A federal District Court in Texas has upheld an IRS denial of a $1.257 million charitable contribution deduction claim for a gift to a donor advised fund because, it said, the contemporary written acknowledgment of the gift did not say the money was held under the “exclusive legal control” of the recipient charity.  The Court said that the Contemporaneous Written Acknowledgment could not be combined with the gift agreement, which provided for ultimate authority and control of the assets, to meet the requirements of the Treasury regulations.

Kevin and Patricia Keefer donated the proceeds from the sale of a 4% limited partnership interest in a partnership that was selling a hotel in Burbank CA to a donor advised fund at the Pi Foundation in 2015.  They claimed the charitable contribution deduction on their tax return for the year.  They filed a Form 8283 with a qualified appraisal along with an acknowledgment letter from Pi saying that no goods or services were provided in return for the donation, and a copy of the DAF Packet from Pi that described the procedures for operation of DAFs that made clear that the assets of the DAF were “under the ultimate authority and control” of Pi.

The IRS denied the deduction for several reasons.  The Keefers paid the tax and sued for a refund.  Both the IRS and the Keefers moved for summary judgment.

Before the Court, the IRS argued that the Keefers should not be allowed to avoid capital gains tax on a gift of long term appreciated property because it was made when the sale was virtually complete and was an assignment of income. The IRS said the Keefers should be taxed on their gain.  The Court held that although it was likely that the sale would go through, it was still sufficiently uncertain so that the assignment of income doctrine should not apply and they could claim the fair market value of the gift.

The IRS also argued that the Keefers could not take any deduction because they had not given their entire interest in the partnership.  They had withheld the right to some other distributions to be made to partners prior to the distribution of sale proceeds.  The Court agreed with the IRS on this issue and denied the claimed deduction because it was not a gift of their entire interest.

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But the Court also considered an entirely separate argument from the IRS that the acknowledgment did not comply with the requirements of sections 170(f)(8) and (18) of the Tax Code.  Section 170(f)(8) requires a contemporary written acknowledgment (“CWA”) describing the property given and stating whether the recipient organization provided any goods or services in consideration of the gift.  Section 170(f)(18) provides that a deduction for a gift to a DAF shall be allowed only if the taxpayer obtains a CWA meeting the requirements of 170(f)(8) and also states that the recipient “has exclusive legal control over the assets contributed.”  The IRS argued that the DAF package and the CWA could not be read together because they did not contain any language linking them together.

Here, the Court reasoned that an acknowledgment had to acknowledge a gift that had been completed or for which the donor was obligated to complete.  In a prior Tax Court Case, it said, the Tax Court had ruled that a charity could not “acknowledge” a gift that had not matured or was not obligated.  Here, it said, the DAF Packet did not complete the donation or legally obligate the Keefers to donate the interest to Pi. 

The Court rejected the Keefers’ argument that two prior cases had found that deeds conveying conservation easements to charity could qualify as CWAs if they spelled out the entire transaction and made clear that no good or services were received in return for the gifts.  But here, the actual acknowledgment letter did not reference the Keefer DAF or refer to the DAF Packet and, the Court said, it must consider whether the acknowledgment letter alone proves compliance with both sections of the Code.  “Because the Acknowledgment Letter does not reference the Keefer DAF or otherwise affirm Pi’s exclusive legal control, as required by section 170(f)(18), the Keefers did not obtain a CWA satisfying each statutory requirement,” it concluded.

The Court rejected the Keefers’ argument that they had substantially complied with the regulations.  It said the regulation specifically requires a statement that the charity maintains exclusive legal control over the assets.  While the acknowledgment might not require that exact language, it had to provide the information.  (Keefer v. U.S., N.D. TX, Dallas Div., No. 20-CV-0836, 7/6/22.)

YOU NEED TO KNOW

This is a very tight reading of the Tax Code and a warning to sponsors of donor advised funds to include the required language of section 170(f)(18) in the gift acknowledgment, even where the DAF agreement is a full acknowledgment of a completed gift from which the receipt of no goods or services can be determined and which contains language about ultimate control of the donation.  Even if the DAF fund agreement may be a CWA for the initial agreement, under the logic of the Court, it might not be contemporaneous with subsequent donations to the fund.  A DAF sponsor might as well avoid the question by putting it all in a single compliant contemporary written acknowledgment at the time of each gift.