The Tax Court upheld a real estate developer's charitable deductions for two land contributions to a town, finding that the appraisals for the donations substantially complied with the qualified appraisal requirements for contributions for noncash property over $5,000 and that the contributions were not quid pro quo exchanges.
Background
Peter Emanouil is a Massachusetts real estate developer. In 1999, he purchased 197 acres of undeveloped property called Granite Hill (GH property) in Westford, Mass. Over the next several years, he made various attempts to either develop or sell the GH property.
Finally, in February 2009, Emanouil obtained final approval for an affordable housing project (AHP) including 164 units on 104 of the 197 acres. In order to obtain approval, Emanouil was forced to make a number of concessions to allay Westford's concerns regarding the size of the development (including the number of units and the acreage), potential impacts on the town (including traffic and other impacts), and potential environmental concerns.
In December 2008, as the process for obtaining approval for the project was ongoing, Emanouil donated 16 acres of the remaining GH property to Westford. Before making the donation, he had the property appraised. The appraisal provided a "current market value estimate" of $1.5 million for the 16 acres, based on the highest and best use of the land, which was as a 12-lot subdivision for single-family residential use. The appraisal stated that its purpose was "[t]o inform a potential disposition." It did not include the date that the contribution was to be made or any reference to its being prepared for income tax purposes.
In November 2009, after Emanouil had received final approval for the development project, he donated an additional 71 acres of the GH property to Westford. Before making the donation, he had the property appraised. The appraisal provided a "current market value estimate" of approximately $2.5 million for the land, based on the highest and best use for the land, which was as a 38-lot subdivision. Like the previous appraisal for the 16-acre parcel, the appraisal stated that its purpose was "[t]o inform a potential disposition" and did not include the date that the contribution was to be made or any reference to its being prepared for income tax purposes.
On his 2008 Form 1040, U.S. Individual Income Tax Return, Emanouil reported the land donation as a $1.5 million gift to charity and included a Form 8283, Noncash Charitable Contributions. After the charitable deduction limitation, he claimed a charitable contribution deduction of approximately $700,000 and carried the remainder of the contribution amount forward to be claimed on returns for subsequent years.
On his Form 1040 for 2009, Emanouil reported the second land donation as a $2.5 million gift to charity and included a Form 8283. Due to the charitable deduction limitation, he claimed a deduction of about $660,000 for 2009 from his charitable contribution carryforward from 2008 and carried forward the remaining contribution amounts from 2008 and 2009. On Forms 1040 for 2010 through 2012, Emanouil claimed deductions for the charitable contribution carryforwards from 2008 and 2009.
The IRS examined the Emanouils' 2010, 2011, and 2012 returns and issued a statutory notice of deficiency disallowing the carryover charitable contribution deductions. The notice stated the grounds for disallowing the deductions as failure to substantiate the reported values of properties transferred and failure to show that the properties were transferred with charitable intent.
Emanouil timely filed a petition in Tax Court to challenge the IRS's determinations. In Tax Court, in addition to the valuation and charitable intent issues, the IRS argued that the appraisals for the donations did not meet all the requirements to be qualified appraisals.
The Tax Court's decision
The Tax Court held that Emanouil was entitled to the charitable contribution deductions he took for his contributions of land from the GH property to Westford. The court found that he had substantially complied with the qualified appraisal requirements for the contributions and he had charitable intent for the donations, so the contributions were not quid pro quo transfers.
Qualified appraisal requirement: Sec. 170(f)(11)(C) provides that, "[i]n the case of contributions of property for which a deduction of more than $5,000 is claimed," the taxpayer must "obtain[] a qualified appraisal of such property and attach[] to the return . . . such information regarding such property and such appraisal as the Secretary may require." The regulations set out 11 items that an appraisal must include to be a "qualified appraisal." The IRS claimed that Emanouil's appraisals for his land donations did not include two of these necessary items — the expected date of the contribution and a statement that the appraisal was prepared for income tax purposes.
