Charitable recognitions for tax purposes go wrong

The rules for justifying charitable deductions are very strict with added layers when a donor advised fund or gifts of property are involved. You can get a pretty good idea of ​​how bad things can get from a recent opinion by Judge Jane Boyle of the United States District Court for the Northern District of Texas – Kevin M. Keefer and Patricia Keefer c . United States.

A complicated operation

I could imagine this transaction being used in an exam for a Masters in Taxation. Kevin had started his career in public accounting, but was working in hotel scales. Patricia had also held a CPA license for all that is worth. Kevin indirectly held a limited partnership interest in Burbank HHG Hotel LP. Burbank owned a Marriot Courtyard hotel near Burbank Airport in Los Angeles. Apple Hospital REIT expressed interest in acquiring the hotel in 2015.

Prior to the completion of any sale, Mr. Keefer converted a portion of his indirect ownership interest to a 4% direct ownership interest. He then donated that interest to the Utah-based Pi Foundation, which created a donor-advised fund with the donation. An appraiser valued the interest at $1,257,000 largely based on the pending sale, which eventually materialized. The Keefers treated this as a deduction for charitable contribution.

Because the interest was a partnership interest with associated liabilities greater than the base, some gain was recognized. There is a special rule that allocates a portion of the contribution base, causing the gain recognized to be greater than it would have been if the interest in the partnership had been sold for one dollar. If you don’t understand this, don’t worry as long as you don’t have a lot of partnership interests or are studying for your MST.

The audit report

The 2015 Keefer Statement has been audited. The agent disallowed the charitable contribution of $1,257,000, resulting in a deficit of $423,304. It seems to me that there should have been an adjustment of the gain, since the deduction for charity being denied, there should be no basic adjustment. Even though the adjustment is mentioned in the audit report, the agent does nothing about it. Attorney Kenneth Horwitz wrote a letter to the agent pointing out his inability to undo the base adjustment and asking him to adjust his report, but apparently that went nowhere.

The report rejects the charitable contribution on two grounds. He notes that Form 8283 signed by both appraiser and host institution with appraisal attached as required for properties valued over $500,000. There was a catch though:

The reviewer determined that the appraisal was unqualified because it did not include the employer identification number (EIN) or social security number of the qualified appraiser or person employing or engages the qualified appraiser. An assessment that does not contain each of the eleven provisions described in Treas. Reg. § 1.170A-13{c)(3)(ii)(E) is not a qualified assessment.

Then there is the issue of the acknowledgment required for contributions over $250. In the case of a donor-advised fund, the acknowledgment must include a statement that the funds are under the exclusive legal control of the sponsoring organization.

I’m more of a fanatic than a lot of people about getting recognition for charitable contributions, but I have to admit there’s a good chance these two traps would have gotten by me if I had considered the return. Thus, I tend to think that asserting accuracy was a bit of a stretch, but the accuracy penalty is pretty routine.


Rather than go to tax court, the Keefers decided to pay the tax and seek a refund followed by a lawsuit in district court. This threw the IRS computers on a loop. The refund request was dismissed as late because the law had run on the original statement. The notice itself indicates that the deadline is the later of the following dates: among others “2 years after paying the tax”, but somehow they didn’t register with the programmers. What is really strange is that the IRS did not concede this point in litigation and it had to be dealt with by Judge Boyle, who ruled that the claim was timely. From there, things get worse for the Keefers.

First, I thought getting at least a refund due to the core issue was a sure thing. However, the government has come up with something. They argued that the donation was an anticipated surrender of income. Judge Boyle notes that the sale was not a sure thing at the time of the donation, which favors the taxpayers. There is, however, another problem. The 4% partnership interest that was cut to make the donation did not include a share of the reserve funds. This meant that the Keefers had not donated their entire interest. This would create an additional tax that would eliminate the base adjustment.

On denying the deduction, Judge Boyle ruled that Pi’s failure to acknowledge that he had legal control was sufficient to deny the deduction. It was nice that there was a separate package in which this was explained. As this was sufficient to torpedo the inference, Boyle J. did not address the argument regarding the assessor’s identification number. So we can keep losing sleep over that one too.


All of this illustrates just how meticulous you need to be with charitable contributions in general, but in particular those of donor-advised goods and funds. I have to think that the people managing the funds might want to check their attestations. I hope that this decision will be appealed, but I have not received any answers to my questions on this subject.

Tax Court blogger Lew Taishoff consistently agrees with the government on the issue of income attribution. Being a partnership guy, I’m not so sure, but I tend to defer to the more knowledgeable. He agrees that the IRS speed argument is frivolous. On why they went to the district court rather than his preferred venue, he wrote to me:

The strategic consideration is likely that the USDCNDTX is allegedly taxpayer-friendly and clueless about tax laws. Your classmate Judge Albert G (“Scholar Al”) Lauber would have hung up Keefer to dry.

Other coverage

Theresa Schiep has Texas couple denied $1.3 million deduction for donating interest on Law360 Tax Authority.

The Preachers’ Aid and Society and Benefit Fund discusses the case at some length in their section Washington News – Charitable deduction for partnership donation denied. It ends with some practical advice.

Most donors donate money or public stock to DAF sponsoring organizations. The check is immediately cashed and the stock is usually quickly sold and converted to cash. Therefore, the organization’s actions demonstrate sole control and comply with section 170(f)(18)(B). However, this decision of the district court may be followed by the tax court or other judges of the district court. For this reason, it is important that donor receipts for DAF donations be amended to include this provision:

“No goods or services were provided in exchange for your generous financial donation and the nonprofit organization has sole legal control over the contributed assets.”

For convenience, it would be appropriate to use the extended language for all DAF gift receipts. For simplicity, many organizations may choose to use this language for all receipts.

Although the risk primarily relates to DAF donations of partnership interests, business interests, or minority interests in real estate, it is important that all organizations sponsoring DAFs use the expanded language in future contemporary written acknowledgments. . This language is designed to comply with the requirements of Section 170(f)(8) and Section 170(f)(18).

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