In the case of Belair Woods LLC v. Commissioner, TC Memo 2018-159, the Tax Court found that a taxpayer had neither fully nor constructively complied with the documentation requirements for a charitable contribution.  The Court held that this action constituted a failure in compliance despite the taxpayer having received advice from a consultant that an attorney had indicated that providing basis in the case of a contribution was not truly required.  

However, the Court determined that even though the taxpayer’s position was clearly wrong, there was still a possibility the taxpayer might be able to show it had reasonable cause for its failure that could preserve the deduction.  However, whether it had such cause or not must be determined in a later proceeding, since several material facts remained to be shown by the taxpayer to justify its reliance on the information relayed from the attorney.

Belair Woods had contributed a conservation easement to a charitable organization.  In doing so, it relied upon information it received from a consulting firm specializing in structuring conservation easements to maximize the tax deduction for such easements.  When it came time to prepare the tax return for the year in question, the taxpayer contacted the consulting organization about how to properly prepare the Form 8283, Noncash Charitable Contributions.

The Tax Court describes the request for advice and response as follows:

Belair contacted Forever Forests about preparing the Form 8283, specifically with reference to reporting its “cost or adjusted basis.” Forever Forests relayed advice that it had received in 2008 from Baker Donelson, a law firm. At Forever Forest's request, an attorney at that firm had reviewed the instructions to Form 8283 and concluded that “[i]t should not be necessary to include the basis information * * * if you attach an explanation to Form 8283 providing a reasonable cause for why it is not included.” He further stated that “a reasonable cause for not including basis information should be that the basis of the property is not taken into consideration when computing the amount of the deduction.”

The Tax Court continues to explain what Belair did with that information:

In the relevant boxes on the Form 8283, Belair wrote “see attached” and appended a two-page letter. The letter stated that: (1) the donated property was a conservation easement, (2) the easement covered 141.15 acres of woodlands, (3) the easement had an appraised FMV of $4,778,000, and (4) the parcel covered by the easement was acquired on August 1, 2007, by “purchase/exchange.” With respect to “cost or adjusted basis” the letter stated:

A declaration of the taxpayer’s basis in the property is not included in * * * the attached Form 8283 because of the fact that the basis of the property is not taken into consideration when computing the amount of the deduction. Furthermore, the taxpayer has a holding period in the property in excess of 12 months and the property further qualifies as “capital gain property.”

The Tax Court noted in its opinion the guidance that is provided by the regulations with regard to what the taxpayer must provide.  The Court notes:

Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[ ] a qualified appraisal of such property and attach[ ] to the return * * * such  information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), sec. 155(a)(1), Pub. L. No. 98-369, 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction. See sec. 170(a)(1) (“A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.”).

The Tax Court dismissed entirely the idea that disclosure of basis was simply unnecessary to comply with the regulations.  The Court notes:

Even if petitioner's premise were correct, its conclusion does not follow from its premise. The regulations excuse the omission of basis information only if reasonable cause is established in the explanation attached to the appraisal summary. See sec. 1.170A-13(c)(4)(iv)(C)(1), Income Tax Regs.; Friedman v. Commissioner, T.C. Memo. 2010-45, 99 T.C.M. (CCH) 1175, 1177. In its attachment to the appraisal summary, Belair did not offer the explanation it now advances. Nor did it disclose what its basis would be under the alternative approaches it mentions. Rather, it declined to disclose basis information of any sort on the theory that the IRS did not need this information.

The Court also rejected the “substantial compliance” doctrine to treat the omission as not relevant.  The disclosure of basis is important and failing to disclose that basis, when it is available to the taxpayer, impedes the IRS’s ability to recognize potentially questionable donation claims.  As the opinion continues:

Here, Belair acquired the land in question by contribution from HRH, a related party. HRH had acquired the land in August 2007 for $2,605 per acre. In December 2009 Belair valued the easement at $33,707 per acre and the land covered by the easement at $35,990 per acre (viz., $5,080,000 ÷ 141.15). This valuation presupposed that the 141.15 acres had increased in value by 1,380% during the previous 2-1/2 years, amid the worst real estate crisis since the Great Depression. This is precisely the sort of information that  Congress wished the IRS to have, and Belair’s refusal to supply this information contravenes “the essential requirements of the governing statute.” Estate of Evenchik, 105 T.C.M. (CCH) at 1234; see Bond, 100 T.C. at 41; see also sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs. (listing “cost or other basis” as a category of required information); Alli v. Commissioner, T.C. Memo. 2014-15, 107 T.C.M. (CCH) 1082, 1094 (“[C]ourts have routinely declined to apply the substantial compliance doctrine where * * * entire categories of required information are omitted.”).

However, the Tax Court noted that Congress did add IRC §170(f)(11)(A)(ii) to the law in 2004.  That provision provides that the denial of the deduction shall not apply “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.”

The matters before the Tax Court were competing motions for summary judgment in this case.  Summary judgment is appropriate only where there is no significant dispute regarding material facts necessary to decide the matter.  However, in the case of whether the taxpayer had met the reasonable cause test, the Court found that additional information needed to be considered.

As the opinion continues:

Petitioner contends that Belair, when preparing its Form 8283, reasonably relied on advice from Forever Forests, which in turn relied on advice from an outside law firm. We conclude that resolution of this issue will require us to address several questions as to which genuine disputes of material fact currently appear to exist. These questions include whether Forever Forests was a “tax professional”; whether Forever Forests was “a competent and independent advisor unburdened with a conflict of interest,” see Mortensen, 440 F.3d at 387; whether Belair could reasonably rely on legal advice relayed to it indirectly; and whether Belair actually relied in good faith on advice that respondent seems to regard as too good to be true.

It is not clear if the taxpayer will be able to clear the hurdles presented, especially showing that the consultant was free of a conflict of interest or if reliance on indirect legal advice is truly reasonable. However, the taxpayer has been his day in court to attempt to show that he/she can make these showings.