In the case of Keefer v. United States, USDC ND TX,[1] a taxpayer was denied a deduction for a contribution on two separate grounds. First, the Court found that the taxpayers had failed to give away the entire asset in question, resulting in an anticipatory assignment of income and, second, the taxpayers did not obtain a proper contemporary written acknowledgment of the contribution.

The Facts of the Case

The case involves the donation of an interest in a limited partnership. The opinion begins with the following facts:

In 2015, when the events giving rise to this suit occurred, Burbank was a limited partnership existing for the purpose of owning and operating a single hotel property (“the Hotel”). See Doc. 66, Appraisal, 50, 54. Kevin was a limited partner in Burbank. Doc. 15, Am. Compl., ¶ 7; Doc. 69-5, Assignment Int., 19.

On April 23, 2015, Burbank and Apple Hospitality REIT (“Apple”), exchanged a nonbinding letter of intent (“LOI”) for a deal that included Apple's purchase of the Hotel.1 Doc. 66, Appraisal, 54; see Doc. 69-1, Keefer Dep., 11, 47. Burbank did not sign the LOI but continued negotiating for the Hotel's sale. Doc. 66, Appraisal, 54. Burbank was also considering other offers for the Hotel. Id. at 54–55; see Doc. 69-1, Keefer Dep., 11, 47. On June 18, 2015, Kevin assigned a 4% limited partner interest in Burbank to Pi for the purpose of establishing a donor advised fund (“DAF”) at Pi. Doc. 69-5, Assignment Int., 19–20. As of that date, “[Burbank] had tentatively agreed on the sale of [the Hotel to Apple] for $54 million, but the contract for sale had not been signed and Apple had not conducted its review of the property and records.” Doc. 66, Appraisal, 54; see Doc. 69-1, Keefer Dep., 11. On July 2, 2015, Burbank and Apple signed a contract for Apple to purchase the Hotel for $54 million. Doc. 69-4, Purchase Contract, 48–55; Doc. 69-5, Purchase Contract, 1; Doc. 66, Appraisal, 54. The contract provided for a 30-day review period for [Apple] to evaluate the property. Doc. 69-4, Purchase Contract, 54. The sale closed on August 11, 2015. Doc. 69-5, Closing Statement, 7–8.[2]

The opinion describes the appraisal the taxpayers commissioned to provide the value of the donation:

To substantiate the donation, the Keefers’ tax advisor commissioned an appraisal of the donated partnership interest as of June 18, 2015 (“the Appraisal”). See Doc. 66, Appraisal, 50–56. The Appraisal was performed by Katzen, Marshall & Associates, Inc. (“KM”) and was prepared and signed by David Marshall (“Marshall”), a Principal of that firm. Id. at 56, 60. It included an appraiser’s certification and a description of Marshall’s qualifications but did not include either Marshall’s or KM’s tax identification numbers. See id. at 58–61. Additionally, the Appraisal included a section titled “Partnership Agreement,” setting out “[c]ertain provisions of the [Burbank Partnership] Agreement[,]” including that agreement’s definition of “Available Cash Flow” and the schedule for “Distribution of Available Cash Flow.” Id. at 52–53.[3]

The appraisal noted an additional agreement that was part of the donation:

The Appraisal indicated that its “purpose [was] estimating the fair market value of a 4.000% limited partnership interest, subject to an oral agreement, . . . in Burbank . . ., owned by Kevin.” Id. at 50. Attached to the Appraisal was a “STATEMENT OF LIMITING CONDITIONS” describing the referenced oral agreement as follows:

[KM] ha[s] been informed that the Donor and Donee have an agreement that the Donee will only share in the next proceeds from the Seller's Closing Statement. The Donee will not share in Other Assets of the Partnership not covered in the sale.

