A taxpayer argued that the failure to include the basis of the property in an appraisal summary supporting its charitable deduction for a conservation easement should not prove fatal to the deduction in the case of Oakhill Woods, LLC v. Commissioner, TC Memo 2020-24.[1]  The letter attached to the appraisal noted:

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.”[2]

IRC §170(f)(11)(C) provides:

(C) Qualified appraisal for contributions of more than $5,000

In the case of contributions of property for which a deduction of more than $5,000 is claimed, the requirements of this subparagraph are met if the individual, partnership, or corporation obtains a qualified appraisal of such property and attaches to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require.

As the claimed deduction was nearly $8,000,000, this provision applied to this donation.  Reg. §1.170A-13(c)(2) requires that a qualified appraisal be attached to the return, and one of the requirements for an appraisal to be a qualified appraisal is that it must contain information on the cost or other basis of the property that was the subject of the appraisal.[3]

The IRS argued that the failure to provide the cost basis meant that there was not a properly completed appraisal summary—and that means the deduction should be disallowed.[4]

While the taxpayer argued that it had either strictly or substantially complied with the regulation despite not having the cost basis included, the Tax Court noted that it had rejected that position in Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159 which had virtually identical facts—the lack of the cost basis was a more than minor and unimportant departure from the requirements found in the regulations.[5]

The Belair Woods case was decided after the taxpayer had filed it petition in this case, so following that decision the taxpayer decided to add another argument—that the underlying regulation was invalid.  As the opinion notes:

On December 12, 2018, two months after we issued our opinion in Belair Woods, petitioner filed a cross-motion for partial summary judgment challenging the validity of section 1.170A-13(c)(4)(ii)(D) and (E), Income Tax Regs. These provisions set forth the regulatory requirements (discussed above) that an appraisal summary “shall include” information concerning the manner in which the donor acquired the donated property, the date on which he acquired it, and the “cost or other basis of the property adjusted as required by section 1016.” Ibid. Petitioner contends that these provisions “are invalid under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), because they do not give effect to the unambiguous language of the statute.”[6]

The opinion notes that when looking at a challenge to a regulation’s validity under Chevron, the court looks at the following two items:

• Has Congress spoken directly to the question at issue?  If Congress has passed a law that unambigiously answers the question, then there is no issue for the IRS’s regulation to decide.  But if not, we go on to the second prong of the test.

• If there is ambiguity to be resolved, is the IRS interpretation a permissible interpretation of the statute?[7]

The taxpayer claimed that, in fact, the Deficit Reduction Act of 1984 (DEFRA) which had enacted IRC §170(f)(11)(C), had spoken to this issue—and it provided that the basis information was required in the return, not the appraisal summary:

The statute on which petitioner relies is a provision of DEFRA, enacted by Congress in 1984. See supra p. 11. The Senate Finance Committee expressed Congress' concern that “inflated valuations of donated property have been increasingly exploited by tax shelter promoters.” S. Prt. No. 98-169 (Vol. 1), supra at 444. The Committee believed that “stronger substantiation and overvaluation provisions should be made applicable to charitable contributions of property.” Ibid. DEFRA accordingly added to the Code a number of new enforcement provisions.

DEFRA section 155(a), which was not codified, directed the Secretary to advance Congress' objectives by promulgating regulations tightening the substantiation requirements for charitable deductions. It provided that, “[n]ot later than December 31, 1984, the Secretary shall prescribe regulations” requiring taxpayers claiming certain deductions to do the following:

(A) to obtain a qualified appraisal for the property contributed,

(B) to attach an appraisal summary to the return on which such deduction is first claimed for such contribution, and

(C) to include on such return such additional information (including the cost basis and acquisition date of the contributed property) as the Secretary may prescribe in such regulations.[8]

The taxpayer argues that the IRS’s requirement that the taxpayer’s basis be in the appraisal summary is contrary to the clear language of Congress.

