Details matter when claiming a charitable deduction under IRC §170—and failing to follow all of the requirements will most often trigger a complete disallowance of the deduction. That’s true even of a claimed $33 million deduction in the case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.
In this case the LLC, being taxed as a partnership, purchased a remainder interest in property for $2.95 million in March 2002. In August 2003, the LLC assigned its interest to a university, a §501(c)(3) organization. The Form 1065 reported a noncash charitable contribution of $33,019,000 from this donation.
On the Form 8283, Noncash Charitable Contributions, the partnership reported the date it had acquired the property and how it had acquired that property. But the space on the form that asked for the “Donor’s cost or other adjusted basis” was left blank.
Under Reg. §1.170A-13(c)(2)(i)(B) one of the requirements that must be fulfilled when claiming noncash contribution of most assets with a value in excess of $5,000 is the attachment to the return of a “fully completed appraisal summary” to the return on which the contribution is first claimed. Per Reg. §1.170A-13(c)(4)(ii)(E) one item to be included in that summary is “the cost or basis of the property” as adjusted by IRC §1016.
The taxpayer argued that, while it was true they hadn’t provided that information as part of the return, they should not be denied the deduction since the partnership had substantially complied with the requirements. The taxpayer argued that they should be judged similar to the taxpayer in the case of Bond v. Commissioner. The Tax Court explained that holding as follows:
In Bond v. Commissioner, 100 T.C. 32, 40-41 (1993), we determined that the reporting requirements of section 1.170A-13, Income Tax Regs., are “directory and not mandatory”, so that a failure to comply strictly with those requirements can be excused if the donor demonstrates “substantial compliance”. The taxpayers in that case attached to the return on which they claimed the deduction in issue an appraisal summary on Form 8283 that included all of the required information other than the appraiser’s qualifications, which “were promptly furnished to respondent’s agent at or near the commencement of his audit” of their return. Id. at 42. We reasoned: “The denial of a charitable contribution deduction under these circumstances would constitute a sanction which is not warranted or justified.” Id. We thus concluded that the taxpayers had substantially complied with section 1.170-13A, Income Tax Regs., and were entitled to the claimed deduction.
But the Court went on to note that it had held in the 1997 Hewitt case that there are distinct limits to substantial compliance:
By contrast, in Hewitt v. Commissioner, 109 T.C. 258 (1997), aff’d without published opinion, 166 F.3d 332 (4th Cir. 1998), the taxpayers neither obtained a qualified appraisal of the nonpublicly traded stock they donated nor attached an appraisal summary to their return. The Commissioner disallowed the taxpayers’ claimed deduction even though she did not dispute that the deducted amount equaled the stock’s value. We rejected the taxpayers’ argument that they had substantially complied with the substantiation requirements. “Given the statutory language [requiring a qualified appraisal] and the thrust of the concerns about the need of respondent to be provided with appropriate information in order to alert respondent to potential overvaluations”, we wrote, “petitioners simply do not fall within the permissible boundaries of Bond”. Id. at 264; see also Alli v. Commissioner, T.C. Memo. 2014-15, at *52 (“In determining whether a taxpayer has substantially complied with the charitable reporting regulations, we return to the purpose of the regulations[.]”).
In Smith v. Commissioner, T.C. Memo. 2007-368, 2007 WL 4410771, at *19, aff’d, 364 F. App’x 317 (9th Cir. 2009), we derived from Bond and Hewitt a standard for determining substantial compliance under which we “consider whether * * * [the donor] provided sufficient information to permit * * * [the Commissioner] to evaluate the[ ] reported contributions, as intended by Congress.”
In this case the Court found that failing to provide information about the original acquisition cost of the property kept information from the IRS that would have lead any reasonable person to wonder about whether a claimed value more than ten times higher than what had been paid for the asset just over a year earlier was reasonable. This was not just minor irrelevant information—rather it was information that was crucial to someone looking to evaluate how reasonable the claimed value was.