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Taxpayers Denied $5.2M Charitable Deduction

Taxpayers Denied $5.2M Charitable Deduction

They didn’t meet documentation requirements, and their appraisals contained valuation misstatements.

Once again, taxpayers learn the hard way that substantial compliance isn’t good enough when it comes to substantiating a charitable contribution deduction.

In Braen, et. al. v. Commissioner of Internal Revenue, T.C. Memo 2023-85, issued July 11, 2023, the Tax Court found the Internal Revenue Service properly disallowed a $5.22 million charitable income tax deduction claimed by members of the Braen family. The charitable contribution deduction was claimed in connection with the bargain sale of property to the Town of Ramapo in Rockland County, N.Y.

The court found the family members didn’t strictly adhere to the contemporaneous written acknowledgment (CWA) requirements that apply to charitable contribution deductions. The court also found the qualified appraisals for the property contained substantial valuation misstatements based on differing conclusions between the taxpayer and the IRS as to highest and best use of the donated property — and that they weren’t “qualified appraisals” because they failed to disclose the settlement agreement that influenced the value of the property. As a result, the court upheld the penalties assessed by the IRS.

The Facts

Braen Commercial Holdings Corp. (Holdings) is a family-owned S corporation focusing on mining. In 1996, Holdings entered into an option agreement to purchase land in the Town of Ramapo for $3.5 million. Holdings believed the land had significant deposits of granite and other materials; however, a host of permits and governmental authorizations were required to establish a quarry on the property.

While Holdings worked to obtain approvals, the New York State Department of Environmental Conservation (DEC) expressed several environmental concerns about establishing a quarry on the property.

Despite these concerns, in July 1998, Holdings purchased the property and began submitting proposed work plans. Holdings didn’t get far over the next eight years, primarily because of the DEC’s environmental concerns.

Further complication arose in 2004 when zoning for the Ramapo portion of the property changed from planned industrial to low-density rural residential district.

In March 2005, Holdings filed a lawsuit in New York state court opposing the zoning change. Ultimately, a settlement between Holdings, Ramapo, and New York State was reached whereby:

  1. Ramapo would subdivide the property into six lots
  2. Ramapo would buy five of the lots for $5.25 million
  3. Ramapo would then sell three of those lots to New York State for nearly $2.63 million
  4. Holdings would retain the remaining lot and its zoning would immediately revert to its former industrial designation

The court approved the parties’ settlement and the sale closed Sept. 29, 2010. At the closing, a Ramapo representative signed Form 8283, Noncash Charitable Contributions, so that Holdings might claim a charitable contribution deduction for the difference between the fair market value (FMV) of the property and the purchase price paid by Ramapo. Form 8283 was blank except for the phrase “see attached qualified appraisal report,” but no appraisal was attached.

Holdings engaged a mineral appraiser and real estate appraiser to prepare the qualified appraisals required to claim a charitable contribution deduction.

The mineral appraiser concluded the property’s highest and best use was as a quarry, and the FMV of the mineral deposit on the property was more than $14.55 million.

The real estate appraiser concluded the 425-acre parcel had a FMV of nearly $5.85 million assuming a highest and best use of residential vacant land. The appraiser noted that his report would be presented in conjunction with a mineral appraisal survey.

Holdings’ 2010 Tax Return

On its 2010 return, Holdings valued the portion of the property sold to Ramapo at $10,472,000 and claimed a charitable contribution deduction of more than $5.22 million, asserting a FMV of $17,472,000 for the property based on a mineral value of $14,554,000 and a land value of $2,918,263. The explanation stated that, although Holdings “would be entitled to a charitable contribution deduction of $12,222,000,” it “is only claiming a charitable contribution of $5,222,000” to avoid a dispute with the IRS over the value of the transferred property and a potential substantial or gross valuation misstatement penalty.

Shareholders’ Individual 2010 Returns

On their 2010 individual tax returns, Holdings’ shareholders claimed proportionate shares of the more than $5.22 million deduction. Each of the returns included an unsigned (and in some cases, blank) Form 8283.

The IRS disallowed the charitable contribution deductions and assessed an accuracy-related penalty based on substantial valuation misstatement, negligence and substantial understatement of income tax.

The Court’s Decision

Internal Revenue Code Section 170(f)(8) provides that a charitable deduction isn’t allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution with a CWA from the charity recipient. To claim an income tax deduction, a CWA that substantially complies with the requirements isn’t sufficient. The CWA must strictly adhere to the statutory requirements. In addition, if the charitable contribution is of property other than cash, the amount of the contribution is generally the FMV at the time of contribution.

The Braens argued that the sale of 425.5 acres represented a bargain sale and that Holdings was entitled to deduct the difference between the FMV of the property sold and the purchase price.

To claim a charitable contribution deduction in connection with a bargain sale, the FMV of the donated property must exceed the value of any benefits received and the taxpayer must obtain a CWA from the recipient substantiating the contribution.

With respect to the first requirement, the court found the bargained-for zoning reversion included in the settlement agreement was consideration for the land and should have been included in the value Holdings received for selling the land — thereby reducing the charitable portion of the bargain sale. By failing to provide the value of the zoning reversion, Holdings lost out on the entire charitable contribution deduction.

The court also found the CWA requirements of IRC Section 170(f)(8) weren’t met. Per Section 170(f)(8), the CWA must include:

  1. The amount of cash and a description (but not value) of any property other than cash contributed
  2. Whether the charitable entity provided any goods or services in consideration for the contributed property
  3. A description and good-faith estimate of the value of any goods or services the taxpayer received as consideration

While Ramapo’s attorney did provide an acknowledgement letter, it didn’t identify the zoning change as consideration, nor did it provide a good-faith valuation of it. Holdings’ failure to comply with requirements of Section 170(f)(8) accordingly prohibited the Braens from claiming charitable contribution deductions on their respective personal income tax returns.

In addition to the loss of the charitable deduction, the Braens faced an accuracy-related penalty premised on negligence, a substantial understatement of income tax and a substantial valuation misstatement as outlined in Section 6662.

The court analyzed the appraisals prepared and expert opinions provided. The Braens and the IRS had different values based primarily on differing conclusions as to the highest and best use of the property sold to Ramapo (mining versus residential development, respectively).

The court ultimately concluded it was unlikely Holdings would be able to obtain the approvals, zoning changes and permits required for quarrying in a reasonable time due to the ongoing issues with the DEC and thus quarrying wasn’t the property’s highest and best use.

As a result, the court found that the appraised value of the property was $5,227,060 rather than the $10 million that Holdings stated on its return. In addition, the court agreed with the IRS that the appraisals weren’t considered “qualified appraisals” for substantiation purposes because they failed to include the terms of either the settlement agreement or Ramapo’s agreement with New York State to sell three lots, both of which relate to the property contributed.

Final Takeaway

The Tax Court’s decision once again reinforces the need to strictly adhere to the substantiation rules for charitable contribution deductions for both CWAs and qualified appraisals. Donors must carefully review all documentation and appraisals when contributing funds to charity — or risk losing out on significant charitable income tax deductions.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit

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