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Faulty Framework?

The question posed above is not intended to be rhetorical. Rather, it is one that the owners of a closely held business should consider thoroughly before transferring or committing any business assets to a charitable organization.

Unfortunately, many owners fail to treat their business as a separate person. They effectively view the business as an extension of themselves – what the IRS and other creditors may describe as an owner’s alter ego.

Thus, the owners of a closely held business will sometimes ask whether they can reduce their overall income tax bill – i.e., their personal tax liability plus the tax imposed on their business – by directing their business to make charitable contributions, sometimes on their behalf.

The thinking that underlies this question is faulty because it conflates planning for charitable giving, which is usually a personal and often an emotional decision, with planning for business expenditures, which should only be incurred in amounts that are reasonable for the accomplishment of a specific and legitimate business purpose.[i]

The Deduction

Of course, a charitable contribution made[ii] by any taxpayer, including a business, during a taxable year is generally allowable as a deduction in computing the taxpayer’s taxable income for the year.[iii]  There is a tax benefit.

In general, if a business makes a charitable contribution of property other than money, the amount of the contribution is the fair market value[iv] of the property at the time of the contribution, subject to various statutorily prescribed reductions.[v]  

Then there is the “added” benefit of generating a fair market value deduction[vi] without having to recognize the gain inherent in the property contributed to the charity.

That said, the fact remains that the business has given up something of value, including the potential for future appreciation, in exchange for a current deduction.[vii] Stated differently, the deduction reduces the cost of making the contribution but does not eliminate it. From an economic perspective, the business would probably have been better off selling the property and then retaining the after-tax proceeds for use in the business.  

In light of this economic outcome, should a business entity be engaged in charitable giving to any significant degree when little-to-no business benefit may reasonably be expected to result from the contribution, other than an incidental one that may not be easily quantified?[viii]  

Business vs Individual Giving

The view that corporations are business organizations operated for profit, and that eleemosynary activities, including charitable giving, are best conducted by private individuals and not-for-profit organizations, is reflected in the tax incentives for charitable giving that are afforded to individuals versus corporations.[ix]

For example, for a taxable year beginning before January 1, 2026, an individual may claim an income tax deduction for a cash contribution made to a domestic public charity[x] up to an amount equal to 60 percent of the individual’s contribution base;[xi] for cash transfers made after 2025, the percentage limit becomes 50 percent.

A corporation’s total charitable contribution deduction for a taxable year, on the other hand, may not exceed 10 percent of the corporation’s taxable income for such year.[xii]

Although the deduction for both individuals and corporations is contingent upon the recipient entity being organized in the U.S., a corporation’s contribution to a charitable trust or to a private foundation will be deductible only if it is to be used within the U.S. or any of its possessions.[xiii] A similar gift by an individual to a trust or foundation is not limited in this way.[xiv]

A corporation may be tempted to claim a business expense deduction for that portion of its contribution to a charity that exceeds the above-described limits. Unfortunately for the corporation, Congress foresaw this possibility; thus, the Code provides that no such deduction will be allowed for any contribution which would be allowable as a charitable deduction if not for the percentage limitations.[xv]

In other words, the corporation must determine whether the transfer will be treated as an expense or as a “gift;” if the latter, the excess portion of the gift may be carried forward for five years.

Business Charity

A for-profit business’s reason for being is to make money for its owners – “persons” who are, or who are ultimately owned by, individuals. That’s why the business was organized – for any lawful business purpose[xvi] – and that’s why its owners have invested, and put at risk, their time, intellectual capital, and money[xvii] in the business – in exchange for the opportunity to realize a worthwhile return on their investment.

Over time, government and society, generally, have pressured businesses to increase their commitment to various “constituents.”[xviii] More recently, businesses have been taken to task for not demonstrating greater commitments to their “communities” at large.

In general, many businesses have responded by adapting old policies to these changing demands, and by adopting some new ones, with varying degrees of “success.” Some have been more vocal than others about touting these activities and calling attention to their status as good corporate citizens.[xix] In every case, a business’s responses involve an expenditure of funds – in other words, there is an opportunity cost.

At the same time, a business’s principal profit-making purpose has not changed, notwithstanding that many would like to see the business transformed into an active agent of social change. The best way to reconcile these goals – and indeed the most effective way of achieving lasting consequences – is to demonstrate how such change will ultimately lead to greater profit for the business, its owners, and its employees, assuming that is possible. In this way, the business may be enlisted as a willing and active participant to effectuate the desired change.

