Friday, March 1, 2019
Donations to charity can provide a tax deduction for the donor. Normally, the tax deduction is tied to the value of the property donated to a qualified charity. That’s an easy determination if the gift is cash. But what if the gift consists of property other than cash? How is that valued for charitable deduction purposes?
Valuing non-cash gifts to charity – that’s the topic of today’s post.
When a charitable contribution of property other than money is made, the amount of the contribution is generally the fair market value (FMV) of the donated property at the time of the donation. Treas. Reg. §1.170A-1(c)(1). What is FMV? It’s “the price at which the property would change hands between a willing buyer and seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Treas. Reg. §1.170A-1(c)(2). Sometimes FMV is relatively easy to determine under this standard. Other times, it’s not as easy – especially if the non-cash gift is a unique asset. In that situation, the IRS has two approaches to arrive at FMV: the comparable sales method; and the replacement value of the donated property. In a relatively recent Tax Court case, these valuation approaches to a substantial non-cash donation to charity were on display.
In Gardner v. Comr., T.C. Memo. 2017-165, the petitioner was a big-game hunter that had been on numerous safaris and other big-game hunts around the world. In one two-year period he had been on over 20 safaris. Like many big-game hunters, he provided the meat from his kills to the local community and then had taxidermists prepare the hide for eventual display in the “trophy room” of his home. Some of the displays were full body mounts, others were wall hangings or rugs. These types of displays are the most attractive and desirable in the hunting business. His trophy room was, at one point, featured in a hunting publication, “Trophy Rooms Around the World.”
Ultimately, the petitioner downsized his collection by donating 177 of the “less desirable” pieces in his collection to a charity (an ecological foundation). None of the donated specimens were of “record book” quality. Before making the donation, he had the donated specimens appraised. Based on that FMV appraisal, he claimed a charitable deduction of $1,425,900. That figure was derived from his appraiser’s computation of the replacement cost of each donated item – what it could cost him to replace each item with an item of similar quality. Replacement cost was computed by projecting the out-of-pocket expenses for the petitioner to travel to a hunting site; take part in a safari; kill the animal; remove and preserve the carcass; ship the carcass to the U.S.; and pay for taxidermy services to prepay the specimen for display. The petitioner’s appraiser gave every one of the donated items a quality rating of “excellent” for specimen quality and taxidermy quality. For provenance, the appraiser listed the items as “meager.” The appraiser, however, did not provide any evidence for the rational of why he utilized the replacement cost approach.
On audit, the IRS valued the donated specimens at $163,045 based on their expert’s report. The expert appraiser for the IRS had been a licensed taxidermist for more than 30 years and was a certified appraiser specializing in taxidermy items. He characterized the donated items as mostly “remnants and scraps” of a trophy collection – what’s left over after mounting an animal or “what’s left over when you’re done mounting an animal.” He testified that there was an active market among taxidermists for such items to either complete projects or mount them for their own collections. That market, the IRS expert noted, has been expanded by the internet and allowed a ready determination of market value. Indeed, the IRS expert found 504 comparable sales transactions via traditional auctions and internet auction sites. This wasn’t the situation, the IRS expert asserted, where world-class trophy mounts were involved with a thin to non-existent market (which would support the use of the replacement cost approach). Thus, based on the comparable sale approach, the IRS arrived at the $163,045 value.
The matter ended up in the Tax Court, and the Tax Court first noted that it had previously determined how to value hunting specimens donated to charity in 1992. In Epping v. Comr., T.C. Memo. 1992-279, the Tax Court reasoned that if an active market exists, the general rule is to use comparable sales to arrive at a value of the donated property. The Epping case involved “an assortment of animal mounts, horns, rugs, and antlers.” The Tax Court in that case determined that there was an active market in hunting specimens with substantial comparable sales.” However, the Tax Court also noted that replacement cost is appropriate when the donated property is unique, and no evidence of comparable sales exists. Thus, to be able for a taxpayer to use replacement cost to value the donated items, the taxpayer must show that there is no active market for the comparable items and that there is a correlation between the replacement cost and FMV. That’s a tough hurdle to clear in many situations.
In the present case, the Tax Court, was persuaded by the IRS expert’s testimony that the 177 donated items were neither of “world-class” nor museum quality. Instead, the Tax Court agreed that they were mostly “remnants, leftovers, and scraps” of the petitioner’s collection. In addition, the Tax Court noted that the petitioner’s own testimony indicated that he wanted to “downsize” his collection by getting rid of unwanted items. The Tax Court also noted that photographs of the specimens provided by his expert indicated that the donated specimens were not high quality, and none were of record-book quality. In addition, the Tax Court noted that the IRS expert had established an active market for items similar to those the petitioner donated. Thus, the Tax Court determined that the specimens were commodities rather than collectibles and would be appropriately valued based on the market price for similar items – the IRS approach. To further support the use of the comparable sales approach, the Tax Court concluded that the petitioner did not really attempt to challenge the IRS expert’s data and didn’t introduce any evidence of market prices for comparable items. The petitioner failed to prove that the FMV of the 177 donated items exceeded the $163,045 value that the IRS established.
Valuing non-cash charitable gifts can be tricky. Establishing FMV of the donated property must be backed up with sufficient evidence that supports the valuation approach. Truly unique items that lack a ready market may be able to be valued under the replacement cost approach. A good appraiser goes a long way to making that determination. As the Tax Court stated, “To paraphrase Ernest Hemingway, there is no hunting like the hunting for tax deductions.”