Decision will be entered for respondent.
LARO,
The issues before the court are:
(1) whether the contributed apartment building was owned by petitioners or a wholly owned corporation of petitioner husband when it was contributed. We hold that it was owned by the corporation;
(2) whether petitioners may claim a deduction with respect to the corporation's contribution where respondent is treating the corporation as an S corporation. We hold that they may;
(3) whether the qualified appraisal 2014 Tax Ct. Memo LEXIS 15">*16 and other documentation requirements of
(4) whether such noncompliance should be excused under the judicial doctrine of substantial compliance or for reasonable cause pursuant to
Ben Alli is a medical doctor with a master's degree in public health from the University of Pittsburgh, an M.D. from St. George's School of Medicine in the West Indies, and a Ph.D. from Columbia University Union Graduate School. Originally from Africa, Dr. Alli has lived in the United States for over 40 years and is a U.S. citizen. In addition, Dr. Alli and his wife have three children. Petitioners resided in Michigan when they filed their petition.
Dr. Alli and his sister established BSA Corp. (BSA), a Michigan corporation which owns several apartment buildings in Detroit, Michigan.2 After acquiring his sister's interest in BSA, Dr. Alli became BSA's sole shareholder. Petitioners reported BSA's 2008 rental income on Schedule E, Supplemental Income and Loss, of 2014 Tax Ct. Memo LEXIS 15">*17 their personal return. Petitioners also reported BSA's 2008 depreciation deduction for its residential rental property on Form 4562, Depreciation and Amortization, of their personal return. Petitioners' 2008 return was prepared by Kent S. Siegel, a paid preparer.
In 1983 petitioners purchased two apartment buildings, 2211 Pingree (Pingree) and 2987 Gladstone (Gladstone) from the U.S. Department of Housing and Urban Development (HUD) at a HUD auction for a total of $353,000. The purchase of these two buildings was financed by a HUD mortgage. Pingree and Gladstone participated in HUD's Section 8 housing program. As part of the program, in 1983 petitioners and HUD entered into a "Housing Assistance Payments" (HAP) contract and a regulatory agreement for the two properties. Pursuant to these contracts, petitioners were required to keep the properties in a decent, safe, and sanitary condition. In 1988 petitioners transferred Pingree and Gladstone to BSA.
In the early 1990s 2014 Tax Ct. Memo LEXIS 15">*18 HUD became aware of significant problems at the two properties. In 1992 and 1993 HUD's Detroit office inspected the properties and discovered significant problems (e.g., missing smoke detectors and other fire hazards, roach infestation, peeling paint, significant water damage, etc.). HUD ordered Dr. Alli to effect all of the requisite repairs. Yet despite representations by Dr. Alli that most of the problems had been remedied, inspections in 1994, 1996, and 1997 revealed that the same deficiencies were still present.
*19 In 1998 a second HUD inspector again encountered many of the previously identified deficiencies at Pingree and Gladstone. After the failed inspection, Dr. Alli again represented that the identified deficiencies had either already been corrected or would be corrected within a few weeks. In 1999 when these corrections still had not materialized, HUD classified Pingree and Gladstone as "troubled property" and referred the properties to HUD's Department Enforcement Center (DEC).
In early 1999 a team from DEC inspected the properties and found the conditions to be deplorable—e.g., severe water damage; sink and shower units separating from the walls; actively leaking plumbing; 2014 Tax Ct. Memo LEXIS 15">*19 damaged or inoperable appliances, doors and lighting; and roach infestation. Also in 1999 DEC contracted Pinnacle Realty Management Co. (Pinnacle) to conduct an independent review of the Pingree/Gladstone properties. Pinnacle reported that "[t]he picture painted by prior inspections is accurate" and that the properties did not meet minimum standards of decent, safe, and sanitary conditions. In late 1999 an inspection by HUD's Real Estate Assessment Center (REAC) confirmed the continuing existence of many past deficiencies as well as new ones. REAC also directed Dr. Alli to conduct a survey of the properties, which Dr. Alli failed to do.
