Originally published on Forbes.com Apr 18th, 2013
Your company gets into a dispute with a city about who stinks the most. You settle the dispute by selling them dirt, but not charging them as much as it is worth. Take a charitable contribution. Makes sense to me. To the IRS not so much, particularly if you don’t get the paperwork right. In the case of Boone Operations Co. LLC, the Tax Court went with the IRS.
The dirt and stink are not metaphorical. Boone ran a landfill adjacent to a landfill run by the City of Tuscon. The neighbors frequently complained about odors and dust. Here is some of the story:
Boone owns and operates Speedway Landfill in Tucson, Arizona Speedway Landfill accepts construction and inert debris materials from various third parties. Speedway Landfill is to the east of, and adjacent to, the Vincent Mullins Landfill (VML). Tucson previously operated the VML as a municipal landfill that accepted all types of domestic and commercial debris and waste. The two landfills are surrounded by residential areas to the east and west, a park to the north, and a commercial complex to the south.
When materials in a landfill decompose, methane gas is produced. Both the VML and Speedway Landfill produced methane gas, but the VML produced a greater quantity of methane gas because of the nature of the materials deposited. The VML operated its own collection system and burner to mitigate the methane gas problem. However, the flare in the VML collection system frequently was extinguished, causing significant odor problems. Additionally, because of poor drainage, water ponds formed on the VML. These water ponds produced more methane gas, and the subsequent runoff traveled back into the VML and the Speedway Landfill.
Douglas Kennedy, chief executive officer of Boone, received complaints from surrounding residents regarding dust and odors.Because the two landfills were next to each other, neighbors complained about the landfills indiscriminately….
In 1986 the VML stopped accepting waste materials. However, Tucson subsequently encountered problems closing the VML. Fearing that the VML’s closing problems and ongoing environmental problems would negatively affect Speedway Landfill, Mr. Kennedy negotiated with Tucson to resolve the various problems and to assist Tucson with the process of properly closing the VML.
There were all sorts of problems on the road to a solution and for a while Boone and the City were suing one another, but ultimately they came to a settlement.
If you are doing business with a governmental entity or a charity, characterizing some of your dealings as being a charitable contribution can be a win/win. You have something they want. They are willing to pay for it. You would like to get more than they are willing to pay. They can use their charitable status to help close the deal. They just have to admit that your “whatever” is worth even more than you want for it, maybe way more. Now you get what they pay plus a charitable deduction.
Your advisor might encourage you to examine your conscience to make sure that you have a desire to benefit the other party, since donative intent is a requirement. You won’t have much trouble convincing yourself or your advisor. The IRS may be a bit more skeptical. When it comes to charitable contributions of $250 or more, though, there is a sine qua non. That would be an acknowledgment from the done organization that there was a contribution and a statement that there was either no quid pro quo or its value if there was one. That was the main problem with Boone Operations Co. LLC’s bargain sale contribution to the City of Tuscon.
The win/win nature of a charitable contribution was not lost on Boone and Tuscon, they made it part of the final deal that resolved the sundry issues between them:
Charitable Contribution of Acceptable Fill.
8.1. Prior Contribution. * * * acknowledges that as of the date of the Settlement Memorandum, it had accepted Boone’s charitable contribution of 95,000 cubic yards of Acceptable Fill which has been placed on an acceptable location on the * * * (the “Prior Contribution”).8.2. Future Contribution. Boone agrees to make another charitable contribution of an additional 105,000 cubic yards of Acceptable Fill which are presently stored on or near the boundary between the Speedway Landfill and the * * * (the “Future Contribution” and, together with the 2002 Contribution, the “Charitable Contribution”) and to relocate the Future Contribution to locations on the * * * which are adjacent to the West 100 Feet as reasonably directed by * * *
Running a landfill might be a dirty stinking business, but apparently the dirt can help with the stink. For 2003 and 20004 Boone took charitable contributions for bargain sales of dirt to Tucson. According to appraisals it gave Tuscon about a million dollars worth of dirt each year for which it was paid a little over $700,000 in total. Form 8283, along with an appraisal was attached to Boone’s returns.
That was not enough for the IRS:
Respondent contends that the 2003 settlement agreement does not constitute a contemporaneous written acknowledgment because the 2003 settlement agreement did not include a statement as to whether Tucson provided goods or services in consideration for the fill or a good-faith estimate of the value of any goods or services Tucson provided to Boone. Respondent also contends that the Forms 8283 do not constitute contemporaneous written acknowledgments. Respondent notes that Tucson completed only part IV of each Form 8283 and that part IV of Form 8283 does not contain a statement as to whether Tucson provided any goods or services in exchange for the fill.
Additionally, although the 2003 settlement agreement indicates the amount of cash Tucson agreed to pay for the fill, it does not value the other benefits Boone received. See infra pp. 38-48. The Forms 8283 make no mention of any benefits Boone received beyond the $6 per cubic yard sale price. Accordingly, these documents fail to satisfy the requirements of clauses (ii) and (iii) of section 170(f)(8)(B).
That was actually all that was needed to defeat the deduction, but the Tax Court went on to critique the appraisal and examine the quid pro quo involved. What is mysterious to me about this is why there was not a separate acknowledgment drawn up. It may be that nobody thought of it or alternatively there might not have been a city official keen to sign one. I suspect the reason the Tax Court went further into the appraisal and quid pro quo analysis might be that an appeals court might find the language in the contract was sufficient acknowledgment. It will be interesting if this is appealed.
You can follow me on twitter @peterreillycpa.