Most taxpayers are familiar with the benefit of charitable
When a donation is made to a qualified charity, the gift can be
claimed as a tax deduction, as governed by Section 170 of the
Internal Revenue Code (and related Regulations) and, thereby, can
reduce overall taxable income. However, recent tax rulings have
suggested that although taxpayers recognize the significant savings
that deductions can offer, they may not be aware of the specific
steps that need to be taken in order to comply with Internal
Revenue Service (IRS) substantiation requirements and qualify for a
deduction on their non-cash contributions.
Recent Tax Rulings
In Mohamed v. Commissioner, a California couple was
penalized and denied an $18.5 million deduction for their real
estate donations simply because they did not have the appropriate
paperwork when they filed their return. IRS denied the deduction
because the Mohameds did not have their contribution independently
valued by a qualified appraiser, as required by tax law for
non-cash property contributions of more than $5,000. Instead, the
taxpayers prepared and filed their own tax return, including Form
8283, the form used to report non-cash contributions to charity.
Despite the Mohameds' good faith, the Tax Court agreed that the
Mohameds failed to meet the Section 170 requirements, upholding
IRS' denial of the deduction. In other words, the Mohameds were
denied their $18.5 million deduction for not reading the fine print
and appropriately following instructions.
In Rothman et al. v. Commissioner, the Tax Court faced
another non-cash donation involving a historic façade
easement. There was no question that the easement was placed on the
property and then donated to a qualified charity. Why, then, did
IRS deny the deduction? The appraisal did not meet the technical
requirements of a qualified appraisal. In its detailed opinion, the
Tax Court agreed with IRS that this appraisal failed on a number of
the detailed qualified appraisal provisions of the regulations.
Do It Right
These recent cases can serve as a reminder that when making
non-cash charitable contributions in an amount greater than $5,000,
it is vital to obtain a qualified appraisal to meet the
requirements to claim a tax deduction and submit the appraisal as
part of the tax return. A qualified appraisal, as defined in the
regulations, must include certain information including a legal
description of the property, the property's physical condition,
the date of the contribution and a statement that the appraisal was
prepared for income tax purposes. The document must also describe
the method(s) of valuation used to develop the value and the market
data considered, among other items. The qualified appraisal must
also be prepared by a qualified appraiser.
What is a qualified appraiser? A qualified appraiser, also
defined in the regulations, is an individual who has earned an
appraisal designation from a recognized professional appraisal
organization, or has met the minimum education and experience in
valuing the type of property being valued as outlined by IRS.
As evidenced by the two cases above and numerous others, it is
critical to get a qualified appraisal from a qualified appraiser to
properly support a charitable deduction. Although the taxpayers in
the aforementioned cases argued that their compliance with the
rules was close enough, IRS and the Tax Court disagreed. The lesson
seems clear: the tax law is complex. If the regulations list
requirements one must follow to get a deduction, it is much easier
to follow the steps from the start than try to challenge the
validity of a regulation later.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.