Charitable Deductions Denied for Contributions of Dirt

By Bruce R. HopkinsMay 20, 2013 | Print

The US Tax Court, on April 11, held that a limited liability company (LLC) is not entitled to charitable contribution deductions pertaining to alleged gifts of fill dirt to a city because the substantiation requirements were not met and the transfers failed to qualify as bargain sales (Boone Operations Co., LLC v. Commissioner).


The LLC owns and operates a landfill that accepts construction and inert debris materials from various parties. Another landfill was operated by the city nearby. Both landfills are surrounded by residential areas, a park, and a commercial complex. Because decomposing materials produce methane gas, various environmental problems resulted, including odors. Litigation ensued; a settlement was reached.

The LLC sold 99,879 cubic yards of fill to the city, which paid $599,274. The next year, the LLC sold 47,088 cubic yards of fill to the city for $282,528. Based on appraisals, the LLC determined that the first-delivered fill had a value of $1,048,730; the second was said to have a value of $988,848. The LLC treated the transactions as bargain sales and claimed charitable deductions accordingly.


Two of the requirements of the substantiation rule are that the gift acknowledgment, which must be contemporaneous, must state whether the donee provided any goods or services in consideration for the gift property and a description and good-faith estimate of the value of any goods or services provided (IRC § 170(f)(8)(B)(ii), (iii)).

A person claiming a charitable deduction as the result of an ostensible bargain sale must demonstrate that the person purposefully contributed money or property in excess of the value of any benefit the person received in return (United States v. American Bar Endowment (Sup. Ct. 1986)). When a person enters into a contractual arrangement and claims that a bargain sale occurred, courts consider the entirety of the arrangement in determining whether the person contributed money or property in excess of the value of the benefits received (e.g., Thompson v. Commissioner (Tax Ct. 1954)).


The court ruled that the settlement agreement and the Forms 8283 prepared by the LLC were contemporaneous. However, although the settlement agreement indicated that the city provided goods and services in exchange for the contributions of fill dirt, it lacked a good-faith estimate of the value of them. The forms did not make mention of benefits the LLC received other than the sales prices.

The court decided that the LLC failed to comply with the contemporaneous written acknowledgment requirements. The substantial compliance doctrine was held to be inapplicable.

The court found that the gift property was not properly valued, in that the appraiser made “material mistakes” that rendered her appraisals “unconvincing.” She included delivery and labor costs twice, once as a business expense and again as part of the charitable deductions. The appraiser was said to have made some “untenable assumptions.”

Moreover, the court, observing that the fill sale “was not an independent transaction but rather an integral and interdependent part” of the settlement agreement, inquired as to whether the LLC received any additional consideration. The court found several benefits enumerated in the agreement, such as the value of resolution of zoning disputes, dismissal of lawsuits, certain drainage plans, and closure of the other landfill. The court also concluded that the LLC received various unenumerated benefits as a result of the transactions.

Overall, the court concluded that the LLC failed to sustain its burden of proving that the settlement agreement resulted in one or more bargain sales of the dirt. [9.19, 21.4]

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