Cohan v Commissioner of Internal Revenue

US Tax Court, T.C. Memo. 2012-8, Jan. 10, 2012: A charitable organization’s contribution acknowledgment letter that omitted items of value the taxpayer received in consideration was not a valid acknowledgment letter, the taxpayer did not act reasonably in relying on the letter, and therefore the taxpayer could not take a deduction for the contribution.

A taxpayer-donor claiming a charitable contribution in excess of $250 must be substantiated by a written acknowledgment of the contribution from the donee of the gift that lists the value of the contribution and a description and “good faith estimate” of the value of any goods or services provided by the donee organization in consideration for the contribution. Internal Revenue Code Sec. 170(f)(8)(B).  A taxpayer may not use a charitable organization’s estimate of the value of goods or services as the fair market value if the taxpayer knows, or has reason to know, that the estimate is unreasonable. Sec. 1.170A-1(h)(4)(ii), Income Tax Regs.

In this case, the taxpayer claimed a deduction for a bargain sale gift in connection with a very complex transaction. There was no dispute that the donee (The Nature Conservancy, TNC) gift letter omitted several item of consideration from TNC to the taxpayer. The Tax Court had to decide whether TNC’s gift letter had a good faith valuation of the consideration and whether the taxpayer could reasonably rely on the gift letter. As part of the extensively negotiated bargain sale, TNC agreed to reimburse certain tax liabilities of the donor. The Tax Court recognized that this gave TNC an incentive to minimize the tax liability, “TNC (through its officers and attorneys) knew that any decrease in the value of consideration that [taxpayer] received would reduce those liabilities … [and] TNC had an incentive to exclude from the gift letter part of the consideration that TNC received because the less consideration disclosed in the gift letter, the more the gift letter would on its face support the reporting of a greater charitable contribution deduction (and thus lesser reimbursement).”

The Court wrote, “In fact, the record strongly suggests that representatives of TNC and [the taxpayer] made a conscious decision to exclude items of consideration received … in calculating the amount of the bargain sale gift and to play the audit lottery with the hope of minimizing the tax indemnification amount. After a careful review of the record, we conclude that the gift letter did not include a description or a good-faith estimate of the total consideration…”  The Court then easily concluded that the taxpayer knew or should have known of the omissions and of TNC’s incentive to minimize the value of consideration to the taxpayer, and therefore the taxpayer did not reasonably rely on the gift letter.

After concluding that these failures were more than overlooking mere formality and that there was not even substantial compliance, the Court held that the taxpayer failed to substantiate the contribution with a written acknowledgment s that met the requirements of the Code, and therefore the charitable contribution deduction should be disallowed.

The IRS had imposed a Code section 6662(a) accuracy-related penalty which the Court also upheld.

Although the transaction here was a bargain sale, not a qualified conservation contribution – a conservation easement or historic preservation easement – the same principles would apply.

The decision is available at

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