A well-recognized idiom provides that “nothing is certain but death and taxes.” However, the uncertainties associated with valuations and how those taxes will ultimately be computed make it unwise for tax professionals to guarantee a result or fail to indicate risks that might be attendant to a proposed plan. Risks may be heightened when personal property is donated with the expectation that an appraisal will establish the allowable deduction. When automobiles, boats and airplanes are donated for a claimed value that exceeds $500, and sold by the charity without any significant intervening use, the amount of the deduction allowed generally won’t exceed the gross proceeds received by the charity. (Internal Revenue Code Section 170(f)(12)(A)(ii).) Based on the complaint, it appears that the recently filed case of Ridinger v. Stone, No. 1:22-cv-09082 (S.D.N.Y. 2022) may illustrate how an alleged representation that a planned personal property donation technique would eliminate those risks can result in a disgruntled client and a malpractice claim. Because the only public record is the complaint, and the defendants haven’t been heard from, this is all premature, but nonetheless we may learn cautionary even at this juncture.
IRS Audits Charitable Deduction for Donation of Yacht
In Ridinger, Loren and James Ridinger sued their attorneys for malpractice after the Internal Revenue Service assessed a deficiency of in excess of $3.2 million based on their charitable donation of a yacht. The couple allege they planned to sell or donate a yacht owned by a company they controlled. In 2016, in furtherance of that plan, they obtained an appraisal that valued the yacht at $4.93 million. They also identified a potential charity to benefit from the donation. They discussed their plans, and the appraisal obtained, with their attorneys. Following the advice of counsel, plaintiffs allege:
- They were persuaded to donate the yacht to a different charity (Veterans Inc.) that was represented by the same law firm.
- They were informed that a deduction premised on the appraised value would be reduced if the yacht were sold by the charity for a lesser amount within three years of the donation, but their attorneys told them they had a way to avoid that from occurring.
- Because of the attorneys’ relationship with Veterans Inc., plaintiffs were told the attorneys could arrange for the charity to immediately sell the yacht for the appraised value. The attorneys disclosed that an entity in which the attorneys personally held an interest (RR Skye) would be the purchaser.
- They were assured that a sale to RR Skye for the appraised value would avoid a reduction in the amount allowed as a deduction and the risks that could result from a donation to their chosen charity if that charity sold the yacht for less than the appraised value.
- Based on counsel’s representation that a donation to Veterans Inc. would eliminate uncertainties regarding the value of the donation, the Ridingers donated the yacht to Veterans Inc. and claimed a charitable deduction premised on the yacht’s appraised value on their 2016 income tax returns.
- Veterans Inc. sold the yacht for its appraised value to RR Skye, but rather than receiving cash, Veterans Inc. received promissory notes for the purchase price. Following that sale, the notes were discounted by 10% and assigned to a different entity owned by the attorneys. Veterans Inc. never received any funds for its sale of the yacht.
- In 2017, RR Skye sold the yacht to a third party for $1.3 million.
- On audit, the IRS assessed a deficiency of in excess of $3.2 million and asserted fraud and accuracy related penalties in excess of $1.4 million relating to the yacht’s donation.
Lessons Learned
Without regard to the veracity or validity of the claims brought by the Ridingers, it’s generally advisable to:
- Never guarantee a result;
- Advise clients that all planning techniques carry risks;
- Advise the client to ascertain, when the client wishes to donate personal property valued in excess of $500, whether the charity is willing to accept the donation and determine whether that charity will actually use the item for some period or sell the item in short order; and,
- When the attorney has an interest in the outcome of a transaction or represents more than one client to the transaction, to inform each client, in writing, of those relationships as well as of the potential risks, the advisability of obtaining independent advice of counsel, and obtain written consent to the essential terms of the transaction and the lawyer’s role in the transaction.