Without this level of self-interested involvement, the business and its owners will remain merely taxpayers from which to collect taxes.

That said, let’s return to charitable giving.

Business Giving

Let’s assume a closely held business with at least two owners; whether it is family-owned or not is not necessarily relevant. How do the owners decide upon which charitable organizations to support and from which to withhold support? What factors do they consider?

If the charity happens to be a client, or if the charity is important to the owners of a client or vendor, it may be wise for the business, from a business perspective, to foster and maintain that relationship, assuming it makes economic sense, by making a contribution that is commensurate to or reflective of the importance of the relationship.

Alternatively, the business may decide to support a charity whose mission aligns with the business’s products or line of business. Thus, for example, a sneaker and sportswear distributor may contribute funds to a local charity that encourages physical fitness. In this case, the business is promoting its business through name or brand recognition.

Outside of the above-described scenarios and others similar to them, the decision becomes more difficult to justify from a business perspective when there is more than one business owner. For instance, I was once involved with a situation in which a minority shareholder was upset that the majority shareholder had used corporate funds – without any ostensible corporate purpose or economic benefit – to support the latter’s favorite charities rather than making larger distributions.[xx]

Either way, however, the question must be asked: Is the contribution being made in order to secure some economic benefit for the business?[xxi] Does the business expect to receive a more-than-incidental benefit in exchange for the contribution?[xxii] If so, is it really a contribution, or would it be more accurately characterized as a marketing expense, for example?[xxiii]

How much of an economic benefit must the business reasonably expect in order for the contribution to qualify as a business expense, as opposed to a charitable gift?[xxiv] The answer may have tax, and therefore economic, consequences.

The Code allows a taxpayer to claim a deduction for all the ordinary and necessary expenses paid or incurred by the taxpayer in carrying on a trade or business.[xxv]

On the other hand, it has long been the case that, in order for a transfer to be treated as a gift for income tax purposes, it must be motivated by a “detached and disinterested generosity.”[xxvi] For example, in the case of a bargain (below market) sale of property by a taxpayer to a charity – as we will see below – the taxpayer must demonstrate that they intend to make a gift of the bargain element in order to claim a charitable deduction for the bargain element – the transaction cannot merely be a bad deal for the taxpayer.[xxvii]

Does the application of such a standard to a business make any sense? As a matter of corporate law, for example, is there a reasonable argument to be made that such a transfer constitutes an “ultra vires” act per se?

Assuming the business expects to receive some benefit – call it goodwill or name/brand recognition – is the benefit so “incidental” or so difficult to quantify that the charitable deduction should be preserved as arising from a gift?[xxviii]

Alternatively, what if the contribution is being made at the request or behest of a particular owner (as in the situation described above)? In the absence of some demonstrable business purpose, should the contribution be treated as a distribution to the owner – a nondeductible constructive dividend or other distribution in respect of the owner’s equity interest in the business?[xxix] What if there is no resulting economic benefit to the owner or to some related person.[xxx]

The proper characterization of a business transfer to a charity may have some meaningful tax consequences, as the U.S. Tax Court determined in the case described below.[xxxi]

Bargain Sale?

Corp was a family-owned S corporation engaged in the mining business.

Corp acquired a large plot of land (Property) located in Town with an eye to developing it into a quarry. At the time of the purchase, part of Property was zoned as “planned industrial” while the remainder was zoned as rural residential. Quarrying was prohibited.

Corp understood that to establish a quarry on the Property, Town’s zoning law had to be amended to remove quarrying as a prohibited use. Another important prerequisite was a State mining permit, not to mention a host of other permits and approvals.

Corp began the process to obtain the necessary approvals by petitioning Town to amend its zoning law to permit quarrying.

Corp also submitted a mining permit application, environmental assessment form, and proposed quarry plan to State’s department of environmental conservation (DEC). DEC responded by requesting an environmental impact statement. DEC later convened a public “scoping” hearing at which public officials revealed that five villages near the proposed quarry site had passed resolutions against it.

Over the next few years, Corp made little headway. At one point, it requested that the DEC conduct a “conceptual review of the substantive consistency” of the project with current State environmental policy and standards.” DEC declined to conduct this review, and Corp brought a lawsuit to compel it to do so. The court ultimately sided with DEC.

