TAX COURT OPINION

Case: Russell E. & Barbara A. Andrews
Docket Number: 5542-08S
Judge: Colvin
Opinion Type: bench
Filed: 07/19/2010
Pages: 19

Ss UNITED STATES TAX COURT WASHINGTON, DC 2021 7 Russell E . & Barbara A . Andrews, Petitioners , v . ) Docket No .5542-08 S COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to Petitioners and to respondent a copy of the pages of the transcript of the trial in the abov e case before Judge Holmes at St .~Paul, Minnesota on June 11, 2010, containing his oral findings of fact and opinio n rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, a decision will be entered under Rule . 155 . (Signed) Mark V . Holmes Judg e Dated : Washington, D .C . July 19, 2010 SERVED Jul 27 2010 3 1 Bench Opinion by Judge Mark V . Holmes June .11, 201 0 2 Russell E . & Barbara A . Andrews Docket 5542-08S 3 THE COURT : In the case of Russell & Barbara 4 Andrews , Docket No . 5542-08S, the Court has decided to 5 render oral findings of fact and opinion, and th e 6 following represents the Court's oral findings of fact 7 and opinion . 8 This bench opinion is made pursuant to the 9 authority granted by section 7459(b) of the Internal 10 Revenue Code of 1986, as amended, and Rule 152 of the 11 Tax Court Rules of Practice and Procedure . 12 The parties reached a stipulation, and it 13 together with the other exhibits and testimon y 14 constitute the record in this case . 15 The findings_,of fact in this case ar e 16 relatively simple . On about November 27, 2002, the 17 Andrewses purchased the land and a single-family home 18 located at 10508 South Shore Drive in Plymouth , 19 Minnesota . The property is on Medicine Lake i n 20 Plymouth, a highly desirable suburban location . Some 21 homes on the lake are folder and were likely built as 22 cabins 50 or more years ago . Mixed with these older, 23 smaller homes are many newer, more modern homes . The 24 homes that the Andrewses bought was built in 1955 , 25 making it 48 years old at the time of purchase . I t Heritage Reporting Corporation (202) 628-4888 4 1 was approximately 1,200 square feet and was in 2 reasonably good repair . 3 On about April 2, 2003, the property was 4 appraised by Brian Baker . Baker valued the lot an d 5 the house separately and indicated the appraised fair 6 market value of the house itself to be $98,616, plus 7 additional amounts for the other improvements on the 8 land . Baker was an employee of Comprehensiv e 9 Valuation Services, whose client was U .S . Bank, a 10 lender to the Andrewses for prospective construction 11 on that property after the home was to be demolished . 12 The appraisal form that Mr . Baker used, the appraisal 13 request form, rather, that Mr . Baker used, did state 14 that the homeowner was donating the home to the fire 15 department, "Land value important . " 16 On about May 9, 2003, the Andrewses entered 17 into an agreement with the city of Plymouth to donate 18 the house on their property to the Plymouth Fir e 19 Department . Beginning on May 9, the fire department 20 had full, unrestricted access to the house for all 21 training and equipment testing exercises it deemed 22 appropriate . The donation agreement between th e 23 Andrewses and Plymouth states that the fire department 24 intended to complete its training exercises by July 1, 25 2003 . There was no deadline placed on the fir e Heritage Reporting Corporation (202) 628-4888 5 1 department by the Andrewses in the document, however . 2 In the weeks following the donation, th e 3 fire department conducted multiple drills an d 4 exercises at the house . Although the agreemen t 5 between the Andrewses and the city of Plymouth stated 6 that the house would ultimately be destroyed by fire, 7 when the house was returned to the Petitioners, it was 8 still standing but was neither habitable no r 9 repairable . Under the terms of the donation between 10 the Andrewses and the fire department, the Andrewses 11 were responsible for cleaning up any debris left by 12 the destruction of the house by the fire department, 13 which the Petitioners did, at a cost of approximately 14 $9,500 . 15 I also find specifically that the Andrewses 16 did not contribute their house with the intent that it 17 would save them the cost of removing the house fro m 18 the land . They were aware that the cost of removal 19 would be about the same in either way . Thei r 20 investigation of these costs revealed that th e 21 majority of the cost was in cleaning up rubble and 22 debris, and even if a house was left standing intact, 23 the destruction of that house is a relatively minor 24 part of the job of clearing the property for ne w 25 construction . Heritage Reporting Corporation (202) 628-4888 6 1 I also find that the Andrewses had donative 2 intent, that they in fact wanted to help out the fire 3 department in their relatively small city . 4 On their timely filed 2003 joint income tax 5 return, the Andrewses claimed a $97,297 deduction for 6 the charitable contribution of their dwelling to the 7 fire department . They attached Form 8283 to thei r 8 2003 income tax return, along with an appraisal -- Mr . 