$64.5 Million Charitable Deduction Lost for Lack of Substantiation

• DOI: http://doi.org/10.1002/npc.30293
• Date: 01 March 2017
• Published date: 01 March 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

March 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

lenge of the “purported” tax benefits in this setting is

primarily based on overvaluation of the easement, using

the 2.5 percent standard. This means that legitimately

valued property will be swept up in this enforcement

effort. For example, the property described in the next

article was said by the court to have appreciated in value

by 600 percent over two-and-a-half years, according to

an appraisal that was not challenged by the court. Those

concerned about the chilling effect on these contribu-

tion transactions certainly have a point. ◆

$64.5 MILLION CHARITABLE

DEDUCTION LOST FOR LACK

OF SUBSTANTIATION

A company executed in favor of New York’s Trust for

Architectural Easements a historic preservation deed of

easement, claiming a charitable contribution deduction of

$64.5 million. The US Tax Court, on December 22, ruled

that this deduction is unavailable because the Trust did not

provide the donor with the requisite substantiation letter

(15 West 17th Street, LLC v. Commissioner). The court also

rejected the donor’s attempt to salvage the deduction by

reason of the alternative donor-reporting option.

Facts

The property involved in this contribution transaction is a

certified historic structure (IRC § 170(h)(4)(C)(i)). The Trust is a

qualified charitable organization (IRC § 170(h)(3)). The deed

granted the Trust a perpetual conservation easement over

the property. The company secured an appraisal concluding

that the property had a fair market value of $69.2 million

before placement of the easement and $4.7 million there-

after, thus justifying the claimed deduction of $64.5 million.

The Trust acknowledged this gift by letter. The letter

failed to state whether the Trust had provided any goods

or services to the donor in exchange for the easement. In

its Form 990 for the year involved, the Trust did not report

the contribution from the company, nor did it there state

whether it provided any goods or services to the com-

pany in exchange for the gift property. The Trust filed an

amended return, after the petition in this case was filed,

adding those two items.

Law

A charitable deduction is not allowed, for federal

income tax purposes, for a contribution of $250 or more

unless the donor substantiates the gift by a contempora-

neous written acknowledgment from the donee (IRC §

170(f)(8)(A)). This acknowledgment must state whether

the donee supplied the donor with any goods or services

in consideration for the gift and, if it did, must furnish a

description and good-faith estimate of the value of the

goods or services (IRC § 170(f)(8)(B)(ii), (iii)).

The Internal Revenue Code provides an alternative

to this substantiation requirement, by which the donor

reports the requisite information by return filed with the IRS

(IRC § 170(f)(8)(D)). This optional approach is said to be uti-

lized “in accordance with such regulations as the Secretary

may prescribe.” These regulations have not been issued in

final form, although they were issued in proposed form

(summarized in the November 2015 issue) and thereafter

withdrawn (as summarized in the May 2016 issue).

The general substantial rule is “strict” and cannot

be overridden by the doctrine of substantial compliance

(e.g., French v. Commissioner (summarized in the May

2016 issue)).

Analysis

The Tax Court summarily rejected the argument that

the reference to “regulations” in IRC § 170(f)(8)(D) is to

regulations concerning the filing of charitable organiza-

tions’ annual information returns. It then turned to this

question: “How should a court respond when a taxpayer

or the IRS desires to have a particular tax [statutory]

treatment apply in the absence of regulations to which

the statute refers?” It began its analysis by “considering

whether Congress couched its delegation of rulemaking

authority in mandatory or permissive terms.”

The court, tracing the case law, concluded that

“most” of its cases have dealt with delegations of man-

datory rulemaking authority. The vast majority of these

cases involve “taxpayer-friendly” Code provisions held

to be “self-executing.” Also reviewed are cases involv-

ing discretionary delegations of rulemaking authority.

The court concluded that the donee reporting alterna-

tive (IRC § 170(f)(8)(D)) is an example of congressional

grant to Treasury of discretion to prescribe regulations.

It also stated that the legislative history accompanying

this option shows that Congress intended that it “not be

self-executing.”

The court wrote, “Congress plainly understood that

donee reporting raised serious policy questions concern-

ing the form and manner of such reporting, which the

Secretary would need to address before any such alter-

native could be implemented.” (This is quite the under-

statement, considering that the proposal generated over

38,000 comments (mostly adverse), causing withdrawal

of the proposed regulations three weeks later.) The

court added that this is a “classic example of a situation

in which Congress has delegated discretionary policy-

making authority to the Secretary.”

The court, agreeing with the Treasury Department and

the IRS, rejected the proposition that a donee can jump-

start IRC § 170(f)(8)(D) by filing an amended Form 990.

In this case, the amended return was filed six years after

the company’s tax return involved was due to be filed and

three years after the IRS completed its examination of that

return. Thus, inasmuch as the reporting option is not self-

executing, the general substantiation rule was held to be