier for approximately $2,500 per acre. (Oakhill Woods, LLC v. Comm’r at *3) The Court noted that the taxpayer’s deduction involved appreciation of more than 800% during a 3-1/2 year time period which spanned the years of “the worst real estate crisis since the Great Depression.” (Oakhill Woods, LLC v. Commissioner at *19)

In Loube, the taxpayers purchased property intending to construct a new residence on the property after demolishing the existing home. (Loube v. Commissioner at *2) Less than a month after the acquisition, the taxpayers donated the existing house (but not the land) to a qualifying charity. (Loube v. Commissioner at *4.) The taxpayers claimed a deduction of $297,000 on their 2013 income tax return. (Loube v. Commissioner at *8) The valuation is suspect because the value of the home, which the taxpayers originally planned to demolish, was based on the cost to construct the property as opposed to the fair market value of the property.

In both cases, the taxpayers failed to include the cost or adjusted basis of the donated property on Form 8283. As noted above, cost or adjusted basis is one of the items specifically required to be included on Form 8283.

THE TAX COURT’S DECISIONS

In both cases, the IRS disallowed the deductions for failing to establish the fair market value of the donated property and failing to strictly comply with all the reporting requirements associated with noncash charitable contributions. (Loube v. Commissioner at *22; Oakhill Woods, LLC v. Commissioner at *19) The taxpayers filed petitions with the Tax Court challenging the IRS’s determinations. In both cases, the IRS filed motions for summary judgment, arguing that it was entitled to decisions in its favor without trial, because the taxpayers failed to include the cost or adjusted basis of the donated property on Form 8283 as required by the regulations. In opposition, the taxpayers argued that they substantially complied with the reporting requirement by including the required information elsewhere on their returns or in an attachment to their returns.

In Oakhill, the taxpayer argued that the information that was missing from Form 8283 was included on Schedule L, the balance sheet and schedules included with the return. However, in the court’s opinion, the taxpayer simply chose to ignore the disclosure requirement all together. (Oakhill Woods, LLC v. Commissioner at *14.) Thus, the court concluded that the taxpayer failed to substantially comply with the disclosure requirements; and, for this reason, the court granted the motion for partial summary judgment in favor of the IRS. (Oakhill Woods, LLC v. Commissioner at *2)

In Loube, the taxpayers argued that they substantially complied with the requirement by attaching a complete copy of a third-party appraisal which contained the information that was missing from Form 8283. However, the court again granted summary judgment in favor of the IRS. The Court noted that the Deficit Reduction Act (DEFRA) was specifically passed to require heightened substantiation requirements related to deductions of noncash charitable contributions so that the IRS could flag potentially overvalued deductions from the face of Form 8283, and the court reiterated that “a taxpayer who fails to disclose ‘cost or adjusted basis’ on [Form 8283] has failed to substantially comply with section 1.170A-13, Income Tax Regs.” (Loube v. Commissioner at *20, citing RERI Holdings I, LLC v. Commissioner, 149 T.C. 1.)

INSIGHT

In both cases, the Tax Court granted the IRS’s requests for summary judgment. In rejecting the taxpayers’ substantial compliance arguments, the Tax Court noted that the regulations added the appraisal summary requirement so that the IRS could efficiently review and flag potentially overvalued charitable deductions from the face of Form 8283 without slogging through other aspects of the returns and attachments. As such, the Tax Court reasoned that taxpayers cannot substantially comply with the regulatory requirements without completely and accurately filling out Form 8283.

The decisions are particularly noteworthy for those involved in planning future charitable deductions because the Tax Court’s decisions did not turn on the suspect valuations. Instead, the Tax Court focused on strict compliance with the regulatory requirements. Based on these holdings, the IRS could argue in future cases that the Tax Court’s holdings extend to other charitable deductions that, although properly valued, are not reported in strict compliance with the regulations. As such, taxpayers and their advisors should give careful attention to satisfying the reporting requirements when planning large charitable deductions.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Aaron Borden leads Grant Thornton LLP’s Private Wealth Services practice in Dallas.