Easement Gift Ruled Nondeductible Because of Late Recording by Donee

• DOI: http://doi.org/10.1002/npc.30352
• Published date: 01 August 2017
• Date: 01 August 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

August 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

acquire an interest in the Note. Rather, the Foundation

will acquire nonvoting interests in the LLC, with respect

to which it will not have any management rights or con-

trol over distributions—hence, no self-dealing.

This ruling was repeated in another (Priv. Ltr. Rul.

201723006), with the IRS also ruling that the LLC is not

a business enterprise for purposes of the excess business

holdings rules because at least 95 percent of its gross

income will derive from passive sources (IRC § 4943(d)

(3); Reg. § 53.4943-10(c)(1)). Therefore, the Founda-

tion’s nonvoting interests in the LLC are not excess busi-

ness holdings. [12.4(a), (c)]

Commentary: Who says you can’t do something indi-

rectly that you can’t do directly? Well, the IRS recently

said as much, writing that “if a private foundation can-

not directly engage in a transaction without committing

an act of self-dealing, then it cannot indirectly engage

in the transaction without committing an act of self-

dealing” (Priv. Ltr. Rul. 201719004 (summarized in last

month’s issue)). This ruling outcome is a tribute to excel-

lent tax law planning. ◆

PRIVATE FOUNDATION’S

MATCHING GIFT PROGRAM

RULED TO NOT ENTAIL

SELF-DEALING

A business corporation currently provides its employ-

ees with two matching gift programs. Under one of

these programs, the corporation matches an employ-

ee’s contribution to a public charity in an amount equal

to 50 percent of the gift. Pursuant to the other pro-

gram, the company makes a charitable gift to a public

charity where an employee volunteers service time. The

corporation is ceasing these programs, except as to

gifts made to charities in four states; a private founda-

tion related to the business will continue the matching

gift programs.

In accordance with this new arrangement, the foun-

dation will not satisfy an employee’s pledge of a contri-

bution, the foundation will not match any contributions

to an organization it controls or that is controlled by

one or more disqualified persons with respect to it, the

recipient charity must have a favorable IRS determina-

tion letter, the foundation has the discretion to refuse

to make a matching grant, the foundation may modify

the programs at any time, and employee contributions

are not eligible for the program where the employee

receives anything in return for the gift.

The IRS imposed these additional restrictions: the

foundation will not match any donations that were

made under the corporation’s matching gift programs

and will not match any employee contributions made

pursuant to the corporation’s matching gift programs in

the four states.

The IRS observed that this corporation will benefit

from this restructuring of the matching gift programs

because it will receive “favorable public recognition and

good will” and “may also experience a happier and

more loyal work force.” Nonetheless, the IRS ruled that

these benefits are “similar to” incidental and tenuous

benefits, and thus will not give rise to self-dealing (Priv.

Ltr. Rul. 201725008). The IRS also held that these foun-

dation grants will be qualifying distributions and not

constitute taxable expenditures. [12.4(a), (b), (e)]

Note: The ruling as to lack of self-dealing is reproduced

in Priv. Ltr. Rul. 201725009. ◆

EASEMENT GIFT RULED

NONDEDUCTIBLE BECAUSE OF

LATE RECORDING BY DONEE

The US Tax Court, on June 15, ruled that the gift of a

façade easement to a qualified public charity, resulting

in a claimed deduction of $11.4 million, was not deduct-

ible because the charity was late in recording the deed

of easement, thereby violating the tax law requirement

that the gift be in perpetuity (Ten Twenty Six Investors v.

Commissioner).

The court held, as the IRS contended, that a conser-

vation easement has no legal effect, under state (New

York) law, until it is recorded. Rejected was the donor’s

argument that, by simply delivering the deed to the

charity, a common law interest was created (a restric-

tive covenant) and conveyed, for which the deduction

was available. The court stated that the deed shows the

parties’ intent to create a property interest that is clearly

within the statutory definition of a conservation ease-

ment under state law.

Aside from that issue, the court ruled that the failure

to record violated the perpetuity requirements surround-

ing this type of gift (IRC § 170(h)(2)(C), 5(A)). The court

discussed the fact that, as of the date of the contribu-

tion, at least two future events were possible, either of

which could have prevented enforcement of the restric-

tion on the property. [9.7(e)]

Commentary: Where were the lawyers? The court cited

three other cases where this charitable donee failed

to timely record a gifted easement. Surely the charity,

being a qualified charitable donee (IRC § 170(h)(3)), has

lawyers who are cognizant of the state law recordation

rules. And surely the donor (a limited partnership) has

lawyers who know the state recordation law and the

federal gift deductibility laws, and who should have

been hyper-vigilant on this point due to the recordation

tardiness displayed by this donee on the prior occa-

sions. ◆