In Izen v. Comm’r, the Fifth Circuit Court of Appeals recently affirmed a Tax Court decision to deny a taxpayer’s charitable contribution deduction where the taxpayer failed to meet the statutory documentation requirements for the charitable contribution.[1] The key documentation that the taxpayer lacked was a contemporaneous written acknowledgement that included his taxpayer identification number. The taxpayer attempted to argue that he had substantially complied with the statutory requirements, but the Fifth Circuit affirmed the Tax Court’s holding that the doctrine of substantial compliance does not apply to statutory requirements.
Facts and Tax Court Proceedings
The taxpayer and On Point Investments, LLP (“On Point”), a partnership, purchased a private jet in December 2007 for $42,000, with each paying $21,000 for a 50% undivided interest. After its purchase, the aircraft remained in storage for three years at an airfield in Montgomery County, Texas. On December 31, 2010, the taxpayer and On Point allegedly made completed gifts of their respective 50% interests in the jet to the Houston Aeronautical Heritage Society (“Society”), a tax exempt organization.
The taxpayer timely filed his 2010 Federal income tax return, pursuant to an extension, on October 17, 2011. On this return he claimed the standard deduction and did not claim any deduction for charitable contributions. After review, the IRS sent him a timely notice of deficiency in August of 2012 related to his failure to substantiate certain deductions claimed on his Schedules C, Profit or Loss From Business, and Schedules E, Supplemental Income or Loss, on his 2009 and 2010 returns.
The taxpayer timely petitioned the Tax Court[2] (pro se) but did not allege any charitable contribution deductions. On April 1, 2014, the Tax Court granted the taxpayer’s motion to amend his petition, in which he first alleged that on December 31, 2010, he had donated his 50% interest in the jet to the Society. The taxpayer further alleged in his petition that his 50% interest in the aircraft had been appraised at $338,080, and that he was entitled to a charitable contribution deduction in that amount for 2010.
The taxpayer then filed a motion for summary judgement seeking a ruling that he was entitled to a charitable contribution deduction for his alleged gift. The Tax Court denied that motion on March 9, 2016, finding that there existed several disputes of material fact. These included: (1) whether the taxpayer had secured from the Society and attached to his return a “contemporaneous written acknowledgment” as required by section 170(f)(12); (2) whether the required Form 8283, Noncash Charitable Contributions, had been properly signed and dated by an officer of the Society; and (3) whether the fair market value of petitioner’s 50% interest, as of December 31, 2010, was $338,080.
The taxpayer then filed an amended tax return for 2010, on which he claimed the charitable contribution deduction of $338,080. On the return he included the following items:
(1) an acknowledgment letter addressed to Philippe Tanguy (a limited partner in On Point), dated December 30, 2010, and signed by Drew Coats as president of the Society;
(2) a Form 8283 executed by Amy Rogers, managing director of the Society, and dated April 13, 2016;
(3) a copy of an “Aircraft Donation Agreement” allegedly executed on December 31, 2010, by Drew Coats as president of the Society but bearing no other signatures; and
(4) an appraisal dated April 7, 2011, opining that the fair market value of petitioner’s 50% interest in the aircraft, as of December 30, 2010, was $338,080.
The IRS responded with its own motion for partial summary judgment, contending that the taxpayer’s charitable contribution deduction should be denied on the ground that he failed to satisfy the substantiation requirements of section 170(f)(12). In response, the taxpayer filed a renewed motion for partial summary judgment, urging that the defects previously discerned by the Tax Court had been cured by his subsequent filing of the 2010 amended return.
Holding by Tax Court and Affirmation by Fifth Circuit.
We have previously discussed several similar cases as this one, such as Gray Edmondson’s article on the RERI appeal, which involved the gift of an LLC interest where the underlying property was appraised but the taxpayer failed to complete Form 8283.[3] The Tax Court ended up denying the taxpayer’s motion for partial summary judgement and granting the IRS’s motion denying the deduction in full. The Tax Court and the Fifth Circuit both found that the taxpayer had not complied with IRC §170(f)(12) because he had not provided the required contemporaneous written acknowledgment with his return. The Tax Court noted that one way for taxpayers to meet this requirement is to attach to his or her return the donor’s copy of the Form 1098-C, which the charity is directed to provide to the donor. Having failed to do so, apparently because the Society did not complete or file with the IRS a Form 1098-C in connection with the alleged gift, the question became whether any of the other documents attached to the return, or some combination thereof, could satisfy the requirements of IRC §170(f)(12).
