SCOTUS Reports

Tag: Contemporaneous Written Acknowledgment

  • Izen v. Comm’r, 148 T.C. No. 5 (2017): Substantiation Requirements for Charitable Contributions of Used Vehicles

    Izen v. Comm’r, 148 T. C. No. 5 (2017)

    In Izen v. Comm’r, the U. S. Tax Court ruled that Joe Alfred Izen, Jr. was not entitled to a $338,080 charitable contribution deduction for donating a 50% interest in a 40-year-old aircraft to a museum. The court held that Izen failed to comply with the strict substantiation requirements of I. R. C. § 170(f)(12), which mandates a contemporaneous written acknowledgment (CWA) from the donee for contributions of used vehicles valued over $500. This decision underscores the importance of adhering to detailed substantiation rules to claim charitable deductions, impacting how taxpayers must document such contributions.

    Parties

    Joe Alfred Izen, Jr. (Petitioner) filed a petition against the Commissioner of Internal Revenue (Respondent) in the United States Tax Court. Izen sought a charitable contribution deduction for the tax year 2010, which was challenged by the Commissioner through cross-motions for partial summary judgment.

    Facts

    In December 2007, Joe Alfred Izen, Jr. , and On Point Investments, LLP, purchased a 1969 model Hawker-Siddley DH125-400A private jet for $42,000, with each paying $21,000 for a 50% undivided interest. The aircraft was stored at an airfield in Montgomery County, Texas, for three years. On December 31, 2010, Izen and On Point allegedly donated their respective 50% interests to the Houston Aeronautical Heritage Society, a tax-exempt organization under I. R. C. § 501(c)(3), operating a museum at the William P. Hobby Airport. Izen claimed a charitable contribution deduction of $338,080 on his amended 2010 tax return filed on April 14, 2016, based on an appraisal dated April 7, 2011, which valued his interest at that amount as of December 30, 2010.

    Procedural History

    Izen timely filed his 2010 tax return on October 17, 2011, claiming the standard deduction and no charitable contribution. The IRS examined Izen’s 2009 and 2010 returns and issued a notice of deficiency on August 17, 2012, disallowing certain deductions. Izen petitioned the Tax Court, initially challenging the disallowance of Schedule C and Schedule E deductions. On March 28, 2014, Izen filed a motion for leave to amend his petition to include the charitable contribution deduction, which was granted on April 1, 2014. The court denied Izen’s initial motion for partial summary judgment on March 9, 2016, due to disputes of material fact regarding substantiation. Subsequently, both parties filed cross-motions for partial summary judgment, with the Commissioner arguing that Izen failed to substantiate the charitable contribution under I. R. C. § 170(f)(12).

    Issue(s)

    Whether Joe Alfred Izen, Jr. is entitled to a charitable contribution deduction of $338,080 for his alleged donation of a 50% interest in a 1969 model Hawker-Siddley DH125-400A private jet to the Houston Aeronautical Heritage Society in 2010, given his compliance with the substantiation requirements of I. R. C. § 170(f)(12)?

    Rule(s) of Law

    I. R. C. § 170(f)(12) stipulates that no deduction shall be allowed for contributions of used motor vehicles, boats, and airplanes valued over $500 unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment (CWA) from the donee organization that meets the requirements of I. R. C. § 170(f)(12)(B). The CWA must be included with the taxpayer’s return claiming the deduction and must contain specific information, including the donor’s name and taxpayer identification number, the vehicle identification number, a certification of the intended use or material improvement of the vehicle, and a statement about any goods or services provided in exchange for the vehicle.

    Holding

    The court held that Joe Alfred Izen, Jr. was not entitled to the claimed charitable contribution deduction of $338,080 because he failed to include with his amended 2010 tax return a contemporaneous written acknowledgment that complied with the requirements of I. R. C. § 170(f)(12)(B).