While pursuing the mining permit and zoning changes, Corp entertained the prospect of selling Property. In fact, Corp entered into an option agreement with Holder to sell 40 percent of Property for $4 million. Holder never exercised its option.

Corp subsequently discussed the possibility of a bargain sale (and the accompanying tax benefits) with Trust, a tax-exempt organization. During this discussion, Taxpayer made clear that a certain section of Property was not for sale because “it was the best piece for [Corp] to keep” for future mining.

In furtherance of these discussions, Corp commissioned an appraisal of Property, with a highest and best use of “seek[ing] approval of the necessary permits for use as a quarry for portions of the property with development of remainder portions.” The appraisal determined a value of $17.5 million by adding the value of the underlying land to the value of the mineral deposits, as instructed by Corp’s counsel. As to the value of the land, the appraisal concluded that Property was worth $10.22 million. For the mineral value, the appraisal (1) relied on a mineral appraisal by Geologist, who estimated that the deposits were worth $14.5 million but (2) included a 50 percent discount given the uncertainty of governmental approvals.

Corp later offered to sell the property to Trust for $20 million, based upon the appraisal and approximately $2.5 million of claimed carrying costs. Trust did not accept Corp’s offer.

Shortly thereafter, Town passed a new zoning law that changed Property’s zoning from planned industrial to low-density rural residential.

Corp filed a lawsuit opposing the zoning change.

The parties thereafter exchanged settlement terms as part of court-ordered mediation. Corp’s initial bid was for Town to purchase Property for $12 million as a “bargain sale,” grant Corp a right to grade and remove material, and guarantee an additional payment of $5.5 million if Corp were not able to remove sufficient material within a fixed period. Town countered with a price of $5 million, which was “somewhat in excess of recent purchases by the town of undeveloped property elsewhere” in the area.

The parties ultimately homed in on a deal whereby Town would buy most of Property for $5.25 million, with the zoning on the remaining average[xxxii] reverting to its former industrial designation. Corp emphasized that “certain aspects of the proposed agreement must remain in order to make the deal come to a concise and timely consummation”; i.e., the rezoning of the portion of Property that Corp retained.

Town passed resolutions authorizing the purchase of the land, describing the purchase “as part of a court ordered settlement of an action . . . challenging the rezoning of” Property.

As talks progressed, the deal grew to include State, which agreed to supply partial funding for the acquisition in exchange for some of the land. State’s appraisal of Property determined a highest and best use of residential development, and a fair market value of approximately $3 million. 

Corp and Town ultimately signed a land purchase agreement, with Town agreeing to pay $5.25 million for most of Property. The agreement stated that Town was “aware that the transfer of the property [was] being undertaken by [Corp] as a [b]argain [s]ale.”

The agreement provided that “th[e zoning] lawsuit is being settled as part of the conveyance of the property from [Corp] to the [Town].” The agreement also specified that it was “contingent on the settlement of” the zoning litigation “and the entry by the Court of an Order which shall include the subdivision of the property in substantial conformity with the proposed order appended hereto.”

The proposed order provided that (1) Town would subdivide the property into six lots, (2) Corp would then sell to Town five of the lots for $5.25 million, and (3) Town, in turn, would sell three of the lots to State for $2.625 million.[xxxiii] The draft established that Corp would retain the remaining lot, and its zoning designation would “immediately revert to its prior designation of [planned industrial].”

The land purchase agreement also addressed the agreement between Town and State for the sale of a portion of Property that Town would receive. In a section entitled, “Subject to [State’s] Contract and Performance,” the agreement provided that Town’s “obligation hereunder is expressly conditioned upon the execution and all necessary approvals of the contract of sale between” Town and State, and stated that the agreement would be “null and void” if such agreement was not executed.

The court approved the parties’ settlement of the zoning litigation, and entered an order identical to the proposed order attached to the purchase agreement.

The Tax Issue

Before the closing of the sale, Corp’s accountant advised that Town would need to sign IRS Form 8283, Noncash Charitable Contributions, so that Corp might claim a charitable contribution deduction. Town’s city manager signed the Form 8283 at closing, immediately following which Town completed the sale of three lots to State for $2.625 million.[xxxiv]

To prepare its tax return for the year of the sale, Corp retained Accounting Firm and Appraiser to prepare qualified appraisals as would be required to claim a charitable contribution deduction.


