Cliché as it may sound, it’s better to be lucky than good. Just ask the shareholders of CMT, the S corporation that conveyed a conservation easement valued at $5.4 million to Wetlands America Trust, Inc. (WAT), yet very nearly lost its charitable contribution deduction for failure to properly substantiate the contribution.
After the conveyance of the conservation easement, CMT received a letter from WAT acknowledging the $5.4M value of the contribution; however, the letter failed to address whether CMT had received any goods or services from WAT in exchange for the conservation easement.
On the conservation deed that was conveyed from CMT to WAT, however, there was included the following language:
NOW, THEREFORE, the Grantor, in consideration of the foregoing recitations and of the mutual covenants, terms, conditions and restrictions hereinunder set forth and as an absolute and unconditional gift, subject to all matters of record, does hereby freely give, grant, bargain, donate and convey unto the Grantee, and its successors and assigns, the Easement over the Protected Property subject to the covenants, conditions and restrictions hereinafter set forth which will run with the land and burden the Protected Property in perpetuity.
The deed also contained a detailed description of the conservation easement’s restrictions, WAT’s rights pursuant to the easement, and the rights reserved to CMT. Additionally, the conservation deed included a description of the property on which CMT placed the conservation easement and was signed by WAT during 2004.
On its 2004 tax return, CMT deducted the $5.4M value of the conservation easement as a charitable contribution. The IRS denied the deduction, arguing that CMT had failed to adequately substantiate the contribution pursuant to I.R.C. § 170(f)(8).
As a reminder, a charitable contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee organization. Section 170(f)(8)(B) provides that the contemporaneous written acknowledgment must include 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) * *
In its initial argument, CMT maintained that the letter of acknowledgement received from WAT met the substantiation requirements of I.R.C. § 170(f)(8). The Tax Court held otherwise, however, noting that the letter failed to address whether CMT had received any goods or services in exchange for its contribution.
On the verge of losing its $5.4M deduction courtesy of a drafting oversight, CMT was bailed out by the fastidiousness of the transferred deed, as the Tax Court concluded that the deed, while not a formal letter of acknowledgement, contained all of the necessary substantiation information:
The conservation deed was signed by a representative from WAT, provided a detailed description of the property and the conservation easement, and was contemporaneous with the contribution. Additionally, the conservation deed in the instant case states that the conservation easement is an unconditional gift, recites no consideration received in exchange for it, and stipulates that the conservation deed constitutes the entire agreement between the parties with respect to the contribution of the conservation easement. Consequently, we conclude that…the conservation deed in the instant case satisfies the substantiation requirements of section 170(f)(8).