Roderick M. Campbell & C. Sandra Campbell v. Commissioner , 2020 T.C. Memo. 41 ( 2020 )

T.C. Memo. 2020-41
UNITED STATES TAX COURT
RODERICK M. CAMPBELL AND C. SANDRA CAMPBELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30224-12. Filed April 7, 2020.
Steven R. Mather, for petitioners.
Michael W. Berwind and Christopher J. Richmond, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ASHFORD, Judge: By statutory notice of deficiency dated September 12,
2012, respondent determined a deficiency in petitioners’ Federal income tax of
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[*2] $286,949 and accuracy-related penalties pursuant to section 6662(a) and (h)1
of $45,935 and $22,910, respectively, for the 2008 taxable year.
After concessions,2 the issues remaining for decision are whether petitioners
(1) are entitled to a carryover charitable contribution deduction with respect to a
2007 donation of 3,432 new designer eyeglass frames to Lions in Sight of
California and Nevada (Lions in Sight) and (2) are liable for section 6662(a)
and (h) accuracy-related penalties.3 We resolve the first issue in favor of
respondent and the second issue in favor of petitioners.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts and the attached exhibits are incorporated herein by this reference.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Some monetary amounts are
rounded to the nearest dollar.
2
The notice of deficiency in pertinent part adjusted (1) petitioners’ reported
loss on their Schedule E, Supplemental Income and Loss, by $704,682 and
(2) petitioners’ reported net operating loss carryforward by $1,019,896. The
parties now agree that the correct Schedule E adjustment and the correct net
operating loss carryforward adjustment should be $493,277 and $713,927,
respectively.
3
The sec. 6662(a) penalty applies to petitioners’ Schedule E loss and net
operating loss carryforward. The sec. 6662(h) penalty applies to their carryover
charitable contribution deduction.
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[*3] Petitioners resided in California when their petition was timely filed with the
Court.
I. Petitioners’ Participation in an Eyewear Charitable Contribution Program
In December 2006 Mr. Campbell learned of an eyewear charitable
contribution program through certified public accountant Victor Kawana, a one-
third owner (and at the time of trial the managing partner) of Kruse Mennillo, LLP
(Kruse Mennillo), an accounting and management consulting firm with offices in
Cerritos, California, and Kansas City, Missouri. Since approximately 2000 Kruse
Mennillo had been providing accounting, estate planning, and return preparation
services to petitioners. This eyewear charitable contribution program involved ZD
Products, Inc. (ZD Products), consolidating over 170,000 designer eyeglass frames
it possessed into units of approximately 3,432 frames each and selling these units
to 50 buyers for $50,000 per unit; each buyer would then purportedly be eligible to
donate his or her frames after a minimum one-year holding period to Lions in
Sight, a section 501(c)(3) nonprofit organization4 (or to a different qualified
charitable organization of the buyer’s choosing), and claim a charitable
4
Lions in Sight is affiliated with the Lions Club International, a community
service organization; its mission is to promote the collection of used eyeglasses
from the general public for recycling and use worldwide and to provide no-cost
eye care assistance to needy and low-income individuals.
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[*4] contribution deduction at the appraised fair market value at the time of
donation. As discussed below, Mr. Campbell received a copy of an offering
memorandum dated November 30, 2006, detailing the program and its tax
implications, along with other documents that the offering memorandum
referenced.
The offering memorandum was prepared by Mr. Kawana (and two other
Kruse Mennillo partners) at ZD Products’ request.5 It recited that ZD Products
(1) was in possession of 171,600 designer eyeglass frames and (2) “will sell
allotments of approximately 3,432 units to 50 prospective buyers for $50,000 per
unit”, and that “[q]ualified individuals, if desired, are eligible to donate the frames
to qualified charities at fair market value, $225,322 after a one-year holding
period”, thus becoming eligible for a tax deduction at appraised fair market value.
It also recited that, if desired, ZD Products “will take care of all arrangements
regarding storage of the frames for the necessary time period, insurance at cost
basis, drop shipment to a qualified charity, and completion of IRS form 8283
signed by a qualified appraiser to be attached to purchaser’s income tax return
[for] the year of deduction.” According to the offering memorandum the
purchaser would be allowed to inspect or remove his or her unit at any time.
5
The president of ZD Products was also listed on the offering memorandum.
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[*5] Furthermore, although there was no restriction on the use or disposition of the
purchaser’s unit during the one-year holding period, the offering memorandum
identified Lions in Sight as the targeted donee and explained why, including
indicating that ZD Products had already made arrangements with Lions in Sight to
ship the frames to it.
The offering memorandum also stated that ZD Products had retained
Marshall & Stevens, Inc. (Marshall & Stevens), a Los Angeles, California-based
valuation consulting firm, to make an analysis and valuation of the frames on the
basis of “the assumption of a donee contributing the property for the function of
an income tax deduction.”6 Additionally, the offering memorandum stated that
Marshall & Stevens would conduct a followup appraisal at the time of the
donation, provide and sign a Form 8283, Noncash Charitable Contributions, and
defend its appraisal if challenged by the Internal Revenue Service (IRS).