Accounting Firm submitted to the IRS a request for a prefiling agreement (PFA),[xxxv] listing as “questions for determination” whether (1) Corp had the requisite donative intent to claim a charitable contribution deduction and (2) the transferred property’s value was $26.245 million. The IRS accepted the PFA request, requiring Corp to submit documentation related to Property and the sale, including a contemporaneous written acknowledgment of the sale from Town.

In the course of the PFA process, Corp realized that it had neither sought nor obtained a contemporaneous written acknowledgment from Town. Accordingly, Corp sent a draft statement to Town’s attorney, asking him to “provide[] an acknowledgment that [Corp] sold the lots to the Town for the stated price and that no other goods or services was [sic] provided for the sale.”

Town’s attorney revised the statement to make clear that “it wasn’t just a purchase of property, it was a purchase of property as part of the negotiated settlement of the lawsuit”: 

This letter will confirm that . . . Town . . . purchased from [Corp] for the sum of $5.25 million . . . pursuant to contract of sale . . ., certain vacant lands . . .

[Town] did not provide to [Corp] any goods or services, in whole or in part, as consideration for the sale. A lawsuit bearing [index number] was settled incident to the sale and was approved by order of [the Court].

After receiving Corp’s supporting documentation, the IRS raised questions about the rezoning and the mineral value, and whether the appraisals were “qualified” under the applicable regulation.[xxxvi] Several months later, the IRS “withdr[ew] from further consideration of the issues described in [Corp’s] request for [a PFA].”

Tax Return

Corp timely filed its tax return for the year of the sale on Form 1120S, U.S. Income Tax Return for an S Corporation, claiming a charitable contribution deduction of $5.222 million arising out of the sale of Property to Town.

Corp attached a “charitable contribution deduction explanation,” which asserted a fair market value of $17.472 million based on a mineral value of $14.554 million for a portion of Property and a value of approximately $2.92 million for land on which no mining would be performed (with the remaining acreage reserved as a buffer). The explanation stated that, although Corp “would be entitled to a charitable contribution deduction of $12.222 million,” it “is only claiming a charitable contribution of $5.222 million” to avoid a dispute with the IRS over the value of the transferred property and a potential substantial or gross valuation misstatement penalty.

Corp included with its return appraisals that failed to include the settlement agreement that concluded the zoning litigation or the purchase agreement between Town and State.

The final Form 8283, under the column “For bargain sales, enter amount received,” reflected $5.25 million, and under the column “Amount claimed as a deduction,” the form stated $5.222 million.

On their individual tax return, Taxpayer (as Corp’s shareholder) claimed a $5.222 million charitable deduction. The return was prepared based upon on the Schedule K-1, Shareholder’s Share of Income, Deductions, and Credits, etc., provided by Corp. 

The IRS audited Corp’s tax return for the year at issue. The focus of the audit was Corp rather than Taxpayer.

The revenue agent sent Form 5701, Notice of Proposed Adjustment, to Taxpayer, together with Form 886-A, Explanation of Items, which disallowed the charitable contribution deduction.[xxxvii]

The IRS subsequently sent Taxpayer a 90-day letter pertaining to the tax year in question, plus any subsequent years to which Taxpayer had carried forward the charitable contribution deduction, in which it proposed changes to Taxpayer’s tax return and income tax liability.

Taxpayer timely petitioned the U.S. Tax Court, arguing that the IRS was wrong to disallow the charitable contribution deductions.[xxxviii] 

The Tax Court

The Code allows taxpayers a deduction for any charitable contribution made during the taxable year,[xxxix] so long as the taxpayer complies with “regulations prescribed by the Secretary.” If the charitable contribution is of property other than money, the amount of the contribution is generally the fair market value of the property at the time of contribution.[xl]  

Taxpayer argued that the sale of Property to Town represented a “bargain sale” made with donative intent and that Corp accordingly was entitled to deduct the difference between the fair market value of the portion of Property sold and the purchase price.

The issue before the Court was whether the fair market value of the property donated by Corp exceeded the value of any benefits received by Corp.; in other words, was there really a bargain? 

Bargain Sale

According to the Court, a contribution of property generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return. The “relevant inquiry,” therefore, focuses on whether the transaction was structured as a quid pro quoexchange, giving weight to “the external features of the transaction” – and not on the taxpayer’s subjective motives.

Stated differently, “[i]f it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and if the taxpayer cannot garner that benefit unless he makes the required ‘contribution,’ the transfer does not qualify the taxpayer” for a charitable contribution deduction.

