Janet Braen, et al, v. Comm., TCM 2023-85

In 1998, Braen Commercial Holdings Corp. (a family mining company founded in 1904) purchased a 505-acre plot of land in Ramapo, New York, with an eye to developing it into a granite quarry, adding to an existing stable of four quarries. Years of delays and disputes with both the state and town followed, including litigation over a 2004 zoning change made by Ramapo. As part of a 2010 settlement of this lawsuit, Ramapo purchased 425.5 acres of the property for $5,250,000 and rezoned the remainder to its pre-2004 designation. Holdings’ 2010 tax reporting treated the sale to Ramapo as a bargain sale that had generated a charitable contribution of $5,220,000, and the Braens claimed proportionate shares of this amount on their respective tax returns as deductions under §170. The IRS disallowed these deductions in full and determined accuracy-related penalties.

Holdings asserted a fair market value of $17,472,000 based on a mineral value of $14,554,000 for 175 acres and a land value of $2,918,263 for 212.5 acres on which no mining would be performed (with the remaining 38 acres reserved as a buffer). An explanation attached to the return stated that, although Holdings “would be entitled to a charitable contribution deduction of $12,222,000, it “is only claiming a charitable contribution of $5,222,000” to avoid a dispute with the IRS over the value of the transferred property and a potential substantial or gross valuation misstatement penalty.”

Was settlement of the lawsuit a substantial benefit to Holdings? Contributions of property generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return (Seventeen Seventy, TCM Memo. 2014-124). The courts have found that a transfer of real property in exchange for development approvals is a benefit and precludes a finding of the requisite donative intent (Triumph, TCM 2018-65.) The Court found that Holdings gained the significant benefit of a change to its then-governing zoning designation as part of the coordinated settlement and land purchase agreement. This benefit was required to be taken into account when analyzing any charitable contribution deduction. Having failed to do so, the Braens are not entitled to the claimed charitable contribution deductions.

Contemporaneous acknowledgement flawed. The Court opined that even if were to overlook Holdings’ failure to value the zoning reversion, the deduction nonetheless would have been barred because of a “fatal defect in the contemporaneous written acknowledgment.” The 2011 acknowledgment letter provided by the Ramapo town attorney did not satisfy §170(f)(8). Holdings negotiated for and received the zoning change as part of the settlement and land purchase, and, to satisfy §170(f)(8), the acknowledgment was required to both identify the zoning change as consideration and provide a good-faith valuation of it. The letter plainly did not do so, instead stating that Holdings did not receive “any goods or services, in whole or in part, as consideration” other than the $5,250,000.