I have a client on extension for their
individual tax return. They donated real estate last year. I am waiting on an
appraisal and a signed Form 8283 before sending in the return.
Charitable contributions have become
a “gotcha” area for the IRS. The rules border on the insane. Does it make sense
to you that I need a letter from the charity for donations over $250 even if I have a cancelled check? The
IRS will accept a cancelled check as proof of a travel expense or of a
child-care payment, but not for proof of a donation. Fail to follow their rules
and you may lose the deduction altogether.
Sure enough, someone thought they followed the rules. Let’s
go through the story of Boone Operations.
Boone Operations owned a landfill
(Speedway). Right next to them, the city of Tucson (Arizona) also owned a
landfill (Tucson). Both were surrounded by commercial and residential
development.
Tucson must have been a mess. The flare
in its collection system kept going out and water kept collecting because of
poor drainage. Tucson stopped accepted waste materials, but there were issues
closing the place down. The neighbors howled; hearings were held. Douglas Kennedy
(Kennedy), Boone’s owner, was concerned that Tucson was going to drag him down.
He offered to help. In 1996 the two parties were happy and holding hands. Boone
agreed to:
·
Share
the cost of an interim gas system
·
Negotiate
a permanent gas system
·
Cooperate
to extend Boone’s aquifer permit to Tucson
You also
had the following text in an agreement the attorneys drew up:
6. Acceptable Waste Fill and Soil Fill
[Boone] agrees to provide [Tucson] with, and [Tucson] agrees to accept, acceptable waste fill and soil.
6.1 Placement of Acceptable Waste Fill
Boone shall, at no cost to [Tucson], fill the *** with acceptable waste to the approved final grades.
Seems clear: Boone will provide waste fill.
The promising relationship between Boone and Tucson soon soured:
·
6/99
- Boone places waste on Tucson to comply with agreement
·
10/99
– the Department of Solid Waste Management wants to know why Boone placed waste
on Tucson
·
11/99
– Tucson wants Boone to remove the waste
·
03/00 – Boone sues Tucson for $20 million
·
04/01
– Tucson provides Boone a settlement offer
·
09/01 -
Tucson files civil and criminal charges
·
04/02
– Boone files with the Superior Court
Shame. They seemed like
such a nice couple.
Anyway, in December 2002,
they settle. Tucson agreed to a number of things, including (a) paying $450,000
for Boone to construct drainage, (b) helping with easements and (c) releasing
Boone and Mr. Kennedy from lawsuits.
And then the magic words:
8.1 Prior Contribution. [Tucson] acknowledges that as of the date of
the Settlement Memorandum, it had accepted Boone’s charitable contribution of
95,000 cubic yards of Acceptable Fill.
8.2 Future Contribution. Boone agrees to make another charitable
contribution of an additional 105,000 cubic yards of Acceptable Fill.
To the uninitiated, it
appears that Boone has made a contribution of 200,000 cubic yards of Acceptable
Fill to Tucson, don’t you think?
Boone files tax returns
showing a donation of $449,000 for one year and $706,000 for another.
The IRS disallows the
deductions. It has two arguments:
(1) Boone failed to obtain
contemporaneous written acknowledgement.
(2) Boone received significant cash and
noncash consideration and failed to prove that the value of the fill provided
exceeded the consideration received.
The IRS argued that a written acknowledgement must include the following
magic words:
·
The
amount of cash and a description (but not value) of any property other than
cash contributed.
·
Whether
the donee organization provided any goods or services in consideration, in
whole or part, for any property described.
·
A
description and good faith estimate of the value of any goods and services received,
or, if such goods and services consist solely of intangible religious benefits,
a statement to that effect.
What does Boone have? The Settlement Agreement from December 2002.
Without the magic words, however, Boone does not have “written acknowledgement.”
Since the donation was over $250, no
deduction is allowed without written acknowledgement.
The Court then went on the argument (2). It went through the appraisal
process in painstaking detail. There appear to have been significant errors in
the appraiser’s calculations, for example, leading to an overvaluation of the donated
fill. The Court also pointed out that Boone and Mr. Kennedy were released from
a potential lawsuit. That release could have a value. If so, should that value be taken into account?
I question why the Court did this. The Court had already disallowed the deduction for lack of written acknowledgement. Why keep going?
I question why the Court did this. The Court had already disallowed the deduction for lack of written acknowledgement. Why keep going?
My thinking? The Court expects a challenge on issue [1], and it thinks it could be reversed by a superior court. The Court
therefore kept going, reasoning that if was reversed on issue [1] it would
be sustained on [2].
You know how this turned out: the Tax Court disallowed the charitable
deductions under both arguments.
COMMENT: Please do not mess with IRS in this area. If you are thinking about a significant donation of anything other than cash, please call your tax advisor first. Get your papers lined up and do not play “gotcha” with the IRS.
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