Tax Court Allows Deduction Without Appraisal

Fellow appraiser Selma Paul sent me an very interesting and recent tax court ruling.  Although this is related to a real estate, on many levels the claim and ruling is still very interesting to personal property appraisers.  The case, in part revolves around the need to attach a qualified appraisal with tax returns.

It seems a tax payer included a 2000 appraisal on real estate that was part of a charitable gift in 2004.  The IRS found other problems as well, but in this instance in regard to the appraisal, the tax payer relied upon advice from his CPA to use the old appraisal.  Because the the CPA firm was legitimate and had a solid reputation, plus was handling the tax payers taxes for years without issue, the tax court allow the good faith use of the appraisal based upon that guidance.

The tax case is  Crimi v. Comm'r, T.C. Memo. 2013-51 (2/14/13)

Parker Tax Publishing reports on the ruling

Congress enacted Code Sec. 170(f)(11), applicable to contributions of property made after June 3, 2004, to require a taxpayer claiming a deduction of more than $500,000 for a charitable gift of property to attach to the year's tax return a qualified appraisal of the property. The court did not address whether the 2000 appraisal was in substantial compliance with the qualified appraisal requirements; nor did it express an opinion as to whether an updated appraisal obtained at the audit stage would cure any defects in the 2000 appraisal. The court said discussions of these issues were moot because it agreed with the Crimis that any noncompliance should be excused for reasonable cause because they reasonably and in good faith relied on Mr. LaForge's advice that the 2000 appraisal met all legal requirements to claim the deduction.

Code Sec. 170(f)(11)(A)(ii)(II) provides that if a taxpayer donor claimed a deduction for a charitable gift of property worth more than $500,000 but failed to attach a qualified appraisal required by Code Sec. 170(f)(11)(D) to his return, the deduction will not be disallowed if the taxpayer can show the failure was due to reasonable cause and not willful neglect. The court noted that neither the statute nor the regulations explain what constitutes reasonable cause in the context of a failure to obtain a qualified appraisal.

However, the court stated, reasonable cause requires that the taxpayer to have exercised ordinary business care and prudence as to the challenged item. Thus, the court observed, the inquiry is inherently a fact-intensive one, and facts and circumstances must be judged on a case-by-case basis. Citing Reg. Sec. 1.6664-4(c)(1), the court said that a taxpayer's reliance on the advice of a professional, such as a CPA, constitutes reasonable cause and good faith if the taxpayer can prove by a preponderance of the evidence that: (1) the taxpayer reasonably believed the professional was a competent tax adviser with sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the advising professional; and (3) the taxpayer actually relied in good faith on the professional's advice.

John had relied on Mr. LaForge and the CPA firm that he worked for as competent tax advisers for over 20 years. Upon the filing of the returns at issue, Mr. LaForge had been a CPA for over 20 years and had expertise in preparing tax returns claiming deductions for charitable contributions. The accounting firm was an established regional accounting firm staffed with accountants, some of whom had law degrees. During the 24 years of engagement, Mr. LaForge had become intimately familiar with John's and Concrete's financial affairs, and there had been no history of mishaps. On these facts, the court concluded that John actually relied on Mr. LaForge's advice in good faith and found it reasonable for John to believe the 2000 appraisal was not stale in substance and thus was a good appraisal.

Source: Parker Tax Publishing