Tax Court: Taxpayer Made a Bargain Sale, But At an Amount Less Than Deducted

(Parker Tax Publishing February 2026)

The Tax Court held that the sole owner of five S corporations, who engaged in a bargain sale of those corporations, was entitled to a charitable contribution deduction, but at a lesser amount than reported on his return. In so holding, the court rejected the IRS's assertion that the owner was not eligible for a charitable deduction because he did not relinquish dominion and control over the S corporations, submit qualified appraisals, or otherwise make gifts. Barney v. Comm'r, T.C. Memo. 2025-133.

Facts

In 1985, Carl Barney began acquiring for-profit colleges. By 2012, he owned five S corporations that operated postsecondary educational institutions in Utah, Idaho, Colorado, Wyoming, Arizona, and California (collectively, Colleges).

In December 2012, the S Corporations merged with the Center for Excellence in Higher Education (CEHE), a Code Sec. 501(c)(3) organization (the Transaction). Under the merger agreements, CEHE agreed to pay total consideration of up to $431 million in the form of two promissory notes -- Term Note A and Term Note B. Term Note A had a stated principal amount of $200 million, and Term Note B had a stated principal amount of $231 million (collectively, Purchase Notes).

Barney hired two appraisers, Richard Pollak of Barrington Research Associates and Matt Connors of Rocky Mountain Advisory (RMA), to conduct appraisals of the S corporations. Pollak concluded that the collective value of the S corporations on the date of the merger was $620.8 million (Barrington Appraisal). Connors's report valued the S corporations a collective FMV of $700 million (RMA Appraisal). CEHE engaged Blue & Co. (Blue) to review Pollak's valuation of the S Corporations. Blue issued a summary appraisal review report (Blue Report) that found a FMV range for the S Corporations between $511.3 million and $680 million.

On their Forms 1120S for tax year 2012, each S Corporation reported capital gains from the Transaction of approximately $306 million, $42 million, $104 million, $74 million, and $83 million. The total charitable contribution deduction reported on the five Schedule K-1s was approximately $181 million and the total capital gain reported was approximately $609 million. Three of the S corporations reported its merger into CEHE as a bargain sale and the other two S corporations claimed charitable contribution deductions to CEHE totaling $135 million.

After auditing the S corporations' returns, the IRS proposed a deficiency assessment of approximately $31 million and a penalty of almost $11 million. The IRS's valuation expert, Carl Saba, opined that the S Corporations had a FMV of $289 million as of December 31, 2012. Another IRS expert, Stuart Gilson, opined that the S Corporations had an overall FMV between $200 million and $300 million.

In 2017, Barney and the S corporations filed amended returns for 2012. Barney claimed a $132.4 million charitable contribution and reported a $27.4 million overpayment for 2012. The IRS denied the refund claim and determined a deficiency of approximately $31.2 million and a penalty of approximately $12.5 million. According to the IRS, Barney had (1) failed to establish that his non-cash charitable contribution satisfied the requirements of Code Sec. 170, and (2) failed to establish the FMV of the contribution.

Before the Tax Court, Barney argued that he was entitled to a charitable contribution deduction since he made qualifying charitable contributions in 2012. The IRS countered that Barney was not entitled to deduct his claimed noncash charitable contributions or transfers of the Colleges CEHE in 2012 because he did not relinquish dominion and control over the S Corporations, submit qualified appraisals, or make "gifts" since the transfers were subject to reclamation, and finally, that Barney's contributions (or transfers) of the S Corporations to CEHE were equal to the consideration received.

Under Code Sec. 170, a charitable contribution deduction is allowed for a part-sale, part-gift (i.e., a bargain sale) made to a charitable organization. Generally, under Reg. Sec. 1.1001-1(e) and Reg. Sec. 1.1011-2, the transferor recognizes taxable gain on the sale over the taxpayer's adjusted basis and is entitled to deduct the excess of the property's FMV over the sale price as a bargain sale.

Analysis

The Tax Court held that the Transaction qualified as a bargain sale, but for an amount less than originally reported. In resolving that the transaction was in fact a bargain sale, the court first had to determine the values of the S Corporations transferred and the consideration received by Barney.

After considering the evidence, the Tax Court found Barney's original FMVs - based on the Barrington Appraisal - to be excessive and self-serving. Both Pollak's and Connors's conclusions as to values, the court said, were based on management's unreasonably optimistic projections. According to the court, any true third party considering an acquisition of the S Corporations would not rely on internal management projections to arrive at a purchase price. Rather the third party would obtain an independent valuation using comparable business sales or a more vetted and reliable DCF model. The court concluded that, in valuing the S Corporations, it was far more reasonable to apply a conservative income projection reflective of the struggles facing the for-profit college industry from early 2009.

The court concluded that, under Code Sec. 1001(a), Barney's gain from the Transaction was equal to the excess amount realized on the sale over its adjusted basis. The court thus concluded that the amount realized was $267 million, which is the collective FMV of the Purchase Notes as determined by Gilson. Having determined that the amount Barney realized, $267 million, was less than the FMV of the S Corporations transferred under the Transaction (i.e., $300 million), the court held that the Transaction qualified as a bargain sale; albeit for an amount less than originally reported.

The court also rejected the IRS's contention that Barney failed to relinquish dominion or control over the transferred S Corporations. Other than some ancillary right to salary as a director of CEHE, the court said, Barney was not entitled to receive any portion of the profits derived from the S Corporations since they were now under the ownership and control of CEHE, a nonprofit entity. Thus, the court found, the transfer of control and ownership of the S Corporations from Barney to CEHE was made for charitable purposes. Finally, with respect to the IRS contention that no qualified appraisal was submitted and thus no charitable deduction was allowed, the court cited the Barrington Appraisal as complying with the substantial compliance regulations.

For a discussion of the tax treatment of bargain sales, see Parker Tax ¶84,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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