Evolving Law on Stewardship Administration and Tax Code Regulations
Taxpayers and land trusts will want to understand how a new case affects conservation gifts. The IRS and the Tax Court positions on cash donations and qualified appraisals suffered a reversal when the Second Circuit of the US Court of Appeals decided three important issues differently than they had.
An appeals court recently reversed the tax court’s denial of a deduction because the IRS claimed the appraisal was not qualified under the Treasury Regulations. The appeals court also allowed the deduction for the required stewardship contribution to the preservation organization and applied the substantial compliance doctrine to both the qualified appraisal and to minor omissions in the Form 8283.
The ruling will likely inspire additional appeals of other recent Tax Court adverse decisions to taxpayers. It is possible that the IRS will appeal this case or that the IRS will make an effort to distinguish other cases from Scheidelman in order to continue justifying the disallowance of required cash contributions and valuations based on appraisals that may not fulfill the IRS’s interpretation of the spirit of the Treasury Regulations. Scheidelman should not be read as countenancing shoddy or unsupported appraisals. Conservation organizations should continue to proceed with caution when requesting cash contributions and should seek meaningful appraisals.
Second Circuit Reversal
- Minor omissions in the completion of the gift acknowledgment Form 8283 (in this case, the omission of property acquisition information) will not invalidate the underlying donation. The court used “substantial compliance” rather than the Tax Court’s “strict compliance” used by the IRS.
- The ruling affirms the deductibility of easement stewardship contributions even if payment is not strictly voluntary in the usual sense of the word. The court reasoned that the cash contribution for acceptance of the easement did not constitute a quid pro quo payment because the National Architectural Trust’s agreement to accept the easement was not a transfer of anything of value to the taxpayer. While payment of the contribution may be a “prerequisite” to the acceptance of an easement, the donor did not receive in return any bargained for benefit or goods and services. A cash contribution (even mandatory in nature) that serves to fund the administration of another charitable donation is sufficiently voluntary to constitute a charitable contribution according to the Second Circuit. The other Circuit Courts have not adopted this interpretation yet.
- Finally, the court held that an easement appraisal may be “qualified” even if certain shortcuts are applied by the appraiser. The appraiser’s application of these sources to his analysis in conjunction with other factors cited by the appraiser constituted “reasoned analysis,” and therefore met the regulatory threshold requirements of a “qualified appraisal.” The appeals court further found that the before-and-after appraisal method was not, on its face, insufficient to claim a deduction for the contribution of the easement. However, the court did not specify what deduction, if any, would be allowed for the easement. The court returned the case to the Tax Court to determine if the actual valuation is credible and accurate.
On March 24, 2003, Huda T. Scheidelman completed an application to donate a conservation easement on the façade of her historic Brooklyn brownstone. The National Architectural Trust required an initial deposit of $1,000 with the application and an additional donation of $9,275 upon completion of the appraisal and acceptance of the easement. Ms. Scheidelman sent the money and, on June 23, 2004, the Trust completed a Form 8283 acknowledging the easement contribution. The form was then sent to Ms. Scheidelman with a thank-you letter stating that she had received “no goods or services in return.”
Ms. Scheidelman claimed tax deductions for her contribution in 2004, 2005 and 2006. In March of 2008, the Commissioner mailed notice to Ms. Scheidelman of a deficiency in those years as a result of disallowance of her deductions. Ms. Scheidelman filed a petition with the Tax Court for a redetermination. In her petition, she also requested an additional deduction for the $9,275 contribution in 2003. After hearing the case, the Tax Court eliminated the penalties but denied all deductions. Ms. Scheidelman appealed.
Despite the opinion in Scheidelman, conservation organizations should continue to be wary of the risk that the IRS will deny a deduction for a mandatory contribution. The court’s decision that a cash contribution (even a mandatory one) that serves to fund the administration of another charitable donation is likewise an “unrequited gift” is a positive development in case law on charitable donation deductions. However, prudent conservation organizations know to ”request” contributions and should not change their practice until this area of law has fully evolved, all the circuits have accepted the opinion of the Second Circuit and the IRS has confirmed their acceptance of the ruling.
The IRS has stated in the past that tying a stewardship contribution to actual stewardship costs is not fatal to deductibility. Rather, it is a percentage fee that is most problematic for the IRS when reviewing stewardship contributions. The IRS concerns about actual stewardship costs could prompt greater scrutiny if the amount requested is either disproportionately high relative to actual cost or if the amount is directly tied to tax benefits. Conservation organizations should continue to exercise prudence in seeking donations to fund stewardship administration and defense.