The Tax Court held that a married couple were entitled to deductions for their charitable contributions of land to a town. According to the court, the taxpayers substantially complied with the qualified appraisal requirements of Regs. Sec. 1.170A-13(c)(3)(ii). Also, the land's valuations were reasonable, and the contributions were not part of a quid pro quo exchange.
Facts: Peter Emanouil is a real estate developer in Massachusetts. In 1999, he purchased 197 acres in Westford, Mass., and during the next few years made many attempts to develop or sell the property. After he made many concessions to the town concerning his proposed affordable housing development's size and its impact on traffic and the environment, the town granted approval for the project in February 2009 on 104 of the 197 acres. Emanouil also made two donations to the town of most of the remaining land — 16 acres in December 2008 and 71 acres in November 2009.
On their 2008 and 2009 joint federal income tax returns, Peter and Pascale Emanouil claimed charitable contributions of $1.5 million and $2.5 million, respectively, on Form 8283, Noncash Charitable Contributions, due to their land donations to the town. For each year, they attached an appraisal of the land's value; however, neither appraisal included the expected date of the contribution nor a statement that the appraisal was prepared for income tax purposes. The amounts that they deducted on their 2008 return and their 2009 return were limited by their adjusted gross income (AGI), so the couple carried the unused amounts forward and deducted them on their 2010, 2011, and 2012 returns. In 2016, the taxpayers received a deficiency notice from the IRS that disallowed their 2010, 2011, and 2012 deductions, resulting in tax deficiencies totaling $781,603, plus accuracy-related penalties of $312,641. The taxpayers petitioned the Tax Court for relief.
Issues: A taxpayer may deduct charitable contributions of noncash property; however, no deduction is allowed if the taxpayer's transfer of the property is contingent upon the taxpayer's receiving a specific benefit (no donative intent). If a taxpayer donates noncash property, the deduction is the property's fair market value (FMV) if a sale of the property would have resulted in long-term capital gain. The deduction for the contribution of long-term capital gain property is limited to 30% of the taxpayer's AGI, with all charitable contributions for the year limited to 60% of the taxpayer's AGI (50% for the tax years in this case). An amount not deductible in the current year due to the AGI limitation may be carried forward five years.
To take a deduction, a taxpayer must comply with certain substantiation requirements. Form 8283 must be attached to a taxpayer's return when deductions for noncash contributions exceed $500; a qualified appraisal must also be attached when deductions for noncash contributions exceed $5,000. A qualified appraisal, as defined in Regs. Sec. 1.170A-13(c)(3)(ii), must include 11 items of information, including two items at issue in this case — the date or expected date of the contribution and a statement that the appraisal was prepared for income tax purposes.
The IRS argued that the taxpayers' donations lacked charitable intent because they were used as a "bargaining chip" in exchange for approval by the town's Zoning Board of Appeals (ZBA) of a permit for the affordable-housing development. The Service also contended that the donations' values were not properly substantiated because they lacked a proper qualified appraisal and that the couple overstated the value of the properties used for their deductions.
Holding: The Tax Court held that the taxpayers should be allowed the deductions for the amounts reported on their tax returns. The court found that the donations were made with the intent to make a gift and were not made to entice the ZBA to approve the project. According to the court, there was no evidence of any quid pro quo, and, in fact, the ZBA's chair testified that the donations were unrelated to the board's approval.
The court also found that, while the taxpayers' appraisal documentation did not strictly comply with the requirements of Regs. Sec. 1.170A-13(c)(3)(ii), it did substantially comply. The court stated that although the appraisal lacked the date or expected date of the contribution, the Form 8283 did show the date of the contribution; therefore, the lack of that information on the appraisal report was not fatal. The appraiser testified that the appraisal's purpose was to "prepare a market-value opinion," and since there is no such thing as an "income tax value," the court held that the appraisal amount would have been the same if the stated purpose of the appraisal had been for income tax. The court concluded that the taxpayers had substantially complied with the requirements of a qualified appraisal despite the absence of the two items, since those defects in their appraisal were not so substantial that the omissions failed to provide the required information to the IRS.
The court also examined the process the appraiser used to determine the FMV amounts used on the tax returns and concluded they were reasonably determined. Since the taxpayers' deductions and the reported amounts were upheld by the court, the accuracy-related penalty amounts were inapplicable.
- Emanouil, T.C. Memo. 2020-120
— By Charles J. Reichert, CPA.