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Jewish World Review March 23, 2001 / 28 Adar, 5761

Tax Tales by A. J. Cook

A.J. Cook
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To give is divine, but you'd better have a good appraisal -- ON some issues, the Internal Revenue Service refuses to change its position even though taxpayers continue to whip it in court.

One example where the agency won't accept defeat involves valuing donated assets. It consistently challenges deductions higher than what the donor recently paid.

Generally, a donor may deduct a hypothetical market value - the price that would be set between a willing buyer and willing seller with both knowing relevant facts. But neither must be under any compulsion.

Rather than bothering with the hypothetical, the IRS says if the item is bought shortly before the donation, that price is market value.

Not necessarily. Three cases show where courts rejected the unbending IRS position and accepted higher values:

- James and Corlin Rhoades, airline pilots from Salt Lake City, landed a rare opal at bargain-basement fare. The previous owner was getting a divorce, and they bought the gem for $10,500. Two and a half years later, they donated the 35-carat opal to Stanford University.

Despite a $70,000 appraisal, the IRS limited the deduction to the purchase price. The court allowed $50,000.

- Robert and Lorraine Kingsbury of Providence, R.I., bought six paintings during one year and donated them Dec. 30 of the following year to the El Paso Museum of Art. They had paid $4,900, at auctions and distress sales, for the art by Mable Woodward, a turn-of-the-century American impressionist.

The IRS wasn't impressed. But a Woodward-paintings expert persuaded the court to permit a $9,000 deduction.

- Daniel L. Herman and Paul Brown, businessmen from Mountain City, Tenn., were eager to reopen a hospital in their community. The Johnson County Hospital had filed for bankruptcy, and the administrator planned to auction its equipment. The two men bought the equipment for $40,000.

A little over two years later, they donated it to the new hospital. Even though the equipment was appraised at $1 million, the IRS limited each man's deduction to $20,000 and added a valuation misstatement penalty of more than $23,000.

The judge accepted the $500,000 per man deduction and removed the penalty.

All these winning taxpayers had one thing in common: The prices paid for the items did not reflect true market value because the seller was compelled to sell. The courts refused to follow the IRS hard line about purchase price.

The moral: To give is divine, but you'd better have a good appraisal.

A.J. Cook, lawyer and accountant, is counsel with the law firm of Pietrangelo Cook PLC. Comment by clicking here.


03/06/01: Home improvements as medical deductions?
02/14/01: Distinguishing income from receipts confuses
02/07/01: IRS sank its teeth into hunters' expenses
01/30/01: 'Match game' could mean big bucks for IRS
01/22/00: Getting the address right

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