The initial written appraisal prepared by Marshall & Stevens and dated
November 27, 2006 (2006 Marshall & Stevens appraisal), was included with the
offering memorandum. The 2006 Marshall & Stevens appraisal described the
6
We note that the offering memorandum incorrectly refers to “donee” here
when instead the reference should be “purchaser” or “donor”.
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[*6] property that ZD Products requested it value and the property’s physical
condition as follows:
1.3 Description of the Donated Property
The property to be contributed consists of new (unused) Designer
Eyewear Products (“Designer Eyewear Products” or “donated
property”). The subject property list with description, count and
wholesale price originated from Eyewear Designs LTD. Located in
Syosset NY. The subject property consists of various styles and
designer brand names. These designer brand names include Bill
Blass, Elizabeth Arden, Perry Ellis, and Pierre Cardin. The total
quantity is 171,600. A sampling of the various brand names and
models show that the eyewear brands are still active in the
marketplace. These particular designer eyewear product brand names
are some of the most well known and long standing eyewear products
in the designer eyewear marketplace. They have however have [sic]
been discounted over time and are no longer the most current popular
styles and brands.
1.4 Physical Condition of the Property
We have not made a personal viewing of the subject property. It is
our understanding that the subject property analyzed is in new
(unused) condition and that the amount of property or “count” is
correct. The current location of the subject property is not known.
The referenced “subject property list” (which was attached to the 2006 Marshall &
Stevens appraisal) stated that the “donated property” consisted of 31,950 Bill
Blass frames, 23,150 Elizabeth Arden frames, 13,200 Elizabeth Arden “Petites”
frames, 33,150 Pierre Cardin frames, 54,350 Perry Ellis frames, and 15,800 Perry
Ellis America frames. This list also showed various models within each eyewear
brand of varying quantities and wholesale prices. The wholesale price per model
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[*7] ranged from $37 to $80. Using the market approach7 and on the basis of the
wholesale prices with a markup of 35%, Marshall & Stevens opined that the fair
market value of the “donated property” as of November 27, 2006, was
$11,266,115.
Mr. Campbell decided to participate in the eyewear charitable contribution
program. As memorialized by a bill of sale dated December 22, 2006, Mr.
Campbell purchased for $50,000 “an inventory of Prescription Designer Eyewear”
from ZD Products. The bill of sale stated that an “[i]temized inventory by brand
name, style, and quantity is attached”, and that he had “an unrestricted and
unfettered interest in the merchandise attached”, although no such inventory or
merchandise list was attached. The parties also stipulated that Mr. Campbell
agreed to purchase “a single allotment of approximately 3,432 eyewear frames
from ZD Products”. Pursuant to the offering memorandum ZD Products stored
Mr. Campbell’s frames on his behalf.
Mr. Kawana also participated in the eyewear charitable contribution
program (and claimed a deduction for donating his frames) despite his role in
7
In any valuation there are generally three approaches to value--the income
approach, the market approach, and the cost approach. See Bank One Corp. v.
Commissioner, 120 T.C. 174, 306 (2003) (discussing each approach), aff’d in part,
vacated in part, and remanded on another issue sub nom. JPMorgan Chase & Co.
v. Commissioner, 458 F.3d 564 (7th Cir. 2006).
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[*8] advising ZD Products with respect to the program and promoting the program
to Mr. Campbell (and others).
At a time in 2007 not established by the record, ZD Products came into
possession of additional new designer eyeglass frames for the eyewear charitable
contribution program. As of December 2007 more than 340,000 frames were
available for donation to Lions in Sight. To that end, in December 2007
Dr. William Iannaccone, the chief operating officer of Lions in Sight, was
contacted about receiving the more than 340,000 frames as a donation.
Dr. Iannaccone agreed to accept the donation, but because of Lions in Sight’s
warehouse constraints ZD Products stored the frames on Lions in Sight’s behalf
until April 29, 2008, when they were delivered to Lions in Sight’s warehouse.
On December 28, 2007, Lions in Sight sent Mr. Campbell a letter
acknowledging his “generous gift of prescription eye ware [sic]” and how his
donation would assist Lions in Sight. The letter was signed by Dr. Iannaccone.
The letter made no mention as to whether Lions in Sight provided any goods or
services in consideration for his donation.
Pursuant to the offering memorandum Marshall & Stevens prepared a
followup written appraisal for ZD Products; this appraisal was dated December 26,
2007, and certified by Senior Manager Shane Park at Marshall & Stevens (2007
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[*9] Marshall & Stevens appraisal). The 2007 Marshall & Stevens appraisal
contained the same description and physical condition of the “donated property”
as the 2006 Marshall & Stevens appraisal except that the total quantity of eyeglass
frames had increased to 349,629 (from 171,600) and included the following
additional brand names--Laura Ashley, Eddie Bauer, HSM, Nicole Miller, Dakota
Smith, and Bebe.
