T.C. Memo. 2010-45
UNITED STATES TAX COURT
NEWTON J. AND VONISE FRIEDMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19018-07. Filed March 11, 2010.
Ps claimed charitable contribution deductions for the
donation of equipment in 2001 and 2002. Ps did not strictly
comply with the substantiation requirements of sec. 1.170A-
13, Income Tax Regs., but they contend their documentation
satisfied the substantial compliance doctrine according to
Bond v. Commissioner, 100 T.C. 32, 40-41 (1993).
Held: Ps did not establish substantial compliance
because they did not provide adequate descriptions of the
equipment and did not identify the valuation methods used,
the manner of acquisition, and the cost bases of the
equipment.
Held, further, Ps’ documentation did not satisfy the
requirement of sec. 170, I.R.C., that they obtain
contemporaneous written acknowledgments of the donations.
Held, further, Ps are liable for accuracy-related
penalties under sec. 6662(a), I.R.C.
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Theodore J. England, for petitioners.
Mark H. Pfeffer, for respondent.
MEMORANDUM OPINION
NIMS, Judge: Respondent determined the following
deficiencies and penalties with respect to petitioners’ Federal
income tax:
Penalty
Year Deficiency Sec. 6662(a)
2001 $81,469 $16,294
2002 80,779 16,156
The issues for decision are: (1) Whether petitioners
adequately substantiated deductions for noncash charitable
contributions made during the years in issue; and (2) whether
petitioners are liable for section 6662(a) accuracy-related
penalties. Unless otherwise indicated, all Rule references are
to the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
years in issue.
Background
This case was submitted fully stipulated pursuant to Rule
122. The stipulations of the parties, with accompanying
exhibits, are incorporated herein by this reference. Petitioners
resided in California at the time they filed their petition.
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Petitioners timely filed Forms 1040, U.S. Individual Income
Tax Return, for 2001 and 2002. On their 2001 return petitioners
claimed $217,500 in noncash charitable deductions on Schedule A,
Itemized Deductions, for donations of diagnostic and laboratory
equipment to Global Operations and Development (Global
Operations). On their 2002 return petitioners claimed $217,500
in charitable contribution deductions for donations of diagnostic
and laboratory equipment to Global Operations and the University
of Southern California (USC). The returns were prepared by Reed
Spangler, a certified public accountant (C.P.A.).
To substantiate the 2001 donations petitioners attached to
their 2001 return three Forms 8283, Noncash Charitable
Contributions. These consisted of a Form 8283 for items
appraised by Garson P. Shulman (2001 Shulman Form 8283), a Form
8283 for items appraised by Jack LeVan (2001 Jack LeVan Form
8283), and a Form 8283 summarizing the items listed in the two
aforementioned Forms 8283 (2001 summary Form 8283). Petitioners
included a separate written appraisal report and a receipt from
Global Operations only for the items covered by the 2001 Shulman
Form 8283.
Petitioners included with their 2002 return Forms 8283 for
items appraised by John E. LeVan (2002 John E. LeVan Form 8283),
Jack LeVan (2002 Jack LeVan Form 8283), and David S. Handelman
(2002 Handelman Form 8283). Petitioners included a separate
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written appraisal report and a receipt from Global Operations
only for the items covered by the 2002 John E. LeVan Form 8283.
Respondent selected petitioners’ 2001 and 2002 returns for
examination. On May 11, 2004, for purposes of the examination,
Mr. Handelman prepared an appraisal report of the items donated
to Global Operations in 2001 (2004 Handelman appraisal). On
January 27, 2006, Mr. Handelman prepared an appraisal report as
to the items in the 2002 John E. LeVan Form 8283 (2006 Handelman
appraisal). At the conclusion of the examination respondent
disallowed the deductions for the charitable contributions to
Global Operations and USC.
On June 15, 2007, respondent sent petitioners a notice of
deficiency for the 2001 and 2002 tax years. Petitioners filed a
timely petition with this Court.
