Claiming the proper deductions and credits can be an overwhelming process for taxpayers. With new case law constantly being decided by the Tax Court and the IRS, it can be especially difficult to keep up with new regulations. A recent case involving estate tax and charitable deductions, Fakiris v. Commissioner, reached an important holding in the area of estate tax. Decided June 28, 2017, the case explores the issue of whether a gift is complete or not during a person’s life. The Tax Court had to resolve the issue of whether a charitable contribution deduction carryover was available.
The ever-changing issues in the world of tax law can present many challenges to California taxpayers. The tax attorneys of NewPoint Law Group can assist with all of your estate planning needs. To schedule a free and confidential legal consultation with a Roseville tax attorney, please call our law office at 1-800-358-0305.
What Happened in Fakiris v. Commissioner?
The taxpayer, George Fakiris was a real estate developer managing Grou Development LLC. Grou acquired a theater that he intended to develop into a skyscraper. Because of the historical nature of the theater, Grou’s plans to convert it faced much resistance. The Grou company ultimately decided to make a bargain sale to a charitable organization that had tax-exempt status, who would later transfer the theater to a dance ensemble (once the dance ensemble received its own tax-exempt status from the IRS).
The Grou company and the charity signed a contract with two important provisions:
- The charity was prohibited from transferring the theater property for five years after the conveyance (other than to the dance ensemble); and,
- The company was permitted to transfer the premises to the dance ensemble once it received tax-exempt status.
After the contract was signed, the property was conveyed by deed to the charity and the founder of the dance ensemble paid the company $470,000 for the theater. The charity paid nothing to the Grou company. The theater later appraised for approximately $5 million at the time of transfer. The charity then transferred the property to the dance ensemble before it received tax-exempt status in a transaction with no consideration (bargained-for exchange).
Grou disclosed the sale at $470,000 and, with a basis of $64,482, reported $405,518 in capital gains. George Fakiris, however, claimed a noncash charitable contribution of $3 million (a 60 percent member share of the $5 million appraised value) as an itemized deduction, resulting in a carryover of $2,936,857. (A tax carryover lets you claim a deduction or credit for a single expense over the course of two or more years by claiming the tax break on multiple tax returns.) Since Fakiris failed to reduce deduction at all for the $470,000 sales price and carried the deduction forward for the next four years, the IRS denied the $5 million charitable deduction that Grou claimed.
What Does the Decision in Fakiris v. Commissioner Mean for California Taxpayers?
Taxpayers can learn a lot from the Fakiris decision with regard to drafting real estate contracts and the potential tax penalties of those contracts. The above-mentioned provisions that the original parties placed in the contract were troubling to the IRS. The second provision was inconsistent with the rest of the contract because the Grou company no longer had title to the premises after conveyance. However, because the court interpreted the provision to mean that the Grou company retained the right to direct the charity to transfer the property to the dance ensemble, the company was found to have retained “dominion and control” over the theater. This ultimately meant that the transfer of the gift was incomplete and that the value of the contributed property was zero. Due to the disparity between the value of the property claimed on the return and as determined by the court, the court then applied accuracy-related penalties, noting that accuracy-related penalties don’t distinguish between a valuation misstatement due to legal error versus a valuation error. Taxpayers should take note of this case when especially when attempting to claim charitable deductions.
When Is a Charitable Deduction Permissible?
The 1966 case Goldstein v. Commissioner set out six criteria for making a charitable deduction:
- 1. a donor competent to make the gift;
- 2. a donee capable of accepting the gift;
- 3. a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift;
- 4. the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it;
- 5. a delivery by the donor to the donee of the subject of the gift or the most effectual means of commanding the dominion of it; and
- 6. acceptance of the gift by the donee.
As discussed above, the real issue in the Fakiris case came down to dominion and control. Because the provisions of the contract allowed the Grou company continued dominion and control as a result of directing who would receive the property in the five years after deed transfer, the gift failed. Since the gift was incomplete, this meant the IRS did not allow for a charitable contribution deduction for Grou or for George.
Contact an Experienced California Tax Attorney Today
State and federal tax regulations pose a challenge to many Americans. Keeping up with changing laws adds an extra layer of difficulty to an already complex topic. Fortunately for California taxpayers, the estate planning attorneys at NewPoint Law Group have extensive experience handling an array of tax-related issues and concerns. To discuss your concerns with our tax professionals in Roseville, California, please call at 1-800-358-0305 for a free and confidential consultation.