Id. at 57.[4]

The appraisal came to the following conclusion:

After describing its method for calculating the donated asset’s value, the Appraisal concluded that $1,257,000 “reasonably represent[ed] the fair market value, excluding Other Assets of the Partnership, of a 4.000% Limited Partnership Interest in Burbank . . . as of June 18, 2015,” with “[a]ll estimates of value . . . subject to the attached Statement of Limiting Conditions and Appraisers’ Certification.” Id. at 56. The Appraisal indicated that “[Kevin] stated that at the Valuation Date, he was not aware of any material fact or condition that would . . . derail the sale . . . [and that] the Partnership had a second bidder at essentially the same price.” Id. at 55. The Appraisal estimated a “5% probability of no sale.” Id

The taxpayers claimed a charitable deduction for the donation on their 2015 income tax return:

In October 2016, the Keefers “timely filed their joint federal income tax return (Form 1040) for the year 2015.” Doc. 15, Am. Compl., ¶ 9. “[They] deducted the Pi charitable contribution of $1,257,000 from income in their 2015 return on Schedule A.” Id. Attached to the Form 1040 was Form 8283, signed by Marshall and listing KM's tax identification number. See Doc. 66, Claim for Refund, 29, 31; Doc. 66, Form 8283, 36. Also attached were the Appraisal, the DAF Packet, and the Acknowledgment Letter. See Doc. 66, Claim for Refund, 29, 31; Doc. 66, IRS Checklist, 66–71.[5]

The IRS would examine the return and would seek to disallow the deduction:

In late July or early August of 2019 “the IRS sent plaintiffs [an examination report and] a Notice of Deficiency for the year 2015 [(collectively, ‘the IRS Notice’)] . . . disallow[ing the] 2015 charitable contribution to Pi, and thereby increas[ing] plaintiffs’ 2015 tax by $423,304.00, along with penalties or additions of $84,660.80 plus accruing interest.” Doc. 15, Am. Compl., ¶ 10; Doc. 66, IRS Notice, 4–22. The IRS Notice stated in relevant part:

It has not been established that the Taxpayers are entitled to deduct a charitable contribution in the amount of $1,257,000, [because] they did not have [a contemporaneous written acknowledgment (“CWA”)] from the donee organization showing that the donor advised fund “has exclusive legal control over the assets contributed” and their appraisal did not include the identifying number of the appraiser. Therefore, this deduction is not allowable.

Id. at 7.[6]

The taxpayers paid the amount of taxes and interest per the IRS assessment and then filed a claim for refund, which the IRS disallowed. The taxpayers then filed suit for refund in U.S. District Court.

The two questions that eventually decided the outcome in the case were:

Did the agreement limiting the charity’s interest to only sharing in the proceeds of the sale amount to an anticipatory assignment of income that would serve to bar the deduction? And
Were the two documents the taxpayers submitted as their acknowledgment sufficient to meet the requirements found in IRC §170(f)(8) (the general acknowledgment rules) and (18) (special acknowledgment rules for contributions to donor advised funds)?

Anticipatory Assignment of Income

The IRS argued that the contribution made just before the sale was to close amounted to an anticipatory assignment of income from that sale, thus requiring the taxpayer to recognize the income from the sale rather than merely getting a charitable contribution deduction for the value of this noncash asset (the interest in the partnership).

The opinion outlines the two criteria looked at in the Humacid case to determine if a contribution is an anticipatory assignment of income:

“Per Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964), [courts will] respect the form of [a donation of appreciated stock shares] if the donor (1) gives the property away absolutely and parts with title thereto (2) before the property gives rise to income by way of a sale.” Dickinson v. Comm’r, 2020 WL 5249242, at *3 (T.C. Sept. 3, 2020) (first citing Grove v. Comm’r, 490 F.2d 241, 246 (2d Cir. 1973); then citing Carrington v. Comm’r, 476 F.2d 704, 708 (5th Cir. 1973); then citing Behrend v. United States, 1972 WL 2627, at *3 (4th Cir. 1972); and then citing Rauenhorst v. Comm’r, 119 T.C. 157, 162–163 (2002)).[7]

While the Court disagreed with the IRS’s view that the sale was in such a state at the time of the transfer of the interest that the transfer was after the property gave rise to the income, but agreed with the IRS that the interest retained by the taxpayers meant they had not given the property away absolutely and parted with the title.

