French v. Comm’r—Conservation Easement Deduction Denied for Lack of Contemporaneous Written Acknowledgment
Contemporaneous Written Acknowledgment Requirements
The Tax Court explained the contemporaneous written acknowledgment (CWA) requirements as follows:
- pursuant to § 170(f)(8)(A), no deduction is allowed for a charitable contribution of $250 or more unless the contribution is substantiated with a CWA obtained from the donee organization;
- a CWA “need not take any particular form,” but it must meet the requirements of § 170(f)(8)(B), which requires that a CWA include:
- the amount of cash and a description (but not value) of any property other than cash contributed,
- whether the donee organization provided any goods or services in consideration, in whole or in part, for the property contributed, and
- a description and good faith estimate of the value of any such goods or services;
- the doctrine of substantial compliance does not apply to excuse compliance with the strict substantiation requirements of § 170(f)(8)(B) and, if a taxpayer fails to meet those requirements, the entire deduction is disallowed; and
- to be “contemporaneous,” § 170(f)(8)(C) requires that the taxpayer obtain the written acknowledgment on or before the earlier of (i) the date the return was filed or (ii) the due date (including extensions) for filing the return for the year in which the charitable contribution was made.
Analysis
Because the taxpayers in French donated the conservation easement in 2005, they were required to obtain a written acknowledgment from MLR that was “contemporaneous” with their 2005 return and satisfied the requirements of § 170(f)(8)(B). The taxpayers had two “written acknowledgments” from MLR that might have qualified as CWAs: (i) a letter from an MLR representative dated June 6, 2006, stating that “no goods or services were furnished in respect of your easement donation” and (ii) the conservation easement deed, which was signed by a representative of MLR and recorded on December 29, 2005.
Letter from MLR Was Not “Contemporaneous”
The letter from MLR did not satisfy the CWA requirements because it was not obtained by the taxpayers on or before the date they filed their amended 2005 return. The taxpayers filed their amended 2005 return on or before April 15, 2006, but they did not obtain MLR’s letter until June of 2006, approximately two months later. Accordingly, the letter was not “contemporaneous” with their return.
Conservation Easement Deed Was Insufficient to Prove Donee Provided No Goods or Services
The conservation easement deed, which was signed by a representative of MLR and recorded in December of 2005, was “contemporaneous” with taxpayers’ amended 2005 return because it was obtained by the taxpayers before the date on which they filed that return. However, to comply with the “strict substantiation requirements” of § 170(f)(8)(B)(ii), a CWA must “state whether the donee organization provided goods or services in exchange for the donor’s charitable contribution.” The Tax Court found that the conservation easement deed in French did not satisfy this requirement.
The Tax Court explained that a conservation easement deed can satisfy the substantiation requirements of § 170(f)(8)(B)(ii) in two ways: (i) the deed contains a statement as to whether the donee provided goods or services for the contribution or, (ii) if the deed does not contain such an explicit statement, the deed as a whole contains sufficient information to allow the IRS to determine whether taxpayers received consideration in exchange for the contribution. The Tax Court cited Averyt v. Comm’r, T.C. Memo. 2012-198, and RP Golf, LLC v. Comm’r, T.C. Memo. 2012-282, as examples of deeds complying with the latter approach.
In both Averyt and RP Golf, LLC, the taxpayers claimed deductions for conservation easement donations and were permitted to rely on the easement deeds as CWAs even though neither deed stated whether the donee organization provided any goods or services in exchange for the donation. In Averyt, the deed stated that the easement was granted for the purpose of conservation and that the deed was the entire agreement of the parties. In RP Golf, LLC, the deed stated that the easement was made “in consideration of the covenants and representations contained herein and for other good and valuable consideration”; but the deed did not include any consideration of any value other than the preservation of the property. The deed in RP Golf, LLC, also stated that it was the entire agreement of the parties. In both cases, the Tax Court held that the deeds, “taken as a whole,” proved compliance with § 170(f)(8)(B)(ii). Accordingly, when a conservation easement deed does not explicitly state whether the donee provided goods or services in exchange for the donation, the deed, taken as a whole, must prove compliance with § 170(f)(8)(B)(ii), and factors that support compliance are that (i) the deed recites no consideration received from the donee other than the preservation of the property and (ii) the deed contains a provision stating that the deed is the entire agreement of the parties. According to the Tax Court, that information allows the IRS to conclude that a taxpayer did not receive any consideration for the contribution and correctly reported his or her charitable contribution.
In French, the conservation easement deed did not state whether the donee provided goods or services in exchange for the charitable contribution. In addition, although the deed included provisions stating that the intent of the parties was to preserve the property, those provisions did not confirm that the preservation of the property was the only consideration provided by MLR in exchange for the donation because the deed did not include a provision stating that it was the entire agreement of the parties. “Without such a provision,” said the Tax Court, “the IRS could not have determined by reviewing the deed whether taxpayers received consideration in exchange for the contribution of the easement.” Accordingly, the deed, taken as a whole, was insufficient to satisfy § 170(f)(8)(B)(ii), and failure to comply with that section was fatal to the claimed deductions. To justify the seeming harshness of this rule, the Tax Court cited to Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), in which the 9th Circuit explained that “[t]he deterrence value of section 170(f)(8)’s total denial of a deduction comports with the effective administration of a self-assessment and self- reporting system.”
Although the IRS also argued that the taxpayers in French did not have an ownership interest in the underlying property (because the easement donation was made through trusts) and overvalued the easement, the Tax Court did not address those issues.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law