The inventory list attached to the 2007 Marshall & Stevens appraisal stated
that the “donated property” consisted of the same quantity and frame models as the
inventory list attached to the 2006 Marshall & Stevens appraisal plus 84,847
Laura Ashley frames, 38,923 Eddie Bauer frames, 583 HSM frames, 6,044 Nicole
Miller frames, 1,047 Signature Collection frames,8 43,411 Dakota Smith frames,
and 3,174 Bebe frames. This list also showed various models within each eyewear
brand of varying quantities and wholesale prices. Like the inventory list attached
to the 2006 Marshall & Stevens appraisal, the wholesale price per model ranged
from $37 to $80. Using the market approach and on the basis of the wholesale
prices with a markup of 35%, Marshall & Stevens opined that the fair market
value of the “donated property” as of December 26, 2007, was $24,019,826.
8
This brand was not mentioned in the “Description of Donated Property”
section of the 2007 Marshall & Stevens appraisal.
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[*10] On April 9, 2008, Marshall & Stevens sent petitioners a letter stating that it
had “made an analysis and valuation of the Fair Market Value of Designer
Eyewear Products” and that “as a result of our analysis, we have determined that
the Fair Market Value of the Designer Eyewear Products you hold is $225,596
based on” the 2007 Marshall & Stevens appraisal. The 2007 Marshall & Stevens
appraisal was attached to the letter.
II. Petitioners’ Tax Reporting
A. 2007 Return
Petitioners prepared and timely filed (with the assistance of Kruse Mennillo)
their joint Form 1040, U.S. Individual Income Tax Return, for 2007 (2007 return).
On the 2007 return they reported adjusted gross income of !$1,016,964,
consisting of taxable interest of $5,696, ordinary dividends of $236, a capital loss
of $3,000, a Schedule E loss of $114,861, a net operating loss carryforward of
$897,680, and self-employment tax of $7,355. As relevant here, they attached to
the 2007 return a Schedule A, Itemized Deductions, claiming $97,621 of itemized
deductions. On this Schedule A petitioners reported, among other items, the
purported $225,596 donation to Lions in Sight (along with charitable gifts by cash
or check of $39,435 and a charitable contribution carryover from a prior year of
$15,645), but because of petitioners’ negative adjusted gross income they could
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[*11] not claim a charitable contribution deduction as an itemized deduction for
2007. As discussed infra p. 12, petitioners claimed this deduction as a carryover
deduction on their Schedule A for 2008.
Further information regarding the Lions in Sight donation was shown on a
Form 8283, which they also attached to the 2007 return.9 Section B of the form,
captioned “Donated Property Over $5,000 (Except Certain Publicly Traded
Securities)”, has four parts. Part I, captioned “Information on Donated Property”,
indicated that petitioners donated “eyeglass frames” in “new” condition having an
appraised fair market value of $225,596, which they had purchased in December
2006 for $50,000. Part III, captioned “Declaration of Appraiser”, bore a signature,
albeit illegible, of a “principal” at Marshall & Stevens dated December 26, 2007,
and showed Marshall & Stevens’ address in Los Angeles, California, and a
Federal tax identification number.10 Part IV, captioned “Donee
Acknowledgment”, indicated that Lions in Sight (1) is a qualified organization
under section 170(c), (2) received the donated property described in Part I on
December 28, 2007, and (3) does not intend to use the property for an unrelated
9
The record does not include page one of this form which requests
information on donated property of $5,000 or less and publicly traded securities.
10
Part II is not relevant here.
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[*12] use. This part also bore the signature of Dr. Iannaccone (along with his title)
dated April 14, 2008, and showed Lions in Sight’s address in Walnut Creek,
California, and its employer identification number.
In addition to attaching this form to the 2007 return petitioners attached
Marshall & Stevens’ April 9, 2008, letter to them and the 2007 Marshall &
Stevens appraisal.
B. 2008 Return
Petitioners prepared and timely filed (not with the assistance of Kruse
Mennillo but of another paid preparer) their joint Form 1040 for 2008 (2008
return). On the 2008 return they reported adjusted gross income of $2,968,330,
consisting of wages of $39,000 (attributable to Mr. Campbell’s employment as an
executive consultant with RWB Automotive, LLC), taxable interest of $57,405,
ordinary dividends of $2,601, a capital gain of $4,354,602, a Schedule E loss of
$495,205, taxable Social Security benefits of $29,823, and a net operating loss
carryforward of $1,019,896. As relevant here and like the 2007 return, petitioners
attached to the 2008 return a Schedule A. On this Schedule A they claimed
$837,577 of itemized deductions, consisting of, among other items, the carryover
charitable contribution deduction from the 2007 return (which included the Lions
in Sight donation).
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[*13] III. Postcontribution Appraisal
A retrospective appraisal of the 349,629 eyeglass frames was performed by
Leslie Miles of Miles Appraisals; this appraisal was dated February 24, 2012
(2012 Miles appraisal).11 In opining as to the fair market value of these frames,
Mr. Miles reviewed the 2007 Marshall & Stevens appraisal. Mr. Miles did not
sample or inspect the frames because of the retrospective nature of the assignment,
and his analysis revealed that 39,709 frames “were not matched [(i.e., not current
in the marketplace)] and, therefore, not included in the valuation except at a zero
amount.” Additionally, at trial Mr. Miles stated that he did not know who owned
the frames that he valued, nor whether the frames Mr. Campbell had donated to
Lions in Sight were part of what he valued. Using the market approach and on the
basis of the wholesale price with a markup of 35% and deducting 15% for costs
associated with handling and restocking the frames, Mr. Miles opined that the fair
market value of the 349,629 eyeglass frames as of December 26, 2007, was
$12,861,750.
