Colorado Real Estate Journal - March 2, 2016
Having written numerous times on the subject of charitable deductions for federal income tax purposes, I would have thought that the number of cases, articles and IRS notices would have alerted taxpayers (and certainly their representatives) to properly follow the Internal Revenue Code and related regulations to assure the donor of the tax benefit of a charitable deduction when contributing real estate to a qualified charitable recipient. (For a collection of many of these articles, cases and IRS pronouncements on this topic of charitable gifts and the requirements for claiming such deductions, see, for example, Levine, Mark Lee and Segev, Libbi Levine, Real Estate Transactions, Tax Planning and Consequences [Thomson/Reuters, 2016].) But, alas, notwithstanding the numerous authorities that have addressed this fundamental area of prerequisites for claiming charitable deductions, another recent case was issued that illustrated, again, that taxpayers and their representatives continue to either ignore or fail to research the requirements that must be achieved to support a federal income tax deduction for gifts to charities. This recent case, David R. Gemperle and Kathryn D. Gemperle, Petitioners v. Commissioner of Internal Revenue Service, TC Memo 2016-1, made it very clear that if taxpayers do not follow the code and related regulations, they may well find not only a denial of the charitable deduction, but also that they are also liable for penalties for improperly claiming the deduction. Summary of the charitable deduction rules. The code clearly states in Code Section 170 that, “There shall be allowed as a deduction any charitable contribution … which is made within the taxable year.” And the code further states what the requirements are for such deduction. Of course, and not in issue in the Gemperle case, there is a requirement to make a qualified gift to the qualified recipient (the charity). However, the requirements for the deduction do not end with simply these items. And the taxpayers in Gemperle learned this lesson the proverbial “hard way” by losing the charitable deduction and being penalized by the court for the failure to comply with the regs. Without belaboring all of the Code Section 170 requirements for the deduction, it suffices to say, as to this Gemperle case, that one of the absolute requirements to the type of deduction sought by the taxpayers was to attach to the tax return of the taxpayers a qualified appraisal as the same is defined in the regs as to Code Section 170. Of course, as one might suppose, the taxpayers and the representative failed to attach the appraisal to the return. This defect, the inaction, is noted in more depth below, in a summary of the Gemperle case. Gemperle case: No qualified appraisal. The actions by the Gemperle taxpayers took place in connection with a charitable contribution they made in 2007. The contribution was for a qualified, done façade easement in connection with their historic Chicago residence, a certified historic structure. See Code Section 170(f)(3)(B). The IRS on audit of the Gemperle return for 2007 asserted the position that the taxpayers did not comply with the requirements for such deduction. Thus, the IRS argued that there should be no deduction AND there should be imposed against the taxpayers a 40 percent penalty under Code Section 6662, because of the taxpayers’ overstatement of the deduction to an excessive amount. (The IRS argued that the value of the easement, if any, should be no more than $35,000; but, the taxpayers claimed the value to be $108,000. In such instance, if the IRS is successful, the penalty is 40 percent!) Without examining in detail all of the facts of the case, the crucial point, as determined by the court, was that the taxpayers, as argued by the IRS, did not attach a qualified appraisal to the taxpayers’ return. Thus, this was a violation of the regs and should result in a denial of the deduction. OK, so what did the court say on these points? First, the court said that there was no argument that the appraisal was not attached to the return. And, there was no testimony by any appraiser to support the alleged value of the claimed deduction, even if one did not consider the mistake of failing to attach the appraisal to the return. The court stated in its opinion: “The taxpayer donor must include with the return for the contribution year a qualified appraisal.” (Emphasis was added by author.) See also Regs. Section 1.170A-13(c)(2)(i). The court, relative to the failure to include the appraisal, addressed the issue as to whether the taxpayers could still claim the deduction, even without attaching the appraisal to the return. The court said: “Because we find that petitioners (taxpayers) failed to include a copy of a qualified appraisal with the 2007 return as required by Section 170(h)(4)(B)(iii)(I), we will sustain respondent’s (IRS) adjustments to the 2007 and 2008 returns denying them any charitable contribution deduction.” And, if there was any doubt as to the court’s position, the court added: “While it appears on the face of Section 170(h)(4) (B) that the failure to include the necessary appraisal with the return for the contribution year is fatal, the deduction (denial of the same) … is confirmed in the Staff of the Joint Committee on Taxation.” The court thus held that under the language of the code and under the reports as to the legislative history for the code section, attaching the appraisal is a sine qua nonto claim the deduction. The court noted that the taxpayers stated: “We admit that the full appraisal was not included with the return.” And, for failing in this regard, the court, again, stated: “We will sustain respondent’s (IRS’) adjustments disallowing for 2007 and 2008 petitioners’ charitable contribution deductions.” And, as to penalties, the court said that since the taxpayers did not include the appraisal with their tax return filing, the taxpayers “are thus liable for accuracy-related penalties” See Code Section 6662(b). And, as mentioned earlier, the taxpayers were also charged with a valuation misstatement, causing them to have to pay a 40 percent penalty. Conclusion. The moral of the story that one can lose a charitable deduction and face penalties – by failing to comply with the appraisal requirements to claim a charitable deduction – which seems apparent. Yet as mentioned earlier in this article, these types of cases arise far too often. (For a collection of these decisions and related issues as to charitable gifts, see the Levine and Segev Work, Real Estate Transactions, cited supra in this article.) Clearly, this failure to attach a qualified appraisal to the tax return of the taxpayers was a costly mistake