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.
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]
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.
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.