Charitable Deduction of Trust Not Limited To Adjusted Basis in Donated Property.

The settlors created a dynasty trust in 1993 with terms authorizing the trustee to make charitable distributions out of the trust's gross income at the trustee's discretion.  The trust wholly owned a single-member LLC and in 2004, the LLC donated properties that it had purchased to three charities.  Each property had a fair market value that exceeded basis.  The LLC received the funds to buy the properties from a limited partnership's distribution to the trust in which the trust was a 99 percent limited partner.  The limited partnership owned and operated most of the Hobby-Lobby stores in the U.S.  The IRS claimed that the trust could not take a charitable deduction equal to the full fair market value, but should be limited to the trust's basis in each property.  The trust claimed a charitable deduction in excess of $20 million on Form 1041 for 2004, and later filed an amended Form 1041 increasing the claimed charitable deduction to just shy of $30 million, and seeking a tax refund of over $3 million.  The IRS denied the refund, claiming that the charitable deduction was limited to cost basis.  The trust paid the deficiency and sued for a refund.  On the trust's motion for summary judgment, the parties agreed that the donated properties were acquired by the trust with funds coming from gross income from a pre-2004 tax year.  Thus, according to the trust, I.R.C. Sec. 642(c)(1) allowed the charitable deduction to be computed based on the donated property's fair market value.  The court agreed, noting that I.R.C. Sec. 642(c)(1) allowed a deduction without limitation contrary to the basis limitation contained in I.R.C. Sec. 170, and that charitable deduction provisions are to be construed liberally in the taxpayer's favor.  The court noted that the donated properties were all acquired with distributions from the limited partnership to the trust, and each distribution was part of the LLC's gross income for the year of distribution.  Thus, the donated properties were clearly bought with funds traceable to the trust's gross income and were donated under the terms of the trust.  The court noted that the IRS admitted that there was no caselaw or other substantial authority that supported the government's position.    The court granted summary judgment for the trust.  Green v. United States, No. CIV-13-1237-D, 2015 U.S. Dist. LEXIS 151539 (W.D. Okla. Nov. 4, 2015). 

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