Chirelli v. Commissioner, T.C. Memo 2021027 March 3rd, 2021 is another tax court case in which a taxpayer lost their non-cash charitable contribution due to lack of substantial compliance by the appraiser in producing an IRS Qualified Appraisal. There are important takeaways from this case to help protect taxpayers from losing their deductions and the subsequent paying of fines and interest should their appraisals not meet IRS standards. The IRS is serious about ensuring appraisers comply with the Internal Revenue Code and adhere to the strict definition of both Qualified Appraiser and Qualified Appraisal.
Please find a copy of the case text here:
https://casetext.com/case/chiarelli-v-commr-1
- 1Like Loube v. Commissioner, 2020, Form 8283 was not filled out completely and signed by the taxpayer, nonprofit and appraiser. (See link for full case text: https://casetext.com/case/loube-v-commr)
- 2One of the appraisals grouped items into general categories without specifically describing them. As appraisers, one of our primary functions is to observe and identify what we are appraising. Accurate and detailed descriptions do just that. The case notes that the taxpayer did “not otherwise provide reliable written records credibly identifying the individual items donated, their values or condition, the manner of acquisition, the donation dates, or his bases in the property."
- 3The condition was also not specified, with a general category of “excellent” noted. Again, the appraiser did not back-up their work.
- 4The Contemporaneous Written Acknowledgement letter (CWA), receipts, and accompanying substantiation were found lacking.
Choosing the wrong appraiser can compromise not just the tax deduction but trigger underpayment fines and penalties. There is an accuracy penalty assessed to the appraiser at times, but the major negative implications hit the taxpayer.
John D. Russell, J.D. of The American Society of Appraisers offers a great write-up of the case here:
Peter J. Reilly with Forbes also offers an insightful look at the Chirelli case:
IRS Qualified Appraisers and Qualified Appraisals
- 1Education: All members of the appraisal team, both owners and staff appraisers should have sufficient college and relevant course-related education completed and up to date.
- 2Accreditation with one of the three personal property appraisal organizations is critical to grasping comprehensive valuation methodology.
- 3The appraiser or owners of the firm must not be precluded from preparing appraisals for the IRS as detailed in IRS Circular 230, found here: https://www.irs.gov/pub/irs-pdf/pcir230.pdf. Appraisers prepare documentation “relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service.” They are held to the same standards as attorneys, CPAs and other enrolled agents presenting documentation to the IRS. It sounds obvious but a quick criminal record check never hurts.
Circular 230 provides the following information:
Deconstruction Charitable Contribution Tax Court Cases
Mann v. United States, 2019 and appeal in 2020
In both the original case and the appeal, the taxpayer lost. The first appraisal was of an intact residential real estate structure. The second appraisal used construction cost estimating software, R.S. Means, to calculate the value of the entire structure without any reference to what was constructively donated to the nonprofit. Many materials that were destroyed on site, were included within the donation value despite never being donated. As the appeal made clear, the appraiser should have been relying upon sales in the open market to conclude Fair Market Value. This approach, the Sales Comparison Approach, is used in the majority of all personal property appraisals. The appraiser claimed to be using the Cost Approach or Cost New less Depreciation method, which the court rejected in the appeal.
From the case text:
Finally, the nonprofit did not appear to have maintained an inventory of what was actually donated.
Loube v. Commissioner, 2020
The same appraiser and nonprofit involved in Mann were involved in this case in which the tax deduction was disallowed. In this write up by IRS Counsel Theresa Melchoire, the taxpayer, nonprofit and appraiser made the disallowance easy due to not filling out Form 8283 in its entirety. Ms. Melchoire provided the following memorandum entry. The valuation methodology, again, used R.S. Means to determine the value of the whole house without respect to what was actually donated and did not base the value on market data. Essentially, the house was valued in the pre-deconstructed state.
Nonprofits and Contemporaneous Written Acknowledgement
Appraisers must only appraise what has been donated to a nonprofit recipient organization. The IRS substantiates these donations through the Contemporaneous Letter of Acknowledgement (CWA) and must ensure that the nonprofit accepts everything the appraiser appraises. At The Green Mission Inc., we do not begin the research and appraisal writing engagement until we have received this detailed receipt from the nonprofit. The potential for inadvertent or deliberate misstatement of inventories exists without this check in place.
Following the rules closely ensures that the taxpayer will not have the entire donation disallowed at a later date, leading to large fines, attorney’s fees, and interest. This is especially true in a transaction where each party has some incentive to maximize the appraisal value and list of items donated. Nonprofits could be motivated to claim acceptance of an expansive list of inventory, some of which could never reach the nonprofit and could presently reside in the dumpster or landfill. This would allow the taxpayer a greater deduction, the appraiser a higher fee and the nonprofit potentially a higher cash donation or fee-for-service charge.
The IRS Knows Best What it Will Allow
This is evidenced by the most recent court cases, the taxpayer must insist on an appraiser with a thorough understanding of the appraisal documentation needed to substantiate a donation as well as a firm understanding of the Internal Revenue Code regarding Form 8283.
The Green Mission Inc. Process
- 1Clients contact us to procure an appraisal for their donation or potential donation.
- 2We provide a quoted value range for the donation based upon preliminary information, documents, photographs and in-person inspection of the property.
- 3A fee is quoted for our services.
- 4The nonprofit or governmental recipient organization sends us a dated copy of the Contemporaneous Written Acknowledgement of the donation, with the inclusion of the accepted inventory. This list of property is what is included within our appraisal.
- 5Our appraisal research begins and includes:
- aA detailed description of the property being donated.
- bAn overview of the secondary retail market generally and specific to the type of property being donated.
- cA listing of comparable sales examined with analysis comparing the subject property to the comparable sale.
- dA conclusion of the value for each separate property as well as for the aggregate value.
- eOur reports are written from a research perspective ensuring we support our valuation with documentation substantiating the data upon which we rely.
- 6Finally, we ensure the appraisers portion of Form 8283 is filled out completely and accurately and remind clients to ensure they and their CPA complete the form in its entirety.
The Green Mission Inc. looks forward to working within the personal property appraisal industry to ensure the high standards and ethics required by the IRS, personal property appraisal organizations and the Uniform Standards of Professional Appraisal Practice (USPAP) are met, and taxpayers are protected from losing their deductions due to appraiser error.
