On April 7, 2020, the Tax Court issued a Memorandum Opinion in the case of Campbell v. Commissioner (T.C. Memo. 2020-41). The primary issue before the court in Campbell was whether petitioners are entitled to a charitable contribution deduction with respect to donation, which hinges on the issues of whether the taxpayer submitted appropriate substantiation for the contribution and/or reasonably relied on the advice of a CPA that the charitable deduction was appropriate.
In 2006, petitioner-husband learned about a charitable program (through his CPA) that sold units of eyewear (approximately 3,500 pairs of glasses per unit) for $50,000, the purchaser of which unit could then (purportedly) donate the glasses (after a 1-year holding period) to a qualified IRC § 501(c)(3) organization and claim a charitable deduction at the appraised FMV of the eyewear at the time of the donation, which was advertised as roughly $225,000.
The petitioner-husband was provided with an “offering memorandum” detailing the program and its tax implications. The offering memorandum was prepared by the same CPA at the request of the eyewear company. It noted that the eyewear company would store and ship the frames to the charity, and (most importantly) would complete IRS Form 8283 (Noncash Charitable Contributions) signed by a qualified appraiser that would be attached to the donor’s income tax return in the year of donation. The CPA was also a participant in the program, all the while representing the eyewear company and promoting the program to his client and others.
In December 2007, the chief operating officer of the charity of choice, sent the petitioner-husband a letter acknowledging the generous gift of “eye ware,” which should have been petitioners’ first clue (well, it should have been about their 20th, but who’s counting) that something was amiss. Though the letter was signed by the COO, it made no mention of whether the charity provided any goods or services in consideration for the petitioner-husband’s donation. In April 2008, the valuation firm hired for the program, sent the petitioner-husband an appraisal report that valued the “designer eyewear products” that the petitioner “held” at $226,000 and change.
The petitioners timely filed their 2007 return (prepared by the CPA’s firm) reporting over $1m in gross income, a $898,000 NOL carryforward, and claiming the charitable donation as one (of many) itemized deductions. Because the losses reported on the return were so substantial, the petitioners reported a negative gross income in 2007 and carried-forward the deduction to their 2008 return. The petitioners attached the Form 8283 and appraisal.
The petitioners timely filed their 2008 return, claiming AGI of $3m, substantial capital losses reported on Schedule E, and $838,000 of itemized deductions reported on Schedule A. The IRS examined the petitioners’ return and determined that not only should the charitable contribution be disallowed, but that accuracy-related penalties should be imposed.
Non-Cash Charitable Contributions
A taxpayer is allowed as a deduction any charitable contribution made during the taxable year. IRC § 170(a)(1). A charitable contribution is defined as “a contribution or gift to or for the use of” a charitable organization. IRC § 170(c). Such a deduction is allowable “only if verified under [the] regulations.” IRC § 170(a); Treas. Reg. § 1.170A-13.
As relevant here, for any noncash charitable contribution exceeding $5,000, the regulations require the donor to obtain a “qualified appraisal” for the property contributed, to attach a fully completed “appraisal summary” to the income tax return for the year the deduction is claimed, and to maintain records containing certain information required by Treas. Reg. § 1.170A-13(b)(2)(ii)). See Treas. Reg. § 1.170A-13(c)(2); IRC § 170(f)(11)(C); Alli v. Commissioner, T.C. Memo. 2014-15, *19, n.13. Additionally, and as relevant here, for any contribution of $250 or more the donor must obtain a “contemporaneous written acknowledgment” (CWA) from the charitable organization. Treas. Reg. § 1.170A-13(f)(1); see also IRC § 170(f)(8); Oatman v. Commissioner, T.C. Memo. 2017-17, *13.
Under the regulations for an appraisal to be a “qualified appraisal” it must be made no earlier than 60 days before the date of the contribution and no later than the due date of the return; must be prepared, signed, and dated by a qualified appraiser; must not involve a prohibited appraisal fee; and must include certain other specified information. See Treas. Reg. § 1.170A-13(c)(3)(i).