On the first issue, the IRS was attempting to get the court to find that the sale was a done deal even though there was not yet a binding obligation for the sale to go forward at the time of the transfer. The Court notes:

In a few cases, courts have extended this doctrine to situations where the stock’s redemption was so imminent and certain that “the shareholder’s corresponding right to income had already crystallized at the time of the gift.” Dickinson, 2020 WL 5249242, at *3 (emphasis omitted) (citing Palmer v. Comm’r, 62 T.C. 684, 694–95 (1974)); see Ferguson v. Comm’r, 174 F.3d 997, 1001–02 (9th Cir. 1999). These courts have generally drawn the line where the corporation’s shareholders or directors have already voted to redeem shares, creating a “binding obligation” of redemption. See Dickinson, 2020 WL 5249242 at *3. But the Ninth Circuit has extended this principle to situations where, considering the facts and circumstances of a particular deal, redemption is “practically certain to proceed” without a binding obligation. See id. at *3 n.2 (quoting Ferguson, 174 F.3d at 1004).[8]

Specifically, the IRS wanted this Texas District Court to apply the Ninth Circuit’s standard outlined in the Fergusoncase to this fact pattern:

The Government urges this Court to follow the Ninth Circuit’s more expansive approach, as set out in Ferguson, in applying Humacid to this limited partnership interest. Doc. 68, Gov’t’s Br., 17. In Ferguson, a taxpayer donated shares of appreciated stock during an open tender offer window preceding a proposed merger. 174 F.3d at 998–1000. “[T]he tender offer, and hence the merger agreement, was conditioned on the . . . [tender] of at least 85% of the outstanding shares . . . by the expiration date of the tender offer. . . . However, this minimum tender condition was waivable at the sole discretion of [the acquiring company].” Id. at 999. As of the date the taxpayer assigned the shares, with “over one week remaining in the tender offer window,” “over 50% of the outstanding . . . shares had been tendered, . . . [which the Tax Court found] was sufficient to ensure that [the acquiring company] would accept the tendered stock and thus unilaterally could and would proceed with the merger.” Id. at 1004. The Tax Court therefore found this was an anticipatory assignment of the redemption income. Id. The Ninth Circuit affirmed the Tax Court’s ruling that the anticipatory assignment doctrine applied, finding that the acquiring company’s duty to consummate the merger had not been triggered as of the assignment date because the 85% tender threshold had not yet been satisfied, but that given the “momentum” of the deal and the interests of all the parties the merger was “most unlikely” to fail. Id. at 1005–1006.[9]

The Texas District Court was not bound by this Ninth Circuit precedent, since an appeal of this decision would be heard by the Fifth Circuit Court of Appeals, so the IRS was hoping this court would find the Ninth Circuit ruling persuasive even if the Court did not have to follow it.

But the District Court rejected the Ninth Circuit’s analysis:

The Court declines to extend the Ferguson approach to the real estate transaction at issue here. The uncontroverted evidence shows that the Keefers executed the agreement to assign the partnership interest to Pi on June 18, 2015. Doc. 69-5, Assignment Int., 19–20. The partnership executed the contract for sale of the Hotel on July 2, 2015. Doc. 69-4, Purchase Contract, 48–55; Doc. 69-5, Purchase Contract, 1–2. So, at the time of the assignment on June 18, 2015, the Hotel was not even under contract. And while Apple had sent an LOI to Burbank before that date, the LOI was nonbinding and was never signed by Burbank. Doc. 66, Appraisal, 54; see Doc. 69-1, Keefer Dep., 11; Doc. 69-1, LOI, 47–49. Moreover, even after the contract with Apple was signed, it provided Apple a 30-day review period. Doc. 69-4, Purchase Contract, 54. Until that review period elapsed, Apple had no binding obligation to close and the deal was not “practically certain” to go through. See id.[10]

Thus, the Court concludes that the transfer satisfied the second Humacid prong:

Under these circumstances, the Partnership’s right to the income from the Hotel sale had not yet vested when the Keefers assigned the interest to Pi. Thus, the pending sale — 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. See Doc. 66, Appraisal, 55; cf. Caruth Corp., 865 F.2d at 649 (“The IRS . . . makes recourse to Justice Holmes[’s] metaphor, and urges that we hold Caruth taxable upon the dividend because here the fruit was exceptionally ripe. . . . We fail to see why the ripeness of the fruit matters, so long as the entire tree is transplanted before the fruit is harvested.”).[11]

But the last part of the final quoted sentence would prove to create problems for the first prong—the Court found that, in fact, the entire tree was not transplanted. Rather, the taxpayer retained all interests except the interest in the sales proceeds, which amounted to an effective assignment of the income only.