Two of the several statutory requirements for IRC §170(f)(12) are that the contemporaneous written acknowledgment include the name and taxpayer identification number of the donor and that the acknowledgment be provided by the donee organization within thirty days of contribution. None of the items attached to the taxpayer’s amended return included his taxpayer identification number, and the acknowledgement letter from the Society (addressed to the limited partner) did not even mention the taxpayer by name. Additionally, the Form 8283, which was dated April 13, 2016, years after the donation occurred, clearly did not meet the thirty-day requirement. On appeal, the taxpayer asked the Fifth Circuit to consider a different letter from the Society, which was actually addressed to him, but which was not attached to his amended return. The Fifth Circuit declined, because such was not attached to the return in question, and further opined that even if it could have considered it, it also lacked the taxpayer’s identification number.
In a last ditch effort, the taxpayer argued that he had substantially complied with the requirements of IRC §170(f)(12) and that the documents he provided should be read together with the return to substantiate his claimed deduction. As noted by the Fifth Circuit, the doctrine of substantial compliance applies where a taxpayer acted in good faith and exercised due diligence but nevertheless failed to meet a regulatory requirement. Both Courts held that the doctrine does not apply to statutory requirements.[4] The Fifth Circuit opinion specifically cites to a 2004 Ninth Circuit decision to support the proposition that substantial compliance does not apply to requirements found in the statute regarding charitable contributions, no matter how minor the fault might appear (such as failing to show the taxpayer’s identification number on the acknowledgement).[5] Accordingly, Fifth Circuit affirmed the Tax Court’s holding to deny the taxpayer’s motion for partial summary judgement.
Conclusion
As we have discussed countless times, the importance of documentation cannot be overstated where tax matters are concerned. This importance is exponentially heightened where there is an actual statutory requirement for documentation, especially with charitable deductions. Taxpayers are responsible for knowing and complying with all statutory requirements and must bear the consequences of their failure to do so. In this case, the taxpayer failed to properly attach documentation which met the statutory requirements of a contemporaneous written acknowledgment to either his original or amended tax return. The argument that the Society failed to provide him with a Form 1098-C, or apparently complete and file one with the IRS at all, did not relieve him of the necessity of meeting the statutory requirements. While the taxpayer attempted to attach several documents to his amended return, he either was unaware of the requirement that his name and taxpayer identification number must be included or was unable to procure documents meeting such requirement. Either way, the outcome was the same as the majority of cases where the taxpayer fails to properly document a transaction, the taxpayer lost. The fact that the documentation required to be provided here as the subject of a statutory requirement removed the taxpayer’s ability to rely on the doctrine of substantial compliance.
[1] Izen v. Comm’r, CA5, Docket No. 21-60679, June 29, 2022.
[2] Izen v. Comm’r, 145 TC No. 5, March 1, 2017.
[3] Gray Edmondson, “RERI Revisited on Appeal, $33M Deduction Denial Upheld” (June 5, 2019), https://esapllc.com/reri-appeal/.
[4] McAlpine v. Comm’r, 968 F.2d 459, 462 (5th Cir. 1992).
[5] See Addis v. Comm’r, 374 F.3d 881, 887 (9th Cir. 2004). See also: Scheidelman v. Comm’r, 682 F.3d 189, 199 (2nd Cir. 2012); Bond v. Comm’r, 100 T.C. 32, 40-41 (1993); RERI Holdings, LLC v. Comm’r, 149 T.C. 1, 15 (2017); Volvo Trucks of N. Am., Inc. v. United States, 367 F.3d 204, 210 (4th Cir. 2004); McAlpine v. Comm’r, 968 F.2d 459, 462 (5th Cir. 1992); Prussner v. United States, 896 F.2d 218, 224 (7th Cir. 1990) .