9 Baker's -- as support for the claimed deduction . Th e 10 appraisal was prepared for a lender however, as I lfro~ 11 said :--U .S . Bank; 'to assist it in evaluating the 12 Andrewses/application for a loan for construction of a 13 new house on their property following demolition o f 14 the old house . 15 On to the opinion . The key issue in thi s 16 case is whether the Code's requirements for claiming ont41h4fei 6n j 17 charitable deductions for noncash/lof over $5,000 wer e 0 18 met . There are three basic categories of chores that 19 somebody seeking a deduction for a noncash gift of 20 over $5,000 must meet : one is a contemporary, written 21 acknowledgment of the gift, another is the qualified 22 appraisal of the value of the gift, and the third is 23 an appraisal summary that's supposed to be attached to 24 the taxpayer's return . I'll take them in that order . 25 First off is the contemporary, written Heritage Reporting Corporation (202) 628-4888 7 1 acknowledgment . The Commission argues that th e 2 Andrewses did not obtain a contemporaneous, written 3 acknowledgment of the contribution that meets th e 4 requirements of code section 170(f)(8) and o f 5 Regulation 1 .170A-13(f) . The written agreemen t 6 between the Andrewses and the fire department abou t 7 the arrangement that they had fails to contain all the 8 information required, according to the Commissioner . 9 The contemporaneous, written acknowledgment 10 required under the Code requires a description of the 11 property ; a statement of whether there were any goods 12 or services provided in exchange, other tha n 13 intangible religious benefits that aren't relevant in 14 this case ; and, third, a description and good-faith 15 estimate of the fair market value of any service s 16 provided in exchange for the donation . 17 "Contemporaneous" means on or before the earlier of 18 the return filing date or the return due dat e 19 including extensions . There's no doubt in my mind 20 that the "contemporaneous" requirement, at least, was 21 met here . 22 There are two disputes between the parties 23 as to whether the contemporaneous, writte n 24 acknowledgment requirement was met . The firs t 25 disputes involves whether there were any goods o r Heritage Reporting Corporation (202) 628-4888 8 1 services provided in exchange for the donation . The 2 answer to this, I believe, lies in Exhibit 4 of th e 3 stipulated exhibits, which was the Andrewses agreement 4 to contribute to the city of Plymouth a single-family 5 dwelling for use in fire drills and testing equipment . 6 The relevant regulation requires a statement 7 of whether the donee provides any goods or services in 8 consideration in whole or in part for any of the cash 9 or other property transferred to the donee . That' s 10 1 .170A-13 (f) (2) (ii) . 11 The agreement between the Andrewses/and the 12 city of Plymouth states : "Now, therefore, i n 13 consideration of the contribution of the above- 14 described single-family dwelling by donor to donee, 15 the parties hereto agree as follows : donor make s 16 contribution" -- then they recite the description of 17 the property -- "and donee agrees to accept th e 18 single-family dwelling at" -- and again repeats the 19 description of the property . 20 There area number of things that the donee 21 also agrees to do, including, for instance , 22 indemnifying the Andrewses for any damage suffered by 23 them or claims made against them as a result of the 24 fire department's actions or inactions . 25 Friedman v . Commissioner , T .C . Memo . 2010- Heritage Reporting Corporation (202) 628-4888 9 1 45, does say that there needs to be a statement that 2 no goods or services were provided for a donation , 3 even if in fact no goods were provided . Kendrix v . 4 5 Commissioner , T .C . Memo . 2006-9, and Castleton v . Commissioner , T .C . Memo . 2005-58, affirmed by 18 8 6 Federal Appendix 561 (9th Cir . 2006), agree . However, 7 whatever the donee was giving to the Andrewses I 8 believe is encompassed by and I therefore hold that 9 the agreement satisfies the "goods or services" part 10 of the requirement by stating "in consideration of the 11 contribution above . " 12 Therefore, I find that at least the first 13 part of the contested contemporaneous, writte n 14 acknowledgment requirement for claiming a charitable 15 noncash deduction is met . 16 The second requirement for a contemporaneous 17 written acknowledgment is contained at Regulatio n 18 I . 170A-13 (f) (2) (iii) : "If the donee organizatio n 19 provides any goods or services other than intangible 20 religious benefits, a,description and good-fait h 21 estimate of the value of those goods and/or services ." 22 There is an exception to this requirement, however, 23 if the value of any goods or services provided i s 24 insubstantial . The value of those goods or services 25 that are insubstantial are disregarded . See sectio n Heritage Reporting Corporation (202) 628-4888 1 0 1 1 . 