Thursday, June 30, 2011

The "Contemporaneous Written Acknowledgment" Trap Costs Taxpayers a $2 Million Charitable Contribution Deduction

In a memorandum opinion issued yesterday, Tax Court Judge David Laro ruled that taxpayers were not entitled to a charitable contribution deduction relating to the donation of a conservation easment because taxpayers failed to comply with IRC 170(f)(8) and Treasury Regulation 1.170A-13(c)(2).  The statute and regulation require "contemporaneous, written acknowledgement" among other things.  It would appear from the opinion that the disallowance of the deduction resulted from a monumental -- $2,000,000 -- tax planning blunder. 

First, it's actually questionable whether there even was a "donation" since the agreement to forego development of the land (the "conservation easement) was made as part of the settlement of litigation between the taxpayer and the county government.  Here is the short version.  Taxpayer sued County over certain warranties associated with the transfer of land.  The parties settle with County agreeing to transfer land, taxpayer agreeing not to develop the land.  According to the settlement agreement, dated August 27, 2004, the "county agreed to provide written acknowledgment, in form and substance acceptable to [Mr.] DiDonato, of a donation to the county of [Mr.]DiDonato’s development rights in the parcel.”  In other words, the parties agreed to settle litigation by calling the taxpayer/plaintiff's part of the agreement a "donation" of a conservation easement and the county agreed to provide acknowledgment suitable to the taxpayer at some later date.  The County would convey land to taxpayer, but retain development rights.  Taxpayer's agreement to forego development rights constituted the grant of a conservation easement.  That the agreement called for acknowlegement is indication that counsel was aware of the contemporaneous written acknowledgement requirement but, according to the court, simply got it wrong.  In any event, assume there was a valid contribution of a charitable conservation easement.  Ok, so taxpayers file their 2004 return in 2005, claiming a $1.8 million charitable contribution deduction and attaching the settlement and an appraisal of the granted easement.  The whole land transfer, though, was subject to a public hearing required by law (because the land involved was conservation land, basically).  The public hearing approving the deal did not occur until December 12, 2005. The court ruled that the settlement agreement could not be a contemporaneous acknowledgement because the deal was subject to a condition subsequent (the public hearing) which had not yet occurred.  Alright then.  According to the opinion, "on or about December 22, 2006, [after taxpayers filed their 2004 return claiming the deduction] the county sent to Mr. DiDonato a letter acknowledging and thanking him for his “donation” of the development rights to the Schaafsma parcel. That letter advised Mr. DiDonato that the county did not independently appraise the donated property and that it was Mr. DiDonato’s responsibility to determine the value of the donated property for “income tax deductibility” purposes." The opinion leaves us to conclude that taxpayer's counsel considered the letter acceptable.  Que the music from Jaws!  Finally, on March 19, 2007, taxpayer's executed a deed of restriction agreeing not to further development the property.   According to the Court, contemporaneous would have been either on December 12, 2005 (the date of the hearing approving the deal) or March 17, 2007 (the date the taxpayer executed the deed restriction).  The County's December 22, 2006 letter does not comply with Treasury Regulation 1.170A-13(c)(2) because it doesn't contain the magic language.  The settlement agreement was not contemporaneous because the transfer could not take place until after the public hearing, according to the court.  Ergo there was no "contemporaneous written acknowledgement" at all! Nor can there ever be one now because "contemporaneous" means on or before the date of the return for the year in which the contribution was made (either 2005 or 2007). The County's letter was on or before the 2007 date, but it did not contain the language required by the statute and regulation.   

What to do?!!!!!  Should taxpayer amend the 2007 return claiming the deduction for tax year 2007?  Its almost 2012, so a proper acknoweldgement now would hardly be contemporaneous, would it?  See, Treas. Reg. 1.170A-13(f)(3).  Boy, this seems a trap for the unwary to me. 


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In reference to the contemporaneous written acknowledgement piece, two esteemed tax attorney colleagues point out the following about the Tax Cout decisoin:

At point no. 3, Judge Laro has confused the value or amount of the reciprocal benefit provided by the donee with the “goods or services contributed by the taxpayer”. Worth keeping this in mind in relation to the decision that was handed down.

Posted by: Robert Levite | Jul 5, 2011 8:08:34 AM

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