In Janet R. Braen et al. v. Commissioner, T.C. Memo. 2023-85 (July 11, 2023) (Choose Urda), we be taught that there isn’t a charitable deduction for a cut price sale executed to settle a lawsuit, despite the fact that it was an enormous cut price sale.  There, the taxpayers claimed a $5.2 million charitable contribution deduction from a cut price sale that they had made with a New York city referred to as Ramapo.  Choose Urda wants each certainly one of 39 pages to clarify the advanced details and apply them.  However the primary Lesson I see within the case is that this: even a giant cut price sale to a charity requires donative intent.  With no donative intent, there isn’t a §170 deduction, irrespective of how huge the discount.  Intent is set by goal details surrounding the transaction.  Right here, these details confirmed that the taxpayers’ intent was to not be charitable; their intent was to settle a lawsuit that they had filed in opposition to the city.  By settling they prevented the danger of a extra hostile consequence had the lawsuit proceeded, they usually regained their proper to develop the land they didn’t promote.  I confess this isn’t fairly the best way Choose Urda sees the case.  So see what you suppose.  Particulars under the fold. 

Legislation: Deductions for Cut price Gross sales to Charities
Usually talking, a taxpayer can not take a charitable deduction for funds to a charity when the charity provides them worth in return.  We name that quid professional quo. Because the Supreme Courtroom put it: “[t]he sine qua non of a charitable contribution is a switch of cash or property with out ample consideration.” United States v. American Bar Endowment, 477 U.S. 105, 118 (1986) (emphasis provided).  Rev. Rul. 83-104 provides a beautiful set of details exploring what constitutes quid professional quo in personal college settings.  And the quid professional quo doesn’t should be in cash or tangible items; shopping for your approach up the stairway to Heaven isn’t charitable.  Hernandez v. Commissioner, 490 U.S. 680 (1989) (funds for religious periods weren’t charitable donations).

As implied by the phrase “ample” within the Supreme Courtroom quote, taxpayers can take a deduction when the worth of what they offer the charity exceeds the worth of what they get in return.  We see that in cut price gross sales to charities.  That’s when a taxpayer sells property to a charity for a lot lower than that property’s honest market worth (fmv).  Whereas the discount sale appears to be like like a single transaction, tax regulation treats it as two separate transactions: partly a sale and partly a present.

For the sale half, the taxpayer makes use of the principles in §1001 to find out achieve by treating the cost acquired from the charity as the quantity realized for functions of calculating achieve.  Nonetheless, the taxpayer nonetheless wants to find out the premise to make use of for the sale half.  Part 1011(b) tells us that “the adjusted foundation for figuring out the achieve from such sale shall be that portion of the adjusted foundation which bears the identical ratio to the adjusted foundation as the quantity realized bears to the honest market worth of the property.”  In different phrases, a taxpayer should divide the property into that which is bought and that which is donated and allocate foundation accordingly.  See Treas. Reg. 1.1011-2,

Simply because the taxpayer should allocate foundation for the sale half, the taxpayer should additionally allocate the fmv for the present half.  Treas. Reg. 1.170A-4(c) says that “there shall be allotted to the contributed portion the quantity of achieve that’s not acknowledged on the discount sale however that may have been acknowledged if such contributed portion had been bought by the donor at its honest market worth on the time of its contribution to the charitable group.” (emphasis provided)

The instance I take advantage of at school is that of a taxpayer who buys property for $100.  It’s fmv will increase to $200.  At that time the taxpayer needs to present the property to a charity but in addition needs to get their foundation again.  So that they promote the property to the charity for $100.  It is a sale of half the property and a donation of the opposite half.  Why?  Consider it as the dimensions of the discount: $100 paid for $200 value of property is a ratio of ½.  Thus, the taxpayer allocates their foundation of $100 by that ratio to every of the sale half and the present half.  The taxpayer thus has a achieve of $50 on the transaction ($100 quantity realized minus the allotted foundation of $50) and has a donation of property with a fmv of $100 (the allotted portion of the whole property’s fmv) and a foundation of $50 (the allotted foundation).

Beneath this reality sample, the quantity of the charitable contribution will rely on whether or not the taxpayer should cut back to foundation underneath the principles in §170(e) and laws cited above.

