S corporation denied charitable deduction for bargain land sale to town

The Tax Court held that owners of a family mining company could not claim charitable contribution deductions for a purported bargain sale of land to a town in New York state because the company did not supply a contemporaneous written acknowledgment showing the value of a rezoning that the company received in return.

Facts: Braen Commercial Holdings Corp. (Holdings), an S corporation, was founded in 1904 and, at the time of the proceedings, was owned by seven members of the Braen family. Holdings quarried stone and operated plants producing paving and building stone, concrete, and asphalt, principally in New Jersey. Holdings entered an option to purchase land near the unincorporated town of Ramapo, N.Y., in 1996. At that time, the land was zoned “planned industrial.”

Holdings then began securing permits and approvals to operate a granite quarry on the site, including petitioning Ramapo to amend its zoning law to allow quarrying. Despite residents’ protests and other difficulties in obtaining approvals, including a contentious state application, Holdings purchased the land in 1998 for $3.5 million. (The state’s objections included the possible effect on the site’s timber rattlesnakes, a threatened species.)

Troubles obtaining the approvals compounded in 2005, when Ramapo rezoned the property less amenably to Holdings’ plans, to a low-density rural residential use. The following year, Holdings sued the town in opposition to the zoning change. The town and Holdings settled the suit in 2010: Ramapo would buy 425 acres of the tract for $5.25 million and allow the remaining 80 acres to retain its industrial zoning. A state court approved the settlement agreement in April 2010, and the land was conveyed to the town later that year. Holdings sent the town a blank Form 8283, Noncash Charitable Contributions, in anticipation of claiming a tax deduction.

Holdings’ attorney and Ramapo’s town attorney together prepared an acknowledgment letter that included the land purchase price, that “the town did not provide to the Seller any goods or services, in whole or in part, as consideration for the sale,” and that the lawsuit was settled incident to the sale.

The IRS, however, raised questions about the transaction, both in correspondence for a prefiling agreement for Holdings’ 2010 tax return and then in audits of its return and individual returns of its shareholders. On its return, Holdings claimed a charitable contribution deduction of $5,222,000. In an attached explanation, Holdings stated that, based on a land and mineral valuation totaling more than $17 million, the deduction could have been double the amount claimed, but the company reduced it to avoid any dispute with the IRS. Holdings included appraisals and three copies of Form 8283 with its return. A final Form 8283 included an appraised fair market value (FMV) of the property of $10,472,000. The shareholders claimed proportionate shares of the $5,222,000 deduction.

After the audit, the IRS issued Holdings a notice of proposed adjustment and to its shareholders notices of deficiency disallowing the charitable contribution deduction, among other items. The Service also proposed accuracy-related penalties against Holdings relating to a substantial valuation misstatement, negligence, or a substantial understatement of tax. Members of the Braen family (the Braens) petitioned the Tax Court regarding the charitable contribution deduction and penalties, and their cases were consolidated.

Issues: The Tax Court was required to answer two questions to determine if the Braens were entitled to a charitable contribution deduction in connection with the claimed bargain sale: (1) whether the FMV of the property donated exceeded the value of any benefits received and (2) whether the recipient of the property provided a contemporaneous written acknowledgment substantiating the contribution.

The Tax Court explained that in general, a taxpayer is not allowed a deduction for a property donation if the taxpayer receives a benefit (the FMV of any goods or services) in return for the property donated, unless the value of that property exceeds the benefit received by the taxpayer and that excess value was intended by the taxpayer to be a gift. Thus, the court looked at whether the Braens received a benefit and if so, its value.

The court first found that the zoning change on the land retained by the Braens was a benefit they received. The court cited Triumph, T.C. Memo. 2018-65, for the proposition that “a transfer of real property in exchange for development approvals … is a benefit and precludes a finding of the requisite donative intent.” Even more on point, in Ackerman Buick, Inc., T.C. Memo. 1973-224, the Tax Court found that “a desired zoning variance from a city which would or might not be available without making a dedication of land to the city has been held to be a direct economic benefit which would preclude a charitable deduction.”

The Braens attempted to avoid the conclusion that they had received a benefit by arguing that Holdings was entitled to the zoning change as a matter of law, which their zoning litigation, if it had not been settled, would have shown. In support of this argument, the Braens relied on the opinion of the attorney who represented them in the zoning litigation and their interpretation of New York state law. However, the Tax Court rebuffed this argument, finding that the attorney could well be considered an advocate and not an impartial expert. Moreover, the record amply demonstrated that the rezoning, as part of the settlement that included the sale, was a benefit to Holdings in its development plans.

Having found that the zoning change was a benefit, the Tax Court further found that the taxpayers were required to take it into account when determining the amount of a charitable contribution deduction. The taxpayers had not assigned any value to the zoning change and therefore had failed to take it into account in calculating their charitable deduction. Accordingly, the court held the taxpayers were not entitled to a charitable deduction.

In addition, the Tax Court found that even if it overlooked the failure to value the zoning change, the deduction would still not be allowed because of a fatal defect in the Braens’ claimed contemporaneous written acknowledgment for the contribution of the property. Sec. 170(f) (8)(A) requires contributions of $250 or more to be substantiated by a contemporaneous written acknowledgment with specified content, including the amount of cash and a description of any property other than cash contributed, whether the donee provided any goods or services in consideration for the donated cash and/or property, and a description and good-faith estimate of the value of that consideration. “Contemporaneous” for this purpose means before the earlier of the return’s date of filing for the tax year in which the contribution was made or its due date, including extensions.

Failure to supply a valid contemporaneous written acknowledgment prevents the taxpayer from claiming any deduction for the contribution, the Tax Court stated (citing cases including Izen, 148 T.C. 71 (2017), aff’d, 38 F.4th 459 (5th Cir. 2022)).

The Braens claimed that the acknowledgment letter provided by the Ramapo town attorney satisfied the contemporaneous written acknowledgment requirement. To satisfy the requirement, the Tax Court found that the letter would have had to identify the zoning change they received as consideration and provide a good-faith valuation of it. The court stated that “[t]he letter plainly did not do so, instead stating that Holdings did not receive ‘any goods or services, in whole or in part, as consideration’ other than the $5,250,000.”

The Braens countered this point by arguing that letter’s reference to the lawsuit’s settlement provided the required information. But as the court found (citing Durden, T.C. Memo. 2021-14), the IRS is not required to look beyond a written acknowledgment that on its face fails to provide the required information. Hence, the court stated, the letter lacked the required information to serve as a valid contemporaneous written acknowledgment.

Holding: For these reasons, the Tax Court held that Holdings failed to meet the substantiation requirements of Sec. 170(f)(8) and the Braens were not entitled to any charitable contribution deductions.

In addition, after analyzing submitted appraisals, the court upheld penalties for a substantial valuation misstatement under Sec. 6662(e)(1)(A), since the FMV of the property stated on Holdings’ 2010 tax return of $10,472,000 was more than 150% of the value the court calculated based on its analysis of submitted appraisals.

■ Braen, T.C. Memo. 2023-85

To comment on this column, contact Paul Bonner, the JofA’s tax editor