July 25, 2017
Leaving the cost basis line of a charitable contribution deduction disclosure form blank cost a taxpayer their tax deduction. It also made them subject to penalties totaling 40 percent.
In a unanimous decision in the case RERI Holdings I, LLC v. Commissioner, the U.S. Tax Court disallowed a charitable contribution deduction for the donation of a remainder interest in real property because the taxpayer did not provide the donor's cost or other adjusted basis for the property when filing IRS Form 8283.
RERI acquired the property in March 2002 for approximately $3 million and claimed a deduction on its 2003 Form 8283 of more than $33 million related to a remainder interest in the real estate. But, by omitting the cost basis from Form 8283, the Tax Court reasoned that the "significant disparity" between the cost basis and claimed fair market value was not disclosed to the IRS. Therefore, the IRS was not provided the information required to determine whether an overvaluation position had been taken by RERI.
The Tax Court deemed the omission of cost basis a failure to comply with the substantiation requirements in the regulations and disallowed the deduction. In addition, the taxpayer was subject to penalties for the gross valuation misstatement rules, the Tax Court noting that the taxpayer must "do more than simply accept the result of a qualified appraisal."
With the unanimous decision, the Tax Court opened the door for the IRS to disallow an entire donation if cost basis is not disclosed on Form 8283. Taxpayers should take care to document and properly report the cost basis for donations as well as make a good-faith investigation into the fair market value of appraised property before filing disclosure information for the charitable donation.