WT Art Partnership LP et al. v. Commissioner; No. 28440-15; No. 19604-16

WT ART PARTNERSHIP LP, LONICERA LLC, TAX MATTERS PARTNER, ET AL., Petitioner(s), v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

UNITED STATES TAX COURT
WASHINGTON, DC 20217

ORDER

The principal issue in these consolidated cases is whether the Internal Revenue Service (IRS or respondent) properly disallowed charitable contribution deductions claimed by WT Art Partnership, LP (WT Art), on its 2010-2012 Federal income tax returns. On January 21, 2020, respondent filed a Motion for Partial Summary Judgment in docket No. 28440-15, contending that WT Art failed to secure a "qualified appraisal" for a painting it donated to the New York Metropolitan Museum of Art (Met) in 2010. The cases were consolidated on March 31, 2020. On June 5, 2020, respondent filed a Motion for Partial Summary Judgment in docket No. 19604-16, contending that WT Art failed to secure a "qualified appraisal" for three paintings and a fractional interest in a fourth painting it donated to the Met in 2011 and 2012. Finding material facts to be in genuine dispute, we will deny both Motions.

WT Art is a limited partnership formed in 1997 to acquire 12 Chinese paintings. In 2010 WT Art donated to the Met one of these paintings (the "Palace Banquet") and claimed on its 2010 return a charitable contribution deduction of $26 million. In 2011 WT Art donated to the Met a second painting ("Snow-Covered Mountains") and a 40% interest in a third painting ("Tiantai Mountains") and claimed on its 2011 return charitable contribution deductions of $11,000,000 and $6,320,000, respectively. (In 2005 WT Art had donated to the Met a 60% in interest in the latter painting.) In 2012 WT Art donated to the Met two additional paintings ("Lofty Virtue" and "The Simple Retreat") and claimed on its 2012 return charitable contribution deductions of $8,568,000 and $22,032,000, respectively.

For all five contributions WT Art relied on appraisals prepared by China Guardian Auctions Co., Ltd., of Beijing, China (China Guardian). Each appraisal report described the painting, the method of valuation, results of recent auctions in which similar paintings were offered for sale, and a list of references on which the appraiser relied. China Guardian's president, Wang Yannan, signed the cover sheet of each appraisal report, but there is otherwise no indication of who actually appraised the paintings.

In responses to discovery WT Art identified four employees of China Guardian who worked on the five appraisals under Ms. Wang's supervision. WT Art subsequently identified Yin Guanghua as the individual who "performed the most important, substantive work" underlying all five appraisals. Mr. Yin later testified in a deposition that he had appraised all five paintings. In that deposition he described his qualifications, stating that he has studied Chinese art for more than 50 years and was a protégé of Xu Bangda, whom Mr. Yin described as one of the most prominent art appraisers in China. Mr. Yin testified that he appraises thousands of artworks every year.

The purpose of summary judgment is to expedite litigation and avoid unnecessary and time-consuming trials. See FPS Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). When determining whether to grant summary judgment, we must view factual materials and inferences drawn therefrom in the light most favorable to the nonmoving party (here WT Art). See FPL Grp., Inc. & Subs. v. Comissioner, T.C. 554 (2000); Bond v. Commissioner, 100 T.C. 32, 36 (1993).

Where a contribution of property is valued in excess of $500,000, the taxpayer must obtain and attach to his return "a qualified appraisal of such property." I.R.C. § 170(f)(11)(D). An appraisal is "qualified" if it is "conducted by a qualified appraiser in accordance with generally accepted appraisal standards" and meets requirements set forth in "regulations or other guidance prescribed by the Secretary." I.R.C. § 170(f)(11)(E)(i). In order to be a "qualified appraiser," an individual must have "earned an appraisal designation from a recognized professional appraiser organization or ha[ve] otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary." I.R.C. § 170(f)(11)(E)(ii)(I). Such individual must "regularly perform[ ] appraisals for which * * * [he] receives compensation" and must meet "such other requirements as may be prescribed by the Secretary." I.R.C. § 170(f)(11)(E)(ii)(II) and (III). The individual also must "demonstrate[ ] verifiable education and experience in valuing the type of property subject to the appraisal." I.R.C. § 170(f)(11)(E)(iii)(I).

