Donors of Items Salvaged from Deconstructed Home Failed to Substantiate Donations

(Parker Tax Publishing January 2020)

The Tax Court held that a couple failed to comply with the substantiation requirements for a noncash charitable contribution deduction of over $5,000 because the taxpayer's appraisal summary on Form 8283, Noncash Charitable Contributions, did not include the date the donated property was acquired or the taxpayer's basis in the donated property. The Tax Court further held that the couple failed to substantially comply with the substantiation requirements by attaching a copy of the full appraisal to the return. Loube v. Comm'r, T.C. Memo. 2020-3.

Background

In 2013, Chad and Dana Loube purchased real property in Maryland for $795,000, consisting of land and a single-family house. The Loubes intended to demolish the house and build a new residence of their own design in its place.

Second Chance, Inc. (Second Chance), is a charitable organization formed under Code Sec. 501(c)(3) and it performs deconstruction services, including the removal of furniture, appliances, fixtures, lumber, and other materials. Second Chance sells salvageable material from deconstruction and uses the deconstruction process to teach skills to persons facing barriers to employment while environmentally reusing materials that would otherwise end up as landfill debris.

Second Chance sent the Loubes an email explaining its deconstruction program. The email noted that a contribution by the Loubes to Second Chance would generate a tax deduction and the email included a "Tax Strategy Planning Worksheet." The Loubes entered into an agreement with Second Chance to donate "improvements" but the agreement did not specify what items, objects, or property were being donated. The Loubes hired an appraiser, Patrick Smith, who prepared an appraisal of the Loubes' property. According to the appraisal, the cost to reproduce the house would be $674,000.

On their 2013 tax return, the Loubes claimed a $297,000 noncash charitable contribution deduction for their donation of the improvements to Second Chance. They attached to their return a Form 8283, Noncash Charitable Contributions (appraisal summary). On the appraisal summary, the type of property donated was identified as "Other" and the description of the donated property stated "house improvements." The blocks on the form for the date the donated property was acquired and the donor's cost or adjusted basis were left blank. The Loubes did not provide any explanation for the blank portions of the appraisal summary, but they did attach the appraisal prepared by Patrick Smith to the return. The IRS determined that the Loubes were not entitled to the deduction. In a notice of deficiency, the IRS noted that there were no appraisals for the individual items donated after the deconstruction of the house. The IRS explained that under Reg. Sec. 1.170A-1(c)(2), an appraisal should have been done for each individual item that was donated after it was detached from the home.

Under Code Sec. 170(f)(11), where a charitable contribution of property is valued in excess of $5,000, the taxpayer must obtain a qualified appraisal and attach it to the return. In addition, Reg. Sec. 1.170A-13(c) requires an appraisal summary to be submitted on a Form 8283. Reg. Sec. 1.170A-13(c)(4) defines the necessary elements of an appraisal summary. These elements include, among others, a description of the donated property. Failure to meet the required elements of an appraisal summary generally results in disallowance of the claimed deduction unless the taxpayer has reasonable cause for being unable to provide the required information.

The Loubes challenged the notice in the Tax Court and the IRS filed for summary judgment. First, the IRS argued that the Loubes' appraisal summary omitted required information, including the date the donated property was acquired and its cost basis. Second, the IRS argued that the appraisal was not a qualified appraisal because it did not appraise the property that the Loubes actually donated. According to the IRS, the Loubes had to separately value each individual item actually removed by Second Chance. Third, the IRS argued that even if the Loubes' appraisal was qualified, they gave a partial interest in property, for which a deduction is generally prohibited. The Loubes responded that, while they may not have strictly complied with the requirements in the regulations, they nevertheless substantially complied by attaching the full appraisal to their return.

Tax Court's Analysis

The Tax Court granted summary judgment for the IRS. It held that the Loubes failed to strictly comply with Reg. Sec. 1.170A-13(c) because the appraisal summary they submitted with their tax return failed to provide, among other information, the basis and the acquisition date of the contributed property. The court found that the couple also failed to attach to the appraisal summary an explanation of reasonable cause for their inability to provide the basis, acquisition date, or other information related to the contributed property.

The Tax Court concluded that the Loubes did not substantially comply with the regulations because their appraisal summary omitted too much of the required information and provided no reasonable-cause explanation for the omissions. The Tax Court noted that, in RERI Holdings I, LLC v. Comm'r, 149 T.C. No. 1 (2017), aff'd 2019 PTC 400 (D.C. Cir. 2019), it held that a taxpayer who failed to disclose cost or adjusted basis on its appraisal summary had failed to substantially comply with Reg. Sec. 1.170A-13. In that decision, the court explained that Congress specifically enacted the reporting requirements in order to combat inflated charitable deductions and those reporting requirements required, where reasonably obtainable, a disclosure of the basis of contributed property to facilitate the IRS's efficient identification of overvalued property.

The Tax Court was not persuaded by the fact that the Loubes attached the full appraisal to their return. The court said that, while it may have been possible for the IRS to glean sufficient information from the purchase price and tax information listed in the appraisal, that did nothing to change the fact that Congress specifically required the heightened substantiation requirements in the regulations so that the IRS could efficiently flag properties for overvaluation from the face of appraisal summaries. According to the court, Congress wanted to prevent the IRS from having to sleuth through the footnotes of millions of returns to obtain the information necessary to determine if a taxpayer adequately substantiated a charitable contribution deduction.

For a discussion of the recordkeeping and substantiation requirements for charitable donation deductions, see Parker Tax ¶84,190.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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