11
This appraisal is inexplicably addressed to “Nathan Hochman”, and in the
appraisal he is referred to as the “client”.
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[*14] IV. Notice of Deficiency
Following an examination of the 2008 return, respondent determined in
pertinent part that petitioners’ carryover charitable contribution deduction with
respect to Mr. Campbell’s Lions in Sight donation should be disallowed and that
accuracy-related penalties should be imposed. The notice of deficiency mailed to
petitioners on September 12, 2012, reflects those determinations. A Civil Penalty
Approval Form prepared by the examining agent on June 10, 2011, listed 2008 (as
well as 2007) and bore a signature on the line provided on the form for “Group
Manager Approval to Assess Penalties Identified Above” dated July 12, 2011,
approving that a “[p]enalty will be asserted with the 2008 Year.”12 The record
does not include any other evidence of penalty approval for 2008.
OPINION
I. Burden of Proof
In general, the Commissioner’s determinations set forth in a notice of
deficiency are presumed correct and, except for the burden of production in any
court proceeding with respect to an individual taxpayer’s liability for any “penalty,
addition to tax, or additional amount”, see sec. 7491(c), the taxpayer bears the
12
The parties have stipulated that the signature (i.e., initials) is that of the
immediate supervisor of the examining agent.
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[*15] burden of proving otherwise, see Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Furthermore, tax deductions are a matter of legislative grace,
and the taxpayer bears the burden of proving entitlement to any deduction
claimed. Segel v. Commissioner, 89 T.C. 816, 842 (1987). This burden requires
the taxpayer to demonstrate that the claimed deduction is allowable pursuant to
some statutory provision and to substantiate the item giving rise to the claimed
deduction.13 Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001);
Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d
821 (5th Cir. 1976).
II. Charitable Contributions
A. Applicable Law
A taxpayer is allowed as a deduction any charitable contribution made
during the taxable year. Sec. 170(a)(1). A charitable contribution is defined as “a
contribution or gift to or for the use of” a charitable organization. Sec. 170(c).
Such a deduction is allowable “only if verified under regulations prescribed by the
13
By motion petitioners contended that the burden of proof should shift to
respondent pursuant to sec. 7491(a). Under sec. 7491(a)(1) and (2), if the taxpayer
produces credible evidence with respect to any factual issue relevant to
ascertaining his Federal income tax liability and meets certain other requirements,
the burden of proof shifts from the taxpayer to the Commissioner as to that factual
issue. Immediately before the trial of this case the parties were heard on
petitioners’ motion and the Court, by order, denied the motion.
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[*16] Secretary.” Sec. 170(a); see sec. 170A-13, Income Tax Regs. As relevant
here, for any noncash charitable contribution exceeding $5,000, the regulations
require the donor to (1) obtain a “qualified appraisal” for the property contributed,
(2) attach a fully completed “appraisal summary” to the income tax return for the
year the deduction is claimed, and (3) maintain records containing certain
information (as required by section 1.170A-13(b)(2)(ii), Income Tax Regs.). Sec.
1.170A-13(c)(2), Income Tax Regs.; see also sec. 170(f)(11)(C); Alli v.
Commissioner, T.C. Memo. 2014-15, at *19 n.13. Additionally and as relevant
here, for any contribution of $250 or more the donor must obtain a
“contemporaneous written acknowledgment” (CWA) from the charitable
organization. Sec. 1.170A-13(f)(1), Income Tax Regs.; see also sec. 170(f)(8);
Oatman v. Commissioner, T.C. Memo. 2017-17, at *13.
B. Parties’ Positions
Respondent contends that petitioners are not entitled to their carryover
charitable contribution deduction with respect to Mr. Campbell’s Lions in Sight
donation because (1) the contribution was not made with donative intent, (2) the
contribution was not made in 2007 but rather in 2008, and (3) petitioners did not
comply with the substantiation requirements under section 170 and the regulations
thereunder. Respondent contends that petitioners did not comply with the
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[*17] substantiation requirements because (1) the 2007 Marshall & Stevens
appraisal was not a “qualified appraisal” and (2) Lions in Sight’s December 28,
2007, letter to Mr. Campbell was not a proper CWA.14
We need only address whether petitioners have complied with the
substantiation requirements under section 170 and the regulations thereunder.
