Some tax cases take near forever to wrap-up.
I am looking at a case involving tax year 2008; it was
decided in April, 2020. It involves over $300 grand in taxes and penalties.
Let’s set it up.
A. Take an accounting firm with offices in Cerritos, California and Kansas City, Missouri.
B. Through them the taxpayers (Campbell) learned of a donation program involving Lions in Sight. The program was rather straightforward.
a. A
company (ZD Products) consolidates eyeglass frames (let’s say approximately 170,000).
b. The
company breaks down that number into lots (let’s say approximately 3,400 frames).
c. It
then sells the lots for approximately $50 grand each.
d. If
you buy a lot, you are advised to wait a year before doing anything. Not to
fear, they will take care of your lot for you.
e. After
a year you donate the lot to Lions in Sight.
i. This
is prearranged.
ii. Lions
in Sight is affiliated with the Lions Club International. Its mission is to
collect and provide used eyeglasses for use worldwide and to provide eye care
assistance to the needy and low-income. In truth, it sounds like a fine
charity.
f. You
will get a bright shiny appraisal saying that your donation was worth
approximately $225 grand.
It sounds like the program ran well. In 2007 Lions in
Sight had so many frames in storage that they requested ZD Products to store a sizeable
new donation until 2008, when they could free up space.
Nice problem to have.
The IRS became aware and did not care for this at all.
No surprise: one puts in $50 grand and – a year and a day later – gets a
donation worth $225 grand. Quick math
tells me that someone with a tax rate over 23% comes out ahead.
What do we have? Someone takes a good cause (the Lions
Club), stirs in a for-profit party (both the company selling the eyeglasses and
the company organizing the deal), and has a sacerdote (the appraiser) bless the
bona fides. Everybody wins; well, everybody but the IRS.
We have seen something similar to this with conservation
easements. Take a good cause – say preserve a wetland … or just green space.
Bring in the marketers, attorneys and valuation experts. Stick the property
into an LLC; sell interests in the LLC; donate the LLC interests to who-knows-who
and – voila – instant big bucks tax deduction for someone who was never really that
interested in wetlands or green space to begin with.
I have a question for you. Why do you think that the
IRS has so many rules concerning donations? You know them: you need a receipt;
past a certain dollar limit you need a letter from the charity; past another dollar
limit you need an appraisal; somewhere in there you have a form attached to
your tax return just for the donation.
Tripwires.
Let me give you one.
If you need an appraisal, then the appraisal has to be
for what you actually donated.
Bear with me.
This story started off with approximately 170,000
eyeglass frames. They are of varying sizes, styles, quality and value. An
appraisal is done on the mother lode.
Break the lode into lots of approximately 3,400.
Donate the lots.
The appraisal was done on the 170,000.
You need an appraisal on your 3,400.
You do not have this. Best you have is 34/1,700 of an
appraisal.
But it is virtually impossible that each lot will be
the same. There are too many combinations of styles, sizes, designers, costs
and whatnot. Just taking a percentage (34/1,700)
is not good enough – not for this purpose.
You have no appraisal.
You have no deduction.
Tripwire.
The case for the home gamers is Campbell v
Commissioner.
