The Tax Court recently supported the IRS' decision to deny taxpayers a charitable contribution deduction for a conservation easement that was greater than $5,000. The deduction was denied after the taxpayers failed to attach an appraisal for the easement with their return. The IRS also imposed accuracy-related penalties and interest that the Tax Court also upheld.
In 2007, the taxpayers who lived in a historic district decided to pursue a façade easement, which requires a property owner not to make changes to the façade without first confirming that such changes will not compromise the historic value. The easement was eligible to be considered a qualified conservation contribution. One requirement in order to claim this type of contribution on a tax return is to have the easement appraised by a qualified appraiser and then attach the qualified appraisal to the tax return filed in the year of the deduction.
The taxpayers obtained an appraisal from a qualified appraiser who valued the donation to be $108,000. When the taxpayers filed their return, they claimed a total donation of $108,000, of which $69,186 was allowed on their 2007 return, and $38,814 was carried over and claimed on their 2008 return. However, they failed to attach the appraisal to their return when they filed, which made Form 8283, Noncash Charitable Contributions, incomplete.
The IRS disallowed the charitable contribution in its entirety based on several grounds:
- The absence of a qualified appraisal.
- The façade easement was neither granted in perpetuity nor protected in perpetuity, which is a requirement for a qualified conservation contribution.
- Failure to include a copy of a qualified appraisal or photographs with the 2007 return.
- Failure to prove that the contribution decreased the value of the home by $108,000.
It is important to remember that generally, when taxpayers claim a charitable contribution on form 8283 with a return that is greater than $5,000, a qualified appraisal needs to be attached. Failure to do so can result in a disallowance of the deduction.
A qualified appraisal must include all of the following:
- Detailed description of the property.
- Physical condition of the property when donating tangible property.
- Date or expected date of contribution to the donee.
- The terms of any agreement entered into by or on behalf of the donor or donee.
- Name, address, and identifying number of the qualified appraiser.
- Qualifications of the qualified appraiser who signs the appraisal. This includes background, experience, education, and membership in professional appraisal organizations.
- Statement that the appraisal was prepared for income tax purposes.
- Date on which the property was appraised.
- Property's appraised fair market value on the date of contribution.
- Method of valuation used to determine the fair market value, i.e., income approach, market-data approach, or replacement-cost-less-depreciation approach.
- Basis for the valuation, i.e., comparable sales transactions or statistical sampling.
For more information on claiming non-cash contributions on Form 8283, or what constitutes as a qualified appraisal, please contact your Marcum tax advisor.