Congress has provided that for certain tax deductions a taxpayer must produce documentation in a specified form, subject to very detailed rules, or no deduction will be allowed to the taxpayer regardless of any other information that might be available to justify the deduction.
One particularly nasty area that requires detailed documentation or the deduction is entirely disallowed is found for charitable contributions in excess of $250. That provision blocked entirely any potential deduction for the taxpayer in the case of French v. Commissioner, TC Memo 2016-53.
IRC §170(f)(8)(B) requires that the taxpayer obtain an acknowledgement that contains the following information:
(B) Content of acknowledgementAn acknowledgement meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.
Congress, not satisfied merely to require that documentation, also imposed a specific time by which the taxpayer must obtain that information, found at IRC §170(f)(8)(C):
(C) Contemporaneous For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of—
(i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or
(ii) the due date (including extensions) for filing such return.
Thus a taxpayer must have in his/her hands documentation with all of the necessary information before the taxpayer files the return in question or, if earlier, the due date (including extensions) of the return.
The specific item that often causes problems is the lack of statement regarding what goods or services the taxpayer received in exchange for the contribution or, if none were received (the normal state of affairs), a statement that says nothing was received (aside from an intangible religious benefit).
In this case the taxpayers had made a contribution of a conservation easement in late 2005, with a deed recorded on December 29, 2005. The taxpayer received a letter from the charity on June 6, 2006 that stated they had received no goods or services in exchange for their contribution.
However, the taxpayers had actually filed a 2005 return (and amended return) by the original due date for the 2005 return of April 15, 2006. Thus the letter from the charity was immediately removed from consideration by the Court, as it was not obtained prior the filing of their return.
In previous cases involving deeds of conservation easement the Court had found the deed itself might satisfy these requirements if it either contained an explicit statement that the donor had not received any goods or services or, lacking that, the deed as a whole effectively provides that no goods or services were received. (See Averyt v. Commissioner, TC Memo 2012-198 and Simmons v. Commissioner, TC Memo 2009-208 aff’d 646 F.3d 6 (DC Cir 2011)).
The taxpayers’ deed did not explicitly state that no goods or services had been received, so the Court looked to see whether the deed, taken as a whole, provided as much. The Court noted how the deeds in the Averyt and RP Golf cases had managed to do that:
…[I]n Averyt the deed stated that the conservation easement was granted for the purpose of conservation and that the deed was the entire agreement of the parties. See Averyt v. Commissioner, slip op. at 4, 12. Moreover, in RP Golf, LLC v. Commissioner, at *10, the deed stated that the conservation easement was made “in consideration of the covenants and representations contained herein and for other good and valuable consideration”; but the deed did not include any consideration of any value other than the preservation of the property. Additionally, similar to the deed in Averyt, the deed in RP Golf, LLC v. Commissioner, at *10-*11, stated that it was the entire agreement of the parties. In the light of these facts the Court in Averyt and RP Golf, LLC held that the taxpayers had substantiated their charitable contributions because the deeds “taken as a whole” proved compliance with section 170(f)(8)(B)(ii). RP Golf, LLC v. Commissioner, at *10-*11; Averyt v. Commissioner, slip op. at 12-13.10
Unfortunately the deed that the taxpayers produced in this case did have language indicating it represented the entire agreement of the parties. Thus since the deed neither stated that no consideration was given nor did it say it was the entire agreement (where its silence as to consideration would indicate none had been given), the taxpayers had failed to meet the documentation requirements.
The IRS and taxpayers had also disagreed on whether the taxpayers had an actual ownership interest in the property and whether the easement had been properly valued—but the Court noted that it did not need to deal with those issues since the failure to have the required statement meant no deduction would be allowed.
One interesting issue to note is that the 2005 return was not actually a year before the Court in this case—rather the IRS was attempting to disallow the carryover of contributions in excess of the annual limits to 2006, 2007 and 2008. The fact that the deduction “survived” for three years past the original filing date and the 2005 return moved beyond the IRS’s ability to assess tax against it did not protect the deduction in later years—nor did it bar the IRS from effectively disallowing the loss in 2005 which had the effect of taking the carryover off the later returns.
Some reading the case might decide that the Court simply went this route to avoid having to deal with the messier issues of ownership and valuation of the interest. The reader might conclude that had the taxpayers been “sympathetic” and their contribution otherwise beyond reproach the Tax Court would not have thrown out the deduction for such an arbitrary rule—after all, everyone agreed the taxpayers did not actually receive anything and had the letter been written three months earlier there would have been no problem on this issue.
However a look at prior cases indicates that even sympathetic taxpayers have been victimized by this provision. For instance see Durden v. Commissioner, TC Memo 2012-140 for a case where the lack of a “no goods or considerations” clause cost the taxpayer a cash deduction of nearly $25,000. Advisers must counsel clients that the law requires absolute and strict compliance with these rules, including making sure the documentation is in hand before the return is filed (or required to be filed if earlier).