    Reasoning

    The court applied the legal test outlined in I. R. C. § 170(f)(12), which requires strict compliance with substantiation requirements for contributions of used vehicles valued over $500. The court identified several deficiencies in the documentation provided by Izen: (1) the acknowledgment letter included with the return was addressed to Philippe Tanguy, not Izen, and did not contain the required information; (2) the Aircraft Donation Agreement, while containing some required information, was not signed by Izen or On Point, failing to establish a completed gift; (3) the Agreement did not include Izen’s taxpayer identification number, a statutory requirement; and (4) it lacked a detailed certification of the intended use and duration of use by the donee organization, as required by I. R. C. § 170(f)(12)(B)(iv)(I). The court rejected Izen’s argument for substantial compliance, citing previous holdings that the doctrine does not apply to excuse noncompliance with the strict substantiation requirements of I. R. C. § 170(f)(8) and (12). The court also considered the legislative intent behind the statute, which aimed to address tax compliance issues related to charitable contributions of used vehicles, and concluded that the strict statutory requirements must be met to claim the deduction.

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment and denied Izen’s motion for partial summary judgment.

    Significance/Impact

    Izen v. Comm’r reinforces the stringent substantiation requirements for charitable contributions of used vehicles under I. R. C. § 170(f)(12). The decision highlights the necessity for taxpayers to strictly adhere to the statutory requirements, including providing a contemporaneous written acknowledgment that meets all specified criteria. This case serves as a reminder to taxpayers and tax professionals of the importance of detailed documentation and the potential consequences of failing to comply with these requirements. Subsequent courts have consistently upheld the strict application of these rules, impacting the practice of claiming charitable deductions for used vehicles and emphasizing the need for meticulous record-keeping and adherence to IRS guidelines.

  • 15 W. 17th St. LLC v. Comm’r, 147 T.C. 19 (2016): Charitable Contribution Substantiation and the Role of Donee Reporting

    15 W. 17th St. LLC v. Comm’r, 147 T. C. 19 (2016)

    In a significant ruling on charitable contribution substantiation, the U. S. Tax Court held that the absence of IRS regulations precludes the use of a donee’s amended tax return to substantiate a charitable donation. The court ruled that without specific IRS regulations, a contemporaneous written acknowledgment from the donee remains mandatory for deductions over $250, impacting how taxpayers substantiate charitable contributions and affirming the IRS’s discretion in implementing donee reporting systems.

    Parties

    15 West 17th Street LLC, with Isaac Mishan as the Tax Matters Partner, was the Petitioner, challenging the IRS’s disallowance of a charitable contribution deduction. The Commissioner of Internal Revenue was the Respondent, defending the disallowance and the procedural requirement for substantiation.

    Facts

    15 West 17th Street LLC (LLC) purchased a property in Manhattan in 2005 and later donated a conservation easement over part of it to the Trust for Architectural Easements (Trust) in 2007. The LLC claimed a $64,490,000 charitable contribution deduction on its 2007 tax return. The Trust initially failed to acknowledge the donation adequately on its 2007 Form 990 but later filed an amended return in 2014 that included the required information. The IRS disallowed the deduction due to the absence of a contemporaneous written acknowledgment (CWA) from the Trust.

    Procedural History

    The IRS audited the LLC’s 2007 return and issued a notice of final partnership administrative adjustment (FPAA) in 2011, disallowing the charitable contribution deduction. The LLC petitioned the Tax Court for review, and after the case was docketed, the Trust submitted an amended Form 990 in 2014. The LLC then moved for partial summary judgment, arguing that the amended return satisfied the substantiation requirement under section 170(f)(8)(D). The Tax Court denied the motion, holding that section 170(f)(8)(D) was not self-executing without IRS regulations.

    Issue(s)

    Whether the filing of an amended Form 990 by the donee organization, which included the information required by section 170(f)(8)(B), can serve as an alternative to the contemporaneous written acknowledgment required by section 170(f)(8)(A) for substantiating a charitable contribution deduction in the absence of IRS regulations implementing section 170(f)(8)(D)?

