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Once Again, Form Over Substance Rules

Once Again, Form Over Substance Rules

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.
In an earlier post we described an interesting charitable technique known as thRaymond Russolilloe “conservation easement.”  In a nutshell, this technique allows you to swap some (permanent) flexibility with respect to your property for a healthy charitable deduction.  It is designed to encourage taxpayers to preserve open space for conservation or recreation purposes and to protect certain historic structures.   I encourage you to read the prior post for more details.  We think it is a great technique because, as we said then and still maintain now, it is the very essence of having your cake and eating it, too.
But, as in all things tax, you have to make sure you dot your I’s and cross your T’s.  A recently decided Tax Court case (David R. Gemplerle, et ux. v. Commissioner, TC Memo 2016-1) underscores the tax truism that form prevails over substance, especially in cases like this.
The Gemperle’s owned and lived in an historic home.  In 2007, they granted a facade easement on the property to the Landmarks Preservation Council of Illinois.  The Council guided them through the process, including the hiring of an appraiser who subsequently determined the value of the easement to be $108,000 which the taxpayers then claimed on their 2007 tax return.  On later examination, the IRS disallowed the deduction for the simple reason that the taxpayers did not attach a copy of the appraisal to the return as filed nor did they fully complete Form 8283, Noncash Charitable Contributions.  The Tax Court agreed with the IRS position, basically eliminating the deduction and, on top of it all, assessing  a 20% accuracy related penalty and a 40% valuation penalty.
In court, the IRS argued five points:  (1) the absence of a “qualified” appraisal; (2) the existence of some technical deficiencies with respect to the facade easement itself; (3) the failure of the taxpayers to include a copy of the appraisal with the return; (4) the failure of the taxpayers to attach an appraisal summary as required by regulations and; (5) the ultimate failure of the taxpayers to prove that the decrease in value was indeed $108,000.  The Tax Court stripped the issue down to its simplest and harshest essence – they threw out the taxpayer’s case because of the taxpayers’ failure to attach a copy of the appraisal to the tax return.  Because they were relying on this simple test of fact (was an appraisal attached? – No) they did not even need to consider any of the IRS’ other points.
We can argue this heavy handed decision on the part of the Court, but the moral of the story should be clear to taxpayers and practitioners alike – if the rules say to attach certain documentation to a return, do it!  Particularly in the area of valuation, form will often beat out substance.

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