*20 In 2000 HUD notified petitioners that they had violated the regulatory agreement and defaulted on the Pingree/Gladstone HAP contract for failure to maintain the properties in a decent, safe, and sanitary condition. When petitioners again failed to correct the violations, HUD began relocating tenants and initiating foreclosure proceedings. Before HUD completed the foreclosure, however, petitioners paid off the balance of the HUD mortgage. On October 16, 2000, HUD recorded a "Discharge of Regulatory Agreement", which canceled the regulatory agreement 2014 Tax Ct. Memo LEXIS 15">*20 that petitioners and HUD had entered into in 1983.3
On November 29, 2001, petitioners and BSA sued the United States and the Secretary of HUD for breach and termination of the Pingree/Gladstone HAP contract. The United States counterclaimed, alleging that petitioners and BSA breached the HAP contract by failing to provide decent, safe, and sanitary housing. On April 4, 2007, as part of the HUD litigation proceedings, petitioners and BSA stipulated that BSA currently owned and operated the Pingree/Gladstone apartments. In an opinion entered on August 26, 2008, the U.S. Court of Federal Claims held in favor of the United States and the Secretary of HUD and held *21 against petitioners and BSA. The court further held that the corporate veil of BSA should be pierced.
On September 29, 2008, BSA, Dr. Alli, and Mrs. Alli executed a quitclaim deed of Gladstone to Volunteers of America, Michigan for nominal consideration (i.e., $1). On the same day, petitioners' 2014 Tax Ct. Memo LEXIS 15">*21 son, Adeola Alli, also executed a quitclaim deed of Gladstone to Volunteers of America. On October 29, 2008, Volunteers of America sent Dr. Alli a letter thanking him for the contribution of Gladstone. The letter included a statement that Dr. Alli "received no goods or services as a result of this donation" and further enclosed a donation receipt. The donation receipt stated that the donation was made on October 23, 2008, and further provided Volunteers of America's taxpayer identification number.
At the time of the donation, only 6 of Gladstone's 34 apartment units had tenants. With regard to real property, Volunteers of America's policy was to find a prospective purchaser before it would accept a donation in order to minimize the organization's liability exposure. With regard to the donation of Gladstone, Brian Wilbur, the Director of Thrift Operations at Volunteers of America, contacted Roger Ackerman, a real estate agent with whom Mr. Wilbur had previously done business.
*22 Mr. Ackerman visited Gladstone twice. The first time, he inspected only four or five of the apartment units. The second time, Mr. Ackerman inspected nearly all 34 apartment units. At trial Mr. Ackerman described 2014 Tax Ct. Memo LEXIS 15">*22 the apartment units as "pretty rough" and opined that most of the units were "not rent-ready". In addition, Mr. Ackerman observed that the elevator was broken, the roof leaked, the floors "heav[ed] up", kitchens were missing, and one apartment unit was completely burned.
Volunteers of America wished to sell the property quickly and entered into a contract on September 10, 2008, to sell Gladstone to an investor in California for $60,000. This investor was the only person who expressed interest in purchasing Gladstone.
Petitioners reported the charitable contribution of Gladstone on Form 8283, Noncash Charitable Contributions, of their 2008 return. On the Form 8283 petitioners described Gladstone as a "34 Unit Apartment Building" in "Good Condition" with an appraised fair market value of $499,000. Petitioners further reported that they had acquired Gladstone in June 2000 and that their basis in Gladstone was $1,200,000. Petitioners' Form 8283 did not include an appraiser's name, address, or identifying number, nor did it include an appraiser declaration.
*23 In addition, petitioners' Form 8283 did not include the donee's signature, its taxpayer identification number, 2014 Tax Ct. Memo LEXIS 15">*23 or its statement regarding whether the donor had received any consideration for the contribution.
On May 26, 1999, nearly a decade before the contribution of Gladstone, Anthony Sanna, MAI, conducted a market rent survey of the Pingree/Gladstone apartments (Sanna appraisal). Using the rental rates for five comparable apartment buildings, Mr. Sanna concluded that Pingree and Gladstone had an annual gross income potential of $390,840. Mr. Sanna did not estimate the fair market value of the Pingree/Gladstone apartments. In addition, the Sanna appraisal was not performed for income tax purposes, but rather for the purposes of HUD's Section 8 housing program. Finally, the Sanna appraisal did not include the date or expected date of Gladstone's contribution, nor did it include the terms of agreement regarding Gladstone's disposition.
