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Emanouil v. Commissioner (T.C. Memo. 2020-120)

On August 17, 2020, the Tax Court issued a Memorandum Opinion in the case of Emanouil v. Commissioner (T.C. Memo. 2020-120). The primary issues before the court in Emanouil were (1) whether the petitioners complied with the qualified appraisal requirements of IRC § 170(f)(11)(C); (2) whether the petitioners contributions were part of a quid pro quo exchange rather than a charitable gift; (3) what the fair market values were of the properties that the petitioners contributed; and (4) whether accuracy-related penalties apply.

Background

The petitioner-husband (PH) was a real estate developer. He purchased 197 acres of undeveloped property and attempted to develop the property. PH obtained permission to build on 104 acres, but he was required to concede and mitigate certain items.  PH donated 16 acres to the town, having had the 16 acres appraised for $1.5m.  Three months later he received final approval, and nine months after approval, he donated an additional 71 acres that had been appraised at $2.5m.  Importantly, the Tax Court notes that the donation of the property was not a condition of approval or an aspect of mitigation.

When Burden of Proof Really Matters

When each party has satisfied its burden of production by offering sufficient evidence, it is the party supported by the greater weight of the evidence who will prevail, and thus the burden of proof has real significance only in the event of an “evidentiary tie.” See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008), supplementing T.C. Memo. 2007-340.

Qualified Appraisal

In order for a charitable contribution to be deductible, the contribution must be verified under regulations prescribed by the IRS, i.e., the taxpayer must comply with specified reporting requirements. IRC § 170(a). For deductions in excess of $5,000, the taxpayer must obtain a qualified appraisal of the property, attach to the tax return a fully completed appraisal summary on a Form 8283 and must maintain records regarding the property, the terms of the contribution, and the donee organization. See IRC § 170(f)(11)(C); Treas. Reg. § 1.170A-13(c)(2).

The IRS argued that the petitioners failed to properly substantiate their contributions because their appraisals attached to their returns did not identify the dates (or expected dates) of the contributions and did not contain statements that the appraisals were prepared for income tax purposes; therefore, the appraisals were not “qualified appraisals” pursuant to Treas. Reg. § 1.170A-13(c)(2)(i)(A), (3).

Strict versus Substantial Compliance

A taxpayer who does not strictly comply may nevertheless satisfy the elements if he has strictly complied with the “essential” requirements and has substantially complied with the “directory” requirements. Requirements are “directory” if they are helpful to the IRS in the processing and auditing of returns on which charitable deductions are claimed” rather than essential or “mandatory” which requires literal, strict compliance. Bond v. Commissioner, 100 T.C. 32, 41 (1993); see also Costello v. Commissioner, T.C. Memo. 2015-87, at *22; cf. Hewitt v. Commissioner, 109 T.C. 258, 264 (1997).

In Cave Buttes, L.L.C. v. Commissioner, 147 T.C. 338 (2016), the Tax Court held that the legislative history of the qualified appraisal statute illustrates that the statute’s purpose was to provide the IRS with sufficient information to “deal more effectively with the prevalent use of overvaluations.” Id. at 349-350. In Alli v. Commissioner, T.C. Memo. 2014-15, at *56, the Tax Court observed that the purpose of the appraisal requirements is to ensure that the correct values of donated property are reported to the IRS. Thus, the “essential” requirements relate only to the valuation of the land – basis, fair market value, qualifications of appraiser, etc.

Accordingly, it would follow that if the appraisal at issue does generally provide the information required in the regulations to do just that—i.e., to ensure that the correct values of donated property are reported–then the “essential requirements of the governing statute,” Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *12 (quoting Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004)), can be satisfied despite certain defects that may not be significant in a given case.

Grace for Charity

In the absence of a heightened potential for abuse, Congress (and the Tax Court) generally favors charitable giving; therefore, the Tax Court attempts, when possible, to broadly construe statutes created out of public policy concerns like the charitable concerns of IRC § 170 and similar statutes enacted to benefit charitable organizations. See Helvering v. Bliss, 293 U.S. 144, 150-151 (1934); Estate of Crafts v. Commissioner, 74 T.C. 1439, 1455 (1980).

Failing to include the date of contribution in the appraisal is not significant when the return includes a Form 8283 that specifies the date of contribution. See Zarlengo v. Commissioner, T.C. Memo. 2014-161, at *36; Simmons v. Commissioner, T.C. Memo. 2009-208, 98 T.C.M. (CCH) 211, 215 (2009) (same), aff’d, 646 F.3d 6 (D.C. Cir. 2011). Because the petitioners’ returns included the respective Forms 8283 and disclosed the respective dates of the contributions, the absence of that information from the appraisal was not fatal to the qualification of their appraisals.

No Quid Pro Quo

In examining whether a transfer was made with the expectation of a quid pro quo, the Tax Court gives most weight to the external features of the transaction, avoiding imprecise inquiries into taxpayers’ subjective motivations. Hernandez v. Commissioner, 490 U.S. 680, 690-91 (1989). If it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and, most relevant to our determination in this case, if the taxpayer cannot garner that benefit unless he makes the required “contribution,” then the transfer does not qualify the taxpayer for a deduction under IRC § 170. See Graham v. Commissioner, 822 F.2d 844, 849 (9th Cir. 1987), aff’g 83 T.C. 575 (1984), aff’d sub nom. Hernandez v. Commissioner, 490 U.S. 680 (1989). The Tax Court found that the dealings between PH and the town were not indicative or a quid pro quo, and the IRS presented no evidence to support its argument of one.

(T.C. Memo. 2020-120) Emanouil v. Commissioner

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