Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: TAX TRENDS

Expenses & Deductions

Tax Court allows appraisals that substantially comply with the rules

The Tax Court upheld a real estate developer's charitable deductions for two land contributions to a town, finding that the appraisals for the donations substantially complied with the qualified appraisal requirements for contributions for noncash property over $5,000 and that the contributions were not quid pro quo exchanges.

Background

Peter Emanouil is a Massachusetts real estate developer. In 1999, he purchased 197 acres of undeveloped property called Granite Hill (GH property) in Westford, Mass. Over the next several years, he made various attempts to either develop or sell the GH property.

Finally, in February 2009, Emanouil obtained final approval for an affordable housing project (AHP) including 164 units on 104 of the 197 acres. In order to obtain approval, Emanouil was forced to make a number of concessions to allay Westford's concerns regarding the size of the development (including the number of units and the acreage), potential impacts on the town (including traffic and other impacts), and potential environmental concerns.

In December 2008, as the process for obtaining approval for the project was ongoing, Emanouil donated 16 acres of the remaining GH property to Westford. Before making the donation, he had the property appraised. The appraisal provided a "current market value estimate" of $1.5 million for the 16 acres, based on the highest and best use of the land, which was as a 12-lot subdivision for single-family residential use. The appraisal stated that its purpose was "[t]o inform a potential disposition." It did not include the date that the contribution was to be made or any reference to its being prepared for income tax purposes.

In November 2009, after Emanouil had received final approval for the development project, he donated an additional 71 acres of the GH property to Westford. Before making the donation, he had the property appraised. The appraisal provided a "current market value estimate" of approximately $2.5 million for the land, based on the highest and best use for the land, which was as a 38-lot subdivision. Like the previous appraisal for the 16-acre parcel, the appraisal stated that its purpose was "[t]o inform a potential disposition" and did not include the date that the contribution was to be made or any reference to its being prepared for income tax purposes.

On his 2008 Form 1040, U.S. Individual Income Tax Return, Emanouil reported the land donation as a $1.5 million gift to charity and included a Form 8283, Noncash Charitable Contributions. After the charitable deduction limitation, he claimed a charitable contribution deduction of approximately $700,000 and carried the remainder of the contribution amount forward to be claimed on returns for subsequent years.

On his Form 1040 for 2009, Emanouil reported the second land donation as a $2.5 million gift to charity and included a Form 8283. Due to the charitable deduction limitation, he claimed a deduction of about $660,000 for 2009 from his charitable contribution carry-forward from 2008 and carried forward the remaining contribution amounts from 2008 and 2009. On Forms 1040 for 2010 through 2012, Emanouil claimed deductions for the charitable contribution carryforwards from 2008 and 2009.

The IRS examined the Emanouils' 2010, 2011, and 2012 returns and issued a statutory notice of deficiency disallowing the carryover charitable contribution deductions. The notice stated the grounds for disallowing the deductions as failure to substantiate the reported values of properties transferred and failure to show that the properties were transferred with charitable intent.

Emanouil timely filed a petition in Tax Court to challenge the IRS's determinations. In Tax Court, in addition to the valuation and charitable intent issues, the IRS argued that the appraisals for the donations did not meet all the requirements to be qualified appraisals.

The Tax Court's decision

The Tax Court held that Emanouil was entitled to the charitable contribution deductions he took for his contributions of land from the GH property to Westford. The court found that he had substantially complied with the qualified appraisal requirements for the contributions and he had charitable intent for the donations, so the contributions were not quid pro quo transfers.

Qualified appraisal requirement: Sec. 170(f)(ll)(C) provides that,"[i]n the case of contributions of property for which a deduction of more than $5,000 is claimed," the 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." The regulations set out 11 items that an appraisal must include to be a "qualified appraisal." The IRS claimed that Emanouils appraisals for his land donations did not include two of these necessary items--the expected date of the contribution and a statement that the appraisal was prepared for income tax purposes.

The Tax Court explained that where the essential requirements of a statute or regulations can be met without strict compliance by the taxpayer, substantial compliance with...