Senators Urge IRS to Step Up Scrutiny of Potential Scam Involving Charities

The Senate Finance Committee wants the Internal Revenue Service to step up its investigation of a possible tax scam involving charities that accept donations of a type of property lease.

The agency in May said that it had identified 48 companies whose investors have claimed about $271-million in charitable deductions by using what the IRS calls questionable donations of interest in real-estate leases.

The IRS is looking into all deductions in 2003 and beyond to see if other entities have taken part in such deals and to determine what role charities have played in the transactions.

Max Baucus, a Montana Democrat who chairs the Senate Finance Committee, and Charles Grassley of Iowa, the committee’s senior Republican, are now calling for the agency to identify the nonprofit organizations that were involved with those transactions and to move quickly to revoke their tax-exempt status.

“The IRS is clearly aware of this shell game involving contributions of property to tax-exempt entities, but I’m not satisfied that enough is being done quickly enough to stop this abusive transaction,” Mr. Baucus said. “We want to know how widespread this problem is and who’s playing fast and loose with the tax code in this way.”

The arrangement under review involves a group of investors who form a company to buy a so-called “remainder” lease for a piece of property.

The lease is appraised at a value the IRS considers to be inflated. The investors then donate their interest in the lease to a charity, and each investor writes off a share of the donation on his or her income-tax return.

The charity benefits when the investors later buy back the lease, usually paying the charity far less than the amount the donors claimed it was worth when calculating their donations.

The IRS has not yet decided what actions to take in the cases.

But Mr. Grassley said the agency needs to make that decision promptly to curtail further abuse. “The IRS must send a clear signal that charities cannot engage in these types of transactions and expect to continue to receive the benefits of tax-exempt status,” Mr. Grassley said. “The agency needs to use all of the tools it has to police the charities — big and small — that engage in these transactions.”