IRS: No Charitable Deduction for Trust Because Distribution Not Made Pursuant to Governing Instrument

• Date: 01 March 2017
• DOI: http://doi.org/10.1002/npc.30295
• Published date: 01 March 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

March 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

“fully applicable” in this case. That rule was not adhered

to, causing loss of the entire deduction. [21.3, 21.4]

Note: This opinion does not contain any discussion as to

why the Trust’s letter to the donor lacked the necessary

elements recited in the statute requiring the acknowl-

edgment. It does not contain any hint as to where the

lawyers were as these developments unfolded. ◆

COURT REJECTS IRS’S

LACK-OF-DONATIVE INTENT

ARGUMENT

The US Tax Court, also on December 22, preserved

most of donors’ charitable contribution deduction for

noncash gifts, in the process rejecting the argument that

the deduction should be denied in full on the ground

that the donors lacked the requisite donative intent

(McGrady v. Commissioner).

Facts

Two donors reported a noncash charitable contri-

bution deduction of $4.7 million, resulting from two

contributions. One gift was to a township in which they

live of a conservation easement on their homestead

property. The other gift was to a qualified conservation

organization of a fee simple interest in an adjoining par-

cel of undeveloped land. They also purchased a parcel

of land, resulting in their ownership of a tract of land,

completely subject to conservation easements, that sur-

rounded their homestead property in three directions.

The deductions were buttressed with appraisals and

expert testimony at trial.

These gifts were made in the context of 18 months

of negotiations, in which the donors were involved from

the outset. These negotiations involved the township,

the charitable entity, other property owners, and a

developer.

The IRS disallowed these deductions in full. The agency

concluded that they lack donative intent, overvalued the

properties, failed to satisfy various reporting requirements,

and received return benefits in exchange for their gifts. The

IRS also determined accuracy-related penalties.

Law

In assessing whether a transaction involves a quid

pro quo exchange, the Tax Court gives the most weight

to the “external features” of the transaction, “avoiding

imprecise inquiries into taxpayers’ subjective motiva-

tions” (e.g., Costello v. Commissioner (2015) (summa-

rized in the July 2015 issue)).

Analysis

The court observed that the IRS’s case was largely

based on the donor’s “supposed abilities” to “steer

the entire set of transactions in a way that benefited

them.” The government asserted that the donors were

“motivated by a desire to protect their privacy and to

prevent suburban development from spoiling the attrac-

tive views from their residence.” The court disagreed,

stating that there was no evidence that the donors “had

the power to manipulate these negotiations or that the

other parties made meaningful concessions to them.”

The donors were said to be “mere incidental beneficia-

ries” of the outcome of the various negotiations.

Both charitable donees provided the donors with

timely gift substantiation documents. Properly executed

Forms 8283 were attached to the appropriate tax return.

The IRS contended that all of these documents were

deficient because they failed to disclose and value the

quid pro quos they allegedly received. The court found

that this argument lacked merit, in that, as noted, quid

pro quos were not provided to the donors.

The government prevailed somewhat in this case

by the court’s downward adjustment of the fair market

value of the donated parcel and the conservation ease-

ment. The overall charitable contribution deduction was

held by the court to be $3.7 million. Other arguments

that the donors received return benefits, raised by the

IRS, were rejected by the court, as was the assertion

that the donors are liable for penalties. [3.1(a), 9.7(h)] ◆

IRS: NO CHARITABLE

DEDUCTION FOR TRUST

BECAUSE DISTRIBUTION

NOT MADE PURSUANT TO

GOVERNING INSTRUMENT

The IRS Office of Chief Counsel ruled that (1) chari-

table contributions made by a trust, following modifica-

tion of its governing instrument, are not deductible in

the absence of the requisite conflict, and (2) IRC § 642(c)

is the exclusive tax code provision supporting tax deduc-

tions for charitable payments by trusts and estates (Chief

Couns. Adv. Mem. 201651013, released December 16).

Facts

A grantor created a trust for the benefit of two

children, during their lifetimes and then for the benefit

of their descendants, subject to testamentary powers

of appointment granted to the children to appoint the

income among the grantor’s descendants, their spouses,

and charities. One child died, having exercised his power

of appointment over one-half of the income of the trust

in favor of his descendants. The trust continued to be

administered as a single trust, distributing one-half of its

income among the descendants of the deceased child

and one-half to the other child.