Wednesday, May 11, 2011

Reforming Donations of Partial Interests

Sarah B. Lawsky (UC-Irvine) has published "The Sum of Its Parts:  Reforming Charitable Donations of Partial Interests," in 64 Tax L. Rev. 37  (2010).  Here is an excerpt from the article's introduction:

This Essay begins with a tax puzzle, and not the type of tax puzzle that can be solved merely by following a twisting path of cross references and allusions through the Code. It is a deeper puzzle: Why does the Code permit someone who donates property to a charity to take a deduction for that donation, but deny a deduction to someone who donates a partial interest in that same property?  For example, someone who donates a building to a charity may be permitted to take a deduction for the fair market value of the building.  But if instead of donating the entire building, that person permits the charity to use the building rent-free for a year, he cannot take any deduction.  This is a rule of great practical significance, denying as it does charitable deductions for, among other things, permitting a charity to use real estate, providing a charity with an interest-free loan, and granting a charity a license to use a patent.

The place to start when searching for a justification, or at least some justification, for a particular Code section is, of course, legislative history. But unfortunately, the only reason Congress gave for including the partial interest provision in the Code does not actually, on further investigation, provide a way to distinguish between partial interests and whole interests. Thus I will ruin this puzzle by revealing the answer up front:  The provision denying a deduction for the charitable donation of partial interests is, I think, wrong.  This rule is at best unnecessary and at worst inconsistent with other areas of tax law.


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