An individual donating land to a municipality simultaneously when seeking to obtain development approvals from that same municipality often encounters the issue of whether the contribution lacked charitable intent and if the donation induced the municipality to grant the necessary approvals. Another frequent issue arising from a contribution of property is whether the appraisal contained all of the required information. Both of these issues were present in the recent case of Emanouil v. Comm’r [1], where a taxpayer, a real estate developer, claimed a $1.5 million charitable deduction for 2008 and a $2.5 million charitable deduction for 2009 for his land donations to the town of Westford, Massachusetts.
In 1999, the taxpayer purchased 179 acres of undeveloped land in Westford in 1999 for $470,000. After spending several years trying to develop or sell the land, the taxpayer eventually obtained approval from the town to build an affordable housing project on 104 acres. He donated 16 acres to the town in December 2008 and 71 acres in February 2009. The IRS disallowed the deductions, claiming that, (1) the donations lacked charitable intent, (2) the donations weren’t properly substantiated because the appraisals lacked crucial information, and (3) the fair market value of the contributed land equaled less than the appraisal amounts provided by the taxpayer. The tax court rejected all IRS arguments and permitted the full deductions.
Charitable Intent; Quid Pro Quo
Concerning the charitable intent issue, over a period of years, the taxpayer considered many different types of development proposals for the land, including a flexible housing project, several types of affordable housing projects, partnering with the town, and selling all or part of the land to the town — attending numerous meetings with the various town officials, the zoning board, and the community via public hearings. During the approval process, the taxpayer made many changes and concessions that he believed necessary to satisfy the town’s concerns about the project’s size and environmental impact. In many meetings, the taxpayer’s intent to donate portions of the land were mentioned, but these donations were not part of the conditions imposed by the town.
The IRS contended that the donation did not pass the “quid pro quo” analysis of Hernandez v Comm. [2] There the Supreme Court stated the test as follows:
“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.” In examining whether a transfer was made with the expectation of a quid pro quo, we give most weight to the external features of the transaction, avoiding imprecise inquiries into taxpayers' subjective motivations. See id. at 690-691. If it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and, most relevant to our determination in this case, if the taxpayer cannot garner that benefit unless he makes the required “contribution”, then the transfer does not qualify the taxpayer for a deduction under section 170.”
The IRS asserted that the taxpayer used the proposed donations to induce the town to approve the project, and that once the donations had been proposed, they could not be separated from the overall land use negotiations. The tax court rejected that contention, holdingthat the donations were gifts and not an inducement for the town’s approval of the taxpayer’s planned developments. The court described the situation as the taxpayer’s acquisition of the 197 acres to implement a substantial and profitable development, and when he realized that his plans to develop the entire land did not pan out, he had to decide what to do with the remaining land. The court concluded that the evidence did not suggest that without the contributions, the taxpayer would have been unable to secure the town’s approval. The court found the situation distinguishable from the taxpayer’s situation in Graham v. Comm’r, [3] where the Ninth Circuit held that:
“ʽwhere it is understood that the taxpayer's money will not pass to the charitable organization unless the taxpayer receives a specific benefit in return, and where the taxpayer cannot receive the benefit unless he pays the required price, then the transaction does not qualify for the deduction under section 170’ (emphasis added )”.
Further, the court found that in the process leading to the eventual approval of the project, the town was frank about the concessions it required from the taxpayer before granting approvals, and these concessions did not include gifts of the two pieces of property. The court made a specific finding that that none of the evidence showed that the town directed the zoning board to reject the project unless the additional donations were included as a “surreptitious” part of the proposal, and that the relevant witnesses testified credibly that there was no quid pro quo.
As stated by the court:
“One can imagine a circumstance in which two parties with mutual interests and a high level of trust could conduct some business with each other (here, the application for and approval of permits) that depended on a side agreement (here, for the donation of additional property) that was never reduced to writing and could never be enforced. That is, in effect, what the Commissioner posits, but we find it is unlikely here. The town and Mr. Emanouil seem to have had civil and cooperative business dealings, but they were hardly allies. About eight years earlier he had sued the town concerning another property acquisition, so they had no reason for special trust of each other.”
