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Chiarelli v. Commissioner (T.C. Memo. 2021-27)

On March 3, 2021, the Tax Court issued a Memorandum Opinion in the case of Chiarelli v. Commissioner (T.C. Memo. 2021-27). The primary issues presented in Chiarelli were whether the petitioner was entitled to noncash charitable contribution deductions for the years at issue and whether the petitioner was liable for the IRC § 6662(a) accuracy-related penalties for 2012 and 2013.

Incomplete Form 8283

The petitioner inherited valuable property from his late mother, had the items appraised by an auction company, and donated significant portions of the property, claiming charitable deductions of $90,000 in 2012, $93,000 in 2012, and $77,000 in 2015, respectively.  For each of the years at issue Section A of Form 8283 directed petitioner to list each item or group of similar items of donated property with a value of $5,000 or less and provide the name and address of the donee organization, a description of the donated property, and the fair market value of the donated property. Unless an item had a value of $500 or less, Section A also required petitioner to provide the date of the donation, the date he acquired the donated property, the manner of its acquisition, his cost or adjusted basis therein, and the method he used to determine the fair market value. Petitioner left Section A blank for each of the years at issue.

For each of the years at issue Section B, Part I of Form 8283 directed petitioner to provide detailed information about each item (or group of similar items) of donated property valued in excess of $5,000, including a description of the item, a brief summary of its physical condition at the time of the donation, its appraised fair market value, the date it was acquired, the manner of its acquisition, and his cost or adjusted basis therein. On Section B, Part I for tax year 2012 petitioner described all of the donated property as “miscellaneous household items” in “excellent” condition with an aggregate appraised fair market value of $89,110. Petitioner did not specify the dates that he acquired the donated property and wrote that the manner of acquisition was by purchase.  Petitioner claimed an aggregate basis in the donated property of $251,800 but provided no information as to how he determined this figure.

On Section B, Part I for 2013, petitioner described the donated property as “clothing and household furniture” in “excellent” condition with an aggregate appraised fair market value of $93,087. Petitioner listed the manner of acquisition as inheritance but also wrote that the donated property was acquired on “various” dates. Petitioner claimed an aggregate basis in the donated property of $255,300 but provided no information as to how he determined this figure.

On Section B, Part I for 2015, petitioner described the donated property as “various household items and clothing” in “excellent” condition with an aggregate appraised fair market value of $77,300. Petitioner did not specify the dates he acquired the donated property and wrote that the manner of acquisition was by purchase. Petitioner claimed a basis in the donated property of $150,000 but provided no information as to how he determined this figure. For each of the years at issue Section B, Part II of Form 8283 directed petitioner to list each item included on Section B, Part I with a value of $500 or less and to provide his signature and date thereof. Section B, Part III of Form 8283 required the appraiser to provide his signature, title, and date of signature verifying his appraisal and his qualifications as an appraiser.

Section B, Part IV of Form 8283 required the donee organization to list its name and employer identification number and to cause an authorized individual to provide his or her signature, title, and date of signature acknowledging both its status as a qualified organization and its receipt of the donated property on the date specified. Petitioner submitted Section B, Parts II, III, and IV unsigned and incomplete for each of the years at issue.

The petitioner was audited—no shock here—and he trickled in information to the IRS, including appraisals, but not receipts of the donations.  Nevertheless, the petitioner never fully completed the Form 8283.

Substantiating Large Noncash Charitable Contributions

We discuss compliance with the valuation rules in the article “Excuse me, are you DEFRA (Compliant)?”  So, click here to read that sage piece of legal analysis if you want a more in-depth guide to the DEFRA requirements discussed below.

Under Treas. Reg. § 1.170A-13(b)(1), a taxpayer must maintain for each noncash charitable contribution with a fair market value of $5,000 or less a receipt from the donee organization unless doing so is impractical. The donee receipt must show:

  1. the name of the donee organization;
  2. the date and location of the contribution; and
  3. a description of the property in detail reasonably sufficient under the circumstances. Id.

