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Charitable Tax Deduction Permitted for Bargain Sale of Property to Retirement Home Developers.

(Parker Tax Publishing June 1, 2015)

The Tax Court held that a taxpayer's sale of property to a charitable organization for less than its fair market value was a bargain sale, entitling the taxpayer to a charitable contribution deduction. However, the taxpayer was required to recalculate his claimed deduction, as the property was valued incorrectly. Davis v. Comm'r, T.C. Memo. 2015-88.

Background

Bob Davis is a Texas entrepreneur, real estate investor and a limited partner in Sun West Land, Ltd. (Sun West), which invests in real estate. Donald Perry was the President and CEO of Sears Methodist Retirement System, Inc. (SMRS) and its charitable foundation (the Foundation). SMRS is a charitable organization that builds, develops, and operates various senior living centers throughout northwest Texas.

In 2003 Davis informed Perry that Sun West had land in Waco that would be ideal for the next SMRS retirement community. The following year Davis purchased two tracts of land from Sun West and an adjoining tract from an unrelated real estate group. In 2005 Davis began discussions with Perry to sell a portion of the newly purchased land to the Foundation. Although part of the land was within an undevelopable flood zone, Perry did not object to its inclusion because it was scenic and could be used for recreational purposes.

Davis retained Bruce Cresson II to appraise the property, and Cresson estimated the fair market value of the land to be $4.1 million. The appraisal included a negative 30 percent adjustment due to the flood zone restrictions offset by a positive 30 percent adjustment due to the property's scenic value.

Perry told Davis SMRS could not pay more than $2 million, but suggested a transfer for less than fair market value could qualify as a "bargain sale" and, thereby, entitle Davis to a charitable deduction for the difference between the sale price and the fair market value. Perry also told Davis he could potentially receive other benefits, such as a right to name a building erected on the land, and could have family members reside in the retirement community at reduced rates.

In 2005, Davis conveyed the land to the Foundation for $2 million in cash, but because Davis and Perry had been unable to agree on the details of the extra benefits, they were not included. In October of 2005 Perry sent Davis a letter briefly describing the property and noting that his gift to the organization was $2.1 million, the difference between the $2 million the Foundation gave Davis and the $4.1 million appraised fair market value of the property.

On his 2005 return, Davis included a Form 8283, Noncash Charitable Contributions, reporting a $2.1 million charitable contribution deduction. He applied $566,960 of the contribution to 2005, and carried over and applied $416,390 and $170,981 of the remaining amounts to his 2006 and 2007 returns, respectively.

In 2010, the IRS issued a notice of deficiency to Davis for 2005, 2006, and 2007 denying the entirety of the claimed charitable contribution deductions.

Analysis

A bargain sale of property to a qualified charitable organization is a sale or exchange for less than the property's fair market value and is treated as partly a charitable contribution and partly a sale or exchange (Reg. Sec. 1.170A-4(c)(2)(ii)).

A taxpayer making a charitable contribution of $250 or more must obtain a contemporaneous written acknowledgment from the donee including: (1) the amount of cash and a description of any property other than cash contributed; (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for the contributed property; and (3) a description and good faith estimate of the value of any goods or services provided (Code Sec. 170(f)(8)(B)).

The IRS argued that Davis lacked charitable intent when he sold the land, noting that he structured the transaction as a contribution only after being informed of the concept of a bargain sale. The Tax Court disagreed, finding Davis sold the land to the Foundation for less than its fair market value with the intention of transferring the difference as a charitable contribution. The court reasoned the mere fact that Perry suggested conveying the land in part as a charitable contribution did not mean that Davis lacked charitable intent.

The IRS next argued that Perry's October 2005 letter failed to satisfy the contemporaneous written acknowledgment requirements because it did not disclose goods and services, other than the $2 million, that Davis received in connection with the sale. The court disagreed with the IRS, noting that because Davis and Perry never reached an agreement on additional benefits there were no goods or services other than the $2 million in cash to disclose, and found the letter met the requirements.

However, the court disagreed with Cresson's valuation of the property and determined that its value was less than $4.1 million, claiming the reduced value of the land due to its location in the flood zone could not be completely offset by an increase in value derived from its scenic nature. The court instead adopted the conclusion of the IRS's expert that a 15 percent negative adjustment should be taken into account to reflect the flood zone restrictions, without the offsetting positive adjustment.

The Tax Court thus held that Davis was entitled to his $566,960 charitable deduction in 2005 from the bargain sale of his property to the Foundation, but required the carryover deductions for 2006 and 2007 to be recalculated based on the reduced valuation.

For a discussion of bargain sales, see Parker Tax ¶84,170. (Staff Editor Parker Tax Publishing)

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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