Another Round of Charitable Deduction Regulations Issued

Published date01 February 2020
Date01 February 2020
February 2020 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
purchased 10 units for a total of $96,300, the partner
would receive a tax deduction of over $459,000. The
government alleged that Zak assisted in all aspects of the
formation and sale of interests in this partnership, per-
sonally purchased units of interests in the partnership,
and claimed the inflated charitable deduction.
The court concluded that the government’s pleading
“adequately apprises defendants with sufficient specificity
of the type of conduct which makes up the alleged illegal-
ity.” It ruled that the complaint satisfies the pleading stan-
dard “as it applies to these allegations of fraud which are
widespread, complex, and occurring over a long period of
time.” The motion to dismiss as to this count was denied.
The court declined to dismiss a count in the complaint
by which the federal government is seeking entry of an
injunction order to prevent the defendants from con-
tinuing to engage in this allegedly abusive tax scheme.
The court also declined to dismiss a count by which the
government is seeking disgorgement, in the face of an
argument that the remedy being sought is barred by the
statute of limitations. The court, however, dismissed one
count, because the complaint failed to state “adequate
specific factual allegations to support [the government’s]
conclusory claim” that Zak is an appraiser. [10.15(c)]
The Department of the Treasury and the IRS, on
December 13, issued another batch of regulations con-
cerning the federal income tax charitable contribution
deduction and the SALT cap (IRC § 164(b)(6) (REG-
107431-19). These proposals address four topics.
These proposed regulations are part of an overall
cluster of regulations designed to thwart efforts in cer-
tain states to circumvent the cap by creating tax credit
programs in return for charitable contributions. The
essence of the federal position is that these transfers are
not gifts because the transfers are made with an expec-
tation of a substantial quid pro quo. Final regulations on
this general point were issued last year (summarized in
the September 2019 issue).
Quid Pro Quo Principle
The general rule is that a payment made by a person
to or for the use of a charitable organization that is in con-
sideration for goods or services of equivalent value is not a
deductible charitable contribution (Reg. § 1.170A-1(h)(1)).
The charitable contribution deduction may not exceed the
amount of cash paid and the fair market value of property
transferred to a charitable organization over the fair mar-
ket value of goods or services the organization provides in
return (Reg, § 1.170A-1(h)(2)). A donee provides goods
or services in consideration for a person’s payment if, at
the time the person makes a payment to the donee, the
person receives or expects to receive goods or services in
exchange for the payment (Reg. § 1.170A-13(f)(6)).
The phrase in consideration for, for purposes of
determining whether a state or local tax credit reduces
or eliminates a charitable contribution, is defined in the
tax regulations as having the same meaning as defined
in the foregoing paragraph, except that the state or local
tax credit need not be provided by the donee organiza-
tion (Reg. § 1.170A-1(h)(3)(iii)).
One of the purposes of the proposed regulations is
to make clear that the quid pro quo principle applies
irrespective of whether the party providing the quid pro
quo is the donee.
The basic law as to the quid pro quo principle is
stated by the Supreme Court in United States v. Ameri-
can Bar Endowment (summarized in the July 1986 issue)
and Hernandez v. Commissioner (summarized in the July
1989 issue). These two cases do not directly address the
matter of benefits provided by third parties. But, as the
preamble to the proposed regulation observes, the Court
“derived” the principle in those cases from a lower court
opinion and a revenue ruling.
In the lower court opinion, the then-Court of Claims
held that a sewing machine company was not eligible
for a charitable deduction for selling sewing machines to
schools at a discount because the company expected a
return in the nature of future increased sales to students,
rejecting the argument that the benefit would come
from the students, not the schools (Singer v. United
States (1971)). The IRS ruled that only a portion of a
payment to a charitable organization was a gift because
of a benefit provided by a third party (Rev. Rul. 67-246).
The preamble also notes that “courts have ruled that
a taxpayer’s expectation of significant financial returns
demonstrates a lack of charitable intent.” Two cases are
cited in this regard. In one, a person contributed land
for construction of a school; a charitable deduction was
denied because the person believed that the presence
of the school would result in the creation of roads that
would increase the value of the person’s retained land
(Ottawa Silica Co. v. United States (Fed. Cir. 1983)). The
same outcome occurred when a company contributed a
conservation easement that restricted land for use as a
park because the company expected that the restriction
would increase the value of its adjacent property (Wen-
dell Falls Development, LLC v. Commissioner (Tax Ct.)
(opinion summarized in the January 2019 issue)).
Based on this body of law, Treasury and the IRS con-
cluded that the quid pro quo principle is “equally appli-
cable regardless of whether the donor expects to receive
the benefit from the donee or from a third party.” That
is, “[i]n either case, the donor’s payment is not a chari-
table contribution or gift to the extent that the donor
expects a substantial benefit in return.”

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT