Last month, the Tax Court issued another decision disallowing in full a taxpayer's charitable deduction for the contribution of real property. This case provides an important reminder to be wary of potential pitfalls when donating real property, including negotiations with government or other public officials that could be characterized as a quid pro quo arrangement.
In Triumph Mixed Use Investments III, LLC v. Comm'r, T.C. Memo. 2018-65, [Here] the taxpayer was a developer of a large planned unit development in Lehi, Utah. The developer was producing new development plans to utilize additional development credits. As part of this process, the developer was required to get the city council's approval of its new development plans.
Before submitting development plans to the city council, the taxpayer asked the city's Development Review Committee and the Planning Commission to review the plans. The Development Review Committee indicated that the city of Lehi wanted all of the open space to be donated to the city concurrent with the approval and recording of the new plans. The Planning Commission agreed to approve and recommend that the city council approve the development plans if the open space areas were dedicated to the city, and the city council followed suit.
The Tax Court framed the question as whether the taxpayer “actually made a charitable contribution or whether the transfer was part of a quid pro quo arrangement as the Commissioner alleges.” The court also cites to U.S. v. American Bar Endowment, 477 U.S. 105, 116 (1986) (cited by Judge Morrison in Wendell Falls [Here]), which holds that a taxpayer is not entitled to a charitable deduction when the taxpayer receives a substantial benefit that has a value equal to or in excess of the value of what was contributed. See our prior blog discussing Wendell Falls, and the application of American Bar Endowment to find donor receipt of a substantial benefit, [Here].
The Tax Court concluded that the donation of the open space real property was part of a quid pro quo arrangement, finding that the taxpayer donated the open space in exchange for the city council's approval of the development plans. The court further found that the taxpayer did not prove that the contributed open space was worth more than the substantial benefit it received (i.e., city council approval). Accordingly, the Tax Court disallowed the taxpayer's $11,040,000 charitable deduction in total and imposed an accuracy related-penalty of 20 percent.
Triumph is not a conservation easement case. However, it should caution taxpayers making charitable contributions, such as conservation easements, to be wary of representations made when negotiating with government officials. Wendell Falls, McGrady, and now Triumph show that the IRS and the courts are very sensitive to quid pro quo arrangements, and that they are willing to apply quid pro quo and the substantial benefit analysis in American Bar Endowment to attack charitable gifts of property, be they conservation easements or not.