September 24, 1998 | Read Time: 1 minute
The I.R.S. has ruled that a gift of property that comes with the donor’s right to purchase the land back must be valued after, not before, the option expires.
In 1993, a corporation granted a tract of valuable land to the charity but retained an option to repurchase the tract for a nominal amount of money. “There was more than a remote possibility that the option would be exercised,” the revenue service said.
The company was an “S corporation,” which is a business that does not pay income taxes but whose shareholders do.
For the 1993 tax year, the company’s shareholders each deducted as a charitable contribution their share of the fair market value of the donated property at that time. State law treated the tract as having been transferred to the charity in 1993.
But an audit by the I.R.S. led to a dispute about the proper year in which shareholders should take the deductions. The company eventually agreed with the government that its shareholders could not take write-offs until the option expired in 1995, the revenue service said, “since the possibility of the corporation exercising the option to reacquire the tract was not so remote as to be negligible.”
In its new ruling, the national office of the Internal Revenue Service said that the charitable-contribution deductions should be based on the fair market value of the land in 1995 when the option expired and the contribution “became deductible.” The fact that state law treated the land as belonging to the charity in 1993 did not matter, the I.R.S. said.
As is its policy, the I.R.S. did not identify the charity or company involved in the ruling (Technical Advice Memorandum 9828001).
