Legal Risks in Timeshare Donations
In recent years, timeshare donation schemes have gained traction as a seemingly attractive option for timeshare owners looking to exit their contracts. However, a recent ruling by the 9th U.S. Circuit Court of Appeals sheds light on the potential pitfalls and legal ramifications of such schemes. In this article we look at the dangers of timeshare donation schemes.
The Allure of Timeshare Donations
The concept of timeshare donations taps into a pervasive desire among timeshare owners to unburden themselves of ongoing maintenance fees and contracts they may no longer want or need. The added promise of a charitable tax deduction makes the proposition seem like a noble way to cut ties, turning a financial burden into an opportunity for social good. It’s an appealing pitch that promises not only an escape hatch but also a moral high ground—a combination that proves irresistible to many.
The Pitch to Timeshare Owners
James Tarpey, a Montana lawyer, spearheaded a timeshare donation scheme that promised owners a way out of their contracts. As Judge M. Margaret McKeown noted, Tarpey’s pitch was compelling:
“Through Donate for a Cause, James Tarpey pitched an attractive offer to customers looking to get rid of timeshares: Donate your unwanted property to us, we’ll get it appraised, and you’ll claim a charitable contribution deduction on your federal tax return.”
The Attractive Proposition for Timeshare Owners
A Win-Win Tax Scenario on the Surface
For many timeshare owners, the idea of donating their property in exchange for a tax deduction seemed like the perfect solution to a common problem.
Owning a timeshare often comes with its own set of challenges, including maintenance fees, inflexible usage schedules, and the potential for declining property values. James Tarpey’s donation proposition offered a way out.
The allure was simple and compelling: donate your timeshare to “Donate for a Cause,” and in return, not only would you be free from the burdens of timeshare ownership, but you’d also receive a charitable contribution deduction on your federal tax return. He touted this arrangement as “the only way to get rid of an unwanted timeshare and still make some money.” This deduction was based on the appraised value of the timeshare, which, as many owners believed, could offset other tax liabilities.
For many, this seemed like a golden opportunity. It promised financial relief in the form of tax benefits while also providing a sense of philanthropy, as their timeshare would be used for charitable purposes.
Unraveling the Reality: Overvalued Appraisals and Discrepancies
However, beneath this attractive proposition lay a more complex and problematic reality. The primary issue was the significant overvaluation of the timeshares. Instead of appraisals reflecting the true market value of the properties, they were inflated, sometimes egregiously so.
To put this into perspective, consider a timeshare that, in a fair market scenario, might be valued at $10,000. Under Tarpey’s donation scheme, this same timeshare might be appraised at $50,000 or even higher.
This inflated value would then be the basis for the donor’s tax deduction, leading to a much larger deduction than what was genuinely warranted.
The discrepancies became glaringly apparent when these donated timeshares were later listed for sale. Platforms like eBay, known for their vast and varied marketplaces, became a hub for these timeshare resales. Shockingly, many of these properties sold for just a fraction of their appraised values. For instance, a timeshare appraised at $50,000 might sell for a fraction of that on eBay.
This stark difference between appraised and sale values was a red flag. It indicated that the appraisals were not just slightly off but were grossly exaggerated. Such discrepancies did not go unnoticed. They raised eyebrows among legal and financial experts, leading to deeper investigations into the legitimacy of Tarpey’s entire operation. The promise of a win-win scenario began to unravel, revealing a scheme that was more about profiteering than philanthropy.
The Role of Donate for a Cause and Resort Closings
Tarpey operated under the charity “Donate for a Cause” and a business named “Resort Closings.” The former was responsible for accepting timeshare donations, while the latter handled the closing processes for these donated timeshares. Owners were required to pay a donation fee to the charity and additional timeshare transfer fees. From 2010 to 2013, Donate for a Cause accepted an astounding 7,600 timeshare donations. This operation brought in a gross income of over $22 million for Tarpey.
Inflated Appraisals: Inside Sources and Questionable Valuation Practices
At the heart of the timeshare donation scheme was a critical flaw: the inflated appraisals. These appraisals, which determined the value of the timeshares being donated, were consistently higher than what the properties were genuinely worth.
Such overvaluation meant that donors believed they were making a more significant charitable contribution than they actually were, leading to larger tax deductions.
The Conflicted Appraisal Team Behind Timeshare Valuations
The source of these appraisals was even more concerning. James Tarpey, the mastermind behind the scheme, was directly involved in the appraisal process. But he wasn’t alone. Alongside him were three other individuals: his sister and two additional appraisers. This close-knit group was responsible for determining the value of countless timeshares, a task that should have been impartial and based on market realities.
Lack of Appraisal Qualifications
What raised eyebrows even further was the lack of qualifications among this group. U.S. Treasury regulations have clear guidelines on who can be considered a qualified appraiser, especially for charitable contributions. These guidelines ensure that appraisals are accurate, unbiased, and reflective of true market values.
Shockingly, none of the individuals involved in Tarpey’s operation met these criteria. Neither Tarpey, his sister, nor the two other appraisers had the necessary credentials or qualifications to provide appraisals for tax purposes. This glaring oversight meant that countless timeshare owners were basing significant financial decisions on appraisals that lacked legitimacy. This was covered in detail by the
The Legal Ramifications of Deducting Timeshares
The Internal Revenue Service (IRS) took notice of Tarpey’s operations and assessed penalties for making false statements and exaggerating valuations in connection with a tax shelter.
Tarpey contested these penalties, arguing either against his liability or the accuracy of the penalty calculations. However, a federal judge ruled against Tarpey, stating that the penalty should encompass the entire operation, from soliciting timeshare donations to directing profits to other organizations. The judge also believed that the income from the timeshare business should be attributed to Tarpey, as he functioned as the nonprofit’s alter ego.
The 9th Circuit upheld this decision, emphasizing that the penalized activities were not just limited to false statements but extended to the entire timeshare donation business.
Conclusion: Why Caution is Crucial in Timeshare Donations
The 9th Circuit’s ruling serves as a stark reminder of the potential dangers of timeshare donation schemes. Timeshare owners must exercise caution and conduct thorough research before participating in such programs. It’s important to understand the tax implications, the legitimacy of the charity or organization involved, and the accuracy of property appraisals. As the old adage goes, if something seems too good to be true, it probably is. Read more from a Forbes interview with Attorney Andy Meyer.
This article is written for information purposes only and is not intended as legal advice. Owners who have timeshare related issues should contact an attorney familiar with timeshare law.
Led by timeshare attorneys J. Andrew Meyer and Michael D. Finn with over 75 years of combined legal experience. The Finn Law Group is a consumer protection firm specializing in timeshare law. If you feel you may have a legal matter, we offer a free consultation to discuss your rights and options. Feel free to contact us at 727-214-0700 or by email at i[email protected]. Learn more about timeshare matters on our Twitter page.