170A-13 (f) (8) (i) (A) . This exception doesn't quite 2 appear to apply, but Revenue Procedure 90-12 als o 3 says : "These guidelines describe a safe harbor ; 4 depending on the facts in each case, benefits received 5 in connection with contributions may b e 6 'insubstantial' even if they don't meet thes e 7 guidelines ." I . find that the Andrewses did not in 8 fact receive anything in return that would require 9 them to reduce their donation for goods or services 10 received, so the purpose of this portion of th e 11 regulation and statute is met, where the service s 12 received would not be necessary without the donation, 13 as here . I don't believe that they can be considered 14 "of value" to the donors . It's a little bit like the 15 value of the towing service in picking up a used car 16 that is being donated for its salvage value . 17 Moving on to the second, broader category of 18 requirements for claiming a charitable contribution in 19 this situation, the qualified appraisal . There are 20 numerous requirements for what must be present for an 21 appraisal to be qualified, and I won't recite them all 22 but instead focus on those that are contested . Al l 23 references from here on out in this bench opinion to 24 the regulations are to section 1 .170A-13(c) ; in other 25 words, .I won't repeat all those numbers as I refer t o Heritage Reporting Corporation (202) 628-4888 1 1 1 the various sub-sub-sub-subsections of the 2 regulations . 3 The contested requirements for a qualified 4 appraisal are six in number here . One is (3)(ii)(A), 5 a description of the property sufficient that a person 6 not familiar with that property could be apprised o f 7 what property was being contributed . This is also a 8 requirement of the appraisal summary that has to be 9 attached to a taxpayer's tax return when he claims a 10 noncash charitable contribution like the Andrews' . 11 The second contested requirement i s 12 (3)(ii)(C), a statement of the date or expected date 13 of the contribution ; (3)(ii)(D), the terms of th e 14 agreement ; (3)(ii)(G), a statement that the appraisal 15 was prepared for income tax purposes ; (3)(ii)(I), an 16 appraisal of the fair market value of the property on 17 the date of contribution -- this too is also a 18 requirement of the appraisal summary ; and, finally, 19 (3)(ii)(K), a specific basis for the valuation . The 20 appraisal summary contains some of those requirements, 21 but contains as well a requirement that the cost or 22 other basis in the donated property be on the 828 3 23 attached to the tax return . Some of these are not 24 reasonable objections in my view on the part of the 25 Commissioner . In particular, the Commissioner' s Heritage Reporting Corporation (202) 628-4888 12 1 objections to (3) (ii) (C) and (3) (ii) (D) hinge on the 2 difference between the qualified appraisal and th e 3 document labeled "Appraisal" that the Andrewses 4 attached to their tax return . I agree with th e 5 Andrewses that one can aggregate the documents that 6 are assembled together to constitute a qualifie d 7 appraisal . The Tax Court itself seems willing t o 8 supplement the appraisal with the appraisal summary . 9 See Simmons v . Commissioner , T .C . Memo . 2009-208 , 10 finding appraisal okay because the taxpayer included 11 all required information on the face of the return or 12 attached to the return, in Consolidated Investor s 13 Group, T .C . Memo . 2009-290 . And it seems likely in my 14 view and I so hold that the appraisal summary could be 15 supplemented by the appraisal itself that was attached 16 to the return to together constitute the appraisa l 17 summary to the extent it's attached to the return and 18 the qualified appraisal to the extent that they are 19 all found in the Andrewses .tax records . Similarly, I 20 find insubstantial the Commissioner's argument under 21 (3)(ii)(I) that the appraisal of the fair market value 22 has to be on the date of contribution . The difference 23 between April 3rd, the date of the appraisal, and May 24 9th, the date of the contribution, is too small in my 25 view, barring something disastrous happening to th e Heritage Reporting Corporation (202) 628-4888 1 3 1 property in those few days, to be other than a d e 2 minimis deviation from this requirement, and if I were 3 pressed, would find that it was in substantia l 4 compliance with the rules and that regulation . 5 However, the remainder of the Commissioner' s 6 objections to the sufficiency of the Andrewse s 7 qualified appraisal and appraisal summary are muc h 8 more serious . They hinge on what was being appraised 9 and why it was being appraised . The Andrewses admit 10 that they did not comply literally with th e 11 substantiation requirements and asked me to hold that 12 they substantially complied . Substantial compliance 13 is designed to avoid hardship when a party does all 14 that he reasonably can but nevertheless does no t 15 satisfy the requirements of a statutory provision . 