From Taxable to Tax-Exempt Corp
Travel back with me to 1986, if you will, and the repeal of the General Utilities doctrine. The Tax Reform Act of 1986[i] added Sec. 337(d) to the Code and directed the Treasury to prescribe the regulations necessary to carry out the purposes of the doctrine’s repeal.[ii]
The Technical and Miscellaneous Revenue Act of 1988 amended Sec. 337(d) to specify that the section authorizes regulations to “ensure that these purposes shall not be circumvented * * * through the use of a * * * tax-exempt entity.”
According to the legislative history concerning the 1988 amendment to Sec. 337(d), such a regulation would:
“* * * include[] rules to require the recognition of gain if appreciated property of a C corporation is transferred to a * * * tax-exempt entity [footnote 32] in a carryover basis transaction that would otherwise eliminate corporate level tax on the built-in appreciation.”
“[footnote 32] The Act generally requires recognition of gain if a C corporation transfers appreciated assets to a tax exempt entity in a section 332 liquidation. See Code section 337(b)(2).”
The Regulations
The regulations[iii] promulgated by the IRS provide that a taxable corporation[iv] that transfers, or is treated as transferring, all or “substantially all” of its assets to one or more tax-exempt entities,[v] whether in liquidation or otherwise, is required to recognize gain or loss as if the assets transferred were sold at their fair market values.[vi]
Substantially All
The term “substantially all” has the same meaning as under the corporate reorganization rules.[vii] Unfortunately, there is no statutory definition; thus, whether substantially all of a corporation’s assets has been transferred will depend upon the facts and circumstances.
That said, the IRS has provided operating rules for purposes of issuing letter rulings, according to which the “substantially all” requirement is treated as having been satisfied if there is a transfer of assets that represent at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the transferor corporation immediately prior to the transfer.[viii]
If the transaction is preceded by the sale of certain assets – for example, an unwanted line of business – and the proceeds from the sale are included in the assets transferred, the satisfaction of the “substantially all test” should not be jeopardized, provided there is no obligation for the acquiring corporation to distribute these to the former shareholders of the transferor.
Outside of the ruling guidelines, the courts and the IRS have examined not only the value of the assets transferred by the transferor corporation but also the nature of the assets retained by such corporation; in particular whether such retained assets are operating assets or investment assets.[ix]
Conversion
In general, the regulations treat a taxable corporation that changes its status – colloquially, “converts” – to a tax-exempt entity[x] as having transferred all of its assets to a tax-exempt entity immediately before the change in status becomes effective – while the corporation is still taxable – irrespective of whether an actual transfer of the assets has occurred.[xi]
Noteworthy Exclusions
The regulations do not affect the tax treatment of a corporation’s gift of a portion[xii] of its assets to charity, nor do they affect a shareholder’s tax treatment when indirectly transferring all or any part of the corporation’s assets to charity by transferring all or any part of the corporation’s stock to charity.
In either case, the corporate or individual donor may be entitled to claim a charitable contribution deduction, subject of course to the usual limitations.[xiii]
However, if shareholders donate all of a corporation’s stock to a charity and the charity then liquidates the corporation, the liquidating corporation’s gain shall be subject to tax.[xiv]
Still, no gain will be recognized on any of the assets transferred that are used by the tax-exempt entity in an activity the income from which is subject to the unrelated business tax.[xv] The gain on such assets will later be recognized as unrelated business taxable income if the tax-exempt entity disposes of the assets or ceases to use the assets in an unrelated trade or business activity.
The regulations also exclude from their reach transactions that qualify for nonrecognition of gain under the like kind exchange and involuntary conversion gain deferral rules,[xvi] but only to the extent that the replacement asset is used in an unrelated business activity.[xvii]
Bargain Sale of Assets
Just over a month ago, the U.S. Tax Court considered the bargain sale – part gift, part sale – of its assets by a for-profit corporation to a tax-exempt, nonprofit organization.[xviii] Interestingly, there was no mention whatsoever of the above “deemed sale” rule.