C. Section 170 Substantiation
1. Qualified Appraisal
Under the regulations for an appraisal to be a “qualified appraisal” it must
(1) be made no earlier than 60 days before the date of the contribution and no later
than the due date of the return, (2) be prepared, signed, and dated by a qualified
appraiser, (3) not involve a prohibited appraisal fee, and (4) include certain
information. Sec. 1.170A-13(c)(3)(i), Income Tax Regs. The information that
must be included is the following:
(A) A description of the property in sufficient detail for a
person who is not generally familiar with the type of property to
ascertain that the property that was appraised is the property that was
(or will be) contributed;
(B) In the case of tangible property, the physical condition of
the property;
14
Respondent also contends that the Form 8283 attached to the 2007 return
was not a fully completed “appraisal summary”. In the light of our holdings as
discussed infra, we decline to address this contention.
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[*18] (C) The date (or expected date) of contribution to the donee;
(D) The terms of any agreement or understanding entered into
(or expected to be entered into) by or on behalf of the donor or donee
that relates to the use, sale, or other disposition of the property
contributed * * * ;
(E) The name, address, and * * * the identifying number of the
qualified appraiser * * * ;
(F) The qualifications of the qualified appraiser who signs the
appraisal, including the appraiser’s background, experience,
education, and membership, if any, in professional appraisal
associations;
(G) A statement that the appraisal was prepared for income tax
purposes;
(H) The date (or dates) on which the property was appraised;
(I) The appraised fair market value * * * of the property on the
date (or expected date) of contribution;
(J) The method of valuation used to determine the fair market
value * * * ; and
(K) The specific basis for the valuation * * * .
Id. subdiv. (ii).
Respondent contends that the 2007 Marshall & Stevens appraisal was not a
“qualified appraisal” because it failed to satisfy the first requirement of section
1.170A-13(c)(3)(ii), Income Tax Regs. We agree (as further discussed below), but
the 2007 Marshall & Stevens appraisal suffers from a more fundamental problem;
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[*19] that is, it is not an appraisal of what Mr. Campbell donated, i.e., his 3,432
new designer eyeglass frames, see sec. 1.170A-13(c)(2)(i)(A), Income Tax Regs.,
but rather is an appraisal premised on valuing 349,629 frames. As we stated in
Alli v. Commissioner, at *30, “[i]n order for the qualified appraisal to help the IRS
‘deal more effectively with the prevalent use of overvaluations,’ the appraised
property must be the same property that was donated and that gave rise to the
claimed deduction.” See also Estate of Evenchik v. Commissioner, T.C. Memo.
2013-34, at *8 (concluding that taxpayers did not obtain a “qualified appraisal” of
“the contributed property”, consisting of 72% of the shares in a corporation,
because the appraisals obtained were appraisals of the corporation’s assets and not
of the contributed shares); Smith v. Commissioner, T.C. Memo. 2007-368, slip op.
at 47-48 (concluding that taxpayers’ charitable contribution of fractional interests
in a family limited partnership that was supported by an appraisal of the
partnership’s sole underlying asset, along with their failure to attach a qualified
summary appraisal to their return and show that the appraisal was completed by a
qualified appraiser, did not “substantially comply or otherwise provide * * * [the
Commissioner] with sufficient information to accomplish the statutory purpose” of
enabling the Commissioner to “understand and monitor the claimed
contributions”), aff’d, 364 F. App’x 317 (9th Cir. 2009).
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[*20] Although the 2007 Marshall & Stevens appraisal included Mr. Campbell’s
3,432 eyeglass frames, we (and the IRS) have no way to determine whether what
he alone contributed is overvalued. This is the type of situation that Congress
intended to prevent when it codified more than 15 years ago the requirement that a
taxpayer claiming a charitable contribution deduction for the donation of property
worth more than $5,000 obtain a qualified appraisal for the property contributed.
Sec. 170(f)(11)(C) (as amended by the American Jobs Creation Act of 2004, Pub.
L. No. 108-357, sec. 883(a), 118 Stat. at 1631).
Tellingly, the 349,629 eyeglass frames that Marshall & Stevens valued
varied in price between $37 and $80, yet petitioners could not discern whether Mr.
Campbell’s 3,432 frames are from the low end of the price spectrum, the high end,
or some varying combination. Indeed, the 2012 Miles appraisal highlights the
primary defect of the 2007 Marshall & Stevens appraisal. In the 2012 Miles
appraisal, 39,709 of the 349,629 eyeglass frames were assigned a value of zero as
of December 2007. Might Mr. Campbell’s 3,432 frames been a part of the 39,709
frames?
On brief petitioners argue (via requesting that the Court find as fact) that
Mr. Campbell purchased and donated a fractional interest, i.e., an undivided
3,432d interest, in the 349,629 frames. The record unmistakably belies this. As an
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[*21] initial matter, petitioners have stipulated that Mr. Campbell purchased a
single allotment of 3,432 eyeglass frames from ZD Products. We treat a
stipulation “as a conclusive admission by the parties, and the Court will not permit
a party to change or contradict a stipulation, except in extraordinary
circumstances.” Kearse v. Commissioner, T.C. Memo. 2019-53, at *15 (quoting
Shackelford v. Commissioner, T.C. Memo. 1995-484, slip op. at 15); see also Rule
91(e). We also note that petitioners have not “asked to be relieved [from the
binding effect] of this stipulation, and we will therefore hold * * * [them] to it.”
