Another Round of Charitable Deduction Regulations Issued

• DOI: http://doi.org/10.1002/npc.30682
• Published date: 01 February 2020
• Date: 01 February 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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)] ◆

ANOTHER ROUND OF

CHARITABLE DEDUCTION

REGULATIONS ISSUED

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.”