The Court observed that the “proscribed” benefit does not need to be financial, adding that it had previously found that a transfer of real property in exchange for development approvals was a benefit that precluded a finding of the requisite donative intent.[xli] 

However, the Court continued, “a taxpayer may still deduct a contribution of property if (1) the value of the property transferred exceeds the fair market value of any goods or services received in exchange and (2) the excess payment is made ‘with the intention of making a gift.”[xlii] In that instance, taxpayers may deduct the difference between the fair market value of the contributed property and that of the goods or services provided by the charitable organization. 

Where a taxpayer, however, “fails to identify or value all of the consideration received in the transaction,” the Court added, “the taxpayer is not entitled to any charitable contribution deduction.” 

In the case before it, the Court determined that Taxpayer did not establish the value of all the consideration Corp received as part of the purported bargain sale, and thus Taxpayer was not entitled to the claimed charitable contribution deduction.

As an initial matter, the land purchase agreement and the settlement of the zoning litigation had to be considered together as parts of an “inseparable package” in determining whether Corp contributed property in excess of the value of the benefits received. The land purchase agreement expressly noted that the zoning litigation was “being settled as part of the conveyance of the property.” It further specified that the purchase was conditioned on “the entry by the Court of an Order which shall include the subdivision of the property in substantial conformity with the proposed order appended hereto.” And the settlement agreement unambiguously referenced the land purchase agreement, which was included as an attachment.

The Court found that Corp received two types of consideration: (1) the $5.25 million purchase price and (2) the reversion of the zoning designation “to its prior designation of [planned industrial]” over the portion of Property that Corp retained.

The zoning reversion was central to the overall deal, the Court stated. Even before Town’s rezoning, Corp had emphasized that, as part of any sale, it wanted to retain “for some development purpose” the portion of Property bordering certain industrial facilities. During the court-ordered negotiations in the zoning litigation, Corp injected the idea of rezoning and retaining that portion of Property in response to Town’s proposal to purchase the entirety. As the negotiations continued, Corp made clear that rezoning a retained parcel was a sine qua non for settlement. In summary, the bargained-for zoning reversion was consideration that was required to be valued when claiming the deduction.[xliii]

The record amply demonstrated, the Court stated, that Corp prized the planned industrial zoning designation for potential future development. Thus, the Court was certain that Corp gained a significant benefit with the change to of the zoning designation as part of the coordinated settlement and land purchase agreement. This benefit was required to be taken into account when analyzing the charitable contribution deduction. Having failed to establish the value of the consideration, Taxpayer was not entitled to the claimed charitable contribution deduction.[xliv] 

Parting Thoughts

The Court’s decision was spot on.

Interestingly, the same factors on which the Court properly denied Taxpayer’s charitable contribution deduction may also support the conclusion that Corp acted properly in furtherance of its business purpose.

Specifically, Corp wanted to secure the zoning change and the permits necessary for it to conduct its business on Property. By settling the litigation on the terms described, it avoided the uncertainty of a trial and negotiated a desirable business outcome.

As for the bargain element? I believe the federal gift tax regulations are instructive – albeit not applicable, technically speaking – and may serve as guidelines for a business’s decision-makers: first, a corporation cannot make gifts – rather, the corporate transfer is treated as a gift by its shareholders; and second, a transfer of property made in the ordinary course of business (bona fide, at arm’s length, free from donative intent) will be considered as made for full and adequate consideration in money or money’s worth.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] Why do you think the Code allows a deduction for compensation paid in exchange for services only to the extent it is reasonable for, or commensurate in value with, the services received? IRC Sec. 162.

[ii] Ordinarily, a contribution is made at the time delivery is completed.

[iii] IRC Sec. 170.

[iv] The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. 

[v] Which may depend upon the nature of the property contributed (tangible personal property and the use to which it is put), the nature of the gain that would be realized on the sale of the property (long-term capital gain property or ordinary income property), the nature of the charitable organization to which the contribution is made (public charity or private foundation), and whether the contribution is made in trust (as a lead interest or a remainder interest) or outright (in which case the deduction may depend upon whether the interest contributed is less than the donor’s entire interest in the property). IRC Sec. 170(e) and (170(f).

There are also limitations on how much of the deduction may be claimed in the year of the contribution and subsequently.

