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IRS EYES CHARITABLE REAL ESTATE REMAINDER DONATIONS

May 22, 2007

Tax Analysts reports ($link) on a real estate charitable transaction that has drawn the attention of the IRS. From the report:

[Acting IRS Commissioner Kevin] Brown said the transaction, which the IRS learned about last summer, typically involves real property subject to a long-term lease that is purchased "through a tier of closely held flow-through entities owned by a group of investors." After about a year, the so- called remainder interest in the property is contributed to an exempt organization "at an apparently inflated value," Brown said. Sometimes, he said, "the donor may have reacquired the donated interest from the charity two years later at a significantly lower cost."

In short, you join a group to buy leased real estate, "donate" a remainder interest, and buy it back for an amount less then the deduction. This is a risky tax bet, especially now that the IRS is looking for these things. If they IRS concedes that the donation is legitimate, they'll hit the valuation hard if the charity sells the interest back for a lower price than the charitable deduction amount. They might even say the whole thing was rigged, disallow all deductions, and even hit the charity with a penalty.

Link:
IRS letter to Senator Baucus on these transactions.

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