The Tax Court, in a case before Judge Halpern, held that a partnership was not entitled to the $ 33 million charitable contribution deduction claimed for the donation of a remainder interest in property to the University of Michigan, and held that the deduction the partnership claimed resulted in a gross valuation misstatement.

The Case Summary is as follows:

PS, a partnership, paid $2.95 million in March 2002 to acquire a remainder interest in property. The agreement that created the remainder interest provided covenants intended to preserve the value of the subject property but also limited the remedy available to the holder of the remainder interest for a breach of those covenants to immediate possession of the property; in no event would the holder of the corresponding term interest be liable for damages to the holder of the remainder interest. On Aug. 27, 2003, PS assigned the remainder interest to U, a university. On its 2003 Form 1065, U.S. Return of Partnership Income, PS claimed a deduction under I.R.C. sec. 170(a)(1) of $33,019,000. The Form 8283, Noncash Charitable Contributions, that PS attached to its return provides the date and manner of its acquisition of the contributed remainder interest but left blank the space for the “Donor’s cost or other adjusted basis”.


Held: PS’ omission from its Form 8283 of its cost or other adjusted basis in the contributed remainder interest violated the substantiation requirement of sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs.


Held, further, because PS’ disclosure of its cost or other basis in the contributed property would have alerted R to a potential overvaluation of that property, omission of that information prevented the Form 8283 from achieving its intended purpose; the omission thus cannot be excused on the grounds of substantial compliance.


Held, further, PS’ failure to comply, either strictly or substantially, with the requirements of sec. 1.170A-13(c)(2), Income Tax Regs., requires denial in full of its claimed charitable contribution deduction.


Held, further, because of the limitation on remedies available to the holder of the remainder interest for breaches of protective covenants, the agreement that created that interest did not provide adequate protection to its holder, for purposes of sec. 1.7520- 3(b)(2)(iii), Income Tax Regs.; the standard actuarial factors provided under I.R.C. sec. 7520 thus do not apply in valuing the remainder interest; instead, the value of that interest is its “actual fair market value”, determined without regard to I.R.C. sec. 7520, on the basis of all of the facts and circumstances. Sec. 1.7520-3(b)(1)(iii), Income Tax Regs.


Held, further, on the basis of all of the facts and circumstances, the remainder interest that PS assigned to U on Aug. 27, 2003, had a fair market value on that date of $3,462,886.

Held, further, because the $33,019,000 value that PS assigned to the remainder interest it transferred to U is more than 400% of that interest’s actual fair market value, PS’ claimed charitable contribution deduction resulted in a gross valuation misstatement. I.R.C. sec. 6662(e)(1)(A), (h)(2).

Held, further, any underpayment resulting from the disallowance of PS’ claimed charitable contribution deduction would be “attributable to” a gross valuation misstatement to the extent the underpayment relates to the disallowance of that portion of the deduction that exceeds $3,462,886. AHG Invs., LLC v. Commissioner, 140 T.C. 73 (2013). 885 Inv. Co. v. Commissioner, 95 T.C. 156 (1990), overruled.


Held, further, PS did not make a good-faith investigation of the value of the property subject to the remainder interest and thus did not have reasonable cause for, or act in good faith with respect to, its claim of a charitable contribution deduction that resulted in a gross valuation misstatement. I.R.C. sec. 6662(c)(2)(B).

See full opinion in RERI Holdings I LLC v. Commissioner, 149 T.C. No. 1 by clicking here.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.