Charity's Acknowledgment Letter Failed Substantiation Test; Deduction Denied

(Parker Tax Publishing July 2022)

The Fifth Circuit affirmed the Tax Court and held that a taxpayer was not entitled to a charitable contribution deduction for an airplane he and a partnership donated to a charity because a letter received from the donee acknowledging the donation was only addressed to a partner in the partnership and not the taxpayer. Further, not only was the letter not addressed to the taxpayer, it did not contain the taxpayer's identification number and thus did not meet the substantiation requirements of Code Sec. 170(f)(12)(B)(i). Izen v. Comm'r, 2022 PTC 182 (5th Cir. 2022).

Background

In 2007, Joe Izen, Jr., and a partnership, On Point Investments, LLP (On Point), purchased a 40-year-old airplane for $42,000. Izen and On Point each paid $21,000 for a 50 percent undivided interest in the airplane. The airplane was put in storage at an airfield in Montgomery County, Texas and remained there for three years. On December 31, 2010, Izen and On Point allegedly made completed gifts to the Houston Aeronautical Heritage Society (the Society) of their respective 50 percent interests in the airplane. On Point was allegedly represented by a limited partner, Philippe Tanguy. Izen did not report any charitable contribution deduction on his 2010 federal income tax return.

In 2012, the IRS notified Izen that he had deficiencies for his 2009 and 2010 tax years. Izen petitioned for a redetermination by the Tax Court. In 2014, Izen filed an amended petition and, for the first time, argued that he was entitled to a deduction of $338,080 for the charitable donation of his 50 percent interest in the airplane to the Society.

In April 2016, Izen filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 2010. On this return, he claimed for the first time a deduction of $338,080 for the alleged contribution of his 50 percent interest in the airplane to the Society. Izen included with his amended return: (1) an acknowledgment letter addressed to Tanguy, not Izen, dated December 30, 2010, and signed by the president of the Society; (2) a Form 8283, Noncash Charitable Contributions, executed by the managing director of the Society, and dated April 2016; (3) a copy of an "Aircraft Donation Agreement" allegedly executed on December 31, 2010, by the president of the Society but bearing no other signatures; and (4) an appraisal dated April 2011, opining that the fair market value of Izen's 50 percent interest in the aircraft, as of December 30, 2010, was $338,080. The acknowledgment letter did not mention Izen and did not provide his taxpayer identification number. Izen also included a copy of the donation agreement between him, Tanguy, and the Society, but that agreement lacked Izen's taxpayer identification number. The Form 8283 attached to Izen's Form 1040X also did not include Izen's taxpayer identification number.

The IRS contended that Izen was not entitled to the charitable contribution deduction because he failed to satisfy the substantiation requirements of Code Sec. 170(f)(12), which apply to contributions of used motor vehicles, boats, and airplanes. The Tax Court agreed with the IRS and, in Izen v. Comm'r, 148 T.C. 71 (2017), the Tax Court held that Izen was not entitled to the charitable contribution deduction he claimed on his amended 2010 tax return since he failed to satisfy the statutory substantiation requirements for taking the deduction. The court found this to be the case because Izen had not included with his amended 2010 return a contemporaneous written acknowledgment (CWA) that complied with Code Sec. 170(f)(12)(B). Izen appealed to the Fifth Circuit, arguing that he substantially complied with the requirements and that the documents he provided should be read together with the return to substantiate his claimed deduction.

Charitable Contribution Substantiation Requirements

Code Sec. 170(f) sets forth a series of substantiation requirements for deducting a charitable donation. The requirements vary depending on the character and size of a taxpayer's charitable gift. For gifts of $250 or more, Code Sec. 170(f)(8) requires that the taxpayer secure from the donee organization, and maintain in his files, a CWA that includes: (1) the amount of cash and a description of any property contributed; (2) a statement whether the donee provided the taxpayer with any goods or services in exchange for the gift; and (3) if so, a description and good-faith estimate of the value of such goods or services. Under Code Sec. 170(f)(8)(B), no deduction is allowed in the absence of a CWA meeting these requirements. Code Sec. 170(f)(12) sets out additional rules for the contributions of qualified vehicles, including boats and airplanes.

The substantiation requirements of Code Sec. 170(f)(12)(B) are more stringent than those of Code Sec. 170(f)(8)(B) in two major respects. To claim a charitable contribution deduction, a taxpayer must substantiate the validity of the donation and its valuation. Where the contribution's value exceeds $5,000, the taxpayer must also provide a qualified appraisal. For a contribution of a qualified vehicle, including airplanes, whose value exceeds $500, the taxpayer must provide a CWA from the donee organization, including the name and taxpayer identification number of the donor. Code Sec. 170(f)(12)(C) provides that an acknowledgment is contemporaneous if it is provided by the donee organization within 30 days of the contribution. Further, the donee organization must provide the IRS with the information contained in the acknowledgement. Code Sec. 170(f)(12)(A)(i) disallows the deduction unless the requisite CWA is included in the tax return claiming the deduction. However, the doctrine of substantial compliance may support a taxpayer's claim that he or she substantially complied with the applicable rules and acted in good faith and exercised due diligence but nevertheless failed to meet a regulatory requirement.

Analysis

The Fifth Circuit affirmed the Tax Court's decision. The court began by looking at Izen's Form 1040X, as that was the first tax return where Izen claimed the charitable deduction for his airplane donation. The court found that Izen did not provide a satisfactory CWA with his Form 1040X. In reaching that conclusion, the court cited the fact that Izen included a letter dated December 30, 2010, from the Society discussing the donation of the airplane, but the letter was addressed to Tanguy, not Izen. The letter did not, the court noted, mention Izen and did not provide his taxpayer identification number. Thus, the court concluded, the letter did not substantiate the contribution of the airplane under Code Sec. 170(f)(12)(B).

The court also noted that while Izen included a copy of the donation agreement between him, Tanguy, and the Society, the agreement failed to satisfy Code Sec. 170(f)(12)(B)(i) as it lacked Izen's taxpayer identification number. Finally, the court observed, Izen attached a Form 8283 to his Form 1040X, but the Form 8283 did not include his taxpayer number. With respect to Izen's argument that he substantially complied with the substantiation rules for his contribution, the court said it could not accept the argument that substantial compliance satisfies statutory requirements. Congress, the court found, specifically requires that the contemporaneous written acknowledgment include the taxpayer identification number, but that was lacking in Izen's case.

For a discussion of the recordkeeping and substantiation requirements necessary for deducting a charitable contribution, see Parker Tax ¶84,190.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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