On April 24, 2008, approximately five months before the contribution of Gladstone, Darvin Jones made an appraisal of the Pingree/Gladstone apartments as an update to the 1999 Sanna appraisal (Jones appraisal). Mr. Jones determined the "market value" of Pingree to be $898,437 and the "market value" of Gladstone to *24 be 2014 Tax Ct. Memo LEXIS 15">*24 $664,062, for a total of $1,562,500. Mr. Jones defined "market value" as "the highest price estimate in terms of money which a property Will [sic] bring, if exposed for sale in the open market, allowing a reasonable time of [sic] Find [sic] a purchaser who buys with knowledge of all uses of which it is adapted, and for which it was capable of being used."
The Jones appraisal stated that the purpose of the appraisal was for establishing the properties' values "
In appraising Pingree and Gladstone, Mr. Jones used the cost approach and the income approach. Because "[t]he assemblage of sales was difficult for establishing market value", Mr. Jones did not use the market approach. With 2014 Tax Ct. Memo LEXIS 15">*25 respect to the cost approach, Mr. Jones utilized a $40,000 per unit construction cost and 15-year life expectancy to estimate Pingree's value at $718,750 and *25 Gladstone's value at $531,250, for a total value of $1,250,000. With respect to the income approach, Mr. Jones determined the market rental rate using 9 comparable apartment buildings, estimated expenses using 25 comparable apartment buildings, and assumed a 5% vacancy rate. On the basis of these figures, Mr. Jones estimated the Pingree/Gladstone apartments' annual net operating income to be $250,268.5 Mr. Jones then appraised the Pingree/Gladstone apartments at a "market value" of $1,562,500, using the mortgage equity process and a capitalization rate of 16%. Mr. Jones based this capitalization rate on the elevated risk involved with real estate investments, a projected interest rate of 12%, and a projected loan term of 15 years.62014 Tax Ct. Memo LEXIS 15">*26
The "Reconciliation and Conclusion" section of the appraisal stated that the value of Pingree/Gladstone was $1,562,500 under each of the income approach, the market approach, and the cost approach, and thereby yielded a final *26 "reconciled" value of $1,562,500.72014 Tax Ct. Memo LEXIS 15">*27 The Jones appraisal concluded by reiterating that the "[f]inal valuation projection, as previously mentioned, will be based on the renovated marketing position of [sic] subject property. Renovation will conform to the plans and specifications developed for this specific capital input."
Finally, the Jones appraisal omitted the date or expected date of Gladstone's contribution, the terms of agreement regarding Gladstone's disposition, a statement that the appraisal was performed for income tax purposes, and Mr. Jones' qualifications and identifying number.
The primary issue in this case is whether petitioners are entitled to a deduction for the charitable contribution of Gladstone.
With respect to deductions, the Commissioner's determinations in a notice of deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance of the evidence that the Commissioner's determinations are erroneous.
The parties dispute the ownership of Gladstone as of the date that Gladstone was contributed. Respondent argues 2014 Tax Ct. Memo LEXIS 15">*28 that petitioners are not entitled to a deduction for the contribution of Gladstone because Gladstone did not belong to them. According to respondent, the quitclaim deeds which transferred Gladstone to Volunteers of America prove that Gladstone belonged, at least in part, to BSA or to petitioners' son, Adeola Alli. Petitioners argue that although they personally *28 owned Gladstone, BSA and their son executed these deeds because Volunteers of America required a broad release before accepting donations of real property.8
While the record is thin on the issue of who owned Gladstone at the time of the contribution, we hold that BSA was the sole owner. As late as April 2007 petitioners admitted, as part of the HUD litigation proceedings, that BSA owned and operated Gladstone.
