It’s been a rough summer for taxpayers attempting to dispute IRS disallowances of charitable contribution deductions for conservation easements under IRC §170(h). In the most recent case, the plaintiff was coming before the Court for the third time and, as with the last two, the IRS prevailed on the issue in front of the Tax Court.

In this case, the taxpayer in Belair Woods, LLC v. Commissioner, TC Memo 2020-112[1] was disputing the IRS’s position that the easement in question failed the “protected in perpetuity” requirement under IRC §170(h)(5)(A). That provision and regulations[2] implementing the provision, require that the grant of the easement must, in the event the easement is extinguished, provide the charity with a proportionate share of the proceeds upon a later sale of the property.

Online tax discussion groups, many of which are sponsored by state CPA societies for their members, offer useful places to discuss tax issues and become aware of what is going on in taxes.  It was when participating in such a group discussion that I became aware of a theory being proposed to allow working around the state and local tax deduction cap based on the proposed regulations[1] issued by the IRS in December regarding payments to charitable organizations not treated as charitable contributions under Proposed Reg. §1.162-15.

A taxpayer who dedicated his life to evangelization, using normal interactions in life to open discussions regarding his religious beliefs to all around him, found that the Tax Court did not agree with his view that this made his various expenses incurred for meals, travel and other items were automatically deductible. (Oliveri v. Commissioner, TC Memo 2019-57, May 28, 2019)[1]

Courts prefer to decide issues on narrow grounds if they can, and a failure in completing Form 8283, which Forbes online contributor called an error that “would be a review comment that a senior accountant with three years experience would have given an associate,”[1] was the issue the Tax Court had focused on to deny a $33 million deduction to a partnership in the 2017 case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.

The Sixth Circuit did not come to the rescue of the taxpayer in this case, agreeing with the Tax Court that the failure to include basis information on the tax return was sufficient to allow a denial of the entire deduction. (Jeff Blau, et al v. Commissioner, USCA DC, Case No. 17-1266)[2]

The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB) announced that they are in the process of reviewing final regulations for the state and local tax workarounds and a separate notice related to §§170(c) and 164. 

OIRA has been reviewing all IRS regulations, both proposed and final, since last year.  However, this is the first time that OIRA has announced a review of a notice.  This is also interesting since the IRS also recently issued a policy statement indicating a reduced use of subregulatory guidance, which has some questioning what this particular review might mean, if anything, about the new IRS policy.

In Information Letter INFO 2018-0030 the IRS has given limited additional information on the clarification the agency issued on September 5 regarding the state tax deduction workaround proposed regulations on August 23 (REG-112176-18).

The proposed regulations would require taxpayers to reduce charitable contribution deductions by the amounts of any state tax credits received for contributing if the credit exceeds 15% of the amount of the contribution.  In the later clarification, the IRS and Treasury stated that this regulation did not change the treatment of amounts paid that might be deductible under IRC §162(a) as an ordinary and necessary business expense.

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In the case of Harbor Lofts Associates et al. v. Commissioner, 151 TC No. 3 the Tax Court ruled that a long term lease holder did not hold a qualified real property interest which could qualify for a deduction for the donation of a conservation easement.

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The much anticipated proposed regulations to deal with the various credits that could be used to work around the newly imposed limitation found at IRC §164(b)(6) on deductions for state and local taxes have been released by the IRS (REG-112176-18).  The resulting rules are going to affect both the new workaround credits passed by New York, Connecticut, New Jersey and other states following the passage of the Tax Cuts and Jobs Act, as well as already existing credits in other states.

The credits in question give taxpayers a credit for all or a very significant portion of the contribution made as a direct reduction in state income taxes or property taxes.  Credits of this type had existed for years, being especially popular as credits for making contributions to organizations that provided scholarships or financial support to students attending private primary and secondary schools.

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Revenue Procedure 2018-32 has been issued by the IRS to provide consolidated guidance for taxpayers to gain assurance that an organization they are making a charitable contribution to qualifies to receive tax deductible contributions.  This ruling consolidates and updates prior guidance found in several prior procedures.

The prior procedures that have been modified and superseded are:

• Rev. Proc. 81-6, 1981-1 C.B. 620;
  

• Rev. Proc. 81-7, 1981-1 C.B. 621;
  

• Rev. Proc. 89-23, 1989-1 C.B. 844; and
  

• Rev. Proc. 2011-25 I.R.B. 887

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The Tax Court, in the case of Palmolive Building Investors LLC et al. v. Commissioner, 149 TC No. 18, refused to follow the holding of the First Circuit Court of Appeals in the case of Kaufman v. Commissioner.  The Court continued to very strictly apply the subordination requirement in Reg. §1.170A-14(g), finding that the taxpayer in this case had not managed to satisfy the perpetuity requirement of IRC §170(h)(5).

