Tuesday, January 31, 2012
Most everyone knows by now that, pursuant to IRC § 170(f)(8), charitable donors who make gifts of $250 or more must obtain a contemporaneous written acknowledgment (CWA) from the donee that states (i) the amount of the contribution, (ii) whether the donee provided any goods or services in consideration, and (iii) a description and good faith estimate of the value of any such goods or services. The Tax Court’s recent decision in Cohan v. Comm’r, T.C. Memo. 2012-8, emphasizes that the CWA must be complete and accurate. Cohan involved a purported bargain sale of rights of first refusal pertaining to property located on Martha’s Vineyard to a charity in exchange for some lots, leases, beach access rights, and other valuable consideration. The charity provided a CWA to the taxpayers in connection with the transaction, but the CWA did not reflect all of the consideration the charity provided to the taxpayers. The Tax Court sustained the IRS’s complete disallowance of the deductions claimed with respect to the donation component of the transaction because (i) the CWA did not include a description or good faith estimate of all of the consideration provided by the charity, (ii) the taxpayers' reliance on the CWA in calculating their deductions was not reasonable because they knew the CWA omitted certain items of consideration, (iii) and the CWA deficiencies could not be forgiven under the doctrine of substantial compliance because the information required to substantiate the contributions was not included anywhere else on the taxpayers’ income tax returns.
The Tax Court noted that the record strongly suggested that the parties made a conscious decision to exclude items of consideration from the CWA for purposes of calculating the amount of the bargain sale gift and to play the audit lottery. Quoting an earlier decision by the Ninth Circuit involving a similar issue, the court explained that the CWA requirement is important to the effective administration of our self-reporting tax system and “the Government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability.”
Cohan highlights a potentially troubling issue for charitable donors and donees because it will sometimes be unclear whether a donee’s actions in connection with a donation rise to the level of “goods or services” that need to be reflected on the CWA. For example, in Kaufman v. Comm’r, 136 T.C. No. 13, the IRS challenged deductions claimed with respect to the donation of a conservation easement and cash on a variety of grounds, including the donor’s “unquestioning and self-serving” reliance on CWAs that certified that the donee had provided no goods and services. The IRS argued that the CWAs “were erroneous and did not contain a good faith estimate of the value of the goods or services [the donee] provided” because the donee had accepted and processed the donor’s application, provided the donor with a form conservation easement agreement, undertaken to obtain approvals from the necessary government authorities, secured the lender agreement from the bank, given the donor’s husband basic tax advice, and provided the husband with a list of approved appraisers. The Tax Court sided with the donor on this issue, holding that the IRS failed to prove the monetary value, if any, of what the donor may have received from the donee, or that the donor “knew the items had value (if, indeed, they did) and, therefore, knew that the letters were inaccurate (if, indeed, they were).” But Cohan and Kaufman leave open the possibility that actions taken by a donee in connection with a donation may, in some circumstances, be deemed to rise to the level of “goods or services” that must be valued and reflected on the CWA, and failure to do so may result in a complete disallowance of the deduction.