However, the Court must still consider the first Humacid prong: whether by assigning the 4% interest “subject to an oral agreement” the Keefers “carve[d] . . . a partial interest out of the [assigned] asset.” See Salty Brine I, Ltd, v. United States, 761 F.3d 484, 491 (5th Cir. 2014). If so, then they retained that partial interest in the asset after the assignment and the anticipatory assignment of income doctrine would apply, as the whole asset was not transferred before the Hotel sale closed on August 11, 2015. See id.; Doc. 69-2, Closing Statement, 20–21. In other words, reverting to Justice Holmes’s metaphor, did the Keefers transplant the whole tree on June 18, 2015, when Kevin assigned the interest to Pi? See Caruth Corp., 865 F.2d at 649.[12]

The taxpayers argued that the oral agreement did not represent an impermissible retained interest. As the Court explained:

The Keefers explain that “before Kevin . . . transferred the 4% partnership interest to Pi, the partnership owed money to the pre-existing partners for pre-donation earnings that had not been distributed to those pre-existing partners . . . because the partnership, as the owner of the [H]otel, was required . . . to maintain a certain amount of cash reserves . . . to comply with . . . loan and franchise obligations.” Doc. 71, Pls.’ Resp., 14. Kevin testified that the “oral agreement” referenced in the Appraisal was an agreement between the pre-assignment partners:

[T]he general partner had made the decision that [the reserve accounts] — since those were amounts withheld from earnings prior to the date of the gift, that the general partner was going to distribute that to the partners in their percentage of ownership prior to that date of the gift. It was his opinion and responsibility to pay those reserves in to the partners from the — where the earnings had been prior to — held back prior to the June 18th. The — what I told the Pi Foundation is we were going to distribute those reserves to a number of re — effectively a distribu — a liability at the time of the transfer to the partners. And they had — they acknowledged what we were doing and how we were gonna treat it, and so we were sure that the [appraisal] valuation was done that way. So that’s what — I consider it an oral agreement in how we were treating that. We treated it as a liability at the time of the transaction, so all those reserves were distribution to the partners prior to June 135 [sic], that we had a liability to pay them, and that’s why they weren’t included in the valuation.

Doc. 69-1, Keefer Dep., 30.

The cash reserves in question, Kevin testified, were reflected on the partnership’s balance sheet as “equipment reserves” and “working capital reserves.” Id. at 32. The reason for keeping these reserves, which had been “reserved from the distributions that [the partnership had] been making from the partners,” was so “if the [H]otel sale didn’t go through [the partnership] would have the money to [make future renovations to the Hotel as required by the franchise agreement] because the Pi Foundation could not obviously contribute capital for the renovation,” he testified. Id. at 34. So, if the Hotel sale occurred and the renovations would not be required “those reserves [would be released as] accrued distribution to those partners prior to the Pi Foundation being admitted.” Id. However, Kevin testified that the franchise agreement did not require such cash reserves; they were reserved at the discretion of the general partner. Id. In sum, the Keefers argue that “[t]he partnership’s payment of pre-existing liability to its pre-existing partners 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.” Doc. 74, Pls.’ Reply, 4.[13]

The IRS argued that the taxpayers’ own appraisal noted that they had not given away the entire partnership interest:

The Government responds that “the Keefer’s [sic] own appraisal that takes into account their side oral agreement . . . shows that they did not donate a true partnership interest . . . [but] g[a]ve away 4% of the net cash from the sale of one of the Partnership’s assets . . . cash the Keefers would have otherwise received from the sale of the [H]otel. This is the classic assignment of income.” Doc. 73, Gov’t’s Reply, 7–8.[14]

The opinion sides with the Government on this issue based on the details of the oral agreement provided by the taxpayers and their own appraisal:

According to Kevin’s testimony, the “reserve accounts” were funds that the general partner chose to maintain for compliance with “loan and franchise agreements” and that had been withheld from partner distributions at the discretion of the general partner. See Doc. 69-1, Keefer Dep., 30, 32, 34. Per his testimony, they were not liabilities like a pre-existing light bill. See id. Instead, they were a reserve of cash held back to address future potential liabilities. See id.

