Let’s talk
about hard rules in the tax Code.
Let’s say
that you donate $500 to your church or synagogue. You come to see me to prepare
your taxes. I ask you whether you have received a letter concerning that $500
donation.
You think
that I am a loon. You after all have the cancelled check. What more does the
government want?
That’s the
problem.
Here’s the
rule:
A single contribution of $250 or more – whether by cash,
check or credit card – must be supported
by a receipt that meets the following requirements:
a. It must identify the amount.
b. It must state that no goods or
services were given in exchange (alternatively, it must subtract said goods
and benefits from the donation if such were given); and
c. The taxpayer must have such receipt
before filing his/her tax return.
To restate
this: you can give the IRS a cancelled check and it will not be enough to save
your contribution deduction - if that deduction is over $250.
The tax Code
is spring-loaded with traps like this. Congress and the IRS say this is necessary
for effective tax administration. Nonsense. What they are interested in is taking
your money.
There is a
super-sized type of charitable deduction known as an “easement.” Think real
property, like land or a building. The concept is that real estate is a
combination of legal rights: the right to ownership, to development, to
habitation, to just leave it alone and look at it.
Let’s say
that you own a historical building in name-a-town USA. Chances are that
restrictions are in place disallowing your ability to upsize, downsize,
renovate the place or whatever. You decide to donate a “façade” easement,
meaning that you will not mess with the exterior of the building. Well, messing
with the exterior of the building is one of those legal rights that together
amalgamate to form real estate, and you just gave one such right away. Assuming
that a value can be placed on it, you may have a charitable donation.
There are a
couple of questions that come to mind immediately:
(1) Depending upon the severity of town
restrictions, you may not have had a lot of room to alter the exterior anyway. You may not have given away much, in truth.
(2) Even hurdling (1), how do you value
the donation?
Sure enough,
there are people who value such things.
That is one
thing about the tax Code: Congress is always employing somebody to do something
whenever it changes the rules, and it is forever changing the rules. Virtually
all tax bills are jobs bills. We can question whether those jobs are useful to
society, but that is a different issue.
You will not
be surprised that a super deduction brings with it super rules:
(1) One must attached a specific tax form
(8283)
(2) One must attach a qualified appraisal
(3) One must attach a photograph of the
building exterior
(4) One must attach a description of all
restrictions on the building
There is an
LLC in New York that claimed a 2007 easement deduction of $64.5 million.
Folks, you
know this is going to be looked at.
Let’s set
the trap:
The LLC
received a letter from the charity acknowledging the easement. Assuming the
return had been extended, this would have been a timely letter.
However, the
letter did not contain all the “magic words” necessary to perform the required
tax incantation. More specifically, it did not say whether the charity had
provided any benefits to the LLC in return.
Guess who
gets pulled for audit in 2011? Yeah, a $64 million-plus easement donation will
do that.
While
preparing for audit, the tax advisors realized that they did not have all the
magic words. They contacted the charity, which in turn amended its 2007 Form
990 to upgrade the information provided about the donation.
Strikes you
as odd?
Here is what
the LLC was after:
IRC Section
170(f)(8):
(A) General
rule
No deduction shall be allowed under subsection (a) for any
contribution of $250 or more unless the taxpayer substantiates the contribution
by a contemporaneous written acknowledgment of the contribution by the donee
organization that meets the requirements of subparagraph (B).
(D) Substantiation not required for
contributions reported by the donee organization
Subparagraph (A) shall not apply to a contribution if the donee organization files a
return, on such form and in accordance with such regulations as the Secretary
may prescribe, which includes the information described in subparagraph (B)
with respect to the contribution.
The LLC was
after that “(A) shall not apply if the donee organization files a return”
language. The charity amended its return, after all, to beef-up its disclosure
of the easement donation.
Nix, said
the IRS. All that hullabaloo was predicated on “regulations as the Secretary
may prescribe.” And guess what: the Secretary did not prescribe Regulations.
Do you
remember about a year ago when we talked about charitable organizations issuing
1099-like statements to their donors? We here at CTG did not care for that idea
very much, especially in an era of increasing identity theft. Many charities
are small and simply do not have the systems and resources to secure this
information.
Well, that
was also the IRS trying to prescribe under Section 170(f)(8)(D). You may
remember the IRS took a tremendous amount of criticism, after which it withdrew
its 1099-like proposal.
The LLC
argued that Congress told the IRS to issue rules under Section 170(f)(8)(D) but
the IRS did not. It was unfair to penalize the LLC when the IRS did not do
its job.
The IRS took
a very different tack. It argued that Section 170(f)(8)(D) gave it
discretionary and not mandatory authority. The IRS could issue regulations but
did not have to. In the jargon, that section was not “self-executing.”
The Tax
Court had to decide a $64 million question.
And the Tax
Court said the IRS was right.
At which
point the LLC had to meet the requirements discussed earlier, including:
The taxpayer must have such receipt before filing his/her tax return.
It had no
such receipt before filing its return.
It now had no
$64.5 million deduction.
The taxpayer was 15 West 17th Street, and they ran into an unforgiving tax rule. I am not a fan of all-or-nothing-magic-tax-incantations, as the result appears ... unfair, inequitable, almost cruel ... and as if tax compliance is a cat-and-mouse game.