The regulations provide that an appraisal is "qualified" only if it is made "not earlier than 60 days prior to the date of the contribution" and is "prepared, signed, and dated by a qualified appraiser." Sec. 1.170A-13(c)(3)(i)(A) and (B), Income Tax Regs. The regulations specify 11 categories of information that a "qualified appraisal" must include, e.g., a description of the property and its physical condition, the date of the appraisal and the expected contribution, a statement that the appraisal is made for income tax purposes, the method of valuation used to determine fair market value, and the qualifications of the appraiser including his or her "background, experience, education, and membership, if any, in professional appraisal associations." Id. sec. 1.170A-13(c)(3)(ii)(F).

A taxpayer need not strictly comply with all of the reporting requirements listed above. In Bond, we held that some of the requirements set forth in the regulation, while "helpful to respondent in the processing and auditing of returns on which charitable deductions are claimed," are "directory and not mandatory." 100 T.C. at 41. "The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision." Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1763. In Bond the taxpayer's appraiser submitted his report without including his qualifications. 100 T.C. at 42. We held that "[t]he denial of a charitable deduction under these circumstances would constitute a sanction which is not warranted or justified." Ibid.; see also Cave Buttes, LLC v. Commissioner, 147 T.C. 338 (2016) (finding that a taxpayer substantially complied even though only one of the two appraisers signed the appraisal summary and provided qualifications).

Respondent contends that he is entitled to summary judgment in both docketed cases because none of the five appraisals satisfies the statutory and regulatory requirements for "qualified appraisals." Respondent alleges that draft documents were prepared by U.S. persons affiliated with WT Art and that China Guardian in effect acted as an "accommodation party" by signing the appraisals. Respondent contends that neither Ms. Wang (who signed each appraisal on behalf of China Guardian) nor any of the four individuals who allegedly worked under her supervision were "qualified appraisers" because they: (1) did not regularly perform appraisals for compensation, I.R.C. § 170(f)(11)(E)(ii)(II); and (2) did not possess appraisal certifications or otherwise have the requisite background, experience, or education. I.R.C. § 170(f)(11)(E)(ii)(I); sec. 1.170A-13(c)(3)(ii)(F), Income Tax Regs. Respondent contends that China Guardian and its staff cannot be "qualified appraisers" in any event because China Guardian was "regularly used" by WT Art and did not perform a majority of its appraisals during the taxable year "for other persons." Id. sec. 1.170A-13(c)(5)(iv)(F). Finally, respondent contends that the appraisals were not conducted under the U.S. "Uniform Standards of Professional Appraisal Practice" or otherwise "in accordance with generally accepted appraisal standards." I.R.C. § 170(f)(11)(E)(i)(II).

Viewing the facts and the inferences drawn from them in the light most favorable to WT Art, we conclude that summary judgment must be denied. The statutory and regulatory provisions on which respondent relies — requiring that we determine whether China Guardian and its staff "regularly performed" appraisals, whether China Guardian was "regularly used" by WT Art, and whether its appraisal staff had the requisite background and experience — present factual questions that seem ill-suited to summary adjudication. And we do not believe that WT Art should be foreclosed from showing that the appraisals were prepared "in accordance with generally accepted appraisal standards" even if the Chinese appraisers did not consciously follow the U.S. Uniform Standards.

Respondent urges alternative grounds for granting summary judgment as to three of the contributions made during 2011 and 2012. He contends that the appraisal of "Tiantai Mountains" improperly valued the entire work rather than the 40% interest that WT Art actually donated in 2011. And he contends that the appraisals of the two paintings donated in 2012 were inadequate because they specified a range of values, rather than a single definitive value, for each painting. It would seem to us that these arguments are directed to the correctness of the valuations, not to the qualified nature of the appraisals. In any event, since trial will be necessary in both consolidated cases, we see little to be gained by addressing these arguments now.

In consideration of the foregoing, it is

ORDERED that respondent's Motions for Partial Summary Judgment, filed January 21, 2020, and June 5, 2020, are denied.

(Signed) Albert G. Lauber
Judge

Dated: Washington, D.C.
July 27, 2020