[vi] Even where a business completes the transfer of property to a qualifying charity, no deduction is allowed with respect to the charitable contribution unless certain substantiation requirements are satisfied. In the case of a contribution in-kind, the contributing taxpayer must (i) obtain a “qualified appraisal” for the property contributed, (ii) attach a fully completed appraisal summary to its tax return, and (iii) maintain records containing certain information, including information regarding the recipient organization, the property contributed, and the terms of any agreement regarding the use or disposition of the property.

Moreover, no charitable deduction is allowed for a contribution unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the recipient organization. 

[vii] Depending upon the property, the business may also be relieved of various costs associated with the continued ownership thereof.

[viii] The view that corporations are business organizations operated for profit, and that eleemosynary activities, including charitable giving, are best conducted by private individuals and by not-for-profit organizations, is reflected in the tax incentives for charitable giving that are afforded to individuals versus corporations.  

[ix] This refers to C-corporations. Charitable contributions by S corporations are separately stated on the Schedule K-1 issued to each shareholder because the separate treatment of such item could affect the liability for tax of that shareholder; for example, the addition of the shareholder’s distributive share of a corporate contribution may impact the shareholder’s ability to deduct currently a contribution made individually by such shareholder/. IRC Sec. 1366(a)(1)(A); the S corporation is not allowed a deduction for charitable contributions. Sec. 1363(b)(2). Similar rules apply to partnerships and their partners. IRC Sec. 702(a)(4); the partnership is not allowed a charitable deduction. IRC Sec. 703(a)(2)(C).

[x] IRC Sec. 170(c) and Sec. 509(a). No income tax deduction is allowed for a transfer to a foreign charity. Interestingly, the gift tax and the estate tax generally allow deductions for transfers to foreign charities.

[xi] IRC Sec. 170(b)(1)(G). One’s contribution base for a taxable year means the individual’s adjusted gross income (IRC Sec. 62) for that year, but without regard to any NOL carryback to that year. IRC Sec. 170(b)(1)(H). The TCJA temporarily increased the limit from 50 percent to 60 percent. The cap reverts to 50 percent after 2025. Sec. 170(b)(1)(A).

[xii] IRC Sec. 170(b)(2)(A). The corporation’s taxable income is determined without regard to NOL carrybacks and other enumerated items. IRC Sec. 170(b)(2)(D).

[xiii] IRC Sec. 170(c)(2).

[xiv] That is not to say that there are no other requirements that must be satisfied before a deduction is allowed.

[xv] IRC Sec. 162(b); Reg. Sec. 1.162-15.

[xvi] See New York’s BCL Sec. 201(a) and LLCL Sec. 201.

[xvii] The opportunity costs are real.

[xviii] This includes employees. The incentive here is obvious: if a business aligns the economic interests of its employees with those of the business, both should benefit. Thus, in order to attract and retain good employees, the corporation has to offer certain basic benefits, be it competitive wages, health insurance, life insurance, 401(k) plans, year-end bonuses, flexible hours, etc. Others support their employees’ charitable activities by taking sponsorships or by matching charitable gifts.

[xix] I am reminded of the parable of the Pharisee and the tax collector. The latter is the hero of the lesson, but let’s focus on the Pharisee. He entered the Temple, walked to the front, and prayed aloud to G-d, reminding Him (as if it were necessary) of how much of his profits he gave to the poor. Luke 18:9-14.

[xx] I have to say that the minority shareholder was equally upset about not having been afforded the same opportunity.

[xxi] New York’s Business Corporation Law specifically provides that a corporation “shall have power in furtherance of its corporate purposes: . . . [t]o make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof.” BCL Sec. 202(a)(12).

“In furtherance of its corporate purposes” – how direct a connection is required? Can an expenditure further a corporation’s  purpose without generating a “corporate benefit”?

As Linda Richman might say, “Talk amongst yourselves.”

[xxii] This issue has occupied charities for years in distinguishing a gift from advertising income or other unrelated business income. The array of political forces at work here have been extraordinary. In many cases, it has taken some intellectual contortionism to generate the “desired” result.

[xxiii] And deductible as an ordinary and necessary expense of conducting the business. IRC Sec. 162.

[xxiv] Speaking of “gifts,” it should be noted that Reg. Sec. 25.2511-1(h)(1) explains that a corporation cannot make gifts for purposes of the federal gift tax; rather, the corporate transfer is treated as a gift by its shareholders.

[xxv][xxv]  IRC Sec. 162(a). It is assumed that the amount paid or incurred is reasonable in light of the consideration received in exchange – why would someone overpay?

