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The tax court has upheld the IRS’s disallowance of a charitable contribution deduction because the donor failed to follow the substantiation requirements of IRS Code Sec. 170.

Tax Court Upholds Denial of $19 Million Charitable Deduction

  • 6/13/2012

Tax Court Upholds Denial of $19 Million Charitable Deduction

The tax court has upheld the IRS’s disallowance of a charitable contribution deduction because the donor failed to follow the substantiation requirements of IRS Code Sec. 170. Specifically, the taxpayer’s donation appraisals did not qualify because he did them himself.

CCH Take Away: This latest decision by the Tax Court underscores the importance of adhering to the strict substantiation requirements of Code Sec. 170 and its regulations. As observed by the taxpayer in his losing argument, “[The regulation] lets a taxpayer keep some of the deduction if he follows the procedure but overvalues his donation, but takes away the entire deduction of the taxpayer who accurately values his donation but fails to follow the procedure.”

Background

In 2003, the taxpayer, a real estate broker and appraiser, formed a charitable remainder unitrust (CRUT) and donated parcels of real estate to it. The taxpayer self-appraised the property. In 2004, the taxpayer donated additional property to the CRUT. Again, the taxpayer self-appraised the property. The IRS challenged the taxpayer’s self-appraisals.

Comment: The taxpayer self-appraised the properties at $18.5 million. An independent appraiser valued the properties slightly higher.

Court’s analysis

The court first noted that when the purported contributions were made, the tax code imposed extensive requirements for substantiation of charitable deductions greater than $5,000. A donor had to obtain a qualified appraisal, provide an appraisal summary, and maintain records about the claimed deduction. Among other requirements, the qualified appraisal had to be signed by a qualified appraiser. A qualified appraiser could not be the donor, the taxpayer claiming the deduction, or the recipient of the property.

Here, the taxpayer was the donor of the property and the taxpayer claiming the deduction. Additionally, the taxpayer, as trustee of the CRUT, was the recipient. The taxpayer, the court found, was not a qualified appraiser.

According to the taxpayer, the regulations improperly disallowed deductions for verified and substantiated donations, whereas Code Sec. 170 permitted the IRS to disallow only unverified donations. The court found that verification of a donation must be done by a qualified appraiser. The regulations were consistent with the statute’s directive to prescribe the form of the verification.

Comment: The court also rejected the taxpayer’s argument that he had substantially complied with the regulations. Substantial compliance requires a qualified appraisal, not a self-appraisal.

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