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The United States Tax Court (the “Tax Court”) recently issued a significant opinion, that of RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017).  In that case, the taxpayer, on its partnership tax return for the 2003 taxable year, claimed a $33 million charitable contribution deduction stemming from its contribution of property to the University of Michigan.  In a Final Partnership Administrative Adjustment issued in March 2008, the Internal Revenue Service (the “IRS”) asserted that the contributed property was worth $3.9 million and, as a result, reduced the claimed charitable deduction and determined that said deduction resulted in a substantial valuation misstatement.   The IRS later amended its answer, asserting alternative arguments that either the taxpayer was not entitled to any deduction for the contribution because the transaction was a sham for tax purposes or lacked economic substance, or that the deduction should be limited to the amount that the University of Michigan realized on its sale of the property.  Amending its answer a second time, the IRS asserted that the claimed deduction resulted in a gross valuation misstatement.

Although the Tax Court addressed various issues in its opinion, the discussion below is confined to its review of the taxpayer’s substantiation of the claimed deduction, specifically with respect to its appraisal summary filed on IRS Form 8283, Noncash Charitable Contributions (“Form 8283”), which omitted the taxpayer’s $2.95 million cost basis in the contributed property.  Because of that omission, the Tax Court denied the taxpayer its claimed charitable contribution deduction for the property that it contributed to the University of Michigan.

Regulatory Provisions

With respect to deductions in excess of $5,000 for certain charitable contributions of property, Treasury Regulations §1.170A-13(c) requires a taxpayer to provide: (1) a qualified appraisal of the property being donated; and (2) “a ‘fully completed’ appraisal summary (i.e., Form 8283) [attached] to the return on which the deduction is first claimed.”  Although the failure to have a qualified appraisal generally results in a disallowance of the claimed deduction, the Tax Court in the above case appears to say that the failure to have a fully completed appraisal summary would result in a disallowance of the claimed deduction as well.  Importantly, however, the Tax Court did not indicate whether the IRS afforded the taxpayer an opportunity to explain or correct its incomplete appraisal summary consistent with the Treasury Regulations.

The corrective provision of Treasury Regulations §1.170A-13(c)(4)(iv)(H) allows a taxpayer to correct their failure to attach the fully completed appraisal summary, provided that the taxpayer responds within ninety days to an IRS request to furnish an appraisal summary.  In such a case, the deduction will not be disallowed for a failure to attach the appraisal summary, assuming that the omission was in good faith, that the qualified appraisal and the appraisal summary otherwise meet the requirements of the regulations, and that the qualified appraisal is received by the taxpayer before the due date (including extensions) of the return on which a deduction is first claimed.

It is also notable that under Treasury Regulations §1.170A-13(c)(4)(iv)(C)(1), a taxpayer can argue that it has reasonable cause for failing to provide the manner of acquisition and the basis of the contributed property on the Form 8283, but it must attach an explanation to that Form 8283 in order to do so.  That regulation states that the “deduction will not be disallowed simply because of the inability (for reasonable cause) to provide these items of information.”  The instructions to Form 8283 also specify that an explanation must be attached if the aforementioned information is missing on the form in order for the deduction to not automatically be disallowed.

Given the foregoing, a taxpayer can claim a deduction even if a Form 8283 is not attached to its return, as long as it is provided to the IRS within ninety days of an IRS request.  The language of Treasury Regulations §1.170A-13(c)(4)(iv)(H) suggests that such requests are not obligatory on the part of the IRS, but making these requests is general IRS procedure, and the larger the claimed deduction (such as the one in the instant case) the more likely it is that a request would be forthcoming.  As mentioned at the outset, however, the Tax Court has now apparently held that filing an incomplete Form 8283 is a potentially fatal defect.

That said, the case does not specify whether the taxpayer submitted a fully completed Form 8283 within ninety days of an IRS request, or even whether such a request was ever made.  The case also does not specify whether the taxpayer provided a statement explaining its failure to include the basis amount on Form 8283.  For the moment, the Tax Court’s holding evidently permits the IRS to disallow deductions for charitable contributions if certain information is missing from the filed Form 8283.  This is in some tension with the regulations, and even prior Tax Court cases, such as Bond v. Commissioner, 100 T.C. 32 (1993), which stated that the reporting requirements of Treasury Regulations §1.170A-13 were “directory and not mandatory,” and that substantial compliance should otherwise suffice.

Conclusions

It is possible that, at least in part, the Tax Court arrived at its decision in the subject case by virtue of the egregious facts, where the taxpayer purchased property for $2.95 million and 17 months later, when it contributed the property to the University of Michigan, a value of $33 million was claimed.  The Tax Court did not believe that this was substantial compliance, as the taxpayer, by failing to include its basis in the contributed property on the Form 8283, subverted that form’s purpose and prevented the IRS from identifying a valuation misstatement.  Most cases, however, will likely not be as extreme, and so it is hoped that the IRS will be reasonable in determining compliance following the Tax Court’s decision.  Care should nonetheless be taken to attach explanatory statements with respect to missing information on a Form 8283, and, even in the absence of an IRS request, to supply a Form 8283 as promptly as possible if it was not filed with the taxpayer’s return.

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