Thus, as described by Kevin, the cash reserves fall within the Partnership Agreement’s definition of “Available Cash Flow,” which is set forth in the Appraisal. See Doc. 69-1, Appraisal, 207 (defining “Available Cash Flow” to include “any other funds, including, but not limited to, amounts previously set aside as reserves by the General Partner, deemed advisable in the discretion of the General Partner, for distribution as cash flow”). And per the Appraisal’s recitation of the Partnership Agreement’s provisions, “Available Cash Flow, if any, in each calendar quarter of a partnership year shall be allocated to and distributed among the Partners pro rata . . . at such time as the General Partner determines, but in no event later than thirty (30) days after the close of such calendar quarter of the Partnership year.” Id. at 208. As Marshall noted: “The Agreement provides that available cash flow shall be distributed to the Partners.” Id. at 209.

By contrast, the Appraisal indicates that, pursuant to the “oral agreement,” the interest donated to Pi would not be subject to the Partnership Agreement’s Available Cash Flow provisions but to an alternative arrangement:

On June 18th, 2015, the donor transferred a 4.000% limited partnership interest in the Partnership to the Pi Foundation. By oral agreement, the Foundation and Donor agreed that the Foundation would only share in the proceeds from Seller’s Closing Statement; the Foundation would not receive its pro rata share in other net assets of the Partnership.

Id. at 209 (emphasis added).

Regarding this oral agreement, Kevin testified that upon the Hotel’s sale, the partnership intended to take the sale proceeds, deduct the reserve funds from the proceeds and pay them out in shares to the pre-June 18 partners but not to Pi, and then disburse to Pi its 4% share of the remaining net proceeds. See id. He also testified that the donated interest as described in the Appraisal “is what [Pi] received.” Doc. 69-1. Keefer Dep., 35.[15]

The Court concludes that the agreement described above clearly meant that less than the entire interest was transferred to the charity:

Based on this evidence, the Court finds that no genuine issue of material fact exists as to whether the Keefers carved out a portion of the 4% partnership interest before donating it to Pi. They did. After the assignment, Pi did not have the right that other partners had to share in a distribution of Available Cash Flow as described in the Partnership Agreement, but only had a right to share in the net proceeds of the Hotel sale. See id. at 35; Doc. 69-1, Appraisal, 209 (noting that “the Foundation would only share in the proceeds from Seller’s Closing Statement; the Foundation would not receive its pro rata share in other net assets of the Partnership”). Or, in the unlikely event the Hotel sale had not been completed as planned, Pi would not have shared equally with the other limited partners in the duty to contribute funds for renovation, should additional funds be required to fulfill the partnership’s obligations under the loan or franchise agreements. See Doc. 69-1, Keefer Dep., 34 (noting that the pre-assignment reserves were needed because “the Pi Foundation could not obviously contribute capital for the renovation”). Reflecting this carve out, the Appraisal calculated a lower value for the donated interest than for a full 4% interest in all of the partnership’s assets. Doc. 69-9, Appraisal, 594 (“All assets not included in the $54 million [sale price] have been excluded.”); id. at 595 (calculating 4% of net sale proceeds without reserves). Accordingly, the Keefers did not donate their full 4% partnership interest on June 18, 2015, but donated only a portion thereof. They did not transplant the whole tree.[16]

Thus, no deduction would be allowed for this contribution, as it amounted to an anticipatory assignment of income.

Contemporaneous Written Acknowledgment Issue

Although the refund claim was doomed by the finding that the transfer was an anticipatory assignment of income, the Court also found that the lack of a proper contemporaneous written acknowledgment (CWA) also would prove fatal to this refund claim.

The opinion describes the general CWA rules found at IRC §170(f)(8):

Section 170(f)(8) provides that a charitable deduction “for any contribution of $250 or more” shall not be allowed “unless the taxpayer substantiates the contribution by a [CWA] of the contribution by the donee organization that meets the requirements of subparagraph (B).” 26 I.R.C. §170(f)(8)(A). Subparagraph B requires in relevant part that a CWA state: (1) “The amount of cash and a description (but not value) of any property other than cash contributed”; and (2) “Whether the donee organization provided any goods or services in consideration, in whole or in part, for [the donated property.]” Id. § 170(f)(8)(B)(i–ii). [17]

The charity receiving this donation was a donor advised fund. Such donations are subject to additional requirements found at IRC §170(f)(18):

A donation to a donor advised fund must also comply with § 170(f)(18), which requires:

A deduction . . . for any contribution to a donor advised fund . . . shall only be allowed if . . . the taxpayer obtains a [CWA](determined under rules similar to the rules of paragraph (8)(C)) from the sponsoring organization. . . of such donor advised fund that such organization has exclusive legal control over the assets contributed.

