One of the more difficult concepts of tax law is that for the most part, it is arbitrary. While there is some narrative that follows from the idea that tax is typically owed on "all income from whatever source derived," the devil is in the details and if you gaze on the 10,000 plus pages of tax statutes and regulations, you quickly realize that it is mostly details.
Because the Tax Code is whatever Congress says it is, there are vast swaths of it that may or may not make a great deal of logical sense. But this doesn't matter. If it has been enacted and is in the United State Code, "sense" is not a requirement. "Compliance," however, is, and that is what is required for your tax returns.
A recent Tax Court decision reminds us of this fact, which in this case, resulted in a $64 million tax deficiency. An organization had received a donation of an easement on a historic building in New York. Charitable deductions under section 170(f)(8)(A) require that the taxpayer receives a contemporaneous written acknowledgment (CWA) from the charity. The substantiation requirement is designed to ensure the charitable gift was a gift and must contain an explicit statement that no goods or services were exchanged for the gift.
In this case, there was no CWA and the donor attempted to remedy the situation by amending a form 990 under the theory that IRC section 170(f)(8)(D) allowed this alternative substantiation method.
The Tax Court disagreed, noting that section 170(f)(8)(D) needed implementing regulations from Treasury, which were never promulgated and therefore the use of the alternative was not effective. Treasury at one point proposed regulations, but after much negative comment withdrew the regulations and noted that it would not implement the exception to the CWA.
This meant the requirement for a CWA could not be fixed by the donor later amending a form 990, and it disallowed the $64 million deduction.
The teaching lesson of this decision is that if the code demands a certain form of compliance, you should work with your tax lawyers and accountants to ensure that you comply.