Tax Court

POOF! $64 Million Charitable Contribution Deduction Disappears

Alright, the facts in the case are a bit more complex than a “poof.”  But it got your attention for my at-least-annual reminder to obtain a contemporaneous written acknowledgment (“CWA”) from the donee for any contribution that is valued at $250 or more.

A CWA must state, among other things, (a) the amount of cash and description (but not the value) of any property other than cash contributed, and (b) whether the donee supplied the donor with any goods or services in consideration for the gift and, if so, must furnish a description and a good-faith estimate of the value of such goods or services.  The CWA must be in hand before you file the income tax return claiming the deduction and no later than the due date (including extensions) for filing such return.

A Tax Court decision issued in December, 2016 – 15 West 17th Street LLC, et al. (“LLC”) v. Commissioner -illustrates the CWA requirement vividly.

In September 2005, LLC purchased for $10 million a property in Manhattan (New York, not Kansas).  LLC planned to demolish a building built in 1903-04.  However, LLC was outflanked by a local preservation society, which got New York City to declare the building a “certified historic structure.”  No demolition could occur.

In December 20, 2007, LLC executed in favor of the Trust for Architectural Easements (“the Trust”) a perpetual historic preservation deed of easement.   On May 14, 2008, the Trust sent the LLC a letter acknowledging receipt of the easement.  The letter did not state whether the Trust had provided any goods or services to LLC, or whether the Trust had otherwise given LLC anything of value, in exchange for the easement.

LLC secured an appraisal concluding that, as of February 8, 2008 the property had a fair market value of $69,230,000 before placement of the easement and had a value after the easement of $4,740,000, a reduction of $64,490,000.  Wow! That property appreciated almost 600% in 2 ½ years!  I don’t think that President Donald J. Trump could claim that kind of real estate investing acumen.  (Okay, he probably would.)  LLC claimed a $64,490,000 charitable contribution on its 2007 tax return.

The IRS does not like deductions for charitable contributions of easements.  This case looks especially egregious.  I am sure that the Revenuers were girded for battle about the valuation.  But they won without firing a shot in that battle.

Most of the opinion of the Tax Court addressed a rather obscure and convoluted argument by LLC that it did not need a CWA, due to a special provision in the statute involving some rule-making authority delegated by Congress to the IRS, but never exercised by the IRS during a period exceeding twenty year.  The Tax Court did not buy LLC’s argument.

Then, the case addressed the provisions in the statute that define a CWA. The IRS simply pointed out that the acknowledgement was not a CWA, because it omitted required language about “no goods and services.”  Fight over.  LLC loses.

Reminder issued.

VKM

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IRS

National Taxpayer Advocate’s 2016 Annual Report to Congress – Some Key Takeaways

Every year, by law, the National Taxpayer Advocate, “an independent voice for the taxpayer within the IRS,” issues a report to Congress.  For 15 years, the National Taxpayer Advocate has been Nina E. Olson.  She knows her stuff.

Issued last week, the 2016 report is about 965 pages, give or take a page or two.  The executive summary alone is 95 pages long.  The IRS ignores the National Taxpayer Advocate at its peril.  The new Congress and the new President would be wise to heed her advice, too.

The 2016 report includes a lot of good ideas, observations, complaints, and suggestions.  I may come back to some additional items in future blogs.  In this blog I focus on three “foundational themes” that she identifies as core to improving the IRS and its operations.

  1. “Simplify the Internal Revenue Code Now.” Of course, the IRS does not write the tax laws; Congress does.  Nevertheless, the IRS’ job revolves around this massive, complicated and confusing document.  Olson points out that the Internal Revenue Code consists of four million words.  She estimates that taxpayers spend six billion hours in order to meet filing requirements. (Based on the way the number is calculated, that may include some or all of tax preparers’ time.  She admits that it’s a rough estimate.)
  1. “The IRS needs to talk to the taxpayer. IRS must present a human side to the agency to foster and keep voluntary compliance.”  While self-service assistance has its beneficial attributes, she points out that behavioral science studies confirm the human voice is quite soothing to someone who is stressed and anxious.  Indeed, she cites a number of behavioral science lessons that may be applicable to taxpayer compliance.
  1. There is a “need for establishing minimum standards of and testing for competency of Federal tax return preparers.” She is not worried about CPAs, attorneys, and enrolled agents.  However, there are a lot of tax return shops that don’t have any real proficiency standards and sometimes have no scruples.  Consider the guy standing on the side of the road at the strip shopping center dressed as the Statue of Liberty; when somebody parks and walks into his storefront, he takes off his costume and prepares a tax return.  It might be good to check his credentials.

VKM

Click here to read this blog post and others on our website at www.hmpc.com