A bargain sale is a tax deduction where you can sell cheaply to a charity and get a charitable contribution deduction instead of a sales price. This theory works fine in some cases depending on inevitable technical details. However, there are times when some taxpayers are overtaken by greed, and the charities can play ball. A deal involving a nice 220-acre farm was rejected by the tax court under similar grounds.
In 1969, the Wallace family sold the larger part of their 220 acre farm to the Cohan family but retained the first refusal to rule out development rights. When in mid 1990s the Cohans demanded a subdivision, the Wallaces sought refuge in the HCAC partnership to cling to their rights of first refusal and bar any development.
The Nature Conservancy (TNC) expressed interest in the piece in 2001 due to its superbly located maritime. The property was to be sold to TNC by the Wallaces and the rights of refusal were to be bought separately from HCAC. In an agreement that was reached in 2000, HCAC were promised 12 types of payments by the TNC and the deal was sealed in June 2001. The property was then appraised at $8.34 million.
On further negotiation, the rights of first refusal were appraised at $14 million but TNC considered it at $11,931,755, a value that left a $2,068,245 bargain sale. HCAC later received a letter from TNC in December 2001 claiming that there weren’t any goods or services provided apart from the listed concerns.
HCAC then demanded a deduction from the IRS, a claim that was denied. It is an IRS requirement that transferred items must be disclosed by the charity which has to make a “good-faith estimate of the value of the benefit it gave to the taxpayer,” a substantial consideration that was omitted by the TNC in their letter. This is well spelt out in the IRS Publication 1771 Charitable Contributions-Substantiation and Disclosure Requirements.
In the ruling, the tax court declined the possibility of a deduction, saying it appeared that both TNC and HCAC had deliberately left out the consideration hoping that they wouldn’t be caught during auditing. To avoid being penalized, HCAC sought to be allowed to depend on the TNC gift letter, a request that was rejected as well deserved, to the gravity of the omission.
Failure to disclose full consideration and incompliance with the rules formed the basis of the judgment. The main elements of a bargain sale are; money and a charitable element, and valuations are very important. In this case, bargain sale was missing and the penalties were fitting.