See Winter v. Commissioner, T.C. Memo. 2010-287, slip op. at 28. Additionally,
the offering memorandum does not reflect that prospective buyers will have a
fractional interest; instead it recites that prospective buyers will have the
opportunity to purchase one or more allotments of 3,432 eyeglass frames from a
collection of 171,600 frames in ZD Products’ possession. The bill of sale between
Mr. Campbell and ZD Products also does not memorialize the purchase of a
fractional interest and it references an itemized inventory or merchandise list
(although such a list is not attached to the bill of sale). Moreover, if Mr. Campbell
indeed had a fractional interest he would not have had the unfettered right as the
offering memorandum provided to (1) inspect or remove his frames and (2) donate
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[*22] his frames before the one-year holding period even to another charitable
organization besides Lions in Sight.
We conclude that the 2007 Marshall & Stevens appraisal does not comply
with the requirement in section 1.170A-13(c)(2)(i)(A), Income Tax Regs., that the
taxpayer obtain an appraisal of the property he contributed and gave rise to his
claimed deduction.
We also agree with respondent, as indicated supra p. 18, that the 2007
Marshall & Stevens appraisal fails to provide “[a] description of the property in
sufficient detail for a person who is not generally familiar with the type of
property to ascertain that the property that was appraised is the property that was
(or will be) contributed”. Sec. 1.170A-13(c)(3)(ii)(A), Income Tax Regs. As we
stated in Alli v. Commissioner, at *31-*32 (quoting Bruzewicz v. United States,
604 F. Supp. 2d 1197, 1206 (N.D. Ill. 2009)), “[t]he description requirement is
‘important, indeed essential, to the review of charitable contribution deductions
and the reliability of corresponding appraisals.’ Indeed, ‘[a]bsent a description of
the * * * [contributed property], the appraisal and its valuation of the donated
property are meaningless.’” The 2007 Marshall & Stevens appraisal did not
provide a description of the 3,432 eyeglass frames as contributed by Mr.
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[*23] Campbell. Consequently, it does not comply with section 1.170A-
13(c)(3)(ii)(A), Income Tax Regs.
Accordingly, we hold that petitioners did not strictly comply with the
requirement under section 170 and the regulations thereunder that the taxpayer
obtain a “qualified appraisal”.
2. CWA
Under the regulations a CWA must include: (1) the amount of cash and a
description (but not value) of any property other than cash contributed;
(2) whether the donee organization provided any goods or services in
consideration for the contribution; and (3) a description and a good faith estimate
of the value of any goods or services provided by the organization, or if such
goods and services consist solely of intangible religious benefits, a statement to
that effect.15 Sec. 1.170A-13(f)(2), Income Tax Regs.
Respondent contends that Lions in Sight’s December 28, 2007, letter to Mr.
Campbell was not a proper CWA because it did not address the “goods or
services” question. We agree (although we recognize that petitioners claim, and it
can be inferred from the record, that Mr. Campbell’s Lions in Sight donation was
15
Sec. 170(f)(8)(B) also sets forth this CWA requirement and sec.
170(f)(8)(D) provides an exception to this requirement, but petitioners do not
assert that this exception applies.
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[*24] not made with the expectation of a quid pro quo). The letter merely
acknowledged his “generous gift of prescription eyeware [sic]” and how his
contribution would assist Lions in Sight; it made no mention of whether Lions in
Sight provided any goods or services in consideration for Mr. Campbell’s
contribution. As we have stated many times, the CWA must affirmatively state
that no consideration was provided for the contributed property regardless of
whether a taxpayer actually received any consideration; this is a mandatory
requirement and no deduction will be allowed if the CWA does not include such a
statement. See, e.g., French v. Commissioner, T.C. Memo. 2016-53, at *8; Crimi
v. Commissioner, T.C. Memo. 2013-51, at *92-*93; Durden v. Commissioner,
T.C. Memo. 2012-140, slip op. at 7-8; Friedman v. Commissioner, T.C. Memo.
2010-45, slip op. at 14. “The deterrence value of * * * [a total denial of a
deduction in the case of an improper CWA] comports with the effective
administration of a self-assessment and self-reporting system.” Addis v.
Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), aff’g 118 T.C. 528 (2002).
Accordingly, we hold that petitioners did not strictly comply with the
requirement under section 170 and the regulations thereunder that the taxpayer
obtain a CWA.
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[*25] 3. Substantial Compliance
Petitioners contend that to the extent they have not strictly complied with
the substantiation requirements of section 170 and the regulations thereunder they
should still be entitled to their carryover charitable contribution deduction with
respect to Mr. Campbell’s Lions in Sight donation because they substantially
complied with these requirements. Their argument primarily springs from Bond v.
