Trust’s Deduction for Real Property Donation Limited to Adjusted Basis (Green, CA-10)

A charitable trust could only deduct its adjusted basis in the properties it donated. The trust could not deduct the fair market value of the property. The trust never sold or exchanged the property. Therefore, the trust never realized the gains associated with the increase in their fair market value or paid tax on those gains.


The trust’s original return reported its adjusted basis in the three donated real properties was $10.7 million and their fair market value was $30.3 million. At no point did the trust report as income the properties’ unrealized appreciation. On its amended return, the trust claimed an increased charitable deduction for the donated properties of $29.6 million and a refund of over $3 million.

Charitable Deduction

For a trust’s donation to qualify as a charitable deduction:

  1. The taxpayer must make a qualifying charitable contribution under Code Sec. 170(c);
  2. Authorized by the terms of the instrument that established the trust;
  3. During the tax year at issue.

In addition, a trust’s charitable deduction is limited to “any amount of the gross income.” The IRS and the taxpayer agreed that charitable donations must be made from the trust’s gross income. However, they also agreed that donated real property purchased with gross income qualified for a charitable deduction under Code Sec. 642(c)(1).

Donation Deduction Limited to Adjusted Basis

However, allowing the deduction of unrealized gains was inconsistent with the Code’s general treatment of gross income. Moreover, the phrase “without limitation” did not authorize the trust’s fair market value charitable deduction. Contrary to the district court’s holding, the phrase “without limitation” only clarified that the charitable deductions of estates and trusts were not limited like those of individuals and corporations.

Finally, the court rejected the trust’s attempt to save its charitable deduction by claiming the property was purchased with unrelated business taxable income. The trust’s Code Sec. 512(b)(11) arguments in its appellate response brief were a substantial variance from the original refund claim it filed with the IRS. Thus, these arguments were barred by the substantial variance rule.

Reversing and remanding DC Okla. 2015-2 ustc ¶50,549.

M.D. Green, CA-10

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All stories by: CCHTaxGroup