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Deficient Appraisals Cost Charitable Donation Deduction

Estate Planning Journal

In Ben Alli, 1 the Tax Court disallowed a charitable income tax deduction because each of the two appraisals obtained by the taxpayer was severely deficient in complying with the requirements of the Regulations regarding qualified appraisals.


The taxpayer was the sole shareholder of BSA Corporation, which owned several apartment buildings. In 1983, the taxpayer purchased the Pingree apartment building and the Gladstone apartment building for a total purchase price of $353,000. Although the properties suffered from severe problems – including missing smoke detectors and other fire hazards; roach infestation; peeling paint; significant water damage; sink and shower units separated from the walls; actively leaking plumbing; and damaged or inoperable appliances, doors, and lighting – the taxpayer failed to make the repairs necessary to improve the building.

On September 29, 2008, BSA contributed the Gladstone apartment building to Volunteers of America, a 501(c)(3) organization. With respect to contributions of real property, Volunteers of America had a policy of finding a prospective purchaser before it would accept a donation of real property. Accordingly, on September 10, 2008, Volunteers of America entered into a contract to sell the Gladstone apartment building for $60,000.

The taxpayer claimed a charitable contribution of $499,000 for his contribution of the Gladstone apartment building to Volunteers of America. In determining the value of the Gladstone apartment building, the taxpayer relied on two appraisals. The first appraisal arrived at a value of $400,000, and the second appraisal arrived at a value of $664,000. The IRS disallowed the charitable contribution on the basis that neither of the two appraisals satisfied the requirements for being a qualified appraisal. The court agreed with the IRS and held that both appraisals suffered from material deficiencies.


In the Deficit Reduction Act of 1984, Congress amended Section 170 to require taxpayers claiming a deduction for a charitable contribution of certain property to:

1. Obtain a qualified appraisal for the property contributed.

2. Attach an appraisal summary to the return.

3. Include on such return additional information (including the cost basis and acquisition date of the contributed property) as may be prescribed in regulations.

In the American Jobs Creation Act of 2004, Congress codified these requirements as Section 170(f)(11) and provided a reasonable cause exception for failure to comply with the substantiation requirements for charitable contributions made after June 3, 2004. Section 170(f)(11) provides that where a deduction is claimed for contributions in excess of $5,000, a taxpayer must obtain a qualified appraisal of such property.

Reg. 1.170A-13(c)(3)(i)(A) requires that a qualified appraisal be made no more than 60 days before the gift and no later than the due date of the return. However, the first appraisal obtained by the taxpayer was made in 1999, nearly a decade before the contribution by the taxpayer to Volunteers of America. The taxpayer argued that although the first appraisal was nearly a decade old, it was relevant to establishing the value of the Gladstone apartment building as of the date of contribution because the second appraisal was an update of the first appraisal. However, Reg. 1.170A-13(c)(5)(iii) provides that where a taxpayer relies on more than one appraisal, each appraisal must independently comply with the qualified appraisal requirements. Therefore, the court held that the first appraisal failed the timeliness requirement.

In addition, the court held that the first appraisal did not establish the fair market value of the Gladstone apartment building. The three approaches to measure the fair market value of property are:

1. The market approach (i.e., the comparable sales approach).

2. The asset-based approach (i.e., the cost approach).

3. The income approach.

The market approach values the property by comparing the property to similar properties sold in arm's-length transactions in or about the same period. The asset-based approach generally values the property by determining the cost to reproduce it. Finally, the income approach determines the value of the property by capitalizing or discounting expected cash flows from the property. The first appraisal did not employ any of the three methods. Instead, it merely estimated the annual profit potential of the Gladstone apartment building using a projected income stream. It did not perform a discounted cash flow analysis on the estimated profit potential to determine Gladstone's fair market value.

The court next turned to an analysis of the second appraisal. The second appraisal was obtained five months before the date of the contribution. Consequently, like the first appraisal, the court held that it also violated the timeliness requirement of the Regulations. The second appraisal valued the Gladstone apartment building with the assumption that the building had been renovated and remodeled and that normal management of the building would be implemented. However, the court found that at the time of the contribution, the Gladstone apartment building was in poor condition and that most units were uninhabitable. Therefore, the court held that the second appraisal was of a hypothetical building rather than of the contributed property and accordingly was not a qualified appraisal.


The taxpayer in this case used two appraisals that were seriously flawed – so seriously flawed that they were almost a joke. One appraisal was almost ten years old, and the other appraisal did not actually appraise the property in its then current condition. It is somewhat surprising then that this case was not settled earlier and rather ended in a trial in Tax Court. The larger lesson of this case is that advisors who are asked to review appraisal reports for clients should be sure to familiarize themselves with the requirements set forth in Reg. 1.170A-13(c)(3) and verify that each of those requirements for a qualified appraisal is satisfied.

1 TC Memo 2014-15, RIA TC Memo ¶2014-015, 107 CCH TCM 1082.  

Frank Baldino is an estate planning attorney who co-chairs Lerch, Early & Brewer’s Estate Planning & Probate group in Bethesda, Maryland. His focus is on protecting the assets of high net worth individuals to minimize federal and state tax liability. For more on appraisals and charitable tax deductions, contact Frank at (301) 657-0175 or

This article originally appeared in the June 2014 edition of Estate Planning, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets.






This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.


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