For-Profit Schools
In 2012, Taxpayer owned five S corporations (the “S Corps”) that owned and operated for-profit colleges (the “Colleges”). Each of the Colleges was a licensed and accredited educational organization. The S Corps were held in a revocable trust (the “Trust”) of which the Taxpayer was the grantor.[xix]
Taxpayer was the chairman of each S Corp. He had previously been the CEO of each S Corp. Taxpayer was the sole trustee and beneficiary of the Trust. Consequently, for federal income tax purposes, Taxpayer was the owner of the S Corps, and all their profits and losses passed through to him.[xx]
The period from 2006 to 2010 saw a rapid expansion of online enrollment at for-profit colleges. The S Corps were no exception.[xxi]
At the same time, though, for-profit colleges also began experiencing increased governmental and public scrutiny. This resulted in slower enrollment growth than in prior years, and led to a reduction in the number of enrolled students at the Colleges and in their revenues.
The wider for-profit college industry experienced a similar trend, so when Taxpayer learned that other for-profit colleges were “converting” to nonprofit entities, he considered transitioning the Colleges into nonprofit entities.
Taxpayer hired Consultant to advise him on the transition from for-profit to nonprofit status. Consultant proposed a merger between the S Corps and Charity, which was a tax-exempt organization described in section 501(c)(3) of the Code.
The Transfers
Ultimately, Taxpayer decided that Trust would transfer the S Corps to Charity.
Specifically, Charity would acquire the assets of three of the S Corps by the merger of the corporations into Charity in exchange for installment obligations payable by Charity to Trust (the “Merger”).
Trust would “donate” the two remaining S Corps to Charity as a charitable contribution (together with the Merger, the “Transaction”).[xxii]
As part of the Transaction, the S Corps hired appraisers to value the five corporations. The first appraiser concluded the S Corps had an aggregate fair market value (“FMV”) of $650 million. A second appraiser concluded that the FMV of the S Corps was $620.8 million. A third appraiser retained by the S Corps valued them at a collective FMV of $700 million.
As part of its own due diligence process, Charity hired its own appraiser to review Taxpayer’s appraisal reports. It found an FMV range for the S Corps between $511.3 million and $680 million.
In December 2012 the S Corps and Charity approved the Merger, and executed an Agreement and Plan of Merger. Also at that time, Taxpayer and Charity executed a Charitable Pledge Agreement for the transfer of the stock of two of the S Corps (collectively, the “Merger Agreements”). The Merger Agreements provided that Charity would issue Trust two secured, interest-bearing promissory notes in exchange for the merged S Corps: Term Note A, with a stated principal amount of $200 million, and Term Note B, with a stated principal amount of $231 million (the “Purchase Notes”).
On December 31, 2012, the Transaction closed, the three S Corps merged into Charity, and the two S Corps became wholly owned subsidiaries of Charity.[xxiii] Trust and Charity executed a Note Purchase Agreement (the “NPA”) for $431 million. The NPA defined Trust’s and Charity’s respective rights until Charity fulfilled its obligations under the Purchase Notes.[xxiv]
Post-Transaction
In 2015, Charity learned from State Agency that in order for it to continue participating in certain student loan programs it would have to provide a sizable letter of credit.
Subsequently, in order to accommodate this requirement, Charity executed Contingent Note A and Contingent Note B (collectively, Contingent Notes) to replace Term Note A and the Term Note B, and a Contingent Note Agreement.
In addition, State Agency was informed that Trust would forgive approximately $351 million of the original merger consideration to enable Charity to issue the letter of credit and continue in the loan program.
Adjusted Purchase Price
Taxpayer, as trustee of Trust, and Charity executed a Settlement Agreement in 2015 pursuant to which Contingent Note B was canceled, and Charity was discharged from its obligation to make further payments thereon.
