Must you comply with every detail of tax regulations?

 

Though regulations required an appraisal report, Dewayne and Karen Bond didn't get one to support their donation of two hot air balloons. One is due for donations exceeding $5,000 other than for cash and publicly traded securities. Their blimps were worth $60,000.

 

The Albuquerque, N. Mex., couple had hired Sid Cutter to appraise the balloons. He completed and signed only Internal Revenue Service appraisal Form 8283. This set the value at $60,000 and described the blimps and his qualifications.

 

The IRS disallowed the deduction because there was no appraisal “report.”

 

Ruling for the Bonds, the court said these regulations are directive, not mandatory. Required compliance with regulations doesn't mean complete compliance; it just means “substantial” compliance. Here, information the appraiser set out on the IRS form satisfied substantial compliance.

 

A few years later, John and Linda Hewitt used the substantial compliance argument. They had given closely-held corporate stock to charities and deducted $120,000. The Virginia Beach , Va. , couple had attached Form 8283 to their return showing details of the valuation.

 

The IRS reduced the deduction to $6,542, the amount the Hewitts paid for the stock. It agreed that $121,000 would have been deductible if the couple had a report from an independent qualified appraiser.

 

Countering this, the couple said information they put on the form was a comprehensive and accurate appraisal, thus showing substantial compliance. They pulled out the Bond balloon case as authority.

 

The judge put no stock in the Hewitts' argument and ruled for the IRS . He said that in Bond, the detailed data on the form contained most of the required information, and an independent qualified appraiser prepared it. In contrast, the Hewitts prepared the form themselves.

 

PLANNING: In spite of the generosity of the judge in the Bond balloon donation case, taxpayers should comply with the regulation requirements literally and get an independent appraisal of valuable items they wish to donate to charity. The Bonds fortunately found a sympathetic judge; other taxpayers may not be so lucky.

 

THE MORAL: Hot air and an independent appraisal can float a deduction.