The Tax Court explained that where the essential requirements of a statute or regulations can be met without strict compliance by the taxpayer, substantial compliance with the requirements will be sufficient. However, a taxpayer will not be in substantial compliance if the taxpayer furnishes "practically none" of the information required by the statute or regulations.
The court found that the purpose of the qualified appraisal requirements was to prevent the use of overvaluations by taxpayers and to ensure that the correct values of donated property are reported. Thus, the court determined that it followed that if an appraisal generally provides the information required in the regulations to ensure that the correct values of donated property are reported, then the essential requirements of the governing statute are met despite a lack of strict compliance with the regulations' requirements.
The court held that Emanouil provided sufficient information to permit the IRS to evaluate the reported contributions and to investigate and address concerns about overvaluation and other aspects of the reported charitable contributions. Evidence of this, the court pointed out, was that the IRS did perform that investigation without any impediment arising from the two alleged defects in the appraisals, and the notice of deficiency did not mention the omissions (which were raised for the first time in Tax Court). In its opinion, the court specifically discussed why the deficiencies in the appraisals did not prevent substantial compliance.
While the IRS did not point to any specific reason for the date-of-contribution requirement, the court noted it had previously held that having the date allows a person to compare the appraisal and contribution dates for purposes "of isolating fluctuations" in the property's value between the dates. Given that the appraisal and contribution dates were within 30 days of each other and the appraisals specified they gave a current market value, the court found this was not a significant issue. Furthermore, the court pointed out that in a number of cases, it had held that an appraisal's failure to state a contribution date was not significant when the date is listed on Form 8283, as it was for both of Emanouil's contributions.
The IRS explained in its brief that an income tax purpose statement is required because it helps the appraiser and the client identify the appropriate scope of work for the appraisal and the level of detail to provide in the appraisal, i.e., to make sure that all the information required for relying on the appraisal — for income tax purposes — is included in the appraisal. The court agreed with this general principle but found that a statement of purpose may not always be necessary to achieve substantial compliance, especially not when the appraisal otherwise includes the level of detail necessary to estimate the fair market value (FMV) of the property in question.
The court determined that the appraisal did this. It provided the FMV of the property "to inform a potential disposition," and the word "disposition" had a meaning broad enough to encompass a sale or a donation. The court concluded there was no reason to believe the valuation in the appraisal would have been different if its stated purposes had been "income tax." Moreover, citing a number of cases, it stated that it had not previously held that failing to include a statement of income tax purposes in an appraisal would defeat substantial compliance in the context of the charitable contribution deduction.
Quid pro quo: The Supreme Court in Hernandez, 490 U.S. 680, 701-702 (1989), stated: "The relevant inquiry in determining whether a payment is a 'contribution or gift' under § 170 is . . . whether the transaction in which the payment is involved is structured as a quid pro quo exchange." Therefore, if it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and, if the taxpayer cannot garner that benefit unless he or she makes the required contribution, then the transfer does not qualify the taxpayer for a charitable contribution deduction. The IRS argued that this requirement was not met because Emanouil used the proposed donations as a "bargaining chip" to induce Westford's Zoning Board of Appeals (ZBA) to approve the permit for his development project and that once the donations had been proposed, they could not be separated from the negotiations.
However, based on the testimony of the witnesses at trial, and the IRS's failure to provide any evidence to the contrary, the Tax Court concluded that the donations were given with donative intent, were received as gifts, and were not an inducement for the ZBA's approval. Rather, the court found that Emanouil had additional land in the GH property he could not use or sell, and he gave the land to Westford not because he could get a benefit from the town but because the town was a known, nearby entity that could receive a tax-deductible contribution that would take the property.
Reflections
As this case shows, while the qualified appraisal requirements are arguably more detailed than necessary to achieve the purpose behind them, the IRS, which has a demonstrated antipathy toward large charitable deductions, will attempt to use the requirements as a trap for the unwary to disallow charitable deductions. To avoid the time, trouble, and expense of going to court to get a deduction for a valid charitable contribution approved, practitioners should routinely advise clients to consult them about the documentation requirements if they are considering making large charitable contributions.
Emanouil, T.C. Memo. 2020-120
