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Lessons from the Tax Court: No leniency on appraisals

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in Small Business Tax,Small Business Tax Deduction Strategies

Beware this pitfall when calculating charitable deductionsA taxpayer in a new case, who should have known better, lost out on a charitable deduction worth millions because he did not obtain an independent appraisal of donated real estate properties. (Mohamed, TC Memo 2012-152)

Key facts: The taxpayer, a real estate broker, certified real estate appraiser and entrepreneur in California had amassed a personal fortune in real estate. He contributed five parcels of property to a charitable remainder trust (CRT) over a two-year period.

The taxpayer filled out his joint income tax returns for the tax years in question by himself.

He also attached Form 8283, Noncash Charitable Contributions, to his returns and claimed charitable deductions for transfers to the CRT based on a value of more than $14 million.

But the taxpayer admitted that he did not read the instructions before completing the form because, as he testified in court, the form seemed “so clear.” He used his own appraisals of the donated properties to establish their value and did not report the tax basis of each property. Instead, he stated on the form that he had acquired all the properties in the 1970s and 1980s. Also, the taxpayer left the Declaration of Appraiser on Form 8283 blank, although he did sign the Donee Acknowledgment portion of the form.

Thus, the IRS denied the deductions in full. After the IRS audited the taxpayer, he hired an independent appraiser, who valued the properties at more than $18 million, higher than the taxpayer’s own appraised value. But the IRS stood firm on its denial.

Bottom line: The Tax Court noted the extensive substantiation requirements in the tax law for charitable gifts of property in excess of $5,000. It agreed with the IRS that the taxpayer had not complied with the rules for qualified appraisals from an independent appraiser. Although it conceded that this result is harsh, the Court ruled that the charitable deduction was zero!

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