Missing Entry on Appraisal Summary Nixes Charitable Deduction July 10, 2019

Missing Entry on Appraisal Summary Nixes Charitable Deduction (RERI Holdings I, LLC v. Comm., US Court of Appeals for the District of Columbia, No. 17-1266 (5-24-2019)

RERI I, LLC paid $2.95 million in Mar. 2002 to acquire a remainder interest in a data center leased to AT&T and located in Hawthorne, California. 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.

Tax practitioner point. A quick look at the facts shows that the taxpayer paid a little less than $3 million for the remainder interest just 17 months before it claimed that the value of the gift was $33 million. And, by the way, the University of Michigan sold the interest in the property for $1.94 million — a tiny bit short of the $33 million value claimed.
Keep reading even if this doesn’t seem to be your client — YET. Don’t stop reading this important court decision because the charity deduction is so big -none of my clients donate that much – or because the taxpayer claimed an 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 Appellate Court agreed with the Tax Court and 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.

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)). 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 RERI did not enter an amount in the space provided for the “Donor’s cost or other adjusted basis.” 

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))1. 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 point. 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.
And a 40% gross misstatement penalty applied. 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 ($3,462,886), RERI’s claimed charitable contribution deduction resulted in a gross valuation misstatement (§6662(e)(1)(A), (h)(2)). The reasonable cause exception did not apply.

Note. There’s a 20% penalty for a substantial valuation misstatement and a 40% penalty for a gross misstatement.

1. As an exception to the rule, if the donor is “unable” to provide information on its cost basis in the donated property, the donor may substitute an explanatory statement attached to the Form 8283 (§1.170A-13(c)(4)(iv)(C)(1)). RERI did not attach an explanation nor did it have satisfactory excuses for its omission.

Tax classes at Western CPE’s resort conferences cover payroll tax developments, in addition to updates and news for individuals, businesses and real estate investors.

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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