In a recent Tax Court case, Gemperle v. Comm'r, T.C. Memo. 2016-1 (J. Halpern), two pro se taxpayers quickly learned the harsh complexities of conservation easement law firsthand while defending a façade easement granted over their Chicago residence. The taxpayers' appraiser, who was selected from a list provided by the donee, valued the easement contribution at $180,000. The taxpayers failed to attach a copy of the appraisal report to their return and failed to fully complete the Form 8283 appraisal summary as required by law. Further complicating the situation, the taxpayers also failed to include the appraiser on their witness list for trial.
At trial, the court granted the IRS's motion to exclude the taxpayers' appraisal from evidence, holding that the taxpayers' failure to produce their appraiser as a witness for trial deprived the IRS of its right to cross-examine the expert witness at trial. The court then disallowed the deduction entirely because of the taxpayers' failure to comply with the technical requirement that a qualified appraisal be attached to the filed return on which the easement deduction was claimed. After reaching these two conclusions, the issue of accuracy-related penalties was all that remained.
In addition to testifying themselves, the taxpayers called three other witnesses at trial. However, none of these witnesses were qualified as experts nor did any of the witnesses purport to value the easement. Instead, the only evidence of value in the record came in the form of an IRS appraisal that concluded the façade easement “had a value in the range of zero to $35,000.” Noting that the taxpayers “failed to furnish admissible evidence that their façade easement had any determinable value,” the court concluded that the value of the façade easement was $35,000 which represented the “the high end” of the range established by the IRS's appraisal. Based on this value, the court concluded that the taxpayers overvalued the easement by more than 200% on their returns and were therefore liable for the 40% gross valuation misstatement penalty.
Like the decision in Bosque Canyon Ranch, T.C. Memo. 2015-130 (a case we discussed in a prior blog post), this case represents another instance in which accuracy-related penalties have been applied where a charitable deduction was disallowed for purely technical reasons. While the Bosque Canyon Ranch court applied accuracy-related penalties without ever addressing value, the court in Gemperle made a value determination in order to assess the gross valuation misstatement penalty. As long as the gross valuation misstatement penalty is in play, we anticipate that the IRS will continue to make valuation an issue in future cases where the deduction is disallowed on purely technical grounds.