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Degrees of Compliance with Charitable Contribution Regulations, Designated Orders June 29 – July 3 and July 27 – 31, 2020

Posted on Sep. 2, 2020

Three of the orders designated during the my (mostly) July weeks involved whether petitioners had met the requirements under two different charitable contribution deduction regulations. The answer depended upon whether the regulations at issue required strict compliance, or if substantial compliance was sufficient.  

One of the two regulations at issue is Treas. Reg. section 1.170A-14(g)(6), which has been a hot topic due the Court’s decisions in Coal Property Holdings, LLC and Oakbrook Land Holdings, LLC (opinion and memorandum) and the IRS’s ongoing efforts to settle similar cases, as announced in an August 31, 2020 news release here.

The Oakbrook decisions were blogged about by Monte (here) and Les (here) with the focus on Administrative Procedure Act considerations related to the regulation’s validity. I won’t reiterate what they have already discussed, except to say that the Tax Court found the regulation was valid and applied it to disallow Oakbrook’s charitable contribution deduction.

Relying upon its reasoning in Oakbrook, the Court granted partial summary judgment for the IRS in orders in Docket No. 24201-15, Harris v. CIR (order here) and consolidated Docket Nos. 14433-17, 14434-17, and 14435-17, Habitat Investments, LLC, MM Bulldawg Manager, LLC, Tax Matters Partner, et al. v. CIR (order here). In both cases language in petitioners’ conservation easement deeds excluded the value of any post-gift improvements when determining the proportionate the amount the donee organization must receive in the event the easement is extinguished. The Court has held that Treas. Reg. section 1.170A-14(g)(6)(ii) requires strict compliance and such language violates the perpetuity requirement. See Kaufman I v. Commissioner. The regulation “imposes a technical requirement, it is a requirement intended to preserve the conservation purpose,” and petitioners must “strictly” follow the proportionality formula set forth in the regulation. See Carroll v. Commissioner.

The other charitable contribution regulation raised in my weeks’ worth of the designated orders is Treas. Reg. section 1.170A-13(c)(3). It was raised in consolidated Docket Nos. 28440-15 and 19604-16, WT Art Partnership LP, Lonicera, LLC, Tax Matters Partner, et al. v. CIR (order here) and the Court finds that substantial compliance with this regulation is sufficient.

The regulation lists the requirements for a “qualified appraisal,” which is required when a contribution of property is valued in excess of $500,000. Petitioner is a partnership that was formed in order to acquire 12 Chinese painting which were later donated to the New York Metropolitan Museum of Art (commonly known as “The Met”). Each of the donated paintings were valued at amounts between $6.23 and $26 million dollars. The IRS argues that the appraisals do not meet the requirements for a number of reasons, including because the auction company who performed the appraisal did not regularly perform appraisals for compensation and did not possess appraisal certifications or otherwise have the requisite background, experience or education.  

The Court previously addressed the qualified appraisal regulations in Bond v. Commissioner when the appraiser failed to include his qualifications with the appraisals. In Bond, the Court held petitioners were entitled to the charitable contribution deduction because the taxpayer did all that was reasonably possible while not perfectly complying with the requirements.

In the order, the Court holds that petitioner is not required to strictly comply with these regulations, but also notes that whether an appraiser is a qualified is a question of material fact which precludes summary judgment for the IRS.

Strict compliance and substantial compliance are both judicially created doctrines. Treas. Reg. section 1.170A-13(g)(6) and Treas. Reg. section 1.170A-14(c)(3) were both subject to notice and comment procedures, as is the case for most regulations. The language in both regulations also state that the requirements “must” or “shall” be met. This begs the question – how does the Court distinguish between regulations that require strict compliance and those that may not?

Strict compliance is required when the regulations relate “to the substance or essence of the statute” or are consistent with the statute as written. See Fred J. Sperapani v. Commissioner, 42 T.C. 308, 331 (1964) and Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986).

On the other hand, the substantial compliance doctrine may be used to forgive “minor discrepancies” in the taxpayer’s reporting. See Costello v. CIR, T.C. Memo. 2015-87. It is permissible when the regulations are “directory and not mandatory” and “not of the essence of the thing to be done but are given with a view to the orderly conduct of business” See Bond and Dunavant v. Comissioner, 63 T.C. 316 (1974). In the world of charitable contribution regulations, substantial compliance has been permitted if the regulation is “only helpful to IRS in the processing and auditing of returns on which charitable deductions are claimed” and does “not relate to the substance or essence of whether or not a charitable contribution was actually made.” See Taylor v. Commissioner, 67 T.C. 1071 at 1078-1079 (1977).

Taxpayers (and practitioners) should not rely upon the idea that substantial compliance will be enough in any case as it is not liberally applied. When it is allowed, substantial compliance is permissible when a taxpayer shows reasonable efforts were made to follow the regulation.

Other orders designated, included:

  • Docket No. 498-19, Patrinicola v. CIR (order here): Petitioners received a notice informing them that their bank records had been subpoenaed, but they thought it was notifying them of forced collections and move to enjoin collection. There is no levy at issue, so the Court denies petitioners’ motion.
  • Docket No. 16605-18W and Docket No. 16947-18W, Kline v. CIR (order here): Petitioners move to vacate the Court’s decision with the mistaken understanding that it could not be appealed. The Court explains it can be appealed since it is not a small tax case and denies the motion.
  • Docket No. 15964-19, Swanson v. CIR (order here): Petitioner’s CDP case with an alleged section 6751(b) component is dismissed as moot, because Court’s jurisdiction is limited and the balance has been paid.
  • Docket No. 13309-19, Ishaq v. CIR (order here): IRS’s motion to dismiss is granted because the Court lacks jurisdiction since neither party can produce the notice of deficiency.
  • Docket No. 6345-14, Larkin v. CIR (order here): Petitioners’ motion for reconsideration for a case involving a foreign tax credit is denied.
  • Docket No. 1312-16L, Smith v. CIR (order here): A section 6751(b) case is remanded to appeals because it not clear whether an immediate supervisor signed off on the penalty.
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