This text focuses on the noncash charitable reporting necessities themselves, particularly Kind 8283, and on how IRS has cited technical noncompliance with these necessities — footfaults, if you’ll — in disallowing claimed deductions even the place there isn’t a precise dispute as to valuation.

In case your solely instrument is a hammer…

However first we should always take a step again and ask, how did we get right here? And as could be very usually the case, the reply is that years in the past the Treasury requested the Congress to provide it the mandatory instruments to extra readily establish perceived abuses, on this case the overvaluation of contributed property.

The tax Code supplies a set of robust incentives for contributions of appreciated property to public charities. Donors keep away from recognition of long run capital achieve, however might also get a deduction at truthful market worth, which offsets extraordinary earnings.

Sure, the deduction is restricted to 30 p.c of your adjusted gross earnings, however you get a five- 12 months carryforward, so normally that is merely a query of timing.

You’d assume these incentives are sufficient, and for most folk they’re. However wherever the tax Code provides an incentive you will see that operators pushing the envelope — within the current context, grossly overstating the worth of the contributed property. The audit price on 1040s has all the time been very low, IRS has restricted sources, and it must work some form of triage to establish the softer targets.

In 1984, the Congress gave the company broad authority to manage on this area, the Treasury promptly rolled out reg.

part 1.170A-13, and the substantiation necessities detailed in that regulation have been manifested in Kind 8283.

In case you are claiming a deduction for noncash presents in extra of $5k, you should connect an 8283 to your return, with the sworn declaration of a “certified” appraiser that she has ready a written valuation report she is prepared to face behind or undergo penalties.

It’s straightforward to misstep in making an attempt to fulfill these substantiation necessities. And since it’s not all the time straightforward for IRS to prevail in a courtroom battle of knowledgeable witnesses on valuation, the company has lately sought to disallow claimed deductions altogether on the premise of what in some circumstances looks like technical noncompliance with the reporting necessities.

Necessary versus Listing

The query in the end is whether or not the taxpayer has “considerably” complied, and the reply will usually activate whether or not the requirement in query is “obligatory,” that’s, info IRS truly must make a threshold determination whether or not to open an examination, or merely “listing,” that’s, info that simplifies the triage course of.

The seminal determination right here is Bond, 100 T.C. 32 (1993), from which one would possibly virtually infer that just about the entire reporting necessities are merely “listing.” However extra not too long ago, beginning with RERI Holdings I, 149 T.C. 1 (2017), the Tax Courtroom has made clear that on the very least, the date the taxpayer acquired the contributed property and her adjusted value foundation are “obligatory” disclosures.

The omission of those two knowledge factors has been dispositive in a number of syndicated easement circumstances, notably Oakhill Woods, T.C.Memo. 2020-24, wherein the courtroom rejected the taxpayer’s argument that it must be ample that the data appeared, albeit not directly, elsewhere on the return.

However generally the reporting errors appear a bit extra innocuous, there isn’t a actual dispute as to the claimed worth of the contributed property, and IRS nonetheless brings out the hammer.

A stark instance of that is Hewitt, 109 T.C. 258 (1997), involving presents to a non-public basis of inventory in what was then not but a publicly traded company, however for which there was one thing of a prepared market. The taxpayers merely didn’t acquire value determinations, and thus omitted to finish related fields on the 8283s. IRS acknowledged the claimed values have been doubtless right, however restricted the allowed deductions to the taxpayers’ foundation.

The Tax Courtroom sustained this outcome, saying the requirement to acquire a written appraisal was statutory and subsequently per se obligatory. The 4th Circuit federal appeals courtroom affirmed with out opinion, 166 F.third 332 (4th Cir. 1998).

The incorrect basket…

Not sometimes, there’s something of a mismatch between what’s contributed and what’s appraised. Take for instance Evenchik, T.C.Memo. 2018-34, wherein the appraiser valued two condominium buildings owned by a intently held company, however the precise reward was of inventory within the company. The outcome was that the claimed deduction was disallowed altogether.

Or it could be that the appraisal was commissioned for another objective, and thus the report doesn’t make the mandatory recitations as to the date of the reward and the aim of the appraisal. That is what occurred in Chrem, T.C.Memo. 2016-164.

In reference to a pending merger right into a associated company whose inventory was owned virtually solely by an worker inventory possession plan (ESOP), shareholders within the goal intently held company had contributed a portion of their inventory to donor suggested funds, from which it was anticipated the buying company would later redeem these shares.

Setting apart the query of prearrangement, which did additionally determine within the case, one of many key points in dispute was whether or not the appraisal report the taxpayers had submitted with their returns met the technical necessities of the regulation. The issue was that the appraisal had been made, not for the aim of substantiating the claimed charitable deductions, however particularly to justify the worth the buying company was paying, to fulfill its fiduciary obligations to the ESOP.

The appraisal was not addressed to the taxpayers individually, it didn’t even point out the contribution of shares to the DAFs, and maybe crucially it didn’t say something about discounting the worth of the small minority place represented by these shares. Additionally, a number of of the taxpayers had claimed deductions in extra of $500k, which might have required them to connect an entire copy of the appraisal report itself to their returns, which they didn’t.

Nonetheless, the taxpayers argued that that they had “considerably” complied with the regulatory reporting necessities, or alternatively that in failing to fulfill these necessities that they had relied fairly on the recommendation of a professional tax skilled, on this case the CPA who had ready their returns.

The events filed cross-motions for partial abstract judgment on simply these points. The courtroom denied each motions, saying there have been materials questions of incontrovertible fact that must be developed at a trial on the deserves. Except the case was settled within the meantime. Which it was, on phrases that aren’t disclosed within the courtroom file.

Whose opinion issues?

One other downside that will generally come up is the independence of the appraiser. Maybe the traditional case being Mohamed, T.C.Memo. 2012-152, wherein the taxpayer was himself an actual property skilled and signed off on his personal value determinations. That clearly was a nonstarter.

However the regulation requires fairly a bit extra. Not solely is the donor herself disqualified, but additionally the donee org, and in addition any occasion to the transaction wherein the donor acquired the topic property. Additional, if the appraiser is “recurrently” engaged by any of those events, she is required to state in her sworn declaration on the 8283 that she does most of her appraisal work for “others.”

It’s not troublesome to think about IRS making a problem of this latter requirement in a number of the syndicated easement circumstances now working their approach by means of examinations and the courts. Or revising the regulation to require independence from the promoter, who might not be a direct occasion to the transaction.