FCG Valuation Case E-Flash Hendrix v. United States

Authored by Fawntel Romero, AM, and Chris D. Treharne, ASA, MCBA, BVAL of Gibraltar Business Appraisals, Inc. a member firm of FCG Issue 12:9

James Hendrix, ET AL., Plaintiffs, v. United States of America, Defendant
Case No. 2:09-cv-132
United States District Court, Southern District of Ohio Eastern Division, Filed July 21, 2010

The U.S. District Court considered whether an income tax charitable deduction for real property should be allowed. Ultimately, the court denied the deduction because the Taxpayer failed to submit a qualified appraisal and failed to obtain a contemporaneous acknowledgement of the donation from the donee.

The Takeaway
While this case is centered on a real estate appraisal, it suggests business appraisals are exposed to similar risks.  More specifically, “discount letters” (which often are substituted for appraisals of family limited partnership interests) and “calculation” reports may subject taxpayers to unnecessary sanctions.

As stated in Hendrix, the purpose of a qualified appraisal is to eliminate unnecessary guessing.  The court found that Taxpayers’ appraisal lacked content in critical areas required by the qualified appraisal regulations.  As a result, the court ruled that the Taxpayers were not entitled to the claimed deduction.

While not published as an E-Flash, Schneidelman v. Commissioner (T.C. Memo. 2010-151, No. 15171-08) also denied a charitable deduction for a facade easement barbecue the taxpayers’ appraisal did not meet the requirements of qualified appraisal.

Clearly, the IRS and courts are increasing their scrutiny of taxpayer submitted appraisal reports.

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