Commissioner, 100 T.C. 32, 40-41 (1993), where we determined that some of the
requirements of section 1.170A-13, Income Tax Regs., are “directory and not
mandatory”, and thus strict compliance with these requirements is not necessary if
the taxpayer demonstrates “substantial compliance”. In Bond the taxpayers
donated two blimps to a charitable organization. Id. at 33. They hired an
appraiser, who timely made an appraisal of the blimps for use by the taxpayers in
the preparation of their Federal income tax return for 1986. Id. The appraiser
prepared an “appraisal summary” (i.e., a Form 8283), which the taxpayers attached
to their 1986 return on which they claimed a charitable contribution deduction of
$60,000 (the appraised value) for the donated blimps. Id. at 34. The taxpayers,
however, did not attach to this return a “qualified appraisal” of the blimps. Id. At
the beginning of the audit of their 1986 return, the appraiser furnished a letter
stating his qualifications and explaining how he appraised the blimps. Id. at 34-
 - 26 -
[*26] 35. We held that the taxpayers had substantially complied with section
1.170A-13, Income Tax Regs., and thus were entitled to the charitable
contribution claimed because:
[The taxpayers] * * * met all of the elements required to establish the
substance or essence of a charitable contribution, but merely failed to
obtain and attach to their return a separate written appraisal * * *
even though substantially all of the specified information except the
qualifications of the appraiser appeared in the Form 8283 attached to
the return. The denial of a charitable deduction under these
circumstances would constitute a sanction which is not warranted or
justified. [Id. at 42.]
Substantial compliance is not intended to excuse all failures but rather it
may be applied where “the taxpayers had provided most of the information
required[] and the single defect in furnishing everything required was not
significant” or made omissions “solely through inadvertence.” Hewitt v.
Commissioner, 109 T.C. 258, 265 & n.10 (1997), aff’d without published opinion,
166 F.3d 332 (4th Cir. 1998); see also Durden v. Commissioner, slip op. at 5
(“The doctrine of substantial compliance is designed to avoid hardship in cases
where a taxpayer does all that is reasonably possible, but nonetheless fails to
comply with the specific requirements of a provision.”). Consequently, the
substantial compliance doctrine is not to be liberally applied. Alli v.
Commissioner, at *54 (and cases cited thereat). Indeed, as we highlighted in
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[*27] Estate of Evenchik v. Commissioner, at *11-*12, and Mohamed v.
Commissioner, T.C. Memo. 2012-152, slip op. at 19, few taxpayers post-Bond
have succeeded in showing substantial compliance with the requirements of
section 170 and the regulations thereunder.
Petitioners suffer the same fate. A taxpayer cannot be excused from strict
compliance where the taxpayer fails to meet an essential requirement of section
170 or a substantive requirement of the regulations thereunder. See, e.g., Estate of
Clause v. Commissioner, 122 T.C. 115, 122 (2004); Alli v. Commissioner, at *55
(and cases cited thereat); Friedman v. Commissioner, slip op. at 6. Regarding the
2007 Marshall & Stevens appraisal, as discussed supra pp. 20-23, its defects are
not (in the words of petitioners) “ridiculously trivial and inconsequential”. The
2007 Marshall & Stevens appraisal was not an appraisal of Mr. Campbell’s
contributed property, i.e., his 3,432 new designer eyeglass frames; instead it
valued 349,629 frames. The appraisal also failed to meet the description
requirement set forth in section 1.170A-13(c)(3)(ii)(A), Income Tax Regs. These
“miscue[s] go[] to the essence of the information required”. Evenchik v.
Commissioner, at *14. Consequently, the 2007 Marshall & Stevens appraisal does
not substantially comply with the requirements of section 170 and the regulations
thereunder. Regarding Lions in Sight’s December 28, 2007, letter to Mr.
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[*28] Campbell and whether it substantially complied with the requirements under
section 170 and the regulations thereunder for a CWA, we have held on numerous
occasions that the doctrine of substantial compliance does not apply with respect
to the CWA requirements. See Izen v. Commissioner, 148 T.C. 71, 76-77 (2017)
(and cases cited thereat).
4. Reasonable Cause
Petitioners also contend that pursuant to section 170(f)(11)(A)(ii)(II)
reasonable cause exists because they “relied on the advice of their long-term
accountants [i.e., Kruse Mennillo] that the documentation relating to the charitable
contribution met the requirements” of section 170 and the regulations thereunder.
As relevant here, if a taxpayer does not strictly or substantially comply with
the requirement of section 170 and the regulations thereunder that he obtain a
“qualified appraisal”, section 170(f)(11)(A)(ii)(II) provides that a charitable
contribution deduction will not be denied if the taxpayer can prove that the failure
to meet this requirement “is due to reasonable cause and not to willful neglect.”16
We use other Code provisions’ reasonable cause standards to interpret the section
16
We note that this reasonable cause exception does not apply to the
requirement of sec. 170 and the regulations thereunder that the taxpayer obtain a
CWA. See sec. 170(f)(11)(A)(i). Thus, there is no reasonable cause to absolve
petitioners’ failure to comply with the CWA requirement.
- 29 -
[*29] 170(f)(11)(A)(ii)(II) reasonable cause standard. See Crimi v. Commissioner,
at *98-*99.
