- Non-cash charitable contributions, particularly those exceeding $5,000, have become a focal point for IRS enforcement and Tax Court rulings. While charitable giving provides an opportunity to benefit both the donor and the receiving organization, it also requires fastidious compliance with documentation requirements to withstand the heightened scrutiny of tax authorities. This article outlines key Tax Court cases, IRS substantiation rules, and proactive strategies for ensuring non-cash charitable contributions meet all necessary requirements.
The Current IRS and Tax Court Environment
Recent developments indicate that the IRS has intensified its focus on non-cash charitable contributions, particularly those involving conservation easements, high-value property, and aggregated donations of similar items. Tax Court rulings continue to reinforce the need for taxpayers to strictly adhere to substantiation requirements, with a growing trend of disallowing deductions due to documentation deficiencies or inflated valuations.
IRS Substantiation Requirements
To claim a deduction for non-cash charitable contributions exceeding $5,000, taxpayers must comply with the following IRS requirements:
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1.Qualified Appraisal: A qualified appraisal must be conducted by a qualified appraiser, detailing the fair market value (FMV) of the donated property.
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2.Form 8283, Section B: Taxpayers must accurately complete this form, providing a description of the donated property and attaching it to their tax return.
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3.Contemporaneous Written Acknowledgment: The charitable organization must provide a written statement confirming the donation, including a description of the property and whether any goods or services were received in return.
Failure to meet these standards can result in the disallowance of deductions, regardless of the taxpayer’s intent or the property’s actual value.
IRS Requirements for Qualified Appraisers
An IRS Qualified Appraiser must meet stringent requirements to ensure their valuations are reliable and compliant with federal standards:
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1.Education and Experience:The appraiser must have completed professional or college-level coursework in valuing the type of property being appraised or have equivalent work experience.
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2.Accreditation: The appraiser must hold a recognized designation from a professional appraisal organization or meet alternative IRS qualifications.
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3.Conducting Appraisals Regularly:The appraiser must perform appraisals on a regular basis as a part of their business.
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4.Disqualification Rules:An appraiser is disqualified if they are the donor, the recipient charity, or related parties.
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5.Compliance with USPAP: Appraisals must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP).
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6.Declaration on Form 8283:The appraiser must sign Form 8283, Section B, affirming their qualifications and the appraisal’s compliance with IRS standards.
Key Tax Court Cases
Smith v. Commissioner
The Tax Court denied a deduction for non-cash contributions due to inadequate documentation. Despite acknowledging that donations were likely made, the taxpayer failed to provide a qualified appraisal and properly complete Form 8283.
RERI Holdings I, LLC v. Commissioner
A claimed $33 million deduction for a conservation easement was disallowed because the taxpayer omitted the donor’s cost or adjusted basis on Form 8283. This case highlights the importance of precision in reporting.
Savannah Shoals, LLC Case
The Tax Court reduced the FMV of a conservation easement donation from $23 million to $480,000, citing deficiencies in the appraisal’s methodology and imposing a 40% penalty for gross valuation misstatement.
Bass v. Commissioner
A taxpayer’s deduction for donated clothing was denied because similar items donated throughout the year were aggregated, exceeding the $5,000 threshold and requiring a qualified appraisal, which was not obtained.
Little Horse Creek Property v. Commissioner
The Court upheld the IRS’s lower valuation of a conservation easement, emphasizing the importance of obtaining a reasonable and defensible appraisal.
Proactive Strategies for Taxpayers
To avoid the pitfalls highlighted in these cases, taxpayers should adopt a proactive approach:
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1.Engage Qualified Professionals:Work with experienced appraisers and tax advisors to ensure valuations meet IRS standards and all documentation is complete and accurate.
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2.Understand Aggregation Rules: Similar items donated over the course of a year must be aggregated to determine if the total value exceeds $5,000, triggering appraisal requirements.
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3.Secure Detailed Documentation:Retain all records, including the qualified appraisal, Form 8283, and the charity’s written acknowledgment, to substantiate the deduction.
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4.Avoid Overvaluation:Inflating the value of donated property can lead to penalties, including a 40% penalty for gross valuation misstatements. Ensure appraisals are defensible and based on reliable market data.
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5.Monitor IRS Policy Updates:Stay informed about IRS enforcement strategies and settlement programs, particularly for high-risk contributions like conservation easements.
Sources
- IRS Publication 561: Determining the Value of Donated Property (irs.gov)
- IRS Publication 526: Charitable Contributions (irs.gov)
- Tax Court Case: Smith v. Commissioner (casetext.com)
- Tax Court Case: RERI Holdings I, LLC v. Commissioner (forvismazars.us)
- Tax Court Case: Savannah Shoals, LLC (cpapracticeadvisor.com)
- IRS Guidance on Conservation Easements (wsj.com)
Conclusion
Non-cash charitable contributions offer substantial tax benefits, but they require careful planning and compliance to withstand IRS and Tax Court scrutiny. By adhering to substantiation requirements and seeking professional guidance, taxpayers can ensure their charitable intentions translate into allowable deductions. As the IRS continues to focus on this area, proactive measures are essential for mitigating risks and achieving favorable outcomes.
Jessica I. Marschall, CPA, ISA AM, is the CEO of The Green Mission Inc., MAS LLC, and Probity Appraisal Group, with over five years of experience in deconstruction valuations. A practicing CPA for 24 years with an active tax consultancy practice, Jessica specializes in tax planning, personal property appraisal, and sustainable financial strategies.