Id. § 170(f)(18). [18]

Finally, the Court notes that taxpayers must strictly comply with these statutory requirements—substantial compliance is not sufficient when dealing with statutory requirements.

Importantly, “[t]he doctrine of substantial compliance does not apply to excuse compliance with the substantiation requirements of section 170(f)(8)(B).” Averyt v. Comm’r, 2012 WL 2891077, at *4, (T.C. July 16, 2012) (citing Durden v. Comm’r, 2012 WL 1758655, at *4 (T.C. May 17, 2012)). Strict compliance is required. See id.[19]

The taxpayers claimed the two documents they provided complied with all applicable CWA requirements:

The Keefers claim that they obtained a statutorily compliant CWA, including Pi’s acknowledgment that it had full and exclusive legal control over the donated property. Doc. 65, Pls.’ Br. Am. Mot., 16. They assert that “PI prepared two documents[,] . . . [the] one page [Acknowledgment Letter] dated [September 9]6, 2015, signed by the Executive Director of PI saying PI received the ‘donation’ and that ‘[n]o goods or services were provided in exchange’ . . . [and the] 12 page [DAF Packet] also on PI letterhead dated June 8, 2015” (collectively, “the Pi Documents”), containing additional terms of the agreement. Id. The Pi Documents, collectively, are a statutorily sufficient CWA, the Keefers argue. Id. at 16–19. They argue that the Acknowledgment Letter, which satisfies § 170(f)(8), is supplemented by the DAF Packet, which proves that Pi exercised exclusive legal control over the property after the donation and therefore satisfies § 170(f)(18). Id.; Doc. 71, Pls.’ Resp., 24.[20]

The IRS presents a number of objections, arguing that the Keefers failed to provide the required CWA:

The Government responds with several alternative arguments. First, it contends that multiple documents cannot be combined to constitute a CWA unless the documents contain a merger clause. Doc. 72, Gov’t’s Resp., 18. But even if they could be, the Government argues neither the DAF Packet nor the Acknowledgment Letter contains a statement that Pi had “exclusive legal control.” Doc. 72, Gov’t’s Resp., 16. The Government argues that this exact language is required to satisfy §170(f)(18). Id. at 17. Or, if this specific language is not required, the Pi Documents “still fail[ ] to show that Pi had exclusive legal control,” it maintains, because the DAF Packet does not include a merger clause and the interest was transferred subject to an oral agreement that “could wrestle the purported ‘exclusive legal control’” away from Pi and back to the Keefers. Id. at 18.[21]

The Court finds that the June 5 packet must be excluded from consideration as part of the CWA and the September 9 letter standing alone is not sufficient to meet the CWA requirements.

One key problem with the June 5 packet is that it was issued before the donation took place on June 18 and at a time when there was no binding legal requirement for the Keefers to make the donation—thus it could not be acknowledging anything, as that implies an event that has already taken place:

Here, the summary-judgment evidence shows, as a matter of law, that the DAF Packet did not complete the donation or legally obligate Kevin to donate the interest to Pi. While the DAF Packet stated that “Kevin . . . hereby transfers as an irrevocable gift to [Pi] . . . the [4.00% partnership interest],” Doc. 66, DAF Packet, 38, the actual assignment did not occur when Kevin signed the DAF Packet documents on June 8, but ten days later. Doc. 69-5, Assignment Int. Further, the DAF Packet’s cover letter states in relevant part: “It is [Pi’s] understanding that you intend to donate to [Pi] 4.00% of interest in Burbank. . . . you agree that if 4.00% of interest in Burbank . . . is not donated to [Pi] for any reason, you will be responsible for paying the [Pi]’s legal fees and costs associated with your anticipated donation.” Doc. 69-1, DAF Packet, 84 (emphasis added). This establishes that, by signing the DAF Packet, Kevin was not legally obligated to complete the donation; rather, he was only legally obligated to pay Pi’s legal expenses whether the donation occurred or not. See id; Doc. 69-5. Assignment Int. So, the DAF Packet is not a CWA because it did not acknowledge a contribution. See 26 I.R.C. § 170(f)(8)(A).[22]

The Court also found that the packet could not be combined with the letter issued following the actual donation to create a CWA, finding that the cases the taxpayer and the IRS cited did not support the view that the packet could be combined with the letter to form a CWA.

