Tax Court in Brief | Scheizer v. Comm’r | Charitable Contribution Substantiation and Reliance on Tax Professional

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The Tax Court in Brief – October 3rd – October 7th, 2022

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Tax Litigation:  The Week of October 3rd, 2022, through October 7th, 2022

Scheizer v. Comm’r, T.C. Memo. 2022-102 | October 6, 2022 | Lauber, J. | Dkt. No. 3679-18

Short Summary: This case concerns a charitable contribution deduction for a gift of art and substantiation requirements of section 170(f)(11) and related Treasury Regulations. Petitioner, Schweizer, is an art dealer, lawyer, and otherwise heavily educated and involved in the commercial industry of artworks. He engaged Wasserman & Wise (Wasserman firm) to prepare his income tax returns. Petitioner donated works of art to various museums. He claimed charitable contribution deductions for these gifts, all of which were reported on returns prepared by the Wasserman firm. Petitioner donated a sculpture and anticipated claiming a charitable contribution deduction for this gift. So, with professional assistance, he requested a Statement of Value (SOV) from the IRS with respect to the sculpture. The proposal valued the work at $600,000, although the appraiser was a novist in the matter. Without receiving a response from the IRS, The Wasserman firm prepared, and Petitioner filed a return claiming a $600,000 deduction for his gift of the sculpture. The amount exceeded the maximum allowable as a deduction for 2011, see § 170(d)(1)(A), so Petitioner claimed a $406,395 deduction for that year and carried the balance forward and submitted a partially completed Form 8283. The Form 8283 was missing most information and was substantially mis-completed otherwise, including lack of an appraisal as required by section 170(f)(11)(D) for gifts valued in excess of $500,000. The IRS selected Petitioner’s 2011 return for examination. An IRS staff appraiser determined that the FMV of the sculpture was $250,000. The IRS issued petitioner a timely notice of deficiency, asserting as its primary position that no deduction was allowable because petitioner failed to satisfy the statutory and regulatory substantiation requirements for this gift.  The notice determined a deficiency of $95,081 and an accuracy-related penalty of $19,016. Petitioner timely petitioned the Tax Court. Motions for summary judgment were filed on the issue and mainly to determine if Petitioner’s failure to meet the substantiation requirements was due to “reasonable cause and not to willful neglect.” See 26 U.S.C. § 170(f)(11)(A)(ii)(II). This opinion was issued.

Key Issues:

Whether Petitioner’s failure to meet the charitable contribution substantiation requirements was “due to reasonable cause and not to willful neglect.” See 26 U.S.C. § 170(f)(11)(A)(ii)(II).

Primary Holdings:

No, sir/ma’am. Petitioner did not have reasonable cause for his failures, and the Tax Court sustained disallowance of the charitable contribution deduction. “We find it wholly implausible that a taxpayer as educated as petitioner, having devoted almost a decade to the study of law, would have acquiesced in the notion that he could properly file a tax return obviously lacking these required elements.”

Key Points of Law:

Charitable Contribution Principles. Section 170(a)(1) allows as a deduction any charitable contribution made within the taxable year. If the taxpayer donates property other than money, the amount of the contribution is generally equal to the FMV of the property at the time of the gift. See Treas. Reg. § 1.170A-1(c)(1). Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[] a qualified appraisal of such property.” 26 U.S.C. § 170(f)(11)(C). A qualified appraisal must be secured no later than the due date of the return, including extensions. Treas. Reg. § 1.170A-13(c)(3)(i)(A), (iv)(B).

Noncash Contributions. A taxpayer claiming a noncash contribution valued in excess of $5,000 must “attach[] to the return . . . such information regarding such property and such appraisal as the Secretary may require.” 26 U.S.C. § 170(f)(11)(C). The required information includes an appraisal summary (i.e., Form 8283) that must be included with the return on which such deduction is first claimed for such contribution. See Treas. Reg. § 1.170A-13(c)(2). Where a contribution of property is valued in excess of $500,000, the taxpayer must both obtain and attach to his return “a qualified appraisal of such property.” 26 U.S.C. § 170(f)(11)(D). Failure to comply with these requirements generally precludes a deduction. Seeid. at § 170(a)(1), § 170(f)(11)(A)(i).

“Reasonable Cause” Exception. Section 170(f)(11)(A)(ii)(II) provides that a deduction may be allowed despite failures otherwise “if it is shown that the failure . . . is due to reasonable cause and not to willful neglect.” See Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24, 119 T.C.M. (CCH) 1144, 1150– 51. “Reasonable cause” requires a taxpayer to exercise ordinary business care and prudence. See, e.g., United States v. Boyle, 469 U.S. 241, 246 (1985). Whether a taxpayer had reasonable cause is a fact-intensive inquiry that requires examination of all the facts and circumstances.

Reliance on Tax Professional. If a taxpayer alleges reliance on the advice of an accountant, return preparer, or other tax professional, the taxpayer must show that he “actually relied in good faith on the professional’s advice.” Crimi, 105 T.C.M. (CCH) at 1353; see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98–99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); Treas. Reg. § 1.6664-4(c)(1).

Professional Advice. Professional advice in this context has been defined as “any communication, including the opinion of a professional tax adviser, setting forth [an] analysis or conclusion . . . provided to (or for the benefit of) the taxpayer.” Pankratz v. Commissioner, T.C. Memo. 2021-26, 121 T.C.M. (CCH) 1178, 1185; see Treasury Regulation § 1.6664- 4(c)(2). The Tax Court looks to see whether the taxpayer relied on the adviser’s judgment. See Woodsum v. Commissioner, 136 T.C. 585, 593 (2011). A professional who simply prepares a return by inputting data without exercising judgment is not considered to render “advice” that justifies reasonable reliance. See Parker v. Commissioner, T.C. Memo. 2012-357, 104 T.C.M. (CCH) 823, 828.

Actual Reliance in Good Faith. A taxpayer who advances a reliance-on-professional-advice defense must establish that his “reliance was reasonable.” See Atkinson v. Commissioner, T.C. Memo. 2015-236, 110 T.C.M. (CCH) 550, 563 (quoting Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011 (5th Cir. 1990), aff’d, 501 U.S. 868 (1991)); Treas. Reg. § 1.6664-4(b)(1). “Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.” Treas. Reg. § 1.6664-4(b)(1). Blind reliance on a return preparer is not a defense. Rather, the taxpayer must personally review the return and satisfy himself that it is accurate before signing and filing it. See, e.g., Metra Chem Corp. v. Commissioner, 88 T.C. 654 (1987); Bronson v. Commissioner, T.C. Memo. 2002-260, 84 T.C.M. (CCH) 447; Osborne v. Commissioner, T.C. Memo. 2002-11, 83 T.C.M. (CCH) 1083; Bilzerian v. Commissioner, T.C. Memo. 2001-187, 82 T.C.M. (CCH) 295. And, defects in “plain view” are likely not justifiable.

Insight: Taxpayers have a duty to review their returns before signing and filing them, and the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer or other tax practitioner engaged by taxpayer. For noncash charitable contributions, taxpayers must comply with the charitable contribution substantiation requirements of section 170 and related Treasury Regulations. For additional information on this topic, please see Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions – Freeman Law.