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Posts Tagged ‘charitable contribution’

On tonight’s episode of Family Fraud, we’ve got two cunning clans eager to prove who has the most flagrant disregard for the tax law! Let’s meet our contestants:

Say hello to the Paynes! Hailing from Florida, the Paynes thought nothing of claiming $90,000 in non-cash charitable contributions in 2011, despite sporting an adjusted gross income of $180,000! Among those contributions were nearly $40,000 in gifts of furniture, a fact made all the more remarkable by the fact that the Paynes lived in a 1,600 square foot home with a one-car garage!

Next let’s welcome the Ohdes! This West Virginia family claimed $142,000 in non-cash charitable contributions in 2011, alleging that they made over 20,000 separate gifts to one local Goodwill organization! In addition to 3,500 items of clothing, included among the donations were 36 lamps, 22 bookshelves, 20 desks, and 16 bed frames. And if you think it’s unrealistic that one family could accumulate that much junk, well, then you’ve never driven through West Virginia.

Who are we kidding, with both families equally willing to throw conventional wisdom and common sense to the wind in hopes of a big tax break, everyone’s a winner. Gary, tell them what they’ve won!

Both families will enjoy an all-expenses paid (by them) trip to Tax Court, where the IRS will teach them the finer points of the substantiation requirements for charitable contribution deductions under Section 170! And they won’t be leaving there empty handed…both the Paynes and Ohdes will exit the court with substantial underpayments, penalties and interest!

Continue reading on Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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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).

http://www.ustaxcourt.gov/InOpHistoric/AverytMemo.TCM.WPD.pdf

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Assume you and the missus just bought a teardown on a prime piece of real estate in lovely East St. Louis. You could simply hire a construction company to demolish the existing home and carry away the rubble, but that’s gonna’ cost you. Or, with a little ingenuity, you could donate the home to the local fire department for use in their drills. What’s the benefit? The fire department does all the heavy lifting by burning the house to the ground — and cutting your costs significantly — and you get a charitable contribution deduction for the value of the house.

At least, that’s the way it has been since the Tax Court blessed such a deduction in Scharf v. Commissioner,[i] 40 years ago.

Yesterday, the Seventh Circuit may well have sounded the death knell for this tax savings opportunity, however, as it upheld the Tax Court’s 2010 decision in Rolfs v. Commissioner,[ii] denying a taxpayer’s charitable contribution deduction on the grounds that the value of the donated home did not exceed the value of the $10,000 benefit they received by having the home demolished for free.[iii] In doing so, the Seventh Circuit established a methodology for valuing homes donated for the purpose of being destroyed that could effectively quash the Scharf charitable deduction play forever.

Like the Tax Court, the Seventh Circuit  did not argue that the contribution of a home to a fire department did not qualify as a charitable contribution; to the contrary, both courts agreed that all of the statutory requirements were in place. The issue, rather, was one of value.  Remember, the value of a charitable contribution must exceed the value of any benefit the donor receives in return, in this case the demolition services, which were valued at $10,000.

The taxpayers argued that the home should be valued based on the before-and-after method, maintaining that the land was worth $76,000 less after the home was demolished, thus fixing the value of the home, and the resulting charitable contribution, at that amount. (The taxpayers failed to reduce the value of their contribution by the $10,000 value recieved in return)

The Seventh Circuit disagreed, holding that the value of the home had to take into consideration its imminent demise:

When a gift is made with conditions, the conditions must be taken into account in determining the fair market value of the donated property. As we explain below, proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction, and certainly not here. What is the fair market value of a house, severed from the land, and donated on the condition that it soon be burned down? There is no evidence of a functional market of willing sellers and buyers of houses to burn.

The Seventh Circuit thus required the house to be valued at the higher of two alternatives:

1) What the house would be worth if it were immediately burned down and sold for scrap, or

2) What someone would pay for the house if they were required to uproot it and move it elsewhere.

According to an IRS expert witness, both values were held to be less than the $10,000 benefit derived from the home’s destruction:

Witness Robert George…concluded that it would cost at least $100,000 to move the Rolfs’ house off of their property. Even more important, he opined that no one would have paid the owners more than nominal consideration to have moved this house. In his expert opinion, the land in the surrounding area was too valuable to warrant moving such a modest house to a lot in the neighborhood. George also opined that the salvage value of the component materials of the house was minimal and would be offset by the labor cost of hauling them away.

Could there be a situation where a house would retain significant value to a potential buyer even if that buyer were required to move the house elsewhere? It’s certainly possible, but it’s unlikely any taxpayers will be willing to tempt fate by claiming a corresponding charitable contribution deduction in light of yesterday’s decision.


[i] T.C.M. 1973-265

[ii] 135 T.C. 24. For a complete write-up of the Tax Court’s decision in Rolfs, click here: Rolfs v. Commissioner, 135 T.C. 24.

[iii] The fair market value of any substantial benefit received as a result of the contribution must reduce the fair market value of the donation.

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