University of Michigan $33MM Charitable Deduction Reaffirmed as a Sham
Stephen M. Ross has become the University of Michigan’s biggest donor, having given over $378 million to his alma mater over his lifetime. In what has become a sixteen-year development, the federal appeals court has reaffirmed a 2017 ruling that the billionaire had grossly overstated a charitable donation of $33 million on his 2003 tax returns.
From 2002 to 2003, Ross and his associates at RERI Holdings LLC bought and then gifted commercial real estate worth an estimated $3.9 million but claimed the same donation as a $33 million deduction. An audit in 2017 led the IRS to discover the massive $29 million difference in value. The Tax Court judges ultimately concluded that Ross and RERI Holdings’ donation was “a sham for tax purposes” and “lacked economic substance.” This year in an attempt to fight that judgment, the group decided to take their case to appeals court, which failed for a few of the following reasons.
At the time, Ross and RERI attempted to reason the write-off valuation was accurate, claiming their appraisal was based on future interest on the real estate. Some believe that the group may have reached this calculation using the Section 7520 rate, which was about 4% at the time, to value the interest on the charitable donation. Unfortunately for Ross and RERI, the 7520 rates were not applicable, and the value of the real estate could never reasonably reach that high of a markup.
Additionally, they incorrectly prepared their Form 8283 Noncash Charitable Contributions. They filled out the fair market value as $33 million as well as the date but failed to state the basis, which would have been approximately $3 million. On one hand, if the number had been included, the IRS would have most likely been suspicious, but on the other, by leaving it blank, this became a red flag of failure to substantiate.
With the case finally closed, Ross and RERI’s final ruling leaves them unable to claim the deduction and liable for a 40 percent penalty on the tax underpayment. As in most tax fraud cases charitable or not, when attempting to deceive the IRS, you will most likely come out as the loser.
No matter the amount, your generosity in gifting time and money to worthwhile causes can have a significant impact on your tax liability. While tax considerations should never drive your charitable giving, it makes sense to structure your gifting to maximize the tax benefits. If you have questions regarding your gifting or estate plan, please contact Talley LLP today.