Calvin Lim and Helen Chu v. Comm., TCM 2023-11

On their joint Federal income tax return for 2016 Calvin Lim and Helen Chu reported a noncash charitable contribution deduction of $1,608,808 passed through to them from Integra – a pass-through entity created by Michael Meyer as part of his “Ultimate Tax Plan” scheme. Because the contribution amount exceeded the maximum allowable deduction for 2016, taxpayers claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 forward to their 2017 return.

“Prohibited appraisal fee” disqualifies the appraisal. Section 170(f)(11) disallows a deduction for certain noncash charitable contributions unless specified substantiation and documentation requirements are met. In the case of a contribution of property valued in excess of $500,000, the taxpayer must obtain and attach to his return “a qualified appraisal of such property.” The Court found that the appraisal submitted by Mr. Lim and Ms. Chu could not be “qualified” because the appraiser (Michael Meyer) prepared it in exchange for a “prohibited appraisal fee.”

The engagement letter specified that Mr. Meyer’s fee would be the greater of $25,000 or an amount calculated by reference to the assets transferred. In the latter case, his fee was defined as 6% of the “deductible amount” of assets up to $1 million, plus 4% of the “deductible amount” of assets exceeding $1 million. The engagement letter further specified that Mr. Meyer’s fee would be $84,000, which presupposes that the deductible amount of the assets transferred would be $1,600,000. Mr. Meyer’s fee was clearly based, directly or indirectly, on the appraised value of the units allegedly donated to the charity. His agreement with Mr. Lim and Ms. Chu thus constituted a prohibited fee arrangement. For that reason alone, the purported appraisal was not a “qualified appraisal” within the meaning of §170(f)(11)(D).