First, the court notes that each of the cases cited involve deeds related to conservation easements:

Averyt and French each involved the donation of a conservation easement. In Averyt, the court held that a letter acknowledging a conservation easement donation was not a CWA because it did not state what portion of the donation was deductible and (incorrectly) indicated that some benefit was provided to the donor in exchange. See Averyt, 2012 WL 2891077, at *4. However, the court found that the conservation easement deed itself was a CWA, even though it did not state that “no goods or services were provided” for the donation:

[T]he conservation deed was signed by a representative from [the donee organization], provided a detailed description of the property and the conservation easement, and was contemporaneous with the contribution. Additionally, the conservation deed in the instant case states that the conservation easement is an unconditional gift, recites no consideration received in exchange for it, and stipulates that the conservation deed constitutes the entire agreement between the parties with respect to the contribution of the conservation easement. Accordingly, the conservation deed, taken as a whole, provides that no goods or services were received in exchange for the contribution. Consequently, we conclude that . . . the conservation deed in the instant case satisfies the substantiation requirements of section 170(f)(8).

Id. at *5 (emphasis added).

In French, taxpayers who did not receive a contemporaneous letter acknowledging their conservation easement donation similarly attempted to rely on their conservation easement deed as a CWA. French, 2016 WL 1160152, at *4. As in Averyt, the deed did not state that “no goods and services were received in exchange” for the donation. Id. But unlike in Averyt, the deed did not contain a merger clause stating that it was the entire agreement between the parties. Id. “Without such a provision,” the court concluded, “the IRS could not have determined by reviewing the conservation deed whether petitioners received consideration in exchange for the contribution of the conservation easement . . . [and] the conservation deed taken as a whole is insufficient to satisfy section 170(f)(8)(B)(ii).” Id. Therefore, the court denied the charitable donation deduction. Id.[23]

The Court, noting that these cases merely show that deeds can serve as a CWA and that neither the IRS nor the taxpayers cited any cases expanding these holdings beyond deeds, comments on how they could apply to documents other than deeds:

If these cases can be applied to documents other than deeds — which by their nature, substantiate a completed transfer of interest — they suggest that a court might consider outside documents to supplement an otherwise-deficient CWA so long as the plain text of the CWA directs and limits the inquiry. Cf. French, 2016 WL 1160152, at *4 (“[T]he deed taken as a whole must prove compliance.” (emphasis added)); Izen, 148 T.C. at 78; Albrecht, 2022 WL 1664509, at *3 (noting that the court construes “the plain text of the deed”). But see Irby v. Comm'r, 139 T.C. 371 (2012).[24]

And here the September 9 letter falls short:

Here, as discussed above, only the September 9, 2015 Acknowledgment Letter is a CWA on which to base this inquiry. The body of this letter reads in full:

Thank you for your donation to The Pi Foundation, Inc. of a 4.00% interest in Burbank HHG Hotel, LP. The Pi Foundation, Inc., is a 501©(3) nonprofit organization. Your contribution is tax-deductible to the extent allowed by law. No goods or services were provided in exchange for your generous financial donation. Please keep this page for your records.

69-1, Acknowledgment Letter, 98.

Critically, the Acknowledgment Letter does not incorporate by reference or otherwise refer to the DAF Packet. See id. It does not reference the Keefer DAF at all, state that the donated interest is destined for any DAF, or even state that Pi is a provider of DAFs. See id. Therefore, the text of the Acknowledgment Letter does not provide the Court any basis on which to incorporate the DAF Packet’s provisions.[25]

Effectively, the Court is agreeing with the IRS that only if this acknowledgment has incorporated the provisions of the packet by explicit reference could the contents of the packet have been considered as part of the CWA.

