Читать книгу The Tax Law of Charitable Giving - Bruce Hopkins R., Bruce R. Hopkins, David Middlebrook - Страница 29

In some instances, a federal income tax charitable contribution deduction is denied because nothing of substance or value was transferred to a charitable organization. For example, in one case, a charitable contribution deduction for the transfer by a corporation of certain film property to the Library of Congress was denied on the ground that what was physically conveyed (principally, negatives on nitrate-based plastic) had little value; the donor claimed a deduction of more than $10 million.¹⁵⁸ Also, a motion picture production company retained access to the property and was relieved of storage costs and potential liability, which the court found to undercut the concept of a gift.

In another case, donors of mining claims to charity were held not to be entitled to any charitable deduction, because the claims lacked any value.¹⁵⁹ The court found a “total absence of objective support for the value claimed” and that the testimony of the “donor's” expert witness stated values that were mere “financial fantasies.”¹⁶⁰

Still another case offers a graphic illustration of this point. In this instance, a court upheld the IRS's denial of a charitable contribution deduction claimed by a corporation for an alleged donation of real property to a state. The IRS had denied the deduction primarily on the basis that the corporation did not own the real property that it had purported to contribute.¹⁶¹ On appeal, however, the decision was reversed, with the court—applying the doctrine of collateral estoppel—ruling that the government was barred from challenging the ownership of the property in dispute, on the ground that the issue in a condemnation proceeding and the litigation in the case were identical.¹⁶²

Underlying this matter was a dispute as to the location of a boundary line between a state park and property owned by the corporation. The first survey of the property had placed the line at one location; a subsequent survey had placed it elsewhere. A more contemporary survey confirmed that the first survey was correct. This line-shifting created a strip of property that was the parcel of land involved in the case. Eventually, to settle earlier disputes, the corporation executed a quitclaim deed to the state—and claimed a charitable deduction for the fair market value of the property. Applying the doctrine of collateral estoppel, the court found that the true property line had been established in prior litigation, seemingly adding the land to the corporation's assets. Indeed, the government vigorously argued against application of the collateral estoppel rule.

Over the years, however, the state and the corporation had acted as though the property line were at the place established by the second survey. The state maintained the park property, including the disputed parcel, and placed signs around the park (and the property at issue) identifying all of it as park land. Based on these and other facts, the court concluded that the state had acquired title to the property in dispute by virtue of the doctrine of adverse possession. Thus, although the corporation thought it owned this land at the time of the intended gift, the title, unknown to the corporation, had already shifted to the state by operation of law. Therefore, the charitable deduction was denied, on the basis of the fundamental principle that there cannot be a charitable contribution deduction for a “gift” of property that the “donor” did not own at the time of the transaction.

Likewise, the IRS challenged a charitable contribution promotion program that involved gifts of grave sites to charitable organizations; one of the bases of the challenge was that the “donors” never owned the contributed items. The ground for this contention was that the “donors” did not receive a formal deed to the property. This issue arose twice in 1993 in the U.S. Tax Court, with the court observing that state law controls on this issue¹⁶³ and that the states' law on the point did not require a deed for the legal transfer of a grave site or cemetery lot. The court held that it was adequate, as a matter of “administrative efficiency,” to use a deed only for the transfer of the grave sites from the original owners to the charitable donees.¹⁶⁴

In another instance, an individual contributed a conservation easement on several acres of undeveloped land; access to the property was by means of neighboring land, pursuant to easements granted by the landowners. The individual lacked a permit to divert water from a creek traversing the property. The property was subject to use and development restrictions imposed by state law. At trial, the donor's expert witnesses testified that the highest and best use of the land before placement of the easement was residential development and as a vineyard. The court, however, held that the donor failed to establish that these uses were “reasonably probable,” “physically possible,” or “economically feasible,” and concluded that the donor “failed to show that the conservation easement had any value,” thus allowing the claimed charitable contribution deduction.¹⁶⁵

This aspect of the law is further illustrated from a different perspective. Forgiveness by the lender of a debt owed by a charitable organization can give rise to a charitable contribution deduction for that lender. For that to occur, however, there must be, in the eyes of the law, a valid, enforceable indebtedness to forgive. This principle was demonstrated in a court case in which the charitable deduction was denied because the underlying obligation was legally deficient.¹⁶⁶

In this case, a married couple placed their two children with learning disabilities in a private school, rather than a public one, because of the inability of the public school to adequately serve the children's academic needs. The couple relied on the Individuals with Disabilities Education Act (IDEA) for the assertion that they were entitled to reimbursement from the public school system for the tuition and other expenses incurred in connection with their children's attendance at the private school. They endeavored, nonetheless, to forgive the system's obligation to reimburse them for the expenses and claimed a charitable contribution deduction for the amount forgiven.

