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Tax Court Disallows $64.5 M Charitable Contribution Deduction

As tax return season approaches, keep in mind that charitable deductions are allowable only if the taxpayer satisfies substantiation requirements.  For contributions of $250 or more, a taxpayer must obtain a contemporaneous written acknowledgement from the donee. 

Here's why. On its 2007 income tax return, 15 West 17th Street, LLC (“LLC”) claimed a charitable contribution deduction of $64.5 million for a facade easement gifted to a charitable organization.  To substantiate the deduction, the donee organization sent a letter to the LLC acknowledging receipt of the easement, but the letter did not state whether the organization had provided any goods or services to the LLC, or whether the organization had otherwise given the LLC anything of value, in exchange for the easement.  The LLC included with its tax return a copy of an appraisal report, a copy of the organization’s letter and IRS Form 8283, which is required for noncash charitable contributions and was executed by the appraiser and by a representative of the organization.  The IRS audited the 2007 tax return and disallowed the charitable contribution because there was no contemporaneous written documentation stating whether the donee organization supplied the donor with any goods or services in consideration for the gift.  The LLC then petitioned the Tax Court and it disallowed the deduction.

After the LLC petitioned the Tax Court in this case, the donee organization submitted an amended Form 990 return for the year in which the gift was made.  The amended return described the gift made from the LLC and included a statement that the donee had provided the LLC with no goods or services in consideration for the gift.  The LLC claimed that the filing made by the donee organization eliminated the need for the contemporaneous written acknowledgement pursuant to Section 170(f)(8)(D) of the Internal Revenue Code.  This provision provides that the contemporaneous written acknowledgement requirements are not applicable to contributions reported by the donee organization “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe.”  The Treasury has not issued any such regulations.  The Tax Court ruled that the discretionary delegation of rulemaking authority set forth in Section 170(f)(8)(D) was not self-executing in the absence of regulations under this provision.  Accordingly, the contemporaneous written acknowledgement requirements were fully applicable to the gift made by the LLC.            

This acknowledgment must: (1) include a description (but not value) of any property other than cash contributed; (2) state whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. The acknowledgment is contemporaneous if the taxpayer obtains it from the donee on or before the earlier of: (a) the date the taxpayer files a return for the year of contribution; or (b) the due date, including extensions, for filing that return.

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About this Author

Melissa Watkins, taxation, business and commercial planning lawyer, Steptoe Johnson, morgantown Law Firm
Member

Melissa Watkins concentrates her practice in the areas of taxation, business and commercial planning, nonprofit tax issues, and other areas related to the establishment and operation of nonprofit organizations.  She is also a licensed certified public accountant.

304-598-8160
Thomas Vorbach, Steptoe Johnson Law Firm, Tax Law Attorney
Member

Tom Vorbach has nearly 40 years of practice experience in the areas of taxation, commercial and international transactions, and real estate, as well as estate planning, estate and trust administration, non-profit organizations, and export and foreign investor matters. Mr. Vorbach is the current leader of the firm's Technology and Entrepreneurial Development Team and was previously the group leader of the Taxation Practice Group.

304-598-8112