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 17^th Street LLC v. Commissioner, the U.S. Tax Court upheld the IRS’s disallowance of the taxpayer’s $64.5 million charitable deduction. 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. It 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 charity.

The Trust sent the LLC the requisite letter acknowledging receipt of the easement. But the letter failed to state whether the Trust had provided any goods, services or anything else of value to the LLC in exchange for the easement, as required by the tax code. The parties attempted to fix the problem by including the missing statement in an amended tax return for the year in which the conservation easement was granted. But the court said that wasn’t enough. Although a section of the tax code provides that an appropriate statement in the donee’s tax return eliminates the need for an acknowledgement letter, that section won’t take effect until regulations are issued.

15 West 17^th 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 an acknowledgement letter 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.