• In RERI case, differing opinions over ramifications of denied charitable deduction
• Qualified appraisal may not negate need to report cost basis
How does the IRS treat the donation of a classic car, a piece of art, or even real estate if donors don't know or don't say what it was worth when they received it?
The Internal Revenue Service can disallow the entire value of the donation if the donor leaves that amount blank on the form used to report such donations, according to a recent U.S. Tax Court decision.
“The phones started ringing early” after the court ruled July 3 in RERI Holdings I, LLC v. Commissioner (see 36 TMWR 848, July 10, 2017), that omission of that cost was enough reason to disallow the donation of a complex property interest, David Kirk, a partner in the national tax private client services at Ernst & Young LLP in Washington, told Bloomberg BNA soon after the ruling.
RERI involved a claimed $33 million deduction for donation of property with a fair market value of $3.46 million. The taxpayers donated a remainder interest in a limited liability company that held commercial real estate subject to a long-term lease. The taxpayers came up with their deduction using actuarial tables published by the IRS to value time-limited interests in intangible property.
“The IRS and the court saw a transaction they didn't like and didn't think should be respected and chose the path of least resistance to get there,” Kirk said.
Cost basis is rarely relevant, he said, as long as the taxpayer is showing fair market value, but the court used cost basis over valuation. “The way they went about it is going to cause ripples,” he added.
Anson Asbury of the Asbury Law Firm in Decatur, Ga., told Bloomberg BNA on July 13
that “this is the most technical of the technical foot faults we've seen yet in the
charitable gift cases and I'm not even sure if a foul was committed.”
Conrad Teitell, a principal at Cummings & Lockwood LLC in Stamford, Conn., has a different view. RERI's action “wasn't a foot fault,” he said. “The ball was way outside the line. The basis requirement isn't a harsh rule. It's meant to protect revenue and prevent abuse.
“Most people want to claim a deduction for what the property is worth. This was a chutzpah case. The court didn't take a shortcut—the donors are the ones that took the shortcut,” Teitell said.
He added that “being able to donate and deduct fair market value encourages donations. If you don't know the cost basis, estimate it.”
Kirk, noting that it was a full Tax Court decision with no dissent, said it was possible the IRS could use the case to do blanket disallowances.
“We will probably see a series of foot faults. It would be best for the IRS to exercise their discretion,” Kirk said. “People should go back through their records and consider whether there have been any omissions of the cost basis and consider the benefits and burdens of amending.”
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For More Information
For a discussion of substantiation requirements for claiming deductions for noncash charitable contributions in the Tax Management Portfolios, see 521 T.M., Charitable Contributions: Income Tax Aspects (U.S. Income Series), and 863 T.M., Charitable Contributions: Income Tax Aspects (Estates, Gifts and Trusts Series), and in Tax Practice Series, see ¶2395, Charitable Contributions: Substantiation Requirements. For a discussion of substantial valuation misstatements in the Tax Management Portfolios, see 634 T.M., Civil Tax Penalties, and in Tax Practice Series, see ¶3830, Penalties.