September 10, 1998 | Read Time: 2 minutes
The U.S. Tax Court has ruled that a man who gave a 42-foot boat to charity placed a value on the gift that was much too high and now owes the government a special penalty for a “substantial valuation misstatement.”
Barry John Sergeant, who lived in Connecticut at the time, bought the Trojan Motor Yacht in 1992 for $8,500 from a boat-sales company. Five years earlier, the 1967-model boat had been sold for $32,000 plus a trade-in valued at about $5,000. But by the time of Mr. Sergeant’s purchase, the boat had been been repossessed, “had deteriorated considerably, and needed a lot of repairs,” the court said.
Mr. Sergeant made repairs to the yacht and tried in vain to sell it for $60,000 to $82,500. Mr. Sergeant then saw an advertisement in The Wall Street Journal that asked for donations of boats to the Oceanus Institute, a charity in Manset, Me. In 1993, he donated the boat to the institute, which sold the yacht 20 days later for $4,000 after apparently damaging it, the court said.
On their 1993 federal income tax return, Mr. Sergeant and his wife claimed that their gift was worth $75,100. They attached an appraisal by a third party that was based on figures from the BUC Guide, a publication that values boats.
During a review of the matter, the I.R.S. decided that the fair market value of the Sergeant boat was only $22,125. The Tax Court agreed. One reason: The court agreed with testimony that the BUC Guide “inflates the value of used boats” and that another publication — the National Automobile Dealers Association Large Boat Appraisal Guide — “more accurately” reflects the fair market value of used boats. The association’s guide said that a boat comparable to the Sergeant yacht was worth as little as $22,750.
But the Tax Court wasn’t finished. Federal law imposes a penalty on taxpayers who claim a value for a gift that is 200 per cent or more of the amount determined to be the correct value. The penalty is waived if there was “reasonable cause,” the taxpayer acted in good faith, and the value was based on a qualified appraisal. The fine is equal to 20 per cent of the underpayment of tax.
The Tax Court said that the penalty could be levied against the Sergeants because the $75,100 value they claimed for the boat exceeded 200 per cent of the correct value of $22,125.
What’s more, the appraisal of the boat did not include the date of the gift, as the law requires; there was insufficient evidence that the appraiser was qualified; and there was no evidence that, in addition to obtaining an appraisal, the Sergeants had “made a good faith investigation of the value” of the gift (Barry John Sergeant and Christine M. Sergeant v. Commissioner of Internal Revenue, T.C. Memo. 1998-265).
