SCOTUS Reports

Tag: Substantial Compliance Doctrine

  • Oakhill Woods, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2020-24: Charitable Contribution Deduction Substantiation Requirements

    Oakhill Woods, LLC v. Commissioner of Internal Revenue, T. C. Memo. 2020-24 (U. S. Tax Court, 2020)

    In Oakhill Woods, LLC v. Commissioner, the U. S. Tax Court ruled that a taxpayer must strictly comply with IRS regulations when claiming a charitable contribution deduction, specifically requiring the disclosure of the cost or adjusted basis of donated property on Form 8283. The court rejected the taxpayer’s argument of substantial compliance and upheld the validity of the regulation, emphasizing the importance of this information in identifying potential overvaluations. This decision underscores the need for precise adherence to substantiation rules to prevent abuse of charitable deductions.

    Parties

    Oakhill Woods, LLC (Oakhill), the petitioner, and Effingham Managers, LLC, as the Tax Matters Partner (TMP), filed the case against the Commissioner of Internal Revenue, the respondent.

    Facts

    Oakhill, a Georgia limited liability company operating as a partnership for federal income tax purposes, claimed a charitable contribution deduction for a donation of a conservation easement to the Georgia Land Trust (GLT) in 2010. The easement covered 379 acres of a 388-acre tract that Oakhill had received from HRH Investments, LLC (HRH), a related party, in December 2009. HRH had purchased the tract in August 2007 for $1,008,736. Oakhill’s appraisal valued the easement at $7,949,000, reflecting a significant increase in value during a period of economic downturn. Oakhill did not report the cost or adjusted basis of the donated property on Form 8283, instead attaching a letter stating that basis information was unnecessary for the deduction calculation.

    Procedural History

    The IRS selected Oakhill’s 2010 tax return for examination and subsequently issued a summary report in December 2014, proposing to disallow the deduction due to the omission of cost or adjusted basis information on Form 8283. Oakhill’s CPA provided this information to the IRS three years after the return was filed. The IRS then issued a notice of final partnership administrative adjustment (FPAA) in September 2017, disallowing the deduction and asserting penalties. Oakhill petitioned the U. S. Tax Court for readjustment of the partnership items in December 2017. The Commissioner filed a motion for partial summary judgment in May 2018, and Oakhill filed a cross-motion for partial summary judgment in December 2018, challenging the validity of the regulation requiring disclosure of cost or adjusted basis.

    Issue(s)

    Whether Oakhill complied with the substantiation requirements of section 1. 170A-13(c), Income Tax Regs. , by including the cost or adjusted basis of the donated property on Form 8283?

    Whether the regulation requiring disclosure of cost or adjusted basis on Form 8283 is valid?

    Rule(s) of Law

    Section 170(f)(11)(C) of the Internal Revenue Code requires taxpayers claiming a charitable contribution deduction for property valued over $5,000 to obtain a qualified appraisal and attach to the return an appraisal summary with information as prescribed by the Secretary. The Secretary has prescribed Form 8283 as the appraisal summary, which must include the cost or adjusted basis of the donated property. See sec. 1. 170A-13(c)(4)(ii)(E), Income Tax Regs.

    Holding

    The Tax Court held that Oakhill did not comply with the substantiation requirements because it failed to include the cost or adjusted basis of the donated property on Form 8283. The court also upheld the validity of the regulation requiring such disclosure.

    Reasoning

    The court reasoned that Oakhill’s omission of cost basis information on Form 8283 constituted a failure to strictly comply with the regulation. The court rejected Oakhill’s argument of substantial compliance, noting that the regulation’s requirement to disclose cost basis is essential for the IRS to identify potential overvaluations, as intended by Congress when enacting DEFRA. The court found that the significant disparity between Oakhill’s claimed value for the easement and the cost basis of the land, had it been disclosed, would have alerted the IRS to a potential overvaluation. The court also dismissed Oakhill’s argument that it had cured the omission by providing the information during the audit, stating that such information must be provided at the time of filing to serve its intended purpose.

    Regarding the validity of the regulation, the court applied the Chevron two-step test. It found that Congress had not directly spoken to the precise issue of where on the return the cost basis information must be disclosed, thus leaving discretion to the Secretary. The court concluded that the regulation was a permissible construction of the statute, as it reasonably required the inclusion of cost basis information in the appraisal summary to facilitate the IRS’s review process.

    The court also considered Oakhill’s reasonable cause defense but found that genuine disputes of material fact existed as to whether Oakhill had relied on competent and independent advice when deciding not to disclose the cost basis.

    Disposition

    The Tax Court granted in part the Commissioner’s motion for partial summary judgment, denying Oakhill’s deduction for failure to comply with the substantiation requirements. The court denied Oakhill’s cross-motion for partial summary judgment, upholding the validity of the regulation.

    Significance/Impact

    This case reinforces the strict compliance standard for charitable contribution deductions, particularly the requirement to disclose the cost or adjusted basis of donated property. It underscores the importance of this information in combating inflated valuations and tax shelter abuse. The decision also affirms the broad discretion granted to the Secretary in prescribing substantiation requirements, which may impact how taxpayers and practitioners approach the preparation of charitable contribution deductions. The case highlights the challenges taxpayers may face in establishing a reasonable cause defense when relying on advice from potentially conflicted parties.

