The substantial compliance doctrine says that taxpayers do not need to be perfect, but they need to act in good faith and substantially comply with the requirements in a statute or regulation. The first case that cited the substantial compliance doctrine is a 1928 Board of Tax Appeals case, Indiana Rolling Mills Co. v. Commissioner, 13 B.T.A. 1141 (1928), where the court held that the taxpayer’s return, which was not signed by the statutorily required corporate officer, was still considered a validly filed tax return. The Court stated that the general rule of statutory construction is that provisions that relate to the “essence of the thing to be done are mandatory” and those that do not relate to the essence of the thing to be done are “directory.” The “essence” of the statute was making an honest return. The fact that the Vice President, rather than the President, signed the return did not go to the essence of the statute.
Separately, in 2004, IRC Section 170(f)(11)(A)(ii)(II) added a new “reasonable cause” defense for failure to comply with the regulatory reporting requirements. A failure to satisfy the reporting requirements is excused if “it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect”.
Readers who have followed the recent reported tax cases involving conservation easements will recognize the facts in Hickory Equestrian. The partnership purchased 305.4 acres of land in Georgia and soon thereafter granted a conservation easement over most of the property to the North American Land Trust. The partnership took a $6.4 million charitable contribution for the easement which the IRS disallowed “on the grounds that Hickory had failed to meet all the requirements of I.R.C. Section 170”. Alternatively, the IRS argued that if any deduction were allowable, Hickory had not “established the value of the noncash charitable contribution”.
After the partnership filed a tax court petition, the IRS filed a motion for partial summary judgment contending that the deduction was properly disallowed because Hickory failed to satisfy the substantiation requirements of Treasury Regulation Section 1.170A13(c). Specifically, the IRS argued that because Hickory failed to report its cost or adjusted basis in the property on Form 8283, the deduction should be disallowed.
The taxpayer acknowledged it had failed to strictly comply with the reporting requirements, but argued that it had substantially complied with the substantiation requirement. Alternatively, the taxpayer argued that when completing its Form 8283 it reasonably relied on advice from the attorneys and accountants who helped prepare its return. The taxpayer asserted that the tax advisors concluded that the instructions to Form 8283 “were ambiguous and that Hickory could comply with the reporting requirements by stating that its basis in the easement was ‘not determinable’”.
In holding that the taxpayer failed to substantially comply, the court noted that the requirement to disclose cost or adjusted basis is designed to help the IRS identify possible inflated valuations. However, the court said the issue regarding whether “Hickory can avail itself of the reasonable cause defense would be reserved for trial because there were “several questions as to which genuine disputes of material fact currently appear to exist”.
For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or email@example.com.