On August 28th and 31st of 2017, we posted the first two installments in a series of posts 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 post, which is found here, provides an overview of the case. Our second post, found here, details how RERI Holdings appears inconsistent with prior Tax Court cases and the IRS Instructions to Form 8283. This post questions if the substantial compliance doctrine still cures minor, technical noncompliance with Form 8283 following RERI Holdings.
In RERI Holdings, the taxpayer donated a remainder interest in property to the Regents of the University of Michigan and claimed a deduction of $33,019,000. The Tax Court disallowed the charitable deduction because the donor failed to fill in the remainder interest's cost or adjusted basis on IRS Form 8283 (an attachment to the tax return). A taxpayer claiming a charitable deduction for the contribution of property (such as a remainder interest) with a value in excess of $5,000 is required to complete IRS Form 8283 to substantiate the contribution. See Treas. Reg. § 1.170A-13(c)(4)(ii)(E).
RERI Holdings is troubling because it applies a bright line rule notwithstanding applicable case law, which indicated that the substantial compliance doctrine was an appropriate cure for minor technical noncompliance with IRS Form 8283. See Bond v. Comm'r, 100 T.C. 32, 42 (1993); Cave Buttes LLC v. Comm'r, 147 T.C. No. 10, at *8 (2016); Dunlap v. Comm'r, T.C. Memo. 2012-126, at * 28-29; Friedberg v. Comm'r, T.C. Memo. 2011-238, *8, 22-23. This raises the question: why didn't Judge Halpern apply the substantial compliance doctrine to RERI Holdings?
In RERI Holdings, Judge Halpern found that omitting the donor's adjusted basis prevented Form 8283 from achieving its intended purpose of substantiating the remainder interest contribution, so substantial compliance was not an appropriate cure. The court noted that the “significant disparity” between the price paid and the value of deductions claimed within a span of just 17 months “would have alerted respondent to a potential overvaluation.”
The scope of RERI Holdings is difficult to determine (or predict). Prior Tax Court cases held that omitting the cost or adjusted basis from IRS Form 8283 is not fatal to donations claimed pursuant to conservation easement contributions. See Dunlap; Friedberg. Is there a difference in the substantiation requirements imposed on contributions of conservation easements than on contributions of other types of property? The above questions and conflicting case law were not addressed in RERI Holdings.
The taxpayer in RERI Holdings donated a remainder interest in property, not a conservation easement. And while the IRS Form 8283 substantiation requirement applies generally to all contributions of property, the IRS provides specific provisions in the Instructions to Form 8283 to clarify how donors should complete IRS Form 8283 for property possessing unique characteristics, such as conservation easements.
Courts have recognized the difficulty taxpayers donating conservation easements have with respect to reporting the cost or adjusted basis on Form 8283. In a recent bench opinion, PBBM-Rose Hill, Ltd. v. Comm'r, No. 26096-14, at *18 (T.C. Oct.7, 2016) (bench opinion), the Tax Court found “that it is unclear whether a taxpayer donating an intangible right should fill out [Form 8283's section regarding the donor's adjusted basis], and if so, how these blanks should be completed for such a contribution.” See also Kaufman v. Shulman v. Comm'r, 687 F.3d 21, 28 (1st Cir. 2012) (explaining that the taxpayers did not ‘acquire” the conservation easement; rather they created it at the moment it was conveyed to the land trust: accordingly, the taxpayers did not have a cost or adjusted basis to report).
Moreover, the Tax Court recently applied the substantial compliance doctrine to cure a minor, technical omission from IRS Form 8283, in part because (1) the Form 8283 requirement “was contained within a dense regulation,” and (2) the fact that the IRS amended the Instructions to Form 8283 to clarify the exact aspect of Form 8283 that the taxpayer's Form 8283 was missing. See Cave Buttes, LLC v. Comm'r, 147 T.C. No. 10, at *8 (2016). The court recognized that instructions to forms are not binding sources of law, but the court found them useful to illustrate taxpayer confusion: “Why else would the IRS have changed the instructions to be more clear?” Id.
Similarly in the conservation easement context, the IRS amended the Instructions to Form 8283 in 2012 to provide specific provisions for conservation easements aimed at clarifying the ambiguity of whether the taxpayer was required to report the basis of the conservation easement or underlying property. Even as amended, the Instructions to Form 8283 indicate that donors do not necessarily have to provide the cost or adjusted basis. See our prior RERI Holdings posts here and here. Moreover, the requirement to report the cost or adjusted basis is contained within the same regulation that the Tax Court called “dense” in Cave Buttes.
Does RERI Holdings trump these prior conflicting Tax Court opinions?
As a result of the decision in RERI Holdings, the IRS Office of Appeals has been taking the position that failing to include the taxpayer's basis in the donated property on Form 8283 in a conservation easement related audit is an issue that cannot be settled at the IRS Office of Appeals, meaning that this issue will soon be addressed by the U.S. Tax Court (or possibly federal district courts), as one or more of such cases are litigated.