LIKE A DOG WITH A BONE, IRS CONTINUES TO INSIST ON STRICT COMPLIANCE WITH APPRAISAL SUBSTANTIATION REQUIREMENTS

 

 Dog WIth Bone

In the recent case of Cave Buttes, LLC v. Commissioner,[1] the IRS once again challenged the submission of an appraisal report with Form 8283 because the report and submission did not strictly comply with Reg. §1.170A-13(c)(3)(ii). In what many may see as a case of extreme nitpicking, the IRS challenged virtually every possible aspect of an appraisal of real property that was the subject of a bargain sale to a local governmental district.  Perhaps had the IRS only challenged certain aspects of the appraisal report instead of throwing in the proverbial kitchen sink, it might have fared better.  Instead, the IRS lost the case. Additionally, the taxpayer was allowed to submit expert testimony at trial that increased the value of the underlying donated property by $667,500, a 44.5% increase over the value taken by the taxpayer on its return.  

In Cave Buttes, a taxpayer sought a charitable contribution deduction that resulted from the bargain sale of certain real property to a local government flood control district (the district). After tense negotiations, the taxpayer and the district entered into a bargain sale of the property whereby the taxpayer would receive $750,000 and simply donate the remaining value of the property to the district.

In filing its return, the taxpayer filled out and filed Form 8283. The appraisal report valued the property at $1.5 million.  The report was prepared and signed by the two appraisers who valued the property. The attached appraisal did not contain the credentials of one of the appraisers. Further, only one of the appraisers (the appraiser whose credentials were contained in the appraisal report) signed the declaration on Form 8283.

The IRS denied the taxpayer’s claimed charitable contribution because the taxpayer did not strictly comply with the requirements of Reg. §1.170A-13(c) in submitting a qualified appraisal. 

Pursuant to Reg. §1.170A-13(c)(3)(ii), a qualified appraisal must include the following information:

 

A.   a description of the property in sufficient detail so that a person who is not generally familiar with the type of property could ascertain whether the appraised property was the property that was or will be contributed;

   * * * *  

F.   the qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education, and membership in any professional appraisal associations;

  * * * *

G.  a statement that the appraisal was prepared for income tax purposes;

  * * * *

I.   the appraised fair market value of the property on the date, or expected date, of the contribution.

 

The IRS attacked the report by claiming that the taxpayer failed to comply with the requirement noted above.  Additionally, the IRS claimed that both appraisers were required to sign Form 8283 pursuant to Reg. §1.170A-13(c)(5)(iii).

With respect to requirement A, the IRS determined that the appraisal was not qualified for a number of reasons including the fact that the appraisal report noted that three lots were transferred and the division of the property into three lots did not legally become effective until four months after the donation. The Tax Court held that a description of the property using the address and characteristics of the property was enough to strictly comply with Reg. §1.170A-13(c)(3)(ii)(A).

With respect to requirement F and the requirement that both appraisers sign Form 8283, the IRS determined that because the report only contained the qualifications of one of the two appraisers, the report was deficient.  The court held that like the taxpayer in Bond v. Commissioner,[2] the taxpayer in Cave Buttes substantially complied with the regulations.  Further, although the court admitted that the regulations require that both appraisers sign Form 8283, the court noted that the Form only contains one signature line and the instructions to Form 8283 were silent as to whether both signatures were required when the taxpayer filed its return.[3]

With respect to requirement G, the appraisal report stated that the appraisal was made “for filing with the IRS.”  The IRS determined that the appraisal report was deficient because it did not use the words that the appraisal was prepared “for income-tax purposes.”  The court quickly disposed of this challenge holding that there were no “magic words” to satisfy this requirement.  According to the court, the taxpayer substantially complied with the regulation.

With respect to requirement I, the IRS challenged the appraisal on two accounts.  First, the “date of valuation” in the appraisal report was listed as “May 5, 2007” despite the fact that the deeds and purchase agreements were signed and delivered on April 18, 2007 and other documents required for closing were delivered separately on April 24, 2007.  Second, in valuing the property, the appraisers used the definition of “market value” contained in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 CFR §34.4, rather than the general definition of “fair market value” contained in Reg. §1.170A-1(c)(2). With respect to the date of valuation, the court noted that there was no significant event that would have changed the valuation between the 11 to 21 days between sale, closing, and valuation dates.  Further, according to the court, each component of the definition of “market value” in FIRREA is present in the definition of “fair market value” in the regulations.[4]  Therefore, the court held that the taxpayer substantially complied with requirement I.

Perhaps the main takeaway of the Cave Buttes case for practitioners is to realize that the IRS may still challenge your appraisal submission if you do not strictly comply with the regulations.  While your client may ultimately prevail in the Tax Court using a substantial compliance argument, following the regulations to a tee would save a lot of unnecessary heartache and money. 

 

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[1] 147 T.C. No. 10 (Sept. 20, 2016).

[2] 100 T.C. 32 (1993).

[3] The court took judicial notice of the fact that the instructions to Form 8283 were changed in 2012 to require both appraisers sign Form 8283.  The court surmised that perhaps this was to clarify previous taxpayer confusion. 

[4] The court also noted that the IRS’s own expert used the definition in FIRREA.