Tax Returns
In 2013, each of the merged S Corps filed its respective final tax return[xxv] for tax year 2012 on which it reported its merger into Charity as a bargain sale in which gain was recognized and by which a charitable deduction was generated.
Each of the merged S Corps elected out of the installment method of reporting gain,[xxvi] and instead reported on its 2012 tax return the entire capital gain from the Transaction[xxvii] of approximately $609 million.
They also reported charitable contributions to Charity,[xxviii] and the deductions arising therefrom – the alleged bargain element of the sale.
Likewise, it appears that the two corporations that were donated[xxix] to Charity also reported capital gains and noncash charitable contributions from the Transaction.[xxx]
Having received his Sch. K-1s[xxxi] from the S Corps, Taxpayer reported on his 2012 income tax return[xxxii] the capital gains and the charitable contribution deductions that flowed through to him as the sole shareholder of the S Corps[xxxiii] and as the deemed owner of Trust.
In total, Taxpayer deducted a charitable contribution of almost $181 million for the Transaction. However, because the deduction was limited to 30% of Taxpayer’s 2012 adjusted gross income[xxxiv] of just over $441 million, Taxpayer deducted approximately $132 million and reserved the balance as a carryover.[xxxv]
The Audit
The IRS selected Taxpayer’s and the S Corps’ 2012 tax returns – the year of the Transaction – for examination. In 2016, the agency sent Taxpayer an examination report proposing a tax deficiency of approximately $31 million.
Amendments
In September 2017, each S Corp amended its 2012 federal return based upon the debt forgiven pursuant to the Settlement Agreement.[xxxvi]
Likewise, Taxpayer amended his individual federal return for that year to report an overpayment of over $27 million and request a refund.[xxxvii]
Deficiency
In 2018, the IRS sent Taxpayer an examination report partially disallowing his claimed refund and proposing a refund of just over $5 million. Because the IRS’s proposed refund exceeded $2 million, it had to be submitted to the Joint Committee on Taxation for review.[xxxviii]
Following this review, in 2021 the IRS issued a Notice of Deficiency in which the agency (i) disallowed all of Taxpayer’s claimed charitable contribution deduction for 2012, of $132 million,[xxxix] (ii) increased his taxable income by an equivalent amount, (iii) determined a deficiency in Taxpayer’s 2012 federal income tax of $31 million, and (iv) denied Taxpayer’s claimed refund.
Taxpayer’s subsequent petition to the U.S. Tax Court disputed the deficiency determined by the IRS, and also claimed he was entitled to a larger refund.[xl]
The Tax Court
As framed by the Court, the issues for determination, which arose from the 2012 bargain sale and donation of the S Corps to Charity, were: (1) whether Taxpayer had a tax deficiency due or had made an overpayment;[xli] and (2) whether Taxpayer was entitled to a noncash charitable contribution deduction of approximately $132 million resulting from a bargain sale to Charity.
IRS’s Position
The IRS contended Taxpayer was not entitled to deduct the claimed noncash charitable contributions of the S Corps to Charity in 2012.[xlii]
In addressing the refund claim, the IRS contended that Taxpayer correctly reported gain based on the stated face values of the Purchase Notes received.[xliii]
Finally, the IRS contended that Taxpayer’s settlement in 2015 did not permit him to amend his 2012 tax return and retroactively adjust his income as originally reported.
Taxpayer’s Position
Taxpayer contended that the agency’s deficiency determination, made on the basis of Taxpayer’s original return and valuation of the Notes, was invalid and that he was due a refund for tax year 2012.
Taxpayer also argued he was entitled to deduct a charitable contribution since he made, and substantiated, qualifying charitable contributions (the “donation”) of the two S Corps in 2012.
Bargain Sale?
A key issue before the Court was whether the Transaction was a bargain sale.