Petitioners rely primarily on a "Good Faith Confidential Agreement" and the "Discharge of Regulatory Agreement" to establish their personal ownership of Gladstone at the time of the donation. We find neither to be persuasive evidence. 2014 Tax Ct. Memo LEXIS 15">*29 With respect to the "Good Faith Confidential Agreement", on June 23, 2004, petitioners entered into the agreement, which purported to relieve BSA of its ownership of both Pingree and Gladstone. However, BSA, the owner of these properties at the time, was not a party to the agreement. Moreover, the agreement was not recorded.9
*29 With respect to the "Discharge of Regulatory Agreement", the agreement does not identify petitioners as the owners of Gladstone. Rather it identifies the regulatory agreement being canceled 2014 Tax Ct. Memo LEXIS 15">*30 as one which lists petitioners as the owners. Indeed, when the regulatory agreement was entered into in 1983, petitioners were the owners of Gladstone and were correctly listed on the regulatory agreement as such. Finally, both documents predate petitioners' admission in 2007 that BSA was the owner of Gladstone. For these reasons, we choose not to credit the "Good Faith Confidential Agreement" or the "Discharge of Regulatory Agreement" as credible evidence that Gladstone belonged to petitioners.
Although BSA was the owner of Gladstone at the time of the contribution, petitioners could still be entitled to the charitable contribution deduction that they claimed. Respondent stated in his pretrial memorandum that he is treating BSA as an S corporation. As a general rule, an S corporation is not subject to tax at the corporate level.
In the Deficit Reduction Act of 1984 (DEFRA),
*32 The principal objective of DEFRA
In the American Jobs Creation Act of 2004 (AJCA),
Where a deduction is claimed for contributions in excess of $5,000, a taxpayer must "obtain[] a qualified appraisal of such property and attach[] to the return * * * such information regarding such property and such appraisal as the Secretary may require."
Under
*34 Where the donor is an S corporation, the donor must provide a copy of the appraisal summary to every shareholder who receives an allocation of a charitable contribution deduction with respect to the property described in the appraisal summary.
In this case, the donor of Gladstone is BSA. However, BSA never filed a corporate return for 2008. Rather, petitioners reported BSA's activities on Schedule E of their personal 2014 Tax Ct. Memo LEXIS 15">*37 2008 return. Because BSA did not attach an appraisal summary for Gladstone to its corporate return, it failed to meet the requirement of
Under the regulations, a qualified appraisal must be made no more than 60 days before the gift and no later than the due date of the return, must be signed by a qualified appraiser, must not involve a prohibited appraisal fee,142014 Tax Ct. Memo LEXIS 15">*39 and must include certain specific 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 2014 Tax Ct. Memo LEXIS 15">*38 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 * * * that relates to the use, sale, or other disposition of the property contributed * * *; *36 (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 * * *; and (K) The specific basis for the valuation * * *.
Petitioners argue that the Jones appraisal is an update of the Sanna appraisal and that both appraisals constitute qualified appraisals. We note that under the regulations, if a donor uses the appraisal of more than one appraiser, each appraiser must comply with the qualified appraisal requirements.
The Sanna appraisal is deficient in at least five requirements of the regulations, which we address below in turn.
The Sanna appraisal's primary defect is that it was made in 1999, nearly a decade before the contribution of Gladstone in 2008. Under the regulations, a qualified appraisal must be prepared by a qualified appraiser no earlier 2014 Tax Ct. Memo LEXIS 15">*40 than 60 days before the contribution date and no later than the extended due date of the return first claiming the deduction.
Petitioners implicitly concede this point. In brief, petitioners argue that the results of the 1999 HUD inspection are irrelevant for establishing the value of *38 Gladstone as of the contribution date because the inspection was a "decade old". It follows that the Sanna appraisal, dated May 26, 1999, is inadequate because it too was prepared and dated nearly a decade before the contribution was 2014 Tax Ct. Memo LEXIS 15">*41 made.
Petitioners argue that although the Sanna appraisal is nearly a decade old, it is relevant to establishing the value of Gladstone as of the date of contribution because the Jones appraisal is an update of the Sanna appraisal. The regulations, however, provide that where a taxpayer relies on more than one appraisal, each appraisal must
The Sanna appraisal does not include the date or expected date of contribution for Gladstone.
