Originally published on Forbes.com.
One of the things that I am moderately fanatical about is getting good charitable contribution acknowledgments for my clients. Also when I have been involved with not-for-profits, I have endeavored to make sure that they have sent out good acknowledgments. It is not exactly rocket science. The Code requires that for contributions of $250 or more there must be a “contemporaneous written acknowledgment” that includes:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i) .
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
Contemporaneous” means that you have to have the written acknowledgment in your hot little hand at the earlier of the filing of your return or its due date including extensions.
The Tax Court had bad news for 15 West 17th Street LLC about how strict that rule is. Very, very strict. The donee organization, the Trust for Architectural Easements went to great lengths to make up for neglecting to include the no goods and services language in its acknowledgment letter to no avail. The claimed contribution was $64,490,000. Ouch! This is a great example of Reilly’s Fourth Law of Tax Planning – Execution isn’t everything but its a lot. As it happens, losing the case the way they did may be not the worst result for the 15 West members, but that requires some explaining. The case has other significance, possibly constitutional, so there may be an appeal.
Background
As is common in Tax Court cases, the story behind the story is probably more interesting than the tax issues in play, but so it goes. In Judge Lauber’s summary of the facts, there is a hint at how the case is going to go.
In September 2005 the LLC purchased, for $10 million, a property in New York City, Borough of Manhattan, known as block 558, lot 43. This property comprised two parcels. The building on the northern parcel, at 126-128 East 13th Street, is the Van Tassell & Kearney Auction Mart (VTK Building). The VTK Building was built in 1903-04 for staging horse auctions. It was later used as a candy factory, as a vocational school for women, and as the studio of Frank Stella, a well-known artist. …..
The LLC’s contribution of the easement to the Trust was completed for Federal tax purposes in 2007. On May 14, 2008, the Trust sent the LLC a letter acknowledging receipt of the easement. This letter did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had other-wise given the LLC anything of value, in exchange for the easement.
The LLC secured an appraisal concluding that, as of February 8, 2008, the property had a fair market value of $69,230,000 before placement of the easement. The appraisal thus opined that the property–acquired for $10 million in September 2005–had risen in value by almost 600% in 2-1/2 years. Opining that the property was worth only $4,740,000 after the donation, the appraisal concluded that the easement had reduced the property’s value by $64,490,000.
The LLC filed its 2007 Form 1065, U.S. Return of Partnership Income, on October 17, 2008. On this return, the LLC deducted $64,490,000, the alleged value of the easement, as a charitable contribution to the Trust. The LLC included with its return a copy of the appraisal report, a copy of the Trust’s May 14, 2008, letter, and Form 8283, Noncash Charitable Contributions, executed by the appraiser and by a representative of the Trust. (Emphasis added)
The judicial notice that the appraisal claimed a 600% value increase and the use of the word “alleged” are clues that things are not going to go well for the taxpayer.
There is other coverage of events surrounding the property that makes for interesting reading. There was a foreclosure in 2012 and earlier this year litigation over the fallout from the foreclosure. Of more relevance to the case was what went on with the Greenwich Village Society for Historic Preservation.
A Historic Building
The original plan when the LLC purchased 126-128 East 13th Street was to tear it down and put up a seven-story store condo building. Development plans had been filed, but a demolition permit had not been issued yet when Andrew Berman of the Greenwich Village Society for Historic Preservation jumped into the breach. His testimony on a hearing to designate the building a historic landmark was compelling.
The LPC has an all-too-rare opportunity today – to bring a treasured piece of New York City’s history facing destruction back from the brink. ……
The former Van Tassel & Kearney Horse Mart is as admired for its unassuming monumentality as it is for its rich and incredible history. The building’s elegant proportions and materials and grand arch and central hall are particularly pleasing to the passerby, and speak to the building’s origins as a place of business for the city’s elite at the turn of the last century….
By all accounts, this is likely the last surviving example in this city of this once common building type, the horse auction mart, though in later years it served as an assembly line training center, including for Women during World War II, and from 1978 to 2005 served as the studio of one of the late 20th century greatest and most influential artists.
The artist who owned the building is Frank Stella. He is apparently still active at the age of eighty and is quite renowned. Among his honors is the Presidential Medal of Honor presented by President Obama in 2009.
I had a brief exchange with Mr. Berman who clarified for me that the effect of the 2006 hearing was to have the building “calendared” by the commission, which put the teardown development plan on hold. The building was finally “designated” by the Landmarks Preservation Commission in 2012.
Renouncing Your Super Powers
Judge Lauber’s statement that the nearly $70 million appraisal implied that the building had increased in value by 600% is not exactly fair. If the developers had thought that the site was worth the $10 million that was paid for it, they would not have purchased it. If you want to make money, you try to buy things for less than they are worth. What would be interesting is to see what consideration the appraiser gave the obstacles presented by the Landmarks Preservation Commission in evaluating the value of the site. There have been quite a few facade easement cases in New York City, where the easement was determined to be worthless since the buildings were already restricted. I wrote about 1982 East LLC here and Loren Dunlap here. That is where I hit on the notion that easements like that is like me renouncing my superpowers.
