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Bruzewicz Case Denies an Easement Deduction for Lack of a Substantiation Letter

March 2009 | Illinois

United States District Court Northern District of Illinois Eastern Division dated March 25, 2009. The Federal District Court ruled in an historic preservation easement deduction refund case that the taxpayer failed to obtain the necessary contemporaneous charitable substantiation 170(f)(8) gift letter and that therefore the deduction was appropriately denied by the IRS. The judge also addressed substantial concerns about the quality and methodology of the valuation appraisal. The Tax Courts appear to be unanimously upholding this 170(f)(8) gift letter bright line test to disqualify deductions.

Rulings on gift letters have varied between the District Courts (strict compliance) and Tax Courts (substantial compliance). In a summary bench order the Tax Court dismissed a similar summary judgment motion in a New York case. If a donor is unable to produce the required gift letter but has other contemporaneous writings that show substantial compliance, then the donor may be well advised to consider filing in Tax Court rather than District Court.

More fallout after the Bruzewicz v. USA decision from the United States District Court Northern District of Illinois Eastern Division has surfaced in Colorado and elsewhere. After the issuance of the Bruzewicz decision, it appears that the IRS has changed the authority of the Colorado branch of the IRS Appeals Division to settle cases by reducing the value the IRS is allowing for the conservation easement, unless the taxpayer can produce the goods and services letter. It also appears that in a number of cases, these landowners did not obtain the goods and services letter from the land trust. Many of the conservation easements under audit were donated many years ago, in 2002 and 2003. The IRS is asking the taxpayer to produce these goods and services letters for the first time, six to seven years later, and in most cases after the audit has been closed, with the dispute having moved on to the IRS Appeals Division or Tax Court. It looks like the IRS believes it has found its silver bullet to disallow these conservation easement charitable deductions on a technicality and not on the merits of the donation. The result is that potentially hundreds – maybe thousands - of landowners nationally who donated valuable development rights to land trusts and permanently restricted their property with conservation easements, may have their charitable contributions disallowed by the IRS as a result of not being able to provide the goods and services letter to the IRS. As the IRS continues to audit conservation easement donations from tax years 2006 through 2008, the experts assume that the goods and services letter issue will be on the IRS checklist. If the taxpayer does not have the goods and services letter, then the experts anticipate that the IRS will disallow the entire deduction. For more information and general guidance on the goods and services letter, click here.

If a donor is unable to produce the required goods and services letter but has other contemporaneous writings that show substantial compliance, then the donor may wish to consider filing in Tax Court rather than District Court. See the memorandum on substantial compliance in the document folders under IRS Cases, Issues and Forms/Contemporaneous Acknowledgment and Substantiation. Land trusts may also wish to evaluate with their legal counsel and their boards whether to issue late goods and services letters for past years where the statute of limitations has not expired. Looking backward, donors vulnerable now may not just those who donated in 2008, 2007, and 2006 (and filed the following year), but if a donor filed for a carry-over deduction, then those who donated in 2001, filed in April, 2002, and filed for a carried over deduction in 2007 may also be vulnerable. Obviously these are complex issues and land trusts and their donors must consult tax counsel for advice.

Please note: The best method to avoid these challenges for future easement donations is to issue a contemporaneous goods and services letter for every donation. Do not rely on substantial compliance arguments going forward. See the Chief Counsel Advisory on what constitutes “contemporaneous” also in the above folder.

Read the full Bruzewicz decision >>

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