United States

Incomplete Form 8283 Doomed Taxpayer's Charitable Deduction

Charitable Deduction Denied and Penalties Assessed


On July 3, 2017, the Tax Court in, RERI Holdings I LLC et al. v. Commissioner, 149 T.C. No. 1, held that a partnership was not entitled to a charitable deduction due to the partnership’s failure to meet the substantiation requirements of section 170 and then assessed a section 6662 accuracy-related penalty for a valuation misstatement.

Section 170 allows a deduction for a charitable contribution. Pursuant to Reg. section 1.170A-1(c)(1), if a charitable contribution is made in property other than money, the value of the deduction is generally measured by the property’s fair market value at the time the taxpayer makes the contribution. To be able to claim a deduction for donated property valued at $5,000 or more, a taxpayer must meet the substantiation requirements outlined in Reg. section 1.170A-13(c)(2). The requirements include the donor’s obligation to obtain a qualified appraisal of the contributed property, attach a fully completed appraisal summary to the tax return on which the deduction is first claimed, and maintain records specified in Reg. section 1.170A-1(b)(2)(ii). The IRS will deny a charitable deduction if a taxpayer does not satisfy these requirements.


In RERI, a partnership acquired a successor member interest (SMI) in a holding company that owned a web hosting facility. RERI paid $2,950,000 for the SMI. About a year and a half after acquiring the SMI, RERI assigned it to the University of Michigan. RERI’s appraiser assigned a value of $55 million to the fee interest in the web hosting facility. The appraiser used Section 7520 valuation tables prescribed by the Secretary and multiplied the estimate of the fee interest in the property by an actuarial factor provided therein to arrive at an investment value of the SMI.

With its 2003 tax return, RERI submitted the Form 8283, Noncash Charitable Contribution, and a summary of an appraisal.  RERI also claimed a charitable contribution of $33,019,000 for the donated SMI on its 2013 tax return. The form 8283 attached to the tax return indicated that RERI acquired the SMI on March 22, 2002, but the space for “Donor’s cost or adjusted basis” was left blank.

The Tax Court rejected RERI’s argument that the appraisal could be done using the section 7520 valuation tables because the agreement that created protective covenants available to SMI’s holder did not provide adequate protection to the holder of the SMI’s interest in the remainder interests in SMI within the meaning of Reg. section 1.7520-3(b)(2).  For this reason the Tax Court held that SMI’s value was the actual fair market value without regard to actuarial factors provided for by section 7520.  The court concluded that the SMI contributed by RERI to the University of Michigan had a fair market value of $3,462,886.

Charitable Deduction Denied

In denying the charitable deduction, the Tax Court looked at its prior holdings where it determined that the reporting requirements for the section 170 regulations are directory and not mandatory and a failure in compliance can be excused through substantial compliance. Substantial compliance includes a fully completed (emphasis added) Form 8283 attached to the return with the claimed deduction and later promptly furnishing the appraiser’s qualifications to the IRS agent. A taxpayer can satisfy the substantial compliance requirement if it provides to the IRS appropriate information to alert the IRS to a potential overvaluation.

In RERI the Tax Court held that the taxpayer failed to meet the reporting requirements of the section 170 regulations by not fully completing the Form 8283, i.e., by leaving blank the space for the “Donor’s cost or other adjusted basis amount” on the Form 8283 as required by regulations section 1.170A-13(c)(4)(ii)(E).  Further, the court did not excuse RERI’s error through substantial compliance because as submitted, the incomplete Form 8283 did not provide sufficient information for the IRS to evaluate the reported charitable contribution. The large disparity between the claimed fair market value and the price RERI paid to acquire the SMI just 17 months prior to assigning it to the university would have alerted the IRS to a potential overvaluation, but the basis amount was not reported. Therefore, the Tax Court concluded that RERI was not entitled to any deduction for its charitable contribution.


Sections 6662(b)(3) and (h)(1) impose an accuracy related penalty in the amount of 40-percent of the portion of the underpayment of tax when the underpayment is attributable of a gross valuation misstatement, which is where the correct value of the claimed property is 400-percent of the amount claimed on the return. Section 6664(c) provides an exception to the imposition of an accuracy-related penalty, if the taxpayer acted with reasonable cause and in good faith with respect to any portion of the underpayment. However, section 6664(c)(3) requires that a taxpayer show that the value of the property was based on a qualified appraisal by a qualified appraiser and that the taxpayer made a good faith investigation of the value of the property to meet the reasonable exception if there was a substantial or gross valuation misstatement.

In RERI, the taxpayer claimed that it made a good faith investigation because the appraisal’s value was confirmed by the purchase price that was paid to acquire the property. The Tax Court disagreed that the taxpayer made a good faith investigation and stated that “[m]arshaling evidence of a property’s value 18 months or more before a gift is made is simply not sufficient as a matter of law to qualify as a good-faith investigation into the value of the property at the time of the gift.” Therefore, the Tax Court concluded that RERI did not have a reasonable cause exception for the imposition of the accuracy related penalty due to a valuation misstatement and confirmed that the taxpayer was liable for the accuracy related penalty.

Because RERI claimed a charitable contribution deduction that was substantially greater than 400 percent of the court-determined fair market value of the property donated, the court held that the taxpayer was liable for the penalty in the amount of 40-percent of the portion of the underpayment of tax.

Conclusion and Analysis

As RERI shows, without a fully completed Form 8283, a taxpayer is not able to claim it met the section 170 substantiation requirements. Further, a taxpayer’s failure to meet the section 170 substantiation requirements is not excused through substantial compliance if the excluded information does not permit the IRS to evaluate the donated property for a potential overvaluation. And, the IRS can still assess penalties for a valuation misstatement even if the penalty is disallowed on other grounds if a misstatement occurred.

Failing to list the donor’s basis in the contributed property, an error that may seem insignificant, can result in a complete denial of the deduction. The taxpayer has not met the substantiation requirements and cannot rectify the error through substantial compliance because the missing information did not alert the IRS to a potential valuation misstatement. Tax practitioners and taxpayers must ensure that the Form 8283 fully discloses all the information pursuant to the provisions of the regulations, otherwise the IRS may disallow the charitable deduction. Also, when a taxpayer claims a charitable contribution deduction of $5,000 or more, the taxpayer must obtain a qualified appraisal and investigate whether that appraisal value seems appropriate. Neglecting to do so means the taxpayer did not make a good faith investigation into the value of the property, and exposes the taxpayer to accuracy-related penalties if there is a valuation misstatement. 


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