However, the Tax Court did not agree:

This argument is unpersuasive for at least three reasons. First, a taxpayer’s “return” for a particular year includes all IRS forms and schedules required to be filed as part of the return. See sec. 1.6011-1, Income Tax Regs. The Form 8283, comprising the appraisal summary, was an essential component of petitioner’s return for 2010. By requiring inclusion of information concerning cost basis and acquisition date on the Form 8283, the Secretary complied with Congress’ mandate that such data be “include[d] on such return.” DEFRA sec. 155(a)(1)(C).

Second, even if Congress were thought to have intended “appraisal summary” and “return” to be mutually exclusive terms, there is nothing in DEFRA section 155 that prohibits the Secretary from requiring that information concerning cost basis and acquisition date be included both on the appraisal summary and elsewhere on the return. Petitioner reads into DEFRA section 155(a)(1)(C) a negative pregnant that is wholly unjustified by the text.

Third, DEFRA section 155(a)(3), which petitioner fails to cite, wholly undermines its argument. That paragraph, captioned “Appraisal summary,” provides that, “[f]or purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations.” (Emphasis added.) Congress thus left the Secretary with discretion to require inclusion on Form 8283 of whatever information the Secretary reasonably deemed relevant. See Blau, 924 F.3d at 1270 (“Though the Congress left it to the discretion of the Secretary * * * to impose additional reporting requirements, the Congress specifically identified the basis and the date of acquisition as the bare minimum that a taxpayer must provide.”). The Code provision governing appraisals makes the depth of the Secretary’s discretion plain. See sec. 170(f)(11)(C) (requiring that taxpayers obtain a qualified appraisal and “attach[ ] to the return * * * such information regarding such property and such appraisal as the Secretary may require”). For these reasons we reject petitioner’s contention that the regulation violates Chevron step one on the theory that it contravenes “the unambiguous language of the statute.”[9]

But since the test is a two-part test, the fact there is ambiguity would not make the regulation valid unless it represents a permissible interpretation of the statute—basically, a reasonable reading of the statute is the standard we are looking at.

Unfortunately for the taxpayer, the Tax Court found the IRS’s interpretation is a reasonable interpretation of the statute enacted by Congress:

When enacting DEFRA Congress decided that the IRS needed disclosure of information — specifically including information concerning cost basis and acquisition date of donated property — in order to combat claims of “excessive charitable deductions” by taxpayers seeking to “play ‘the audit lottery.’” S. Prt. No. 98-169 (Vol. 1), supra at 444. Congress accordingly directed the Secretary to issue regulations requiring that taxpayers claiming certain types of charitable deductions attach to their returns an appraisal summary, which “shall be in such form and include such information as the Secretary prescribes by regulations.” DEFRA sec. 155(a)(3).

The Secretary reasonably concluded that the information the IRS needed would be most accessible to its examining agents if all of the required information appeared in the same place, namely, on the appraisal summary. The Secretary [*27] therefore issued regulations requiring that information concerning cost basis and acquisition date (as well as nine other types of information) be included in the appraisal summary included with the return. See sec. 1.170A-13(c)(4)(ii), Income Tax Regs. We have no difficulty concluding that the Secretary’s requirement to this effect was “based on a permissible construction of the statute.” Chevron, 467 U.S. at 843.[10]

Thus, the Tax Court denied the taxpayer’s challenge to the validity of the regulation.

[1] Oakhill Woods, LLC v. Commissioner, TC Memo 2020-24, February 13, 2020, https://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=12170, (retrieved February 14, 2020)

[2] Oakhill Woods, LLC v. Commissioner, p. 8

[3] Reg. §1.170A-13(c)(4)(ii)(E)

[4] Oakhill Woods, LLC v. Commissioner, pp. 11-12

[5] Oakhill Woods, LLC v. Commissioner, p. 2

[6] Oakhill Woods, LLC v. Commissioner, p. 22

[7] Oakhill Woods, LLC v. Commissioner, p. 23

[8] Oakhill Woods, LLC v. Commissioner, pp. 23-24

[9] Oakhill Woods, LLC v. Commissioner, pp. 24=26

[10] Oakhill Woods, LLC v. Commissioner, pp. 26-27