16 See Estate of Chamberlain v . Commissioner , T .C . Memo . 17 1999-181, affirmed 9 Federal Appendix 713 (9th . Cir . 18 2001) . The Tax Court has applied the doctrine o f 19 substantial compliance in cases where the taxpayer has 20 failed to complete procedural or regulator y 21 requirements but nonetheless fulfilled the essential 22 statutory purpose . In this context, we have noted 23 that the main purpose behind the substantiatio n 24 requirements is to give the Commissioner sufficient 25 information to effectively monitor the propriety an d Heritage Reporting Corporation (202) 628-4888 14 1 valuation of charitable contributions . Hewitt v . 2 Commissioner , 109 T .C . 258, 265 (1997), affirmed b y 3 166 F .3d 332 (4th Cir . 1998) . A failure to include an 4 appraisal, such as in Castleton v . Commissioner , or to 5 get an appraisal before filing a return, Consolidated 6 Investors , T .C .M . 2009-290, are clearly examples i n 7 our case law of things that are not substantially 8 compliant with the requirements of section 170 . 9 Similarly, the case of Bond v . Commissioner , 100 T .C . 10 32 (1993), where the appraiser's qualifications were 11 left off the appraisal summary but then quickl y 12 supplied when the failure was brought to the attention 13 of the taxpayer, are substantially compliant . Thi s 14 case obviously falls somewhere between those two . 15 Though the Andrewses were diligent in their research 16 and did in fact obtain an appraisal, I cannot find 17 that the appraisal constitutes a qualified appraisal 18 under the regulations . First, the appraisal was not 19 obtained for income tax purposes . The point here is 20 not just that the regulations require a statement that 21 the appraisal was for income taxes, but that it i n 22 fact was sought for income tax purposes . While the 23 record shows that the appraiser was likely aware of 24 the impending donation when the appraisal wa s 25 completed -- that's what the request for appraisal i n Heritage Reporting Corporation (202) 628-4888 1 5 1 Exhibit 10 shows -- the appraisal itself states in at 2 least three places that the function of this appraisal 3 was for lending purposes . "The function of th e 4 appraisal was to assist the above-named lender i n 5 evaluating the subject property for lending purposes ." 6 See Exhibit 2 at 49 . "This appraisal is prepared for 7 Federally related mortgage use and is intended fo r 8 financing purposes only ." See Exhibit 2 at 52 . And, 9 "Unless otherwise stated, the function of th e 10 appraisal is to assist the herein-named lender/client 11 and/or their assigns in evaluating the subjec t 12 property for Federally related loan purposes ." See 13 Exhibit 2 at page 55 . Furthermore, and ver y 14 importantly, nothing in the record indicates that the 15 appraiser was aware of the restrictions on th e 16 donation . Without deciding the issue of whether the 17 donation by the Andrewses was a partial interest , 18 there can be no doubt that the donation significantly 19 restricted the fire department's use of the house . 20 According to the regulations, a qualified appraisal 21 must contain "the terms of any agreement o r 22 understanding entered into or expected to be entered 23 into that relates to the sale, use, or othe r 24 disposition of the property contributed, including, 25 for example, the terms of any agreement o r Heritage Reporting Corporation (202) 628-4888 1 6 1 understanding that earmarks donated property for a 2 particular use ." Section 1 .170A-13(c)(3)(ii)(D) of 3 the Income Tax Regulations . The eventual agreement 4 reached about a month after the appraisal shows tha t 5 the donation was earmarked "for use in fire drills and 6 testing equipment by the Plymouth Fire Department . " 7 See Exhibit 4 again . I cannot say that an appraisal 8 performed for financing purposes and without an y 9 reference to the substantial restrictions like those 10 in this agreement substantially complies with the 11 regulations . See section 1 .170A-13(c)(3)(ii)(D) . 12 Cases like Simm ons v . Commissioner , T .C . Memo . 2009- 13 208, and Consolidated Investors Group v . Commissioner , 14 T .C . Memo . 2009-290, addressed merely the absence of 15 the statement in the appraisal that it was prepare d 16 for income tax purposes and did not address whether an 17 appraisal not actually prepared for income ta x 18 purposes would suffice for substantial compliance . 19 From the face of the Andrewses 2003 tax return , 20 including attachments, it is not clear that th e 21 donation of their house was for the limited purpose of 22 fire drills and imminent destruction by fire . Without 23 deciding what impact those limitations have on th e 24 value of the contribution for tax purposes, this i s 25 the type of information required by the regulations t o Heritage Reporting Corporation (202) 628-4888 1 7 1 be submitted to the Commissioner for his evaluation of 2 deductions . Therefore, the Andrewses have no t 3 substantially complied with the requirements and are 4 not entitled to a deduction for the donation of their 5 house to the Plymouth Fire Department in 2003 . 