[xxvi] Comm’r v. Duberstein, 363 U.S. 278 (1960).

[xxvii] Compare the gift tax. Reg. Sec. 25.2511-1(g)(1) states that donative intent is not an essential element in the application of the gust tax to a transfer. The tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.

However, the regulation also states that the gift tax is not applicable to ordinary business transactions. Thus, Reg. Sec. 25.2512-8 provides that a transfer of property made in the ordinary course of business (bona fide, at arm’s length, free from donative intent) will be considered as made for full and adequate consideration in money or money’s worth.

[xxviii] What about the converse? Do these circumstances support an argument against making the transfer altogether?

[xxix] IRC Sec. 301, Sec. 731, and Sec. 1368.

[xxx] Rev. Rul. 79-9. Compare that to the situation in which a corporation satisfies a shareholder’s charitable pledge.

[xxxi] Braen v. Comm’r, T.C., No. 24929-17, 7/11/23.

[xxxii] Adjacent to a solid waste management complex.

[xxxiii] Query whether Town filed Form 8282 to report its sale.

[xxxiv] Accordingly, Corp sent Town a Form 8283, which was blank except for the phrase “see attached qualified appraisal report” in the “description of donated property” section. No such report was attached.

[xxxv] The Pre-Filing Agreement Program (PFA) encourages taxpayers to request consideration of an issue before the tax return is filed thus, resolving potential disputes and controversy earlier in the examination process. The program’s intended effect is to reduce the cost and burden associated with a post-filing examination, provide a desired level of certainty regarding a transaction, and make better use of taxpayer and IRS resources. See Rev. Proc. 2016-30. See also

[xxxvi] Reg. Sec. 170A-13(c).

[xxxvii] With respect to the charitable contribution, the revenue agent outlined the “Government’s position” that an accuracy-related penalty would apply to the shareholders based either on a substantial valuation misstatement, negligence, or a substantial understatement of income tax. A page of the Form 886-A entitled “Taxpayer’s Position” was blank. 

[xxxviii] It bears repeating that, in general, the Commissioner’s determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are in error. Rule 142(a).  The taxpayer bears the burden of proving entitlement to any deduction claimed.  Thus, a taxpayer claiming a deduction on a federal income tax return must demonstrate that the deduction is provided for by statute and must maintain records sufficient to enable the Commissioner to determine the correct tax liability.

IRC Sec. 6001; Reg. Sec. 1.6001-1(a).

[xxxix] IRC Sec. 170(a)(1).

[xl] Reg. Sec. 1.170A-1(c)(1). Taxpayers also must meet several substantiation requirements to successfully claim a charitable contribution deduction. For example, taxpayers must provide a contemporaneous written acknowledgment from the recipient of the contribution where the claimed value of the donated property exceeds $250. IRC Sec. 170(f)(8)(A).

[xli] Receipt of 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.

[xlii] Citing Reg. Sec. 1.170A-1(h)(1).

[xliii] Reg. Sec. 1.170A-1(h)(1).

[xliv] Even if we overlooked Corp’s failure to value the zoning reversion, the deduction nonetheless would be barred because of “a fatal defect in the contemporaneous written acknowledgment,” citing I.R.C. § 170(f)(8)(A), which requires that the contemporaneous written acknowledgment state (1) the amount of cash and a description (but not value) of any property other than cash contributed, (2) whether the charitable organization provided any goods or services in consideration, in whole or part, for the contributed property, and (3) a description and good-faith estimate of the value of any goods or services the taxpayer received as consideration. “A donee organization provides goods or services in consideration for a taxpayer’s payment if, at the time the taxpayer makes the payment to the donee organization, the taxpayer receives or expects to receive goods or services in exchange for that payment.” Reg. Sec. 1.170A-13(f)(6). “Goods or services means cash, property, services, benefits, and privileges.” Reg. Sec. 1.170A-13(f)(5).

The written acknowledgment and other substantiation requirements are designed to “foster disclosure of ‘dual payment’ or quid pro quo contributions.” “Where the written acknowledgment of a charitable contribution by a donee organization states that the donor received no consideration and the donor actually received a benefit in exchange for the donation, the deduction is disallowed in its entirety.”

A taxpayer’s failure to supply a satisfactory contemporaneous written acknowledgment bars a charitable contribution deduction.

The acknowledgment letter provided by the Town attorney did not satisfy section 170(f)(8).