The First Circuit and the Tax Court had disagreed on the extent to which a mortgage must be subordinated to meet the requirements of Reg. §1.170A-14(g)(2).  That regulation provides:

(2) Protection of a conservation purpose in case of donation of property subject to a mortgage.

In the case of conservation contributions made after February 13, 1986, no deduction will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

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The IRS has yet again extended the relief it provided for Hurricane Harvey to cover Hurricane Irma.  In Notice 2017-52 the IRS has provided the same relief for employees and employers when a leave donation program to benefit victims of Hurricane Irma as Notice 2017-48, the details of which were covered in an earlier blog post.

Generally, an employer can allow employees to donate leave time of any sort to a program where the employer then pays an amount equal to the value of that time to a §170(c) charity to be used for relief for victims of either hurricane.  The IRS will not treat the payment as taxable income for the employee, but will treat the amount as compensation expense, rather than a charitable contribution, for the employer.

The payment to the charitable organization must be made before January 1, 2019.

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The IRS in Notice 2017-48 provided guidance on the use of leave-based charitable donation programs that employers can use to provide Hurricane Harvey relief.  Under such programs, employees give up certain amounts of vacation, sick or personal leave in exchange for which the employer makes a cash donation to a qualified charitable organization for Hurricane Harvey relief.

Normally such an arrangement would arguably be taxable to the employee, followed by a charitable contribution deduction for the employee or, in the alternative, that the payments are charitable contributions of the employer which would be subject to the appropriate limits on charitable contribution deductions.  This notice provides that the IRS will not assert that position for programs that meet the requirements of this notice.

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In a split decision, the Fifth Circuit Court of Appeals reversed and remanded the Tax Court’s 2015 opinion in the case of BC Ranch II, LP et al v. Commissioner, Case No. 16-60068 and 16-60069. All the judges on the panel agreed that the Tax Court had erred in deciding that the entire amount paid by limited partners for their interests represented disguised sales and in deciding that a valuation penalty applied. But the panel split on a key question of whether the partnership had complied with the requirements to obtain a charitable contribution for the donation of a conservation easement, with a majority finding the Tax Court had erred in determining the contribution did not qualify for a deduction.

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In the case of Rutkoske, Sr. et al v. Commissioner, 149 TC No. 6, the Tax Court was asked to consider what types of income counted as “gross income from the trade or business of farming” for purposes of gaining access to the increased deduction for qualified conservation easements of property used in agriculture or livestock production under IRC §170(b)(1)(E)(iv).

Normally a deduction for a qualified conservation easement is limited to 50% of the taxpayer’s income after reduction for other charitable contributions.[1]  However, that limit rise to 100% for the contribution of property used in agriculture or livestock production by a qualified farmer or rancher.[2]

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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.

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The case of Izen v. Commissioner, 145 TC No. 5 involved the question of whether a taxpayer had complied with the requirements of IRC §170(f)(12) for his donation of his interest in an aircraft to a museum in Houston.

IRC §170(f)(12) was enacted to impose additional substantiation requirements for taxpayers claiming donations of used motor vehicles, boats and airplanes.

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In Notice 2017-10 the IRS has identified certain syndicated conservation easement transactions as listed transactions for purposes of Reg. §1.6011-4(b)(2) and IRC §§6011 and 6112.

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The word “including” in the Internal Revenue Code creates a potential trap that taxpayers fall into from time to time.  IRC §7701(c) tells us that when we see that word in the code we need to understand that the list presented is not every item that could apply to the situation.

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Another couple discovered that the documentation rules for charitable contributions are very strict in the case of Haag v. Commissioner, TC Summary Opinion 2016-29. This case dealt with both cash and noncash contributions, along with other deduction items the IRS disputed. But our key matter of interest will be for the charitable contributions, since the strict documentation rules are very difficult for taxpayers to comply with, but the Courts feel compelled to enforce those rules since Congress passed them.

The issue involved both cash and noncash contributions. The cash contributions related to the standard situation clients often assert in making a certain amount of weekly contributions to a church. Though we are not told so in this case, quite often the taxpayer will claim they put cash into an offering plate.