    Rule(s) of Law

    Section 170(f)(8)(A) of the Internal Revenue Code requires a contemporaneous written acknowledgment (CWA) for any charitable contribution deduction of $250 or more. Section 170(f)(8)(D) provides that this requirement does not apply if the donee organization files a return that includes the required information “on such form and in accordance with such regulations as the Secretary may prescribe. “

    Holding

    The Tax Court held that section 170(f)(8)(D) is not self-executing and that the absence of IRS regulations implementing this section means that the CWA requirement of section 170(f)(8)(A) remains fully applicable. The Trust’s filing of an amended Form 990 in 2014 did not satisfy the substantiation requirement for the LLC’s 2007 donation.

    Reasoning

    The court’s reasoning was based on the statutory text and legislative history of section 170(f)(8). The court emphasized that the phrase “on such form and in accordance with such regulations as the Secretary may prescribe” in section 170(f)(8)(D) indicates that Congress delegated discretionary rulemaking authority to the IRS. Since the IRS had not issued regulations under this section, the court concluded that section 170(f)(8)(D) could not be applied without such regulations. The court also considered the policy concerns, such as donor privacy and the risk of identity theft, which had influenced the IRS’s decision not to implement donee reporting. The court rejected the LLC’s argument that existing regulations governing the filing of Form 990 were sufficient to satisfy section 170(f)(8)(D), as these regulations did not address the specific requirements of that section.

    Disposition

    The Tax Court denied the LLC’s motion for partial summary judgment, holding that the CWA requirement under section 170(f)(8)(A) remained applicable to the LLC’s 2007 charitable contribution.

    Significance/Impact

    This decision reaffirms the importance of the CWA requirement for substantiating charitable contributions and clarifies that section 170(f)(8)(D) does not provide an alternative substantiation method without IRS regulations. It underscores the IRS’s discretionary authority in implementing tax laws and highlights the potential complexities and policy considerations involved in creating a donee reporting system. The ruling may influence future legislative and regulatory efforts to streamline charitable contribution substantiation while balancing donor privacy and tax compliance.

  • Wachter v. Comm’r, 142 T.C. 140 (2014): Conservation Easement Deductions and Contemporaneous Written Acknowledgments

    Wachter v. Commissioner, 142 T. C. 140 (2014)

    The U. S. Tax Court in Wachter v. Commissioner ruled that conservation easements in North Dakota, limited to 99 years by state law, do not qualify as granted “in perpetuity” under the Internal Revenue Code, thus disallowing related charitable deductions. The court also denied summary judgment on the issue of cash contributions, citing disputes over whether taxpayers received benefits not disclosed in acknowledgment letters, and whether these letters met the contemporaneous written acknowledgment requirement.

    Parties

    Patrick J. Wachter and Louise M. Wachter, and Michael E. Wachter and Kelly A. Wachter, as petitioners, against the Commissioner of Internal Revenue, as respondent. The Wachters were petitioners at the trial level in the U. S. Tax Court.

    Facts

    The Wachters, through entities WW Ranch and Wind River Properties LLC (Wind River), claimed charitable contribution deductions for the years 2004 through 2006. WW Ranch reported bargain sales of conservation easements, while Wind River reported cash contributions. These easements were subject to North Dakota state law, which limits the duration of any real property easement to not more than 99 years. The Wachters used the difference between two appraisals of the same property to determine the value of the easements for their charitable contributions. Wind River’s cash contributions were acknowledged by letters from the North Dakota Natural Resource Trust (NRT), which did not mention any goods or services provided in exchange for the contributions.

    Procedural History

    The Commissioner of Internal Revenue issued notices of deficiency to the Wachters, disallowing their charitable contribution deductions and asserting accuracy-related penalties. The Wachters timely filed petitions with the U. S. Tax Court, which consolidated the cases for trial, briefing, and opinion. The Commissioner moved for partial summary judgment, arguing that the conservation easements did not qualify as “in perpetuity” due to the 99-year limitation under North Dakota law, and that the cash contributions did not satisfy the contemporaneous written acknowledgment requirement. The court granted partial summary judgment regarding the conservation easements but denied it as to the cash contributions due to disputed material facts.

