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Don't get stung when claiming an income tax charitable deduction -- follow the rules to the letter
What happened. Donors bought a boat for $8,500, repaired it, insured it for $25,000 and unsuccessfully tried to sell it for $60,000 to $82,500. Three weeks after they gave the boat to charity in 1993, the charity sold it for $4,000. Donors claimed a $75,100 income tax charitable deduction and attached an expert's appraisal to their income tax return that was based on a boat valuation publication the BUC Guide. IRS's $22,125 valuation was based on the National Automobile Dealers Association Large Boat Appraisal Guide.
Tax Court holds - boat's value. Accepting evidence that the BUC Guide inflates used boats' values - and that many banks no longer use it for refinancing boats - the court finds the fair market value of Donors' boat was $22,125 on the date of the gift.1
Tax Court holds - substantial overvaluation penalty. IRS's imposition of that penalty is sustained because Donors failed to show that their valuation was based on a qualified appraisal or that they made a good faith investigation of the boat's value.2 Donors' appraisal didn't include the date of the gift as required by Reg. Sec. 1.170A-13(c)(3)(ii)(C). Further, the court couldn't determine if Donors' expert was a "qualified appraiser" as required by Reg. Sec. 1.170A-13(c)(4), (5).3
What is the substantial overvaluation penalty? The civil penalty on tax underpayments attributable to a "substantial" valuation misstatement of donated property is 20 percent of the underpayment.4 A valuation misstatement is substantial if the value or adjusted basis of property -- including charitable gifts - claimed on a return is 200 percent or more of the correct value or basis.5 The penalty doesn't apply if a donor acted with reasonable cause and in good faith when the claimed value of donated property was based on a "qualified appraisal" by a "qualified appraiser" - as those terms are defined in the regulations - and the donor made a good-faith investigation into the property's value in addition to getting an appraisal.6 Further, criminal penalties can be imposed. More about those later.
Qualified appraisal requirements. A donor claiming an income tax charitable deduction of over $5,000 for a gift of property other than...