6 That leaves only the question of penalties 7 under section 6662 . The Commissioner determined that 8 the Andrewses are subject to the 20-percent accuracy- 9 related penalty provided by the Code at sectio n 10 6662(a) . The accuracy-related penalty applies to any 11 portion of an underpayment of tax required to be shown 12 on a return that is attributed to, alternatively, (1) 13 negligence or disregard of rules or regulations -- 14 that's 6662(b)(1) -- (2) substantial understatement of 15 income tax -- that's code section 6662(b)(2) -- or (3) 16 any substantial valuation misstatement under chapter 1 17 of the Code -- which is section 6662(b)(3) . Each of 18 those three sections or subsections of 6662 ar e 19 however subject to a defense of reasonable cause and 20 good faith . Reasonable basis and good faith, rather . 21 Reasonable basis is defined by the regulations , 22 1 .6662-3(b)(iii), as a relatively high standard of tax 23 reporting ; that is, significantly higher than no t 24 frivolous or not patently improper . The reasonable 25 basis standard is not satisfied by a return positio n Heritage Reporting Corporation (202) 628-4888 1 8 1 that merely arguable or that merely a colorable claim . 2 If a return position is reasonably based on one o r 3 more of the authorities set forth in regulatio n 4 1 .6662-4(d)(3)(iii), taking into account the relevance 5 and persuasiveness of the authorities and subsequen t 6 developments, the return position will generall y 7 satisfy the reasonable basis standard even though it 8 may not satisfy the substantial authority standard as 9 defined in 1 .6662-4(d)(2) . There are two 10 considerations that were particularly high on my mind 11 here in deciding whether the determination of th e 12 penalty should stand on review by the Tax Court . The 13 first of course is that there is a case, albeit an old 14 case, named Sharf v . Commissioner which is extremely 15 similar to the facts in this case and was decided in 16 favor of the taxpayer . In Sharf , our Court held that 17 a charitable contribution of a building to a loca l 18 fire department for burn exercises did qualify as a 19 charitable contribution under code section 170 . Of 20 course, there are currently at least two similar cases 21 pending decisions . One is Rolfs v . Commissioner , Tax 22 Court Docket No . 9377-04, which awaits decision and 23 presents very similar legal issues as this case, but 24 no decision in that case has been rendered . Another 25 similar case, Hendrix v . U .S . , Court File No . 2 :09 c v Heritage Reporting Corporation (202) 628-4888 1 9 1 132, is pending in the U .S . District Court for th e 2 Southern District of Ohio . The Sharf case in fact was 3 decided prior to section 170(f)(3), which was passed 4 in 1969 ; nevertheless, it remains an authority tha n 5 can be cited for the proposition for which th e 6 Andrewses cited it . And the unsettled state of th e law, at least before Rolfs and Hendrix are decided, suggests to me that they had some reasonable eas-e 9 here . Moreover, the unsettled state of what exactly 10 substantial compliance with the qualified appraisal 11 and appraisal summary rules and regulations als o 12 inclines me to say that there wasllreasonabl e 13 here for drawing a distinction between things like 14 statements that an appraisal was prepared for income 15 tax purposes and the actual purpose of the appraisal 16 being for income tax purposes . These are somewha t 17 subtle distinctions and to my mind create a reasonable 18 basis to do what the Andrewses did . As for their good 19 faith, I do find that the Andrewses based thei r 20 deductions on longstanding if somewhat tenuous case 21 law, that they hired an experienced appraiser to value 22 their property, and entered into a written donation 23 agreement with the fire department to document their 24 contribution . This leads me to conclude that in fact 25 they did claim this deduction in good faith and tha t Heritage Reporting Corporation (202) 628-4888 2 0 1 they had1kreasonable e for doing so . Therefore, I V big .5 ~~ 2 will not sustain the penalty under 6662 . 3 This concludes the Court's oral findings of 4 fact and opinion in this case . A decision under 15 5 5 will be necessary, and I will establish a deadline for 6 that when I get home and the transcript become s 7 available . 8 And with that, this case and this session 9 are over with . Thank you very much to chief counse l 10 for an extraordinarily stimulating session over the 11 last 4 days . Some interesting cases and of course 12 some highly disturbing references to things involving 13 World War II . But apart from that, thank you ver y 14 much . Goodbye . 15 THE CLERK : All rise . 16 (Whereupon , at 2 :33 p .m ., the bench opinion 17 in the above-entitled matter was concluded . ) 18 19 20 21 22 23 24 25 Heritage Reporting Corporation (202) 628-4888