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Quid Pro Quo: When a “Gift” is not a Gift

Tax Alert

April 8, 2016

When it comes to properly documenting property and cash donations, most charities are well-versed with the IRS’ substantiation rules. But equally as important to those rules are the disclosure requirements regarding quid pro quo donations—that is, where the donor receives goods, property, or services in return for the contribution. Recent news stories have reported that state taxing authorities have identified alleged quid pro quo arrangements involving donations to a private nonprofit school choice initiative in exchange for the grant of scholarships for children of those donors.

In most situations, the valuation of the property or goods exchanged is simply fair market value of those items. But in other cases, where services or political approval of plans or projects are involved, this analysis can be more complex or—even worse, as indicated by recent Tax Court cases—nonexistent.


Over the past two years, the Tax Court has disallowed deductions for two taxpayers based on a failure to properly disclose a quid pro quo arrangement related to a donation. In Seventeen Seventy Sherman Street LLC v. Commissioner, T.C. Memo 2014-124 (2014), the Court found a donation of conservation easements to the designated charity of a planning and development agency was actually in exchange for that agency’s grant of an easement altering zoning restrictions, and not a bona fide donation. In that case, the taxpayer sought to develop a registered landmark into residential condominiums. Zoning restrictions on the property limited its primary use to cultural center, theater space, and event rental purposes. And as a landmark, changes to the interior and exterior of the building had to be approved by the city. The parties agreed that the taxpayer would transfer interior and exterior easements on the property in exchange for the agency’s support regarding the removal of zoning restrictions of the property.

After review, the Court determined the easement grant was a quid pro quo exchange.


According to the Court, the taxpayer received consideration in the form of the agency’s recommendation regarding zoning approval, in exchange for their contribution of interior and exterior easements on the building. The Court found the agency’s recommendation increased the likelihood of the city’s ultimate approval of the zoning amendments, and this recommendation thus had substantial value to the taxpayer.

Next, in Costello v. Commissioner, T.C. Memo 2015-87 (2015), the Court found a similar easement exchange lacked donative intent on behalf of the taxpayer. In that case, in an effort to increase density limitations on its property, the taxpayer entered into a contract to sell several of its development rights on a property to a developer. As part of the overall transaction and as a condition of being permitted to sell the development rights, the taxpayer also placed a land preservation easement on the property and conveyed it to the county. Under the arrangement with the county, the transfer of the development rights could not occur until the county approved the plats.

The Court upheld the IRS’ disallowance of the deduction for the taxpayer’s charitable contribution of the easement for failure to properly document the transaction.


However, the Court also observed that notwithstanding those failures, the Court would have upheld the disallowance based on the quid pro quo nature of the transaction. According to the Court, the taxpayers would not have conveyed the easement to the county unless they were allowed to sell their development rights to the third party. Again, the Court observed, the county’s approval of the transfer had substantial value to the taxpayer.

In sum, exempt organizations should ensure they are properly and timely providing, as described in Burnie Maybank’s book South Carolina Nonprofit Corporate Practice Manual, “[p]rovide the donor with a good faith estimate of the fair market value of the goods or services that the donor received.”

Order manual here.

These cases indicate that the IRS has taken an expansive view on the extent to which goods, services, favors, agreements, and approvals will be found to have “substantial value” sufficient to jeopardize a taxpayer’s charitable deduction.


For more information, please review these slides, which address the substantiation and quid pro quo issues in greater depth.

Burnie Maybank twice served as Director of the South Carolina Department of Revenue (under Governor Mark Sanford from 2003 through 2005 and Governor David Beasley from 1995 to 1999.) In private practice he represents companies and organizations needing state and local tax (SALT), tax controversy and economic development incentives assistance.

Jim Rourke is an associate with Nexsen Pruet's Tax Group in Columbia. After earning his undergraduate degree from Harvard and a World Series ring as a staffer with the Boston Red Sox, he earned his law degree from the University of South Carolina and his LL.M. from New York University.

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