Charitable Acknowledgements For Tax Purposes Go Badly Wrong

The foundations for substantiation of charitable deductions are very strict with further layers when a donor suggested fund or property donations are concerned. You may get a reasonably good really feel for a way issues can go badly flawed from a current opinion by Decide Jane Boyle of america District Court docket Northern District of Texas – Kevin M. Keefer and Patricia Keefer v US.

A Difficult Transaction

I may think about this transaction being utilized in an examination for a Masters in Taxation. Kevin had began his profession in public accounting, however had been working within the hospitality stability. Patricia had additionally held a CPA license for no matter that’s price. Kevin held not directly a restricted partnership curiosity in Burbank HHG Resort LP. Burbank owned a Marriot Courtyard resort close to Burbank Airport in Los Angeles. Apple Hospital REIT expressed an curiosity in buying the resort in 2015.

Previous to any sale being finalized Mr. Keefer transformed a part of his oblique curiosity right into a direct 4% curiosity. He then donated that curiosity to the Utah based mostly Pi Basis which established a donor suggested fund with the donation. An appraiser valued the curiosity at $1,257,000 largely on the premise of the pending sale, which ended up going by way of. The Keefers took that as a charitable contribution deduction.

As a result of the curiosity was a partnership curiosity with related liabilities in extra of foundation there was some acquire acknowledged. There’s a particular rule that apportions among the foundation to the contribution inflicting the acknowledged acquire to be better than it will have been had the partnership curiosity been bought for a greenback. If you do not get that, don’t fret a lot about it until you might have a bunch of partnership pursuits or are learning on your MST.

The Audit Report

The Keefer 2015 return was topic to audit. The agent disallowed the $1,257,000 charitable contribution leading to a deficiency of $423,304. It appears to me that there ought to have been an adjustment to the acquire, since with the charitable deduction disallowed there shouldn’t be a foundation adjustment. Though the adjustment is talked about within the audit report, the agent doesn’t do something about it. Legal professional Kenneth Horwitz wrote a letter to the agent stating her failure to reverse the premise adjustment and asking her to regulate her report, however apparently that went nowhere.

The report disallows the charitable contribution on two grounds. It notes that Kind 8283 signed by each the appraiser and receiving establishment with an appraisal connected as required for property valued at greater than $500,000. There was a catch although:

Examiner made the willpower that the appraisal was not certified as a result of it didn’t embrace the employer identification quantity (EIN) or Social Safety variety of the certified appraiser or the one who employs or engages the certified appraiser. An appraisal that doesn’t include every of the eleven provisions as described in Treas. Reg. § 1.170A-13{c)(3)(ii)(E) is just not a certified appraisal.

Then there’s the issue with the acknowledgement required for contributions over $250. Within the case of a donor suggested fund the acknowledgement wants to incorporate an announcement that the funds are underneath the unique authorized management of the sponsoring group.

I’m extra fanatical about getting acknowledgements for charitable contributions than lots of people, however I’ve to admit that there’s a good probability that each of these gotchas would have gotten by me if I had been reviewing the return. Thus I are inclined to assume that asserting the accuracy was type of overkill, however the accuracy penalty is fairly routine.

The Opinion

Slightly than go to Tax Court docket, the Keefers determined to pay the tax and ask for a refund adopted by a swimsuit in District Court docket. This threw the IRS computer systems for a loop. The refund request was denied as being premature as a result of the statute had run on the unique return. The discover itself recites that the deadline is the later of inter alia “2 years after you paid the tax”, however someway they did not register with the programmers. What is de facto odd is that the IRS didn’t concede this level within the litigation and it needed to be addressed by Decide Boyle, who dominated that the declare was well timed. From there issues worsen for the Keefers.

Initially I assumed that getting at the least some refund because of the foundation problem was a certain factor. The federal government got here up with one thing although. They argued that the donation was an anticipatory task of revenue. Decide Boyle notes that the sale was not a certain factor when the donation was made, which favors the taxpayers. There’s one other problem although. The 4% partnership curiosity that was carved out to make the donation didn’t embrace a share of reserve funds. That meant that the Keefers had not donated their complete curiosity. That may create extra tax that will wipe out the premise adjustment.

On denial of the deduction Decide Boyle dominated that the failure of the acknowledgement by Pi to state that they’d authorized management was sufficient to disclaim the deduction. This was regardless of there being a separate package deal during which that was defined. Since that was sufficient to torpedo the deduction Decide Boyle didn’t get into the argument in regards to the appraiser’s ID quantity. So we are able to maintain dropping sleep over that one additionally.

Conclusion

All in this can be a good illustration about how meticulous you ought to be with charitable contributions normally however significantly these of property and to donor suggested funds. I’ve to assume that the individuals operating the funds is perhaps desirous to examine their acknowledgements. I hope that this resolution will get appealed, however haven’t gotten any response to my inquiries on it.

Lew Taishoff who blogs the Tax Court docket relentlessly agrees with the federal government on the task of revenue problem. Being a partnership man, I’m not so certain, however I are inclined to defer to the extra discovered. He agrees that the IRS timeliness argument borders on frivolous. On why they went to District Court docket relatively than his favourite venue, he wrote me:

The strategic consideration might be that USDCNDTX is allegedly taxpayer-friendly and tax legislation clueless. Your schoolmate Judge Albert G (“Scholar Al”) Lauber would have hung Keefer out to dry.

Different Protection

Theresa Schiep has Texas Couple Denied $1.3M Deduction For Interest Donation on Law360 Tax Authority.

The Preachers’ Help and Society and Profit Fund discusses the case at some size in its Washington Information part – Partnership Gift Charitable Deduction Denied. It closes with some sensible recommendation.

Most donors give money or public inventory to DAF sponsoring organizations. The examine is instantly cashed and the inventory normally is promptly bought and transformed to money. Subsequently, the actions of the group reveal unique management and are in compliance with Part 170(f)(18)(B). Nevertheless, this District Court docket resolution could also be adopted by the Tax Court docket or different District Court docket judges. For that reason, it is necessary that donor receipts for DAF items be modified to incorporate this provision:

“No items or companies have been supplied in change on your beneficiant monetary donation and the nonprofit group has unique authorized management over the belongings contributed.”

For comfort, it will be acceptable for the extra in depth language for use for all DAF present receipts. Within the pursuits of simplicity, many organizations might select to make use of this language for all receipts.

Whereas the danger is primarily for DAF items of partnership pursuits, enterprise pursuits or minority pursuits in actual property, it is necessary for all organizations that sponsor DAFs to make use of the expanded language in future contemporaneous written acknowledgments. This language is designed to adjust to Part 170(f)(8) and Part 170(f)(18) necessities.