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D.C. Circuit: Charitable contribution denied, basis in donated property omitted

D.C. Circuit: Charitable contribution denied

The U.S. Court of Appeals for the D.C. Circuit today affirmed a decision of the U.S. Tax Court that upheld an IRS denial of a partnership’s claimed charitable contribution deduction of $33 million.

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The D.C. Circuit found that the partnership “fell short” of the substantiation requirements by omitting its basis in the donated property.

Further, the assessment of an accuracy-related penalty was upheld because the partnership’s claimed fair market value of a remainder interest in real property resulted in a gross valuation misstatement. The D.C. Circuit agreed with the Tax Court’s decision not to excuse the gross valuation misstatement under the reasonable cause and good faith exception, but for “a slightly different reason”—that the partnership bore the burden of proving it had met the requirements and failed to do so.

The case is: RERI Holdings I, LLC v. Commissioner, No. 17-1266 (D.C. Cir. May 24, 2019). Read the D.C. Circuit’s decision [PDF 377 KB]

Background

The partnership acquired and donated a future interest in a piece of commercial property to the University of Michigan. The partnership claimed the donation was a bona fide deduction that the partnership valued at $33 million.

The partnership had paid just under $3 million in March 2002 to acquire the property (the remainder interest in real property). Form 8283, Noncash Charitable Contributions, that the partnership attached to its tax return, provided the date and manner of the partnership’s acquisition of the contributed remainder interest; however, the space for the “Donor’s cost or other adjusted basis” was left blank.

The IRS rejected this deduction, asserting that the partnership had artificially inflated the value of the donated property in order to offset the tax liability of its owners. The Tax Court in July 2017 agreed, and concluded that the partnership’s Form 8283 failed to meet the substantiation requirement of Reg. section 1.170A-13(c)(4)(ii)(E) because it did not include the donor’s cost or other adjusted basis of the contributed property. Further, the Tax Court explained that because disclosure of the partnership’s cost or other basis in the remainder interest would have alerted the IRS to a potential overvaluation of the property, this omission prevented the Form 8283 from achieving its intended purpose and thus could not be excused on the grounds of substantial compliance.

In addition, the Tax Court determined that the remainder interest had a fair market value of approximately $3.5 million on the date of the contribution—not the $33 million claimed by the partnership. Because the value that the partnership assigned to the remainder interest was more than 400% of that interest’s actual fair market value, the partnership’s claimed charitable contribution deduction resulted in a gross valuation misstatement.

Read TaxNewsFlash

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