Failure to Provide Qualified Appraisal Results in Denial of Charitable Deduction

Derek W. Kaczmarek, for respondent.

Sometime in 2004 Harvey donated the approximately 72% of Chateau's capital stock that he owned -- 15,534.67 shares -- to Family Housing Resources, Inc. (FHR), a nonprofit housing corporation. The exact date of the contribution is not clear. On March 5, 2004, Harvey entered into a stock-pledge agreement with FHR memorializing his desire to give FHR the 15,534.67 Chateau shares. That agreement provided that FHR's obligation to close was conditioned on, among other things, Harvey's delivering the share certificates to FHR. (FHR apparently [*3] included that condition because Harvey had lost them.) To remedy that problem, Harvey executed two documents -- each titled "Affidavit of Lost Stock Certificate" -- on August 19, 2004. Those affidavits stated that Harvey did not physically possess the Chateau stock certificates and requested that new certificates for those shares be issued to FHR. Thus, Harvey couldn't have transferred the shares to FHR before August 19, 2004. Harvey eventually formally assigned and transferred his rights in the 15,534.67 Chateau shares to FHR by executing two separate documents titled "Assignment of Stock by Gift." Neither of those assignments, however, bore a date. That donation enabled FHR to create an endowment fund to assist low-to-moderate-income individuals and families obtain affordable housing. On December 16, 2004, FHR sent Harvey a letter thanking him for the gift. We therefore find it more likely than not that the date of the Evenchiks' contribution was somewhere between August 19 (the date Harvey executed the Affidavits of Lost Stock Certificate) and December 16, 2004. FHR's letter acknowledged that FHR had received 15,534.67 shares representing 72.3384% of Chateau's capital stock. It also stated that, based upon a $1,445,000 appraised value of Chateau's underlying assets, FHR valued the contribution at $1,045,289.30.

[*4] The Evenchiks reported that donation on Form 8283, Noncash Charitable Contributions, which they attached to their 2004 tax return. That Form 8283 described the donated property as "15,534.67 shares Chateau Apartments, Inc. common stock" and stated the appraised market value was $1,045,289.30. In support of that valuation, the Evenchiks attached two appraisals of Chateau's underlying assets prepared by Sanders K. Solot & Associates. The first report -- dated August 13, 2004 -- appraised Second Street; it identified the property as "an apartment complex, located at 3666 East 2nd Street in Tucson, Arizona," and concluded the estimated value on August 13, 2004, was $1,100,000 using a sales-comparison approach. The second report -- dated August 19, 2004 -- appraised Lee Street; it identified the property as "a 10-unit apartment complex" "located at 3815 through 3821 East Lee Street, in Tucson, Pima County, Arizona," and concluded the estimated value on August 19, 2004, was $345,000 based on both a sales-comparison approach and an income approach. Neither appraisal, however, opined on the fair market value of Chateau's outstanding shares, much less Harvey's 72.3384% interest in those shares.

[*5] Due to restrictions contained in section 170,² however, the Evenchiks weren't able to claim the entire $1,045,289.30 as a deduction for 2004. That caused them to claim part of that charitable deduction as a carryforward on their 2006 tax return. The Commissioner audited the 2006 return and didn't agree with a number of deductions that the Evenchiks had claimed. He issued a notice of deficiency to them on May 6, 2010, disallowing, among other things, the entire charitable deduction carryforward for 2006 because the Evenchiks had failed to "establish (a) the name and address of the qualifying organization, (b) provide a list of the donations, and (c) show the fair market value of each item on the date of contribution." After various concessions by the parties,³ the sole question left for us to answer is whether the Evenchiks submitted a qualified appraisal for the charitable deduction carryforward claimed on their 2006 return.

The Evenchiks were Arizona residents when they filed their petition. The parties submitted the case for decision under Rule 122.

