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Granting partial summary judgment for the government, the U.S. District Court for the Northern District of Texas has held that the IRS properly denied a charitable deduction stemming from a couple's donation of a 4% limited partnership interest to a private foundation to establish a DAF, so the couple was not entitled to a refund for the resulting tax paid (Kevin M. Keefer, et ux. v. United States).

Facts

Kevin Keefer was a limited partner in Burbank HHG Hotel, LP (Burbank), which owned and operated a single hotel. On April 23, 2015, Burbank and the Apple Hospitality REIT (Apple) exchanged a nonbinding letter of intent (LOI) for Apple to purchase Burbank. Burbank had not signed the LOI and continued courting potential buyers. On June 18, 2015, Keefer assigned to Pi Foundation a 4% limited partner interest in Burbank to establish a DAF. Although Burbank had tentatively agreed to sell the hotel to Apple for $54m, the sales contract had not been signed, and Apple had not yet reviewed the property or associated records. The parties signed a sales contract on July 2, 2015, and the sale closed on August 11, 2015.

The Keefers commissioned an appraisal of the donated interest as of June 18, 2015, which:

• Described the appraiser's qualifications
• Did not include the appraiser's tax identification numbers
• Included a "Statement of Limiting Conditions," stating that Keefer and Pi had agreed that Pi "would only share in the net proceeds from the Seller's Closing Statement [and] not in Other Assets of the Partnership not covered in the sale"

The appraisal concluded the fair market value of the donated interest was $1.257m. Pi sent Keefer a 12-page packet of documents related to establishing the DAF (DAF Packet), which he signed on June 8, 2015. In early September 2015, Pi sent Keefer a brief letter acknowledging the donation (Acknowledgment Letter).

In their timely filed joint federal income tax return for 2015, the Keefers claimed a $1.257m charitable contribution deduction for the donation to the DAF. Their Form 1040 provided their appraiser's tax identification number, the appraisal, the DAF Packet, and the Acknowledgement Letter.

The IRS issued a deficiency notice in July or August 2019, denying the charitable deduction and increasing the Keefers' 2015 tax liability by $423,304 plus penalties and accruing interest. The IRS asserted that (1) the Keefers did not have a CWA from the donee showing the DAF "has exclusive legal control over the assets contributed" and (2) their appraisal did not include the appraiser's identifying number.

The Keefers paid the additional tax and filed a refund claim in November 2019, which the IRS denied in March 2020 as untimely. In November 2019, the Keefers filed the instant refund action in district court.

District court refund claim

Both parties moved for summary judgment. The Keefers made four claims:

• Claim 1: The IRS erred in denying their deduction and refund request
• Alternative Claim 2: If the court finds the contribution was actually an anticipatory assignment of income, the Keefers are nonetheless entitled to a refund of tax, interest and penalties
• Alternative Claim 3: If the court disallows the charitable contribution deduction, the IRS should be required to recalculate the Keefers' basis in the contributed asset and refund resulting overpaid taxes, penalties and interest
• Claim 4: The court should grant summary judgment denying the IRS's defense of variance to the Keefers' two alternative claims

The government asserted that (1) the defense of variance barred the Keefers' two alternative claims and (2) the Keefers' were not entitled to any refund.

Ultimately, the court concluded that:

• The Keefers' refund claim was timely
• The Doctrine of Variance did not bar the taxpayers' claims
• The donation was an anticipatory assignment of income
• The IRS properly denied the Keefers' charitable deduction because their CWA did not meet the requirements of IRC Section 170(f)(8) and (18)
• The taxpayers were not entitled to a refund of their 2015 taxes

A discussion of the last three points follows.

Assignment of income

Noting that a taxpayer may not escape tax on earned income by assigning that income to another party, the court stated, "[T]he critical question is whether the [donated] asset itself, or merely the income from it, has been transferred." The Keefers argued that their donation of the 4% interest met both prongs of the test established in Humacid Co. v. Commissioner, 42 T.C. 894 (1964), which provided that courts will respect the form of a donation of appreciated stock if the donor donates the property and title to it completely before the property produces income from a sale. Specifically, the Keefers contended that the hotel's sale to Apple remained uncertain when they assigned to Pi the 4% partnership interest, including all rights and interest pertaining to the interest. The government contended that the hotel's sale was "practically certain" at the time of the donation and "the Keefers carved out and retained a portion of the partnership asset by oral agreement."

