Charitable Deduction for Bargain Sale to Charity
In Davis,1 the Tax Court held that a taxpayer was entitled to deduct the difference between the fair market value of property sold to a charity and the amount that the charity paid for the property. The court, however, did reduce the claimed deduction modestly because it disagreed with how the real property was valued.
The taxpayer, Bob Davis, was an entrepreneur and real estate investor. In 2005, Davis engaged in a bargain sale of real estate to a Section 501(c)(3) charitable organization that builds, develops, and operates senior living centers. The purchase price by the charity for the real estate was $2.0 million, and the appraised value of the real estate was $4.1 million. Because of the $2.1 million bargain-sale element, Davis claimed a charitable income tax deduction of $566,900 on his 2005 income tax return and carried over $416,390 to 2006 and $170,981 to 2007. In 2010, the IRS issued a notice of deficiency for 2005, 2006, and 2007, denying Davis' entire charitable contribution deduction.
In the Tax Court, the IRS advanced two arguments for disallowance of the entire charitable deduction. The IRS's asserted in its first argument that Davis lacked sufficient charitable intent when he sold the real estate to the charitable organization because he sought the tax benefits flowing from the bargain sale. The court rejected this argument and found instead that as of the time of the sale, Davis believed that he was selling the real estate for less than its fair market value, and that he intended to transfer the excess value to the charitable organization as a charitable contribution. The court also rejected the argument of the IRS that Davis lacked a charitable intent because he investigated the tax benefits of a bargain sale prior to the sale.
The second argument advanced by the IRS for disallowing the charitable deduction was that the value of the real estate did not exceed $2.0 million. The court found the appraisal by Davis' appraiser to be more credible that the appraisal performed by the IRS's appraiser. However, the court did find some flaws in the appraisal of Davis' appraiser and therefore reduced the value of the real estate slightly.
The decision of the court allowing the charitable deduction in this case is not surprising. What was surprising in this case is the IRS's argument that the taxpayer was not allowed a charitable deduction for the bargain sale because he sought and structured the sale so as to obtain a charitable deduction. It is axiomatic that taxpayers may engage in transactions so as to obtain charitable deductions. There is nothing impermissible in seeking an income tax benefit from a transfer to a charity.
1 TC Memo 2015-88 RIA TC Memo ¶2015-088 109 CCH TCM 1450 .
Frank Baldino is an estate planning attorney who co-chairs Lerch, Early & Brewer’s Estate Planning & Probate group in Bethesda, Maryland. His focus is on protecting the assets his clients have accumulated and minimizing federal and state tax liability. These clients range from homeowners whose property has appreciated to people with significant investment, retirement, business, and real estate holdings. For more on charlitable deductions, contact Frank at (301) 657-0175 or firstname.lastname@example.org.
This article originally appeared in the October 2015 edition of Estate Planning, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets.