Yesterday, the Tax Court issued a 63 page opinion finding that the taxpayers were not entitled to a $499,000 charitable contribution deduction for the donation of an apartment building to Volunteers for America because the taxpayers failed to obtain a qualified appraisal for the building. Alli v. Commissioner, T.C. Memo. 2014-15. This case highlights the importance of meeting all of the substantiation requirements for charitable contribution deductions. Even where there is no dispute that a taxpayer has donated valuable property, a failure to follow the appraisal rules in many cases precludes the taxpayer from taking any deduction at all. In the Alli case, there were numerous substantiation problems that resulted in a complete disallowance of the taxpayers’ claimed deduction.
As an initial matter, the Court found that while the apartment building was owned by BSA Corporation, an S corporation owned by the taxpayer-husband, that fact did not preclude the taxpayers from taking a deduction on their individual income tax return. The Court noted that Internal Revenue Code sec. 1366(a)(1) provides that deductions for charitable contributions flow through separately to the shareholder and that sec. 1363(b)(2) does not allow these deductions at the S corporation level.
A majority of the Court’s opinion was devoted to a discussion of the substantiation requirements for charitable contribution deductions under the Treasury Regulations, and in particular, the requirement that a taxpayer obtain a “qualified appraisal.” The Court declined to address whether BSA’s failure to file a Form 1120S (U.S. Income Tax Return for an S Corporation) was sufficient grounds for disallowing the charitable contribution deduction, instead finding that it need not address that issue because neither of the proffered appraisals met the requirements of I.R.C. sec. 170(f)(11) and the Treasury Regulations, and the Form 8283 (Noncash Charitable Contributions) attached to the taxpayers’ return failed to include all of the required information.
The Court found that the taxpayers’ proffered appraisals were deficient in numerous respects. The first appraisal was untimely, didn’t list the date of contribution, failed to list the terms of the agreement relating to the disposition of the building, didn’t state that it was prepared for income tax purposes, and failed to provide a fair market value appraisal of the building under any of the three accepted approaches for valuation (the market approach, the asset-based approach, and the income approach). The second appraisal failed in even more respects than the first, including all of the failures of the first appraisal. The Court also found that the two appraisers were not “qualified appraisers,” which further prevented the taxpayers from satisfying the substantiation requirements. Additionally, the Form 8283 that the taxpayers attached to their return failed to include all of the required categories of information.
While the Court considered whether the substantial compliance doctrine might apply to excuse the taxpayers from strict compliance with the regulations, it found that the appraisals each failed to meet several substantive requirements and they each omitted entire categories of required information. The Court also found that the taxpayers did not meet their burden of establishing reasonable cause. Finally, while the taxpayers claimed they relied upon a paid return preparer, they failed to introduce any reliable evidence of the preparer’s qualifications or any evidence that they provided the preparer with complete information.