How To Avoid Losing A $600,000 Charitable Deduction

in the Swiss v. Comm’r TC Memo 2022-102, the Tax Court ruled that denying a $600,000 charitable deduction for the donation of an artwork was appropriate because the tax return contained an incomplete Form 8283, as well as taxpayer confidence and a lack of due diligence and caution, to a professionally prepared tax return. This, along with the earlier case I reported on, Martha L. Albrecht v. Commissioner TC Memo 2022-53, reinforces the fact that when making a charitable donation of any kind, the taxpayer must ensure that the return is properly prepared; and, if they rely on a professional to prepare the tax return, obtain written assurance that the return has been properly prepared. I’ve included a summary of what a Form 8283 should contain when inspecting your return.

Heinrich Schweizer was born and raised in Germany and was interested in African art from an early age. He worked for Sotheby’s in New York City before returning to Germany to work on his law doctorate. In 2006 he accepted a position as Director of African and Oceanic Art at Sotheby’s in New York. As part of his tenure, he worked with the Sotheby’s appraisal team to provide the auction house’s clients with appraisals of the artworks Sotheby’s put up for sale. When he moved to New York, Mr. Schweizer engaged the law firm of Wasserman & Wise as his legal counsel, which included the preparation of his income tax returns.

Mr. Schweizer has donated art to charity in the past, giving a value of $60,000 in 2007. $100,000 in 2009 and $10,000 in 2010. On December 6, 2011, Mr. Schweizer donated a Dogon sculpture he purchased in 2003 for $100,000 to the Minneapolis Art Institute; and he requested the play’s donation as a charitable deduction on his 2011 federal income tax return.

As with any donation of artwork valued at over $20,000, Mr. Schweizer received a signed valuation of the work from Michael Oliver, an African art dealer (who was not a certified appraiser, and has not previously or since conducted such a fair market valuation) . Schweizer, through Wasserman & Wise, filed a request for a valuation with the IRS’s Art Advisory Panel on June 7, 2011, which any taxpayer can request if the fair market value exceeds $50,000. This application was submitted with the complete documents including the signed report. There was no response from the panel before Mr. Schweizer was required to file his 2011 tax return, which was due October 15, 2011.

The 2011 tax return prepared by Wasserman & Wise was signed by Mr. Schweizer. Mr. Schweizer claimed he met with the preparer and inquired about the incomplete Form 8283. He was assured that the IRS already had the missing documents by the time the application was filed. The author claimed that he had neither informed Mr. Schweizer of this, nor had he consented to an incomplete submission of the declaration.

The IRS first asserted that the actual value of the sculpture was not $600,000 but $250,000 and then reversed its denial of the charity deduction for the donation due to the incompleteness of the 8283 form filed. The Tax Court agreed and further ruled, that while the deduction would have been permissible if the incomplete Form 8283 was due to a valid reason, Mr. Schweizer did not exercise commercial diligence in reviewing and signing the tax return. Although actual reliance on express professional advice might imply such a level of care and prudence, the mere signing of a declaration prepared by a professional does not.

Considering whether or not Mr. Schweizer reasonably relied on the professional advice of Wasserman & Wise and his tax advisor is a fact-based decision and not a good lesson to be learned from this case. The important takeaway from this decision is that when applying for a deduction for a contribution in kind of property, you must review Form 8283 yourself to ensure that it is correctly prepared and complete. If there are any problems, report them to the creator, preferably in writing, and get an answer. With that in mind, here is a quick checklist of what to look for on Form 8283.

First, what type of property is it? Form 8283 has two sections: Section A and Section B. Section A is for property valued less than $5,000 per item (or group of items such as a coin collection) or for publicly traded stock, vehicles, inventory, or any intellectual property Value.

For the items in Section A, you must list the following:

1. The charity that received the property
2. For a vehicle, the chassis number,
3. A description of the property and its condition, including year, make and model for vehicles;
4. for publicly traded stocks, the name, number of shares, date and cost, your cost basis, fair value and fair value determination.

Section B is for donations greater than $5,000 per item or group of items. For Section B, you must indicate for each item what type of property it is and provide the following:

1. description of the property,
2. condition of tangible or immovable property,
3. the date you entered,
4. How you acquired it and your cost basis,
5. Any cash you may have received if it is a special sale and
6. The date and the charity receiving the donation.

It is likely that for each item over $20,000 you will need to have a separate appendix for all of the information required for Section B for each item. They should also be familiar with the standards for valuing works of art and other tangible goods, which are consistent with the standards required for gift and inheritance tax deductions.

It may seem unfair to deny a deduction simply because a form has not been filled out correctly, and perhaps it is, but it is not unfair to require that you at least exercise normal care and prudence when signing a tax return claim in this return.