Wendell H. Murphy, Jr., and Wendy Murphy v. Comm., TCM 2023-72
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
"Reasonable Cause" for Omitted Basis on Form 8283 Saves the Deduction (Wendell H. Murphy, Jr., and Wendy Murphy v. Comm., TCM 2023-72)
Wendell and Wendy Murphy, through Duplin Land Development Inc., an S corporation, owned two tracts of land, which they developed into a 1,500-lot residential community with two 18-hole golf courses, a clubhouse, a recreation facility, and multiple nature trails. Tract 1 shares a border with Northeast Cape Fear River, and Tract 2 is an interior, land-locked tract to the north. Duplin Land Development, Inc. donated in 2010 perpetual conservation easements – each constituting a “qualified real property interest” under §170(h)(1)(A)) – on Tract 1 and Tract 2 to a “qualified organization” under §170(h)(1)(B). Relying on appraisals, the Murphys claimed charitable contribution deductions of $7,344,095 for the Tract 1 easement and $1,080,814 for the Tract 2 easement as “qualified conservation contributions” on their tax returns. The Murphys’ expert valued the easements on the basis that each tract would be developed as residential housing, assuming in each instance that the other tract would remain a golf course. Attached to the return was an incomplete Form 8283, “Noncash Charitable Contributions”, that did not report the Murphy’s basis in either Tract 1 or Tract 2.
Incomplete Form 8283. Basis of the contributed properties was left blank on the Forms 8283. Therefore, taxpayer did not comply with the substantiation requirements of §170(f) and Reg. §1.170A-13(c). While normally a fatal flaw, the judge points to an exception to the disallowance of the contribution deduction “if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect” (§170(f)(11)(A)(ii)(II)). Because the IRS substantiation compliance and reasonable cause issues were considered “new matter” at trial, the IRS had the burden of proof and failed to carry that burden.
Tax practitioner planning. Always make sure all items are completed on the Form 8283. The CPA firm that completed the S corporation return should have had the land basis because it had the accounting records to prepare a balance sheet for the Form 1120-S.
War of the Appraisers. The Tax Court analyzed the appraisals submitted by Duplin Land Development and the IRS and found both appraisals to be lacking. The Court ruled the Tract 1 easement to be valued at $2,790,274 and the Tract 2 easement to be valued at $100,000.