POOF! $64 Million Charitable Contribution Deduction Disappears

Alright, the facts in the case are a bit more complex than a “poof.” But it got your attention for my at-least-annual reminder to obtain a contemporaneous written acknowledgment (“CWA”) from the donee for any contribution that is valued at $250 or more.

A CWA must state, among other things, (a) the amount of cash and description (but not the value) of any property other than cash contributed, and (b) whether the donee supplied the donor with any goods or services in consideration for the gift and, if so, must furnish a description and a good-faith estimate of the value of such goods or services. The CWA must be in hand before you file the income tax return claiming the deduction and no later than the due date (including extensions) for filing such return.

A Tax Court decision issued in December, 2016 – 15 West 17^th Street LLC, et al. (“LLC”) v. Commissioner -illustrates the CWA requirement vividly.

In September 2005, LLC purchased for $10 million a property in Manhattan (New York, not Kansas). LLC planned to demolish a building built in 1903-04. However, LLC was outflanked by a local preservation society, which got New York City to declare the building a “certified historic structure.” No demolition could occur.

In December 20, 2007, LLC executed in favor of the Trust for Architectural Easements (“the Trust”) a perpetual historic preservation deed of easement. On May 14, 2008, the Trust sent the LLC a letter acknowledging receipt of the easement. The letter did not state whether the Trust had provided any goods or services to LLC, or whether the Trust had otherwise given LLC anything of value, in exchange for the easement.

LLC secured an appraisal concluding that, as of February 8, 2008 the property had a fair market value of $69,230,000 before placement of the easement and had a value after the easement of $4,740,000, a reduction of $64,490,000. Wow! That property appreciated almost 600% in 2 ½ years! I don’t think that President Donald J. Trump could claim that kind of real estate investing acumen. (Okay, he probably would.) LLC claimed a $64,490,000 charitable contribution on its 2007 tax return.

The IRS does not like deductions for charitable contributions of easements. This case looks especially egregious. I am sure that the Revenuers were girded for battle about the valuation. But they won without firing a shot in that battle.

Most of the opinion of the Tax Court addressed a rather obscure and convoluted argument by LLC that it did not need a CWA, due to a special provision in the statute involving some rule-making authority delegated by Congress to the IRS, but never exercised by the IRS during a period exceeding twenty year. The Tax Court did not buy LLC’s argument.

Then, the case addressed the provisions in the statute that define a CWA. The IRS simply pointed out that the acknowledgement was not a CWA, because it omitted required language about “no goods and services.” Fight over. LLC loses.

Reminder issued.

VKM