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Charitable Deductions Require Strict Compliance with IRS Rules

 

Given the size of our federal deficit, the IRS is aggressively looking for ways to collect your hard earned dollars

Sometimes, fancy appraisals can defeat the IRS. Sometimes, though, taxpayers end up fighting over deductions they thought were secure. Sometimes they get into trouble because they are too aggressive in their valuation or in how they apply valuation discounts. Sometimes, though, even people who are behaving reasonably trip over some technical rule and end up not qualifying.

If a board game has rules that are difficult to follow, then you can choose to stop playing. However, when it comes to the IRS and the massive volume of federal tax code rules, you can’t just play a different game. The rules are the rules, even if you are seeking some sort of charitable deduction from the IRS.

Recently there have been a number of unfortunate stories about charitable deductions gone awry. One such case, Rothman, et al.v. Commissioner , was analyzed by Forbes Magazine in an article titled “Façade Easement: No (Qualified) Appraisal, No Tax Deduction.” In Rothman, the rules in question concerned non-cash charitable donations, in this case a façade easement, and the central role of professional appraisal.

Easements, quite generally, are ways of preserving types of real property from development. A façade easement, in particular, is used to protect historic city property from, well, becoming another Starbucks. The gift of such an easement to a charity – one that has preservation as its goal – is still charitable, but only when it is appraised properly.

In Rothman, the easement was made, donated and even appraised. However, the donation failed because the appraisal failed the mandated standards. The appraiser did multiple things wrong by not being clearly qualified, not disclosing credentials and not correctly specifying the easement. Furthermore, the appraiser failed to identify the appraisal as one prepared for income tax purposes, and the appraisal wasn’t even made within the proper time frame. These are just a few of the poorly-followed protocols in this situation.

It’s sufficient to say a very significant potential charitable deduction (i.e., $18.5 million) was lost because someone didn’t follow the rules and may have been cutting corners.

You can learn more about charitable planning on our website. Be sure to sign up for our complimentary e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning. 

Reference: Forbes (June 14, 2012) “Façade Easement: No (Qualified) Appraisal, No Tax Deduction

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