On June 4, 2020, the Tax Court issued a Memorandum Opinion in the case of Brannan Sand & Gravel Co., LLC v. Commissioner (T.C. Memo. 2020-76). The issue before the court in Brannan Sand & Gravel Co., LLC was whether the petitioner substantiated (as required by Treas. Reg. § 1.170A-13(c)) a $200,000 charitable contribution claimed for the donation of certain water storage rights.
Background to Donation
The petitioner is in the business of extracting rock, sand, and gravel from the ground and processing those materials into asphalt. It owned 157 acres in Colorado which it mines. Silver Peaks Metropolitan District No.1 (District) is a political subdivision of Colorado, to which contributions made for exclusively public purposes are treated as charitable contributions under IRC § 170. Bromley District Water Providers, LLC, provided (as you may have guessed) water to the District. The petitioner had land suitable for water retention facilities, and the District had a need. It was a match made in gravel-pit heaven.
The petitioner and the District entered in an Agreement to Buy and Sell Real Estate and Option with Bromley in January 2003 and entered into a Contribution Agreement with both Bromley and the District concurrently. The Buy/Sell Agreement reserved mineral and water rights to the petitioner, as well as a water storage easement. The petitioner agreed to contribute to the District an undivided interest equivalent to 20% of the water storage easement purchased by Bromley in consideration of the agreement that Bromley would donate at least $10,000 in water, water rights, or other assets to the District. There were other deals and contracts, but they are unnecessary to the Tax Court’s analysis.
The Not-So-Qualified Appraisal
On its 2010 Form 1065, the petitioner claimed a $200,000 charitable contribution deduction. It attached a Form 8283 (Noncash Charitable Contribution) to the return. The Form 8283 was not entirely complete. In fact, it was rife with missing information. The Form 8283 referred (extensively) to an “attached appraisal,” which was appended to the Form 8283.
The appraiser, who had advised the petitioner that his opinion was based on familiarity with many gravel mines that have been converted into water storage vessels because of his representations of a number of companies in the aggregate industry. The “appraiser” was, by trade, a litigator, but he was “aware of” a number of properties asking a price per acre-foot equivalent to what he had listed on the appraisal form.
Missing from the appraisal were a number of elements, including the method of valuation; the specific basis for determining the fair market value of the property; the physical condition of the property; a statement that the purported appraisal was prepared for Federal income tax purposes; an explanation comparing the transactions that he observed with the property in the petitioner’s transactions; any indication that the appraiser was familiar with the terms of the purchase agreement, the contribution agreement, or the memorandum of understanding entered into by the donor, the donee, and Bromley relating to the conveyance of the property contributed; any comparison to the alleged “comparables” or explanation of whether they involved a willing buyer and a willing seller or were simply a way to resolve litigated disputes; and finally, no justification for choosing the high end of the range that the appraiser identified. Thus, it should not be surprising that the IRS weighed and measured the appraisal and found it wanting. The IRS issued a notice of final partnership administrative adjustment (FPAA) disallowing in full the $200,000 charitable contribution deduction.
Justification (and There’s a Lot) for Denying Deduction
The petitioner had the burden of proving that it had satisfied all of the requirements for the deduction it had claimed. See Tax Court Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This was going to be a tough row to hoe based on the suspect “qualification” of the appraiser, but this was the least of the petitioner’s worries. The Tax Court noted that the most important fact regarding a noncash charitable contribution is the fair market value (FMV) of the property at the time of the contribution. Treas. Reg. § 1.170A-1(c)(1).
“Notably missing from the stipulated facts,” however, is any “reliable evidence” that the easement petitioner contributed to the District had an FMV of $200,000 or anything near that amount as of the date of the contribution. The Tax Court cannot consider opinions, even of a qualified appraiser, that are not received in evidence as proof of fair market value. See Van Der Aa Invs., Inc. v. Commissioner, 125 T.C. 1, 6-7 (2005). Further, in order for an appraisal report to be admissible as evidence of fair market value is if the author testifies and makes himself available for cross-examination. Id.; Evans v. Commissioner, T.C. Memo. 2010-207.
The Tax Court draws the petitioner’s attention to the cases ofOakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24, *11, and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, wherein partial summary judgment was granted in favor of the IRS because of a single omission from the Form 8283 appraisal summary (the donor’s basis in the property). The IRS, through stipulated evidence, shows that the basis is not the only required information “omitted” from the Form 8283. The Tax Court spends a couple of pages going line by line of the IRC § 170 regulations to demonstrate just how very deficient the appraisal was, including the non-qualification of petitioner’s “appraiser.”
When a Litigator may be a Qualified Appraiser?
One sentence is interesting to note, however. It very well may have been meant by the Tax Court as an olive branch, but I read it to expand the strike zone on qualifying as an appraiser for purposes of IRC § 170. The Tax Court notes that the litigator-qua-appraiser “perhaps…could have been qualified to give an opinion of value if he had explained how his experience in litigation related to agreed values between a willing buyer and a willing seller.”
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