Paul L. Caron

Thursday, November 10, 2022

Colella: Incorporation By Reference Nixed A Charitable Deduction For Art

Frank G. Colella (Pace), Incorporation by Reference Nixed a Charitable Deduction for Art, 177 Tax Notes Fed. 35 (Oct. 3, 2022):

Tax-notes-federalIn Albrecht, the Tax Court held the taxpayer failed to meet the statutory requirements to claim a charitable deduction for her donation of various Native American artifacts to the Wheelwright Museum of the American Indian. The court upheld the IRS’s determination that taxpayer had failed to satisfy the section 170 charitable contribution substantiation requirements, viz., the required content of that documentation. Although the decision did not include the dollar amount disallowed, The Wall Street Journal later reported that the value of the donated artifacts was $464,000.

The charitable deduction was denied because the taxpayer had submitted a deed of gift that described the donated items but otherwise failed to satisfy the contemporaneous written acknowledgement (CWA) requirement. Because the deed had incorporated by reference a separate gift agreement that purported to further describe the terms of the donation, and that gift agreement had not been submitted with the deed, the Tax Court was unable to determine whether the museum had provided “any goods or services in consideration” for the donation. Because that particular recitation was necessary for a valid CWA, the Tax Court concluded that the substantiation requirements had not been met. Therefore, the taxpayer could not deduct the value of the donated items.

Although the Tax Court stated that strict compliance with the statutory requirements was necessary, and that “substantial compliance” with the substantiation requirements was not permissible, it undertook a factual examination of the deed to determine whether it would otherwise qualify as a CWA. Despite not being in the form of a “typical” CWA provided in connection with a donation, no particular form of CWA was required to satisfy the statutory requirements. However, because the terms of the gift agreement were specifically incorporated, the deed was incomplete as a matter of law without that additional document. Because the deed specifically referred to the gift agreement, it was impossible to determine whether the deed, standing alone, constituted a valid CWA.

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