Refunds may be available for clients who did not literally follow the substantiation requirements for certain charitable contributions of property.

A recent Tax Court opinion held that full compliance with the reporting requirements for certain charitable contributions of property was not necessary to claim a deduction under Sec. 170.

In Bond, 100 TC 4 (1993), the taxpayer claimed a deduction for a charitable contribution of two blimps valued at $60,000. Under IRS regulations, a donor may not claim a deduction for a charitable contribution of more than $5,000 for property contributed during a year unless the donor satisfies extensive and detailed substantiation requirements. To substantiate the deduction, the taxpayer had the blimps appraised by a qualified appraiser and completed and filed Form 8283, Noncash Charitable Contributions (containing a detailed appraisal summary), with its return. However, the taxpayer did not obtain a separate written appraisal as required by Reg. Sec. 1. 170A-13(c)(2).

Regs. Sec. 1. 170A-13(c) generally provides that a taxpayer must comply with two requirements to claim a charitable deduction of more than $5,000 for property contributed during the year. First, the donor must timely obtain a written "qualified appraisal" for the property contributed. Second, the donor must attach a fully completed appraisal summary (Form 8283) to the tax return on which the deduction for the contribution is first claimed by the donor.

In Bond, the IRS contended that the taxpayer's claim for a charitable deduction for the blimps should be disallowed; by not obtaining and attaching to his return a written appraisal of the blimps, the taxpayer failed to satisfy the prerequisites to a charitable contribution under the regulations.

In formulating its decision, the Tax Court applied the test set forth in Taylor, 67 TC 1071 (1977), to determine if the substantial compliance doctrine applies to the substantiation requirements of the regulations. That test considers whether the regulation requirements relate to the substance or essence of the statute, as opposed to being procedural or directory (in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business).

Applying the test, the Tax Court determined that the essence of Sec. 170 is to allow certain taxpayers a charitable deduction for contributions made to certain organizations. While the substantiation requirements were helpful in the processing and auditing of returns, they did not relate to the substance or essence of whether a charitable contribution was made. Accordingly, the court concluded that the substantiation requirements were directory and not mandatory. As such, taxpayers who substantially comply with those requirements are eligible to claim a charitable deduction.

The Tax Court also reaffirmed its holding in Cary, 41 TC 214 (1963), that the substantial compliance doctrine may apply notwithstanding that the Code provision specifically conditions the entitlement of a tax benefit on compliance with IRS regulations.

In Bond, although the taxpayer did not obtain a separate written appraisal, substantially all the information required to be included in the written appraisal (except for the qualifications of the appraiser) appeared on the Form 8283 attached to the return.

How much less compliance with the substantiation requirements will be considered substantial compliance is uncertain. The Tax Court seemed to indicate that a taxpayer has substantially complied with the substantiation requirements if the information submitted substantiates the donor's claim that (1) the donation of specified property was made during the year, (2) the property was appraised by a qualified appraiser at the amount claimed by the donor as a charitable contribution and (3) the donee was qualified to receive a contribution.

The IRS has not indicated whether it will liberally apply the substantial compliance doctrine in these cases or whether it will try to limit the application of the doctrine to the type of information submitted by the taxpayer in Bond. Nevertheless, clients who either have had their charitable deduction disallowed, or did not claim a charitable deduction on their return because they did not literally comply with the substantiation requirements, should consider filing either a claim for refund or an amended return. In addition, clients who are currently filing returns may have substantial authority to claim a charitable deduction if they can establish that they substantially complied with the substantiation requirements.