“Reasonable cause requires that the taxpayer have exercised ordinary
business care and prudence as to the challenged item. Thus, the inquiry is
inherently a fact-intensive one, and facts and circumstances must be judged on a
case-by-case basis.” Id. at *99 (citing United States v. Boyle, 469 U.S. 241
(1985)). Reliance on the advice of a professional, such as a certified public
accountant, would constitute reasonable cause and good faith if the taxpayer
proves by a preponderance of the evidence that he: (1) reasonably believed the
professional was a competent tax adviser with sufficient expertise to justify
reliance, (2) provided necessary and accurate information to the advising
professional, and (3) actually relied in good faith on the professional’s advice. Id.;
see also Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),
aff’d, 299 F.3d 221 (3d Cir. 2002). However, a taxpayer cannot rely on the advice
of a professional where that advice is not “from a competent and independent
advisor unburdened with a conflict of interest and not from promoters of the
investment.” 106 Ltd. v. Commissioner, 136 T.C. 67, 79 (2011) (quoting
Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir. 2006), aff’g T.C. Memo.
2004-279), aff’d, 684 F.3d 84 (D.C. Cir. 2012); see also Mazzei v. Commissioner,
- 30 -
[*30] 150 T.C. 138, 181 (2018) (citing Neonatology Assocs., P.A. v.
Commissioner, 115 T.C. 98).
Mr. Campbell learned of the eyewear charitable contribution program
through Mr. Kawana at Kruse Mennillo (who petitioners had engaged to provide
accounting, estate planning, and return preparation services to them since
approximately 2000). Mr. Kawana and two other Kruse Mennillo partners served
as advisers to ZD Products with respect to the program (having prepared the
offering memorandum), and Mr. Kawana personally participated in the program.
As we stated in 106 Ltd. v. Commissioner, 136 T.C. 79, “[t]he caselaw is clear
on this point--promoters take the good-faith out of good-faith reliance.” On the
basis of the record before us, we find that Mr. Kawana and Kruse Mennillo were
promoters of the program and not “independent advisor[s] unburdened with a
conflict of interest”. Id. Accordingly, petitioners’ reasonable cause argument is
meritless.17
17
Petitioners also argue that respondent did not submit any facts that would
negate the existence of reasonable cause. Petitioners, however, bear the burden of
proving reasonable cause, see Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001), and they have failed to present evidence of such.
- 31 -
[*31] We sustain respondent’s determination that petitioners are not entitled to
their carryover charitable contribution deduction with respect to Mr. Campbell’s
Lions in Sight donation.
III. Accuracy-Related Penalties
We now address whether petitioners are liable for the section 6662(a)
and (h) accuracy-related penalties.
As indicated supra pp. 14-15, the Commissioner bears the burden of
production with respect to an individual taxpayer’s liability for any penalty. Sec.
7491(c). In Frost v. Commissioner, 154 T.C. ___, ___ (slip op. at 20) (Jan. 7,
2020), we recently held that the Commissioner’s initial burden of production
under section 7491(c) includes producing evidence that he has complied with the
procedural requirements of section 6751(b) and that once he has satisfied this
initial burden the taxpayer must come forward with contrary evidence. Section
6751(b)(1) requires that the initial determination of certain penalties be
“personally approved (in writing) by the immediate supervisor of the individual
making such determination”. See Graev v. Commissioner, 149 T.C. 485, 492-493
(2017), supplementing and overruling in part 147 T.C. 460 (2016); see also Clay
v. Commissioner, 152 T.C. 223, 248 (2019) (quoting section 6751(b)(1)). In
Belair Woods, LLC v. Commissioner, 154 T.C. ___, ___ (slip op. at 24-25)
- 32 -
[*32] (Jan. 6, 2020), we recently held that “the ‘initial determination’ of a penalty
assessment * * * is embodied in the document by which the Examination Division
formally notifies the taxpayer, in writing, that it has completed its work and made
an unequivocal decision to assert penalties.” Furthermore and as relevant here, in
Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 87 (2019), we
recently held that the section 6662(a) and (h) penalties are distinct (despite the title
of section 6662 referring to a (singular) penalty), and the initial determination
under each subsection must be separately approved for purposes of section
6751(b)(1). See also Rogers v. Commissioner, T.C. Memo. 2019-61, at *20
(citing Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 87).
On the basis of the record before us, we hold that respondent has failed to
carry his initial burden of production under section 7491(c) to show that he
complied with the procedural requirements of section 6751(b). The Civil Penalty
Approval Form, although properly signed and dated before the issuance of the
notice of deficiency (the first formal communication of penalties to petitioners),
does not show separate approval for the section 6662(a) and (h) penalties. The
one-page form fails to state with any degree of specificity which penalties should
be asserted (and are approved); indeed, all that the form states is that a “[p]enalty
will be asserted with the 2008 [y]ear.” Section 6751(b)(1) would be meaningless
- 33 -
[*33] if written supervisory approval of an unspecified penalty was sufficient;
examining agents would be free to assert any type of penalty after written
supervisory approval was given, an action that section 6751(b)(1) was designed to
prevent. Consequently, since respondent has not proffered any other evidence that
he complied with the procedural requirements of section 6751(b), petitioners are
not liable for the section 6662(a) and (h) accuracy-related penalties.
We have considered all of the arguments made by the parties and, to the
extent they are not addressed herein, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.