Charitable Deduction Valuation: Timing, Not Experts, Proves To Be Everything

• Date: 01 February 2021
• Published date: 01 February 2021
• DOI: http://doi.org/10.1002/npc.30820

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 February 2021 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

Net Operating Loss Deductions

For tax years beginning after December 31, 2017,

an exempt organization with more than one unrelated

business determines the NOL deduction separately with

respect to each of its unrelated businesses (Reg. §

1.512(a)-6(h)(1)). The regulations explain coordination

of pre-2018 and post-2017 NOLs (Reg. § 1.512(a)-6(h)

(2)), the treatment of NOLs on dispositions of separate

unrelated businesses (Reg. § 1.512(a)-6(h)(3)), and the

treatment of NOLS when identification of a separate

unrelated business changes (Reg. § 1.512(a)-6(h)(4)).

Public Support Tests

The regulations include revisions to the public sup-

port tests (IRC §§ 170(b)(1)(A)(vi) and 509(a)(2)) to

permit an exempt organization with more than one

unrelated business to aggregate its net income and net

losses from all unrelated business activities for purposes

of determining whether the organization is publicly

supported.

The final regulations provide exempt organizations

the option of determining public support using their UBTI

calculated under the bucketing rule or in the aggregate.

Effective Date

These regulations are applicable with respect to

tax years beginning on or after December 2, 2020. An

exempt organization may elect to apply the regulations to

previous tax years beginning on or after January 1, 2018.

Reserved Issues

The proposed regulations reserved two issues for

additional consideration. One of these issues relates

to the allocation of expenses, depreciation, and similar

items shared between an exempt activity and an unre-

lated trade or business or between or among more than

one unrelated business. The second issue related to

changes made to the NOL deduction by the Coronavirus

Aid, Relief, and Economic Security Act (summarized in

the June 2020 issue). The Treasury Department and the

IRS anticipate publishing separate proposed regulations

that will address these issues.

Affected Exempt Organizations

Treasury and the IRS believe that, at most, 14 per-

cent of exempt organizations will be affected by these

regulations. Among the types of exempt organizations

expected to have more than one unrelated business are

colleges and universities, museums and other cultural

organizations, and hospitals.

Based on a recent survey by the Center on Nonprofits

and Philanthropy, Treasury and the IRS project that less

than two percent of exempt organizations (about 4,000

filers) will be affected, with these tending to be large

educational or arts and cultural organizations [12.3(b)

(i), (iv), 25.5]. ◆

CHARITABLE DEDUCTION

VALUATION: TIMING, NOT

EXPERTS, PROVES TO BE

EVERYTHING

A limited liability company contributed a valid conser-

vation easement to a qualified charitable organization.

The transaction occurred, as the US Tax Court stated the

matter, “at the very peak of an amazingly frothy local re-

al-estate market.” Indeed, the IRS’s expert testified that

the easement was contributed at the “top of the market

and that the underlying property, unencumbered by the

easement, was worth less than the amount the donor

paid to acquire it.”

The court, following the dictates of the before-and-

after method of valuation and dissecting the opinions of

the parties’ experts, concluded that the amounts claimed

for charitable deductions in this case were reasonable

(Rajagopalan v. Commissioner; Sapp v. Commissioner

(November 19)). The members of the LLC were said to be

able to get the benefit of the real-estate bubble.

The court recalled the aphorism among observers of

the stock market that “bulls make money, bears make

money, but pigs get slaughtered.” The court observed

that the individual donors took a return position that

was “very considerably subhyperporcine” and thus ena-

bled them to keep their deductions.

The court also acknowledged “how unusual it is in a

valuation case to not find a number somewhere between

those of the experts who battled it out at trial.” But one

of the witnesses was held to have vastly understated

the property’s value at acquisition. The other expert was

faulted for basing his opinion on transactional data with

respect to other properties, rather than data concerning

the property at issue. [9.7, 10.1] ◆

2020-2021 PRIORITY

GUIDANCE PLAN RELEASED

The Department of the Treasury and the IRS, on No-

vember 17, released the 2020-2021 Priority Guidance

Plan. This version of the plan includes 14 projects in the

tax-exempt organizations and charitable giving contexts,

plus an inventory of the regulations and other guidance

issued in implementation of the Tax Cuts and Jobs Act.

Implementation of TCJA

• Final regulations concerning the bucketing rule have

been published (see lead article).

• Final regulations on the college and university invest-

ment income tax (IRC § 4968) were published in Sep-

tember (summarized in the December 2020 issue).