  • Van Dusen v. Comm’r, 136 T.C. 515 (2011): Deductibility of Unreimbursed Volunteer Expenses

    Van Dusen v. Commissioner, 136 T. C. 515 (2011)

    Jan Elizabeth Van Dusen, a volunteer for Fix Our Ferals, sought a charitable-contribution deduction for her unreimbursed expenses in caring for foster cats. The Tax Court ruled that while some expenses were deductible, those exceeding $250 required a contemporaneous written acknowledgment from the charity, which Van Dusen did not obtain. The decision clarifies the deductibility of volunteer expenses under the Internal Revenue Code and sets standards for recordkeeping requirements.

    Parties

    Jan Elizabeth Van Dusen, the petitioner, was the plaintiff in this case. She sought a charitable-contribution deduction for her expenses related to fostering cats. The respondent, the Commissioner of Internal Revenue, contested the deduction, asserting that Van Dusen did not meet the requirements for deductibility.

    Facts

    Jan Elizabeth Van Dusen, an attorney residing in Oakland, California, was a volunteer for Fix Our Ferals, a section 501(c)(3) organization dedicated to trap-neuter-return activities for feral cats. In 2004, Van Dusen incurred out-of-pocket expenses totaling $12,068 for caring for between 70 and 80 cats, of which approximately 7 were her pets. Her expenses included veterinary services, pet supplies, cleaning supplies, and household utilities. Van Dusen claimed these as a charitable-contribution deduction on her 2004 tax return. The IRS issued a notice of deficiency denying the deduction, prompting Van Dusen to petition the Tax Court.

    Procedural History

    The IRS issued a notice of deficiency to Van Dusen for the tax year 2004, determining an income-tax deficiency of $4,838. Van Dusen contested this determination and filed a petition with the United States Tax Court. The parties settled all issues except those related to the $12,068 claimed as a charitable-contribution deduction for her foster-cat care expenses. The Tax Court held a trial to determine the deductibility of these expenses.

    Issue(s)

    Whether Van Dusen’s unreimbursed expenses for caring for foster cats are deductible as charitable contributions under section 170 of the Internal Revenue Code?

    Whether Van Dusen’s records met the recordkeeping requirements of section 1. 170A-13 of the Income Tax Regulations for contributions of less than $250?

    Whether Van Dusen’s expenses of $250 or more were deductible without a contemporaneous written acknowledgment from Fix Our Ferals?

    Rule(s) of Law

    Section 170(a) of the Internal Revenue Code allows a deduction for any charitable contribution. A charitable contribution is defined as a contribution or gift to or for the use of a charitable organization under section 170(c). Section 1. 170A-1(g) of the Income Tax Regulations specifies that unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. Section 1. 170A-13(a) of the Income Tax Regulations requires taxpayers to maintain canceled checks or other reliable written records to substantiate contributions of money. For contributions of $250 or more, section 170(f)(8)(A) and section 1. 170A-13(f)(1) of the Income Tax Regulations require a contemporaneous written acknowledgment from the donee organization.

    Holding

    The Tax Court held that Van Dusen’s expenses for veterinary services, pet supplies, cleaning supplies, and utilities were deductible to the extent they were attributable to her services for Fix Our Ferals. Specifically, 90% of her veterinary and pet supply expenses and 50% of her cleaning supply and utility expenses were deemed deductible. However, expenses of $250 or more were not deductible because Van Dusen did not obtain the required contemporaneous written acknowledgment from Fix Our Ferals. Additionally, Van Dusen was allowed to deduct a $100 check donation to Island Cat Resources and Adoption.

    Reasoning

    The court determined that Van Dusen’s foster-cat care was a service provided to Fix Our Ferals, as she had a strong connection with the organization and her activities aligned with its mission. The court analyzed the deductibility of various expenses, excluding those not directly related to foster-cat care, such as pet cremation, bar association dues, and DMV fees. The court applied the substantial compliance doctrine, as established in Bond v. Commissioner, 100 T. C. 32 (1993), to find that Van Dusen’s records met the recordkeeping requirements for expenses under $250. However, for expenses of $250 or more, the court strictly enforced the contemporaneous written acknowledgment requirement, denying deductions for those expenses due to Van Dusen’s failure to obtain such acknowledgment from Fix Our Ferals. The court also considered the impact of section 280A on Van Dusen’s household utility bills, ruling that they were deductible under the exception in section 280A(b).

    Disposition

    The Tax Court ruled that Van Dusen was entitled to deduct certain expenses related to her volunteer work with Fix Our Ferals, but denied deductions for expenses of $250 or more due to lack of contemporaneous written acknowledgment. The court also allowed a deduction for a $100 check donation to Island Cat Resources and Adoption. A decision was to be entered under Rule 155.

    Significance/Impact

    The Van Dusen case provides important guidance on the deductibility of unreimbursed volunteer expenses under the Internal Revenue Code. It clarifies that such expenses must be directly connected with and solely attributable to services rendered to a charitable organization. The decision also underscores the importance of maintaining adequate records and obtaining contemporaneous written acknowledgment for contributions of $250 or more. The application of the substantial compliance doctrine in this context offers flexibility in substantiating smaller expenses, while the strict enforcement of the acknowledgment requirement for larger expenses emphasizes the need for formal documentation in such cases. This ruling has implications for volunteers and charitable organizations, affecting how they manage and report expenses related to volunteer services.