Charitable contribution substantiation procedures in statute not available in absence of regulations

By Jason Borkes, CPA, Irvine, Calif.

Editor: Mark G. Cook, CPA, CGMA

On Dec. 22, 2016, the Tax Court ruled in favor of the IRS and held that a taxpayer's substantiation requirements for a charitable contribution deduction were not met by information reported on the donee organization's tax return (15 West 17th Street LLC,147 T.C. No. 19 (2016)). The court held that Sec. 170(f)(8)(A), which provides that no deduction is allowed for a charitable contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee organization in a specified form, applied to the taxpayer. The court denied the taxpayer's argument that it met the substantiation requirement of Sec. 170(f)(8)(D), which provides that Sec. 170(f)(8)(A) does not apply if the charitable organization files a tax return as directed in the regulations that includes the information that would otherwise have been included in a contemporaneous written acknowledgment.

The taxpayer, a limited liability company (LLC) taxed as a partnership, claimed a $64.5 million deduction in tax year 2007 for its contribution of a historic preservation easement deed on its real property in New York City to the Trust for Architectural Elements. The trust sent the LLC a letter acknowledging the gift; however, the letter did not state whether the trust had provided any goods or services or anything else of value in exchange. The IRS issued the taxpayer a notice of final partnership administrative adjustment disallowing the deduction as not complying with the requirements of Sec. 170 and associated regulations. The IRS also contested the gift's claimed value.

The taxpayer petitioned the Tax Court for redetermination. While the case was pending, the trust amended its 2007 Form 990, Return of Organization Exempt From Income Tax, to include a statement that no goods or services were provided to the LLC. The taxpayer moved for partial summary judgment, arguing that the amended Form 990 satisfied the substantiation requirements, making a contemporaneous written statement unnecessary.

Contents of a contemporaneous written acknowledgment

Under Sec. 170(f)(8)(B), the contemporaneous written acknowledgment must contain certain information including:

  • The amount of the contribution, if cash, or a description (but not the value), if property other than cash was contributed; and
  • Whether the donee organization provided any goods or services in consideration for the contribution, and, if so, a description and good-faith estimate of the value of the goods or services.

The written acknowledgment is valid only if it is contemporaneous. Per Sec. 170(f)(8)(C), an acknowledgment is contemporaneous if the taxpayer obtains it on or before the earlier of the date on which the taxpayer files the tax return for the tax year in which the contribution was made or the due date of that tax return, including extensions.

Statutory exception to the requirement

Under the aforementioned rules, for most charitable contributions of $250 or more, taxpayers will need to obtain a contemporaneous written acknowledgment to claim a deduction, but Sec. 170(f)(8)(D) provides an exception: A contemporaneous written acknowledgment is not required if "the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe," (emphasis added) that reports the information required under Sec. 170(f)(8)(B) with respect to the contribution. However, the regulations to which Sec. 170(f)(8)(D) refers were never finalized (proposed regulations were issued and withdrawn in 2015), and therefore the IRS has never issued such regulations or guidance as to the form to be filed and the conduct of filing. Thus, it could be construed that the filing of a donee tax return with the intent of complying with Sec. 170(f)(8)(D) cannot, in fact, comply with this statute, since the regulations were never promulgated. However, in some instances, the courts have concluded that a statute is self-executing in the absence of regulations and can be relied on prior to the issuance of regulations (see, e.g., Occidental Petroleum Corp., 82 T.C. 819 (1984), and First Chicago Corp., 88 T.C. 663 (1987), aff'd, 842 F.2d 180 (7th Cir. 1988)).

The 'self-executing' determination

In 15 West 17th Street LLC, the taxpayer argued that Sec. 170(f)(8)(A) did not apply because the charitable donee included on its amended Form 990 the information that would have been provided in a contemporaneous written acknowledgment to the taxpayer, satisfying the requirement under Sec. 170(f)(8)(D). Therefore, the Tax Court reviewed Sec. 170(f)(8)(D) to determine whether it is self-executing. If so, the statute is effective even though the IRS never issued the regulations that it had the authority to issue under the statute.

In other words, if the statute is self-executing, the exception to the contemporaneous written acknowledgment exception could be relied on prior to the issuance of the regulations to which it refers. The Tax Court held that Sec. 170(f)(8)(D) is not self-executing but rather a discretionary delegation of rulemaking authority. This means the determination of whether the provision takes effect is based on the IRS's judgment.

In its opinion, the Tax Court cites Neumann, 106 T.C. 216 (1996), in which the Tax Court distinguished between a "how" regulation and a "whether" regulation in determining whether a statute was self-executing. The court stated that a statute is self-executing if the regulations referred to in it deal with how to apply the statute. In other words, a "how" regulation assumes the statute applies, and the regulations only deal with how to apply rules of the statute. Conversely, a statute is not self-executing if the regulations referred to in the provision deal with whether the provision applies.

In 15 West 17th Street LLC, the court focused on whether the directive in Sec. 170(f)(8)(D) was mandatory or discretionary in determining if the statute applied in the absence of regulations. The court based its decision on the language of the statute. It found that the regulations were discretionary because the statute stated that the IRS "may prescribe" the regulations, as opposed to saying "shall prescribe." Thus, Sec. 170(f)(8)(D) did not apply in this case, because the issuance of regulations is a necessary condition for determining if the statute applies in the first place.

For numerous other areas of the Code written in a manner similar to Sec. 170(f)(8)(D), the IRS has not yet issued the regulations referred to in the statute. It is best to be cautious when the Code is written in this manner, carefully considering the language of the statute and whether the regulations the IRS is directed to issue are "how" regulations or "whether" regulations. In the case of claiming a deduction for a charitable contribution, it is always prudent to conform to Sec. 170(f)(8)(A) and obtain a contemporaneous written acknowledgment of the contribution from the charitable organization. If the charitable organization fails to provide one, or the acknowledgment has omissions or errors, it is the taxpayer's burden to pay additional tax resulting from the disallowance of the charitable contribution deduction.

EditorNotes

Mark G. Cook is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600 or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

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