On February 13, 2020, the Tax Court issued a Memorandum Opinion in the case of Oakhill Woods, LLC v. Commissioner (T.C. Memo. 2020-24). The issues presented in Oakhill Woods, LLC were whether the petitioner satisfied for this donation the substantiation requirements of Treas. Reg. § 1.170A-13(c), and if it did not, whether Treas. Reg. § 1.170A-13(c) is, itself, invalid.
The petitioner owned 388 acres in Effingham County, Georgia. It donated an easement to the Georgia Land Trust, a qualified organization under IRC § 170(h)(3), covering 379 of the 388 acres, reserving the other 9 acres for possible future development. The easement generally prohibits residential and commercial development of the conserved land, and it sought to preserve the swamp, native mosquito habitat, and flat, humid pine scrub that is Effingham County, Georgia. With a straight face, the petitioner claimed a deduction of almost $21,000/acre, for a total of approximately $8m and attached an “appraisal” by Dave Roberts (not to be confused with the founder of the Wendy’s fast food chain, or is he?).
Mr. Roberts claimed that the land, which was 53% wetlands, and 100% in Effingham County, was “prime for residential development.” Sure, Dave. Understanding that Mr. Roberts’ opinion was priceless, the petitioner locked him into it, having him sign a Form 8283 (Non-Cash Charitable Contributions), which the petitioner included with its Form 1065 (Partnership Return).
The Form 8283 requires a taxpayer to provide specific substantiation with respect to noncash contributions over $5,000, including (1) a description of the donated property, (2) a brief summary of its physical condition, (3) its appraised fair market value (FMV), (4) the date the property was acquired by the donor, (5) the manner of acquisition, and (6) the donor’s cost or adjusted basis. If the taxpayer does not attach such documentation and does not provide reasonable cause why it was not provided, the form cautions that the deduction will be automatically disallowed.
Instead of providing the donor’s “cost or adjusted basis” in the property, the petitioner (per the advice of their CPA, The Hamburgler) explained to the IRS that such information was not necessary, because “the basis of the property is not taken into consideration when computing the amount of the deduction.” The IRS, to no one’s surprise except the petitioner, proposed to disallow the claimed deduction for lack of information concerning cost or adjusted basis, which it turns out, was in fact necessary.
Despite petitioner’s best laid plans of hiring a glorified fry-cook-grill-jockey as its “appraiser,” when the IRS ultimately issued its notice of final partnership administrative adjustment (FPAA), it noted that without providing cost or basis, the petitioner had not established that the FMV of the easement “exceeded $0.” To add insult to injury, Bob’s Big Boy (the IRS) determined a 40% “gross valuation misstatement” penalty under IRC § 6662(a) and (h) and (in the alternative) a 20% accuracy-related penalty under IRC § 6662(a).
Substantiation of Charitable Property – Use the Damn Form!
If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time of the contribution. Treas. Reg. § 1.170A-1(c)(1). Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must obtain a qualified appraisal and attach it to the taxpayer’s, along with any other such information “as the [IRS] may require.” IRC § 170(f)(11)(C); Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a)(1), 98 Stat. at 691; Treas. Reg. § 1.170A-13(c)(2). The IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38. If a taxpayer fails to attach an accurate and complete Form 8283 (as required by the regulations), the IRS will in most instances, summarily disallow the deduction, as is their prerogative pursuant to IRC § 170(a)(1).
The petitioner advances the same argument as the taxpayer in Loube v. Commissioner, T.C. Memo. 2020-3, and with about as much success, which is to say none. The petitioner contends that it strictly and/or substantially complied with the regulations, and the Tax Court smiles and nods as it listens to petitioner sing a song of futility as in Loube and as in Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, before that.
Substantiation of Charitable Property – Read the Damn Regulation!
The “regulation” invoked by the petitioner is Treas. Reg. § 1.170A-13(c), which, in part, requires the donor to attach a fully completed appraisal summary to the tax return on which the charitable contribution deduction is first claimed. Treas. Reg. § 1.170A-13(c)(2)(i)(B). A fully completed appraisal summary must include the cost or adjusted basis of the donated property. Treas. Reg. § 1.170A-13(c)(4)(ii)(E).
If a taxpayer has reasonable cause for being unable to provide the information required (relating to the manner of acquisition and basis of the contributed property), an appropriate explanation should be attached to the appraisal summary.” Treas. Reg. § 1.170A-13(c)(2)(iv)(C)(1). “The taxpayer’s deduction will not be disallowed simply because of the inability (for reasonable cause) to provide these items of information.” Id. But it will be disallowed if you don’t follow the freaking directions. As the Dude, a most worthy jurist, once noted, as to the issue of charitable substantiation, “This it isn’t ‘Nam [petitioner]; there are rules.”
Substantiation of Charitable Property – Answer the Damn Request!
There is a bit of a built-in escape hatch if your client just cannot seem to keep its crayons inside the solid lines when it comes to substantiation. The regulation provides that a deduction may be allowed, notwithstanding the abject failure to attach an appraisal summary, but only if the donor complies with an IRS request to submit a Form 8283 within 90 days. Treas. Reg. § 1.170A-13(c)(4)(iv)(H) (providing that a deduction will not be disallowed if such a request is (a) made by the IRS, and (b) the donor complies with the request).
Substantial Compliance not Likely a Viable Option for Substantiation Regulations
Substantial compliance may be shown where the taxpayer “provided most of the information required” or made omissions “solely through inadvertence.” Hewitt v. Commissioner, 109 T.C. 258, 265 n.10 (1997), aff’d without published opinion, 166 F.3d 332 (4th Cir. 1998). In order to substantially comply, however, the taxpayer must satisfy all reporting requirements that relate to “essence” of the statute. Bond v. Commissioner, 100 T.C. 32, 41 (1993); Taylor v. Commissioner, 67 T.C. 1071, 1077 (1977).
The Tax Court notes that Congress, by enacting the heightened reporting requirements of DEFRA, aimed to assist the IRS to easily identify inflated charitable contribution deductions. See RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 16-17 (2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). The goal of DEFRA, in layman’s terms, was to send up a red flag for overvaluations of contributed property. RERI Holdings I, 149 T.C. at 14. It is understandably difficult for the IRS to flag a contribution, however, if the donor stubbornly refuses to tell the IRS how much it’s worth, and so “cost or adjusted basis” is “essential” under Treas. Reg. § 1.170A-13(c)(4)(ii)(E). See RERI Holdings I, 149 T.C. at 16-17. Thus, the petitioner’s failure to provide “cost or adjusted basis” was fatal to the deduction.
Original opinion: (T.C. Memo. 2020-24) Oakhill Woods, LLC v. CommissionerAdd to favorites