As the Tax Court stated in Alli, T.C. Memo. 2014-15 at *30, “[i]n order for the qualified appraisal to help the IRS ‘deal more effectively with the prevalent use of overvaluations,’ the appraised property must be the same property that was donated and that gave rise to the claimed deduction.” See Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *8 (concluding that taxpayers did not obtain a “qualified appraisal” of “the contributed property,” because the appraisals obtained were appraisals of the entirety of the corporation’s assets and not of the specific contributed shares); Smith v. Commissioner, T.C. Memo. 2007-368, *47-*48, aff’d, 364 F. App’x 317 (9th Cir. 2009).
Sufficient Description of Property for Appraisal
The Treasury Regulations concerning descriptions of the donated property explains that the qualified appraisal must include a description of the property “in sufficient detail” for a person who is not generally familiar with the type of donated property to “ascertain” that the specific property appraised is the same specific property that was contributed. Treas. Reg. § 1.170A-13(c)(3)(ii)(A).
As the Tax Court has previously explained, the description requirement is not only important when examining the deduction, it is “indeed essential” to the review of charitable contribution and the reliability of corresponding appraisals. Alli, T.C. Memo. 2014-15 at *31-*32; Bruzewicz v. United States, 604 F.Supp.2d 1197, 1206 (N.D. Ill. 2009)). Absent a sufficient description and identification of the contributed property, the appraisal and its valuation of the donated property are, essentially, meaningless. Id.
Contents of Contemporaneous Written Acknowledgment (CWA)
Not only must the contribution deduction be supported by an appropriate appraisal, the taxpayer must also submit a “contemporaneous written acknowledgement” (CWA) to substantiate the donation. A CWA must include a description (but not value) of any property (other than cash) contributed; a statement as to whether the donee organization provided any goods or services in consideration for the contribution; and, if the organization did provide goods or services, a description and a good faith estimate of the value of any goods or services provided by the organization. See § 1.170A-13(f)(2).
The CWA must affirmatively state that no consideration was provided for the contributed property. The Tax Court has determined that this is a “deal breaker,” which is to say that the “no consideration” statement is so very important that no deduction will be allowed if the CWA does not include such a statement. French v. Commissioner, T.C. Memo. 2016-53, *8; Crimi v. Commissioner, T.C. Memo. 2013-51, *92-*93; Durden v. Commissioner, T.C. Memo. 2012-140, *7-*8; Friedman v. Commissioner, T.C. Memo. 2010-45, *14.
The Tax Court has justified its unyielding position regarding substantiation in a number of Tax Court cases. In the case of Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), aff’g 118 T.C. 528 (2002), the Tax Court observed that a total denial of a deduction in the case of an improper CWA is in keeping with the effective administration of a self-assessment and self-reporting system. Id.
Reasonable Cause – Reliance on Advisor
If a taxpayer does not strictly or substantially comply with the requirement of IRC § 170 and its regulations, which require obtaining a “qualified appraisal,” a charitable contribution deduction will not be denied in the event that the taxpayer can prove that the failure to meet the qualified appraisal requirement was “due to reasonable cause and not to willful neglect.” IRC § 170(f)(11)(A)(ii)(II). Reasonable cause requires that the taxpayer exercised ordinary business care and prudence with regard to the challenged deduction. This inquiry is fact-intensive, and all facts and circumstances must be judged on a case-by-case basis. United States v. Boyle, 469 U.S. 241 (1985).
Reliance on the advice of a professional, such as a tax attorney or certified public accountant, may constitute good faith and reasonable cause, but only in the event that the taxpayer can prove by a preponderance of the evidence that the taxpayer reasonably believed the professional advisor was a competent tax professional with sufficient expertise to justify reliance; that the taxpayer provided all necessary and accurate information to the tax professional; and that the taxpayer actually relied in good faith on the professional’s advice. See Id.; see also Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
If the taxpayer relies on the advice of a competent, independent advisor (meaning that the advisor has no conflict of interest and does not rely on the advice of “promoters of the investment,” this reliance may be reasonable. 106 Ltd. v. Commissioner, 136 T.C. 67, 79 (2011); Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir. 2006), aff’g T.C. Memo. 2004-279), aff’d, 684 F.3d 84 (D.C. Cir. 2012); see also Mazzei v. Commissioner, 150 T.C. 138, 181 (2018) (citing Neonatology Assocs., 115 T.C. at 98). A taxpayer’s reliance on the advice from interested persons or promoters is categorically unreasonable.
Original opinion: (T.C. Memo. 2020-41) Campbell v. CommissionerAdd to favorites