When the Keefers signed the agreement to assign the partnership interest to Pi on June 18, 2015, the court concluded, the hotel was not yet under contract. The contract to sell the hotel was signed on July 2, 2015, and Apple had 30 days to review the property and potentially back out of the contract. Absent a binding obligation to close the sale, "the deal was not 'practically certain' to go through," the court found. The pending sale of the hotel, "even if very likely to occur considering the presence of backup offers and as reflected in the appraiser's estimate that the risk of no sale was only 5% — does not render this donation an anticipatory assignment of income," the court stated.

Turning back to the first Humacid prong, however, the court concluded that the Keefers had carved out a partial interest in the 4% partnership interest when they donated it, and thus did not give the entire interest to Pi. The Keefers asserted that their assignment of the 4% interest subject to an oral agreement that Pi would receive the net proceeds from the sale of the hotel, as opposed to other partnership assets not covered in the sale, "is not a 'carving out' from the 4% partnership interest to Pi any more than the partnership paying a liability for a pre-existing light bill is a 'carving out' from some partnership interest."

The government argued that the oral agreement showed the taxpayers "did not donate a true partnership interest [but gave] away 4% of the net cash from the sale of one of the Partnership's assets [that] the Keefers would otherwise have received from the sale of the hotel. This is a classic assignment of income."

The court rejected the Keefers' light-bill analogy, noting that the funds held back in the Keefers' transfer to Pi were funds that the general partner (1) chose to maintain to comply with loan agreements and (2) had the discretion to withhold from partner distributions. The taxpayers had not made a complete donation of the 4% interest, the court concluded, finding no genuine issue of material fact that they had carved out part of the 4% partnership interest before donating it to Pi. Thus, the anticipatory assignment of income doctrine applied.

Insufficient CWA

The court found that the CWA the Keefers received from Pi did not meet the requirements of IRC Section 170(f)(8) and (18).

The Keefers argued that the Acknowledgement Letter and DAF Packet together constitute a statutorily compliant CWA. The government contended that multiple documents cannot be combined to constitute a CWA unless the documents include a merger clause, and neither document in this case stated that Pi had "exclusive legal control" over the donated assets.

The court concluded that the CWA was not statutorily compliant; therefore, the IRS properly denied the charitable deduction. The court based this conclusion on its finding that (1) the DAF Packet did not constitute a CWA; and (2) the Acknowledgement Letter cannot supplement the DAF Packet. Specifically, the court found that the June 8, 2015 "DAF Packet did not complete the donation or legally obligate Kevin to donate the interest to Pi." The September 9, 2015 Acknowledgement Letter constituted the CWA in this case but did not meet the necessary statutory requirements because it did not "reference the Keefer DAF or otherwise affirm Pi's exclusive legal control, as required by [IRC Section] 170(f)(8)," which requires "strict compliance."

Implications

Taxpayers contemplating making a transfer to a DAF should consider the court's discussion on CWAs. As a general matter, the donee is not required to record or report the information provided on a CWA to the IRS, so the burden falls on the donor to ensure that proper documentation is received for the charitable organization. The court noted that the CWA requirements, under IRC Section 170(f)(8), required strict compliance; thus, IRC Section 170(f)(18) must also require strict compliance because it supplements and cross references IRC Section 170(f)(8): "The taxpayer obtains a [CWA] (determined under rules similar to the rules of [IRC Section 170(f)(8)(C)] from the sponsoring organization (as so defined) of such [DAF] that such organization has exclusive legal control over the assets contributed" (citing Averyt v. Commissioner, T.C. Memo. 2012-198 (internal citations omitted)).

The court noted that the specific language included in IRC Section 170(f)(18) ("exclusive legal control") was not required. Given the lack of guidance in this area, however, failure to make clear that the donee organization had exclusive legal control may result in denial of the donor's charitable deduction. Absent subsequent guidance, a more conservative approach may be for donors to DAFs to request CWAs that contain such language (e.g., "exclusive legal control of contributed assets was held by the [DAF]").

Another small, but important nuance, is that the court in Keefer rejected the government's position that the court should apply the Ninth Circuit's expanded view of the assignment of income doctrine, whereby a deal that is "practically certain to proceed" would cause the assignment of income doctrine to apply (Ferguson v. Commissioner, 174 F.3d 997, 1003 (9th Cir. 1999)). Given the differences in approach, taxpayers should consult their tax advisor to ensure the proper precedent is being considered pursuant to any charitable contribution.

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