Absence of Gift Triggers Gross Valuation Misstatement Penalty

• Published date: 01 February 2021
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/npc.30822

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 2021 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

• Final regulations regarding ABLE programs (IRC §

529A) were published in October (summarized in the

December 2020 issue).

• Proposed regulations in amplification of the law

imposing an excise tax on certain exempt organi-

zations paying excess compensation (IRC § 4960)

(summarized in the August 2020 issue).

• Final regulations governing the availability of federal

income tax charitable contributions where donors

receive or expect to receive a corresponding state or

local tax credit (summarized in the September 2019

issue).

• Final regulations concerning qualified transportation

fringes and other issues (briefly summarized below,

under Other Developments).

Tax-Exempt Organizations

• Regulations concerning the donor-advised fund and

related law (IRC § 4966, 4967).

• Guidance regarding a private foundation’s invest-

ment in a partnership in which disqualified persons

are also partners (IRC § 4941).

• Final regulations concerning supporting organiza-

tions (IRC § 509(a)(3)) (proposed regulations are

summarized in the April 2016 issue).

• Final regulations concerning IRS disclosure of tax-ex-

emption information to state officials (IRC § 6104(c))

(proposed regulations are summarized in the May

2011 issue).

• Final regulations designating the appropriate high-

level Treasury official under the church audit rules

(IRC § 7611). (See the Quote of the Month)

• Guidance revising the group exemption rules (Rev.

Proc. 80-27) (proposed revenue procedure is summa-

rized in the July 2020 issue).

• Guidance on circumstances under which a limited

liability company can qualify for recognition of

exemption as a charitable entity.

• Regulations and other guidance relating to welfare

benefit funds, including voluntary employees’ bene-

ficiary associations (IRC §§ 419A, 501(c)(9)).

• Guidance updating the electronic filing requirements

for exempt organizations reflecting the changes

made by the Taxpayer First Act.

• Final regulations concerning the fractions rule (IRC §

514(c)(9)(E)) (proposed regulations are summarized

in the February 2017 issue).

• Proposed regulations regarding the Independent

Office of Appeals established pursuant to the Tax-

payer First Act.

Charitable Giving Rules

• Guidance regarding charitable contributions of

inventory (IRC § 170(e)(3)).

• Regulations regarding charitable contributions (and

foreign taxes) in determining the limitation on allow-

ance of a partner’s share of loss (IRC § 704(d)).

• Regulations regarding use of actuarial tables in valu-

ing annuities, interests for life or terms of years, and

remainder or reversionary interests (IRC § 7520). ◆

ABSENCE OF GIFT TRIGGERS

GROSS VALUATION

MISSTATEMENT PENALTY

An individual engaged in a transaction, claiming it

was a gift, but the US Tax Court held that there was

no gift because the ostensible donor did not relinquish

dominion and control over the property as required

for a completed gift and thus there was no charitable

deduction (Fakiris v. Commissioner (summarized in the

September 2017 issue)). In that case, the court also held

that disallowance of the claimed deduction gave rise to

gross valuation misstatements for which the individual

was liable for the 40-percent accuracy-related penalty

(IRC § 6662(h)).

The Tax Court revisited that decision and reaffirmed

it, relying on a Supreme Court decision in 2013 (United

States v. Woods). That case concerned an accuracy-re-

lated penalty for valuation misstatements and its appli-

cability where the transaction is disregarded for lack of

economic substance. The Court observed that, when

an asset’s true value is zero, the value claimed for tax

purposes is considered to be 400 percent or more of

the correct amount, so that the resulting valuation mis-

statement is automatically deemed gross and subject to

the 40-percent penalty (referencing Reg. § 1.6662-5(g)).

In the new case (Fakiris v. Commissioner), by decision

dated November 19, the court stated that a “conclusion

that a donor did not relinquish dominion and control

over the subject of a purported gift, and thus that no

property was actually contributed, is coterminous with

a conclusion that the purported gift was a sham; that

is, something that is not what it purports to be.” In this

case, the ostensible donor underpaid his tax because

he overstated the value of the property claimed to have

been contributed; he overstated that value because,

according to the court, a gift was not made, that is,

the transaction was a sham. Thus, the court wrote, the

“correct value of the contributed ‘property’ is zero for

purposes of determining the applicability of the gross

valuation penalty because no property was actually con-

tributed.” [3.1, 10.14] ◆