The Court acknowledged that the standard to determine whether Taxpayer was entitled to deduct a noncash charitable contribution consisted of a number of elements – such as relinquishing dominion and control – however, the Court also noted that the issues were interrelated in determining whether the Transaction was in fact a bargain sale.
According to the Court, in order to resolve whether the Transaction was a bargain sale, it was necessary to first determine the values of the S Corps transferred and of the consideration (the Purchase Notes) received by Taxpayer.
Charitable Deduction
Generally, the amount of a charitable contribution deduction for a donation of property other than money is the FMV of the property at the time of the donation.[xliv]
A charitable contribution deduction is allowed, the Court stated, for a part-sale, part-gift made to a charitable organization.[xlv] The transferor generally recognizes taxable gain on the sale over their adjusted basis for the property transferred, and is entitled to deduct the excess of the property’s FMV over the sale price (the “bargain” element of the sale).[xlvi]
Notwithstanding the objective fact of a below-market sale, the Court noted that a contribution of property “generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.”[xlvii] According to the Court, the “relevant inquiry” focuses on whether the transaction “is structured as a quid pro quo exchange.” In this regard, greater weight is given to “the external features of the transaction” than to a taxpayer’s subjective motives.[xlviii]
However, “a taxpayer may still deduct a contribution of property if (1) the value of the property transferred . . . exceeds the [FMV] of any goods or services received in exchange and (2) the excess payment is made ‘with the intention of making a gift.’”[xlix] In this instance, taxpayers may deduct the difference between the FMV of the contributed property and that of the goods or services provided by the recipient charitable organization.
The Parties’ Positions
The IRS determined that no gift was made since Taxpayer did not intend to contribute more value to Charity than he received in return. In support of this position, the IRS argued that, when the Transaction was viewed in its entirety, Taxpayer never intended to gift any portion of the S Corps to Charity. The IRS pointed to the consideration evidenced by Trust – the Purchase Notes[l] – which the agency asserted was at least equal to the FMV of the S Corps, and to Taxpayer’s control over Charity as evidence that Taxpayer never intended to make a gift.
Taxpayer contended that two of the S Corps were donated to Charity, while the sales of the three remaining S Corps were made under the Merger Agreements for less than FMV (bargain sales).
The Court stated that, to answer the question of whether a bargain sale occurred, it first had to determine the FMV’s of the S Corps.
FMV
The FMV of property on a given date is a question of fact to be resolved on the basis of the entire record. The term “FMV” is defined by IRS regulation[li] to be “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.”
To show the FMVs of the S Corps, the parties offered the reports and testimony of several expert witnesses.[lii]
One of Taxpayer’s appraisals valued the S Corps for a total of $620.8 million. Two others supported the conclusions of the first appraisal.
The IRS’s experts found an FMV for the S Corps much different from the amounts reported by the S Corps and, ultimately, by Taxpayer on his tax return; specifically, one determined an FMV of $289 million, and the other an FMV range of $200 million to $300 million.
The Court found Taxpayer’s FMVs to be excessive and self-serving. Instead, it found that that the IRS experts’ were better reasoned and supported, and concluded that the collective FMV for the S Corps was $300 million at the time of the Transaction.
Next the Court addressed the Taxpayer’s having elected out of the installment method in 2012 despite being a cash basis taxpayer and entitled to report gain only as payments were received. He reported the entire gain for tax year 2012 despite receiving only Purchase Notes as consideration. The Court explained that each tax year stands on its own, and it refused to apply a purchase price adjustment for 2012 on the basis of events occurring in 2015.
Furthermore, the Court continued, Charity approached Taxpayer only after a request for a letter of credit was received from State Agency. Charity’s board sought Taxpayer’s forgiveness of “a significant portion of Charity’s debt” which was deemed necessary to remain eligible for student loan programs. Taxpayer voluntarily forgave the indebtedness (i.e., made a gift), and the parties did not negotiate a reduction in the purchase price of the S Corps.
