Judge Halpern has to untangle a charitable deduction that feels wrong–but is it a sham? And if it is, so what?

The case is RERI Holdings I, LLC, Harold Levine, Tax Matters Partner, 2014 T. C. Memo. 99, filed 5/22/14.

Hal the Tax Matterer (hereinafter just “Hal”) wants partial summary judgment that the concepts of “sham” and “lack of economic substance” don’t apply to charitable gifts. IRS vigorously opposes.

RERI was organized to set up a give-and-go with the remainder interest in a triple-net lease of California real estate. And there was a charitable donation thereof, although IRS claims it was zero and Hal claims $33 million.

Judge Halpern doesn’t give either side partial summary judgment.

First, if a desire for a tax break invalidates a charitable gift deduction, no charitable gift would be deductible. Second, if RERI is a sham, then any deduction would flow through to its partners (RERI having elected to be taxed as a partnership). And that would happen anyway.

A charitable gift doesn’t need a nontax purpose to be deductible, but the amount of the deduction is the FMV of the property. And that means deflated of any give-and-go shenanigans. And any entity formed for the sole purpose of augmenting the supposed FMV of the donated property will be disregarded.

But we don’t know enough just yet. “Whether RERI was organized solely for tax avoidance purposes and lacked economic substance may be a relevant issue in determining whether its contribution… entitled its members to charitable contribution deductions on account thereof. It remains to be seen whether that is the case. Therefore, as stated, we will deny the motion.” 2014 T. C. Memo. 99, at p. 23.