You can anticipate the final decision when you read the
following sentence:
One does not need to be a tax expert to open his eyes and read plain English.”
This time we are talking about art. Expensive art. And
donations of said expensive art.
I am not a fan of the minutiae in this area. It strikes
me as a deliberate gambit to blow-up an otherwise laudable donation for what
one could consider ministerial oversight, but such is the state of tax law.
Then again, the taxpayer side of these transactions
tends to have access to high-powered professional advice, so perhaps the IRS is
not being intractable.
Still, one likes to see reasonable application of the
rules, with acknowledgement that not everyone has advanced degrees and decades
of experience in tax practice. Even if one does, there can be disagreement in
reading a sentence, the interpretation of a comma, the precedence of a prior
case, or the interplay - or weighting - of related tax provisions. Or maybe
someone is overworked, exhausted, running the kids to activities, attending to
aging parents and simply made - excuse a human foible - a mistake.
It used to be known as reasonable cause and can be grounds
for penalty abatement. I remember it existing when I was a younger tax
practitioner. Today? Not so much.
One way to (almost certainly) blow reasonable cause?
Be an expert. I doubt the IRS would ever allow
reasonable cause on my personal return, for example.
Let’s look at the Schweizer case.
Heinrich Schweizer was a high-powered art advisor.
He better not get into it with the IRS about art
donations, then.
Schweizer received a law degree in Germany. He then
worked an internship with Sotheby’s in New York City. When the internship ended,
he returned to Germany to pursue a PhD, a goal interrupted when Sotheby’s recruited
him for a position in their African art department. He there served as Director
of African and Oceanic Art from 2006 to 2015. He increased the value of the
annual auctions and provided price estimates at which customers might sell their
art at auction. He also worked closely with Sotheby’s appraisal department in
providing customers with formal appraisals.
Schweizer filed his first US tax return in 2007. He
hired a CPA firm to help with the tax return. He continued this relationship to
our year in question.
In 2011 Schweizer made a substantial donation to the
Minneapolis Institute of Art (MIA). He donated a Dogon sculpture that he had
acquired in Paris in 2003. The deduction was $600 grand.
COMMENT: One can spend a career in tax and never do this. AAS provides advice and assistance to the IRS and taxpayers on valuation questions. A reason to contact AAS is to obtain a statement of value (SOV) after donating but before filing a tax return. The donor can rely on the SOV as support for the value deducted on the tax return. It is – by the way – not easy to get into AAS. The minimum ticket is a $50 grand donation as well as a filing fee for time and attention.
Schweizer obtained his SOV. All he had to do now was
file his return and include the magic forms (Form 8283 with all the required signatures
and secret handshakes, a copy of the appraisal, yada yada).
Guess what he did not do?
No properly completed Form 8283, no copy of the appraisal,
nothing.
Remember: form is everything in this area of the tax law.
Off to Tax Court they went.
His argument?
His failure to meet the documentation requirements was due to reasonable cause and not willful neglect.
Move me with a
story.
He received and reasonably relied on advice from the accounting firm that it was unnecessary to include either a qualified appraisal or a fully completed Form 8283 with his 2011 return.
Why would I believe this?
Because the IRS already had these documents through the SOV process.
I know the conclusion is wrong, but it gives me pause.
OK, reliance on tax advice can be grounds for
reasonable cause. He will of course need the firm to back up his story ….
The spokesman for the firm testified but did not corroborate, in any respect, Schweizer’s testimony about the alleged advice.”
Well, that seems to be prompting a malpractice suit.
Schweizer’s attorney will have to cross-examine aggressively.
And petitioner’s counsel asked no questions of […] squarely directed to this point.”
Huh? Why not?
The fact that petitioner did not seek corroborative testimony from the person who might have supplied it weighs against him.”
Well, yeah. If someone can bail you out and they fail
to do so, the Court will double-down on its skepticism.
Now it became a matter of whom the Court believed.
To tighten the screws even further, the Court noted
that – even if the firm had told Schweizer that he need not include a phonebook
with his tax return - the Court did not believe that Schweizer would have relied
on such advice in good faith.
Why not, pray tell?
Schweizer was a high-powered art advisor. He was also
trained in law. He had done this - or something very similar - for clients at
Sotheby’s over the years. The Court said: he knew. He may not have been an
expert in tax, but he had been up and down this stretch of road enough to know
the rules.
There was no deduction for Schweizer.
Our case this time was Schweizer v Commissioner,
T.C. Memo 2022-102.
