The IRS is understandably skeptical of taxpayers who claim charitable deductions for conservation easements. Opportunities for fakery abound, including valuation fakery, as explained in this nice post by Peter J. Reilly. To help combat that kind of fakery, Congress has authorized the Treasury to adopt strict reporting requirements. Today’s case shows just how strict they are.
In Oakhill Woods v. Commissioner, T.C. Memo. 2020-24 (Feb. 13, 2020) (Judge Lauber), the taxpayers made a conservation easement but their return omitted information required by regulation. That proved fatal. The IRS disallowed the deduction because of that omission, even though taxpayers offered the information during audit. Judge Lauber agreed with the IRS that the taxpayers could not cure the omission during audit. The taxpayers then tried to argue that the regulation was invalid. Judge Lauber said “don’t be stupid” (but more politely). It’s a nice lesson on the power of the IRS to impose reporting obligations and a cautionary tale to taxpayers on the danger of trying to game the reporting requirements with a needle in a haystack approach.
Law: The Power To Regulate Reporting
Courts have long recognized why the IRS must have the power to regulate reporting. Without such power “the business of tax collecting would result in insurmountable confusion.” Parker v. Commissioner, 365 F.2d 792, 800 (8th Cir. 1966).
The Tax Code is saturated with provisions giving Treasury the authority to regulate what information taxpayers must report and how they must report it. Heck, you really need go no further than §7805(a) which broadly gives Treasury the power to “prescribe all needful rules and regulations for the enforcement of this title.”
In addition to that general grant of regulatory power, however, Congress sporadically (spastically, one might even say) says “we really mean it” in other statutes. Section 6011, for example, gives sweeping powers with this seemingly redundant language: “when required by regulations prescribed by the Secretary, any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary.” Treas. Reg. 1.6011-1 then interprets that statutory language to mean that “[t]he return or statement shall include therein the information required by the applicable regulations or forms.” So everything that you are supposed to send in---forms, schedules, exhibits, etc.---forms part of the “return or statement."
For reporting noncash charitable contributions such as conservation easements, Congress has tripled down on the we-really-mean-it delegation of authority. The first delegation comes right in §170(a)(1), where Congress has said quite bluntly that a “charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.”
The double down came in an off-code provision the Deficit Reduction Act of 1984 (DEFRA), 98 Stat. 691 (1984). Section 155(a)(1) of that Act went beyond authorizing Treasury to regulate reporting; it instead required Treasury to issue “regulations under section 170(a)(1)” to deal with taxpayers claiming charitable deductions greater than $5,000. The regulations were to make taxpayers:
(A) “obtain a qualified appraisal for the property contributed”;
(B) “attach an appraisal summary to the return on which such deduction is first claimed for such contribution”;
(C) “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”; and
(D) “retain any qualified appraisal.”
The triple down came in §155(a)(3) of DEFRA, where Congress yet again lodged discretion in Treasury by providing that the “appraisal summary...shall be in such form and include such information as the Secretary prescribes by regulations.”
Treasury hopped to it, putting out a Temp. Reg. in 1985 which it finalized in 1988. T.D. 8199, 53 F.R. 16076 (May 5, 1988). The regulation is codified at 26 CFR §1.170A-13(c). Subsection (c)(4)(i)(A) requires the appraisal summary to be made on “the Form prescribed by the Internal Revenue Service.” That form is Form 8283. Subsection (c)(4)(ii)(D) requires taxpayers to report in the appraisal summary the “cost or other basis of the property adjusted as provided by section 1016.”
The regulations explicitly forgive certain omissions. For example, subsection (c)(4)(iv)(A)(1) recognizes that taxpayers may not be always able to provide basis information and so gives taxpayers this out: “If a taxpayer has reasonable cause for being unable to provide the information...relating to the manner of acquisition and basis of the contributed property...an appropriate explanation should be attached to the appraisal summary.”
The regulations also allow taxpayers to cure certain omissions. If a taxpayer fails to attach the required appraisal summary, subsection (c)(4)(H) allows taxpayers to cure that omission if the IRS later asks for the omitted Form 8283. If “the donor complies with the request within [90 days], the deduction under section 170 shall not be disallowed for failure to attach the appraisal summary, provided that the donor’s failure to attach the appraisal summary was a good faith omission and [the appraisal summery is properly prepared].”
Oakhill Woods is a pass-through entity that took an almost $8 million §170 deduction on its 2010 return. The deduction was for the contribution of a conservation easement in 379 acres in Georgia. That deduction thus valued the contribution at about $21,000 per acre. Oakhill had acquired the property in 2009 from HRH Investments, in exchange for giving HRH an ownership interest in Oakhill. HRH, in turn, had bought the land in 2007 from a financially troubled paper company for about $2,500 per acre.
Yeah, looking at what HRH paid for the fee simple rights to the land and comparing it to what Oakhill claimed to be the value of conservation easement made three years later during the Great Recession might cause your eyebrows to twitch. And, dear readers, that is precisely why the regulations require taxpayers to report basis in the donated property. It helps catch valuation...er...errors.
