The U.S. Tax Court held that a partnership’s omission of its cost or other adjusted basis of contributed property from its appraisal summary could not be excused on the grounds of substantial compliance. Thus, the Tax Court agreed with denial in full of the partnership’s claimed charitable contribution deduction. In addition, the court determined that accuracy-related penalties apply because the partnership’s claimed fair market value of the remainder interest resulted in a gross valuation misstatement.
The case is: RERI Holdings I, LLC et al. v. Commissioner, 149 T.C. No. 1 (July 3, 2017). Read the Tax Court’s opinion [PDF 263 KB]
The partnership paid just under $3 million in March 2002 to acquire a remainder interest in real property. In August 2003, the partnership assigned the remainder interest to a university, and claimed a charitable contribution deduction of $33 million under section 170(a)(1).
Form 8283, Noncash Charitable Contributions, that the partnership attached to its tax return, provided the date and manner of the partnership’s acquisition of the contributed remainder interest; however, the space for the “Donor’s cost or other adjusted basis” was left blank.
The Tax Court concluded that the partnership’s Form 8283 failed to meet the substantiation requirement of Reg. section 1.170A-13(c)(4)(ii)(E) because it did not include the donor’s cost or other adjusted basis of the contributed property. Further, the court explained that because disclosure of the partnership’s cost or other basis in the remainder interest would have alerted the IRS to a potential overvaluation of the property, this omission prevented the Form 8283 from achieving its intended purpose and thus could not be excused on the grounds of substantial compliance.
In addition, the Tax Court determined that the remainder interest had a fair market value of approximately $3.5 million on the date of the contribution—not the $33 million claimed by the partnership. Because the value that the partnership assigned to the remainder interest was more than 400% of that interest’s actual fair market value, the partnership’s claimed charitable contribution deduction resulted in a gross valuation misstatement. The court concluded that the partnership did not make a good faith investigation of the value of the property subject to the remainder interest and thus did not have reasonable cause for, or did not act in good faith with respect to, its claim of a charitable contribution deduction that resulted in a gross valuation misstatement.
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.