Discussion
I. Charitable Contribution Deductions
Section 170(a)(1) allows as a deduction any charitable
contribution verified under regulations prescribed by the
Secretary. For any noncash contribution exceeding $5,000, the
regulations require the donor to: (1) Obtain a qualified
appraisal for the contributed property, (2) attach a fully
completed appraisal summary (i.e., Form 8283) to the tax return
on which the deduction is claimed, and (3) maintain records
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pertaining to the claimed deduction in accordance with section
1.170A-13(b)(2)(ii), Income Tax Regs. Sec. 1.170A-13(c)(2),
Income Tax Regs.
A qualified appraisal must include, among other things, a
description of the property in sufficient detail for a person who
is not generally familiar with the type of property to ascertain
that the property appraised is the property that was contributed,
a description of the property’s physical condition, the valuation
method used to determine the fair market value, and the specific
basis for the valuation. See sec. 1.170A-13(c)(3)(ii), Income
Tax Regs. A qualified appraisal must be made no earlier than 60
days before the date of the contribution and no later than the
due date of the return, including extensions. Sec.
1.170A-13(c)(3)(i)(A), Income Tax Regs.
The appraisal summary must include, among other things, a
description of the property in sufficient detail for a person who
is not generally familiar with the type of property to ascertain
that the property appraised is the property that was contributed,
a brief summary of the property’s physical condition, the manner
of acquisition, and the cost or other basis of the property. See
sec. 1.170A-13(c)(4)(ii), Income Tax Regs.
In addition to the substantiation requirements of section
1.170A-13, Income Tax Regs., a taxpayer must obtain a
contemporaneous written acknowledgment from the donee
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organization for any contribution of $250 or more. Sec.
170(f)(8)(A). The contemporaneous written acknowledgment must
include a description of any property contributed, a statement as
to whether the donee provided any goods or services in exchange,
and a description and good faith estimate of the value of such
goods or services. Sec. 170(f)(8)(B).
Petitioners attached to their returns Forms 8283 covering
the 2001 and 2002 charitable contributions, but they provided
respondent with appraisal reports and receipts only for the items
listed in the 2001 Shulman and 2002 John E. LeVan Forms 8283. In
addition, those appraisal reports and receipts omitted
information required to substantiate petitioners’ claimed
deduction, as discussed infra.
As to every item contributed, petitioners concede that they
have not strictly complied with section 1.170A-13, Income Tax
Regs. However, petitioners contend that they are entitled to the
claimed charitable contribution deductions because they have
substantially complied with the regulation.
Under the substantial compliance doctrine, the critical
question is whether the requirements relate “‘to the substance or
essence of the statute.’” Bond v. Commissioner, 100 T.C. 32, 40-
41 (1993) (quoting Sperapani v. Commissioner, 42 T.C. 308, 331
(1964)); Taylor v. Commissioner, 67 T.C. 1071, 1077-1078 (1977).
If so, strict adherence to all statutory and regulatory
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requirements is mandatory. See Dunavant v. Commissioner, 63 T.C.
316 (1974). However, if the requirements are procedural or
directory in that they are not of the essence of the thing to be
done but are given with a view to the orderly conduct of
business, then they may be fulfilled by substantial compliance.
See id. at 319-320; Columbia Iron & Metal Co. v. Commissioner, 61
T.C. 5 (1973); Cary v. Commissioner, 41 T.C. 214 (1963). We have
previously held that the reporting requirements of section
1.170A-13, Income Tax Regs., are directory and require only
substantial compliance. Bond v. Commissioner, supra at 41-42.
In Bond, the taxpayers donated two blimps to a charitable
organization and in the same month obtained a professional
appraisal of the blimps. Though the appraiser completed an
appraisal summary for inclusion with the taxpayers’ return, he
did not provide a separate written report of the appraisal.
Aside from the appraiser’s qualifications, the appraisal summary
did, however, contain all of the information required for a
qualified appraisal. The taxpayers promptly provided those
credentials to the Internal Revenue Service at audit. Because
the taxpayers had furnished the Service with all the information
required for a qualified appraisal, we held that they had
substantially complied with the regulation despite the absence of
a separate written appraisal report. Id. at 42.
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Petitioners claim they have substantially complied because,
as in Bond, the documents they have submitted contain the
information required for a qualified appraisal and appraisal
summary. We disagree.
