As demonstrated in several recent court cases, the IRS is taking an aggressive position in issues involving valuations of noncash charitable contributions.
Rather than challenging the value placed on the asset, the IRS is challenging whether the valuation is supported by a “qualified appraisal,” as that term is defined in the regulations.
One taxpayer recently asked the Tax Court to reconsider its previous decision to deny the deduction.
Steven and Rory Rothman purchased a four-story townhouse located within a historic district. Several years later, the Rothmans contributed a historic preservation facade easement on their residence to the National Architectural Trust (NAT).
The Rothmans retained the services of a real estate appraisal firm to value the contribution. The appraisers estimated the property’s fair market value at $2.6 million without the easement and concluded that the easement would decrease the property’s value by approximately $290,000.
The Rothmans claimed a noncash charitable contribution deduction. They attached a copy of the appraisal and Form 8283, Noncash Charitable Contribution, to their return. On audit, the IRS disallowed the deduction based on the Rothmans’ failure to establish the easement’s value and failure to meet the qualified appraisal requirements of the regulations.
The first time it heard the case, the Tax Court ruled that the appraisal submitted by the Rothmans was not a qualified appraisal under the regulations (Rothman v. Commissioner, TC Memo 2012-163). The court found that, among other defects, the appraisal lacked a method and specific basis to determine value. The appraiser did not use the income, cost or replacement-cost approach to extrapolate the fair market value of the subject property as encumbered by the easement.
After that decision was rendered, the U.S. Court of Appeals for the Second Circuit, reversing and remanding a Tax Court decision in a different case, held that an appraisal using a method similar to that used by the Rothmans to value a facade conservation easement met the requirements of the regulations (Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012).
On reconsideration, the Tax Court again concluded that the Rothmans’ appraisal was not a qualified appraisal. While agreeing that the Scheidelman decision settled the issue of whether the Rothmans’ appraisal included a method and a specific basis for the valuation, the court noted that the qualified appraisal regulations impose 15 distinct requirements and that the Rothmans’ appraisal still failed to satisfy eight of those 15 requirements (Rothman v. Commissioner, TC Memo 2012-218, Aug. 1, 2012).
Before making a noncash charitable contribution, you should retain the services of a qualified appraiser and a tax adviser who will help you assure that the appraisal is qualified under the regulations.