For charitable giving of in kind, appreciated property to qualified charitable organizations, there are two main requirements that donors must comply with to substantiate their claimed charitable deductions: (1) a contemporaneous written acknowledgement of the donation by the donee, the so-called “(f)(8) letter,” and (2) an appraisal summary—IRS Form 8283—which provides the IRS with pertinent information about the donated property. See IRC § 170(f)(8), Treas. Reg. § 1.170A-13(c)(2)(B).
We often deal with these substantiation requirements in our conservation easement practice. With respect to donations of conservation easements, donors and practitioners struggled with Line 5(f) of Part I, Section B, which requests that the donor list its “cost or adjusted basis.” The omission of the adjusted basis from IRS Form 8283 has been a hot issue for the IRS to raise during audits and litigation of deductions claimed pursuant to charitable gifts, including conservation easements.
The “cost or adjusted basis” of a conservation easement donation was tough for donors to determine for two principal reasons: First, the Instructions to Form 8283 did not specify whether the donor should report the adjusted basis of the conservation easement or the underlying property as a whole. Indeed, the IRS amended the Instructions to IRS Form 8283 in 2012 to clarify that very issue, which is evidence that the IRS understood that donors were confused by those instructions. See Cave Buttes, LLC v. Comm'r, 147 T.C. No. 10, at *8 (2016) (“Why else would the IRS have changed the instructions to be more clear?”). And second, donors do not purchase or acquire the conservation easements that they donate, rather donors create them at the moment the conservation easements are conveyed to a qualified organization. This led many donors (and their tax professionals) to reasonably determine that they did not have a cost or adjusted basis to report. See Kaufman v. Shulman, 687 F.3d 21, 28 (1st Cir. 2012).
Many donors (and their tax professionals) may have been ambivalent about the confusion regarding the correct adjusted basis to report on IRS Form 8283 because the Tax Court issued a line of cases adopting the substantial compliance doctrine to cure minor, technical omissions from 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.
Notwithstanding its prior cases finding that strict compliance with IRS Form 8283 was not necessary, in a case that did not involve a conservation easement donation—RERI Holdings I, LLC v. Comm'r, 149 T.C. No. 1 (2017) ("RERI Holdings")—the Tax Court disallowed a donor's charitable deduction in total because the donor did not report the cost or adjusted basis of the donated property on IRS Form 8283. In RERI Holdings, the Tax Court seems to reverse course on whether substantial compliance is appropriate to cure the omission of a donor's adjusted basis from IRS Form 8283.
While RERI Holdings is undoubtedly considered a big victory for the IRS, there may still be hope for donors that omitted their adjusted basis from IRS Form 8283. RERI Holdings might be appealed, so it could be reversed. Also, Donors of conservation easements might be able to distinguish RERI Holdings because the donation in RERI Holdings involved a remainder interest in property, not a conservation easement. As will be discussed in a subsequent post, the Instructions to Form 8283 impose different requirements on donations of conservation easements, which raises the following questions: Are there separate rules with respect to IRS Form 8283: One for normal gifts of property, and another for gifts of conservation easements? Can RERI Holdings be distinguished from conservation easement donations in which the donor fails to report its basis on IRS Form 8283?
RERI Holdings is a significant case that may affect scores of conservation easements. In light of this significance, we will follow up on this introduction to RERI Holdings with additional blog articles that will (1) provide an overview of RERI Holdings and explain how it appears to be inconsistent with previous Tax Court cases, and (2) discuss whether RERI Holdings can co-exist with prior Tax Court decisions, which employed a substantial compliance approach to cure minor, technical omissions from IRS Form 8283 relating to conservation easement grants.