A taxpayer who lacks a donee receipt is required to keep reliable written records including, among other things:

  1. the name and address of the done organization to which the contribution was made;
  2. the date and location of the contribution;
  3. a description of the property in detail reasonable under the circumstances (including the value of the property); and
  4. the fair market value of the property at the time the contribution was made, the method used to determine the fair market value, and if the fair market value was determined by appraisal, a copy of the signed report of the appraiser. Van Dusen v. Commissioner, 136 T.C. 515, 532 (2011); Treas. Reg. § 1.170A-13(b)(2)(ii).

Further, no deduction is allowed for “any contribution of clothing or a household item” unless such property is “in good used condition or better.” IRC § 170(f)(16)(A).

The receipts that the petitioner submitted to substantiate his noncash charitable contributions for the years at issue offered no detail with respect to items donated and thus lacked a description of the property in detail reasonable under the circumstances. See Treas. Reg. § 1.170A-13(b)(2)(ii).  Because the petitioner did not obtain proper receipts, he was required to keep reliable written records meeting the regulatory requirements.  Id.

Nonetheless, the petitioner’s written records consisted of purported qualified appraisals that did not describe the property in sufficient detail for a person unfamiliar with the property contributed. Further, petitioner’s written records provided no credible evidence as to the appropriate valuation of individual items donated.  Thus, the Tax Court found that the petitioner failed to maintain reliable written records sufficient to allow the noncash charitable contributions.

Contributions Exceeding $250

Contributions exceeding $250 must be substantiated by a “contemporaneous written acknowledgment” (CWA) from the donee. IRC § 170(f)(8)(A). Thus, a taxpayer is required to substantiate any such claimed contributions with CWAs that included:

  1. a description (but not value) of the property contributed;
  2. a statement on whether the donee provided any goods or services in consideration, in whole or in part, for the property donated; and
  3. if the donee provided goods or services, a description and good faith estimate of their value. See IRC § 170(f)(8)(B).

In the absence of a CWA meeting the statute’s requirements, no deduction is allowed. IRC § 170(f)(8)(A); cf. IRC § 170(f)(8)(D).

Contributions Exceeding $500

Similar items of property are considered as a group for purposes of determining whether a contribution exceeds the $500 threshold. IRC § 170(f)(11)(F). The term similar items of property is defined to mean property of the same generic category or type, such as clothing, electronics, or household appliances. Treas. Reg. § 1.170A-13(c)(7)(iii). For such contributions a taxpayer must:

  1. meet the information requirements for noncash contributions of $250 or more;
  2. maintain written records with a more detailed description of the property, including the manner and approximate date of acquisition and the cost or other basis in the property; and
  3. state such information in his income tax return if required by the return form or its instructions. See IRC § 170(f)(11)(B); Treas. Reg. § 1.170A-13(b)(3)(i)(A)-(B).

Contributions Exceeding $5,000

Similar items of property are considered as a group for purposes of determining whether a contribution exceeds the $5,000 threshold. IRC § 170(f)(11)(F); Treas. Reg. § 1.170A-13(c)(7)(iii). For contributions of property in excess of $5,000, in addition to complying with the substantiation requirements for property in excess of $250 and $500, a taxpayer is required to obtain a “qualified appraisal” of each donated item and attach to each tax return a fully completed appraisal summary on Form 8283. See IRC § 170(f)(11)(C); Treas. Reg. § 1.170A-13(c)(2).  These appraisals must provide the following required information: the physical condition and age of individual items, the qualifications of the appraiser, a statement that each appraisal was prepared for income tax purposes, and the appraised fair market values of individual items donated.  See Treas. Reg. § 1.170A-13(c)(3)(ii).