Bond is inapplicable because petitioners did not merely fail
to attach evidence of a qualified appraisal; they never obtained
such an appraisal. See Hewitt v. Commissioner, 109 T.C. 258
(1997), affd. without published opinion 166 F.3d 332 (4th Cir.
1998); D’Arcangelo v. Commissioner, T.C. Memo. 1994-572.
Unlike the situation in Bond, petitioners’ documents fail to
provide an adequate description of or the condition of the
donated items. The Forms 8283 and the appraisal reports provide
very generic descriptions, stating the items were in “good
working condition” or “operational, clean and in good saleable
condition”. An adequate description is necessary because
“Without a more detailed description the appraiser’s approach and
methodology cannot be evaluated.” O’Connor v. Commissioner, T.C.
Memo. 2001-90.
In fact, petitioners’ documents fail to even indicate the
valuation method used or the basis for the appraised values. We
have previously held such information to be essential because
“Without any reasoned analysis, * * * [the appraiser’s] report is
useless.” See Jacobson v. Commissioner, T.C. Memo. 1999-401.
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Citing Herman v. United States, 73 F. Supp. 2d 912 (E.D.
Tenn. 1999), petitioners contend that the comparable sales method
is the only valuation method that could have possibly been used.
Petitioners’ argument is unpersuasive. Opinions of a U.S.
District Court do not constitute binding precedent in this Court.
Furthermore, nowhere in that opinion does the District Court
state that the comparable sales method is the only valuation
method possible. In fact, a careful reading of Herman should
have led petitioners to the opposite conclusion: that the
comparable sales method is not the only available method.
In Herman, the issue before the court was the valuation of
medical equipment donated by the taxpayers. The taxpayers had
purchased the equipment from a bankruptcy court, and the
Government argued that the taxpayers’ purchase price should be
the fair market value of the equipment. The District Court did
not reject the use of historical cost as a proper valuation
method, but it held that the purchase price could not represent
fair market value because the bankruptcy court was not a willing
seller. Therefore, it is patently clear that the court
considered another valuation method in addition to comparable
sales.
Petitioners’ interpretation of Herman also conflicts with
the plain language of section 1.170A-13(c)(3)(ii)(J), Income Tax
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Regs. That regulation explicitly approves of two other valuation
methods: The income approach and the replacement-cost-less-
depreciation approach.
Petitioners’ position that the comparable sales method is
the only method possible is also untenable because it would
render the valuation method requirement of section 1.170A-
13(c)(3)(ii)(J), Income Tax Regs., superfluous.
Petitioners also contend that the 2004 and 2006 Handelman
appraisals can be used to supply the missing information because
they validate the values reported on the Forms 8283. Although
those appraisals were untimely, petitioners argue that an
untimely appraisal can be used to supplement a timely-filed
appraisal summary, as demonstrated in Bond v. Commissioner, 100
T.C. 32 (1993). Petitioners misstate the holding of Bond. In
Bond, the submission of the information (i.e., the appraiser’s
credentials) required to prove that a qualified appraisal had
been performed was untimely, but the performance of the appraisal
itself was not. By contrast, in the instant case the 2004 and
2006 Handelman appraisals were performed years after the
respective due dates of petitioners’ returns. Therefore,
petitioners cannot rely on those appraisal reports to cure the
absence of the required information in a timely fashion.
Petitioners further failed to establish substantial
compliance because they did not provide the manner of acquisition
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of the items donated in 2002 and the cost or other adjusted basis
in the items donated in either year. Petitioners essentially
argue that this information is unnecessary except in the bargain
sale context. Petitioners claim that in Fair v. Commissioner,
T.C. Memo. 1993-377, “The Tax Court concluded that the cost basis
information was not required to be included on the * * *
[taxpayers’] return and was irrelevant to the calculation of the
amount of the charitable deduction.”
