This case was recently featured on TaxProf Blog because of the Tax Court's novel application of the Cohen rule to Mr. Raggassa's charitable contribution deductions.
Questions for the Tax Court
- Does lack of substantiation preclude deductions for charitable contributions?
- Is a preliminary notice from the IRS, for example a 30-day letter, required before the IRS can assess a valid deficiency?
- Is the IRS bound by the communications of its representatives, even if the taxpayer relies on those communications to their detriment?
Mr. Regassa claimed the following deductions on his 2005 Tax Return. (4). The IRS disallowed a large portion because Mr. Regassa could not substantiate the deductions taken.
Mr. Regassa claims that he did not receive any preliminary notices, such as the so-called 30-day letter, that the IRS normally sends to taxpayers. Therefore, depriving him of an opportunity to discuss the adjustments with the IRS before they determined his deficiency. (5).
He also claims that the IRS representative, Mr. Theodore, misled him during a conversation when Mr. Theodore said, the IRS was "all set" with respect to the adjustments. Mr. Regassa interpreted Mr. Theodore's comments to mean he did not owe anything to the IRS. Consequently, Mr. Regassa nearly missed the deadline to file a petition with the Tax Court upon discovering he still owed $1,575. (7-8).
The Tax Court answered "No" to question 2
Preliminary notices and administrative meetings may be courteous and may allow taxpayers to resolver early misconceptions by the Commissioner, but section 6212(a) (setting forth the requirements for issuing a notice of deficiency) or any other section does not require them. (6-7). As long as the notice of deficiency reveals on its face that the Commissioner has made a determination for a particular year, in a particular amount, and after reviewing the information specific to the particular taxpayer, then barring unusual facts or circumstances not present here, the notice of deficiency is valid. (6).
The Tax Court answered "No" to question 3
[T]he Commissioner is empowered to retroactively correct mistakes of law, even where a taxpayer has relied to his detriment on the Commissioner's mistake.
The Tax Court answered "No" to question 1 (but see Blog Comments at the end of this post)
For each charitable contribution of money less than $250 made before 2006 the pertinent regulation requires that the taxpayer substantiate the contribution with a canceled check, a receipt, or other reliable evidence showing the name of the donee, the date of the contribution, and the amount of the contribution.
[P]recedents exist to all a Cohan estimate for charitable contributions, especially where we find the taxpayer was candid, forthright, and credible. Stockwell v. Commissioner, T.C. Memo. 2007-149 (stating unconditionally that "We may estimate cash charitable contributions under the Cohan rule").
Mr. Regassa provided no substantiation of his charitable contributions. However, the IRS's blanket disallowance goes too far. Mr. Regassa's religious commitment appears genuine. In summary, for charitable contributions, using our best judgment on the entire record before us, and under Cohan bearing heavily against Mr. Regassa's own inexactitude, we find it credible that at least once a month throughout 2005 Mr. Regassa attended and mad a cash contribution of at least $25 to a qualified Ethiopian Orthodox Church in Washington, D.C.
While this decision might seem to give taxpayers a break, please take note the Tax Court recognizes Mr. Regassa's charitable deductions pertained to years before 2006. Why is this important? Because the Pension Protection Act of 2006 added paragraph (f)(17) to section 107 of the Internal Revenue Code. That paragraph reads as follows:
No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.
This new provision provides no wiggle room and will mostly likely preclude taxpayers from arguing the Cohen rule in the future, at least with respect to charitable contributions. The Tax Court should have pointed this out, or at least addressed it.
As a final note, the Tax Court also disallowed the insurance, auto and truck, and cost of goods sold deductions. Mr. Regassa was apparently unaware of how his tax preparer had calculated these amounts. And, gambling losses are only deductible to the extent of gambling winnings.