The IDEA prescribes a multistage administrative procedure by which individuals in these circumstances establish their right to reimbursement. The parents of these children, however, did not avail themselves of that procedure. Once before the court, they submitted an affidavit concerning their consultations with educational, psychological, and legal professionals, who agreed with the parents that they had a valid claim for reimbursement. They also submitted a letter from an educational consultant they had consulted, who expressed the view that the parents were entitled to reimbursement. The court rejected these submissions as inadequate to support an “unequivalent obligation” on the part of the public school system to provide the reimbursement.¹⁶⁷

A statutory path was open to this couple to attempt to establish the requisite unconditional obligation, which could then have served as the predicate for a forgiveness.¹⁶⁸ But, as the court stated, “they didn't elect to pursue that right.”¹⁶⁹ The court referred to the couple's approach as a “self-proclaimed unilateral decision.”¹⁷⁰ This was not enough to adequately obligate the school system, so the attempt to make the forgiveness the basis for a charitable deduction failed.

When situations like this are particularly egregious or are otherwise abusive, the courts have the authority to levy certain penalties.¹⁷¹

Another illustration of this situation is the carefully contrived circular gift. A court case illustrated the point.¹⁷² The transaction involved three related organizations. One was a business league operated in support of small business interests (BL). BL was funded by an individual (A). A also established, with BL funds, a charitable organization (CO). A third organization was a for-profit entity (FP), owned 40 percent by A and 60 percent by BL. Upon application, FP would loan money to a borrower at a 3 percent interest rate, with no principal payment due for 20 years. On the day the borrower received the loan proceeds, they would transfer the funds to CO, along with a small contribution from their own funds. The borrower would then claim a charitable contribution deduction for the entire amount transferred to CO.

The court found a “cooperative arrangement” among the three organizations, facilitated by the fact that A was the sole signatory on the bank accounts of the organizations.¹⁷³ The court found the following “circular flow” of funds: (1) CO loaned money to BL on a short-term basis at a 2.5 percent interest rate; (2) BL then lent the money to FP for a 20-year term, also at a 2.5 percent rate; (3) FP then lent the funds at a 3 percent interest rate to investors; and (4) the investors would complete the flow by contributing the funds to CO.¹⁷⁴

The consequence of this money circle scheme was that the organizations and the “contributors” improved themselves financially. With each transaction, FP received a promise of small interest payments and a repayment of principal in 20 years. CO, while breaking even on the funds “contributed” (since it was the source of the funds), received a small contribution from an investor's personal funds with each transaction. Each investor received a large tax benefit from the charitable deduction, a benefit that more than offset the present value of the interest and principal they agreed to pay to FP. Said the court: “The loser in the whole enterprise was the federal government, which in effect financed the gains received by the [three related] organizations and the private investors.”¹⁷⁵

One of the many of these “donors” (the subject of the case) was B. He borrowed $22,500 from FP; within 20 minutes of the borrowing, he added $2,500 of his own funds and made a $25,000 “gift” to CO. The IRS disallowed $22,500 of the claimed charitable deduction, and the matter went to court, where the government prevailed. The denial of the deduction was based on the lack of economic substance underlying the transaction. The court concluded that the three organizations “operated essentially as an integrated whole” with respect to the loan program.¹⁷⁶ It viewed the three organizations as a “single unit” that was not enriched by the $22,500 “contribution.”¹⁷⁷ The court observed that the passage of the $22,500 through the three organizations left each of them in essentially the same position as if no contribution had been made. Aside from the $2,500 “true” contribution, the court found that the only real economic change at the close of the transaction was B's obligation to pay funds over the next 20 years to FP, a result no different than if B had signed a note to pay CO $22,500 over 20 years. The court observed that this type of promise to make a contribution in the future does not qualify for a current charitable contribution.¹⁷⁸