Appellate Court Upholds Denial of $33 Million Charitable Deduction for Lack of Property Basis Disclosure

• Date: 01 August 2019
• Published date: 01 August 2019
• DOI: http://doi.org/10.1002/npc.30622

Bruce R. Hopkins’ NONPROFIT COUNSEL

2 August 2019 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

IRS data sources to identify organizations potentially

affected by this tax. [20.5] ◆

APPELLATE COURT UPHOLDS

DENIAL OF $33 MILLION

CHARITABLE DEDUCTION FOR

LACK OF PROPERTY BASIS

DISCLOSURE

The US Court of Appeals for the District of Columbia

Circuit, by decision dated May 24, upheld the findings of

the US Tax Court that a donor of property is not entitled

to a $33 million charitable contribution deduction

because of failure to comply with the gift substantiation

rules requiring disclosure of the gift property’s basis and

is subject to the 40 percent tax underpayment penalty

(Blau v. Commissioner). The Tax Court’s opinion (in RERI

Holdings I, LLC v. Commissioner) is summarized in the

September 2017 issue.

Facts

As the DC Circuit stated the matter, “[a]t a high

level of generality, the facts of this case are simple:

RERI acquired and donated a future interest in a piece

of commercial property to the University of Michigan.”

RERI maintains the contribution gave rise to a bona fide

charitable deduction based on a reasonable value of $33

million. The IRS claims RERI “artificially inflated the value

of the donated property in order to offset the tax liability

of its owners.”

By contrast, wrote the court, the “corporate arrange-

ments and transactions involved in this case are fairly

complicated.” Suffice it to say that the IRS regards this

case as involving a successor member interest (SMI),

which was created and transferred via several transac-

tions involving corporations, a partnership, some LLCs,

and, of course, the university. RERI assigned the SMI to

the university, claiming the deduction. In compliance

with the law, the donor attached the requisite appraisal

and a Form 8283 to its return. The space on the form for

the property’s basis amount, however, was left blank; an

explanation for this omission was not provided.

In the Tax Court litigation, the IRS asserted that

RERI was not entitled to any charitable deduction on

the grounds that the transaction was a “sham for tax

purposes or lacks economic substance.” The Tax Court,

however, based its decision as to nondeductibility on

RERI’s failure to properly substantiate the value of the

gift property, in that the basis amount was not disclosed.

That court made much of the fact that RERI paid $3 mil-

lion to acquire the SMI and held the interest for merely

17 months before it was assigned to the university.

Law and Analysis

RERI’s defense was based on the proposition that

it is sheltered by the substantial compliance doctrine.

The court of appeals analyzed the Tax Court’s and IRS’s

version of the contours of the doctrine, the latter being

the more “exacting” one. The court did not choose

BRUCE R HOPKIN S’ NONPROFIT COUN SEL

(Print ISSN: 1542-8 419; Online ISSN: 1542-8427) is p ublished month ly by Wiley Subsc ription Serv ices, Inc., a Wil ey Company, 111 River St., Hoboken ,

NJ 07030-5774 USA.

Postmaster: Send all address c hanges to

BRUCE R HOPKIN S’ NONPROFIT COUNSEL

, John Wiley & Son s Inc., c/o The Sherid an Press, PO Box 465, H anover, PA 17331 USA.

Copyright a nd Copying (in any f ormat): Copyright © 2019 Wi ley Periodicals, Inc . All rights reser ved. No part of this pub lication may be repro duced, stored or tran smitted in any form

or by any means wit hout the prior permis sion in writing from the c opyright holder. Auth orization to copy item s for internal and perso nal use is granted by the co pyright holder for lib raries

and other user s registered with th eir local Reproduc tion Rights Organi sation (RRO), e.g. Copyr ight Clearance Cente r (CCC), 222 Rosewood Drive, D anvers, MA 01923, USA (www.copyright.

com), provided the ap propriate fee is pa id directly to the R RO. This consent doe s not extend to oth er kinds of copying s uch as copying for g eneral distribu tion, for adver tising and promoti onal

purposes, fo r republicatio n, for creating ne w collective wo rks or for resal e. Permissions fo r such reuse can be ob tained using the R ightsLink “Requ est Permission s” link on Wiley Online L ibrary.

Special requests should be addressed to: permissions@wiley.com.