However whether or not the taxpayer can declare a deduction for whichever is the correct quantity is a very totally different query.  The taxpayer should nonetheless have the requisite donative intent.  That’s actually the primary query to ask.  It’s the beginning line.  No donative intent, no §170 deduction. The beginning line continues to be that “[a] charitable present or contribution have to be a cost made for indifferent and disinterested motives. This formulation is designed to make sure that the payor’s major goal is to help the charity and to not safe some profit private to the payor.” Christiansen v. Commissioner, 843 F.2nd 418, 420 (tenth Cir. 1988) (emphasis provided).

In Pollard v. Commissioner, T.C. Memo. 2013-38, the taxpayer couldn’t even get off the beginning line.  There the taxpayer donated an easement to a Metropolis however did so as a way to induce the Metropolis to grant a zoning variance.  The Tax Courtroom echoed the opinions of many different courts when it defined that it will decide donative intent from goal elements and the taxpayer’s subjective testimony of motivation: “In ascertaining whether or not a given cost was made with the expectation of any quid professional quo, courts in addition to the Commissioner study the exterior options of the transaction in query. This avoids the necessity to conduct an imprecise inquiry into the motivations of particular person taxpayers.”  Op. at 20.

Pollard additionally illustrates what courts imply by goal elements: “Whether it is understood that the taxpayer’s contribution is not going to cross to the recipient until the taxpayer receives a selected profit in return, and if the taxpayer can not obtain such profit until he makes the required contribution, then the transaction doesn’t qualify for the part 170 charitable contribution deduction.” Id.  In that case, the taxpayer wished some particular zoning favors and granted the town a conservation easement to induce them to present the preferential zoning.  “The exterior options of the transaction herein show that petitioner’s granting of each the primary and second conservation easements to Boulder County was a part of a quid professional quo change for Boulder County’s approving his subdivision exemption request.”  Id. at 20-21.

Donative intent is the motive force.  If there isn’t a donative intent, then the quantity of what would in any other case be a contribution merely doesn’t matter.  Regardless of how huge.

That’s what we be taught as we speak.  Or at the least it’s what I realized.  You might have a special conclusion.

Information
This case entails a household enterprise, Braen Business Holdings Corp. (Braen).  Braen runs a long-established mining operation  Right here is their web site.  Braen is a pass-through entity and is owned by a lot of totally different members of the Braen household.

The details are messy and Choose Urda does a masterful job in clearly explaining them within the first 16 pages or so.  For this Lesson I believe we will boil it down as follows.

In 1998 Braen purchased land simply outdoors (445.5 acres) and simply inside (38.5 acres) the city of Ramapo, NY, for $3.5 million. Braen had plans for that outdoors land!  Quarrying plans!  And it had plans for the within land as a result of that land was zoned for industrial use and was subsequent to “varied strong waste and sludge composting amenities, and {an electrical} substation.”  Op. at 2-3.  Good neighbors!

However Braen’s plans wanted to clear a number of native, state and federal hurdles.  Regardless of years of effort, Braen couldn’t do it. Particularly, Braen couldn’t get the city of Ramapo to alter a few of its zoning restrictions. Whereas the zoning had for 25 years permitted industrial use of the land, it additionally had explicitly prohibited quarrying, which is what Braen wished to do on a lot of the land simply outdoors Ramapo.

Ramapo did ultimately change its zoning, however reverse of Braen wished.  In November 2004 it amended its zoning ordinances to not allow any industrial use, interval.  So no longer solely was quarrying explicitly prohibited, because it was when Braen purchased the property, however the change to ban industrial use just about nixed Braen’s different plans for a few of the land.  So Braen did what any purchaser would do when the zoning it had relied upon received pulled out from underneath them: it sued the city!

The events went to court-ordered mediation and got here up with a deal.  Ramapo was not going to allow quarrying.  So Braen would promote most of that land to Ramapo for affordable.  Actually low-cost.  In change,  Ramapo would restore the economic use zoning for the land that Braen wished to maintain, the land close to the composting amenities and electrical substation.  The contract to promote the land explicitly offered that “th[e zoning] lawsuit is being settled as a part of the conveyance of the [p]roperty from [Braen] to the City of Ramapo.”  Op. at 10.  Equally, a later part additionally specified that the land sale was “contingent on the settlement of” the zoning litigation “and the entry by the Courtroom of an Order which shall embrace the subdivision of the property in substantial conformity with the proposed order appended hereto.”  Id.  Lastly, the referenced Courtroom Order explicitly offered that, for the property Braen was preserving, the zoning designation would “instantly revert to its prior designation of [planned industrial].”  Id.

On its 2010 return, Braen took a bizarre place.  It claimed a §170 deduction of solely $5,222,000 and handed that by to the members of the family.  What’s bizarre is that, in an attachment, it claimed that it ought to be taking a deduction for $12,222,000, which represented the distinction between the claimed fmv of the property bought ($17,472,000) and the discount gross sales value of $5,250,000.  It isn’t clear from the opinion why Braen was trying to take a far, far smaller deduction.  I’m guessing that the return preparer didn’t know what worth to affiliate with the zoning reversion that was a part of the settlement.  However as we will quickly see, that merely didn’t matter, at the least for my part.

Lesson: It’s Not The Measurement Of The Cut price, It’s the Measurement of Your Coronary heart
Braen claimed it bought property value $17.5 million for a mere $5.2 million to the city of Ramapo.  That’s a few 70% low cost.  A huuuuge cut price!  The events fought exhausting concerning the measurement of the discount partly as a result of the taxpayer’s appraisal of the property’s fmv was a bit suspect however principally as a result of the IRS pushback was “yeah however you bought the zoning modified again as effectively, in order that was a part of the consideration you acquired for the land.”  Choose Urda agreed with that.

For causes I don’t perceive, Choose Urda says that his “decision of the…dispute hinges on two principal necessities to say a charitable contribution deduction in reference to a cut price saile: (1) the honest market worth of the property donated should exceed the worth of any advantages acquired and (2) the taxpayer should provide a contemporaneous written acknowledgement from the recipient substantiating the contribution.”  Op. at 16.

Choose Urda first explains how Braen was unable to show the worth of the zoning reset.  Thus, as a result of Braen was unable to show “the worth of all consideration [it] acquired as a part of the purported cut price sale…they don’t seem to be entitled to the claimed charitable contribution deduction.”  Op. at 18 (emphasis provided).

Choose Urda subsequent spends a very long time discussing the failure to acquire a contemporaneous written receipt.  Braen didn’t have one.  As an alternative throughout the settlement course of, the Braen CPA despatched a clean Kind 8283 to Ramapo, and the Metropolis Supervisor signed it at closing.  Op. at 11.  That was removed from acceptable, main Choose Urda to conclude that the “failure to adjust to necessities of part 170(f)(8) … prohibits the Braens from claiming charitable contribution deductions.”  Op. at 22.

I confess confusion.  It appears Choose Urda needs to equate the dimensions of the discount with the dimensions of the donative intent.  However to me donative intent is a separate hurdle that goes to the power to take a deduction.  The dimensions of the discount simply goes to the quantity of the deduction.  Choose Urda had already defined that “deductibility doesn’t rely on what sort of profit the taxpayer acquired” and he explicitly famous the instances the place “now we have discovered {that a} switch of actual property in change for growth approvals … precludes a discovering of the requisite donative intent.”   Op. at 17.  Even when the worth of the property transferred exceeds the fmv of the quid professional quo, that extra have to be “made with the intention of creating a present.”  Id.

So I used to be actually anticipating that to be the premise of the opinion.  In any case, Choose Urda finds, as a matter of proven fact that “The zoning reversion was central to the general deal”  Op. at 19, and units out how Braen was merely not going to settle with out getting that zoning reset.  That discovering appears to me to vitiate any declare of donative intent.  Braen didn’t need to be good to Ramapo.  Braen wished Ramapo to behave!  Successful the lawsuit was one solution to drive it to behave.  However settling achieved the identical aim.  That appears to me to point out that the first goal was to not assist the city however was to safe a profit private to Braen.  This appears actually near Christiansen v. Commissioner, 843 F.2nd 418, 420 (tenth Cir. 1988).

I invite feedback from readers who’re extra perceptive than I’m on why Choose Urda based mostly the opinion on valuation and substantiation after I suppose the lesson right here is about donative intent. 

Bryan Camp is the George H. Mahon Professor of Legislation at Texas Tech College Faculty of Legislation, a small regulation college in a extremely huge  state.  He invitations readers to return every Monday (or Tuesday if Monday is a federal vacation) to TaxProf Weblog for an additional Lesson From The Tax Courtroom.

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