    Issue(s)

    Whether a conservation easement, limited by North Dakota state law to a duration of not more than 99 years, qualifies as a “qualified real property interest” granted “in perpetuity” under I. R. C. sec. 170(h)(2)(C) and I. R. C. sec. 170(h)(5)(A)?

    Whether the documents provided by the Wachters satisfy the “contemporaneous written acknowledgment” requirement of I. R. C. sec. 170(f)(8) and sec. 1. 170A-13(f)(15), Income Tax Regs. ?

    Rule(s) of Law

    I. R. C. sec. 170(h)(2)(C) defines a “qualified real property interest” as “a restriction (granted in perpetuity) on the use which may be made of the real property. ” I. R. C. sec. 170(h)(5)(A) requires that the contribution be exclusively for conservation purposes. I. R. C. sec. 170(f)(8)(A) mandates a contemporaneous written acknowledgment from the donee for cash contributions of $250 or more, which must include the amount of cash, whether any goods or services were provided in exchange, and a description and good faith estimate of the value of such goods or services, as per I. R. C. sec. 170(f)(8)(B).

    Holding

    The U. S. Tax Court held that the North Dakota conservation easements, subject to a 99-year limitation, do not qualify as granted “in perpetuity” under I. R. C. sec. 170(h)(2)(C) and I. R. C. sec. 170(h)(5)(A), thus disallowing the related charitable contribution deductions. The court further held that material facts remained in dispute regarding whether the Wachters satisfied the contemporaneous written acknowledgment requirement for their cash contributions, thus denying summary judgment on this issue.

    Reasoning

    The court’s reasoning for the conservation easements centered on the interpretation of “in perpetuity” under I. R. C. sec. 170(h)(2)(C). The court found that the 99-year limitation under North Dakota law was not a remote future event but a certain and inevitable occurrence, thus failing to meet the perpetuity requirement. The court distinguished this from isolated situations where long-term leases might be treated as equivalent to a fee simple interest, noting that those situations did not involve the express statutory requirement of being “in perpetuity. “

    Regarding the cash contributions, the court analyzed the contemporaneous written acknowledgment requirement under I. R. C. sec. 170(f)(8). The Commissioner argued that the acknowledgment letters failed to mention goods or services allegedly provided by NRT, such as appraisals and partial funding for the easement purchases. The court found that the receipt of such benefits was a material fact in dispute, and thus, summary judgment on this issue was not appropriate. The court also considered that the Wachters might be able to supplement the record to meet the acknowledgment requirements, as per the precedent in Irby v. Commissioner.

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment with respect to the charitable contribution deductions for the conservation easements but denied the motion with respect to the cash contributions, leaving those issues for trial.

    Significance/Impact

    This case is significant for its interpretation of the “in perpetuity” requirement for conservation easements under the Internal Revenue Code. It establishes that a state law limiting the duration of an easement to less than perpetuity can preclude a charitable deduction for such an easement. The case also underscores the importance of the contemporaneous written acknowledgment requirement for cash contributions, highlighting that disputes over the receipt of benefits in exchange for donations can prevent summary judgment. Subsequent cases and IRS guidance have referenced Wachter v. Commissioner in addressing similar issues regarding conservation easements and charitable deductions.

  • Wachter v. Commissioner, 142 T.C. No. 7 (2014): Impact of State Law on Charitable Contribution Deductions for Conservation Easements

    Wachter v. Commissioner, 142 T. C. No. 7 (U. S. Tax Court 2014)

    In Wachter v. Commissioner, the U. S. Tax Court ruled that a North Dakota statute limiting easements to 99 years prevented conservation easements from being considered perpetual, thus disallowing charitable contribution deductions under federal tax law. The court’s decision underscores the importance of state law in determining the validity of conservation easements for tax purposes, impacting how taxpayers can claim deductions for such contributions.

