Not unlike the American Broadcasting Company’s Wide World of Sports, our blog attempts to provide you the reader with blogs covering a wide variety of topics directly and indirectly related to tax-exempt bonds. In the category of topics indirectly related to tax-exempt bonds, this blog will address a recent Tax Court Memorandum (Fakiris, George v. Commissioner; No. 18292-12; T.C. Memo 2017-126) in which the Tax Court upheld an IRS notice of deficiency based on a disallowed charitable contribution deduction. The Memorandum isn’t the topic of this week’s blog because it is rare for a charitable contribution deduction to be disallowed in full or in part; rather, the Tax Court’s decision is noteworthy because of the incredible effort that the Tax Court went through to reach its conclusion!

Facts

Under the facts of the case, an LLC of which the petitioner was a member purchased the St. George Theatre in Staten Island, New York (the “Theater”) in 2001. The LLC intended to raze the Theater and erect a highrise structure in its place. The LLC faced significant community opposition and decided to donate the Theater to a tax-exempt organization. Here is where the story gets interesting. A community activist organized a nonprofit corporation (the “Corporation”) and submitted an application to the IRS to be recognized as an organization exempt from federal income taxes. The purported exempt purpose of the corporation was to preserve, restore, and use the Theater for the public good.

Although the petitioner wanted to contribute the Theater to the Corporation, the Corporation had not yet received a determination letter from the IRS recognizing its status as a tax-exempt organization eligible to receive deductible charitable contributions.[1] Notwithstanding the fact that contributions to organizations with a pending exemption applications are generally eligible for the charitable deduction if the organization receives a determination letter, the LLC instead sold the Theater (in what purported to be a bargain sale) to an organization formally recognized by the IRS as exempt from federal income taxes and eligible to receive tax-deductible contributions (the “Donee”). However, the contribution was subject to a number of limitations. Specifically, the Donee could not transfer the premises for the first five years unless the transfer was to the Corporation. Furthermore, during the same period of time, the documents arguably provided the petitioner with the ability to retake the Theater and transfer it to the Corporation. (In fact, Donee transferred the Theater to the Corporation the same day that it purchased the Theater from the LLC in what purported to be a bargain sale.)

Disallowed Charitable Contribution Deduction

The Tax Court found that the petitioner was not eligible for a charitable deduction with respect to the bargain sale of the Theater. In so doing, the Tax Court found that the LLC did not “completely relinquish ‘dominion and control’ over the contributed property” and that, therefore, the gift component of the bargain sale was conditional and not eligible for a charitable deduction.

Interestingly, had the petitioner contributed the Theater to the Corporation in the first place, a charitable deduction would likely have been permissible (assuming the petitioner had the requisite charitable intent) but not in the amount claimed.[2] Therefore, it’s curious why the Tax Court fought so hard (the memorandum is quite lengthy) to disallow the deduction in the first place since the petitioner was likely entitled to a charitable deduction when it made the valid contribution to the Corporation! Potentially, there were deeper issues at play that the Tax Court did not want to address.

What does this crappy fascinating blog have to do with tax-exempt bonds?

What relationship does the Fakiris case have to tax-exempt bonds you may ask? It’s possible that the Theater renovations could have been or will be financed with proceeds of tax-exempt qualified 501(c)(3) bonds! <mic drop>

[1] Other elements of the case, such as accuracy related penalties and the apportionment of the purchase price (the petitioner received a modest payment and claimed a charitable deduction for the difference between the payment received and the Theater’s fair market value) are beyond the scope of this memorandum.

[2] The IRS issued the Corporation’s determination letter three months after the petitioner contributed the Theater to the Donee.