Court Allows Charitable Deduction Despite Lack of Attached Qualified Appraisal
(Parker's Federal Tax Bulletin: March 01, 2013)

Earlier this month, the Tax Court handed taxpayers a big win in a case involving a charitable property donation. The Tax Court rejected all the IRS's arguments in determining that the taxpayers were entitled to the deduction. The case is particularly instructive for practitioners because it explains the factors the Tax Court looks at in determining whether a taxpayer has a reasonable cause defense for overlooking a major requirement associated with taking a large charitable contribution deduction. In Crimi v. Comm'r, T.C. Memo. 2013-51 (2/14/13), the IRS tried multiple arguments in its attempts to persuade the Tax Court that the taxpayers were not entitled to a charitable deduction. The most promising argument for the IRS was the fact that the taxpayers attached a 2000 appraisal report to substantiate a 2004 property donation. In the end, however, the Tax Court sided with the taxpayers and held that their reliance on their CPA constituted reasonable cause for any failure to adhere to the qualified appraisal requirements.

Facts

John Crimi was the president and majority shareholder of Concrete, an S corporation. The other shareholders were trusts set up for the benefit of his children. John, individually and through Concrete, has since before 2004 purchased and sold real estate in New Jersey, and he has pursued the development of certain properties into a residential subdivision. In July 2004, both Concrete and John and his family members, individually, transferred to Morris County, New Jersey more than 65 acres of undeveloped land for $1,550,000 in what was characterized as a part-sale, part-gift transaction. The transfer came after a decision had been made to forgo the pursuit of developing the land as a residential development project. Administrative officials of the town in which the land was located expressed their desire to acquire the property to preserve open space as a means of avoiding further development in the township. Previously, in 2000, John had obtained an appraisal of the property in the amount of $2,950,000. On August 16, 2004, the township's administrator wrote and signed a letter (August 16 letter) to the Crimis and Concrete acknowledging the contribution of block 101, lot 1, block 201, lot 1, and block 703, lot 12.

Michael LaForge was a CPA and a member of a reputable CPA firm. He had provided accounting, tax, and financial services to John and Concrete for over 24 years as their accountant. Since at least 1990, Mr. LaForge had been in charge of managing the client relationship with John and Concrete on behalf of the CPA firm, and on the basis of that engagement he was intimately familiar with the financial affairs of John and Concrete. Mr. LaForge, who had known about and been regularly updated on the contemplated part-gift, part-sale transaction since 1998, requested from John a copy of the 2000 appraisal for the 2004 tax return. John provided the 2000 appraisal, knowing only that an appraisal was necessary to claim a charitable contribution deduction. Mr. LaForge was aware when he prepared the returns at issue that the Code and the regulations specified detailed requirements for claiming a charitable contribution deduction. He also knew that the 2000 appraisal did not meet each of the rules to be considered a qualified appraisal even though the Code and the regulations required the Crimis to obtain a qualified appraisal before claiming a charitable contribution deduction. Knowing the 2000 appraisal did not meet the literal requirements to be a qualified appraisal, he consulted with and was advised by a member of the CPA firm's tax department, who determined the 2000 appraisal was a valid appraisal in substantial compliance with the regulations. Outside of explaining to John that an appraisal of the subject property was required in order to claim a charitable contribution deduction, Mr. LaForge did not explain to John or his family any other rules for claiming a charitable contribution deduction. Mr. LaForge did not say that the 2000 appraisal did not comply with the rules for a qualified appraisal. Nor did he advise John that there was at least a possibility that he would not prevail on the substantial compliance argument. Mr. LaForge did not advise John to obtain a new appraisal, and he did not give John reason to seek advice as to the value of the subject property as of the contribution date.

Concrete claimed a charitable deduction of $859,000. Because it was a flow-through entity, John, his wife, and their children claimed their share of the charitable contribution deduction, as well as deductions for their direct contributions of property. The total contribution deduction for 2004 was $1.4 million. This was the difference between the property's fair market value as stated in the 2000 appraisal ($2,950,000) and the 2004 sale price of $1,550,000.

The Crimis' 2004 return attached copies of (1) page 2 of Form 8283 for block 702, lot 12; (2) page 2 of Form 8283 for block 201, lot 1; (3) the August 16 letter; and (4) the 2000 appraisal. The Forms 8283 attached to the Crimis' 2004 return were signed by the individual who prepared the 2000 appraisal, and acknowledged by Mr. Lewis, the town administrator. The Forms 8283 described the donated property as Land - Block 201, Lot 1 and Land - Block 702, Lot 12 and each summarized the physical condition of the donated property as undeveloped land as described in the 2000 appraisal.

The IRS assessed deficiencies after disallowing the charitable deductions.

IRS Arguments

The IRS disallowed the deductions for three reasons. First, the IRS claimed that the Crimis failed to obtain from the county a contemporaneous written acknowledgment as required by Code Sec. 170(f)(8). According to the IRS, the August 16 letter did not satisfy the contemporaneous written acknowledgment requirement because it was not signed by the county that was the purported donee, the letter incorrectly described a part of the contributed property, and the letter did not include a statement as to whether the donee provided any goods or services in consideration, in whole or in part, for the property contributed.

Second, the IRS asserted that the Crimis failed to attach to their federal income tax returns a qualified appraisal as required by Code Sec. 170(f)(11) and Reg. Sec. 1.170A-13(c). According to the IRS, the 2000 appraisal was not a qualified appraisal because it (1) did not value the subject property as of the contribution date; (2) was prepared four years before the contribution date; (3) did not include the date or expected date of contribution; (4) did not contain a statement that the appraisal was prepared for income tax purposes; (5) incorrectly described the subject property as having more acreage than what was actually transferred; and (6) used market value instead of fair market value as its valuation standard.

Third, citing a highest and best use of conservation, the IRS maintained that the subject property's fair market value was $660,000 on the contribution date. Along that line, the IRS argued that insofar as the value of the subject property did not exceed the consideration the paid, no deduction was allowed.

Taxpayer Arguments

At trial, the Crimis asserted that they were entitled to a larger charitable deduction because the value of the property had increased in 2004 from what the 2000 appraisal report stated. The purported increased fair market value of the property was based on a 2007 appraisal report the Crimis had prepared for the trial. Additionally, the Crimis asserted that they actually or substantially complied with the recordkeeping requirements, or alternatively, that the reasonable cause exception of Code Sec. 170(f)(11)(A)(ii)(II) precluded disallowance of the charitable contribution deductions.

Tax Court's Holding

Fair Market Value of Donated Property

The court rejected the IRS propositions that development of the property was highly speculative and that its highest and best use was for conservation purposes. The court said that New Jersey's smart growth policy supported the proposition that in 2004 development of the subject property was at least equally likely as its preservation. Nor did the court accept the IRS's uncorroborated allegation that an allegedly endangered wood turtle species inhabited the subject property, thus making development unlikely. After testimony from various experts, the court concluded that the property's fair market value at the date of the contribution was $2,966,000.

Contemporaneous Written Acknowledgment

With respect to the IRS argument that the August 16 letter was defective and did not satisfy the contemporaneous written requirements, the court said the IRS was wrong on all accounts. The court cited Rev. Rul. 2002-67 in noting that an agent of the donee may provide the contemporaneous written acknowledgment to the donor. The determination of whether a valid agency relationship exists is governed by state law and the court found ample evidence in the record to show that Mr. Lewis, in facilitating the bargain purchase, had acted as the agent of the preservation partnership with actual and apparent authority. Code Sec. 170(f)(8)(B)(i) requires the written acknowledgment to provide a description of the contributed property. Neither the statue nor the regulations, the court observed, states what may constitute a sufficient description. However, the court was satisfied that the August 16 letter provided a sufficient description of the contributed property to ensure the IRS would know the property described in the letter was the property contributed. What is essentially a small typographical error, the court stated, should not prevent the IRS from being able to recognize the property acknowledged to have been received by the county was actually Block 702 Lot 12, especially in the light of the fact that the 2000 appraisal and the Form 8283 attached to the Crimis' 2004 return provided the accurate description of the contributed property.

Code Sec. 170(f)(8)(B)(ii) and (iii) requires the written acknowledgment contain a statement whether the donee organization provided any goods or services in consideration, in whole or in part, for the contributed party, and if so a description and good faith estimate of the value of the consideration provided. If the donee did not provide any consideration for the contributed property, the written acknowledgment must say so. The August 16 letter, the court noted, stated that the donee received the contributed property valued at $2,950,000, in consideration for which the county provided cash consideration of $1,550,000, leaving a charitable contribution of $1.4 million. The court rejected the IRS suggestion that this was insufficient because it failed to say whether the done organization provided other goods, services, or valuable consideration. The court found the language in the letter to be sufficient and thus no other superfluous statement was required.

Qualified Appraisal Requirement Excused for Reasonable Cause

Congress enacted Code Sec. 170(f)(11), applicable to contributions of property made after June 3, 2004, to require a taxpayer claiming a deduction of more than $500,000 for a charitable gift of property to attach to the year's tax return a qualified appraisal of the property. The court did not address whether the 2000 appraisal was in substantial compliance with the qualified appraisal requirements; nor did it express an opinion as to whether an updated appraisal obtained at the audit stage would cure any defects in the 2000 appraisal. The court said discussions of these issues were moot because it agreed with the Crimis that any noncompliance should be excused for reasonable cause because they reasonably and in good faith relied on Mr. LaForge's advice that the 2000 appraisal met all legal requirements to claim the deduction.

Code Sec. 170(f)(11)(A)(ii)(II) provides that if a taxpayer donor claimed a deduction for a charitable gift of property worth more than $500,000 but failed to attach a qualified appraisal required by Code Sec. 170(f)(11)(D) to his return, the deduction will not be disallowed if the taxpayer can show the failure was due to reasonable cause and not willful neglect. The court noted that neither the statute nor the regulations explain what constitutes reasonable cause in the context of a failure to obtain a qualified appraisal.

However, the court stated, reasonable cause requires that the taxpayer to have exercised ordinary business care and prudence as to the challenged item. Thus, the court observed, the inquiry is inherently a fact-intensive one, and facts and circumstances must be judged on a case-by-case basis. Citing Reg. Sec. 1.6664-4(c)(1), the court said that a taxpayer's reliance on the advice of a professional, such as a CPA, constitutes reasonable cause and good faith if the taxpayer can prove by a preponderance of the evidence that: (1) the taxpayer reasonably believed the professional was a competent tax adviser with sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the advising professional; and (3) the taxpayer actually relied in good faith on the professional's advice.

John had relied on Mr. LaForge and the CPA firm that he worked for as competent tax advisers for over 20 years. Upon the filing of the returns at issue, Mr. LaForge had been a CPA for over 20 years and had expertise in preparing tax returns claiming deductions for charitable contributions. The accounting firm was an established regional accounting firm staffed with accountants, some of whom had law degrees. During the 24 years of engagement, Mr. LaForge had become intimately familiar with John's and Concrete's financial affairs, and there had been no history of mishaps. On these facts, the court concluded that John actually relied on Mr. LaForge's advice in good faith and found it reasonable for John to believe the 2000 appraisal was not stale in substance and thus was a good appraisal.

(Staff Editors at Parker Tax Publishing)

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