Petitioners take that discussion out of context, and our
comment there regarding the necessity of cost basis information
is inapplicable to the instant case. We stated that the Fairs
were not required to include their cost basis information on
their return because the version of the regulation in effect for
the year in issue did not, in fact, impose that requirement. The
Fairs made their donation on July 12, 1984. At that time,
taxpayers making noncash contributions exceeding $500 were
required only to maintain written records of their cost basis
information. See T.D. 8002, 1985-1 C.B. 60, 62. Taxpayers were
not required to attach an appraisal summary to their return
unless they made a noncash charitable contribution exceeding
$5,000 after December 31, 1984. See T.D. 8003, 1985-1 C.B. 64,
66. Consequently, the Fairs did not have to include cost basis
information on their return in order to be in strict compliance
with the regulation. By contrast, the version of the regulation
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relevant to petitioners does require them to attach an appraisal
summary to their return and to include cost basis information on
that appraisal summary. See sec. 1.170A-13(c)(4)(ii)(E), Income
Tax Regs.
On brief, petitioners contend that their failure to provide
the manner of acquisition and cost basis information should be
excused because they had reasonable cause for such failure. See
sec. 1.170A-13(c)(4)(iv)(C)(1), Income Tax Regs. Petitioners
claim that they disposed of the records containing that
information while evacuating their house due to an approaching
fire. Petitioners cite Fair v. Commissioner, supra, for the
proposition that the inadvertent loss of cost basis records
necessarily constitutes reasonable cause.
Petitioners misstate the holding of Fair. We held the
taxpayers had reasonable cause because they failed to retain
their cost basis records after being advised by a certified
public accountant (in that case, a tax professional) that those
records were not needed. We did not hold that inadvertent loss
automatically establishes reasonable cause.
Assuming for the sake of argument that petitioners’ reason
for the missing cost basis records constitutes reasonable cause,
petitioners’ omission of that information is still not excused.
If a taxpayer has reasonable cause, the regulations require an
appropriate explanation to be attached to the appraisal summary.
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Sec. 1.170A-13(c)(4)(iv)(C)(1), Income Tax Regs. Petitioners did
not submit any such explanation with their Forms 8283.
Furthermore, the appraisal of the item listed in the 2002
Jack LeVan Form 8283, in particular, was not a qualified
appraisal because it was untimely. That appraisal was performed
on December 1, 2001, which was more than 60 days prior to the
appraised item’s donation on April 2, 2002.
In addition to their failure to substantially comply with
the regulations, petitioners also failed to demonstrate that they
obtained adequate written acknowledgments for their contributions
as required by section 170(f)(8). Petitioners argue that the
Forms 8283 can also serve as written acknowledgments because they
were signed by the donee. However, neither the Forms 8283 nor
the receipts from Global Operations contain a statement that no
goods or services were provided by the donee in exchange, as
required by section 170(f)(8)(B)(ii). We have previously held
that statement necessary for a charitable contribution deduction.
See Kendrix v. Commissioner, T.C. Memo. 2006-9; Castleton v.
Commissioner, T.C. Memo. 2005-58, affd. 188 Fed. Appx. 561 (9th
Cir. 2006).
Petitioners argue that section 170(f)(8)(B)(ii) can be read
to require the statement only when the donee actually furnishes
goods or services to the donor. We disagree.
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“[C]ourts must presume that a legislature says in a statute
what it means and means in a statute what it says there.” Conn.
Natl. Bank v. Germain, 503 U.S. 249, 253-254 (1992). In the
absence of a clearly expressed legislative intent to the
contrary, unambiguous statutory language ordinarily must be
regarded as conclusive. Consumer Prod. Safety Comm. v. GTE
Sylvania, Inc., 447 U.S. 102, 108 (1980).
Section 170(f)(8)(B)(ii) plainly states that the written
acknowledgment is sufficient if it includes information as to
“Whether the donee organization provided any goods or services in
consideration, in whole or in part, for any property” donated by
the taxpayer. The language used is clear and unconditional.
There is no reason to read into section 170(f)(8)(B)(ii) the
limitation suggested by petitioners.
Implying that Congress did not intend to require the
statement in all circumstances, petitioners quote Addis v.
