U.S. Tax Court Denies Motion of IRS for Partial Summary Judgment to Disallow Taxpayer’s Claimed Charitable Deduction
Importance: At the date of this decision, the IRS was becoming more aggressive in enforcing the requirement of Treasury Regulation § 1.170A-13(c)(3)(ii)(D), which required that a qualified appraisal include “the terms of any agreement or understanding entered into … by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property.” The Tax Court had been taking the position that, where the appraisal contained sufficient information to allow the commissioner to evaluate the contribution, the taxpayer’s substantial compliance will adequately serve the purpose Congress intended. Here the motion for partial summary judgment was denied since “there exists a genuine dispute of material fact precluding summary judgment as to whether (or not) petitioner substantiated his charitable deduction claim with a qualified appraisal.”
“On July 17, 2024, respondent filed a Motion for Partial Summary Judgement to Disallow Petitioner’s Claimed Charitable Deduction, moving pursuant to Rule 1211 that this Court find petitioner did not substantiate his charitable deduction claim with a qualified appraisal. On August 27, 2024, petitioner filed an opposition to respondent’s motion for partial summary judgment to disallow petitioner’s claimed charitable deduction.”
Background summary. Carl B. Barney, through the Carl Barney Living Trust, owned 100% of the stock of five S corporations operating for-profit career colleges, including:
- Stevens-Henager College Inc. (SHCI);
- CollegeAmerica Denver Inc. (CADI);
- CollegeAmerica Arizona Inc. (CAAI);
- California College Inc. (CCI); and
- CollegeAmerica Services Inc. (CASI) (provided management services).
In 2006, the Center for Excellence in Higher Education (CEHE), a nonprofit public benefit corporation, was established. It was recognized as a tax-exempt 501(c)(3) organization in 2007. By August 2011, CEHE’s board of directors began considering a merger with Barney’s for-profit colleges.
To prepare for the proposed merger, Barney hired Barrington Research Associates to perform valuations of his S corporations. These valuations, dated December 2012, were used in the merger.
In December 2012:
- The boards of the S corporations approved the merger with CEHE;
- The merger agreements stated that some entities (CADI and CCI) were donated to CEHE as charitable contributions, while others (SHCI, CAAI, and CASI) were sold to CEHE for consideration; and
- CEHE issued two promissory notes to Barney’s trust totaling $431 million as part of the merger terms.
By Dec. 31, 2012, the S corporations had been liquidated, transferring their assets and liabilities to CEHE. The transactions were reported on 2012 tax returns, with charitable contributions claimed for the donated entities based on the valuations Barrington Research provided.
Barney’s tax advisors recommended opting out of the installment sale method for reporting the gain from the transactions. He reported the full gain on his 2012 individual tax return.
This background established the context for the court’s examination of whether a “qualified appraisal” supported Barney’s claimed charitable deduction, as required under IRS regulations.
Respondent’s argument. The IRS argued that Carl B. Barney’s claimed charitable deduction was unsupported because the Barrington appraisal did not qualify as a “qualified appraisal” under Treasury regulations. Specifically:
- Omissions: The appraisal lacked required details about agreements affecting the donated property, such as restrictions tied to the promissory notes (Notes A and B);
- Valuation errors: By ignoring these restrictions, the appraisal misvalued the donated property; and
- Inaccuracies: The appraisal falsely claimed there were no agreements impacting the property.
The IRS contended these deficiencies made the appraisal unreliable for evaluating the deduction, requesting the court to disqualify it as a matter of law.
The petitioner’s argument. Barney argued that the IRS’ interpretation of Treasury Regulation § 1.170A-13 was overly technical. He claimed that:
- Substantial compliance: The regulations only required substantial, not literal, compliance;
- Sufficient information: The appraisal contained enough information for the IRS to evaluate the deduction, fulfilling the purpose of the substantiation rules; and
- Disputed facts: The impact of the promissory notes (Notes A and B) on valuation was a factual matter to be resolved at trial, not through summary judgment.
Barney maintained that the appraisal met the regulatory requirements in substance and supported his claimed deduction.
Qualified appraisal. A “qualified appraisal” was required for charitable deductions of property valued over $5,000 and must comply with Treasury Regulation § 1.170A-13. Key requirements include:
- Details to include: The appraisal must describe the property, provide its fair market value with supporting basis, state it was prepared for tax purposes, and include appraiser qualifications;
- Substantial compliance: The appraisal need not be perfect; minor defects are allowed if it provides sufficient information for the IRS to evaluate the claimed deduction; and
- Essential information: Failure to include key details, such as agreements restricting the property’s use or income, may disqualify the appraisal.
In this case, the court emphasized that substantial compliance suffices if the appraisal met the purpose of aiding IRS evaluation.
Substantial compliance. Substantial compliance with appraisal regulations allowed for minor defects as long as the appraisal provided enough information for the IRS to evaluate the claimed deduction. The court focused on whether the omission was inadvertent and whether essential statutory requirements were met.
However, substantial compliance did not excuse omissions of critical details like fair market value or appraiser qualifications. In this case, the court considered whether the appraisal contained sufficient information to serve its intended purpose despite alleged deficiencies.
“It is the prevailing view of this Court, following such cases as Scheidelman and Friedberg, that where the appraisal contained sufficient information to allow the Commissioner to evaluate the contribution, that the taxpayer’s substantial compliance will adequately serve the purpose Congress intended. (See Scheidelman v. Commissioner, T.C. Memo.)”
Conclusion. The court found that there were genuine disputes of material fact regarding whether Carl B. Barney’s appraisal met the requirements of a “qualified appraisal” through substantial compliance. Specifically, disagreements remained about the treatment of the promissory notes (Notes A and B) and whether the appraisal adequately disclosed required information.
As a result, the court denied the IRS’ motion for partial summary judgment, reserving the issue for trial. It emphasized that the purpose of the regulations was to provide the IRS with enough information to evaluate the deduction, which would be further examined during trial.
The case is Barney v. Comm’r, 2024 U.S. Tax Ct. LEXIS 2647 (Oct. 24, 2024). A digest and full court opinion can be found on the BVLaw platform.