Experienced Small
Business Accountant – The Tax Court has upheld IRS's disallowance of a
charitable contribution deduction for a conservation easement because the
taxpayers, despite obtaining an appraisal, failed to include it with their
return. The Court also found that the taxpayers were liable for 40% gross
valuation misstatement penalties.
Background. In general, Code Sec. 170(f)(3) bars
a charitable contribution deduction for a contribution of an interest in
property that is less than the taxpayer's entire interest in the property, but
an exception is made for a qualified conservation contribution, i.e., the
contribution of a qualified real property interest exclusively for conservation
purposes. (Code Sec. 170(h))
A contribution of a qualified real property
interest that's a restriction relating to the exterior of a building located in
a registered historic district and certified as being of historic significance
to the district (e.g., a façade easement) must meet several requirements in
order to be considered to be “exclusively for conservation purposes.” One such
requirement is that the taxpayer include, with his return for the tax year of
the contribution, a qualified appraisal of the qualified property interest.
(Code Sec. 170(h)(4)(B)(iii))
Facts. Mr. and Mrs. Gemperle live in a “certified
historical structure” in a historic district of Chicago. They learned about the
availability of conservation easement charitable contribution deductions at a
2002 or 2003 presentation by Landmarks Preservation Council of Illinois
(Landmarks) and, several years later, decided to pursue the creation of a
façade easement on their house and contribution of the façade easement to
Landmarks. The taxpayers selected an appraiser, Ms. Fiorenzo, from a list
provided by Landmarks. Ms. Fiorenzo performed two appraisals (the second
correcting errors that were in the first) that valued the easement at $108,000.
The Gemperles also made a cash contribution to Landmarks of $10,800—10% of the
anticipated deduction amount.
The taxpayers claimed a deduction for the easement
on their professionally prepared 2007 return ($69,186 for 2007, with $38,814
carried over to 2008), but failed to include the appraisal. They attached an
incomplete Form 8283, Noncash Charitable Contributions, which clearly stated
both on the form itself as well as in the instructions that an appraisal was
required.
IRS disallowed the easement deduction in its
entirety and asserted that the taxpayers were liable for accuracy-related
penalties either under Code Sec. 6662(h) (40% penalties for a gross valuation
misstatement) or, in the alternative, Code Sec. 6662(a) (20% penalties for
negligence or disregard of rules and regs).
At trial, the Tax Court granted IRS's motion to
bar the taxpayers from asserting that Ms. Fiorenzo's appraisals qualify as
evidence of the value of the façade easement because they failed to produce Ms.
Fiorenzo as a witness who could be cross-examined on the appraisals' content
and conclusions. The witnesses who were called by the taxpayers at trial
weren't qualified experts in appraising real estate and failed to establish a
value for the façade easement. IRS, on the other hand, produced two expert
witnesses, one of whom testified that the real value of the easement was
somewhere between zero and $35,000.
No deduction. The Tax Court agreed with IRS that
the taxpayers weren't entitled to any deduction for their contribution because
they failed to include a copy of a qualified appraisal with their 2007 return
as required by Code Sec. 170(h)(4)(B)(iii)(I). The Court found that this conclusion
was supported both by the language of the statute as well as the underlying
legislative history, which expressly states that a failure to obtain and attach
an appraisal “results in disallowance of the deduction.”
The Court also upheld IRS's imposition of
accuracy-related penalties under both Code Sec. 6662(a) and Code Sec. 6662(h).
With respect to the Code Sec. 6662(a) penalties, the Court easily concluded
that the Gemperles didn't exercise reasonable diligence in ensuring the
correctness of their return, noting that Form 8283 and its instructions clearly
require inclusion of an appraisal. With respect to the Code Sec. 6662(h)
penalties, the Court found that the taxpayers failed to establish that their
easement had any determinable value—and certainly didn't show that the value
exceeded the $35,000 maximum valuation set out by IRS's expert. Accordingly,
accepting $35,000 as its value, the Court found that the Gemperles' claimed
$108,000 valuation exceeded the actual $35,000 valuation by more than 200%,
rendering them liable for the 40% substantial valuation misstatement penalties.
If you have any questions on this topic or would like to
discuss some planning strategies with me, please call. I look forward to hearing from you.
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Amare
Berhie, Senior Tax Accountant
(651)
621-5777
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