A qualified appraisal must include "[t]he terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property contributed".
We have recognized that restrictions on the disposition of property may reduce the fair market value of the property.
The Sanna appraisal does not include a statement that it was prepared for income tax purposes. A qualified appraisal must include "[a] statement that the appraisal was prepared for income tax purposes".
The Sanna appraisal does not state that it was prepared for income tax purposes, but rather states that it was prepared for the purposes of HUD's Section 8 housing program. Accordingly, the Sanna appraisal does not comply with
The Sanna appraisal does not provide a fair market value appraisal of Gladstone. A qualified appraisal must include "[t]he appraised fair market value (within the meaning of
Three approaches measure the 2014 Tax Ct. Memo LEXIS 15">*46 fair market value of property: the market approach (i.e., the comparable sales approach), the asset-based approach (i.e., the cost approach), and the income approach.
*43 An appraiser should employ as many approaches as are appropriate.
The Sanna appraisal did not employ the market approach, the asset-based approach, or the income approach to determine the fair market value of Gladstone. Instead, it merely estimated Gladstone's annual profit potential using a projected income stream. It did not perform a discounted cashflow analysis on the estimated profit potential to determine Gladstone's fair market value. Because the Sanna appraisal did not employ any of the three approaches to determine Gladstone's fair market value, it does not comply with
We now turn to the Jones appraisal.
The Jones appraisal is deficient in at least nine requirements of the regulations, which we address below in turn.
The Jones appraisal's primary deficiency is that it is not an appraisal 2014 Tax Ct. Memo LEXIS 15">*48 of the contributed property but is rather an appraisal of a hypothetical, fully renovated version of the contributed property. Under the charitable contribution statute, where a deduction is claimed for contributions in excess of $5,000, the taxpayer must obtain a
In
The Jones appraisal did not describe Gladstone as it existed but rather described a hypothetical, fully renovated Gladstone. Under the regulations a qualified appraisal must include "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".
The Jones appraisal did not determine the fair market value of Gladstone, but rather its market value. A qualified appraisal must include "[t]he appraised fair market value (within the meaning of
Mr. Jones defined market value as "the highest price estimate in terms of money which a property Will [sic] bring, if exposed for sale in the open market, allowing a reasonable time of [sic] Find [sic] a purchaser 2014 Tax Ct. Memo LEXIS 15">*52 who buys with knowledge of all uses of which it is adapted, and for which it was capable of being used."
The mere fact that the wording of Mr. Jones' definition is different from that of the regulations, however, is not the end of the story.17 Mr. Jones' definition of *48 "market value" is different from "fair market value" as defined in the regulations for the following reasons. First, Mr. Jones' definition of "market value" does not require both the buyer and seller to have "reasonable knowledge of relevant facts" as required by the regulation's definition of "fair market value". Second, Mr. Jones' definition of "market value" does not encompass the notion of a
For the foregoing reasons, the Jones appraisal determined the market value of a hypothetical Gladstone, rather than the fair market value of the actual *49 Gladstone. Consequently, the Jones appraisal does not comply with
The Jones appraisal did not include Mr. Jones' qualifications. Under the regulations, a qualified appraisal must include "[t]he qualifications of the qualified appraiser who signs the appraisal, including the 2014 Tax Ct. Memo LEXIS 15">*54 appraiser's background, experience, education, and membership, if any, in professional appraisal associations".
A qualified appraisal must include "[t]he name, address, and (if a taxpayer identification number is otherwise required by
The Jones appraisal, like the Sanna appraisal, did not include the date or expected date of contribution as required by
The Jones appraisal, like the Sanna appraisal, did not include the terms of the agreement or understanding that relate to the use, sale, or other disposition of Gladstone as required by
The Jones appraisal, like the Sanna appraisal, did not include a statement that the appraisal was prepared for income tax purposes, as required by
Finally, the Jones appraisal was performed 2014 Tax Ct. Memo LEXIS 15">*57 on April 24, 2008, approximately five months before the donation of Gladstone on September 29, 2008. Thus, the Jones appraisal was not conducted "no[] earlier than 60 days prior to the date of contribution of the appraised property" as required by
A qualified appraisal can be conducted only by a qualified appraiser.