Substantial Compliance

In appropriate circumstances, some of the reporting requirements set forth in Treas. Reg. § 1.170A-13 can be satisfied by substantial, rather than literal, compliance. See Hewitt v. Commissioner, 109 T.C. 258, 265 (1997) (describing substantial compliance as satisfied where the taxpayer has “provided most of the information required”), aff’d without published opinion, 166 F.3d 332 (4th Cir. 1998). Most often the Tax Court has found substantial compliance in cases that involved procedural regulatory requirements where, despite a lack of strict compliance, the taxpayer substantially complied by fulfilling the essential statutory purpose. See, e.g., Bond v. Commissioner, 100 T.C. 32, 41-42 (1993).

As a general matter, taxpayers have had great difficulty in meeting the substantial compliance standard for charitable contribution deductions. See, e.g., Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, *15; Alli v. Commissioner, T.C. Memo. 2014-15, *54 (stating that substantial compliance “should not be liberally applied”). Taxpayers cannot satisfy the CWA requirement of IRC § 170(f)(8) by substantial compliance. Izen v. Commissioner, 148 T.C. 71, 76-77, 82 (2017). In Mohamed v. Commissioner, T.C. Memo. 2012-152, *7, the Tax Court compiled a list of errors that it has excused through substantial compliance including failing to complete Section B of Form 8283 and the inclusion of insufficient or inappropriate information with the qualified appraisal.

Failing to provide “most of the information required” for the Tax Court to evaluate whether a taxpayer actually made the alleged charitable contributions is a non-starter for the Tax Court. See Hewitt v. Commissioner, 109 T.C. at 265.

Curing the Errors

Defective submissions may be cured by responding to respondent’s request for additional documentation within 90 days in accordance with Treas. Reg. § 1.170A-13(c)(4)(iv)(H). However, such regulation states that a deduction will not be disallowed for failure to attach an appraisal summary to a return only if the donor complies with instructions to submit that document within 90 days of a request therefor. Id. By its terms that regulation does not apply if a taxpayer fails to attach appraisal summaries to each of his returns. See Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24, *14-*15; Belair Woods, LLC,  T.C. Memo. 2018-159 at *13-*14. Further, such regulation applies only to appraisal summaries and does not afford a taxpayer a window to cure defects with respect to qualified appraisals. See Belair Woods, LLC, T.C. Memo. 2018-159 at *13-*14; see also Chrem v. Commissioner, T.C. Memo. 2018-164, at *24, n.9; Mohamed, T.C. Memo. 2012-152 at *4.

So, About Those Penalties

While the petitioner properly attached Forms 8283 to his tax returns, he failed to make any reasonable attempt to provide the information requested on the forms or otherwise maintain reliable written records for the donated items. The IRS demonstrated to the Tax Court’s satisfaction that the petitioner wholly failed to comply with the substantiation requirements under IRC § 170 and its regulations. Accordingly, the Tax Court found that the IRS met its burden of producing evidence that the underpayments were attributable to the petitioner’s negligence or disregard of rules or regulations.

IRC § 6664(c)(1) provides an exception to the IRC § 6662(a) penalty if it is shown that there was reasonable cause for any portion of the underpayment and the taxpayer acted in good faith. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances, including the knowledge and experience of the taxpayer. See Treas. Reg. § 1.6664-4(b)(1).

The petitioner alleged that he hired and relied on a competent appraiser to complete appraisals in good faith. The Tax Court, however, is not impressed. Citing the Tax Court cases of Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987) and Langston v. Commissioner, T.C. Memo. 2019-19, *16-*18, aff’d, 827 F. App’x 900 (10th Cir. 2020), the Tax Court acerbically observed-

As the return preparer and an attorney licensed to practice before this Court, the petitioner cannot reasonably claim that his reliance on [the appraiser’s] preparation of appraisals constitutes reasonable cause for the omissions on his return when a mere cursory overview of his returns would have revealed that he lacked complete appraisal summaries for the years at issue.

Accordingly, the Tax Court had no qualms in sustaining the IRS’s determination that petitioner was liable for the accuracy-related penalties for 2012 and 2013.

(T.C. Memo. 2021-27) Chiarelli v. Commissioner

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