Charitable Deduction Disallowed Because Basis Information Not Provided
In Oakhill Woods, LLC, TC Memo 2020-24, the taxpayer was denied a charitable contribution deduction for a conservation easement because it failed to provide on Form 8283 information regarding the adjusted basis of the property donated.
In August 2007, HRH Investments, LLC (“HRH”) purchased 405 acres of undeveloped real estate for $1,008,736 ($2,491 per acre). In December 2009, HRH contributed 388 acres of that parcel to Oakhill Woods, LLC (“Oakhill”) as a capital contribution. In December 2010, Oakhill granted a conservation easement to the Georgia Land Trust (“GLT”) for 379 acres of the land contributed by HRH and retained the remaining nine acres for development.
On its tax return for 2010, Oakhill claimed a charitable contribution deduction of approximately $8 million ($20,975 per acre) for the land contributed to GLT. Oakhill included with its 2010 return a copy of the appraisal of the easement. Oakhill also included with its return a Form 8283 which requests that the taxpayer provide certain information including the donor’s cost or adjusted basis in the property contributed. Oakhill did not provide basis information on the Form 8283 but rather included an attachment that stated that basis information was not provided since the basis of the property is relevant in computing the amount of the charitable deduction. The IRS audited the return and disallowed the charitable deduction on the grounds that the basis information was not provided on Form 8283.
Section 170(a)(1) allows a deduction for charitable contributions. Section 170(f)(11)(C) provides that if the value of the property contributed (other than publicly traded securities) is greater than $5,000, the taxpayer must obtain a qualified appraisal of such property and attach to the return a copy of the appraisal and such information regarding the property as the Secretary of the Treasury may require. Reg. 1.170A-13(c)(2) requires that the taxpayer attached to the return an appraisal summary, and Form 8283 is used for this purpose. Form 8283 requires that the taxpayer provide the adjusted or cost basis of the donated property.
Oakhill contended that it strictly, or at least substantially, complied with the IRS regulation. In the alternative, Oakhill argued that the Regulation requiring the reporting of cost basis is invalid.
The Tax Court held that Oakhill did not strictly comply with the Regulation. The court noted that the explanation Oakhill attached to its return did not state or explain why it was unable to provide the basis information, but rather the explanation stated that Oakhill did not provide the basis information because it did not believe it was necessary to provide such information since the charitable deduction was based on the value of the property and not its basis.
Oakhill also argued that it cured its initial omission by supplying the cost basis information during the audit. The Regulations provide that a deduction will not be disallowed for failure to attach an appraisal summary if the donor complies with an IRS request to submit a Form 8283 within 90 days. (Reg. 1.170-13(c)(4)(iv)(H)) The Tax Court rejected this argument stating that the Regulation did not apply to the facts of this case since Oakhill did not fail to attach the Form 8283 to its return, but intentionally did not provide the requested basis information. In addition, the IRS did not ask Oakhill to provide the basis information, but rather stated in the audit report that the charitable deduction would be disallowed because the basis information was not provided.Next, the Tax Court addressed Oakhill’s argument that it had substantially complied with the Regulation. The court noted that some of the reporting requirements in Reg. 1.170A-13, while helpful to the IRS in the processing and auditing of returns are directory and not mandatory and therefore in appropriate circumstances, these requirements can be satisfied by substantial, rather than by literal, compliance. The court stated that the doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision. Substantial compliance may be shown where the taxpayer provided most of the information required or made omissions solely through inadvertence. But in order to substantially comply, the taxpayer must satisfy all reporting requirements that relate to the substance or essence of the statute.
In assessing whether Oakhill substantially complied with the Regulation, the Tax Court considered whether it provided sufficient information to enable the IRS to evaluate the reported contributions, as intended by Congress. The court noted that the aim of the Regulation was to provide the IRS with the tools that would enable it to identify inflated charitable contribution deductions. The court stated that the requirement to disclose cost or adjusted basis when that information is reasonably obtainable is necessary to facilitate the Service’s efficient identification of overvalued property. The court observed that when a taxpayer claims a charitable contribution deduction for recently purchased property, a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination, and that therefore unless the taxpayer complies with the regulatory requirement that it disclose its cost basis and the date and manner of acquiring the property, the IRS will be deprived of an essential tool that Congress intended it to have.
In this case, Oakhill acquired the land in question by contribution from HRH. HRH had acquired the land comprising 405 acres in August 2007 for $1,008,736, reflecting an average per-acre price of $2,491. In December 2009, HRH contributed 388 of those acres to Oakhill, and in December 2010 Oakhill granted an easement over 379 of those remaining acres to GLT, valuing the easement at $7,949,000, reflecting a per acre value for the easement of $20,975. The court observed that Oakhill thus took the position that the 379 acres had appreciated by more than 800% during the previous 3-1/2 years amid the worst real estate crisis since the Great Depression. The court stated that this is precisely the sort of information that Congress wished the IRS to have, and Oakhill’s refusal to supply this information contravenes the essential requirements of the governing statute.
Oakhill argued that it effectively disclosed its cost basis elsewhere on its Form 1065 for 2010. Specifically, Oakhill contended that Oakhill supplied information from which its cost basis could be derived on “Schedule L, Balance Sheets per Books,” on various schedules included within the return, or in the attached appraisal, which included a history of the land donated. The Tax Court was not persuaded. The court noted that the IRS reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable. Oakhill’s 2010 tax return was 35 pages long, and the attached appraisal (excluding addenda) was 143 pages long. The court stated that, where the taxpayer states on Form 8283 that basis information will not be provided, revenue agents cannot be required to sift through hundreds of pages of complex returns looking for possible clues about what the taxpayer’s cost basis might be.
Finally, Oakhill challenged the validity of the Regulation. The Tax Court found that the Treasury had reasonably concluded that the information the IRS needed would be most accessible to its examining agents if all of the required information appeared in the same place on Form 8238. The Treasury therefore issued regulations requiring that information concerning cost basis and acquisition date (as well as nine other types of information) be included in the appraisal summary included with the return. The court concluded that the Regulation’s requirement was based on a permissible construction of the statute.
The taxpayer in this case appears to have taken a knowing risk – disclose the basis information and be subject to an audit because of the inflated value of the easement, or fail to disclose the basis information and see if the IRS asks for it and only provide it at that time. However, the IRS audited the return and disallowed the charitable contribution without asking for the basis information. That left the taxpayer to argue that it substantially complied with the Regulation or that the Regulation was invalid. Both arguments were rejected by the court.
Frank S. Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or [email protected].