As 2022 wraps up, many individuals and businesses are considering charitable donations to help reduce their federal tax bills for the year. This makes it an excellent time for tax preparers to remind their clients they must properly document their charitable contributions to claim a deduction, especially when it comes to donated property.
Four recent court rulings provide excellent examples of how the IRS enforces the rules regarding property donations and how the failure to follow the rules can lead to the loss of valuable deductions.
Home donation not properly appraised
In the first decision, the U.S. Court of Appeals for the 4th Circuit denied a $675,000 charitable deduction to a couple that donated a house they were going to have demolished so they could build a new home on the property. The house was donated to a charity that removed salvageable materials from the house before demolishing it and provided job training to disadvantaged members of the community.
The taxpayer in the case, Mann v. United States, No. 19-1793, (4th Cir. 2021), provided the IRS with an appraisal for the property that valued the house as if it was to be moved to another lot. The IRS rejected the deduction because the appraisal did not reflect what they actually donated and because the entire ownership interest in the house was not conveyed to the charity. The court found the IRS correctly disallowed the deduction because some portions of the home were demolished and not removed by the charity, and the entire interest in the property was not conveyed under state law. The court also found that an alternate appraisal valuing the house’s components at $313,353 overstated the value of the donation.
Deed did not include necessary information
The U.S. Tax Court’s decision in Albrecht v. Comm’r, T.C. Memo. 2022-53 (2022), addressed the IRS’s disallowance of a deduction for a donation of 120 pieces of Native American Jewelry to a museum through a five-page deed of gift, which can serve as contemporaneous written acknowledgement. A copy of the deed was provided to the IRS, but a deduction for the donation was disallowed under §170(f)(8)(B) because the deed did not specify whether the museum provided any goods or services in exchange for the donation or state that it was the entire agreement between the taxpayer and the museum. That Tax Court found that the taxpayer made a good faith attempt to comply with the rules regarding the charitable contribution of property but failed to satisfy the strict requirements of §170(f)(8)(B).
Letter did not meet statutory requirements
In its ruling on Izen v. Comm’r, No. 21-60679 (5th Cir., 2022) the U.S. Court of Appeals for the 5th Circuit upheld the IRS’s disallowance of a deduction for the charitable donation of 50% ownership in an aircraft because the letter he provided from the recipient did not satisfy §170(f)(12)(B)’s rules for the donation of qualifying vehicles. Specifically, the IRS found that for donations that exceed $500 in value, the taxpayer must provide contemporaneous written acknowledgement from the organization receiving the gift, which includes the donor’s name and taxpayer identification number (TIN). Additionally, it found his Form 8283 lacked the taxpayer’s TIN. While the taxpayer argued that he substantially complied with the requirements for claiming the deduction, the 5th Circuit said it could not accept the argument that “substantial compliance satisfies statutory requirements.”
Qualified appraisal not attached
Finally, in October, the Tax Court issued Schweizer v. Comm’r, T.C. Memo. 2022-102 (2022), which disallowed an art dealer’s claim of a $600,000 deduction for a donation to the Minneapolis Institute of Art because he failed to fully complete a Form 8283 or attach a qualified appraisal of the donated property. While the taxpayer claimed he had reasonable cause for the failure because he relied on the advice of an enrolled agent who said the completed form and the appraisal were unnecessary, the court found that the defects in the return should have been obvious.
Rules for properly reporting property donations
Generally, if a taxpayer wants to claim a deduction for non-cash charitable contributions, the IRS has substantiation requirements when the donated property has a value of more than $500 and the taxpayer must complete Form 8283, Noncash Charitable Contributions.
For non-cash contributions between $500 and $5,000, taxpayers need only fill out Section A of Form 8283. For contributions of personal or real property valued at more than $5,000, taxpayers must get a written qualified appraisal for the property and fill out Section B of the form. For contributions of property valued at more than $5,000, both the qualified appraiser and a representative of the organization that received the donation must sign the Form 8283.
When filling out Section B, the taxpayer must provide all of the required information, which includes an accurate description of the donated property, its fair market value on the date it was contributed, the date the property was acquired by the donor, how it was acquired and the owner’s cost or adjusted basis for the property. It is important to note that the taxpayer’s cost or adjusted basis in the donated property can be significantly less than its fair market value and the IRS will often seek to disallow a deduction when it believes that the cost or adjusted basis has not been disclosed.
For donated property valued at between $5,000 and $500,000, the appraisal is incorporated into the Form 8283 and kept by the taxpayer. However, when property has been valued at more than $500,000, the qualified appraisal must be included with the taxpayer’s Form 8283.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.