On August 28, 2017 we posted the first in a series of blog articles regarding the Tax Court's recent opinion in RERI Holdings I, LLC v. Comm'r, 149 T.C. No. 1 (2017) (“RERI Holdings”). The first blog post, which is found here, provides an overview of the case and foreshadows two subsequent discussions regarding the Tax Court's opinion in RERI Holdings. This post details how RERI Holdings appears inconsistent with prior Tax Court cases and the IRS Instructions to Form 8283. The third post, soon to be released, discusses whether the substantiation compliance rules for donations of appreciated property other than conservation easements, as determined in RERI Holdings, are distinguishable from how such rules apply to conservation easement donations.
In RERI Holdings, the Tax Court seems to reverse precedent on the substantiation requirements imposed on charitable contributions of property. The taxpayer—RERI Holdings I, LLC—purchased a remainder interest in an LLC owning real property (a web hosting facility in Hawthorne, California leased by AT&T) for 2.95 million dollars and donated the remainder interest to the Regents of the University of Michigan three days later claiming a charitable deduction in excess of 33 million dollars.
When completing IRS Form 8283 (an attachment to the tax return), the taxpayer (or likely, its tax professional) left blank the space for “Donor's cost or other adjusted basis.” The Tax Court determined that omitting the donor-taxpayer's cost or adjusted basis from IRS Form 8283 caused the donation to fail to comply with Treasury regulation section 1.170A-13(c)(4)(ii)(E). Accordingly, the taxpayer's entire deduction was disallowed. To add insult to injury, the Tax Court also imposed a harsh penalty for a “gross valuation misstatement.”
RERI Holdings is surprising because it contradicts Tax Court precedent holding that the “doctrine of substantial compliance” can cure minor technical omissions, such as failing to provide the adjusted basis on IRS Form 8283. For example, in Dunlap, the taxpayer left blank multiple sections of IRS Form 8283 including the cost or adjusted basis in the donated property, the date the property was acquired, and the manner of acquisition. In holding that the taxpayer substantially complied with its IRS Form 8283 requirement, the Tax Court explained that the taxpayer provided “the most pertinent information” and that the information omitted was “not absolutely necessary.” Dunlap v. Comm'r, T.C. Memo. 2012-126, at * 28-29. See also Friedberg v. Comm'r, T.C. Memo. 2011-238, *8, 22-23.
U.S. Circuit Courts of Appeal have similarly applied the substantial compliance doctrine to allow deductions where taxpayers have omitted the cost or other adjusted basis from IRS Form 8283. See, e.g., Scheidelman v. Comm'r, 682 F.3d 189, 198 (2d Cir. 2012); Kaufman v. Shulman, 687 F.3d 21, 29 (1st Cir. 2012).
RERI Holdings is also surprising in light of the Instructions to IRS Form 8283, which indicate that the cost or adjusted basis may be left blank if the taxpayer has reasonable cause for not completing the form and attaches an explanation of that reasonable cause. Moreover, the Instructions to Form 8283 indicate that taxpayers' deductions will not be disallowed for failing to complete Section B of IRS Form 8283, if the taxpayers provide the IRS a complete IRS Form 8283 within 90 days of IRS request. The court's holding does not indicate if the taxpayer attached an explanation for why the basis was not provided or subsequently provided the basis within 90 days of IRS request.
The implications of RERI Holdings are significant. Taxpayers donating valuable, appreciated property to their church, synagogue, university, or favorite charity could find their charitable deductions denied because they (or their tax professional) failed to complete an obscure line on a two-page attachment to their tax return. The taxpayers might find they are further rewarded for their charitable actions with a hefty penalty.
RERI Holdings reinforces the importance of meticulous, strict compliance with the various technical requirements imposed on charitable gifts. It is well known that the IRS insists on strict compliance with all technical requirements imposed on charitable deductions; however, RERI Holdings is a cautionary tale that the Tax Court may not countenance technical violations either. Reliance on the substantial compliance doctrine to cure omissions, deviations, and other “foot-faults” can put your entire deduction in jeopardy.
Interesting Note: The deduction claimed by RERI Holdings, I LLC sparked a flurry of contentious litigation, which had produced two Tax Court opinions (one in memoranda) prior to RERI Holdings. The IRS had been challenging the charitable deduction on economic substance grounds and whether the appraisal the taxpayer used to value its claimed charitable deduction was a “qualified appraisal.” See RERI Holdings, I LLC v. Comm'r, T.C. Memo. 2014-99; RERI Holdings I, LLC v. Comm'r, 143 T.C. 41 (2014). In disallowing the deduction in RERI Holdings, the Tax Court did not discuss either of these contentions; rather the court's analysis with respect to the validity of the claimed deductions was limited to the taxpayer's omission of its adjusted basis from IRS Form 8283. It seems like the court may have been looking for an easier way to get rid of a pesky case.