The Tax Court disallowed a couple’s charitable deductions and imposed accuracy-related penalties after finding they did not properly substantiate the contributions or provide contemporaneous written acknowledgements of their medical equipment donations. The couple failed to comply with the strict substantiation requirements because they: (1) did not provide adequate descriptions of the equipment and (2) did not identify the valuation methods used, the manner of acquisition, or the cost basis of the equipment.

On their 2001 and 2002 returns, the Friedmans claimed $217,500 in noncash charitable deductions for donations of diagnostic and laboratory equipment to two charitable organizations. Their tax returns included Forms 8283 and appraisals of only certain items.

For any noncash contribution exceeding $5,000, the regulations require the donor to: (1) obtain a qualified appraisal, (2) attach a fully completed appraisal summary (Form 8283), and (3) maintain records pertaining to the claimed deduction. A qualified appraisal must include: (a) a sufficiently detailed description of the property, (b) the valuation method used to determine fair market value, and (c) the specific basis for the valuation. Further, a qualified appraisal must be made no earlier than 60 days before the date of the contribution and no later than the date of the return, including extensions. The appraisal summary must include: (i) a sufficiently detailed description of the property, (ii) the manner of acquisition, and (iii) the cost or other basis of the property. In addition, a taxpayer must obtain a contemporaneous written acknowledgement from the donee organization.

The Friedmans argued that they “substantially complied” with the regulations. While the Tax Court acknowledged that the regulations are “directory” and therefore only require substantial compliance, and not absolute adherence, the court held that the donors did not substantially comply with the regulatory procedures.

Further, the Friedmans argued that they should be excused from penalties because they relied on the advice of their C.P.A. However, a taxpayer relying on professional advice must show: (1) the adviser was a competent professional, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment. In this case, the Tax Court found the donors liable for the penalties because they did not provide full and accurate information to their C.P.A. and therefore they could not have relied in good faith on his advice.

The ultimate lesson of this case is simple: strict compliance with both the letter and spirit of the law is essential. Obtain a qualified and timely appraisal; ensure the appraisal contains all the proper elements; attach a fully completed appraisal summary; maintain meticulous records; and obtain a contemporaneous written acknowledgement from the donee.