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

Date01 August 2019
Published date01 August 2019
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]
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.
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
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