880 F.3d 519
10th Cir.2018Background
- The David and Barbara Green 1993 Dynasty Trust (Trust) owned GDT CG1 LLC and a 99% interest in Hob-Lob Limited Partnership, which generated large distributive income; GDT purchased three properties with distributions from Hob-Lob and later donated them to qualified charities in 2004.
- The Trust claimed charitable deductions on its 2004 Form 1041 based on the properties’ fair market values (~$30.3M), reporting adjusted bases of ~ $10.7M, and later filed an amended return increasing the deduction and seeking a $3,194,748 refund.
- The IRS denied the refund, asserting § 642(c)(1) limits a trust’s charitable deduction for such donated property to the trust’s adjusted basis in the property (not its fair market value).
- The district court granted partial summary judgment for the Trust, allowing deductions at fair market value; parties stipulated two properties’ values and a jury determined the third, leading to judgment for the Trust.
- The United States appealed; the Tenth Circuit reversed, holding § 642(c)(1) is reasonably interpreted to limit the deduction for property donated that was purchased with gross income to the donor-trust’s adjusted basis (unrealized appreciation is not includible in gross income).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper measure of a trust’s deduction under 26 U.S.C. § 642(c)(1) for donated appreciated real property | Trust: deduction equals fair market value of donated property (as in § 170 for individuals/corporations) | U.S.: deduction limited to trust’s adjusted basis in the donated property (unrealized gain not gross income) | Held: Deduction limited to adjusted basis; unrealized appreciation not included under § 642(c)(1) |
| Whether § 642(c)(1) requires donations to be sourced from gross income and whether property purchased with gross income qualifies | Trust: § 642(c)(1) should be read broadly to allow donations traceable to gross income, including property purchased with gross income, measured at FMV | U.S.: § 642(c)(1) requires sourcing to gross income but, for property purchased with gross income, deduction is limited to basis | Held: § 642(c)(1) can be read to include property purchased with gross income, but amount is limited to adjusted basis |
| Chevron deference to Treasury regulation 26 C.F.R. § 1.642(c)-1 | Trust: argued for interpretation favoring fair market value; did not press against regulation deference | U.S.: relied on regulation and its administrative position limiting deduction to basis | Held: Court finds IRS regulation reasonable; even without Chevron, limiting deduction to basis is the most consistent interpretation with Code as a whole |
| Whether Trust may rely on § 512(b)(11) to claim a § 170 FMV deduction for property allocable to unrelated business income | Trust: property was allocable to UBI and § 512(b)(11) provides alternative path applying § 170 FMV rules | U.S.: issue not raised in IRS refund claim; barred by substantial variance and waived below | Held: § 512(b)(11) argument barred by substantial-variance rule and waived because not raised to IRS or district court |
Key Cases Cited
- Old Colony Trust Co. v. Commissioner, 301 U.S. 379 (Supreme Court) (interpreting predecessor to § 642(c)(1) and rejecting requirement that deduction be paid from current year’s income)
- New Colonial Ice Co. v. Helvering, 292 U.S. 435 (Supreme Court) (deductions are matters of legislative grace)
- Helvering v. Bliss, 293 U.S. 144 (Supreme Court) (charitable-deduction provisions construed liberally)
- Rutkin v. United States, 343 U.S. 130 (Supreme Court) (realization principle: taxable income requires realization of readily realizable economic value)
- Cottage Savings Assoc. v. Commissioner, 499 U.S. 554 (Supreme Court) (realization requirement and §1001 analysis)
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (Supreme Court) (deference to reasonable agency interpretations)
- Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, 566 U.S. 399 (Supreme Court) (start statutory interpretation with text)
- Knight v. Commissioner, 552 U.S. 181 (Supreme Court) (taxpayer bears burden to prove entitlement to deduction)