Under the regulations, a qualified appraiser is an individual who includes on the appraisal summary a declaration that: (1) the individual either holds himself out to the public as an appraiser or performs appraisals regularly; (2) the appraiser is qualified to make appraisals of the type of property being valued; (3) the appraiser is not excluded from qualifying as a qualified appraiser under
Mr. Sanna's qualifications were included as part of his appraisal report. He holds a designation from the Appraisal Institute, a recognized professional appraiser organization. In addition, it is evident from his work experience that he regularly performs appraisals for compensation. However, we have held that
Mr. Jones' qualifications were not included in his appraisal report. Although petitioners argue that Mr. Jones' curriculum vitae was provided to the IRS during their audit, they did not produce his curriculum vitae or any other evidence of his qualifications. Furthermore, Mr. Jones also did not make a declaration on petitioners' appraisal summary that he holds himself out as an *55 appraiser, that he is so qualified, that he is not an ineligible individual, and that he understands the consequences of a fraudulent overvaluation, as required by
We now turn to whether petitioners' appraisal summary satisfies the appraisal summary regulation requirements.
Under the regulations, a fully completed appraisal summary must be attached to the tax return on which the deduction for a contribution is first claimed.
An appraisal summary is a summary of a qualified appraisal that is: (1) "made on the form prescribed by the Internal Revenue Service"; (2) "signed and dated * * * by the donee"; (3) "signed and dated by the qualified appraiser * * * who prepared the qualified appraisal"; and (4) includes the following information: (A) The name and taxpayer identification number of the donor * * *; *56 (B) A description of the property * * *; (C) In the case of tangible property, a brief summary of the overall physical condition of the property at the time of the contribution; (D) The manner of acquisition * * * and the date of acquisition of the property by the donor * * *; (E) The cost or other 2014 Tax Ct. Memo LEXIS 15">*62 basis of the property * * *; (F) The name, address, and taxpayer identification number of the donee; (G) The date the donee received the property; (H) * * * a statement explaining * * * the amount of any consideration received from the donee for the contribution; (I) The name, address, and * * * the identifying number of the qualified appraiser who signs the appraisal summary * * *; (J) The appraised fair market value of the property on the date of contribution; (K) The declaration by the appraiser * * * [stating that he is an appraiser, with sufficient qualifications to make this appraisal, and not an individual who is ineligible to make the appraisal]; (L) A declaration by the appraiser stating that * * * [the fee charged was not of a prohibited type and that the appraiser has not been barred from presenting appraisals to the IRS under (M) Such other information as may be specified by the form.
Petitioners' appraisal summary omits at least four categories of 2014 Tax Ct. Memo LEXIS 15">*63 information. In addition, petitioners provided false information in at least four instances. Collectively, petitioners' appraisal summary suffers from at least eight deficiencies.
An appraisal summary must include "[t]he cost or other basis of the property adjusted as provided by
Establishing the taxpayer's proper basis in a contributed property is essential because the basis affects the amount of the deduction allowed. Pursuant to
In the case of tangible property, an appraisal summary must include "a brief summary of the overall physical condition of the property at the time of the contribution".
On their Form 8283 petitioners reported the physical condition of Gladstone as "good". We have 2014 Tax Ct. Memo LEXIS 15">*65 held that a description of the physical condition of property generally as merely "new", "used", "good", "fair", "dismantled", or "discard" is inadequate to satisfy the physical condition requirement of the regulations because *59 "[w]ithout a more detailed description the appraiser's approach and methodology cannot be evaluated."
Moreover, not only was petitioners' description of Gladstone's physical condition inadequate; it was false. In reality, Gladstone's physical condition was not "good" but rather very poor. According to Mr. Ackerman, Gladstone was in "pretty rough" condition and few of its apartment units were rent ready. In summary, by reporting a false and inadequate description of Gladstone's physical condition, petitioners failed to comply with
An appraisal summary must include "[t]he appraised fair market value of the property on the date of contribution".