Commissioner, 118 T.C. 528, 536 (2002), affd. 374 F.3d 881 (9th
Cir. 2004):
The legislative history accompanying the enactment
of section 170(f)(8) states: “Organizations * * *
[that provide goods or services in consideration for
payments from donors] often do not inform their donors
that all or a portion of the amount paid by the donor
may not be deductible as a charitable contribution.”
H. Rept. 103-111, at 783, 785 (1993), 1993-3 C.B. 167,
359, 361. Congress enacted the substantiation
requirements of section 170(f)(8) to require charitable
organizations that receive quid pro quo contributions,
i.e., payments made partly as a contribution and partly
in consideration for goods or services provided to the
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donor by the donee organization, to inform their donors
that the deduction under section 170 is limited to the
amount by which the payment exceeds the value of goods
or services provided by the charity. Id.
That quote does not support petitioners’ position. In fact,
the legislative history of section 170(f)(8) refutes petitioners’
argument and specifically requires the statement regardless: “If
the donee organization provided no goods or services to the
taxpayer in consideration of the taxpayer’s contribution, the
written substantiation is required to include a statement to that
effect.” H. Conf. Rept. 103-213, at 565 n.30 (1993), 1993-3 C.B.
393, 443.
For these reasons, we hold that petitioners have failed to
strictly or substantially comply with the requirements of section
1.170A-13, Income Tax Regs., and have failed to provide the
contemporaneous written acknowledgments required by section
170(f)(8). Accordingly, petitioners are not entitled to the
charitable contribution deductions claimed on their return, and
we so hold.
II. Section 6662(a) Penalties
Section 6662(a) imposes an accuracy-related penalty of 20
percent on the portion of an underpayment attributable to
negligence, disregard of rules or regulations, or a substantial
understatement of income tax. Negligence includes any failure to
keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. “Disregard”
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includes any careless, reckless, or intentional disregard of
rules or regulations. Sec. 6662(c); sec. 1.6662-3(b)(2), Income
Tax Regs.
Petitioners failed to properly substantiate their claimed
charitable contribution deductions. That failure evidences
negligence and careless disregard of the rules and regulations.
Petitioners contend that they should be excused from
liability for the section 6662(a) penalties because they relied
on the advice of their C.P.A.
Section 6664(c)(1) provides a defense to the section 6662
penalty for any portion of an underpayment where reasonable cause
existed and the taxpayers acted in good faith. Reliance on the
advice of a professional tax adviser may, but does not
necessarily, demonstrate reasonable cause and good faith. Sec.
1.6664-4(b)(1), Income Tax Regs. A taxpayer claiming reliance on
professional advice must show that: (1) The adviser was a
competent professional who had sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate
information to the adviser, and (3) the taxpayer actually relied
in good faith on the adviser’s judgment. Neonatology Associates,
P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221
(3d Cir. 2002).
Petitioners have not established Mr. Spangler’s
qualifications as a tax expert. The mere fact that Mr. Spangler
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is a C.P.A. does not necessarily make him a competent tax
adviser. See Mediaworks, Inc. v. Commissioner, T.C. Memo.
2004-177.
Furthermore, the record indicates that petitioners withheld
information from Mr. Spangler and that their reliance on his
advice was therefore not in good faith. Petitioners claimed they
were unable to provide purchase records for the donated equipment
because they were forced to dispose of those records due to an
approaching fire in 1996, but the record indicates that most of
the items listed on the 2001 Shulman and 2002 John E. LeVan Forms
8283 were purchased after that purported fire. Petitioners
purchased a total of 26 items of laboratory equipment on December
6, 2000, and August 12, 2001. Twenty-six of the 29 items listed
in the 2001 Shulman Form 8283 are identical to the equipment
petitioners purchased on those two dates. Similarly, 18 of the
19 items listed in the 2002 John E. LeVan Form 8283 are identical
to equipment petitioners purchased on November 17, 2002. Since
petitioners did not provide Mr. Spangler with all the information
available to them, they failed to provide him with necessary and
accurate information, and their reliance on his advice does not
constitute reasonable cause.
Accordingly, we hold that petitioners are liable for section
6662(a) accuracy-related penalties.
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We have considered all of the parties’ contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are irrelevant, moot, or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.