    Parties

    Patrick J. Wachter and Louise M. Wachter, and Michael E. Wachter and Kelly A. Wachter (Petitioners) v. Commissioner of Internal Revenue (Respondent).

    Facts

    The Wachters, through entities WW Ranch and Wind River Properties LLC (treated as partnerships for tax purposes), claimed charitable contribution deductions for 2004 through 2006. WW Ranch reported deductions based on bargain sales of conservation easements, while Wind River reported cash contributions. The easements were sold to the American Foundation for Wildlife (AFW), partially funded by North Dakota Natural Resource Trust (NRT), which also provided appraisals and cash contributions. The deductions were disallowed by the Commissioner, leading to notices of deficiency and subsequent litigation.

    Procedural History

    The Commissioner issued notices of deficiency disallowing the charitable contribution deductions and asserting accuracy-related penalties. The Wachters filed petitions with the U. S. Tax Court, which consolidated the cases. The Commissioner moved for partial summary judgment on the issues of the perpetuity of the easements under North Dakota law and the sufficiency of contemporaneous written acknowledgments for the cash contributions.

    Issue(s)

    Whether a North Dakota statute limiting easements to 99 years precludes the Wachters’ conservation easements from qualifying as granted “in perpetuity” under I. R. C. sec. 170(h)(2)(C) and (5)(A)?

    Whether the documents provided by the Wachters satisfy the “contemporaneous written acknowledgment” requirement of I. R. C. sec. 170(f)(8) and sec. 1. 170A-13(f)(15), Income Tax Regs. ?

    Rule(s) of Law

    Under I. R. C. sec. 170(h)(2)(C), a qualified real property interest includes “a restriction (granted in perpetuity) on the use which may be made of the real property. ” I. R. C. sec. 170(h)(5)(A) requires that the contribution be “exclusively for conservation purposes. ” For cash contributions of $250 or more, I. R. C. sec. 170(f)(8) mandates a contemporaneous written acknowledgment from the donee.

    Holding

    The court held that North Dakota law limiting easements to 99 years precludes the Wachters’ conservation easements from qualifying as granted “in perpetuity” under I. R. C. sec. 170(h)(2)(C) and (5)(A), thus disallowing the charitable contribution deductions. On the issue of the cash contributions, the court found that material facts remained in dispute regarding the contemporaneous written acknowledgment requirement, and thus summary judgment was not appropriate.

    Reasoning

    The court’s reasoning focused on the perpetuity requirement under I. R. C. sec. 170(h)(2)(C) and (5)(A). The court determined that North Dakota law, which limits easements to a maximum of 99 years, prevents the easements from being considered perpetual. The court rejected the Wachters’ argument that the possibility of the land reverting back after 99 years was a remote future event, as the event was not only possible but inevitable under state law. The court distinguished this from situations where long-term leases might be treated as equivalent to fee simple interests, noting that such situations do not involve the express statutory requirement of perpetuity as in section 170(h)(2)(C). Regarding the cash contributions, the court found that the Commissioner failed to prove that the Wachters expected or received benefits not disclosed in the acknowledgment letters, and that the Wachters might be able to provide additional documentation to meet the requirements of a contemporaneous written acknowledgment.

    Disposition

    The court granted the Commissioner’s motion for partial summary judgment on the issue of the noncash contributions, disallowing the charitable contribution deductions for the conservation easements. The court denied the motion for partial summary judgment on the issue of the cash contributions, leaving that issue to be resolved at trial.

    Significance/Impact

    The Wachter decision has significant implications for the interplay between state and federal law regarding conservation easements. It underscores that state laws limiting the duration of easements can affect their qualification for federal tax deductions, potentially impacting conservation efforts and tax planning strategies. The decision also highlights the importance of strict adherence to the contemporaneous written acknowledgment requirements for cash contributions, emphasizing the need for clear documentation to support charitable deductions.