These express delegations of authority to the Secretary to issue regulations prompted him to forge the hoops that a taxpayer must crawl through to claim a deduction. And the hoops become longer and tighter as the value of donated property rises. There are especially extensive substantiation requirements for noncash charitable deductions greater than $5,000. See sec. 1.170A-13(c), Income Tax Regs. Those regulations say that "[n]o deduction under section 170 shall be allowed with respect to a charitable contribution * * * unless the substantiation requirements described in paragraph (c)(2) of this section are met." Sec. 1.170A-13(c)(1)(i), Income Tax Regs. While paragraph (c)(2) provides three specific substantiation requirements, the only one at issue here is the requirement that the donor "[o]btain a qualified appraisal * * * for [the] property contributed. If the [*8] contributed property is a partial interest, the appraisal shall be of the partial interest." Sec. 1.170A-13(c)(2)(A), Income Tax Regs.

This is where the Evenchiks run into their first problem. Neither of their appraisals appraised the correct asset. Instead of appraisals of the Chateau stock contributed to FHR, the Evenchiks gave the Commissioner appraisals of the underlying assets that Chateau held. Moreover, the Evenchiks contributed to FHR only a partial interest in Chateau, and neither appraisal appraised the effect this might have on the value of the property donated.

Not appraising what was actually donated is a big problem, but not the only one. Section 1.170A-13(c)(3)(ii), Income Tax Regs., requires a qualified appraisal to include the following information:

(A) A description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed;

(B) In the case of tangible property, the physical condition of the property;

(C) The date (or expected date) of contribution to the donee;

(D) The terms of any agreement or understanding entered into * * * by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property contributed * * *;

[*9] (E) The name, address, and * * * the identifying number of the qualified appraiser * * *;

(F) The qualifications of the qualified appraiser who signs the appraisal, including the appraiser's background, experience, education, and membership, if any, in professional appraisal associations;

(G) A statement that the appraisal was prepared for income tax purposes;

(H) The date (or dates) on which the property was appraised;

(I) The appraised fair market value * * * of the property on the date (or expected date) of contribution;

(J) The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and

(K) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.

The two appraisals the Evenchiks used fall woefully short of meeting all of those requirements. For instance, the appraisals failed to:

• provide a description of the property in sufficient detail for a person who is not generally familiar with a partial interest in Chateau to ascertain that the property appraised was the property contributed -- which here of course it wasn't. See sec. 1.170A-13(c)(3)(ii)(A), Income Tax Regs;

• state the date or expected date of the contribution to FHR. See sec. 1.170A-13(c)(3)(ii)(C), Income Tax Regs.;

• include the terms of any agreement or understanding entered into by Harvey or FHR relating to the use of the donated property (e.g. stock-pledge agreement). See sec. 1.170A-13(c)(3)(ii)(D), Income Tax Regs.;

• provide a statement that the appraisal was prepared for income tax purposes. See sec. 1.170A-13(c)(3)(ii)(G), Income Tax Regs.; and

• give the appraised fair market value on the date (or expected date) of contribution. See sec. 1.170A-3(c)(3)(ii)(I), Income Tax Regs.

Although not impossible post-Bond, see Consol. Investors Grp. v. Commissioner, T.C. Memo. 2009-290, 2009 WL 4840246, at *22-*23 (substantial [*12] compliance even though appraisal obtained more than 60 days before contribution and without statement that it was prepared for income-tax purposes), taxpayers have had great difficulty in meeting the substantial-compliance standard. We recently listed some of their flaws in Mohamed v. Commissioner, T.C. Memo. 2012-152, 2012 WL 1937555, at *7:

• failing to get an appraisal. See, e.g., Todd v. Commissioner, 118 T.C. 334, 336, 347 (2002).

• failing to fill out section B of Form 8283 (the appraisal summary). See, e.g., Hewitt, 109 T.C. at 260, 264.

• having someone without expertise in appraisals complete the appraisal. See, e.g., D'Arcangelo v. Commissioner, T.C. Memo. 1994-572, 1994 WL 652230, at *9.

• having an appraisal prepared after the return was filed. See, e.g., Jorgenson v. Commissioner, T.C. Memo. 2000-38, 2000 WL 134332, at *4, *8.