Appraisal
For charitable deductions of property in excess of $5,000, the taxpayer must obtain a qualified appraisal of the property; attach a fully completed appraisal summary on Form 8283 to the tax return; and maintain records regarding the property that include the terms of the contribution and the donee organization. See Section 170(f)(11)(C). [4] In addition, Treas. Regs. Section 1.170A-13(c)(3)(i) and(ii) requires the appraisal to include the following 11 items:
(1) A detailed description of the property so a person not generally familiar with the type of property can ascertain that the appraised property is the same as the contributed property;
(2) For tangible property, the physical condition of the property;
(3) The date of contribution to the donee;
(4) Any agreement terms or understanding contracted by or for the donor or donee that relates to the use, sale, or other disposition of the property contributed;
(5) The name, address, and the identifying number of the qualified appraiser;
(6) The qualifications of the qualified appraiser who signs the appraisal;
(7) A statement that the appraisal was prepared for income tax purposes;
(8) The date the property was appraised;
(9) The appraised fair market value of the property on the date of contribution;
(10) The method of valuation used to determine the fair market value; and
(11) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling.
Of these 11 items, the IRS claimed that the donations were not properly substantiated because the appraisals lacked two (2) of the items — they did not identify the dates of the contributions (item 3) and did not contain statements that the appraisals were prepared for income tax purposes (item 7). The tax court noted that taxpayers who do not strictly comply with the required elements of a qualified appraisal may nevertheless satisfy the elements if the taxpayer has substantially complied with the requirements. The “substantial compliance” doctrine may apply if the requirements are “directory”, i.e., helpful to the IRS in the processing and auditing of returns, rather than “mandatory”, i.e., requiring literal compliance. Citing the legislative history of the qualified appraisal statute, which required that the IRS be provided with sufficient information to deal effectively with overvaluations, the court stated that:
“it would follow that if the appraisal at issue does generally provide the information required in the regulations to do just that — i.e., to ensure that the correct values of donated property are reported — then the “essential requirements of the governing statute”…, can be satisfied despite certain defects that may not be significant in a given case.”
According to the court, the donation in question did not involve the type of donations that present a heightened possibility of abuse, which are partial interests in property, tax shelter promotions, and conservation easements. Because this was a “garden variety” question of real estate’s fair market value, the substantial compliance doctrine was available, particularly since the taxpayer had furnished much of the required appraisal information.
As to the first omitted item, the court held the failure to provide the dates of the donations on the appraisals wasn’t significant because the appraisals were dated within 30 days of the contributions, and the contribution dates were noted on Form 8283 attached to the taxpayer’s returns.
Similarly, concerning the failure to include a statement that the appraisals were prepared for income tax purposes, the court stated that providing an income tax purpose statement will help the appraiser and the client identify the appropriate scope of work for the appraisal and the level of detail that it needs to provide. In previous cases, the tax court has found that failure to include an income tax purpose statement does not itself defeat substantial compliance for a charitable deduction. Moreover, in Emanouil, the tax court noted that each appraisal valued the correct assets according to the correct standard; was prepared within 30 days of the date of the contributions; and used a commonly accepted approach to estimate fair market value. In concluding that the appraisals enabled the taxpayer to substantially comply with the substantiation requirements, the court said:
“In this case each appraisal valued the correct asset (a fee simple interest in real property) according to the correct standard (fair market value); each was prepared within 30 days of the date of contribution; and each used a commonly accepted approach (the income approach) to estimate fair market value for the contribution (discussed below in part III). In other words, the appraisals do not have multiple cumulative defects that we have previously held to be fatal for deducting charitable contributions.
We hold that the Emanouils 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.”
Insights
A taxpayer who donates land to a municipality, while negotiating with that municipality for zoning approvals, must ensure that there is no written documentation or witness testimony that would make the donation a condition of the approvals. The taxpayer in Emanouil provided sufficient contemporary information to the tax court that indicated that the land donations to the town were not a quid pro quo exchange for the town’s approval of the development project. One important fact was that the town required the taxpayer to make specific concessions, and the land contributions were not among them. The tax court concluded that the witnesses testified credibly, and that there was no quid pro quo with respect to the donations. The tax also court rejected as not credible that the town would have imposed additional oral concessions in addition to the written concessions, when no evidence was presented that indicated any of those oral concessions occurred.
Appraisal requirements are clearly set forth in the regulations. To avoid any IRS attack on an appraisal, the taxpayer should ensure that the appraisal addresses every required item, if possible. Having a tax professional review the appraisal for compliance with the required information is advisable. In Emanouil, the taxpayer convinced the court that the appraisal met the substantial compliance standard, but the issue may be avoided entirely if the appraisal contains all the required elements as set forth in the regulations.
[1] T.C. No. 5089-17 (8/17/2020).
[2] 490 U.S. 680. 701-702.
[3] 822 F. 2d 844, 849 (9th Cir. 1987).
[4] Regs sec. 1.170A-13(c)(2), The regulations define the term “qualified appraisal” as an appraisal document that, among other things, “[i]ncludes the information required by paragraph (c)(3)(ii) of this section.”