The Sanna appraisal only estimated the annual income potential of Gladstone and did not provide an appraisal of its fair market value. The Jones appraisal provides an appraisal of a fully renovated Gladstone at $664,062.50. In fact, the $499,000 figure smacks of manipulation—petitioners likely chose the $499,000 figure to avoid
An appraisal summary must include "[t]he name, address, and taxpayer identification number of the donee".
An appraisal summary must include "[t]he declaration by the appraiser described in paragraph (c)(5)(i) of this section".
The appraiser declaration set forth in
The appraiser declaration set forth in
Finally, the appraiser declaration set forth in
Petitioners' Form 8283 does not include the requisite declarations by Mr. Sanna, Mr. Jones, or any other appraiser. Consequently, petitioners failed to comply with
An appraisal summary must include "[t]he name, address, and * * * the identifying number of the qualified appraiser who signs the appraisal summary." *63
An appraisal summary must include "a statement explaining * * * the amount of any consideration received from the donee for the contribution".
Although Volunteers of America provided Dr. Alli with a donation receipt which stated that he did not receive any consideration for the contribution of Gladstone,25 petitioners' Form 8283 did not include a consideration statement as required by
*65 Having concluded that petitioners failed to comply with many of the qualified appraisal and other documentation requirements of
Some courts have held that strict compliance with the qualified appraisal and other documentation requirements is not necessary if the taxpayer substantially complies with the reporting regulations. We did not find any authority from the Court of Appeals for the Sixth Circuit regarding whether the substantial compliance doctrine applies in the context of the qualified appraisal regulations.272014 Tax Ct. Memo LEXIS 15">*73 In
In determining whether a taxpayer has substantially complied with the charitable contribution reporting regulations, we return to the purpose of the regulations—i.e., to provide the IRS with 2014 Tax Ct. Memo LEXIS 15">*74 sufficient information to evaluate the claimed deduction and deal more effectively with the prevalent use of overvaluations.
Some courts have found that strict compliance can be excused where the taxpayer has supplied nearly all of the required information (in either the appraisal report or the appraisal summary) and all substantive requirements have been met. In
In
Moreover, the substantial compliance doctrine should not be liberally applied.
*69 As further explained below, courts have routinely declined to apply the substantial compliance doctrine where: (1) substantive requirements set forth in the qualified appraisal regulations are not met or (2) entire categories of required information are omitted.
Courts have found that strict compliance cannot be excused where a substantive requirement of the qualified appraisal regulations is not satisfied.
The Sanna appraisal fails at least two substantive requirements for a qualified appraisal. First, the Sanna appraisal was performed in 1999, far outside *70 the 60-day period before the contribution required by the regulations. Although an appraisal that is slightly premature may substantially comply with the regulations,
The Jones appraisal also fails at least two substantive requirements. As explained earlier, petitioners have failed to establish that Mr. Jones is qualified to appraise Gladstone. We have held that obtaining an appraisal from a nonqualified *71 appraiser does not constitute substantial compliance.
Courts have also found that strict compliance cannot be excused where the taxpayer fails to provide entire categories of mandated information.
Likewise, the Sanna appraisal, the Jones appraisal, and petitioners' Form 8283 collectively lack entire categories of information—i.e., a consideration statement from Volunteers of America,28 the terms regarding the disposition of Gladstone, an income tax purposes statement, appraiser declarations, and the taxpayer identification numbers of the appraiser and Volunteers of America. In addition, petitioners' Form 8283 contains entire categories of false information—i.e., the contribution date of Gladstone, petitioners' basis in Gladstone, the appraised fair market value of Gladstone, and Gladstone's physical condition. For *74 these reasons, petitioners did not substantially comply with the qualified appraisal and reporting regulations.292014 Tax Ct. Memo LEXIS 15">*83
Even if a taxpayer does not strictly or substantially comply with the qualified appraisal and other documentation requirements, a charitable contribution deduction will not be denied if the failure to meet those requirements is due to "reasonable 2014 Tax Ct. Memo LEXIS 15">*84 cause and not to willful neglect".
