Trust Deduction for Donation of Appreciated Property Limited to Basis

One of the longstanding “rules of thumb” of tax research is to be careful not to rely upon a single court decision that seems to be an “outlier,” especially when it comes from a U.S. District Court which is a court that does not specialize in tax law cases.  This turned out to be true in the case of Green v. United States where a decision from an Oklahoma District Court was reversed on appeal by the Tenth Circuit Court of Appeals (Case No. 16-6371).

We had covered the District Court decision on the Current Federal Tax Developments website when the opinion was published in November of 2015.[1]  The IRS had several objections, including whether any deduction should be allowed.  But on appeal the IRS limited its objection to the amount of the contribution, not whether a contribution deduction should be allowed to the taxpayer.

The issue in the decision that the Tenth Circuit disagreed with was the U.S. District Court’s decision that a trust that made a donation to charity of appreciated real property could claim a deduction for the property’s fair value, rather than limiting the deduction to the taxpayer’s basis in the property.

As we’ve discussed here numerous times, trusts are subject to special rules to claim a charitable deduction.  IRC §642(c)(1) provides the basic rules:

(1) General rule

In the case of an estate or trust (other then [sic] a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulations.

The parties agreed that the trust had acquired the property with gross income in this set of facts and that therefore the donation was made out of gross income.

But the trust and the IRS disagreed on how much should be allowed as a deduction.  The trust claimed a deduction for the entire value of the property, but the IRS asserted that only the basis was an amount paid of gross income, since that was the amount of gross income that was used to acquire the property.

The Tenth Circuit agreed with the IRS on this issue.  The Court found that no gross income had been realized on the appreciation, as the taxpayer had not sold the underlying property.  The opinion notes:

As the IRS correctly notes in this case, because the Trust never sold or exchanged the properties at issue, it never realized the gains associated with their increases in market value and was therefore never subject to being taxed on those gains. Thus, construing § 642(c)(1)'s deduction to extend to unrealized gains would be inconsistent with the Code's general treatment of gross income. Consequently, unless and until Congress acts to make clear that it intended for the § 642(c)(1) deduction to extend to unrealized gains associated with real property originally purchased with gross income (similar to what Congress did in § 170, which, as we have noted, addresses charitable contributions by individuals and corporations), we conclude that we cannot construe the deduction in that manner.

[1] Trust Granted Deduction for Full Fair Value of Donated Property, Not Limited to Basis in Property, Current Federal Developments website, 11/14/15,