In a recent case, the Tax Court supported the IRS’s disallowance of a charitable contribution deduction for a bargain sale of fill to a city government.
Boone Operations Co. owned and operated a landfill in Tucson, Ariz., which was adjacent to a landfill operated by the city. The municipal landfill encountered a number of environmental problems.
In 1996, Boone agreed to help Tucson close its landfill. A dispute between the parties ensued, and Tucson eventually filed criminal and civil charges against Boone.
In 2003, Boone and Tucson entered into a settlement to resolve their disagreements and lawsuits. One aspect of this settlement agreement involved Tucson agreeing to pay Boone $6 per cubic yard for fill.
Boone claimed charitable contribution deductions for the fill for 2003 and 2004 as a bargain sale contribution. To qualify for a charitable contribution deduction of $250 or more, taxpayers must receive from a qualified organization contemporaneous written acknowledgment showing the description of the gift and a good-faith estimate of the value of any goods or services provided by the organization to the donee.
The IRS argued that Boone was not entitled to a charitable contribution deduction because it received significant cash and noncash consideration in exchange for the fill, and it failed to prove that the value of the fill exceeded the value of the consideration that Boone received. In addition, the IRS argued that Boone failed to obtain a contemporaneous written acknowledgment and to provide a qualified appraisal.
Boone argued that the fair market value of the donated fill exceeded $6 per cubic yard. The company provided valuation reports by an appraiser to support this contention.
Boone argued that it intended to make a charitable contribution to Tucson at the time of the sale and so had the requisite charitable intent. It further argued that it complied with all substantiation requirements, including the contemporaneous written acknowledgment requirement and the qualified appraisal requirement.
The court found that Boone could not use the settlement agreement with Tucson to meet the contemporaneous written acknowledgment requirement. While the settlement agreement indicated that Tucson provided goods and services in exchange for Boone’s contribution of fill, the agreement lacked a good-faith estimate of the value of those goods and services. Further, although the agreement indicated the amount of cash Tucson agreed to pay for the fill, it didn’t value the other benefits Boone received.
The court found that Boone failed to prove that the fair market value of the fill Boone contributed exceeded the value of the consideration Boone received from Tucson (Boone Operations Co., LLC, et. al. v. Commissioner, TC Memo 2013-101, April 11, 2013). The court’s analysis of the appraisal by Boone’s appraiser supported a conclusion that the actual fair market value of Boone’s fill ranged from $4.72 to $7.87 per cubic yard. However, the court found that it could not conclude, on the basis of the evidence, that the value of the fill transferred exceeded the amount Boone received, including cash plus other benefits.
The other benefits that Boone received included resolution of zoning disputes, dismissal of civil and criminal complaints, and other items. Boone’s appraiser did not value these additional benefits and failed to provide any evidence that would allow the court to estimate the value of these additional benefits.