Considering the foregoing, the Court declined to apply a purchase price reduction to the amount Taxpayer realized under the Transaction for tax year 2012.
At the end of the day, Taxpayer transferred his interests in the S Corps and reported the Transaction as a bargain sale.
The parties did not dispute that Taxpayer realized an amount under the Transaction during tax year 2012.
According to the Court, Taxpayer’s gain from the Transaction equaled the excess of the amount realized on the sale of the S Corps over the adjusted basis of their assets. The amount realized was the sum of money received plus the FMV of property (other than money) received. A promissory note, the Court stated, was property other than money for purposes of this rule.[liii]
Both parties acknowledged the foregoing principles; however, they disagreed over the value of the Purchase Notes.[liv]
In the end, the Court agreed with the IRS’s expert and adopted his conclusions that the FMV of the Purchase Notes was $267 million.
Having determined that the amount realized under the Transaction was $267 million, which was the collective FMV of the Purchase Notes, and having determined that the amount realized, $267 million, was less than the FMV of the five S Corps transferred under the Transaction, or $300 million, the Court held the Transaction qualified as a bargain sale – that is, a part sale and part donation – albeit for an amount less than originally reported.
With that, the Court held that Taxpayer was entitled to deduct a noncash charitable contribution for the Transaction for tax year 2012.
Observations
You’ll recall statement made earlier that the Court’s opinion made no reference to the “sale” of assets that is deemed to occur when a taxable corporation transfers substantially all of its assets to a tax-exempt entity.[lv]
Instead, its focus was on the valuation of the property transferred to Charity (the S Corps) and the value of the consideration received by Taxpayer in exchange.
Of course, the deemed sale rules should not apply in the case of an actual sale of its assets by a taxable corporation to a tax-exempt corporation in exchange for full and adequate consideration.
But what if the transaction is a bargain sale, as in the case described above?
The IRS once considered the application of the conversion rules to a bargain sale in the context of a private letter ruling (“PLR”) request.[lvi]
Oldco, which was treated as an S corporation (a taxable corporation), planned to merge into Newco, which was a newly formed nonprofit corporation. The taxpayer represented that Newco would be recognized as a tax-exempt organization described in Sec. 501(c)(3) of the Code at the time of the merger (a tax-exempt entity). It also represented that neither Oldco nor its shareholders would receive any consideration or any other kind of benefit in the merger. However, Newco was assuming Oldco’s liabilities.
The IRS ruled that Oldco would be treated as selling its property for an amount realized equal to the amount of liabilities assumed by Newco.
Moreover, according to the IRS, to the extent gains otherwise were not recognized by Oldco on the sale of its property, above (i.e., on the part of its property in excess of the amount of liabilities transferred to Newco) – a bargain sale – Oldco would recognize gain immediately before the merger as if the assets transferred were actually sold at their FMV.
The gains recognized on the sale of property, or on the deemed transfer of assets, and would flow through to each Oldco shareholder in accordance with the rules applicable to S corporations and their shareholders. Each shareholder would also take into account their distributive share of Oldco’ s charitable contribution (the bargain element).
It is not clear from the PLR whether the consideration exchanged in the merger was for substantially all the assets of the taxable corporation (Oldco), or whether the bargain portion of the transfer represented such assets.
Does it matter? Should it? Probably not.
As long as substantially all the assets of the corporation are being transferred, whether for no, or only partial, consideration, the deemed sale rule should apply to the donated portion.
In the case described above, there were certainly three, and perhaps two more, corporate transferors – the three S Corps that participated in the Mergers and the two that were “donated” – to one nonprofit. There was no question whether substantially all the assets of each had been transferred.
Under those circumstances, the bargain element itself should have been treated as a taxable sale.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
Sign up to receive my blog at www.TaxSlaw.com.
[i] P.L. 99-514.
[ii] The legislative history indicates that the General Utilities doctrine was repealed because it tended to undermine the corporate income tax by allowing appreciated property to leave corporate solution without imposition of a corporate level tax. H.R. Rep. No. 99–426, 99th Cong., 1st Sess. 282 (1985).