• including insufficient or inappropriate information in an appraisal. See Smith v. Commissioner, T.C. Memo. 2007-368, 2007 WL 4410771, at *19-20, aff'd, 364 Fed. Appx. 317 (9th Cir. 2009).

Indeed, the facts here are very similar to those in Smith, another case where we rejected a claim of substantial compliance. The taxpayers in Smith argued that they substantially complied with the qualified-appraisal requirements for family limited partnership (FLP) interests which they had contributed to a charitable organization. Id. at *12. The only asset in the FLP interests donated was stock in a closely held, family-owned corporation called Beneco. Id. at *2. The taxpayers obtained two valuations that appraised the outstanding common stock in Beneco, but neither of those appraisals separately valued the taxpayers' FLP interests. Id. at *6-*8. We found it noteworthy that the appraisals were based on valuations of the Beneco stock, and -- even though the values of the FLP interests were substantially dependent upon the Beneco stock values -- that there was not a separate appraisal report for the FLP interests. See id. at *17. We found other problems -- (1) the appraisals were not performed between 60 days before the contribution and the due dates of the returns; (2) one of the reports did not specifically state that it was prepared for income-tax purposes; (3) the reports did not contain the dates (or [*14] expected dates) that the FLP interests were contributed or the values on those dates; and (4) the reports did not disclose the restrictions on the donee's right to use the donated property. Id. at *18.

We held that in light of these defects the taxpayers were not entitled to deductions for the contributions of their FLP interests. Id. at *19. We held that the appraisals did not fully or adequately describe the contributed property well enough to permit the Commissioner to understand the valuation methodology -- missing information that was vitally important if the Commissioner was to understand and evaluate the claimed contributions. Id. at *19-*20. This led us to conclude that the Commissioner properly disallowed the claimed deductions. Id.

The Evenchiks have made the same mistake, and had the wrong asset appraised. Instead of valuing their contributed interest in Chateau, they valued Chateau's interest in two of its own assets -- the apartment complexes. That miscue goes to the essence of the information required, because without knowing the specific property contributed the Commissioner is unable to determine whether the contributed property interest was overvalued. And the problem of misvalued property is so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions. See Mohamed, 2012 WL 1937555, [*15] at *10. Indeed, that problem arose here -- the parties stipulated that the Evenchiks overvalued their partial interest in Chateau by 35%.

Moreover, as it was in Smith, appraising the wrong asset was far from the only error in the appraisals that the Evenchiks submitted: The appraisals also didn't state the date or expected date of the contribution or the fair market value on those dates, didn't provide a statement that the appraisal was prepared for income-tax purposes, and didn't include the terms of any agreement or understanding entered into by Harvey or FHR relating to the use of the donated property. This is not a case where the taxpayers provided most of the information but left out one insignificant datum. Cf. Hewitt, 109 T.C. at 265. This is a case where the appraisals had gaping holes of required information. These defects prevented the Commissioner from properly evaluating the property interest contributed. The Evenchiks are not, therefore, entitled to the deduction they seek. The parties settled other issues, so

Decision will be entered under Rule 155.

² All section references are to the Internal Revenue Code in effect at all relevant times, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.

³ The parties stipulated that the proper value of the 72.3384% interest in Chateau was about $680,000, not the approximately $1.045 million that the Evenchiks claimed on their 2004 tax return. What is still at issue, however, is whether the Evenchiks are entitled to claim even that amount as a charitable deduction.

⁴ Section 170(f)(11) applies only to contributions made after June 3, 2004. 118 Stat. at 1632. The Evenchiks suggest that section 170(f)(11) doesn't apply to their contribution in 2004 because Harvey made the donation "pursuant to a pledge dated March 5, 2004." We agree with the Commissioner that the Evenchiks donated the stock only later in the year, sometime between August and December 16. See supra pp. 2-3. Even if section 170(f)(11) didn't apply, however, section 170(a) and DEFRA section 155 independently give the Secretary the authority to issue regulations defining a qualified appraisal, and our analysis would be substantially the same.