The regulations required Oakhill to report its basis in the land. It did not. Instead, it attached a letter to its Form 8283. The letter said “we are not giving you basis information because we don’t think you need it. Nyah, Nyah, Nyah.” No, that’s not the actual language. Here’s the actual language:
“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.”
Oakhill was selected for audit. Judge Lauber notes that Oakhill was one of a large number of taxpayers who claimed similar deductions for other acreage bought by HRH from the paper company in 2007. See note 2 of the opinion on p. 5. So Oakhill may have been caught up in a more general compliance sweep stemming from the same initial purchase.
At some point during the audit, the IRS sent Oakhill a summary report proposing to disallow the §170 deduction for failure to properly report the basis information on Form 8283. Within 90 days, Oakhill responded with what Oakhill claims was sufficient cost basis information to supplement the Form 8283. The IRS was unimpressed and in 2017 issued the final partnership administrative adjustment (FPAA) denying the deduction for a variety of reasons, one of which was a failure to comply the reporting requirements.
Lesson: The Power of Regulations
In Tax Court Oakhill’s attorneys advanced several arguments to avoid summary judgment. First, counsel invoked the subsection (c)(4)(iv)(A)(1) forgiveness provision, boldly suggesting that Oakhill failed to state basis because it did not know what basis to report. Apparently the attorney made the argument without turning red. Hey, that’s what lawyers are paid to do.
Judge Lauber, with the patience of a saint, gently pointed out that “In its attachment to the appraisal summery Oakhill did not offer the explanation it now advances. Rather, it declined to disclose basis information of any sort on the theory that the IRS did not need this information.” Op. at 14.
Second, the attorney argued that Oakhill was entitled to the subsection (c)(4)(H) 90-day cure because, gosh, it did provide the omitted information within 90 days of the IRS summary report. Judge Lauber points out that the cure only applies when taxpayers totally fail to attach the Form 8283. Oakhill did not fail to attach the Form. “Rather, Oakhill included in its return an intentionally incomplete Form 8283.” Op. at 14. Nor did Oakhill supply the information in response to a “request” for the IRS for the Form 8283. “Oakhill supplied the relevant information...only upon learning that the IRS examination might have an unhappy ending.” Op. at 15.
Here’s the meat of the lesson, from Judge Lauber:
“The regulation creates a prophylactic rule designed to provide the IRS with information to help it decide whether to commence an examination. This requirement would be meaningless if a taxpayer could cure noncompliance ex post facto, after learning that an examination had begun and was headed toward an adverse outcome.” Op. at 15.
This might remind folks of other conservation easement cases where the Tax Court has rejected “savings” clauses in conservation easement documents. Jack Townsend has this great blog post on the how courts have rejected such obvious attempts to scramble back into compliance retroactively but only after getting caught.
Judge Lauber expands on the lesson when explaining why the omission was fatal to any claim that Oakhill had substantially complied with the regulatory reporting requirements.
“Oakhill thus took the position that the 379 acres had appreciated by more than 800% during the previous 3-1/2 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 Oakhill’s refusal to supply this information contravenes the essential requirements of the governing statute.” Op. at 19 (internal citations omitted).
Oakhill also argued that, hey!, it actually had supplied information in other parts of its return from the which the IRS figure out the basis in various other schedules! The needle was there for the IRS to find. Judge Lauber's response reinforces the lesson about the power of regulations to require uniform reporting:
“The explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner as to whether (and to what extent) further investigation may be needed. *** The IRS reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable. Oakhill’s 2010 tax return was 35 pages long, and the attached appraisal (excluding addenda) was 143 pages long. Where the taxpayer states on Form 8283 that basis information will not be provided, revenue agents cannot be required to sift through hundreds of pages of complex returns looking for possible clues about what the taxpayer’s cost basis might be.” Op. at 20-21.
In short, at least for §170 reporting, the needle needs to be in the haystack at exactly the place the regulations require. That’s the lesson. Judge Lauber concludes: “This was not a case of inadvertent omission, but of a conscious election not to supply the required information. For all these reasons, we hold that Oakhill did not comply, literally or substantially, with the regulatory reporting requirements.” Op. at 22.
Coda: Oakhill's attorney also followed the au courant fashion of claiming every Treasury regulation invalid for one reason or another. Here, lacking a procedural attack, the attorney instead asserted a sudden discovery that the regulation---which has been in final form since 1988---was contrary to the plain language of the off-code DEFRA provision that authorized it. He pointed out that 155(a)(1)(C) explicitly said the regulations must require taxpayers to report basis on the “return.” The regulation violated this command when it required basis to be reported on the “appraisal summary.” 'Cause, dontcha know, the “appraisal summary” is not the “return.”
Can you believe lawyers actually get paid to do this?
Judge Lauber crisply disposes of the argument, first explaining that “return” means all the stuff that must be sent in, per the §6011 regulations. So the Form 8382 is, actually, the "return” as much as any other Form. Second, the point of the statute was to give discretion, not remove it. Finally, the taxpayer’s attorney did a face plant by totally ignoring §155(a)(3), which explicitly provides that the “appraisal summary...shall be in such form and include such information as the Secretary prescribes by regulations.” Whoops.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School Thereof.