Delivery Terms and Legal Title: Where the subscription pri ce includes print iss ues and delivery is to t he recipient’s addre ss, delivery term s are Delivered at Pl ace (DAP); the recipi ent

is responsible f or paying any impor t duty or taxes. T itle to all issues tran sfers FOB our shipp ing point, freigh t prepaid. We will ende avour to fulfil claim s for missing or damage d copies within

six months of pub lication, within o ur reasonable disc retion and subjec t to availability.

Information for subscribers:

Bruce R Hopkins’ Non profit Counsel

is published in 12 issu es per year. Subscrip tion prices for 2019 are: Institutional: Online Only: $1064 (Th e Americas),

£545 (UK), €691 (Eur ope), $1064 (rest of the world). Institutional: Print + Online: $1330 (The Americ as), £682 (UK), €863 (Euro pe), $1330 (rest of the world). Institutional: Print

Only: $1064 (The Americ as), £545 (UK), €691 (Europe), $1064 (res t of the world). Personal: Online Only: $579 (The Americ as), £297 (UK), €374 (Europe), $579 (rest o f the world).

Personal: Print + Online: $668 (The Americas) , £515 (UK), €613 (Europe), $668 (rest of t he world). Personal: Print Only: $579 (The Ameri cas), £297 (UK), €374 (Euro pe), $579 (rest of

the world). Pri ces are exclusive of t ax. Asia-Paci fic GST, Canadian GST/HS T and European VAT will be ap plied at the approp riate rates. For mor e information on cur rent tax rates, ple ase go to

https://onlinelibrary.wiley.com/library-info/products/price-lists/payment. T he price includes on line access to the cur rent and all online back files to January 1, 2015, wh ere available. For othe r

pricing options, including access information and terms and conditions, please visit https://onlinelibrary.wiley.com/library-info/products/price-lists. Terms of us e can be found here: htt ps://

onlinelibrary.wiley.com/terms-and-conditions.

Back issues: Single issues fr om current and recen t volumes are availabl e at the current singl e issue price from cs -journals@wile y.com.

Disclaimer: The Publisher and Ed itors cannot b e held responsi ble for errors or a ny consequenc es arising from t he use of informa tion containe d in this journal; th e views and opin ions express ed

do not necessa rily reflec t those of the Publi sher and Editors , neither does th e publication o f advertisem ents constitu te any endorsem ent by the Publish er and Editors of th e products ad vertised.

Wiley’s Corpor ate Citizenship init iative seeks to ad dress the environ mental, social, ec onomic, and ethic al challenges face d in our business and w hich are importa nt to our diverse st akeholder

groups. Since la unching the initia tive, we have focuse d on sharing our conte nt with those in nee d, enhancing comm unity philanthro py, reducing our car bon impact, cr eating global guid elines

and best prac tices for paper u se, establishin g a vendor code of e thics, and enga ging our colleag ues and other sta keholders in our e fforts. F ollow our progre ss at www.wiley.com/go/citizenship.

Wiley is a foundi ng member of the UN-b acked HINARI, AGO RA, and OARE init iatives. They are no w collectively k nown as Research4 Life, making online sc ientific content a vailable free or at

nominal cost to re searchers in devel oping countries . Please visit Wiley ’s Content Access – Corp orate Citizenship si te: http://ww w.wiley.com/Wile yCDA/Sect ion/id-39008 2.html

Journal Customer Services: For ordering information, claims and any enquiry concerning your journal subscription please go to https://hub.wiley.com/community/support/onlinelibrary or

contact your nearest office. Americas: Email: cs-j ournals@wiley.c om; Tel: +1 781 388 8598 or +1 800 835 6770 (toll free i n the USA & Canada). Euro pe, Middle East a nd Africa: Email:

cs-journals @wiley.com; Tel: +44 (0) 1865 778315. Asia Pacific: Em ail: cs-journals@wi ley.com; Tel: +65 6511 8000. Japan: For Japanese s peaking support, E mail: cs-japan@wile y.com.

Visit our Online Customer Help available in 7 languages at https://hub.wiley.com/community/support/onlinelibrary.

Editor: Bruce R. Hopkin s. Production Editor: Mary Jean Jones . Address for Editorial Correspondence: Bruce R. Hopki ns. email:

brucerhopkins@brucerhopkinslaw.com. For submission instructions, subscription and all other information visit: wileyonlinelibrar y.com/journal/npc

View this journ al online at wileyonlinelibrary.com/ journal/npc Printed in the US A by The Allied Group.