Donor Denied Deduction for Airplane Interest Gift Because of Lack of Substantiation

• Published date: 01 May 2017
• Date: 01 May 2017
• DOI: http://doi.org/10.1002/npc.30315

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

May 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

rights” were regarded by the court as “giv[ing] rise to an

inference that the latter affected the former.” (Are we miss-

ing something or is this mere speculation?)

The court also wrote that Wachter “exaggerated the

dirtiness of the paintings on the valuation date and the

risks involved in cleaning them.” He provided an “effec-

tive discount” in the values based on these factors.

Truly, Wachter stumbled in not providing any com-

parables to support his valuations. The court observed

that “[w]e have repeatedly found sale prices for compa-

rable works quite important to determining the value of

art.” (This is also the case with respect to other types of

property.) This omission caused Wachter’s report to lack

“any objective support for his valuation figures.” He was

characterized as “effectively urg[ing] the Court to accept

them on the basis of his experience and expertise,”

which the court declined to do.

By contrast, the government’s expert employed a

comparative market data approach as his valuation

method. The court accepted his valuation of Maypole,

albeit with a 5 percent discount for the low risk of clean-

ing (resulting in a value of $1.995 million), and his valu-

ation of Orpheus, with a value adjustment of 25 percent

for the cleaning risk and two other factors (resulting in a

value of $375,000). [10.1]

Note: We have not previously seen evaluation of a

valuation turn on the existence of an ostensible conflict

of interest. The court did not cite any authority for this

approach. Actually, the court did not go quite that far,

cautiously writing that a conflict “could” cause question-

ing of the expert’s objectivity and give rise to an “infer-

ence” of subjectivity. Of course, in this case, it did. ◆

DONOR DENIED DEDUCTION

FOR AIRPLANE INTEREST

GIFT BECAUSE OF LACK OF

SUBSTANTIATION

The US Tax Court, on March 1, held that a donor

to charity of an interest in an aircraft was not entitled

to any charitable contribution deduction for the gift

because he did not comply with the requisite substantia-

tion requirements (Izen, Jr. v. Commissioner).

Facts

An individual claimed a charitable contribution

deduction in the amount of $338,080 for his gift of a 50

percent undivided interest in an aircraft to a tax-exempt

aeronautical heritage society that operates a museum.

Simultaneously, a partnership contributed the other 50

percent interest on the same date to the same donee.

This donor attached to his tax return for the appro-

priate year (1) an acknowledgment letter signed by the

society but addressed to the partnership, (2) a Form

8283 executed by the society, (3) a copy of an “aircraft

donation agreement” signed by the society but bearing

no other signatures, and (4) an appraisal opining as to

the value of the interest in the aircraft.

The IRS denied this deduction in full on the ground

that the donor failed to satisfy the applicable substantia-

tion requirements.

Law

The federal tax law states a series of substantiation

requirements in connection with charitable contributions

that vary depending on the character and size of the gift

(IRC § 170(f)). These requirements are strict. The doc-

trine of substantial compliance does not apply to excuse

the failure to obtain the necessary acknowledgment.

As to contributions of $250 or more, for them to be

deductible, the donor must secure from the donee and

maintain a contemporaneous written acknowledgment.

This acknowledgment must include (1) the amount of

cash and a description of any property contributed, (2) a

statement whether the donee provided the donor with

any goods or services in consideration for the gift, and

(3) if so, a description and good-faith estimate of the

value of the goods or services (IRC § 170(f)(8)).

More stringent substantiation requirements apply

for contributions of used vehicles, including airplanes,

where the claimed value exceeds $500 (IRC § 170(f)

(12)). These requirements are more demanding than the

$250 rule in two major respects. The required contents

of the acknowledgment are more extensive; the donor

must include a copy of the acknowledgment with the tax

return involved. Also, the donee must provide the requi-

site information to the IRS (by means of Form 1098-C).

A donor may satisfy the acknowledgment requirement

by attaching a copy of this form to the return.

Analysis

The donor did not include a copy of the Form 1098-C

with his return, apparently because the society did not

complete it or file it with the IRS. The IRS has no record

of receiving this form. He attached a copy of the letter

from the society to his return. The court dismissed the

value of that document because it was not addressed to

the donor, did not acknowledge a gift by him, and omit-

ted other categories of required information.

The donor also attached to his return a copy of the

aircraft donation agreement. The court noted that it has

held that a deed of gift can serve as a de facto acknowl-

edgment in instances where the $250 rule applies (as

discussed in, e.g., the May 2016 issue). It assumed,

without deciding, that the same principle applied in this

case. The court, however, concluded that this agreement

did not meet the statutory requirements because it was

not signed by all parties, did not contain the donor’s

taxpayer identification number, and lacked the requisite