Tax Court Backs IRS on Qualified Appraiser Rules and Related Matters
Hoensheid v. Comm'r (In re Estate of Hoensheid), T.C. Memo 2023-34; 2023 Tax Ct. Memo LEXIS 33
In a recent Tax Court case,1 the court backed the IRS when it issued a deficiency notice alleging anticipatory income and capital gains and denial of a charitable contribution deduction as it pertains to a contribution of shares of stock of a privately held company that were acquired for cash. One of the three owner brothers and the brother’s wife gifted 1,380 shares of stock in the company, Commercial Steel Treating Corp. (CSTC), to Fidelity Charitable Gift Fund, a donor advisor entity. The intention was to have the shares gifted to Fidelity prior to the sale of the company so as to avoid the income2 and capital gain from the shares that related to the sale transaction and to obtain a charitable contribution deduction for the fair market value of the stock contributed.
Due mostly to the actions of the donors and petitioners in this case, their plans went almost completely awry. On the transaction and accompanying activities regarding the contribution of the stock, the Tax Court sided with the IRS in determining that the income and gain was to be taxed to the petitioners under the theory of anticipatory income and gain. The main issue in this part of the decision related to the petitioners waiting too long to make the gift. In their effort to be certain that the sale transaction would go through, they waited too long. While petitioners made what might be considered a feeble effort to determine a date before the final terms and agreement to sell were made, those efforts fell short, and the Tax Court ruled the gift was made after the petitioners in effect received the income and gain. The gift was determined to be a valid gift but too late to avoid the income and gain.
The second major issue was whether or not the petitioners were allowed a charitable contribution deduction for the gift of the stock. Since the court had already ruled that a valid gift had been made, this issue turned on whether or not the gift was accompanied by a qualified appraisal of the CSTC stock that had been gifted.
The petitioner decided to use the “cheaper chicken” for the appraisal included in the filing for the gift. Instead of heeding the advice of his competent and experienced legal advisor, the petitioner decided to use an appraisal that was done by the financial advisor used by petitioner for purposes of effecting the transaction. That appraisal was offered to him at no additional charge than the advisor fee for the transaction.
The problem was that the appraiser did not have any business valuation credential and was not experienced in the industry in which CSTC operated. He fell short in other areas of the requirements to be considered as a qualified appraiser. The opinion enumerates the requirements as follows:
[A] "qualified appraiser" is an individual who (I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations, (II) regularly performs appraisals for which the individual receives compensation, and (III) meets such other requirements as may be prescribed … in regulations or other guidance.
The IRS argues that the appraisal is defective in a number of ways as outlined in the opinion and, despite the petitioners’ argument that they met a “substantial compliance rule,” the court determined they had not and disallowed a charitable contribution deduction for the gift.
Even though the court did not apply an underpayment penalty as the IRS requested on a technical issue, the petitioner was the big loser in all of this. And for what? For trying to cut corners and save a dime. Given the size of the gift, $3 million, only a fraction of the amount the petitioner received for his and his wife’s own pockets, there was no reason for them to cut corners on such important issues as the timing for the gift and for the need for a qualified appraiser. This case, for which the digest and opinion can be accessed through the BV Resources Legal Database, provides a great teaching tool for reluctant clients.
1 In re Estate of Hoensheid, T.C. Memo 2023-34; 2023 Tax Ct. Memo LEXIS 33.
2 In the form of dividends.