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Tax Court Denies Charitable Deduction for Donation of Sculpture

Tax Court Denies Charitable Deduction for Donation of Sculpture

The taxpayer, who was an art expert, didn’t meet substantiation requirements.

In a strong reminder to comply with the charitable contribution substantiation requirements or risk losing an income tax deduction, the Tax Court released its opinion in Heinrich C. Schweizer v. Commissioner, T.C. Memo 2022-102, on Oct. 6, 2022. In Schweizer, the Tax Court denied the claim of the taxpayer, Heinrich Schweizer, for a charitable deduction for income tax purposes, citing Heinrich’s failure to meet the substantiation requirements of Internal Revenue Code Section 170 and the accompanying Treasury regulations. This case comes on the heels of Martha L. Albrecht v. Comm’r T.C. Memo 2022-53, which also hinged on compliance with the formalities of Internal Revenue Code Section 170.


Taxpayer’s Donation to Museum & Tax Reporting

For nine years, Heinrich was the Director of the African and Oceanic Art department at Sotheby’s. As part of this role, Heinrich interfaced with and supported Sotheby’s appraisal department from time to time to provide fair market value (FMV) estimates of certain works. During this time, Heinrich made several donations to museums of African art, including a Dogon sculpture (which he had allegedly purchased for $100,000 in 2003) gifted to the Minneapolis Institute of Art in 2011.  

Heinrich’s income tax return preparer assisted him with a “Statement of Value” request, whereby he sought assurances that the IRS would accept the proffered value of the donated Dogon sculpture for purposes of a claimed a charitable deduction. The Statement of Value request included a one-and-a-half page valuation prepared by an unqualified and inexperienced appraiser stating that the value of the Dogon sculpture was $600,000. The request wasn’t answered before Heinrich’s return was due, so his 2011 income tax return claimed the maximum charitable deduction for 2011 and carried the remaining deduction forward, based on the $600,000 valuation. The 2011 tax return failed to include a completed Form 8283 (both improperly completed in certain respects and incomplete in other respects) and didn’t append an appraisal, as required by IRC Section 170(f)(11)(D) for gifts in excess of $500,000.

On examination, the IRS asserted that the charitable contribution deduction should be denied in its entirety because Heinrich failed to satisfy the substantiation requirements of Section 170(f)(11) and the associated regulations, including a failure to obtain a qualified appraisal, failure to attach to the Form 8283 an appraisal of any kind and failure to submit a completed Form 8283.  (The IRS’ staff appraiser initially valued the contributed sculpture at $250,000, but the IRS took the position that the deduction should be fully disallowed.)  The IRS assessed a deficiency of $95,081 and accuracy related penalties of $19,016. The Tax Court agreed with the IRS and upheld the denial of Heinrich’s charitable deduction due to his failure to substantiate the value of his deduction and the absence of reasonable cause for that failure.


Substantiation Requirements

Section 170 governs charitable contributions and deductions for income tax purposes and further describes the requirements for substantiation in Section 170(f)(11). Generally, any donation to charity with a value of more than $500 requires additional documentation. For donations of $5,000 or more, a “qualified appraisal” made by a “qualified appraiser,” as defined in Section 170, is required. For donations with a FMV exceeding $500,000, the taxpayer must attach the appraisal to his federal income tax return in order to substantiate a charitable deduction.

A taxpayer seeking a charitable deduction must also file IRS Form 8283. When a taxpayer donates property (other than publicly traded securities) valued in excess of $5,000, Form 8283 instructs the taxpayer to include the following information on section B: (1) a description of the donated property, (2) a brief summary of its physical condition,

(3) the appraised FMV of the property, (4) the date the property was acquired by the donor, (5) the manner of acquisition, and (6) the donor’s “cost or adjusted basis.”


Tax Court Decision

At trial, Heinrich maintained that he reasonably relied on advice from the accounting firm that the incomplete Form 8283 would be acceptable because the Statement of Value had been submitted to the IRS previously. The tax preparer didn’t corroborate Heinrich’s narrative, and the Tax Court concluded that it was implausible that the accountant gave the advice on which Heinrich claimed to have reasonably relied and that, even if he had relied on such advice, it wasn’t reasonable for Heinrich to have done so. Specifically, the Tax Court noted that a taxpayer must still review his tax return and sign the return, that Heinrich didn’t need any specific training to comprehend that Form 8283 was in parts incomplete and in parts incorrectly prepared or that the return didn’t contain any attachment despite the reference to one. Further, Heinrich’s prior charitable contributions of art and his professional training put him in a unique position to understand the tax law regarding charitable contributions of art.

The Tax Court found that Heinrich: (1) failed to obtain a timely qualified appraisal of the Dogon sculpture as required by Treasury Regulations Section 1.170A-13(c)(3), (2) failed to attach to his 2011 return an appraisal of any kind, as required by Section 170(f)(11)(D) for gifts valued in excess of $500,000, and (3) failed to attach to his return a fully completed Form 8283, as required by Section 170(f)(11)(C) and Treas. Regs. Section 1.170A-13(c)(2)(i)(B). The Tax Court further noted that Heinrich’s testimony was “unverified, self-serving, and unreliable” with respect to the failure to complete the necessary requirements and that his reliance on a tax professional (if he did, indeed rely) was unreasonable.

Significantly, in weighing the particular facts of this case, the Tax Court emphasized Heinrich’s expertise in this particular art specialty, in addition to his training in law, placed him in a unique position to understand the nature of the requirements, the importance of compliance and the ability to comprehend Form 8283. 


Melissa A. Passman is a Senior Associate, and Alexis S. Gettier is Partner, at Day Pitney LLP.

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