Fakiris v. Commissioner1 is an important estate tax case as it deals with whether a gift is complete or not during a person’s life. The Tax Court had to resolve whether a charitable contribution deduction carryover was available.
IRS Denies Charitable Deduction for Theater Renovation Donation
The taxpayer, George Fakiris, was a real estate developer, managing Grou Development LLC (Grou). In 2001, Grou acquired St. George Theatre for $700,000 in a worn state. Grou wanted to develop a skyscraper by razing the theater. Encountering resistance to that plan then, Grou decided instead to donate it to a non-profit, Richmond Dance (Richmond), created to restore the theater. Before donation, concerns over Richmond, still lacking Internal Revenue Service recognition as a non-profit for charitable contribution deduction purposes, led to an intermediary’s involvement. Richmond’s organizer knew WEMGO Charitable Trust, Inc. (WEMGO) well, which was already recognized. Grou transferred the property to WEMGO. That entity agreed to transfer it to Richmond.
On closing, WEMGO transferred $470,000 to Grou for the theater. Richmond’s organizer provided the cash. At closing, WEMGO then transferred it to Richmond still before its recognition as a tax exempt. No consideration supported this latter transfer.
Equity Valuation Associates appraised the theater, as is, at $4.5 million. Soon thereafter, it appraised it at, as is, at $5 million.
Grou disclosed the sale at $470,000 and, with basis of $64,482, reported $405,518 capital gains.
No charitable deduction was then claimed related to the theater. Instead, a cash charitable contribution of $621,496 was disclosed ($372,898 of which was George’s).
George individually claimed $3 million (60 percent member share of the $5 million appraised value) as an itemized deduction, and a related $63,143 was applied. This math meant $2,936,857 was the carryover. George failed to reduce the deduction at all for the $470,000 sales price. The IRS denied the $5 million charitable deduction that Grou claimed
Six Tests for Charitable Deduction
Sales for less than fair market value (FMV) to charities are deductible as the spread between FMV and amount realized.2 An Internal Revenue Code charitable deduction is permissible if six tests are met under Goldstein v. Comm’r:3 “(1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift . . . ; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or the most effectual means of commanding the dominion of it; and (6) acceptance of the gift by the done.”
Surrender of Dominion and Control
Among these tests is that a donor surrender dominion and control.4 It must be a completed gift. Conditions showing otherwise would bar the deduction.
The IRS believed Grou’s transfer to WEMGO to be an incomplete gift as the sales contract allowed Grou dominion and control after the theater’s transfer. Grou could recover the theater from WEMGO and transfer it to Richmond under the contract’s terms. George countered that the right so described was nowhere in the deed.
New York rules governed whether Grou had an interest in the theater after WEMGO received it. Nonetheless, as to whether the continuing interest equated to enough dominion and control to bar a charitable deduction fell under federal rules.
The sales contract had two important conditions: WEMGO was barred from selling in the 5-year period after obtaining the deed, and Grou had the right over those years to transfer it to Richmond on IRC Section 501(c)(3) recognition. Both survived the closing.
The deed barred WEMGO from transferring the property for five years to anybody but Richmond. At first consideration then, Grou legally had no right, though, to transfer the property to Richmond after the deed was issued to WEMGO. Nevertheless, when a sales contract requires deed restrictions that the recorded deed fails to include, a court can reform the deed in equity. As such, the sales contract’s terms with regard to completeness only helped Grou, not WEMGO. Ultimately, Grou had dominion and control as a result of directing who would receive the property in the five years after deed transfer. This fact meant it was an incomplete gift, making for no charitable contribution deduction for Grou or for George.
Endnotes
1. Fakiris v. Commissioner, Docket No. 18292-12, 2017 Tax Ct. Memo. LEXIS 121 (2017).
2. Treasury Regulations Section 1.170A-4(c)(2).
3. Goldstein v. Commissioner, 89 T.C. 535, 541-542 (1987) (quoting Weil v. Commissioner, 31 B.T.A. 899, 906 (1934), aff’d by 82 F.2d 561 (5th Cir. 1936)).
4. Rosano v. United States, 245 F.3d 212, 213 (2d Cir. 2001).
