October 5, 2000 | Read Time: 2 minutes
By GRANT WILLIAMS
The U.S. Tax Court has overruled the Internal Revenue Service and decided that two Texas residents were entitled to a charitable-gift deduction for a year in which they made a deal to sell property to a church for less than the property was worth.
Kenneth L. Musgrave and Etta D. Musgrave signed a contract for deed with a local church in 1994 to sell the property for $152,500, which the church agreed to pay in monthly installments of $1,400. When the contract was signed, the property was valued at $450,000.
Under the law, a taxpayer who sells property to a charity for less than the property´s fair market value — in other words, makes a “bargain sale” — is typically entitled to a charitable-contribution deduction equal to the difference between the fair market value and the amount realized from the sale.
The Musgraves claimed a deduction on their 1994 tax return for the difference between the property´s $450,000 fair market value and its $152,000 selling price and carried over part of the deduction to their 1995 income tax return. At the end of 1997, Mr. Musgrave conveyed legal title to the property to the church, which gave him a note of $133,316 and a deed of trust.
The I.R.S. acknowledged that the Musgraves had the charitable intent required by law. But the revenue service argued that the contract for deed did not result in a “completed gift of the property´´ in the 1994 tax year, meaning that the Texans were ineligible for a deduction that year and until the church made all its payments.
Under the contract, the Musgraves kept legal title to the property but the church had full rights to occupy it and, among other things, was required to maintain the site and pay all taxes.
The Tax Court said it had analyzed Texas law and state court cases before deciding that the “bundle of rights” the church received in the 1994 contract was essentially the same as what it would have received if it had immediately obtained legal title to the property and granted a mortgage back to the Musgraves.
Thus, the court concluded that the Musgraves had made a “completed gift” in 1994 and could take a tax deduction for that year (Kenneth L. Musgrave and Etta D. Musgrave v.Commissioner of Internal Revenue, T.C. Memo. 2000-285).
