Friedman v. Comm'r

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
 -7-

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.