The problem with valuing conservation and facade easements is that they involve subtracting the value of something real and existing now from the value of something hypothetical, which can turn into something of a fantasy. The valuation of the facade easement in this case is more grounded in reality. There was a real development plan ready to roll until Mr. Berman stepped in front of the hypothetical wrecking ball. It would be interesting to dig into it further, but at this point, I really don’t have enough information. My guess is the appraiser kind of underestimated the hurdles and risks including the obvious one that the Landmark Preservation Commission might, as they did, rule in favor of preservation.
If it was reasonable to think that the Landmarks Preservation Commission was going to rule in favor of preservation, then the easement was virtually worthless. If the IRS won the case on that basis they could get a 40% overvaluation penalty. Mr. Berman told me that once a building is “calendared” it is pretty likely that the LPC will designate it but by no means certain. So there was some value to the easement, but it was pretty speculative. The Landmarks Preservation Commission is an agency of the City of New York whose members are appointed by the mayor. I have to say that just the name makes you think that they might be a little less likely to support a teardown. Just saying.
The Constitutional Issue
In the Code, the contemporaneous acknowledgment is not the only possible substantiation contemplated by Congress when it created the new requirement in 1993. There is also this:
SUBSTANTIATION NOT REQUIRED FOR CONTRIBUTIONS REPORTED BY THE DONEE ORGANIZATION. Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.
Given that the IRS had had over a decade to get some regulations out, the thinking was that by the Trust amending its 990 to report the donation, they had should be allowed to claim that they had met the Code requirement. The Tax Court was not buying it.
We conclude that the rulemaking authority delegated in subparagraph (D) is discretionary, not mandatory, and that subparagraph (D) is not self-executing in the absence of regulations. We accordingly hold that the general rule set forth in subparagraph (A), requiring a CWA meeting the requirements of subparagraph (B), is fully applicable for the gift at issue.
The decision notes than when the IRS finally got around to issuing a notice of proposed rulemaking to implement the proposed substantiation alternative in 2015, it was flooded with negative comments and ended up withdrawing the proposal. Oddly enough this attempt to give taxpayers and donee organizations an alternative acknowledgment procedure became part of the IRS scandal narrative. The withdrawal was celebrated on Day 974 of the TaxProf’s IRS scandal diary.
It’s not every day we can celebrate a less intrusive Internal Revenue Service. But charities and the people who support them will be happy to learn that the IRS has withdrawn its proposal to collect more donor information, including Social Security numbers.
There is a pretty lengthy discussion of this issue in the decision, which I am sure some of the legal blogs will relish, but here is the bottom line.
In the exercise of his discretion, the Secretary determined in 1997, and again in 2016, that a system of donee reporting is neither necessary nor desirable, and he accordingly declined to issue the regulations that the statute says he “may prescribe.” We hold that subparagraph (D) is not self-executing and that it has no operative effect in the absence of the regulations to which the statute refers. The requirements of subparagraph (A) therefore remain fully applicable to petitioner’s 2007 gift, notwithstanding the Trust’s filing in 2014 of an amended return including the information described in subparagraph (B)
But That’s Not All
There was a dissent, which is something that you don’t see a lot in Tax Court decisions.
Congress once considered but did not enact mandatory donee reporting as the primary substantiation of charitable contributions, and that the notion of donee reporting survives in section 170(f)(8)(D) as a non-mandatory alternative. That history provides no basis whatsoever for the idea that the actually enacted alternative cannot be employed until the IRS promulgates new regulations.
The Tax Court should not give to Treasury the power to veto section 170(f)(8)(D) by regulatory inaction–a power that Congress did not grant– and thereby deprive taxpayers of a means that Congress did grant.
So there may be an appeal of this decision. On the other hand, the members might be careful what they wish for as it is much cheaper to lose this way than it would be to lose on valuation.
Other Coverage
As any tax blog aficionado would know, there is no way that Lew Taishoff, whose coverage of the Tax Court is extremely thorough, is going to pass on a multi-million dollar regular decision in his general neighborhood. His post is titled Executive Nullification.
I’ll bet this is going up on appeal to Second Circuit, but the tough part is the seven-year gap between 990 1 and 990 2.
If this weren’t one of those overblown façade farragoes, The Jersey Boys would stand a better chance.
Jersey Boys is Mr. Taishoff’s nickname for the firm representing the taxpayers.
Suevon Lee has something on Law 360, but it is behind a paywall and regular readers are familiar with what a cheapskate I am. Thomson Reuters also had a nice summary.
I expect that there will be more coverage next week from bloggers who don’t spend Christmas Eve writing about Tax Court cases.