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When the IRS Calls . . .

What DO you do when the IRS calls?

The Taxpayer’s Lifeserver is a step-by-step guide to what you can do yourself, and when you need a professional.

Charitable Gifts of Real Estate

A Business Owner’s Trash Can Be Treasure to a Community

From Trashy Liability To Paradise, With Tax Benefits to Boot: Making Charitable Contribution in Lieu of Abandoning Unwanted Real Estate

Note: the examples provided in this article for the use of land by not-for-profit organizations are included for the purpose of showing how real estate can be used in ways that improve cities and rural areas. The examples do not necessarily involve land that would have been abandoned had it not been donated to a not-for-profit organization.

I’ll admit it’s not an every-day event, but I do have clients consult me from time to time about how to get rid of a tract of land they don’t want and can’t sell. Often such places, such as vacant, or almost-vacant lots in inner-city settings, are lawsuits waiting to happen. Because of liability issues, simply walking away is  not an option.

Sometimes, the unwilling owner of land that has become more expensive to maintain than it’s worth can be matched with existing charitable organizations  that can use the property or can be donated to local governments. See, for example, Documenting the Life History of a Vacant Lot, Reporter, State University of New York at Buffalo, December 18, 2003 and Abby’s House.

Where there is no existing organization interested in taking over the property, contribution of the building to a private foundation may provide a measure of insulation from liability, as well as a charitable deduction. In the ideal case, the foundation will be structured so as to offer significant benefit to some segment of the public. See, for example, the Manitou Foundation.

 Federal Tax Issues – Charitable Contribution Deduction

When property is transferred as a charitable contribution, the amount of the deduction generally is measured by the fair market value of the property. IRS will generally argue for a lower fair market value, while the donor will want to set the value as high as possible.

Case law:

In John W. Pearsall, Tax Court Memo 1977 – 230, the taxpayer contributed low-income rental units to a private foundation and took a charitable deduction of $60,516. IRS insisted that the buildings were worthless. The Tax Court held for a value of $25,000

On the other hand, when investment or business property is abandoned, the measure of the loss is the adjusted basis of the property. Consequently, if basis exceeds value, the abandonment route will produce a larger deduction than a charitable contribution.

For more on the Tax Court’s role in valuation, see An Empirical Inquiry into the Role of the Tax Court in the Valuation of Property for Charitable Contribution Purposes, Ted D. Englebrecht, Robert W. Jamison, Jr.


Abstract

Several commentators have examined the valuation process for property and closely held stock in estate, gift, and income tax cases in the federal courts. Examination of court determined values led many to conclude that the courts do not actually value property or closely held stock but rather serve as compromisers between the two opposing parties in litigation. The implications for tax counsel and public policy are extremely significant if this charge is supported by fact. The major purpose of this study is to demonstrate statistically that the Tax Court does not act in a manner consistent with a “compromiser model” in federal income tax valuations of property for charitable contribution purposes. A simple regression model is used to test the relationship between the Tax Court determined values and a compromise value-the arithmetic mean of tax-payer and IRS value estimates. In addition, chi-square analysis indicates that the Tax Court did not value one type of property more strictly or generously than other types.

Accounting Review, Vol. 54, No. 3 (Jul., 1979) , pp. 554-562