Magazine article The CPA Journal

Tax Court Rules Appraisal Required for FMV Charitable Contribution Deductions

Magazine article The CPA Journal

Tax Court Rules Appraisal Required for FMV Charitable Contribution Deductions

Article excerpt

In Hewitt v. Commissioner, a case of first impression, the Tax Court recently ruled that taxpayers contributing nonpublicly traded stock to charitable organizations could deduct only their basis, not the fair market value (FMV), where they did not obtain a qualified appraisal even though the FMV used was correct. This is an important case since many taxpayers contribute appreciated property to charity. Such contributions eliminate income tax on the appreciation and also create a deduction equal to the property's FMV if the law is correctly followed.

IRC section 170(a)(1) states that a charitable contribution deduction is allowed only if verified under the regulations. Section 155 of the Tax Reform Act of 1984 required regulations to be issued concerning appraisals for property contributions exceeding $5,000 ($10,000 for nonpublicly traded stock). These amounts, which are not indexed for inflation, apply to the total amount of similar property contributed to one or more donees in the tax year. The donor must obtain a qualified appraisal for such contributions and include an appraisal summary with the return.

Regulations section 1.170A-13(c) contains detailed rules implementing this qualified appraisal requirement. This requirement applies to individuals, partnerships, closely held corporations, S corporations, and personal service corporations. The appraisal must be performed by the due date of the return (including extensions) and must include the method of and specific basis for the valuation. Also, the regulations require the appraisal summary, which is part B of Form 8283, to include the appraiser's signed statement attesting that he or she is qualified to appraise the property, is independent, is aware of the penalties for an overstatement of the property's value, and did not base the appraisal fee on a percentage of the appraised value.

In Hewitt, John and Linda Hewitt contributed Jackson Hewitt stock to the Hewitt Foundation and the Methodist church, for which they deducted $33,000 in 1990 and $88,000 in 1991. Their total basis was under $7,000. In 1990-91, Jackson Hewitt, a nonpublic corporation, was owned by 400 shareholders with approximately 700,000 shares outstanding. From May 1990 to December 1991, Jackson Hewitt recorded 317 transfers of stock involving approximately 100,000 shares. …

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