Are you haunted by phantoms? Sometimes courts are too. In tax court, a phantom regulation is one the IRS has yet to write even though the agency is supposed to.
An unwritten regulation is the crux of the matter in 147 T.C. No. 19 (15 West 17th Street LLC). The LLC, filing as a partnership in 2007, claimed a $64,490,000 charitable contribution deduction for a conservation easement made in December 2007.
In May 2008, the charitable organization that received the easement sent the LLC a letter acknowledging receipt of the easement. The letter did not state whether the charitable organization had provided any goods or services to the LLC, or whether the organization had otherwise given the LLC anything of value in exchange for the easement.
The LLC filed a 2007 tax return on time, claimed the deduction, and attached a copy of an appraisal showing the value of the donated property before and after the donation.
In 2011, the IRS selected the LLC’s tax return for audit, and disallowed the entire charitable deduction. The IRS said the LLC did not obtain a “contemporaneous written acknowledgement” of the donation, as required in internal revenue code section 170(f)(8)(A).
The taxpayer argued the contemporaneous written acknowledgement was not required, because the exception to completing the acknowledgement in section 170(f)(8)(D) applies. That section says the contemporaneous written acknowledgement requirement does not apply when the charitable organization files a return that contains the information otherwise included on the acknowledgement.
The taxpayer says that while the charitable organization did not include the information on its original tax return, the organization did so on a subsequent amended return. The amended return was filed in 2014 after the case arrived in tax court.
The IRS says the exception to completing the acknowledgement is not valid because the regulations referred to in section 170(f)(8)(D) have not yet been written.
Here is the relevant portion of internal revenue code section 170 – Charitable, etc., contributions and gifts. Section (A) is the general rule requiring substantiation for the donation, and section (D) provides the exception the taxpayer believes should apply.
(8) Substantiation requirement for certain contributions
(A) General rule
No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).
(B) Content of acknowledgement. An acknowledgement meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.
(C) Contemporaneous. For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of—
(i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or
(ii) the due date (including extensions) for filing such return.
(D) Substantiation not required for contributions reported by the donee organization
Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases.
The court said the outcome hinges on the part of section (D) that says “in accordance with such regulations as the Secretary may prescribe.”
Does the wording mean the IRS has the discretion to decide whether this section should be implemented and, if so, how, and to determine if the regulations should be written or not? That discretion would mean the IRS has to write the regulations before the exception can be used.
Or does the wording mean the purpose and language of the section is clear, and the IRS merely has to write regulations to clarify the details or mechanics of how the exception can be used? That would mean the exception is valid and the IRS can choose to write regulations that would identify specific forms or wording for using it.
Put another way, the tax court had to decide if the lack of written regulations meant the exception could not be used because without the (unwritten) regulation, the exception cannot apply. That would mean the taxpayer would need a contemporaneous written acknowledgement.
Based on the wording, do you think the taxpayer can qualify for the exception even if the regulations are not yet written? If so, the taxpayer wins.
Or does the IRS have to issue the regulations before the exception applies? If so, the IRS wins.
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The IRS has to issue regulations before the exception applies.
We conclude that section 170(f)(8)(D) sets forth a delegation of discretionary rulemaking authority. The statute authorizes, but does not command, the Secretary to implement a donee reporting regime as an alternative compliance mechanism to the contemporary written acknowledgement regime embodied in subparagraph (A).
The statute thus commits to the Secretary’s discretion whether a regime for donee reporting should be implemented and (if so) how. In the exercise of this discretion, the Secretary determined in 1997, and again in 2016, that a system of donee reporting is neither necessary nor desirable, and accordingly declined to issue the regulations that the statute says the Secretary “may prescribe.”
We hold that subparagraph (D) is not self-executing and that it has no operative effect in the absence of the regulations to which the statute refers. The requirements of subparagraph (A) therefore remain fully applicable to the taxpayer’s 2007 gift, notwithstanding the charitable organization’s filing in 2014 of an amended return including the information described in subparagraph (B).