Can the Tax Fairy make your time-share go away? Resort timeshares are a lot easier to buy than to sell. You take that “free” trip to Branson, and it seems ungrateful to not buy something from the nice people who bought you dinner. After you sign the papers, it occurs to you that maybe you don’t want to go to Branson every year, but there you are paying maintenance fees every year anyway.
That’s why a promise to take a timeshare off your hands and give you a fat tax deduction can be attractive. Maybe too attractive.
The Justice Department last week filed a lawsuit seeking to enjoin a Montana-based charity from promoting an “allegedly abusive timeshare donation scheme.” From the Justice Department press release:
The United States filed a civil injunction suit seeking to bar James Tarpey, a Montana-based attorney, Project Philanthropy, Inc. (a District of Columbia corporation which does business as Donate for a Cause) and Timeshare Closings, Inc. (a Colorado corporation which does business as Resort Closings, Inc.) from promoting an allegedly abusive timeshare donation scheme, the Justice Department announced today. The United States also filed suit against three of Tarpey’s associates – Ron Broyles of California, Curt Thor of Washington and Suzanne Crowson of Montana – all of whom, according to the complaint, assisted Tarpey in facilitating the timeshare donation scheme.
The tax law permits taxpayers to deduct donations of property at fair market value. If the taxpayer claims a deduction for a property donation (other than marketable securities) in excess of $5,000, extra documentation is required. You need a “qualified” appraisal, and you need to file a signed Form 8283 with your return with signatures from the appraiser. The injunction complaint says the timeshare charity failed to meet these requirements (my emphasis):
According to the complaint, which was filed in the U.S. District Court for the District of Montana, the timeshare donation scheme encourages timeshare owners to donate their unwanted timeshares to Donate for a Cause, a tax-exempt entity organized and operated by Tarpey. The complaint states that customers are falsely promised “generous” tax savings and that the defendants purportedly determine the “fair market value” of the timeshare by selecting an independent, third-party appraiser. The United States further alleged that Tarpey’s customers (the timeshare owners) pay significant processing fees to Resort Closings, Inc. to transfer the timeshares to Donate for a Cause. According to the complaint, Tarpey, Broyles, Thor and Crowson appraise the customers’ timeshares in a manner which does not comply with the law and which significantly overvalues the timeshares. According to the complaint, the appraisals fail to comply with regulations governing appraisals submitted with federal tax returns, contain substantive errors and omissions, fail to comply with generally accepted appraisal standards and grossly overvalue the timeshares. In addition, Tarpey, Broyles, Thor and Crowson are legally prohibited from appraising the timeshares for which their customers claimed federal tax deductions because they are too closely affiliated with Donate for a Cause, the complaint alleges.
Keeping in mind that these are only allegations and that the defendants have not yet had the opportunity to defend themselves in court, there are still some useful lessons for taxpayers here.
-It matters where you get the appraisal. The tax law requires the appraiser to meet requirements regarding expertise and experience with the property being appraised. The appraiser has to also meet certain independence-related requirements, one of which is that they can’t perform a majority of their appraisals for the charity receiving the property.
-Big cash “fees” to accept a property are fishy. The complaint alleges that in one case a donor was given an appraisal of $14,500 for a Hawaii time share originally bought for $16,900. The complaint alleges that the charity sold the time share for $19 on eBay, according to the complaint, but the donor was charged $3,000 for the transaction. If a property is actually worth something, the charity will normally pay any transaction costs out of the proceeds of the donated property.
-Reality makes a difference. The complaint says the charity would sell the donated timeshares on eBay for a small fraction of the “appraised” price:
The IRS reviewed a sample of 1,557 appraisals that defendants prepared for timeshares that were subsequently sold on eBay in 2012. The average appraisal amount for these timeshares was $10,619, yet they only generated an average sales price of $429 when sold on eBay – only 4% of the appraised amount.
If true, this is a bad fact. If a charity offers an appraisal that’s way out of line with what you could sell something for, that’s a red flag.
The moral? Donations of appreciated property can give good tax results if done right, but there is no tax fairy.
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