Thus, the Court finds the taxpayers failed to comply with the requirements of IRC §170(f)(18) for donations to donor advised funds even though the acknowledgment did comply with the general rules of §IRC 170(f)(8):

So, the Court cannot read the DAF Packet together with the Acknowledgment Letter but must consider whether the Acknowledgment Letter alone proves compliance with each requirement of § 170(f)(8) and (18). As the Keefers admit, their tax advisor testified, and the IRS reviewer noted, the Acknowledgment Letter proves compliance with § 170(f)(8) but does not prove that Pi received exclusive legal control as § 170(f)(18) requires. See Doc. 71, Pls.’ Resp., 24 (arguing that the DAF Packet establishes exclusive legal control); Doc. 66, IRS Checklist, 69 (indicating no statement of exclusive legal control); Doc. 69-3, Horowitz Dep., 341 (stating that the one-page CWA was “the acknowledgment required by Section 170(f)(8) of the [C]ode” and the DAF Packet was the acknowledgment issued “[i]n accordance with Section 170(f)(18)”). Therefore, because the Acknowledgment Letter does not reference the Keefer DAF or otherwise affirm Pi’s exclusive legal control, as required by § 170(f)(18), the Keefers did not obtain a CWA satisfying each statutory requirement.[26]

IRC §170(f)(18)(B), Like §170(f)(8), Requires Strict Compliance With the Statute

The Court moves on to consider if IRC §170(f)(18)(B) requires the same strict statutory compliance as IRC §170(f)(8) and concludes that answer is yes.

The Keefers argue that § 170(f)(18)(B)’s “only requirement is that there be an acknowledgment, in writing, in some form or fashion that acknowledges the fact that the charity has exclusive legal control of the contributed asset . . . after the donation.” Doc. 74, Pls.’ Reply, 8. But this is not what the Tax Code says. As noted above, § 170(f)(18) provides that:

A [charitable] deduction . . . for any contribution to a donor advised fund . . . shall only be allowed if . . . (B) the taxpayer obtains a contemporaneous written acknowledgment (determined under rules similar to the rules of paragraph (8)(C)) from the sponsoring organization (as so defined) of such donor advised fund that such organization has exclusive legal control over the assets contributed.

26 I.R.C. § 170(f)(18) (emphasis added).

By its plain text, § 170(f)(18)(B) supplements and cross references the CWA requirements of § 170(f)(8), which require strict compliance. See Averyt, 2012 WL 2891077, at *4; Albrecht, 2022 WL 1664509, at *2. Therefore, the Court holds that § 170(f)(18)(B) likewise requires strict compliance.[27]

The opinion does not agree with the IRS argument that the specific words “exclusive legal control” must appear in the document—just that the CWA must acknowledge that such control exists:

However, strict compliance with § 170(f)(18)(B) does not mean that the exact words “exclusive legal control” must appear in the CWA, as the Government argues. See Doc. 68, Gov’t’s Br., 27. Instead, it means that the CWA must prove that the “organization has exclusive legal control,” which might be accomplished without that specific language. Cf. Schrimsher v. Comm’r, 2011 WL 1135741, at *2 (T.C. 2011) (quoting H.R. Rep. No. 103–213, at 565 n.32 (1993) (Conf. Rep.) (“The contemporaneous written acknowledgment ‘need not take any particular form’ . . . [but] must include [the statutorily required] information.”).[28]

But in this case the document falls short of meeting that standard:

Here, as the Court has explained above, the only CWA the Keefers obtained completely fails to address legal control over the donated property. So, the CWA does not contain the information required by § 170(f)(18)(B). The IRS properly denied the deduction for this reason. See Doc. 66, IRS Checklist, 71 (indicating “not met” as to the exclusive legal control requirement).[29]

[1] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/couple-can’t-deduct-donation%2c-not-entitled-to-refund/7dmkd?h=Keefer (retrieved July 16, 2022)

[2] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[3] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[4] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[5] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[6] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[7] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[8] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[9] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[10] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[11] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[12] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[13] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[14] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[15] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[16] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[17] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[18] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[19] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[20] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[21] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[22] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[23] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[24] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[25] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[26] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[27] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[28] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022

[29] Keefer v. United States, USDC ND TX, Case No. 3:20-cv-00836, July 6, 2022