In
A taxpayer's reliance on the advice of a professional, such as a certified public accountant (C.P.A.), would constitute reasonable cause and good faith if the taxpayer proves 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."
In
Petitioners argue that reasonable cause exists because they relied on Mr. Siegal, the paid preparer for their 2008 return, regarding the charitable contribution deduction. Petitioners claim that Mr. Siegal is a C.P.A. and an attorney, and further claim that he has prepared their returns for over 30 years. However, petitioners have produced no reliable evidence of Mr. Siegal's qualifications, no reliable evidence that they provided Mr. Siegal with complete information, 2014 Tax Ct. Memo LEXIS 15">*86 no reliable evidence of the content of Mr. Siegal's advice, and no reliable evidence that they reasonably relied on that advice.30
Petitioners further argue that reasonable cause exists because they relied on the appraisals by Mr. Sanna and Mr. Jones. However, petitioners have produced no evidence that either Mr. Sanna or Mr. Jones is a "professional" as the term is defined in
*77 Accordingly, petitioners do not meet their burden of establishing reasonable cause based on their alleged reliance upon professional advice.
Any arguments not discussed in this opinion are irrelevant, moot, or lacking in merit.
To reflect the foregoing,
1. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. In his pretrial memorandum, respondent stated that he has no record of BSA's filing a corporate tax return for 2008 or 2009 but indicated that he is treating BSA as an S corporation.↩
3. The "Discharge of Regulatory Agreement" described the canceled regulatory agreement as one which identified petitioners as the owner and the Secretary of HUD as the insurer of Pingree and Gladstone.↩
4. The renovations contemplated by the Jones appraisal were never made.↩
5. In comparison, petitioners' 2008 return reported rents received of merely $81,909, expenses of $162,649, and losses of $80,740 for the Pingree/Gladstone apartments.↩
6. Because we need not decide Gladstone's fair market value, we do not find it necessary to evaluate Mr. Jones' assumptions; however, we suspect that some of his assumptions may have been unreasonable, such as the 12% interest rate.
7. We note that the "Reconciliation and Conclusion" section of the Jones appraisal included a number of errors. First, that section purported to reconcile valuations made using the income approach, the market approach, and the cost approach, when in fact the body of the appraisal included only valuations made using the cost approach and the income approach. Second, the reconciliation section stated that both the cost approach and the income approach yielded valuations of $1,562,500, when in fact, the cost approach actually yielded a valuation of $1,250,000 according to the body of the appraisal.
8. Petitioners allege that Volunteers of America required Adeola Alli to execute a quitclaim deed because he had a recorded lien on Gladstone. The alleged lien, however, is not part of the record.↩
9. It is unclear whether, under Michigan law,
10. On November 12, 2013, the Court ordered the parties to brief what implications, if any,
11. Although S corporations used to be subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
12.
13.
14.
15.
Thus, disclosure of the donee's terms, if any, regarding the disposition of contributed property may constitute important information that the IRS needs to account for any discrepancies between the sale value reported by the donee and the appraised fair market value reported by the donor.↩
16. In
17. In
18.
19. Tit.
20. Respondent makes no claim that either Mr. Sanna or Mr. Jones is prohibited from practicing before the IRS pursuant to
21. Pursuant to
22.
23.
24.
25. The donation receipt was not included as part of petitioners' tax return.↩
26.
27. The Court of Appeals for the Sixth Circuit, however, has addressed the substantial compliance doctrine in the context of other tax provisions. In
28. Although Volunteers of America provided Dr. Alli with a donation receipt which stated that Dr. Alli "received no goods or services as a result of this donation" as required by
29. At least one court has held that the substantial compliance doctrine does not apply where the taxpayer does not rely on the offered appraisal because "the purpose of the qualified appraisal is to present an understandable rationale for the claimed deduction * * * [and] to 'show the work' so as to obviate the injection of unfounded guessing into the tax scheme."
30. We further note that petitioners did not call Mr. Siegal as a witness, which gives rise to an adverse inference that had he been called, his testimony would not have supported petitioners' contentions.