Form Over Substance: How a Technicality Cost Taxpayer a $64 Million Charitable Deduction
When interpreting the tax code and regulations, the IRS often elevates form over substance. And nowhere is this more true — or dangerous — than in the substantiation requirements for charitable deductions. As one taxpayer recently learned the hard way, failure to follow these requirements to the letter can have devastating consequences.
In 15 West 17th Street LLC v. Commissioner, 147 T.C. No. 19 (12/22/16), the U.S. Tax Court denied the taxpayer’s motion for partial summary judgment with regard to the substantiation rules, essentially endorsing the IRS’s disallowance of the taxpayer’s $64.5 million charitable deduction.
Background
15 West 17th Street LLC (the “LLC”) owned a building that had been placed on the National Register of Historic Places and, therefore, qualified as a “certified historic structure” for federal tax purposes. The LLC donated a conservation easement on the property by executing a historic preservation deed of easement in favor of the Trust for Architectural Easements, a qualified 501(c)(3) organization.
The Trust sent the LLC a letter acknowledging receipt of the easement. But the letter did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had otherwise given the LLC anything of value, in exchange for the easement, as required under Internal Revenue Code Sec.179(f)(8)(A). That section provides that “No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).
Sec. 179(f)(8)(B) provides that the contemporaneous written acknowledgement (“CWA”) must state, among other things, whether the donee supplied the donor with any goods or services in consideration for the gift. If it did, the CWA must contain a description and good-faith estimate of the value of such goods or services. In this case, the CWA failed to meet this standard.
Statement in Donee’s Tax Return Was Not Enough
After the petition in the case was filed, the parties attempted to avoid the CWA requirement by taking advantage of Sec. 170(f)(8)(D). That section provides that a CWA is not necessary if “the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.” (Emphasis added.)
The Trust filed an amended return for the year in which the conservation easement was granted that included a statement that the Trust had not provided the LLC with any goods or services in consideration for its gift. The LLC argued that the statement in the Trust’s return eliminated the need for a CWA under Sec. 170(f)(8)(D).
The IRS argued, however, and the Tax Court agreed, that Sec. 170(f)(8)(D) is not “self-executing.” In other words, it will not become operative unless and until the Treasury Department publishes the regulations to which the section refers. Because those regulations have not yet been issued, the CWA requirement continues to apply and was necessary to substantiate the LLC’s charitable contribution.
Charitable Deductions: Handle With Care
15 West 17th Street LLC illustrates the potentially devastating consequences of a taxpayer’s failure to dot the i’s and cross the t’s when substantiating charitable deductions. Omitting just a few words from a CWA can cost a taxpayer millions of dollars in tax benefits. Hopefully, in the future, it will be possible to correct mistakes by having the donee include appropriate language in its tax return. But that option won’t be available until regulations are issued.