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eTax Alert: Charitable Deductions August 3, 2017

Don’t stop reading this important Tax Court decision because the charity deduction is so big – none of my clients donate that much – or because the taxpayer claimed outrageous FMV on the donated property – I’d never let my client get that greedy. Instead, read to the end to find out that the Tax Court disallowed the entire charitable deduction because there was an omission on the Form 8283. Did I forget to completely fill in the form? The court didn’t care if the omission was intentional or unintentional. The deduction was disallowed.

Missing Cost on Appraisal Summary Nixes Charitable Deduction (RERI I, LLC, 149 TC No. 1 ((7-3-  2017))

RERI I, LLC paid $2.95 million in Mar. 2002 to acquire a remainder interest in a Hawthorne, California property. On Aug. 27, 2003, RERI assigned the remainder interest to the University of Michigan. On its 2003 Form 1065, RERI claimed a charitable deduction of $33,019,000.

The Form 8283, Noncash Charitable Contributions, appraisal summary that RERI attached to its 2003 return indicated that it acquired the property by purchase on Mar. 22, 2002, but did not enter an amount in the space provided for the “Donor’s cost or other adjusted basis.”

Strict substantiation requirements apply. To deduct non-cash contributions in excess of $5,000, the donor must obtain a qualified appraisal of the contributed property, attach a “fully completed” appraisal summary to the return on which the deduction is first claimed, and maintain records containing specified information (§1.170A-13(c)(2)(i)(A), (B), and (C)).

Taxpayer’s appraisal overstated FMV. The court heard the opposing appraisers and found the FMV on the donated remainder interest to be $3,462,8861[1]. Because the $33,019,000 value that RERI assigned to the remainder interest it transferred to the University of Michigan was more than 400% of that interest’s determined fair market value, RERI’s claimed charitable contribution deduction resulted in a gross valuation misstatement (§6662(e)(1)(A), (h)(2)). There’s a 20% penalty for a substantial valuation misstatement and a 40% penalty for a gross misstatement.

Omission of basis on Form 8283 fatal to deduction. The required appraisal summary must provide, among other things, the adjusted cost or other basis of the donated property (§1.170A-13(c)(4)(ii)(E)). Congress directed the Secretary of Treasury to adopt stricter substantiation requirements for charitable contributions to alert the Commissioner, in advance, of potential overvaluations of contributed property and thereby deter taxpayers from claiming excessive deductions in the hope that they would not be audited (S. Prt. No. 98-169 (Vol. 1), at 444; 1984 Blue Book, at 503-504). Because RERI’s omission of its basis in the contributed property from the Form 8283 it attached to its 2003 return prevented the appraisal summary from achieving its intended purpose, RERI’s failure to meet the requirement of §1.170A-13(c)(4)(ii)(E) could not be excused by substantial compliance. The charitable deduction was denied in full.

Tax practitioner note. Be sure to complete all required information on the Form 8283. While the appraisal is the responsibility of the appraiser, the completion of the Form 8283 is the responsibility of the tax preparer.


[1] The University realized $1,940,000 on its sale of the contributed property.

 © 2017 Sharon Kreider and Vern Hoven

Sharon Kreider, CPA, has helped more than 15,000 California tax preparers annually get ready for tax season. She also presents regularly for the AICPA, the California Society of Enrolled Agents, CCH Audio, and Western CPE. You’ll benefit from the detailed, hands-on tax knowledge Sharon will share with you—knowledge she gained through her extremely busy, high-income tax practice in Silicon Valley. With her dynamic presentation style, Sharon will demystify complex individual and business tax legislation. She’s a national lecturer for business and professional groups and consistently receives outstanding evaluations. In 2014, she was awarded the prestigious AICPA 2014 Sidney Kess Award for Excellence in Continuing Education.

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DIG DEEPER:

How The $3.5 Trillion Budget Blueprint Could Impact Your Clients

The new reporting requirements on brokers are addressed in Section 80603 of the bill. “Broker,” by definition in Sec. 6045 (c)(1), is expanded to include “any other person who (for a consideration) regularly acts as a middleman with respect to property or services…A person shall not be treated as a broker with respect to activities consisting of managing a farm on behalf of another person.” In turn, the bill defines a “digital asset” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.