[iii] Final Regulations were issued late 1998, applicable to transfers of assets occurring after January 28, 1999. T.D. 8802.
[iv] A ‘‘taxable corporation’’ is any corporation that is not a tax-exempt entity under the regulations. They include all C corporations, and all S corporations (whether or not the latter is subject to tax on built-in gain under IRC Sec. 1374). Reg. Sec. 1.337(d)-4(c)(1).
[v] In general, a “tax-exempt entity” includes an organization exempt from tax under IRC Sec. 501. Reg. Sec. 1.337(d)-4(c)(2).
[vi] Reg. Sec. 1.337(d)-4(a)(1). We’re focusing on gains here.
[vii] Specifically, IRC Sec. 368(a)(1)(C). Reg. Sec. 1.337(d)-4(c)(3).
[viii] Rev. Proc. 77-37, amplified by Rev. Proc. 86-42. The IRS states that these operating rules do not define, as a matter of law, the lower limits of the term “substantially all of the properties.”
[ix] Rev. Rul. 88-48. Where business assets are retained, the transaction is treated as divisive, and will not qualify for gain deferral under IRC Sec. 368(a)(1)(C); where the assets are cash or investment assets retained to pay off certain liabilities, the transfer may still qualify for gain deferral.
[x] For example, by changing its purposes and operations, and then applying to the IRS for recognition of its exempt purpose.
[xi] Reg. Sec. 1.337(d)-4(a)(2). There are exceptions. See, e.g., Reg. Sec. 1.337(d)-4(a)(3).
[xii] Less than substantially all.
[xiii] IRC Sec. 170.
[xiv] The final regulations tax a taxable corporation’s gain in other transactions that have the same economic effect. Reg. Sec. 1.337(d)-4(a)(4).
[xv] Under IRC Sec. 511(a). Reg. Sec. 1.337(d)-4(b).
[xvi] IRC Sec. 1031 and Sec. 1033, respectively. Reg. Sec. 1.337(d)-4(b)(3).
[xvii] Under IRC Sec. 511(a).
[xviii] Barney v. Comm’r, T.C. Memo. 2025-133 (Filed December 30, 2025).
[xix] Trust was treated as a disregarded entity for federal income tax purposes
[xx] IRC Sec. 1366 and Sec. 671; Reg. Sec. 1.1361-1(h).
[xxi] The Colleges participated in a variety of federal student financial aid programs to attract and assist students.
[xxii] At first blush, this would seem to indicate a transfer of stock; however, the Court later states that these two corporations reported on their respective tax return the FMV of the assets donated to Charity and the amount of the charitable contribution claimed by each such corporation.
As mentioned earlier, there is no discussion of Reg. Sec. 1.337(d)-4.
[xxiii] It is unclear from the Tax Court’s opinion what became of these subsidiaries.
[xxiv] Among other things, before the Purchase Notes were paid in full, the NPA prevented Charity from taking certain actions without the consent of Trust, including the sale or exchange of membership interests, the making of any further encumbrances, the making of any capital expenditures beyond a prescribed threshold amount, or the making of aggregate capital expenditures beyond a set amount.
[xxv] IRS Form 1120S, U.S. Income Tax Return for an S Corporation,
[xxvi] IRC Sec. 453(d).
[xxvii] This required a valuation of the two notes received in the merger.
[xxviii] Each S Corp filed Form 8283, Noncash Charitable Contributions, and attached a copy of the appraisal.
[xxix] It’s not clear from the opinion whether these two corporations donated their assets; they may have.
[xxx] As already stated, the opinion does not mention IRC Sec. 337(d) or its regulations.
[xxxi] Shareholder’s Share of Income, Deductions, Credits, etc.
[xxxii] On IRS Form 1040, U.S. Individual Income Tax Return.
