U.S. Tax Court, T.C. Memo. 2016-233, December 22, 2016: Preservation easement donee’s 990 cannot substitute for contemporaneous written acknowledgment letter.
The Internal Revenue Code requires that to qualify for a federal income tax deduction for contribution of a historic preservation easement or conservation easement valued at $250 or more, the taxpayer must substantiate the contribution by (among other things) giving the IRS a “contemporaneous written acknowledgment” or CWA from the donee organization. I.R.C. §170(f)(8). (The CWA requirements are summarized below.) A subsection also says, however, that a CWA isn’t necessary “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe,” (emphasis added) that includes the information required to be included in the CWA. I.R.C. §170(f)(8)(D).
The question in this case was whether a description of the contribution in the donee’s tax return form 990 qualifies as a substitution of the CWA which would prevent the IRS from disqualifying the claimed deduction for failure to meet the substantiation requirement. The court majority ruled that the donee’s 990 cannot substitute for the CWA, but there were dissenting opinions.
Code §170(f)(8) requires a CWA as part of substantiation of the claimed contribution. The CWA is an acknowledgment from the donee to the taxpayer, dated on or before the earlier of the filing date of the tax return for the year in which the contribution was made or the due date (including extensions) for filing such return. The CWA must be written, state “[t]he amount of cash and a description (but not value) of any property other than cash contributed… Whether the donee organization provided any goods or services in consideration, in whole or in part” for the contribution, and if so, also give a “description and good faith estimate of the value of any [such] goods or services….”
In this case, in 2008 the donee (“Trust”) gave the taxpayer ( “LLC”) a letter acknowledging the 2007 contribution but did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had otherwise given the LLC anything of value, in exchange for the easement. The Trust’s 990 for 2007 summarized the easement donations it had received during 2007 but didn’t specifically describe a charitable contribution from the LLC or report any other information about the contribution that was supposed to be in a CWA. In 2014, after the deduction was already under review by the court, the Trust filed an amended 990 for 2007 which added, “One of the New York donations received during 2007 included the donation by [the LLC] of an Historic Preservation Deed of Easement * * *. The Trust provided no goods or services to [the LLC] in consideration for its donation of the Historic Preservation Deed of Easement.”
The court’s legal analysis focused on whether the language of Code §170(f)(8)(D) about the possible alternative to the CWA (“a return, on such form and in accordance with such regulations as the Secretary may prescribe”) created a “discretionary delegation of rulemaking authority” or created a provision that is “self-executing.” A “discretionary delegation of rulemaking authority” means that the Secretary of the Treasury has the discretion whether or not to make the provision operative by promulgating regulations. If the authority to issue regulations is discretionary, the absence of regulations has the effect of keeping in reserve, as it were, the possibility of allowing an alternative to the CWA but until the regulations are issued, there would be no substitute for the CWA. On the other hand, if the provision in §170(f)(8)(D) were “self-executing” that would mean that it went into effect even in the absence of the Secretary promulgating the regulations which the statute give the Secretary the authority to issue. If the court had held §170(f)(8)(D) was “self-executing,” then possibly the filing by the Trust of 990 which contained the information normally found in a CWA would save the LLC’s claimed deduction.
The court’s analysis reviewed precedents about discretionary delegation vs. self-executing provisions, the legislative history of this provision and the definition of the word “may” (as in “such regulations as the Secretary may prescribe”) and concluded this provision only created a discretionary delegation (no alternative exists to the CWA). The potential precedent that would be set by a ruling that a provision with this wording creates a self-executing statute of benefit to taxpayers (“taxpayer-friendly”) was significant to the court’s analysis.
The majority opinion was joined by nine judges and concurred in by two others. Six judges dissented in two dissenting opinions. Both dissenting opinions argued that the text of §170(f)(8)(D) should be read in two parts: the first part, self-executing, saying that a donee’s tax return would serve as a substitute for the CWA if it contains the information required of a CWA, and the second part, discretionary, saying that the Secretary may promulgate regulations about this. For the dissenters, the Secretary’s decision not to add to regulations around the filing of a 990 by issuing additional regulations on this subject does not mean that the self-executing part of §170(f)(8)(D) did not go into effect.
Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11075.