The Tax Court denied an art collector and dealer’s claimed charitable deduction for donated artwork because, it held, the taxpayer lacked reasonable cause for his failure to properly substantiate the deduction.
Facts: The taxpayer, Heinrich Schweizer, obtained a law degree and pursued graduate legal studies in his native Germany. From a young age, he became interested in and began collecting African art. In 2006, he came to New York to become the director of African and Oceanic art at Sotheby’s, the large international brokerage company specializing in art, jewelry, and collectibles. He held this position through 2015, becoming proficient in evaluating African art, and worked directly with Sotheby’s appraisal department in providing formal appraisals for these items.
In 2007, Schweizer filed his first U.S. income tax return. On the advice of a colleague, he hired a local accounting firm to prepare it and continued using the firm in the following years. Also in 2007, Schweizer began to donate African art from his personal collection to museums. He contributed works valued at $60,000 in 2007, $100,000 in 2009, and $5,000 in 2010 and took charitable contribution deductions for the contributions in each of those years.
During 2011, Schweizer donated a sculpture by the Dogon people of Mali, West Africa, to the Minneapolis Institute of Art. Prior to filing his return for that year, his accountant filed a statement of value with the IRS, seeking assurance that the Service would accept the value as claimed (see Rev. Proc. 96-15). The statement of value included a 1½-page appraisal of the Dogon sculpture by an individual who was not a certified appraiser, along with a “substantially” completed Form 8283, Noncash Charitable Contributions. The sculpture was valued at $600,000. The requested assurance was not received from the IRS by the extended due date of the return.
On his 2011 return, Schweizer claimed a $600,000 charitable contribution deduction for the sculpture. The return he filed contained a partially completed Form 8283. On the form, the donation was listed on Section A, where donations of property valued at $5,000 or less and certain publicly traded securities are reported. In addition, no description of the donated property was provided; instead, the words “see attached” were written on the form, but no attachment or qualified appraisal was included with the return.
In his testimony before the Tax Court, Schweizer stated that he reviewed the return in his accountant’s office and noted the discrepancies on Form 8283 but was told by his accountant that a complete Form 8283 and appraisal were unnecessary because “the IRS already had it — or has it.” However, the accountant testified at trial that he had not given Schweizer this advice.
The IRS examined the 2011 return. During the examination, an IRS appraiser determined the sculpture was worth $250,000. The IRS issued Schweizer a timely notice of deficiency, in which it asserted as its primary position that no deduction was allowable because Schweizer failed to satisfy the statutory and regulatory substantiation requirements for this gift. The notice asserted as a secondary position that the allowable charitable contribution deduction should be reduced to $250,000. The notice, however, listed only one deficiency amount, based on the second position. Schweizer challenged the IRS’s determination in Tax Court.
In an amendment to its answer to Schweizer’s Tax Court petition, the IRS asserted an increased deficiency, contending that, based on its first position regarding substantiation in the notice of deficiency, Schweizer’s charitable deduction should be denied in its entirety. The IRS also made a motion for partial summary judgment on the substantiation issue, which the Tax Court granted. The court found that Schweizer failed to obtain a timely qualified appraisal of the sculpture as required by Regs. Sec. 1.170A-13(c)(3); failed to attach to his 2011 return an appraisal of any kind, as required by Sec. 170(f)(11)(D) for gifts valued in excess of $500,000; and failed to attach to his return a fully completed Form 8283, as required by Sec. 170(f)(11)(C) and Regs. Sec. 1.170A-13(c)(2)(i)(B).
The Tax Court concluded that any one of these issues alone would be sufficient to disallow the charitable deduction. However, the court declined to grant summary judgment on whether Schweizer qualified for the exception in Sec. 170(f)(11)(A)(ii)(II) for failures shown to be due to reasonable cause and not to willful neglect, leaving that issue to be decided at trial.
Issues: Sec. 170(a)(1) allows as a deduction any charitable contribution made during the tax year. Under Regs. Sec. 1.170A-1(c)(1) the amount of the charitable contribution deduction for a donation of property other than money is generally the fair market value (FMV) of the property at the time of the gift. If a contribution of property other than publicly traded securities exceeds $5,000, the taxpayer generally must obtain a qualified appraisal of the contributed property no later than the due date of the return, including extensions. The taxpayer must also include Form 8283 with the return on which the deduction is first claimed (Sec. 170(f)(11)(C)). Where the claimed value of the donated property exceeds $500,000, as in Schweizer’s case, Sec. 170(f)(11)(D) requires that a qualified appraisal be obtained no later than the due date of the return, including extensions, and the qualified appraisal must be attached to the return. If these requirements are not met, a deduction for a charitable contribution is generally not allowed.
However, Sec. 170(f)(11)(A)(ii)(II) provides that a deduction may be allowed despite a failure to meet the substantiation requirements if the taxpayer shows that the failure is due to reasonable cause and not to willful neglect. To have reasonable cause, a taxpayer must have exercised ordinary business care and prudence (see Boyle, 469 U.S. 241, 246 (1985)). Whether a taxpayer had reasonable cause is a factsand- circumstances determination. If a taxpayer asserts to have reasonable cause because he or she reasonably relied in good faith on the advice of a professional tax adviser, the taxpayer must show that he or she “actually relied in good faith on the professional’s advice” (Crimi, T.C. Memo. 2013-51 at 1353).
Holding: The Tax Court held that Schweizer did not have reasonable cause based on his reliance on his accountant’s advice. The court found there was no credible evidence that Schweizer’s accountant advised him that it was unnecessary to include either a qualified appraisal or a fully completed Form 8283 with his 2011 return. Furthermore, if he had given Schweizer that advice, Schweizer could not have reasonably relied in good faith upon it.
With regard to whether Schweizer received the advice, the Tax Court held that in making that determination, it was not bound to accept Schweizer’s “unverified, self-serving, and unreliable” testimony (citing Tokarski, 87 T.C. 74 (1986)). There being no other credible evidence in the trial record that he received the advice, the court concluded he had not.
On the issue of whether he relied on the advice in good faith, the court noted that it had consistently held that “blind reliance on a return preparer is not a defense.” Given his education, “mind for business,” and particularly his occupation in the art world and familiarity with Form 8283 from his past deductions, the court found that Schweizer knew that his return had to include a properly completed Form 8283 with a qualified appraisal attached. Knowing this, the court determined, Schweizer could not have reasonably relied on contrary advice from his accountant, because such reliance would exemplify “willful blindness.”
Even if Schweizer had not been familiar with Form 8283 and its requirements, he could not reasonably rely on the accountant’s purported advice because “the defects were there in plain view” on his return, and if he had reviewed the return as he testified he had, it would have been obvious that the return was defective. The court found it “wholly implausible that a taxpayer as educated as [Schweizer], having devoted almost a decade to the study of law” would have believed that he could properly file a tax return that was obviously lacking the required elements.
Also, the court noted, taxpayers have a duty to review their returns before signing and filing them, and the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer (citing Metra Chem Corp., 88 T.C. 654 (1987), and Magill, 70 T.C. 465 (1978), aff’d, 651 F.2d 1233 (6th Cir. 1981)). The court stated that it was “most likely that petitioner did not review his 2011 return with any care at all.”
■ Schweizer, T.C. Memo. 2022-102
— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the College of Human Ecology, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.