[xxxiii] Taxpayer also elected out of the installment method for reporting his gain from the Transaction.
[xxxiv] IRC Sec. 170(b)(1)(B).
[xxxv] IRC Sec. 170(d).
[xxxvi] Recall the S Corps had elected out of installment reporting. They claimed that the Settlement supported a lower valuation for the two notes received as consideration in the Mergers. They amended their tax returns to reflect the reduced value and gain.
[xxxvii] For the same reason, Taxpayer also amended his returns for the 2013, 2014, and 2015 carryover tax years.
[xxxviii] Since the IRS’s proposed refund exceeded $2 million, IRC Sec. 6405 required that it be submitted to the Joint Committee on Taxation for review. (The refund threshold is $5 million in the case of a C corporation.)
[xxxix] The Notice of Deficiency determined that Taxpayer had failed to establish that his noncash charitable contribution satisfied the requirements of IRC Sec. 170 and failed to establish the FMV of the contribution.
[xl] In 2015, Taxpayer filed a complaint in the U.S. District Court, seeking a refund for tax year 2015 of almost $35 million. The District Court stayed that proceeding pending the decision of the Tax Court.
[xli] In case you’re wondering about the Tax Court’s jurisdiction to consider refund claims, the Court explained that if it determined there was no deficiency and further determined that Taxpayer had made an overpayment of income tax for the same taxable year, the Court had jurisdiction to determine the amount of such overpayment. The Court stated:
“Our overpayment jurisdiction stems from our jurisdiction to ultimately redetermine the correct amount of the deficiency even if the amount so redetermined is greater [or less] than the amount of the deficiency, and if there is no deficiency and we further determine that the taxpayer has made an overpayment of income tax for the same taxable year, then that amount shall be refunded (or credited) to the taxpayer.”
[xlii] Specifically, the Service contended that Taxpayer did not relinquish dominion and control over the S Corps, submit qualified appraisals, or make “gifts” since the transfers were subject to reclamation, and finally, that Taxpayer’s contributions (or transfers) of the S Corps to Charity were equal to the consideration received.
[xliii] Not as “adjusted” by the Taxpayer based upon the Settlement. The IRS argued that Taxpayer transferred his interest in the S Corps, through Trust, to Charity and, therefore, correctly reported capital gain of $431 million for 2012 on the basis of the Purchase Notes received.
[xliv] Reg. Sec. 1.170A-1(c)(1).
[xlv] See also IRC Sec. 1011(b) (acknowledging bargain sales).
[xlvi] Reg. Sec. 1.1001-1(e), 1.1011-2.
[xlvii] Stated slightly differently, in determining whether there was a quid pro quo exchange, the relevant question is whether the taxpayer expected a benefit in return for the payment.
[xlviii] “If 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 deduction under section 170.”
This scenario is often encountered where a landowner-developer, in order to obtain a change or variance in zoning with respect to a piece of land will transfer another lot to the municipality at a bargain price. Hardly a disinterested transfer.
[xlix] Reg. Sec.1.170A-1(h)(1).
[l] With a face amount of $432 million.
[li] Reg. Sec. 1.170A-1(c)(2).
[lii] One of my former partners – someone I would describe as an old-timer when I was young – would sometimes refer to this as “the battle of the whores.” He was also a great attorney and a Renaissance man. A favorite line of his: “The coffee isn’t ready until the stirring spoon can stand straight up in the cup.”
The Court acknowledged this reality when it stated, “We are not bound by the opinion testimony of any expert witness, and we may accept or reject expert testimony in the exercise of our sound judgment. We may also reach a decision as to the value of property that is based on our own examination of the evidence in the record.”
[liii] IRC Sec. 1001.
[liv] Reg. Sec. 1.1001-1(a), (e).
[lv] The only indication of deemed sale treatment was a table on which an amount of gain was associated with the two S Corps that were donated.
[lvi] PLR 200402003.